September 30, 2021

By Paul Stephan

Arbitration has been having a bad year.

No, consumers and employees didn't find a clever ploy to escape arbitration clauses. And no, the U.S. Supreme Court hasn't grown skeptical of arbitration. Instead, some of the very companies that once inserted arbitration clauses into their contracts are now trying to escape the monsters they've created.

For years, DoorDash Inc. required its delivery workers to agree to an arbitration clause that bars class actions. So 5,000 workers followed the contract and filed individual claims in arbitration in 2019. Uber Technologies Inc. faced a similar situation the same year

Facing millions in arbitration fees, DoorDash asked for a reprieve in Abernathy v. DoorDash Inc., in the U.S. District Court for the Northern District of California.

The court largely refused, writing in its 2020 ruling that "DoorDash, faced with having to actually honor its side of the bargain ... now wishes to resort to a class-wide lawsuit, the very device it denied to the workers, to avoid its duty to arbitrate. This hypocrisy will not be blessed."

In May 2021, Gibson Dunn  & Crutcher LLP published a letter to "Our Clients and Friends," listing "successful strategies for deterring and defending against mass arbitrations," which it describes as "a recent phenomenon in which thousands of plaintiffs — often consumers, employees or independent contractors — bring arbitration demands against a company at the same time."

Then in July, Inc. removed the arbitration clause from its conditions of use after around 75,000 customers filed arbitration claims over nonconsensual recordings by Alexa devices.

What happened? For decades, arbitration's defenders touted it as a faster and cheaper alternative to litigation. It was supposed to be less formal, less complicated and less one-size-fits-all. To be sure, many people doubted these claims and an endless debate followed about whether arbitration could deliver on its promises.

But all these benefits of arbitration — speed, cost, informality, simplicity, customizability and more — are real benefits only if two conditions hold. First, those benefits must be unparalleled. Arbitration is supposed to be an alternative to litigation, so if arbitration offers a benefit that litigation also offers, then that doesn't justify arbitration.

Second, the benefits must be mutual. If arbitration leads to smaller damage awards and more dismissed claims, then that is certainly a benefit to defendants, but it is not a benefit to plaintiffs. Any nonmutual benefit shouldn't count in arbitration's favor either.

As I argue in an article in the University of Memphis Law Review, arbitration proponents have not put forward a single benefit of arbitration that is both unparalleled and mutual. Even assuming that, empirically, arbitration is speedy, inexpensive and more, all of those benefits are either replicable in litigation — and therefore not unparalleled — or are helpful to one party over the other, and therefore not mutual.

Take, for example, the speedy resolution of a dispute. This is one of the most frequently cited benefits of arbitration, but litigation can and often does lead to fast dispute resolution. The deadlines found in the Federal Rules of Civil Procedure provide for a case to end eight months after it began, plus time for discovery and trial.

The rules also allow parties to agree to even shorter deadlines and limited discovery. Fast litigation is not merely theoretical: Before the pandemic, the median lawsuit in the U.S. District Court for the Eastern District of Virginia took about 12 months. Compare that — on a somewhat apples-to-oranges basis — to the average arbitration, which takes eight months.

And while litigation provides a time-saving class action mechanism to aggregate similar claims, arbitration usually makes class actions impossible after the Supreme Court's 2011 decision in AT&T Mobility LLC v. Concepcion.

Some of arbitration's other supposed benefits, while generally lacking a parallel in litigation, redound to one party's benefit over the other's. For instance, while arbitrators may have more specialized subject matter knowledge than a generalist judge, that expertise often comes from long experience in the defendant's line of work. Expertise can come at the price of impartiality.

Arbitration is a sham, not because it is worthless, but because most of its benefits can be obtained in litigation. And other benefits that lack a parallel in litigation do not incur mutually to the parties.

In light of the actual use of the arbitration system by employees and consumers, large companies may modify their arbitration agreements as Gibson Dunn advises. The firm's recommendations would add even more obstacles for employees and consumers seeking redress.

Several of these recommendations, however, would actually make arbitration look more like litigation. Gibson Dunn suggests "requiring the parties to engage in a mediation or informal dispute resolution conference" before serving an arbitration demand; mediation and alternative dispute resolution are, of course, common features of ordinary litigation.

The firm also recommends adding an offer of judgment rule, similar to Federal Rule of Civil Procedure 68(d). And it suggests consolidating claims and allowing classwide settlement, longstanding features of class actions and multidistrict litigation. Arbitration was supposed to be an improvement to litigation. Now, the best it can do is imitate.

Paul Stephan is an associate at Cohen Milstein Sellers & Toll PLLC and a member of the firms Consumer Protection practice.

The complete article can be accessed here.