Friday, October 13, 2006
Here is a must-read empirical piece by Theodore Eisenberg (Cornell) and Geoffrey Miller (NYU) on the number of companies that utilize binding arbitration clauses in their various types of contracts(including employment contracts).
Here's the abstract:
We study a data set of 2,858 contracts contained as exhibits in Form 8-K filings by reporting corporations over a six month period in 2002 for twelve types of contracts and a seven month period in 2002 for merger contracts. Because 8-K filings are required only for material events, these contracts likely are carefully negotiated by sophisticated parties who are well-informed about the contract terms. These contracts, therefore, provide evidence of efficient ex ante solutions to contracting problems.
The vast majority of contracts did not require arbitration. Only about 11 percent of the contracts included binding arbitration clauses. The rate of arbitration clauses varied substantially by type of contract. For example, pooling and servicing agreements and trust agreements had no arbitration clauses while employment and licensing contracts had the highest rate of arbitration clauses, 37 percent and 33 percent respectively. Arbitration clauses are strongly negatively associated with standardization of contract terms: the more standardized the contract, the less likely it will mandate arbitration of disputes. Contracts with California connections tended to have high rates of arbitration clauses while contracts with New York connections tended to have low rates of arbitration clauses. Arbitration clauses were significantly more likely to appear in contracts with international connections, but even in such contracts, the clauses were infrequent in absolute terms. Only 20 percent of international contracts contained arbitration clauses compared to ten percent of domestic contracts.
Our results suggest, in contracts involving two sophisticated actors, that the parties perceive preserving access to litigation to be value-enhancing compared to ex ante binding arbitration. This contrasts with widespread beliefs about arbitration’s efficiency and with imposition of mandatory arbitration clauses in some standardized consumer transactions such as credit card and cellular phone contracts.
You can download this ground-breaking piece on NELLCO at this link. I would be interested to hear whether the 37% number for employment contracts is considered high or low by readers out there.