I. Executive Summary
In the last two years, plaintiffs’ firms have devised a strategy to weaponize companies’ arbitration agreements against them: file thousands of individual arbitrations at once, trigger massive fee obligations to initiate the claims, and leverage those obligations to force a settlement before the company can defend the merits. Thus far, courts have been unwilling to intercede. One California judge, commenting on the decades of advocacy for enforcement of arbitration agreements, called the trend “poetic justice.”1
That opinion, however, assumes the claims are filed in good faith and have at least some merit. Yet the manufacturing of mass claims is nothing new.2 And the mass arbitration model is susceptible to abuse given the minimal requirements for initiating a claim, the lack of oversight, and the mandatory fees companies must pay as soon as a claim is filed, meritorious or not, genuine or contrived. The result is a new frontier of aggregated dispute resolution: mass arbitration to extract payouts not tied to any real injuries or wrongdoing but, instead, the exposure a company faces to administer the cases in the arbitral forum.
This GT Advisory revisits the Supreme Court rulings that set the stage for the mass arbitration phenomenon and discusses how companies have reacted to mass filings. It then explains why the mass arbitration model has inherent potential for abuse and offers practical suggestions for companies facing the threat of mass filings. Finally, this GT Advisory identifies developments to watch.
II. How We Got Here: The Plaintiffs’ Bar’s Response to the Rigorous Enforcement of Arbitration Agreements
A. The Supreme Court’s enforcement of class action waivers sets the stage for mass individual claims.
Although much-maligned by consumer and employee groups, arbitration can provide significant mutual benefits, like efficiency, speed, flexibility, confidentiality, and simplified procedural and evidentiary rules. Over the last decade, however, one feature of arbitration has received the most attention from parties and courts alike: the class action waiver. Today’s growing trend of mass arbitration has its genesis in the 2011 decision AT&T Mobility Servs. v. Concepcion, where the Supreme Court upheld the enforceability of an arbitration contract that prohibited individual consumers from bringing or participating in class action litigation.3
Concepcion involved a dispute by consumers over sales taxes charged for a cell phone advertised as free.4 The sale and servicing agreement for the phone contained an arbitration provision requiring all claims to be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”5 The plaintiffs (the Concepcions) sued in federal court, and AT&T moved to compel arbitration. The district court denied the motion, finding the class action waiver unconscionable under the California Supreme Court’s decision in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). The Ninth Circuit affirmed, ruling that the Federal Arbitration Act (FAA) did not preempt California’s so-called “Discover Bank Rule.”6
The United States Supreme Court reversed, finding that the principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms.7 The Court held that the Discover Bank Rule interfered with the purposes and objectives of the FAA and was therefore preempted.8 The majority also rejected plaintiffs’ argument that “class proceedings are necessary to prosecute small-dollar claims,” finding that the Concepcions actually might have been better off pursuing individual arbitration:
As noted earlier, the arbitration agreement provides that AT&T will pay claimants a minimum of $7,500 and twice their attorney’s fees if they obtain an arbitration award greater than AT&T’s last settlement offer. The District Court found this scheme sufficient to provide incentive for the individual prosecution of meritorious claims that are not immediately settled, and the Ninth Circuit admitted that aggrieved customers who filed claims would be “essentially guarantee[d]” to be made whole, 584 F.3d, at 856, n. 9. Indeed, the District Court concluded that the Concepcions were better off under their arbitration agreement with AT&T than they would have been as participants in a class action, which “could take months, if not years, and which may merely yield an opportunity to submit a claim for recovery of a small percentage of a few dollars.” [Citation.]9
In the wake of Concepcion, the Supreme Court has repeatedly enforced arbitration provisions precluding class or representative actions. In 2013, the Supreme Court reversed the Second Circuit and held that the FAA does not permit courts to invalidate a class action waiver on the ground that the cost of individually arbitrating a federal statutory claim could exceed the potential recovery.10 And in 2018, the Court applied Concepcion in the employment context, holding that the National Labor Relations Act did not supersede Congress’ instruction in the FAA that arbitration agreements providing for individualized proceedings must be enforced.11
The Court’s rigorous enforcement of arbitration agreements according to their terms continued in a pair of 2019 opinions: Henry Schein, Inc. v. Archer & White Sales, Inc. and Lamps Plus, Inc. v. Varela. In the former, the Court held that, when the parties’ arbitration agreement delegates arbitrability questions to an arbitrator, “a court possesses no power to decide the arbitrability issue.”12 In the latter, the Court held that ambiguity is an insufficient basis to find that the parties agreed to class-wide arbitration, and that any such intent must be expressed clearly rather than in general language commonly used in arbitration agreements.13
In sum, Concepcion and its progeny distilled three principles that set the stage for the mass individual arbitration trend:
(1) Arbitration provisions requiring parties to arbitrate individually, and not in a class or collective action, must be enforced according to their terms under the FAA;
(2) Courts possess no power to decide arbitrability disputes where the parties have delegated that power to an arbitrator; and
(3) Class-wide or collective proceedings in arbitration are not available to the parties unless the arbitration agreement clearly and unequivocally expresses otherwise.
