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Abstract:
If we define the deterrence benefits from contract enforcement as avoided harms net of avoidance costs, we should expect contracting parties to choose the dispute resolution forum that provides the greatest difference between deterrence benefits and dispute resolution costs. We apply this framework to franchise contracts and conduct an empirical analysis of the determinants of arbitration agreements among franchising parties. Although it is obvious that contracting parties have an incentive to choose arbitration in order to reduce dispute resolution costs, there have been no studies of the importance of deterrence concerns. We examine the deterrence hypothesis and find a great deal of support for it. Our results suggest that deterrence factors outweigh litigation costs in the design of dispute resolution agreements. We find that the probability of arbitration is significantly higher when the parties rely on implicit contract terms for governance and compliance with those terms is difficult to ensure.

contract law, tort law, law and economics, litigation, governance, franchising, arbitration

Abstract:
If we define the deterrence benefits from contract enforcement as avoided harms net of avoidance costs, we should expect contracting parties to choose the dispute resolution forum that provides the greatest difference between deterrence benefits and dispute resolution costs for every type of dispute. We apply this general framework to franchise contracts and conduct an empirical analysis of the determinants of arbitration agreements among franchising parties. Although it is obvious that contracting parties have an incentive to choose arbitration in order to reduce dispute-resolution costs, there have been no studies of the importance of deterrence concerns. We examine the deterrence hypothesis here and find a great deal of support for it. Indeed, our results suggest that deterrence factors generally outweigh litigation costs in the design of dispute resolution agreements. We find that the probability of arbitration is significantly higher when the parties are likely to rely on implicit contract terms for governance and compliance with those terms is difficult to ensure.

contract law, tort law, law and econ, litigation, governance, franchising, arbitration

Abstract:
Much attention has been given to how cognitive illusions - both heuristics and cognitive biases - affect decision making by juries. Less, albeit increasing, attention has been given to how cognitive illusions affect decision making by judges. Almost no attention, however, has been given to how cognitive illusions might affect decision making by arbitrators. This article extends the behavioral analysis of the legal system to private judging, and considers the implications of that analysis for the debate on pre-dispute consumer arbitration clauses. Empirical evidence on the effect of cognitive illusions in arbitral decision making is extremely limited. Further complicating the analysis of private judging are structural differences between arbitration hearings and jury trials, which may heighten or dampen the effect of cognitive illusions on decision making in the real world. If arbitrators are assumed to be more like judges than jurors in their decision making - a seemingly reasonable assumption - studies comparing the effect of cognitive illusions on judges and jurors provide at least a starting point for making predictions about arbitral decision making. On this view, the article reaches the very tentative conclusion that arbitrators, like judges, may be less susceptible to at least some cognitive illusions than jurors. If subsequent research bears out this tentative conclusion, it would have important implications for the ongoing debate over consumer arbitration. If arbitral decision making is less subject than jury decision making to the effects of cognitive illusions, then the use of arbitration may improve the accuracy of dispute resolution, reducing the risk of overcompensation (rather than resulting in undercompensation). This is not to suggest that such utilitarian arguments should be used to override constitutional protections, or that the jury might not serve other functions than simply dispute resolution. Instead, the point simply is that when Congress (or another policy maker) is considering whether to restrict the enforceability of consumer arbitration agreements, it should not assume that juries necessarily make "better" decisions than arbitrators. To the contrary, restricting the availability of arbitration may reduce the accuracy of dispute resolution, thereby imposing real costs on the parties to consumer contracts.

