Outsourcing Justice

Federal Court Invalidates Spotify’s Arbitration Clause Using A Clever Argument

In Rent-A-Center v. Jackson (2010), the Supreme Court gave its blessing to “delegation clauses,” whereby the parties agree to arbitrate whether they agreed to arbitrate.  (I suppose if you were really paranoid about making sure a case would be sent into arbitration, there could be an endless cycle of delegation and sub-delegation clauses within an arbitration agreement, whereby a party makes 1) an agreement to arbitrate 2) the threshold issue of whether they agreed to arbitrate 3) whether there is an obligation to arbitrate the underlying substantive dispute.)

Delegation clauses present a tough nut to crack because in Rent-A-Center, the Supreme Court found that a delegation clause is severable from the underlying arbitration agreement.  As a result, delegation clauses are fully enforceable unless a party can direct a specific challenge to the tiny delegation provision in an arbitration clause, which is difficult to do.  Consequently, because of delegation clauses, courts in effect rubberstamp arbitration agreements containing delegation clauses, and any challenges to the enforceability of an arbitration agreement are resolved by the arbitrator.  I’ve seen harsh arbitration clauses with very one-sided terms, and courts should immediately toss out such arbitration agreements as unenforceable.  However, because of delegation clauses, courts can rubberstamp an order compelling arbitration, even if the arbitration clause is clearly defective.  The arbitrator in turn then considers the validity of the defective arbitration clause, possibly severing the unfair terms and continuing with arbitration.

To have any real chance of proceeding in court when there is a delegation clause at issue, one has to direct a specific challenge to the delegation clause, which is difficult to do.  (I have previously blogged about such a case where the plaintiff was able to mount a successful, specific attack against a delegation clause; see here).  Earlier this week, a federal court in California recognized another possible argument to get around a delegation provision.  See Ingalls v. Spotify USA, Inc., No. C 16-03533 (N.D. Cal. Nov. 14, 2016) (click here to see a copy of the decision).

Spotify’s Terms and Conditions incorporated the American Arbitration Association’s rules, which provide that an arbitrator can decide whether the parties agreed to arbitrate.  The court found that incorporation of the AAA rules was not sufficient to establish delegation where one party is not sophisticated.  The court reasoned that the relatively unsophisticated consumers in the case, who had no “business or legal acumen,” could not be expected to appreciate the significance of the incorporation of a delegation clause.  Using this case as a building block, perhaps one can argue that delegation clauses should not be enforceable against any unsophisticated party, consumer or employee, who cannot appreciate the significance of a delegation clause.  Without appreciating the significance of a delegation clause, a party cannot clearly and unmistakably intend to delegate the issue of the enforceability of an arbitration clause to an arbitrator.

After invalidating the delegation, the court went on to invalidate the entire arbitration agreement as unconscionable, because of its confidentiality provisions, Spotify’s ability to unilaterally modify the agreement, and the shortened statute of limitations set forth in the agreement.

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