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State lawmakers pursue tort reform and changes to forced arbitration system that arose as … [+]
In the days and even hours leading up to Governor Ron DeSantis’s (R-Fla.) spring signing of House Bill 837, tort reform legislation that shortens the statute of limitations for certain lawsuits and makes a number of other changes, there was a reported “rush to the courthouse with negligence lawsuits in advance of its effective date.” The scramble to file suits, noted the firm Holland & Knight, “suggests that HB 837 will curtail the overall tort liability confronted by all kinds of companies operating in Florida.”
Florida isn’t the only state where tort reform was enacted in 2023. Five weeks and a day before Governor DeSantis signed HB 837, Iowa Governor Kim Reynolds (R) signed HF 161, legislation capping noneconomic damages in medical malpractices lawsuits.
“Iowa joins the majority of U.S. states by enacting commonsense medical malpractice reform that places a reasonable cap on non-economic damages,” Governor Reynolds said in her February 16 signing statement for HF 161. “Protecting our health care system from out-of-control verdicts promotes access to care in communities across our state and better positions us to recruit the best and brightest physicians to Iowa.”
The need for tort reform that limits unexpected legal costs for employers while maintaining consumer safeguards is an ongoing topic of debate in state legislatures. While business interests and trade associations often advocate for tort reform, companies have also developed a strategy for mitigating legal costs over the years, with an approach that focuses on arbitration as an alternative to class action and does not rely on legislative or regulatory action. This development, however, has come with its own unintended consequences that some now seek to address.
The Rise of Mass Arbitration
Though tort reform helps businesses limit the potential for unexpected legal fees and penalties associated with class action lawsuits, companies have found over the years that they can mitigate prospective legal costs through forced arbitration agreements. Forced arbitration allows companies to avoid the courtroom through contractual language mandating that consumer complaints be addressed through arbitration rather than class action lawsuits or other legal action.
Mandatory arbitration clauses are a tool now used by most of the largest companies. In fact, 81 of the businesses who comprise the Fortune 100 prevent consumers from taking them to court with contractual language mandating arbitration.
Digital terms of service agreements with forced arbitration clauses are used by many companies today. More than 825 million separate consumer arbitration agreements are now in existence. As of 2018, approximately 7,000 arbitration cases were heard annually. Critics of forced arbitration contend it leads to less favorable outcomes for consumers, many of whom are unaware they’ve agreed to forced arbitration.
“I would venture that every person living in the U.S. today has unknowingly signed up for forced arbitration in some aspect of their lives, whether it’s through credit cards, cell phones, long-term care or employment contracts,” said Julia Duncan, senior director of government affairs for the American Association for Justice.
Arbitration arose as a preferable alternative to class action lawsuits, one that has been effective in reducing unexpected legal costs. Yet, although arbitration originated as an alternative to mass legal action, businesses now face a new predicament with the rise of mass arbitration, which many companies appear unable to handle, or in some cases refuse to engage with the process entirely.
Companies Shirk Mass Arbitration Process They Erected
Companies first pushed for forced arbitration as a way to avoid class action lawsuits. This effort to avoid mass legal action through mandatory arbitration has been followed by the rise of mass arbitration. In an attempt to avoid the costs associated with mass legal action, companies now find themselves grappling with unexpected costs associated with mass arbitration.
In 2020, for example, 31,000 separate demands for arbitration were issued by UberEats customers who argued Uber’s
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“While Uber is trying to avoid paying the arbitration fees associated with 31,000 nearly identical cases, it made the business decision to preclude class, collective or representative claims in its arbitration agreement with its consumers,” the appeals court noted in its ruling. “AAA’s fees are directly attributable to that decision.”
While companies are now having a difficult time living under the forced arbitration regime they created, opponents of forced arbitration have taken legislative action. In 2019, for example, California lawmakers passed Assembly Bill 51, which prohibits companies from forcing their workers to sign arbitration agreements. AB 51, however, was subsequently struck down by the Ninth Circuit Court of Appeals on February 15, 2023, which ruled that businesses can mandate that their employees and job applicants sign arbitration agreements as a condition of employment.
California lawmakers have also passed legislation stipulating that if an employer fails to pay their required portion of arbitration fees or costs within 30 days past due, the business is in “material breach” of the agreement. That deemed breach allows the matter to be be resolved in civil court and through class action.
Critics of forced arbitration point to examples of companies shirking the arbitration process that they helped erect and into which they voluntarily forced complaints. Samsung, for example, is refusing to pay arbitration fees related to motions for arbitration filed by nearly 50,000 Samsung Galaxy users who claim their biometric data was improperly used.
“For nearly a decade, Samsung has included a forced mandatory arbitration provision and class action waiver in its terms and conditions wielding it as a shield to successfully evade class actions,” noted the Galaxy users’ motion to compel arbitration. The motion added that “now, when tens of thousands of customers finally level the playing field by simultaneously filing individual claims in arbitration, Samsung refuses to honor its contract to arbitrate and, worse, tells the arbitral forum that Samsung — a company with approximately $21 billion in net income last year — will only arbitrate if the individual consumers pay its fees.”
Critics of forced arbitration point to substandard outcomes for consumers. Businesses that have mandated arbitration over legal action, meanwhile, are proving unable to handle the responsibilities and cost associated with mass arbitration. Those on all sides of this debate believe some form of response from state officials is called for. There is bipartisan, cross-ideological consensus that state legislative reforms to the arbitration system that companies created is necessary.
While the benefits of some types of tort reform have become clearer with the passage of time, evidence continues to mount that the current forced arbitration regime, though it has become common, is flawed and needs to be reformed. As more state lawmakers pursue legislation seeking to ensure arbitration leads to better outcomes, businesses, consumer groups, and stakeholder organizations will likely be coming to the table with their own ideas. Even those who differ over the preferred solution, after all, now agree that the status quo is untenable.
