Mandatory Arbitration Provisions Research Articles

Mandatory Arbitration of International Tax Disputes: A Solution in Search of a Problem

This article is based on the author's S.J.D. thesis.Improving the resolution of international tax disputes has witnessed recent developments. The Organization of Economic Development and Cooperation (“OECD”) amended its Model Convention and Commentary to include mandatory and binding arbitration of tax disputes between two treaty countries that have been unsuccessful in resolving the disputes through negotiations between their tax authorities. The United States has amended its income tax treaties with Belgium, Canada, Germany and France to include mandatory and binding arbitration of unresolved tax disputes. These amendments are undoubtedly an important step toward improving the resolution of international tax disputes. Nevertheless, the Article argues that these amendments fail to achieve this goal. By their terms, the amendments enable countries to avoid the arbitration. There is a risk these amendments will damage previously existing resolution methods that have generally been successful. The arbitration, as currently proposed, can be used by taxpayers to achieve abusive and undesirable tax results. The Article argues that these amendments will not serve the two primary goals income tax treaties aim at achieving which are preventing double taxation as well as double nontaxation (i.e., escaping taxation).In Part one of the Article I present a brief overview of major contributions to the literature in this field. I set forth an evaluation methodology that focuses on two questions: First, does a mandatory arbitration provision fit in the overall network of tax treaties? Second, can the mandatory and binding arbitration provision actually resolve disputes? I argue that when we are able to answer positively to both questions, a recommendation to adopt such a provision will follow.In Part two I focus on the OECD proposal for mandatory and binding arbitration aimed at improving the resolution of international tax disputes. I conclude that under the current proposed structure, a negative answer to the above evaluation questions is more likely to be given than a positive one. I address certain policy issues related to the proposal, structural deficiencies embodied in it as well as possible negative consequences it may have. I conclude that the proposal should be reexamined.In Part three I examine the mandatory and binding arbitration provisions that were adopted recently in a few income tax treaties to which the United States is partner. I conclude that the United States expresses a position aimed at limiting the application of mandatory and binding arbitration.Part four is a summary of the work. I explain that I generally do not oppose the adoption of mandatory and binding arbitration. Nevertheless, I offer some considerations regarding the circumstances accompanying the application of the proposed provisions as well as their structure. I suggest that the proposals should be reexamined because they lack features that are major and crucial for successful mandatory and binding arbitration and because of the risk that they will negatively affect pre-existing dispute resolution mechanisms.

The Corporate Contract and the Internal Affairs Doctrine

In the landmark ruling Salzberg v. Sciabacucchi, the Delaware Supreme Court upheld the validity of a corporate charter provision restricting the rights of shareholders to bring federal securities law claims. Although rights arising under federal securities law lie beyond the internal affairs doctrine, which has traditionally defined the boundaries of state corporate law, the Salzberg court ruled that such rights may be regulated by the “corporate contract,” created by state corporate law and comprised of a corporation’s charter and bylaws. Embracing contractarian precepts, the Salzberg court thus rejected the lower Chancery Court’s concession theory of the corporate contract as inextricably bound by the internal affairs doctrine. Salzberg’s contractarianism has wide-ranging implications for the role of the internal affairs doctrine, the reach of the corporate contract, and the rights of shareholders arising under both state corporate law and federal securities law. For one, Salzberg suggests that the corporate contract may be used to impose all types of restrictions to deter shareholders from bringing federal securities class actions. Most significantly, the decision opens the path to using the corporate contract to compel bilateral arbitration for all shareholder claims. In this respect, Salzberg reflects a growing divergence in corporate law between a judicial rhetoric wedded to contractarianism and a statutory framework that still bears concessionary hallmarks of state power. Whether a mandatory arbitration provision set forth in a corporation’s governing documents is enforceable against shareholders will turn on how the Delaware legislature or the federal courts ultimately resolve this contract-concession tension.

