Empirical Arbitration Analysis Reveals Companies Prefer Litigation

Professors Theodore Eisenberg, Geoffrey Miller and Emily Sherwin investigated a number of Fortune 100 firms’ use of mandatory arbitration clauses. See Arbitration’s Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts (draft December 18, 2007). Their empirical analysis revealed that companies frequently use arbitration clauses in consumer contracts but do not use them in their nonconsumer contracts. Firms’ use of arbitration for consumer contracts but not for nonconsumer contracts suggests that, ex ante, many firms prefer litigation over arbitration, at least for disputes with other repeat players. Moreover, the authors suggest, the use of arbitration clauses in consumer contracts may be an effort to preclude class actions — either in arbitration or court — rather than an effort to promote a fair and efficient dispute resolution mechanism for consumer disputes.

I had wondered how often firms utilized class action arbitration waivers following the Court’s decision in Bazzle v. Green Tree Financial in 2005 (which permits arbitrators to conduct class action arbitration if the parties’ arbitration agreement does not prohibit class action arbitration). The authors found that 80% of the consumer contracts they studied waived class action litigation rights.

If the conclusions the authors reach are true, I suppose the question is whether it matters that the reasons firms give for using class action arbitration waivers and arbitration clauses in consumer contracts are false. It may well be (and the authors do not conclude otherwise) that arbitration is a better method for resolving consumer disputes. If that is the case, however, one wonders whey the firms choose not to use it in their agreements with other repeat players.

Should courts be more willing to strike down consumer class action arbitration waivers in arbitration agreements if the reason firms are using them is to avoid class actions? Certainly, the deepening circuit split on the issue of class action waiver enforceability suggests that this will be an ongoing issue.

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