Samsung Challenges Mass Arbitration in the Seventh Circuit

Arbitration in the Style of Edward Gorey,
Imagined by Dall-E

In case you missed it:  There was a time when people sued corporations against which they had complaints.  In the second half of the twentieth century came mandatory arbitration clauses, which some businesses imposed on their customers and employees.  This tendency increased in the late twentieth century, and then SCOTUS decided four cases, culminating in Italian Colors, in which it embraced the arbitration-for-all model, even in cases that involve statutory rights, even if the arbitration clause includes a class-action waiver that prevents the vindication of certain kinds of rights.  Mandatory arbitration clauses, including class-action waivers became ubiquitous.  Because why not?

And then came the rise of mass arbitration, which we most recently covered here.  Mass arbitration answered the question, "Why not?".  Arbitration can be expensive too, and if plaintiffs' attorneys can line up thousands of plaintiffs to file the same claim against a company, all the sudden, the costs of arbitration rival or exceed the costs of class litigation.  

About 50,000 Samsung customers filed arbitration demands alleging that the company had violated Illinois' biometric privacy laws.  Samsung refused to pay the initial arbitration fees for all but 14 of the claimants, claiming that some of the purported claimants were deceased and others were not Illinois residents.  The American Arbitration Association administratively closed all but 14 of the cases in November 2022, as the cases could not proceed if Samsung would not pay the fees.

The customers filed suit in the US District Court for the Northern District of Illinois, petitioning for compelled arbitration and for an order compelling Samsung to pay the arbitration fees provided for in the terms and conditions associated with plaintiffs' Samsung products. In October, 2022, plaintiffs brought suit in federal court seeking an order compelling arbitration and ordering Samsung to pay the fees. 

In September, 2023, in Wallrich v. Samsung Electronics America, Inc., the district court granted Samsung's motion to dismiss with respect to 15,000 plaintiffs who had not properly alleged venue, but the court denied the motion with respect to the remaining 35,000 plaintiffs.  The court first noted jurisdiction under Section 4 of the Federal Arbitration Act (FAA), because Samsung is an international corporation.  While the court did not find venue arising under the FAA, it did find venue under 28 U.S.C. §1391 for claimants residing within the Northern District of Illinois.

Samsung's remaining arguments smack of chutzpah.  Having prevented the arbitrations mandated by its terms of service from taking place by refusing to pay fees, Samsung now argues that the federal courts lack the authority to compel it to arbitrate or to pay the fees.  No problem, Samsung insists, either because the plaintiffs can now just proceed in court, or better still, plaintiffs cannot proceed either in arbitration or in court because the federal courts lack the power to second-guess the AAA's refusal to reopen the arbitration proceedings.

The district court then rejected Samsung's various attacks on the standing of the individual claimants.  Samsung alleged that at least some of them were randos who responded to plaintiffs' attorneys' ads in obscure publications.  The court did not buy that argument.  Each plaintiff alleged residency in the district and alleged that they had purchased a Samsung device.  Samsung challenged no specific claimants, and so the court had no basis to reject claimants' factual allegations. 

Samsung raised various arguments for why the claims were outside of the scope of the arbitration agreement, including the argument that mass arbitration was a form of prohibited class arbitration.  The court reminded Samsung that questions of scope are reserved for the arbiter and thus are not reason to deny a motion to compel arbitration.  As to Samsung's various arguments for why its refusal to pay arbitration fees was not a breach or why it should not be compelled to pay such fees, the court concluded that Samsung had been "hoist with its own petard."  It wanted to avoid class, collective, or representative claims when it wrote its arbitration provision.  What it got was mass arbitration with the attendant fees.  As Shakespeare didn't put it, "You made the bed; now sleep in it."

Samsung is fighting on.  As Avalon Zoppo reports here on Law.Com, Samsung has sought an interlocutory appeal in the Seventh Circuit.  The scholar who wrote the book on mass arbitration (well, two big law review articles, anyway), Maria Glover (right), suggests that Samsung may not even succeed in convincing the Seventh Circuit that it has jurisdiction over such an interlocutory appeal.  Such appeals are appropriate to review a final judgment, but not when a district court has issued a stay and granted a motion to compel arbitration.  Samsung argues that this situation is distinguishable from the usual interlocutory appeal in such matters.  What if it turns out that 25,000 of the 35,000 claimants are not actual Samsung customers?  Why should Samsung have to pay $4 million just to establish that two-thirds of these claims never should have been brought?

Stephen Ware (below left) comments that companies, including Samsung, are already at work on an alternative to mass arbitration called "batch arbitration."  This permits the companies to arbitrate with "batches" of fifty identical claims, enabling it to reduce its fee obligations by a factor of 50.  Batch arbitration provisions also require mediation in advance of arbitration, and the next batch cannot proceed until the first batch resolves its claims.  

This is an interesting development.  Professor Ware notes that there are other options available to the Samsungs of the world, including finding arbitration associations with lower fees or joining the exodus from mandatory arbitration provisions.  I wonder about the enforceability of batch arbitration.  How can a company make one set of customers' rights to vindicate their contractual or statutory rights contingent on the conclusion of the vindication of a completely different set of customers' rights.  I assume that the contractual obligation to move through the batches is supposed to pressure plaintiffs' attorneys into settlement.  But what if the batches are represented by different law firms?  That eliminates the leverage, and when mediation stalls, each batch goes to court to compel arbitration.  And then the companies will once again be telling federal courts to butt out.

H/t: Ben Davis.