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The back-and-forth, tit-for-tat, “be-careful-what-you-wish-for” world of mandatory arbitration clauses continues, with companies on one side and employees and consumers on the other, and there is no indication that the dueling is over.
The series of actions and reactions can be traced back decades to the introduction of clauses in employment and consumer contracts mandating that all disputes be submitted to arbitration.
In response to the clauses, attorneys for claimants filed lawsuit after lawsuit seeking to have the clauses voided. Some federal circuits ruled with the plaintiffs; others held the clauses enforceable. The Supreme Court settled the split of authority in 2001, in Circuit City Stores, Inc. v. Adams, holding that companies could require all disputes be submitted to arbitration.
Claimants’ lawyers, in response to Circuit City, began filing arbitrations on behalf of one or more consumers but seeking class-wide treatment and remedies for thousands of similarly situated consumers.
Companies reacted by further amending their mandatory arbitration clauses to bar class-wide relief. In response, plaintiffs’ counsel filed lawsuits challenging the bans but, again, in 2011, the Supreme Court, in AT&T Mobility v Conception, ruled in favor of the companies, upholding the clauses.
Mass arbitrations
In the face of consistent Supreme Court decisions upholding the arbitration clauses and bans on class actions, claimants’ lawyers reacted with a “if-you-can’t-fight-‘em-join-‘em” approach and began filing hundreds and even thousands of single arbitrations on behalf of consumers and employees and mass arbitrations were born.
Because the companies were contractually bound to pay initial filing fees for each individual claimant arbitration, they were faced with paying millions of dollars to arbitration service providers such as the American Arbitration Association and JAMS.
They were also exposed to the costs of defending thousands of individual claims.
The number of filings and attendant costs were striking. For example, DoorDash was faced with initial filing fee costs of $12 million as a result of some 6,000 arbitration demands filed on behalf of couriers.
Uber, facing 12,500 individual demands from drivers, reportedly settled the dispute for over $100 million rather than bear the costs of defending the individual claims. Nearly 50,000 claims were filed against Samsung, 3,300 against Wells Fargo and Amazon reportedly faced over 75,000 arbitration demands.
The reaction of companies faced with mass arbitrations has varied. Some amended their clauses in an attempt to make mass filings less likely or at least more manageable.
For example, some companies inserted requirements for initial mediation sessions, some included mandates for a limited number of bellwether cases while other companies, most notably Amazon.com, simply removed the mandatory arbitration clauses, preferring to return to traditional litigation of consumer and employee claims.
Service providers respond
In addition to the reaction of companies to the proliferation of mass arbitration filings, two of the leading arbitration service providers, American Arbitration Association and JAMS, recently announced changes to their arbitration rules and fee schedules.
The AAA amended its rules effective as to all arbitrations filed after Jan. 15, 2024. The new rules added a flat initiation fee lowering the cost of mass filings and made procedural changes aimed at lessening the impact of the mass filings.
Prior to the amendments, businesses were required to pay initial fees ranging from $100 to $325 per case. For mass filings after Jan. 15, 2024, the companies are required to pay a flat initial fee of $8,125 for all cases.
The amendments also added a requirement that claimants’ counsel affirm that the information provided for each individual person was true and accurate; a requirement aimed at reducing or combating the filing of fictitious or duplicative claims. The new amendments also expanded the initial mediation requirements and broadened the power and authority of a process arbitrator.
Likewise, effective May 1, 2024, JAMS released its mass arbitration rules and fee schedules. The new fee schedule imposed a flat filing fee of $7,500, up to $2,500 to be paid by consumers and the balance to be paid by the companies.
Similar to the AAA amendments, the new JAMS rules required sworn declarations as to each demand and created a process administrator mechanism.
Recent developments
Two recent lawsuits, both filed in 2024, exemplify the dynamics, issues and tension between and among the parties—one brought by a company against a law firm representing customers or consumers and another brought by a plaintiffs’ law firm against a company and, indirectly, against a service provider.
On Feb. 9, a lawsuit was filed on behalf of L’Occitaine, Inc. against the law firm of Zimmerman Reed, LLP and thousands of its clients. The law firm had notified the company in November 2023 of its intent to file 3,144 arbitrations demands on behalf of clients of the company.
The company’s complaint alleged that the law firm was engaging in an unlawful conspiracy to manufacture frivolous arbitration claims. While the court granted the law firm’s motion to dismiss the claims against it, it also ruled that the company was not obligated to arbitrate the claims.
Another recent case starkly illustrates the extent of the divisiveness and antagonism spawned by actions and reactions over the mandatory arbitration clauses.
Also in February, the law firm representing thousands of Wells Fargo customers filed a class action alleging that Wells Fargo wrongfully used AAA’s recently adopted mass arbitration rules to win dismissal of thousands of arbitration claims filed on behalf of class members alleging improper overdraft fees.
The lawsuit, Andrew Pennela et al v. Wells Fargo Bank, filed in California Northern District, did not name AAA as a defendant but alleged that the AAA’s new mass arbitration rules and the expanded powers of process arbitrators allow companies like Wells Fargo to force consumers to file mass arbitrations.
The extent of the rancor between and among all the parties involved is evidenced by allegations in the First Amended Complaint in the case, filed in April. The pleading alleges that the company, in collusion with the arbitration service provider and the law firm primarily involved in the defense of the claims against it, was “working behind the scene to rig the game even as it was telling consumers that arbitration would be a fair, neutral and independent forum for their claims.”
Similarly, in an article in the Spring 2024 issue of the journal of the ABA’s Business Law Section, entitled “Mass Arbitrations: The Uncertain Path Ahead,” the authors urge appellate courts to provide guidance “as companies are likely to continue to develop various strategies for combating mass arbitrations to avoid caving in to massive settlement demands supported only by the in terrorem effect of large arbitration fees.”
Until the important issues surrounding the claims of employees and consumers are resolved, or at least narrowed and the discord and enmity among the players is mitigated, the individual consumer or employee may remain caught in the three-way struggle of plaintiffs’ counsel, companies and service providers, perhaps calling to mind the proverb that when elephants fight, the grass gets trampled.•
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John R. Van Winkle, of Van Winkle Baten Dispute Resolution, was a participant in the founding and was the second chair of the American Bar Association’s Section of Dispute Resolution. Opinions expressed are those of the author.
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