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Bellwether Arbitration Clause Held Unenforceable

Robert Edward Bartkus


  • In the case of Achey v. Cellco Partnership, Verizon faced a challenge to enforce its arbitration agreement in a cellular phone service contract due to concerns about its mass arbitration bellwether provision.
  • The court in Achey found the bellwether process, particularly Verizon's explicit bellwether provisions, unconscionable.
  • Issues cited included limitations on damages, evidence, and discovery, as well as concerns about the extended time frame and the power it afforded the defendant, making the arbitration an "inferior" forum.
  • This legal case highlights ongoing debates and challenges within the realm of consumer arbitration, with potential implications for the use of bellwether provisions in arbitration agreements.
Bellwether Arbitration Clause Held Unenforceable
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On May 1, 2023, the New Jersey Appellate Division, in Achey v. Cellco Partnership, 475 N.J. Super. 446 (App. Div.), certification granted, 255 N.J. 286 (2023), declined to enforce an arbitration agreement in Verizon s cellular phone service contract due, in part, to its mass arbitration bellwether (“test case”) provision. While an appeal was pending in the New Jersey Supreme Court, the parties entered into a $100 million class action settlement agreement. Even though the settlement is expected to be approved, the case presents an array of questions that may arise in the future, as well as a few lessons learned.

Background: The Consumer Mass Arbitration Landscape

Arbitrators and arbitration counsel—especially those steeped in the day-to-day practice of consumer litigation—may understand Achey as part of the most recent “front” in what some have characterized as the long-running “warfare” between consumer class action plaintiffs’ counsel and their corporate counterparts. See J. Maria Glover, “Recent Developments in Mandatory Arbitration Warfare: Winners and Losers (So Far) in Mass Arbitration,” 100 Wash. U. L. Rev. 1617 (2023).

Class actions. Once courts permitted arbitration as a means to resolve individually “low-value” employment and consumer disputes, parties found themselves mired in class action arbitrations—a procedural morass that the U.S. Supreme Court eventually decided was incompatible with arbitration unless there was a clear and unmistakable agreement between the parties to use class action arbitration procedures. Oxford Health Plans LLC v. Sutter, 569 U.S. 564 (2013). Such agreements are unlikely in contracts of adhesion. Moreover, even though class actions are generally viewed favorably as a matter of state public policy, courts have upheld class action waivers in consumer and employee arbitration agreements. See, e.g., Pace v. Hamilton Cove, 475 N.J. Super. 568 (App. Div. 2023).

Mass arbitration filings. Plaintiffs’ counsel responded by filing thousands of arbitrations addressed to the same issue, under consumer or employment arbitration forum rules that required the defendants to pay administrative and other fees up front. Courts then were confronted with another problem: defendants that balked at paying fees in the six- and seven-figure range. Arbitration forums also were confronted with the problem of finding the large number of arbitrators needed to decide such cases.

Mass arbitration rules (including test cases). In response, arbitration forums stepped up with protocols for “mass arbitrations” that allowed the parties to select bellwether or test cases, much as might be done in multidistrict litigation (MDL) in federal court under 28 U.S.C. § 1407 or state processes when multiple “mass torts” cases are assigned to a single judge. MDL panels regularly transfer and consolidate cases for purposes of discovery or motions (and sometimes for selecting bellwether cases to assist with settlement more broadly), but in arbitrations such processes require the agreement of counsel—who are mindful of the pressures class actions (and, by analogy, mass arbitrations) can bring to settlement discussions. (In briefing, defendants’ counsel have characterized these cases as “a tactic to demand ransom,” an argument plaintiffs’ counsel dispute.)

When litigants do not agree to apply the mass arbitration rules, the forums typically have discretion to assign eligible cases to be bound by the rules. The American Arbitration Association’s Mass Arbitration Supplementary Rules provide that its decision to assign cases is deemed final, subject to review by a process arbitrator (appointed under the rules). Other forums’ rules (e.g., Center for Prevention & Resolution and New Era) may be similar, though JAMS takes a more hands-off approach—encouraging the parties to agree on processes but not imposing a structure. The rules have reduced initial filing fees, but they have not solved the cost problem companies complain of.

Where the parties do not agree to arbitration, and the defending company moves to compel arbitration of a court case, defendants may face at least two initial hurdles (in addition to plaintiffs’ general objections to arbitration). First, have the parties agreed to bellwether arbitration by merely adopting the forum rules rather than explicitly adopting its “supplementary” mass arbitration rules? Borrowing from cases requiring an explicit agreement to class action arbitration, courts may say that mere adoption of the forum’s rules, generally, is not enough.

