Pandolfi v. AviaGames, Inc.

Background

Plaintiffs Andrew Pandolfi and Mandi Shawcroft sued AviaGames, Inc. ("Avia"), Avia’s co-founders, and two companies that invested in Avia. The operative first amended complaint asserted claims under California Business and Professions Code § 17200, the California Consumer Legal Remedies Act, and the federal Racketeer Influenced and Corrupt Organizations Act.

The plaintiffs alleged that Avia represented its cash games as contests in which players competed in real time against other human players of similar skill, using strategy and skill rather than chance. They alleged that Avia instead used bots, including historical recordings of earlier playthroughs, and could match players against bots with similar or higher skill ratings. They further alleged that Avia kept a player’s entry fee when a bot won because no cash prize had to be paid.

Avia’s December 2022 and July 2023 Terms of Service contained an arbitration agreement covering disputes relating to the Terms, Avia’s services, or the relationship between a player and Avia. The agreement also contained a delegation clause, meaning it assigned an arbitrator—not a court—the authority to decide issues about the arbitration provision’s enforceability, revocability, or validity. The agreement included a bellwether process for 25 or more similar or coordinated claims. Under that process, each side would select 10 cases to proceed first, while other cases would wait; the process would continue in groups of 20 until the claims were resolved.

In an earlier order, the court found that each plaintiff and Avia had entered into an arbitration agreement. The court also found some procedural unconscionability—unfairness in how the contract was presented or formed—and requested supplemental briefing on whether delegating arbitrability issues to an arbitrator was substantively unconscionable, meaning unfair in the substance or practical effect of the term. The court had previously denied the motion to compel arbitration but later amended that order after requesting additional briefing concerning a recent California Supreme Court decision.

Discussion

Delegation clause

The court held that the delegation clause was procedurally unconscionable to some degree because it was embedded in lengthy, small, light-gray text and was not separately numbered or titled. The court rejected Avia’s request to supplement the record with evidence that the Terms appeared more clearly in the mobile application. Avia had an earlier opportunity to provide that evidence, and the court stated that the clause would remain obscure and surprising even if the application used larger white-on-blue text.

The court then held that the delegation clause was substantively unconscionable when considered with the bellwether provision. Applying California law after the California Supreme Court’s decision in Ramirez v. Charter Communications, Inc., the court assessed the provision at the time the contract was formed. The court found that players could predictably have company-wide claims that would trigger the bellwether process. Because only 20 cases could proceed at a time, and generally only one case could be assigned to each arbitrator, the process would likely delay even the initial decision about whether a claim belonged in arbitration. The court concluded that this likely delay could discourage players from pursuing their rights.

The court also found that the bellwether provision broadly covered similar claims even when the plaintiffs’ lawyers were unrelated and not coordinating. It further found an unexplained imbalance because players were likely to bring claims triggering the provision, while it was unclear when Avia would bring 25 or more similar claims against a player. The court rejected Avia’s arguments that other arbitration rules would prevent delay, that a process arbitrator could resolve arbitrability issues, or that general requirements against undue delay would override the specific bellwether provision.

The court declined to sever the bellwether provision from the delegation clause. It reasoned that the provision’s potential to discourage players from pursuing their rights was not cured by removing it after the fact. The court therefore found the delegation clause unconscionable both procedurally and substantively and held that it was unenforceable.

Arbitration agreement

Because the delegation clause was unenforceable, the court—not an arbitrator—decided whether the broader arbitration agreement was unconscionable. The court found some procedural unconscionability because players were notified through pop-up boxes that they were agreeing to updated Terms, but were not specifically told that significant changes had been made to the arbitration provisions. The arbitration terms were also presented in small, light-gray text over roughly three pages without bolding or underlining to identify the newly added delegation and bellwether provisions.

The court found three provisions substantively unconscionable: the delegation clause, the bellwether provision, and the statute-of-limitations provision. The limitations provision required a player to begin arbitration within one year after the claim accrued or lose the claim permanently. The court compared that period with the longer statutory periods for the plaintiffs’ claims: four years for the § 17200 claim, three years for the Consumer Legal Remedies Act claim, and four years for the Racketeer Influenced and Corrupt Organizations Act claim. The court also noted that the shortened period appeared to apply to claims players had against Avia, rather than clearly applying equally to Avia’s claims.

The court rejected the plaintiffs’ arguments that the jury-waiver and public-injunctive-relief provisions were also substantively unconscionable. It read the jury waiver as reflecting the player’s agreement to arbitrate, not as waiving a jury trial for disputes that could not legally be arbitrated. It also found that the current Terms allowed public injunctive relief and that the plaintiffs’ challenge relied on older Terms that were not at issue.

Severance and disposition

The court declined to sever the unconscionable provisions from the arbitration agreement. It concluded that the bellwether and one-year limitations provisions were not merely incidental; together with the delegation clause, they were designed to make arbitration an inferior forum and could discourage players from pursuing their rights. The court stated that the agreement to arbitrate was unconscionable and therefore unenforceable.

Outcome

The court denied the Avia Defendants’ motion to compel arbitration. The order disposed of Docket No. 73. The court also rescheduled the hearing on three motions to dismiss filed by the Avia Defendants, ACME, and Galaxy for November 6, 2024, at 3:00 p.m.; the opinion did not decide those motions.