Abuse of the arbitration system by plaintiffs' lawyers through the filing of mass arbitrations is by now well-documented, including in a paper we authored for the Chamber of Commerce's Institute for Legal Reform. Companies have responded by revising arbitration agreements to address this abuse, and arbitral forums have adopted new default rules to govern mass arbitrations when the issue is not addressed in the arbitration agreement.
Not surprisingly, plaintiffs' lawyers—hoping to retain the ability to coerce settlements through mass-arbitration filings—are challenging contract provisions and arbitral forum rules that address the issue.
A panel of the Ninth Circuit recently refused to enforce the arbitration agreement in Ticketmaster's terms of service, rejecting the company's attempt to address the problem of mass arbitration by incorporating the rules of a new arbitration provider (New Era). That decision—Heckman v. Live Nation Entertainment, Inc.—is flawed in several respects. But more important for most businesses, the decision is narrow and rests on the unique aspects of the New Era rules adopted in the Ticketmaster agreement. Plaintiffs' lawyers are already arguing that Heckman sweeps more broadly, but that approach misreads the opinion and, in addition, contravenes Supreme Court precedent interpreting the Federal Arbitration Act (FAA).
A majority of the Heckman panel first concluded that the arbitration agreement's use of New Era's rules was unconscionable under California law. Second, the entire panel—both the majority and the concurring judge—held that New Era's rules transformed mass arbitrations into a type of arbitration so unlike traditional individual arbitration that (in the panel's view) the FAA no longer applies. And the panel went on to say that without the FAA, which (as the Supreme Court held in AT&T Mobility LLC v. Concepcion) preempts California's Discover Bank rule against waivers of class arbitration, Ticketmaster's arbitration agreement was invalid under Discover Bank.
This post first describes the relevant background and the Ninth Circuit decision. We then explain why that decision is limited to New Era's unique approach to mass arbitration—and that any broader reading of the decision is barred by the Supreme Court's holdings in Concepcion and subsequent cases.
Background
The lawsuit: The Heckman decision arose out of an antitrust class action filed against Live Nation and Ticketmaster. The defendants responded to the complaint by moving to compel arbitration under the arbitration provision in Ticketmaster's online terms, which consumers accept in the course of buying concert tickets.
Six months before the case was filed, the defendants amended the operative arbitration clause to change the arbitration forum from JAMS to New Era ADR, a new arbitration provider that launched in 2020. Unlike JAMS and AAA, New Era offers subscription pricing, allowing the business to pay a set amount for certain administrative expenses, no matter how many arbitrations are filed, rather than paying a per-case fee. New Era's pricing reflected an effort to address one of the concerns with mass arbitration: that some plaintiffs' lawyers had sought to exploit JAMS's and AAA's per-case arbitration fees (under the fee schedules those organizations used in the past) by threatening to file as many arbitrations as possible to inflict enormous upfront arbitration fees on the targeted business. That threat often allowed these lawyers to extract settlements from businesses, because in many cases the initial fees for arbitration made it too expensive for a business to defend itself on the merits.(In 2024, as we've previously reported, JAMS and the AAA have also updated their fee schedules.)
The district court denied the defendants' motion to compel arbitration, holding that several aspects of the arbitration clause—and especially the New Era rules for mass arbitration—were unconscionable under California law.
The Ninth Circuit's decision
A panel of the Ninth Circuit, with Judge William Fletcher writing for the majority, affirmed the denial of the motion to compel arbitration. (We had submitted an amicus brief for the Chamber of Commerce of the United States urging reversal.)
New Era's unique rules: The panel focused on New Era's procedures for mass arbitrations in effect when the motion to compel arbitration was filed. (New Era has since updated its rules.)
