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Supreme Court's Concepcion Decision Invalidating California Law Against Waivers of Class Arbitration Provides Basis for Online Game Company to Compel Arbitration

Monday, August 29, 2011

Swift v. Zynga Game Network, Inc., No. 09-CV-05443, 2011 BL 202575 (N.D. Cal. Aug. 4, 2011) A magistrate judge for the U.S. District Court for the Northern District of California granted defendant Zynga Game Network, Inc.'s motion to compel arbitration of class action claims by a user who alleged that she, and others similarly situated, was deceived by "special offers" made by the network in connection with the provision of free video game services. Even though the defendant did not move to compel arbitration until 16 months after the plaintiff filed suit, the court held that the defendant did not waive the right to insist on arbitration. Until the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), controlling California case law rendered unenforceable arbitration clauses that required claims to be arbitrated on an individual basis and did not allow for class arbitration.

Plaintiff's Initial Access to Defendant's Network

As explained by the court, in November 2009, plaintiff Rebecca Swift filed a putative class action against defendants Zynga, Acknowledge Inc., and Kitn Media USA, Inc. alleging that she was the victim of deception in certain "special offer" transactions offered in connection with Zynga's free online YoVille video games. Swift at 2. Swift first accessed Zynga's game network in April 2009 through the Facebook social media website. A message on the Facebook screen inquired if Swift wished to "[a]llow [a]ccess?," and explained that "[a]llowing YoVille access will let it pull your profile information, photos, your friends' info, and other content that it requires to work." Id. at 3. Swift ultimately clicked on a button labeled "Accept," which appeared directly above the following statement: "By proceeding, you are allowing YoVille to access your information and you are agreeing to the Facebook Terms of Service in your use of YoVille. By using YoVille, you also agree to the YoVille Terms of Service." Id. at 8, 3. The words "terms of service" were displayed as a blue hyperlink which, when clicked, directed a user's browser to a page containing the terms of service. Id. at 3.

Zynga's Terms of Service

The YoVille terms of service provided that all claims arising out of or relating to the terms of service must be arbitrated in San Francisco, California pursuant to the rules of the American Arbitration Association. The YoVille terms of service did not address whether claims in arbitration could be pursued on a class basis or otherwise in a representative capacity. However, they did provide that Zynga could change the terms at any time, that use of Zynga's games after notice of the change in terms would constitute acceptance of the changes, and that the changes take effect after notice by posting the changes on "Zynga's service or by any other method of notice Zynga deems appropriate." Swift at 3. On August 1, 2009, Zynga implemented its "Universal" terms of service, which were intended to supersede the YoVille terms of service. Id. at 4. The Universal terms provided, subject to certain exceptions, that all disputes must be arbitrated. Section 12(e) of those terms also prohibited arbitration on a class basis, as well as the joinder of one arbitration with another. A separate clause, Section 13(b), provided that "[i]f Section 12(e) is found to be illegal or unenforceable, then neither you nor Zynga will elect to arbitrate any Dispute falling within that portion of Section 12(e) found to be illegal or unenforceable." Id.

The Supreme Court's Decision in Concepcion

At the time Swift sued the defendants, the jurisprudence of the California Supreme Court declared most collective arbitration waivers in consumer contracts to be unconscionable and unenforceable. See, e.g., Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). However, on April 27, 2011, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011). In Concepcion, the Court held that the Federal Arbitration Act preempts the Discover Bank rule of California law, and directed courts to enforce class arbitration waivers. The Court further held that, unless the parties explicitly agreed to class arbitration, arbitrations could only proceed on an individual basis.

Defendant's Motions to Compel Arbitration and to Stay Litigation

Promptly after the Supreme Court decided Concepcion, Zynga filed a motion to compel Swift to arbitrate her claims against Zynga. Acknowledge and Kitn Media joined in Zynga's motion and asked the court to stay Swift's claims against them. Swift opposed the defendants' motions. In a decision dated August 4, 2011, the court granted Zynga's motion to compel arbitration, and although it did not order Swift to arbitrate her claims against Acknowledge and Kitn Media, the court stayed the litigation in its entirety pending the conclusion of arbitration between Swift and Zynga.

