Mass Arbitration in 7th Circuit: Wallrich v. Samsung

The Seventh Circuit will soon hear argument in a mass arbitration case which has attracted amicus briefs from leading organizations on each side of civil justice issues, including the U.S. Chamber of Commerce and the plaintiffs’ trial lawyers organization, the American Association for Justice. The case is Wallrich et al v. Samsung Electronics America, Inc. et al.

Mass arbitration was plaintiffs’ lawyers’ response to courts’ enforcement of agreements requiring individual arbitration instead of class actions. As arbitration organizations’ rules tend to require lower filing fees of individual claimants than responding businesses, those businesses have balked at the fees of mass individual arbitration. For instance, Amazon removed arbitration from its terms of service in 2021 “after plaintiffs’ lawyers flooded Amazon with more than 75,000 individual arbitration demands on behalf of Echo users. That move triggered a bill for tens of millions of dollars in filing fees.”

Other companies have tried to reduce the fees of mass arbitration, such as by switching arbitration organizations. For instance, Damini Mohan reports that “In 2020, Doordash changed its arbitration provider from AAA to ADRServices, Inc., which has a lower filing fee due to thousands of delivery workers initiating mass arbitration.”

Another approach is batching. For instance, Samsung’s new arbitration agreement provides:

“Both the counsel for the claimant and the counsel for Samsung must each pick 25 claims to go through individual arbitration,” all before the same arbitrator.  After these 25 arbitrations, “the parties will engage in global mediation for all the remaining claims.” Then, if claims remain unresolved, counsel for each side pick 50 more claims for individual arbitration, all before the same arbitrator (although a different arbitrator from the first 25.) And so on.

As Mohan writes, “From a business perspective, multi-staged batch arbitration helps manage mass arbitration more efficiently by reducing the upfront costs and distributing them more evenly over a period of time.” And from a business perspective, perhaps settling most of the cases after paying fees to arbitrate only a small portion of them.

Samsung’s new arbitration agreement appeared after the Wallrich case now before the Seventh Circuit.

In Wallrich, Samsung device users alleging violations of the Illinois’ Biometric Information Privacy Act (“BIPA”), 740 ILCS 14/1, et seq., filed 50,000 individual arbitration demands before the American Arbitration Association (AAA) in 2022. The AAA invoiced the consumers for their share of the initial arbitration administration fees, which the consumers paid. However, Samsung notified the AAA that it would not pay its share of the assessed initial administrative fees for the Illinois claimants because it found the claimant list included discrepancies such as deceased claimants and claimants who were not Illinois residents. Samsung agreed to pay the fees for fourteen consumers now living in California, citing California Code of Civil Procedure § 1281 et seq., which provides for sanctions in event of nonpayment.

Consumers filed a petition to compel arbitration in the U.S. District Court for the Northern District of Illinois, where Judge Harry D. Leinenweber ruled for the consumers—compelling arbitration and ordering Samsung to pay over $4 million in AAA fees.

The district court found (p.22) that Samsung and the petitioners formed arbitration agreements because “To find that each Petitioner residing in this District is a Samsung customer, the Court must accept the word of over 30,000 individuals, some of whom may have been recruited to this action by obscure social media ads.”

In contrast, Samsung’s brief to the Seventh Circuit says the district court erred in thinking it “‘must accept’ the unverified and unattested ‘word of over 30,000 individuals.’” Samsung’s brief says, “no Appellee swore under penalty of perjury that the petition’s allegations or its attachments were true. . . Appellees thus failed to convert the petition and its attachments into evidence.” Samsung’s brief says, “Appellees have not submitted any evidence that each one of them owns a Samsung device”

On the other hand, petitioner’s brief to the Seventh Circuit says of the standard to compel arbitration that “courts ‘have analogized the standard to that required of a party opposing summary judgment’”, where “Sworn testimony is not the only basis on which summary judgment may be granted.” Facts may be supported by a broad range of “materials in the record,” including “depositions, documents, electronically stored information, affidavits or declarations, stipulations … , admissions, interrogatory answers, or other materials.” Fed. R. Civ. P. 56(c)(1)(A).

