Potential pitfalls of the arbitration clause: Mass arbitrations on the rise

Arbitration Clauses

Companies, and particularly online retailers, often include an arbitration clause or class action waivers (or both) in their terms and conditions. Particularly when joined with a class action waiver, arbitration clauses reduce exposure to mass claims, and keep the claims private between the company and its customers. Generally speaking, these clauses serve to reduce a company’s exposure. Thus, when employing such clauses, consumers who wish to make a purchase from the website must accept the arbitration agreement to complete the purchase. This would then bind the consumer to arbitrate any claim on an individual basis. 

Mass Arbitration

The plaintiff’s class action bar has been frustrated by the use of these clauses. In an attempt to overcome the practical limitations created by such clauses, we have observed a recent trend among plaintiff’s attorneys where a substantial number of individuals collectively bring similar or identical claims against a common defendant through the arbitration process. 

Initiated through extensive filing campaigns, mass arbitration claims can impose significant financial burdens on companies. While the cost of litigating a case in arbitration is clearly less significant in an individual arbitration than in a class action, a company is responsible for filing and administrative fees. Thus, when plaintiff attorneys organize and file groups of claims the filing fee can quickly escalate into the millions of dollars. This financial burden, coupled with the challenges of conducting due diligence in the face of extensive claimant numbers, can quickly strain a company’s resources.  

Takeaway

While plaintiff’s attorneys have largely been focusing on technology-based companies, companies across the country that utilize arbitration clauses are at risk. Eversheds Sutherland recommends that consumer-facing companies adopt proactive measures to prevent or mitigate potential risks.

Specifically, companies should initiate thorough reviews of existing arbitration agreements, ensuring that these agreements are clear and transparent and provide fair terms for all parties involved. They should also consider revising agreements to include provisions that discourage or limit the potential for mass arbitration claims when possible. This includes a required pre-dispute resolution provision for each individual claimant. 

By adopting a proactive approach, businesses can significantly reduce their exposure to the challenges posed by mass arbitration. A comprehensive strategy will protect a company and contribute to building a positive reputation in the industry while maintaining healthy relationships with consumers.

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.