In War On Arbitration, Consumers And Companies Both Lose

In War On Arbitration, Consumers And Companies Both Lose

In The News | September 3, 2021

ATRA President Tiger Joyce writes how companies that end arbitration face the risk of consumer class actions, in the face of plaintiffs firms ramping up mass arbitration proceedings.

This piece was originally published by Law360.

Amazon.com Inc., the world’s largest online retailer, announced in June that it planned to amend its terms of service, which specify how customers resolve disputes with the company.

Previously, claims were resolved through arbitration — a more cost-effective and efficient alternative to litigation. Now, consumers will need to hire a lawyer and bring a lawsuit to resolve disputes with the company.

Amazon customers can be expected only rarely to seek lawyers to represent them to bring individual claims, but the company’s decision is an invitation to entrepreneurial lawyers to bring class actions against the company. This is a great development for the lawyers involved, but not so much for those seeking compensation.

A recent study by Jones Day found that in consumer fraud class actions, less than 30% of settlement amounts went to consumers.[1] Further, the study concluded, the lawyers bringing cases received large fees regardless of the amount actually paid out.

William Lerach, the notorious securities class action lawyer from more than a generation ago, famously said, “I have the greatest law practice in the world. I have no clients.”

Lerach, who went to prison for concealing illegal payments to class action plaintiffs, was correct in his comment at the time, and it remains the case today. The reality is that these cases primarily serve the interests of lawyers, not their clients.

So, why did Amazon opt to open itself to this legal risk? The simple answer is that arbitration is morphing into the latest form of mass litigation and, in many ways, is indistinguishable from class actions. In all of these cases, individuals are recruited and sign up with lawyers to represent them as arbitration clients, just as is the case with class actions.

But, rather than represent them as a single class, arbitration lawyers represent clients individually. The goals of the different approaches are the same, however. Lawyers use the sheer volume of individuals involved in various arbitration claims to force a multimillion-dollar settlement.

A dominant player in this new approach is Keller Lenkner LLC, a small Chicago-based firm composed primarily of former defense lawyers.[2] In the past two years, Keller Lenkner has represented more than 200,000 arbitration clients, by far the most of any law firm.[3]

In doing so, it files virtually identical arbitration demands against a few specific, targeted defendants, then demand that a defendant pay roughly $3,000 for each of its clients to cover the American Arbitration Association’s routine costs for an individual claim.[4] By aggregating these cases, Keller has weaponized the AAA fees to drive settlements with large fee payouts for itself.

Another important legal distinction between class actions and mass arbitration is that any firm representing mass arbitration clients, like Keller Lenkner, has a separate and distinct ethical obligation to each individual client it represents.

In the CenturyLink Sales Practices and Securities Litigation, a case in the U.S. District Court for the District of Minnesota that reached a preliminary settlement in January 2020, Keller Lenkner provided identical advice to more than 20,000 clients on whether they should opt out of a proposed class action settlement.[5]

In a case that is still pending in the Los Angeles County Superior Court, Intuit Inc. v. 9,933 Individuals, Keller Lenkner is representing approximately 125,000 individuals.[6] Scenarios like these raise questions about whether mass arbitration clients receive the individualized advice they are entitled to from their lawyers.

This concern was articulated by Richard Zitrin, a legal ethics professor at the University of California Hastings College of Law, who often advises plaintiffs counsel, regarding the mass arbitration case Abernathy v. DoorDash Inc. in the U.S. District Court for the Northern District of California:

Based on my background and experience where, as here, plaintiffs’ counsel purports to represent thousands of clients against a particular defendant, red flags go up in my mind about whether such representation meets the ethical requirements all lawyers must abide by.[7]

Judges should closely scrutinize such mass arbitration arrangements to ensure that the attorneys’ obligations to each individual are preserved.

The AAA should play a constructive role in these matters as well. The organization’s fee structure contemplates the process for individual claims, not mass litigation. At a minimum, a sliding scale seems appropriate when thousands of identical claims are filed together.