Federal Forum Provisions and the Internal Affairs Doctrine

A key question at the intersection of state and federal law is whether corporations can use their charters or bylaws to restrict securities litigation to federal court. In December 2018, the Delaware Chancery Court answered this question in the negative in the landmark decision Sciabacucchi v. Salzberg. The court invalidated “federal forum provisions” (“FFPs”) that allow companies to select federal district courts as the exclusive venue for claims brought under the Securities Act of 1933 (“1933 Act”). The decision held that the internal affairs doctrine, which is the bedrock of U.S. corporate law, does not permit charter and bylaw provisions that restrict rights under federal law. In March 2020, the Delaware Supreme Court overturned the Chancery’s decision in Salzberg v. Sciabacucchi, holding, among others, that in addition to “internal” affairs, charters and bylaws can regulate “intra-corporate” affairs, including choosing the forum for Securities Act claims. This Article presents the first empirical analysis of federal forum provisions. Using a hand-collected data set, we examine the patterns of adoption of such provisions and the characteristics of adopting firms. We show that adoption rates are higher for firms with characteristics, such as belonging to a particular industry, that make them more vulnerable to claims under the 1933 Act. We also show that adoption rates substantially increased after the Supreme Court case Cyan Inc. v. Beaver County Employees Retirement Fund, which validated concurrent jurisdiction for both federal and state courts for 1933 Act claims. We also find that the firms that adopt FFPs at the initial public offering (“IPO”) stage tend to share characteristics that have been associated with relatively good corporate governance. To assess the impact of the Sciabacucchi decision, we also conduct an event study. We find that the decision is associated with a large negative stock price effect for companies that had FFPs in their charters or bylaws. The effect is robust even for firms that had better governance features, that underpriced their stock at the IPOs, and whose stock price traded at or above the IPO price prior to the Sciabacucchi decision. In light of the empirical findings suggesting that federal forum provisions may serve shareholders’ interests by mitigating excessive 1933 Act litigation, we consider alternative legal theories for validating federal forum provisions in corporate charters and bylaws. We suggest two possible approaches: (1) allowing corporate charters and bylaws to address matters that are technically external but deal with the “affairs” of the corporation; and (2) adopting a more “flexible” internal affairs doctrine that could view 1933 Act claims as being “internal” to a corporation’s affairs. The Delaware Supreme Court’s decision can be viewed as being more consistent with the first, rather than the second, approach. We examine the possible implications of adopting either approach, particularly with respect to the existing Delaware statute on exclusive forum provisions and to mandatory arbitration provisions.

Mandatory Arbitration and the Market for Reputation

Is mandatory arbitration of shareholder claims desirable? With the blessing of the Supreme Court, mandatory arbitration provisions with class action waivers have become common in contract, consumer, and labor law. Policymakers now consider importing this trend to corporate and securities laws as well. The existing debate centers around consent and compensation: Can shareholders be held to consent to arbitration provisions in the company’s corporate governance documents? Are shareholders better off with arbitration, given that litigation currently offers them very little compensation (with high fees)? This Article adopts a different, information-production perspective. It examines how the choice between litigation and arbitration affects the effectiveness of market discipline. Litigation, regardless of the legal outcomes, produces a positive externality: information on corporate behavior. Internal memos, emails, spreadsheets, and transcripts that are exposed in the process give us a glimpse into how the company-in-question is ran. This information helps outside observers reassess their willingness to do business with the parties to the dispute. In other words, litigation shapes the reputations of companies and businesspersons. By shifting from litigation to arbitration, we are likely to save administrative costs, but lose some of the effectiveness of reputational deterrence. While adopting a mandatory arbitration provision can be desirable for a given company, the ex ante effects of allowing such provisions would be overall detrimental to the market.

Mandatory Securities Arbitration’s Impermissibility Under State Corporate Law: An Analysis of the Johnson & Johnson Shareholder Proposal

Under New Jersey corporate law, may a corporation adopt a mandatory arbitration provision in its bylaws that would require shareholders to bring federal securities law claims via separate individual arbitration? The issue is squarely raised by a recent shareholder proposal at Johnson & Johnson, a New Jersey corporation, that asks the board to adopt such a bylaw for “disputes between a stockholder and the Corporation and/or its directors, officers or controlling persons relating to claims under federal securities laws.” This whitepaper, which has been signed on to by 26 professors of securities and business law, explains why such a bylaw would violate the New Jersey Business Corporation Act, the relevant provisions of which are similar to those in the Delaware General Corporation Law. Although bylaws may be used to modify the “corporate contract” with shareholders, that authority is not unlimited. Under New Jersey law, as in Delaware, a corporation’s bylaws may only include provisions relating to internal corporate affairs. Because a mandatory securities arbitration provision purports to govern matters that are not internal affairs of the corporation, it is not an allowable subject for corporate bylaws.

