Earlier this week, a federal court unsealed some troubling documents that show how justice can sometimes be bought, sold, and negotiated for the benefit of stronger corporate parties. As described by the federal court, “these documents would be useful to the public in evaluating the true extent to which the [arbitral] organization is impartial.” The organization at issue in this particular case was the International Institute for Conflict Prevention & Resolution, often referred to as CPR, but I believe the lack of regulation in this area impacts other arbitration organizations as well.
You may have seen recent headlines about Doordash and how the class action waiver in its arbitration clause has caused headaches for the company. Because of the class action ban, workers filed thousands of individual arbitration proceedings against Doordash with the American Arbitration Association, and Doordash initially refused to pay the arbitral fees associated with all of these proceedings, which amounted to about $12 million for all the proceedings. (The Supreme Court majority in AT&T v. Concepcion quickly labelled class arbitration proceedings as inefficient; doesn’t this example involving Doordash and thousands of individual arbitration claims help demonstrate some potential efficiencies with class arbitration?) A federal court recently ordered Doordash to honor its own arbitration clause and pay the fees for the thousands of arbitration proceedings filed against it, and this order has garnered much media attention for the poetic justice of Doordash being burned by its own arbitration clause.
However, another aspect of the court’s ruling has gone largely unnoticed. Earlier this week, the federal court also released documents that had been previously filed under seal in this Doordash case. As described by the court, these documents raise questions about the neutrality or impartiality of CPR. (Click here for a copy of the unsealed documents.) These documents demonstrate how non-profit arbitration organizations, like CPR, attempt to negotiate “a book of business” with corporations (a term used by an officer of CPR), and the “book of business” involves the claims of potentially injured workers or consumers against these corporations. Can you imagine a judge telling a corporate defendant in an ongoing case, “you don’t like your current judge or the rules governing your ongoing lawsuit, do you? Come, hire me as your new judge instead. I’ll charge you a cheaper rate to resolve your dispute, which we can negotiate, and you can help draft and approve of the very rules that will govern the proceedings in order to benefit you over the injured worker or consumer.”
The recently-unsealed documents help demonstrate that CPR developed new dispute resolution rules at the request of the company Doordash, and Doordash was closely involved in reviewing and editing and approving the rules. Also, it appears that CPR did not discuss the new rules with any lawyers for the workers involved in these disputes, and CPR also held up the launch of the new rules until Doordash signed off on the rules and the new payment terms, which were not intended to be revealed publicly. Furthermore, Doordash developed these new rules to apply to existing, ongoing disputes which were already being administered by the American Arbitration Association. Even my young children recognize the unfairness in trying to change the rules of a game in the middle of an ongoing game. But far more than a mere game is at stake; people’s livelihoods and legal claims are at issue. Also, the documents mention that CPR had previously “negotiated deals” to get more business from other parties. (In the unsealed documents, there is still one email that is redacted and which appears to reflect some concerns by CPR. I wish legislators from Congress or from a state like California would publicly question CPR and other arbitration organizations how they go about negotiating deals for arbitration work.)
I am not commenting on the CPR rules themselves, but on the process of how the dispute resolution rules were developed. Also, I wouldn’t want rules drafted solely by the plaintiffs’ bar (there are some references in the Doordash case to abusive practices by the plaintiffs’ counsel, and I have seen class action abuse from all sides.) What I am advocating is a closer look at how arbitration rules, practices, and fees are developed by arbitration organizations. I would want our legal system to encourage healthy, fair, robust competition among different arbitration providers like the AAA, CPR, and JAMS, and such competition should in theory lead to lower prices and better services. However, how these organizations currently compete for business seems to be problematic. Each individual organization, like CPR, currently has a financial incentive to have large companies draft arbitration clauses in consumer or employment contracts choosing their particular arbitration organization over the others. As a result of this financial interest, the arbitration organization may be tempted to develop rules or practices that tend to favor the company, which drafts the arbitration clause, over any potential consumer or employee claimants. CPR wanted this large book of business, and as the documents help show, CPR had an interest in developing rules and negotiating fees that would be attractive to the respondent Doordash in the ongoing cases. Doordash had hoped to unilaterally change its contracts to require arbitration administered with CPR because Doordash disliked its original chosen provider, the AAA, and how the AAA was administering the arbitration proceedings. There are prior examples of this skewed, financial incentive favoring the corporate party (see the older example of NAF; also, I’ve seen a memo circulated from another arbitral organization several years ago seeking to solicit new books of arbitration business from companies who would be respondents in future cases.) Shouldn’t arbitration organizations compete for consumers or employees/potential claimants to select them, instead of solely competing for a company/future respondents to select them as a provider in the company’s contracts? Perhaps arbitration law could ban arbitration clauses from pre-selecting arbitration organizations or detailed arbitral rules in advance; instead, after a dispute arises, the parties should be able to mutually select the arbitration provider. In this way, arbitration organizations would have a stronger interest in developing rules that appeal to a sense of fairness for all parties, instead of catering to the interests of one side only. If arbitration clauses were banned from designating an arbitration provider in advance, it may have helped avoid some of the behavior in this Doordash case. Also, perhaps ethics rules should be developed to govern arbitration organizations and how they attract a “book of business,” the term used by an officer of CPR in the Doordash case. Perhaps there could be a ban on ex parte communications regarding the development of arbitration rules, and the development of any rules or amendments should involve an open-ended, transparent process with the input of different parties and organizations. Or substantive laws, like civil rights laws or wage laws, could specify in advance the minimum required procedures for any arbitration proceedings involving the particular legal claim. Also, the discussion of an organization’s fees should not be one-sided, ex parte, and non-public, as was the case with CPR and Doordash; I am troubled by a respondent negotiating a fee with an arbitration provider in a secretive manner. Instead, the same fees should be available to all similarly-situated parties and publicly stated in advance.
