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Lead Article: Proliferation of Mass Arbitration: Ballooning Costs and Emerging Tactics

Business Litigation Reports

Introduction

For many years, companies have included arbitration clauses in their contracts with employees and consumers. The clauses typically require that any dispute be resolved in arbitration rather than in court.  Although companies traditionally prefer to compel arbitration, plaintiffs’ attorneys have recently developed a strategy to use mandatory arbitration to their advantage by banding together similarly situated plaintiffs to bring “mass arbitration” claims.  Mass arbitration occurs when hundreds or thousands of individuals file separate arbitration demands against a single entity based on a common legal theory.  Typically, companies must cover significant upfront arbitration fees to defend against these claims, which can be overwhelming and may increase pressure on a company to resolve the disputes.  This new weapon for plaintiffs in large-scale employment and consumer disputes is the natural outgrowth of three strands of precedent: (1) cases that upheld mandatory arbitration in consumer and employment cases; (2) cases that approved of class action waivers in the same contexts; and (3) cases that required companies to pay the costs of such individual arbitrations.  The proliferation of mass arbitration claims presents numerous risks and opportunities for consumers, employees, and companies alike.  

 

The Supreme Court Sets the Stage

The Supreme Court created conditions favorable to the proliferation of mass arbitration through a series of decisions starting twenty years ago.

In 2001, the Supreme Court settled conflicting opinions among the lower courts, holding that employers could require in employment contracts that employees submit all disputes with a company to arbitration.  Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001).  

In 2011, the Supreme Court strengthened the ability of companies to impose arbitration on consumers and limited consumers’ rights to bring class-wide arbitration.  AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011).  In Concepcion, plaintiffs alleged that AT&T falsely advertised phones as “free” when consumers had to pay approximately $30 in sales tax.  Id. at 1744.  The sales agreement required that consumer claims be arbitrated, and it also prohibited consumers from bringing claims as “a plaintiff or class member in any purported class or representative proceeding.”  Id.  Previously, the California Supreme Court prohibited the use of collective action waivers as unconscionable under California law.  Id. at 1746.  In a 5-4 decision, however, the U.S. Supreme Court upheld the agreement’s arbitration requirement and its prohibition on class arbitrations.  Id. at 1753.  Writing for the majority, Justice Scalia noted that invalidating the arbitration requirement or class arbitration waivers would frustrate the goal of the Federal Arbitration Act (the “FAA”) to enforce private agreements and to encourage efficient dispute resolution.  Id. at 1749.  

In 2019, the Supreme Court further limited the availability of class arbitrations in Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019).  After a hacker stole tax information from 1,300 Lamps Plus employees, the hacker filed a fraudulent income tax return in the name of Frank Varela, who then filed a class action lawsuit on behalf of the affected employees.  Id. at 1412-13.  Based on a clause in its employment contract that required “any and all” claims to be decided through arbitration, Lamps Plus moved to dismiss the suit in favor of individual arbitration.  Id. at 1413.  Initially, the District Court compelled arbitration but allowed the employees to proceed as a class, and the Ninth Circuit affirmed on the basis that the clause was ambiguous as to whether class arbitrations were available.  Id. at 1414.  The Supreme Court reversed.  The Court held that silence and ambiguity are insufficient to infer consent to participate in class arbitration.  Id. at 1415.  The Court noted that class arbitration was contrary to the purposes of the FAA, as it “sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment.”  Id. at 1411 (quoting Concepcion, 131 S. Ct. at 1751).  Thus, unless an agreement specifically allows for class treatment, an arbitration must proceed on an individual basis.  Id. 

