Is There a Flight from Arbitration?

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.

Keywords: arbitration, dispute resolution, franchising

JEL Classifications: K12, K41

Working Paper Series