Plaintiffs’ firms have devised a strategy to weaponize arbitration agreements against companies in the last two years: file thousands of individual arbitrations at once, trigger massive fee obligations to initiate the claims, and leverage these obligations to force a settlement before the company can defend the merits of the claims themselves. Courts have so far been hesitant to intervene in this situation.
In the wake of the Supreme Court’s decision to uphold class action waivers, a new wave of individual lawsuits is certain to follow.
BACKGROUND
Arbitration, despite its reputation as a scourge for consumers and workers alike, may provide a number of advantages, including speed, flexibility, secrecy, and simplified procedural and evidentiary procedures. In the past ten years, parties and courts alike have focused on one aspect of arbitration: the class action waiver. It all started with the Supreme Court’s ruling in 2011 in AT&T Mobility Servs. v. Concepcion, which affirmed the legality of an arbitration contract that barred individual customers from joining in class action lawsuits.
In this ruling, however, the claims are assumed to be submitted in good faith and to have at least some validity. However, the practice of mass-producing claims is not new. Mass arbitration is prone to misuse because of the low bar for launching a claim, the lack of control, and the mandated costs corporations must pay as soon as a claim is made, no matter how valid or fabricated it may be. As a consequence, there is a new frontier in collective conflict resolution: mass arbitration to extract compensation that is not related to any genuine damage or wrongdoing but, instead, the exposure a corporation confronts to handle these cases in the arbitral court
Customers in Concepcion were fighting about sales taxes on a free mobile phone that was offered. AT&T filed a motion to compel arbitration against the Concepcion’s in federal court.
Class action waiver was also found to be unconscionable by the district court in light of Discover Bank v. Superior Court, a judgment by the California Supreme Court (2005). California’s so-called ‘Discover Bank Rule‘ was pre-empted by the Federal Arbitration Act (FAA), according to the Ninth Circuit. The United States Supreme Court overruled Discover Bank in a 5–4 decision in AT&T Mobility v. Concepcion. According to the U.S. Supreme Court, private arbitration agreements must be enforced in accordance with their provisions, and the FAA serves this goal.
The Court ruled that the Discover Bank rule was preempted because it interfered with the FAA’s goals and objectives.
THE MANDATORY ORIGINS OF MASS ARBITRATION CLAUSES
Many employees and consumers agree to arbitrate any dispute they may have with their employer or vendor. These agreements often result from ‘mandatory’ arbitration clauses which simply means that the employee or consumer had no choice but to agree if they wanted to take the job or buy the product.
In both state and federal courts throughout the nation, workers and customers brought lawsuits challenging these arbitration agreements, which typically contained waivers of class action proceedings, but they were overwhelmingly unsuccessful. Despite concerns that arbitration agreements were unjust or unconscionable, the U.S. Supreme Court finally dismissed appeals to these terms in a few well-known judgments.
The unwritten and unintended consequences snagged many organizations when it became clear that arbitration would be necessary for employment contracts or purchase agreements. A large number of individual arbitrations were brought by plaintiffs, now referred to as complainants, in which defendants (now called respondents) were obliged to pay filing fees and arbitration costs. It was common for these fees to exceed a million dollars.
Class actions and multidistrict litigation were said to have been overlooked on the defense side because of their ability to settle a large number of comparable issues in a single court procedure. In addition, the enormous quantity of submissions threatens to overload neutral service providers.
A possible solution: impartial providers could come up with strategies that would benefit both claimants and responders, while also offering a fair and efficient venue for settling a large number of comparable claims. It was first met with some skepticism and a few legal battles in opposition, but today numerous suppliers have devised schemes of their own.
CLASS ACTION CLAIM MANAGEMENT PLANS
Claims management plans have been devised by three providers, [A.] the CPR (the International Institute for Conflict Prevention and Resolution), [B.] the AAA (the American Arbitration Association), and [C.] FedArb (Federal Arbitration Board).
