An appeal pending in the U.S. Court of Appeals for the Ninth Circuit is poised to decide whether an arbitration agreement that requires mass arbitration disputes to be resolved by multiple rounds of bellwether arbitrations lawfully facilitates a quicker and more efficient resolution of the disputes than would be achieved by pursuing thousands of individual arbitrations—as appellant Verizon Wireless, Inc. contends—or whether it is substantively unconscionable because it effectively eliminates the claims of  thousands of Verizon customers who are required to wait for up to 156 years for the bellwether arbitrations to conclude—as appellees assert and the district court found.

In MacClelland v. Cellco Partnership d/b/a Verizon Wireless, 27 named plaintiffs brought a class action against Verizon asserting false advertising claims.  The plaintiffs’ law firm also represents 2,685 Verizon customers with similar claims.  The district court denied Verizon’s motion to compel arbitration pursuant to the arbitration clause in its customer agreement, finding that the clause was substantively unconscionable because, inter alia, the “mass arbitration” provision in the arbitration clause was unreasonably favorable to Horizon.  Under that provision, when 25 or more customers who are represented by the same counsel raise similar claims, the claims must be resolved pursuant to the following “coordinated proceeding”:

Counsel for the Verizon Wireless customers and counsel for Verizon Wireless shall each select five cases to proceed first in arbitration in a bellwether proceeding.  The remaining cases shall not be filed in arbitration until the first ten have been resolved.  If the parties are unable to resolve the remaining cases after the conclusion of the bellwether proceeding, each side may select another five cases to proceed to arbitration for a second bellwether proceeding.  This process may continue until the parties are able to resolve all of the claims, either through settlement or arbitration.  A court will have authority to enforce this clause and, if necessary, to enjoin the mass filing of arbitration demands against Verizon.

According to the district court, this provision is substantively unconscionable because it could take up to 156 years to resolve all of the claims and thus deters potential litigants from enforcing their rights.  Moreover, the statute of limitations provision in Verizon’s customer agreement does not contain a tolling provision to prevent claims that are the subject of later arbitration tranches from becoming time-barred, which would cause a forfeiture of legal rights in contravention of public policy.  On appeal, Verizon contends the district court erred because the bellwether procedure leads to a quicker and more efficient resolution of claims than would be achieved by clogging the system with thousands of individual adjudications and because the court misconstrued the operation of the statute of limitations provision.

We have addressed mass arbitration issues and potential defenses extensively in our blogs and podcasts.  In particular, we have discussed the American Arbitration Association’s (AAA) recent issuance of “multiple consumer case” rules that regulate the filing and administration of consumer mass arbitration claims filed with the AAA.  

Notably, the district court in Verizon Wireless found that the AAA rules stand “in stark contrast” to Verizon’s provision because they “do not require that a party wait a set amount of time before initiating a demand for arbitration.  Nor do they require that arbitrations proceed in tranches.  And while the Supplementary Rules provide that the parties shall participate in a global mediation within a set amount of time, ‘any party may unilaterally opt out of mediation upon written notification to the AAA and the other parties to the arbitration.'”  The Rules also make clear that the global mediation shall take place currently with the arbitrations and “shall not act as a stay of the arbitration proceedings.”  The court concluded: “It is one thing to set up a bellwether system to adjudicate a group of cases with the purpose of facilitating global or widespread resolution via ADR.  It is another to formally bar the timely adjudication of cases that do not settle.”

We will update you when the Ninth Circuit issues its decision.  Verizon just filed its opening brief last week and oral argument has not yet been scheduled, so a decision will not be forthcoming until 2023, at the earliest.  We will also continue to advise you on other important developments in mass arbitration litigation.  The implementation of bellwether procedures is only one of many mass arbitration defense strategies that consumer financial services companies should consider adopting in order to protect against the potentially catastrophic economic consequences of mass arbitrations.