CUSTOMIZING EMPLOYMENT ARBITRATION, PART 1

Erin O’Hara O’Connor

Florida State University College of Law

Kenneth J. Martin

Randall S. Thomas

Customizing Employment Arbitration

Erin O’Hara O’Connor,[1] Kenneth J. Martin[2] ^{[3] [4]} & Randall S. Thomas[5]

ABSTRACT: 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 some 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 Chief Executive Officer (“CEO”) employment contracts entered into during the time period from 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 a firm’s 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 CEOs and their firms located in California. Our data suggest that court efforts to protect employees by scrutinizing the specific carveouts we observe is both unnecessary and destructive.

1. Introduction……………………………………………………………………………………………… 135
2. A Brief Arbitration Primer…………………………………………………………………………. 140
3. Choosing To Arbitrate…………………………………………………………………. 140
4. Court Regulation of Agreements To Arbitrate………………………….. 145
5. Agreements To Arbitrate Employment Disputes 149

• Univariate Analysis………………………………………………………………………………….. 158

1. The Contra cts Sample and the Prevalence of Arbitra tion

Clauses………………………………………………………………………………………….. 158

1. Arbitration Procedure and Cost findings………………………………….. 162
2. Other features of Arbitration Customization…………………………….. 166
3. Carveouts: Customizing the Choice Between Litigation and

Arbitration……………………………………………………………………………………. 167

1. The California Effect: IT firms Versus Non-IT firms…………………. 171
2. Multivariate Analysis………………………………………………………………………………. 172
3. Implications and Conclusions……………………………………………………………………. 177
4. Informa tion, Reputa tion, Innovation, and the Need for

Further Carveout Studies……………………………………………………………. 177

1. Carveouts and Unconscionability……………………………………………….. 180
2. Introduction

Arbitration has become an increasingly popular form of dispute resolution. Today, it is routine for businesses, consumers, and employees to resort to arbitration rather than courts when they seek redress.^[6] This trend has been particularly pronounced in the united States, where the Supreme Court has interpreted the Federal Arbitration Act (“FAA”)^[7] to contain a very strong pro-arbitration policy.^[8] Parties can agree to arbitrate virtually any claim, including claims arising under the federal securities acts, patent law, antitrust, the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and employment discrimination and other civil rights acts.^[9] According to Supreme Court precedent, the broad respect for agreements to arbitrate applies both when they are negotiated between the parties and when they appear in contracts of adhesion, including consumer^[10] and employment contracts.^[11] Arbitration clauses are even upheld where the clear purpose of arbitration is to circumvent procedural mechanisms like class actions, designed to ensure that such claims will be brought in the first place.^[12] With relatively limited exception, the Court has uniformly struck down state regulations that interfere with arbitration under the FAA.^[13]

Arbitration is thought to be popular for many reasons, including that it can be customized to suit the desires of the parties.^[14] Scholars have noted that parties often use arbitration clauses to select a specific arbitration association, a particular location for the proceedings, and an off-the-rack set of governing rules.^[15] In addition, parties can specify the number of arbitrators who will decide their case (s),^[16] qualifications of their

arbitrator(s),^[17] and the governing procedures for choosing the decision maker(s) .^[18] The parties can further specify the mode and conduct of arbitral proceedings, including the relevant rules of discovery^[19] and of evidence.^[20] Furthermore, the parties can state whether they wish the arbitrator’s findings to contain the arbitrator’s reasoning,^[21] and they can choose a purely private form of law to guide the substantive outcome.^[22]

While the possibilities for customization seem limitless,^[23] there has been little work on understanding whether the parties actually do customize their arbitration clauses in this manner.^[24] What types of customization are common for arbitration agreements, and what types are more likely the products of creative but fanciful thinking by law professors?^[25]

In this Article, we explore these questions using a hand-coded, randomly selected sample of 910 CEO employment contracts at S&P 1500 public companies. CEO employment contracts are particularly useful for our

inquiry because they are heavily negotiated documents entered into by sophisticated parties. Consistent with our earlier research, we find that the use of arbitration provisions is increasing over time, but that beyond a few basic decisions about which arbitration associations to use, whether to employ those associations’ arbitration rules, and to a much lesser extent, how to divide the costs of the proceeding, these parties and their attorneys rarely focus on customizing arbitration provisions. In other words, despite the robust academic literature on the subject, real-world customization is largely absent, although we find some evidence that it is slowly increasing over time.

We are surprised to find strong evidence of a very different form of customization: carving out certain types of litigable claims from otherwise broad agreements to arbitrate. These litigation carveouts have received scant attention in the arbitration literature.^[26] In fact, most of the arbitration literature assumes that parties face a binary choice between courts and arbitration for the resolution of all of their disputes. But in the context of CEO employment agreements, we find it is commonplace for the parties to draft provisions generally requiring arbitration but at the same time reserving a right for the parties to go to court under some defined circumstances. Effectively, these parties are customizing the border between courts and arbitration for specific types of claims. We believe that the carveouts studied in this paper might be common in other types of contracts as well,^[27] making them an important topic for future research.

More broadly, our study of CEO employment contracts provides a unique opportunity to revisit arguments about some common practices related to arbitration between employers and employees. Employment arbitration is controversial in the United States.^[28] Although employment

arbitration promises a quicker, cheaper, and less adversary means for employees to resolve their disputes with employers, critics charge that the arbitration agreements are contracts of adhesion, that the employment arbitration system is rigged in favor of employers, and that employers utilize arbitration to effectively deprive employees of their rights.^[29]

Given the concerns about the fairness of employment arbitration, governments and arbitration associations have responded in several different ways.^[30] Particularly relevant to this Article, many U.S. state courts use the contract law doctrine of unconscionability to scrutinize the terms of arbitration clauses in employment contracts for fundamental fairness. In the context of arbitration carveouts, a number of U.S. courts will strike an arbitration clause as unconscionable if it forces only the employee to arbitrate her claims, while still preserving the employer’s right to enforce its rights in court.^[31] In California, state courts have struck down arbitration clauses that on their face require both parties to bring their claims to arbitration but then carve out from arbitration claims that are likely to be brought by the employer.^[32] Given that California is often a leader in state efforts to regulate unfair arbitration provisions, its stance on this issue could well spread to other states.

Our CEO employment contracts provide a window into the terms of employment agreements where both parties have significant bargaining power and actively negotiate their agreements with the assistance of counsel.^[33] These agreements are admittedly very different from the adhesion contracts typically found in employment, but the very fact that our contracts are negotiated can provide some indication of whether sophisticated employees think arbitration disserves their interests. In our contracts, the terms that survive mutual negotiation likely are not the product of employer overreaching, but rather reflect the strong economic desire of one of the parties to obtain a legal right, even if it means that the party must provide extra compensation, or alternate concessions, in order to obtain the right. This suggests that if we find that the parties commonly agree to certain arbitration provisions, these provisions must be the result of an efficient

bargain between them.^[34] Such findings may have implications for the enforceability of similar provisions in other employment contracts; if even sophisticated employees are comfortable accepting these terms, then perhaps courts should reconsider their hostility to such contract clauses. Along these lines, our first important finding is that about half of the CEO employment agreements provide for the arbitration of disputes, and that the use of arbitration clauses is increasing significantly over time. Our finding suggests that the use of arbitration in the context of employment provides significant perceived legitimate benefit to one or both parties, at least for sophisticated parties.

Our second finding relevant to state regulation of arbitration clauses is that almost half of the contracts with arbitration clauses carve out the very types of disputes that would cause the California courts to strike employment arbitration clauses. These carveouts include disputes pertaining to the confidentiality, noncompete, nonsolicitation, and nondisparagement clauses of the employment agreement. Collectively, these clauses appear to be designed to enable the firm to protect the value of its information, reputation, and innovation. Although we believe that employment arbitration provisions probably should be scrutinized by courts to ensure their fundamental fairness, it appears that these carveouts serve a legitimate economic function for the company and do not simply represent overreaching in a one-sided contract of adhesion. Court scrutiny of these carveouts in employment contracts, especially CEO and top management contracts, therefore seems misplaced.

Our study also provides evidence that the California court decisions have significantly influenced the drafting of arbitration agreements by firms primarily located in California. Using multivariate regression analysis, we find that California firms were significantly more likely than non-California firms to contract for preliminary relief in courts (a carveout permitted by California courts), but significantly less likely to carve out other, more nuanced, claims for resolution by courts (carveouts considered suspect in California courts). For many non-California firms, court resolution of the latter types of claims, such as those involving restrictions on disclosing confidential firm information or soliciting key employees, appears to enable firms to better protect themselves and their shareholders. Those benefits are denied to firms primarily located in California. In the end, California doctrine provides no additional legitimate benefit to employees while inflicting harm on local firms.

