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Strategies for defending against the newest BIPA class action threat: Mass arbitration

Strategies for defending against the newest BIPA class action threat: Mass arbitration
 

By David J. Oberly, Biometric Privacy & Data Privacy Attorney

For years, arbitration has offered businesses a lower-cost alternative to expensive class action litigation. Recently, however, companies have seen a sharp uptick in the use of abusive mass arbitration by the plaintiff’s bar to neutralize arbitration provisions and class action waivers and, more importantly, gain leverage to extract sizeable settlements regardless of the merits of the underlying claims.

This tactic has been used with increasing frequency particularly in Illinois Biometric Information Privacy Act (BIPA) class action litigation, where businesses have been forced to choose between paying blackmail settlements that have no relation to the merits or foregoing the ability to arbitrate disputes altogether. To address this emerging, high-stakes threat, companies are well-advised to implement strategies to mitigate the risk of becoming the next target of mass arbitration.

How mass arbitration works

The mass arbitration strategy relies upon the fact that businesses ordinarily pay for most, if not all, of the fees and costs associated with arbitrating disputes. The plaintiff’s bar is now leveraging the willingness of companies to foot the bill for arbitration by filing hundreds, if not thousands, of identical arbitration claims, putting companies immediately on the hook for arbitration fees that often reach into seven or even eight figures.

Consequently, businesses are forced to choose one of two equally poor options: incur the cost of these significant fees in order to maintain the ability to defend itself in arbitration or, alternatively, settle. Even if the claims have no substantive merit, the prospect of thousands of arbitration demands forces many companies to immediately pay, in the aggregate, exorbitant filings fees or negotiate a settlement.

At bottom, the end game for the plaintiff’s bar is not to see these disputes all the way through to a decision on the merits. Instead, the central objective of mass arbitration is to force companies to settle these disputes in order to avoid paying the cost of initial arbitration fees, which businesses cannot recoup even if they prevail in every arbitration.

Importantly, the threat of mass arbitration in BIPA class action litigation is no longer merely a theoretical one. Last year, Samsung was the target of a mass arbitration threat involving approximately 50,000 arbitration demands that were to be filed if the company did not agree to an immediate settlement of at least $50 million. Samsung refused, and the Labaton Sucharow firm proceeded with filing their 50,000 arbitration demands before the American Arbitration Association (AAA). Samsung declined to pay its share of the assessed arbitration filings fees because it found numerous discrepancies in the list of claimants, such as deceased individuals who were not Illinois residents. As a result of non-payment by Samsung, the arbitrations were administratively closed by the AAA.

In response, Labaton Sucharow filed suit against Samsung on behalf of 49,486 consumers, seeking to compel Samsung to arbitrate pursuant to the arbitration provision included in Samsung’s terms and conditions. In September 2023, the U.S. District Court for the Northern District of Illinois found that Samsung had violated of its arbitration agreement as a result of its failure to pay the AAA’s initial filing fees. More importantly, the court ordered Samsung to pay over $4 million in arbitration fees that required for the parties to arbitrate their claims before the AAA.

Practical strategies for modifying and strengthening arbitration provisions

Although the law governing mass arbitration is still in its relative infancy and continues to evolve, companies have several potential strategies that can be implemented to directly address the precipitous rise in mass arbitration. Many of these strategies center on arbitration agreements themselves, and are designed to strengthen the language of companies’ arbitration provisions in a manner that alters the incentives for, and ability of, the plaintiff’s bar to pursue mass arbitration. Potential strategies that companies can consider include, but are not limited to, the following:

