J.A. v. Microsoft Corp.

J.A., through his guardian, TARA ALLEN, et al.,individually and on behalf of all others similarly situated, Plaintiffs, v. MICROSOFT CORPORATION, Defendant.

CASE NO. C20-0640-RSM-MAT

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE

April 2, 2021

REPORT AND RECOMMENDATION

INTRODUCTION

Defendant Microsoft Corporation (Microsoft) filed a Motion to Compel Arbitration and Stay Claims. (Dkt. 36.) Plaintiffs oppose the motion. (Dkt. 39.) The Court, having considered the briefing and relevant record, herein recommends the Court GRANT the motion and STAY these proceedings pending the outcome of arbitration.

BACKGROUND

Plaintiffs brought this lawsuit against Microsoft on behalf of themselves and all other similarly situated consumers who purchased wireless, Microsoft-branded Xbox One controllers, including standard controllers accompanying an Xbox One console and separately sold Elite Controllers Series 1 and Series 2. (Dkt. 32, ¶1.) Plaintiffs maintain a defect causes the controllers to register "phantom input or stick drift" and thwart accurate gameplay, i.e., properly registering user input on a controller, which is the central purpose of video game controllers.

Plaintiffs reside in a number of different states and include Donald McFadden (New York), Brandon Petti (California), and Samuel Whisnant (North Carolina), and five minors proceeding through their guardians: J.A. (Illinois); C.C. (Maryland); A.D. (California); A.H. (North Carolina); and J.H. (North Carolina). (Id., ¶¶10-72.) Plaintiffs purchased their controllers between 2015 and 2019 and allege the drift defect interfered with and prevented their accurate gameplay. They bring claims for breach of express warranty, breach of implied warranty of merchantability, unjust enrichment, and violations of state consumer protection laws, and seek both a public injunction and monetary relief. The minor plaintiffs disaffirm their "End User Licensing Agreement" with Microsoft and aver they ceased use of the defective controllers. (Id., ¶¶19 (J.A.), 52 (C.C.), 26 (A.D), 33 (A.H.), and 40 (J.H.))

Microsoft posits that plaintiffs, like all users of its Xbox gaming system, agreed to individually arbitrate disputes with Microsoft as a condition of their use of Xbox services and purchase and use of Xbox controllers. They contend each plaintiff agreed to arbitration: (1) under the Microsoft Services Agreement (MSA) governing the relationship between Microsoft and users of Xbox Live, an online interactive video game and entertainment service offered for use with xBox consoles; and (2) pursuant to the arbitration agreement contained in product guides for the xBox controllers purchased. (Dkt. 36.) Noting the arbitration provisions in both agreements adopt American Arbitration Association (AAA) rules, Microsoft asserts the parties delegated any arbitrability issues to an arbitrator, including the issue of whether the minor plaintiffs disaffirmed their contracts. Microsoft asks that the Court order plaintiffs to submit their claims to bindingarbitration on an individual basis and stay this action pending that arbitration.

Plaintiffs deny an agreement to arbitrate exists. They also contend the arbitration agreements and delegation provisions are unconscionable, and that the agreements are invalid as to California claims in prohibiting public injunctive relief and not enforceable against disaffirming minors. They ask the Court to reject the motion to compel and, should the court compel arbitration over certain claims, that litigation as to any remaining claims be allowed to proceed.

DISCUSSION

A. Legal Standard

Under the Federal Arbitration Act (FAA), written agreements to arbitrate disputes arising out of transactions involving commerce "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. A party aggrieved by the failure or refusal to arbitrate under a written agreement for arbitration may petition the district court for an order directing arbitration to proceed as provided for in the agreement. 9 U.S.C. § 4. A court may not, however, compel arbitration before resolving whether a valid arbitration agreement exists. Lifescan, Inc. v. Premier Diabetic Servs., 363 F.3d 1010, 1012 (9th Cir. 2004). See also AT&T Techs. v. Communs. Workers of Am., 475 U.S. 643, 648 (1986) ("'arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.'") (quoted source omitted).

