Corporate America’s Favorite Legal Trick Is Backfiring
For decades, companies have used arbitration agreements to shirk responsibilities to their customers and employees. Now the tables are starting to turn, as customers and employees use such agreements against corporations.
Victims of corporate malfeasance are turning to mass arbitration because it offers a way to force companies to pay up for their misdeeds. (Scott Graham / Unsplash)
Last year, Uber turned a quarterly profit for the first time ever. But a major obstacle stands in the way of the rideshare company repeating that achievement: a $92 million bill owed to the American Arbitration Association over claims that Uber discriminated against businesses when it said it was waiving Uber Eats charges to certain black-owned restaurants after the police killing of George Floyd.
Uber has been trying to sue its way out of paying the tab — but a recent New York appeals court decision blocked their request for an injunction to stop the arbitration association from collecting the bill.
Uber is one of several companies that has been targeted by a new legal tactic for vindicating the rights of aggrieved consumers and employees: “mass arbitration,” which is based around the very same tool that corporate America has used for decades to insulate itself from legal responsibility.
The strategy relies on recruiting tens of thousands of injured customers or employees of a company to simultaneously file claims requesting that their complaints go to arbitration, a process in which a private mediator selected by the targeted company referees the dispute. Unlike a class action lawsuit, each arbitration claim must be litigated individually, one by one.
Victims of corporate malfeasance are turning to mass arbitration because it offers a way to force companies to pay up for their misdeeds — and, in a world where many companies forbid customers and employees from suing them, it is often the only way to do so.
This new grassroots strategy suggests that corporate America’s favorite trick of using arbitration rules to avoid liability could be losing some of its potency. This legal tactic was further watered down earlier this week, when the Supreme Court unanimously ruled that companies could lose their right to arbitrate if they fail to invoke that privilege in a timely manner.
The costs and fees associated with responding to a single arbitration claim are not particularly high. But when a company is hit with tens of thousands of such claims at once, they mount quickly. Faced with tens or even hundreds of millions of dollars in fees, many companies choose to settle out of court, or permit a class action lawsuit against them instead, leading to hundreds of millions of dollars in restitution for wronged customers and employees over the past several years.
Some corporations are trying to fight back by changing the rules of arbitration — but for now it seems that a few rogue law firms have figured out how to hold some of the United States’ biggest companies to account.
“What we’ve been seeing, and may continue to see, is relatively quick resolutions of claims with claimants reporting receiving something along the lines of what they thought they were owed,” said Georgetown Law School professor Maria Glover, an expert in mandatory arbitration law.
Protect Your Company From Lawsuits With This One Weird Trick
When a company breaks the law at the expense of its customers or employees, the injured parties have a right to sue for damages.
Or at least they did, until 1991.
That year, a 7-2 Supreme Court decision found that companies can force their employees or customers to give up their right to sue and require them to use arbitration instead. The resolutions reached through the arbitration process are backed by the force of law.
In most arbitrations, companies have the upper hand. Not only are they able to select the arbitration referee, but they also employ mandatory arbitration agreements that can require the injured party to pay an up-front fee as high as $1,900 just to bring their claim.
Many parties, like victims of wage theft or consumer scams, have complaints that are worth less than the fees that would be required to arbitrate them. That means that going the arbitration route “would not be an economically rational proposition,” said Glover.
No wonder that once the Supreme Court opened the doors to arbitration, employers and sellers rushed to weaponize mandatory arbitration agreements against workers and consumers.
“It was almost malpractice for a lawyer not to advise their employer-client to adopt one of these things,” said Cynthia Estlund, professor at NYU Law School and an expert in employment law.
Today, the majority of American workers are covered by mandatory arbitration agreements, as are customers of major companies such as DoorDash, Chipotle, and Peloton.
It’s impossible to know for sure how many claims aren’t being brought due to mandatory arbitration provisions. But the current number of arbitration claims is strikingly low. Fewer than six thousand cases are filed per year, among the more than sixty million American workers who are subject to mandatory arbitration, according to the Economic Policy Institute.
Mandatory arbitration “seems to have suffocated employment claims to a significant degree,” said Estlund. “What employers are really trying to do when they impose these agreements is not so much choose a simpler procedure but close down claims altogether.”