The district court said:

Samsung has a customer list, against which they could compare the list of Petitioners. Samsung raised concerns about specific names to the AAA, which in

turn asked Petitioners to correct their list. Petitioners did so, and the record does not show that Samsung has raised specific concerns since. Samsung’s current rejection that all Petitioners are customers is merely “denying facts,” and this is not enough.

 Samsung’s brief replies that whether it had a customer “list is irrelevant because Appellees bore the initial burden of proof, which they did not carry.” In addition, Samsung’s brief says it “does not have a comprehensive ‘customer list.’” Petitioner’s brief refers to “Samsung’s failure to identify a single claimant—out of tens of thousands—who didn’t show up in its records” and Samsung’s “refus[al] to provide information entirely within its possession” both of which seem to continue asserting that the burden is on Samsung.

The district court’s holding that Samsung and the petitioners formed arbitration agreements was also based on the district court’s finding that “The AAA has already reviewed Petitioners’ arbitration agreements and determined that they met the filing requirements.” Addressing this, Samsung’s brief to the Seventh Circuit says:

the AAA’s filing-requirement determination says nothing about whether the parties agreed to arbitrate, because the AAA does not require claimants to establish at filing that they are bound by an arbitration agreement. It instead requires claimants to simply attach an arbitration agreement to their demand without proof that they are bound by it.

 And Samsung correctly points out that “whether the parties agreed to arbitrate at all is a question for the court (and, if necessary, a jury), not the arbitrator.” However, petitioner’s brief says the record shows

(a) each claimant had filed a demand for arbitration stating that they are the owner of a Samsung device, along with significant amounts of identifying information; (b) this information was subject to official and adversarial vetting, in which both the AAA and Samsung raised issues that the claimants addressed;

 Having found that the petitioners formed arbitration agreements with Samsung, the district court went on to hold that Samsung’s refusal to pay the AAA’s fees for each individual claimant constitutes a breach of the arbitration agreement, so the court’s order compelling arbitration also ordered Samsung to pay those fees. In contrast, Samsung’s appellate brief says “the (alleged) arbitration agreements” “provide that administrative filing fees ‘shall be determined according to AAA rules,’” which Samsung reads as “the arbitration agreements expressly commit[ting] administrative-fee issues to the AAA.” Samsung says, “the AAA, applying its own rules, decided that Samsung was not required to pay fees and closed the cases given the nonpayment by either party.” On the other hand, petitioner’s brief says the AAA “the AAA determined that the company was ‘responsible for payment of the initial administrative filing

fees totaling $4,125,000.00’” and “the AAA [closed] the arbitrations ‘due to non-payment of filing fees by the business.’” So, the “record cannot be squared with Samsung’s assertion that the AAA ‘decided that Samsung was not required to pay fees.’”

Interestingly, the district court notes that Samsung has not argued inability to pay, “but the Court has not been convinced that Petitioners are able to lend over $4,000,000 while the dispute pends.” And petitioners’ appellate brief says the cases Samsung cites are distinguishable because they “involved parties that could no longer afford their fees, which courts have consistently distinguished from a willful refusal to pay.”

While Samsung argues that “administrative fees are quintessential ‘procedural’ matters for arbitral bodies, not courts, to decide,” the district court did “not see filing fees as procedural in this case” because “The fees are bound up in the right to arbitrate that the ADR tribunal governs.” This procedural/substantive distinction may be crucial under the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), which said, “issues of substantive arbitrability . . . are for a court to decide and issues of procedural arbitrability, i.e., whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, are for the arbitrators to decide.”

