Spring 2014 Workshop
Peter B. Rutledge (Georgia)
“Sticky” Arbitration Clauses?: The Use of Arbitration Clauses after Concepcion and Amex
(with Christopher R. Drahozal)
We present the results of the first empirical study of the extent to which businesses have switched to arbitration after AT&T Mobility LLC v. Concepcion. After the Supreme Court’s decision in Concepcion, commentators predicted that every business soon would use an arbitration clause, coupled with a class arbitration waiver, in their standard form contracts to avoid the risk of class actions. We examine two samples of franchise agreements: one sample in which we track changes in arbitration clauses since 1999, and a broader sample focusing on changes since 2011, immediately before Concepcion was decided. Our central finding is consistent across both samples of franchise agreements: the use of arbitration clauses in franchise agreements has increased since Concepcion, but not dramatically, and most franchisors have not switched to arbitration. While our results necessarily are limited to franchise agreements and may not be generalizable to consumer and employment contracts, they nonetheless provide valuable evidence on how businesses are responding to Concepcion.
Given our finding that only a handful of franchisors have switched to arbitration clauses since Concepcion, the next question is “why not”? We reexamine the assumptions underlying the predictions of a switch to arbitration ― that there is no reason for a business not to use an arbitral class waiver and that businesses readily and costlessly can and will modify their form contracts ― and find reason to question both. By using an arbitration clause, businesses do more than simply contract out of class actions: they contract for a bundle of dispute resolution services, including, for example, a very limited right to appeal. 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. In addition, even standard form contracts might be sticky ― i.e., resistant to change even if change might be in the business’s best interest. We find empirical support for both possible explanations for why many franchisors have not begun using arbitration clauses after Concepcion.
Finally, we consider the potential implications of the Court’s subsequent decision in American Express Cos. v. Italian Colors Restaurant for the future use of arbitration clauses. To the extent bundling costs deter the use of arbitral class waivers, we still would not expect all or most businesses to switch to arbitration even after Amex. Likewise, to the extent contract stickiness explains the limited switch to arbitration, Amex will have limited effect. In fact, Amex might actually make class action waivers that are not part of an arbitration clause more attractive than before. Although on its facts Amex addresses the enforceability of arbitral class waivers, much of the Court’s reasoning applies as well to non-arbitral class waivers, which avoid the bundling costs of an arbitral class waiver. Of course, even after Amex much legal uncertainty remains about the enforceability of non-arbitral class waivers. But on this broad interpretation, Amex on the margin increases the attractiveness of non-arbitral class waivers and might result in some uptick in their use (an increase that was occurring even before Amex, at least in franchise agreements).
Scott Baker (Washington University)
Reputation and Litigation: Using Formal Sanctions to Control Informal Sanctions
(with Albert Choi)
A long line of legal scholarship has examined how formal or legal sanctions can deter misbehavior or facilitate cooperation. A second strand of legal scholarship asks how informal or reputational sanctions can accomplish these same goals. Insufficient attention has been paid to why, in reality, these two kinds of sanctions often co-exist and how they interact with each other. This paper attempts to fill this gap by analyzing how the two types of sanctions can be jointly deployed in a long-term, relational contract setting. The paper advances four claims. First, both legal and reputational sanctions are costly: legal sanctions require spending resources on litigation while reputational sanctions can lead to inefficient failures to trade. An optimal deterrence regime must, therefore, make a trade-off between these two types of costs. Second, in achieving optimal deterrence, the two sanctions function as both substitutes and complements. As substitutes, relying more on one type of sanction requires less of the other to reach any desired level of deterrence. As complements, formal sanctions—by revealing information about past misconduct—can improve the performance of the informal sanctions. Indeed, a desire to generate information can explain why contracting parties might want legal liability to turn on a fault-based standard (such as “best efforts,” “commercially reasonable efforts,” or “good faith”). Third, the paper argues that the most effective deterrence regime will often combine both types of sanctions. By keeping legal sanctions low, the regime keeps the litigation costs in check while taking advantage of the informational benefits of litigation. Reputational sanctions, then, can make up for any shortfall in deterrence. Finally, the paper shows how various empirical findings are consistent with the theoretical predictions.
