Rios v. HRB Digital LLC

Background

Pedro Rios, Jr. and Christian Marquez brought a proposed nationwide class action against HRB Digital LLC and HRB Tax Group, Inc. They allege that HRB used tracking pixels and analytics code on its online tax-preparation platform to intercept and disclose confidential taxpayer information to Meta Platforms, Inc. and Google LLC. The alleged information included names, identifiers, health savings account contributions, scholarships, tuition expenses, dependent information, income categories, and tax credits. The complaint asserts claims under the Electronic Communications Privacy Act, California’s Invasion of Privacy Act, California’s Unfair Competition Law, and the California Consumer Legal Remedies Act.

HRB requires users of its online platform to accept an Online Services Agreement (OSA). Both plaintiffs accepted the OSA in January 2024. The OSA contains an arbitration provision requiring disputes to be resolved through individual arbitration, while allowing users to opt out within 30 days. It also waives jury trials and participation in class actions or class arbitration, subject to a small-claims-court option.

The Arbitration Procedures

The OSA requires a consumer to send a written Notice of Dispute and participate in an informal resolution process for at least 60 days before beginning arbitration. It also contains a staged bellwether process for situations involving 25 or more people with similar claims who are represented by the same or coordinated counsel.

Under that process, the parties select 20 initial test cases. No other arbitrations may be filed while those cases proceed, and later groups cannot begin until earlier groups are completed. The agreement encourages arbitrators to resolve cases within 120 days but does not impose an enforceable deadline or provide a remedy for delays caused by other arbitrations, arbitrators, or HRB. The agreement also contains tolling provisions for statutes of limitations, but one provision makes tolling depend on a “fully complete Notice,” a phrase the court found was not objectively defined.

Before the lawsuit was filed, plaintiffs’ counsel sent HRB individually signed Notices of Dispute and tax-information consent forms for 2,481 claimants. HRB initially said the notices were improper and ineffective, asserting that each claimant had to mail a separate notice. The court noted that the OSA did not expressly require that procedure. HRB later agreed to accept the notices while reserving its rights.

Parties’ Arguments

HRB moved under the Federal Arbitration Act to compel arbitration and stay the court case. HRB argued that the plaintiffs had agreed to the OSA and therefore had to arbitrate. The plaintiffs did not dispute that they assented to the OSA. Instead, they argued that the arbitration provision was procedurally and substantively unconscionable—that is, formed or presented in an unfair way and containing unfairly one-sided terms. They also argued that the Federal Arbitration Act did not apply to the OSA’s mass-arbitration protocol and that the class-action waiver was unenforceable under California law.

Because the OSA contained no provision delegating questions about arbitrability to an arbitrator, the court—not an arbitrator—decided the plaintiffs’ unconscionability challenges.

Procedural Unconscionability

The court found a modest degree of procedural unconscionability. It characterized the OSA as a standard-form contract drafted by HRB and presented as a non-negotiable condition of using the online platform. The court also considered the 21-page, single-spaced agreement, the placement of the arbitration provision beginning on page 15, the setting during tax season, and the complexity of the bellwether procedures.

The court concluded that ordinary consumers would not reasonably expect their ability to pursue claims to depend on the number of other claimants or the identity of their attorneys. It also found that the 30-day opt-out provision did not automatically eliminate procedural unconscionability. The court treated the opt-out as one factor rather than as an outcome-determinative protection, in part because the agreement required users to submit a new opt-out request each year to avoid later versions of the arbitration agreement.

Substantive Unconscionability

The court found a significant degree of substantive unconscionability, focusing on the actual effects of the agreement’s terms. First, it concluded that the staged bellwether process was likely to cause unreasonable and potentially years-long delays. Because claims could not proceed until earlier rounds were completed, the slowest case in one round could delay all later cases. The process also could pressure claimants to find different counsel to avoid being included in the mass-arbitration protocol.

The court rejected HRB’s comparison to bellwether proceedings in multidistrict litigation. In the court’s view, multidistrict cases are filed and managed by a court, while HRB’s procedure prevents claims from being filed in arbitration until earlier groups are completed. The court found that the OSA’s limits appeared to be a design choice by HRB rather than a limitation imposed by the arbitration forum.

Second, the court found significant problems with the statute-of-limitations tolling provisions. HRB had reserved the right to challenge whether the notices were complete, and the OSA did not define “fully complete Notice” using objective criteria. The court concluded that claimants faced uncertainty about whether their claims would remain timely during potentially lengthy delays. It also found the tolling arrangement asymmetrical because HRB could challenge tolling, while the agreement gave claimants no comparable mechanism to address delays in the bellwether process.

Severability and Disposition

The OSA included a severability clause, which could allow a court to remove an unfair term and enforce the remainder of an agreement. The court declined to sever the challenged provisions. It ruled that the bellwether and tolling terms were not merely collateral but instead were designed in a way that structurally made arbitration an inferior forum. The court concluded that unconscionability permeated the entire arbitration agreement and refused to enforce the arbitration clause as a whole.

Because the arbitration agreement was unconscionable and unenforceable, the court did not reach the plaintiffs’ arguments concerning Federal Arbitration Act preemption or the applicability of Discover Bank v. Superior Court. The court denied HRB’s motion to compel arbitration and stated that the order disposed of Docket No. 18. It did not decide the merits of the plaintiffs’ alleged privacy violations.