Corporate America’s Favorite Legal Trick Is Backfiring

Last year, Uber made a quarterly profit for the first time ever. But a major hurdle stands in the way of the ride-hailing company repeating that feat: a $92 million bill owed to the American Arbitration Association over allegations that Uber discriminated against companies when she said she was waiving Uber Eats fees at some black-owned restaurants after the police killing of George Floyd.

Uber tried to sue for not paying the tab – but a recent New York appeals court ruling blocked their request for an injunction to prevent the arbitration association from collecting the bill.

Uber is one of many companies that have been targeted by a new legal tactic to enforce the rights of aggrieved consumers and employees: “mass arbitration”, which is based on the same tool that American companies have been using for decades to isolate themselves from justice. responsibility.

The strategy relies on recruiting tens of thousands of aggrieved customers or employees of a company to simultaneously file claims requesting that their complaints be submitted to arbitration, a process in which a private mediator selected by the targeted company arbitrate the dispute. Unlike a class action, each claim for arbitration must be argued individually, one by one.

Victims of corporate wrongdoing are turning to mass arbitration because it offers a way to force companies to pay for their wrongdoings – and, in a world where many companies prohibit customers and employees from suing them, c is often the only way to do it.

This popular new strategy suggests that America’s favorite corporate trick of using arbitration rules to avoid liability may be losing some of its potency. This legal tactic was further watered down earlier this week, when the Supreme Court unanimously ruled that companies could lose their right to arbitration if they fail to invoke this privilege in a timely manner.

The costs and fees associated with responding to a single request for arbitration are not particularly high. But when a business is hit with tens of thousands of such claims at once, they mount rapidly. Faced with tens or even hundreds of millions of dollars in costs, many companies choose to settle or instead allow a class action lawsuit against them, leading to hundreds of millions of dollars in damages for customers. and aggrieved employees over the past few years. years.

Some companies are trying to retaliate by changing arbitration rules — but for now, it looks like a few rogue law firms have found a way to hold some of America’s biggest corporations to account.

“What we’ve seen, and may continue to see, are relatively quick resolutions to claims, with claimants saying they’ve received something along the lines of what they thought they were owed,” Maria said. Glover, professor at Georgetown Law School, expert in compulsory arbitration. right.

When a company breaks the law at the expense of its customers or employees, injured parties have the right to sue for damages.

Or at least they did, until 1991.

That year, a 7-2 Supreme Court decision found that companies can force their employees or customers to waive their right to sue and require them to resort to arbitration instead. Resolutions reached through the arbitration process have the force of law.

In most arbitrations, companies have the upper hand. Not only are they able to select the arbitrator to arbitrate, but they also use binding arbitration agreements that can require the aggrieved party to pay an upfront fee of up to $1,900 just to bring their claim.

Many parties, such as victims of wage theft or consumer scams, have claims that are worth less than the costs that would be required to arbitrate them. That means going the arbitration route “wouldn’t be an economically rational proposition,” Glover said.

No wonder once the Supreme Court opened the doors to arbitration, employers and vendors rushed to weaponize binding arbitration agreements against workers and consumers.

“It was almost professional misconduct for a lawyer not to advise their employer-client to adopt any of these things,” said Cynthia Estlund, a NYU Law School professor and employment law expert.

Today, the majority of American workers are covered by binding arbitration agreements, as are customers of large corporations such as DoorDash, Chipotle and Peloton.

It is impossible to know with certainty how many complaints are not due to mandatory arbitration provisions. But the current number of arbitration requests is surprisingly low. Less than six thousand cases are filed per year, among the more than sixty million American workers subject to compulsory arbitration, according to the Economic Policy Institute.

Mandatory arbitration “seems to have stifled employment claims to a large extent,” Estlund said. “What employers are really trying to do when they impose these agreements is not so much to choose a simpler procedure, but to close the claims completely.

For almost thirty years, it seemed like the companies had cracked the code and completely insulated themselves from a wide range of legal claims. Then, in 2018, something interesting and unexpected happened.

