Spotify Challenges Ruling Over 'Unconscionable' Way It Forces Users Into Arbitration

Daniel Ek, Spotify Co-Founder/CEO
Toru Yamanaka/AFP/Getty Images

Daniel Ek, Spotify Co-Founder/CEO

The streaming company is facing a proposed class action over claims it automatically renews subscriptions without proper notice and consent.

Streaming giant Spotify has filed a notice of appeal to the 9th Circuit concerning a federal judge's recent decision not to force two of its users into arbitration.

Gregory Ingalls and Tony Hong are looking to lead a class action lawsuit over a common feature in entertainment subscription services. They signed up for Spotify's premium service upon a three-month discount offer and claim that Spotify failed to adequately inform them that it would automatically renew their subscriptions at the full price once their trial period had ended. After a lawsuit was filed contending that their affirmative consent was needed under California law, Spotify moved to compel arbitration pursuant to a Terms and Conditions agreement.

The trend in courtrooms throughout America is to make consumers litigate disputes in arbitration even if they spend no time considering the implications of checking "yes" on so-called "clickwrap." Critics argue that corporations have the upper hand in secretive arbitration because they can steer disputes to favorable arbitrators and be prevented from filing claims as a class.

On November 14, however, U.S. District Judge William Alsup found three features of Spotify's arbitration provisions to be "substantively unconscionable."

The first involved the way Spotify reserved the right to make changes to the arbitration provision unless the user timely rejected an amendment.

There's been a variety of prior cases in the 9th Circuit that have dealt with unilateral modification of terms including a 2003 decision, Ingle, that held that a “unilateral modification provision itself may be unconscionable," and one from this past August, Tompkins, that held that so long as the unilateral modification is separate from the arbitration provision, it could not invalidate the latter.

Judge Alsup ruled that because Spotify had established a "burdensome procedure for rejecting modifications," involving written notice sent by mail, this was closer to Ingle than Tompkins.

The second reason why the arbitration provision was found to be unconscionable may be surprising, judging by the fact that disputes in arbitration frequently are as quiet as a pin drop.

Spotify attempted to prohibit both sides from making "any public pronouncement or public comment or originate any publicity concerning the arbitration," but Alsup writes this can't be.

"Our court of appeals has recognized that even facially-neutral confidentiality provisions can favor a company over an individual, because the various attorneys representing individual plaintiffs cannot learn from the full body of arbitration, while the limited set of attorneys representing the company can," states the decision, which also rejects Spotify's argument that it should be left up to the arbitrator to decide whether the confidentiality clause is enforceable.

Finally, Alsup also decided that Spotify's attempt to impose a one-year limitations period on claims wasn't proper because it was "part and parcel of the arbitration provision." In Tompkins, the 9th Circuit upheld a contract that reduced the limitations period across venues (even disputes not arbitrated), and oddly enough, a less ambitious provision by Spotify is found to be unconscionable as well.

Here's the full decision from Alsup who concluded by deeming Spotify's arbitration provision to be so rife with unconscionable elements to not be severable. Meaning, that whatever worth the arbitration provision had, it was negated by the bad parts.

In a motion filed on Tuesday, Spotify's attorneys at Davis Wright Tremaine are asking for a pause on proceedings to allow the appeals court to tackle "whether the arbitration agreement was permeated with unconscionability such that it could not be cured by severance."

This article was first published by The Hollywood Reporter.