The Seventh Circuit's recent decision in Wallrich v. Samsung Electronics America, Inc. is significant news in the world of mass arbitration. In recent years, businesses have faced an increasing risk of being targeted by abusive mass arbitration campaigns that seek to leverage the arbitration fees the business must pay, win or lose, to coerce a settlement of even meritless claims. In Wallrich, Samsung was facing a mass arbitration that it contended was based on meritless claims; among other things, Samsung said, some of the claimants were not really Samsung customers at all.
In response, Samsung refused to pay most of the arbitration fees, which led to the closure of the arbitrations.
Seeking to return to arbitration, the plaintiffs' lawyers went to federal court and obtained an order that compelled Samsung to participate in the arbitrations and pay the fees. Samsung appealed, and the Seventh Circuit has now reversed the district court's decision. As discussed below, the court of appeals held that the mass arbitration claimants had failed to prove the existence of valid arbitration agreements, and added that Samsung could not be forced to pay arbitral fees because Samsung's arbitration agreement delegates threshold arbitration-fee disputes to the arbitrator and the arbitration organization (here, the American Arbitration Association) had determined that the arbitrations should be closed.
(We filed an amicus brief for the interested businesses associations in support of Samsung's appeal.)
Mass arbitration abuses
In a mass arbitration, plaintiffs' lawyers pursue numerous copycat individual arbitrations against a business. There is nothing wrong in principle with a mass arbitration, but threats to file mass arbitrations have sometimes been the vehicle for shakedowns of businesses in recent years.
The lawyers threatening to file mass arbitrations rarely plan to actually litigate the arbitrations. Instead, they seek to weaponize the upfront arbitration fees that the business must pay immediately, even if it later wins the case, to extract settlements, regardless of the merit or value of the underlying claims. Even worse, to increase their settlement leverage, these lawyers sometimes engage in questionable practices to recruit as many claimants as possible so that they can threaten the business with an ever-larger amount of arbitration fees. For example, some businesses have complained that the claimants' lawyers use misleading online solicitations to sign up claimants and then fails to vet them to ensure that they are real people who actually are customers of or workers for the company and have a colorable claim.
We have written about this problem in detail in a report for the U.S. Chamber of Commerce, Mass Arbitration Shakedown: Coercing Unjustified Settlements.
The Wallrich mass arbitration and petition to compel arbitration
According to Samsung, the mass arbitration campaign at issue in Wallrich is a textbook example of this phenomenon. Samsung contended that after it refused to settle a threatened mass arbitration, the plaintiffs' lawyers proceeded to file nearly 50,000 individual arbitrations before the AAA asserting identical claims under Illinois's Biometric Information Privacy Act. In each demand for arbitration, the claimant attached the arbitration provision in Samsung's terms and conditions, which had been downloaded from Samsung's website, and alleged purchasing an (unidentified) Samsung phone. None of the claimants, however, signed the demands for arbitration. Samsung argued that it was deeply skeptical of the veracity of the claimants, pointing to what it described as obvious deficiencies in the AAA filings (including missing or inaccurate contact information, duplicative claims, and claims filed in the names of fictitious and deceased claimants).
Because of these concerns, Samsung refused to pay most of the over $4 million in initial AAA fees assessed for the filings. (Under the Samsung arbitration clause attached to the demands, Samsung was responsible for all arbitration fees, even the claimant's share.) In response to that refusal, the AAA asked the claimants to advance Samsung's share of the fees, subject to reallocation in the final awards. When the claimants also declined to pay the fees, the AAA terminated the arbitration proceedings.
The plaintiffs' firm, on behalf of over 35,651 of the claimants who allegedly reside in the Northern District of Illinois, filed a petition in that federal court to compel Samsung to arbitrate and pay the AAA fees. Over Samsung's objections, the district court granted that petition, ordered Samsung to pay the AAA fees, and stayed the action. Samsung appealed, focusing primarily on two issues: (1) whether the district court had erred in overlooking the claimants' failure to prove that they have arbitration agreements with Samsung; and (2) whether the district court had the power to order Samsung to pay the arbitration fees.
The Seventh Circuit's decision
The Seventh Circuit reversed, holding that the district court had erred in both steps of the analysis.
