On February 28, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s denial of a petition to compel individual arbitration against Starz Entertainment, LLC. The court held that the plaintiff, who objected to JAMS’ decision to consolidate arbitration proceedings, was not aggrieved under the Federal Arbitration Act (FAA) because Starz never failed, neglected, or refused to arbitrate. The consolidation of numerous identical filings by JAMS pursuant to its own rules did not present a gateway question of arbitrability. Furthermore, the FAA did not permit the plaintiff to raise unconscionability as a basis to compel individual arbitration. The decision distinguishes Heckman v. Live Nation Ent., Inc. and provides further guidance to parties seeking to control mass arbitration risk.
Background
The plaintiff created a Starz account and agreed to Starz’s Terms of Use (Terms), which contained a mandatory arbitration clause providing that: “All controversies, disputes or claims arising out of or relating to these Terms of Use will be determined pursuant to the mediation and arbitration procedures of JAMS . . . in accordance with the comprehensive rules and procedures . . . of JAMS (‘JAMS Rules’), as modified by these Terms of Use.” The Terms also provided that: “You and Starz agree that each may bring claims against the other only in your or its individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”
Later, the plaintiff, along with thousands of other claimants represented by the same law firm, initiated arbitration proceedings against Starz, alleging violations of federal and state privacy laws related to Starz’s alleged disclosure of their identities and viewing histories to third parties. In an effort to minimize fees, JAMS consolidated 7,300 filings to be presided over by a single arbitrator. If addressed separately, the filings would have resulted in charges to Starz totaling $12,775,000 in initiation fees alone. The plaintiff’s counsel opposed consolidation and thereafter objected to each arbitrator appointed by JAMS, preventing the arbitration from going forward. Subsequently, the plaintiff petitioned the district court to compel individual arbitration, arguing that the consolidation amounted to Starz’s refusal to engage in individual arbitration as required by the Terms.
The district court denied the plaintiff’s petition, holding that she was not “aggrieved” within the meaning of the FAA because Starz had not failed, neglected, or refused to arbitrate. The court also concluded that the procedural issue of consolidation did not present a gateway question of arbitrability for judicial determination.
Ninth Circuit’s Analysis
The Ninth Circuit affirmed the district court’s decision. The panel held that the plaintiff was not a “party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate,” as required by 9 U.S.C. § 4 of the FAA, because Starz never failed, neglected, or refused to arbitrate. The Ninth Circuit reiterated that the FAA’s limited role for courts does not extend to second-guessing an arbitration provider’s application of its own rules. The court found no gateway question of arbitrability that required judicial intervention.
Specifically, the court emphasized that the plaintiff’s argument that the Terms’ prohibition against “class or representative proceeding” also precluded consolidation had no merit. The Terms never used the phrase “individual arbitration” or expressly prohibited consolidation and the court found that JAMS’s decision to consolidate the filings was within its authority under its Rules. That consolidation did not transform the arbitration into a class or representative proceeding. The court also distinguished Heckman, holding that none of the red flags present there — bellwether cases that would serve as precedent even though the claimant had no notice, opportunity to be heard, or right to participate — were present.
Further, the court noted that the plaintiff was not without recourse within the arbitration proceeding. To the extent the plaintiff disagreed with the court’s finding that consolidation did not violate her right to an individual proceeding, she could make that argument to the arbitrator selected to preside over the consolidated proceeding. That arbitrator presumably has the authority to revisit the consolidation order. The court further noted that to the extent the plaintiff’s complaint arose from the inability of the parties to agree on the appointment of an arbitrator, she can petition a court to appoint one. However, the court opined that “the fact that [the plaintiff] has not pursued this path casts serious doubt over the true motivation underlying the mass-arbitration tactic deployed here, which appears to be geared more toward racking up procedural costs to the point of forcing Starz to capitulate to a settlement than proving the allegations of data breach to seek appropriate redress on the merits.”
Additionally, the court rejected the plaintiff’s attempt to use unconscionability to compel individual arbitration. The court noted that unconscionability is typically raised as a defense to avoid enforcement, not as a means to modify or compel arbitration on different terms. “We are aware of no precedent where the party petitioning to compel arbitration under FAA § 4 simultaneously characterizes as unconscionable the same arbitration agreement that the petitioner seeks to enforce. [The plaintiff] makes the novel request that we use unconscionability doctrine to chisel an arbitration agreement into a version that suits her preferred contractual interpretations and then order the other party to comply with those modified terms. This we cannot do.”
Our Take
The court’s ruling reinforces that arbitration is fundamentally a matter of contract. The parties had agreed to the JAMS Rules, which include provisions for consolidation. By enforcing these Rules, the court upheld the principle that arbitration agreements should be interpreted and enforced according to their terms.
Additionally, while this case did not involve an explicit mass arbitration clause, it does not diminish the value of including such clauses in arbitration agreements. The court’s decision does not provide extensive guidance on mass arbitration clauses, but it does illustrate the potential challenges and costs associated with mass arbitration tactics. We continue to recommend that clients consider including mass arbitration clauses to address these risks proactively.
