Introduction

For many of us, fall means football.  And regardless of whether your football flavor is the American pigskin variety, or the beautiful game we call soccer in the United States, you can appreciate the importance of a good offense.  So too do the 81 of the 100 largest companies in the United States who use arbitration clauses in their consumer contracts.^[1]  These companies view arbitration as a way to resolve disputes more cost-effectively and efficiently than through litigation.  Arbitration agreements also reduce class action exposure.  Recently, however, the plaintiffs’ bar has utilized a tactic called “mass arbitration” to make arbitration substantially less appealing for companies.  Companies now face the challenge of drafting arbitration clauses designed to avoid, or at minimum, deter mass arbitrations.  How can these companies play offense in the arbitration arena?

How We Got Here

Although the Federal Arbitration Act was enacted in 1925, the inclusion of arbitration agreements in consumer contracts is a relatively recent development.  As arbitration clauses became more prevalent in consumer contracts, plaintiffs filed lawsuits challenging the enforceability of arbitration clauses.  The 2011 United States Supreme Court case of AT&T Mobility LLC v. Concepcion^[2] was a watershed moment in arbitration litigation.  In Concepcion, the Court held that arbitration agreements are enforceable even if they contain class action waivers which would otherwise make arbitration uneconomical for plaintiffs.  Arbitration agreements for large companies very frequently contain class action waivers as a result.

Despite the favorable result for businesses in Concepcion, there were numerous challenges to arbitration agreements on the basis of unconscionability.  Companies responded by including consumer-friendly provisions in their standard arbitration agreements in order to avoid unconscionability claims.  Chief among these consumer-friendly provisions is language which states that the company will pay the vast majority of the arbitration fees.  For example, an arbitration clause could provide that the customer pays $200 towards the arbitration tribunal’s filing fees, and the company pays everything else.  That means the company would pay the additional $500 in filing fees, $1,500 arbitrator fee, and $1,400 case management fee at the inception of the case.  The company would also be responsible for the additional costs billed by the arbitration tribunal, which could include hearing fees, travel for the arbitrator(s), and the arbitrator(s)’ hourly fees.  The plaintiffs’ bar has used these consumer-friendly provisions to the consumers’ advantage by filing mass arbitrations.

What is Mass Arbitration?

Many plaintiffs’ firms have become adept at identifying a common cause of action against a single company, and then utilizing online technology to identify potential claimants who they sign up as clients.  The firm then files an arbitration on behalf of the client, which forces the company to incur the expenses associated with a new arbitration proceeding.  Because there is a class action waiver in the arbitration agreement, the process of filing an individual arbitration against the same company is repeated thousands of times.  The amount of arbitration fees a company is required to pay as a result is overwhelming.  Using the figures above, if there were 10,000 individual claims, and the business was contractually obligated to pay $3,400 in case initiation fees each time a new arbitration is filed, the business would be responsible for $34M in arbitration fees before there has been any consideration of the merits of the claim.

To date, courts have been largely unsympathetic to companies who find themselves in this predicament.  In April 2022, the New York Appellate Division unanimously affirmed the denial of Uber’s motion for preliminary injunction seeking to prevent the American Arbitration Association from issuing invoices in 31,000 additional arbitration cases, after Uber had already been invoiced for $91M in arbitration fees^[3].  In another case, the court held that the company had to present its arguments against mass arbitration to the arbitrator, after its arbitration fees were paid, rather than a judge, because the arbitration agreement delegated the issue of arbitrability to the arbitrator^[4].

Defense and Deterrence Strategies

Companies who want to thwart, or at least deter mass arbitrations should consider the following modifications to their arbitration agreements:

1. Information Dispute Resolution Requirements.  Companies can require that the parties must engage in mediation or some other dispute resolution conference as a condition precedent to filing an arbitration demand.
2. Offer A Small Claims Alternative for Both Parties.  Small claims courts have much lower filing fees than arbitration tribunals.  If a company has the ability to opt into small claims court in lieu of paying arbitration fees in thousands of cases, the cost savings can be significant.
3. Revisit Delegation Clauses.  Many arbitration agreements feature delegation clauses, which require arbitrators to resolve questions of arbitrability rather than courts resolving them.  If these gateway arbitrability questions are instead delegated to courts, the company is not required to pay arbitration fees in order to have them adjudicated.
4. Assess Potential Procedures and Protocols for Mass Arbitrations.  Companies should explore language in their arbitration agreements which identifies bellwether cases and the potential for batching similar claims so that the identical issue is not adjudicated repeatedly in separate individual arbitrations.
5. Revisit Cost-Sharing Provisions.  Provisions where the company pays most or all of the arbitration costs were inserted into arbitration agreements to make them consumer-friendly, and less prone to attack as unconscionable. However, companies should evaluate whether it makes sense to shift more of the up-front arbitration costs back to the consumer so that they are more evenly allocated.
6. Condition Reimbursement of Fees on a Finding of Good Faith.  This would encourage plaintiffs’ attorneys to vet the claims more thoroughly on the merits before they are filed.

The suggestions above are provided with the standard disclaimer that this is not an exhaustive list and that this area of law is rapidly evolving, so a company should consult their attorney about their individual needs.

Conclusion

The onset of mass arbitration poses a formidable challenge to companies.  Companies should not be content to wait to see whether the courts put limits on mass arbitration.  Instead, they should play offense by reviewing their existing arbitration agreements now, and making revisions designed to mitigate mass arbitration exposure.

^[1]  Imre Stephen Sazalai, The Prevalence of Consumer Arbitration Agreements by America’s Top Companies, 52 UC Davis Law Review Online 233, 234 (2019)

^[2]  563 U.S. 333 (2011).

^[3]  Uber Techs., Inc. v. Am. Arb. Ass’n, Inc., No. 15732, 2022 WL 110550 (N.Y. App. Div. April 14, 2002).

^[4]  Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524 (2019).