Arbitration by Stephen Ware

Mass Arbitration in 7th Circuit: Wallrich v. Samsung

The Seventh Circuit will soon hear argument in a mass arbitration case which has attracted amicus briefs from leading organizations on each side of civil justice issues, including the U.S. Chamber of Commerce and the plaintiffs’ trial lawyers organization, the American Association for Justice. The case is Wallrich et al v. Samsung Electronics America, Inc. et al.

Mass arbitration was plaintiffs’ lawyers’ response to courts’ enforcement of agreements requiring individual arbitration instead of class actions. As arbitration organizations’ rules tend to require lower filing fees of individual claimants than responding businesses, those businesses have balked at the fees of mass individual arbitration. For instance, Amazon removed arbitration from its terms of service in 2021 “after plaintiffs’ lawyers flooded Amazon with more than 75,000 individual arbitration demands on behalf of Echo users. That move triggered a bill for tens of millions of dollars in filing fees.”

Other companies have tried to reduce the fees of mass arbitration, such as by switching arbitration organizations. For instance, Damini Mohan reports that “In 2020, Doordash changed its arbitration provider from AAA to ADRServices, Inc., which has a lower filing fee due to thousands of delivery workers initiating mass arbitration.”

Another approach is batching. For instance, Samsung’s new arbitration agreement provides:

“Both the counsel for the claimant and the counsel for Samsung must each pick 25 claims to go through individual arbitration,” all before the same arbitrator.  After these 25 arbitrations, “the parties will engage in global mediation for all the remaining claims.” Then, if claims remain unresolved, counsel for each side pick 50 more claims for individual arbitration, all before the same arbitrator (although a different arbitrator from the first 25.) And so on.

As Mohan writes, “From a business perspective, multi-staged batch arbitration helps manage mass arbitration more efficiently by reducing the upfront costs and distributing them more evenly over a period of time.” And from a business perspective, perhaps settling most of the cases after paying fees to arbitrate only a small portion of them.

Samsung’s new arbitration agreement appeared after the Wallrich case now before the Seventh Circuit.

In Wallrich, Samsung device users alleging violations of the Illinois’ Biometric Information Privacy Act (“BIPA”), 740 ILCS 14/1, et seq., filed 50,000 individual arbitration demands before the American Arbitration Association (AAA) in 2022. The AAA invoiced the consumers for their share of the initial arbitration administration fees, which the consumers paid. However, Samsung notified the AAA that it would not pay its share of the assessed initial administrative fees for the Illinois claimants because it found the claimant list included discrepancies such as deceased claimants and claimants who were not Illinois residents. Samsung agreed to pay the fees for fourteen consumers now living in California, citing California Code of Civil Procedure § 1281 et seq., which provides for sanctions in event of nonpayment.

Consumers filed a petition to compel arbitration in the U.S. District Court for the Northern District of Illinois, where Judge Harry D. Leinenweber ruled for the consumers—compelling arbitration and ordering Samsung to pay over $4 million in AAA fees.

The district court found (p.22) that Samsung and the petitioners formed arbitration agreements because “To find that each Petitioner residing in this District is a Samsung customer, the Court must accept the word of over 30,000 individuals, some of whom may have been recruited to this action by obscure social media ads.”

In contrast, Samsung’s brief to the Seventh Circuit says the district court erred in thinking it “‘must accept’ the unverified and unattested ‘word of over 30,000 individuals.’” Samsung’s brief says, “no Appellee swore under penalty of perjury that the petition’s allegations or its attachments were true. . . Appellees thus failed to convert the petition and its attachments into evidence.” Samsung’s brief says, “Appellees have not submitted any evidence that each one of them owns a Samsung device”

On the other hand, petitioner’s brief to the Seventh Circuit says of the standard to compel arbitration that “courts ‘have analogized the standard to that required of a party opposing summary judgment’”, where “Sworn testimony is not the only basis on which summary judgment may be granted.” Facts may be supported by a broad range of “materials in the record,” including “depositions, documents, electronically stored information, affidavits or declarations, stipulations … , admissions, interrogatory answers, or other materials.” Fed. R. Civ. P. 56(c)(1)(A).

The district court said:

Samsung has a customer list, against which they could compare the list of Petitioners. Samsung raised concerns about specific names to the AAA, which in

turn asked Petitioners to correct their list. Petitioners did so, and the record does not show that Samsung has raised specific concerns since. Samsung’s current rejection that all Petitioners are customers is merely “denying facts,” and this is not enough.

 Samsung’s brief replies that whether it had a customer “list is irrelevant because Appellees bore the initial burden of proof, which they did not carry.” In addition, Samsung’s brief says it “does not have a comprehensive ‘customer list.’” Petitioner’s brief refers to “Samsung’s failure to identify a single claimant—out of tens of thousands—who didn’t show up in its records” and Samsung’s “refus[al] to provide information entirely within its possession” both of which seem to continue asserting that the burden is on Samsung.

