If Arbitration Is So Wonderful, Why Don't Corporations Arbitrate Against Each Other?

October 6, 2008
By JONATHAN D. GLATER, New York Times

Corporate executives routinely sing the praises of arbitration clauses, the language buried in the fine print of contracts for mobile phones or credit cards, for example, that typically bars a consumer from going to court in the event of a dispute.

“Arbitration is an efficient, effective, and less expensive means of resolving disputes for consumers, employers, investors, employees and franchisees, in addition to the many businesses that use the same system to resolve business disputes,” more than a dozen business trade groups wrote in a letter to Congress in May.

Now three law professors suggest that companies are far less likely to use arbitration clauses in contracts with each other than they are in contracts with consumers.

“I believe they’re really using arbitration as a way of avoiding class action litigation,” said Theodore Eisenberg, a law professor at Cornell. Because it is not worth it to a single upset consumer to sue a big company, he said, “the only thing those companies fear is your having a plaintiffs’ lawyer aggregate you and people like you into a class action.”

Arbitration provisions are a controversial topic, although it is fair to say they are getting less attention right now in light of the current financial turmoil. But legislation limiting their use in nursing home contracts is working its way through Congress and on Monday, the Supreme Court will hear arguments in a case about the enforceability of arbitration agreements.

The findings by Professor Eisenberg, whose co-authors on the most recent study were Geoffrey P. Miller of New York University School of Law and Emily Sherwin of Cornell Law School, might prove provocative. Their study, which was described in an article this summer in the University of Michigan Journal of Law Reform, included contracts by 21 different telecommunications and financial services companies.

They found that companies included mandatory arbitration clauses in 75 percent of consumer agreements but in just 24 percent of contracts over all. Every consumer contract with an arbitration clause also waived possible group, or class, arbitration.

In prior studies, they found that companies used arbitration clauses in just 11 percent of contracts with other companies, Professor Eisenberg said. Companies say that arbitration is “a fair and cost-saving process,” he continued. “If they believe that is true across the board, why don’t they insist on it when they contract with each other?”

The research drew on public companies’ regulatory disclosures of material contracts ”” those that, generally, would be of interest to investors ”” and that has fueled some of the criticism of the results.

“If it’s a big, important contract, then you don’t put in an arbitration clause,” said Stephen J. Ware, a law professor at the University of Kansas. A dispute over a significant contract may call for the costlier but more thorough litigation process, he said, while smaller contracts with consumers do not.

“It’s entirely possible that businesses are being consistent in using arbitration more for immaterial contracts than for material contracts,” said Professor Ware, who is working on an article critical of the conclusions reached by Mr. Eisenberg and his colleagues.

The particular industries that Professor Eisenberg looked at, Professor Ware said, also may affect the findings. The finance and telecommunications sectors are more likely to include arbitration requirements in consumer contracts than are other sectors, he said.

The research does not address the question of whether arbitration more often leads to results favoring consumers or whether the process benefits corporations. That is another hotly debated issue.