Swapping Arbitrators Midstream Risks Moving Claims Back to Court

Corporate defendants attempting to save money and tilt mass arbitration proceedings in their favor by switching service providers late in the game potentially undermine the validity of the alternative dispute resolution contract, possibly—and ironically—reopening the door to the courthouse.

Claimants in at least three recent video-privacy cases, two involving ESPN Enterprises Inc. and the third against WarnerMedia Direct LLC, have objected to updated agreements purporting to change providers after the defendants faced mass-arbitration campaigns.

But the companies’ freedom of action is limited.

“What we’re seeing in the cases is that it’s going to be problematic to try to change your provider when you’re already in the middle of a mass arbitration or have a motion to compel arbitration pending” in court, said Elizabeth Shaffer, a partner with Dinsmore & Shohl LLP who has defended companies in mass arbitrations.

Trying to change your arbitrator can render your agreement unenforceable, and if it does, “you could expose yourself to a class action,” she said.

Still, the defendant traditionally is on the hook for costs to initiate arbitration, which can run to $3,500 per claimant. So finding the most efficient and least costly forum for resolving arbitration campaigns involving thousands of claims is to be expected, Shaffer said.

Tit-for-Tat

The shift to mass arbitration is part of a tit-for-tat battle with corporate defendants over the handling of large numbers of low-dollar claims, Shaffer said.

Companies struck first by including mandatory arbitration provisions in their consumer and employment agreements, which they paired with waivers prohibiting consumer class actions, she said. The agreements typically required businesses to pick up the tab for most of the filing fees as a way to reassure the courts that arbitration was a consumer-friendly way to resolve disputes, she said.

But the strategy exposed them to potentially enormous fees arising from the simultaneous filing of thousands of similar claims. The up-front costs of a large mass-arbitration campaign easily could run into the tens of millions of dollars.

Plaintiffs’ firms within the past decade have mounted a mass-arbitration counterattack, filing campaigns based on wage-and-hour, antitrust, privacy, and data-sharing claims, and a wide range of others, said Maria Glover, a professor at Georgetown Law, one of the first legal scholars to examine mass arbitration.

An American Arbitration Association spokesperson said there appears to be an increase in privacy-related claims in recent years, although a precise breakdown isn’t available.

Prominent companies facing mass arbitration privacy claims include Google LLC, Samsung Electronic Co., GoodRx Holdings Inc., L’Occitane Inc., Plex Inc., Tubi Inc., and Starz Entertainment LLC.

Arbitration is a “creature of contract,” and defense attorneys say courts typically allow contract changes—including to the arbitration provider—where it can be shown that both sides agreed to the modification. They also say new procedures make sense considering the challenges of attempting to handle thousands of claims at a time.

“There’s a natural process going on here, as businesses confront mass arbitrations, of trying to identify forums that have better, more efficient procedures for the types of mass arbitrations they’re facing,” said David Horniak, a partner with DLA Piper who has defended and written on mass arbitration.

Revised Procedures

In response, arbitration providers like AAA and JAMS have introduced new procedures and fee schedules to boost efficiency and lower costs. And startup providers such as New Era ADR emerged to compete for a place in the mass-arbitration landscape.

The difficulty arises when companies already facing litigation try to pick and choose among them.

For example, consumer plaintiffs represented by Labaton Keller Sucharow LLP seized the opportunity to file a proposed class action in federal district court against WarnerMedia’s HBO Max after the company attempted to switch arbitration providers in the midst of a mass-arbitration campaign over alleged Video Privacy Protection Act violations.

Warner refused to participate in proceedings before AAA, breaching the arbitration agreement and class-action waiver to which it was linked, the plaintiffs said.

Other claimants appear content to proceed with mass arbitration while fighting the abrupt forum switch.

In Antoine v. ESPN Enterprises Inc., the sports network evaded a VPPA class action by successfully moving in court to compel arbitration before JAMS.

But after the plaintiffs’ attorneys launched a mass-arbitration campaign, ESPN issued a new user agreement selecting ADR Services as the arbitrator instead.

The plaintiffs moved to compel arbitration before the JAMS, and the court agreed, in part because it already did so under the prior agreement.

‘Oppression and Surprise’

In an antitrust case against Live Nation Entertainment Inc. the US Court of Appeals for the Ninth Circuit ruled that the ticket seller’s new agreement switching arbitration providers from JAMS to New Era ADR without notice wasn’t enforceable because the company engaged in “oppression and surprise.”

The court also held that the procedures themselves were unfairly tilted against claimants.

“Courts are right to view post-dispute amendments to the arbitration provision with concern,” especially where there may be collaboration between the arbitrator and the respondent company, said Ben Whiting, a partner with Keller Postman LLC, a pioneering mass-arbitration firm.

New Era—a newer provider that at the time handled mass arbitration campaigns by “batching” claims—"appears to have been assisted” in developing its rules by Live Nation, he said.

New Era has since changed its arbitration procedures, said Rich Lee, its co-founder and CEO.

Shaffer said she expects courts will allow companies to change the arbitration forum if no litigation is underway.

But doing so after arbitration cases have been filed under a prior agreement “would be harder,” she said.