The panel found it difficult to understand New Era's rules, describing them as "internally inconsistent, poorly drafted, and riddled with typos." But, as the panel read them, those rules called for New Era to decide unilaterally whether to group mass-arbitration cases into batches of similar cases. Each batch is then assigned to an arbitrator. Three bellwether cases are then chosen from all of the cases and decided, after which the parties engage in a single settlement conference. If the remaining cases aren't settled, they are then resolved using New Era's expedited procedures, with limits on discovery, briefing, and evidence. Most significantly, the panel understood New Era's rules to provide that an arbitrator's decisions in the bellwether cases would be binding "precedent" on common issues in all cases, including later-filed cases. (New Era has written an article arguing that the Heckman panel misread New Era's rules and consequently erred.)
Delegation clause: Ticketmaster's arbitration provision contains a delegation clause—a provision that delegates questions of arbitrability (including whether the arbitration provision is enforceable) for decision by the arbitrator. But as a threshold matter, the majority concluded that a court could decide whether the arbitration provision was unconscionable because, in the majority's view, the delegation clause itself was procedurally and substantively unconscionable under California law.
Procedural unconscionability: The majority agreed with the district court's holding that the delegation clause—and Ticketmaster's new arbitration clause—was "procedurally unconscionable to an extreme degree." The majority pointed to several factors supporting that determination:
- The terms were a non-negotiable "contract of adhesion."
- Ticketmaster's "market dominance" leaves "prospective ticket buyers" with no alternative but to agree to Ticketmaster's terms.
- Ticketmaster's terms provide that "merely browsing [its] website without purchasing a ticket" constitutes agreement to "Ticketmaster's changed Terms," which can be amended "without prior notice" to change "retroactively" how preexisting claims would be resolved.
- The terms incorporate New Era's rules, which the majority characterized as "so dense, convoluted[,] and internally contradictory to be borderline unintelligible."
- Ticketmaster's terms are "affirmatively misleading," because although they describe the terms as calling for disputes to be resolved in "individual arbitration" rather than "class or representative proceedings," the incorporated New Era rules mandate that "cases with common issues or facts will be batched" and "treated in a 'class or representative' fashion."
Substantive unconscionability: Next, the majority held that Ticketmaster's process of arbitrating mass claims under New Era's rules was "substantively unconscionable to a substantial degree," adding that "[i]t may not be too much to say that th[e] method of dispute resolution contemplated by New Era's Rules is 'unworthy even of the name of arbitration.'"
The majority identified four reasons for that conclusion:
- Preclusive effect of bellwethers: In a mass arbitration of 25 or more cases, New Era batches the cases, with New Era "unilaterally decid[ing] which cases will proceed in a batch." As the majority read New Era's rules, three bellwether cases are then adjudicated, with the arbitrator's ruling deemed "binding on the plaintiffs in all of the non-bellwether cases," regardless when those cases were filed, even though those plaintiffs had no "notice" of the bellwethers," could not "be heard in" them, had no "guarantee of adequate representation" in them, and had no "right to opt out" of the bellwether's preclusive effect. Bellwether case decisions favoring a defendant "will . . . be binding on non-bellwether plaintiffs, who had no chance to participate in the [bellwether] arbitration and who are ignorant of the decision until it is invoked against them." In addition, "because the Rules do not provide access to the bellwether record for non-bellwether plaintiffs," those plaintiffs "will struggle to differentiate their cases from the bellwethers. Notably, this lack of access is asymmetric: the defendant will always have access to the record as a party to bellwether cases." The majority described this procedure as "violat[ing] basic principles of due process." (Ticketmaster and New Era strongly dispute this understanding of New Era's rules.)
- Lack of discovery and procedural limitations: Next, the majority deemed New Era's rules "inadequate vehicles for the vindication of plaintiffs' claims." Specifically, according to the majority, mass arbitration claimants have "no right to discovery," their "[c]omplaints are limited to 10 pages," the "evidentiary record and initial briefing is limited to 10 documents," and "[c]losing briefs are limited to . . . about five pages"—a limitation that the majority described as "border[ing] on the absurd." (Ticketmaster and New Era disagree with this reading of New Era's rules as well.)
