Editor’s note: President Joe Biden signed a bill into law March 3, 2022, banning enforcement of pre-dispute arbitration pacts for sexual-harassment and sexual-assault claims.
When the U.S. Supreme Court upheld waivers of class and collective actions in arbitration agreements in 2018, most employers saw this as a step forward because arbitration can be a swift, inexpensive way to resolve disputes. But some employees are turning to mass arbitration in employment cases, causing headaches for employers.
Over the past few years, roughly 20 employers are known to have been hit with demands to settle hundreds or thousands of individual arbitration claims based on a common theory. No one knows how many more cases may have occurred outside public scrutiny. Enterprising plaintiffs’ lawyers have devised this tactic to secure individual relief in aggregated claims when the filing of a class action or collective lawsuit is barred by the employer’s mandatory arbitration clause.
Employers have little to no bargaining power in such situations because the arbitration agreement calls for them to pay most of the upfront costs of arbitration, regardless of whether a case has any merit. Filing fees and arbitrator fee deposits easily could average $10,000 per case—that’s $2 million for 200 claimants and $20 million for 2,000 claimants.
Courts generally find that employer challenges to mass arbitration are barred by the terms of the arbitration agreement itself. Arbitrators may consider objections to mass claims, but that would occur only after all upfront and early-stage fees have been paid. Accordingly, the pressure to settle claims—before any consideration of the merits—is immense.
Who’s in the Crosshairs?
Employers with tens of thousands of employees are at greatest risk of being hit with mass arbitration. “If you have 1,000 employees total, you probably aren’t high on anyone’s list,” says Patrick Bannon, an attorney with Seyfarth Shaw in Boston. That’s because mass arbitration involves a concerted campaign by a plaintiff’s firm, which takes time and effort. “Scale is the most important factor,” he explains.
As to the type of claim that will attract interest, “Mass arbitration is more likely where the plaintiffs are able to identify a claim theory that for each individual claimant has very similar or nearly identical facts, elements of proof or recoverable penalties,” according to Michael McCarthy, an attorney with Greenberg Traurig in Los Angeles.
Claims in which the employer has the burden of proof are especially likely to generate mass arbitration, McCarthy says. Examples include claims in which the employer must show that it properly classified workers as independent contractors and those in which it must show that it properly implemented an alternative workweek schedule. Claims that carry statutory penalties, eliminating the need for individualized proof of harm, may be similarly appealing, McCarthy adds.
Defusing the Bomb
Unsurprisingly, employment attorneys advise employers seeking to avoid mass arbitration to be vigilant about compliance. Review policies and practices to identify any issues that might lead to claims in the first place, McCarthy says.
Beyond that, employers of all sizes should treat mass arbitration horror stories as cautionary tales in which the moral is to carefully review arbitration agreements and make well-informed adjustments. Even smaller employers can benefit from this, says Bannon, who adds, “There are a lot of arbitration clauses floating around that could use a tune-up.”
But what to tinker with if the objectives are both to maintain enforceability of the arbitration clause and to avoid mass arbitration? Arbitration of contractual disputes—including most employment contracts—is supported by the 1925 Federal Arbitration Act (FAA). The act applies to claims arising under both federal and state law, and pre-empts most state laws in the field. While Supreme Court rulings favoring arbitration are expansive, “presumably the FAA has some boundaries,” says Maria Glover, a professor at Georgetown University Law Center.
There are plenty of suggested modifications, but “anything off the beaten path involves some risk,” Bannon says. “One idea that is helpful and ought not to taint enforceability is some kind of grievance and conciliation process. In the labor-management context, that’s been standard for a long time. Building that into an arbitration agreement in a nonunion context might be helpful.”
Other, riskier possibilities include provisions that exclude from arbitration the types of claims most likely to give rise to mass arbitration, that allow a party facing more than a certain number of claims to opt out of arbitration and that explicitly forbid mass arbitration.
McCarthy suggests approaching it this way: Avoid terms that might incentivize plaintiffs to pursue mass arbitration, and consider including terms that may help mitigate costs or increase efficiency for claim resolution. In the former category are provisions that shift attorney fees in plaintiffs’ favor or that are overly generous in covering arbitration costs. In the latter category are terms that:
- Provide for mutual consent to specific procedures in situations where the claim is one of many related claims.
- Call for use of arbitration providers that have mass claim protocols (for example, new fee structures and rules of procedure).
- Mitigate risks or defer costs (for example, prefiling procedures calling for notice, information sharing or mediation).
- Reallocate or shift fees in certain circumstances.
- Provide that a court may interpret certain provisions of the arbitration agreement, as this allows for disputes about those provisions to be made once in court rather than by the arbitrator in each case.
“Some [arbitration clause] revisions will be challenged, and some won’t survive,” Glover says. “Fee leveraging [in favor of employers] will not work forever. There’s a limit to how much you can foist on claimants.
“Do I think any of [the revisions] are the death knell for mass arbitration? No,” Glover adds. But she believes that in some contexts, such provisions will make mass arbitration less attractive for lower-value claims.
Margaret M. Clark, J.D., SHRM-SCP, is a freelance writer in Arlington, Va.
Illustration by Adam Niklewicz for HR Magazine.
Rules of Engagement
The first generation of mass arbitration in employment was fueled largely by the Supreme Court’s 2018 decision in Epic Systems Corp. v. Lewis, which upheld an arbitration clause requiring individualized proceedings.
The truly massive assaults against the most sophisticated employers likely will diminish, says Maria Glover, a professor at Georgetown University Law Center.
And what about the less sophisticated defendants? “They’re coming for them,” Glover says. “Entrepreneurial lawyers will try to figure out a way to aggregate individual claims. As things evolve, it will become less splashy and more of a response to aggregate harm where class actions are off the table.” —M.M.C.