The district court’s holding that Samsung and the petitioners formed arbitration agreements was also based on the district court’s finding that “The AAA has already reviewed Petitioners’ arbitration agreements and determined that they met the filing requirements.” Addressing this, Samsung’s brief to the Seventh Circuit says:

the AAA’s filing-requirement determination says nothing about whether the parties agreed to arbitrate, because the AAA does not require claimants to establish at filing that they are bound by an arbitration agreement. It instead requires claimants to simply attach an arbitration agreement to their demand without proof that they are bound by it.

 And Samsung correctly points out that “whether the parties agreed to arbitrate at all is a question for the court (and, if necessary, a jury), not the arbitrator.” However, petitioner’s brief says the record shows

(a) each claimant had filed a demand for arbitration stating that they are the owner of a Samsung device, along with significant amounts of identifying information; (b) this information was subject to official and adversarial vetting, in which both the AAA and Samsung raised issues that the claimants addressed;

 Having found that the petitioners formed arbitration agreements with Samsung, the district court went on to hold that Samsung’s refusal to pay the AAA’s fees for each individual claimant constitutes a breach of the arbitration agreement, so the court’s order compelling arbitration also ordered Samsung to pay those fees. In contrast, Samsung’s appellate brief says “the (alleged) arbitration agreements” “provide that administrative filing fees ‘shall be determined according to AAA rules,’” which Samsung reads as “the arbitration agreements expressly commit[ting] administrative-fee issues to the AAA.” Samsung says, “the AAA, applying its own rules, decided that Samsung was not required to pay fees and closed the cases given the nonpayment by either party.” On the other hand, petitioner’s brief says the AAA “the AAA determined that the company was ‘responsible for payment of the initial administrative filing

fees totaling $4,125,000.00’” and “the AAA [closed] the arbitrations ‘due to non-payment of filing fees by the business.’” So, the “record cannot be squared with Samsung’s assertion that the AAA ‘decided that Samsung was not required to pay fees.’”

Interestingly, the district court notes that Samsung has not argued inability to pay, “but the Court has not been convinced that Petitioners are able to lend over $4,000,000 while the dispute pends.” And petitioners’ appellate brief says the cases Samsung cites are distinguishable because they “involved parties that could no longer afford their fees, which courts have consistently distinguished from a willful refusal to pay.”

While Samsung argues that “administrative fees are quintessential ‘procedural’ matters for arbitral bodies, not courts, to decide,” the district court did “not see filing fees as procedural in this case” because “The fees are bound up in the right to arbitrate that the ADR tribunal governs.” This procedural/substantive distinction may be crucial under the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002), which said, “issues of substantive arbitrability . . . are for a court to decide and issues of procedural arbitrability, i.e., whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, are for the arbitrators to decide.”

Arbitration Appeals Before SCT in Coinbase v. Bielski

The Supreme Court will hear argument this Tuesday March 21 in Coinbase, Inc. v. Bielski, in which the issue centers on appeals of district court rulings denying motions to compel arbitration. 

The Federal Arbitration Act generally enforces arbitration agreements, and it does so not with the usual remedy for breach of contract, which is money damages, but with a stronger remedy—specific performance. The Federal Arbitration Act does this by instructing district courts to grant motions to stay litigation and compel arbitration of claims the parties agreed to arbitrate.[1]

In further support of arbitration is the Federal Arbitration Act’s appeals structure. FAA § 16 makes immediately appealable district court orders denying motions to compel arbitration,[2] but not orders granting them.[3] So, if the district court rules for arbitration, the parties go to arbitration, instead of appealing the district court’s pro-arbitration ruling to the circuit court. But if the district court rules against arbitration, then the party seeking arbitration is entitled to an interlocutory appeal to ask the circuit court to reverse the district court’s anti-arbitration ruling, and thus to compel arbitration. So, the party seeking arbitration can get the dispute to arbitration by winning at either district or appellate court, but the party opposing arbitration has to win at both courts if the pro-arbitration side appeals.

All that is established by statute, while the question in this Supreme Court case, Coinbase, Inc. v. Bielski, is narrower. It’s a question about staying the district court pending appeal. If the district court rules against arbitration and the party seeking arbitration exercises its right to an interlocutory appeal, may the district court proceed on other issues in the case while that appeal about arbitration is pending; or is the district court automatically stayed with respect to the entire case pending appeal? That’s the question the Supreme Court has set for argument on March 21.

