Shielding Against the Mass Arbitration Surge: Strategies to Mitigate Risk

Mass arbitration is posing significant challenges for businesses, as it creates a new battleground in dispute resolution with the potential to overwhelm companies with a flood of simultaneous claims. Consumer-facing companies conducting business online should be aware of mass arbitration tactics and how to protect themselves from this growing trend.

Filing Arbitration Demands in a Coordinated Mass Action

As a backlash to the rise in arbitration provisions following the U.S. Supreme Court's 2011 decision in AT&T Mobility LLC v. Concepcion, plaintiffs' firms have devised a response to mandatory arbitration clauses – filing thousands of virtually identical arbitration demands in a coordinated mass action. Though arbitration provisions were once thought to be an efficient means to avoid protracted class action litigation, they are now causing companies to reconsider. These plaintiffs' firms tend to identify businesses with an online terms of use with an arbitration provision that selects an arbitration provider. These are typically consumer-based claims with low thresholds of proof and are not limited to any specific industry. Such mass arbitration claims have been filed against a wide array of sectors, including media, entertainment, retail and technology.

Filing Fees Quickly Escalate

The fees associated with simply having the demands filed can quickly amount to an existential threat, as many companies agree to cover the filing costs of consumer claims in an effort to make their arbitration clause enforceable. However, what amounts to a $2,000 filing fee for one arbitration demand rises into the millions of dollars when tens of thousands of demands are filed at once. Thus, these mass arbitrations can be extremely expensive to defend, even before any demand is adjudicated.

Court Challenges Are Mostly Unsuccessful

Court challenges to mass arbitration have, for the most part, been unsuccessful. One approach to reducing the risk of being on the receiving end of thousands of arbitration demands is to modify existing arbitration provisions to include obstacles to filing mass arbitrations. Some companies have tried to accomplish this through so-called bellwether provisions and batching provisions. A bellwether provision is trying a group of 20 to 50 cases as precedent-setting cases and then applying the result against the entire claimant pool. Batching provisions involve putting the thousands of claims in groups of 20 to 50 to be heard consecutively rather than simultaneously. However, multiple California district courts have found these methods unconscionable because they cause individuals to be bound by other confidential and unrelated cases, and batching in order would cause some claimants to wait more than 10 years to have their cases heard – the opposite of arbitration's intent, which is meant to be cost-effective and efficient.

An alternative approach that has been attempted is suing the arbitration providers themselves to enjoin them from assessing exorbitant fees, as one defendant famously tried to enjoin the American Arbitration Association (AAA) from invoicing millions of dollars in administrative fees. The suit was dismissed and the appeal denied. Companies have also tried to sue plaintiffs' firms directly for manufacturing baseless claims and violating the Computer Fraud and Abuse Act (CFAA). The skincare company L'Occitane recently had its complaint against the opposing plaintiff's firm dismissed on this theory.

Finally, some companies have tried to avoid their own arbitration provisions after trying to enforce them by settling on a class action basis. However, this approach has been met with scrutiny by courts.

Reducing Risk

Given the low success rate with combatting mass arbitration tactics in the courts, companies should take proactive steps to revise features in their dispute resolution clauses, which could help save millions in eventual fees.

One strategy for reducing risk is revising terms of use to address mass arbitration. However, any modifications to an arbitration clause must be mindful of the countervailing factor of enforceability. The objective of these changes to the dispute resolution clause is to hinder the business model of the plaintiffs' firm to assert claims while expending minimal effort, with the goal of making it to the stage of filing arbitrations and triggering fees. One such change is including a mandatory informal period during which the parties have to try and resolve claims before arbitrations can be filed. This forces the claimants to participate in the process – something their attorneys want to avoid – and stops them from immediately filing, thereby triggering automatic fees. In addition, other changes to dispute resolution clauses can be made that have the effect of putting greater controls on administrative fees.

Judicial Arbitration and Mediation Services (JAMS) and the AAA recently amended their rules to address mass arbitration. The main component of the new mass arbitration procedures is to include a "process administrator" who governs many of the preliminary procedural issues that arise in mass arbitration. The new rules adopt an approach that includes a process/procedural arbitrator at the outset of the case who allows the parties to help ensure threshold filing and viability conditions are met before the case can progress and more fees are incurred. The new mass arbitration rules also include a revised fee schedule that eliminates the approach of charging all administrative fees up front to the business. Many of the same administrative fees are still included in the new rules, but they are charged only when the parties reach certain stages. Though these are welcome changes to the JAMS and AAA procedures, it is too soon to tell how effective these new rules will be.

The new wave of mass arbitration has caused many consumer-facing companies to question whether the benefits of arbitration outweigh their potential expensive risks. In recent years, some large companies have dropped their arbitration clauses altogether. Though class actions can be more predictable and allow the opportunity for appeal, they are public and could implicate more people than a mass arbitration campaign. On the other hand, arbitrations have fewer procedural ways to fight claims. There is some hope these new JAMS and AAA rules will alleviate much of the burden at the threshold stages of the arbitration, but to date, they remain largely untested and still have the risk of incurring significant costs if claims advance beyond the initial pleading stage. Whichever approach is chosen, companies must be aware of the benefits and risks for each. By proactively implementing these strategies, businesses can successfully mitigate the risks posed by mass arbitration.

Holland & Knight Can Help

Holland & Knight's Class Action Litigation and Arbitration Team is dedicated to defending mass arbitration claims and pursuing novel defenses, as well as tracking impactful court decisions and settlement trends. The mass arbitration team focuses on preventative consultation prior to arbitration, creative early resolution and reducing potential liability. If you have any questions regarding mass arbitration defense strategies, please contact the author.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.