Introduction: Mass Arbitration

For many years consumers, employees, and others fought hard—with varying degrees of success—to compel class arbitration, and sellers, employers, and other more economically powerful entities fought equally hard to compel separate arbitrations in multi-claimant situations. Over time, companies included in their agreements—and courts enforced—clear class-arbitration waivers.

That might have been the end of the story but for a stroke of genius on the part of certain plaintiffs’ attorneys. These clever attorneys devised what is now known as “mass arbitration.”

In mass arbitration, as in class arbitration, multiple claimants—each represented by the same lawyer or group of lawyers—assert at the same time numerous  claims against a corporate defendant.

The result is that business entity defendants may be are forced to pay upfront hundreds of thousands or millions of dollars in arbitration provider and arbitrator fees as a precondition to defending thousands of individual arbitration proceedings that raise one or more common issues.

Saddling the business entity defendants at the outset with those enormous arbitration fees obviously puts them in an untenable settlement position. The business entities also incur very substantial legal costs for arbitration-related litigation.

Given the vigor with which business entities have opposed class arbitration—which, despite its cumbersome nature, purports to be (but really isn’t) a workable mechanism for resolving multiple, similar, arbitral claims—one can hardly fault a judge for concluding that business entity defendants have reaped what they’ve sown. But it would be strange to think that Federal Arbitration Act (“FAA”) arbitration should, in multiple claimant situations, boil down to the business entity choosing one form of economic extortion (endless, inefficient, and prohibitively expensive class arbitration) over another (being forced to pay millions of dollars of arbitration fees upfront before being able to defend any of the individual arbitrations).

There have been some recent efforts on the part of arbitration providers to amend their rules to address mass arbitration in a more equitable manner. But those rules, and the ins, outs, and idiosyncrasies of mass arbitration are beyond this post’s ambit.

Our focus instead is on a very important mass-arbitration development: the first U.S. Circuit Court of Appeals decision to address mass arbitration, Wallrich v. Samsung Electronics America, Inc., No. 23-2842, slip op. (7^th Cir. July 1, 2024). The case is especially significant because it may portend the end of mass arbitration, at least in the form it typically takes.

The U.S. Court of Appeals for the Seventh Circuit derailed petitioners’ efforts to compel judicially the respondent to pay millions of dollars of arbitration fees demanded by mass arbitration claimants. It did so in two blows, the second more decisive than the first.

First, it held that the more than 35 thousand claimants failed to prove the existence of an arbitration agreement between any of them and the two (related) corporate defendants and refused to allow any of the claimants to supplement their motion to compel with any additional evidence. That blow disposed of the case before it, but might have (subject to preclusion rules) left open a path for claimants to start over.

Second, and more decisively, it held that the terms of the contract, which incorporated American Arbitration Association (“AAA”) rules, the district court had no authority to compel the business entities to pay the more than $4 million in arbitration fees. By agreeing to the AAA rules, the parties vested in the AAA the discretion to resolve fee disputes, and it resolved this particular fee dispute by giving the claimants the option of either funding the business entity’s fees or proceeding with their claims in court.

This second holding—as applied to future cases where an arbitration provider or arbitrator might decide to relieve a mass arbitration target from the obligation to pay mass arbitration fees—may, even apart from provider efforts to address mass arbitration scenarios more fairly, portend the demise of mass arbitration, or at least mass arbitration scenarios in which multiple claimants are able to impose enormous, initial arbitration fee obligations on business entity respondents.

Mass Arbitration: Wallrich Background

More than 35 thousand consumers filed with the American Arbitration Association (“AAA”) separate, individual claims against Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. (collectively “Samsung”). The claimants alleged that Samsung— using the electronic devices it sold to its customers— violated Illinois law by unlawfully collecting and storing biometric data.

As a result of the mass arbitration filing, Samsung was called on to pay more than $4 million in arbitration fees as a precondition to defending the arbitrations. Samsung refused, and the parties submitted the dispute to the AAA.

The AAA, which had the discretion to decide disputes over fees, terminated the thousands of arbitration proceedings, and permitted the claimants to proceed with their claims in federal court. But the claimants did not abide the AAA’s direction—they petitioned the Court under Section 4 of the Federal Arbitration Act (“FAA”) to compel Samsung to arbitrate the claims and pay the arbitration fees.

Samsung contended that none of the claimants proved the existence of an arbitration agreement, and that, even if any of the claimants proved the existence of such an agreement, the district court was not, in any event,  authorized to order payment of arbitration fees.