A few law firms, primarily Chicago-based Keller Postman, have begun filing thousands of arbitration claims against Peloton, Family Dollar, TurboTax and other large companies using binding arbitration agreements.

This strategy was based on the weaponization of the fact that it is not just consumers or employees who are required to pay fees to arbitrators. Businesses need to do it too.

When companies are faced with thousands of arbitration requests at once, these costs can reach astronomical sums. A 2021 mass arbitration effort against Intuit left the financial software company on the hook for up to $128 million in fees.

“This tactic basically gives the employer exactly what they say they want,” said Estlund, who is complaining to his chosen arbitrator. But perhaps unsurprisingly, it turns out that companies that impose arbitration often don’t like the taste of their own medicine.

In the face of this financial onslaught, some companies have opted to settle claims against them for huge sums of money. Keller Postman claims to have secured over $200 million for its mass arbitration clients.

Some companies have chosen to abandon arbitration altogether and take their chances in court. It effectively means abandoning what for thirty years has been the main strategy of companies to avoid their legal responsibilities towards their consumers and their employees.

After being hit with more than seventy-five thousand arbitration requests from customers who said Amazon’s Echo devices recorded their conversations without their consent, Amazon removed a mandatory arbitration provision from its Terms of Service. , meaning customers can now sue.

Companies unwilling to abandon arbitration have used creative strategies to get out of their own arbitration contracts. For example, Uber and Family Dollar sued the arbitration forum the companies themselves had chosen to enforce arbitration agreements drafted by the companies.

In its 2020 lawsuit, Family Dollar asked the judge to invalidate numerous arbitration claims against it, on the grounds that the cash amount the plaintiffs were seeking was less than the corresponding arbitration fee — which is, of course. sure, precisely why companies have long sought to impose arbitration rather than face legal action. Family Dollar settled out of court before a judge could rule on their argument.

Ultimately, mass arbitration cannot completely replace people’s right to sue. It’s a costly and labor-intensive tactic, as it requires both capital to pay arbitration fees and staff to actually arbitrate all individual claims – or at least threaten to do so. TO DO. This state of affairs means that many small claims cannot be used in a mass arbitrage strategy because they will not bring in the money needed to bring them.

“He’s not going to get the lowest low value claims,” ​​Glover said. “But he’s getting claims that won’t be pursued through the federal court system because they would never be economically viable.”

Mass Arbitration also cannot address claims that require individual investigation and proof, such as discrimination by a specific supervisor, as the cost of investigating the claim outweighs the potential award. .

“It’s just more expensive to prove discrimination than if there’s a legal issue as to whether overtime was due,” Glover said.

And while the rise of mass arbitration took them by surprise, companies are now learning to fight back. In arbitration, the defendants always have the right to set the rules, and the targeted companies are not afraid to play dirty.

Companies can try to eliminate certain provisions in contracts that require them to pay arbitration fees, or even require plaintiffs to pay these fees, if the claim is denied. Some have already started doing so.

Companies could also try to force plaintiffs to take their claims to smaller arbitration firms that can only handle a few cases at a time, meaning that while it would theoretically be possible for plaintiffs to recoup their costs initial, they would be forced to wait years for a trickle of money to be paid.

Additional strategies may still be in development. “I think we’ll see more [company] provisions that attempt to make [mass arbitration] just totally uneconomical, inefficient and time-consuming,” Glover said.

But that doesn’t mean mass arbitrage will go away. Some states have limits on the extent to which companies can shift costs to plaintiffs, and not all companies will adapt as quickly as the savviest and wealthiest have begun to do. The future of mass arbitration may be in suing smaller, less well-juried companies that are still big enough to offer significant financial rewards, Glover argues.

“I can’t imagine life is going to get any easier for claimants, but I’m not sure the courts are going to let it get so tough that we’re back to where you just can’t claim anymore,” he said. said Glover. . “The emperor’s nudity has been revealed.”

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