Second, does the forum’s bellwether protocol present unique unconscionability issues, such as delay? Some cases have compelled arbitration under these rules. See, e.g.,McGrath v. DoorDash, Inc., No. 19-5279 (N.D. Cal. Nov. 5, 2020). A 2023 opinion, however, Heckman v. Live Nation Entertainment, Inc., No. 22-0047 (C.D. Cal. Aug. 10, 2023), found the New Era bellwether process unconscionable, in part (it appears) accepting the plaintiffs’ argument that New Era was formed to provide corporate-friendly procedures.

Defendants may counter that forum rules, such as Rule R-7 of the American Arbitration Association’s Commercial Arbitration Rules, provide that such gateway issues must be delegated to the arbitrator. However, a debate over the sufficiency of delegation by incorporation of a forum’s rules is still brewing, and neither the U.S. Supreme Court nor various circuits or state supreme courts have definitively resolved the issue. Even where the parties’ arbitration agreement contains an explicit delegation clause, it is not settled whether general delegation language would cover any bellwether questions that are raised, such as unconscionability.

Bellwether arbitration clauses. Responding to this quagmire, consumer goods and services companies (and possibly employers) have added explicit bellwether provisions to their arbitration agreements, by which the companies might assert greater control over the mass dispute process—and not depend on forum rules or post-dispute agreements among (by then) adverse counsel. By including such provisions in the agreement itself, rather than by reference to forum rules, these clauses also may be intended to satisfy the need (expressed in some cases) that an agreement to class-wide arbitration—and by analogy, mass arbitrations—must be clear and unmistakable. Custom-made bellwether provisions also may solve or mitigate the financial burden still imposed by forum rules.

The Complaint in Achey

The 28 plaintiffs in Achey (filed as a class action in early 2022) alleged that the small-dollar “administrative” and similar charges included in their monthly service bills violated New Jersey’s Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1 et seq. As with other so-called “junk fees,” these charges are alleged to be an attempt by the company to recoup taxes and other costs, rather than increasing the advertised monthly fee. These costs may vary from one state or jurisdiction to another and over time, so it may be cumbersome to advertise a standard monthly fee to a prospective customer. Plaintiffs allege that separately billing such fees makes it difficult for a prospective customer to compare the price of a service offered by different carriers. Some companies may include these costs in their basic fee; those that do not may appear to have a lower price. Once the customer notices the itemized fees on a monthly bill, it may be too late to cancel or opt out. The Achey plaintiffs allege that the extra fees were not disclosed up front and, therefore, constitute deceptive marketing.

Verizon Moves to Compel Arbitration

Verizon responded to the Achey complaint by moving to compel arbitration, based on an extensive clause in the plaintiffs’ service contracts. The plaintiffs argued that the arbitration provision was unconscionable for several reasons: a limitation on damages; a shortened (180-day) time to file a claim with Verizon; a limitation on discovery and the evidence or arguments that could be presented in the arbitration; and a bellwether process that deterred individual plaintiffs from exercising their right to select their own counsel (because joining other plaintiffs represented by a national “consumer” firm would subject a plaintiff to the bellwether process).

The focus of the Achey plaintiffs’ criticism, though, was the bellwether process itself, including (1) the role of defense counsel in organizing the process by selecting 10-case “batches” not only from among the 28 named plaintiffs but also from among the 2,537 claimants-in-waiting said to be represented by the same law firm; and (2) the time it could take until an individual claim was adjudicated—by one formulation, as much as 145 years for some, given the large number of plaintiffs not initially named and the “ten-by-ten-by-ten” batching process if the early bellwether cases do not lead to a global settlement.

Selecting test cases for multiparty complex litigation in state and federal courts is hardly a novel idea. As Verizon points out, legal theories may be litigated once for each 10-case batch rather than via endless, similar pretrial motions. Whether before a judge or a jury, the test case can provide the parties with “instructive guidance” regarding their evidence and arguments. As long as the test case is fairly representative, the decision or verdict should help to settle some or all of the others in its group—or even more broadly result in a “global resolution,” even if collateral estoppel does not bind parties in future cases. In theory, no one would be forced to follow the fate of the initial test case or later test cases selected from the subsequent batches. As argued by Verizon, the bellwether protocol in its arbitration clause—like other court-ordered arbitration processes or rules—is nothing more than a helpful way to “streamline,” organize, and resolve a large number of cases.

The Trial Court Grants Verizon’s Motion to Compel

In mid-2022, the trial court severed and struck the provision limiting damages as contrary to the Consumer Fraud Act. However, the court otherwise granted the motion to compel arbitration. Under New Jersey state court rules (as distinct from federal procedure under the Federal Arbitration Act), that was a final judgment subject to immediate appeal, and so the plaintiffs appealed. See N.J. Ct. R. 2:2-3(b)(8).

The Appellate Division Reverses: Bellwether Provision Found Unconscionable

In May 2023, by a reported (and hence precedential) opinion, a three-judge panel of the Appellate Division reversed the order compelling arbitration. The panel described the entire clause, not just the provision limiting damages, as “permeated” with unconscionability and violations of public policy; in so finding, the panel avoided a contract clause that would have required the court to sever any particular provisions it found “invalid.”