We proceed as follows. Part II frames our research questions and provides a review of the existing academic literature and governing law on

arbitration agreements and their contents. In Part III we describe our CEO employment contracts sample and provide a univariate analysis of its contents. Part IV provides a multivariate analysis of the determinants of the use of arbitration provisions, customization, and carveouts. Part V discusses the implications of our study for court treatment of arbitration carveouts and for future scholarship.

1. A Brief Arbitration Primer

To set the stage for our research questions, in Subpart A we briefly describe the growth of arbitration and common factors that can lead contracting parties to opt for arbitration of disputes. Subpart B then discusses the current state of arbitration law as it relates to court regulation of parties’ agreements to arbitrate, and it addresses the application of the unconscionability doctrine to arbitration clauses in contracts of adhesion. Subpart C concludes by describing special court concerns regarding employment arbitration.

1. Choosing To Arbitrate

For many contracting parties, arbitration has become an increasingly popular form of dispute resolution. The typical means of choosing arbitration is for the contracting parties to specify in their agreement that any future disputes will be subject to binding arbitration.^[35] Survey data^[36] and scholars’ claims^[37] both indicate an increasing use of arbitration clauses in international commerce. Domestically, the past few decades apparently have witnessed an increased use of arbitration clauses in a wide variety of agreements, including securities industry brokerage account contracts,^[38] employment contracts,^[39] consumer contracts,^[40] and even nursing home care agreements.^[41]

The popularity of arbitration has also led to a dramatic rise in the reported use of arbitration association services. For example, the International Chamber of Commerce’s International Court of Arbitration has had a twenty-fold increase in filed cases between 1956 and 2007.^{35 36 [42]} Between 1980 and 2007, the number of international arbitrations filed with the American Arbitration Association (“AAA”) increased more than six­fold.^[43] The caseload of eleven arbitral institutions located throughout the world increased from a total of 1392 filings in 1993 to 3235 filings in 2007,^[44] and to 3685 in 2010.^[45] Between 1997 and 2001, the number of employment arbitrations filed with the AAA rose by 60%;^[46] today, an estimated one-third of nonunion employees are subject to arbitration clauses for their employment-related disputes.^[47] Between 2003 and the first quarter of 2012, 61,702 consumer arbitration cases were concluded under the auspices of the AAA.^[48] And, as noted by Gary Born, “the use of arbitration as a means of resolving new (previously ‘un-arbitrated’) categories of disputes, including class actions, bilateral investment treaty claims and human rights claims, attests to its enduring and increasing popularity.”^[49]

Arbitration can provide a number of advantages for contracting parties. In the context of cross-border transactions, for example, arbitration can provide a neutral forum,^[50] and the decisions rendered by arbitrators are more easily enforced across borders than are court judgments.^[51] Moreover, arbitration is a much more heterogeneous phenomenon than is court determination, and often the parties are permitted to contract over the particular features of arbitration. This freedom enables the parties to customize the arbitration process to suit their needs.^[52]

For example, the parties can ensure that the dispute is heard by decision makers with industry experience who will be familiar with relevant custom and trade usage.^[53] In addition, arbitration can be (although often is not) streamlined to provide relatively cheap and speedy resolution of claims,^[54] and it can enable the parties to avoid juries,^[55] tailor the parties’ rights to engage in discovery,^[56] eliminate punitive damage awards,^[57] shift fees and costs amongst the parties,^[58] help ensure confidentiality regarding the details of the dispute,^[59] provide a right to appeal awards to an appellate panel,^[60] and provide relative certainty about the governing law of the contract.^[61] In general, arbitrators possess the authority provided to them by the association chosen for arbitration, which typically includes the powers that a judge would possess, but the parties’ agreement can further customize the exercise of an arbitrator’s authority.^[62]

There is little empirical evidence regarding the degree to which contracting parties actually do customize their arbitration clauses. Christopher Drahozal’s studies of franchise contracts and (along with Peter B. Rutledge) consumer credit card agreements indicate that companies often carefully address several possible features of arbitration, but they also tend to remain silent regarding several possible issues that could be addressed. Regarding franchise contracts, only about 10% of the arbitration clauses addressed the arbitration award’s standard of review, and only about 20% of the contracts addressed the governing rules for discovery, but approximately 96% of the contracts specified the location of the arbitration proceeding.^[63] By 2007, approximately 60% of franchise contract arbitration provisions specified the number of arbitrators, 70% provided time limits for filing claims, 85% restricted the award of punitive damages, 85% also addressed the allocation of the costs of arbitration, and almost 90% addressed the availability of class arbitration.^[64]

In contrast, a sample of 293 standard-form credit card agreements indicated that the drafting patterns overlapped with, but were also somewhat distinct from, the franchise agreements. 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.^[65]

Nearly half of these contracts addressed party rights to challenge the award in front of an arbitral appeals panel, but only about 2% stated that the parties had an obligation to keep the details of any dispute confidential, only 2% provided for limits in discovery, and only 4% provided time limits for filing claims. The very small incidence of these latter provisions is likely due to the fact that some arbitration associations will not hear consumer arbitrations unless they satisfy minimum standards of fairness to the consumer,^[66] and some courts will strike arbitration clauses in consumer contracts if they appear to be unfairly one-sided.^[67]

Although growing in popularity, arbitration is not well suited for all contracting parties. For example, when at least one party wishes to rely on the certainty of the legal principles that will be applied to the case,^[68] or forecasts a potential need for assistance to foreclose on property,^[69] courts may be preferred. In addition, because of the very limited ability to obtain judicial review of arbitral awards,^[70] a company concerned about very large judgments relative to the value of the company might prefer the appeals process available in courts.^[71] In their study of material contracts filed with the SEC, Eisenberg and Miller found very low rates of the use of arbitration clauses in several types of high-level business contracts where applicable legal rules are relatively well developed.^[72] They found virtually no use of arbitration clauses in trust agreements, pooling and service agreements, and bond indentures, and only about 5% use of arbitration clauses in service agreements, about 12% use for securities purchases, and 19% use in merger agreements.^[73]

We studied the use of arbitration clauses in the context of CEO employment contracts to determine how commonly these parties choose to have their disputes arbitrated and to glean some indication of whether the use of arbitration clauses in these contracts is growing over time. We were interested in learning about whether the use of arbitration clauses depends on either the industry type or the primary location of the firm. Regarding the specific details of arbitration agreements, we wanted to observe the extent to which arbitration agreements are customized in CEO employment contracts, and we sought a determination of what factors might influence this customization.

We also sought to determine the extent to which individually negotiated contracts respond to the desirability of otherwise applicable state laws. For example, one finding of our study is that contracts involving firms primarily located in California are more likely to include an arbitration clause. This increased use might well result from the fact that California courts will not provide a firm with some of the legal protections that it seeks, including enforcement of noncompete provisions in an employment contract.^[74] The increased use of arbitration clauses by California firms is particularly noteworthy given that, as discussed below, California courts are especially hostile to arbitration clauses in employment contracts. This hostility might, in other circumstances, lead firms to use arbitration clauses less rather than more often.

1. Court Regula tion of Agreements To Arbitrate

When parties do enter into a written agreement to arbitrate their disputes, a strong federal pro-arbitration policy ensures that their choice will be respected in most cases. In 1925, Congress passed the FAA,^[75] which provides for the enforcement of both arbitration clauses and arbitration awards found in contracts “evidencing a transaction involving commerce.”^[76] The FAA instructs courts to stay any pending court proceeding and to issue an order to compel arbitration if one of the parties seeks to enforce an arbitration agreement.^[77] Congress amended the FAA to add Chapter 2^[78] after the United States joined the New York Convention, which requires

member nations to enforce arbitration agreements and awards.^[79] Chapter 2 provides protections to contracting parties who enter into commercial agreements with a “reasonable relationship” to “one or more foreign states.”^[80] The Supreme Court has held that the FAA binds state as well as federal courts.^[81] And for international commercial relationships, Chapter 2 provides an automatic right to the defendant to remove a case to federal court for enforcement of the arbitration agreement or award.^[82]

In order for the arbitration agreement to be enforced, however, the dispute must involve a subject matter that is capable of resolution by arbitration.^[83] It is not uncommon for the governments of other nations to determine that in order to protect certain important public rights or the interests of third parties, some claims are not referable to arbitration.^[84] Elsewhere, common forms of nonarbitrable subject matter include criminal offenses, consumer employment disputes, and claims involving intellectual property and domestic relations.^[85]

