Class actions have long been a bugbear for large corporations. They are immensely expensive and can pose existential risk to firms when claims are large. The corporate defense bar has long complained that class actions are used to blackmail corporations, forcing them to settle unmeritorious or even frivolous claims. Over decades, corporations fought back by obtaining legislative reform and other remedies. Their most powerful weapon, however, was the arbitration clause. Over a series of Supreme Court cases, the corporate defense bar persuaded the Court that the Federal Arbitration Act should be interpreted to require courts to give broad deference to arbitration provisions in contracts. Arbitration provisions, along with class action waivers, ensured that consumers, employees, and other counterparties would not be able to bring class actions against corporations, or even sue them in federal court. Instead, individuals would be required to bring claims piecemeal before a private arbitrator. This ruled out all but the richest claims, and protected corporations from many of the class actions that they would otherwise face. Or so it seemed.
In the late 2010s, a small group of plaintiffs’ lawyers hit upon a substitute for the class action—what would come to be known as “mass arbitration.” In a mass arbitration, like in a class action, lawyers represent hundreds or thousands of plaintiffs who have common claims against a single defendant. But they have individual lawyer-client relationships with each plaintiff, and bring their claims en masse in arbitral tribunals. Mass arbitrations are expensive and risky for plaintiffs’ lawyers because the lawyers must pay, or obtain financing for, the cost of contacting thousands of clients and litigating the cases individually. But the costs are even higher for defendants, who must pay filing fees as well, and are often required to pay the plaintiff’s attorneys’ fees under the terms of the arbitration clause. Mass arbitration is a fast-growing practice, but it raises many questions and faces new challenges as defendants regroup and redraft arbitration clauses. In this article, we review recent developments and offer an evaluation of the promise and pitfalls of mass arbitration as a substitute for class actions.
The Arbitration Revolution
By the mid-2010s, arbitration had virtually replaced litigation for some common types of claims. Most American workers were subject to arbitration agreements that limited their ability to challenge employment practices in court. Mandatory arbitration clauses were also ubiquitous in contracts for consumer products and services, shunting disputes over everything from overcharges to design defects into private, confidential arbitration.
With filing fees alone totaling hundreds of dollars, individual arbitration made no sense for all but the rarest high-dollar claims. The traditional solution to such collective action problems—the class action—was barred by the class-action waivers in most arbitration agreements.
The effect of these provisions was dramatic. A major wireless provider saw just six claims from 2011 to 2014 from its 57 million customers. A fast-food chain with thousands of employees nationwide faced just four demands over the same period. One study estimated that mandatory arbitration had slashed some 98 percent of employment-related claims.1
Some courts declined to enforce class-action waivers on the grounds that they made it cost-prohibitive for claimants to vindicate their rights. But the US Supreme Court put an end to that in 2013, holding that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”2 The pioneers of mass arbitration would soon put that proposition to the test.
Mass Arbitration’s Pioneers
In 2018, a handful of enterprising plaintiffs’ firms launched the first wave of mass arbitrations, filing thousands of employment-related demands against ride-sharing platforms Uber and Lyft and fast-casual mainstay Chipotle. These initial campaigns were soon followed by similar efforts against DoorDash, Peloton, Intuit, and others.
The filing fees for these efforts ran to millions of dollars—far more than the $400 it would have cost to file a single class action in federal court. But the pioneers of mass arbitration were banking they could turn two central features of the arbitration system to their advantage.3
The first of these features—counterintuitively—was the cost of arbitration itself. Although the up-front costs of arbitration are high for claimants, they are higher still for defendants. Those costs meant little to companies facing just a handful of arbitration claims a year. But mass arbitration aimed to exploit the differential at scale. While it cost an estimated $1.5 million to file 6,000 arbitration demands against DoorDash, those claims cost DoorDash $12 million in its own up-front fees—real money by any measure.4
The second feature was the prevalence of fee-shifting. Most arbitration contracts included provisions that required the defendant to reimburse successful claimants’ expenses. As long as arbitrations remained rare, and successful claimants rarer still, these fee-shifting provisions were principally for show—a way to assure courts that mandatory arbitration was not completely one-sided. A defendant facing thousands of demands, however, had to contend with the risk that it could be made to pay millions on top of whatever damages the claimants were awarded.
As for why mass arbitrations arose when they did, the best theory invokes two roughly contemporaneous events: the rise of litigation financing and the rise of social media. Litigation financing enables plaintiffs’ firms to afford the upfront arbitration fees. Social media provided an efficient method for contacting victims of corporate wrongdoing. Plaintiffs’ firms have further developed platforms for gathering information about claims and maintaining relationships with clients.5
The Backlash
The first wave of mass arbitrations confronted corporate defendants with the very risk they had contracted to avoid—meaningful exposure to liability from their customers and workers. The US Chamber of Commerce, which had previously defended class-action waivers on the grounds that they did not prevent multiple individual arbitrations, now argued that mass arbitration was extortionate.6 Among the businesses that had imposed the arbitration provisions exploited by mass arbitration, the response ranged widely.
