PRESENTED by: THE NATIONAL CENTER FOR DISPUTE SETTLEMENT

1. ARBITRATION IN LIEU OF LITIGATION & ENFORCEABILITY OF ARBITRATION CLAUSES PRESENTED by: THE NATIONAL CENTER FOR DISPUTE SETTLEMENT

2. NCDS • National ADR Firm: 3rd Party Neutral • Key Dates: 1968, 1987 • Automotive Warranty Cases since 1995 • Mediation, Arbitration, Med-Arb • 35,000 cases since 1995 • Currently serving 6 car companies & their customers

3. WORKSHOP TOPICS • Who We Are • Where Are We Now? • Advantages & Disadvantages • Legal Landscape • Enforceability • Discussion

4. NCDS AUTO CLIENTS • DCX • TOYOTA • LEXUS • PORSCHE • MITSUBISHI • MAZDA

5. WHERE ARE WE NOW? • No abatement in Warranty Litigation; no reduction in costs. • Proliferation of Plaintiff firms. • Consumer awareness evolving into unrealistic expectations . • Non-binding arbitration will be the final resolution in fewer cases. • The areas are: All disputes related to remarketed (“buyback”) vehicles. Binding Arbitration is working well in the areas of the industry into which it has been introduced. • Including issues related to disclosure, employee, vendor, dealer employee and other special purchasing programs. We note, as well, an increase in auto dealership use of Binding Arbitration clauses and Binding Arbitration clauses in financing agreements.

6. WHY NOW? • An unbroken and expanding line of positive judicial decisions. • Use of binding arbitration in credit card disputes, health care provider disputes, insurance policies and utility bills have all been implemented with little or no comment or criticism. • A tacit acceptance by the Federal Trade Commission and many Consumer Advocates that binding arbitration is “inevitable”.

7. ADVANTAGES OFARBITRATION + Arbitration is faster than litigation. + Arbitration is cheaper than litigation. + There is no appeal of the merits of the decision. + Lawyers are not required (though allowable). + Arbitration is private and less accessible by the media. + Arbitration is non-precedential. + Properly drafted arbitration clauses effectively inhibit private attorney general claims or class action formation as parties can only be added by consent of all parties to the arbitration agreement.

8. DUE PROCESS PROTECTIONS • Right to Timely & Adequate Notice • Right to Representation by Legal Counsel • Right to be Heard • Right to an Impartial Decision-Maker

9. DISADVANTAGES OF ARBITRATION • Adversarial process; impact on customer retention. • Hostility from: • the press, members of the plaintiff’s bar, state lemon law administrators, attorneys general, self-styled “Consumer Advocates”, and politicians. • There will likely be challenges in court to enforceability however, these challenges are generally resolved as threshold motions and will be unsuccessful.

10. THE CURRENT LEGAL “LANDSCAPE” Federal Circuits: Fifth (covers Mississippi, Texas, Louisiana,) Eleventh (covers Alabama, Georgia, Florida) Favorable State Court Decisions: Texas Louisiana Michigan Wisconsin Illinois Ohio Florida Georgia Indiana Alabama Statutory Provisions: Kentucky

11. US SUPREME COURT • Has not addressed Mag Moss relationship with the FAA • General Sense of Court’s View • Circuit City: supported mandatory arbitration of employment contracts • Green Tree Financial: Arb agreements must mention costs & fees to be enforceable • Gilmer: Upheld arbitration clause in ADEA case • Moses H. Cone Memorial Hospital: bars class actions

12. FEDERAL CIRCUIT COURTS • Both 5th & 11th Circuit Courts have held that Mag Moss does not prohibit binding arbitration • Different rationale in each case

13. 5th CIRCUIT: MS, TX, LA • Walton vs. Rose Mobile Homes: • MMWA does not preclude binding arb • Congressional intent in FAA supporting binding arb is not contradicted by MMWA

14. 11TH CIRCUIT: AL, GA, FL • Davis vs. Southern Energy Homes: • Permits enforcement of valid binding arbitration agreements within warranties • Similar purposes to MMWA & FAA • Every statutory right case considered by USSC upheld if statute did not preclude arbitration • Richardson vs. Palm Harbor Homes: • Predispute arbitration agreement, which was presumptively enforceable under Federal Arbitration Agreement (FAA), was not rendered unenforceable by Magnuson-Moss

15. 11TH CIRCUIT: AL, GA, FL • Cunningham vs. Fleetwood Homes of GA: • Court concluded that it was “not required to and do[es] not decide whether Magnuson-Moss makes arbitration agreements unenforceable as to all Magnuson-Moss claims. Nor is it necessary for [the court] to determine whether warrantors may include binding arbitration provisions in the warranty itself.”

