Just one case, but a great one for weekend reading.

Mass Arbitration; Appellate Jurisdiction; Failure to Pay Forum Filing Fees

Every once in awhile there is a case with an outsized impact on how disputes are resolved. Wallrich v. Samsung Electronics America, Inc., 2024 U.S. App. LEXIS 16003 (7^th Cir. July 1, 2024), may be such a case.

A few years back, companies selling to large consumer audiences, such as cell phone manufacturers, began to insert provisions in the form terms and conditions that accompanied their product or service which provided that the consumer waived the right to bring a class arbitration.  Many of the claims which arise from such sales assert relatively small damages.  Therefore, the vendors expected that the number of claims would drop, because the potential recovery versus the attendant cost of a claim on behalf of one individual would dissuade both consumers and claimants’ counsel from pursuing those matters.  In response, the plaintiff consumer bar began to file massive numbers of arbitrations at the same time – all asserting the same claim against the same respondent. For example, in Wallrich, 35,651 Illinois plaintiffs filed claims before the American Arbitration Association alleging that Samsung unlawfully collected and stored sensitive biometric information.  To deal with the onslaught of small consumer claims, the AAA and other tribunals adopted new rules. The AAA’s included fee shifting, which allocated part of the administrative fee to the respondent.  Wallrich arises out of that fee shifting – and the Seventh Circuit’s response may well be the death knell or, at least, a trip to the emergency room for such mass filings.

The case reads like a law review article and, because “ADR Highlights” tries to limit itself to a “one cup of coffee” size, I’ll only discuss the conclusions of Judge Kirsch, writing for himself, Chief Judge Sykes, and Judge Easterbrook.  However, if you only read one arbitration case this month, Wallrich should be that case.

First, the court dealt with appellate jurisdiction.  The case arose in the District Court in a somewhat unusual posture.  Rather than the more common scenario where the defendant moves to compel arbitration of the claim upon which plaintiff has brought suit, the plaintiffs in Wallrich brought an action which solely sought to compel arbitration of their claims along with an order that Samsung pay the AAA’s administrative fees, which totaled $4,125,000.  The District Court granted the motion and stayed the case pending arbitration.  Samsung appealed.  Section 16(b)(1) of the Federal Arbitration Act prohibits appeals from “an interlocutory order . . . granting a stay of any action under Section 3 of this act.”  Meanwhile, Section 16(a)(3) provides that “an appeal may be taken from. . . a final decision with respect to an arbitration that is the subject of this title.”  The court holds that it has jurisdiction over the appeal, as the case below was brought under Section 4, not Section 3, of the FAA.  Therefore, the limitation on appeals contained in Section 16(b)(1) does not apply.  Since the District Court granted all the relief which plaintiffs sought, i.e. an order compelling Samsung to arbitrate and to pay the AAA’s fees, the court’s actions below were “a final decision;” therefore, an appeal was allowed under Section 16(a)(3).   So, is there a practice tip here?  When bringing an action to compel arbitration, should counsel also include a request for some type of post-arbitration relief? Would the continued pendency of that request before the District Court convert the action to compel arbitration into a Section 3 claim and kick in the prohibition against an interlocutory appeal if the court compels arbitration?

This discussion of arbitral appellate jurisdiction, while relevant to the broad arbitration bar, may have buried the lede. The crucial part of the opinion to consumer advocates and their corporate foes lies in the court’s holdings as to (1) the requirements for demonstrating that each consumer entered into an arbitration agreement with the respondent and (2) the consequences of the AAA’s administrative refusal to accept the arbitration.  The District Court found that the claimants had submitted sufficient evidence to demonstrate the existence of an agreement to arbitrate.  The crux of that evidence was a “spreadsheet containing [the consumers’] names and addresses” and “copies of their arbitration demands made before the AAA.”  The Court of Appeals holds that those filings are insufficient to prove the existence of an agreement to arbitrate, which is an indispensable element of a claim under the Federal Arbitration Act.  The arbitration demands, Judge Kirsch opines, “are nothing more than allegations, much like a complaint in a district court. . . . No claimant submitted any declaration or otherwise attested under penalty of perjury to the facts alleged in the arbitration demand.”   “[A] spreadsheet of only names and addresses likewise fails to show that any of those named were Samsung customers” and does not do “anything to link those consumers to the agreement.”  The court creates a roadmap for what it would consider adequate proof of an agreement; Plaintiffs “could have submitted receipts, order numbers, or confirmation numbers from their purchases of Samsung devices.  Or even more directly, they could have submitted declarations attesting to the allegations in their arbitration demands.” This seems like a light burden, but imagine the administrative complexity of assembling this material for each of 35,000 claimants.

And the risk of failing to satisfy that burden is large.  The plaintiffs asked the Circuit Court to remand the case to the District Court “to allow them to present additional evidence.”  The panel refuses to do so.  Under the Seventh Circuit’s standard, the existence of an agreement to arbitrate is resolved as if it were a motion for summary judgment, and, Judge Kirsch opines, “the summary judgment stage, which our posture is akin to, does not allow second chances. . . . The consumers had the opportunity to present their evidence, and they failed to do so.”  Ouch!!!

Finally, the Court addresses the effect of the AAA’s termination of the arbitration for the failure of the parties to pay the forum’s administrative fees.  The AAA has specific rules dealing with the payment of fees in mass arbitrations.  Rule MC-10(d) of the AAA Supplementary Rules for Multiple Case Filings provides that if one party, here allegedly Samsung, does not pay its share of the administrative fees, the other party, here the claimants, may do so.  If neither pays, the AAA may terminate the case and, under the rules, either party may move forward in court. The Wallrich court treats the parties’ invocation of the rules as a delegation to the AAA to determine who pays the fees, whether the appropriate amounts have been tendered, and the process if those costs remain outstanding.  The AAA made that decision when it terminated the arbitration.

So, where does that leave the consumers?  As Judge Kirsch recognizes, “they can now pursue their claims on the merits in the district court.”  However, assuming there is a valid class action waiver in Samsung’s terms and conditions, that means the filing of 35,000 individual complaints, with a fee of $350 per case, 28 U.S.C. § 1914(a) – an obvious hurdle for plaintiff’s counsel.

What are some of the effects of Wallrich?  First, to the extent that other Circuits adopt the Seventh Circuit’s rationale, mass arbitration filings will become rare or, at a minimum, much more burdensome and, therefore, uneconomical for consumer counsel. Second, expect those sellers who removed arbitration clauses from their agreements in order to avoid their exposure to potentially huge filing fees to put those clauses back into play, since those fees would no longer be a risk.  Finally, counsel filing actions to compel arbitration may begin dressing up their cases with additional claims for relief as they seek to avoid immediate appeals if the District Court grants their petition.

Have a great weekend, as those of you in the U.S. finish up the burgers, hot dogs, and potato salad left over from yesterday’s picnic.

David Reif, FCIArb
Reif ADR
Dreif@reifadr.com
Reifadr.com