The district court ruled in favor of the claimants, but the Seventh Circuit reversed “[b]ecause the consumers failed to meet their evidentiary burden in proving the existence of an arbitration agreement with Samsung, and because the parties’ alleged agreement incorporated the AAA’s rules and procedures, which granted the AAA substantial discretion over resolving fee disputes. . . .” Wallrich, slip op. at 2.

The Alleged Arbitration Agreements

There were two respondents-appellants—which we collectively refer to as “Samsung”—Samsung Electronics Co., Ltd. (“Samsung Korea”) and Samsung Electronics America, Inc. (“Samsung America”), a subsidiary of Samsung Korea. These companies “design, manufacture, and sell electronic devices, including smartphones and tablets.” Slip op. at 2.

Samsung has terms and conditions pursuant to which persons are deemed to agree when they open the package containing the electronic device or create a user account for the device.  Those terms and conditions include an arbitration agreement covering “all disputes” between Samsung and consumer “arising in any way from the sale, condition or performance of the device.” Slip op. at 2 (quotation omitted). These disputes are required to “be resolved exclusively through final and binding arbitration, and not by a court or jury.”  Slip op. at 2 (quotation omitted).  Arbitration is to “be conducted according to the American Arbitration Association (AAA) Commercial Arbitration Rules. . . .” Slip op. at 2-3 (quotation omitted). “[A]dministrative, facility, and arbitrator fees” are to “be determined according to AAA rules” in situations where (as was the case here) a party seeks damages in excess of $5,000. Slip op. at 3 (quotation omitted).

The terms and conditions vest in the AAA “the discretion to apply or not to apply” any of the AAA Rules, which include Rules governing fees. The AAA Rules have requirements for initial filing fees that apply when “25 or more similar claims for arbitration are filed.” Slip op. at 3. The individual consumers and the business entity must pay initial filing fees before the arbitration may proceed. Slip op. at 3.

The AAA Supplementary Rules for Multiple Case Filings, which also applied, deal with situations where a party refuses to pay its filing fees. To that end, the Court explained, Rule MC-10(d) provides, “[I]f administrative fees, arbitrator compensation, and/or expenses have not been paid in full, the AAA may notify the parties in order that one party may advance the required payment within the time specified by the AAA.” Slip op. at 3 (quoting Rule MC-10(d)).

Rule MC-10(e) provides that where consumers do not advance the fees, “the AAA may suspend or terminate [the] proceedings” and “may also decline to administer future arbitrations with the parties involved.” Slip op. at 3 (quoting Rule MC-10(e)). In that event, the Supplementary Rules provide that either party can submit the dispute to judicial resolution. Slip op. at 3.

The AAA Initially Decides that the 35,651 Arbitration Claim Filings are Deficient and Orders Claimants to Refile

Samsung argued to the AAA that the claimants’ filings were deficient for various reasons, including for lack of contact information and misspelled or inaccurate information. Slip op. at 4.

The AAA directed the claimants to correct their filings, the claimants submitted corrected filings, and the AAA determined the corrected filings complied with the rules. The AAA directed Samsung to pay it $4,125,000 to cover Samsung’s share of the filing fees. The claimants had already funded their fees. Slip op. at 4.

Samsung refused to pay the filing fees, which prompted the AAA to give the claimants the opportunity to advance the fees, which would allow the arbitration to continue, but the claimants did not advance the fees.

The AAA informed the parties that the arbitration would be closed, and the claimant’s filing fees refunded, unless the $4,125,000 was paid by Samsung or advanced by the consumers. Closing the arbitration, the AAA told the parties, would allow  either to submit the dispute to a court for resolution. Slip op. at 3.

The Claimants File a Section 4 Petition in the District Court

The consumers said that they would not advance Samsung’s fees and asked the AAA to stay the arbitration proceedings until they could obtain an order compelling arbitration. They therefore filed a petition to compel arbitration in the U.S. District Court for the Northern District of Illinois.

The only relief they sought was an order: (a) compelling Samsung to pay the arbitration fees; (b) directing Samsung to proceed to arbitration; and (c) awarding the petitioners their costs and attorneys’ fees. Slip op. at 4-5.

The Court Grants the Mass Arbitration Petition and Purports to Stay the Case

The district court determined that a valid arbitration agreement existed between each of the petitioners and Samsung based on: (a) copies of the arbitration demands filed with the AA; (b) copies of Samsung’s terms and conditions; (c) a spreadsheet listing the name and address of each claimant; and (d) the AAA’s determination that each arbitration claim satisfied the AAA filing requirements.

