Pandolfi v. Aviagames, Inc.

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ANDREW PANDOLFI, et al., Plaintiffs, v. AVIAGAMES, INC., et al., Defendants.

No. 23-cv-05971-EMC

United States District Court, N.D. California

July 26, 2024

ORDER DENYING AVIA DEFENDANTS' MOTION TO COMPEL ARBITRATION

DOCKET NO. 73

EDWARD M. CHEN, UNITED STATES DISTRICT JUDGE.

Plaintiffs Andrew Pandolfi and Mandi Shawcroft have filed suit against AviaGames, Inc. (“Avia”) and its co-founders (collectively, the “Avia Defendants”), as well as two companies that invested in Avia. The Avia Defendants have moved to compel arbitration pursuant to the Federal Arbitration Act. Previously, the Court addressed some of the issues raised in the motion to compel but deferred a final ruling so that the parties could provide supplemental briefing. Having considered that supplemental briefing, as well as all other briefing and documents related to the motion to compel, the Court hereby DENIES the Avia Defendants' motion.

I. FACTUAL & PROCEDURAL BACKGROUND

A. First Amended Complaint

In the operative first amended complaint (“FAC”), Plaintiffs allege as follows.

Avia is a gaming company that launched in 2017. See FAC ¶ 30. Ms. Chen and Ms. Wang are Avia's co-founders. They are also currently employees: Ms. Chen is the CEO, and Ms. Wang a VP of Strategy & Business Development. See FAC ¶¶ 14-15.

Avia's games - which include Bingo Clash, Solitaire, Pool Clash, Match n Flip, 21 Gold, and Tile Blitz - can be accessed through mobile browsers or through downloaded standalone applications. See FAC ¶¶ 30-31. The games can be played for cash. See FAC ¶¶ 35, 43, 67.

Avia claims that it does not have any financial interest in the outcome of cash games or any stake in who wins or loses. See FAC ¶¶ 37, 69.

Avia represents to players and prospective players that its games give players the ability to compete against other players (i.e., human opponents and not bots) - in particular, other players of equal skill levels. See FAC ¶¶ 34, 42. Avia also represents that “players ‘[c]ompete in real time against other players' and that they ‘[c]ompete using only [their] strategy and skill.'” FAC ¶ 35. In other words, Avia's games are ones of skill and not ones of chance. See FAC ¶¶ 39, 66 (alleging that games of chance mean that a player's skill does not impact the game's outcome). Such representations and/or similar representations “are visible to each user who downloads Avia's games” and/or on Avia's website (e.g., in the FAQ section). FAC ¶¶ 34-38, 48. See, e.g., FAC ¶ 44 (“Players downloading the games see [such] statements as game descriptions when they access the relevant app store, such as the Apple's AppStore or Samsung's Galaxy Store”).

Avia's representations are allegedly false:

• Players do not compete against live human opponents but rather against bots -specifically, historical playthroughs which can include a video recording of a match played previously by another player. See FAC ¶ 53. “Using bots helps Avia maintain player liquidity. Avia needs players for the real players to play against. If there are not enough real players and the players need to wait to get the results of their match, they are less likely to keep playing.” FAC ¶ 63.

• Avia can manipulate matches by matching a player against a bot of a similar skill level or a bot that has a higher skill rating or score. See FAC ¶¶ 54, 71.

• Avia does have a financial interest in its games because, if a historical playthrough wins a match, Avia does not pay a cash prize to anyone and keeps the entry fee paid by the live player. See FAC ¶ 53.

Based on, inter alia, the above allegations, Plaintiffs assert the following claims: (1) violation of California Business & Professions Code § 17200; (2) violation of the California Consumer Legal Remedies Act (“CLRA”); and (3) violation of the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”).

B. Terms of Service

Avia requires individuals to agree to its Terms of Service (“Terms”) as a condition of playing an Avia game. See Qu Decl. ¶ 6. Avia periodically updates its Terms. See Qu Decl. ¶¶ 6, 8. The relevant Terms for purposes of the case at bar are the December 2022 Terms and the July 2023 Terms. Both the 2022 and 2023 versions contain an arbitration agreement. Under that agreement, “[a]ll disputes, claims or controversies arising out of or relating to these Terms, any Services, or the relationship between you and Aviagames . . . includ[ing] claims that accrued before you entered into this Agreement” shall be resolved by binding arbitration. Qu Decl., Ex. 1 (Terms § 15(a)). The arbitration agreement also contains a delegation clause - i.e., a clause that specifies that an arbitrator (and not a court) decides certain gateway issues related to arbitrability. Specifically, the delegation clause provides that all “disputes arising out of or relating to interpretation or application of this arbitration provision, including the enforceability, revocability, or validity of the arbitration provision or any portion of the arbitration provision” are to be decided by an arbitrator. Qu Decl., Ex. 1 (Terms § 15(c)). The Avia Defendants moved to compel arbitration based on the arbitration agreement in the December 2022 and July 2023 Terms.

