A Closer Look: Ninth Circuit Holds Arbitration Agreement with Certain Mass Arbitration Protocols Unenforceable

In a significant decision for businesses who are attempting to revise their consumer arbitration clauses to address the prospect of mass arbitration, the Ninth Circuit affirmed the district court's denial of Live Nation and Ticketmaster's motion to compel arbitration, based largely on the content of the mass arbitration provisions of their arbitration agreement. Heckman v. Live Nation Ent., Inc., - F.4th -, 2024 WL 4586971 (9th Cir. Oct. 28, 2024). The court concluded that the "dense, convoluted and internally contradictory" arbitration rules cross referenced in Ticketmaster's arbitration provision, along with other elements of the provision, rendered it unenforceable. The court also held, on an alternate basis, that the Federal Arbitration Act (FAA) did not even apply to the mass arbitration procedure at issue because it is "not arbitration as envisioned by the FAA."

Plaintiffs brought a putative class action alleging that Live Nation and Ticketmaster engaged in anticompetitive practices. Plaintiffs' ticket purchase agreements included Ticketmaster's Terms of Use. The terms provided that any claim must be decided by an arbitrator at New Era ADR. The Defendants moved to compel arbitration, but the district court denied the motion on the grounds that the arbitration clause is unconscionable and unenforceable.

The Ninth Circuit affirmed. The court found several features of the mass arbitration protocols to be "novel and unusual." These included the following:

• New Era "will always unilaterally decide" which cases will be grouped together, or "batched."
• While plaintiffs may be able to participate in the selection of the arbitrator, "the neutral may be replaced at New Era's sole discretion."
• Bellwether cases are selected, and an arbitrator's decision in a bellwether case becomes "precedent" in batched cases. Because proceedings are confidential, however, bellwether decisions are binding on non-bellwether plaintiffs "who had no chance to participate in the arbitration and who are ignorant of the decision until it is invoked against them."
• There are limits on evidence and briefing, no right to discovery, and no requirement that the arbitrator hold a hearing.
• Plaintiffs can attempt to be removed from the batch after the bellwether cases are decided. But they do not have access to the bellwether record so "will struggle to differentiate their cases from the bellwethers."

The Ninth Circuit first examined the delegation clause, which provided that the arbitrator had the authority to decide the validity of the arbitration agreement. Because of the features described above, the court found that "New Era's Rules 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." These included, for example, the procedure through which non-bellwether plaintiffs have "no notice of the bellwether cases and no opportunity to be heard in those cases," and the briefing limits that "border on the absurd." The court criticized other features of New Era's rules, including a procedure that the court found functionally only permits a defendant to appeal. For these reasons, the court held the delegation clause was unconscionable.

The court then concluded that the arbitration agreement as a whole was unconscionable for the same reasons. New Era's rules described above, the court found, make it "impossible for plaintiffs to present their claims on equal footing to Live Nation." The court also refused to sever the New Era rules from the arbitration clause as a whole on the ground that "Defendants engaged in a systematic effort to impose arbitration . . . as an inferior forum."

The court rejected the Defendants' argument that the application of California's unconscionability law is preempted by the FAA. Application of California law here, the court held, "relies on generally applicable principles that neither disfavor arbitration nor interfere with the objectives of the FAA."

Finally, the court held "on an alternate and independent ground" that "the FAA simply does not apply to and protect the mass arbitration model" described above. In passing the FAA, Congress understood arbitration "to be a fair and efficient alternative to bilateral judicial proceedings." But New Era's arbitration procedure, the court found, "is not arbitration as envisioned by the FAA in 1925." The court therefore found the FAA did not apply and applied the California state-law rule from Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005), which makes class-action waivers unenforceable in most consumer disputes.

Companies who face the prospect of mass arbitration should be mindful of Heckman when crafting arbitration clauses. The "novel and unusual procedures" that the court criticized increase the likelihood that a court will find an arbitration clause unenforceable, but many arbitration clauses with mass arbitration terms may be distinguishable from those before the Ninth Circuit in Heckman. For example, the court explained that the rules at issue "differ[ed] significantly from the rules of traditional arbitration fora such as" JAMS and AAA.