The Seventh Circuit Derails Mass Arbitration Tactics

By Gerald L. Maatman, Jr., Eden E. Anderson, Rebecca S. Bjork, and Ryan T. Garippo

Duane Morris Takeaways:  On July 1, 2024, in Wallrich, et al. v. Samsung Electronics America, Inc., No. 23-2842, 2024 WL 3249646 (7th Cir. July, 1, 2024), the U.S. Court of Appeals for the Seventh Circuit dealt a major blow to mass arbitrations.  This decision strengthens protections for companies that utilize arbitration agreements as an effective way to limit their potential classwide exposure. The Seventh Circuit’s opinion is required reading for any corporation utilizing arbitration programs.

Case Background

Samsung Electronics, Co. Ltd. and Samsung Electronics America, Inc. (collectively “Samsung”) are two affiliates that manufacture and sell consumer electronics.  “When consumers purchase or use Samsung devices, they automatically agree to Samsung’s terms and conditions.”  Id. at *1.  Like many other companies, Samsung’s terms and conditions contain an arbitration provision, which specifies that “all disputes” between Samsung and its customers shall be arbitrated before the American Arbitration Association (the “AAA”).  Id.

Pursuant to those terms and conditions, “[a] group of 35,651 Illinois consumers . . . filed arbitration demands before the AAA alleging they purchased Samsung devices and that those devices unlawfully collected and stored sensitive biometric data in violation of the Illinois Biometric Information Privacy Act.”  Id. at *2.  This tactic — commonly known as a mass arbitration demand — is often used by plaintiffs’ lawyers as an attempt to secure a quick settlement out of a defendant.  The tactic is sometimes successful because a defendant is often forced to pay expensive arbitration filing fees in order to initiate an arbitration. Often it is more cost effective for the defendant simply to settle the claims altogether rather than pay the filing fees and other expenses of litigation.  For this reason, numerous federal courts have held that while this tactic may be permissible, “mass arbitration interferes with the fundamental attributes of arbitration promoted by the [Federal Arbitration Act].”  See, e.g., Lamour v. Uber Technologies, Inc., No. 16-CV-21449, 2017 WL 878712, at *6 (S.D. Fla. Mar. 1, 2017) (quotations and citations omitted).

Against that backdrop, counsel for the claimants in Wallrich attempted to deploy mass arbitration tactics in this litigation.  After the consumers filed their arbitration demands, “the AAA requested $4,125,000 from Samsung, representing Samsung’s share of the initial administrative filing fees.”  Wallrich, 2024 WL 3249646, at *2.  The only difference between this case and others was that Samsung refused to pay the fees.  The AAA then offered the consumers the opportunity to pay the $4,125,000.  They also declined.  And, as a result, the AAA terminated the proceedings and paved the way for a federal class action lawsuit.

Rather than pursue a class action, the consumers then “filed a Petition to Compel Arbitration” in the U.S. District Court for the Northern District of Illinois.  Id.  They sought, among other things, “an order compelling Samsung to pay its AAA filing fees and to arbitrate the claims.”  Id.  In support of that petition, the consumers submitted their: (1) “arbitration demands before the AAA”; (2) “copies of Samsung’s terms and conditions”; (3) a spreadsheet containing the consumers’ names and addresses; and (4) “the AAA’s determination that the consumers had met the AAA filing requirements.”  Id.  The consumers did not submit any proof, however, that they were actually customers of Samsung.  Id. at *7.  But regardless, the district court still entered an order compelling Samsung to pay the filing fees and to arbitrate the disputes.  Samsung then appealed that decision.

The Seventh Circuit’s Opinion

On appeal, the Seventh Circuit dealt a major blow to mass arbitration tactics and reversed the order of the district court.  The Seventh Circuit held, in a unanimous opinion, that “the consumers effectively needed to present evidence that they were in fact Samsung customers” in order to arbitrate the dispute.  Id. at *6.  It also held that the consumers had not met their burden of doing so.

The Seventh Circuit explained that “arbitration demands are nothing more than allegations, much like a complaint filed in a district court.”  Id.  As such, they are not proof that the consumers were actually Samsung customers.  Similarly, copies of the terms and conditions “do nothing to show that any of the consumers purchased a Samsung device” nor did the AAA’s determination as to the filing requirements make such a showing either.  Id.  And last, the Seventh Circuit explained that the “spreadsheet of only names and addresses likewise fails to show that any of those named were Samsung customers.”  Id.  Accordingly, none of the “evidence” submitted by the consumers was sufficient to address their burden.

Further, the Seventh Circuit noted that the “consumers could have submitted almost anything to meet their burden of proving the existence of an arbitration agreement.  For example, they could have submitted receipts, order numbers, or confirmation numbers from their purchases of Samsung devices.  Or even more directly, they could have submitted declarations attesting to the allegations in their arbitration demands.  They did not.”  Id. at *7.  The major difference, however, was that all 35,651 consumers would have needed to submit such proof.  In the absence of such evidence in the record, the Seventh Circuit was left with no choice but to reverse the district court.

The Seventh Circuit concluded that a motion to compel arbitration is akin to a motion for summary judgment and, therefore, “does not allow second chances.”  Id.  “The consumers had the opportunity to present their evidence, and they failed to do so.”  Id.  Consequently, the mass arbitration tactics on display here seem to have been permanently halted.

Implications For Companies

The importance of Wallrich, et al. v. Samsung Electronics America, Inc. cannot be understated.  Companies faced with mass arbitration threats can now force each and every purported claimant to submit proof that his claim is subject to an arbitration agreement.  If a claimant does not come forward with such proof, the company may be able to refuse to pay any filing fees and avoid mass arbitration altogether.  As a result, corporate counsel can rest easy knowing that it is more difficult for their arbitration agreements to be weaponized against them.

That said, the importance of arbitration agreements also must be emphasized.  The Illinois Biometric Information Privacy Act (“BIPA”) is one of plaintiff’s counsel’s favorite litigation targets.  When utilized on a class-wide basis, claims under the BIPA are defined by its “draconian exposure” and its “job-destroying liability.”  Cothron v. White Castle System, Inc., 216 N.E. 3d 918, 940 (Ill. 2023) (Overstreet, J., dissenting).  However, if each BIPA plaintiff is required to arbitrate his claims individually, a company’s exposure becomes significantly less and, in some circumstances, even de minimis.  Accordingly, corporate counsel should also consider this factor as one of the benefits to implementing an arbitration program as an effective strategy to limit classwide relief.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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