The Flight From Arbitration

For years, arbitration clauses have been popping up in the fine print of consumer contracts almost to the point where it is hard to find a consumer contract that doesn’t require mandatory arbitration. If you have a potential claim against a credit card company, bank, phone provider, architect, or even an attorney (and shame on the attorneys putting arbitration clauses in their contract), then that claim is likely subject to an arbitration clause. We’ve even had drawn out fights over an arbitration agreement in a contract to purchase logs for a client’s log home.

According to the businesses inserting the clauses, arbitration should be used because it is more efficient and can reduce the cost of litigation for all parties. If that is true, you would expect businesses to insert arbitration clauses into all the contracts that businesses use between one another. According to a study done by two professors of law, that expectation is wrong.

Theodore Eisenberg, a Cornell Professor of Law, and Geoffrey Miller, a professor of law at NYU, have recently released a draft of their study The Flight From Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in Publicly Held Companies’ Contracts. In the study, the professors analyzed 2,414 contracts that were filed with the Securities and Exchange Commission, and found that companies that were quick to use arbitration agreements in disputes with consumers rarely used arbitration agreements in contracts with one another. The study found:

The most striking result is the paucity of arbitration clauses, even in international contracts. Our results contradict some received wisdom but are consistent with the 1998 Cornell University survey finding that relatively few large corporations use arbitration frequently…

Our arbitration clause rate findings contrast with the widespread use of mandatory arbitration clauses in certain standardized consumer contracts, such as credit card and mobile phone agreements…

Some suggest that arbitration clauses in some consumer contracts may be being used for some other purpose, such as a mechanism to completely avoid dispute resolution, leaving consumers with no effective remedy, or to gain advantage in dispute resolution over parties who cannot realistically negotiate. In this view, arbitration clauses are being used to avoid class actions, regardless of the effect on the fairness of the dispute resolution process.

These findings don’t surprise us. We think most consumer attorneys agree with us that arbitration clauses aren’t put in place for efficiency, but to make it more difficult for consumers to bring claims, and when they do, more difficult for them to prevail. Although arbitration can be good for the right case if done in the right manner, we continue to believe that mandatory arbitration agreements unnecessarily take away our clients’ rights to a jury trial.  Apparently, some businesses agree.