Skillz Platform Loses Appeal on Petition to Compel Arbitration

The Parties

Plaintiff: Pavel Gostev

Plaintiff’s Counsel: Blood Hurst & O’Reardon; The Law Offices of Andrew Brown; Ellsworth Law Firm

Defendant: Skillz Platform, Inc.

Defendant’s Counsel: Quinn, Emanuel Urquhart & Sullivan

Big Picture

The California Court of Appeal’s February 28, 2023 decision in this case is important to study for anyone responsible for drafting terms of service agreements that contain agreements to arbitrate. The decision deviates from some recent federal cases (particularly on who decides issues of arbitrability) and it highlights how important it is, in general, to make terms as consumer-friendly and mutual as possible.

The Skillz platform and Terms of service

Skillz provides a mobile platform that hosts games in which players can pay to compete against each other for cash prizes. To participate, players must create an account which entails providing an email address, entering a date of birth, and tapping a button that says “Next.” Below the “Next” button are the words: “I agree to the Terms of Service and the Privacy Policy.” The underlined text is hyperlinked and, if clicked, takes the player to the terms of service.

The plaintiff, a resident of the state of Washington, created his account in July 2019 and sued Skillz in San Francisco County Superior Court in February 2021. He alleged that Skillz’ games constitute gambling games in violation of California and federal law and also brought claims for unfair competition the violations of the CLRA. The plaintiff was aware of the arbitration provision in the Terms of Service when he filed his lawsuit, and addressed it in his complaint. He alleged that the agreement to arbitrate was unenforceable because it prohibited public injunctive relief in violation of McGill v. Citibank, N.A. (2017) 2 Cal.5th 945, 216 Cal.Rptr.3d 627, 393 P.3d 85 (McGill), and because it was unconscionable.

The trial Court decision

Skillz petitioned to compel arbitration and the trial court denied the petition. The trial court found that the parties had not delegated the issue of arbitrability to the arbitrator. The court also found that the arbitration agreement was procedurally and substantively unconscionable. At the hearing on the petition, the court observed:

“I've got to say that we’ve look[ed] at a lot of these arbitration cases and ... this is the longest list of unconscionable features that I think I've ever seen.”

In its written decision, the court identified (among other things) as substantively unconscionable provisions:

• that plaintiff’s damages are limited,

• the arbitration must occur in San Francisco,

• plaintiff only has one year to bring his claim,

• the parties must split the arbitration fees and costs, and

• defendant can obtain equitable relief without posting a bond or security.

After the trial court denied its petition to compel arbitration, Skillz appealed.

The Appeal (affirming the trial court’s decision)

Arbitrability

The appellate court first examined whether the parties had agreed that the arbitrator would decide the threshold issue of arbitrability. The court observed that the default rule is that a court — not an arbitrator — will make that decision, unless the parties clearly and unmistakably agree otherwise. The appellate court found that Skillz’ terms of service did not contain an express agreement on this topic and that it wasn’t sufficient to simply reference the AAA Commercial Rules (which provide: “The arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim or counterclaim.”) Skillz had pointed to federal authority that holds the opposite, including e.g., G.G. v. Valve Corporation (9th Cir. 2020) 799 Fed.Appx. 557, 558 (under Washington state law, “teenagers clearly and unmistakably agreed to arbitrate questions of arbitrability because the arbitration agreement incorporates AAA rules”). The California appellate court, though, which isn’t bound by federal decisions, said it didn’t find such authority persuasive and instead relied on several California state court decisions in reaching a contrary result.

Unconscionability

The appellate court next examined whether the terms of service were unconscionable. Under California law, both procedural and substantive unconscionability must be shown for the defense to be established, though not necessarily to the same degree. For terms of service agreements, like this one, procedural unconscionability is usually easy to show since they are offered on a take-it-or-leave-it basis. In this case, the court also pointed to allegations of inconsistencies in the agreement itself. On substantive unconscionability, the appellate court was, like the district court, persuaded that Skillz had included too many provisions which were non-mutual in nature. In addition to those listed above by the trial court, the appellate court also highlighted:

• the requirement to arbitrate disputes in this case was not mutual (i.e., only Skillz could bring IP claims in court and only Skillz could bring claims in court for billing disputes and alleged unfair methods in participating in the services or using the software)

• the $50 cap on liability;

• a waiver of liability for injury due to hacking; and

• an indemnification clause which was non-mutual and one-sided.

Accordingly, it concluded that the lack of mutuality in the promises to arbitrate in the terms of service were also substantively unconscionable.

Public Injunctive Relief

Public injunctive relief is relief that benefits the general public — not just the individual plaintiff who brings a lawsuit under California’s CLRA and UCL. In this case, the plaintiff alleged that Skillz’ terms of service violated the McGill case (cited above) which held that an arbitration provision was invalid and unenforceable in California insofar as it purported to waive a plaintiff’s statutory right to seek public injunctive relief under the CLRA and UCL.

In this case, the arbitration provision specified that the “arbitrator may award declaratory or injunctive relief only to you individually, and only to the extent required to satisfy your individual claim.” The appellate court found that, “[g]iven the myriad limitations in the Terms of Service favoring Skillz, it seems likely that Skillz intended the language at issue would prevent the award of injunctive relief benefitting anyone other than the individual user, but we need not resolve this question of contract interpretation.” In other words, since so many of the other terms were found to be unconscionable, this was basically a moot point.

Other Issues with the Terms of Service

In addition to the problems discussed above, the appellate court, like the trial court, also took issue with the shortened one-year limitations period on claims, mandating that arbitration be in San Francisco, and the agreement that the parties share equally in the fees and costs of the arbitration. The court also took particular issue with the fact that the arbitration filing fee for the plaintiff’s claim was $6,250, while the Terms of Service purported to limit damages to $50.

As a result, the appellate court affirmed the trial court’s order denying the petition to compel arbitration.