In the United States, however, the Supreme Court has progressively limited the circumstances under which a court can determine that a dispute is nonarbitrable, in both the international and domestic contexts. For example, the Supreme Court has determined that federal securities act claims can be arbitrated, notwithstanding language in the federal statutes that forbids parties to waive any of their statutory rights.^[86] The Court has reasoned that arbitration is merely a venue for dispute resolution and does not necessarily entail a diminution of legal protection.^[87] In addition, antitrust claims,^[88] RICO claims,^[89] and claims under the Age Discrimination and Employment Act^[90] are all arbitrable. More generally, the Court has stated that “[i]t is by now clear that statutory claims may be the subject of an arbitration agreement.”^[91] In fact, earlier this year in a case involving federal consumer credit card regulations, the Supreme Court suggested that federal law claims should be deemed arbitrable unless Congress specifically provides otherwise.^[92]

The Supreme Court has similarly curtailed state power to limit the pro­arbitration policy embedded in the FAA, finding that state laws that deem claims nonarbitrable are preempted.^[93] Furthermore, state procedural laws designed to make sure that parties to adhesion contracts have notice that the agreement is subject to arbitration are preempted under the FAA.^[94] State laws that apply only to arbitration agreements are not permitted.^[95] And state laws that hinder the purposes and objectives of the FAA’s pro­arbitration policy apparently are also preempted, even if they are not directed solely at arbitration.^[96]

The only situation under which a court can refuse to enforce an arbitration clause in an agreement governed by the FAA is when, under § 2 of the FAA, the court finds “such grounds as exist at law or in equity for the revocation of any contract.”^[97] Grounds for refusing to enforce such arbitration agreements must therefore derive from generally applicable contract doctrines, such as fraud, duress, or unconscionability.^[98]

Unconscionability is a creature of state law, so its contours vary by jurisdiction. As a general matter, however, contract provisions can be struck down in whole or in part if the agreement is infected with elements of both procedural and substantive unconscionability such that it appears to the court that enforcing the contract as written would be fundamentally unfair.^[99]

Procedural unconscionability is present when a party lacks a meaningful choice or there is some defect in the bargaining process that causes a court to question the true assent of the party to the terms of the contract.^[100]

Substantive unconscionability is present when the terms of the bargain unreasonably favor one party.^[101] Some courts have determined that contracts of adhesion, offered on a take-it-or-leave-it basis to one of the parties, carry with them some procedural unconscionability and that terms in contracts of adhesion can be struck down if they appear to be oppressive or unfairly one- sided.^[102]

Courts have used the unconscionability doctrine in the context of contracts of adhesion, including both consumer and employment contracts, to ensure that the arbitration clause does not effectively deprive the nondrafting party of her ability to vindicate her claims.^[103] For example, arbitration clauses that force a party to an adhesion contract to travel long distances or otherwise incur prohibitively expensive costs in order to arbitrate claims can be struck down as unconscionable.^[104] In addition, arbitration clauses may be deemed unconscionable when coupled with a limitation of the remedies available to consumers.^[105] Courts will scrutinize individual arbitration agreements for a determination of whether the process for choosing arbitrators appears to be designed to produce non­neutral decision makers.^[106] If an arbitration clause provides only one party special procedural advantages in arbitration, the clause can likewise be deemed unconscionable. These last two features were present in the arbitration clause used by Hooters of America, Inc. during the 1990s.^[107] Hooters created a list of “acceptable arbitrators” from which the parties would choose, and it could modify that list at any time. Moreover, under the arbitration provision, the employee was required to provide the employer with notice of the claims as well as details of the claims and was thereafter forbidden to raise additional claims later, but these rules did not apply to the employer. In addition, the employee was required to provide the employer with a list of witnesses and a summary of facts known about each, but the employer was subject to no corresponding duty. Finally, the employer—but not the employee—was provided with rights to appeal the arbitrator’s decision to a court. Because the arbitration clause had features that increased the likelihood that the employer would prevail, it was struck down as “egregiously unfair.”^[108]

1. Agreements To Arbitrate Employment Disputes

A number of factors have combined to cause some courts to use whatever tools they may to carefully scrutinize agreements to arbitrate employment disputes. First, states have little ability to enact laws designed to prevent employers from using adhesion contracts to force employees to arbitrate their employment disputes. The Supreme Court has determined that even statutory nondiscrimination suits are subject to arbitration, and state laws directed at preserving particular state employment claims for courts are preempted by the FAA.^[109] Second, employment arbitration is on the rise, raising concerns about the employers’ motivations for inserting these clauses into employment contracts.^[110] For example, some charge that arbitration clauses are drafted to effectively deprive employees of their rights.^[111] Along the same lines, some scholars object to the effective privatization of civil rights and other discrimination claims in arbitration.^[112] In short, the claim is that employers prefer arbitration because, relative to employees, they fare better in arbitration than in litigation.

The available empirical evidence on case win rates does not provide clear guidance on the matter. Two studies conducted in the 1990s showed higher employee win rates in arbitration than in litigation.^[113] In contrast, a recent study comparing outcomes of employment disputes in litigation and arbitration show that employee win rates tend to be higher in litigation.^[114] Another study found that results for high-wage employees differ significantly from results for low-wage employees. High-wage employees appear to fare as well in arbitration as in courts. Low-wage employees fare relatively worse than their higher paid counterparts in arbitration, but they seem to be practically shut out of courts due to the fact that their lower-value claims fail to attract counsel.^[115] Of course, even if we had reliable information on relative employee win rates in arbitration and litigation, the two categories of cases are subject to very different selection pressures, making the comparison not terribly useful.^[116] Nonetheless, concerns about the motivations behind the employer’s unilateral choice persist.

When employees win, empirical studies show that overall the amounts that they recover are substantially higher in litigation than in arbitration.^[117] One study found that although this difference existed for lower wage employees, there was no statistically significant difference in mean or median awards in arbitration and at trial for higher wage employees.^[118] Here too, selection effects cause concern over the meaning of any difference.

Still other critics of employment arbitration focus on a potential repeat- player effect. Employers with multiple cases in front of the same arbitration association fare better in arbitration than do employers that do not arbitrate multiple cases.^[119] Moreover, employers that arbitrate multiple cases with the same arbitrator tend to fare better, on average, than employers that arbitrate multiple cases with different arbitrators.^[120] The concern is that when employers effectively pick the arbitration association and have greater knowledge about potential arbitrators, they can produce results biased in their favor, especially if arbitrators want to be selected again in the future.^[121]

Defenders of employment arbitration counter that these concerns are overblown and that arbitration can provide a quick, informal, and low-cost means for employees to bring their employment claims.^[122] Empirical evidence indicates that employment arbitration cases are resolved substantially sooner than are litigated employment cases, regardless of the type of claim alleged.^[123] Arbitration defenders also argue that arbitration better enables the parties to resolve disputes while preserving a positive working relationship and that employer cost savings can be rechanneled into more generous employee compensation and benefits.^[124] But even defenders of employment arbitration acknowledge that some contractual provisions and practices could prove harmful to employees.^[125]

Persistent concerns about employment arbitration have caused some countries to refuse to enforce arbitration clauses in employment contracts.^[126] During the past few years, Congress has regularly considered but not passed an Arbitration Fairness Act that would also preclude courts from enforcing such clauses.^[127] As a matter of current governing federal law in the U.S.,^[128] however, state and federal courts must enforce arbitration clauses in employment contracts to the same extent as any other arbitration clause.^[129]

In response to the controversy surrounding employment arbitration, some arbitration associations have made efforts to self-regulate. To better protect employee interests, and to help preserve the validity of employment arbitration, the major U.S. arbitration associations have drafted protocols that each employer must satisfy as a prerequisite to the association handling its employment disputes. For example, JAMS provides Employment Arbitration Minimum Standards that require, among other things, that (1) all remedies available under applicable law remain available to the employee; (2) the employee is provided with at least minimally adequate discovery rights; (3) fees and costs incurred by the employee are reasonable and not so large as to preclude employee claim prosecution; and (4) the arbitrator provides a written award containing reasons for her decision.^[130] The AAA Employment Due Process Protocol provides employees with similar rights to discovery, reasonable fees, and costs and remedies available under applicable law in their disputes involving statutory rights.^[131]

Some state courts use the unconscionability doctrine to independently police problematic terms in employment arbitration agreements, including those that provide for potentially biased arbitrator selection, impose prohibitively expensive costs to arbitrate, or so limit the employee’s rights in arbitration that effective claim prosecution or effective remedies are precluded. Other provisions that unilaterally restrict an employee’s right in arbitration are also heavily scrutinized. For example, a unilateral provision precluding the award of punitive damages to the employee only was similarly struck down as substantively unconscionable.^[132] And, in response to concerns about the repeat-player problem, California courts have refused to enforce arbitration clauses when the arbitral forum chosen by the employer is so small that the employer can at least implicitly exert pressure on the arbitrators to render decisions in its favor.^[133]

In addition to these measures, some courts also require mutuality in the parties’ agreement to arbitrate. In fact, at least one court has described mutuality as “the paramount consideration in assessing conscionability.”^[134] If an arbitration clause requires only the employee but not the employer to take claims to arbitration, then these courts will strike the arbitration clause.^[135] Mutuality helps to ensure fairness: “If the arbitration system established by the employer is indeed fair, then the employer as well as the employee should be willing to submit claims to arbitration.”¹³¹ Even when the arbitration clause appears to obligate both parties to participate in binding arbitration, courts can strike it as unconscionable when the employer reserves for itself an unfettered right to modify or to terminate the arbitration plan without prior notice to the employee.¹³² In these cases, it appears that the mutual obligation to arbitrate is illusory.¹³³ When the arbitration provision is found to lack mutuality, the employee is permitted to proceed with litigation notwithstanding the presence of an arbitration agreement.