The Court, as a general matter, determines two issues with a motion to compel arbitration: "(1) whether a valid agreement to arbitrate exists and, if it does (2) whether the agreement encompasses the dispute at issue." Chiron Corp. v. Ortho Diagnostic Systems, Inc., 207 F.3d 1126, 1130 (9th Cir. 2000); accord Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015). The party seeking to compel arbitration "bears 'the burden of proving the existence of an agreement toarbitrate by a preponderance of the evidence.'" Norcia v. Samsung Telecomm. Am., 845 F.3d 1279, 1283 (9th Cir. 2017). This burden is substantial and the Court must give the party denying the existence of an agreement to arbitrate "'the benefit of all reasonable doubts and inferences that may arise.'" Three Valleys Mun. Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136, 1141 (9th Cir. 1991) (quoted source omitted). In this inquiry, the Court applies ordinary state-law principles governing the formation of contracts. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995); Norcia, 845 F.3d at 1283.

Upon finding an agreement to arbitrate, the FAA "'leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration[.]'" Chiron Corp., 207 F.3d at 1130 (quoting Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 218 (1985)). "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 626 (1985).

Parties to a contract may also "agree to have an arbitrator decide, not only the merits of a particular dispute but also 'gateway' questions of 'arbitrability,' such as whether the parties have agreed to arbitrate or whether their agreement covers a particular controversy." Henry Schein, Inc. v. Archer & White Sales, Inc., ___ U.S. ___, 139 S. Ct. 524, 529-30, 202 L.Ed.2d 480 (2019) (quoting Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 68-69 (2010)). Where parties include such a gateway or "delegation" clause, it is "simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other." Rent-A-Ctr., W., Inc., 561 U.S. at 70. If a valid agreement exists and delegates arbitrability issues to an arbitrator by "'clear and unmistakable'" evidence, "acourt may not decide the arbitrability issue." Henry Schein, Inc., 139 S. Ct. at 529-30 (quoted and cited sources omitted). This is true "even if the court thinks that the argument that the arbitration agreement applies to a particular dispute is wholly groundless." Id. Under Ninth Circuit law, "incorporation of the AAA rules constitutes clear and unmistakable evidence that contracting parties agreed to arbitrate arbitrability." Brennan, 796 F.3d at 1130.

B. Existence of Agreements to Arbitrate

Microsoft maintains plaintiffs entered into binding arbitration agreements through two separate avenues. The Court addresses the two types of agreements below.¹

1. Clickwrap agreement:

In creating an Xbox live account, plaintiffs were required to accept, prior to August 2015, the Xbox Live Terms of Use (TOU) and, after August 2015, the MSA by clicking a button, either through the Xbox One console or a personal computer. (Dkt. 37 (Decl. of Andreas Holbrook), ¶¶2-7.) They were required to accept updates in order to continue to use Xbox Live. (Id., ¶¶3(c), 6, Exs. C-E.) Both the TOU (as of December 2011) and the MSA include a binding arbitration clause and class action waiver. (Id., ¶¶4-5, Exs. A & B.) Since 2019, users click "Next" and are informed doing so means the user agrees to the MSA, while earlier versions required users to click"I Accept". (Id., ¶7, Exs. K, L.) The acceptance screen on the console provides a button linking to the full terms of the MSA, while the browser provides the same through the agreement's name in blue hyperlink text. (See id.)

Notice of the arbitration clause and class action waiver appears in capitalized and sometimes bold text on the first page of the MSA and directs the user to the section containing the full text of the agreement. (Id., ¶5, Exs. A-F.) For example, the MSAs begin: "IF YOU LIVE IN . . . THE UNITED STATES, PLEAD READ THE BINDING ARBITRATION CLAUSE AND CLASS ACTION WAIVER IN SECTION 15. IT AFFECTS HOW DISPUTES ARE RESOLVED." (See, e.g., Dkt. 37, Ex. C.) As reflected in the most recently updated MSA, effective October 1, 2020, Section 15 states:

Binding Arbitration and Class Action Waiver If You Live In (or, If a Business, Your Principal Place of Business Is In) the United States. We hope we never have a dispute, but if we do, you and we agree to try for 60 days to resolve it informally. If we can't, you and we agree to binding individual arbitration before the American Arbitration Association ("AAA") under the Federal Arbitration Act ("FAA"), and not to sue in court in front of a judge or jury. Instead, a neutral arbitrator will decide and the arbitrator's decision will be final except for a limited right of review under the FAA. Class action lawsuits, class-wide arbitrations, private attorney-general actions, and any other

...