 

“Unconscionable” Fee Arrangements

Another factor leading to the proliferation of mass arbitrations arose from courts requiring companies to pay the bulk of fees in mandatory arbitration.  In 1997, the D.C. Circuit held that “where arbitration has been imposed by the employer and occurs only at the option of the employer,” the employer must pay all of the arbitration fees.  Cole v. Burns Int’l Sec. Servs., 105 F.3d 1465, 1485 (D.C. Cir. 1997).  The court noted that it would be “unacceptable’” to require plaintiffs to pay substantially higher fees to initiate an arbitration than they would have to pay in court.  Id. at 1483.  The court also placed other restrictions on arbitration clauses, such as mandating neutral arbitrators, providing for sufficient discovery, and allowing for all types of relief that would be available in court.  Id. at 1482.

Other courts have found that clauses requiring plaintiffs to bear significant costs are unconscionable in both employment and consumer contracts.  In 2011, a California district court invalidated a fee provision in an employment contract providing for a 50/50 split of arbitration fees “absent ‘settled’ authority coming only from the Supreme Court.”  Chavarria v. Ralphs Grocer Co., 812 F. Supp. 2d 1079, 1083 (C.D. Cal. 2011).  The court called this provision a “substantial economic barrier to justice” which nullified arbitration’s goal of reducing cost.  Id. at 1088.  Courts have similarly held in the consumer sphere that consumers cannot be forced to bear substantial costs in a mandatory arbitration.  See, e.g., Torrance v. Aames Funding Corp., 242 F. Supp. 2d 862, 874 (D. Or. 2002); Sanchez v. Valencia Holding Co., 61 Cal. 4th 899 (2015).

In accordance with these decisions, arbitration forums such as JAMS and the American Arbitration Association (the “AAA”) changed their consumer and employment arbitration rules to require companies to pay for the vast majority of arbitration costs.  See, e.g., JAMS Employment Arbitration Rules, JAMS Policy on Consumer Arbitrations.

 

Ballooning Costs

While arbitration can provide financial advantages compared to litigation, the trend of mass arbitration has altered the calculus for litigants.  For example, the AAA charges $300 to individuals and $2,650 to companies to cover the initial filing and case management fees for each individual arbitration demand.  See, e.g., AAA Employment Arbitration Rules.  In California, a new state law provides that arbitration fees must be paid within 30 days of the due date set by the arbitration provider.  Cal. Civ. Proc. Code § 1281.97.  

Recently, more than 6,000 couriers filed arbitration demands against DoorDash, a food delivery service provider.  Abernathy v. DoorDash, Inc., 438 F. Supp. 3d 1062, 1064 (N.D. Cal. 2020).  DoorDash’s employment agreement contained a “Mutual Arbitration Provision” that required employees to resolve “any and all disputes” through arbitration with the AAA.  Id.  The court compelled DoorDash to proceed with the individual arbitrations.  Id.  Pursuant the AAA’s rules, the plaintiffs were required to pay $1.2 million to initiate arbitration, while DoorDash was saddled with a $12 million upfront bill.  Id.  

Similarly, Uber faced 12,501 individual arbitration demands from its drivers over a three-month period in 2018.  Pet. for Order Compelling Arbitration, Abadilla v. Uber Technologies, Inc., Case No. 3:18-cv-7343 (N.D. Cal. Dec. 5, 2018).  The drivers contended that they were improperly classified as independent contractors rather than employees.  Id.  Eventually, Uber settled the cases for between $146 million and $170 million rather than undertake an impending mass arbitration battle. 

In response to these inflating costs, some companies have declined to pay the initial filing fees while arguing that a mass arbitration is inappropriate.  For example, in 2019, Postmates refused to pay approximately $10 million in filing fees when 5,274 couriers filed individual arbitration demands.  Adams v. Postmates, Inc., 414 F. Supp. 3d 1246, 1250 (N.D. Cal. 2019), aff’d, 823 F. App’x 535 (9th Cir. 2020).  The company argued that the “individual arbitration demands were insufficient . . . to initiate arbitration proceedings.” Id.  The court compelled arbitration and required Postmates to pay the arbitration fees to determine whether the plaintiffs’ claims were valid in the first instance.  Id. at 1255.  In a related case involving Postmates, a court further upheld the California law requiring payment within 30 days, holding that the state law was not preempted by the FAA, as the law “encourages arbitration” by “preventing parties . . . from holding hostage employees’ or consumers’ validly arbitrable claims.”  Postmates Inc. v. 10,356 Individuals, No. CV 20-2783 PSG, 2021 WL 540155, at *7 (C.D. Cal. Jan. 19, 2021).  

