December 23rd, 2024

Federal Court Enforces Mass Arbitration Terms

We recently wrote about the Ninth Circuit’s decision in Heckman v. Live Nation Entertainment, Inc., No. 23-55770, 120 F. 4th 670 (9th Cir. 2024), which struck down Ticketmaster’s mass arbitration terms as unconscionable and unenforceable. We observed that these terms were extreme. The terms provided that three confidential bellwether cases would be binding on all plaintiffs—regardless of their inability to participate or even know about those proceedings. The Ninth Circuit held that this method of dispute resolution was “unworthy even of the name of arbitration.”

What seemed to trouble the Ninth Circuit most was that Ticketmaster’s bellwether provisions strongly resembled a class action, yet did not provide the non-bellwether claimants with any of the protections or benefits of a class action. While the Ninth Circuit expressed skepticism that any mass arbitration is consistent with the Federal Arbitration Act, we predicted that the Ninth Circuit had left breathing room for less extreme protocols; for example, a batching protocol.

The first trial court decision interpreting Heckman has now been published, and it’s good news for businesses that want to utilize a batching protocol in their terms of service.

In Kohler v. Whaleco Inc., No. 24-CV-00935 (S.D. Cal. Nov. 25, 2024), the plaintiff filed a putative class action asserting claims under various California consumer protection statutes related to defendant Temu’s pricing discounts. Temu moved to compel arbitration. Temu’s arbitration agreement, like Ticketmaster’s, contained a protocol for mass arbitration. Unlike Ticketmaster’s agreement, Temu’s agreement utilized a batching rather than bellwether protocol, which provided:

In the event that there are twenty-five (25) or more individual Arbitration Notices of a substantially similar nature filed against us by or with the assistance of the same law firm, group of law firms, or organizations, within a thirty (30) day period, AAA shall … administer the arbitration demands in batches of 100 Arbitration Notices per batch … concurrently.

The district court agreed that the Ninth Circuit’s decision in Heckman was limited to bellwether proceedings, not batching protocols. Temu’s batching protocol avoided both the class-action-type features of bellwether proceedings and the concerns about claimants receiving adequate due process: “By contrast, the Batch Arbitration Provision at issue here does not mention bellwether proceedings, and Plaintiff has not raised any concern about a lack of notice or opportunity to be heard in the batch arbitration proceedings.”

The Kohler decision is a good litmus test for the parameters, post-Heckman, around permissible and impermissible mass arbitration terms under California law. We will continue to monitor this issue. In the meantime, companies should review their arbitration terms—and particularly their mass arbitration protocols—in light of these decisions.

If you have questions about the enforceability of your dispute resolution provisions, or about other commercial litigation matters, please contact Caren Decter at (212) 705 4833 or cdecter@fkks.com or Peter Devlin at (212) 705 7836 or pdevlin@fkks.com or any other member of the Frankfurt Kurnit Litigation Group.