Janie and Jack LLC, a San Francisco online retailer of children’s clothing, earlier this week sued thousands of consumers who used its website, asking a federal judge to bar the consumers from asserting arbitration claims against the company.
Like many online businesses, J&J has “Terms of Service” on its website that say users of the site agree to bring any claims against the company by way of arbitration, not through the courts. They also agree to waive any right to bring a class action lawsuit.
The lawsuit is the latest salvo in an ongoing battle between consumer lawyers seeking to aggregate small claims into large claims and defendants who would like to see small claims handled individually where the small size often makes them impractical to pursue. The ongoing legal maneuvering has led to defendants arguing against the very legal clauses they drafted and once wanted to enforce.
Such provisions are widely used and are generally designed to protect defendants from class actions in which small consumer or employee claims — each too small to be pursued individually – are aggregated in a single suit that could have millions or even billions at stake.
In years past, consumers and their lawyers often challenged the enforceability of such “agreements,” particularly when the terms of service were found in pages of fine print, and the consumer had to click and agree to use the site.
However, overburdened courts generally favored arbitration as an efficient alternative to civil litigation and regularly approved agreements that diverted claims into arbitration.
According to an influential 2021 study updated in 2023 by Maria Glover, a professor at Georgetown Law School, “nearly every American is subject to forced arbitration agreements with class action waivers — over 50% of nonunionized employee contracts, 76% of consumer contracts, and 99.9% of mobile-wireless contracts contain a forced arbitration clause, and “virtually all” consumer contracts also include class-action waivers.”
Glover pointed out that because so many kinds of consumer claims — she mentioned specifically civil rights, wage theft, sexual harassment and consumer fraud — could not be economically pursued individually, barring class actions “effectively eliminated the ability of plaintiffs to bring these claims altogether.”
However, resourceful plaintiffs’ lawyers came up with an out-of-the-box idea.
Instead of resisting arbitration, they would embrace it by filing individual arbitration cases on behalf of thousands of individual clients. They figured out that even though a single individual arbitration proceeding was uneconomical to pursue, if enough virtually identical arbitrations were aggregated, they would present a serious problem for the defendants.
The reason? Arbitration fees and costs.
The cost of arbitration fees
Under many typical arbitration arrangements, the defendant must pay some or all of the arbitration fees and costs upfront. In a case with thousands of arbitration plaintiffs, a defendant could face fees in the millions.
According to their lawyers, J&J faced exactly such a problem.
The company received a letter from a lawyer who said his firm represented 2,408 consumers who had used the J&J website, allegedly unaware that their data was being shared with third parties.
The lawyer alleged that J&J violated California and federal consumer protection and privacy laws and made a demand that the company address the claims.
J&J declined to recognize the validity of the claims and when an individual arbitration claim was filed, it refused to pay the arbitration fee. Then, fearing that the other claims would also be filed, it sued all 2,408 prospective arbitration plaintiffs to block them from going forward.
J&J’s complaint began by laying out the arbitration costs. Under the fee schedule for the American Arbitration Association, J&J would, according to its calculations, pay out an average of more than $11,000 per claim.
It said that the plaintiffs’ lawyers “have taken to weaponizing arbitration agreements and, in doing so, have negated, entirely, the underlying purpose and benefits of arbitration — namely, cost effective, expedited resolution of disputes.”
The complaint said that even if the consumers were to be successful in their claims, they would only recover, at most, $10,000 apiece; if J&J had to pay more than that for arbitration fees and costs, it was grossly unfair.
J&J said the plaintiffs’ goal “is not to reduce costs; it is to increase them.”
The legal filing walks through each element of the arbitration costs charged by the American Arbitration Association from a “per case fee” (charged on a sliding scale from $325 down to $100), “arbitrator appointment fee” ($450-600), “arbitrator fees” (assumed to be $10,000 on average) and a “final fee” of $600.
Taken altogether, J&J said it was on the hook for arbitration costs (not including the fees of its own lawyers) adding up to $3,461,000.
J&J argues that the district court should enter a declaratory judgment that finds first that the asserted arbitration “agreement” doesn’t exist (that is, there was no mutual agreement) and, in any event, the arbitration provision does not apply to the consumers’ claims.
J&J argues that in California, a contract requires a “meeting of the minds” or mutual consent. The terms of service it created for its site presented consumers with what it says was a “take it or leave it situation” — if they used the site, they agreed that “disputes” had to be resolved through arbitration. (“You agree to give up your right to go to court to assert or defend your rights under this Agreement.”)
In J&J’s views, using the site and therefore accepting the terms of service wasn’t an actual agreement, apparently because it was take it or leave it.
In addition, it argued the only thing subject to arbitration was a controversy “arising out of or related to any transaction conducted on the [website].” J&J said that the consumers did not demonstrate that they actually had “transactions” on the website.
Legal experts weigh in
How well those arguments will serve J&J remains to be seen.
Marshall Baker, a class action defense lawyer in Los Angeles and not involved in the case, said that “courts have looked with some skepticism at attempts to avoid mass arbitration.”
Evan Murphy had a similar view. Murphy had been a capital markets attorney for 15 years when he was charged $100 by a company for a service that he did not order. When he tried to get it back, he had to file for arbitration, and from that experience he ended up changing his practice. For the last five years, he has focused on class actions and mass arbitrations. He is not involved in the J&J case.
Murphy said the San Francisco federal court has been “the epicenter for mass arbitration and mass arbitration rulings.”
He says that he sees companies “creating all sorts of ways to stave off arbitrations or mass arbitrations.” In his opinion, companies that have pushed for arbitration are now arguing against it. He says they have a “double standard.”
He referenced an employment case from San Francisco where the employer (DoorDash) wanted to walk away from its own arbitration requirements. In that matter, U.S. District Judge William Alsup said, “The irony … is that the workers wish to enforce the very provisions forced on them … The employer … faced with having to actually honor its side of the bargain, now blanches at the cost of the filing fees it agreed to pay in the arbitration clause.”
The U.S. Chamber of Commerce, a trade organization for business, sees the consumer lawyers as the problem.
In a 2023 report called “Mass Arbitration Shakedown,” it calls out the lawyers for using mass arbitration to trigger “an immediate, massive bill to businesses for arbitration fees — often totaling hundreds of millions of dollars. Even if the claims are meritless, or completely frivolous, the business is between a rock and a hard place: it is either pressured to settle (or abandon arbitration altogether) or forced to pay that huge fee bill simply to have the chance to defend itself.”
Zimmerman Reed, the law firm representing the consumers, did not immediately respond to an invitation to comment on the new lawsuit.
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