A New Strategy for Regulating Arbitration

Confidential arbitration is a standard precondition to employment. But confidential arbitration prevents a State from ensuring or even knowing whether employees’ economic, civil, and due process rights are respected. Further, employers regularly require employees to waive rights to class proceedings (thereby foreclosing small claims) and to arbitrate under the laws of another jurisdiction (thereby evading mandatory state law). In response, States have tried to regulate arbitration provisions, arbitral awards, and arbitral processes. But these efforts have all failed because the Supreme Court says they are preempted by the Federal Arbitration Act. In this Article, I argue that States can and should adopt a new strategy: Deter parties from forming such contracts in the first place. The Article proceeds in three parts. First, I explain the problem. Over the last fifty years, the Supreme Court systematically immunized arbitration provisions against every plausible contract defense. Yet the Supreme Court continues to insist that, just as the Federal Arbitration Act requires, arbitration agreements are still subject to “generally applicable contract defenses, such as fraud, duress, or unconscionability.” This is false. Second, I present the first large-scale evidence on the pervasiveness of arbitration. The Supreme Court’s arbitration precedents have effect only to the extent private parties agree to arbitrate their disputes. To study this, I use machine-learning protocols to parse millions of filings with the Securities and Exchange Commission and create a database of nearly 800,000 contracts formed by public companies. These contracts include employment agreements, credit agreements, joint ventures, purchases, and others. Employment contracts are by far the most likely to include a mandatory arbitration provision. Finally, I argue that, because the Supreme Court has all but stripped States of their power to enforce contracts, States should adopt policies that deter formation of objectionable contracts. For example, States cannot prohibit forced arbitration of sexual harassment claims. They can, however, prohibit sexual harassment as a subject matter for employment contracts; they can also enforce this with civil penalties and whistleblower rewards. Similarly, States cannot stop an employer from arbitrating under the laws of another jurisdiction, thereby evading mandatory limits on noncompete agreements. But States can declare noncompetes illegal, levy civil fines on employers that form them, and again offer employees whistleblower rewards to report violations. These approaches work because they create a cause of action for a third party - the State - who is not subject to the arbitration agreement. And unlike past efforts, these laws would not be preempted because they do not “derive their meaning from the fact that an agreement to arbitrate is at issue.”

The Nature and Scope of the Mandatory Arbitration Provision in the OECD Multilateral Convention (2016)

In this article, the author considers the nature and scope of the mandatory arbitration provision in the OECD Multilateral Convention (2016) and discusses the effectiveness of the arbitration procedure.

The Impact of Mandatory Arbitration on the Common Law Regulation of Standard Terms in Consumer Contracts

The focus of this paper is the regulation of standard terms in consumer contracts at common law, i.e., judges deciding cases in published opinions. In particular, I focus on the two most important common law doctrines in this area — unconscionability and good faith — and to a lesser extent on court decisions that interpret consumer statutes. They have all played a central role in regulating standard terms in consumer contracts over the years, yet their continuing role is being threatened by the proliferation of mandatory arbitration provisions in consumer contracts. If this trend continues, the ability of courts to further develop contract doctrine in consumer transactions may be severely limited. I begin with a discussion of the role that common law plays in regulating consumer transactions. I then discuss how the unconscionability and good faith doctrines have evolved as limitations on standard terms in consumer contracts. Next I discuss the increasing use of mandatory arbitration clauses in consumer contracts and the likely effects of this trend on consumer contract litigation. Toward the end of the paper, I explore what this might mean going forward if the common law of unconscionability and good faith in consumer contracts are essentially frozen in time, and if mandatory arbitration results in fewer published decisions interpreting and applying consumer statutes.