- One-sided appellate rights: Ticketmaster's terms allowed it to appeal a grant of an injunction but didn't allow claimants to appeal the denial of an injunction. The majority acknowledged that the California Supreme Court had allowed asymmetric arbitral appeals in individual arbitrations in Sanchez v. Valencia Holding as a permissible extra "margin of safety" for the business. The majority concluded that Ticketmaster's provision had crossed the line, however, because a denial of an injunction in a single bellwether case, which cannot be appealed, purportedly has preclusive effect on all claimants. Thus, the clause had "effectively stacked the deck," with any losses getting appealed, but any denial is "final for the entire batched class of plaintiffs."
- Loss of arbitral disqualification rights: The majority stated that Ticketmaster had conceded that New Era's rules for arbitrator selection violate the California Arbitration Act, which gives each party the right to disqualify an arbitrator. Although Ticketmaster argued that the FAA preempts the California law, the majority rejected that argument, concluding that California law does not "interfere with or otherwise burden or obstruct arbitration."
Severability: Ticketmaster's terms included a severability clause and specified that if New Era can't administer the arbitrations, they will be resolved by another provider (FairClaims) under that provider's rules. The majority held, however, that the district court did not abuse its discretion in declining to sever the unconscionable provisions of Ticketmaster's arbitration agreement.
In addressing severance, the majority stated that the initial inquiry is "whether the central purpose of the contract is tainted with illegality." The majority concluded that was the case here, because, "[r]ead together, [New Era's] Rules and [Ticketmaster's] terms are so 'overly harsh or one-sided' as to unequivocally represent a 'systematic effort to impose arbitration ... as an inferior forum.'"
Alternative FAA holding: As a separate and independent basis for affirming the denial of the arbitration motion, the majority held that Ticketmaster's arbitration clause was unenforceable under California's Discover Bank rule, which declares most class action waivers unconscionable. Normally, the majority explained, that rule would be preempted by the FAA, as the Supreme Court had held in Concepcion. But the majority held that "the FAA does not apply" to New Era's unusual mass-arbitration procedures.
The majority stated that the FAA protects only individualized arbitration (in which each claimant's case is resolved separately), not "[c]lass-wide arbitration." But New Era's rules, in the panel's view, require "the use of aggregation in arbitration," because the results in bellwether proceedings purportedly have preclusive effect on all non-bellwether claimants. Because a mass arbitration under New Era's rules is "not arbitration as envisioned by the FAA," the majority concluded that "the FAA simply does not apply to and protect [its] mass arbitration model," and so "Discover Bank therefore applies" and invalidates Ticketmaster's agreement.
Concurrence: Judge Lawrence Van Dyke wrote a separate concurrence to explain that he would resolve the case by solely relying on the majority's alternative holding—that the FAA doesn't protect "[t]he scheme that New Era has created," and so Discover Bank "springs back to life."
Judge Van Dyke explained that, in his view, "[s]imply labeling something as 'arbitration' does not automatically bring it within the ambit of the FAA's protection." Taking a colorful (if exaggerated) example, Judge Van Dyke wrote, an agreement to arbitrate "through a vigorous, winner-take-all game of ping-pong" is not arbitration at all. And Judge Van Dyke stated that "New Era's system of collective arbitration is not what Congress set out to protect in the FAA."
Ticketmaster has petitioned for rehearing en banc of the panel's decision.
Analysis
Heckman deals with an unusual and rarely used approach to mass arbitration, because New Era's rules have not been widely adopted. Thus, while plaintiffs' counsel can be expected to argue that Heckman applies to all mass-arbitration provisions (indeed, they already are doing so)—those arguments are based on a misreading of the decision that, if courts were to accept, would violate the FAA and controlling Supreme Court precedent.
