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Farshad Ghodoosi & Monica M. Sharif, Arbitration Effect (Jan. 26, 2022), available at SSRN.

Arbitration is a hotly debated topic which has garnered significant scholarly attention from both opponents and proponents. Nevertheless, arbitration clauses are prevalent in employment and consumer agreements. Furthermore, the U.S. Supreme Court, has generally enforced these clauses through a series of pro-arbitration decisions. But what do we know about the impact of arbitration clauses on employees’ or consumers’ right to sue? A fascinating new article, Arbitration Effect, by Farshad Ghodoosi and Monica M. Sharif sheds light on this question. The authors conducted a series of experiments to measure “the arbitration effect,” i.e., whether an arbitration clause negatively impacts an individual’s decision to sue. The findings of these experimental studies are as follows:

First, individuals are less likely to pursue legal actions in arbitration than in court. In other words, the inclusion of arbitration clauses leads to lesser likelihood of individuals suing—hence the arbitration effect.

Next, when individuals are given the choice, along with appropriate explanation (most notably that arbitration means waiving the right to court), they do not opt out of arbitration provisions. Individuals do not overwhelmingly reject arbitration as an option at the contracting phase, even when they are aware of disputes. Thus, even if people are less likely to use arbitration to settle disputes when they arise, they do not opt out of arbitration provisions at the contracting stage.

Further, informational nudges do not change the arbitration effect. When individuals are given information about the fundamental positive attributes of arbitration (e.g., regarding class action or win rate) they are still more likely to sue in court. When individuals are given neutral information regarding peer experience or their own experience, they are still more likely to pursue legal action in court than arbitration.

Moreover, individuals do not hold negative perceptions regarding the trustworthiness or reputation of firms that utilize arbitration agreements in their contracts.

The article contains several contributions: First, experimental studies may guide legislators and judges in making contract policy decisions. These experiments provide valuable information regarding parties’ preferences and the way contracts influence their behavior. This information could assist in formulating legal rules regarding enforceability of arbitration agreements. Second, these experiments show that parties might not sue in arbitration when dispute arises, however they do not opt out of arbitration even if they are given the chance when contracting. Thus, these experiments raise the question whether parties might have different preferences, regarding arbitration in this case, when contracting versus when a legal conflict arises. Therefore, when deciding arbitration agreements cases judges should not assume that the parties’ ex-ante and the ex-post considerations are the same. Third, it enriches the literature on a hotly debated issue among U.S. Supreme Court justices and academics alike, namely, arbitration agreements. Both proponents and opponents of arbitration have written a great deal on arbitration, its advantages and disadvantages, its benefits and limits, its desirability, and its difficulties. This article sheds new light on the subject of arbitration and the right to sue.

The empirical study herein raises a number of interesting sets of questions, upon which the authors touch briefly:

First, should courts enforce arbitration clauses, particularly in employment and consumer contracts, or should courts deem such clauses unconscionable and refuse to enforce them? Is enforceability based on employees’ and consumers’ consent to arbitration? Is the U.S. Supreme Court’s pro-arbitration approach warranted?

Next, is the legislation pending in Congress which prohibits or limits arbitration clauses in consumer and employment agreements warranted? Are these bills the correct regulatory solution? Should Congress paternalistically protect employees and consumers?

Further, what is the preferred legal approach to arbitration agreements? Is it the intervention by courts or Congress as described above or is it non-intervention, i.e., letting consumers and employees bargain their agreements directly? What would yield the best legal results? What is the best way to protect individuals’ (especially consumers’ and employees’) access to justice?

Furthermore, do consumers and employees place different value on court suit vis-a-vis arbitration? Are they indifferent to either of the two? Why do employees and consumers choose arbitration ex ante when entering a contract, but do not use arbitration ex post to pursue legal action? Why do parties act differently during contracting versus when disputes actually arise?

Is the “arbitration effect” good, bad, or neutral? If arbitration clause has a cooling effect, that is, it reduces the chances of a suit, should the law fight the arbitration effect and encourage legal suits, or should it embrace it and refrain from intervening?

Finally, what causes the arbitration effect? Why are parties less likely to sue in arbitration? Is this a reflection of their choice? Or of their perception of arbitration? Or is there another explanation, unrelated to the arbitration agreement or to the attributes of arbitration?

In sum, this is a thought-provoking article which raises many difficult, crucial questions.

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Cite as: Orit Gan, The Impact of Arbitration Clauses, JOTWELL (July 20, 2022) (reviewing Farshad Ghodoosi & Monica M. Sharif, Arbitration Effect (Jan. 26, 2022), available at SSRN),