Proof of existence of arbitration agreements: First, the Seventh Circuit held that the district court had erred in concluding that the claimants had satisfied their obligation of proving the existence of arbitration agreements with Samsung. The court noted that under the "summary judgment standard" applicable to motions to compel arbitration, the claimants had an initial "burden of producing a valid arbitration agreement with Samsung." But the materials submitted by the claimants with their petition—"(1) copies of their arbitration demands made before the AAA; (2) a spreadsheet containing their names and addresses; (3) copies of Samsung's terms and conditions; and (3) the AAA's determination that the consumers had met the AAA filing requirements"—were insufficient.
The Seventh Circuit began by explaining that the arbitration demands, which were unsigned, were not competent evidence because "[n]o claimant submitted any declaration or otherwise attested under penalty of perjury to the facts alleged in the arbitration demands."
The spreadsheet of claimants and copies of Samsung's terms were equally deficient. The spreadsheet merely lists names and addresses, but dooesn't "show that any of those named were Samsung customers." And the copies of the terms—unaccompanied by declarations or affidavits—were "simply copies found in any Samsung device or on Samsung's website, not terms and conditions reviewed and received by specific customers."
Finally, the "AAA's determination that the consumers had met the filing requirements . . . also does not serve as evidence of an arbitration agreement" because the filing requirements "involve no substantive determinations."
The Seventh Circuit was careful to explain that the initial burden of production was modest; the consumers "could have submitted receipts, order numbers, or confirmation numbers from their purchases of Samsung devices"—or even "declarations attesting to the allegations in their arbitration demands"—to meet their "initial burden of pro[of]." But they had offered nothing of the sort. And the court rejected their request for a "remand . . . to allow them to present additional evidence" because "the summary judgment stage, which our posture is akin to, does not allow second chances."
Order to pay arbitration fees:In addition, the Seventh Circuit held that the district court also had "exceeded its authority and the scope of the arbitration agreements by ordering Samsung to pay the AAA filing fees." The Seventh Circuit determined that by incorporating the AAA rules, which give the AAA "discretion over the payment of administrative fees, including the consequences that would stem from a party's refusal to pay those fees," the parties' arbitration agreement delegated threshold arbitration fee disputes to the AAA." The court then explained that the AAA acted "within in its discretion" by terminating the arbitrations after the claimants declined to advance Samsung's share of the fees.
In support, the Seventh Circuit pointed to similar holdings by the Fifth and Ninth Circuits, Dealer Computer Services, Inc. v. Old Colony Motors, Inc., 588 F.3d 884 (5th Cir. 2009), and Lifescan, Inc. v. Premier Diabetic Services, Inc., 363 F.3d 1010 (9th Cir. 2004). The claimants tried distinguishing those cases as "involv[ing] parties who did not have the means to pay their fees." But the Seventh Circuit rejected that distinction. The court explained that the FAA "does not grant the consumers an unfettered right to arbitrate," but rather merely requires that "parties arbitrate according to the terms of their agreement." Because the agreements allowed the AAA to decide to terminate the arbitrations, "the parties therefore fully 'arbitrated' under their agreement." The court noted that "[i]f the AAA believed Samsung was abusing the arbitration process, it could have stayed the case or threatened to decline administering future consumer arbitrations with Samsung, but it did not. Instead, the AAA terminated the proceedings and invited the parties to resolve their claims in district court. At that point," the Seventh Circuit explained, "Samsung's and the consumers' arbitration was complete."
Appellate jurisdiction: The Seventh Circuit also considered whether it had appellate jurisdiction in in the first place. The claimants argued that there was no jurisdiction under Section 16(b)(1) of the Federal Arbitration Act, which bars an interlocutory appeal from order "granting a stay of any action under section 3 of this title," because the district court had entered a stay. The Seventh Circuit concluded, however, that the stay was not entered under Section 3 of the FAA, which applies to motions to compel arbitration in the context of a pending lawsuit in which there are also "substantive claims" that "are distinct from a request to arbitrate." Instead, because plaintiffs had commenced the action as a freestanding "petition to compel arbitration," the order was under Section 4 of the FAA. The Seventh Circuit explained that the order was an "appealable final decision" because the district court "did not have authority to enter a stay," as the order compelling arbitration "resolved the action's only claim for relief," which "ended the litigation on the merits."
Implications
Wallrich represents an important data point for any business that may be targeted by a mass arbitration.