Moreover, the AAA should implement a process to weed out frivolous claims. There have been examples of claims filed on behalf of deceased individuals, by those who did not use a product or service that is at issue and by those who suffered no demonstrable loss.

Arbitration has been under attack by the plaintiffs bar and its allies for some time and in various contexts. For trial lawyers, cost-effective alternatives to full-blown litigation are bad for business. If left unchecked, this new legal trend may prove to be the most effective way to eliminate arbitration as evidenced by Amazon’s recent decision.

But, as more businesses potentially go the way of Amazon and conclude they’d rather face class actions than mass arbitration, the country’s legal system could lose a vital form of alternative dispute resolution.

With class members receiving, on average, less than 30% of a monetary award, the loss of arbitration would be devastating for both consumers and defendants.[8]

Lawsuit abuse across the U.S. results in more than $160 billion in excessive tort costs, meaning every American pays approximately $488 each year in a so-called tort tax.[9] Tort costs affect 2,211,450 jobs across the country, with an estimated loss of $143.8 million in wages.[10] The economic costs and impacts of the excesses in the civil justice system are why we should preserve balanced, cost-effective alternatives to litigation.

If the war on arbitration is successful, it will be a major victory for the trial bar who looks to pocket millions in attorney fees at the expense of not only corporate defendants, but also meaningful resolution outside of courts.

Sherman Joyce is president of the American Tort Reform Association.

[1] Jones Day, An Empirical Analysis of Federal Consumer Fraud Class Action Settlements (2010–2018) (2020), https://www.jonesday.com/en/insights/2020/04/empirical-analysis-consumer-fraud-class-action.

[2] Jon Steingart, How Keller Lenkner Gets Around Class Waivers, Law360 (Jan. 21, 2021), https://www.law360.com/employment-authority/articles/1346675/.

[3] Declaration of Warren Postman in Opposition to CenturyLink’s Motion to Disqualify Counsel and Require Corrective Notice, In re CenturyLink Sales Pracs. & Sec. Litig. , No. CV17-2832, 2020 WL 3513547 (D. Minn. June 29, 2020).

[4] Am. Arb. Ass’n., Consumer Arbitration Rules: Costs of Arbitration (Am. Arb. Ass’n. Inc., 2020).

[5] In Re: CenturyLink Sales Practices and Securities Litigation, Case No. 0:17-md-02795-MJDKMM (D. Minn. preliminary settlement order issued Jan. 24, 2020).

[6] Bundy Declaration in Support of Intuit’s Opposition to Defendants’ Motion for a Preliminary Injunction, Intuit Inc. v. 9,933 Individuals, No. 20STCV22761 (Cal. Super. Nov. 20, 2020).

[7] Declaration of Richard Zitrin in Support of Respondent DoorDash Inc.’s Opposition to Petitioners’ Motion for a Temporary Restraining Order, Abernathy v. DoorDash Inc. , 438 F. Supp. 3d 1062 (N.D. Cal. 2020) (No. 3:19-cv-07545-WHA).

[8] Jones Day, Update: An Empirical Analysis of Federal Consumer Fraud Class Action Settlements (2019–2020) (2021), https://www.jonesday.com/en/insights/2021/07/update-an-empirical-analysis-of-federal-consumer-fraud-class-action-settlements-(20192020).

[9] Citizens Against Lawsuit Abuse, Impact of Tort Costs and the Potential Economic Benefits of Tort Reform in the United States (2021), https://d3n8a8pro7vhmx.cloudfront.net/cala/pages/74/attachments/original/1617996467/CALA_2021_Economic_Impact_Report.pdf?1617996467.

[10] Citizens Against Lawsuit Abuse & John Dunham & Assocs., Impact of Tort Costs and the Potential Economic Benefits of Tort Reform in the United States (2021).

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