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.”

 

 

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

11th Circuit Denies Motion to Compel Arbitration of Telephone Consumer Protection Act Claim

In Gamble v. New England Auto Finance, Inc. the Eleventh Circuit Court of Appeals held that a loan agreement’s arbitration clause did not cover the plaintiff’s Telephone Consumer Protection Act (TCPA) claim. Plaintiff Gamble and New England Auto Finance, Inc. (“NEAF”) formed the auto loan agreement which requires arbitration of disputes that “arise[] from or relate[] to this Agreement or the Motor Vehicle securing this Agreement.” After the loan was paid off, NEAF began sending Gamble text messages and persisted even after Gamble requested NEAF stop, so Gamble brought a TCPA claim.

The Court refused to grant NEAF’s motion to compel arbitration because “Gamble’s TCPA claim ...arises not from the Loan Agreement or any breach of it, but from post-agreement conduct that allegedly violates a separate, distinct federal law.” The Eleventh Circuit pointed out that Gamble could bring a TCPA claim even if no agreement at all existed between Gamble and NEAF. Since Gamble paid off the loan and the texts did not arise from or relate to anything contained in the loan agreement the scope of the arbitration provision did not include Gamble’s claim.

“Clickwrap” Arbitration Agreement in Email’s Hyperlink Unenforceable

In Starke v. SquareTrade, Inc., 2019 WL 149628 (2d Cir. Jan. 10, 2019), the 2nd Circuit affirmed a district court ruling that a “clickwrap” arbitration agreement in an email’s hyperlink was unenforceable because it did not give reasonable notice. While “shrinkwrap” was the name given to contracts on the box of tangible products, “clickwrap” is the name for agreements formed when a user clicks a link as opposed to opening some packaging. In Starke, following the consumer’s purchase of a service contract, the seller sent an email to the consumer with a hyperlink that was “inconspicuously placed” at the bottom, according to the court. The court provided guidance as to what can in future transactions be done to ensure the transaction process results in a binding agreement.

Check out Proskauer Rose’s article on Starke for a detailed discussion of the reasoning, images of the screens at issue and a list of the factors the court provided.

A couple weeks later in Sultan v. Coinbase, Inc.,  2019 WL 319391 (2d Cir. Jan 24, 2019), the 2nd Circuit case found enforceable an arbitration agreement that a user agreed to when signing up to use the digital currency exchange Coinbase. Proskauer Rose discusses Sultan and outlines how some of the same factors mentioned in Starke led to enforcement.

I posted on the issue of ‘clickwrap’ agreements previously when discussing what is required to manifest assent. I excerpted an article written by Widener University Law Professor Juliet M. Moringiello entitled “Notice, Assent, and Form in a 140 Character World.”

Article Defending Some of the Supreme Court's Controversial Arbitration Decisions

A Short Defense of Southland, Casarotto, and Other Long-Controversial Arbitration Decisions, was just published in the Loyola Consumer Law Review.

The abstract follows:

Scalding criticism of Supreme Court arbitration decisions appeared in the 1990’s and is now widespread. Over twenty years ago, the Supreme Court held that pre-dispute arbitration clauses in adhesion contracts are generally enforceable. Thoughtful scholars then feared threats to consumers' and employees' rights, and today similarly warn that the Court’s recent arbitration decisions “will provide companies with free rein to commit fraud, torts, discrimination, and other harmful acts without fear of being sued.” Professors are not the only sources of strong language opposing the Court’s arbitration decisions. Under the heading “Forced Arbitration Destroys Individual Rights,” a 2015 federal court decision declares: “Today, forced arbitration bestrides the legal landscape like a colossus, effectively stamping out the individual’s statutory rights wherever inconvenient to the businesses which impose them. What is striking is that, other than the majority of the Supreme Court, whose questionable jurisprudence erected this legal monolith, no one thinks they got it right.”

From this alleged consensus of “No one thinks they got it right,” this Article dissents in significant part. While I have long opposed Supreme Court decisions on arbitration law’s separability doctrine and judicial review of arbitration awards, and would reduce adhesive arbitration agreements’ impact on class actions, I continue to sympathize with some of the Court’s long-controversial arbitration decisions.

