Updated AAA Rules and Fees Could Change the Mass Arbitration Landscape

The American Arbitration Association (AAA) has amended its Mass Arbitration Supplementary Rules¹ and fee schedules² applicable to certain consumer and employment arbitrations, effective January 15, 2024. The AAA announced that it implemented these changes after receiving input from “individuals and businesses involved in mass arbitrations” and that it designed the new rules “to save time, reduce costs and foster constructive dialogue right from the start.”³ The changes likely are a response to the recent trend of mass arbitrations being used not to resolve disputes on the merits of a claim but rather to exploit arbitral rules of procedure to obtain settlements regardless of the validity of any claim.

Background

In recent years, a pattern has emerged in mass arbitrations in the consumer and employment contexts: law firms purporting to represent large numbers of allegedly “individual” claimants — often numbering in the high thousands or tens of thousands — assert claims in arbitration at little or no cost to themselves, taking advantage of the procedural rules of arbitration services providers (ASPs). Many ASPs — including, until recently, the AAA — assess case-initiation fees on a per-case basis. In other words, if a law firm purports to represent 10,000 claimants, and the ASP charges (for the sake of argument) $1,000 per case to initiate the arbitration, then a respondent might face $10 million in up-front fees before an arbitration can commence. In the face of such a threat, many companies have no option but to settle, even in cases in which the claims are highly unlikely to succeed or are frivolous, because the cost to initiate the arbitrations (much less mount a defense) is too high.

ASPs may decline to make merits- or procedural-based rulings until an arbitrator is appointed, which typically occurs only after the nonrefundable case-initiation fees are paid. Even if the underlying claims are frivolous on their face, those merits cannot be reached unless a company first pays a sum that frequently amounts to as much as an adverse judgment, if not more. And depending on the number of purported claimants that are amassed, companies may not be capable of absorbing such a significant up-front cost in the hopes (however likely) of later exonerating themselves and seeking fee-shifting orders, assuming fee-shifting is even available. As a result, companies often are forced to pay windfall settlements that bear no relation to the merits of a particular claim. Such outcomes undermine the integrity of the arbitral process, particularly when, in many cases, claimant pools are rife with duplicative claims and claim information that is inaccurate or even fictitious.⁴

AAA’s Updated Fee Schedule

Under the prior rules, AAA assessed fees to initiate a case as follows:

• For individuals, a case-filing fee of $125 or $75 per case depending on tier
• For businesses, a case-filing fee of $325, $250, $175, or $100 per case depending on tier
• In all cases, a case-management fee of $1,400 for one arbitrator or $1,775 for a panel of three arbitrators, which the business pays prior to arbitrator appointment⁵

This fee structure imposed high administrative costs on businesses in mass arbitrations. To give an example: for 10,000 cases, a business would have had to pay case filing fees of at least $1.375 million and arbitrator appointment fees — which are necessary to review any issue on the merits — of $14 million for a single arbitrator, for a total of $15.375 million.⁶ 

Now, the AAA has updated its fee schedule for mass arbitrations as follows:

• For individuals, a flat case-initiation fee of $3,125 for all cases
• For businesses, a flat case-initiation fee of $8,125 for all cases
• For cases that proceed beyond the initiation stage, a per-case fee for individuals and businesses depending on tier
• In all cases, an arbitrator appointment fee of $450 per case for the business and $50 per case for individuals where arbitrators are selected by direct appointment, and $600 for businesses and $75 for individuals where arbitrators are selected via a list and rank process⁷ 

The new fee schedule significantly lowers case-initiation fees for businesses and shifts costs to individual claimants. Payment of the flat case-initiation fees will also permit parties to proceed with “administrative review of the filing, an administrative conference call with the AAA, and the appointment of a Process Arbitrator and/or a Global Mediator” before incurring additional fees.⁸ After this point, the AAA fee schedule reverts to the prior version in certain respects. Under the example of 10,000 cases, a respondent company would pay $1.375 million in per-case fees and a minimum of $4.5 million in arbitrator appointment fees before having an opportunity to contest the merits, for a total of $5.875 million. Compared to a total of $15.375 million under the prior rules to initiate 10,000 cases to the point of at least being able to contest procedural matters, the new rules reflect approximately a 62% reduction in initiation fees for a business.⁹ 

The updated fee schedule is summarized below:

AAA’s New Affirmation Requirement

To address the issue of duplicative, inaccurate, and fictitious claims, the AAA now requires mass arbitration claims to “include an affirmation that the information provided for each individual case is true and correct to the best of the representative’s knowledge.”¹⁰ This requirement applies at the filing stage, under Rule MA-2, and may be challenged before an initial “Process Arbitrator” (Rule MA-6) once the flat case-initiation fees are paid to determine if the filing requirements are met. The Process Arbitrator also may hear other administrative or procedural disputes before the claims proceed to arbitration. The new AAA rules also include a similar requirement under Rule MA-4, in which answers, counterclaims, and amended claims must include the same affirmation from counsel representing both claimants and respondents, as applicable.