Legislative Approaches to Trust Arbitration in the United States

In the United States, the treatment of mandatory arbitration provisions in trust agreements remains murky. This uncertainty may discourage estate planners from suggesting arbitration, even in cases where it would effectuate the settlor’s goals. A number of US state legislatures have already reformed their trust codes to make this area of law more predictable. Although it is impossible to predict the future, it seems likely that other US states will adopt similar provisions in the coming years and may thereby improve the way in which arbitration is used to resolve internal trust disputes. Therefore, this chapter explores the variety, validity, and viability of various legislative attempts to resolve the uncertainty surrounding mandatory arbitration of internal trust disputes. In so doing, the chapter provides a descriptive and normative analysis of various state legislative approaches regarding arbitration of trust disputes and critiques these efforts so as to help legislators going forward.

Mandatory Arbitration Provisions Involving Talent and Studios and Proposed Areas for Improvement

In recent years, the major television studios have increasingly insisted that their new contracts with talent, including executive producers, directors and actors, include a mandatory arbitration provision and that one particular arbitration provider, JAMS, be the forum to arbitrate all disputes. The studios defend their inclusion of mandatory arbitration provisions with JAMS as the provider, arguing that the arbitration process has safeguards to protect fairness, JAMS arbitrators are particularly well qualified and that juries tend to favor talent, not large corporations. Given the studios’ near universal designation of a sole provider in their contracts, the studios’ size and influence on the Los Angeles economy, the realities of arbitration and private judging as a for-profit business and anecdotal stories of arbitrators favoring the repeat player studios over talent, the talent community is increasingly concerned about the danger of “repeat player/provider bias” in major studio versus talent arbitrations. The article examines the historical trends and the reasons for them, the lack of transparency and risk of repeat player/provider bias in talent versus studio arbitrations, the legal possibilities in challenging such a mandatory arbitration provision, the potential impact of the California consumer arbitration disclosure statute and steps that can and should be made by the arbitration providers to alleviate the perception, if not the reality, of repeat player/provider bias in this arena.

Mandatory Arbitration within Tax Treaties: A Need for a Coherent International Standard

ABSTRACT As businesses expand operations globally, the threat of double taxation on income earned becomes a significant concern. The current Mutual Agreement Procedures (MAP) within the tax treaties frequently fail to provide equitable relief, exposing taxpayers to uncertain outcomes, and cause compliance considerations under Accounting Standards Codification (ASC) 740, Income Taxes. In July 2008, the Organisation for Economic Co-operation and Development (OECD) Model Tax Treaty began including a mandatory arbitration provision for taxpayers failing to reach agreement under MAP. The U.S. Model, while beginning to shift toward including mandatory arbitration in some of the later treaties, still relies on the voluntary MAP proceedings for resolution of disagreements, because any party can elect out of arbitration. Data provided by the U.S. Treasury indicated that a wide range of taxpayer income covered by the U.S. treaties failed to receive partial or full relief from double taxation. The U.S. should consider adopting the OECD Model Tax Treaty's mandatory arbitration provisions for all tax treaties, to remove the uncertainty of double taxation and promote international trade.

Mandatory Consumer Arbitration

Arbitration clauses in consumer contracts are ubiquitous. Typically, it is the party selling the good or providing the service that will present a contract to the prospective buyer as part of a printed form which is pre-drafted by the seller and used by it in numerous transactions. The buyer or the ultimate consumer rarely has the ability to negotiate substantive terms present in these contracts and will either have to take it or leave it, as the terms exist. One of the several clauses in the form will be a provision for the resolution of dispute exclusively through arbitration and the waiver of the right to litigate by the consumer. This paper proposes that it is required to be recognized that mandatory arbitration provisions in consumer contracts are inherently unfair, and are distinct from agreements made by parties of equal bargaining power with a free will to pursue alternate dispute resolution. Pre-dispute arbitration clauses in consumer contracts, need to be placed under a separate legal category and should not be given the same deference as other agreements to arbitrate. The first section of the paper will look at the position in United States and the grounds that exist to challenge pre-dispute clauses. The subsequent section will discuss how the problem of mandatory arbitration is dealt with in the European Union.

