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Sept 14 (Reuters) – The Chicago federal judge who just ordered Samsung Electronics to arbitrate Illinois biometric privacy breach claims by nearly 36,000 Samsung device owners is not the first judge to note the irony of compelling a corporate defendant to abide by the terms of the very contract it imposed on consumers.
But U.S. District Judge Harry Leinenweber is one of only a handful of judges – and apparently the first outside of California – to back up his order compelling arbitration with a ruling that the defendant must pay millions of dollars in arbitration fees to launch the cases. (California is unique because state law imposes sanctions on mass arbitration defendants that refuse to pay fees.)
As Leinenweber pointed out in his Sept. 12 opinion directing Samsung to pay about $4.13 million in case initiation fees to the American Arbitration Association, other judges have stopped short of ordering corporate defendants to pay the upfront fees, even after siding with mass arbitration claimants who sought to compel arbitration.
Samsung had pointed to such rulings to argue, among other things, that only an arbitrator – and not the court deciding whether to compel arbitration – can order arbitration fees to be paid.
But Leinenweber said payment of the initial fees is not just a procedural matter. “The fees are bound up in the right to arbitrate,” he said. “The filing fee rule affects whether the parties can exercise their right to arbitrate at all. Money is the means of dispute resolution, and the way to start this process.”
Neither Samsung nor its lawyers at O’Melveny & Myers responded to my queries on the decision.
“This ruling is significant because it went beyond just compelling arbitration and made fees part of the analysis,” said Georgetown University law professor Maria Glover, a mass arbitration scholar. “That’s perfectly logical but not what we’ve seen in the past.”
Arbitration initiation fees, as you probably recall, are the most hotly-contested issue in mass arbitration. When plaintiffs first began demanding arbitration en masse about five years ago, big arbitration providers like AAA and JAMS typically charged companies more than $1,000 per case in upfront fees – which meant that arbitration demands by hundreds or thousands of claimants quickly put companies on the hook for millions of dollars in fees before cases even began.
Companies have long argued that plaintiffs firms used those upfront arbitration fees as a bludgeon to force them into settlements without any consideration of the merits of plaintiffs’ claims. Courts have been generally unsympathetic to these arguments, often noting that corporations litigated for years to establish their right to impose mandatory arbitration on customers and employees — and only began to have second thoughts when those same customers and employees actually sought to enforce the arbitration contracts that companies had imposed upon them.
AAA has changed its rules to reduce upfront fees in mass arbitrations, but mass arbitration critics continue to assert that the fees give unwarranted leverage to plaintiffs firms, incentivizing plaintiffs firms to file even unvetted claims.
Samsung, for instance, told Leinenweber earlier this year that hundreds of Samsung device owners had apparently signed up with multiple sets of plaintiffs firms, leading to overlapping arbitration demands. Samsung accused Labaton Sucharow, which had moved to compel arbitration for about 50,000 clients, of inadequate vetting, in light of duplicate demands by 241 people who were listed in a parallel case brought by Robbins Geller Rudman & Dowd and Milberg Coleman Bryson Phillips Grossman.
In Monday’s decision, Leinenweber seemed unimpressed by Samsung’s accusations, noting only that Labaton had double-checked its list and that AAA had signed off on arbitration demands by all of the clients on its revised list. The judge similarly refused to engage with Samsung’s assertion that Labaton clients could not compel arbitration because the Samsung arbitration clause included a prohibition on collective action. Leinenweber said that was a question for the arbitrator to decide.
Samsung also argued that if Labaton had really wanted to arbitrate its clients’ claims, the plaintiffs firm could have paid Samsung’s upfront fees and sought to recoup the money if it prevailed on the merits. Labaton’s refusal to do so, Samsung contended, amounted to a waiver of its clients’ right to compel arbitration.
Not according to the judge, who said that Labaton had done exactly what it need to in the face of Samsung’s intransigence. “The fact that [Labaton’s clients] had the option to pay Samsung’s fees does not negate the reality that those fees were deemed Samsung’s responsibility by the AAA,” Leinenweber wrote.
The judge did dismiss petitions to compel arbitration by about 14,000 Labaton clients who live outside of the Northern District of Illinois, finding that he did not have jurisdiction.
Mass arbitration expert Glover said the Chicago judge’s matter-of-fact rejection of Samsung’s various protests – along with Leinenweber’s finding that a decision compelling arbitration must be accompanied by an order specifically requiring the defendant to pay initial arbitration fees – is a sign that courts are beginning to view these cases as routine.
“We’re in the new world – mass arbitration is part of the landscape now,” Glover said. “Companies have to understand: You’re not going to dodge the arbitration and you aren’t going to dodge the fees.”
Labaton partner Melissa Nafash called Leinenweber’s decision the “right result” in an email statement. “The court acknowledged that Samsung made the business decision to include an arbitration provision in its user agreement and prohibited Samsung from using gamesmanship to avoid it,” she said.
Leinenweber has not yet ruled on a motion to compel arbitration by about 1,000 clients of Robbins Geller and Milberg, which have said they represent as many as 60,000 Samsung device users with biometric privacy claims. But it’s hard to imagine he will reach a different result in that case.
Robbins Geller partner Stuart Davidson said via email that the judge’s ruling this week was a rejection of “rank gamesmanship” by Samsung. “Judge Leinenweber rightly called Samsung out for its conduct, which should serve as a wake-up call for other companies considering similar tactics,” Davidson said.
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Reporting By Alison Frankel; editing by Leigh Jones
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