Concepcion-era arbitration clauses have been regularly enforced by the Supreme Court, which has ruled against class or representative lawsuits. By holding that the FAA does not provide lower courts the authority to reject a class action waiver because the expense of arbitrating each federal statutory claim separately may outweigh the possible recovery, the Supreme Court overturned the Second Circuit in 2013. It also applied Concepcion in the workplace environment, stating that the National Labor Relations Act did not overrule Congress’s directive in the FAA that arbitration agreements requiring individual processes must be enforced.
In Henry Schein, Inc. v. Archer & White Sales, Inc. and Lamps Plus, Inc. v. Varela, the Court continued to strictly enforce arbitration agreements in accordance with their provisions. According to the first decision, ‘a court lacks no competence to determine the arbitrability problem’ when an arbitration agreement delegated arbitrability concerns to an arbitrator, the Supreme Court ruled.
When parties agree to arbitrate individually, not in a class or collective action, the FAA requires that arbitration agreements be enforced according to their terms.
Supreme Court ruled in Lamps Plus, Inc. v. Varela that class arbitrations are not permitted in 2019, thereby reining in the power of parties to litigate on a class basis. The Supreme Court ruled in favor of the petitioner. Silence and uncertainty, according to the Court, are inadequate indicators of assent to class arbitration. As a result, arbitrations must be conducted on an individual basis unless a class action agreement is explicitly provided for.
THE CPR PROTOCOL
The Employment-Related Mass Claims Protocol CPR plan, which may be discovered, is the most extensive and in-depth of the three options.
To ensure that all parties are on the same page, the Protocol goes into great depth. However, the Protocol makes it plain that the parties might alter the conditions of the Protocol in order to satisfy their specific requirements. Attorneys from both the plaintiffs’ and defendants’ sides, as well as well-versed arbitrators, were selected by CPR to serve on a Task Force that was tasked with drafting the Protocol.
In order to be eligible for the CPR program, an individual must have filed and amassed at least thirty comparable claims against the same company. The first step is to determine whether the circumstances are comparable enough to merit the Protocol’s use. An Administrative Arbitrator will determine whether the Protocol should be used if they can’t come to an agreement.
An Initiation Price will be paid by Respondents if the Protocol applies, although this is not the complete fee that will be paid in the long run. The arbitration will thereafter take place in ten instances that have been chosen at random. The Administrative Arbitrator will consider whether one or more of the additional instances submitted by either party should be included.
In each situation, CPR will then construct a random list of fifteen conflict-free neutrals. At the very least, 30% of the names on the list will be varied neutrals. Prior to getting the list, respondents must pay an appointment fee.
One arbitrator will be chosen for each test case through a ranking and striking procedure by the parties and a chance for a party to object based on arbitrator disclosures. The arbitrator’s fees must be paid at that point. After the first pre-hearing meeting, the arbitrator will hear the matter and deliver a reasoned award within a hundred and twenty days after the hearing. CPR will then make these rewards completely anonymous.
Choosing a mediator who will be compensated by Respondent is the next step. Having access to the anonymized arbitration awards, the mediator can attempt to reach a ‘Substantive Methodology’ for resolving all the cases that are still outstanding at that point, namely all those filed up to that point except for the cases that have been the subject of a final arbitration award. All major conditions of a settlement must be agreed upon, and objective standards must be used to apply those terms to each specific case. A ninety-day mediation period is allowed. All cases are put on hold and the statute of limitations is extended during this period.
Even if mediation fails, the Respondent or any Claimant might choose to continue in court instead of arbitration. To opt-out of the agreement, the parties have sixty days. That said, if Respondent chooses to withdraw, all of the charges against it will go to trial. The claimant, on the other hand, has the option to go to court even if Respondent refuses to opt-out. Arbitration is the only option if both parties refuse to withdraw their claims. It must be completed within a hundred and twenty days following the appointment of an arbitrator.
Each Claimant will get an offer if the mediation is successful, and they have the option of accepting or rejecting it. Arbitration is the next step if the offer is turned down. Any mix of in-person and remote hearings may be held by the arbitrator. There must be a hearing within fifty miles of the domicile of the Claimant.
