India: Amazon Calls Quits To Arbitration With Consumers

Introduction

As the world is increasingly adopting arbitration as the mode to resolve disputes, we see an outlier, and that too a massive one. In early June, 2021, Amazon, world's largest online retailer, removed the arbitration clause from the User Policy on its website. In effect, all users are now not bound by the rigours of the arbitration clause and can file regular suits or even Class Action Suits against Amazon at civil courts. The decision comes when the company is inundated in multiple arbitration claims by consumers. In this article, we try to discuss the context in which the decision is made and the future prospects of arbitration arising therefrom.

Amazon's Conundrum

Much like the regular commercial world, the red-blooded Silicon Valley companies developed an affinity to adopt arbitration as the method of dispute resolution for any disputes with the users/ customers. Arbitration is cheaper than the regular civil proceedings, quicker and allows the companies to save its face when slapped with unfavorable awards, owing to its crowned feature: confidentiality. It is by all means a superior mode of resolution of commercial disputes between corporations, individuals or both. However, things become different when the warring parties are corporations and consumers.

With the development of arbitration law and its popularity, companies such as Amazon, Comcast, Wells Fargo, Ticketmaster, Dropbox, Goldman Sachs, P.F. Chang's, and Uber began using arbitration clauses in the terms of use agreement on their respective websites. Meaning thereby, a website user or a customer who makes a transaction using the company's service is knowingly or unknowingly, waiving off his right to approach the civil court or file a Class Action Suit in case of a dispute against the company.

But if arbitration is so beneficial to the businesses, why did Amazon choose to abandon it? We can figure out why.

Although Amazon hasn't reported any reason for the move, the legal circumstances surrounding the company make the investigation pretty clear. The company is facing 75,000 arbitration claims from consumers regarding the privacy issues arising from the use of Echo devices¹. Does it change much? The answer is a resounding yes.

A typical civil suit can be initiated by multiple parties against a single entity, however, arbitration, being based on the contractual relationship between the parties, can only take place between signatories to the respective contract. In the past, consumers, as well as law firms, faced difficulties in settling the claim of several, sometimes thousands, of customers against corporations. The law firms thus figured out a way - to launch mass-arbitration claims against the corporations. This way, the claims don't just remain a fly in the face of the companies but become truly difficult to deal with. Imagine having to pay for thousands of arbitrators or the ensuing paperwork, which is quite considerable in arbitrations.

Amazon's problems became worse due to the arbitration clause on its Website itself. Under the said arbitration clause, the fees from the side of the Consumers were also to be paid by Amazon. According to the Wall Street Journal report,² Amazon has to pay $10 million before even the start of the arbitrations.

When put under the hot tub, Amazon did the math and chose courts over arbitration.

Whether Arbitrations are Consumer Friendly?

Arbitration has been reviled as a mode of dispute resolution between corporates and consumers due to the undue advantages inadvertently offered by the procedure to resourceful corporations as against unsuspecting consumers who inadvertently agreed to the fine print. Deepak Gupta and Lina Khan refer to such clauses as "forced arbitration clauses" and such arbitration as "massive wealth transfer"³. They argue that it allows the corporation to transfer wealth upwards (to itself) from consumers, workers and financial institutions.

However, in 2010, Northwestern Pritzker School of Law conducted a study⁴ on 300 decisions of the American Arbitration Association consumer arbitration the results of which were quite different. The study revealed, "Consumers won some relief in 53.3% of the cases they filed and recovered an average of $19,255; business claimants won some relief in 83.6% of their cases and recovered an average of $20,648". Meaning thereby that contention that arbitration decisions tend to be pro-businesses, is not tenable. The study further showed, "in cases with claims seeking less than $10,000, consumer claimants paid an average of $96 ($1 administrative fees + $95 arbitrator fees). This amount increases to $219 ($15 administrative fees + $204 arbitrator fees) for claims between $10,000 and $75,000". Furthermore, the result showed that the arbitrator awarded attorney's fees to the consumers in 63% of the cases in which the consumer sought such an award.

In light of the above, it does not appear that arbitration can really be called biased to corporations. The mechanism of arbitration is such that the conflicting parties are given due chance to present their claims and pursue the same to their satisfaction. Having a robust case to their side, consumers can take a handsome arbitral award coupled with the reimbursement of the fees paid to the arbitrator, the attorneys and the institution. However, reimbursement to the consumer that is partaking in arbitration is something that should be a norm rather than a discretion.

Future of Arbitration

A sweeping move like such from the apex of the e-commerce industry would not go unnoticed by the companies. The decision deals a serious blow to the practice of choosing arbitration as a mode of dispute resolution by parties entering into contracts. The other companies may eventually follow suit, which would veritably change the arbitration landscape.

Mass-arbitrations have happened earlier as well. In 2018, Uber faced 12,500 arbitration claims for labour law violations.⁵ Similarly, in 2020, 5,010 arbitration claims were filed against Doordash from its employees⁶. However, they have not generally resulted in the corporations doing away with arbitration in toto.

It is important for the businesses to consider the opportunity cost of abandoning arbitration. When choosing courts over arbitration, the businesses are choosing long term disputes in the public eye, and a prolonged burn in the pockets, not to mention, class action suits that can result in a bad rep of great extent.

Footnotes

1. Amazon drops arbitration requirement after facing over 75,000 demands, ABA Journal, Available at: https://www.abajournal.com/news/article/amazon-drops-arbitration-requirement-after-facing-75000-demands.

2. Amazon Faced 75,000 Arbitration Demands. Now It Says: Fine, Sue Us, Wall Street Journal, Available at: https://www.wsj.com/articles/amazon-faced-75-000-arbitration-demands-now-it-says-fine-sue-us-11622547000?reflink=share_mobilewebshare.

3. Deepak Gupta and Lina Khan, Arbitration as Wealth Transfer, Available at: https://web.archive.org/web/20160322142114/https://www.acslaw.org/sites/default/files/Arbitration_as_Wealth_Transfer_1.pdf.

4. Christopher R. Drahozal and Samantha Zyontz, An Empirical Study of AAA Consumer Arbitrations, Available at: https://www.cfpbmonitor.com/wp-content/uploads/sites/5/2014/11/25OhioStJonDispResol843.pdf.

5. Forced into arbitration, 12,500 drivers claim Uber won't pay fees to launch cases, Available at: https://www.reuters.com/article/legal-us-otc-uber/forced-into-arbitration-12500-drivers-claim-uber-wont-pay-fees-to-launch-cases-idUSKBN1O52C6.

6. DoorDash drivers use their forced arbitration clause to force DoorDash into arbitration, Available at: https://www.theverge.com/2020/2/12/21135474/doordash-workers-forced-arbitration-william-alsup.

Originally published Aug 30, 2021

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.