Even if the parties appear to mutually commit to arbitrate disputes, courts will sometimes strike an arbitration clause if the drafter carves out a right to bring claims to court and the claims carved out appear to represent the entirety of the drafter’s claims. Consider, for example, the arbitration clause at issue in Sutton’s Steel and Supply, Inc. v. BellSouth Mobility, Inc.¹³⁴ BellSouth’s standard-form contract included an arbitration clause that obligated both it and the customer to resolve disputes in arbitration, but in a separate clause, the company reserved the right to bring court actions against the customer to collect debts owed.¹³⁵ The court found that this carveout compromised the mutuality of the parties’ agreement to arbitrate, especially because it seemed implausible that BellSouth would ever have claims against its customers other than claims for the collection of moneys owed.¹³⁶ In effect, the carveout took back the company’s promise to arbitrate claims. Similar reasoning is sometimes used in the context of arbitration clauses in employment contracts,¹³⁷ although it is less clear at what point an employer has carved out all conceivable claims against an employee. ^{[136] [137] [138] [139] [140] [141] [142]}

In truth, courts do not agree on the doctrinal foundation for mutuality. Some place the issue within unconscionability, reasoning that it is fundamentally unfair for an employer to force employees to submit claims to arbitration without itself agreeing to submit its claims to arbitration.^[143] Other courts treat the issue as one of consideration,^[144] reasoning that the arbitration agreement is a separate agreement from the remainder of the employment agreement and that therefore something other than the terms of the employment contract must support the employee’s promise to arbitrate. The consideration doctrine is a blunter regulatory tool than is unconscionability. Courts using the consideration doctrine must either enforce or refuse to enforce the arbitration agreement,^[145] whereas those using unconscionability have the authority to enforce part of the arbitration clause, while striking the portion perceived to be unfair.^[146] More importantly for present purposes, under consideration analysis, courts typically do not inquire into adequacy or fairness; anything given by the employer, whether a return promise or a small bonus, would be sufficient.^[147] For courts using the consideration doctrine, then, the employee’s promise to arbitrate claims can be supported by a promise on the part of the employer to submit any claims to arbitration.^[148] But for courts using the unconscionability doctrine to scrutinize the agreement, more obligation on the part of the employer may be necessary to establish fundamental fairness.

In particular, courts using the unconscionability doctrine are more likely to look past the agreement’s bilateral arbitration obligations to inquire into whether the drafter has used carveout provisions to reserve a greater (albeit qualified) right to resort to courts. California courts, in particular, express concern that when the employer carves out a right to bring even a small number of its claims to court, it is preserving for itself a procedural advantage not realistically offered to employees. In several cases, the California courts have refused to order an employee to arbitrate her claims on grounds that the employer has tainted the arbitration clause by including such carveouts. Almost always, the carveouts are for the very types of claims that we commonly observe in CEO employment contracts. Specifically, carveouts rendering the arbitration clause substantively unconscionable have included rights to bring the following types of claims to court: noncompete- clause claims;^[149] claims involving intellectual-property rights;^[150] and confidentiality clause or other proprietary-information claims.^[151] On the other hand, carveouts for preliminary relief that mirror the rights to such relief already afforded to arbitrated disputes under state law are permitted.^[152]

On the surface, California has not rendered these unilateral carveouts categorically impermissible. California courts have consistently stated that carveouts and other forms of nonmutuality will not render an arbitration clause unconscionable if the employer can justify the carveouts with evidence of a legitimate business need.^[153] However, we are not aware of a single case where a California court has found the employer’s business justification to be sufficient to preserve the arbitration clause.^[154]

In Mercuro v. Superior Court,^[155] for example, the arbitration clause included carveouts for injunctive or other equitable relief for unfair competition, unauthorized disclosure of trade secrets, or violation of

intellectual-property rights. The employer attempted unsuccessfully to justify the carveouts on the ground that monetary damages for misappropriation of its intellectual-property assets would be difficult to calculate and that in any event money damages would not protect it from further misappropriation.^[156] The court rejected the employer’s argument in part by stating that it had no evidence to support its business justification.^[157] This and other questionable provisions in the arbitration clause resulted in the clause being struck in its entirety.^[158]

Consider also Fitz v. NCR Corp.^[159] The arbitration clause at issue carved out disputes involving the parties’ confidentiality or noncompete agreements and those involving its intellectual-property rights.^[160] In addition, the clause carved out some employee claims like worker’s compensation and unemployment insurance proceedings, as well as agency proceedings for discrimination or other civil rights violations.^[161] The court concluded that the employer could not justify its carveouts by a need for provisional relief in courts because California law already gives parties some limited ability to obtain provisional relief.^[162] The company had cited to some cases where employees rather than employers have brought noncompete and intellectual-property-rights claims to court, but the court nevertheless found it problematic that most such claims are brought by employers.^[163] The employer argued that it had only carved out a fraction of its possible claims and had obligated itself to arbitrate others, including theft and embezzlement claims, but the court thought these claims were unlikely.^[164] Finally, the company argued that it had also agreed to carve out some employee claims, but the court cited Mercuro to conclude that those claims would be separately maintained by an administrative agency in any event.^[165] Here too the court struck the entire arbitration clause from the employment contract.^[166]

In striking arbitration clauses with carveouts, the California courts have not confined their role to the protection of low-level employees. The same scrutiny has been applied to carveouts in the arbitration clause of a franchise contract,^[167] and to employment disputes brought by the employer’s vice president of operations,^[168] vice president and chief financial officer,^[169]®⁴ and president and CEO.^[170] This extension is remarkable, given that procedural unconscionability is much less likely in the employment contracts of company executives.^[171]

To our knowledge no other courts have subjected carveouts to arbitration agreements in employment contracts to the same exacting scrutiny as have the California courts. One non-California court struck an arbitration clause with carveouts similar to those found in the California cases, but the court interpreted the carveout provision as completely eliminating any obligation on the part of the employer to arbitrate its claims.^[172] In addition, the JAMS Employment Arbitration Minimum Standards^{[173] [174]} impose a mutuality requirement on arbitration clauses in employment contracts, but its requirement is less stringent than California’s. The Minimum Standards provide that “[b]oth the employer and the employee must have the same obligation (either to arbitrate or go to court) with respect to the same kinds of claims.”¹⁶s Presumably nothing in this standard prevents an employer from carving out particular types of claims, so long as both employer and employee are by the terms of the clause permitted to bring such claims in court (as was true in Fitz). California courts often take the lead in scrutinizing arbitration clauses, so California’s scrutiny of carveouts from employment-contract arbitration agreements could well spread to other courts.

In this Article we seek a better understanding of the use of carveouts in the arbitration clauses contained in CEO employment contracts. How common are carveouts? What types of claims are carved out? Does the frequency of the use of carveouts depend on the type of firm? Are firms based in California less likely to carve out claims, given the precedent in California? And, given that our contracts are heavily negotiated employment contracts, does their content shed light on the soundness of the California courts’ reasoning regarding the mutuality of party obligations to arbitrate? We now turn to our research questions.

[1] Milton R. Underwood Professor of Law, Vanderbilt Law School.

[2] Regents Professor of Finance, College of Business, New Mexico State University.

[3] John Beasley II Professor of Law and Business, Vanderbilt Law School, Professor of

Management, Owen School of Business, Vanderbilt University.

f The authors would like to thank Christopher Drahozal, Theodore Eisenberg, Michael Klausner, Larry Ribstein, Bo Rutledge, and Steve Ware for helpful comments and suggestions. Thank you also to Lisa Bashinsky, Diane Pettit, Max Sills, and Shen Zhang for valuable research assistance.

[6]     See infra Part II.B.

[7]     9 U.S.C. §§ 1-16 (2006).

[8]      See infra Part II.A.

[9]      See infra notes 78-87 and accompanying text.

[10]   The Supreme Court has been particularly active this term in ensuring the enforcement of arbitration clauses in consumer contracts. See, e.g., Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201 (2012) (per curiam) (nursing home care agreements); Compucredit Corp. v. Greenwood, 132 S. Ct. 665 (2012) (consumer credit card contracts).

[11]   Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (employment discrimination claims).

