Amazon faced 75,000 arbitration demands. Now it says: Fine, Sue us

Companies have spent more than a decade forcing employees and customers to resolve disputes outside the traditional court system, using secretive arbitration proceedings that typically don’t allow plaintiffs to team up and extract big-money payments akin to a class action.

Now, Amazon. [AMZN] -0.14% com Inc. is bucking that trend. With no announcement, the company recently changed its terms of service to allow customers to file lawsuits. Already, it faces at least three proposed class actions, including one brought May 18 alleging the company’s Alexa-powered Echo devices recorded people without permission.

The retail giant made the change after plaintiffs’ lawyers flooded Amazon with more than 75,000 individual arbitration demands on behalf of Echo users. That move triggered a bill for tens of millions of dollars in filing fees, according to lawyers involved, payable by Amazon under its own policies.

Amazon’s decision to drop its arbitration requirement is the starkest example yet of how companies are responding to plaintiffs’ lawyers pushing the arbitration system to its limits.

Arbitration agreements are buried in the contracts consumers sign to do everything from buying a cellphone to using a ride-hailing app. Many employers also require arbitration for adjudicating issues like pay disputes or discrimination claims. The U.S. Supreme Court has repeatedly upheld and strengthened the rights of companies to mandate arbitration.

The proceedings mirror court cases in some ways, but take place in private settings paid for by the parties, with less evidence presented and no appeals. Companies often agree to pay for initial filing fees of between $100 and $2,000. The companies that manage the proceedings charge additional fees, and the arbitrators, or judge equivalents, bill for their time.

Consumer advocates and plaintiffs’ lawyers say the structure is inaccessible and often doesn’t make it financially worthwhile for individuals to pursue a claim. Companies say it is a fair process.

In recent years, a few well-resourced law firms have used online marketing and other tools to sign up consumers and employees en masse to file arbitration claims, alleging everything from unfair pay to fraudulent business practices. The filings can overwhelm arbitration providers and the targeted companies, which are accustomed to paying the fees for small numbers of claims but not tens of thousands all at once.

“It has the potential to be pretty unfair to the company,” said Patrick Bannon, an employment lawyer at Seyfarth Shaw LLP who has represented clients facing mass arbitrations. The arbitration fees put intense pressure on businesses to settle, he said, “whether the claim is valid or not.”

“Companies thought they were getting out of liability altogether,” by adding arbitration clauses, said Chicago lawyer Travis Lenkner, whose firm filed the majority of the Amazon claims. “Now they’re seeing exactly what they bargained for, and they don’t like it.”

Amazon had no comment on the change to its terms of service, but said its Echo devices only record when in use and that customers can delete the recordings or choose not to have them saved.

The mass-arbitration filings have forced companies to scramble. Uber Technologies Inc., Lyft Inc., and TurboTax maker Intuit Inc. have all tried to avoid paying filing fees or direct claims back into court after being hit in recent years with thousands of arbitration claims.

Few companies so far seem ready to scrap arbitration outright like Amazon.

Instead, some are requiring employees to speak to a lawyer at the company before filing an arbitration claim. One arbitration provider created a mass-claim protocol that calls for handling a few test cases before the full filing fees come due.

When Mr. Lenkner’s firm, Keller Lenkner LLC, made arbitration demands against food-delivery app DoorDash Inc. in 2019 on behalf of more than 5,000 drivers who said they were improperly classified as contractors, the company balked at paying the filing fees and tried to resolve the claims in a class-action settlement. In a role reversal, Keller Lenkner then asked a federal court to compel arbitration, a request usually made by companies.

“No doubt, DoorDash never expected that so many would actually seek arbitration,” U.S. District Judge William Alsup wrote in an order last February. “Instead, in irony upon irony, DoorDash now wishes to resort to a class-wide lawsuit, the very device it denied to the workers, to avoid its duty to arbitrate. This hypocrisy will not be blessed.”

DoorDash [DASH] said in November it reached individual settlements totaling $85 million to resolve worker misclassification claims brought by 35,000 DoorDash and Caviar drivers.

By its estimate, Keller Lenkner has secured more than $375 million in settlements for more than 100,000 individual arbitration clients over about two years.

Filing arbitration claims en masse takes considerable upfront resources and technology because plaintiffs’ lawyers need to have a relationship with every single client. In class-action lawsuits, most plaintiffs have no involvement until receiving an email or postcard saying they are eligible for a payment.

It’s “not something most people thought plaintiffs’ lawyers would or could try to do,” said Mr. Bannon, the defense lawyer.

The claims against Amazon followed news reports in 2019 that Alexa devices stored recordings of users. When consumers filed proposed class actions saying the practice violated laws against recording without both parties consenting, Amazon successfully argued the claims belonged in arbitration.

Starting in early 2020, Keller Lenkner and other firms filed tens of thousands of individual demands for arbitration. Amazon said some claims have been withdrawn or ended in the company’s favor.

In May, Amazon attorneys alerted plaintiffs’ lawyers to the change in the retailer’s terms of service. Instead of what was once 350 words on its website detailing arbitration requirements, there are now two sentences saying disputes can be brought in state or federal court near Amazon’s Washington state headquarters.

Adam Zimmerman, a professor at Loyola Law School who studies class actions, said Amazon’s move could cause other companies to consider scrapping arbitration. But a wave of change is unlikely, he said, because lawsuits create more legal exposure.

Source: WSJ