For many interactive entertainment companies, one of the most important terms of service is the clause requiring parties to submit their disputes to arbitration. A California appeals court recently refused to enforce a mobile gaming platform’s arbitration clause. The decision, which was highly critical of the clause, provides a roadmap for proper drafting of these important provisions. Below, we break down the court’s analysis and provide some guidance for anyone drafting terms of service for California users of their platform.

Background

In Gostev v. Skillz Platform, Inc., No. A164407 (Cal. Ct. App. Feb. 28, 2023), a player sued the game platform (“Skillz”) alleging the game Solitaire Cube constituted illegal gambling under California and federal law. Skillz asked the court to move the parties to arbitration pursuant to the arbitration provision in the terms of service. The plaintiff objected, arguing the provision was both procedurally and substantively unfair.

Who decides the threshold issue of enforceability—the court, or an arbitrator?

Skillz first argued that the question whether the dispute was arbitrable was a question for the arbitrator— not a court.  The court disagreed. While the default presumption is that a court, and not an arbitrator, decides whether a dispute is arbitrable (Gostev, slip op. at 7), Skillz argued that Section 14 of the Terms of Service to its game (“TOS”), which Gostev agreed to as part of a standard click-through agreement and defines the term “Dispute” to mean “any dispute . . . concerning [the TOS]”, as indication that Gostev agreed to determine the enforceability of the mandatory arbitration provision in arbitration. The court rejected this argument, pointing to past precedents, that such language only refers to substantive disputes (i.e., disputes about the fairness of the actual terms), and that if the parties want to have an arbitrator decide the threshold issue of the arbitrability of a dispute, that would need to be expressly set out in the agreement. “Indeed, because the issue is arcane and not likely contemplated by the parties, silence or ambiguity as to who would decide the enforceability of the arbitration provision suggests it was not a matter on which the parties mutually agreed . . . .” Id. at 10.

Skillz argued that because the TOS referred to the AAA Commercial Arbitration Rules, which provide that the arbitrator shall have the power to rule on his or her own jurisdiction, there was express language stating that an arbitrator would determine the enforceability of the arbitration provision. To support this argument, Skillz cited Dream Theater, Inc. v. Dream Theater, 124 Cal. App. 4th 547 (2004), among other supporting federal court decisions. The California Court of Appeals rejected this argument, distinguishing the agreement in Dream Theater because it was a negotiated agreement between two sophisticated business entities and declining to follow the federal decisions. “We do not find the federal authority cited by Skillz persuasive. . . . ‘There are many reasons for stating that the arbitration will proceed by particular rules, and doing so does not indicate that the parties’ motivation was to announce who would decide threshold issues of enforceability.’” Gostev, slip op. at 16 (citation omitted).

Is Skillz’s mandatory arbitration provision in the TOS “procedurally” unconscionable and thereby unenforceable?

The court began its analysis by stating that “the Terms of Service is a consumer contract that was offered on a take-it-or-leave-it basis, which, in itself, ‘is sufficient to establish some degree of procedural unconscionability.’” Id. at 19. (Procedural unconscionability addresses the circumstances of the contract negotiation, and focuses on whether the parties had equal bargaining power.) As an initial matter, the court states that click-through agreements are already facing an uphill battle. The court found in favor of Gostev, in part because there appeared to be “confusing and contradictory provisions” in the TOS—in one section, the TOS states that all disputes are to be handled by arbitration, and in another section, the TOS states that interference with the performance of Skillz’s software is subject to civil prosecution. These conflicting terms may have created an “unfair surprise” for the plaintiff.  

Is Skillz’s mandatory arbitration provision in the TOS “substantively” unconscionable and therefore unenforceable? 

With respect to the issue of substantive unconscionability, the court had “no difficulty concluding the arbitration provision is substantively unconscionable.” The court focused specifically on the following provisions:

- The requirement to arbitrate disputes was not mutual, as the arbitration provision excluded from arbitration claims related to Skillz’s intellectual property rights.

- There was a $50 cap on liability.

- The user waived liability for injury due to hacking.

- The indemnification clause was not mutual.

Id. at 20–23.

Finally, in finding the mandatory arbitration provision unconscionable, the court looked to other provisions of the TOS:

- “Here, the shortened limitations period (reducing the applicable limitations period by up to 75 percent of the statutory limitations period) is another factor supporting our conclusion that the arbitration provision is substantively unconscionable.” Id. at 27.

- “The forum selection clause [favoring Skillz] contributes to our assessment that the arbitration provision in this case is substantively unconscionable.” Id. at 28.

- “The arbitration provision states, ‘Each party . . . shall pay an equal share of the fees and costs of the arbitrator and AAA’ and ‘the arbitrator may award to the prevailing party reimbursement of its reasonable attorneys’ fees and costs (including, for example, expert witness fees and travel expenses), and/or the fees and costs of the arbitrator’ . . . . These provisions contribute to our conclusion that the arbitration provision is [substantively unconscionable].” Id. at 29. As a result, the court refused to allow Skillz to enforce its arbitration clause against the plaintiff.

Takeaways

While it is natural for drafters of click-through end user terms of service to create arbitration terms advantageous to the company, the Gostev case makes clear that certain limitations exist—particularly in “take it or leave it” cases where platform users are not negotiating with the platform.

1) Be explicit. If your intent is for users to delegate the threshold question of arbitrability to arbitrators (and not courts), you need to be explicit about that. As the Gostev court said here, “Skillz, which drafted the [TOS] … could have expressly stated in the arbitration provision that threshold questions of enforcement were to be delegated to the arbitrator, but it did not do so.”  

2) Be careful when choosing which rights are arbitrable, and which are not. The Gostev court was clearly concerned about the way Skillz cherry-picked which disputes would go to arbitration, and which would not. Terms providing that disputes about platform IP go to court, but disputes about user IP go to an arbitrator, for example, may no longer be enforceable.