 

Development of Mass Arbitration Strategies

Mass arbitration efforts inherently involve recruiting enough plaintiffs to create significant exposure for the company.  For plaintiffs’ attorneys, this is often a significant obstacle.  Locating hundreds or thousands of employees or consumers who are willing to engage in arbitration is a daunting task that requires “expensive ad campaigns and time-consuming administrative coordination.”  Andrew Wallender, Corporate Arbitration Tactic Backfires as Claims Flood In, Bloomberg Law (Feb. 11, 2019).  

Though mass arbitrations seek individual dispute resolution on a surface level, they can have an impact similar to class action claims.  For example, the software firm Intuit recently faced a mass arbitration threat when 125,000 plaintiffs alleged that the company misled them into paying for its Turbo Tax service.  Alison Frankel, Intuit Defends $40 Million Class Settlement, Attacks Mass Arbitration Firm, Reuters (Dec. 9, 2020).  Facing an overwhelming number of individual claims, Intuit and the plaintiffs’ lawyers agreed to a $40 million settlement of all claims in the broader “class” of Turbo Tax purchasers (which was ultimately rejected by the court as being too low). 

 

Efforts to Curb Cost

The threat of mass arbitration can cause companies to willingly waive or alter existing arbitration clauses.  When tens of thousands of plaintiffs filed individual arbitration demands against Amazon, the company modified its terms of service in certain contexts.  Sara Randazzo, Amazon Faced 75,000 Arbitration Demands. Now It Says: Fine, Sue Us, Wall Street Journal (Jun. 1, 2021).  While the terms originally contained a lengthy arbitration clause, they were changed to allow claims to be brought in state or federal court.  Id.  Several other companies, including Google and Microsoft, have followed suit and eliminated mandatory arbitration clauses in some of their employment contracts.  Erin Mulvaney, JPMorgan, Facebook Fight Mass Arbitration Legal Strategy, Bloomberg, (Jul. 3, 2019).  

Aside from abandoning arbitration clauses altogether, companies have tried taking other steps to curb the impact of mass arbitrations.  For example, some companies have attempted to negotiate aggregated “bellwether” arbitrations, where a certain number of claims go through the arbitration process, and the results are extrapolated to cover the remaining claims.  

Arbitration providers have also tried to adapt to the mass arbitration phenomenon.  The International Institute of Conflict Prevention and Resolution (“CPR”) created a process for mass employment arbitration, which provides that when 30 or more employees file similar claims against an employer, ten are randomly selected as bellwethers.  After the initial arbitrations are complete, a CPR mediator uses the results to attempt to strike a class-wide deal agreeable to both sides.  If the process does not result in a settlement, the parties can proceed in arbitration or in court.  See CPR Mass Claims Protocol and Procedure.  

Additionally, the AAA recently adopted a specific fee structure for “multiple consumer case filings.”  The AAA’s approach involves a sliding scale for fees in cases involving 25 or more similarly situated consumer plaintiffs.  Under these rules, businesses must pay filings fees of $300 per case for the first 500 cases, $225 per case for cases 501-1,500, $150 per case for cases 1,501-3,000, and $75 per case for any additional cases.  See AAA Revised Consumer Arbitration Rules.  While such updated fee structures may still require companies to pay hundreds of thousands of dollars in initial arbitration costs, they could lessen the financial burden and encourage companies to continue to rely on arbitration for dispute resolution in lieu of traditional litigation.  

 

Conclusion

The proliferation of mass arbitration has greatly impacted the approach companies, consumers, and employees take to dispute resolution.  Although arbitration was once seen as a concrete way for companies to avoid the significant costs of litigation, the new mass arbitration trend has forced all parties to reconsider their litigation strategies.