Turnabout is Fair Play: The Power of Mass Arbitration
By Lynda J. Grant, Esq.
Intro
On May 3, 2021, Amazon sent its customers an email updating its terms of use. The seemingly innocuous email informed consumers that “any dispute or claim relating in any way to your use of any Amazon service will be adjudicated in the state or federal courts in King County, Washington”. Doubtless most consumer considered the email a mere routine update. But it was anything but routine. Rather the five sentence email announced Amazon’s retreat from its mandatory arbitration clause. Faced with 75,000 arbitrations stemming from use of its Echo device, or a mass arbitration[1], Amazon apparently thought the better and cheaper course was to face one large class action than to experience death by a thousand cuts.
The question is does Amazon’s retreat herald a retreat by other consumer giants. And if not, is mass arbitration a viable method to even the playing field between the consumer with only a small loss, and consumer giants.[2] The answer is not a simple one and the story is still evolving.
Background
The rise of the mass arbitration is a direct response to the proliferation of mandatory arbitration and class action waivers in virtually every consumer agreement and judicial decisions upholding them. Arbitrations were originally aimed at providing an efficient means for two commercial entities to resolve their issues without resort to often expensive and time consuming court litigation. Over the past several decades, however, the use of arbitration agreements has been stretched well beyond their original purposes. Sturdevant, supra, note 2, at 9. See also M. Gilles, The Day Doctrine Died: Private Arbitration and the End of Law, Verdict, Vol. 28, No. 3 at 20-24. This expansion has been propelled by a series of Supreme Court decisions that have progressively diminished the availability of class actions, and increased the strength and reach of the Federal Arbitration Act, 9 U.S.C. §1, et seq. (“FAA”).[3] Such cases include Stolt-Nielsen S.A. v. AnimalFeeds Int’l. Corp., 559 U.S. 662, 687 (2010) (finding that the parties could not engage in a class arbitration where there was no specific agreement allowing for it), AT&T v. Concepcion, 563 U.S. 333, 352 (2011)(interpreting the FAA to allow businesses to require consumers to bring claims solely in individual arbitrations rather than as part of a class, and holding that the FAA pre-empted state law barring enforcement of class action waivers); and Am. Express Co. v. Italian Colors Rest., 570 U.S. 228, 234-39 (2013)(“Italian Colors”)(upholding class action waivers in an arbitration agreement, and rejecting the argument that arbitration was not economically feasible and thus rights would not be vindicated).
Even before these decisions, corporate attorneys were advising their clients to include arbitration agreements in their terms of use or employment agreements. Their justification for thwarting consumer and employee access to courts was, as they contend, to even the playing field in jurisdictions they thought were “judicial hellholes”, where their clients were likely to lose a suit. Transcript, Consumer Finance Monitor: A Deep Dive on Mass Consumer Arbitration (Season 4, Episode 13).[4] This led to an avalanche of litigation on various issues regarding the enforceability of arbitration agreements and class actions waivers, and the reach of the FAA versus state contract law. Id. But the Supreme Court put to rest any claim that arbitration provisions containing class action waivers were unenforceable, short of being able to show that the arbitration clause was obtained through fraud or duress, or was otherwise unconscionable. The result, naturally, was the insertion of arbitration clauses into all kinds of agreements, from online platforms, to employment agreements and claims for sexual harassment.[5]
The impact on employees and consumers was devasting, effectively eliminating access to justice and the courts for all but those with the most significant claims justifying the filing and prosecution of an arbitration. Even where the individual had a monetarily substantial claim, as one study put it, “consumers were more likely to be struck by lightning than win a monetary award in forced arbitration”.[6] Employees fared even worse. Id. In 2020, despite about 60 million workers being subject to forced arbitration clauses, just 82 won a monetary award through a forced arbitration. Id. Class action lawyers regularly passed on litigating even the most meritorious claims where it meant spending years litigating the enforceability of an arbitration clause before ever reaching the merits. Worse, when they did fight the arbitration clauses, they created increasingly more adverse caselaw that seemingly expanded the scope of the FAA and reduced to a trickle the circumstances in which an arbitration clause would be struck. The field was thus ripe for a new method for prosecuting consumer and employee claims on an aggregate basis — enter the mass arbitration.
