Big Mass Arbitration Decision from the Ninth Circuit

Skot Hellman and others (Plaintiffs) bought tickets to concerts promoted by Live Nation Entertainment, Inc. and Ticketmaster LLC (collectively Defendants). When they did so, they were provided with terms, which call for arbitration by New Era ADR (New Era). When Plaintiffs filed their putative class action in the District Court, the Defendants moved to compel arbitration. The District Court denied the motion, finding the arbitration agreement unconscionable. Defendants appealed.

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In Hellman v. Live Nation, decided last October, the Ninth Circuit affirmed, holding that both the arbitration clause’s delegation provision and the arbitration agreement as a whole are unconscionable. In the alternative — hold on to your hats, folks — the Ninth Circuit held that the Federal Arbitration Act (FAA) does not preempt California’s statutory prohibition on class action waivers contained in contracts of adhesion in large-scale small-stakes consumer cases.

This case is another episode in the battle between the plaintiffs’ bar and vendors over the possibility of collective actions in the wake of SCOTUS’ decision in Concepcion allowing vendors to bar such actions, even in the face of state legislation prohibiting class-action waivers. Plaintiffs’ attorneys developed the strategy of mass arbitration (illustrated left), forcing the vendors to face thousands of separate claims on the same subject matter at a tremendous cost because of the arbitration fees. We have blogged repeatedly about mass arbitration and the corporate response, most recently here.

Enter New Era, created in 2020, to assist vendors in counteracting mass arbitration. It creates a two-tiered system of arbitration, Standard Arbitration and Expedited/Mass Arbitration. The latter applies when there are common issues of fact and law in five or more cases. Expedited proceedings are usually virtual. Defendants were New Era’s first customers. New Era’s Expedited proceedings were at issue in the case, and the opinion in brutal. The majority notes at the outset, “New Era’s Rules are internally inconsistent, poorly drafted, and riddled with typos.” Defendant’s counsel struggled to explain them at oral argument.

Here are some highlights of the terms’ problematic terms:

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• Users of Defendants’ website have to agree to be bound by updated terms automatically simply by continuing to use the websites;
• New Era itself, not an arbiter, determines whether its Expedited procedures apply;
• Although claimants are given a role in selecting the arbiter, New Era has discretion to replace the arbiter;
• Three bellwether cases are then chosen, and the arbiter’s decision in those three cases then becomes binding precedent on all batched cases, even though claimants get no information about the decision in the batched cases until it is invoked against them;
• Complaints are limited to ten pages; filings are limited to ten documents totalling no more than 25 MB and must be uploaded within fourteen days of filing a claim;
• There is no right to discovery;
• There are no preliminary hearings and the arbiter may decide to dispense with merits hearings;
• Briefs are limited to roughly five pages (15,000 characters)
• Once decisions are issued in the bellwether cases, the other cases are resolved in a single settlement conference;
• Claimants can opt out by showing that there are “no common issues of fact and law” between their case and the bellwethers, but they cannot make such a showing becasue they have no information about the bellwether cases;
• Decisions are deleted sixty days after they are issued but are nonetheless somehow binding on later claimants added to the batch; and 
• Grants of injunctive relief (but not denials) may be appealed to a three-person arbitral panel.

Orwellian? Kafkaesque? Or is this simply an alternative-to-trial balloon sent up to be demolished so that the model can be tweaked just enough to be deemed not unconscionable?

Moving on to the analysis, the Ninth Circuit first affirmed the District Court’s finding that the delegation of the question of arbitrability to the arbiter was “to an extreme degree” unconscionable.  As to procedural unconscionability, the elements of “oppression and surprise” are met. Defendants’ procedures are oppressive because they are the exclusive means through which claimants could gain access to live events. They are surprising because, according to Defendants, the terms of the relationship can be changed at any time without notice but with retroactive effect. Moreover, the terms are misleading, in that they identify individual arbitration as the exclusive means of dispute resolution, but New Era’s is not individual arbitration.

As to substantive unconscionability, the Ninth Circuit provides a handy summary of its findings:

The district court held that four features of New Era’s Rules support a finding of substantive unconscionability of the delegation clause: (1) the mass arbitration protocol, 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 arbitrator selection provisions. Heckman, 686 F. Supp. 3d at 957. We agree.

The Ninth Circuit then proceeds to address the unconscionability of the arbitration agreement as a whole. That part was easy. Standing alone, the four provisions discussed above suffice to render the entire agreement unconscionable, so there is no need to do any analysis of the rest. The only question is severability, and the Ninth Circuit found that the District Court did not abuse its discretion in refusing to sever the unconscionable elements of the agreement from the whole.

The Ninth Circuit also notes that the FAA does not preclude the application of unconscionability doctrine under state law. I thought that went without saying, but perhaps the lawyers who defended Defendants’ absurd arbitration provision gave that argument a try as well. I mean, it’s not a worse argument than the argument that their arbitration provision is fair and even-handed.

Then the Ninth Circuit and the concurring opinion get out on a very interesting limb. Under Discover Bank, the California Supreme Court held that class waivers are unenforceable when contained in a “consumer contract of adhesion,” to the extent that they permit a party with superior bargaining power to carry out a scheme to “deliberately cheat large numbers of consumers out of individually small sums of money.” SCOTUS upheld the legality of class action waivers, but it also has repeatedly disparaged aggregation in arbitration and recognized that the FAA did not envision representative actions before arbitral bodies. If follows — and this is brilliant! — that the FAA does not apply to the New Era arbitration scheme, because it does not envision individual arbitration at all.

The case is thus very nicely teed up for SCOTUS review, but they likely won’t decide it because they don’t need to decide it. There would be no reason to take the case if the state law ground for rejecting arbitration is sufficient. From that perspective, Judge VanDyke’s concurring opinion is perhaps too bold. He would have decided based on the Discover Bank argument alone. But that would have invited SCOTUS review, and who knows what the Justices would do.  However, Judge VanDyke makes the interesting point that the whole notion that the question of arbitrability should be put to the arbiter is untenable on these facts. The legality of New Era’s entire scheme is at issue. Should an arbiter determine it unconscionable, they would be eviscerating their employer’s entire business model. The conflict of interest is so palpable, the decision cannot be left to an arbiter.