The Mass Arbitration Racket: Unscrupulous Abuse Of The Arbitration Ecosystem

We’ve all gotten those little postcards in the mail informing us that a big lawsuit against {insert company here} has settled. It reads something along the lines of, “As…

We’ve all gotten those little postcards in the mail informing us that a big lawsuit against {insert company here} has settled. It reads something along the lines of, “As a potential member of the class in the recent lawsuit against {insert company here}, you may be entitled to compensation.” Even though you didn’t remember signing up to join the lawsuit, it’s great you might get some cash. It’s the holidays; it’s 2020 – every little bit helps. A closer reading shows that you’ll receive a coupon to enjoy a free {insert product here} from {insert company here}! Wait, what?  

Welcome to the world of class actions, where consumers receive pennies on the dollar, if anything at all, and the lawyers get big paydays. A 2015 study by the Consumer Financial Protection Bureau found that only 13 percent of class actions resulted in a payout for consumers. And even then, the average award for consumers is about $32, while plaintiffs’ attorneys got about $1 million. 

A system where lawyers reap the rewards is why many consumers might choose to use arbitration to settle disputes with companies. Recent ILR research shows that consumers win more money, more often and more quickly in arbitration than in litigation. Lawsuits can be expensive, and it can be nearly impossible to find a lawyer to take low-dollar claims.  

But just like how plaintiffs’ lawyers found ways to abuse the class action system, some are finding ways to use arbitration to prioritize their interests over their clients by encouraging what’s known as mass arbitration. 

Mass arbitrations depend on the fact that, under the rules of most arbitral organizations, businesses are required to pay most of the costs of arbitration, with customers and workers paying relatively little (and under some arbitration clauses, nothing at all). Some plaintiffs’ lawyers recognized that, as the number of claimants increases, the total costs of arbitration could skyrocket. And if a lawyer can recruit thousands of clients or more, that lawyer can impose millions—sometimes tens of millions—in arbitration fees on companies. And predictably, such lawyers tell a business that it must settle for a large amount or pay those fees to the arbitral organization—all regardless of the merits.  

Mass arbitration isn’t about access to justice; it’s about increasing the litigation costs. In their quest to obtain leverage, plaintiffs’ lawyers have used questionable tactics to amass large numbers of claimants—often without proper vetting or investigation.  Mass arbitrations might include:  

  • Some claimants who are not customers or workers associated with the business—meaning they have no legitimate claim and are not parties to the arbitration agreements they have invoked. 
  • Some claimants who have not actually entered into valid engagement agreements with the lawyers who seek to represent them (despite ethical rules requiring such agreements). 
  • Some claimants who did not use the product or service that is the subject of their claim, meaning that their claims are likely frivolous. 
  • Some claimants who have passed away, raising serious questions about whether the lawyers vetted them at all. 

Claims like these should never be brought at all.  They are part of the scheme that some plaintiffs’ lawyers pursue based on the model (pioneered in mass torts litigation) that more claimants equal more money. But more money sometimes means more problems—in this case, problems of professionalism and ethics. 

In future posts, we’ll take a closer look at these stories of abuse.