Andrew Wheat

Privatizing Justice


Lemon homes–including many moldy ones–are sprouting up in subdivisions across Texas. Most new homeowners do not learn until after they have discovered major home defects that they cannot take their homebuilder to court. That’s because, under contracts becoming increasingly common in every sector of American commerce, they unwittingly signed away their access to the courts when they bought their houses. Instead, they must take their complaints before ostensibly neutral arbitrators, whose decisions are binding. These kangaroo courts operate in secrecy without juries or judges. Their ruling arbitrators need not be lawyers. In fact, arbitrators can ignore laws that otherwise govern these United States.

One of the worst outfits is the American Arbitration Association (AAA), the nation’s leading arbitration group. The company created a task force of construction industry representatives to help “AAA be more responsive to the needs” of the industry, according to a 1996 AAA publication. It would be hard to find an arbitrator more “responsive” than the AAA’s Stephen Paxson, a Houston attorney. Several years after the Falbaum family of Houston bought their new Village home in 1996, a foundation crack grew to span the length of the house–which was slipping downhill. After the Falbaums filed suit, Village repaired the foundation, but a state judge kicked the rest of the family’s claims (including diminished home value, lost time, and Deceptive Trade Practices Act damages) to arbitration. Last year AAA arbitrator Paxson exonerated the builder of every claim. Falbaum attorneys smelled a rat when they read in Paxson’s ruling that he ignored case law that the plaintiffs cited because he personally believed that the case (Perry Homes v. Alwattari) “was wrongly decided.”

Soon thereafter, the Falbaums learned that this “neutral” arbitrator had failed to disclose that he was the general counsel of the Greater Houston Builders Association (GHBA). In fact, while Paxson was arbitrating the Falbaum’s case, the GHBA asked him to prepare a brief urging the Texas Supreme Court to overturn Perry Homes (the court declined to do so). During this time, Paxson also testified before the Texas Legislature in support of legislation that sought to gut the Perry Homes decision.

In an extraordinary event, Harris County District Judge Caroline Baker refused to enforce Paxson’s arbitration decision (a ruling that Village is appealing). The Falbaums sued Paxson and AAA (which in a delicious irony had not put a binding arbitration clause in its own contract with the Falbaums) for failing to provide the fair and impartial arbitration that they promised. Although AAA asked a Harris County judge to toss out this suit, last month Judge Patricia Hancock allowed it to proceed. If the court grants the Falbaums broad rights to obtain information from AAA, the suit could disclose a wealth of information about the arbitration industry’s secretive proceedings.

Even the judges who force these cases into arbitration are subject to conflicts, since many of them accept lucrative arbitrator jobs after they leave the bench. As a visiting judge in Travis County District Court in April, for example, ex-Texas Supreme Court Justice Rose Spector heard David Weekley Homes’ motion to force the toxic mold claims of the family of Scott and Dawn Richardson into AAA arbitration. At the hearing, Judge Spector said she considered recusing herself because she also works as an AAA arbitrator. Opting against recusal, the judge kicked all claims involving the contract signatories (Weekley and the adult Richardsons) to AAA, while keeping the remaining claims (involving the Richardson kids and Weekley’s subcontractors) in state court.

Meanwhile, the Richardsons and Janet Ahmad, the San Antonio founder of Homeowners for Better Builders, are desperately seeking a single case of a Texas homeowner who has emerged victorious from arbitration. This quest has stumbled over two of the most controversial aspects of AAA: its coziness with the business defendants that supply it with consumer disputes, and its obsessive secrecy, which shields it from the transparency and accountability found in public courts.

Two interim Texas House panels are preparing legislative proposals on binding arbitration. In recent House hearings, the business interests defending the status quo testified that arbitration is wonderful for everyone. Yet they could not explain why it must be done in secret and why consumers who have a beef are not allowed to voluntarily choose between arbitration and the courts.

The Legislature is a place where the power of ideas are weighed against the power of campaign money–which overwhelmingly wants to keep consumer arbitration binding and behind closed doors. In the hearings, legislators seemed to be shopping for ways to better educate the public about binding arbitration or to subject these kangaroo courts to minor reforms. Reggie James, director of the Consumer’s Union’s Southwest Office, said both responses would be pointless. He advised lawmakers not to try to reform private arbitration because–if they succeeded–all they would accomplish is to duplicate the existing court system. James said consumer education also is futile since binding arbitration is like a bullet shot from a gun: It has the same effect on people whether or not they see it coming. The only defensible arbitration is voluntary arbitration–selected after a dispute arises.

Andrew Wheat is research director of Austin-based Texas for Public Justice.