I choose the word “sympathize” because I believe much of the criticism of the Court’s arbitration decisions does not sufficiently weigh the difficult position the Court was in when deciding those cases. The FAA was enacted in the 1920’s before the landmark federalism case of Erie v. Tompkins, the New Deal’s expansion of the Commerce Clause and thus of federal power to preempt state law, the growth of federal employment and consumer law in the 1960’s and 1970’s, and the ensuing explosion of class actions. Each of these enormous changes to our nation’s legal landscape conflicted with the premises underlying the FAA. While Congress could have amended the FAA to accommodate and be more consistent with these enormous changes, it did not. So, reconciling an old statute with a half century of law in tension with that statute’s premises became the Court’s task.

The Courts’ critics generally argue that the drafters and adopters of the FAA did not intend for it to: (1) preempt state law or (2) cover consumer and employment arbitration agreements. This Article responds to those arguments.

Arbitration Agreements in Bankruptcy

I spoke on Arbitration Agreements in Bankruptcy at the Missouri Bar Association’s Annual Bankruptcy Institute in Springfield, MO, March 9, 2018,. The topic of arbitration agreements in bankruptcy is addressed in my co-authored 2017 book, Principles of Arbitration, and in a 2018 case by the United States Court of Appeals for the Second Circuit in New York City, Anderson v. Credit One Bank.

My presentation on arbitration agreements in bankruptcy is available on  Ware’s SlideShare.

Adhesive Arbitration Agreement with Consumer Already Litigating?

The U.S. Court of Appeals for the 11th Circuit refused to enforce an adhesive arbitration agreement between a bank and a consumer customer already suing that bank.

The Dasher v. RBC Bank (11th Cir. Feb. 13, 2018) plaintiffs alleged the bank had processed debit card transactions in such a way that it would increase overdraft charges. When the suit was brought, the bank had no arbitration agreement with plaintiffs, but during the case the bank sent customers an amended customer agreement that included an arbitration provision. By continuing to use their bank accounts, the customers arguably assented to the amended customer agreement. But the 11th Circuit said that was overridden by the fact that, as Liz Kramer puts it, "Through counsel, the named plaintiff [customer] was fighting the motion to arbitrate in the courts."

Kramer's Arbitration Nation blog goes on to say: "This is an important decision for many reasons.  First, it offers future courts an alternative argument to  “waiver” in situations like this one.... Second, it offers an important reminder to defendants that courts do not take kindly to repeated motions to compel arbitration based on evolving arbitration agreements." 

The Centrist Case Against Current (Conservative) Arbitration Law

The Centrist Case Against Current (Conservative) Arbitration Law is my article just published in the Florida Law Review. 

In The Politics of Arbitration Law and Centrist Proposals for Reform, published in the Harvard Journal on Legislation, I explained how issues surrounding consumer and other adhesive arbitration agreements became divisive along predictable political lines (progressives vs. conservatives) and proposed an intermediate (or centrist) position to resolve those issues. However, The Politics of Arbitration Law did not argue the case for my proposals. It left those arguments for this Article, which makes the case against current (conservative) arbitration law, and a third article, which will make the case against progressive proposals to reform arbitration law. In other words, this Article stands out from the many other articles critiquing current arbitration law because this Article’s critique comes from a centrist, rather than progressive, perspective. For that reason, this Article’s critique may be more likely than progressive critiques to gain traction with lawmakers. 

I welcome comments directed to ware@ku.edu

Cellphone Arbitration Clauses Under Attack

Time Magazine published on Sunday a joint op-ed in which Federal Communications Commissioner Mignon Clyburn (D) and U.S. Senator Al Franken (D-Minn.) argue that cellphone carriers and other communications businesses have used class action waivers in arbitration agreements to “evade accountability by effectively locking the courtroom doors on their customers.”  

The FCC contemplates a rulemaking in February 2017 with respect to arbitration clauses in consumer communications services contracts.  

Hat tip to Mark Kantor

The Politics of Arbitration Law and Centrist Proposals for Reform

My latest article, The Politics of Arbitration Law and Centrist Proposals for Reform, is in the Harvard Journal on Legislation. Stephen J. Ware, The Politics of Arbitration Law and Centrist Proposals for Reform, 53 Harvard J. on Legislation 711 (2016).

