When Gamers Become Plaintiffs – Arbitration Clauses for the Win

By: Michelle Cohen

Online businesses, including gaming companies, frequently include arbitration clauses in their “terms and conditions” or other policies when consumers register for their services. These clauses notify users that disputes will be subject to private arbitration by an appointed neutral arbitrator, usually the American Arbitration Association or JAMS.  Businesses favor arbitration for several reasons, including reduced costs of litigation, expediency, confidentiality, and requiring that matters be addressed on an individual (not class) basis. Over the past several years, parties have challenged arbitration clauses and urged courts to reject mandatory arbitration and to allow the plaintiffs (including class action plaintiffs) to “have their day in court.”  Recently, in a case involving the online gaming company Fliff in California, [1] the federal district court granted Fliff’s motion to compel arbitration in a consumer action. This case provides some instructive guidance for companies’ arbitration clauses.

Background

             Fliff, a mobile app available in the Apple app store and on Google Play, describes itself as a platform for “sports predictions built on social competition with promotional games and loyalty rewards to elevate the experience.” Bishoy Nessim, a California resident, created a Fliff account in December 2022. To create his account, Nessim was required to click on a checkbox which provided the following statement: “I accept the Terms of Use and the Sweepstakes Rules of Fliff Inc.”  Nessim used the Fliff app, and later filed a putative class action against Fliff for violations of California’s Unfair Competition Law (“UCL”) and other claims. In particular, Nessim claimed Fliff operates “an illegal ‘unregulated online sports book’” and that Fliff’s online games constitute unlawful and unfair business acts under the UCL. Fliff filed a motion to compel arbitration based on an arbitration agreement in Fliff’s Sweepstakes Rules.

Nessim did not dispute that he had agreed to the Terms of Use and the Sweepstakes Rules. However, he contended that the arbitration agreement was unlawful as it was unconscionable (and on other bases).

Court Enforces the Arbitration Clause  

            The Federal Arbitration Act (“FAA”) permits a party to a written arbitration agreement to petition a federal district court for an order compelling parties to arbitrate. The FAA directs a federal court to determine whether: (1) the agreement encompasses the dispute at issue, and if so, to determine if (2) the agreement is valid. If the answer is yes to both questions, then the court must enforce the arbitration agreement. State law applies to determine if the parties agreed to arbitrate. The court concluded that the arbitration clause covered Nessim’s claims and that the arbitration agreement in the Sweepstakes Rules was valid.

First, the court reviewed Fliff’s Sweepstakes Rules and concluded that an agreement to arbitrate exists. The Sweepstakes Rules provided:

“any and all disputes and causes of action arising out of or connected with the Sweepstakes…,shall be resolved individually, …by final and binding arbitration under the rules of the American Arbitration Association.”

Nessim checked the box accepting the Terms of Use and the Sweepstakes Rules. Moreover, Nessim did not challenge the existence of the agreement. Thus, the court did not have to review, for instance, whether the checkbox was sufficient, whether the Terms of Use and Sweepstakes Rules were sufficiently presented, or other questions typically raised by plaintiffs challenging arbitration clauses. Further, Nessim did not contest whether his particular claims were covered by the arbitration agreement, so the court concluded the claims were covered.

Second, Fliff asserted that the parties agreed that the arbitrator, rather than the court, should determine issues associated with arbitrability. Fliff cited that fact that the AAA rules  were incorporated in the arbitration clause in the Sweepstakes Rules. Here, the court dug deeper, since generally, a court is to decide arbitrability unless the parties “clearly and unmistakably provide otherwise.”  Following a lengthy review of case law, the court concluded that “where at least one party is unsophisticated, mere incorporation of the AAA Rules or their equivalent is ‘insufficient to establish a clear and unmistakable agreement to arbitrate arbitrability.’” The court noted that the arbitration agreement did not contain an explicit delegation clause. Therefore, there was “no clear and unmistakable evidence that the Parties agreed to arbitrate arbitrability.”  This meant, in turn, that the arbitrability decision remained with the court.

Third, in reviewing whether (as Nessim argued), the arbitration clause was unconscionable (and should be invalidated), the court noted several factors in its review of “procedural” unconscionability, including:

• The arbitration agreement was an “adhesive contract” since Nessim had no opportunity to negotiate with Fliff and it was a “take it or leave it” bargain. That factor weighed in favor of unconscionability
• Applying California law, the court found minimal procedural unconscionability because the contract was for a nonessential recreational activity and California courts routinely reject procedural unconscionability when contracts involve nonessential recreational activities – since the consumer could simply forgo the activity (as compared to an essential good or service). Also, after reviewing the “market,” the court concluded that Nessim had other available alternatives to the Fliff platform within the relevant market.

As to substantive unconscionability, Nessim claimed the arbitration clause limited his remedies under California’s UCL. The court quickly rejected this argument as contrary to applicable precedent. Thus, the court upheld the arbitration clause and stayed the action pending the results of arbitration.

Lessons Learned

Companies utilizing arbitration clauses, particularly gaming businesses which regularly rely on arbitration clauses, should note a few important points from the Fliff decision:

• The court indicated that mere reference to the AAA (or a similar service) was not sufficient to mandate that an arbitrator would determine arbitrability, rather than the court.
• Thus, a best practice is for an arbitration clause to clearly state that all issues relating to the services will be decided in arbitration, including any questions concerning arbitrability. (Note that the U.S. Supreme Court unanimously held in 2019 in Schein v. Archer & White, [2] applying the Federal Arbitration Act, that if a contract reflects the parties’ agreement to have the arbitrator decide issues of arbitrability, a court may not override that agreement).
  • One example of this type of comprehensive clause:  “the arbitrator, and not any federal, state or local court or agency, shall have exclusive authority to resolve all disputes arising out of or relating to the interpretation, applicability, enforceability or formation of these Terms, including, but not limited to any claim that all or any part of these Terms are void or voidable, whether a claim is subject to arbitration, and any dispute regarding the payment of administrative or arbitrator fees”
• Other courts have noted favorably where companies have included links to the AAA (or similar arbitration services’ rules), rather than just referencing the AAA.
• California’s case law distinction between recreational services and non-recreational services for purposes of examining unconscionability is fairly unique and companies should not expect to rely on this distinction in other jurisdictions.
• As Nessim did not challenge the fact that he had entered into an arbitration agreement, the court did not address other factors that typically come into play in these challenges, including the sufficiency of the checkbox for binding persons/businesses to the arbitration clauses and other terms, the clarity of the terms, and the existence of an arbitration opt-out clause (which can often be viewed favorably by courts).

Finally, while the Fliff decision sending the case to arbitration (and avoiding a public trial and possible class action) represents a victory for Fliff, companies should note that the impact of the decision is limited as Nessim never disputed that he agreed to the arbitration provision. Each challenged arbitration clause is reviewed on a case by case basis, and courts in various jurisdictions have refused to enforce arbitration clauses for various reasons, including the lack of an affirmative agreement to the terms and conditions, a lack of clarity in the clause itself.

[1] Nessim v. Fliff, Inc., et al, Case No. 5:23-cv-01048-SSS-SHKx (C.D. Cal. Jan 5, 2024).

[2] 139 S.Ct. 524 (2019).