Earlier this fall, the United States Court of Appeals for the Second Circuit undermined a strategy often used by the plaintiff’s bar in privacy claims: the threat of mass arbitration fees. In a decision reversing the district court, the Second Circuit held that the petitioners cannot use the Federal Arbitration Act (FAA) to compel arbitration on the basis that a business failed to pay arbitration fees. This decision adds to a growing body of precedent that courts cannot compel a business to pay arbitration fees, which as discussed previously here on Privacy World, can total in the thousands or millions of dollars in the event of mass arbitration.
Case Background
The case arose out of large-scale layoffs that took place at Twitter (now X Corp.) after its acquisition by Elon Musk in 2022. Thousands of terminated employees who had signed arbitration agreements as part of their contracts brought arbitration actions against Twitter.
The employee argued that, under the applicable JAMS guidelines, a respondent business like Twitter must pay all arbitration fees other than the initial filing fees. Twitter argued that the arbitration fees should be split pro rata under the terms of the employment contracts. JAMS sided with the employees and refused to appoint an arbitrator until the fees were paid. The employees then filed a petition in the Southern District of New York under section 4 of the FAA seeking “an order compelling Twitter to pay all ongoing fees for their arbitrations.” The district court sided with the employees and ordered Twitter to pay all of the disputed fees. Twitter appealed.
Second Circuit Reverses Lower Court’s Ruling on Fees, Finding That a Contrary Holding Would Undermine Purpose, Goals of Arbitration
The Second Circuit reversed the district court’s ruling. The Court started by recognizing that the FAA only allows a court to compel arbitration where there has been a “failure, neglect, or refusal” to arbitrate. 9 U.S.C. § 4. The Court then cited a body of caselaw holding that procedural issues beyond arbitrability—including waiver, delay, and forum-specific defenses—”are presumptively not for the judge, but for an arbitrator, to decide.” Putting these threads together, the Court reasoned that the payment of fees is merely a procedural issue that must be decided and enforced by an arbitration panel and not a “failure, neglect, or refusal” to arbitrate. In reaching this result, the court cited the Third, Fifth, Ninth, and Eleventh Circuits which have reached similar conclusions.
Supporting its reasoning, the Second Circuit stated that the employees’ position would undermine “the twin goals of arbitration, namely, settling disputes efficiently and avoiding long and expensive litigation.” Without the FAA, the employees’ remedies for non-payment is “to [ask] JAMS to use the tools available to it to resolve the procedural [issue] as it sees fit – even if that ultimately means terminating the arbitrations.”
This case gives businesses in the Second Circuit an extra line of defense when facing large fees from mass arbitration—and offers persuasive authority for defendants litigating in other forums.
Even so, companies should stay vigilant and carefully review the language in existing arbitration agreements to make sure their potential exposure to mass arbitrations in the first place are minimized. This is particularly so given the recent abuse of mass arbitration as a procedural mechanism by the plaintiff’s bar to bring frivolous or unsupported claims, particularly in the area of consumer privacy.
