INTRODUCTION
A BRIEF ARBITRATION PRIMER
To set the scene for our research questions, in subsection A we briefly describe the growth of arbitration and the common factors that may lead contracting parties to choose dispute arbitration. Subpart B then discusses the current state of arbitration law as it relates to judicial regulation of parties' agreements to arbitrate, and addresses the application of the doctrine of unconscionability to arbitration clauses in contracts of adhesion.
CHOOSING To ARBITRATE
The Rutledge and Drahozal study found that 94% of arbitration clauses addressed the number of arbitrators, but only 42% of issuers addressed the allocation of the costs of arbitration.o. notes the lack of arbitration clauses in insured mortgage agreements, but provides no satisfactory explanation for their absence). We were interested in learning whether the use of arbitration clauses depends on either the type of industry or the primary location of the firm.
COURT REGULATION OFAGREEMENTS To ARBITRA TE
striking Montana statute that required contracts with arbitration clauses to provide a prominent notice of the clause on the first page of the contract). In this article we seek a better understanding of the use of carve-outs in arbitration clauses included in CEO employment contracts. We conclude this section with an analysis of the use of judicial excavations in these agreements and.
This new, integrated document reflects all the terms of the employment contract between the CEO and the company. For each of the employment contracts containing an arbitration clause, we coded a wide range of additional information about the content of the arbitration provision, including. Primary location is probably a rough, albeit imperfect, proxy for the place of employment of the CEO.
In our contracts, 57, or 12%, of the arbitration clauses included a provision requiring the parties to keep the details of a dispute confidential. Only 47, or io%, of the arbitration provisions stated that the arbitrator was required to provide a written statement of her findings. In 30, or 6%, of the arbitration clauses, the parties agreed to allow discovery and specified how it would be conducted.
Even less often, in 8, or 2%, of the clauses, the parties agreed on what was permissible to testify at the arbitration hearing. In total, 32% of contracts with arbitration clauses and 69% of contracts contain at least one carveout. We found this caveat in 30% of contracts with arbitration clauses and 64% of contracts containing at least one covenant.
However, with respect to specific types of opt-outs, Table 6 shows that companies outside of California were much more likely to incorporate most of the types of opt-outs examined. Is the frequency of the use of opt-outs positively or negatively correlated with the use of arbitration clauses in the first place.
AGREEMENTS ToARBITRATEEMPLOYMENTDISPUTES
UNivARATE ANALYSIS
THE CONTRACTS SAMPLE AND THE PREVALENCE OFARBITRATION
We created our sample of CEO employment contracts by creating a list of all companies included in the S&P 1500 from 1995 to 2005. If so, we searched for those employment contracts attached as evidence to one of the company's securities filings. papers. . They are usually quite short and affect only a few terms of the initial (or renegotiated) contract, usually specifying changes to the executive compensation agreement.
We have not attempted to include all the other various contractual agreements that exist between CEOs and their companies. A revised contract includes all changes in various amendments and often adds new terms. Next, for some of the variables included in our multivariate analysis, we needed additional information about the CEOs and their companies.
The return on equity is then averaged over the five-year period prior to the start date of the CEO's compensation contract. To determine whether California law is affecting contracting parties, we divided firms based on the firm's designated primary location in Compustat. Overall, some version of the AAA procedural rules is chosen in 306 of the 451 contracts (68%) that specify the rules for arbitration.
For example, 47 of the contracts left out the award of costs by the arbitrator, a provision that is no more informative than silence.
OTHER FEATURES OFARBITRATION CUSTOMIZATION
Overall, 37% of the contracts with arbitration clauses and 79% of contracts that had at least one exception specified that disputes involving the confidentiality clauses would or could be resolved in courts. Of the 418 contracts with confidentiality clauses, 172, or 41%, of them cut these disputes out for court decision. For example, while only 7% of contracts with arbitration clauses cut out disputes involving the contract's non-severance clause, it is likely that many, and perhaps most, of these contracts do not contain a non-severance clause.
We first tested a null hypothesis that there was no difference in the incidence of code carve use based on whether the firm was primarily located in California or not. Disputes involving the agreement's noncompete clause were overturned in 38% of non-California firms compared to 5% of California firms.'99 However, this difference may have multiple causes. We found that 24% of California firm arbitration clauses, compared to only io% of non-California firm provisions, reserved the right to seek preliminary injunctive relief, a difference that is statistically significant at the 1 % of confidence.
