The Threat of Mass Arbitration: How Companies Can Avoid Becoming the Next Target

This essay is included in Insights 2024, a collection of articles and videos addressing important emerging legal issues in the year ahead.

The plaintiffs’ bar is taking an old adage to heart: If you can’t beat ’em, join ’em. After a decades-long battle against mandatory arbitration agreements—with little success to show for it—plaintiffs’ counsel are increasingly embracing mass arbitration to pressure companies to settle for tens, even hundreds, of millions of dollars. 

Mass arbitration filings seek to leverage millions in mandatory arbitration fees to extract hefty settlements vastly disproportionate to the merits of ostensible claims. By simultaneously filing—or threatening to file—as many as hundreds of thousands of cookie-cutter, often unvetted arbitration demands, plaintiffs’ firms are forcing companies to choose between paying exorbitant fees before ever reaching the merits or acceding to massive settlement demands. And, in several cases, courts have rejected various arguments seeking to limit mass arbitrations.

To help defray claimants’ costs, third-party litigation funding is often used to advance filing fees. But companies have ended up paying the heaviest price. DoorDash reportedly reached individual settlements totaling US$85 million to resolve worker misclassification claims brought by its drivers. To avoid a similar fate, some companies have opted to discontinue using arbitration despite its effectiveness in resolving consumer and employment disputes efficiently and fairly.

So far, mass arbitration remains relatively unfamiliar to many businesses with arbitration provisions. But as its popularity increases, so do the risks companies face. To mitigate risks and manage expenses, companies should keep in mind the following best practices: 

Require pre-dispute resolution. A company may require claimants to exhaust a pre dispute resolution process before filing an arbitration demand. This promotes early resolution of disputes without incurring arbitration fees for either side, and it deters frivolous mass claims by imposing individualized, procedural prerequisites to arbitration.

Insist on individualized proof of an arbitration agreement. Plaintiffs’ firms have recruited mass arbitration claimants through social media advertising without performing basic due diligence. Companies have seen instances of obviously fake claimant names, potentially stolen or otherwise false identities (including dead individuals on claimant lists), or single claimants appearing on multiple counsels’ claimant lists targeting the same company for the same alleged conduct. Insisting on individualized proof of an arbitration agreement before the arbitral body (e.g., a process arbitrator) or before the court (if subject to a claimant’s petition to compel arbitration) can blunt the effectiveness of extortionate mass arbitration threats. Depending on the product or service at issue, such proof can include purchase records or confirmation that each claimant has an account with the company.

Require individualized information to initiate any filing. Requiring firms to collect and provide detailed, claimant-specific information as a pre-requisite to filing can also deter firms from bringing mass arbitrations without adequate pre-claim diligence.

Mass arbitration waivers. Some companies have revised their arbitration agreements to provide companies the right to opt out of arbitration and proceed in court if more than a certain number of arbitration claims are filed (e.g., 50-100). 

Sequencing procedures. Companies can sequence mass arbitration claims to prevent simultaneous assessment of case administration fees for thousands of arbitration demands. This creates a more manageable fee and case schedule, while neutralizing unwarranted settlement pressure of a single multimillion-dollar administrative fee invoice. Options include arbitrating initial test cases with a mediation to follow or batching claims into manageable tranches. 

Courts have started weighing in on the enforceability of these and similar arbitration provisions. For example, some mass arbitration sequencing procedures have withstood court scrutiny. E.g., McGrath v. DoorDash, Inc. (N.D. Cal.) (holding that “mass-claims protocol” permitting companies to “bellwether up to 10” cases at a time was “fair and impartial”). Others have not based on concerns that the procedures at issue, among other things, excessively delayed the processing of claims, including by requiring consumers to wait months if not years before filing arbitration demands; risked time barring consumers’ claims under applicable statutes of limitation; and/or raised due process concerns by potentially requiring that decisions in bellwethers be applied as binding “precedent” to all cases. E.g., MacClelland v. Cellco Partnership (N.D. Cal.); Heckman v. Live Nation Entm’t (C.D. Cal.).

In considering how to tailor their arbitration agreements to address mass arbitration risk, companies must be mindful of both this evolving area of the law and the strategies that best suit their needs.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Randall W. Edwards, an O’Melveny partner licensed to practice law in California; Esteban Rodriguez an O’Melveny partner licensed to practice law in California; and Ashley Pavel, an O’Melveny counsel licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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