In the latest development regarding so-called mass arbitrations, the U.S. Court of Appeals for the Seventh Circuit recently heard argument in a case that any company with consumer-facing terms should be following. In Wallrich v. Samsung Electronics America, Inc., No. 23-2842 (7th Cir. Nov. 8, 2023), Samsung was the target of a mass-arbitration campaign, i.e., a coordinated effort where plaintiffs lawyers line up thousands of individual claimants and file identical arbitration demands for them in order to force the company (here, Samsung) to pay millions of dollars in arbitration filing fees having nothing to do with the merits of the claims.
When Samsung Electronics received nearly 50,000 identical arbitration demands in 2022, it refused to pay the filing fees and the American Arbitration Association (AAA) closed the matter. Claimants then sued Samsung in federal district court to force Samsung to honor the terms of its arbitration provision and pay the AAA. In response, Samsung argued that there were no valid arbitration agreements between the company and many of the claimants, that the “collective” (mass) action violated the class action waiver in the terms and conditions, and that the court did not have the power to compel arbitration. The United States District Court for the Northern District of Illinois disagreed and found there were valid arbitration agreements, that the court did have power to compel arbitration, and that Samsung was indeed responsible for the $4 million (plus) in initial filing fees. Samsung appealed to the Seventh Circuit.
During oral argument on February 15, 2024, the Seventh Circuit considered whether it should reverse the District Court’s decision. The court was particularly interested in whether there were valid arbitration agreements between the company and the claimants. Members of the panel expressed skepticism, for example, that a spreadsheet of the claimants’ contact information and claim dates (submitted by claimants to the AAA as evidence, but not under penalty of perjury) was sufficient proof of an agreement. The court also questioned whether it had proper appellate jurisdiction to hear the case, since the District Court had not entered a final judgment in the case but instead made its decision through an order compelling arbitration and staying the litigation pending arbitration.
Because Wallrich is one of the first appellate cases to address the growing trend of mass arbitration, it is an important case to watch for any company that has, or is considering, adopting arbitration terms in its consumer-facing terms. Mass arbitrations have increasingly emerged as the plaintiff’s weapon of choice following the widespread adoption of arbitration provisions with a class action waiver in the wake of the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011). In mass arbitration proceedings, arbitration bodies like the AAA usually require the respondent company (not the consumer) to pay most of the initial filing fees. If there are thousands of claimants, these initial fees can amount to millions of dollars, which must be paid before any arbitrator has a chance to assess the validity of the claims. The plaintiffs’ bar then uses these sizeable upfront costs to pressure companies into early settlement.
Clients with consumer-facing terms should watch the developments in Wallrich, and other mass arbitration cases moving through the federal judicial system, as part of their routine reevaluation of the dispute resolution clauses in the consumer contracts. In the meantime, given the ongoing threat of mass arbitration, clients should carefully consider whether an arbitration clause makes sense or, at a minimum, whether to mitigate the risk of mass arbitration through strategies, such as designating an alternative arbitration body or adopting a batching process for these types of attacks.
As a leading advisor to technology companies, Wilson Sonsini Goodrich & Rosati is well-positioned to discuss the pros and cons of arbitration (and nuanced approaches to dispute resolution) for clients at all stages of growth. For more information on arbitration generally, or to discuss your preferred approach, contact any member of the firm’s litigation or technology transactions practices.
