ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Monday, April 15, 2024

Richard Frankel on the Corporate Response to Mass Arbitration

Frankel_bio_v2We have touched on this topic a few times before. We noted a challenge in the Seventh Circuit to mass arbitration here, and we provided Roku’s terms of service, which provide an illustration of the new practice of “batch arbitration.”  Richard Frankel (right) has undertaken the first large empirical study, as far as I know, of the corporate response to mass arbitration. Batch arbitration is just one of the tools in the new corporate arsenal. The article, Fighting Mass Arbitration: An Empirical Study of the Corporate Response to Mass Arbitration and Its Implications for the Federal Arbitration Act is available on SSRN here.

Professor Frankel looks at 82 arbitration clauses that corporations have introduced in response to mass arbitration. The new clauses introduce three innovations. First, over 80% of the clauses require pre-dispute mediation before a customer can bring an arbitration action, and failure to mediate may lead to dismissal of the arbitration claims.  Second, about 40% of the corporations in Professor Frankel’s data set are experimenting with variations on batch arbitration, in which a few claims are selected for arbitration.  The outcomes in those cases creates a baseline. The corporation then settles the remaining suits through mediation and only pays arbitration fees for a handful of cases.  Finally, corporations are seeking out arbitral bodies that charge low fees.

Arbitration
Image by DALL-E

Professor Frankel makes two very important points with respect to these corporate responses to  mass arbitration.  First, unsurprisingly, the effect of these new corporate measures is to suppress claims and make the arbitration process more procedurally complex and time consuming.  Second, Professor Frankel contends that the new forms of arbitration that corporations have made part of their terms of service are not covered under the Federal Arbitration Act (FAA).  That means that states can regulate in this area to prevent corporations from using new forms of arbitration to suppress claims. Indeed, Professor Frankel argues, the rise of mass arbitration illustrates that the FAA is ill-suited to address the claims affecting large groups of people. 

The Article traces the development of the FAA from "sleepy law" (7) to the primary mechanism that has allowed corporations to evade liability through class action bans, "even where such provisions impede injured parties from pursuing claims." (13) Plaintiffs' attorneys responded with mass arbitrations, a subject that we have covered, most recently, here.  That background sets the stage for Professor Frankel's empirical study of the corporate response.

Guess what! Nearly 90% of corporations in the study still use mandatory arbitration provisions.  The most popular response to mass arbitration, employed by 80% of corporations with mandatory arbitration provisions, has been to require some sort of pre-arbitration procedures, some of which toll the statute of limitations, some of which don't.  About 40% of the corporations have introduced batch arbitration requirement.  Batch arbitration can be combined with a bellwether approach, in which a few representative claims are heard and then become the basis for negotiations of a global settlement.  National Arbitration and Mediation and ADR Services are favored arbitration providers among the companies that do impose batch arbitration requirements on their customers or employees. Excerpt from a retreat for partners and associates who came up with these plans captured on video below.

The study includes lots of nuance and particularized evaluation of the techniques involved, explaining the processes and advantages to corporations of the various mechanisms adopted.

The next section of the Article weighs the effects of corporate responses to mass arbitration on access to justice.  Professor Frankel summarizes the effects of pre-arbitration exhaustion requirements as follows:

While pre-arbitration exhaustion carries the appeal of helping to resolve a dispute through informal mediation and thus avoiding the need to go through arbitration, it also leads to delay and erects additional hurdles for plaintiffs seeking to vindicate their rights. (36)

The new pre-arbitration mediation requirements differ from earlier versions of the same mechanism in that it appears that their primary goal "is simply to make it harder for claimants to file suit." (37). Moreover, "some pre-arbitration requirements seem to have no clear purpose other than to make mass arbitration more difficult or to lay traps for claimants."  Third, despite corporations' descriptions of pre-arbitration mediations as "informal," they sometimes impose onerous production burdens on claimants beyond what a court might require. (39) Finally, the pre-arbitration requirements provides corporations with a ready defense, as they can allege that claimants failed to exhaust alternatives to arbitration or litigation. (40-43)

The main effect of batching is delay, and at least two courts have cited that delay in striking batching requirements as unconscionable. (44) Batching and bellwether approaches reveal the duplicity of the class-action waiver strategy. Corporations attacked class arbitration on the ground that arbitral bodies are ill-suited to handle mass claims. Now they seek to force claimants to adjudicate their claims in batches, but on terms that the corporations control. (46-47). That same duplicity underlies corporate approaches to fees. Corporations defended class-action waivers by claiming that individual arbitrations were still convenient for claimants, as the corporations paid the fees. Then came mass arbitration, and it because clear that the corporations always assumed that class-action waivers would deter claims, because mass arbitration revealed that corporations did not anticipate paying fees for all of claimants who availed themselves of the arbitration mechanism.  In response to mass arbitration, corporations sought to defer paying fees through new mechanisms, batching and bellwether strategies that are designed to make most of the claims, and their attendant fees, disappear. (48-49)

In the final substantive section of the paper, Professor Frankel argues that many of the responses to mass arbitration fall outside of the FAA, mostly because they do not further the FAA's aim of speedy dispute resolution. That does not render them unlawful, but it does eliminate the preemption doctrine that has prevented states from regulating arbitration clauses that do fall within the FAA. Professor Frankel explains why both pre-arbitration mediation requirements and batching are not the sort of proceedings covered by the FAA. (50-55).

Professor Frankel discusses various legislative interventions that could strike down pre-arbitration mediation requirements as well as batching or bellwether schemes. (55-58) More radically, he suggests that batch arbitration exposes the doctrinal error at the heart of the SCOTUS rulings, culminating in Concepcion and Italian Colors, that treated class action waivers as enforceable under the FAA.  "[T]he Supreme Court’s notion of what makes a proceeding an arbitration under the FAA—that it is speedy, bilateral and procedurally simple—cannot be squared with mass harm." (59)

So, to sum up. The corporate response to mass arbitration reveals corporate ingenuity in seeking to throw up barriers to the vindication of contractual rights.  At the same time, it reveals their duplicity, claiming to leave open paths to justice that they have intentionally foreclosed.  The Supreme Court has indulged this duplicity, as Justice Kagan put it, "admirably flaunted rather than camouflaged" in opinions that made clear that the FAA, as interpreted by the Court, encourages the adoption of class-action waivers as a means of escaping accountability for contractual and statutory violations. The response to mass arbitration makes that duplicity impossible to ignore and opens a path, both to renewed state regulation of arbitration clauses and to the reconsideration of the Court's precedents that now, more clearly than ever, stand between claimants and the opportunity to vindicate their rights.

The Court's conservative majority is stuck between two fitting statements of its ethos.  As Justice Kagan noted, it wants to tell claimants "too darn bad."  But you guys are legends!  Don't follow precedents that have proved themselves unworkable!  Which brings us to our second statement about the ethos of the Roberts Court's super-majority.

Screenshot 2024-04-13 at 11.26.50 AMYou can buy the t-shirt here.

Congratulations to Professor Frankel!  It's not just a law review article; it's a legislative agenda and a litigation strategy!

https://lawprofessors.typepad.com/contractsprof_blog/2024/04/richard-frankel-on-the-corporate-response-to-mass-arbitration.html

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