 

 

Rules for Mass Individual Arbitrations

 Arbitration agreements precluding class actions or classwide arbitrations have become common since the Supreme Court's Concepcion case. This has led some enterprising plaintiffs' lawyers to file many virtually identical arbitration cases on behalf of a group of consumers or employees.

The American Arbitration Association now has rules to address such multiple case filings.

The International Institute for Conflict Prevention & Resolution (CPR) also has rules for such mass employment claims.

Consumer Arbitration Radvocate and Data on AAA Consumer Arbitrations

Radvocate says it "is not a lawyer or a law firm. Radvocate is a service that automates companies' dispute resolution processes to help you bring consumer arbitrations." Alison Frankel at Reuters describes Radvocate as a "legal tech startup" while citing its analysis of American Arb. Ass'n (AAA) data on the number of consumer arbitrations.

Frankel writes that a "mere 895 consumer arbitrations were resolved by AAA in the first quarter of 2019" but "That’s the third-highest quarterly number since 2016." Frankel continues: "the company that resolved the most arbitration claims in the first quarter of 2019 was AT&T, which, together with its subsidiary DirecTV, completed 111 consumer arbitrations in the timeframe. Citibank resolved 44 cases; Credit One, 40; and Comcast, 36."

HT Tom Witherspoon

American Arbitration Association Contrasted with Trade Association Arbitration

Commercial arbitration's different types -- such as the contrast between the AAA and trade associations -- are discussed in my recent article: Stephen J. Ware, Private Ordering and Commercial Arbitration: Lasting Lessons from Mentschikoff, 2019 J. Disp. Resol. (2019).

It revisits the classic work of Soia Mentschikoff who detailed a
thoroughgoing form of private ordering in trade association arbitration that
privatizes all three of:

(1) lawmaking (through arbitrators applying industry trade rules rather than
governmental law, and through the precedential effect of arbitrators’ reasoned
awards);
(2) adjudication (through arbitration procedures quite different from courts’
rules of procedure and evidence); and
(3) enforcement of the adjudicator’s decision (through private sanctions
culminating in expulsion from the association).

By contrast, she shows that the general commercial arbitration typical of the
AAA often includes only the second of these three forms of privatization.

A summary from Beth Graham at DisputingBlog.

New Justice Kavanaugh Gets to Write Unanimous Opinion Reaching Predictable Result

New Supreme Court Justice Brett Kavanaugh's opinion for a unanimous Court will interest arbitration nerds. It holds that if an arbitration agreement (or the rules it incorporates) sends to arbitrators (rather than judges) the issue of which disputes the parties agreed to arbitrate, then a court cannot refuse to enforce that agreement by finding "wholly groundless" the argument that the particular dispute is covered by the arbitration agreement.

The Court's opinion in Henry Schein, Inc. v. Archer & White Sales, Inc., is summarized by Law360, the National Law Review, and Squire Patton Boggs

Jay-Z and Arbitration

Jay-Z persuaded New York Judge Saliann Scarpulla to stay an arbitration because of a lack of black arbitrators. Jay-Z argued that his company's arbitration agreement with Iconix Brand Group violated New York's public policy against discrimination.

Jay-Z (Shawn C. Carter), through his lawyers, argued "When Mr. Carter began reviewing arbitrators on the American Arbitration Association’s Search Platform ... he could not identify a single African-American arbitrator on the 'Large and Complex Cases' roster, composed of hundreds of arbitrators, that had the background and experience to preside over the Arbitration. After repeated requests to the AAA for diverse arbitrators with expertise in complex commercial law, the AAA was able to provide only three neutrals it identified as African-American: two men — one of whom was a partner at the law firm representing Iconix in this arbitration and thus had a glaringly obvious conflict of interest — and one woman."

However, the transcript suggests Judge Scarpulla's skepticism toward Jay-Z's argument and that she only granted a temporary stay of arbitration until the main judge on the case (Judge Barry Ostrager) hears the merits of the case.

