Pandolfi v. AviaGames, Inc.

Background

Andrew Pandolfi and Mandi Shawcroft sued AviaGames, Inc. (Avia), Avia’s co-founders, and two companies that invested in Avia. The first amended complaint asserts claims under California’s unfair-competition law, the California Consumer Legal Remedies Act, and the federal Racketeer Influenced and Corrupt Organizations Act. The plaintiffs allege that Avia represented that its games involved competition against live human opponents of similar skill, but actually used bots based on historical playthroughs. They also allege that Avia could match players with bots of similar or higher skill and keep entry fees when a bot won.

Avia requires players to agree to Terms of Service. The December 2022 and July 2023 Terms contained an arbitration agreement covering disputes related to the Terms, Avia’s services, or the relationship between a player and Avia. The agreement also included a delegation clause, meaning that an arbitrator—not a court—would initially decide disputes about the arbitration provision’s validity or enforceability. The agreement further included a bellwether process for 25 or more similar or coordinated claims: each side would select 10 cases to proceed first, with additional groups of cases proceeding later if necessary.

Prior ruling and delegation clause

In an earlier order, the court found that each plaintiff and Avia had agreed to arbitrate. It also found that the delegation clause clearly and unmistakably assigned arbitrability questions to an arbitrator, unless the delegation clause itself was unconscionable. The court previously found some procedural unconscionability—unfair surprise—in the delegation clause because it appeared in lengthy, small, light-gray text without a heading or other feature drawing attention to it. The court requested supplemental briefing on whether the delegation clause was substantively unconscionable when considered with the bellwether provision.

Delegation clause

The court held that the delegation clause was both procedurally and substantively unconscionable. It found that, at the time players agreed to the Terms, the combination of the delegation clause and bellwether process could discourage players from pursuing their rights because similar claims could be coordinated and only 20 cases could proceed at a time. The resulting delay could occur even before an arbitrator decided whether a claim was subject to arbitration.

The court also found actual delay at the time of enforcement. In 2024, dozens of individuals represented by the plaintiffs’ counsel and more than 1,600—and later more than 4,100—individuals represented by another firm appeared to be asserting similar claims. The court concluded that the bellwether process could coordinate those claims and require claimants, numbering in the thousands, to wait months or years even to submit their arbitration demands and have arbitrability decided.

The court rejected Avia’s argument that the American Arbitration Association’s mass-arbitration rules would permit a process arbitrator to resolve arbitrability quickly. The court stated that the rules did not show that a process arbitrator could decide whether the agreement was unconscionable. It also rejected reliance on a general requirement that arbitration proceed without undue delay, finding that the general principle did not override the more specific bellwether provision and was not a sufficient safeguard.

The court further rejected Avia’s request to sever, or remove, the bellwether provision while leaving the delegation clause in place. Because the bellwether provision could have discouraged players from bringing claims, the court found that removing it would not cure its effect. The court therefore held that the delegation clause was invalid and that the court, rather than an arbitrator, would decide whether the broader arbitration agreement was enforceable.

Broader arbitration agreement

Under California law, an agreement may be unconscionable when it has both procedural and substantive unfairness, applying a sliding scale between the two. The court found some procedural unconscionability because players received pop-up notices about updated Terms but were not specifically told that significant changes had been made to the arbitration provisions. The arbitration provisions also appeared in small, light-gray text across roughly three pages without bolding or underlining to identify the newly added delegation clause and bellwether process.

The court found substantive unconscionability in the delegation clause and bellwether provision. It also found the one-year limitations provision substantively unconscionable because it required a player to begin arbitration within one year after a claim accrued, while the statutory periods for the plaintiffs’ asserted claims were three or four years.

The court rejected the plaintiffs’ challenges to the jury-waiver provision and the public-injunctive-relief provision. It concluded that the jury waiver, read in context, reflected the agreement to arbitrate and did not require players to waive a jury trial for disputes that could not legally be arbitrated. It also concluded that the plaintiffs relied on older Terms concerning public injunctive relief, while the updated Terms allowed public injunctive relief to be sought outside arbitration when permitted.

Severance and disposition

The court declined to sever the bellwether and one-year limitations provisions from the arbitration agreement. It found that the agreement contained multiple substantively unconscionable provisions designed to deter players from pursuing claims, indicating that arbitration had been structured as an inferior forum rather than as a valid alternative to litigation. The court therefore found the agreement to arbitrate unconscionable and unenforceable.

Judge Edward M. Chen denied the Avia Defendants’ motion to compel arbitration. The court did not dismiss the case in this order. It set a hearing on three motions to dismiss filed by the Avia Defendants, ACME, and Galaxy for September 18, 2024, at 1:30 p.m.