[12]   See, e.g., AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) (holding that California law prohibiting many class waiver clauses in arbitration agreements was preempted by the FAA).

[13]    See infra notes 88-91 and accompanying text.

[14]   See David Horton, Arbitration as Delegation, 86 N.Y.U. L. REV. 437, 444 (2011) (noting that federal arbitration law provides parties with an arbitral option that they can fill with customized procedures).

[15]      See, e.g, 1 Gary B. Born, INTERNATIONAL COMMERCIAL ARBITRATION 619 (2009)

(describing the material terms of an arbitration agreement as “number of, identity of and means of selecting arbitrators, arbitral seat, scope of agreement, institutional rules, [and] choice of law”).

[16]     Id.

[17]    Frederick Brown & Catherine A. Rogers, The Role of Arbitration in Resolving Transnational Disputes: A Survey of Trends in the People’s Republic of China, 15 BERKELEY J. INT’L L. 3²9> 334 ⁽¹997⁾.

[18]     BORN, supra note 10, at 176-77.

[19]    Anthony J. Diana et al., Electronic Discovery in Specific Areas of Practice, in ELECTRONIC DISCOVERY Deskbook 2012, at 299, 234 (PLI Litig. & Admin. Practice, Course Handbook Ser. No. 35302, 2012).

[20]     1999 IBA Working Party & 2010 IBA Rules of Evidence Review Subcomm., Commentary on the Revised Text of the 2010 IBA Rules on the Taking of Evidence in International Arbitration, 5 DISP. Resol. Int’l 45, 46 (2011).

[21]     Alan Scott Rau, On Integrity in Private Judging, 14 ARB. Int’l 115, 146-50 (1998).

[22]     See, e.g., Lisa Bernstein, Private Commercial Law in the Cotton Industry: Creating Cooperation Through Rutes, Norms, and Institutions, 99 MICH. L. Rev. 1724 (2001) (explaining how cotton industry uses arbitration where privately drafted contract rules are applied).

[23]    They are not actually limitless. For example, parties to arbitration agreements governed by the FAA may not contract to alter the applicable standard of review of arbitral awards, at least not in federal courts. See Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576 (2008).

[24]     Existent empirical evidence includes one study of fifty-two arbitration clauses found in a wide variety of consumer contracts, Linda J. Demaine & Deborah R. Hensler, “Volunteering” To Arbitrate Through Predispute Arbitration Clauses: The Average Consumer’s Experience, LAW & CONTEMP. PROBS., Winter/Spring 2004, at 55, and one study of twenty standard-form franchise agreements, Christopher R. Drahozal & Peter B. Rutledge, Contract and Procedure, 94 MARQ. L. Rev. 1103 (2011) (presenting results of former study that indicated an increasing trend toward the use of several customized terms in franchise agreements). In addition, there is at least one study of the use of class waivers in consumer contracts. Theodore Eisenberg et al., Arbitration’s Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts, 41 U. MICH. J.L. REFORM 871 (2008).

[25]     In some law review articles, the author counsels businesses to pay more attention to their customization options, which suggests a belief that customization is at least suboptimally infrequent. See, e.g., Thomas J. Stipanowich, Arbitration and Choice: Taking Charge of the “New Litigation,” 7 DePaul BUS. & COM. L.J. 383 (2009); Eileen B. Vernon, Arbitration in the Energy/Minerals Field: Customizing the Clause, 56 DISP. RESOL. J. 50 (2001) (advocating updated customization of arbitration clauses used by environmental, energy, and natural-resource companies).

[26]     To our knowledge, only Christopher Drahozal has empirically studied carveouts from arbitration, and carveouts typically play only a very minor role in his studies. See, e.g., Christopher R. Drahozal, “Unfair” Arbitration Clauses, 2001 U. ILL. L. Rev. 695 [hereinafter Drahozal, Unfair Arbitration Clauses]; Christopher R. Drahozal & Quentin R. Wittrock, Is There a Flight from Arbitration?, 37 HOFSTRA L. Rev. 71 (2008). Drahozal and Stephen Ware have both addressed the topic of carveouts in nonempirical articles. Christopher R. Drahozal, Nonmutual Agreements To Arbitrate, 27 J. CORP. L. 537, 552-55 (2002); Stephen J. Ware, Paying the Price of Process: Judicial Regulation of Consumer Arbitration Agreements, 2001 J. DISP. RESOL. 89, 98-100.

[27]     See Erin O’Hara O’Connor, Carveouts and the Choice Between Courts and Arbitration (draft manuscript on file with authors) (studying carveouts in different types of contracts and involving parties from different countries to discern circumstances under which parties affirmatively demand courts).

[28]     Christopher R. Drahozal, Busting Arbitration Myths, 56 U. Kan. L. Rev. 663, 665 (2008); Cynthia L. Estlund, Between Rights and Contract: Arbitration Agreements and Non-compete Covenants as a Hybrid Form of Employment Law, 155 U. PA. L. Rev. 379, 379 (2006); Jyotin Hamid & Emily J. Mathieu, The Arbitration Fairness Act: Performing Surgery with a Hatchet Instead of a Scalpel?, 74 Alb. L. Rev. 769, 769 (2011); Keith N. Hylton, Agreements To Waive or To Arbitrate Legal Claims: An Economic Analysis, 8 SUP. CT. Econ. Rev. 209, 248 (2000); David S. Ruder, Securities Arbitration in the Public Interest: The Role of Punitive Damages, 92 NW. U. L. Rev. 69, 72 n.23 (1997); Jean R. Sternlight, Panacea or Corporate Tool?: Debunking the Supreme Court’s Preference for Binding

Arbitration, 74 WASH. U. L.Q. 637, 670 (1996); Adriaan Lanni, Case Note, Protecting Public Rights in Private Arbitration, 107 YALE L.J. 1157, 1161 n.25 (1998).

[29]      See infra Part II.C.

[30]     See infra Part II.C.

[31]      See infra notes 129-31 and accompanying text.

[32]     See infra notes 134-37 and accompanying text. As we discuss below, when courts find unconscionable the types of carveouts observed in our contracts, the arbitration clause is struck in its entirety and employers find themselves unable to rely on arbitration for the resolution of any claims.

[33]     See Stewart J. Schwab & Randall S. Thomas, An Empirical Analysis of CEO Employment Contracts: What Do Top Executives Bargain For?, 63 WASH. & Lee L. Rev. 231, 236-39 (2006) (describing prevalent contracting behavior among CEOs and their firms’ boards).

[34] Specifically, the bargain must be Kaldor-Hicks efficient in that one of the parties is willing to negotiate away other possible advantages in order to include the carveout in the agreement.

[35]      Parties can instead contract for nonbinding arbitration, in which case the arbitrator’s

decision is advisory only. Alternatively, after a dispute arises, the parties can enter into an agreement to resolve the claim through arbitration. This Article ignores such arbitration agreements and focuses almost exclusively on pre-dispute agreements to subject disputes to binding arbitration.

[36]      See, e.g., BORN, supra note 10, at 70; PRICEWATERHOUSECOOPERS, INTERNATIONAL Arbitration: Corporate Attitudes and Practices 2, 5 (2008), available at http://www.pwc. co.uk/ en_UK/ uk/assets/pdf/pwc-international-arbitration-2008.pdf.

[37]     BORN, supra note 10, at 70; see also CHRISTOPHER R. DRAHOZAL & RICHARD W. Naimark, Towards a Science of International Arbitration: Collected Empirical RESEARCH 59 (2005) (finding that 88% of sample of international joint venture agreements contained arbitration clauses).

[38]     See David J. Branson, American Party-Appointed Arbitrators—Not the Three Monkeys, 30 U. DAYTON L. rev. 1, 38 (2004) (noting that use of arbitration clauses in securities industry, employment, and consumer contracts is now “standard,” and that in general, the use and public acceptance of such clauses is “pervasive”).

[39]     Id.; see also Alexander J.S. Colvin, An Empirical Study of Employment Arbitration: Case Outcomes and Processes, 8 J. EMPIRICAL Legal STUD. 1, 2 (2011) (commenting on dramatic

growth in employment arbitration and citing estimate that for at least one third of nonunion employees, disputes must be resolved in arbitration).

[40]     Branson, supra note 33, at 38; Laura K. Bailey, Note, The Demise of Arbitration Agreements in Long-Term Care Contracts, 75 MO. L. Rev. 181, 181 (2010).

[41]      Bailey, supra note 35, at 181.

[42]      BORN, supra note 10, at 69.

[43]      Id.

[44]      ^Id

[45]     Statistics: Case Statistics – 2010, H.K. INT’L Arb. Ctr., http://www.hkiac.org/index.php/ en/hkiac-statistics/case-statistics (last visited Aug. 16, 2012).

[46]     Theodore Eisenberg & Elizabeth Hill, Arbitration and Litigation of Employment Claims: An Empirical Comparison, 58 DISP. RESOL. J. 44, 44 (2004).