Hat tip to Mark Kantor

International Arbitration Program at the World Bank

Three leading international arbitral institutions annually co-sponsor a joint colloquium. Leaders of  the International Centre for Settlement of Investment Disputes (ICSID), the Int'l Chamber of Commerce International Court of Arbitration, and the American Arbitration Association's International Centre for Dispute Resolution will discuss priorities and trends at their respective institutions, in Washington, DC, December 7, 2018.

Other sessions will address practical challenges faced by practitioners—i.e. ethical dilemmas, media scrutiny, compliance with awards—and offer guidance from experts in the field on how to manage these effectively.

Trump Campaign Begins Arbitration Against Omarosa

Trump's 2020 re-election campaign filed the arbitration against former senior White House adviser Omarosa Manigault Newman, alleging she breached a nondisclosure agreement. CNBC reports the case was filed with the American Arbitration Association in New York City.

Arbitration Speedier Than Litigation, Says AAA Study

The American Arbitration Association says "on average, U.S. district court cases took more than 12 months longer to get to trial than cases adjudicated by arbitration (24.2 months vs 11.6 months)." While one can always question whether the litigated cases studied are similar to the arbitration cases studied, this data fits the received wisdom from earlier data that arbitration tends to be quicker than litigation. This study is part of a broader website of AAA resources on arbitration.

ABA Section on Dispute Resolution's Annual Arbitration Training Institute

Great to be in Chicago for arbitrator training.

Steve Ware

The American Bar Association Section on Dispute Resolution's 10th Annual Arbitration Training Institute. Collaborating Organizations: American Arbitration Association,  College of Commercial Arbitrators, FINRA, International Institute for Conflict Prevention and Resolution (CPR), JAMS.

International Arbitration Conference in NY

Promising conference on international arbitration at Columbia Law School, May 24, hosted by the
American Arbitration Association International Centre for Dispute Resolution

NY Times Criticizes Confidentiality of Employment Arbitration

Today's New York Times refers to "the murky world of corporate arbitration, in which serious charges of misconduct are often settled behind closed doors." The case accuses parent of Kay Jewelers "of discriminating against women by denying them equal pay and promotional opportunities. The accusations of sexual harassment are included in statements employees made about pay and promotion disparities, and the accusers have sought to link the accusations to their wages."

University of Kansas Law Professor and arbitration expert Chris Drahozal gave me permission to add his point that "the arbitration rules in the Kay Jewelers arbitration agreement (National Arbitration and Mediation) are unusual in the U.S. In imposing a confidentiality obligation on the parties. By comparison, the AAA and JAMS rules impose a confidentiality obligation only on the arbitrator and the administrator. Under the AAA and JAMS rules, either party remains free to release any information about the arbitration (in the absence of a confidentiality order by the arbitrators) without consent of the other party."

Arbitration Organizations Largely Immune From Suit

The Eighth Circuit Court of Appeals held that arbitrator immunity extends to arbitration organizations, here the American Arbitration Association, in Owens v. American Arbitration Association, Inc., 2016 WL 6818858 (8th Cir. Nov. 18, 2016).

Commentary from Liz Kramer, Seth Leventhal, and the American Bar Association Section on Litigation.

Objecting to Appointment of Arbitrators and Postponing Arbitral Hearings

California case summarized by California Arbitration and Mediation involving the arbitration organization, Alternative Resolution Centers (ARC), and mentioning another one: ADR, Services, Inc.,  California's options for arbitration extend beyond the American Arbitration Association and JAMS. 

New Rules for Consumer Arbitration

The American Arbitration Association announces its new Consumer Arbitration Rules for cases filed on or after September 1, 2014.

Nursing Home Arbitration Enforced

The South Carolina Supreme Court recently enforced a nursing home's arbitration agreement, in
Dean v. Heritage Healthcare of Ridgeway, LLC, __S.E.2d__, 2014 WL 2771300 (S.C. June 18, 2014).

