Legal Update

For over three decades, arbitration has offered an efficient and cost-effective mechanism for resolving consumer disputes. Companies across a variety of industries, including telecommunications, retail and the gig economy, employ arbitration as one component of an integrated framework of dispute resolution mechanisms designed to resolve small-stakes disputes amicably and avoid costly, inefficient litigation.

Despite its promise, consumer arbitration has lived in the crosshairs of the plaintiffs' bar since its inception. Salvos have included legislative efforts to declare the enterprise legally unenforceable, judicial challenges to particular clauses (particularly when combined with class waivers) as unconscionable under state contract law, and efforts to inject class arbitration principles into disputes that, by the parties' agreement, were intended to be individualized. While each tactic initially encountered some success, they all eventually foundered, often at the banc of the Supreme Court. The latest salvo - mass arbitration - fits within this broader pattern.

Mass arbitration is elegant in its simplicity. It follows a common event, such as an allegedly dubious fee, a mass data breach or similar, which affects a sufficiently large number of a company's customers and, thereby, gives rise to claims subject to arbitration under the company's consumer contracts. Instead of commencing litigation to challenge the clause's enforceability or seeking to proceed by class arbitration, plaintiffs' counsel cleverly commences thousands (or in some cases tens of thousands) of arbitrations simultaneously. Because those clauses often require the company to bear the cost of arbitration (a provision ironically sometimes added precisely to mitigate the risks that the clause could be deemed unconscionable), these simultaneously commenced arbitration trigger millions of dollars of up-front fees for the company. This situation seems to present the company with a thorny trilemma: pay the fees (and undertake the arbitral proceedings); refuse to pay the fees (and effectively waive the arbitration right); or pay a "go away" settlement.

As with the earlier legal assaults on consumer arbitration clauses, reported case law is starting to unpack the contours of this current fight. In some cases, companies attempt to address the mass arbitration dynamics in the arbitration clause (or in the choice of rules to govern the arbitration). These sorts of contractual moves, like "bellwether" provisions, have become the subject of a new wave of enforcement challenges to these provisions. The Ninth Circuit's recent decision in the Live Nation litigation scored a victory for plaintiffs' resisting such a mass arbitration provision in an arbitration clause. There, the Ninth Circuit found substantively unconscionable a "bellwether" provision in an arbitration clause that, in its view, bound litigants not participating in the bellwether arbitration to the arbitrator's findings under a delegation clause.

In other cases, companies have sought to flip the script by refusing to pay the administrative fees. Exemplary in this regard is the Seventh Circuit's recent decision in Wallrich. Wallrich involved a mass arbitration by several thousand consumers against Samsung stemming from the company's alleged unlawful collection and storing of biometric data under Illinois law. When Samsung refused to pay the American Arbitration Association's (AAA) administrative fees, the AAA dismissed the arbitration. Unusually, the consumers then turned to federal court, seeking an order to compel arbitration and requiring Samsung to pay the fees (a tactic that had succeeded in several federal and state trial courts around the country). After the consumers obtained a favorable result in the district court, the Seventh Circuit reversed. It found a lack of sufficient evidence that the consumers had in fact entered into arbitration agreements with Samsung; moreover, even if they had, Samsung's refusal to pay the fees left the consumers with two choices: advance the fees themselves (if they wished to continue with arbitration) or, instead, seek relief in federal court.

Live Nation and Wallrich demonstrate that companies are not defenseless in case of a tactical mass arbitration but must tread carefully to avoid judicial invalidation of their tactics. Ultimately, then, as with prior iterations attacking arbitration clause, companies have a variety of other available tools as a means of blunting abusive mass arbitration. These tools fall into two categories.

Some tools operate prospectively. That is, they can be integrated into existing (or new) arbitration clauses to counteract the mass arbitration tactic. Taking into account situations where bellwether provisions have been held unenforceable, these include:

• Bilateral small claims carve-outs;
• Content verification requirements as a precondition to commencing arbitration;
• Designated arbitral rules that explicitly address mass arbitration;
• Choice-of-law clauses;
• Step clauses (like med-arb or offer-of-judgment provisions);
• Modified fee shifting provisions; and
• Bellwether/stay provisions provided that they move case expeditiously and toll the limitations period.

Others operate retrospectively; that is, they can be employed after an event giving rise to a mass arbitration has occurred (where the prospects of amending an existing clause are limited). In addition to the tactic deployed in Samsung (waiving the clause), others include:

• Ethical monitoring to ensure plaintiffs' counsel is not misrepresenting its client base;
• Post-filing agreement such as an opt-in to mass arbitration rules; and
• Stay requests.

In short, mass arbitration - including the familiar jockeying over the guardrails - is manageable. However, it requires careful consideration and consultation with experienced arbitration counsel, including at the pre-dispute stage through thoughtful drafting and the post-dispute stage where opportunities for procedural contracting are likely more limited. Until the Supreme Court weighs in, disputes over the permissible boundaries of this latest salvo in the consumer arbitration battles are bound to persist.