Verizon appeal will be early test of corporate strategy to combat mass arbitration

Signage is seen at a Verizon store in Manhattan, New York City, U.S., November 22, 2021. REUTERS/Andrew Kelly

(Reuters) - Corporations worried about the prospect of mass consumer arbitration should be paying close attention to Verizon Wireless Inc’s new case at the 9th U.S. Circuit Court of Appeals.

Verizon is appealing a July 22 ruling in which U.S. District Judge Edward Chen of San Francisco denied the telecom’s motion to compel arbitration of customer claims that the company deceptively tacked on administrative fees to their monthly wireless bills.

Chen determined, as a threshold matter, that he, rather than an arbitrator, had the authority to decide whether the consumer contract was enforceable. He went on to conclude that it was not, because, in his view, the Verizon contract – which includes a provision that bars consumers from arbitrating their claims en masse — was “permeated by unconscionability.”

Verizon is challenging all of Chen’s conclusions, beginning with his ruling that the contract’s incorporation of American Arbitration Association rules — including an AAA rule delegating threshold arbitrability issues to an arbitrator – did not strip him of jurisdiction to evaluate the contract’s terms. The company contends that the overwhelming weight of precedent holds that if a contract incorporates AAA rules, arbitrability disputes are to be decided by the arbitrator, even in consumer cases.

If Verizon persuades the 9th Circuit that Chen was wrong on that threshold question, the appeals court might not even need to opine on Verizon’s strategy to subvert mass consumer arbitration.

But if the 9th Circuit does weigh in on the enforceability of Verizon’s so-called batch arbitration clause, it will be an important early test of a tactic that corporations are increasingly likely to deploy in consumer contracts – and that will surely become even more common if such clauses are blessed by the appeals court.

Verizon’s consumer contract, in essence, eliminates consumers’ ability to arbitrate en masse, thus neutralizing their leverage from the steep initial arbitration fees companies are required to pay under AAA rules. The telecom’s consumer contract mandates that if more than 25 customers who are represented by the same plaintiffs' firm file similar demands for arbitration, the cases are to be arbitrated in batches of only 10 at a time, five picked by plaintiffs' lawyers and five by defendants.

If the two sides cannot reach a global settlement after the first 10 bellwether arbitrations, Verizon's contract says, 10 more cases go to arbitration. That contractual process continues until there’s a global resolution or until all of the cases have been arbitrated to a conclusion.

Verizon’s appellate lawyers from Paul, Weiss, Rifkind, Wharton & Garrison told the 9th Circuit in the company’s Nov. 21 brief that this system of batching just 10 cases at a time “employs a fair and established process for resolving numerous similar claims,” akin, in Verizon's view, to bellwether trials in multidistrict litigation. Limiting the number of cases to be arbitrated, the company acknowledged, does remove the “in terrorem” settlement pressure of multimillion-dollar arbitration fees. But the process of testing the strength of consumers’ claims in 10-case batches, Verizon said, promotes efficiency and fairness.

“The whole purpose of the mass-arbitration provision is to facilitate a quicker resolution of the claims than would be achieved by clogging the system with countless individual adjudications,” Verizon told the 9th Circuit. “The bellwether process is designed to provide the parties with the information necessary to reach a global settlement.”

That is not how the trial judge in the Verizon case saw the company's batching clause. Chen noted that Hattis & Lukacs, the plaintiffs' firm that brought the prospective class action against Verizon, represents not just the 27 named plaintiffs in the case but also more than 2,600 other Verizon customers who intend to assert consumer law claims. If all of those Hattis & Lukacs clients were forced to arbitrate their claims in batches of 10 cases at a time, Chen said, it would take 156 years to give them all a hearing.

“Requiring the consumers who retain counsel willing to represent them in cases such as this to wait months, more likely years before they can even submit a demand for arbitration is ‘unreasonably favorable’ to Verizon,” Chen said. “The court concludes that the provision is substantively unconscionable.”

Both Verizon counsel Kannon Shanmugam of Paul Weiss and plaintiffs counsel Daniel Hattis of Hattis & Lukacs declined to comment on conscionability of the batch arbitration provision. But I talked about with Warren Postman of Keller Postman, whose firm has been in the vanguard of mass arbitration campaigns, about the tactic. (Postman is in the midst of litigation challenging a similar batch arbitration provision in Live Nation Entertainment Inc’s consumer contract.)

Postman said his firm has run into several versions of provisions restricting the number of arbitration cases that can proceed simultaneously. He describes the provisions, broadly speaking, as “gerrymandering the process.” (Law professor Maria Glover of Georgetown University Law Center also outlined several kinds of corporate batching clauses in her definitive June 2022 Stanford Law Review study of mass arbitration. Glover predicted that if the bellwether process mandated by batching provisions ends up resembling a class action or MDL model, defendants “would probably prefer to be in court” after all.)

Postman said that corporations seem to be designing the provisions to increase the cost of prosecuting consumer claims while simultaneously reducing their own defense costs. “You can take 20 years to get relief for your clients,” he said. “Or you can take a settlement discount. A plaintiff who has to wait years to get before a decision-maker is going to take a huge discount.”

Both Postman and Shannon Liss-Riordan of Lichten & Liss-Riordan, who has also conducted mass arbitration campaigns, said the Verizon case will send an important signal to companies about the legitimacy of batch arbitration. “A lot of people will be watching,” Liss-Riordan said.

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.