  • Informal Dispute Resolution. Require the parties to engage in mediation or other form of informal dispute resolution before arbitration can be initiated. This can serve to make it more time-intensive for plaintiff’s counsel to employ a mass arbitration strategy and increase the likelihood that only serious claimants participate in arbitration or other form of dispute resolution.
  • Individualized Arbitration Demands. Require claimants to submit individualized arbitration demands specifying the identity of the plaintiff and his or her counsel; a detailed description of the individual’s legal claims, the basis for those claims, and the requested relief; a good faith calculation of the specific amount in dispute; and an express authorization by the claimant to bring the arbitration demand. This can serve to further deter meritless claims and prevent plaintiff’s counsel from submitting a single arbitration demand with an appended list of purported claimants (a frequent tactic of the plaintiff’s bar).
  • Small Claims Court Alternative. Permit both parties to elect to have a dispute heard in small claims court, regardless of whether the claimant initially files in arbitration. This can serve to lower the costs of resolving the dispute substantially, as small claims courts usually require much smaller (oftentimes nominal) filing fees.
  • Cost-Splitting. Provisions providing that the company will pay most, if not all, of the costs of arbitration have become commonplace in arbitration agreements, as language of this nature makes them more consumer-friendly and, in turn, ostensibly reduces the likelihood that they will be found to be unconscionable. To the extent permitted under applicable law and the rules of arbitration, consider removing this type of language providing an unconditional promise to pay arbitration fees and costs. Consider replacing this language with a cost-splitting provision giving the company the ability to require claimants to bear some of the costs of arbitration, such as the cost that would be incurred if a claimant filed his or her claim in court. This can serve to reduce the costs of arbitration, while also deterring the pursuit of frivolous claims as well.
  • Fee-Shifting/Penalties. Allow the arbitrator to award fees and costs to the prevailing party and/or in the event the arbitrator determines that a claimant has pursued a frivolous claim. In so doing, companies can consider using a legal standard akin to Federal Civil Rule 11, which could allow the provision to withstand unconscionability challenges. This can serve to further deter the likelihood of frivolous mass arbitrations, while also encouraging plaintiff’s attorneys to vet claimants and their claims on the merits prior to filing.
  • Mass Arbitration Protocol. Consider establishing specific protocols to address the outsized costs of mass arbitration, such as the identification of bellwether cases and the ability to consolidate arbitrations into “batches” to allow for more streamlined dispute resolution. This can serve to not only create cost efficiencies for the company, but can also provide a benefit to claimants because their claims will be adjudicated in a more efficient manner.

It should be noted, however, that each of the above strategies has its own benefits and risks, and is ordinarily dependent upon the specific jurisdictions in which a company operates and the unique nuances of its business. Further, some of these strategies remain untested in court, making it imperative that organizations work closely with experienced biometric privacy counsel in considering any alterations to the language of their arbitration agreements. In addition, in modifying arbitration language in a more business-friendly direction, the risk exists that poorly constructed arbitration provisions may be deemed unconscionable and unenforceable if challenged in court, further raising the importance of working closely with experienced biometric privacy counsel to tailor arbitration language to the specific legal needs of the organization.

The final word

Mass arbitrations are likely to be a significant threat for all types of companies that use biometric data in their operations for the foreseeable future. Accordingly, companies and their in-house legal teams are well-advised to engage experienced outside biometric privacy counsel to review their arbitration provisions (and class action waivers) and advise on potential strategies for mitigating the increasing risks of potential mass arbitration and its associated costs.

About the author

David J. Oberly is Of Counsel in the Washington, D.C. office of Baker Donelson, and a member of the firm’s Biometric Privacy, Artificial Intelligence, and Data Protection, Privacy & Cybersecurity practices. Recognized as “one of the nation’s foremost thought leaders in the biometric privacy space” by LexisNexis, David’s practice focuses on counseling and advising clients on a wide range of biometric privacy, artificial intelligence, and data privacy/security compliance and risk management matters. In addition, David has deep experience in litigating bet-the-company BIPA class action disputes. He is also the author of Biometric Data Privacy Compliance & Best Practicesthe first and only full-length treatise of its kind to provide a comprehensive compendium of biometric privacy law. He can be reached at doberly@bakerdonelson.com. You can follow David on X at @DavidJOberly.

DISCLAIMER: Biometric Update’s Industry Insights are submitted content. The views expressed in this post are that of the author, and don’t necessarily reflect the views of Biometric Update.

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