In recent years, a new factor has entered the equation for employers considering employee arbitration programs: mass arbitration.
In this piece, we explain the mass arbitration problem and then turn to some possible steps employers can consider to mitigate the risks.
What Is The Mass Arbitration Problem?
For many years most plaintiffs’ lawyers have seen arbitration agreements as the enemy and have tried to prevent their enforcement. That’s understandable: arbitration agreements make it harder to turn employment disputes into the kind of massive multi-plaintiff litigation that scares employers and rewards plaintiff’s lawyers.
But in recent years, some creative plaintiffs’ lawyers have found a way to turn arbitration agreements to their advantage – indeed, into a lethal weapon. It’s a multi-step process. Step one: plaintiffs’ lawyers identify a legal theory that might have been the basis of a class or collective action against an employer that uses arbitration agreements. Step two: they use social media and internet advertising to sign up as clients hundreds or thousands of individuals who work or worked for the employer. Step three: they file an arbitration demand on behalf of each individual – hundreds or thousands of individual arbitration demands. Step four: the plaintiffs’ firm contacts the employer with a settlement demand.
Being named in hundreds or thousands of individual arbitration demands is, for most employers, a disaster, for several reasons:
Upfront filing fees. Many employers agree in their arbitration agreements to pay most, if not all of the initial filing fee for an employee arbitration demand. If the employer’s arbitration agreement names AAA as the arbitration administrator, the total of the initial filing fee plus the initial case management fee for each demand is currently $2,950, of which the employer must pay at least $2,650. If the arbitration administrator is JAMS, the initial filing fee per demand is currently $1,750, of which the employer must pay at least $1,350. These fees are due at the beginning of the case and are often non-refundable.
Early deposit for arbitrator compensation. Almost all employment arbitration agreements provide that the employer will pay, at least initially, for the arbitrator’s compensation. Indeed, JAMS prohibits employers from requiring employees to pay any part of the costs of arbitration other than part of the initial filing fee. Many arbitrators require an initial deposit shortly after they are selected. The amount is up to the arbitrator but it’s often in the range of $5,000 to $15,000.
Additional fees and costs. Of course, the fees due at the outset of the case are only the tip of the iceberg. If a case needs to be arbitrated, the employer will incur significant lawyers’ fees and costs – almost certainly tens of thousands of dollars per case. And, as a case gets close to an arbitration hearing, the arbitration-sponsoring organization will charge additional administrative fees and the arbitrator will require a significant additional deposit.
Bottom line, an employer who receives 200 individual arbitration demands will probably face – just within the first 90 days – roughly $500,000 to $1,500,000 in arbitration-related costs and fees: $270,000 to $590,000 in filing fees ($1,350 to $2,950 per demand times 200 demands); plus arbitrator compensation deposits of $100,000 to $900,000 ($5,000 to $15,000 per demand times 20 to 60 demands depending on quickly arbitrators are assigned). And, if arbitrators are selected in 20 cases per month, additional arbitrator compensation deposits will continue to become due at a rate of $100,000 to $300,000 per month. All of these amounts will be due even if none of the arbitration demands has any merit. If there were 2,000 claimants rather than 200, all of these numbers, obviously, would be ten times larger.
A typical arbitration agreement does not provide an employer any mechanism to avoid or challenge these costs. Courts have generally found employer challenges to mass arbitration campaigns barred by the terms of the arbitration agreements themselves. Indeed, one federal judge found irony—and even “hypocrisy”—in a company asking a court to block mass arbitration after corporate America has urged for decades that arbitration agreements be enforced as written. See Abernathy v. DoorDash, Inc., 438 F. Supp. 3d 1062, 1067-68 (N.D. Cal. 2020). Arbitrators will presumably consider objections to mass arbitration – but only after all of the up-front and early stage arbitration fees have been paid. And the State of California has piled on: it has enacted a law commonly known as “SB 707,” imposing draconian penalties on employers that don’t pay arbitration filing fees within 30 days of when they are due.
Several sophisticated and well-funded plaintiffs’ firms now reportedly invest time and money in signing up claimants for mass arbitration campaigns. When they have a critical mass of claimants, they often present the employer with a 7 or even 8-figure settlement demand. A settlement demand is hard to refuse if the alternative is to pay a comparable amount in up-front arbitration fees, before any litigation can even start. Indeed, receiving a mass arbitration demand letter is arguably worse than receiving a class or collective action complaint.
Mitigation Options: Experimental and Potentially Dangerous, but Worth Considering
Employers that already have, or are considering entering into, arbitration agreements with large numbers of employees (or independent contractors) should assess their potential mass arbitration exposure. Some organizations may conclude that they aren’t large enough to be a likely target of a mass arbitration campaign. For others, the risk of a mass arbitration campaign might be so high that they decide to abandon arbitration agreements altogether.
Employers that don’t want to give up on arbitration agreements altogether can try to make a mass arbitration campaign harder for plaintiffs’ lawyers to pull off or to reduce the settlement pressure a mass arbitration campaign would create. Possible steps include:
- Require a grievance and conciliation step before an arbitration demand can be filed
- Require claimant to pay a higher share of the arbitration filing fee (to the extent allowed by the arbitration sponsoring organization)
- Require a non-cookie-cutter arbitration demand that includes specific information about the claimant’s claim
- Exclude from arbitration claims most likely to give rise to mass arbitration
- Provide a party facing more than a certain number of arbitration demands the option to bow out of arbitration
- Choose an arbitration provider that will apply special procedures and/or special fee schedules for mass arbitration
- Forbid mass arbitration in the agreement
These steps are experimental and have not been the subject of clinical trials. Some have serious disadvantages and entail major risks. Some may be unenforceable or even illegal in some jurisdictions or render an arbitration agreement unenforceable in its entirety or cause an arbitration-sponsoring organization to refuse to administer it. We strongly advise obtaining current, business-specific, jurisdiction-specific advice before adopting or revising an employee arbitration agreement.
Nevertheless, if an organization has arbitration agreements with a large number of individuals, change in some form may be worth considering. An arbitration agreement that may have been state-of-the art a few years ago might today leave an employer defenseless against the emerging risk of mass arbitration.