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Mass Arbitration… The Next Class Action?

Enacted in 1925, the Federal Arbitration Act established an alternative dispute resolution system through which private parties could resolve both federal and state law issues without appearing in court. Arbitration is intended to be a more efficient and less costly alternative to litigation. Over the years, the U.S. Supreme Court has issued several opinions strengthening the legitimacy and authority of arbitration since 1925.

Recently, however, arbitration has come under attack by the plaintiffs’ bar and its allies. Legislatures and courts in Judicial Hellholes® like California have tried to limit the use of arbitration, specifically in the employment law context. The plaintiffs’ bar has even been able to get Congress to consider limiting arbitration through the so-called Forced Arbitration Injustice Repeal Act (FAIR) Act. This bill would prohibit enforcement of pre-dispute arbitration agreements in the context of employment, consumer, antitrust or civil rights disputes.

‘MASS ARBITRATION’ THE NEW CLASS ACTION?

While one faction of the trial bar seeks to eliminate arbitration entirely, another more entrepreneurial group seeks to profit from the process. Historically, arbitration preserved claims as individual matters – not ones that are treated as a monolithic “class.” That distinction, however, may be changing with recent cases being handled by plaintiffs’ lawyers as “mass arbitrations.”

The effort is being driven by Keller Lenkner, a small Chicago-based law firm. Keller Lenkner pro- motes itself as litigating individual arbitrations concerning consumer and employee rights. In the past two years, Keller has represented over 200,000 arbitration claimants by partnering with other law firms across the nation and investing millions of dollars in proprietary software. Keller Lenkner routinely files virtually identical arbitration demands against the same defendant with the intent of pressuring the company into a multi-million-dollar settlement.

Law firms leverage the arbitration fees defendants must pay to the American Arbitration Association (AAA) in order to pressure companies into a settlement. In mass arbitration claims, defendants must pay the AAA $3,000 per individual claimant to secure a hearing. Even if defendants are successful, there is no way to recoup the administrative fees. When facing thousands of individual claims, the potential fees are too high, and companies opt to settle.

Keller Lenkner solicits clients through a webpage where potential claimants submit information about their experience with various defendants. Keller charges a flat fee of $750 if the claimant wins, but charges nothing if the claimant loses or abandons the claim.

This is a dramatic change in large-scale civil claims. Once certified by a judge, the “class” in a class action is a single entity. The personal injury lawyer represents the entire class through one of a few class representatives. By contrast, with arbitration clients, the personal injury firm represents each client individually.

ETHICAL ISSUES ABOUND

Because law firms like Keller Lenkner seek to represent individual claims on a mass scale, several ethical issues are raised. First, differing interests of clients must be considered. One could argue Keller Lenkner fails to ensure they are representing each client individually and not putting their own fiscal interests ahead of the individual client’s interests. For example, in a case against CenturyLink, 22,000 clients received identical advice on whether to opt out of a class action settlement. Keller Lenkner attempted to bar clients from inclusion in class actions in order to maintain a maximum number of viable arbitration claims.

Conflicts of interest also arise from differing interests. Can a lawyer recommend an outcome that could harm the interest of another client? And how does the law firm ensure that confidentiality and legal privilege is distinct and protected for each client?

Even a staunch plaintiffs’ bar ally has acknowledged the ethical concerns around the practice. Professor Richard Zitrin, a legal ethics professor at the University of California Hastings College of Law and an ethics consultant for plaintiffs’ firms, testified in a case involving DoorDash that, “Based on my background and experience, where, as here, plaintiffs’ counsel purports to represent thousands of clients against a particular defendant, red flags go up in my mind about whether such representation meets the ethical requirements all lawyers must abide by.”

“Based on my background and experience, where, as here, plaintiffs’ counsel purports to represent thousands of clients against a particular defendant, red flags go up in my mind about whether such representation meets the ethical requirements all lawyers must abide by.”

– Professor Richard Zitrin, University of California Hastings College of Law

IMPACT OF MASS ARBITRATION

Amazon, the world’s largest online retailer, amended its “terms of service” in June, eliminating its arbitration clause, thereby allowing customers to bring lawsuits in courts across the country. While the decision came with very little publicity, the implications are significant. Thousands of claims can no longer be adjudicated through the arbitration process, but rather will end up in already overburdened courts. This will lead to greater hassle for consumers and larger paydays for plaintiffs’ lawyers.

As more businesses potentially go the way of Amazon and conclude they would rather face class actions than mass arbitration, the country’s legal system could lose a vital form of alternative dispute resolution.

With class members receiving, on average, less than 30% of a monetary award, the loss of arbitration would be devastating for both consumers and defendants.

Lawsuit abuse across the U.S. results in more than $160 billion in excessive tort costs, meaning every American pays approximately $488 each year in a so-called tort tax. Tort costs affect 2,211,450 jobs across the country, with an estimated loss of $143.8 million in wages. The economic costs and impacts of the excesses in the civil justice system are why we should preserve balanced, cost-effective alternatives to litigation.

WHERE IS THE AMERICAN ARBITRATION ASSOCIATION?

The American Arbitration Association (AAA) can play a meaningful role in protecting the arbitration process. It most likely never anticipated this type of abuse – but now, it should recognize that firms like Keller Lenkner are weaponizing their fees and using them as leverage to pressure companies into settlements.

This issue is now in front of a New York state court as Uber recently sued the AAA over excessive administrative fees resulting from a mass arbitration targeting the company over an alleged discriminatory policy. According to Uber, “The AAA, a nonprofit arbitration service provider, casts this astronomical sum as purported administrative fees and costs. In fact, it is a ransom orchestrated by politically-motivated lawyers, who are manipulating the arbitral process to prop up baseless claims of ‘reverse discrimination.”

The merit of these cases never comes into play because of the high fees, so many settled claims are frivolous and unfounded. Companies would rather settle than pay millions of dollars in fees up front.

Uber argues that the AAA should adjust fees for mass arbitration, recognizing the efficiencies that come with identical actions. By lowering fees in mass actions, the AAA would eliminate the incentives for lawyers to bring these types of claims. It would protect the legitimacy and fairness of the process. Unlike Amazon, Uber is not abandoning arbitration. It is pushing for a more fair and equitable process that protects the rights of all parties.

Unlike other companies that have unsuccessfully challenged the AAA’s fees, Uber stands in a unique position having already paid about $5 million in administration fees to initiate the 31,000 pending cases that are a part of the mass action. Now, Uber is seeking relief from having to pay close to $100 million in additional fees to arbitrate the “cookie-cutter” claims.

The AAA also should consider implementing a process to manage frivolous claims. The plaintiffs’ lawyers’ strategy is to drive up the fees as much as possible and force an early settlement. There have been examples of claims filed on behalf of deceased individuals and people who did not use a product or did not suffer a real loss. In these instances, defendants should be reimbursed.

Arbitration has long been under attack by the plaintiffs’ bar and its allies, and the mass arbitration cases may be yet another attempt to get rid of it. Amazon may be the first of many companies to eliminate the use of arbitration – a decision that harms consumers and will lead to lengthy and expensive court battles clogging already overburdened court systems.

“The AAA, a nonprofit arbitration service provider, casts this astronomical sum as purported administrative fees and costs. In fact, it is a ransom orchestrated by politically-motivated lawyers, who are manipulating the arbitral to prop up baseless claims of ‘reverse discrimination.’”