Growth of class action-style claims may fuel interest in ‘mass arbitration’

Consumers and other groups of people are being drawn together by claimant law firms and claims management companies seeking to pursue collective redress on behalf of affected individuals when there is perceived wrongdoing by companies.

In many jurisdictions, this claims industry is being fuelled by the growth of third party funding for bringing cases. In some jurisdictions, including in the EU where most member states have implemented the EU Representative Actions Directive, the uptick is also being driven by changes in legislation or procedure that allow claims more easily to be brought by a class of individuals. The changes include an increasing number of ‘opt-out’ litigation procedures, whereby claims can be brought on behalf of members of a class regardless of whether they have ‘opted in’ to participate in the claim.

With the potential value of these claims running to many millions, even billions, of dollars in some cases, it is little wonder that the growing trend of collective action is rising up the risk registers of businesses.

As this trend continues, businesses might increasingly explore whether arbitration, instead of litigation, offers a viable alternative way of dealing with some of these large-scale disputes and, if so, how best to implement this.

The concept of mass arbitration is well-established in the US, a particularly active geography for class actions. In the US, it has become common for some businesses to incorporate ‘class action waivers’ into their terms and conditions. These waivers provide that customers or others, such as employees, cannot pursue class action litigation against the business. They sometimes require that any disputes be resolved through arbitration instead.

Courts and legislatures may take different approaches to the enforceability of such ‘class action waivers’ in different jurisdictions and different circumstances.

In addition, some law firms in the US behind class action claims have sought to use class action waivers which include arbitration clauses to their tactical advantage. In essence, their approach is to gather large numbers of claims and pursue them by way of individual arbitrations. Since some arbitration rules or agreements require the corporate respondent in these circumstances to pay most or all of the administrative fees for the arbitration, this strategy can put respondent businesses to considerable expense long before any consideration of the merits of the dispute, increasing pressure on those businesses to settle.

In a paper published in February 2023 entitled “Mass Arbitration Shakedown – Coercing Unjustified Settlements” (80-page / 1.83MB PDF), the US Chamber of Commerce Institute for Legal Reform described in detail what it saw as abuses of arbitration as a mechanism for resolving mass claims.

Some arbitral institutions have been considering ways of addressing the problem. For example, in August 2021, the American Arbitration Association (AAA) introduced a new set of procedural rules for mass arbitrations (10-page / 227KB PDF), aimed at streamlining the administration and reducing the cost of mass arbitration filings. These were most recently updated in January 2024, with an aim of further addressing some of the ongoing issues involved in mass arbitration.

Some of the measures provided for in the latest AAA mass arbitration rules include: a specific fee structure which eliminates filing fees and replaces them with a flat initiation fee followed, for cases that survive initial review, by tiered fees per case which decrease as the volume of claims increases; an easier process for businesses which challenge arbitration filings to request a “process arbitrator” to deal with those challenges; and strengthened provisions as regards mediation by the parties.

There remains debate about whether the AAA rules do enough to address the issues with mass arbitration.

It will be interesting to see whether further institutions follow suit in introducing specific rules for mass arbitration and what shape such rules might take, particularly as mass actions risk outside the US continues to grow.

In the meantime, however, businesses considering the use, or continued use, of arbitration as a risk management tool to address mass actions risk must carefully weigh and take legal advice on their options, factoring in US experience of mass arbitration being turned from a shield for businesses into a sword used against them.

It is also possible that, in a challenging global economic environment, we will see an increase in mass investment treaty arbitration, for example by international bondholders or bank depositors affected by government decisions impacting their investments. ICSID has previously accepted jurisdiction over such mass claims made against Argentina and Cyprus, and Pinsent Masons has previously examined the potential for similar claims against Switzerland in the wake of UBS’s 2023 acquisition of Credit Suisse.