US Chamber of Commerce Institute of Legal Reform releases report on mass arbitration, its abuses, and how to prevent them
The plaintiffs’ bar has been trying to kill arbitration for more than a decade. But the courts have repeatedly rejected efforts to invalidate arbitration agreements. These lawyers have therefore switched to a different tactic: mass filing of arbitration demands.
When a single law firm or group of firms files 20,000 or 50,000 or 100,000 demands, does it really intend to resolve those claims on the merits? Or is the goal to use the costs of instituting an arbitration—which are disproportionately borne by companies when consumers or employees initiate arbitration—to coerce a settlement without regard to the merits of the underlying claim? If, for example, a company would immediately have to pay more than $10 million in fees upon the filing of 5,000 arbitration demands, just to be able to contest the merits, and thousands more for each claim that actually goes to arbitration—then paying a hefty settlement can seem like the only realistic option.
The U.S. Chamber of Commerce Institute of Legal Reform just issued a 75-page in-depth analysis of the mass arbitration phenomenon—Mass Arbitration Shakedown: Coercing Unjustified Settlements—that we authored. It documents the rise of mass arbitrations, the abusive consequences of these filings, and the ethical problems they present. We also suggest solutions that preserve the key benefit of arbitration—speedy, less-costly merit-based decisions—while also ensuring access to fair resolution of claims for injured consumers and employees.
Below the fold is a summary of the white paper.
Mechanics of Mass Arbitration
Abusive mass arbitration is the latest plaintiff-lawyer strategy to try to eliminate arbitration. Ironically, it is based on the fact that—in order to increase access to arbitration for consumers and employees—businesses routinely pay all, or virtually all, of the fees charged by arbitration providers. Here’s the gambit: the lawyers file simultaneously tens of thousands of essentially-identical arbitration demands, triggering an immediate, massive bill to businesses for arbitration fees—often totaling hundreds of millions of dollars. Even if the claims are meritless, or completely frivolous, the business is between a rock and a hard place: it is either pressured to settle (or abandon arbitration altogether) or forced to pay that huge fee bill simply to have the chance to defend itself. And that sunk cost cannot be recovered even if the business wins every single arbitration. These mass arbitration attacks—or more commonly, threats by plaintiffs’ lawyers to initiate abusive mass arbitrations—have skyrocketed in recent years.
A Coercive Gambit
Critics of these campaigns explain that the lawyers’ purpose is not to obtain an arbitrator’s decision on the merits for each of the underlying claims. The lawyers generally appear to lack the resources to handle tens of thousands of arbitration proceedings simultaneously, and arbitration providers certainly do not have tens of thousands of arbitrators to resolve them.
Rather, as companies have explained, the apparent goal of plaintiffs’ lawyers is to saddle the company with an immediate obligation to pay tens of millions of dollars in fees to the arbitration provider if the company wants to have any opportunity at all to defend itself. For example, under the fee schedule of the largest arbitration provider, the American Arbitration Association (AAA), a business confronting 5,000 cookie-cutter consumer arbitration demands requesting telephonic hearings must pay the AAA over $13 million in fees immediately after the arbitrations are filed. And if the business wants to have arbitrators appointed and to obtain rulings on the claims, the business must pay another $9.5 million in fees.
Faced with that reality, the company will either pay a hefty settlement to resolve the claims en masse— regardless of how weak the underlying merits might be—or abandon arbitration altogether and return to the overburdened and inefficient court system, as some companies have done. Either way, the plaintiffs’ lawyers win.
Of course, these coercive gambits can succeed only if the plaintiffs’ lawyers are able to amass a large “inventory” of claimants. Not surprisingly, as companies have explained, the route to that goal can be paved with abusive practices: claims filed in the names of nonexistent individuals, former customers without grievances, and others obviously not eligible for relief; misrepresentations and ethical violations in connection with the search for claimants, often placed in the hands of third parties; and lawyers’ failure to convey settlement offers to their clients—in order to keep their claims “live” and therefore impose the risk of massive arbitration fees that is the essential element of the entire scheme.
To be sure, there is nothing intrinsically improper about a set of lawyers coordinating representations of multiple consumers or employees with similar individual claims in arbitration. The benefits of individual arbitration—a forum that is more efficient and accessible than the overburdened judicial system, and that provides claimants with results that are at least as favorable, and often more favorable, than the judicial system— are no less real in the context of multiple similar claims. But those benefits can be realized only if claims are resolved by reference to their underlying merits.
The Class Action Playbook, Revisited
Abusive mass arbitrations are the 21st century equivalent of the abusive class actions that characterized the last part of the 20th century—claims that can be brought solely for the purpose of extracting a settlement unrelated to the merits by leveraging the threat of huge costs. For class actions, it was gigantic litigation defense costs and the threat of draconian liability. For abusive mass arbitrations, it is the immediate obligation to pay tens, or hundreds, of millions of dollars in arbitration fees.
The goal of any fair system for resolving disputes should be outcomes that are driven by the merits of the claim. But mass arbitrations force settlements wholly unrelated to the merits. If a company is going to have to pay $10 million, or $100 million simply to be able to defend itself—and defense costs on top of those sums—settlement, or dropping arbitration and going back to class actions in court, become the rational alternatives, even when a claim is entirely meritless.
Solving the Problem
How can we ensure that arbitration will be able to resolve large numbers of claims and preserve the merits-based outcomes and other benefits of arbitration? One possibility is to borrow from a well-known case-management tool long used by the federal courts: the bellwether trial. The appropriate use of bellwether arbitrations can facilitate the swift resolution of mass arbitrations: the parties can arbitrate a set of jointly-selected test cases (the company paying the arbitration fees solely for those cases), with the other cases suspended (subject to a tolling agreement that protects the plaintiffs’ rights to pursue their claims). The parties can then use the rulings on the merits of the test cases to settle all of the remaining cases, or they can arbitrate another set of jointly-selected cases.
This approach avoids the most abusive aspect of mass arbitrations— leveraging the aggregate up-front arbitration fees of all of the cases to coerce a settlement—while structuring the process to encourage settlement tied to assessments of the merits. It also ensures that every claimant ultimately has an opportunity to have his or her dispute resolved on the merits.
In the white paper, we discuss the use of the bellwether process to resolve mass arbitrations efficiently and fairly for all involved, as well as steps that the major arbitration providers and state bar authorities should consider to reduce the abuses that appear to be associated with mass arbitrations.
The post US Chamber of Commerce Institute of Legal Reform releases report on mass arbitration, its abuses, and how to prevent them appeared first on Class Defense Blog.