[47]      Colvin, supra note 34, at 2.

[48]     Am. Arbitration Ass’n, Consumer Arbitration Statistics, available at http://www. adr.org/aaa/ShowPDF?doc=ADRSTG_020811 (last visited Aug. 30, 2012).

[49]      Born, supra note 10, at 70 (footnotes omitted).

[50]     See id. at 2 (stating that international commercial arbitration successfully provides a “fair, neutral, expert and efficient means of resolving difficult and contentious transnational problems”).

[51]     This difference is due to the fact that more than 140 nations are parties to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which obligates each nation to enforce arbitral awards regardless of where they are rendered. Convention on the Recognition and Enforcement of Foreign Arbitral Awards art. 1, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 3, available at http://treaties.un.org/doc/publication/ UNTS/Volume%20330/v330.pdf; see also Status of Convention on the Recognition and

Enforcement of Foreign Arbitral Awards, UNITED NATIONS TREATY COLLECTION, http:// treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=XXII-1&chapter=2 2 &lang=en (last visited Aug. 17, 2012) (listing the countries that are participants to the agreement). In contrast, there is no widespread international convention that forces nations to enforce one another’s court judgments. A recently concluded Hague Convention on Choice of Court Agreements would require nations to enforce court judgments rendered in a court designated in a contractual choice-of-court clause. Hague Convention on Court of Choice Agreements, June 30, 2005, 44 I.L.M. 1294. However, this Convention has not yet come into force, and some wonder whether it will ever do so. See Stephen B. Burbank, A Tea Party at the Hague?, 18 SW.J. Int’l L. 629 (2012).

[52]      See,   e.g., AM.  ARBITRATION    ASS’N,  DRAFTING    DISPUTE    RESOLUTION     CLAUSES:  A

PRACTICAL Guide 5 (2007), available at http://www.foreclosuremediationfl.adr.org/si.asp? id=4125 (“The parties are free to customize and refine the basic arbitration procedures to meet their particular needs.”).

[53]      Alan Scott Rau et al., Arbitration 5 (3d ed. 2006).

[54]     See Am. ARBITRATION ASS’N, supra note 47, at 16, 32 (providing sample arbitration clauses designed to help ensure quick dispute resolution). On the question of whether arbitration is in fact faster and cheaper than litigation, see Rau ET AL., supra note 48, at 5 (arguing that it is); Peter B. Rutledge, Whither Arbitration?, 6 Geo J.L. & PUB. POL’Y 549, 579 (2008) (discussing the cost savings arbitration provides); David S. Schwartz, Mandatory Arbitration and Fairness, 84 NOTRE DAME L. Rev. 1247, 1268 & n.53 (2009) (assuming, for the purposes of the author’s analysis, that “process costs are, on the whole, less in arbitration than litigation,” with the caveat that the author suspects that the “cost savings in arbitration are often exaggerated”); Thomas J. Stipanowich, Rethinking American Arbitration, 63 IND. L.J. 425, 460 (1988) (lawyer surveys indicate that arbitration tends to be faster and cheaper than litigation). But see W. LAURENCE CRAIG ET AL., INTERNATIONAL CHAMBER OF COMMERCE ARBITRATION 29-36 (3d ed. 2000) (recognizing that some participating in arbitration governed by the International Chamber of Commerce have criticized the process for being too costly); Christian A. Atwood, Creative Approaches To Financing Company M&A in a Brave New (Unlevered) World, in DEALING WITH M&A Financing and Risk in a Changing Market 25, 33 (2010) (providing that author’s personal experience suggests that arbitration is no faster or cheaper than litigation); Christopher R. Drahozal, Arbitration Costs and Forum Accessibility: Empirical Evidence, 41 U. MICH. J.L. REFORM 813, 840 (2008) (stating that the empirical evidence is too limited to draw definitive conclusion about relative costs of arbitration and litigation).

[55]    Randall Thomas, Erin O’Hara & Kenneth Martin, Arbitration Clauses in CEO Employment Contracts: An Empirical and Theoretical Analysis, 63 VAND. L. Rev. 959, 972 (2010).

[56]    Am. ARBITRATION ASS’N, supra note 47, at 30-31 (providing sample clauses to address document discovery and the taking of depositions).

[57]      See Erin A. O’Hara & Larry E. Ribstein, The Law Market 94 (2009).

[58]     Am. ARBITRATION Ass’N, supra note 47, at 35 (providing sample clauses to address allocation of attorneys’ fees). Our CEO employment contracts commonly provide cost- allocation provisions in the arbitration clause. See infra Table 4.

[59]     Am. ARBITRATION Ass’N, supra note 47, at 36 (providing sample clauses requiring the parties to maintain confidentiality regarding the details of the dispute).

[60]     Id. at 37 (providing sample language that would create a right of appeal in arbitration).

[61]     O’Hara & Ribstein, supra note 52, at 87-88. Arbitration-association rules typically require the arbitrator to apply the law chosen by the parties, in contrast to courts, which tend to apply a discretionary standard to the enforcement of choice-of-law clauses. Id.

[62]     Am. ARBITRATION Ass’N, supra note 47, at 5 (“If the parties agree on a procedure that conflicts with otherwise applicable AAA rules, the AAA will almost always respect the wishes of the parties.”); id. at 32-33 (providing sample provisions for arbitration agreements specifying or limiting remedies that arbitrators can award); id. at 36 (providing sample provisions requiring arbitrators to issue a reasoned award).

[63]      Drahozal & Wittrock, supra note 21, at 102-14.

[64]      ^Id.

[65]     Peter B. Rutledge & Christopher R. Drahozal, Contract and Choice, BYU L. Rev. (forthcoming) (manuscript at 31, 33), available athttp://ssrn.com/abstract=2 101399.

[66]    See Am. Arbitration Ass’n, Consumer Due Process Protocol (1998), available at http://www.adr.org/aaa/ShowPDF?doc=ADRSTG_005014.

[67]      Rutledge & Drahozal, supra note 60.

[68]      See Hylton, supra note 23, at 231.

[69]    See, e.g., R. Wilson Freyermuth, Foreclosure by Arbitration?, 37 PEPP. L. Rev. 459, 480-82 (2010) (noting lack of arbitration clauses in secured mortgage agreements, but providing no satisfactory explanation for their absence).

[70]    The grounds for modifying or vacating an arbitral award pursuant to an agreement covered by the FAA are found in section 10 of that statute and include corruption, fraud or undue means, evident partiality, arbitrator misconduct, or excess use of arbitral authority. 9 U.S.C. § 10 (2006); see also Remmey v. PaineWebber, Inc., 32 F.3d 143, 146 (4th Cir. 1994) (“[I]n reviewing arbitral awards, a district or appellate court is limited to determining ‘whether the arbitrators did the job they were told to do—not whether they did it well, or correctly, or reasonably, but simply whether they did it.’” (quoting Richmond, Fredericksburg & Potomac R.R. Co. v. Transp. Commc’ns Int’l Union, 973 F.2d 276, 281 (4th Cir. 1992))); Eljer Mfg., Inc. v. Kowin Dev. Corp., 14 F.3d 1250, 1253-54 (7th Cir. 1994) (“Errors in the arbitrator’s interpretation of law or findings of fact do not merit reversal under this standard. Nor does an insufficiency of evidence supporting the decision permit us to disturb the arbitrator’s order.” (internal citations omitted)); Fine v. Bear, Stearns & Co., 765 F. Supp. 824, 827 (S.D.N.Y. 1991) (“It is well-settled that a court’s power to vacate an arbitration award must be extremely limited . . . .”).

[71]    Christopher R. Drahozal, Contracting Around Hall Street, 14 LEWIS & CLARK L. REV. 905, 908 (2010).

[72]    Theodore Eisenberg & Geoffrey P. Miller, The Flight from Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in the Contracts of Publicly Held Companies, 56 DePaul L. Rev. 335, 350 (2007).

[73]      Id. at 351.

[74]     Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not To Compete, 74 N.Y.U. L. Rev. 575, 607-09 (1999).

[75]      Federal Arbitration Act, 9 U.S.C. §§ 1-307 (2006).

[76]      Id. § 2.

[77]      ^Id. §§ 3^–4.

[78]      Id. §§ 201-08.

[79]      See supra note 46.

[80]      9 ^U.S.G § 2°2.

[81]      Southland Corp. v. Keating, 465 U.S. 1 (1984).

[82]     9 U.S.C. § 205. Suits involving domestic contracts containing arbitration agreements are removable to federal court only if they involve an independent federal question or if the case satisfies the requirements for diversity jurisdiction.

[83]     See BORN, supra note 10, at 767 (“Both international arbitration conventions and national law provide that agreements to arbitrate such ‘non-arbitrable’ matters need not necessarily be given effect and that arbitral awards concerning such matters need not necessarily be recognized.” (footnotes omitted)).