16. 3RD CIRCUIT: DEL, NJ, PA,VI • Terry Johnson vs. W. Suburban Bank: • No direct decision on issue, but court held “a party who agrees to arbitrate, but then asserts that his or her statutory claim cannot be vindicated in an arbitral forum, faces a heavy burden.” • Nothing prevents contracting parties from including a provision in their agreements that refers statutory claims arising under the contract to arbitration.

17. FEDERAL DISTRICT COURTS • Pack vs. Damon Corporation: The Court, held that: … 1) arbitration clause in retail installment contract was not unconscionable; and MMWA did not preclude arbitration of MMWA claims. 2) FAA preempted several state statutes which could be read to prohibit a binding arbitration agreement.  

18. STATE SUPREME COURTS • American Homestar of Lancaster, Inc. (Texas, 01) • Court found that: 1) as a matter of first impression, nothing in the Magnuson-Moss Act's text, legislative history, or purposes preclude enforcement of predispute binding arbitration agreements under the Federal Arbitration Act (FAA), and 2) arbitration agreement was enforceable. 3) holding that the MMWA does not prohibit a consumer from agreeing to binding arbitration.

19. STATE SUPREME COURTS: Alabama • Southern Energy Homes, Inc. vs. Ard (2000) • Held that: (1) purchasers entered into binding agreement to arbitrate, and (2) Magnuson-Moss Act does not invalidate arbitration provisions in written warranty.

20. STATE INTERMEDIATE APPELLATE COURTS Indiana • Daimler Chrysler Corporation vs. Yaeger(Dec. 1, 2004) • Held that: 1) buyers were bound by arbitration provision in manufacturer's employee purchase program; 2) Mag-Moss Warranty Act did not prohibit binding arbitration under program; 3) Regulation of Federal Trade Commission (FTC) that prohibits binding arbitration under Magnuson-Moss Warranty Act was unreasonable; and , 4) state's Lemon Law did not preclude enforcement of binding-arbitration provision.

21. STATE INTERMEDIATE APPELLATE COURTS: Ohio Sikes vs. Ganley Pontiac Honda, 2004 • MMWA does not preclude binding arbitration of warranty disputes and the arbitration clause in the Purchase Agreement was not substantively or procedurally unconscionable.

22. STATE INTERMEDIATE APPELLATE COURTS: Michigan • Abela vs. General Motors Corp (Mich.App.2003) • The Court held that: 1) pre-dispute agreement to submit claims for breach of written warranty to binding arbitration was enforceable under Mag-Moss Warranty Act; 2) (FAA) preempted motor vehicle lemon law statute that prohibits waiver of rights and remedies provided to a consumer. 3) Federal Arbitration Act (FAA) surmounts any state law that invalidates agreements to submit claims to binding arbitration. 9 U.S.C.A. § 2.

23. STATE INTERMEDIATE APPELLATE COURTS: Wisconsin • Stevenson vs. Daimler Chrysler Corporation (December 13, 2004 – Unpublished) • Parties are bound by the Employee Purchase Program Agreement that requires binding arbitration to resolve lemon law and MMWA claims. Court concludes that arbitration is not precluded by the Wisconsin Lemon Law nor the MMWA.

24. LEASE CASES • Mag Moss applies to purchases • Leasing not covered • Recent cases find that binding arbitration clauses enforceable under FAA or state statute

25. LEASE CASES • Smith vs. Monaco Coach Corp (2004) • The District Court held that the Magnuson-Moss Warranty Act did not extend implied warranties to customers not protected by traditional state law, and therefore buyers of motor home did not have implied warranty to enforce against motor home's manufacturer.

26. LEASE CASES • Cohen vs. AM General Corp(Mar. 10, 2003) • Summarily noting that all rights in warranty were transferred to lessees. The District Court, held that consumer was entitled to enforce factory vehicle warranty against vehicle manufacturer under the Magnuson-Moss Act.

