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The only parties left stewing over the increased use of arbitration — large consumer plaintiff and defense class-action firms — are now those actively seeking to destroy it. Should they succeed in killing arbitration, the "who," "where" and "how" would make for a predictable board game: class-action firms in mass arbitration with social media.
While there are many well-known ills of social media, the ability to microtarget a company's customers to manufacture grievances and solicit mass arbitration claimants is one of the lesser-known malevolent uses. Instead of inefficient highway billboards, plaintiffs' firms now use Instagram and TikTok to identify a company's customers and place specific advertisements enticing them to provide limited information in exchange for the promise of a cash settlement. During the only minuteslong process of inputting information about their experience with a financial institution, consumers are then prompted to agree to become a mass arbitration claimant and execute an attorney-client retainer agreement.
The result of this campaign is that the financial institution receives a demand letter from a large plaintiffs' firm threatening to file individual arbitrations on behalf of hundreds or thousands of claimants, unless a massive settlement is reached. Arbitration is used because businesses are required to pay the vast majority of fees to initiate and administer an arbitration, even if the business prevails. As a result, a company facing arbitration against 1,000 customers would be looking at a $5 million arbitration-fee bill. (Most famously, Uber was hit with a $92 million bill for 31,000 demands.) Add on the costs of hiring defense counsel and it's easy to see why a settlement becomes an attractive option to a targeted business.
The mass arbitration model has now been in widespread use for the last five years. Courts have refused to intervene, citing arbitration agreements as removing their jurisdiction to do so. Arbitral authorities, like the American Arbitration Association, have made small progress in adjusting fee schedules and appointing "process arbitrators" to adjudicate some common disputes, but these changes have had limited impact. And consumer advocacy groups have wallowed in the schadenfreude of businesses now complaining about the arbitration process, without realizing the real harm that could be done to consumers left without an informal dispute-resolution process.
As a result, some companies (Amazon being the most prominent example) have abandoned arbitration altogether. Others are poised to do the same. But there is no reason to throw the baby out with the bathwater. Instead, the best way to address the risk of mass arbitration is to prepare to defend a demand before it ever arrives.
The element of surprise has worked in favor of mass arbitration plaintiffs' firms over the past few years. After all, the tactic of amassing a large number of claimants to initiate arbitration is a new phenomenon and many businesses had no strategy to address such a risk. Prior to 2018, courts had not yet been asked to intervene in mass arbitration disputes and the arbitration association had no formal process for administering them. Defense firms were struggling to advise clients on the proper course of action and often advised on costly, but futile, solutions that involved seeking relief through the judicial system. Thus, short-fuse mass arbitration demands that included lists of thousands of customers created, in the words of one consumer advocate,
But, in 2023, surprise is no longer an excuse. Any financial institution with an arbitration provision should be prepared for a mass arbitration demand to arrive and have a playbook ready. Any plan must involve at least the following critical elements.
First, financial institutions should interview and coordinate with defense counsel now. No time should be wasted following the receipt of a mass arbitration demand interviewing firms and negotiating rate and fee structures. Those elements should be worked out beforehand, leaving resources for addressing the demand itself.
Next, relationships should be built with similarly situated companies so that knowledge can be shared regarding the tactics of mass arbitration firms. Because of the private nature of arbitration, receiving a mass arbitration demand can feel like a lonely experience. It can be difficult to find others who have received (and handled) similar threats. But industry groups and outside counsel can be a beneficial resource for collaboration. Additionally, employees are regularly inadvertent targets of mass arbitration solicitations because they are oftentimes also customers. Thus, avenues should be created for employees to report mass arbitration solicitations so that the legal department can investigate any potential campaigns.
Additionally, executives and board members should be primed for the cost of mass arbitration and be armed with risk analysis. These costs should be explained before the receipt of a demand, to reduce the "in terrorem" nature of a demand letter and settlement offer with a short turnaround time. Mass arbitration firms know that their most significant settlement leverage is before arbitration fees being paid and, thus, often manufacture artificial deadlines and threats of filings to induce panic.
Arbitration agreements should also be analyzed and revised to account for mass arbitration, introducing elements that will require individualized analysis of each arbitration demand. For example, pre-arbitration notice provisions can require specific information about each individual claim to be included in demand letters. Also, expensive arbitration administrators with no mass arbitration rules should be eliminated from arbitration agreements.
Finally, resources should be allocated to people and tools that allow a company to quickly vet a large number of mass arbitration demands. For example, a bank facing a mass arbitration demand complaining about the legality of certain fees should be able to quickly identify whether a mass arbitration claimant was ever charged such a fee. Experience shows that many mass arbitration claimants are not thoroughly vetted by counsel and, as a result, demands are littered with claimants who have never even suffered the alleged harm. The most important resource of any financial institution facing a demand is knowledge and information about its customer's history — something rendered meaningless without the tools and resources to analyze and deploy it.
Mass arbitration is a fact of life in modern consumer finance litigation. Those hoping it will go away through court decisions or legislative change are primed to be sorely disappointed. Rather, mass arbitration can only be combated through preparedness, education and resolve. Hoping that a demand will never come across the desk is not a strategy.