Based on this determination the district court ordered Samsung to pay the fees and to proceed with individual arbitrations. Slip op. at 5.

In addition to its opinion, the district court made separately a minute entry order indicating that the petition was granted and that the case was stayed pending arbitration. Samsung appealed.

District Court’s Subject Matter Jurisdiction and Court’s Appellate Jurisdiction

The Court first addressed the district court’s subject matter jurisdiction and the Court’s appellate jurisdiction, issues that are important but outside the scope of this post, which is focused on mass arbitration. That said, the Court’s discussion of both issues was thorough and right on the mark, and readers who wish to delve into the details may read the opinion. See slip op. at 5-11.

It found that the district court had subject matter jurisdiction under Chapter 2 of the Federal Arbitration Act (which implements the New York Convention) because the commercial dispute at issue involved at least one party, Samsung Korea, that was not a citizen of the United States. Slip op. at 5-6; see, e.g., 9 U.S.C. § 202, 203. (For a couple of posts discussing the New York Convention,  see here and here.)

It found that there was appellate jurisdiction because the Court’s order was “a final decision with respect to an [FAA-governed] arbitration. . . ,” 9 U.S.C. § 16(a)(3), and the district court’s (“inexplicable”) stay did not affect the Court’s appellate jurisdiction. See slip op. at 5-11.

Section 16(b)(1), said the Court, “only limits appellate review of an ‘interlocutory order’ granting a stay ‘under section 3[,] [a]nd a  § 3 stay only occurs in proceedings brought ‘upon any issue referable to arbitration.’” Slip op. at 6-7 (quoting 9 U.S.C. 16(b)(1)). The “district court did not have the authority to enter a stay, and whatever stay it did enter was certainly not one authorized under § 3—no party sought a stay, and the case did not involve an issue referable to arbitration.” Slip op. at 10-11.

Court Holds that Each of the Mass Arbitration Claimants Failed to Meet Their Burden to Show the Existence of an Arbitration Agreement

After disposing of the threshold jurisdictional matters, the Court set forth what the petitioners had to show to obtain an order compelling arbitration: “(1) an enforceable written agreement to arbitrate; (2) a dispute within the scope of the arbitration agreement; and (3) a refusal to arbitrate.” Slip op. at 11 (citing A.D. v. Credit One Bank, N.A., 885 F.3d 1054, 1060 (7th Cir. 2018)).

Samsung argued that the petitioners did not satisfy their burden as respects the first and third elements. As respects the first, Samsung contended that the petitioners failed to present evidence of an arbitration agreement and that the district court improperly shifted to Samsung the burden of proof and production. Slip op. at 11.

As respects the third element, Samsung argued that its failure to pay the arbitration fees was not a refusal to arbitrate. According to Samsung, assuming the petitioners established the existence of an arbitration agreement, the arbitration proceeded according to the terms of that agreement. Because the applicable AAA Rules vested in the AAA the discretion to resolve fee disputes, and because the AAA exercised that discretion by giving the petitioners the option of either advancing the fees or litigating their claims in court, the arbitration proceeded “in the manner provided for in . . . [the parties’] agreement.” 9 U.S.C. § 4; see slip op. at 16.

Summary Judgment Standard of Review

The Court said that it (and other circuits) had “analogized the standard needed [to compel arbitration] to that required at summary judgment.” Slip op. at 12. A district court could determine as a legal matter that parties agreed (or did not agree) to arbitrate only if there were no genuine issues of material fact concerning contract formation. Slip op. at 12 (citations omitted).

The party moving to compel has, the Court said, the initial burden to establish existence of an arbitration agreement, that is, to produce evidence from which a jury could reasonably conclude an agreement to arbitrate existed. See slip op. at 12 (citations omitted).

Ordinarily the petitioners would “bear the burden of producing a valid arbitration agreement with Samsung[,]” but here “Samsung conceded that an individual agrees to arbitrate all disputes when [subject to an exception not pertinent to this case] he or she purchases or uses a Samsung device, the [petitioners] effectively only needed to present evidence that they were in fact Samsung customers.” Slip op. at 12.

The Mass Arbitration Petitioners Failed to Meet Their Burden to Show the Existence of an Arbitration Agreement

The petitioners attempted to discharge their burden by producing: “(1) copies of their arbitration demands made before the AAA; (2) a spreadsheet containing their names and addresses; (3) copies of Samsung’s terms and conditions; and (4) the AAA’s determination that the consumers had met the AAA filing requirements.” Slip op. at 13.

