The proposed class action lawsuit against sweepstakes sports predictions site Fliff won’t happen, as a California federal judge ruled it must proceed to arbitration per the operator’s terms and conditions. It’s an important decision and one that might signal that the flurry of litigation against social gaming sites is coming to an end.
The plaintiff in the Fliff case was Bishoy Nessim. He argued that Fliff’s product amounted to illegal sports betting under California law.
Several other suits have made similar illegal gambling allegations against various social casino operators like Video Gaming Worlds and DoubleDown Interactive. Historically, those have tended to end in settlement, with the operators denying wrongdoing. Thus, the underlying legal question remains unanswered: can it still be “gambling” when the chips have no cash value?
As a result of those suits, however, it has become popular among social gaming sites to include compelled arbitration clauses in their terms. By agreeing to such terms, users forfeit their right to file litigation—including class actions—against the operator. Instead, they must seek compensation in any dispute individually through binding arbitration.
So, before the United States District Court for the Central District of California could rule on the merits of Nessim’s case, it had to decide whether to enforce that clause and send the case to arbitration.
Nessim’s legal team filed suit in California because of an important precedent known as the McGill Rule, which formed a crucial part of Nessim’s arguments.
However, the court found that McGill did not apply. That sets another precedent and makes it unlikely that other social gaming plaintiffs will try the same tack. Instead, we’re starting to see a second wave of suits, not against the operators but against the tech companies that help market and process payments for them.
No Agreement to ‘Arbitrate Arbitrability’
Nessim’s team did win on one point despite losing the larger battle.
Fliff’s lawyers had argued that the court couldn’t even rule on the question of whether the case should proceed to arbitration. Its terms and conditions state that the rules of the American Arbitration Association (AAA) would govern all disputes. According to Fliff, even the question of whether arbitration was necessary was one for an arbitrator to decide, not a court.
On this point, Judge Sunshine Sykes disagreed. Her ruling states that the question of “agreement to arbitrate arbitrability” is a complicated one. However, after reviewing various related cases, she found that the mere mention of the AAA Rules wasn’t sufficient to constitute such an agreement “when at least one of the contracting parties is unsophisticated.”
While that sounds like a slight at Nessim, what it means is that, as a layperson, he could not be expected to understand all the contents of the AAA Rules without any additional explanation. The level of commitment to arbitration that Fliff inferred would have to be explicitly spelled out to be binding for a legally “unsophisticated” party like the average Fliff customer.
The McGill Rule Doesn’t Apply to Social Gaming Sites
Unfortunately for Nessim, Judge Sykes, having defended her authority to make the decision, nonetheless decided in Fliff’s favor.
Nessim’s lawyers provided two possible reasons the arbitration clause might not be valid. The first was the McGill Rule, while the second was that the contract was unconscionable.
Judge Sykes largely agreed with the counterpoints Fliff had made to each of these in its response.
In a nutshell, the McGill Rule is that in California, no one can waive their right to seek public injunctive relief. More plainly, you can’t sign a contract that would prevent you from asking a court to put a stop to something that’s harming the general public. This resulted from a lawsuit trying to force Citibank to cease its deceptive marketing of “credit protection” services.
However, the Ninth Circuit later clarified that this only applies when a suit attempts to protect the general public in the broadest possible sense. Nessim was filing suit on behalf of himself and other Fliff customers. Still, Judge Sykes ruled that Fliff customers constitute a “particular class of persons” and are not synonymous with the public as a whole.
The same logic would presumably apply to any other suits targeting social sites on behalf of their customers. To invoke the McGill Rule, a suit would have to allege harm to the general public, such as through a marketing campaign.
‘A Minor Amount of Unconscionability’
In plain English, “unconscionability” just means a lack of fairness. As a legal concept, however, there are types and degrees of unconscionability.
On the more technical side, Judge Sykes admitted she saw “a minor amount of procedural unconscionability.”
In other words, Fliff’s approach was unfair, but only a little bit.
Specifically, procedural unconscionability refers to coercing others into signing a bad contract. The point on which Judge Sykes agreed with Nessim is that he had no opportunity to negotiate a different contract or opt out of specific provisions. It was a “take it or leave it” deal.
But legally speaking, that only becomes a problem if the party signing the contract can’t simply take their business elsewhere or do without the thing being offered. No one needs to bet on sports.
Moreover, Nessim’s accusation that Fliff’s product is illegal ironically helped the company on this front. Judge Sykes pointed out that there are no legal alternatives to Fliff in California, but if Nessim believes Fliff to be illegal, then offshore sportsbooks provided ample, equally illegal alternatives for him to choose from.
That left “substantive unconscionability,” or whether the contract itself was so awful as to “shock the conscience.”
Here, too, Judge Sykes disagreed with Nessim’s team. She pointed out that the example they raised had to do with using an arbitration clause to circumvent the Fair Employment and Housing Act, not just the inclusion of such a clause in any old contract. She found that compelled arbitration, on its own, wasn’t inherently shocking to the conscience.
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