On The Case

Sweeping new arbitration study: ‘Enterprising’ plaintiffs' lawyers adapt

(Reuters) - Plaintiffs’ lawyers are like water: if you dam them in one spot, they’ll flow to another. You can change their course but you can’t stop them.

After the U.S. Supreme Court effectively eliminated the last barrier prohibitions on classwide arbitration in last June’s Epic Systems v. Lewis, I wrote a couple pieces about why forcing consumers and employers into individual arbitration may have unintended consequences for corporations.

In the stories I told, arbitration turned out to be a rather costly affair for companies facing determined opponents – especially when those opponents were represented by their own lawyers. I speculated that mandatory individual arbitration might have unintended consequences for corporations.

A sweeping new study of more than 40,000 private arbitration cases filed between 2010 and 2016 confirms that hypothesis – and provides some evidence that plaintiffs’ lawyers are beginning to understand that mandatory individual arbitration may be a new opportunity. Yes, that opportunity is born of the desperation engendered by the Supreme Court’s pro-arbitration rulings. And no, arbitration is never going to be a substitute for consumer and employee class actions. But the study found that arbitration reforms have left the door open for some kinds of consumer, employment and medical malpractice claims, and that “enterprising” plaintiffs’ lawyers have figured out how to take advantage of that opening.

In "Arbitration Nation," to be published next year in the California Law Review, law professors David Horton and Andrea Chandrasekher of the University of California, Davis, undertook what seems to be the most comprehensive review to date on private arbitration cases. They obtained data from the four of the biggest private dispute resolution outfits - AAA, JAMS, ADR Services and Kaiser Health Care - to examine the process and outcomes of nearly 41,000 consumer, employment and medical malpractice arbitrations.

Their takeaways, in a nutshell: Arbitration can be an efficient and “surprisingly affordable” forum for plaintiffs, but they’re much more likely to succeed if they hire lawyers instead of trying to represent themselves.

Across the data set, the study found that arbitrations wrap up, on average, in about 11 months. (Employment cases take the longest, and even they take just 14 months to reach a conclusion.) Plaintiffs’ share of arbitration fees, on average, was $1,114, a “manageable” amount, according to Professors Horton and Chandrasekher, considering that arbitration fees can run into tens of thousands of dollars. In JAMS employment proceedings, for instance, the average arbitrator’s fee was more than $37,000 – but plaintiffs payed, on average, just $62. The median fee in cases that went to a final resolution was 0, which means, according to the law profs, that the majority of plaintiffs who fully prosecuted their claims paid nothing at all to arbitrators.

The bad news for plaintiffs is that their win rate in arbitration is lower than in litigation in court, according to the study. The comparisons aren’t perfect, as Horton and Chandrasekher explain. But on average, consumers win only a third of their cases at AAA and only 21 percent at JAMS, in contrast with a win rate of more than 80 percent in small claims court. Employees win 22 percent of their AAA cases and 31 percent of JAMS arbitrations, compared with win rates of about 33 percent in federal court and 50 percent in state court. Only 16 percent of patients with medical malpractice claims won arbitrations in the Kaiser system. In state courts, 27 percent of plaintiffs recover damages in med mal cases.

But the odds shift drastically when plaintiffs have lawyers. In some of the scenarios Horton and Chandrasekher considered, they said, “no variable affects win rates as dramatically as whether a plaintiff hires attorneys with arbitration experience.”

There is some evidence, Professor Horton told me in an interview, that plaintiffs' lawyers are beginning not only to understand the difference they can make for plaintiffs with arbitration claims but also that they can gain leverage by filing masses of individual arbitration proceedings. In a sense, Horton said, they are “recreating class actions in a different form.” "Arbitration Nation" specifically mentions a spike of consumer arbitration filings against AT&T and Sallie Mae and a rash of hundreds of employment filings against Macy’s. (Horton and Chandrasekher previously documented the mass consumer arbitrations in their 2015 Georgetown Law Journal paper, "After the Revolution: An Empirical Study of Consumer Arbitration.")

Those weren’t the only mass filings the professors ran across, though. Horton told me the data revealed several other instances – perhaps as many as a dozen at AAA and JAMS combined - of plaintiffs’ firms filing 20 or 30 parallel cases against the same defendant. If anyone on the plaintiffs’ side is taking advantage of arbitration’s relative speed and efficiency, he and Chandrasekher said in their paper, it’s lawyers, not consumers, employees or medical patients representing themselves.

A key factor enabling plaintiffs’ lawyers to bring mass filings, Horton said, is that AAA and JAMS have adopted minimum due process standards that assure plaintiffs’ ability to file claims. Moreover, he said, companies themselves, back when they were worried about courts deeming arbitration clauses unenforceable, included cost caps and fee-shifting provisions in order to demonstrate their good faith.

Corporations may be less concerned about unconscionability after the Supreme Court’s run of arbitration-friendly decisions, but Horton said plaintiffs can still go to court, in some circumstances, to challenge contract provisions delegating disputes to arbitration. (He has a paper on that issue, too.) So far, he said, he has not noticed a trend of businesses revising arbitration clauses or adopting new ones that boost the cost for plaintiffs to bring cases.

Despite the early signs that plaintiffs’ lawyers are adapting to mandatory arbitration, Horton and Chandrasekher argue in their paper that mass arbitration remains “a pale substitute” for class actions. They have an unusual idea to restore power to consumers and employees: The paper proposes that state lawmakers create a statutory “bounty” for plaintiffs’ lawyers who take and win cases in arbitration. “This approach addresses the root of the arbitration drought, which appears to be a lack of incentives for lawyers to take these cases, rather than a lack of access to arbitration,” they wrote. “Moreover, because experienced lawyers greatly increase the probability of a plaintiff win, it would help level the playing field between individuals and repeat-playing corporations.”

I have my doubts about whether lawmakers, many of whom rely on corporate campaign contributions, will be in a rush to incentivize plaintiffs’ lawyers to bring more arbitration proceedings. But it’s certainly an interesting idea.

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