Allowing Shareholders to Customize Their Protections Through Arbitration of Shareholder Disputes

This article proposes allowing corporations to require arbitration of shareholder disputes by adopting an arbitration provision into their bylaws or charter. I outline the benefits, drawbacks, and legal challenges these provisions will face. There are two errors in the current view of shareholder litigation. First, it isn’t about management. Managers and directors may have their name on the complaint, but at the end of the day, the shareholders write the check, and the managers keep their yachts. Studies show that shareholder litigation has little effect on a manager or director’s wallet or reputation. So when evaluating remedies, the balance is not between the needs of shareholders and management. It is about allowing shareholders to determine the scope of their remedies against themselves. Second, this isn’t about litigation. Shareholder suits settle at extremely high levels. These suits are about settlement, not judgment. So when evaluating the benefits and drawbacks of reform proposals, such as arbitration, we err by comparing them to litigation. With this perception corrected, most of the disadvantages of arbitration melt away. I propose allowing shareholders to decide what level of protection they want through shareholder litigation. I propose doing this by allowing firms to include mandatory arbitration provisions in their charters or bylaws. This doesn't require a change in the law — instead it requires the SEC to reverse its position that arbitration violates the Securities and Exchange Act of 1934, bringing the commission back in line with current Supreme Court precedent. Under my proposal some firms may choose to retain the current regime. Others might opt for binding arbitration of all claims. Others would be free to explore a mix of arbitration and litigation, customized to their needs. For example, acquisitive firms may push claims regarding mergers into arbitration, but allow more typical fraud claims to continue through the courts. This proposal adds flexibility, lowers the cost to taxpayers, and customizes solutions on a company-by-company basis. To invoke Smith, Wright and Hintze’s seminal theory, it leverages corporations as “laboratories of corporate governance.” Further, because I am not proposing imposing arbitration on any company, but instead allowing each company the freedom to adopt arbitration as it sees fit, it’s not clear why we should care whether it offers benefits to the company. Because managers are rationally apathetic to shareholder litigation, there’s little reason to suspect they will spend political capital pushing through arbitration against the shareholders’ will. And if it is the shareholders’ will to limit their own remedy, why should the government stop them?

Mandatory Arbitration within Tax Treaties: A Need for a Coherent International Standard

As businesses expand operations globally, the threat of double taxation on income earned becomes a significant concern. The current Mutual Agreement Procedures (MAP) within the tax treaties frequently fail to provide equitable relief, exposing taxpayers to uncertain outcomes. The uncertainty causes compliance considerations under FAS 109, Accounting for Income Taxes and FIN 48, Accounting for Uncertainty in Income Taxes. In July 2008, the OECD Model Tax Convention began including a mandatory arbitration provision for taxpayers failing to reach agreement under MAP. The U.S. Model, while beginning to shift towards including non-binding arbitration in some of the later treaties, still relies on the voluntary MAP proceedings for resolution of disagreements. Data provided by the U.S. Treasury indicated that a wide range of taxpayer income covered by the U.S. treaties failed to receive partial or full relief from double taxation. The movement towards international accounting standards under IFRS provides the impetus to develop a universal procedure for avoiding double taxation. The U.S. should consider adopting the OECD Model Tax Convention for all tax treaties to remove the uncertainty of double taxation and promote international trade.

Significant Amendments to the France–United States Tax Treaty

In this article, the author provides a comprehensive overview of the amendments to the France–United States tax treaty, introduced by the 2009 Protocol, and analyses their practical implications for taxpayers. The changes concern, particularly, the application of the treaty to tax-exempt entities, the treatment of partnerships, exemptions from withholding tax on intra-group dividends and on royalties, avoidance of double taxation, introduction of a mandatory arbitration provision and limitation on treaty benefits.

Mandatory Arbitration Provisions in Collective Bargaining Agreements: The Case against Barring Statutory Discrimination Claims from Federal Court Jurisdiction

Mandatory Arbitration Provisions in Collective Bargaining Agreements: The Case against Barring Statutory Discrimination Claims from Federal Court Jurisdiction