In this case, Coinbase, Inc. v. Bielski, the plaintiff Bielski sued Coinbase for violations of the Electronic Funds Transfer Act.[4] Coinbase then moved to stay the litigation and compel arbitration pursuant to the arbitration clause in the Coinbase User Agreement that Bielski had signed. However, the district court denied Coinbase’s motion to compel arbitration because the district court held that the arbitration agreement was unconscionable.[5]

Coinbase filed an interlocutory appeal to the Ninth Circuit requesting a stay of the district court proceedings pending that appeal, and Coinbase asked the district court to stay its proceedings pending the resolution of that appeal. The district court denied Coinbase’s motion for a stay pending appeal because, it said, Bielski “would suffer if forced to wait for a remedy” on Bielski’s underlying suit about the Funds Transfer Act.[6]

The Ninth Circuit also refused Coinbase’s request for a stay of the district court pending appeal,[7] so Coinbase petitioned the Supreme Court. Coinbase asks the Supreme Court to decide whether “a non-frivolous appeal of the denial of a motion to compel arbitration oust[s] a district court’s jurisdiction to proceed with litigation pending appeal.”[8] Or as Bielski puts it, the question before the Supreme Court is whether “an interlocutory appeal of a denial of a motion to compel arbitration … require[s] an automatic stay of all district court proceedings pending appeal?”[9]

The federal circuit courts have split on this question, with the Second and Fifth Circuits joining the Ninth. These three circuits hold that an appeal of the district court’s refusal to compel arbitration does not automatically stay the district court pending appeal.

But most circuits hold to the contrary. The Third, Fourth, Seventh, Tenth, Eleventh, and D.C. Circuits hold that appeal of a district court’s refusal to compel arbitration does divest the district court of jurisdiction pending appeal.

When we look at the two sides of this circuit split, we can see it arising in the 1990s in a pretty familiar way, which is the progressive or anti-arbitration position is first taken by the Ninth Circuit out on the Left Coast, while the conservative or pro-arbitration position is first taken by the Seventh Circuit in an opinion by Judge Frank Easterbrook—who by the way was my Civil Procedure professor at the University of Chicago.

Part of the context for this circuit split is the general rule in federal court that “[t]he filing of a notice of appeal . . . divests the district court of its control over those aspects of the case involved in the appeal.” That’s a quote from the Supreme Court’s 1982 decision in Griggs v. Provident Consumer Discount Co.[10] So, in that Griggs framework, the question in this Coinbase case is whether appeal of a denied motion to compel arbitration divests the district court of the non-arbitration merits of the case (about the Funds Transfer Act) while the circuit court is deciding whether to affirm or reverse the district court’s refusal to compel arbitration.

In one sense, the alleged violation of the Funds Transfer Act is not involved in the appeal because the appeal is just about whether to enforce the arbitration agreement. But in another sense, any litigation of the Funds Transfer Act claim or any other claim, even just taking a deposition or other discovery, would be the district court exercising control over aspects of the case involved in the appeal—because everything in litigation is involved in the appeal of whether the case will be resolved by litigation or arbitration. For example, maybe arbitration will have narrower discovery than litigation would, so an arbitrator would not order a deposition that the district court would order.

The Ninth Circuit takes the first of those views. It said not everything involved in the case is involved in the appeal of refusing to compel arbitration, and the contrary rule urged by [defendants] would allow a defendant to stall a trial simply by bringing a frivolous motion to compel arbitration.”[11] The Ninth Circuit said,

The system created by the Federal Arbitration Act allows the district court to evaluate the merits of [a motion for arbitration], and if, for instance, the court finds that the motion presents a substantial question, to stay the proceedings pending an appeal from its refusal to compel arbitration.[12]  

In other words, the Ninth Circuit says, whether to stay pending appeal is a proper subject for the exercise of discretion by the trial court.

In contrast, most circuit courts to have considered the issue hold that a nonfrivolous appeal from a district court order denying arbitration automatically divests the district court of jurisdiction of the case pending appeal. In other words, the interlocutory appeal stays litigation in district court until the Court of Appeals resolves the appeal.

This view traces back at least to Judge Easterbrook’s 1997 opinion, which says that denying such a stay would "largely defeat[] the point of the appeal."[13] Which is to decide if the case will be litigated or arbitrated--before incurring the costs of starting the litigation or arbitration. As the Eleventh Circuit said in support of this view, whether the case will be litigated or arbitrated is a “threshold issue” that should be resolved first. Or as the Tenth Circuit said, also in support of this Easterbrook view, failing to grant a stay pending appeal would deny the defendant’s "legal entitlement to avoidance of litigation" if it turns out the defendant had that entitlement to arbitrate, which we won’t know until the circuit court rules.

So, we can see the issue in this Coinbase case as a policy question of which kind of errors should courts make. Should courts make plaintiffs wait to litigate until after an appeal that affirms the district court’s ruling that the plaintiff has a right to litigate rather than arbitrate? Or should courts make defendants litigate until an appeal reverses the district court’s erroneous ruling that the plaintiff has to litigate instead of arbitrate?

