Ninth Circuit’s Live Nation Decision Evaluates Enforceability of Mass Arbitration Protocols in Online Terms

This week, the Ninth Circuit in Heckman v. Live Nation Entertainment affirmed the denial of a motion to compel arbitration pursuant to the arbitration agreement in Ticketmaster’s online terms of use, which required arbitration through New Era ADR under its mass arbitration rules. (See previous Sidley review of the district court’s decision here.) The latest Live Nation decision raises important considerations for crafting enforceable online terms to address recent trends in mass action litigation.

Plaintiffs in Live Nation purchased tickets to live entertainment sold through Ticketmaster’s website, which required agreement with Ticketmaster’s terms of use, including its arbitration agreement. Ticketmaster’s arbitration agreement provided that all claims arising out of any ticket purchase, including prior purchases, would be resolved through arbitration under New Era’s rules applicable to “Expedited/Mass Arbitrations.” A “mass arbitration” under New Era’s rules constituted an “expedited arbitration” with five or more cases involving common issues of law and fact. In its delegation clause, Ticketmaster’s arbitration agreement also conferred exclusive authority to the arbitrator “to resolve all disputes arising out of or relating to the interpretation, applicability, enforceability, or formation” of the agreement, including any claim that the agreement is void or voidable, in whole or in part.

The court’s procedural unconscionability finding focused primarily on “the factors of oppression and surprise.” For oppression, the court observed a “power imbalance” between the parties, noting that defendants’ market dominance in ticket services forced ticket buyers to accept the terms or be foreclosed from purchasing from a primary market. As for surprise, the court explained that the terms state that they may be changed without notice, that changes may be applied retroactively, and that users “merely browsing” the website would be bound. The court also found the terms to be “affirmatively misleading” because they stated that all claims would be resolved through “individual arbitration,” which it viewed as “flatly inconsistent” with New Era’s rules that batch cases with common issues or facts and treat them in “a ‘class or representative’ fashion” (i.e., by assigning a single arbitrator to decide all cases in the batch and requiring the selection of bellwether cases that create precedent for common issues in the batched cases).

The court held that the arbitration agreement was substantively unconscionable based on New Era’s mass arbitration protocol, its procedural limitations, the limited right of appeal, and the arbitrator selection procedure. Affirming the district court’s finding that the mass arbitration protocol is “fundamentally unfair,” the court concluded that binding claimants to bellwether rulings from cases where they had no right or opportunity to participate “violates basic principles of due process,” and affording the arbitrator the discretion to not apply bellwether precedent did not serve as adequate protection. The court viewed New Era’s rules as “inadequate vehicles for the vindication of plaintiffs’ claims” because it precluded a right to discovery, which it considered to be potentially critical for supporting challenges to the selection of an arbitrator as one example, and because New Era’s limitation of 10 pages for complaints was too restrictive.

As for the right of appeal, the court focused on the lack of mutuality. The court held that by affording the right to appeal only when the arbitrator awards injunctive relief (no appellate rights for a denial of injunctive relief) and permitting the party against whom injunctive relief was awarded to appeal that decision to JAMS, the arbitration agreement functionally reserved the right to appeal for defendants only. Finally, in concluding that New Era’s rules for selecting the arbitrator was unconscionable, the court reiterated the same three features the district court relied on to hold that New Era’s rules were inconsistent with California law, which defendants did not dispute: New Era had the power to override a claimant’s disqualification of an arbitrator; each side, rather than individual parties, had the right to disqualify an arbitrator; and a single arbitrator presides over several cases at one time.

Based on its conclusion that the delegation clause was procedurally and substantively unconscionable, the court held that the arbitration agreement as a whole was similarly unconscionable and refused to sever the unenforceable provisions. The court’s refusal to enforce the terms’ severability provision focused on the court’s observation that defendants had engaged in a “systematic effort to impose arbitration” as an “inferior forum,” including by requiring any claims not arbitrable through New Era to be arbitrated by FairClaims pursuant to its FastTrack Rules and Procedures and, failing that, by an alternative, mutually selected arbitration provider.

Live Nation is a helpful reminder that issues of unconscionability remain key in drafting enforceable arbitration agreements in an evolving landscape involving mass arbitrations. Consider the following best practices to mitigate the potential risk of an unconscionability finding:

• Maintain mutuality in procedural requirements intended to address mass arbitration efforts, as well as other arbitral rights (e.g., appellate rights).
• Give careful consideration to notice and opt-out provisions addressing future changes to the arbitration agreement.
• Review any batching protocols adopted to ensure they comport with notions of due process.