Arbitration, initially conceived as an efficient alternative to traditional litigation, has recently witnessed a transformative twist in the form of Mass Arbitration (MA) filings. In this thought-provoking blog, we delve deep into the intricacies of Mass Arbitration, its multifaceted effects on corporations, and the pivotal role that insurance policies play in mitigating the financial risks that accompany this burgeoning legal trend.
Unpacking Mass Arbitration
Mass Arbitrations materialize when groups of individuals, whether employees, consumers, or parties adversely impacted by a company’s actions, concurrently initiate arbitration claims against the same entity. In essence, it is an alternative mechanism to class-action lawsuits, often necessitated by arbitration clauses within contracts. To illustrate, consider a scenario where a company relentlessly inundates internet users with ads and pop-ups while surreptitiously peddling their personal information to third parties. In such cases, the affected parties unite to seek restitution through arbitration. Thus, Mass Arbitrations serve as a compelling response to the impediments posed by arbitration clauses that obstruct class-action lawsuits.
The Ripple Effect of Mass Arbitration
- Escalated Legal Costs: Perhaps the most palpable effect of Mass Arbitration is the substantial escalation of a company’s legal expenditures. These costs are exacerbated by the filing fees associated with each individual claimant. To encourage the use of arbitration, companies agree to pay these fees for the complainants. In Mass Arbitrations, these fees can total in the tens of millions of dollars, often becoming a significant financial burden, particularly in states where they must be settled within thirty days, such as California.
- Pressure to Settle: Companies ensnared in Mass Arbitrations often grapple with an unenviable dilemma – pay substantial arbitration fees upfront and capitulate to plaintiffs’ firms’ settlement demands under the looming threat of an even larger wave of cases. These settlements can entail substantial sums, further straining the financial resources of businesses. Thus, the firms filing these Mass Arbitrations understand their leverage to obtain quick, costly settlements.
- Reputation Damage: The notoriety surrounding Mass Arbitrations can cast a shadow over a company’s reputation, leading to negative publicity and eroding consumer trust. The public exposure of such cases can have long-lasting repercussions for a company’s brand image.
Charting a Path Forward: Insurance as the Vanguard
To contend with the burgeoning tide of Mass Arbitration filings, corporations must adopt a multifaceted approach, with insurance policies as their primary defense:
- Rethinking Mandatory Arbitration Agreements: While eliminating mandatory arbitration agreements can expose businesses to the risk of protracted litigation, it does reduce the likelihood of upfront arbitration fees. Companies must carefully weigh the trade-offs between mass or class litigation and Mass Arbitration.
- Embracing Small Claims Court Provisions: Companies can incorporate contract provisions that permit both parties to redirect disputes to small claims court, where the fees are more reasonable. This not only provides a cost-effective avenue for dispute but provides the complainants and the companies with quicker resolution.
- Batching Mass Arbitrations: Another innovative approach is to revise arbitration clauses to facilitate the batching of Mass Arbitrations into more manageable groups, streamlining the dispute resolution process for all stakeholders and becoming a hinderance for law firms filing Mass Arbitration proceedings.
- Equitable Cost-Sharing: Companies should revisit cost-sharing provisions, ensuring that they are not solely responsible for covering all arbitration fees. Sharing these costs with complainants can help alleviate the financial burden on businesses and deter frivolous arbitration filings.
- Pre-Dispute Individual Mediation: Prior to the filing of any arbitration demand, companies can mandate pre-dispute individual mediation. The prospect of having to navigate thousands of pre-dispute resolutions may dissuade firms from pursuing Mass Arbitrations.
- Mandating Individual Requests: Specify that all arbitration requests must be submitted individually rather than en masse. This discourages the bulk filing of Mass Arbitrations.
- Insurance Safeguards: Companies should meticulously review their insurance policies, such as Directors and Officers (D&O), Fiduciary, and Employment Practices Liability Insurance (EPLI), Professional Liability and Cyber Liability, to ensure that these policies comprehensively cover arbitration demands, including all associated costs and expenses. This should be explicitly articulated in the policy as part of the definition of Claims.
Mass Arbitration filings represent a paradigm shift in the legal landscape, presenting formidable financial and reputational risks for corporations. To navigate this evolving terrain effectively, businesses must proactively implement measures such as revising arbitration agreements, incorporating small claims court provisions, and fortifying their insurance policies. By adopting these strategic initiatives, companies can safeguard their interests, minimize financial vulnerabilities, and ensure they are well-prepared to tackle the challenges posed by Mass Arbitrations.
For more information on Liberty’s Executive Liability offerings, please reach out to Bill Holden, SVP (Executive Liability Practice Leader), The Liberty Company Insurance Brokers.
