Alert

Delegation Clause + Mass Arbitration Protocol = Unconscionable Arbitration Agreement

November 25, 2024

Recently, the Ninth Circuit Court of Appeals affirmed a district court’s decision finding a delegation clause in an arbitration agreement to be both procedurally and substantively unconscionable and, moreover, that California’s prohibition on class action waivers contained in adhesion contracts is not preempted by the Federal Arbitration Act (FAA).

Background

Plaintiffs, on behalf of themselves and a putative class action, brought suit against Live Nation and Ticketmaster, alleging various anticompetitive practices in violation of the Sherman Act. Defendants moved to compel arbitration, and the district court denied the motion, finding that the delegation clause was both procedurally and substantively unconscionable. Defendants appealed, and on appeal, the Ninth Circuit affirmed.

Unconscionable Delegation Clause

Despite the arbitration agreement at issue delegating threshold arbitrability questions to an arbitrator to decide, the district court and the Ninth Circuit ultimately decided those issues on their own, in large part because they found the delegation clause to be both procedurally and substantively unconscionable. In reaching this decision, the courts largely ignored the text of the delegation clause itself. Instead, they focused on the arbitration agreement, along with the relationship of the parties. For instance, the courts focused on the defendants’ large market share in the ticket industry as well as the “retroactive” change in terms to the defendants’ arbitration agreement. Both the district court and Ninth Circuit also found that the defendants’ terms were “affirmatively misleading” and thus sufficient to support a finding of procedural unconscionability.

Regarding substantive unconscionability, the Ninth Circuit again focused on other provisions in the arbitration agreement and the terms on the defendants’ website, not the text of the delegation clause itself, to decide it was likewise substantively unconscionable. According to the Ninth Circuit, four provisions, separate and apart from the delegation clause, rendered it substantively unconscionable: “(1) the mass arbitrationprotocol, including the application of precedent from the bellwether decisions to other claimants; (2) procedural limitations, such as the lack of a right to discovery; (3) the limited right of appeal; and (4) the arbitratorselection provisions.”

California Prohibition on Class Action Waivers not Preempted by the FAA In This Case

Finally, the Ninth Circuit also decided that the California’s Supreme Court rule prohibiting class action waivers decided in Discover Bank v. Superior Court, 36 Cal. 4^th 148 (2005) did not apply to mass arbitration protocols and was not preempted by the FAA. Interestingly, the Supreme Court came to the opposite conclusion in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) where it held that the Discover Bank rule posed an obstacle to the underlying purpose and objectives of the FAA. Notwithstanding this, the Ninth Circuit attempted to distinguish Concepcion on the basis that “[a]s applied to the Expedited/Mass Arbitration procedures… the Discover Bank rule poses no such obstacle [in this case], because those procedures do not apply to the forms of arbitration covered by the FAA.”

What it Means and What Comes Next

Businesses that use form arbitration agreements that delegate threshold questions of arbitrability to an arbitrator, and not a court, to decide will need to re-review those provisions in light of the Ninth Circuit’s decision in Heckman to ensure that, when considered in totality with the rest of the arbitration agreement, they are not unconscionable.

Also, the United States Supreme Court has not yet weighed in on the mass arbitration phenomenon or the validity of various clauses designed to reduce the expenses of such actions. However, Heckman appears tailor-made for the Supreme Court to weigh in. Indeed, not only does the Ninth Circuit’s decision appear to undercut one of the central tenants of the FAA (that parties are free to structure their agreements as they deem fit, including deciding who decides threshold arbitrability questions) but it also appears to (at least partially) resurrect the Discover Bank rule which the Supreme Court rejected in Concepcion.