B. Claimant-friendly cost provisions generate a wave of individual arbitration claims.
While rulings like Concepcion and Epic Systems provided the kindling for the mass arbitration phenomenon, the one-sided cost provisions often included in companies’ arbitration agreements provided the spark. Indeed, despite the Supreme Court’s enforcement of class action waivers under the FAA, courts continued to scrutinize consumer and employment arbitration agreements, regularly invalidating agreements that imposed forum costs on the claimant that could stifle claims.14 To avoid potential invalidation of their arbitration agreements and accompanying class action waivers, businesses routinely offered (and continue to offer) claimant-friendly terms requiring the business to pay for all administrative and arbitrator fees in any arbitration.15
In or about 2018, recognizing the massive fee obligations companies would face from thousands of individual claims filed at once, a few plaintiffs’ firms began “testing a new weapon in arbitration: sheer volume.”16 Early, publicized examples involved employment misclassification claims against “gig economy” companies like Uber, Postmates and DoorDash.17 Mass arbitration claims spread to the consumer context rapidly, with firms utilizing targeted online advertising and claim submission websites to aggregate claimants.18
Over the last two years, with multiple courts having shown an unwillingness to step in, the mass arbitration trend is only gaining momentum.
1 Abernathy v. Doordash, Inc., No. 3:19-cv-07545-WHA (N.D. Cal. filed Nov. 15, 2019), ECF No. 76 [Transcript], at p. 27.
2 See, e.g., Francesca Mari, The Atlantic, The Lawyer Whose Clients Didn’t Exist (May 2020), available at, www.theatlantic.com/magazine/archive/2020/05/bp-oil-spill-shrimpers-settlement/609082/.
3 AT&T Mobility v. Concepcion, 563 U.S. 333, 352 (2011).
4 Id. at 337.
5 Id. at 336.
6 Id. at 340 (explaining the Discover Bank Rule as a rule of California law classifying most class action waivers in consumer contracts as unconscionable).
7 Id. at 344 (“Requiring the availability of classwide arbitration interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”).
8 Id. at 352.
9 Id. at 351-52 (internal citation omitted).
10 Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 237-238 (2013).
11 Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1630-32 (2018).
12 Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524, 529 (2019).
13 Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1418-19 (2019) (relying on Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U. S. 662 (2010), which concluded similarly as to silence in an arbitration agreement).
14 See Italian Colors, 570 U.S. at 236 (explaining that “filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable” could still invalidate an arbitration agreement); Chavarria v. Ralphs Grocery Co., 733 F.3d 916, 927 (9th Cir. 2013) (invalidating arbitration agreement notwithstanding Concepcion where the agreement imposed administrative and filing costs that could “effectively foreclose pursuit of the claim”); Capili v. Finish Line, Inc., 699 F. App'x 620, 622 (9th Cir. 2017) (“The district court properly determined that the cost-sharing provision was substantively unconscionable. The provision required Capili, a retail employee making $15 per hour, to pay up to $10,000 at the outset of arbitration, not including the fees and costs for legal representation.”).
15 The default rules of popular arbitration providers like the American Arbitration Association (“AAA”) also typically require the business to cover arbitration costs in the consumer and employment context. See, e.g., AAA Consumer Rules, Costs of Arbitration (requiring the business to pay all administrative, filing and arbitrator fees, except for a $200 filing fee to the claimant).
16 Michael Corkery and Jessica Silver-Greenberg, The New York Times, ‘Scared to Death’ by Arbitration: Companies Drowning in Their Own System (April 6, 2020), available at, www.nytimes.com/2020/04/06/business/arbitration-overload.html.
17 See, e.g., Adams v. Postmates, Inc., 414 F. Supp. 3d 1246 (N.D. Cal. 2019); Abernathy v. Doordash, Inc., 438 F. Supp. 3d 1062 (N.D. Cal. 2020); Abadilla v. Uber Technologies, No. 3:18-cv-07343 (N.D. Cal. filed Dec. 5, 2018).
18 See, e.g., Alison Frankel, Reuters, Mass consumer arbitration is on! Ed tech company hit with 15,000 data breach claims (May 12, 2020), available at, www.reuters.com/article/legal-us-otc-chegg/mass-consumer-arbitration-is-on-ed-tech-company-hit-with-15000-data-breach-claims-idUSKBN22O33E; Alison Frankel, Reuters, FanDuel wants N.Y. state court to shut down mass consumer arbitration (Jan. 14, 2020), available at, www.reuters.com/article/us-otc-fanduel/fanduel-wants-n-y-state-court-to-shut-down-mass-consumer-arbitration-idUSKBN1ZD2SK.