“Since it costs a lot to win, and even more to lose”: Implications for competition law from the use of arbitration for tort claims and the possibility of collusion to subvert due care standards.

Paul Aubrecht (Erasmus University Rotterdam, University of Hamburg, University of Bologna)

Abstract

There is tension between the goals of tort law, contract law, antitrust law and legal systems when firms collusively use arbitration for tort claims. Competition law is designed to limit the abuse of market power and conspiracies to restrain trade. Contracts to arbitrate tort claims, including claims for torts related to consumer, service, medical, and employment contracts, may lead to an underproduction of efficient due care standards which are produced by courts in the adjudicating of tort claims alongside other public goods such as information, rule interpretation and gap filling. Arbitration is private and does not produce public goods from adjudicating tort claims. In the United States (US) there has been an expanding interpretation of the Federal Arbitration Act (FAA) to treat contracts to arbitrate the same as other contractual terms with a strong preference to enforce arbitration for nearly all claims including tort claims, including terms found in commonly used adhesion contracts which are often entered into without being fully read or understood by consumers, patients and employees. In the Europe Union (EU) many contracts to arbitrate must meet additional contractual formation requirement to be considered valid, which in practice limits the extent of the use of arbitration between businesses and consumers. Arbitration clauses are often found alongside terms favorable to defendants which limit potential damages from victims and other potentially pro plaintiff procedural rights in litigation. Judicial or regulatory arbitrage may occur when repeat players (firms facing multiple similar claims, RP) and industries coordinate efforts to take advantage of the differences between arbitration and litigation in order to: 1) act strategically using information, resource and opportunity advantages over one shotters (single claim claimants, OS) in the arbitration of tort claims to avoid liabilities for torts and avoid taking due care as required by law; 2) avoid judicial oversight of bad acts including, tortious acts, collusive behavior, price fixing (including the indirect price fixing effects which collusion to use arbitration may result in), and other anticompetitive or otherwise illegal behavior; 3) play for rules by strategically influencing the production of public goods from litigation in order to avoid the adjustment of inefficiently low due care standards to an efficient standard, and strategically waive arbitration in order to adjust inefficiently high due care standards to an efficient standard. Courts should be wary of becoming involved as “instruments” of a collusive scheme to divert tort claims to arbitration as the collusive use of arbitration for tort claims may lead to inefficient market outcomes which may decrease social welfare. This paper aims to: 1) Identify the tensions between, contract, tort, and competition law within the context of contracts to arbitrate tort claims. 2) Highlight potential anticompetitive effects from the use of arbitration for tort claims using a law and economics approach; and 3) Consider if current legal instruments in the EU and US are capable of smoothing the tension between laws and the alleviating of harms caused from the collusive use of arbitration for tort claims.

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