Erin O'Hara O'Connor (Vanderbilt)
(with Christopher Drahozal)
Bundling, or the package sale of two or more goods or services, is “ubiquitous.” Consider, for example, gift baskets, cable service packages, and cars sold with standard options. This widespread bundling suggests that firms and customers both benefit from packaged products and services. At the same time, however, recent technological innovation and legal change have resulted in an increasing unbundling of previously packaged products. Phone companies provide long distance calling plans separately from local phone service. Airlines charge separately for air travel and baggage handling. Music companies sell songs individually instead of in albums. Television programs are available a la carte. Economists and others debate the implications of unbundling for consumers and society, but that unbundling is occurring is beyond dispute.
Allen Blair (Hamline)
Finely Tuned: Calibrating Procedure through Contract
Contacting parties have tremendous latitude when defining the substantive obligations that they owe to one another as well as the law that will govern their agreement. Traditionally, parties have not enjoyed the same freedom to tailor the procedural mechanisms used in the event that a dispute arises. Party-driven rulemaking was seen as a dangerous threat the legitimate public function of courts. The consistent trend of case law, however, indicates that courts are abandoning their historic skepticism over the devolution of judicial authority and recognizing the advantages of seeing dispute resolution procedures, both outside of courts and within them, as defaults rather than immutable or mandatory rules.
Viewing procedural rules as defaults offers parties additional means of calibrating accuracy and efficiency to meet their ex ante preferences. As with all default rules, two fundamental questions exist: (a) is a particular rule mandatory or is it alterable; and (b) if it is alterable, how can it be altered. Although several commentators have wrestled with the first question, seeking to develop a normative theory about what rules, if any, should be contractible, the second question has largely gone unconsidered. More importantly, the work done to date tends to think about procedural contracting from the vantage of system designers or courts.
This Article takes a different approach. I consider both questions about default rules from the perspective of the contracting parties. With respect to the first question, I develop a non-formal model that anticipates when and to what degree parties will seek to customize procedure. This model suggests that the likely set of rules that parties may want to alter, as well as the extent of the alteration, is more constrained that some commentators have argued. Accordingly, many of the most egregious normative concerns raised about private procedural ordering are diminished or disappear altogether if one looks at the matter from the perspective of transacting parties.
I then turn to the second question and contend that most of the remaining normative concerns can best be addressed by varying the stickiness of the defaults rather than prohibiting procedural contracting entirely. In circumstances where negative externalities or imbalances created through disparate party contracting pose risks that are too great, lawmakers can place barriers to altering the default that can be overcome only at higher costs.
Navin Kartik (Columbia Economics Department)
"Does Competition Promote Disclosure?" A talk based on the paper:
Multi-Sender Acquisition and Disclosure of Verifiable Information
(with Wing Suen & Frances Xu)
Does competition promote disclosure? We study a class of disclosure games with multiple senders. Senders have linear preferences over a receiver’s posterior expectation of some state of the world, and conditional on the true state, each sender may draw an independent verifiable signal. We show that senders’ disclosure behavior are strategic complements when there is a cost to concealing information but strategic substitutes when there is a cost to disclosing information. Thus, when concealing information is costly, additional senders can only help a receiver; by contrast, when disclosure is costly, a receiver can be better off with fewer senders, less informed senders, or when senders face higher disclosure costs. These insights are derived from the following general result: when two Bayesian individuals have mutually-known different priors over the state, under suitable conditions, each believes that a more informative experiment (Blackwell, 1953) will, on expectation, bring the other’s posterior expectation closer to his own prior expectation.
Michael Roberts (Wharton)
The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting
Using hand-collected data from SEC filings, we show that bank loans are repeatedly renegotiated in order to modify contractual constraints designed to mitigate information related problems. The typical loan is renegotiated every eight months, or four times during the life of the contract. The financial health of the contracting parties, the uncertainty of the borrower’s credit quality, and the purpose of the renegotiation govern the timing of these renegotiations. However, the relative importance of these factors depends critically on when in the relationship the renegotiation occurs. This temporal dependence reflects a decline in information asymmetry during the lending relationship such that lenders can write more efficient contracts and rely more heavily on observable signals of borrower credit quality when amending the contracts.
Please email Tricia Philip-Rao for a copy of the paper.
April 28 — CANCELED
The Arrow Lecture
Given by Paul Milgrom (Stanford)