Arbitration agreements have become a fixture of American contracts, and companies have turned to them as a strategy for reducing class action exposure. In recent years, plaintiffs have responded by initiating “mass arbitrations” – individual arbitrations filed on behalf of hundreds or thousands of customers or employees, which may immediately threaten companies with millions of dollars in arbitration-initiating fees alone. Many companies, however, have been slow to react to the risks posed by mass arbitration. This post discusses some of those risks, the difficulties companies have encountered in trying to address this issue, and potential strategies for mitigating the threat posed by mass arbitration.
The mass arbitration issue did not emerge overnight. Instead, this threat emerged in response to efforts by corporate defendants to make their arbitration agreements more palatable to courts. For example, defendants successfully persuaded courts that arbitration agreements should be strictly enforced “according to their terms,” even if the arbitration agreements contained class-action waivers that plaintiffs argued made arbitration uneconomical. See AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 344 (2011). Arbitration agreements also increasingly featured delegation clauses, which required arbitrators (and not courts) to resolve “gateway” questions of arbitrability and prevented courts from reaching more substantive arguments. See Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 529 (2019). And in response to the legions of unconscionability challenges tested in courts over the years, arbitration agreements evolved to incorporate an array of consumer- and employee-friendly provisions. Significantly, one such standard provision promises that companies, not consumers or employees, will bear the bulk of at least upfront arbitration fees – a term that has become widely incorporated into the rules of popular arbitration providers.
Mass arbitration claimants have used these developments against companies. Aided by sophisticated lead-generation services, plaintiffs’ lawyers can identify a substantial number of potential claimants and initiate individual arbitration proceedings on their behalf. According to these claimants, a company cannot avoid its contractual obligations to participate in arbitration proceedings – even if such proceedings number in the hundreds or thousands. Because most arbitration agreements include class-action waivers, each demand is filed individually, triggering its own arbitration fees. The company then finds itself responsible for costs imposed both by the rules of the arbitration organization it selected and by the consumer- or employee-friendly provisions in its own arbitration agreement, potentially adding up to enormous upfront costs that cannot be postponed or avoided – and that create outsized settlement pressure without regard for the merits of the underlying claims. In California, for example, a drafting party that fails timely to pay arbitration fees pursuant to an arbitration agreement is subject to various statutory penalties, including liability for the other side’s reasonable attorneys’ fees and costs. See Cal. Civ. Proc. Code § 1281.97.
Companies’ efforts to seek relief from courts have been rebuffed, with many judicial comments drawing headlines for describing the companies’ resistance to mass arbitration as ironic, hypocritical, or poetically just given the historical backdrop of defendants enforcing arbitration agreements against plaintiffs. See, e.g., Abernathy v. DoorDash, Inc., 438 F. Supp. 3d 1062, 1068 (N.D. Cal. 2020) (“[I]n irony upon irony, DoorDash now wishes to resort to a class-wide lawsuit, the very device it denied to the workers, to avoid its duty to arbitrate. This hypocrisy will not be blessed, at least by this order.”). And when delegation clauses are involved, companies may have to present their arguments against mass arbitration to the arbitrator in the first instance – after, of course, the filing fees are paid. See, e.g., Adams v. Postmates, Inc., 414 F. Supp. 3d 1246, 1254 (N.D. Cal. 2019) (“[T]he crux of Postmates’ position is that no arbitration fees are due because Petitioners allegedly failed to submit individual arbitration demands in accordance with the Mutual Arbitration Provision. . . . That determination is within the arbitrator’s exclusive authority.”), aff’d, 823 F. App’x 535 (9th Cir. 2020).
Despite the risks posed by mass arbitration, many companies have been slow to react. And courts have generally been unreceptive to efforts to modify arbitration agreements to mitigate the threat of mass arbitration after a company has been targeted.
But before they become targets, companies have several options available that could mitigate the risk of a mass arbitration. For example, companies could modify their existing arbitration agreements to:
- add informal dispute-resolution requirements as conditions precedent to arbitration;
- delegate certain gateway issues to the courts;
- remove promises to pay arbitration-related filing fees;
- consider switching arbitration providers or renegotiating rules with existing providers;
- promise only to reimburse fees at the conclusion of arbitration, conditioned on a finding that the claim was brought in good faith;
- include fee-shifting provisions; and
- include procedures specifically geared toward mass arbitration, such as procedures for identifying bellwether cases in the event of mass arbitration filings, batching claims, or sliding fee scales.
Some arbitration organizations, and in particular newer organizations seeking to compete with more established market leaders, have moved to offer procedural solutions similar to those identified in the last bullet above.
Some of these moves, however, have drawn skepticism and scrutiny from the media, courts, and commentators alike for projecting gamesmanship and partiality. For example, plaintiffs have targeted in discovery a corporation’s communications with newer arbitration providers. See, e.g., Abernathy, 438 F. Supp. 3d at 1067 (denying request to seal documents concerning “an arbitration organization that holds itself out to the public as impartial” but provided defense attorneys with a draft mass arbitration protocol for discussion). And one company’s effort to mitigate against the threat of mass arbitration by changing its arbitration administrator resulted in it being targeted by an antitrust complaint. See Heckman v. Live Nation Entertainment, Inc., No. 22-cv-00047 (C.D. Cal.).
Mass arbitrations appear to be a permanent threat for defendants. Indeed, some prominent companies have already moved away from arbitration agreements entirely, apparently finding class-action lawsuits to be more palatable than the threat of mass arbitrations. Companies that continue to rely on arbitration agreements would be well-advised to review their terms and develop strategies for mitigating against the risks of mass arbitrations.