As Liz Kramer explains:

the agreement said that “any arbitration proceeding that takes place under this [] Agreement shall follow the rules of the [AAA]“.  However, the AAA stopped accepting personal injury disputes based on pre-injury arbitration agreements in 2003.  The nursing home moved to compel arbitration and the trial court denied the motion.  It found that the language about the AAA rules meant that the dispute should be heard by the AAA and since the AAA was not available, the arbitration agreement was invalid.  The Supreme Court of South Carolina reversed.  But before the supremes could get to the merits, they had to overrule their own 1993 decision, which held that nursing home contracts did not involve interstate commerce.  After reviewing the intervening cases from SCOTUS, the court found the nursing home agreement does involve interstate commerce and is governed by the FAA.  On the merits, the court found that the availability of the AAA to administer the arbitration was not a material term and instead the parties’ agreement simply calls for the arbitration to be governed by the AAA rules, regardless of what entity administers the proceeding.

American Arbitration Association Consumer Arbitration

More good work by my University of Kansas School of Law faculty colleague, Christopher R. Drahozal.  Professor Drahozal is serving as a Special Advisor to the Consumer Financial Protection Bureau on its study of arbitration clauses in consumer financial services contracts.

His abstract:

This chapter has provided an overview of consumer arbitrations administered by the American Arbitration Association, the largest administrator of consumer arbitrations. It does not, of course, purport to resolve the ongoing debate over arbitration and access to justice. A consumer’s incentive to bring a claim (and an attorneys’ incentive to take a case) depend on the costs of the process and the expected outcome in the forum. With the recent amendments to its consumer arbitration rules, the AAA reduced the cost to consumers of bringing claims in arbitration, both by lowering the upfront fees and by largely precluding reallocation of fees to consumers in the award. The expected outcome in arbitration (in particular, relative to the expected outcome in court) presents a much more difficult question because limits to available data preclude comparison of similarly-situated complainants. More research remains to be done.

Part of what I like about this chapter’s review of empirical studies is that it points out when selection effects make it hard to draw conclusions from the data.

Do Arbitration Organizations Comply with California Disclosure Laws?

Carolyn Said writes in the San Francisco Chronicle that while "a decade-old California law already requires arbitration companies to post data on their cases online. The problem is that many don't do it. A UC Hastings study found that only half post any data, and it's short of what's required."


"The vast majority of California consumer arbitrations, about 95 percent, are done by JAMS (formerly Judicial Arbitration and Mediation Services), the American Arbitration Association or Kaiser's independent administrator, and all of these organizations comply with the disclosure law," said Donne Brownsey, a lobbyist for the California arbitration industry.
"JAMS is compliant with California's consumer arbitration disclosure requirements," the organization's general counsel, John Walsh, said in a statement.

Dropbox Adds Arbitration Clause

California Mediation and Arbitration reports the clause has what are now pretty typical provisions for consumer agreements:

Arbitration will be administered by the AAA under the Commercial Arbitration Rules and the Supplementary Procedures for Consumer Related Disputes. 

Arbitration will be held in the US in the county where you live or work, San Francisco (where Dropbox is headquartered) or any other location the parties agree to.

Dropbox will pay arbitration fees for claims less than $75,000.  If you receive a more favorable award than what Dropbox offers to pay, you get a bonus of $1,000, in addition to the award.  Dropbox won’t seek fees and costs in arbitration – unless the arbitrator determines your claim is frivolous.

Exceptions to the arbitration requirement include small claims, or injunctive relief for certain claims.

There is a class action waiver:  “You may only resolve disputes with us on an individual basis, and may not bring a claim as a plaintiff or a class member in a class, consolidated, or representative action.”

Pace University Law Professor Jill Gross writes at the consistently-strong ADR Prof Blog "I wonder whether Dropbox adopted the few consumer-friendly features of the clause simply to please its users, to forestall any finding of unconscionability based on the class action waiver, or to try to retain users who might object."