Arbitration, contracts, behavioral law & economics

Abstract:
Concern about the "lawlessness" of arbitration is widespread, but what commentators mean by "lawless" varies. The most common meaning is simply that arbitrators are not required to follow the law in making their awards. A second meaning is that parties to arbitration agreements use arbitration to avoid application of legal rules protecting consumers and employees. A third meaning is that arbitration impedes the creation of law by the courts. This article examines the empirical evidence underlying these various views of arbitral lawlessness. It considers what we know about three related empirical questions: (1) do arbitrators follow the law in making their awards? (2) do businesses provide for arbitration to avoid mandatory legal rules? and (3) to what extent does arbitration interfere with the development of the law? Certainly much more research needs to be done. But, perhaps surprisingly, the available empirical evidence to date provides at best weak support for the view that arbitration is "lawless." There is evidence that arbitrators do not treat statutory issues in as much detail as courts, but little other evidence that arbitrators definitively differ from judges in their attitudes and practices toward legal issues. Studies find no indication that parties agree to arbitrate to avoid mandatory legal rules, even when they have the opportunity and incentive to do so. Finally, whether arbitration interferes with the development of the law is extremely difficult to evaluate. Certainly many arbitration awards are not published; but there is some evidence that awards that are published serve as precedent (persuasive rather than binding) in subsequent arbitrations.

Dispute Resolution, Arbitration

Abstract:
The article examines the jurisprudential value of Tribunal decisions and awards from both theoretical and empirical perspectives. The article considers four factors for assessing the precedential value of awards and decisions of international tribunals: (i) the integrity and authoritative standing of the court or tribunal issuing the earlier decision; (ii) the similarity of the relevant facts in the two cases, (iii) the similarity of the law relied on as necessary to making the decision (the decisional law); and (iv) the merits or instructive value of the prior tribunal's reasoning in reaching its decision - hence, its exposition of the law. Applying these factors to the jurisprudence of the Iran-U.S. Claims Tribunal demonstrates the importance of that jurisprudence as persuasive authority in investor-State arbitration. Part I of the article examines the extent to which Tribunal precedent has been cited by parties and tribunals in investor-State arbitrations. The citation analysis finds significant citation of Tribunal precedent in awards and decisions in arbitrations administered by the International Centre for Investment Disputes (ICSID), and in party submissions in arbitrations under Chapter 11 of the North American Free Trade Agreement. Thus, the awards and decisions of the Iran-U.S. Claims Tribunal have been and likely will continue to be an important source of authority in investor-State arbitration.

Abstract:
A common criticism of arbitration is that its upfront costs (arbitrators' fees and administrative costs) may preclude consumers and employees from asserting their claims. Some commentators have argued further that arbitration costs undercut the benefits to such claimants of contingent fee contracts, which permit the claimants to defer payment of attorneys' fees and litigation expenses until they prevail in the case (and if they do not prevail, avoid such costs altogether). This paper argues that this criticism has it exactly backwards. Rather than arbitration costs interfering with the workings of contingent fee contracts, the contingent fee mechanism provides a means for overcoming liquidity and risk aversion barriers to arbitration. Arbitration costs are just another form of litigation expense, which attorneys should be willing to advance on behalf of clients with viable claims. As a result, even accepting the premises of the cost-based criticism, it does not follow that arbitration costs necessarily preclude individuals from bringing their claims in arbitration. Even if individual claimants cannot afford the forum costs of arbitration, at least some of those individuals - those with viable claims given the total costs of the dispute resolution process - should nonetheless be able to bring their claims. For this reason, much of the legal analysis of arbitration cost challenges is misdirected, focusing too much on the personal finances of the individual claimant and too little on the incentives for attorneys to take the case (such as the value of the claim and possible recovery under fee-shifting statutes). In the vast majority of federal court cases adjudicating cost-based challenges to arbitration agreements, the claimant is represented by counsel, and in most has asserted a claim that, if successful, would permit the recovery of attorney's fees. This evidence suggests that in most reported cases, even those in which courts invalidated the arbitration agreement on cost grounds, arbitration costs were not a barrier to asserting the claim in arbitration.

