How Financial Services Can Avoid Mass Arbitration Risk

Consumer complaints and litigation are normal occurrences for financial services companies, even those with robust compliance systems, but some recent developments are increasing the risks of mass arbitration. Attorneys from the law firm Womble Bond Dickinson point to strategies that can help companies reduce mass arbitration risk.

The trend of mass arbitration is a reversal, of sorts. Mandatory arbitration clauses that include a class action waiver have long been considered a plus by most corporate legal strategists, and they’ve been widely adopted. Now some plaintiff attorneys are trying to turn the tables by agglomerating hundreds and sometimes thousands of consumer clients, all invoking the same arbitration clause.

Given that defendants are typically responsible for arbitration costs, which can reach millions of dollars, plaintiffs get powerful settlement leverage. Companies can reduce this risk by thoughtful selection of arbitration providers, according to the authors. Look for those willing to work with company lawyers to draft clauses “that limit the abusive nature of mass arbitrations.”

Another developing problem for the companies is a kind of professionalization of consumer complaints and the ensuing litigation and arbitration. Many of these disputes “are completely manufactured by consumer law firms and credit repair organizations that work closely with them,” according to the authors. They note a relatively small number of repeat plaintiffs and consumer law firms are driving this trend.

Also in the mix: a substantial number of pro se plaintiffs, who are involved in about 10 to 15 percent of civil litigation cases, according to one estimate. Although these cases may not be a large share of any particular company’s portfolio, they can be especially troublesome and expensive to defend.

One strategy for addressing these developments, according to the authors, is to promptly correct any deficiencies that have precipitated complaints. This can be a defense in litigation, and as a matter of policy can be a shield against liability in some states, including Massachusetts, California, and West Virginia.