In no more than six months, the arbitrations and mediations for the test cases should be completed, followed by another six months for the arbitration. As a last alternative, the mediation process may be restarted by the parties, but only those parties who did not previously have the chance to do so can now opt-out.
THE AAA PLAN
The AAA has prepared ‘Supplementary Rules for Multiple Case Filings’. Other forms of arbitration may choose to arbitrate under CPR’s rules, which do not apply to employment or consumer issues.
The AAA invites parties to agree on a number of issues in the introduction to the new Rules, like [A.] agreed-upon scheduling order; [B.] agreement to appoint a special master to oversee common procedural issues (e.g. discovery, the statute of limitations); [C.] an agreement to hear the case solely on documents; [D.] an agreement to assign multiple cases to a single arbitrator; [E.] an agreed form of award; [F.] limitations on briefs, motions, and [G.] disclosure request, as well as the arbitration process itself.
When twenty-five or more comparable cases are filed, the Rules apply, and the parties’ representation is either consistent or coordinated. All consumer and employment cases that fulfill this qualification will be subject to these rules. Demand for Arbitration is submitted, but the filing party must additionally submit a Multiple Case Filing Intake Data Spreadsheet after the threshold of twenty-five cases has been met, and this Spreadsheet must be updated when further cases are filed. There is a forty-five-day deadline for filing responses, counterclaims, and/or amended claims.
Further filings may be made after the Initial Arbitration Demand, if necessary, in relation to all previously filed matters. The AAA may decide to appoint a Process Arbitrator to decide the administrative issue for all cases included in the Multiple Case Filing if the parties dispute any AAA administrative decision (e.g., designation of cases as substantially similar, filing of one document addressing substantially similar issues, determining the applicable rules, determining the payment of fees and compensation for the arbitrator)…
The Process Arbitrator might be chosen by the parties, chosen from a list provided by the AAA, or picked by the AAA. After receiving a final submission, a Process Arbitrator must reach a decision within thirty days. It is the responsibility of the parties and the Merits Arbitrator to abide by the decision of the Process Arbitrator.
Merits arbitrators might be chosen by the parties or from a list published by the American Arbitration Association (AAA). The parties will have fifteen days after receiving the list of arbitrators to rank and strike. If no arbitrator is chosen via this method, the AAA may choose an arbitrator and may allocate many cases to that arbitrator.
The arbitrator’s remuneration and costs will be handled in the same way as all other AAA matters. Administrative Fees.
THE FEDARB FRAMEWORK
Currently, FedArb is using the trademark ADR-MDL to refer to a ‘Framework for Mass Arbitration Proceedings.’
There are 20 or more claims brought by workers or customers, represented by the same law firm, that fall within FedArb’s purview, and those claims contain a similar set of facts and legal difficulties. A $50 filing fee is all that each claimant is need to pay unless state or local regulations allow them to be waived. The company will cover all setup, administrative, and arbitration expenses.
While the ADR-MDL panel is formed, all individual arbitrations are halted. FedArb charges a one-time ADR-MDL startup cost for the Company. ADR-MDL panel or FedArb will designate a lead counsel for claimants if various law firms represent them and they cannot agree on who will represent them as lead counsel. Former federal judges from FedArb’s list will be used to select a three-judge panel, with input from the parties. The parties may agree on a single FedArb panelist if there are less than fifty claims and the total amount of damages sought is less than USD250,000.
Disputes involving legal, procedural, and factual matters will be resolved by the ADR-MDL Panel. All present and future claimants will be bound by the panel’s decision on a standard damages formula.
Following such decisions, the case will be remitted to individual arbitrators for consideration of any remaining problems. Fed Arb will provide the parties with a list of five names from which they may choose an arbitrator. The arbitrator must make a decision within ninety days after being appointed.
However, nothing in the ADR-MDL framework prevents the parties from resolving any case or group of cases, notwithstanding the absence of a mediation procedure.