Arbitration, arbitration costs, dispute resolution, contingent fee contracts

Abstract:
While selection effects have important implications for empirical studies of the litigation process, existing theories of case selection are incomplete. Existing theories focus on "ex post selection" - selection resulting from choices made by parties after a dispute arises, such as by settlement or jury trial demands. But parties also engage in "ex ante selection" - selection resulting from choices made before a dispute arises. A common form of ex ante selection occurs when parties include a pre-dispute arbitration clause in their contract, agreeing to have future disputes resolved in arbitration rather than in court. This paper develops a theory of ex ante selection of disputes for litigation, and examines implications of the theory for empirical studies of litigation. Studies comparing outcomes in arbitration and litigation provide evidence that ex ante selection occurs. This paper argues that the effects of ex ante selection are not limited to such studies, but also may affect studies that examine only the litigation process. The central intuition is that the disputes for which litigation is most likely to be problematic (and thus of interest to researchers) are the very disputes most likely to end up in arbitration. When parties expect litigation to be costly or damage awards excessive, they have an incentive to provide for arbitration to resolve future disputes. Such ex ante selection may mask characteristics of the litigation process that empirical studies are seeking to examine.

Arbitration, selection bias, empirical studies

Abstract:
Reports of dissatisfaction with arbitration are increasingly frequent. A recent article by Eisenberg and Miller suggests that businesses are fleeing arbitration, while [a]necdotal evidence suggests that franchisors are either abandoning arbitration altogether or using more 'carve-out' provisions (exempting specific categories of disputes from the franchise agreement arbitration clause). This paper examines whether the use of arbitration clauses has changed over time - in other words, whether there has been a flight from arbitration. It compares the use of arbitration clauses in franchise agreements from the same franchisors in 1999 and 2007 to see how, if at all, the clauses have changed. We find little evidence of a flight from arbitration by franchisors, at least in the aggregate. The percentage of franchisors using arbitration clauses is almost identical in 2007 as in 1999, although some franchisors have stopped using arbitration while others have started. Likewise, there is little indication that franchisees are fleeing arbitration by avoiding franchisors that use arbitration clauses. As for other terms in arbitration clauses, the most notable change has been the substantial increase in class arbitration waivers (from 50% to over 80% of clauses). With some exceptions, few terms seem to have been modified in response to the risk of court invalidation. Instead, other common changes appear to be designed to hold down costs, such as providing for a sole arbitrator instead of a panel of three arbitrators.

arbitration, dispute resolution, franchising

Abstract:
This Article evaluates the likely consequences of restrictions on secret settlements. Both the defendant and an early claimant - a claimant who discovers that he or she has a claim before other claimants do - have a strong incentive to maintain secrecy, and they have a variety of means by which they might do so. First, in many cases, a claimant can circumvent restrictions adopted by a single state or federal court by filing suit in a state or court without such restrictions. Second, parties might circumvent secret settlement restrictions adopted by a single state by choosing another state's law to govern the settlement. Third, parties could avoid restrictions on secret settlements in court by settling before the claimant files suit. Finally, many parties could accomplish much the same result as a secret settlement by use of predispute or postdispute arbitration agreements, taking advantage of the privacy of the arbitration process. Indeed, restrictions on secret settlements not only may be ineffective, but in fact may be counterproductive. To the extent the restrictions encourage parties to settle before the claimant files suit or to choose arbitration instead of litigation, they may reduce rather than expand the amount of information available to the public about the dispute. Currently, if the secret settlement occurs after the claimant files suit, the factual allegations in the complaint are a matter of public record for some period of time (at least until the settlement occurs). If secret settlements are prohibited, and the settlement takes place outside of court or the case goes to arbitration, even that information is lost. Thus, rather than increasing the information available to the public about alleged hazards to public health and safety, restrictions on secret settlements may have the unintended consequence of doing exactly the opposite.

Litigation, Settlement, Secret Settlements

Abstract:
This Article presents the results from the first detailed empirical study of consumer arbitration as administered by the American Arbitration Association. Primarily using a sample of 301 AAA consumer arbitrations that resulted in an award between April and December 2007, it considers such issues as the costs incurred by consumers in arbitration, the speed of the arbitral process, and the outcomes of the cases - the very topics of most interest in the policy debate on consumer arbitration.

