Most websites, including entertainment and game sites, include a “terms and conditions” page that asks users to agree to a long list of obligations that few consumers even glance at, much less study in detail.Often one of those obligations is to resolve any disputes via arbitration rather than litigation.

California encourages the use of arbitration, because it offers the potential to resolve disputes more quickly, less expensively, and more privately than traditional litigation.

However, because the parties to an arbitration give up some of the protections litigants enjoy when they appear before a judge, the state requires that arbitrations be conducted in a manner that is fair to all parties.

If that requirement is violated, a court may nix an arbitration, as one online game company was recently reminded by the California Court of Appeal (Gostev v Skillz Platform.)

Skillz, based in San Francisco, offers mobile apps that host games in which players can pay to compete for cash prizes. Users must register by providing their email address and date of birth, and must check a box that indicates they agree to the site’s terms of service.

Pavel Gostev, who lives in the state of Washington, opened a Skillz account in July of 2019. By checking the box he agreed to the Skillz 15-page, 15-section “Terms of Service” document.

The first section declared, in capital letters, that “ANY CLAIM, DISPUTE OR CONTROVERSY OF WHATEVER NATURE … MUST BE RESOLVED BY FINAL AND BINDING ARBITRATION” as detailed in Section 14 of the document.

That section stated that “any dispute, action or other controversy” (other than about the site’s intellectual property rights) could be handled in small claims court, if it qualified for that venue, or through “informal negotiation” followed by arbitration commenced by either party.

(Despite this seemingly all-inclusive language, a different section of the document said Skillz, in its “sole discretion,” could institute “civil and/or criminal proceedings” against users who the company believed used “unfair methods” in playing its games.)

Any arbitration, Skillz stated, had to be initiated within one year or be “permanently barred.” It had to be conducted in San Francisco. Each party would bear its own attorneys’ fees and other expenses. The costs of arbitration would be split between the parties. The arbitrator was free to award attorney fees to the prevailing party, but could not award “non-economic damages,” such as for emotional distress or punitive damages.

In February of 2021, Gostev sued Skillz in San Francisco, alleging its games amounted to gambling that was illegal under California and federal law, and that the company engaged in “predatory and unlawful practices” to take advantage of their customers.

His complaint argued that the arbitration clause in the Terms of Service was unenforceable based on legal precedents, and because, he claimed, its terms were “unconscionable.”

Skillz asked the San Francisco Superior Court to compel arbitration of Gostev’s claims, including arbitration of his challenge to the enforceability of the arbitration provision.

The trial court ruled against Skillz, saying its arbitration agreement was “procedurally and substantively unconscionable.”

In fact, the judge observed, “I’ve got to say that we’ve looked at a lot of these arbitration cases and ... this is the longest list of unconscionable features that I think I’ve ever seen.”

The court listed a number of unfair provisions it said were unfair: the agreement limited a plaintiff’s damages; required that arbitrations be conducted in San Francisco regardless of a plaintiff’s location; gave a plaintiff only one year to bring a claim; required the parties to split the fees and costs of arbitration (which testimony said could easily top $30,000); and allowed Skillz – but not a plaintiff – to seek relief without having to post a bond or security.

The document was so permeated with unconscionability, the trial judge said, that it could not be remedied by severing, or discarding, the unfair clauses.

Skillz appealed, but again came up on the losing side.

The legal doctrine against unconscionability, the appellate justices noted, requires that contracts not impose terms that are overly harsh, unduly oppressive, so one-sided as to shock the conscience, or unfairly one-sided.

The unconscionability doctrine, they said, is concerned not with ‘a simple old-fashioned bad bargain,’ but with terms that are ‘unreasonably favorable to the more powerful party’ to an agreement.

Courts evaluate unconscionability on both procedural and substantive grounds – how the contract is negotiated, and its terms, the appellate justices noted.

A “contract of adhesion,” in which (as in the Skillz document) a consumer is confronted with a take-it-or-leave-it agreement that cannot be negotiated, is likely to contain some degree of procedural unconscionability.

The terms of the Skillz arbitration agreement also suggest substantive unconscionability, the justices said. Most consumers would be surprised to learn that just the filing fee to arbitrate a nonmonetary claim would be $6,250, with the arbitrator’s fees, attorney’s fees and other costs potentially adding tens of thousands more.

In light of this, along with the one-year deadline to file claims, the requirement for arbitration in San Francisco (where Skillz is based) and other rules that favored the company over a plaintiff, the justices said, “we have no difficult concluding” that the arbitration clause “is substantively unconscionable.” They upheld the trial court’s decision to deny arbitration.

By Laurie Murphy