Companies Prefer Litigation in Business, but not Consumer, Contracts

Companies that tout the virtues of arbitration appear to prefer litigation for disputes involving contracts with other companies, according to a study by three law professors.

More than three quarters of contracts by companies studied required mandatory arbitration of consumer disputes. But fewer than 10 percent of their contracts outside the employment and consumer spheres required arbitration.

Assertions by large companies that mandatory arbitration is a better form of dispute resolution “appear to be disingenuous,” the study (PDF) concludes. The findings support the view that the real goal of arbitration is to thwart consumer class actions, according to the study posted on SSRN.

The New York Times reports on the findings by law professors Theodore Eisenberg and Emily Sherwin of Cornell, and Geoffrey Miller of New York University. The study examined contracts by 21 different telecommunications and financial services companies.

Law professor Stephen Ware of the University of Kansas told the Times that the industries studied may affect the findings. He also said it’s possible that companies require arbitration more often for immaterial contracts but not for material ones. “If it’s a big, important contract, then you don’t put in an arbitration clause,” he said.