The rise of the mass arbitration was “both a response to and a product of a decades-long, wildly successful campaign by defense-side interests to dismantle the infrastructure for enforcing substantive rights.” Glover, Mass Arbitration, at 1289. If it was arbitrations corporations wanted, then it was arbitrations they would get. Starting in about 2018, enterprising and well-funded plaintiffs’ counsel, with the help of technology, started filing hundreds if not thousands of arbitrations against a particular company in what ordinarily would have been a class action. In an extreme example of “be careful what you wish for” such household names as DoorDash, Samsung, Ticketmaster, Uber, Postmates, Verizon and Intuit suddenly faced the prospect of dealing with tens of thousands of arbitrations under their own mandatory arbitration agreements, rather than just one class action.
Reports were that companies were “scared to death” by the prospect of a mass arbitration and “drowning in their own system.”[7] The U.S. Chamber of Commerce issued an eighty page screed denouncing the mass arbitration as a “shakedown” used to “coer[ce] unjustified settlements.”[8] And, corporate lawyers and in-house counsel quickly cobbled together game plans on how to “avoid mass arbitrations.”[9]
The Power of Mass Arbitration
The power of the mass arbitration lies not so much in the filing of an onslaught of cases or their merits, although that is certainly a factor. Rather, it is in each filer’s ability to shift the initial costs of filing and the arbitration fees onto the target corporation under their own “friendly” arbitration clause and the rules of the arbitral forum. In their efforts to push every consumer and employee complaint into arbitration and skirt judicial scrutiny, corporate America had to make their arbitration clauses ostensibly consumer-employee friendly. As part of that effort, and to avoid any claims of unconscionability, corporations adopted “friendly” fee shifting provisions in their arbitration clauses. Glover, Mass Arbitration, at 1314-1315. Arbitration agreements then typically contain a clause that limits the financial responsibility of the consumer or employee to pay the tribunal’s filing fee, while providing that the corporation will pay the remainder of the filing fee and the arbitrator’s fee. The company might further agree to pay all of the filing fee if the consumer or employee cannot afford to pay it. Those fees can be as much as $1,500 to file the claim, and more than $50,000 per party for the arbitrators. D. Lamdany, The American Journal of Mediation, Putting their Money Where Their Mouth Is: Mass Employment Arbitration Filings and the NonPaying Party Problem, Vol. 13 (2020)[10].
By inserting such clauses into their arbitration agreements, corporations were able to argue that their arbitration agreements did not impose an undue burden on the consumer or employee and, therefore, were fair and enforceable. Believing that they would only have to absorb the costs of an occasional arbitration, this fee shifting provision made sense. Surely, it was thought, even with that minimal fee shifting, consumers and employees would not think it worth the time and the money to pursue their meritorious but likely monetarily small claims. Moreover, such fees were fairly de minimus even if the corporation faced a few arbitrations a year. What corporate America failed to appreciate was the crushing liability that such provisions would impose when filers, following the corporation’s own regime, filed en masse. And, even more importantly, that the fees they would incur from mass filings would be used as a cudgel to pressure them into settling. In short, by leveraging arbitration fees and fee shifting provisions “[c]laims that were rendered unmarketable by class-action waivers suddenly bec[ame] capable of generating settlement pressure greater than that produced by class certification.” Glover, Mass Arbitrations, at 1341.
The Corporate Response
Corporations’ gambits in response to the filing of mass arbitrations are varied but seem to fall primarily into two categories: non-payment of the arbitration venue’s filing fees, often leading instead to the prosecution and settlement of the very class action they sought to avoid, or, a change in the arbitration agreement to favor the corporation, generally to delay, stagger or “batch” the arbitrations, more akin to the processes found in multi-district litigation.
Failure to Pay
Corporations’ attempts at non-payment have not been well received by courts to say the least. Courts have been particularly galled at corporate refusals to pay their share of the upfront arbitrations fees, forcing plaintiffs to compel the very arbitrations that corporations themselves had mandated.