California companies appear to be forced to exclude fewer claims than they might otherwise exclude in order to maintain enforceability of the arbitration clause, a clause that California companies are more likely to seek in the first place. This form of estimation allows us to determine whether the presence of any independent (right-hand) variable increases or decreases the likelihood of including an arbitration clause in a CEO employment contract. This is a way of testing the persistence of the univariate effects we found in Tables 6 and 7.
Only about half of CEO employment contracts with arbitration clauses contain carveouts, but virtually all franchise agreements contain them.2o6 Why are there fewer carveouts in CEO employment contracts.
CARVEOUTS: CUSTOMIZING THE CHOICE BETWEENLITIGATIONAND
MULTIVARIATE ANALYSIS
In Table 8 we present the results of a multivariate logistic regression analysis using the presence or absence of an arbitration clause as our dependent variable. For independent variables, we include firm size, firm type (IT, non-IT), firm location (inside or outside California), an interaction term (“Cal x IT”), the presence of an arbitration clause in a previous CEO contract at this company, and the average return over five years. We include the variables average return on capital, arbitrage clause in previous contract and a control variable for time, because our previous research has shown that these have important influences on the presence of an arbitrage clause.-o= In Table 8, Model i we let the interactive variable CA x IT disappears, namely I when a company is both located in California and an information technology company.
ARBINPRIORCONTRACT is a dummy variable equal to i if a previous CEO contract in the company included an arbitration clause, o if not. 05, or the .io level, respectively The results show that there is a strong and consistent California effect on the presence of an arbitration clause in CEO contracts. In addition, the five-year average return on equity, the presence of an arbitration clause in the CEOs' previous contracts, and a time trend are all statistically significant and have the same signs as we found in our previous work.203.
Using the same variables shown in Table 8, we ran a variety of different regressions for the presence and degree of customization (number of tailored provisions contained in a single arbitration clause). We found that there was a strong, significant positive time trend in both the presence of adaptation and its degree. There is a weakly significant negative effect on the presence of exceptions for California-based firms, but this is accounted for for in-state IT firms.
ARBIN_PRIORCONTRACT is a dummy variable equal to i if a previous CEO contract in the company contained an arbitration clause, o otherwise.
IMPLICATIONS AND CONCLUSIONS
INFORMATION, REPUTATION, INNOVATION, AND THE NEED FOR
One explanation is that a higher fraction of franchise contracts are not negotiated; thus, the franchise contracts may more closely represent the preferences of the franchisor, which are tempered in the CEO contracts by the ability of CEOs to fulfill their preferences. Another explanation, explored below, is that legal constraints force the parties in the CEO employment contract negotiations to include fewer exceptions in their agreements than are found in franchise contracts. As an initial matter, in the regression, the presence of an arbitration clause in a previous contract did not significantly affect the probability of the presence of a distribution, suggesting that parties who have long been comfortable with arbitration appear to only used benefits as often (or as rarely) than other parties.
Some distributions may be positively correlated and some negatively correlated with the use of arbitration clauses. Despite a large number of unanswered questions, the exceptions studied in the CEO employment contracts are instructive and can be used to draw tentative conclusions. For one, the exclusions found in these contracts, as well as in the franchise contracts, appear to be primarily focused on using courts to protect the value of the firm's information, reputation, and innovation.
To the extent that parties contract for particular courts at least some of the time, those choices can provide lessons for other courts about how to better protect and promote these interests. The arbitration clauses in CEO employment contracts have important policy implications for the regulation of employment arbitration clauses more generally. First, in some cases the cost of arbitration is so high that, if forced to pay it, the employee may effectively be prevented from vindicating some or all of her claims.219 Cost issues have been addressed by employers, who in many cases have agreed has. to pay some or all of the arbitration costs,o2 0 and by arbitration associations, which now offer low-cost arbitration of employment disputes.221.
Second, arbitration agreements can have the effect of circumventing procedural and other statutory guarantees for employees.222 Here, too, some of the arbitration associations have provided for the protection of employees with due process protocols223, and a review of case law shows that employers have responded to legal and private pressure by incorporating fairer provisions into their arbitration clauses.