27. LEASE CASES • Diamond vs. Porsche Cars North America, Inc. • Court concludes that lessees are not “consumers” contemplated by the MMWA.

28. NCDS EXPERIENCE IN BINDING ARBITRATION IN THE AUTOMOBILE INDUSTRY • Arbitration clause in remarketed vehicle disclosures since 2002 • Employee Purchase Plans since 1999 • “Friends and Family” Plans since 2002 • Vendor and Dealer Programs since 2003 • Specialized Submissions

29. HOW TO DO IT • Put binding arbitration language in all dealer purchase agreements and in the express warranty. • Allow the award of attorney’s fees, expert witness fees and any other remedies available under state and federal law. • Use trained panels similar to those used in non- binding and other, existing, binding arbitration programs. • Use Submission Agreements where possible • Encourage dealers seeking to use Binding Arbitration • “Piggy-back”

30. SAMPLE LANGUAGE “ANY DISPUTE, CONTROVERSY OF CLAIM ARISING OUT OF OR RELATING TO THIS VEHICLE, THE PURCHASE TRANSACTION, THE VEHICLE CONDITION, HISTORY PERFORMANCE, EXPRESS OR IMPLIED WARRANTIES OR SERVICE CONTRACT SHALL BE RESOLVED BY FINAL AND BINDING ARTBITRATION UNDER THE RULES OF THE NATIONAL CENTER FOR DISPUTE SETTLEMENT. YOU MAY NOT BRING A SEPARATE LAWSUIT. PERSONAL INJURY OR OTHER PRODUCT LIABILITY SUITS ARE NOT SUBJECT TO THIS PROCESS. JUDGMENT ON THE AWARD OF THE ARBITRATOR MAY BE ENTERED IN ANY COURT OF COMPETENT JURISDICTION. THIS TRANSACTION AFFECTS INTERSTATE COMMERCE AND IS GOVERNED BY THE FEDERAL ARBITRATION ACT. POTENTIAL REOVERY IS THE SAME AS THAT AVAILABLE UNDER RELEVANT STATE AND FEDERAL LAWS, INCLUDING THE AWARD OF CUSTOMARY AND REASONABLE ATTORNEY AND EXPERT WITNESS FEES. THE PURCHASER UNDERSTANDS THAT HE OR SHE HAD A RIGHT TO HAVE ANY DISPUTE DECIDED IN COURT BUT HAS WILLINGLY AGREED TO HAVE ANY SUCH DISPUTES DETERMINED BY ARBITRATION TO AVOID THE BURDEN, TIME, EXPENSE AND UNCERTAINTY OF THE JUDICIAL PROCESS. THIS IS A KNOWING WAIVER OF ANY RIGHT TO A JURY TRIAL, JUDICIAL OR ADMINISTRATIVE DETERMINATION. NEITHER YOU NOR WE SHALL BE ENTITLED TO JOIN OR CONSOLIDATE CLAIMS IN ARBITRATION BY OR AGAINST OTHER PURCHASERS WITH RESPECT TO OTHER VEHICLES OR ARBITRATE ANY CLAIMS AS A REPRESENTATIVE OR MEMBER OF A CLASS OR IN A PRIVATE ATTORNEY GENERAL CAPACITY. YOU SHOULD REMEMBER THAT BY DECIDING TO ENTER THIS AGREEMENT YOU ARE DECIDING TO USE THIS DISPUTE RESOLUTION PROCESS TO SETTLE YOUR DISPUTE INSTEAD OF GOING TO A COURT. AFTER A DECISION BY AN ARBITRATOR, A COURT WILL REFUSE TO HEAR THE FACTS IN A CASE EXCEPT IN ALL BUT THE MOST UNUSUAL CIRCUMSTANCES. YOUR SIGNATURE IS REQUIRED IMMEDIATELY BELOW TO INDICATE THAT YOU HAVE READ THIS DISCLOSURE.”

31. CODE OF ETHICS • Maintain the Integrity of the Process • Conducting the Hearing with Decorum • Duty to Make a Based on Evidence • Maintain the Confidentiality of the Process • Avoiding Conflicts of Interests

32. DISCUSSION