On May 3, 2021, Amazon Inc. proposed a monumental change in the way it resolves legal disputes with its customers. Instead of requiring its customers to arbitrate their disputes, Amazon instead proposed that those disputes be litigated in the state and federal courts sitting in King County, Washington, without a jury. If, as a customer of Amazon, you bought anything from Amazon after that date, you agreed to accept Amazon’s proposal. In shifting away from arbitration, Amazon joined other tech giants like Facebook, Twitter, and Google, all of which avoid mandatory arbitration.
Amazon’s shift to public judicial resolution of disputes and away from confidential private resolution marks a solid departure from the usual practice of large businesses that have largely favored the latter. It’s worth asking why.
HOW DO ARBITRATION AGREEMENTS WORK?
Arbitration is a voluntary process, even though one of the parties to an arbitration agreement may feel that they have little choice but to agree. Without an agreement to arbitrate, there’s no arbitration. In the case of negotiated agreements between parties who each have some bargaining power, the question of how disputes are to be resolved is often a contentious point of debate between the lawyers. Some folk wisdom holds that arbitration is better, faster, and cheaper than litigation, but there are elements of arbitration that are certainly more expensive, and the absence of serious avenues for appeal and review of arbitral awards should give parties pause before they agree to arbitrate.
WHY DO DEFENDANTS SEEK TO COMPEL ARBITRATION?
The most attractive element of arbitration to defendants (called “respondents” in arbitration) is its private and limited nature. For the most part, an arbitration is held in a private session with no right of public access, no publicly-available transcript, no publicly-available evidence, and no publicly-available decision. (There are a few fields where arbitral decisions are made public, but that’s only because either a law or an industry standard requires it.) When a party defending against a claim in arbitration loses, the facts established in that loss do not carry over into the other arbitration proceedings against the same defendant arising from similar circumstances with a different plaintiff (called the “claimant” in arbitration). The best efficiency that a consumer can hope for under the American Arbitration Association (“AAA”) consumer rules is that the case is deemed eligible for multiple case-filing status, which reduces filing fees and may – but doesn’t necessarily – reduce the number of hearings.
WHY DID AMAZON BUCK THE TREND?
The Balkanizing effect of individual arbitration is great for defendants who want to deter claims, but too much of it can end up hurting the defendant. That’s what Amazon discovered when it tried to push the Echo Dot cases into individual arbitration proceedings. If you’re Amazon and your core business is selling and delivering consumer goods, and if you’ve got a robust customer service policy that tries to satisfy customers when they have a problem, then you don’t expect a lot of high-dollar arbitration claims to be filed, because the damages suffered by an unhappy buyer rarely exceed the price paid for the goods. In that case, the expense of arbitration becomes a burden for the consumer and a deterrent to the consumer filing a claim. Indeed, the expense might be so burdensome that arbitration is not an effective remedy, and that could lead a court to invalidate the agreement to arbitrate. That’s why Amazon originally tried to shift the calculus by making it easier for the consumer to arbitrate individual claims, consistent with the AAA’s policies regarding consumer arbitration. It did so by agreeing to arbitrate under the AAA’s less expensive consumer rules, to use expedited procedures, and to reimburse a substantial amount of consumer’s share of the arbitral fees in most instances.
The fact that arbitration requires an agreement to arbitrate begs the question of how to resolve the claims of people who don’t have an agreement. This turned out to be a huge problem for Amazon in the Echo Dot cases, because the Echo Dot device doesn’t know who’s in the room when it monitors speech. The household’s Amazon subscribers agree to the Amazon user terms, but the non-subscribers and visitors to the house don’t. Thus, when Amazon tried to push all of its Echo Dot class actions to arbitration, it had to recognize that it would likely end up arbitrating the claims against subscribers and litigating against non-subscribers. Both groups would claim to have rights to compensation that arose under some state laws governing online privacy, but the non-contracting group arguably had stronger claims because they had not agreed – by clicking “yes” – to limit their remedies and potential liability. Thus, adverse rulings in the cases brought by non-subscribers set the stage for bad outcomes in the arbitration cases anyway.
Against this backdrop, Amazon realized that despite its best efforts to avoid litigation, there would be a significant group of litigated cases that could make arbitration more costly for Amazon as a result of the concessions Amazon made to be more consumer-friendly in its arbitration agreement. Amazon had agreed, for example, to reimburse the customer’s filing fees and arbitrator fees for all cases in which the customer had less than $10,000 at stake and which the arbitrator did not find to be frivolous. But since there were already pending class actions with non-customers that would certainly get past the pleading stage, non-frivolousness was basically a foregone conclusion. That meant that the 75,000 or so individual arbitrations could easily cost Amazon $150 million in reimbursement of arbitration expenses alone, even before there was a penny of damages, and overwhelm the resources of the AAA. (In 2020, the AAA handled fewer than 68,000 consumer cases.) If brought in court, those individual cases would grind the state and federal court systems in Seattle to a halt.
In the end, Amazon came to realize why big defendants have learned to love class actions: they provide the closure that arbitration can’t deliver. Expect to see more companies re-think their consumer arbitration clauses.