Recent developments in commercial and investment treaty arbitration suggest that class-action style arbitration claims against businesses and Sovereigns are on the rise.
To illustrate this point, we first look at the latest mass arbitration claims brought by bondholders against Switzerland before turning to a recent development in the U.S. that has led to an increase in mass arbitration claims against businesses.
1. The Multiple Investment Treaty Arbitrations Faced by Switzerland Following the Credit Suisse Debacle.
In March 2023, UBS acquired Credit Suisse through an emergency rescue deal, which was signed off by the Swiss Financial Market Supervisory Authority (FINMA). As part of this deal, nearly USD 18 billion of the bank's bonds were written down to zero, while equity investors were able to recover USD 3.3 billion. The rescue deal was the most significant bank takeover since the 2008 global financial crisis.
Those affected are not just large institutional bondholders but also a large number of smaller retail investors.
Fast-forward to October 2024, two groups of bondholders have formally notified Switzerland of potential investment treaty claims, while a third group comprising 400 bondholders based in Asia has entered into a funding agreement with Omni Bridgeway and intend to seek USD 270 million in damages from Switzerland. That number is expected to grow as more bondholders join the action.
In addition, international law firms Clyde & Co and Withers both announced that they were preparing investment treaty claims on behalf of individual and institutional bondholders over the rescue deal and anticipate initiating proceedings early this year.
It is expected that the bondholders will argue that the rescue deal was brokered by the Swiss government and was an unlawful encroachment of the bondholders' property rights amounting to expropriation under the applicable investment treaty/ies.
2. Mass Arbitration Shakedown
In the U.S., it has become common for businesses to incorporate class action waivers into their terms and conditions. These waivers often require that any disputes have to be solved by way of arbitration rather than litigation. The reasoning for this is that arbitration is faster, simpler and less expensive than U.S. litigation. Moreover, consumers and employees also win more often and received arbitration awards that are equal to, or better than, decision in courts.
Everyone benefits except one group, plaintiffs' lawyers.
This is why some law firms have sought to use these class action waivers providing for arbitration to their advantage by coercing businesses to settle unjustified claims.
In essence, their approach is to gather a large number of claims and pursue them by way of individual arbitrations. Since businesses are required, under most arbitration rules or agreements, to pay most or all of the administrative fees for the arbitration. This strategy can lead to considerable expense for them long before any consideration of the merits of the dispute, increasing pressure on those businesses to settle, including meritless claims.
By way of illustration, under the fee schedule of the American Arbitration Association (AAA), the largest arbitration provider in the U.S., a business facing 5,000 ordinary consumer arbitrations must pay the AAA over USD 13 million in fees immediately after the arbitrations are filed. If the business wants to have arbitrators appointed and obtain rulings on the claims, the business must pay another USD 9.5 million in fees. These sunk costs cannot be recovered even if the businesses win every single arbitration.
Some arbitral institutions have implemented measures to address abusive mass arbitrations. Yet, the number of abusive mass arbitrations is on the rise.
It will be interesting to see whether this mass arbitration fevers spreads outside the U.S.
For more insights also see our Global Consumer Trends 2025 article 'Legislative changes and the impact on legal funding for class actions'.
If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our Consumer and International Arbitration experts.