At the extremes, Amazon announced that it would cease mandating arbitration after it faced thousands of arbitration demands complaining that its Alexa virtual assistant surreptitiously recorded peoples’ conversations.7 Food-delivery app Postmates simply refused to participate in arbitration or pay the fees it had agreed to, arguing that the mass filings were “de facto” class actions.8 And Uber sued its arbitration service provider, AAA, to enjoin it from applying its own rules.9
Between these scorched-earth alternatives, many looked for ways to adapt the system to reflect the new reality. The result was a sharp increase in competition among arbitration providers over which could offer the optimal rules and procedures for handling mass arbitration.
Adaptation
The principal response to the mass arbitration revolution has been a change in how arbitration service providers handle mass demands. Some once-obscure providers took advantage of the disruption to draw clients from legacy providers with the promise of more favorable rules. Meanwhile, the most popular arbitration providers, AAA and JAMS, looked for ways to adapt their existing procedures.
AAA led the way, adding special rules for mass arbitrations in 2021. Those rules have been substantially revised for 2024,10 with JAMS introducing its own rules at the same time.11 The rules address the challenges of mass arbitration in several ways.
First, they eliminate some of the uncertainty occasioned by the first wave of mass arbitrations by making clear that mass arbitration is a proper use of the arbitral forum.
Second, they uncouple fees from the number of arbitrations. Once the number of substantially similar arbitration demands reaches a certain threshold, both the claimants and defendant pay a flat up-front fee, with additional fees accruing hourly, rather than on a per-arbitration basis.
Third, they include administrative measures meant to enhance efficiency. This includes the use of “process arbitrators” to review filings for compliance and to handle case-processing issues before demands are handed off to the arbitrators who will determine the merits.
Finally, the rules offer a quick off-ramp. AAA’s rules include a mandatory mediation before the demands are assigned to an arbitrator for a ruling on the merits.12 JAMS offers mediation on a voluntary basis.13
Evaluation
Many scholars and other commentators have bewailed the demise of the class action at the hands of the Supreme Court. They argue that the class action is the only way to achieve remedies for victims of corporate wrongdoing when individual harms are small but aggregate to large amounts. Critics of class actions argue that class actions are frequently abused by plaintiffs’ lawyers, whose incentives are not always aligned with those of class members. Some class actions result in damages that are so paltry on a per-victim basis that victims do not bother to collect them, raising questions about why plaintiffs’ lawyers should receive millions of dollars in fees. A natural question arises whether mass arbitration is subject to the same criticisms or defenses, or may be regarded as a serendipitous improvement on the traditional mechanism for aggregating claims.
To answer this question, we briefly review the standard arguments for and against class actions.14 On the plus side, class actions economize on litigation costs by placing common factual and legal issues before a single court in a single proceeding rather. This avoids the redundancy of litigating thousands or even millions of claims. As noted earlier, class actions also enable victims of wrongdoing to recover for relatively small claims that do not justify litigation costs in individualized proceedings.
Class actions, however, are beset with agency costs. The incentives of plaintiffs’ lawyers are not necessarily aligned with those of the class members. If lawyers are paid on an hourly basis, they may extend litigation beyond what is necessary to resolve the claims. If they are paid a share of the recovery, they may settle litigation sooner than appropriate. While these problems exist for individualized litigation as well, they are exacerbated for class actions because no individual plaintiff has the incentive to try to control the decisions of class counsel. Instead, judges are required to review the settlement for fairness, but judges do not always understand the interests of class members.
Critics of class actions celebrate arbitration clauses (or, really, the class action waiver included in most arbitration clauses) because they eliminate these costs. They further argue that since the defendants’ litigation costs are normally passed on to employees in the form of lower wages, or to consumers as higher prices, arbitration clauses benefit the corporate counterparties as well. Defenders of class actions, by contrast, argue that consumers and employees rarely understand arbitration clauses and would not approve of them if they did.
Mass arbitration sacrifices some of the benefits of class actions but has some advantages as well. Most important, lawyers must contact and obtain evidence from their clients, file cases individually, and potentially face thousands of individual arbitrations. Ethical and practical constraints prevent firms from representing as many plaintiffs as they could in a class action, putting a limit on the economies of scale they can achieve by aggregating claims. But, by the same token, because the lawyers must represent clients on an individualized basis, they should also be more responsive to them. The agency-cost criticism of class actions is mitigated in mass arbitrations.