In summary, the Appellate Division concluded:

  • The provision limiting damages to the amount of “direct” loss was contrary to the well-established rule that the remedies of the Consumer Fraud Act cannot be waived.
  • The limitation on evidence and discovery similarly frustrates the goal of the Consumer Fraud Act to root out fraud and to protect consumers.
  • The 180-day limit to file a claim with Verizon had been held unconscionable in the context of other consumer fraud cases as a “trap for the unwary” and a likely windfall to defendants and was therefore unconscionable even though not a formal shortening of the statute of limitations. The court rejected Verizon’s effort to disclaim any intent to use this provision to preclude any of these claims.
  • The bellwether process gave excessive power to the defendant to decide how long the “batching” and test case process would continue.
  • The delay inherent in the bellwether process was substantively unconscionable, in part because parties not chosen for the initial test case batching could not file their claims and thus must sit out the process for an uncertain, but unreasonably long, time, and in part because there was no tolling provision. Verizon no doubt included this “no-file” provision to avoid having to pay a forum’s initial filing fees (which could be cumulatively huge) for these cases, intending that unfiled cases likely would be settled once the test cases were decided or settled. The court, however, saw this as likely to deprive most claimants of a meaningful remedy.
  • Looking at the “cumulative effect” of these problems, the court saw an unconscionable—and hence unenforceable—alternative to the court-supervised class action litigation that the plaintiffs had elected by filing their complaint. As the court emphasized, when all provisions were combined, this arbitration would be an “inferior” and often “wholly ineffective” forum—and, the court concluded, “inten[tionally]” so.

What’s Next: Lessons Learned

Although the issues raised on appeal may be decided by reported opinions for now, the settlement does not finally resolve the issues addressed by the Appellate Division and the California federal case, MacClelland v. Cellco P’ship, 609 F. Supp. 3d 1024 (N.D. Cal. 2022), on which the Appellate Division principally relied. Other courts still may find their own conclusions until further appellate opinions bind lower courts.

First, the underlying issue of administrative fees remains. The settlement may provide “up to” $100 to individual class members, but the fees have not been discontinued. Although the company agreed to modify its billing disclosures, this does not resolve the more general issue of so called “junk fees” that are unrelated to actual costs, are not disclosed at the outset of consumer relationships, and, therefore, still permit the company to advertise a potentially misleading fee that cannot readily be compared with fees charged by other providers or carriers.

Second, the issues in addition to the bellwether procedure remain important: the delegation of determining unconscionability defenses by incorporating forum rules and whether an arbitration clause can be thrown out because of the cumulative effect of several provisions, unconscionable in varying degrees, despite a severance clause.

Regardless of what happens in court, parties and their lawyers should take away several lessons from the scathing opinions in Achey and MacClelland:

  • Never include provisions that have been held unlawful or unenforceable as violating consumer- or employee-protective statutes. For example, though not mentioned in the Achey opinion, the Appellate Division recently declined to enforce an arbitration clause that contained a shortened time for asserting a claim. Guc v. Raymours Furniture, Inc., No. A-3452-20 (N.J. Super. Ct. App. Div. Mar. 11, 2022). According to the decision in Guc, that provision was so intertwined with other parts of the clause as to make the entire clause unenforceable.
  • Be wary of including provisions such as damages or time limitations that can be seen as unfairly restricting a claimant’s ability to litigate a claim, especially when viewed cumulatively, thereby making arbitration an inferior forum rather than one that exchanges discovery or other procedures for greater efficiency and speed. If an add-in makes the process unfair, do not include it; not only may a court refuse to compel arbitration, but a forum can review a consumer or employee clause for unfair provisions and refuse to administer the case. E.g., Hernandez v. MicroBilt Corp., No. 22-3135 (3d Cir. Dec. 5, 2023). In these bellwether cases, a time limitation must specifically toll any time to sue until claims are filed in the process required by the parties’ contract.
  • Be wary of substituting a “home-made” procedure for the processes included in the forum’s rules, whether it be for discovery or a bellwether process. The forums work with plaintiffs and defendants to craft a process that both can endorse as fair. Any complex substitute, even if arguably substantially similar, can be viewed as unfair and unconscionable. The process still needs to be fair to the defendant regarding payment of filing and related initial fees; the filing fees should not be leverage against any party.
  • If intending to incorporate a forum’s rules regarding delegation, mass arbitration, or other provisions foreign to a trial court, be sure to make the incorporation by reference explicit, at least until the Supreme Court accepts a different process. Otherwise, set out the delegation explicitly.

Stay tuned for further developments on the viability of bellwether arbitration; the Achey settlement likely is not the last word.