First and foremost, it makes clear that businesses can fight back when facing a threat to file a mass arbitration that includes the names of claimants who aren't customers or workers associated with the company. Most significantly, businesses can properly resist arbitrations asserted on behalf of individuals who don't actually have arbitration agreements with the business. That resistance can take different forms. For example, a business could wait to see if the claimants follow the same strategy as the Wallrich claimants and file a petition to compel the business to arbitrate and then litigate whether each claimant can prove an arbitration agreement. But a business could take other approaches.
For instance, some businesses have chosen to go on the offensive and bring a lawsuit against the claimants—and sometimes also their counsel—to halt the arbitrations. These lawsuits could invoke the Federal Arbitration Act in seeking an injunction against the arbitrations or a declaratory judgment that the underlying claims are not arbitrable. And potential claims against claimants' counsel could challenge (among other things) those lawyers' erroneous representations that the underlying claimants are real people who actually are customers or workers with a relationship to the business. This approach may allow the business to identify an appropriate court (or courts) in which to raise the issues.
Depending upon the arbitral forum, businesses may also have the option of seeking the appointment of a process arbitrator to consider these and other threshold challenges to the arbitrations.
Regardless of how the issue is presented, businesses can argue that the claimants must prove the existence of an arbitration agreement—just like businesses need to when they move to compel arbitration in response to a lawsuit. (To be sure, in some lawsuits, the company's burden might be satisfied by the plaintiff's complaint itself, if it alleges the existence of the contract with an arbitration clause and thus operates as a judicial admission that the parties agreed to arbitrate.)
Because of deficiencies in the way that claimants are commonly recruited for mass arbitrations, claimants' counsel may be unable to meet that initial burden. That's what the Seventh Circuit held in Wallrich. A mere list of claimants and limited identifying information is not enough, the Seventh Circuit explained, because it isn't evidence sufficient to show that each claimant actually entered into an arbitration agreement with the defendant. Businesses should remain alert to ways to challenge the admissibility of materials submitted to prove that asserted claims are arbitrable.
In addition, although the Seventh Circuit's decision focused on the claimants' initial burden to show the existence of an arbitration agreement, businesses can also show that, even if some or all claimants seemingly satisfy that initial burden, that evidence can be rebutted. For example, substantial inaccuracies in the list of purported claimants could show that the list is unreliable as a whole—potentially casting it into doubt as to each and every claimant.
In addition, the Wallrich court's discussion of the arbitration fee issue constitutes an important reminder to parties to arbitration agreements to consider carefully the applicable rules regarding allocation of arbitration fees and disputes over arbitrability of claims. If parties are not satisfied with how the rules allocate jurisdiction to decide these issues, parties should consider specifying in the agreement whether courts or arbitrators may decide them.
That said, it is not certain that other courts will follow the Seventh Circuit's approach to the fee issue. Some critics of Wallrich will caricature the opinion as an open invitation for businesses to avoid arbitration at will by simply refusing to pay their share of the arbitration fees. But that would greatly oversimplify things. The Seventh Circuit emphasized that it was deferring to the AAA's determination of how to allocate the fees, and that, in light of the contract and applicable AAA rules, the organization had discretion to impose a different allocation or different consequences for a failure to pay applicable fees. As the Seventh Circuit observed, "[i]f the AAA believed Samsung was abusing the arbitration process, it could have stayed the case or threatened to decline administering future consumer arbitrations with Samsung, but it did not." Wallrich's holding on the fees issue ultimately turned on the parties' agreement to incorporate AAA rules: having "agreed to abide by the rules and procedures of the AAA," the parties are bound by "those rules and their consequences."
In this case, Samsung argued that it was the claimants' counsel—not Samsung—that sought to abuse the arbitration process. It's possible that the AAA was concerned with the claimants' counsel's use of arbitration fees as a cudgel to threaten Samsung to the bargaining table, especially given (according to Samsung) the apparent failure by claimants' counsel to vet their clients to ensure that they actually were Samsung customers.
But the AAA may not agree in future cases that it is claimants' counsel who is abusing the process if a business refuses to pay its share of the arbitration fees in future cases. And under the logic of the Seventh Circuit's decision, courts may not second-guess the AAA's determination regarding how to handle nonpayment of fees—at least in the absence of contract provisions allocating those questions to courts. Put another way, it is not risk-free for a business to decline to pay arbitral fees. Businesses should carefully weigh the costs and benefits of that approach, including a clear-eyed assessment of the nature and extent of any abuses of the arbitration process by claimants' counsel.
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