The Law Firm That Broke Mandatory Arbitration
For nearly thirty years, it seemed that corporations had cracked the code and fully insulated themselves from a wide swath of legal claims. Then, in 2018, something interesting and unexpected happened.
A few law firms, most prominently the Chicago-based Keller Postman, started filing thousands of arbitration claims against Peloton, Family Dollar, TurboTax, and other major companies employing mandatory arbitration agreements.
This strategy was founded on weaponizing the fact that it’s not only consumers or employees who are required to pay fees to arbitrators. Companies must do so as well.
When companies are hit with thousands of arbitration claims at once, these fees can mount to astronomical sums. A 2021 mass arbitration effort against Intuit left the financial software company on the hook for up to $128 million in fees.
“This tactic is basically giving the employer exactly what they claim to want,” said Estlund, which is bringing complaints to their chosen arbitrator. But perhaps unsurprisingly, it turns out that companies that mandate arbitration often don’t like the taste of their own medicine.
Faced with this financial onslaught, some companies have chosen to settle the claims filed against them, to the tune of huge sums of cash. Keller Postman claims that it has secured more than $200 million for its mass arbitration clients.
Some companies have chosen to abandon arbitration altogether and take their chances in the courts. This means effectively ditching what for thirty years has been corporations’ main strategy for shirking their legal responsibilities to their consumers and employees.
After being hit with more than seventy-five thousand arbitration claims from customers who said that Amazon’s Echo devices had recorded their conversations without their consent, Amazon removed a mandatory arbitration provision from its terms of use — which means that customers can now sue.
Companies unwilling to abandon arbitration have employed creative strategies to squirm out of their own arbitration contracts. For example, Uber and Family Dollar sued the arbitration forum that the companies themselves selected for enforcing the arbitration agreements that the companies wrote.
In its 2020 lawsuit, Family Dollar asked the judge to invalidate many of the arbitration claims against it, for the reason that the cash amount the claimants were seeking was smaller than the corresponding arbitration fees — which is, of course, precisely the reason that companies have long sought to compel arbitration rather than face lawsuits. Family Dollar settled out of court before a judge could rule on its argument.
Limits of Mass Arbitration
Ultimately, mass arbitration can’t completely replace people’s right to sue. It is an expensive and labor-intensive tactic, since it requires both the capital to pay the arbitration fees and the staff to actually arbitrate all the individual claims — or at least to threaten to do so. This state of affairs means that many low-dollar amount claims can’t be used in a mass arbitration strategy, because they won’t make back the money required to bring them.
“It’s not going to get the lowest low-value claims,” Glover said. “But it’s getting claims that aren’t going to be pursued through the federal court system, because they would never be economically viable.”
Mass arbitration also can’t address claims that require individual investigation and proof, like discrimination at the hands of a specific supervisor, since the expense of investigating the claim outweighs the potential reward.
“It is just more expensive to prove discrimination than if there’s a legal question about whether overtime was owed,” Glover said.
And while the advent of mass arbitration took them by surprise, corporations are now learning to fight back. In arbitration, defendants still get to set the rules, and the companies being targeted aren’t afraid to play dirty.
Companies can try to eliminate some provisions of contracts that obligate them to pay arbitration fees, or even compel plaintiffs to pay those fees, if the claim is dismissed. Some have already started to do so.
Corporations could also try to force plaintiffs to bring their claims before smaller arbitration companies that can only handle a few cases at a time, meaning that while it would be theoretically possible for plaintiffs to make back their up-front fees, they’d be forced to wait years for a cash trickle to pay itself out.
Additional strategies may still be in the works. “I think we’ll see other [company] provisions that try to make [mass arbitration] just completely uneconomical, inefficient, and burdensome,” Glover said.
But that doesn’t mean that mass arbitration is going away. Some states have limits on how far companies can shift fees onto plaintiffs, and not all companies will adapt as quickly as the savviest and wealthiest have started to. The future of mass arbitration may be in bringing claims against smaller, less well-lawyered companies that are still large enough to offer significant financial rewards, Glover argues.
“I can’t imagine that life is going to get easier for claimants, but I’m not sure that courts are going to let it get so hard that we’re back to where you simply can’t claim anymore,” Glover said. “The emperor’s nudity has been revealed.”