The abstract:

Arbitration law in the United States is far more controversial when applied
to individuals than to businesses. While enforcement of arbitration agreements
between businesses sometimes raises legal issues that divide courts, those issues
tend to interest only scholars, lawyers, and other specialists in the field of arbitration.
In contrast, enforcement of arbitration agreements between a business
and an individual (such as a consumer or employee) raises legal issues that
interest many members of Congress and various interest groups, all of whom
have taken positions on significant proposals for law reform. The Consumer
Financial Protection Bureau has extensively researched and reported on consumer
arbitration agreements and is expected to issue a rule regulating, or even
prohibiting, such agreements.

This Article both explains how issues surrounding consumer and other adhesive
arbitration agreements became divisive along predictable political lines
and introduces a framework to understand and compare various positions on
them. This new framework arrays on a continuum five positions on the level of
consent the law should require before enforcing an arbitration agreement
against an individual. Progressives generally would require higher levels of
consent than arbitration law currently requires, while conservatives generally
defend current arbitration law’s low standards of consent.

This Article proposes a centrist position. It joins progressives in rejecting
overbroad enforcement of adhesive arbitration agreements due to conservative supported
anomalies in arbitration law’s treatment of contract-law defenses, legally-
erroneous decisions, and class actions. Once these anomalies are fixed,
though, this Article joins conservatives in defending general enforcement of adhesive
arbitration agreements under contract law’s standards of consent because
adhesive arbitration agreements should—contrary to progressive opinions—be
as generally enforceable as other adhesion contracts. This Article briefly concludes
by proposing language for a rule the Consumer Financial Protection Bureau
could adopt to enact the reforms advocated in this Article.

Ban on Class Waivers in Consumer Finance Arbitration Coming Soon?

The Consumer Financial Protection Bureau has proposed a rule to ban class waivers in arbitration agreements.

As the CFPB summarizes:

First, the proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service. Second, the proposal would require a covered provider that is involved in an arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the Bureau.

Hat tip to Opal Nicole Smith

NY Times Keeps Criticizing Adhesive Arbitration Agreements

Today's criticism goes beyond yesterday's criticism in arguing that the process of arbitration is biased in favor of businesses and against individual consumers and employees.

The Times asserts that arbitration’s “rules tend to favor businesses, and judges and juries have been replaced by arbitrators who commonly consider the companies their clients.” That’s quite a strong allegation and one that I think most arbitrators would dispute. Arbitrators are supposed to be neutral and a ground for vacating an arbitration award is evident partiality of the arbitrator.

Good commentary on the NY Times articles by North Carolina Law Professor Mark Weidemaier

NY Times Attacks Adhesive Arbitration Agreements as Defeating Class Actions

Today's article describes the "soaring number of" arbitration clauses in consumer and employment contracts as the "center of a far-reaching power play orchestrated by American corporations"" "to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practices."

Gee, I thought no longer doing business with companies that displease me was another option that's been working well.

Seriously, class actions seem to me a mixed bag for consumers, especially consumers who don't realize they're being damaged by sometimes-complex "illegal or deceitful business practices," so I'm skeptical of both progressives who say class actions are the only thing protecting us from disaster and businesses who say class actions are a disaster.

I don't believe the Times article cites any data suggesting consumers fare worse in arbitration than in individual (as opposed to class) litigation.

More on arbitration and class actions

Good commentary on the NY Times articles by North Carolina Law Professor Mark Weidemaier

Consumer Financial Protection Bureau Director Criticizes Arbitration Clauses Reducing Class Actions

CFPB Director Richard Cordray said pre-dispute arbitration clauses “are often buried deeply in the fine print of many contracts for consumer financial products and services, such as credit cards and bank accounts. Companies use them, in particular, to block class action lawsuits, providing themselves with a free pass from being held accountable by their customers in the courts. Companies have been able to use these obscure clauses to rig the game against their customers to avoid group lawsuits.”

Alan Kaplinsky responds: “the data in the CFPB’s arbitration study ... demonstrates that most consumers derive no benefit from class action litigation.  The threat of a class action (presumably the ‘leverage’ Director Cordray is referring to) adds nothing but a huge layer of expense in defending these largely meritless lawsuits, benefiting only plaintiffs’ attorneys.”