Now that the U.S. Supreme Court has pretty much knocked down all barriers to contracts prohibiting classwide arbitration, via 2011′s AT&T Mobility v. Concepcion and last term’s American Express v. Italian Colors, have businesses actually rushed to add mandatory individual arbitration clauses to their contracts? A new study of agreements between franchisors and franchisees finds that they have not, and theorizes that the side effects of arbitration, including the limited right to appeal, may deter some businesses from adopting mandatory arbitration clauses. What’s more, the study’s authors – two law professors with long expertise in arbitration – hypothesize that the Supreme Court’s Amex ruling may permit businesses to prohibit class litigation without the collateral consequences of arbitration agreements.
In “Sticky’ Arbitration Clauses?: The Use of Arbitration Clauses after Concepcion and Amex,” Peter Rutledge of the University of Georgia and Christopher Drahozal of the University of Kansas look specifically at contracts in the franchise industry, which they say were predicted to be revamped after the court’s Concepcion ruling to include mandatory arbitration clauses. (Rutledge and Drahozal have previously studied mandatory arbitration clauses in credit card agreements, but Drahozal told me that his work as a special advisor to the Consumer Financial Protection Bureau precludes him from publishing on issues before the CFPB.) The empirical data they collected (from 68 franchisors listed as the top franchising opportunities in Entrepreneur Magazine and from a random sample of 239 franchise agreements filed with the Minnesota Department of Commerce) indicates that Concepcion did not actually have much of an impact on franchise contracts. The percentage of franchisors using arbitration clauses increased from 39.7 percent before the ruling to 44.1 percent in 2013, or 49.4 percent of franchises in 2011 to 50.6 percent in 2013. Not all of those clauses, moreover, include class arbitration waivers. In 2011, 77.8 percent of franchisors with arbitration clauses prohibited classwide actions; by 2013, after Concepcion, the percentage was up to 86.7 percent. Those numbers, write Rutledge and Drahozal, show “at most a slight shift to arbitration following Concepcion, and certainly not the ‘tsunami’ predicted by some commentators.” (Hat tip to Andrew Trask of McGuireWoods, author of the Class Action Countermeasures blog.)
The professors include the caveat that their data is only on franchise contracts, and they note that other businesses – particularly online consumer giants such as Sony, Netflix, eBay and Instagram – have inserted post-Concepcion mandatory arbitration clauses in their contracts. (Sony and Netflix switched over to arbitration after defending big data breach class actions, they point out.) The two years since Concepcion may also not have been enough time for a robust assessment of the ruling’s impact, Rutledge and Drahozal wrote. And in a phone interview, Drahozal emphasized that this study didn’t directly measure whether Concepcion has led to a decline in class action litigation.
Despite the caveats, I was quite interested in a theory Rutledge and Drahozal offered for why Concepcion and the court’s follow-up in Amex haven’t led every franchisor in the country to insert mandatory arbitration clauses and classwide waivers in contracts with franchisees. Part of the explanation may simply be inertia, or what the professors call “contract stickiness.” But they don’t think that’s the whole story. Arbitration, they explain, is often a good alternative to litigation, but it’s not without costs. “An arbitration clause does more than simply reduce the risk of class actions; it removes the case altogether from a judicial forum,” they wrote. “By using an arbitration clause, parties agree to use a bundle of dispute resolution services, a bundle that includes avoiding class actions but has other features (such as) decision makers selected by the parties, procedures paid for by the parties, and, importantly, a very limited appeals process that, generally, cannot be altered by contract.” Those can be significant collateral consequences, the paper said: “For businesses that perceive themselves as unlikely to be sued in a class action, these ‘bundling costs’ may discourage them from using an arbitration clause.”
That conclusion, Drahozal told me, would be consistent with what he and Rutledge previously found in a pre-Concepcion study of arbitration agreements in the credit card industry. The biggest credit card issuers, which were presumably the most likely to be targeted in class actions, typically included mandatory arbitration clauses in consumer contracts. Smaller banks and credit unions were less likely to mandate arbitration, probably because they were less likely to be sued in class actions.