How mass arbitration impacts employment agreements

(Mass arbitration is a recent phenomenon in which thousands of plaintiffs—often consumers, employees, or independent contractors—bring arbitration demands against a company at the same time.)

The arbitration clause in an employment agreement is one of the most overlooked, yet it often has the greatest potential to be a ticking time bomb. Almost every contract has a “dispute resolution” clause that dictates the forum that will be used if litigation arises related to the agreement. 

In most cases the forum is either (a) state or federal court; or (b) an arbitration association like the American Arbitration Association or JAMS.  

Years ago, employment attorneys stopped using court as the chosen forum and instead started inserting arbitration clauses with class action waivers as a method of avoiding the potential massive liability associated with class action litigation. 

In class action litigation, one plaintiff can sue on behalf of hundreds, or thousands, of unidentified plaintiffs. This approach drives the potential liability up by orders of magnitude.

The strategy worked … until recently.  A new form of litigation has arisen as a result of these arbitration clauses/class action waivers.  It’s called a “mass arbitration.”  In a mass arbitration, the attorney(s) pre-identify hundreds, or thousands, of plaintiffs in individual cases usually filed in bulk.  

So, what’s the big deal about this growing trend?  Traditional arbitration forums typically charge a per case fee, along with an arbitrator deposit, for each individual case. 

For example, if a case fee and arbitrator deposit total $5,000 and there are 10,000 individual cases filed in a mass arbitration, the initial costs to start the litigation will be $50 million.  That’s before arbitrators are even assigned or before a company has had a chance to present their side of a case. That fee is just to start the cases.  

This reversal of companies’ own class action waiver strategy has resulted in substantial repercussions for several large and well-known companies, including Amazon, DoorDash, Uber and Postmates.

As reported, Amazon faced a nine-figure filing fee in a non-employment related mass arbitration, and decided to proverbially “swim back to Alcatraz” by choosing to remove its arbitration clause from its terms of service and go back to allowing lawsuits to be filed against them in court. 

So, does this mean companies should follow Amazon’s lead and ditch arbitration clauses in favor of a return to court?  No.  It goes without saying that Amazon is uniquely positioned financially to handle class action litigation, as are companies like Google, Apple and Microsoft. 

Most companies simply cannot take on the potentially massive liability of a class action because their case reserves are not strong enough for both the extended fight that comes with a class action and the potential payout if they lose the case.

Contrary to Amazon’s position, arbitration remains a viable alternative and should remain the forum of choice for most companies. Arbitration presents efficiencies for the company and fundamental fairness and speed for the employees.  

That said, companies need to think more strategically about the actual arbitration platform or organization they use in their clauses, and about how that choice may have adverse consequences.  In addition, companies need a process to ensure that employee grievances are heard, taken seriously and addressed. 

Accordingly, here are some factors that all companies should consider when pondering litigation issues in general, in addition to mass arbitrations.

Ounce of prevention

As HR executives well know, the best strategy to employ in any form of litigation is preventative medicine. Prevention starts with two simple principles: document, document, document and communicate, communicate, communicate. 

If an employee reaches the point of needing to be terminated and is blindsided, or even just surprised, the chance of future litigation increases exponentially, which is good for no one.  Employees should know exactly where they stand, what they are doing well and what they are doing poorly. 

Performance evaluations should be documented and acknowledged by both the company and the employee so there are no crossed wires on the employee’s status.  Being consistent and systematic about documentation and communication can significantly reduce the chance of both one-off litigation and mass arbitrations.  Most importantly, it’s simply the right and fair thing to do.

Also of paramount importance is thinking critically about the forum chosen for arbitration.  Most companies use boilerplate dispute resolution provisions without much thought about the consequences. 

But this provision alone can result in thousands, or millions, of dollars being spent and an endless sapping of time, energy, bandwidth and human capital.  You can read more about the potential impact of these clauses here, but thinking critically about your arbitration forum has become non-negotiable in the era of mass arbitrations.

Technology

Among the many changes COVID has forced, the use of technology in dispute resolution is quickly becoming more prevalent, as it should be. Examples include the use of Zoom for hearings, e-mail for document and evidence submission, and Dropbox for document storage,  but none of these technologies are integrated in a seamless workflow, nor are they purpose-built for legal proceedings. 

But if your dispute resolution provider cannot save you time, money, and effort by facilitating its processes through technology, you need a new dispute resolution provider. Technologies that facilitate efficient litigation should be embraced, not used begrudgingly in the vain hope of returning to the costly ways of the past. 

And while video platforms have been unequivocally useful during the pandemic, their use alone is not an indicator that a provider is technologically advanced.

In short, alternative dispute resolution providers should be leaders when it comes to thinking of new and inventive ways to use technology in litigation. Remember, arbitration is an alternative to court, it should not look and function exactly like court. 

Additionally, mass arbitrations cannot be administered efficiently without heavy adoption of technology.  And plaintiffs cannot get swift and efficient resolution of meritorious disputes if the process is rooted in plane flights, bankers boxes and conference rooms.  Likewise, a process consisting of disjointed filing and scheduling processes, documents exchanged over emails, and video conferencing as a final step doesn’t reflect improvement in the use of technology.

Mediation

Mediation can be a highly effective and amicable process if used at the right time. Currently, it is often employed as a last resort, when the parties have reached their breaking point and no common ground for settlement appears to exist. 

As a result, it ends up as an offshoot of the litigation process that can often distract from the litigation process rather than integrating into it.  Doesn’t it seem incongruous to use a collaborative and facilitative settlement process only after years of litigation when acrimony and animosity have set in and the parties are completely entrenched and at the peak of their anger?  Yes, it does.  

Instead, mediation should be used strategically and introduced at stages of the case where the parties may be more amenable to settlement.  That timeframe may be at the beginning of the case. In a mass arbitration, the timing may depend on the outcome of early bellwether litigation, as that could demonstrate which direction the remaining cases are likely headed.

Because of technology, introducing mediation as a necessary step at several points in the litigation process is easier and more cost effective. Plus, it helps to make sure expectations are consistently level-set and there are multiple opportunities for amicable settlement.

Cost sharing

Cost sharing has always been a central theme in the fairness of arbitration provisions.  If a company is choosing the dispute resolution forum, is it fair for them to shift the full set of per case fees to its employees?  Is it fair for a business to be priced out of a dispute from initial filing fees? 

The answer in both cases is “probably not.”  It’s ok that both parties have skin in the game.  This approach ensures that a party thinks twice before filing a frivolous claim. 

That said, it’s also reasonable to think creatively about how a company can bear a portion of the financial burden instead of shifting everything to its employees, while also ensuring that the money it spends is directed toward a resolution of the merits of the case and not merely a punitive settlement.

Companies dreading the possibility of being forced back to the world of litigation in courts and class actions can rest easy. Arbitration — more than ever before — can and does remain viable and useful as an alternative in the era of mass arbitration.

However, arbitration only works if it is designed thoughtfully, holistically and accounts for technology-centered rules and procedures. The technology itself, cost-sharing, and the strategic use of mediations, must be incorporated as well.

Whether designing a system in-house, or selecting an ADR provider, companies that consider each of these factors will have a much better chance at creating a fair, efficient arbitration process for their employees (and customers) — one that removes the gamesmanship, discourages frivolous claims, and resolves meritorious claims in a fair, expedient, and easy-to-understand manner.