ISSUES WITH MASS ARBITRATION
However, mass arbitration has changed the equation for litigants by making arbitration more expensive than litigation. expenses for each individual arbitration demand filed with the AAA. A good example is the AAA Employment Arbitration Rules. Arbitration expenses in California must now be paid within thirty days of the due date established by the arbitration provider.
Some corporations have refused to pay the first filing fees, claiming that mass arbitration is improper because of the rising expenses. When it comes to the California statute that requires payment within thirty days, a court found that the rule ‘encourages arbitration’ by ‘preventing parties… from holding, hostage workers’ or customers’ lawfully arbitrable claims,’ and so was not prohibited by the Federal Arbitration Act.
Finally, each of these protocols is designed to cope with massive volumes of data. These features seem to be recurring: expedited procedures, respondents paying most of the costs, and a system for detecting comparable issues that can be used in many situations.
Courts ordering firms to pay the majority of expenses in required arbitration is another factor contributing to the growth of mass arbitrations. When arbitration has been imposed by the employer and is only permitted at the employer’s request, as the D.C. Circuit ruled in 1997, it is the employer’s responsibility to cover the whole cost of arbitration. If plaintiffs must spend much more to begin arbitration than they must pay in court, it is ‘inappropriate,’ the court concluded. Courts have often set constraints on arbitration agreements, such as requiring unbiased arbitrators, adequate discovery, and the ability to seek all forms of remedy that would be available in court.
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Sources
1. AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011a)
2. Any claims must be made ‘in the individual capacity of the parties and not as a plaintiff or member of any putative class or representative action,’ according to the arbitration clause in the phone’s sale and service agreement.
3. Discover Bank v. Superior Court, 36 Cal. 4th 148,
4. Under the Discover Bank test, a class-action waiver will be unenforceable under California law when it appears in a ‘consumer contract of adhesion’, when the disputes ‘predictably involve small amounts of damages, and where the plaintiff alleges that ‘the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money
5. Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. ___ (2019)
6. 17-988 Lamps Plus, Inc. v. Varela (04/24/2019)
7. However, in the latter, the Court found the parties’ consent to class-wide arbitration could not be based only on ambiguity and that any such desire must be conveyed unambiguously rather than in ordinary arbitration agreement terminology, such as ‘class arbitration.’
8. Arbitrability conflicts may only be decided through arbitration, and courts have no authority in certain cases.
9. On behalf of 1,300 Lamps Plus workers, a hacker obtained their tax information and then submitted a bogus tax return in Frank Varela’s name, resulting in a class-action lawsuit. In the same place. On the basis of an arbitration provision in its employment contract, Lamps Plus sought dismissal of the litigation in favor of individual arbitration. Employees were allowed to continue as a class in arbitration, but the Ninth Circuit upheld this decision on the premise that the arbitration language was vague as to whether class arbitrations were permitted.
10. A worldwide mediation of the Multiple Case Filings will be arranged within 120 days after the filing of the Answer. If the parties are unable to agree on a mediator, the AAA will select one for them. Both the arbitrations and the mediation will take place at the same time. The arbitrations will not be halted unless the parties agree to it. No one must participate in mediation if they don’t want to. The mediator will not serve as an arbitrator in this case.
11. Multi-district Litigation (MDL) is a term used in federal court to describe the practice of assigning a single judge to pre-trial hearings for a large number of comparable cases. FedArb’s ADR-MDL is based on this broad concept.
12. Cal. Civ. Proc. Code 1281.97, as amended.
13. 823 F. App’x 535 decision in Adams v. Postmates, Inc, 414 F. Supp. 3d 1246, 1250 (ND Cal. 2019). (9th Cir. 2020).
14. There are 10,356 individuals who have filed a lawsuit against Postmates Inc. (C.D. Cal. Jan. 19, 2021).
15. Burns International Security Services, 105 F.3d 1465, 1485, Cole v. Burns, Inc. (D.C. Cir. 1997)