[84]      Id. at 768.

[85]      Id.

[86]     Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989); Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220 (1987); Scherk v. Alberto-Culver Co., 4¹7 ^U.^S. 5^06, 5¹4-¹7 ⁽¹974⁾.

[87]      Rodriguez de Quijas, 490 U.S. at 481.

[88]     Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985). The holding in Mitsubishi was confined to international agreements, but the lower courts have uniformly held that antitrust claims arising under domestic contracts can also be arbitrated. See BORN, supra note 10, at 785 n.1137, 793 n.1170 (citing several cases).

[89]      McMahon, 482 U.S. at 242.

[90]      Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 27, 35 (1991).

[91]      Id. at 26.

[92]      CompuCredit Corp. v. Greenwood, 132 S. Ct. 665, 668-73 (2012).

[93]    Marmet Health Care Ctr., Inc. v. Brown, 132 S. Ct. 1201, 1203-04 (2012) (striking state prohibition on arbitration of wrongful death claims brought against nursing homes); Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 56, 58 (1995) (striking state law that disenabled arbitration of claims involving punitive damages); Perry v. Thomas, 482 U.S. 483, 491 (1987) (holding that the California Labor Law, which provided that wage collection actions were nonarbitrable, is preempted by the FAA); Southland Corp. v. Keating, 465 U.S. 1, 10 (1984) (striking law that prohibited arbitration of state financial investment statute claims).

[94]    Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681 (1996) (striking Montana statute that required that contracts with arbitration clauses provide conspicuous notice of the clause on the first page of the contract).

[95]    Preston v. Ferrer, 552 U.S. 346, 349-50, 356 (2008) (striking state regulation empowering state commission to decide scope of arbitration); Casarotto, 517 U.S. 681.

[96]      AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011).

[97]      9 U.S.C. § 2 (2006).

[98]      Casarotto, 517 U.S. at 687.

[99]    See generally George W. KUNEY & Robert M. Lloyd, CONTRACTS: TRANSACTIONS AND Litigation 309-10 (2d ed. 2008).

[100]    Charles L. Knapp et al., Problems in Contract Law: Cases and Materials 570 (5th ed. 2003).

[101]    Id. at 568, 570.

[102]    See, e.g., Alexander v. Anthony Int’l, L.P., 341 F.3d 256, 265 (3d Cir. 2003); Flores v. Transamerica HomeFirst, Inc., 113 Cal. Rptr. 2d 376, 381-82 (Ct. App. 2002).

[103]    See, e.g., Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (App. Div. 1998) (striking requirement that consumer proceed to arbitration at International Chamber of Commerce (“ICC”) because the expenses associated with filing a claim with the ICC rendered the chosen forum financially prohibitive).

[104]    Cf. Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79 (2000) (recognizing these grounds for invalidating an arbitration agreement but placing the burden of proof on the party seeking to invalidate the clause).

[105]     Ting v. AT&T, 182 F. Supp. 2d 902 (N.D. Cal. 2002), aff’d in part, rev’d in part, 319 F.3d 1126 (9th Cir. 2003); Powertel, Inc. v. Bexley, 743 So. 2d 570 (Fla. Dist. Ct. App. 1999).

[106]      Hayes v. County Bank, 713 N.Y.S.2d 267 (Sup. Ct. 2000).

[107]      Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 939 (4th Cir. 1999).

[108]      Id. at 938.

[109]      See supra Part II.B.

[110]      See supra Part I.

[111]     David E. Feller, Fender Bender or Train Wreck?: The Collision Between Statutory Protection of Individual Employee Rights and the Judicial Revision of the Federal Arbitration Act, 41 ST. LOUIS U. L.J. 5^{61 (1}997).

[112]     Joseph R. Grodin, Arbitration of Employment Discrimination Claims: Doctrine and Policy in the Wake of Gilmer, 14 HOFSTRA Lab. L.J. 1 (1996); Lewis L. Maltby, Private Justice: Employment Arbitration and Civil Rights, 30 COLUM. HUM. RTS. L. Rev. 29 (1998).

[113]     William M. Howard, Arbitrating Claims of Employment Discrimination, DISP. RESOL. J. Oct.-Dec. 1995, at 40; Maltby, supra note 107.

[114]      Colvin, supra note 34, at 6.

[115]      Eisenberg & Hill, supra note 41, at 44.

[116]     See, e.g., Lisa B. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Emp. Rts. & Emp. Pol’Y J. 189, 199 (1997); Stephen Ware, The Effects of Gilmer: Empirical and Other Approaches to the Study of Employment Arbitration, 16 OHIO ST.J. ON DISP. Resol. 735 (2001).

[117]      Colvin, supra note 34, at 6; Maltby, supra note 107, at 48.

[118]      Eisenberg & Hill, supra note 41, at 44.

[119]      Bingham, supra note 111, at 209-10; Colvin, supra note 34, at 13.

[120]      Colvin, supra note 34, at 14-15.

[121]     See, e.g., Bingham, supra note 111, at 192-94; Lisa B. Bingham, On Repeat Players, Adhesive Contracts, and the Use of Statistics in Judicial Review of Employment Arbitration Awards, 29 McGeorge L. Rev. 223 (1998); Sarah Rudolph Cole, Incentives and Arbitration: The Case Against Enforcement of Executory Arbitration Agreements Between Employers and Employees, 64 UMKC L. Rev. 449 ⁽¹99⁶⁾.

[122]     See, e.g., David Sherwyn et al., In Defense of Mandatory Arbitration of Employment Disputes: Saving the Baby, Tossing Out the Bath Water, and Constructing a New Sink in the Process, 2 U. Pa. J. ^Lab. & ^EMp. ^L. 73^, 99 ⁽¹999⁾.

[123]     Eisenberg & Hill, supra note 41, at 51 (finding that mean and median times in arbitration ranged from seven to thirteen months while mean and median times in both state and federal courts exceeded twenty months).

[124]    See, e.g., Ware, supra note 111, at 754 & n.92 (noting that fans of the Gilmer case argue that employment arbitration benefits everyone).

[125]     See, e.g., Samuel Estreicher, Predispute Agreements To Arbitrate Statutory Employment Claims, 72 N.Y.U. L. Rev. 1344 (1997); Sherwyn et al., supra note 117, at 147 (acknowledging that mandatory arbitration is not perfect). For models of employment arbitration producing both efficiencies and inefficiencies, see Matthew T. Bodie, Questions About the Efficiency of Employment Arbitration Agreements, 39 Ga. L. Rev. 1 (2004), and Hylton, supra note 23.

[126]     Jean R. Sternlight, Is the U.S. Out on a Limb? Comparing the U.S. Approach to Mandatory Consumer and Employment Arbitration to That of the Rest of the World, 56 U. MIAMI L. Rev. 831 (2002). One author suggests that the high union density in other countries makes labor courts cost-effective and attractive, resulting in less demand for labor arbitration. See Samuel Estreicher, Arbitration of Empbyment Disputes Without Unions, 66 CHI.-KENT L. Rev. 753, 793 ⁽¹99⁰⁾.

[127]      For current text, see Arbitration Fairness Act of 2011, S. 987, 112th Cong. (2011).

[128]     Section 1 of the FAA contains language that could have been interpreted to exclude employment arbitration from its coverage. In defining the scope of applicability of the FAA, Congress provided “but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1 (2006). The Supreme Court has interpreted this provision to exclude only interstate transportation workers. Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).

[129]      See supra Part II.B.

[130]     JAMS, JAMS Employment Arbitration Rules & Procedures (2009), available at http://www.jamsadr.com/files/Uploads/Documents/JAMS-Rules/JAMS_employment_ arbitration_rules-2009.pdf. These minimum standards do not apply to individually negotiated agreements. Id. at 4.

[131]     Am. Arbitration Ass’n, Employment Due Process Protocol (2011), available at http://www.adr.org/aaa/ShowPDF?url=/cs/groups/lee/documents/document/mdaw/ mdaz/ ~edisp/adrstg_004368.pdf.

[132]      See Zuver v. Airtouch Commc’ns, Inc., 103 P.3d 753, 766-67 (Wash. 2004).

[133]     See Mercuro v. Superior Court, 116 Cal. Rptr. 2d 671, 678-79 (Ct. App. 2002) (noting that employer’s choice of arbitral forum resulted in only eight available arbitrators in the relevant district and finding that the potential for the repeat-player effect to influence the decision was one factor in its decision to strike the arbitration clause).

[134]      Abramson v. Juniper Networks, Inc., 9 Cal. Rptr. 3d 422, 436 (Ct. App. 2004).

