We previously wrote about a California federal district court decision in Heckman v. Live Nation Entertainment that denied Ticketmaster’s motion to compel arbitration of Sherman Act antitrust claims based in large part on the bellwether procedures for mass arbitration claims set forth in the company’s arbitration clause.  That decision has now been affirmed by the Ninth Circuit Court of Appeals.

The arbitration clause named New Era ADR as the arbitration administrator.  Under its rules, if more than five cases involve common issues of law or fact, they are “batched” (grouped together) for mass arbitration treatment and a single arbitrator is chosen to decide all cases in the batch.  Three bellwether arbitrations are selected—one by each side and one selected by the neutral.  The arbitrator’s decision in these cases become “Precedent” for resolving common issues of law and fact in the batched cases and any later-filed cases added to the batch.  The district court determined that “the application of Precedent in mass arbitrations … raises a host of issues.”  Among other things, according to the district court, New Era’s rules granted the neutral “unfettered discretion” in determining whether and how to apply Precedent to cases, which “could be the difference between a fair arbitration process where each claimant is provided a sufficient opportunity to be heard, and a mechanical process for summarily disposing of an entire class of claimants based on an earlier proceeding to which they were not a party.”  The district court concluded that “the potential due process concerns associated with adjudicating thousands of claims on the basis of vague ‘Precedent’ at the sole discretion of the neutral” supported a finding of substantive unconscionability when combined with other “procedural limitations” in the New Era rules, including the lack of a right to discovery, the arbitrator selection procedures and a limited right of appeal that “stacked the deck” in favor of the company. 

In its opinion, the Ninth Circuit concurred with the district court’s conclusions, emphasizing that “[i]t is black-letter law that binding litigants to the rulings of cases in which they have no right to participate—let alone cases of which they have no knowledge—violates basic principles of due process.”  However, under New Era’s rules:

A batched plaintiff whose case is not a bellwether case has no notice of the bellwether cases and no opportunity to be heard in those cases.  Further, that plaintiff has no guarantee of adequate representation in those cases and has no right to opt out of the batched cases that will be bound by the results in the bellwether cases. 

New Era’s rules were unconscionable and unenforceable, the appeals court ruled, because they “provide to defendants many of the protections and advantages of a class action, but provide to non-bellwether plaintiffs virtually none of its protections and advantages.”

The Ninth Circuit further held, “based on an alternate and independent ground, that the application of California unconscionability law to the arbitration agreement at issue here is not preempted by the FAA [Federal Arbitration Act]” because “the FAA simply does not apply to and protect the mass arbitration model” set forth in Ticketmaster’s arbitration clause and New Era’s rules.  As explained in the Heckman panel’s opinion and in a separate concurring opinion authored by one of its members: (1) the FAA is intended to protect the enforceability  of individualized bilateral arbitration proceedings, not the use of aggregation in arbitration; (2) although mass arbitrations consist of individual arbitrations, Ticketmaster’s arbitration clause and the New Era rules depend on the use of “batch” proceedings and “bellwether” cases—procedures “whose attributes fundamentally differ from the core attributes of bilateral arbitration envisioned by the FAA”; (3) “[a] switch from bilateral to aggregative arbitration ‘sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly, and more likely to generate procedural morass than final judgment’”; (4) because the FAA is not applicable, California’s “Discover Bank” rule, holding that class action waivers are unconscionable and unenforceable when contained in adhesive small-dollar consumer contracts, governs and is not preempted by the FAA; and (5) AT&T Mobility LLC v, Concepcion, in which the U.S. Supreme Court held that the Discover Bank rule was preempted by the FAA, does not counsel otherwise because the concern in Concepcion was state law that interfered with individualized bilateral arbitration rather than aggregation procedures such as batching and bellwether cases.       

In our view, the Ninth Circuit’s FAA preemption analysis is strained and highly questionable.  A strong argument can be made that the FAA protects not only dispute resolution that is individualized, fast and efficient, but also the right of parties to choose procedures that do not have those characteristics.  In a 1989 decision, Volt Information Sciences v. Board of Trustees of Stanford University, the U.S. Supreme Court held that the FAA protects the right of parties to choose the law that will govern the arbitration, even if that law is contrary to the principles and policies embodied in the FAA.  (In Volt, the arbitration clause called for the application of California law, which, unlike the FAA, permits a court to stay an arbitration pending the resolution of related litigation).  The Court emphasized:

[T]he FAA’s primary purpose [is to ensure] that private agreements to arbitrate are enforced according to their terms …. [P]arties are generally free to structure their arbitration agreements as they see fit. Just as they may limit by contract the issues which they will arbitrate…, so too may they specify by contract the rules under which that arbitration will be conducted. Where, as here, the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the Act would otherwise permit it to go forward.  By permitting the courts to “rigorously enforce” such agreements according to their terms …we give effect to the contractual rights and expectations of the parties, without doing violence to the policies behind by the FAA.

Applying the rationale of Volt to the mass arbitration scenario, the FAA arguably should protect arbitration clauses that incorporate batching and bellwether procedures for mass arbitration situations, even though such procedures can require more complexity, time and expense than a typical individualized bilateral arbitration.

We will keep you apprised of any further developments in the Heckman case.  For more information on mass arbitrations, please listen to our recent podcasts, which address numerous aspects of this important topic:

https://www.ballardspahr.com/Insights/Blogs/2024/05/Podcast-A-Discussion-of-Industry-and-Consumer-Perspectives-on-Mass-Arbitration; (Special guest Richard Frankel); https://www.ballardspahr.com/Insights/Blogs/2023/05/Podcast-Deep-Dive-into-Mass-Arbitration-Special-Guest-Andrew-Pincus; https://www.ballardspahr.com/Insights/Blogs/2022/02/Podcast-Deep-Dive-Mass-Arbitration-Part-I-Special-Guest-Maria-Glover; https://www.ballardspahr.com/Insights/Blogs/2022/02/Podcast-Deep-Dive-Mass-Arbitration-Part-II-Special-Guest-Maria-Glover].

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