As to statutory text, Bielski’s brief in the Supreme Court points out that if Congress enacting FAA § 16 had wanted to require a stay pending appeal, it could have done so. It knew how to do so, because FAA § 3 expressly requires stays of litigation pending arbitration, so “Congress's silence regarding stays in Section 16 is deafening,” Bielski’s brief says.

In contrast, Coinbase’s brief says “in enacting this [FAA § 16] text, Congress legislated against the backdrop of the divestiture rule,” that Griggs rule I mentioned earlier, which provides that district courts are divested of authority to proceed with matters implicated by the appeal. Congress's creation of an immediate arbitrability appeal right ensured that district courts would be divested of authority to proceed to the merits while the appeal proceeds.” And Coinbase quotes Judge Easterbrook’s opinion for the Seventh Circuit, saying the “divestiture rule ‘is fundamental to a hierarchical judiciary.’ It ‘fosters judicial economy’ and guards against ‘confusion and inefficiency that would result if two courts’ purported to exercise jurisdiction over related matters simultaneously.”

Thanks to Shane Creason for excellent research assistance.

Greg Stohr of Bloomberg News discusses the crypto side of this case.

Arbitration of Cases Involving Sexual Assault or Sexual Harassment Claims

On March 3, 2022, President Biden signed into law the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (the “Act”) amending the Federal Arbitration Act (“FAA”) to allow employees alleging claims of sexual assault and sexual harassment to bring such claims in federal, state, or tribal court regardless of whether they signed an arbitration agreement with their employer. The Act applies retroactively to arbitration agreements formed before the Act was passed, as it applies “with respect to any dispute or claim that arises or accrues on or after the date of enactment of this Act.” 

The Act may apply to claims other than sexual harassment or assault claims if those other claims are brought by the employee in the same case in which the employee brings the sexual harassment or assault claims. Section 402 of the Act governs not just sexual misconduct claims, but cases that relate to such disputes. “[N]o predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a case which . . . relates to the sexual assault dispute or the sexual harassment dispute.” This suggests courts should not sever the sexual misconduct claims, while sending other claims to arbitration. 

The bill’s wording will encourage workers to add claims of sexual assault to avoid having their cases sent to arbitration, said Ohio State law professor Sarah Rudolph Cole, according to Bloomberg Law.

The Act also bypasses delegation clauses, and perhaps the separability doctrine, by providing “The applicability of this chapter to an agreement to arbitrate and the validity and enforceability of an agreement to which this chapter applies shall be determined by a court, rather than an arbitrator, irrespective of whether the party resisting arbitration challenges the arbitration agreement specifically or in conjunction with other terms of the contract containing such agreement, and irrespective of whether the agreement purports to delegate such determinations to an arbitrator.”

Arbitration with Lawyers as Debtors and their Cases as Collateral (Litigation Finance)

Arbitration and Secured Transactions two of your favorite things? 

No? Well as a lawyer, you might want to understand them, anyhow.

Litigation finance for plaintiffs' lawyers sometimes involves the lawyer granting the financier a security interest in the lawyer's cut of judgments and settlements the lawyer's cases win. The contracts can be tricky, though. For instance, a report for Bloomberg Law examined contracts with high interest rates, usually around 18% to 22%, that might be illegal (usurious) if the financier had recourse against the debtor/lawyer, but the contracts are non-recourse, which means the financer can only seek repayment from its collateral--the lawyer's cut of judgments and settlements.

However, in some of these contracts "a default converts the deal to a recourse loan—triggering repayment whether the underlying cases win or lose."

Moreover, some of these agreements may define the collateral very broadly. As Bloomberg writes, "Many of these contracts include a list of specific cases that it says are subject to the terms of the agreement. Yet many of the same contracts elsewhere appear to contradict that concept, saying the firm will provide 'all cases as collateral' including all fees the firm 'now is or may hereafter become entitled to receive.'” 

Secured Transactions students will recognize this as an after-acquired property clause--routine in financing inventory and accounts.

And many of these contracts have arbitration clauses. Why would financiers want to bring these breach of contract (or "debt collection") actions in arbitration rather than litigation? After winning a judgment, they'll still have to go to court to confirm and enforce the judgment.

Rules for Mass Individual Arbitrations

 Arbitration agreements precluding class actions or classwide arbitrations have become common since the Supreme Court's Concepcion case. This has led some enterprising plaintiffs' lawyers to file many virtually identical arbitration cases on behalf of a group of consumers or employees.

The American Arbitration Association now has rules to address such multiple case filings.

The International Institute for Conflict Prevention & Resolution (CPR) also has rules for such mass employment claims.