The Court concluded that petitioners attempt was unsuccessful because:

1. Unsworn statements in arbitration demands, like those in pleadings, were simply allegations, not evidence. See slip op. at 13.

2. The copies of Samsung’s terms and conditions did not suffice because they were “simply copies of found in any Samsung device or on Samsung’s website, not terms and conditions reviewed or received by specific customers.” Slip op. at 13. They did not, “[w]ithout more,” “show that any of the customers purchased a Samsung device.” Id.

3. The spreadsheet consisted “of only names and addresses[,]” and thus “fail[ed] to show that any of those named were Samsung customers.” Slip op. at 13-14.

4. All the petitioners did was identify “a generic arbitration agreement” and “independently list[] the names and addresses of alleged consumers without doing anything to link those consumers to the agreement. . . .” Slip op. at 14. That did not establish the existence of agreement element required for a successful motion to compel, which requires “a showing of assent between the relevant parties.” Slip op. at 14 (citation omitted).

5. The AAA’s determination that the customers met AAA filing requirements was not evidence of the existence of an agreement. The Court explained that the filing requirements  “involve[d] no substantive determinations. . . ,” such as whether the parties were bound by an arbitration agreement. Slip op. at 14. The customers were required only “to explain the dispute, list the names and addresses of the consumers, specify the amount in dispute, identify a location for the hearing, state the relief sought, and attach a copy of the alleged arbitration agreement.” Slip op. at 14. If these requirements are met the AAA determines that filing requirements are met—the AAA does not as part of this process determine whether the parties entered an arbitration agreement, or for that matter, whether claimants were, in fact, customers of the other party. Slip op. at 14.

The Court said “[t]he customers could have submitted almost anything to meet their burden of proving the existence of an arbitration agreement.” Slip op. at 15. They might “have submitted receipts, order numbers, or confirmation numbers from their purchases of Samsung devices.” They might “have submitted declarations attesting to the allegations in their arbitration demands.” Slip op. at 15. “Without adducing[,]” said the Court, “any evidence aside from their allegations, the consumers failed to meet their initial burden of proving the existence of a valid arbitration agreement with Samsung.” Slip op. at 15.

The petitioners’ fallback argument was that the Court should remand the case to allow the presentation of further evidence, but the Court roundly rejected that plea. The Court said “the summary judgment stage, which our posture is akin to, does not allow second chances[,]” and here “[t]he customers had the opportunity to present their evidence, and they failed to do so.” Slip op. at 15 (citations omitted).

The District Court had no Authority to Order Samsung to Pay Arbitration Fees

The Court’s holding that the petitioners had not met their evidentiary burden to establish an arbitration agreement—and were not entitled to a supplement their original motion to attempt to correct that deficiency—disposed of the petition to compel arbitration. The Court might have left the matter at that, but questions may have persisted concerning whether the same or other Samsung customers could assert new arbitration proceedings against Samsung.

The Court chose instead to deal what may be a definitive death blow to mass arbitration in cases where provider rules (or other provisions of the parties’ agreement) delegated fee disputes to the provider or some other arbitral body, and the claimants attempt to impose on the business entity the obligation to pay a substantial initial filing fee. The Court held that “even assuming an arbitration agreement between the consumers and Samsung, the consumers cannot compel Samsung to pay the AAA’s administrative fees.” Slip op. at 20.

The Court’s holding hearkens back to the allocation of power between courts and arbitrators. It explained that persons may clearly and unmistakably delegate arbitrability issues to the arbitrators. Further, “procedural issues, like fee disputes, are ‘presumptively not for the judge, but for an arbitrator, to decide.’” Slip op. at 16 (quoting Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (emphasis in original)).

The alleged arbitration agreement “delegated threshold arbitration fee disputes to the AAA[,]” said the Court, and “[t]he parties thus bargained for the AAA’s discretion over the payment of administrative filing fees, including the consequences that would stem from a party’s refusal to pay those fees.” Slip op. at 16.

The parties agreed the AAA would have the discretion to decide fee disputes and a dispute over fees arose. As contemplated by the alleged agreement, the AAA decided that the consumers would have two options: (a) front the fees for Samsung; or (b) pursue its claims in court. The consumers did neither and instead asked the district court effectively to set aside the AAA’s determination, a determination the parties vested in the AAA the discretion to make.

