As California’s Automatic Renewal Law’s (ARL) popularity increases with the class action plaintiffs’ bar, subscription services have been attempting to limit their exposure using broadly worded arbitration clauses. However, when the streaming service Spotify’s boilerplate arbitration language was put to the test, it failed.
In June 2016, two individuals filed a putative class action in the Federal Court for the Northern District of California against Spotify for alleged violations under the ARL. Spotify sought to stay the case to enforce the arbitration provision contained in its boilerplate terms and conditions.
On November 14, 2016, District Judge William Alsup denied Spotify’s request, held that he had jurisdiction to determine the enforceability of the arbitration clause, and ultimately found that the Spotify’s arbitration clause was unconscionable and therefore unenforceable.
Although Spotify’s terms and conditions clearly delegated the issue of arbitrability to the arbitrator, the Court essentially held that such delegation was inappropriate in a consumer contract with an unsophisticated party--who would not understand its significance. In other words, because the contract was between a sophisticated corporation and two unsophisticated consumers, the delegation was invalid.
Having determined its jurisdiction, the Court then applied California contract law to find that--while not procedurally unconscionable--Spotify’s arbitration clause was substantively unconscionable. This finding of substantive unconscionability was ultimately based on three features of Spotify’s terms and conditions: (1) that Spotify retained the right to unilaterally change the terms of the arbitration clause; (2) any arbitration was required to proceed confidentially; and (3) that Spotify reduced the statute of limitations for all claims brought through arbitration to one-year. These three features created a “pervasiveness of unconscionability” that proved fatal to Spotify’s argument.
Spotify is currently appealing Judge Alsup’s decision with the Ninth Circuit and whether his order is affirmed remains to be seen. However, practitioners should avoid creating overly one-sided arbitration agreements, especially when dealing with consumer-facing boilerplate terms and conditions.