In the DoorDash case[11], for instance, plaintiffs’ counsel filed over 5,789 individual arbitrations on behalf of DoorDash couriers for claims that they were misclassified as independent contractors, thereby depriving them from a number of benefits and protections. Under the couriers’ mutual arbitration agreement with DoorDash, they were required to resolve their actions in binding arbitration before the American Arbitration Association (“AAA”). DoorDash commenced paying the requisite filing fees until it determined that doing so for all the filed arbitrations would cost it approximately $12 million. Thereafter, it refused the AAA’s repeated demands for payment, with the excuse that the arbitration demands were insufficient. AAA rejected its argument but given DoorDash’s refusal to pay, eventually closed the arbitrations in accordance with its Commercial Rules requiring payment of filing fees by each party before the commencement of arbitration. In an ironic twist, it was then the couriers who filed a motion to compel in federal court to force DoorDash to comply with its own mandatory arbitration clause.
Having successfully delayed the arbitration onslaught, however, DoorDash wasted no time. It contacted a new arbitration forum, the International Institute for Conflict Prevention and Resolution (“CPR”) and aided the CPR in devising a new protocol to address a mass number of employment arbitrations. This new protocol included the use of bellwether arbitrations forcing a large number of claimants to wait years before being heard while these bellwethers were litigated. Without prior notice, it then forced its couriers to consent to this new arbitration agreement when they signed into work under the premise that DoorDash had an unfettered right to modify the arbitration agreement. At the same time, it then negotiated with a class action firm to settle an action on a class basis for only $122 per claimant—less than half the filing fee for which it would have been responsible before the AAA.
The irony that DoorDash was trying to stymie its own arbitration clause was not lost on Judge Alsup before whom the couriers’ motion to compel was pending. Judge Alsup granted the couriers’ motion to compel arbitration in significant part, while issuing a stinging rebuke to DoorDash:
For decades, the employer-side bar and their employer clients have forced arbitration clauses upon workers, thus taking away their right to go to court, and forced class-action waivers upon them too, thus taking away their ability to join collectively to vindicate common rights. The employer-side bar has succeeded in the United States Supreme Court to sustain such provisions. The irony, in this case, is that the workers wish to enforce the very provisions forced on them by seeking, even if by the thousands, individual arbitrations, the remnant of procedural rights left to them. The employer here, DoorDash, faced with having to actually honor its side of the bargain, now blanches at the cost of the filing fees it agreed to pay in the arbitration. No doubt, DoorDash never expected that so many would actually seek arbitration. Instead, in 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.
(emphasis added). Abernathy v. DoorDash, Inc., 438 F. Supp. 3d 1062, 1067-68 (N.D. Cal. 2020). Judge Alsup then ordered DoorDash to pay the $9.5 million in outstanding filing fees. Lamdany, Putting their Money Where their Mouth Is: Mass Employment Arbitration Filings and the Nonpaying Party Problem, at 1, n.1.[12]
To add insult to injury, Judge Alsup refused to seal an affidavit showing the influence of DoorDash’s counsel on the allegedly independent CPR, further stating, “[t]he district court should not be a party to concealing this information from the public, especially as it concerns an arbitration organization that holds itself out to the public as impartial. This document would be useful to the public in evaluating the true extent to which the organization is impartial.” Id. at 1067.
Other corporations have followed the non-payment route, in many cases resulting in the litigation of the very class actions such agreements sought to eliminate. Uber has twice travelled down the non-payment route, once with respect to the misclassification of its drivers, and again in a fee discrimination suit. In the first instance, Uber was hit with over 12,000 driver arbitrations before JAMS, in accordance with its own arbitration clause, which would have cost it about $18 million in filing fees. Abadilla v. Uber Technologies, Inc., Case No. 3:18-cv-7343 (N.D. Cal.)(ECF No. 1 at ¶¶7-9). In a new spin on the mass arbitration procedure, it was the drivers’ counsel who attempted to negotiate a process involving bellwether arbitrations. That proposal was rejected by Uber, which instead sought to disqualify plaintiffs’ counsel—successfully delaying any arbitration. Uber found little succor from JAMS in that effort though, which explained that its role was not to investigate the potential conflicts of the drivers’ counsel, although it did delay the arbitration. (ECF No. 66-2). The drivers subsequently filed a motion to compel Uber to comply with its own arbitration provision and to pay for the many arbitration filings fees that were pending. The motion to compel was never heard and ultimately, the cases were settled for between $146 million to $170 million. Lamdany, Putting their Money Where their Mouth Is: Mass Employment Arbitration Filings and the Nonpaying Party Problem. Under the settlement agreement, a large majority of the Uber drivers who filed arbitration claims received settlement payments. Id.
