Corporate America has the upper hand in lawsuits. Consumers could be poised to take back power
For decades, corporate America has held the upper hand when it came to disputes with consumers and workers. But that could be changing.
Buried deep in the fine print of user agreements and employment contracts, mandatory arbitration clauses force Americans to take their lawsuits out of the federal court system and resolve complaints in the private arbitration system—a separate legal dispute resolution process without some of the same protections afforded in court cases.
Many have argued that arbitration discourages consumers and workers from even raising the dispute at all. But the status quo may be shifting due to the use of “mass arbitration” against corporations—a process in which thousands or even tens of thousands file individual arbitration cases against a company in a coordinated effort.
TurboTax’s parent company, Intuit, is the latest major corporation facing a barrage of arbitration claims after consumers were blocked from moving forward with a class action lawsuit courtesy of mandatory arbitration stipulations. And how Intuit navigates the deluge could lead other companies to reconsider how they engage with legal disputes.
The latest target of “mass arbitration”: Intuit
Intuit’s legal proceedings started in 2019, when consumers filed a class-action lawsuit against the tax giant, claiming the company’s “free” tax filing products were misleading and they ended up paying for services that should have been free.
An audit by the Treasury inspector general for tax administration released in 2020 found that the Free File Program—a service designed to allow Americans to prepare and file their taxes online for free—run in partnership with Intuit, H&R Block, and others, charged 14 million Americans for tax filing services despite their being eligible for free filing.
But Intuit and H&R Block both have forced-arbitration clauses in their service contracts, and successfully argued that consumers needed to individually argue their claims in arbitration.
“Intuit has at all times been clear and fair with our customers, and we believe that arbitration can provide a quick and individualized resolution to any customer who has a real dispute,” a company spokesman told Fortune.
Normally, that would have ended most of the cases—it’s typically not cost effective for a law firm to bring individual arbitration cases.
But Keller Lenkner, the law firm representing consumers against Intuit, has flooded the arbitration system with tens of thousands of arbitration claims. The firm says it represents more than 100,000 consumers harmed by Inuit’s actions.
Keller did not immediately respond to Fortune’s request for comment.
That mass arbitration strategy of individual people is taking a toll. Last year, 17% of all closed consumer arbitration cases involved Intuit or H&R Block, according to a new analysis by the American Association for Justice (AAJ), an advocacy and lobbying organization for plaintiffs lawyers.
The sheer volume of arbitration cases makes it very expensive for Intuit to fight this battle. Typically, companies pay organizations like the American Arbitration Association (AAA) and JAMS to arbitrate a case. The arbitrator or panel of arbitrators then hears the case, makes a ruling and determines the appropriate restitution, if any, and determines how attorneys’ fees will be split.
Intuit has argued that Keller is weaponizing the arbitration process.
“The game is that by filing these arbitrations, and collecting clients on Facebook and Twitter and other social media, the Keller firm is able to threaten companies—Intuit’s not alone—into paying $3,000 in arbitration fees for a $100 claim,” a lawyer for Intuit argued at a hearing in December 2020.
As of last December, the tax software giant was on the hook for at least $33 million in administrative fees to AAA, the arbitration venue contracted by Intuit to handle its arbitration cases, according to Reuters. To arbitrate just 125 cases, Intuit paid $220,000 in administrative fees, ProPublica reported in February. And that’s not including restitution awarded when consumers win, or cases in which Intuit has been ordered to pay consumers’ legal fees.
If Intuit really did arbitrate 100,000 cases (some of the cases initially filed have already been dropped), the company would be on the hook for $175 million in fees, ProPublica reports. The money at stake hasn’t escaped Intuit, which did offer to settle the claims for $40 million in late 2020, but a federal judge rejected the offer.
“Intuit was, in Hamlet's words, hoisted by their own petard,” Judge Charles Breyer said in December 2020. “I think arbitration is the petard that Intuit now faces.”
Intuit told Fortune that to date, the company has won more than 80% of arbitration cases related to its provision of free tax preparation. “We continue to have very real concerns about law firms that file thousands of claims that they later withdraw, and that bring claims on behalf of people who never used TurboTax or, if they did, filed their taxes for free,” the spokesman said.
H&R Block told Fortune it does not comment on ongoing legal proceedings.
How the arbitration landscape is changing
The Intuit legal saga follows similar strategies employed against Amazon, Chipotle, DoorDash, and Family Dollar, where consumers and employees flooded the companies with thousands of arbitration claims. (It’s worth noting that Keller was involved in both the Amazon and DoorDash cases.)
Last July, Amazon ended its use of mandatory arbitration in user agreements after it faced 75,000 arbitration demands from users of Echo, the company’s smart home device that users claimed secretly recorded their conversations. Now Amazon allows customers to sue the company in federal court.
“Companies want to use forced arbitration when they can unilaterally force it on their workers and on their unsuspecting consumers,” Julia Duncan, director of federal programs for AAJ, told Fortune. “They want to use it to shut down cases.”
When companies fail to shut down the claims by forcing consumers or workers to individually file arbitration claims, you see them typically try to then get out of arbitration, Duncan says. “It reveals the ultimate hypocrisy of the companies, and it reveals the ultimate truth of forced arbitration: which is that forced arbitration is not and never has been a true alternative forum for cases. Forced arbitration has always been where the majority of cases go to die.”
But Duncan doesn’t see most companies following Amazon’s lead. Rather than compel companies to drop their arbitration clauses, “mass arbitration” may instead cause companies to “tweak” their existing arbitration rules, Duncan says. For example, companies could alter their fee structures with arbitration forums like AAA to make the consumer pay a portion of the cost, or stipulate that arbitration take place only in certain states.
“They can do that because there are no rules,” she said. “This obviously needs to be a policy determination about how and when we restore the right to seek justice for workers and consumers.”
Federal lawmakers are cracking down on arbitration. In February, Congress passed legislation that nullified mandatory arbitration for sexual assault and sexual harassment claims.
The House of Representatives also passed the FAIR Act in March, which would end forced arbitration in consumer and employment contracts. The House passed the legislation in 2019, but it stalled in the Senate. Americans would still be able to arbitrate their claims, but the process would be voluntary and they could bring their case as a lawsuit in federal court instead if they chose to do so.
But the legislation has yet to be picked up in the Senate. So until that happens, Americans will be forced to use arbitration to resolve most disputes with major corporations.
Never miss a story: Follow your favorite topics and authors to get a personalized email with the journalism that matters most to you.