Courts are paying significant attention to the enforceability of online terms of service, including the mandatory arbitration agreements that are often part of them. For years, companies included these mandatory arbitration provisions with class action waivers to reduce their exposure to mass, collective actions. Recently, however, plaintiffs' counsel have devised a strategy to weaponize these arbitration provisions against companies by filing (or threatening to file) thousands of individual arbitrations at once, and then leveraging the potential millions of dollars in arbitration fees to extract large settlements from businesses.
Prior to 2024, the two leading arbitration providers—JAMS and the American Arbitration Association ("AAA")—charged businesses several hundred dollars in initial filing fees per claimant. Thus, if a plaintiff's firm amassed 5,000 claimants, the business would be invoiced for more than $1 million in initial filings fees (regardless of ultimate liability on the claims). Under the California Arbitration Act, failure to pay these arbitration fees could result in severe sanctions.
In light of this fee risk, many companies have revised their arbitration provisions to help protect against the risk of mass arbitration—including by selecting other arbitration providers such as NAM and ADR Services that have more favorable mass arbitration fee schedules.
In response, JAMS and AAA recently introduced revised mass arbitration procedures and fee schedules that are more favorable for businesses. The most significant change is that JAMS and AAA now charge businesses a flat, initial filing fee of $7,500 and $8,125, respectively. The new flat fee approach hinders plaintiffs' counsel's ability to leverage these initial filing fees.
However, JAMS and AAA still charge hefty case administration fees that can easily add up to six or even seven figures. In light of this, many companies are also still considering other arbitration providers. They are also revising their arbitration provisions to include "batching" or "bellwether" provisions to further mitigate against this fee risk. Under a typical "batching" provision, up to 100 claims may be treated as a single claim for fee purposes. A "bellwether" provision typically involves selecting a small number of representative cases from a larger pool of similar claims to be decided first; the outcomes are then used to guide the resolution of the remaining cases.
Arbitration providers each take their own approach when it comes to batching claims and hearing bellwether cases. Under the JAMS rules, for example, in the event of a "Mass Arbitration," which involves "75 or more similar" cases, JAMS may(but does not have to) designate a Process Administrator who has the authority to determine whether to batch, consolidate, or otherwise group the claims, and for what purposes (including "discovery, arbitrator appointments, merits hearings, or otherwise"). While AAA's mass arbitration procedures define "Mass Arbitration" to involve 25 or more consumers, they are silent on batching procedures and expressly encourage the parties to "agree to processes for the efficient resolution of those cases." Although AAA will appoint a Process Arbitrator for each mass arbitration to initially decide which demands should be included, AAA's rules do not explicitly give the Process Arbitrator authority to batch, group, or consolidate claims.
Importantly, the rapidly evolving mass arbitration landscape emphasizes the need for businesses to re-evaluate their arbitration agreements and online terms proactively. To illustrate, for JAMS' new procedures to apply, the applicable agreement or terms must explicitly incorporate these new changes either in a pre-dispute or post-dispute written agreement. This highlights the importance of regularly reviewing and amending arbitration clauses to ensure they reflect the latest procedural innovations and cost structures.
Businesses must also make sure that any updates they make to their arbitration provisions are actually binding on consumers. Most jurisdictions require that companies provide consumers with "reasonably conspicuous notice" of the update terms, and that consumers "manifest assent" to those updated terms. This updating process should be carefully crafted in consultation with experienced counsel.
As the arbitration environment continues to evolve, it is crucial for businesses to stay informed about these changes and regularly review and update their terms of service and arbitration agreements. By doing so, companies can be better prepared to navigate the complexities and risks of mass arbitration. Our team is prepared to help.
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