The Rise of Mass Arbitration and Its Implications for Companies

Mass arbitration has exploded in volume in recent years as a major litigation tactic for plaintiffs’ attorneys. Consumers are filing hundreds or thousands of individual claims against companies for the same issue. The goal: to use the threat of huge filing fees to coerce organizations into settling claims quickly.

The tactic has become so common that the American Arbitration Association (AAA), JAMS, and other arbitration providers have introduced new rules to manage the influx and associated costs. Some organizations are amending their arbitration agreements to include procedural guardrails to help manage the onslaught of filings.

However, courts have only begun to consider the issue, and some state legislatures are looking to regulate mass arbitration. Additionally, arbitration providers will likely continue to fine-tune their mass arbitration rules. Counsel for both claimants and respondents should monitor these developments closely, and companies should review their contracts for potentially problematic clauses.

>>Read more: What's the Difference Between Arbitration and Mediation?

Challenging Forced Arbitration Clauses

Companies often include forced arbitration clauses in contracts to prevent consumers from pursuing class-action lawsuits, which can be costly and represent significant risk. Forcing disputes into arbitration makes it difficult for consumers or employees to pursue claims that are not financially feasible on their own.

Companies view arbitration as faster and less expensive than traditional litigation. Cases are heard by private arbitrators, who may be more sympathetic to businesses than a jury might be. Furthermore, because arbitration decisions generally have limited grounds for appeal, they provide greater legal certainty and closure.

Arbitration also shields companies from public scrutiny. Unlike court trials, arbitration is private, and organizations can avoid the strict rules of evidence used in courts. This helps them avoid the reputational damage associated with sensitive matters such as discrimination, sexual misconduct, or widespread fraud.

Mass arbitration is a direct challenge to this strategy. In the typical action, 25 or more similar claims are filed against one company, often coordinated by specialized law firms. The number is on the rise. In 2024, the AAA received 92 consumer and employment mass arbitration filings comprising more than 280,000 individuals’ claims, an average of more than 3,000 claims per case.

Companies are responsible for the administrative fees for each case, and the collective action can total millions of dollars in fees alone. This gives companies an incentive to settle quickly, often for a higher amount than they would have otherwise.

Mass Filings Prompt Changes to Arbitration Rules

Both AAA and JAMS have made significant changes to their rules to address mass litigation tactics. AAA’s Mass Arbitration Supplementary Rules went into effect on January 15, 2024, to enhance process efficiency in these cases. JAMS quickly followed suit with similar Mass Arbitration Procedures and Guidelines, effective as of May 1, 2024. These rules generally apply to proceedings involving 75 or more similar claims, although JAMS requires that parties agree in writing to apply its rules.

To prevent the inclusion of fictitious claims, both organizations now require counsel to provide verified claimant information and sworn declarations attesting to the accuracy of the submissions. The new procedures also facilitate early screening to identify and dismiss unsupported or meritless claims.

Companies can request a process administrator to resolve preliminary matters, such as verifying filing requirements and confirming claimant eligibility. Without this guardrail, claimant-side firms frequently used the threat of high filing fees to force companies into early settlements, regardless of the merits of the individual claims.

Most importantly, both organizations moved away from high, per-case filing fees. AAA uses a flat initiation fee of $11,250 to start the process, with claimants responsible for $3,125. Per-case fees apply to actions that proceed past the initial stage. JAMS implemented a flat, nonrefundable $7,500 filing fee, with consumers paying up to $2,500. JAMS then charges an appointment fee of $2,000 for two-party matters or $3,500 for disputes involving three or more parties. This fee is assessed per arbitrator rather than per case.

Companies Try to Counteract Mass Arbitration

Organizations are responding to mass arbitration by updating their contracts to require informal, prefiling negotiations. They’re also using stricter claim verification to filter out invalid or frivolous claims. When claims do go to arbitration, they’re forcing them into batches instead of arbitrating thousands of cases individually, making it harder for claimants to gain leverage through volume.

Bellwether cases are often chosen to test strengths, weaknesses, and potential settlement values. This strategy delays arbitration by creating a procedural bottleneck. Most claims are paused, sometimes for years, while a few representative cases are litigated.

To reduce costs, organizations are choosing arbitration providers with lower, fixed, or more structured fees. Some, however, have taken a scorched-earth approach by suing arbitration providers or challenging the validity of claims in court to avoid paying fees.

Uber sued the AAA in New York state court, arguing the fees were a “ransom” engineered by lawyers using the arbitration process to force settlements. The court refused to issue an injunction against the AAA. Postmates took a different approach by suing individual claimants, arguing that mass arbitration was effectively a class action. The court held the company to its own forced arbitration clause.

How States and Courts Are Responding

In response to the Postmates litigation, California passed S.B. 707, which requires organizations to pay arbitration fees within 30 days after the due date or be in material breach of the arbitration agreement. This 2019 law made California an attractive state for mass arbitration claims due to the pressure on organizations to settle quickly.

However, the California Supreme Court has since interpreted the law to require that nonpayment must be “willful, grossly negligent, or fraudulent” before S.B. 707 applies. The court also held that the Federal Arbitration Act (FAA) does not preempt S.B. 707 under this narrow interpretation.

The California Supreme Court’s ruling conflicts with federal court decisions, which have generally found that the FAA preempts state laws. Furthermore, in Frazier v. X Corp., the Second Circuit held that intra-arbitration procedural disputes, such as the payment of fees, are matters for the arbitrator to resolve. This ruling dealt a blow to claimants who used Section 4 of the FAA to obtain quick, high-value settlements due to the specter of massive arbitration fees.

At the same time, courts have held that mass arbitration procedures such as batching can be unconscionable and unenforceable if they create unreasonable delay, lack transparency, or force claimants to be bound by decisions in other cases. For example, in Heckman v. Live Nation, the Ninth Circuit invalidated rules that denied claimants a right to opt out, allowed limited discovery, or allowed the arbitration provider to make arbitrary decisions on how cases were grouped.

Courts are also examining whether mass arbitration procedures significantly alter the nature of arbitration. If so, states could regulate them without preemption by the FAA.

The Path Forward

Organizations should review their arbitration agreements to determine whether to include procedures for mass arbitration. However, the landscape remains highly uncertain, with recent court decisions providing mixed results. Some courts have upheld company procedures designed to rein in mass arbitration fees, while others have undercut such measures. Organizations and their counsel should monitor developments closely to determine the best path to address mass arbitration risks.

Alternative Dispute Resolution Is Evolving Rapidly. Are You Prepared?

Alternative dispute resolution (ADR), such as arbitration, is a rapidly changing area of the law that requires close scrutiny of emerging case law and legislation.

For those interested in learning more about ADR and pursuing a career as a practicing attorney, Purdue Global Law School offers an online Juris Doctor (JD) program. Graduates of our JD program are academically eligible upon graduation to sit for the California or Connecticut bar or, with an approved petition, the Indiana bar.

Business professionals can also benefit from a strong foundation in ADR principles. Purdue Global Law School’s online Executive Juris Doctor (EJD) program includes courses in specific areas of the law that help students better understand legal issues related to their business or profession. You can also choose from individual online law courses.

Request more information today to find the path that works for you.