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Case Note: U.S. Court of Appeals for the Seventh Circuit Addresses “Mass Arbitration” Tactic

With the rise in popularity of arbitration agreements that prohibit class actions—fueled by a series of decisions from the U.S. Supreme Court enforcing class waivers in arbitration agreements—the plaintiff-side bar has been looking for new tactics to combat this risk-mitigation strategy. One emerging tactic is the so-called “mass arbitration” strategy, wherein the plaintiff’s attorney enrolls a larger number of “clients” and then brings a series of individual arbitration cases against the same defendant. The goal is to drive up the arbitration-related fees and gain leverage over the defendant in that way, a maneuver made possible by the fact that many arbitration agreements are drafted to require the business to shoulder most (if not all) of the expenses of the arbitration.

Samsung was recently targeted by this tactic. One plaintiff-side law firm filed 50,000 individual arbitrations against Samsung with the American Arbitration Association (AAA). Samsung’s share of the initial filing fees alone was $4,125,000. Samsung balked and refused to pay the fees. The plaintiffs then filed a motion to compel arbitration in court, attempting to force Samsung to arbitrate over 14,000 claims individually.

In Wallrich v. Samsung Electronics America, Inc., No. 23-2842 (7th Cir. July 1, 2024), the Seventh Circuit rejected this effort because the plaintiffs’ attorneys failed to meet their burden of proving that each of their “clients” actually entered into an arbitration agreement with Samsung. The evidence they offered for this purpose—essentially just a list of individuals who claimed to have purchased Samsung products or services—was insufficient in the court’s view, to meet their burden. Instead, the court wanted to see receipts, purchase documentation, sworn statements from each plaintiff, etc. In the absence of such evidence, the court was unable to determine whether arbitration agreements were in place for each of the individuals, and so held that the motion to compel should have been denied, thus ending the plaintiffs’ attempt to compel Samsung to arbitrate.

The court also noted (in dicta, so not binding) that the consequences of Samsung’s failure to pay AAA’s fees was ultimately up to AAA to decide according to the arbitration agreement. If AAA determines that the failure of a party to pay filing fees means the arbitrations must be terminated (forcing the claimants to proceed in court), that is AAA’s call to make, not the courts’.

For transportation providers that use arbitration, the impact of Samsung may be limited. The case was decided on the basis of the pleading standards under the Federal Arbitration Act, and many drivers and other transportation workers engaged in interstate commerce are exempt from that law. The pleading standard to compel arbitration under state arbitration acts may vary. However, the Court’s insistence that the plaintiff prove the existence of an agreement to arbitrate should generally apply under state arbitration law. In addition, the holding only applies in the Seventh Circuit (which includes Indiana, Illinois, and Wisconsin).

That said, in cases within the Seventh Circuit where the parties have agreed to have AAA serve as the arbitration administrator, Samsung makes the “mass arbitration” tactic less attractive to plaintiff-side attorneys, as they will be required to obtain evidence from each “client” (such as a sworn statement) confirming that they in fact had an arbitration agreement with the defendant. And it makes it more likely that defendants facing effective “mass arbitration” maneuvers will simply refuse to pay AAA’s fees and force the plaintiffs to court, where the procedural protections attending class and collective actions make the defense of such claims preferable to the prospect of thousands of individual arbitration hearings.

 

News from Scopelitis is intended as a report to our clients and friends on developments affecting the transportation industry. The published material does not constitute an exhaustive legal study and should not be regarded or relied upon as individual legal advice or opinion.

Case Note: U.S. Court of Appeals for the Seventh Circuit Addresses “Mass Arbitration” Tactic

With the rise in popularity of arbitration agreements that prohibit class actions—fueled by a series of decisions from the U.S. Supreme Court enforcing class waivers in arbitration agreements—the plaintiff-side bar has been looking for new tactics to combat this risk-mitigation strategy. One emerging tactic is the so-called “mass arbitration” strategy, wherein the plaintiff’s attorney enrolls a larger number of “clients” and then brings a series of individual arbitration cases against the same defendant. The goal is to drive up the arbitration-related fees and gain leverage over the defendant in that way, a maneuver made possible by the fact that many arbitration agreements are drafted to require the business to shoulder most (if not all) of the expenses of the arbitration.

Samsung was recently targeted by this tactic. One plaintiff-side law firm filed 50,000 individual arbitrations against Samsung with the American Arbitration Association (AAA). Samsung’s share of the initial filing fees alone was $4,125,000. Samsung balked and refused to pay the fees. The plaintiffs then filed a motion to compel arbitration in court, attempting to force Samsung to arbitrate over 14,000 claims individually.

In Wallrich v. Samsung Electronics America, Inc., No. 23-2842 (7th Cir. July 1, 2024), the Seventh Circuit rejected this effort because the plaintiffs’ attorneys failed to meet their burden of proving that each of their “clients” actually entered into an arbitration agreement with Samsung. The evidence they offered for this purpose—essentially just a list of individuals who claimed to have purchased Samsung products or services—was insufficient in the court’s view, to meet their burden. Instead, the court wanted to see receipts, purchase documentation, sworn statements from each plaintiff, etc. In the absence of such evidence, the court was unable to determine whether arbitration agreements were in place for each of the individuals, and so held that the motion to compel should have been denied, thus ending the plaintiffs’ attempt to compel Samsung to arbitrate.

The court also noted (in dicta, so not binding) that the consequences of Samsung’s failure to pay AAA’s fees was ultimately up to AAA to decide according to the arbitration agreement. If AAA determines that the failure of a party to pay filing fees means the arbitrations must be terminated (forcing the claimants to proceed in court), that is AAA’s call to make, not the courts’.

For transportation providers that use arbitration, the impact of Samsung may be limited. The case was decided on the basis of the pleading standards under the Federal Arbitration Act, and many drivers and other transportation workers engaged in interstate commerce are exempt from that law. The pleading standard to compel arbitration under state arbitration acts may vary. However, the Court’s insistence that the plaintiff prove the existence of an agreement to arbitrate should generally apply under state arbitration law. In addition, the holding only applies in the Seventh Circuit (which includes Indiana, Illinois, and Wisconsin).

That said, in cases within the Seventh Circuit where the parties have agreed to have AAA serve as the arbitration administrator, Samsung makes the “mass arbitration” tactic less attractive to plaintiff-side attorneys, as they will be required to obtain evidence from each “client” (such as a sworn statement) confirming that they in fact had an arbitration agreement with the defendant. And it makes it more likely that defendants facing effective “mass arbitration” maneuvers will simply refuse to pay AAA’s fees and force the plaintiffs to court, where the procedural protections attending class and collective actions make the defense of such claims preferable to the prospect of thousands of individual arbitration hearings.

 

News from Scopelitis is intended as a report to our clients and friends on developments affecting the transportation industry. The published material does not constitute an exhaustive legal study and should not be regarded or relied upon as individual legal advice or opinion.