Below is the abstract for “Arbitration and Rule Production,” available for download on SSRN.

Arbitration has been criticized as displacing cases from the public courts and thereby reducing the production of court precedent (the “displacement hypothesis”). Moreover, while arbitral awards might substitute for court precedent, the standard view is that arbitrators have little incentive to issue awards that produce legal rules because such awards mostly benefit parties to future disputes (the “positive externalities hypothesis”). This Article critically examines both the displacement hypothesis and the positive externalities hypothesis. In so doing, it not only fills gaps in the existing legal literature, but also offers new theoretical and empirical insights that provide the groundwork for a comprehensive account of arbitration and rule production.

The Article begins by evaluating the underlying factual predicate of the displacement hypothesis: the extent to which arbitration is used to resolve disputes in the relevant contracting market (defined as the type or types of contracts likely to give rise to disputes that raise legal issues in a particular field and in a particular jurisdiction). The Article then provides updated data on the use of arbitration clauses in credit card contracts and franchise agreements, showing that even ten years after the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion many standard form contracts still do not include arbitration clauses, contrary to the predictions of leading scholars.

Next, the Article examines rule production in partial-arbitration markets—contracting markets with some but not all disputes resolved in arbitration. The Article extends the analysis in Marc Galanter’s Why the “Haves” Come Out Ahead to explain how businesses might use arbitration clauses (instead of settlements) to avoid the creation of unfavorable court precedent—with the implication that increased use of arbitration might displace settlements rather than reduce the production of court precedent.

Finally, the Article considers rule production in arbitration-only markets. It reconsiders the positive externalities hypothesis, as stated by William Landes and Richard Posner, that arbitrators lack the incentive to issue reasoned awards. To the contrary, the interests of parties and the role of arbitration institutions provide good reason to believe that arbitrators will issue reasoned awards and that many of those awards will be publicly available—which, indeed, is common practice today in international arbitration, domestic U.S. consumer and employment arbitrationand, to an increasing degree, in domestic U.S. commercial arbitration.

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Christopher R. Drahozal

ASSOCIATE REPORTER, RESTATEMENT OF THE LAW, THE U.S. LAW OF INTERNATIONAL COMMERCIAL ARBITRATION

Chris Drahozal is an internationally known scholar whose writing focuses on the law and economics of dispute resolution, particularly arbitration. Drahozal is the author of multiple books and numerous articles on commercial arbitration. He has given presentations on the subject in Europe, Asia, Canada, and the United States, and has testified before Congress and state legislatures on arbitration matters as well. He has previously served as a Special Advisor to the Consumer Financial Protection Bureau, assisting with its study of arbitration clauses in consumer financial services contracts.

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