Formation of a Legally Binding Contract

The court first determined that a valid contract existed between Swift and Zynga requiring arbitration of Zynga's claims. Swift argued that she was not adequately apprised of the contents of the terms of use because Zynga's agreement did not display those terms on the same screen as the button she had to click to indicate her assent. She cited in support of this argument Specht v. Netscape Communications Corp., 306 F.3d 17, 21-22 (2d Cir. 2002), in which the Second Circuit held enforceable a software license agreement that displayed a scrollable text of the license and did not permit the user to proceed without clicking to indicate her acceptance. The Second Circuit also found unenforceable a clickwrap arrangement in which the terms of the purported agreement were not displayed to the user, but could only be accessed by scrolling to the bottom of the page and clicking a link, which led to a web page list of links that included a link to the terms. The court in the instant case found Specht inapposite, noting that Swift "was provided with an opportunity to review the terms of service in the form of a hyperlink immediately under the 'I accept' button," which she admittedly clicked. Swift at 9. The court observed that recent cases have found that "clickwrap presentations providing a user with access to the terms of service and requiring a user to affirmatively accept the terms, even if the terms are not presented on the same page as the acceptance button, are sufficient" to create binding contracts. Id.

Plaintiff's Claims Were Not Excluded from Requirement of Mandatory Arbitration

The court also found that Swift's claims did not come within an exception in the terms of service, which exempted from the requirement of mandatory arbitration claims for "theft." Swift at 10. Moreover, the court disagreed with Swift's assertion that Section 13(b) of the Universal terms of service did not allow the parties to arbitrate their claims because California law rendered the class arbitration waiver in Section 12(e) unenforceable. The court rejected Swift's contention that the arbitration provisions were unconscionable, noting that to invalidate a contract provision for unconscionability, the provision must be both procedurally and substantively unconscionable. The court observed that Swift did not even articulate an argument that Zynga's terms of use were procedurally unconscionable.

Defendant Did Not Elect to Litigate Claims or Otherwise Waive Its Right to Compel Arbitration

The court rejected arguments by Swift that Zynga waived its right to compel arbitration by waiting more than one year after litigation commenced to seek compulsory arbitration, and thus "elected" to proceed with litigation. Swift at 9. The court explained that "[a] party seeking to prove waiver of a right to arbitration must demonstrate: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts." Hoffman Construction Co. of Oregon v. Active Erectors & Installers, Inc., 969 F.2d 796, 798 (9th Cir. 1992). The court agreed with Zynga that, prior to the Supreme Court's decision in Concepcion, any attempt by Zynga to compel arbitration would have been futile. Indeed, other courts have reached the same conclusion with regard to the timeliness of motions to compel arbitration after Concepcion was decided. See, e.g., Villegas v. U.S. Bancorp, No. 10-CV-01762, 2011 BL 162372 (N.D. Cal. June 20, 2011). The court found that Zynga did not waive its right to seek arbitration by awaiting the Concepcion decision rather than directly challenging the Discover Bank rule in Swift's case. Moreover, Zynga did not engage in litigation longer than necessary, but rather "acted promptly following the change in law by ceasing litigation activity and moving to compel." Swift at 12. Lastly, the court found no merit in Swift's argument that she was prejudiced by facing arbitration after having litigated for almost one and a half years. The court observed that it was not until March 2011 that the parties consented to proceed before the magistrate judge, and that a trial date still had not been set as of the date of the court's ruling. Accordingly, the court granted Zynga's motion to compel arbitration and to stay the litigation.

Co-Defendants' Joinder

The court declined to order Swift to arbitrate her claims against Acknowledge and Kitn Media. According to the court, Acknowledge and Kitn Media were not among the parties against whom the Zynga terms of use required claims to be arbitrated. Moreover, although Swift referred to Acknowledge and Kitn Media as agents of Zynga in the complaint, the court agreed with Swift's subsequent argument that her characterization of those defendants as Zynga's agents was simply incorrect. However, the court observed that in Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 20-21, n.3 (1983), the U.S. Supreme Court held that district courts possess discretion in maintaining their caseloads "to stay litigation among the nonarbitrating parties pending the outcome of the arbitration." The court in the instant case found that it would be most efficient to stay Swift's claims against Acknowledge and Kitn Media while Swift's arbitration against Zynga proceeded. Accordingly, the court exercised its discretion to grant the requested stay of litigation against Acknowledge and Kitn Media.
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