chevron-down Created with Sketch Beta.
July 14, 2017 Practice Points

Arbitration, Consumer Sophistication, and Public Policy

By Terrie Sullivan

Arbitration clauses between consumers and businesses can raise important questions about constitutional due process. Recently, a federal district court in Northern California held that an arbitration agreement was invalid, despite the presumptive “clear and unmistakable language” of the agreement, because the consumer lacked sophistication. Ingalls v. Spotify USA, Inc., 2016 WL 6679561 (Nov. 14, 2016).

In Ingalls, plaintiffs who were subscribers to Spotify’s music streaming service brought a class action against the company. The plaintiffs claimed that Spotify failed to adequately inform them that it would automatically renew their subscriptions at full price once the free trial periods had ended, and that Spotify failed to obtain the plaintiffs’ consent in violation of a California law that restricts businesses from automatically renewing user subscriptions. In response, Spotify moved to compel arbitration.

The arbitration clause at issue provided for mandatory individual arbitration and included a class-action waiver. It also stated that arbitration would occur before the American Arbitration Association (AAA) and would be resolved pursuant to the “Commercial Dispute Resolution Procedures and the Supplementary Procedures for Consumer Related Disputes.” The agreement informed consumers of the website and phone number for the AAA, and stated that “AAA procedures and other information about arbitration could be found at or by calling the AAA phone number.” However, at the time Spotify’s arbitration agreement was drafted, the AAA had discontinued those consumer procedures and replaced them with its new “Consumer Arbitration Rules.”

The court held that an arbitrator did not have the power to rule on the issue of arbitrability because in the court’s view, the plaintiffs were “ordinary consumers” and could not be expected to understand what it meant to incorporate the AAA rules, nor was it “clear and unmistakable” that the parties intended to delegate the issue of arbitrability to an arbitrator. The court stated that unless otherwise provided by an “unequivocal understanding between the parties,” decisions concerning the validity and enforceability of an arbitration agreement are reserved to the courts. The court also stated that the fact that Spotify’s arbitration agreement referred to AAA procedures no longer in effect refuted any assertion that the delegation provision was “clear and unmistakable.” The court distinguished Brennan v. Opus Bank, 796 F.3d 1125 1130 (9th Cir. 2015), where the Ninth Circuit court held that “incorporation of the AAA rules constitutes clear and unmistakable evidence that contracting parties agreed to arbitrate arbitrability.” The court stated that Brennan did not concern a situation where one of the parties was an unsophisticated consumer, and it noted that every decision since Brennan held that the incorporation of the AAA rules is insufficient to establish the validity of a delegation clause where at least one of the parties is unsophisticated.

Practice Pointer
Ingalls v. Spotify is noteworthy because it exemplifies a shift in the general view that consumer arbitration agreements are enforceable unless there is some extreme negating circumstance such as fraud or duress. Ingalls also raises questions about the definition of “consumer sophistication,” and how it is to be measured in future cases.

Lastly, similar to court rules and procedures, arbitration rules are subject to change. It is imperative for attorneys who draft arbitration agreements to keep abreast of changes to rules and policies of the arbitration organization cited in the agreement. As Ingalls demonstrates, incorrect information contained in arbitration agreements could pose serious issues for businesses down the road; thus, substantiating whether rules have changed is a critical step for drafter of arbitration agreements.

Terrie Sullivan is a 2017 J.D. candidate at DePaul University College of Law in Chicago, Illinois.

Copyright © 2017, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).