[135]      See, e.g., Ingle v. Circuit City Stores, Inc., 328 F.3d 1165 (9th Cir. 2003); Circuit City Stores, Inc. v. Adams, 279 F.3d 889 (9th Cir. 2002); Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669 (Cal. 2000); Frye v. Speedway Chevrolet Cadillac, 321 S.W.3d 429, 441­42 & n.21 (Mo. Ct. App. 2010) (questioning but not deciding whether arbitration clause is sufficiently mutual when employer does not obligate itself to submit its disputes to arbitration); cf. Iberia Credit Bureau, Inc. v. Cingular Wireless LLC, 379 F.3d 159 (5th Cir. 2004) (striking an arbitration agreement in consumer contract obligating only the consumer to arbitrate); Simpson v. Grimes, 2002-0869 (La. App. 3 Cir. 5/21/03); 849 So. 2d 740, abrogated by Aguillard v. Auction Mgmt. Corp., 2004-2804, 2004-2857 (La. 6/29/05); 908 So. 2d 1. But see Harris v. Green Tree Fin. Corp., 183 F.3d 173, 181 (3d Cir. 1999); Doctor’s Assocs., Inc. v. Distajo, 66 F.3d 438, 453 (2d Cir. 1995) (upholding one-sided obligation to arbitrate);

Martindale v. Sandvik, Inc., 800 A.2d 872 (N.J. 2002) (upholding potentially unilateral arbitration clause); Motsinger v. Lithia Rose-FT, Inc., 156 P.3d 156 (Or. Ct. App. 2007) (holding that it is not unconscionable to require only employee to arbitrate where the terms of the arbitration appear fair to the employee).

[136]      Armendariz, 6 P.3d at 692.

[137]     Dumais v. Am. Golf Corp., 299 F.3d 1216, 1219 (10th Cir. 2002); Floss v. Ryan’s Family Steak Houses, Inc., 211 F.3d 306, 315-16 (6th Cir. 2000); Gibson v. Neighborhood Health Clinics, Inc., 121 F.3d 1126 (7th Cir. 1997); Snow v. BE & K Constr. Co., 126 F. Supp. 2d 5, 14-15 (D. Me. 2001); Gibson v. Nye Frontier Ford, Inc., 205 P.3d 1091 (Alaska 2009); Frye, 321 S.W.3d at 442 & n.21; Redmond v. Big Sandy Furniture, Inc., No. 08CA12, 2008 WL 4966549 (Ohio Ct. App. Nov. 19, 2008); Salazar v. Citadel Commc’ns Corp., 2004-NMSC-013, 135 N.M. 447, 90 P.3d 466; J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003).

[138]     See, e.g., Dumais, 299 F.3d at 1219; Salazar, 2004-NMSC-013, 91 12; Webster, 128 S.W.3d at 232.

[139]     Sutton’s Steel & Supply, Inc. v. BellSouth Mobility, Inc., 00-511, 00-898 (La. App. 3 Cir. 12/13/00); 776 So. 2d 589, abrogated by Aguillard v. Auction Mgmt. Corp., 2004-2804, 2004-2857 (La. 6/29/05); 908 So. 2d 1

135. ^Id. ^at 9^-1u 77^{6 S}°. 2d 59^6-97.

[141]      Id. at p. 10-11, 766 So. 2d 597.

[142]      Mercuro v. Superior Court, 116 Cal. Rptr. 2d 671, 676-77 (Ct. App. 2002).

[143]      See supra note 130.

[144]     See supra note 130; see also Showmethemoney Check Cashers, Inc. v. Williams, 27 S.W.3d 361 (Ark. 2000) (consumer loan agreement).

[145]      Cf Restatement (Second) of Contracts § 17(1) (1981) (listing consideration as requirement of contract).

[146]     See U.C.C. § 2-302(1) (2012) (“If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”); RESTATEMENT (SECOND) OF CONTRACTS § 208 (“If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.”).

[147]     See KNAPP ET AL., supra note 95, at 62 (discussing adequacy of consideration requirement).

[148]      Harris v. Green Tree Fin. Corp., 183 F.3d 173, 181 (3d Cir. 1999).

[149]    See, e.g., Fitz v. NCR Corp., 13 Cal. Rptr. 3d 88 (Ct. App. 2004); Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138 (Ct. App. 1997); see also Martinez v. Master Prot. Corp., 12 Cal. Rptr. 3d 663 (Ct. App. 2004) (unfair competition claims); Mercuro v. Superior Court, 116 Cal. Rptr. 2d 671 (Ct. App. 2002) (fee sharing).

[150]     See, e.g., Kalmbach v. Sportsmobile W., Inc., No. F054648, 2008 WL 4988663 (Cal. Ct. App. Nov. 25, 2008); Fitz, 13 Cal. Rptr. 3d 88 (intellectual property); Martinez, 12 Cal. Rptr. 3d 663 (trade secrets); Abramson v. Juniper Networks, Inc., 9 Cal. Rptr. 3d 422 (Ct. App. 2004) (trade secrets); O’Hare v. Mun. Res. Consultants, 132 Cal. Rptr. 2d 116 (Ct. App. 2003) (trade secrets); Mercuro, 116 Cal. Rptr. 2d 671 (intellectual-property violations and trade secrets); Stirlen, 60 Cal. Rptr. 2d 138 (patent infringement).

[151]    See, e.g., Fitz, 13 Cal. Rptr. 3d 88 (confidentiality-clause claims); Martinez, 12 Cal. Rptr. 3d 663 (misuse or disclosure of confidential information); Abramson, 9 Cal. Rptr. 3d 88 (confidential and proprietary information); O’Hare, 132 Cal. Rptr. 2d 116 (confidentiality- clause claims); Mercuro, 116 Cal. Rptr. 2d 671 (confidential information); Stirlen, 60 Cal. Rptr. 2d 138 (improper use of confidential information).

[152]    See, e.g., Clarus Sys., Inc. v. Variphy, Inc., No. A115360, 2007 WL 576149, at *1 (Cal. Ct. App. Feb. 26, 2007); Inter@ctive, Inc. v. Cubic Transp. Sys., Inc., No. D047096, 2007 WL 178429, at *1 (Cal. Ct. App. Jan. 25, 2007); cf. Htay Htay Chin v. Advanced Fresh Concepts Franchise Corp., 123 Cal. Rptr. 3d 547 (Ct. App. 2011) (franchise contract).

[153]    See, e.g., Armendariz v. Found. Health Psychcare Servs., Inc., 6 P.3d 669, 692 (Cal. 2000) (inference of unconscionability can be overcome if employer has reasonable justification for the nonmutuality); Fitz, 13 Cal. Rptr. 3d at 103 (upholding nonmutual arbitration agreement only if the stronger party can show, through the contract or other facts, that “business realities” create a special need for the advantage); cf. Mercuro, 116 Cal. Rptr. 2d at 677-78 (rejecting employer’s proffered evidence of business justification as insufficient).

[154]    See, e.g., Fitz, 13 Cal. Rptr. 3d 88; O’Hare, 132 Cal. Rptr. 2d 116; Mercuro, 116 Cal. Rptr. 2d 671; Stirlen, 60 Cal. Rptr. 2d 138.

[155]      Mercuro, 116 Cal. Rptr. 2d 671.

[156]      Id. at   677-78.

[157]      Id. at  678.

[158]      Id. at  684.

[159]      Fitz, 13 Cal. Rptr. 3d 88.

[160]      Id. at 92.

[161]      Id.

[162]      Id. at  105.

[163]      Id. at  104.

[164]      Id. at   104-05.

[165]      Id. at   92, 104.

[166]      Id. at   106-07.

[167]      See Nagrampa v. Mailcoups, Inc., 469 F.3d 1257 (9th Cir. 2006).

[168]     See Kalmbach v. Sportsmobile W., Inc., No. F054648, 2008 WL 4988663, at *1 (Cal. Ct. App. Nov. 25, 2008)

[169]      See Stirlen v. Supercuts, Inc., 60 Cal. Rptr. 2d 138, 140 (Ct. App. 1997).

[170]      See Trivedi v. Curexo Tech. Corp., 116 Cal. Rptr. 3d 804 (Ct. App. 2010).

[171]     Cf. Guiliano v. Inland Empire Pers., Inc., 58 Cal. Rptr. 3d 5, 14-16 (Ct. App. 2007) (holding that protections of Armendariz do not apply in case brought by company executive vice president and chief financial officer, at least when his dispute involves a right to a multimillion- dollar bonus rather than an unwaivable statutory claim).

[172]      See Hull v. Norcrom, Inc., 750 F.2d 1547 (11th Cir. 1985).

[173]      See JAMS, JAMS POLICY ON EMPLOYMENT ARBITRATION MINIMUM STANDARDS OF PROCEDURAL Fairness (2009), available at http://www.jamsadr.com/files/uploads/Documents/ JAMS-Rules/JAMS_Employment_Min_Stds-2009.pdf.

[174]      Id. at 4.