July 2, 2020 / 7:37 PM / a month ago

Chegg tries a new way to avert mass arbitration: cancel users’ contracts

(Reuters) - We’ve seen a lot of, um, creative tactics by companies attempting to avoid mass arbitration by workers and consumers they’ve compelled to surrender their right to sue. There are the now-classic tactics of attacking plaintiffs' lawyers and refusing to pay arbitration fees, which, as you know, can add up to millions of dollars. Companies have tried to avail themselves of class actions – yes, the very devices their contracts prohibit – to disrupt mass arbitration. One company was accused of attempting to switch arbitration services in the midst of a mass arbitration campaign. Another went to state court to try to halt 1,000 arbitration demands – after winning a decision in federal court to compel different users to arbitrate.

The irony of companies trying to evade their own unilaterally-imposed arbitration provisions has not been lost on judges. Most notably, U.S. District Judge William Alsup of San Francisco admonished the delivery service Door Dash last February in a decision ordering the company to arbitrate wage-and-hour demands by about 5,000 couriers: “This hypocrisy,” the judge wrote, “will not be blessed.”

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But never underestimate the resourcefulness of corporations and their lawyers! I have news today of a previously unattempted (as far as I know) strategy to combat mass arbitration, brought to you by the education tech company Chegg, which sells and rents textbooks and provides expert homework help to subscribers.

The background: As I told you in May, the plaintiff firm Z Law filed a class action in 2019 on behalf of millions of Chegg customers whose personal information was allegedly compromised in a 2018 data breach. Chegg’s lawyers at Orrick Herrington & Sutcliffe moved to compel arbitration, citing a mandatory arbitration provision in the user agreement its customers are required to accept. In April 2020, U.S. District Judge Richard Bennett of Baltimore granted Chegg’s motion.

Z Law then filed more than 15,000 individual demands at the American Arbitration Association, asserting a claim of $25,000 for each Chegg customer. Z Law principal Cory Zajdel told me at the time that he sent six boxes of filings, containing individual demands by all of his 15,000 clients, to Chegg, hoping to foreclose arguments that his clients were not Chegg customers or did not exist.

In June, according to a July 1 letter from Zajdel to the AAA, the arbitration service instructed Chegg to pay about $7.5 million in fees to launch the arbitrations. (Chegg’s arbitration clause requires the company to pay the initial fees.)

I should say here that Chegg counsel Douglas Meal did not respond to my detailed email request for comment, so this account is based on Zajdel’s letter to the AAA.

Instead of paying the requisite fees and beginning the process of arbitrating with its customers, Chegg said those customers had breached their user agreements by asserting frivolous or improper demands for arbitration. Chegg unilaterally purported to terminate the agreements. The company then informed AAA that it was under no obligation to arbitrate with those customers, or, for that matter, to pay any fees associated with their arbitration demands.

Chegg, in other words, determined the merits of its users’ claims to purportedly ward off their demands for arbitration and its obligation to pay $7.5 million in AAA fees. But Zajdel said in his letter to the AAA that that’s … not how this works.

The Chegg user agreement, he said, delegates responsibility to the AAA to resolve gateway arbitrability issues – as Chegg itself argued to Judge Bennett in Baltimore when it moved to compel arbitration instead of litigating a data breach class action. Judge Bennett agreed with Chegg, noting that Chegg and its users had “delegated the issue of arbitrability to an arbitrator.”

Zajdel’s letter explained the Catch-22 Chegg had created for customers who want to arbitrate. Under the user agreement, the plaintiffs’ lawyer said, the cure for filing a frivolous or improper demand for arbitration is to shift some of the initial filing fees paid by Chegg onto the customer that brought a claim determined to be unwarranted. But under Chegg’s interpretation of the arbitration provision, the letter said, an arbitrator never even gets to decide if the claim was unjustified because Chegg has already determined that users breached their agreement.

Zajdel’s letter also pointed out that Chegg’s user agreement specifically says that its “legal disputes” provisions survive termination of the agreement. So according to his interpretation, Chegg can’t escape its obligation to arbitrate by cancelling the accounts of customers who have demanded it.

As I said, defense counsel didn’t respond to my invitation to tell Chegg’s side of the story so I don’t know how the company came to believe that it has the unilateral authority to deem its customers’ arbitration demands to be so frivolous that they constitute a material breach of the user agreement. But it’s a good bet that in the not very distant future, a federal judge is going to want an answer to that question.

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