C. Prior Order

On May 21, 2024, the Court issued an order addressing some of the issues raised in the Avia Defendants' motion. Specifically, the Court held that each Plaintiff and Avia had entered into an agreement to arbitrate. See Docket No. 113 (Order at 5-7). Although Plaintiffs challenged the arbitration agreement on the basis that it was unconscionable, the arbitration agreement clearly and unmistakably delegated that gateway issue of arbitrability to the arbitrator in the first instance. The only way for the Court to decide the issue of unconscionability would be if the delegation clause itself were unconscionable, in which case it could not be enforced. See Docket No. 113 (Order at 7-9).

The Court found that there was some procedural unconscionability with respect to the delegation clause. See Docket No. 113 (Order at 12). As for substantive unconscionability, the issue was whether it would be unconscionable for an arbitrator to decide arbitrability issues. According to Plaintiffs, it would be unconscionable to delegate arbitrability to the arbitrator because of the arbitration agreement contained a bellwether provision. See Docket No. 113 (Order at 13-14); see also Holley-Gallegly v. TA Operating, LLC, 74 F.4th 997, 1002 (9th Cir. 2023) (explaining that a provision outside of a delegation clause may be considered in deciding whether a delegation clause is substantively unconscionable); Bielski v. Coinbase, Inc., 87 F.4th 1003, 1012 (9th Cir. 2023) (noting that a delegation clause “itself may not provide enough information for the court to evaluate the challenge”). The bellwether provision states in relevant part as follows:

The AAA Supplementary Rules for Multiple Case Filings and the AAA Multiple Consumer Case Filing Fee Schedule will apply if twenty-five (25) or more similar claims are asserted against Aviagames or against you by the same or coordinated counsel or are otherwise coordinated. In addition to the application of the AAA Supplementary Rules for Multiple Case Filings and the AAA Multiple Consumer Case Filing Fee Schedule, you and Aviagames understand and agree that when twenty-five (25) or more similar claims are asserted against Aviagames or you by the same or coordinated counsel or are otherwise coordinated resolution of your or Aviagames' Claim might be delayed. For such coordinated actions, you and Avia games also agree to the following coordinated bellwether process. Counsel for claimants and counsel for Aviagames shall each select ten (10) cases (per side) to proceed first in individual arbitration proceedings. The remaining cases shall be deemed filed for purposes of the statute of limtiations but not for the purpose of assessing AAA fees. No AAA fees shall be assessed in connection with those cases until they are selected to proceed to individual arbitration proceedings as part of bellwether process. If the parties are unable to resolve the remaining cases after the conclusion of the initial twenty (20) proceedings, each side shall select another ten (10) cases (per side) to proceed to individual arbitration proceedings as part of a second bellwether process. A single arbitrator shall preside over each case. Only one case may be assigned to each arbitrator as part of a bellwether process unless the parties agree otherwise. The bellwether process shall continue, consistent with the parameters identified above, until all the claims included in these coordinated filings, including your case, are adjudicated or otherwise resolved....

Qu Decl., Ex. 1 (Terms § 15(c)(6)).

Plaintiffs argued that the bellwether provision makes delegation of arbitrability to the arbitrator unconscionable because “adjudication by an arbitrator of the issue of arbitrability can be unduly delayed as a result of the bellwether provision.” Docket No. 113 (Order at 14). Plaintiffs also asserted that there could be a “chilling effect on players' willingness to pursue their rights (including statutory rights) . . . if adjudication of arbitrability alone can be delayed.” Docket No. 113 (Order at 14).

The Court asked for supplemental briefing on the substantive unconscionability of the delegation clause when taken together with the bellwether provision. See Docket No. 113 (Order at 17) (acknowledging that this was a second request for supplemental briefing). The Court then held a hearing after the supplemental briefing was filed. The Court now issues its order on the motion to compel arbitration.

II. DISCUSSION

A. Unconscionability of Delegation Clause

Plaintiffs bear the burden of proving...