Arbitration, Dispute Resolution, Contracts

Abstract:
Manifest disregard of the law is a "non-statutory" or "judicially-created" ground for vacating arbitration awards. It does not appear in the Federal Arbitration Act, but instead has been developed by courts - which typically derive the doctrine from dictum in the overruled Supreme Court case of Wilko v. Swan. The usual test for manifest disregard - that the arbitrator knows the applicable law but intentionally refuses to apply it - is based on a literal reading of the Wilko dictum and is directly contrary to the common law cases cited by the Wilko Court. Indeed, in seeking to ensure that arbitrators correctly apply mandatory rules of law in their awards, lower courts have distorted the doctrine further, in ways that undercut the arbitration process itself. In short, manifest disregard of the law, as currently applied, leaves much to be desired. Nonetheless, in "Rethinking the Federal Arbitration Act," manifest disregard of the law should be codified as a ground for vacatur. The justification for codifying manifest disregard is not to ensure that arbitrators follow mandatory rules of law in their awards. Instead, the justification is to ensure the integrity of the judicial process - by enabling courts to avoid putting their power and authority behind arbitral awards that openly flaunt the law. As codified, challenges to arbitration awards for manifest disregard of the law will rarely, if ever, succeed. But the need to protect the integrity of the court system justifies codifying manifest disregard, even if the doctrine only rarely is applied.

Arbitration, Awards, Judicial Review

Abstract:
An increasing number of courts, albeit still a minority, refuse to enforce nonmutual arbitration clauses (clauses that require one party but not the other to arbitrate, in whole or in part) in consumer and employment contracts. Critics take the view that such clauses are unfair to consumers and employees, who must arbitrate their claims while the business avoids arbitration of at least some of its own claims. This article challenges the view that nonmutual arbitration clauses necessarily are unfair. Certainly to the extent market forces constrain business (mis)behavior, nonmutual arbitration clauses may make consumers better off. Commentators who criticize (and courts that invalidate) nonmutual arbitration clauses, however, are skeptical of markets and question the effectiveness of market constraints. This article shows that even accepting - for the sake of argument - the skeptical view of markets and business behavior held by critics of pre-dispute consumer arbitration clauses, a requirement that arbitration clauses contain mutual promises to arbitrate may actually make consumers worse off, not better off. Moreover, such a mutuality requirement may result in arbitration proceedings that are less fair, rather than more fair, to consumers. Thus, while a poorly functioning market is a necessary condition for a mutuality requirement to make sense as a policy matter, it is not a sufficient condition. Courts that refuse to enforce nonmutual agreements to arbitrate may be harming consumers rather than helping them.

Arbitration, mutuality, contracts

Abstract:
This Interim Report builds on the Preliminary Report, Consumer Arbitration Before the American Arbitration Association, issued in March 2009 by the Searle Civil Justice Institute's Consumer Arbitration Task Force. It seeks to compare the outcomes of debt collection arbitrations to the outcomes of debt collection cases in court to help in evaluating arbitration as a means of resolving consumer disputes. The arbitration cases examined are debt collection cases administered by the American Arbitration Association (AAA) as part of its consumer arbitration docket, supplemented by cases brought by a single debt buyer as part of a consumer debt collection program administered by the AAA. The court cases examined are a sample of cases seeking collection of unpaid student loans in federal court and samples of debt collection cases from Oklahoma state courts and Virginia state courts. The Task Force focused on debt collection cases because debt collection cases tend to present relatively simple legal and factual issues and thus are relatively comparable in arbitration and in court.