Uber was not so lucky with its second bite at the non-payment apple, when it was faced with 31,560 arbitration demands by Uber Eats customers relating to the waiving of delivery fees for Black-owned restaurants. In an appeal from a decision finding Uber liable to the AAA for approximately $92 million in forum fees, a New York appeals court upheld the lower court’s decision and reprimanded Uber, stating:
While Uber is trying to avoid paying the arbitration fees associated with 31,000 nearly identical cases, it made the business decision to preclude class, collective, or representative claims in its arbitration agreement with its consumers, and AAA’s fees are directly attributable to that decision. (cites omitted).
Uber Techs. Inc. v. Am. Arb. Ass’n, 204 A.D. 3d 506, 510 (App. Div. 2022).
Rather than engage in a fight over non-payment, some corporations have just proceeded or attempted to proceed with a class action. Peleton was faced with over 2,700 consumer complaints filed before the AAA in accordance with its own arbitration agreement, for misrepresentations about its purported growing media library. It refused to pay the multi-million filing fees and the AAA’s request to remove it as the neutral in that agreement, resulting in the filing of a class action which is presently being litigated. Fishon v. Peleton Interactive, Inc., Case No. 1:19-cv-1711-JSR (S.D.N.Y.)(ECF No. 1 at ¶¶35-43). Similarly in Wallrich v. Samsung Electronics America, Inc., Civil Action No. 1:22-cv-05506 (N.D. Ill.)(ECF Nos. 1 at ¶1, 36-37; 35 at 14), when faced with 49,986 biometric violation arbitrations, Samsung refused to pay hundreds of millions in filing fees in order to push the arbitration plaintiffs into a class action, after withdrawing its motion to compel arbitration of that class action. It is presently seeking to dismiss the consumers’ action to compel arbitration in favor of the class action. See also In re Intuit Free File Litig., Case No. 3:19-cv-02546-CRB (N.D. Cal.)(in which Intuit, when faced with about 100,000 arbitration demands arising from a misleading advertisement claim, attempted to settle the claims through a class action. Over significant objection, the Court did not approve the class action settlement finding, among other things, that the procedure to opt out of the class action settlement would unduly burden those seeking arbitration and that the settlement was inadequate)(ECF No. 214)); Lyles v. Chegg, Inc., Case No. 1:19-cv-3235 (D. Md.)(ECF No. 26-1)(after successfully compelling arbitration and claiming that the validity of the arbitration agreement was subject to determination by the arbitrator, in the face over 16,000 individual arbitrations that were then filed, and over $54 million in fees, Chegg declared that the claims were frivolous, that the mass arbitration violated the agreement, and that it was not proceeding with the arbitration, thereby itself making the determination as to the validity of the arbitration agreements); FanDuel Inc. v. Badii, No. 650211/2020 (N.Y. Sup. Ct. Jan. 9, 2020).[13]
Changing the Rules
Some corporations have taken the opposite tack. Instead of closing down the mass arbitrations against them, they have leaned into arbitration after first changing the rules. When DoorDash was faced with a mass of arbitrations, it modified its arbitration agreement, changing the arbitration forum to one seemingly less neutral, which had its own corporation friendly mass arbitration protocol. Likewise Ticketmaster, when faced with a mass of arbitrations, changed the arbitral forum in its arbitration agreement from JAMS to the recently created New Era ADR, which offers defendants and other corporations arbitration services based upon a set subscription fee regardless of the number of arbitrations before the forum. Ticketmaster thus eliminated the multi-million dollar filing fee issue of JAMS or the AAA. Heckman v. Live Nation Entertainment, Inc., Case No. 2:22-cv-00047-GW-GJS (N.D. Cal.)(ECF No. 1 at ¶¶1-5).
