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Concepcion, a Procedural Hurdle for DraftKings and FanDuel Class Action Plaintiffs (Part II)

The Daily Fantasy Sports (“DFS”) industry continues to be the center of attention for media pundits, state and federal lawmakers, and high-profile lawyers. Since my last blog post explaining the DraftKings’ data leak that sparked the initial wave of scrutiny of DFS ((Alen Cisija, What You Need to Know About the DraftKings Data Leak (Part I), Mich. Bus. & Entrep. L. Rev. (Oct. 26, 2015), http://mbelr.org/what-you-need-to-know-about-the-draftkings-data-leak-part-i/#rf12-1561)), major American sports leagues have made efforts to distance themselves from the industry, ((Austin Knoblauch, Roger Goodell Concerned Over Role of Daily Fantasy, NFL.com (Nov. 22, 2015), http://www.nfl.com/news/story/0ap3000000585071/article/roger-goodell-concerned-over-role-of-daily-fantasy; Steve Fainaru & Mark Fainaru-Wada, Adam Silver: ‘Should Be a Regulatory Framework’ for Daily Fantasy Operators, ESPN.com (Oct. 22, 2015), http://espn.go.com/espn/otl/story/_/id/13941819/nba-commissioner-adam-silver-favor-regulation-daily-fantasy-operators)) seven states have banned major DFS companies from operating DFS contests, ((See Chris Grove, What Are the States Where You Can Play Daily Fantasy Sports?, Legal Sports Report (Nov. 14, 2015), http://www.legalsportsreport.com/daily-fantasy-sports-blocked-allowed-states/)), and numerous new lawsuits have been filed in both state and federal courts. ((See, e.g., Complaint, Walls v. DraftKings, Inc., No. 15-CV-02758 (W.D. Tenn. Nov. 23, 2015); Complaint, Facenda v. DraftKings, Inc., No. 15-CV-08922 (C.D. Cal. Nov. 17, 2015); Manzella v. DraftKings, Inc., No. 15-CV-02083 (N.D. Ala. Nov. 17, 2015))) In this post, I will focus specifically on the procedural hurdle the class action plaintiffs face in their legal battles against DraftKings and FanDuel (collectively, “Defendants”).

Before attempting to refute plaintiffs’ claims of fraud, negligence, and conspiracy, Defendants will likely file a motion to dismiss, or a motion to compel arbitration, based on Defendants’ terms of use agreements. These agreements, which all plaintiffs have already agreed to, contain mandatory arbitration clauses and class action waivers. ((See DraftKings Terms of Use, DraftKings (Aug. 18, 2015), https://www.draftkings.com/help/terms (“Any and all disputes . . . shall be settled by binding arbitration . . . . [They] shall be arbitrated on an individual basis only, and shall not be consolidated or joined with or in any arbitration or other proceeding involving a Claim of any other party. You and DraftKings agree that the arbitrator shall have no authority to arbitrate any Claim as a class action or in any other form other than on an individual basis.”); FanDuel Terms of Use, FanDuel (Aug. 1, 2014) https://www.fanduel.com/terms ([A]ll claims . . . shall be finally settled by binding arbitration . . . . 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, or whether a claim is subject to arbitration . . . . YOU AND FANDUEL AGREE THAT EACH MAY BRING CLAIMS AGAINST THE OTHER ONLY IN YOUR OR ITS INDIVIDUAL CAPACITY, AND NOT AS A PLAINTIFF OR CLASS MEMBER IN ANY PURPORTED CLASS OR REPRESENTATIVE PROCEEDING.”))) As a recent New York Times exposé explained, “by inserting individual arbitration clauses into a soaring number of consumer and employment contracts, companies . . . [have] devised a way to circumvent the courts and bar people from joining together in class-action lawsuits, realistically the only tool citizens have to fight illegal or deceitful business practice.” ((Jessica Silver-Greenberg & Robert Gebeloff, Arbitration Everywhere, Stacking the Deck of Justice, N.Y. Times (Oct. 31, 2015) http://www.nytimes.com/2015/11/01/business/dealbook/arbitration-everywhere-stacking-the-deck-of-justice.html?_r=0)) As applied here, the DFS operators’ terms of use state that, regardless of the merits of the claims participants may have against Defendants—e.g., fraud, negligence, conspiracy—Plaintiffs agreed via terms of use agreements to resolve any disputes individually and in private arbitration.

The prohibition of class action waivers in arbitration agreements has been challenged on the ground of contract unconscionability under state law. ((John Murray, Jr., The Supreme Court on Unconscionability, the FAA, and Class Arbitration, 2011 Emerging Issues 5659 (May 18, 2011))). In AT&T Mobility LLC v. Concepcion, however, the United States Supreme Court upheld the enforceability of class action waiver clauses and ruled that the Federal Arbitration Act (“FAA”), which strongly supports the validity and enforceability of arbitration agreements as written, ((Id.)) preempts state laws that deem them per se unenforceable. ((See Concepcion, 563 U.S. 333 (2011)))

In Concepcion, AT&T customers brought a class action suit against the telephone service provider alleging fraud in the company’s practice of charging customers sales tax on cellphones that it had advertised as free. ((Id. at 333)). AT&T then moved to compel individual arbitration pursuant to the parties’ terms of use agreement, which mandated arbitration of unresolved disputes and precluded class actions. ((Id.))   The district court denied AT&T’s motion, ruling that the terms of use agreement was unconscionable under California state law. ((Id.)) The Ninth Circuit Affirmed. ((Id.))

The Supreme Court reversed, enhancing “its [already] strong support for the enforcement of arbitration agreements as written under the FAA.” ((Murray, supra note 7)) The court restated the purpose of the FAA as a “liberal federal policy favoring arbitration,” ((Concepcion, 563 U.S. at 346)) which requires the enforcement of arbitration agreements according to their terms so as to facilitate streamlined proceedings. ((Id. at 334)) “Requiring the availability of class arbitration,” the Court reasoned, was inconsistent with that purpose because it “interferes with fundamental attributes of arbitration.” ((Id. at 344; see also Murray, supra note 7 (“The majority . . . found that the [state law in question] interfere[d] with arbitration since a switch from bilateral to class arbitration sacrifices the principal advantage of arbitration—informality—thereby making the process slower, more costly, and more likely to generate procedural morass.”))) The Court further held that the FAA’s savings clause ((9 U.S.C. § 2 (2012) (“[A]n agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”)))—which allows arbitration agreements to be invalidated by generally applicable contract defenses such as fraud, illegality, and unconscionability—does not recognize defenses that apply only to arbitration, or derive their meaning from the fact that an agreement to arbitrate is at issue. ((Concepcion, 563 U.S. at 339))

In light of the Court’s ruling in Concepcion, it is unlikely that the class action Plaintiffs’ claims against DraftKings and FanDuel will survive a motion to dismiss, or a motion to compel arbitration on an individual basis. Concepcion makes it clear that an attack targeted narrowly at the arbitration clause of the larger terms of use agreement will fail, despite the FAA’s savings clause. Similarly, an entire body of contract law suggests that a claim of unconscionability with respect to the entire terms of use agreement is just as unlikely to succeed. ((See Arthur Corbin, Corbin on Contracts § 29.4 (2015) (“Most claims of unconscionability fail. The mere fact that there is a lack of equivalence between the performances of the parties does not even get close to the establishment of unconscionability. A harsh result alone is an insufficient ground for a finding of unconscionability. Superior bargaining power is not in itself a ground for striking down a resultant contract as unconscionable.”))).

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