Mass Arbitration Risks: What Companies Need to Know

Transcript

The following transcript of this discussion was edited for clarity.

Arbitration agreements have long served as an efficient alternative to litigation. But with the rise of social media and AI, plaintiffs’ firms can now file thousands of consumer claims at once. What was meant to be streamlined has quickly become overwhelming — with companies often facing millions of dollars in fees early on.

I’m Sarah Cambon, and today I’m joined by Goodwin partner Kyle Tayman to talk about what happens when mass arbitration hits — and what companies can do to protect themselves. His piece is part of Goodwin’s Forces of Law series.

Sarah Cambon: Kyle, thanks so much for being here.

Kyle Tayman: Thanks for having me.

Can you explain what mass arbitration is? 

Mass arbitration is a new litigation strategy that has gained prominence in the last few years. It is predominantly pushed by former class-action attorneys as class-action lawsuits have become more difficult to pursue. 

In mass arbitration, plaintiffs’ attorneys file a massive volume of identical arbitration demands. This allows them to target a similar number of claimants as in a class action — so long as they can recruit them — while also gaining the added leverage of the high fees and expenses associated with arbitration.

Can you explain why fees play such a big role in mass arbitration? 

A business pays the bulk of the arbitral fees, while the consumer pays a much smaller share. For a mass arbitration case in which there are 10,000 consumers and the arbitration fee is $500, fees at the outset of the case can quickly total to millions of dollars. 

A lot of companies recognize that they face those high fees and choose to avoid them through settlement.

Are there particular types of companies or industries that are especially exposed to mass arbitration?

No company is completely immune, but there are companies that are much more at risk, particularly ones with large volumes of consumers, because plaintiff firms must identify and recruit claimants to pursue mass arbitration — and they typically do so heavily through social media. 

Retail, technology, and financial services companies are some sectors particularly at risk.

In addition, the claims often center on data privacy, which exposes almost any company with a website or a consumer-facing product or service.

Your article notes that technology really changed the game here. What has specifically made mass arbitration viable when it wasn’t before? 

One factor is social media, which allows plaintiff firms to reach large numbers of consumers quickly and advertise at relatively low cost.

Another is the advent of technology such as artificial intelligence, which allows plaintiff firms to quickly receive and process consumer claims. They can then mass repeat the arbitration demands. To be clear, plaintiff firms have to file individual arbitration demands on behalf of each client. For instance, a case with 20,000 consumers would entail 20,000 individual demands.

In the past, managing that volume — whether through paper or basic computer processing systems — would have been costly and cumbersome. Modern technology, however, makes it far easier to handle and process large volumes of data, enabling firms to pursue mass arbitrations much more efficiently than before.

What steps have arbitration providers and courts taken so far to address mass arbitration? 

The arbitration providers are starting to compete for business for mass arbitration by setting mass arbitration rules, procedures, processes, and fees.

The big risk with mass arbitrations is the high fees. We’ve seen both the American Arbitration Association (AAA) and JAMS (formerly, Judicial Arbitration and Mediation Services) adopt fee structures that significantly lower the upfront cost of entering the process stage of a mass arbitration, reducing some of the threat companies face when a mass arbitration is filed or threatened against them.

Courts recognize that consumers have a right to pursue arbitration, as enshrined in the Federal Arbitration Act. At the same time, they are attempting to balance that right against the risks companies face in mass arbitrations, where filing fees can be substantial and the merits of the claims may sometimes be dubious.

We’ll see more and more decisions starting to address mass arbitrations as the year progresses, in part because there are newer procedures — both from companies and arbitration providers — that are being challenged in courts.

If you’re a company trying to get ahead of mass arbitration risk, how can you prepare?

Companies should first ask themselves, “Do we prefer arbitration over litigation?”

There are certain companies that have asked that question and decided they prefer to go to court and to accept class actions. Other companies have done the opposite. They have decided they prefer the risk of mass arbitration over going to court.

If companies decide they are prepared to accept the mass arbitration, the next step is to ensure they are comfortable with their arbitration procedures. Those procedures must also be balanced and structured to withstand judicial scrutiny and remain enforceable in court.

Companies might require more detailed factual allegations in the arbitration demand, as well as additional notice provisions and more time to attempt to resolve claims before any demand is filed. Companies can also establish procedures that go beyond the arbitral body’s standard mass arbitration rules to ensure that any mass arbitration proceeds in an orderly fashion that mitigates some of the costs and risks. 

How do you expect mass arbitration to evolve over the next few years?

I think we will see a continued evolution of mass arbitration rules and procedures among arbitral bodies, which will allow for more competition in this space.

AAA and JAMS are the primary players. We’re starting to see other arbitral bodies emerge and more companies select alternatives. I think that will continue as there is competition in the marketplace for procedures that are more favorable to companies, while also balancing consumer rights and consumer protections to make sure that any outcomes of arbitration remain enforceable under the law in courts and consistent with the Federal Arbitration Act.

Over time, courts are likely to provide clearer guidance on which types of arbitration clauses and procedural mechanisms are permissible and which are not, effectively calling more “balls and strikes.”

We’ll see companies adopt a range of strategies in responding to mass arbitrations — whether that means contesting them within the arbitral process, challenging them in court, or seeking to enforce specific terms.

It’ll be interesting to see where this all heads next. Kyle, thanks so much for being here. 

Thank you. And thank you everyone for listening. I hope this was helpful.