As another example, consider Amazon.com, which has an expansive arbitration clause and which currently selects the AAA as the chosen provider. I believe other arbitral organizations would have a financial incentive to be Amazon’s chosen arbitration provider. Do we want arbitral organizations soliciting and contacting Amazon to get Amazon to switch arbitration providers by negotiating the development of arbitration rules and fees that tend to favor Amazon, with no input from consumer advocates? Because of the expansiveness of arbitration clauses in America in all types of consumer and employment transactions, this system of justice may be the only available system for some people. The courthouse door is not accessible for many Americans as a result of arbitration clauses, and because of the role arbitration organizations serve in modern society, arbitration organizations should be above reproach, with not even a hint of impropriety. The rules governing arbitration should be developed in a transparent, public manner, with participation of all interested parties, and perhaps even overseen by a government agency, much like the SEC has oversight regarding the arbitration rules governing FINRA. Also, courts should be more aggressive in interpreting and applying state unfair trade practices laws to arbitral organizations that engage in abusive practices that undermine their impartiality. I hope these unsealed documents from the Doordash case serve as another wake-up call regarding the harms of forced arbitration.
This sick situation is only the tip of the iceberg of a perverse system that harms and sometimes kills small businesses, injured workers, insurance policyholders, consumers & employees. The secrecy concerning the decisions of particular arbitrators and the AAA’s flat refusal to provide “win rates” for particular parties before designated arbitrators raise legitimate and serious suspicions. JAMS provides this information WITHOUT BEING ASKED. Surely the AAA can.
I have been counsel for hundreds of automobile dealers over several decades. We were so outraged by the AAA’s blatant favoritism towards the auto manufacturers mandating use of AAA in franchise agreements that we tried to change the FAA. Our effort originally foundered on Jeff Sessions opposition.
Through shrewd legislative efforts (without amending the FAA) we eventually succeeded in prohibiting arbitration of disputes between auto dealers and manufacturers UNLESS arbitration is agreed AFTER the dispute arises. We remain cursed with the AAA and its favoritism towards other auto industry entities that insert it in their contracts. Defenses such as our “National Veto List” of unacceptable arbitrators are only a partial offset. When Chrysler discovered an evasion to our reforms, it unsurprisingly returned to mandating use of the AAA in the newest franchise agreements. Those franchise agreements contain numerous provisions designed to evade the Congressional reforms and trap unwary auto dealers. Yet, the AAA silently collects its huge fees, despite knowing some smaller dealers have been driven into bankruptcy by the outrageous cost of AAA arbitrations.
Years ago there were well documented stories in the California media about the AAA asking its’ arbitrators to solicit business from their corporate clients for inclusion of AAA in their contracts. The resulting uproar simply moved the “include us in your contracts” solicitations underground and beyond news media discovery.
When a proposed Code of Ethics for arbitral organizations was proposed, the AAA participated in drafting it. But then refused to agree to following it. Why? In a footnote I believe was on Page 1 it claimed the AAA was too special to comply with the very ethics guidelines it drafted. Even today strange things happen in AAA consumer arbitrations that “coincidentally” favor the very large businesses that insert AAA into their contracts. Businesses can delay paying arbitration fees, evade deposit obligations for months WITH NO AAA action. When demands for critical information are sent to the AAA, the response is deafening silence. The recent concern for due process is welcome, but seems more a reaction to the risk of real political reform rather than any serious interest in justice.
The need for a total overhaul is clear. Judges do not haunt the halls of justice touting for business like common streetwalkers. Neither should arbitration organizations.
Arbitration can be useful when negotiated between sophisticated parties of equal strength. Imposing arbitration on small businesses, injured workers, consumers and employees is a travesty and insult to the concept of Justice.