Takeaways

The AAA’s changes may have a meaningful effect on how mass arbitrations are brought and resolved going forward, though it will take time for the longer-term consequences to become clear. Some key takeaways include the following:

• The new rules and fees may encourage streamlined procedures. Parties may now seek rulings from a single Process Arbitrator on procedural and certain merits-related issues without incurring excessive fees.¹¹ This could lead to more-streamlined ways of resolving disputes, such as implementing a case-batching process or using “bellwether” cases to resolve the merits — that is, one or a small number of cases that are resolved first with potentially case-dispositive effects on the others. Claimants likely will oppose such efforts in a bid to preserve the in terrorem effect of subsequent administrative fees, which remain significant. For cases involving smaller claimant pools, these changes may be sufficient to reach the merits without undermining the arbitral process.
• No bellwether process is required (yet). Notably, the updated AAA rules do not require parties in mass arbitration to follow a bellwether process, whereas other ASPs require bellwether procedures for mass arbitrations. For example, the International Institute for Conflict Prevention & Resolution (CPR) requires arbitration of randomly selected claimants as part of its bellwether protocols.¹² The AAA’s new rules are likely as much a response to CPR and similar providers as they are to abusive mass arbitrations in the first place and represent yet another effort by the AAA to regulate mass arbitrations.¹³ 
• Consequences for false or misleading affirmations. It remains to be seen what sanctions the AAA will impose (beyond deeming claims improperly filed) for claimants who fail to provide affirmations or submit false affirmations. That said, the updated rules challenge the existing business model for plaintiffs’ firms, which typically rely on social media and non-lawyer marketing services to quickly identify a large pool of potential claimants — a process that does not rigorously vet claimants or the facts concerning potential claims.¹⁴ There is a significant risk that current practices would not qualify as “to the best of the representative’s knowledge,” particularly if claimants’ compliance with the AAA rules is subject to courts’ review. Indeed, the new Rule MA-2 would seem to confirm that the burden of vetting claims is on the claimants and their counsel rather than on the respondent, and it is improper to shift these costs to respondents at the filing stage (i.e., to require that respondents identify each and every claimant out of thousands that may be duplicative, inaccurate, or fictitious).

There will be further debate about the scope of parties’ responsibilities in view of the AAA’s revised rules. It is clear, however, that the AAA’s update has reallocated the costs and burdens associated with mass arbitrations, which the mass arbitration model previously sought to avoid.

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^[1] “Mass Arbitration Supplementary Rules,” AAA (Jan. 15, 2024).
^[2] “Consumer Mass Arbitration and Mediation Fee Schedule,” AAA (Jan. 15, 2024).
^[3] “AAA® Announces Updated Mass Arbitration Supplementary Rules,” AAA (Jan. 15, 2024).
^[4] “Mass Arbitration Shakedown: Coercing Unjustified Settlements,” U.S. Chamber of Commerce, Institute for Legal Reform (Feb. 28, 2023), at 37: “Defense counsel report that the number of obviously groundless claims in mass arbitrations often exceeds 30 percent of claims — and on a number of occasions has exceeded 90 percent.”
^[5] “Consumer Arbitration Rules, Costs of Arbitration,” AAA (Aug. 1, 2023).
^[6] This assumes the business has not agreed to pay the individual’s costs of arbitration. Where a respondent business has agreed under the terms of its arbitration agreement to pay AAA fees on behalf of both itself and individual claimants, case-initiation fees would be $2.15 million in addition to a minimum of $14 million in single-arbitrator appointment fees, for a total of $16.15 million.
^[7] Supra note 2.
^[8] Id.
^[9] Using the example from footnote 6 in which a business agreed in its arbitration agreement to pay AAA costs on behalf of both itself and individual claimants, per-case fees would be $2.15 million and minimum arbitrator appointment fees would be $5 million, for a total of $7.15 million.
^[10] Supra note 1 (revised Rule MA-2).
^[11] See Mass Arbitration Supplementary Rules, MA-6 (“Process Arbitrator”).
^[12] Mitchell L. Marinello, “CPR Issues New Employment Rules and Updates Mass Claims Protocol,” American Bar Association (June 25, 2021).
^[13] The AAA previously amended its existing Mass Arbitration Supplementary Rules and fee schedules on August 1, 2023.
^[14] Developments in the Law, Labor Law, Chapter Three, “The Enforcement Opportunity: From Mass Arbitration to Mass Organizing,” 136 Harv. L. Rev. 1652, 1662.

 

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