The American Arbitration Association (AAA) has announced updates to its Mass Arbitration Supplementary Rules1 and its fee schedules for consumer2 and employment3 mass arbitrations.
These changes may ameliorate some of the worst abuses in recent mass arbitrations and are a welcome development in that respect. But they do not come close to eliminating the risks associated with abusive mass arbitrations.
Mass Arbitration Abuses4
In a mass arbitration, a lawyer or coordinated group of lawyers files (or threatens to file) a significant number of individual arbitrations asserting similar claims. Mass arbitrations are not inherently improper but have in recent years been subject to extraordinary abuse, as some lawyers have sought to weaponize the arbitration fees that businesses must pay. Because businesses typically must pay arbitration fees even if they win the case, claimants' lawyers have routinely sought to use the threat of fees to extract settlements, regardless of the merit or value of the underlying claims.
Even worse, to magnify the threatened fees (and thus the settlement leverage), claimants' lawyers have a powerful incentive to compile as large a portfolio of claimants as possible. To maximize the number of claimants, some lawyers have engaged in questionable practices, such as using improper or misleading online solicitations to recruit claimants and failing to vet claimants to ensure that they are actually associated with the company and have one of the claims being asserted. These methods enable lawyers to amass tens or hundreds of thousands of claimants—letting the lawyers threaten the targeted business with many millions of dollars of arbitration fees, which the business must pay to even have an opportunity to defend itself on the merits. To avoid these fees, many businesses have been forced to pay substantial settlements.
Unsurprisingly, these settlements have produced a spike in the number of threatened mass arbitrations. Companies in more industries are being targeted, including comparatively small businesses. And an ever-larger number of plaintiffs' lawyers are pursuing mass arbitrations.
The AAA's New Mass Arbitration Supplementary Rules and Fee Schedules
New rules for abusive mass arbitrations
The most significant changes are aimed at a common scenario in abusive mass arbitrations—a claimant pool that includes many claimants who are not even customers or workers of the target business, or who were never exposed to the challenged improper conduct. In some striking cases, the claimants are fictitious or file duplicate claims. Any such claimants by definition assert frivolous claims; some do not even have arbitration agreements with the targeted business. Even in these egregious circumstances, some claimants' lawyers have sought to avoid responsibility for these filings, asserting that they were entitled to rely upon the information typed into online forms by their putative clients without further investigation.
The new rules impose significant barriers to these practices.
First, when claimants' counsel files the Demands for Arbitration to commence a mass arbitration, the filing must "include an affirmation that the information provided for each individual case is true and correct to the best of the [lawyer's] knowledge." A similar requirement also applies to answers, counterclaims, and amended Demands for Arbitration. These changes make it easier for arbitrators and courts to conclude that counsel have an obligation not to file knowingly false or unverified claims—and to impose Rule 11-type sanctions if that duty is violated.
Second, the new rules make it easier for businesses that seek to challenge arbitration filings to request a Process Arbitrator, who is empowered to decide threshold administrative disputes that the parties' arbitration agreement do not allocate to courts for decision. Previously, a Process Arbitrator could be appointed only if the non-refundable filing fees for all cases had been paid. Because those filing fees ranged between $175 to $450 per case, the amount needed to be paid could quickly reach millions of dollars in large mass arbitrations.
Now, no matter how many cases are filed, the only fee required at the outset before a Process Arbitrator may be appointed is an Initiation Fee of $3,125 by the claimants and $8,125 by the business respondent. The business is responsible for paying the Process Arbitrator's normal hourly rate, but the Process Arbitrator can then hear challenges to the propriety of the filings, including not only compliance with the AAA's filing requirements, but also "filing requirements in the parties' contract[s]" and "any applicable conditions precedent" under those contracts.
These protections are important. Many plaintiffs' counsel have ignored their obligations to comply with these contractual requirements, and this procedure provides businesses with a practical, accessible process to enforce compliance. The Process Arbitrator can also hear disputes over other administrative matters. Further, the Process Arbitrator now has the power to determine that particular disputes require fact-specific individualized proceedings, as well as to address disputes regarding the precedential impact of his or her rulings.
As before, Process Arbitrators must issue written rulings, but now those rulings must contain the "reasons" for the ruling. And Merits Arbitrators are, as a general matter, bound by Process Arbitrator's rulings unless the Merits Arbitrator determines that the Process Arbitrator "abused their discretion."
New Fee Schedule
As discussed above, the new rules eliminate filing fees and replace them with new flat Initiation Fees. Filing fees nevertheless remain for any cases that survive review by the Process Arbitrator (or if no Process Arbitrator is requested). These fees are now called "Per Case Fees," and any amounts paid for Initiation Fees are credited against the Per Case Fees. In both consumer and worker mass arbitrations, the Per Case Fees start at $125 for claimants and $325 for businesses and decrease with the number of cases filed.
In addition, once cases are ready to proceed to the selection of Merits Arbitrators, the AAA will charge an Arbitrator Appointment Fee for each case. This fee is now split between claimants and businesses. Arbitrator compensation also has changed in consumer cases. Merits Arbitrators will now be paid $300 per hour in consumer cases. In cases involving workers, Merits Arbitrators remain compensated at their regular hourly rates.
Implications for Mass Arbitrations and Next Steps
These rule changes should make it easier for businesses to resist the most abusive forms of mass arbitrations by making it affordable to obtain appointment of a Process Arbitrator to hear challenges to the filing of arbitrations in the names of nonexistent customers or workers. The new rules also should make it easier for businesses to seek to hold claimants' counsel responsible for improperly filed arbitrations—and to enforce contractual requirements regarding the arbitration process.
At the same time, the rule and fee-schedule changes make it important for businesses to revisit their arbitration agreements. Businesses should consider updating their agreements to account for these changes. In addition, businesses should take up the AAA's recommendation to include additional or different procedures in their agreements to ensure that mass arbitrations are resolved fairly and efficiently.
As a baseline, arbitration agreements should be designed with the needs of individual consumers and workers in mind. A robust pre-arbitration dispute resolution process—requiring claimants to explain their concerns so that the company has an opportunity to resolve them cooperatively—facilitates the quick settlement of disputes, without the need to arbitrate at all. The arbitration process itself should be fair to both sides.5
Businesses should also consider contracting for the use of appropriate procedures, including bellwether arbitrations, to address mass arbitrations.6 The AAA's new rules make it possible to tie those provisions to the new Process Arbitrator enforcement mechanism.
Footnotes
1. American Arbitration Association, Mass Arbitration Supplementary Rules, effective Jan. 15, 2024.
2. American Arbitration Association, Consumer Mass Arbitration and Mediation Fee Schedule, effective Jan. 15, 2024.
3. American Arbitration Association, Employment/Workplace Mass Arbitration and Mediation Fee Schedule, effective Jan. 15, 2024.
4. For a detailed discussion of the abuses associated with mass arbitration, see Andrew J. Pincus, et al., Mass Arbitration Shakedown: Coercing Unjustified Settlements, U.S. Chamber of Commerce Institute for Legal Reform, Feb. 28, 2023.
5. See also Archis A. Parasharami, et al., Getting Under the Hood: A Practical Guide to Drafting Consumer and Employee Arbitration Agreements, Westlaw Employment Journal, Aug. 13, 2013.
6. See Pincus, et al., supra note 4.
Originally published by Washington Legal Foundation
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