Customizing Employment Arbitration
| Author | Erin O'Hara O'Connor - Kenneth J. Martin - Randall S. Thomas |
| Position | Professor of Law, Vanderbilt Law School - Regents Professor of Finance, College of Business, New Mexico State University - Professor of Law and Business, Vanderbilt Law School, Professor of Management, Owen School of Business, Vanderbilt University |
| Pages | 133-182 |
133
Customizing Employment Arbitration
Erin O’Hara O’Connor, Kenneth J. Martin & Randall S. Thomas†
ABSTRACT: According to the dispute resolution literature, one advantage
of arbitration over litigation is that arbitration enables the parties to
customize their dispute-resolution procedures. For example, parties can
choose the qualifications of the arbitrator(s), the governing procedural rules,
the limitation period, recoverable damages, rules for discovery and the
presentation of evidence and witnesses, and the specificity of required
arbitrator findings. While some scholars have questioned whether parties to
arbitration agreements frequently take advantage of this customization,
there is little solid empirical information about the topic.
In this Article, we study the arbitration clauses found in a random
sample of 910 Chief Executive Officer (“CEO”) employment contracts
entered into during the time period from 1995 to 2005 to determine how
much customization actually takes place. We find only a small number of
instances where fine-grained customization has occurred. Parties pay very
little attention to customizing arbitral proceedings in these employment
contracts although there is a significant increase in the practice over time.
We find this result surprising given that CEO contracts are heavily
negotiated documents.
Unexpectedly, we find that about half of the arbitration clauses in our
contracts carve out a subset of potential claims or types of relief by reserving
a right for the parties to seek such relief or file such claims in court. This
phenomenon of customizing the circumstances under which parties will use
arbitration has received almost no attention in the academic literature to
date. In particular, we find that the types of claims carved out for court
resolution are those involving a firm’s efforts to protect the value of its
Milton R. Underwood Professor of Law, Vanderbilt Law School.
Regents Professor of Finance, College of Business, New Mexico State University.
John Beasley II Professor of Law and Business, Vanderbilt Law School, Professor of
Management, Owen School of Business, Vanderbilt University.
† The authors would like to thank Christopher Drahozal, Theodore Eisenberg, Michael
Klausner, Larry Ribstein, Bo Rutledge, and Steve Ware for helpfu l comments and suggestions.
Thank you also to Lisa Bashinsky, Diane Pettit, Max Sills, and Shen Zhang for valuable research
assistance.
134 IOWA LAW REVIEW [Vol. 98:133
information, reputation, and innovation. CEOs and companies in the
information technology business are not significantly more likely to carve out
such claims, and the use of these carveouts is increasing over time,
suggesting that such carveouts are increasingly valuable to all firms.
Unfortunately, California court regulation of arbitration clauses in
employment contracts has significantly dampened the use of carveouts in
contracts between CEOs and their firms located in California. Our data
suggest that court efforts to protect employees by scrutinizing the specific
carveouts we observe is both unnecessary and destructive.
I. INTRODUCTION ...................................................................................... 135
II. A BRIEF ARBITRATION PRIMER ............................................................... 140
A. CHOOSING TO ARBITRATE ................................................................ 140
B. COURT REGULATION OF AGREEMENTS TO ARBITRATE ....................... 145
C. AGREEMENTS TO ARBITRATE EMPLOYMENT DISPUTES ....................... 149
III. UNIVARIATE ANALYSIS ............................................................................ 158
A. THE CONTRACTS SAMPLE AND THE PREVALENCE OF ARBITRATION
CLAUSES .......................................................................................... 158
B. ARBITRATION PROCEDURE AND COST FINDINGS ................................. 162
C. OTHER FEATURES OF ARBITRATION CUSTOMIZATION ......................... 166
D. CARVEOUTS: CUSTOMIZING THE CHOICE BETWEEN LITIGATION AND
ARBITRATION ................................................................................... 167
E. THE CALIFORNIA EFFECT: IT FIRMS VERSUS NON-IT FIRMS ................ 171
IV. MULTIVARIATE ANALYSIS ....................................................................... 172
V. IMPLICATIONS AND CONCLUSIONS ......................................................... 177
A. INFORMATION, REPUTATION, INNOVATION, AND THE NEED FOR
FURTHER CARVEOUT STUDIES ........................................................... 177
B. CARVEOUTS AND UNCONSCIONABILITY .............................................. 180
2012] CUSTOMIZING EMPLOYMENT ARBITRATION 135
I. INTRODUCTION
Arbitration has become an increasingly popular form of dispute
resolution. Today, it is routine for businesses, consumers, and employees to
resort to arbitration rather than courts when they seek redress.1 This trend
has been particularly pronounced in the United States, where the Supreme
Court has interpreted the Federal Arbitration Act (“FAA”)2 to contain a very
strong pro-arbitration policy.3 Parties can agree to arbitrate virtually any
claim, including claims arising under the federal securities acts, patent law,
antitrust, the Racketeer Influenced and Corrupt Organizations Act
(“RICO”), and employment discrimination and other civil rights acts.4
According to Supreme Court precedent, the broad respect for agreements
to arbitrate applies both when they are negotiated between the parties and
when they appear in contracts of adhesion, including consumer5 and
employment contracts.6 Arbitration clauses are even upheld where the clear
purpose of arbitration is to circumvent procedural mechanisms like class
actions, designed to ensure that such claims will be brought in the first
place.7 With relatively limited exception, the Court has uniformly struck
down state regulations that interfere with arbitration under the FAA.8
Arbitration is thought to be popular for many reasons, including that it
can be customized to suit the desires of the parties.9 Scholars have noted
that parties often use arbitration clauses to select a specific arbitration
association, a particular location for the proceedings, and an off-the-rack set
of governing rules.10 In addition, parties can specify the number of
arbitrators who will decide their case(s),11 qualifications of their
1. See infra Part II.B.
3. See infra Part II.A.
4. See infra notes 78–87 and accompanying text.
5. The Supreme Court has been particularly active this term in ensuring the
enforcement of arbitration clauses in consumer contracts. See, e.g., Marmet Health Care Ctr.,
Inc. v. Brown, 132 S. Ct. 1201 (2012) (per curiam) (nursing home care agreements);
Compucredit Corp. v. Greenwood, 132 S. Ct. 665 (2012) (consumer credit card contracts).
discrimination claims).
7. See, e.g., AT&T Mobility LLC v. Concepcion, 131S. Ct. 1740 (2011) (holding that
California law prohibiting many class waiver clauses in arbitration agreements was preempt ed
by the FAA).
8. See infra notes 88–91 and accompanying text.
9. See David Horton, Arbitration as Delegation, 86 N.Y.U. L. REV. 437, 444 (2011) (noting
that federal arbitration law provides parties with an arbitral option that they can f ill with
customized procedures).
10. See, e.g., 1 GARY B. BORN, INTERNATIONAL COMMERCIAL ARBITRATION 619 (2009)
(describing the material terms of an arbitration agreement as “number of, identity of and
means of selecting arbitrators, arbitral seat, scope of agreement, institutional rules, [and]
choice of law”).
11. Id.
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