Key findings are the following: (1) Creditors prevailed less often (that is, consumers prevailed more often) in the arbitrations studied than in court; (2) creditor recovery rates in the arbitrations studied were lower than, or comparable to, creditor recovery rates in court; (3) the consumer response rates in the arbitrations studied did not appear to differ systematically from consumer response rates in court; and (4) the rate of other case dispositions (e.g., dismissals and settlements) did not appear to differ systematically between the arbitration and court cases studied. At a minimum, the findings should dispel the notion that high creditor win rates and recovery rates in debt collection arbitrations in and of themselves show that arbitration is biased in favor of businesses. Instead, high creditor win rates and recovery rates appear to be due to characteristics of debt collection cases rather than the venue - court or arbitration - in which those cases are resolved. While these findings are subject to several important limitations, the report furthers our empirical understanding of arbitration as a means of resolving consumer disputes, and contributes new information to the policy debate over consumer arbitration.

Arbitration, debt collection

Abstract:
This article challenges the conventional wisdom that the Supreme Court's decision in Southland Corp. v. Keating, holding that the Federal Arbitration Act ("FAA") applies in state court and preempts state law, was an illegitimate exercise of judicial lawmaking. Justices' O'Connor and Thomas, and numerous commentators, have strongly criticized Chief Justice Burger's majority opinion in Southland as disregarding Congress's unambiguous intent that the FAA apply only in federal court. But a reexamination of the legislative history of the FAA suggests that, while the "primary purpose" of the FAA was to make arbitration agreements enforceable in federal court, a secondary purpose was to make arbitration agreements enforceable in state court as well. Submissions to Congress by the principal drafter of the Act provide strong evidence that the FAA was intended to apply in state court. A contemporaneous commentary, overlooked by Southland critics, likewise supports that conclusion. Conversely, the vast majority of statements in the legislative history relied on by commentators to criticize the Southland holding state simply that the FAA applies in federal court, not that it applies only in federal court. Although Chief Justice Burger's analysis in Southland leaves much to be desired, this analysis supports his conclusion: that "although the legislative history is not without ambiguities, there are strong indications that Congress had in mind something more than making arbitration agreements enforceable only in the federal courts."

Abstract:
The article reexamines the most common academic criticisms of "mandatory" arbitration of consumer disputes. First, it presents the results of an empirical study of "unfair" arbitration clauses, based on a sample of dispute resolution clauses in franchise agreements. The study finds that while some provisions identified by arbitration critics as unfair are common in the sample, others (such as clauses providing for biased arbitrators) are very rare. Second, it describes plausible circumstances under which both parties to pre-dispute arbitration clauses -- even clauses containing "unfair" provisions -- will be made better off by arbitration. Third, it argues that business reputation and arbitration institutions may constrain corporate opportunism in the use of pre-dispute arbitration agreements. Accordingly, increased government regulation of arbitration may be unnecessary, or at least more limited than some have proposed.

arbitration, consumer arbitration, mandatory arbitration, dispute resolution, franchising

Abstract:
The article defends the incorporation of commercial norms into commercial codes, through provisions such as statute 1-205 of the Uniform Commercial Code. It finds significant reliance on trade usages in international commercial arbitration: institutional rules and arbitration statutes frequently require arbitrators to consider trade usages in resolving international disputes, and the available evidence suggests that arbitrators in fact do so. There is much less evidence that arbitrators rely on prior dealings between the parties. Because of the competitive market in international dispute resolution, the reliance on commercial norms by international arbitrators suggests that the benefits of such reliance -- such as providing information to generalist decision makers -- exceed any costs -- such as from precluding extralegal enforcement of aspects of the parties' agreement. As a result, the empirical evidence presented in the article supports Article 2's "incorporation strategy," at least as to usages of trade.

Abstract:
The dormant Commerce Clause of the U.S. Constitution, according to the Supreme Court, creates a free trade zone among the states. This article argues that state and local governments act as "fire alarms" in dormant Commerce Clause cases, bringing to the Supreme Court's attention laws of other states that interfere with this American common market. Because states are more reliable fire alarms than private parties, the article predicts that the Court is more likely to strike down statutes opposed by other states than ones without state opposition. The empirical evidence presented is consistent with that prediction. The Court's ability to learn from fire alarms enhances the effectiveness of its oversight of interstate trade, and supports the Court's role under the dormant Commerce Clause in preserving the American common market.