But Verizon Wireless has them all beat. When faced with the possibility of over 2,700 arbitrations arising from a less than $2.00 charge on consumer telephone bills, it modified its arbitration agreement to add a litany of draconian provisions, including provisions directly aimed at making mass actions more difficult, if not impossible.
In addition to a number of other egregious provisions, Verizon added the below clause to its arbitration clause:
If 25 or more customers initiate notices of dispute with Verizon Wireless raising similar claims, and counsel for the Verizon Wireless customers bringing the claims are the same or coordinated for these customers, the claims shall proceed in arbitration in a coordinated proceeding. Counsel for the Verizon Wireless customers and counsel for Verizon Wireless shall each select five cases to proceed first in arbitration in a bellwether proceeding. The remaining cases shall not be filed in arbitration until the first ten have been resolved. If the parties are unable to resolve the remaining cases after the conclusion of the bellwether proceeding, each side may select another five cases to proceed to arbitration for a second bellwether proceeding. This process may continue until the parties are able to resolve all of the claims, either through settlement or arbitration. A court will have authority to enforce this clause and, if necessary, to enjoin the mass filing of arbitration demands against Verizon.
MacClelland v. Cellco P’ship, Case No. 3:21-cv-08592-ECM (N.D. Cal.)(ECF No. 29 at 22)(“Verizon”). Having protected itself by adding the bellwether or batch provisions, and a 120-day notice of claim provision, among other provisions, Verizon then sought to compel arbitration.
In opposition to that motion, the consumers argued that Verizon’s arbitration provision was unconscionable and unenforceable for a number of reasons, not least of which was Verizon’s attempt to “batch” ten cases at a time and delay perhaps for years, the remainder of the arbitrations. The consumers’ counsel argued that at that rate “it would take approximately 156 years to resolve the claims of all 2,712 Verizon customers, given that the average arbitration takes 6.9 months to complete.” Plaintiffs’ Opposition to Defendants’ Motion to Compel Arbitration and Stay Proceedings (ECF No. 29 at 22-23). The consumers further argued that under the batching process, the statute of limitations would expire on most of the claims, and that consumers would be disabled from taking advantage of the institutional knowledge accrued by their counsel by placing limits on counsel with more than 25 cases. Id.
Judge Edward Chen, before whom the case was pending, agreed and denied Verizon’s motion to compel. MacClelland v. Cello P’ship, 609 F. Supp. 3d 1024 (N.D. Cal. 2022). Specifically, Judge Chen found that the terms of the mass arbitration provision were substantively unconscionable given the years that consumers would have to wait under the batching provisions to litigate their claims and the attendant risk that such claims would be time barred. Id. at *1041-42. The Court further held that the provisions restricting plaintiffs’ counsel with more than 25 cases but not Verizon’s counsel with the same number of cases lacked mutuality. Id. at *1042-43. The Court found, “Verizon is thus able to enjoy all of the advantages that come from being a ‘repeat player,’ while law firms that represent twenty-five or more of Verizon’s customers may be forced to sideline any clients which would exceed the numeric cap.” Id. at *1043.
Verizon has appealed the decision to the U.S. Court of Appeals for the Ninth Circuit, Case No. 22-16020 (filed July 13, 2022), and the case is considered an “early test of corporate strategy to combat mass arbitration.” A. Frankel, Verizon Appeal Will Be Early Test of Corporate Strategy to Combat Mass Arbitration, Reuters (November 22, 2022).[14]
Conclusion
The mass arbitration movement is only a few years old. It is therefore too soon to tell how effective a mechanism it will be. Some commentators are already announcing the end of mass arbitration 2.0, proclaiming that the window of opportunity to leverage arbitral venue fees is over. Clearly, a new wave of mass arbitrations is developing and bringing with it more legal wrangling between consumer-employees’ and corporations’ counsel. New arbitral fora with corporate friendly mass arbitration protocols are springing up and corporations are revising their arbitration agreements to include anti-mass arbitration provisions. The decision by the Ninth Circuit in the Verizon case will have a significant impact on the continued viability of mass arbitrations, at least in their current incarnation, and whether “batching” or bellwether procedures become common place.
