Why Do Businesses Use (or Not Use) Arbitration Clauses?

Why Do Businesses Use (or Not Use) Arbitration Clauses?

by Christopher R. Drahozal and Stephen J. Ware

Some recent scholarship contends that arbitration is failing in its attempts to compete with litigation. When arbitration does succeed in attracting customers, such as businesses including arbitration clauses in their consumer contracts, commentators assert that it does so illegitimately, such as by enabling businesses to evade class actions and other forms of aggregate relief.

Both of these positions have found support in a pair of recent empirical studies authored by Theodore Eisenberg and Geoffrey Miller (and, for one of the studies, by Emily Sherwin as well). The first study examined the use of arbitration clauses in a sample of material contracts (such as loan commitments and merger agreements) filed with the SEC, and found that only a small percentage of the material contracts included arbitration clauses. The second study (with Professor Sherwin) compared the use of arbitration clauses in material corporate contracts of telecommunications and financial services companies with the use of arbitration clauses (and class arbitration waivers) in consumer contracts drafted by the same companies, and found a much higher use of arbitration clauses in the consumer contracts.

In this paper, we revisit the Eisenberg and Miller (and Sherwin) studies. The studies provide a fascinating and valuable look into the use of arbitration clauses in the types of contracts they studied. But as we show in detail, the types of contracts they studied are not representative of either business or consumer contracts as a whole. Indeed, the business contracts they studied are predominantly types unlikely to include arbitration clauses, while the consumer contracts they studied are among those most likely to include arbitration clauses and class arbitration waivers. As a result, their findings need to be construed narrowly, as limited to the types of contracts studied, and not as applicable to either business or consumer contracts generally.