Wednesday, October 5, 2011

Play Station Network new arbitration clause

Recently, Sony changed the Terms of Service for users of its Play Station Network (PSN). The new terms of service require that users of PSN agree to pre-dispute mandatory arbitration specifically excluding the right to class action. This type of arbitration clause violates California case law established in Discovery Bank which held that any waiver of the right to class action lawsuit would be unconscionable if three criteria were met: (1) it is in a contract of adhesion; (2) it governs disputes over small amounts of money; and (3) it is alleged to be part of a scheme to deliberately cheat consumers out of individually small amounts of money. The law is not a wholesale prohibition of class action waivers in consumer contracts such as Sony’s. Rather, the law sets a general unconscionability standard under contract law.

The California law is basically a state-court interpretation of provisions in the California Civil code. The first provision of the code prevents parties to a contract from escaping responsibility for their own violation of the law. (see Cal. Civ. Code Ann. § 1668) The second code provision gives courts the power to limit unconscionable clauses in a contract in order to avoid any unconscionable result. (see §1670.5(a)) California has been very progressive in protecting the rights of less powerful consumers forced to waive their ability to litigate through pre-dispute mandatory arbitration clauses such as the one Sony has designed.

From a business perspective, one can see that Sony desires to put distance between itself and the loss of integrity of its protection of customer data due to breach of its system by hackers. The resulting class actions will cost the Company billions of dollars. Interestingly enough, Sony has relocated to the US following the recent Tsunami in Japan. One can only speculate whether Sony acquired US legal advice regarding the new Terms of Service. The question remains: Is the arbitration clause in Sony’s new Terms of Service valid or does it violate California law??

The answer comes in the form of a recent Supreme Court decision, AT&T Mobility. In that case, the Court held in a 5-4 decision that the California law is pre-empted by the Federal Arbitration Act. The majority written by Justice Scalia found that the California law “stands as an obstacle to the accomplishment and execution of the full purposes and obj4ectives of Congress.” According to the dissent, written by Justice Breyer along with Justices Ginsburg, Sotomoyor and Kagan joining finds little support for the majority opinion. The dissent argues that California is free to define unconscionability and that should be of no concern to the Feds as long as the rule does not disfavor arbitration. Justice Breyer reduces this case to the doctrine of federalism at its core. The state is free to pass laws and Congress cannot pre-empt them cavalierly. In AT&T Mobility, according to the dissent, tat same principle of federalism requires the Court to uphold California law and not strike it down.

I am no Supreme Court scholar but I believe that Scalia is woefully out of touch with the realities and practicalities of arbitration clauses in general. This case, as the dissent points out, was not about class actions and arbitration but about contract law application to arbitration clauses. The holding was too pro-business and not enough protection for the consumer. It was a knee-jerk negative reaction to a Ninth circuit decision-more left coast discrimination!

NB-I would like to thank my student Wilber Han for bringing this issue to my attention and discussions in my Management 12A class (Business Law) for clarifying the issues.

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