Seventh Circuit Decision: Samsung Prevails in Mass Arbitration Dispute
Last week, the Seventh U.S. Circuit Court of Appeals ruled in favor of electronics giant Samsung in a case where consumers sought to compel arbitration based on agreements tied to their purchase or use of Samsung devices.
Samsung had refused to pay the American Arbitration Association filing fees. A federal district court ordered Samsung to arbitrate and to pay the filing fees. In Wallrich v. Samsung Electronics America Inc., No. No. 23-2842 (7th Cir. July 1) (available at https://bit.ly/4eV1Lcw).
Samsung had refused to pay a substantial preliminary arbitration bill of about $4 million related to mass filings in 2022. The consumers alleged that Samsung Electronics Co. and Samsung Electronics America Inc. had unlawfully collected and stored sensitive biometric data in violation of Illinois law through the consumer's Samsung devices.
The AAA was compelled to close the case after Samsung declined to cover the filing fees for nearly 50,000 identical arbitration demands brought against it. In response, the consumers sought enforcement of the arbitration provisions and payment to the AAA through a suit in federal district court. The district court ruled in favor of the consumers, determining that valid arbitration agreements existed and ordering Samsung to pay the arbitration fees.
Samsung appealed to the Seventh Circuit. Last week, the appellate panel reversed the lower court's ruling. The appeals court held that when Samsung refused to pay the AAA's filing fees, and the consumers subsequently failed to advance the fees, the actions effectively concluded the arbitration process, which the AAA formally closed. This closure, according to the Seventh Circuit, enabled the consumers to pursue their claims in federal court.
A significant element of the ruling was the appeals court's scrutiny of the evidence of arbitration contracts under which the consumers could demand ADR. The Seventh Circuit found the evidence insufficient.
The consumers had relied on arbitration demands, a spreadsheet of names and addresses, Samsung's terms and conditions, and the AAA's procedural determinations.
The court, however, found these submissions inadequate to prove that the consumers were indeed Samsung customers bound by arbitration agreements. Emphasizing the necessity of concrete evidence such as receipts or sworn declarations to demonstrate actual assent to arbitration terms, the court highlighted deficiencies in the evidence presented.
The Seventh Circuit suggested that each plaintiff should have submitted specific proof of purchase, confirmation numbers, or other documentation, rather than a mere list of names and a copy of Samsung's agreement.
Most notably, the Seventh Circuit ruled that Samsung fulfilled its obligations under the mass arbitration agreement. The court determined that the AAA had the discretion to decide whether to proceed with arbitration despite Samsung’s non-payment of fees. The consumers, by purchasing Samsung devices, had agreed to delegate authority over administrative filing fees and their consequences to the AAA. This delegation empowered the AAA to terminate the arbitration proceedings, and thereby completing the arbitration process.
The Seventh Circuit's Wallrich v. Samsung decision has significant implications for the enforceability of arbitration agreements and the role of arbitral bodies in resolving fee disputes under the Federal Arbitration Act.
The issue of FAA jurisdiction arose, with the Seventh Circuit addressing two jurisdictional hurdles in the case before reaching the merits. First, it affirmed that the district court had subject matter jurisdiction under FAA Chapter 2, which implements the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This chapter confers jurisdiction upon district courts for actions related to arbitration agreements arising from commercial relationships involving non-U.S. citizens, as was alleged in this case involving the Samsung companies, whose parent is based in Suwon, South Korea.
Second, the Seventh Circuit confirmed its own appellate jurisdiction under FAA Section 16 to review the district court's final decision compelling arbitration. It distinguished between actions brought under Section 4 to compel arbitration, which are appealable, and stays issued under Section 3, which are generally not immediately appealable under Section 16(b)(1).
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This Seventh Circuit decision is significant for several reasons. First, it represents a significant victory for Samsung, as it avoids a substantial financial obligation related to arbitration fees.
Second, the ruling establishes a key precedent by emphasizing the importance of substantial evidence when asserting arbitration agreements in mass arbitration contexts.
Finally, the case discusses key FAA jurisdictional issues, particularly considering recent U.S. Supreme Court interpretations of FAA provisions governing stays, orders to compel arbitration, and finality.
The Seventh Circuit’s ruling coincides with efforts by arbitration bodies to address the complexities of mass arbitrations. Earlier this year, the AAA revised its Mass Arbitration Supplementary Rules, reducing per-case filing fees to a flat rate, with the stated intent of mitigating the financial burden on both consumers and businesses involved in mass arbitration disputes. See https://bit.ly/3Wfi3FD. Private provider JAMS Inc. revised its mass arbitration rules on May 1; see https://bit.ly/4bI9kQN. [CPR Dispute Resolution Services LLC, which is owned by the CPR Institute, which publishes this blog, provides mass arbitration services under rules that can be found at https://bit.ly/3LkXDoF.]
The unanimous Seventh Circuit decision, written by Circuit Court Judge Thomas L. Kirsch II and joined by Chief Circuit Judge Diane S. Sykes and Circuit Judge Frank H. Easterbrook, has both been praised for halting potentially exorbitant mass arbitration claims and criticized for allegedly infringing upon the principle of the mutuality of arbitration agreements. See, e.g., Mark J. Levin & Alan S. Kaplinsky "Seventh Circuit Slams the Brakes on Consumer Mass Arbitration against Samsung," Ballard Spahr Consumer Finance Monitor (July 8) (available at https://bit.ly/3LgrmyT), and Adam Pulver, "Seventh Circuit Holds Company Can Flout Arbitration Agreement Without Consequence," Consumer Law & Policy Blog—Public Citizen Litigation Group (July 2) (available at https://bit.ly/3Lf2FD0).
As a result of the decision, plaintiffs' lawyers navigating mass arbitration disputes will likely need to refine their strategies to meet the heightened evidentiary standards and procedural nuances outlined by the court.
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The author, a CPR 2024 Summer intern, is a student at Harvard University Law School in Cambridge, Mass. CPR 2024 Spring intern Natalie Malumba contributed background research for this post.
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