Moreover, in practice, mass arbitrations rarely lead to a massive number of arbitrations along with the attendant costs for plaintiffs and defendants. Ironically, the potential for those costs encourages parties to settle. Class actions, by contrast, are frequently litigated. And in mass arbitrations that have gone forward, the parties have sometimes agreed to arbitrate a small number of test cases, which then provide the basis for negotiating the settlement.
Conclusion
The future of mass arbitration remains uncertain as plaintiffs’ lawyers, defendants, and arbitration service providers maneuver over a changing landscape. As we have seen, some corporations like Amazon have thrown in the towel and removed their arbitration clauses. It seems likely that other defendants will try to discourage mass arbitration by revising arbitration clauses. But they face the risk that if they do so, courts will hold that they are immunizing themselves from liability rather than lawfully exercising their discretion to formulate arbitration clauses under the Federal Arbitration Act. If so, mass arbitration could lead to a revival of the class action.
Arbitration services providers have an interest both in maintaining mass arbitration, which has been good business for them, and in offering ways to reduce its costs so that defendants are not scared off. The AAA reforms suggest that the providers are willing to reduce their effective fees so that they can hold on to this business as well as develop new ways to offer mass arbitration services more efficiently. But the service providers have mixed incentives. Ultimately, they are beholden to corporations, not to plaintiffs’ lawyers, for their business. It will be up to the courts to ensure that mass arbitration is a fair alternative to the class action.
Footnote(s):
1 Jessica Silver-Greenberg & Michael Corkery, In Arbitration, a ‘Privatization of the Justice System’, NYTimes (Nov. 1, 2015), https://www.nytimes.com/2015/11/02/business/dealbook/in-arbitration-a-privatization-of-the-justice-system.html; Alexander J.S. Colvin, The Growing Use of Mandatory Arbitration, Econ. Pol’y Inst. (Apr. 6, 2018), https://files.epi.org/pdf/144131.pdf; Cynthia Estlund, The Black Hole of Mandatory Arbitration, 97 N.C. L. Rev. 679, 696-97 (2018).
2 Am. Exp. Co. v. Italian Colors Rest., 570 U.S. 228, 236 (2013).
3 For the authoritative study of mass arbitration, see J. Maria Glover, Mass Arbitration, 74 Stan. L. Rev. 1283, 1340-50 (2022); see also J. Maria Glover, Recent Developments in Mandatory Arbitration Warfare: Winners and Losers (So Far) in Mass Arbitration, 100 Wash. U. L. Rev. 1617, 1620-25 (2023).
4 Glover, Mass Arbitration at 1345-46.
5 Id. at 1338-40.
6 Mass Arbitration Shakedown: Coercing Unjustified Settlements, U.S. Chamber of Comm. Inst. For Legal Reform (Feb. 28, 2023), https://instituteforlegalreform.com/research/mass-arbitration-shakedown-coercing-unjustified-settlements/.
7 Sara Randazzo, Amazon Faced 75,000 Arbitration Demands. Now it Says: Fine, Sue Us, Wall St. J. (June 1, 2021), https://www.wsj.com/articles/amazon-faced-75-000-arbitration-demands-now-it-says-fine-sue-us-11622547000.
8 Alison Frankel, On the Verge of $2.65 Billion Uber Deal, Postmates Faces Mass Arbitration Reckoning, Reuters (July 21, 2020), https://www.reuters.com/article/idUSKCN24M2RT/.
9 Alison Frankel, Uber Sues AAA To Block $100 Million Fees in ‘Politically-Motivated’ Arbitration, Reuters (Sept. 20, 2021), https://www.reuters.com/legal/government/uber-sues-aaa-block-100-million-fees-politically-motivated-arbitration-2021-09-20/.
10 Mass Arbitration Supplementary Rules, Am. Arbitration Ass’n (2024), https://www.adr.org/sites/default/files/Mass-Arbitration-Supplementary-Rules.pdf .
11 JAMS Mass Arbitration Procedures and Guidelines, JAMS (May 1, 2024), https://www.jamsadr.com/mass-arbitration-procedures.
12 Mass Arbitration Supplementary Rules at 9-10, Am. Arbitration Ass’n (2024), https://www.adr.org/sites/default/files/Mass-Arbitration-Supplementary-Rules.pdf.
13 JAMS Mass Arbitration Procedures and Guidelines, JAMS (May 1, 2024), https://www.jamsadr.com/mass-arbitration-procedures.
14 For a helpful overview, see Thomas S. Ulen, An Introduction To the Law and Economics of Class Action Litigation, 32 Eur J Law Econ 185, 185–203 (2011).