For those practicing in the field of consumer and employee class actions, however, what is evident is that the specter of mass arbitrations is influencing many corporations. While mass arbitrations may not sound the death knell for arbitration agreements, they are a factor that consumer giants and employers must consider in deciding whether to maintain their arbitration provisions or to invoke them, rather than proceed with a class action.
*Lynda J. Grant is a partner with TheGrantLawFirm, PLLC, in New York City and has been representing consumers, investors and others wronged by corporate misdeeds for over 40 years. https://grantfirm.com. For a more comprehensive treatment of the subject of mass arbitration, the author recommends, J. Maria Glover, Mass Arbitration, 74 Stanford L. Rev. 1283 (June 2022).
[1] Mass arbitration refers to the commencement of a large number of individual arbitrations arising from the same issue, generally brought by the same attorney or a group of attorneys, against a target corporation.
[2] The Amazon retreat and the filing of mass arbitrations may be the beginning of a movement to eliminate mandatory arbitration agreements. The Forced Arbitration Injustice Repeal Act of 2022 (the “FAIR Act of 2022”), which eliminates arbitration clauses in consumer disputes, among other circumstances, and makes the court, rather than an arbitrator, the arbiter in the first instance as to whether the arbitration agreement is enforceable, has been reintroduced in the Senate. See J. Sturdevant, Reasserting The Right to a Public Jury Trial, Verdict, Vol. 28, No. 3 at 11-13 (July 2022).
[3] The FAA provides that a written arbitration provision is enforceable except on grounds that would invalidate any contract. The Supreme Court has explained that the FAA requires arbitration provisions to be “rigorously enforced” according to their terms, and that they cannot be overridden even by federal law unless that statute specifically evinces a congressional mandate to do so. Italian Colors, 570 U.S. at 232-36.
[4] https://www.ballardspahr.com/insights/blogs/2021/04/pod-a-deep-dive-into-mass-consumer-arbitration.
[5] In March 2022, President Biden signed into law the “Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021”, amending the FAA to give employees who are parties to arbitration agreements the option of bringing claims of sexual assault or sexual harassment either in court or arbitration.
[6] American Association for Justice, Forced Arbitration During a Pandemic: Corporations Double Down at 3 (October 2021), https://www.justice.org/resources/research/forced-arbitration-in-a-pandemic.
[7] M. Corkery, J. Silver-Greenberg, ‘Scared to Death’ by Arbitration: Companies Drowning in Their Own System, New York Times (April 6, 2020), https://www.nytimes.com/2020/04/06/business/arbitration-overload.html.
[8] A. J. Pincus, A. A. Parasharami, K. Ranlett, C. Longoria-Green, U.S. Chamber of Commerce, Mass Arbitration Shakedown: Coercing Unjustified Settlements – ILR (Feb. 28, 2023).
[9] M. Booden, Docket, How to Avoid Mass Arbitration Claims (April 20, 2022), https://docket.acc.com/how-avoid-mass-arbitration-claims.
[10] http://www.americanjournalofmediation.com/docs/07%20Lamdany_Submission.pdf.
[11] Abernathy v. DoorDash, Inc., Case No. 19-cv-07545 (N.D. Cal.)(“DoorDash”).
[12]The related class action was eventually settled for about $100 million and is estimated to pay “Dashers” about $130 per claimant. According to its most recent Form 10-K, DoorDash is still involved in a number of arbitrations regarding the classification of its “Dashers”. See Form 10-K for the period ended December 31, 2022, filed with the Securities and Exchange Commission on February 27, 2023.
[13] Non-payment may not be a viable long term alternative. Under the AAA rules, the AAA may decline to administer future consumer arbitrations with any business failing to pay, effectively ending a company’s arbitration program. Further, at least one state has taken the issue into its own hands. California has passed a law penalizing corporation that refuse to pay their arbitration fees. Cal. S.B. 707, Ch. 870 (2019-20).
[14] https://www.reuters.com/legal/government/verizon-appeal-will-be-early-test-corporate-strategy-combat-mass-arbitration-2022-11-22.