Customizing Employment Arbitration
Thomas, Randall S., 1955-
Martin, Kenneth J.
O'Connor, Erin O'Hara, 1965-
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 other 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 CEO employment contracts entered into during the time period 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 firm efforts to protect the value of its 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 CEO’s and their firms located in California. Our data suggests that court efforts to protect employees by scrutinizing the specific carveouts we observe is both unnecessary and destructive.