Critically, Heckman's substantive-unconscionability analysis turns almost entirely on the panel's understanding of New Era's sui generis rules for mass arbitrations; according to the panel, New Era's rules concerning "precedent" meant that the results of bellwether cases would bind future claimants who had no ability to participate in, or to ensure adequate representation in, the bellwether cases. Yet most arbitration agreements do not provide for one arbitration to have preclusive effect on another arbitration. In fact, many businesses that use a bellwether or staging process for handling mass arbitrations efficiently—an approach modeled after the approach taken with respect to MDL proceedings in court—expressly state that arbitral awards do not have such preclusive effect. That is, the central defect that the Heckman court identified in the New Era rules simply does not exist in the overwhelming majority of arbitration provisions used by most businesses.
The other procedural rules criticized by the Heckman majority also are inconsistent with the approach taken by AAA and JAMS. Those forums give the arbitrator discretion with respect to the availability and extent of discovery, the length of written submissions, and the amount of evidence submitted. That is a further basis for distinguishing Heckman.
Given the narrow nature of Heckman's decision, courts also must reject arguments that the panel's alternative holding revives Discover Bank as a general matter. By its own terms, that holding would apply only in the truly rare case that an arbitration agreement departs so dramatically from standards of alternative dispute resolution that it no longer qualifies as an agreement "to settle" a "controversy" "by arbitration" within the meaning of Section 2 of the FAA. After all, as the Supreme Court emphasized in Concepcion, the FAA affords "parties discretion in designing arbitration processes" that are "tailored to the type of dispute." That holding therefore also rests entirely on the panel's determinations about New Era's unique rules–and thus does not extend to approaches to mass arbitration that preserve individualized dispute resolution and do not impose the strict procedural limitations of the New Era rules.
Heckman therefore can readily be distinguished because most arbitration agreements did not adopt the novel rules, as understood by the panel, of New Era—a recent arrival on the arbitration-administration scene. Heckman itself noted that New Era's rules "differ significantly from the rules of traditional arbitration fora such as ... 'JAMS'... or the American Arbitration Association." Stretching Heckman to arbitration provisions that use AAA, JAMS, or other arbitration organizations with similarly fair procedures is precluded by Concepcion, which itself involved AAA procedures.
But even on its own terms, Heckman's alternative holding is questionable. In an opinion by Justice Breyer, the Supreme Court once mused that the FAA gives parties "considerable latitude" to agree to arbitrate under even "the law of Tibet[] or the law of pre-revolutionary Russia" (subject to other constraints). And the Court observed in Concepcion that parties are free to agree to all sorts of procedures that are inconsistent with the traditional characteristics of arbitration, stating that "[p]arties could agree to arbitrate pursuant to the Federal Rules of Civil Procedure, or pursuant to a discovery process rivaling that in litigation," or even to "aggregation." Although these types of agreements are "not arbitration as envisioned by the FAA," the Court stated that "[a]rbitration is a matter of contract, and the FAA requires parties to honor parties' expectations." Similarly, in Lamps Plus, Inc. v. Varela, the Court acknowledged that "[c]lass arbitration lacks th[e] benefits" of the "individualized form of arbitration envisioned by the FAA," but nonetheless concluded that, under the FAA, courts can compel "class arbitration" when there is an "affirmative contractual basis for concluding that the part[ies] agreed to do so." To be sure, the FAA forbids states from imposing these procedures onto arbitration agreements that provide otherwise. However, that is a far cry from holding that the FAA doesn't protect a party's agreement to use specific procedures (even including class arbitration).
Even though its application should be narrow, Heckman is a reminder to businesses of the need to review their arbitration provisions. Developments in the area of mass arbitrations continue to occur at a brisk pace. Businesses should continue to assess how to craft arbitration agreements to provide for the efficient and fair resolution of consumer and workplace claims while safeguarding against the abusive use of mass arbitration—abuses that have become increasingly prevalent.
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