American Business Law Journal
Volume 60, Issue 2, 235–287, Summer 2023
Arbitration Effect
Farshad Ghodoosi*and Monica M. Sharif**
Arbitration is changing the United States justice system. Critics argue that
arbitration leads to claim suppression. Proponents argue that, compared with
courts, arbitration is cheaper and less formal. These claims have not been
empirically tested. In particular, whether and how arbitration impacts individ-
uals’decision to sue remains an open inquiry. This article for the first time
shows, in a series of experiments, the impact of arbitration agreements on indi-
viduals’ decisions to sue. This article calls it the “arbitration effect.”Fir st, we
test whether the arbitration effect exists; that is, if arbitration agreements nega-
tively impact individuals’ decision to sue. Second, we experimentally test indi-
viduals’ decisions to opt out of arbitration agreements. Lastly, we assess
whether any type of information can “cure”the arbitration effect. The results
establish that individuals are less likely to sue in arbitration as opposed to
court, hence the arbitration effect. Such an effect, however, does not exist at the
contracting stage, meaning that individuals do not shun arbitration when
given the option. Further, none of the fundamental attributes of arbitration, as
touted by the U.S. Supreme Court, nor win-rates and class actions mitigate the
arbitration effect. Equally, informational nudges do not reduce the effect, and
individuals do not ascribe negative attributes to firms forcing mandatory arbi-
tration. For decades, courts and lawmakers grappled with issues related to arbi-
tration. The article provides much-needed data on arbitration. Findings cast
serious doubts on the ongoing efforts—market-based, judicial, or regulatory—
aiming to change the arbitration course.
*Assistant Professor of Business Law, California State University, Northridge, David
Nazarian College of Business & Economics, Department of Business Law, JSD, LLM, Yale
Law School, LLM in Business Law, U.C. Berkeley Law School. farshad.ghodoosi@csun.edu
**Assistant Professor of Management, California State University, L os Angeles, PhD,
University of Miami.
©2023 The Authors.
American Business Law Journal ©2023 Academy of Legal Studies in Business.
235
INTRODUCTION
Arbitration has changed U.S. law and its justice system, perhaps for-
ever.
1
At the core of this change lies the notion that arbitration provides
equal access to vindication of individual rights.
2
As such, the mere right
to access arbitration is consequential, not the ability to access arbitra-
tion.
3
Accordingly, if there is a way (a right) there will be a will. The
problem, however, is that there is no will to sue in arbitration even
when there is a way.
4
This is what this article empirically shows and calls
the arbitration effect.
When a PayPal customer, faced with a confiscation of an
account worth thousands of dollars, sued to recover those funds,
PayPal Inc. quickly moved to compel the arbitration agreement, which
wasburiedinafifty-four-page user agreement.
5
Or when a customer
of Coinbase Inc., a major cryptocurrency exchange platform, was
scammed out of a large sum of money, the consumer elected to go to
1
One federal judge opined that the arbitration trend and the accompanying supportive
decisions from the Supreme Court are “among the most profound shifts in our legal his-
tory.”Jessica Silver-Greenberg & Robert Gebeloff, Arbitration Everywhere: Stacking the Deck of
Justice,N
EW YORK TIMES (Oct. 31, 2015) [hereinafter Silver-Greenberg & Gebeloff, Arbitration
Everywhere], https://www.nytimes.com/2015/11/01/business/dealbook/arbitration-everywhere-
stacking-the-deck-of-justice.html.
2
In 1985, in a watershed decision, the U.S. Supreme Court allowed arbitration to adjudicate
rights arising under a federal statute “so long as the prospective litigant effectively may vin-
dicate his or her statutory cause of action in the arbitral forum. . . .”Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth,473 U.S. 614, 637 (1985). Prior to Mitsubishi, in 1953, the
Supreme Court in Wilko v. Swan held that an arbitration agreement would violate the Secu-
rities Act of 1933’s prohibition on waiving the rights therein. Wilko v. Swan, 346 U.S.
427, 434–35 (1953).
3
In Italian Colors, the Supreme Court found the effective vindication doctrine to be a
“judge-made exception”that originated in Mitsubishi’s “dictum.”By de-emphasizing the
effective vindication doctrine, the Court in Italian Colors stressed the “right to pursue”lan-
guage of Mitsubishi. To put it simply, the Court in Italian Colors ruled that it is the right to sue
that should be the focus, not the ability to bring a claim. American Express Co. v. Italian
Colors Rest., 570 U.S. 228, 235–37 (2013).
4
This article focuses on perspectives of individuals (consumers and employees) on arbitra-
tion, not on organizations’ willingness to use arbitration.
5
Tingyu Cheng v. Paypal Inc., No. 21-cv-03608-BLF, 2022 U.S. Dist. LEXIS 7245
(N.D. Cal, Jan. 13, 2022).
236 Vol. 60 / American Business Law Journal
court. Invoking the user agreement, Coinbase tried to compel arbitra-
tion in part to defeat the potential class action lawsuit.
6
When an
employee of Tesla accused the company of sexual harassment and al-
lowing a frat house atmosphere, Tesla did not hesitate to try to compel
arbitration.
7
Similarly, Uber tried to compel arbitration in a lawsuit in
which an Uber driver allegedly refused to provide a ride to a blind
passenger because of a guide dog.
8
These are only some of the high
profile court cases in 2022 grappling with sending disputes to arbitra-
tion. The list goes on as more than eighty percent of the top one hun-
dred companies in the United States have language forcing arbitration
on consumers.
9
In 2022 alone, there have been more than 2000 cases
in federal and state courts involving issues related to arbitration agree-
ments (such as arbitrability) that have reached some form of a deci-
sion.
10
The underlying contention is often similar: consumers and
employees bring a case in courts while the corporations move to com-
pel arbitration.
The query raised by these facts is whether, empirically, individuals try
to avoid arbitration and, if so, at what stage and why. Much of what we
know about arbitration fits into three categories: lenient Supreme Court
jurisprudence favoring arbitration,
11
normative stances vehemently argu-
ing against the use of arbitration (at the minimum in consumer and
6
Abraham Bielski v. Coinbase Inc., No. C 21-07478 WHA, 2022 U.S. Dist. LEXIS 65689
(N.D. Cal. April 8, 2022). In a rare success, the U.S. Court for the Northern District of
California rejected Coinbase’s motion to compel arbitration because of lack of mutuality in
the complaint process of the arbitration agreement.
7
Vishwam Sanskarn, Tesla Loses Bids to Move California Sexual Harassment L awsuit into Arbitra-
tion,Y
AHOO FINANCE (May 22, 2022), https://finance.yahoo.com/news/tesla-loses-bid-move-
california-071137369.html.
8
Sarchi v. Uber Techs., Inc., 268 A.3d 258 (Me. 2022).
9
Adam Tanner, I Agree to What? The Surprising Rights Companies Claim in Terms of Service,
CONSUMER REPORT (March 25, 2022), https://www.consumerreports.org/digital-rights/
surprising-rights-companies-claim-in-terms-of-service-a1175960373/.
10
WESTLAW,https://legal.thomsonreuters.com/en/westlaw (last visited January 15, 2023)
(access case database and search the term “arbitration agreement”for all federal and state
cases filtering for 2022).
11
See infra Part II.
2023 / Arbitration Effect 237