Section 4 of the FAA provides that, “[a] party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for arbitration may petition any United States district court . . . for an order directing that such arbitration proceed in the manner provided for in such agreement.” 9 U.S.C. § 4; see slip op. at 16. Arbitration had here “proceeded in the manner provided for” in the alleged agreement, and that was “all that was required.” Slip op. at 16, 20.

The parties consented “to abide by the rules and procedures of the AAA, and they proceeded through arbitration in accordance with those rules and their consequences.” Slip op. at 20. Had the AAA determined that Samsung “was abusing the arbitration process, it could have stayed the case or threatened to decline administering future consumer arbitrations with Samsung, but it did not.” Slip op. at 20. The AAA decided instead to give the consumers the options of fronting the fees (which could presumably be reimbursed in the final award) or simply submitting the merits of their arbitration claims to court. Slip op. at 20. “At that point,” said the Court, the consumers’ arbitration was complete[,]” slip op. at 20, “and the district court did not have the authority to flout the parties’ agreement and disturb the AAA’s judgment.” Slip op. at 17.

The Court added that its position was consistent with the Fifth Circuit’s decision in Dealer Computer Services, Inc. v. Old Colony Motors, Inc., 588 F.3d 884 (5^th Cir. 2009)(a case successfully briefed and argued by our good friend and colleague, Richard D. Faulkner), and Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010 (9^th Cir. 2004). While neither case involved “mass arbitration,” in each the Court refused to compel arbitration and order a party to pay fees because the parties had agreed to AAA rules authorizing the AAA to resolve fee disputes and the AAA had resolved the fee disputes by suspending or the arbitration.  See Dealer Computer, 588 F.3d at 886, 888; Lifescan, 363 F.3d at 1012-1013.

The petitioners attempted to circumvent Dealer Computer and Lifescan by arguing that those cases involved parties who lacked the financial resources to fund fees and that was obviously not the case with Samsung. While at least one Ninth Circuit case suggested that argument might, in appropriate circumstances, be sound, the Seventh Circuit saw “no reason” to adopt it because the FAA “does not grant the consumers an unfettered right to arbitrate and nothing in the statute treats parties differently based on financial status.” Slip op. at 19. The FAA simply “requires. . . that the parties arbitrate according to the terms of their agreement.” Slip op. at 19.

Contacting the Author

If you have any questions about this article, arbitration, arbitration-law, or  arbitration-related litigation, then please contact Philip J. Loree Jr., at (516) 941-6094 or PJL1@LoreeLawFirm.com.

Philip J. Loree Jr. is principal of the Loree Law Firm, a New York attorney who focuses his practice on arbitration and associated litigation. A former BigLaw partner, he has nearly 35 years of experience representing a wide variety of corporate, other entity, and individual clients in matters arising under the Federal Arbitration Act, as well as in insurance or reinsurance-related, and other, matters.

ATTORNEY ADVERTISING NOTICE: Prior results do not guarantee a similar outcome.

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Tags: AAA, Agreement, allocation of power, American Arbitration Association, Arbitrability, Authority, compel, Contract, Dealer Computer, Dean Witter, Device, Discretion, Existence, FAA, Faulkner, Federal Arbitration Agreement, fees, Fifth Circuit, Filing Requirements, Howsam, Lifescan, manner provided for, Mass Arbitration, Ninth Circuit, Old Colony, Phone, Richard D. Faulkner, Rules, Samsung, Section 4, Seventh Circuit, Supplementary Rules, Wallrich

This entry was posted on Tuesday, July 16th, 2024 at 2:05 pm and is filed under American Arbitration Association, Appellate Jurisdiction, Arbitrability, Arbitrability | Clear and Unmistakable Rule, Arbitrability | Existence of Arbitration Agreement, Arbitration Agreements, Arbitration as a Matter of Consent, Arbitration Fees, Arbitration Law, Arbitration Practice and Procedure, Arbitration Provider Rules, Arbitration Providers, Authority of Arbitrators, Class Action Arbitration, Class Action Waivers, Class Arbitration Waivers, Clear and Unmistakable Rule, Delegation Agreements, Equal Footing Principle, FAA Chapter 1, FAA Chapter 2, FAA Section 4, Federal Arbitration Act Enforcement Litigation Procedure, Federal Arbitration Act Section 202, Federal Arbitration Act Section 203, Federal Arbitration Act Section 4, Federal Subject Matter Jurisdiction, Mass Arbitration, Petition to Compel Arbitration, Practice and Procedure, Procedural Arbitrability, Questions of Arbitrability, Richard D. Faulkner, Section 4, United States Court of Appeals for the Seventh Circuit. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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