“There’s a Systemic Problem”

Arbitration courts were legally enshrined over a century ago under the Federal Arbitration Act, mainly as a way to more efficiently resolve small contract disputes between businesses without gumming up the court system.

But today, corporations have found ways to massively expand these courts’ reach across consumer and labor law, shielding themselves from liability for defective products, fraud, workplace injuries, and antitrust violations. The court proceedings are mostly secret with few transparency standards.

In 2019, a study from the University of California, Davis, found that eight-one of the top hundred largest companies forced consumers to sign arbitration agreements by slipping these clauses into the fine print of their terms-of-use agreements without fully informing consumers.

According to recent legal actions against the industry, arbitration courts have been found to rule in favor of companies over consumers upward of 95 percent of the time and are rife with inherent conflicts of interest.

“There’s a systemic problem in that the arbitrators are rewarded for ruling against the plaintiffs,” said Christine Hines, senior policy director at Consumer Advocates.

That’s because companies pay arbitration services to firms stacked with privately hired judges who are incentivized to make corporate-friendly rulings or risk losing their clients’ business.

One of the most common arbitration clauses that has come under scrutiny is the use of “class action waivers.” These clauses deny a group of consumers with identical complaints their right to jointly sue for joint damages in one giant case in a regular court.

People have levied class action lawsuits against Ticketmaster for practices like charging exorbitantly high fees on ticketing, failing to provide adequate protections against fraud, and exposing buyers to scams on resale markets.

But under class action waivers, each case is heard separately in a practice known as mass arbitration, even though the evidence and proceedings are often exactly the same. Consumer advocates say this is designed to dissuade consumers from filing lawsuits in the first place, since the relief they might win in arbitration is small compared to their legal costs. Very few law firms will even represent plaintiffs in those arbitration cases.

“Under mass arbitration, plaintiffs have to sign up every single person on a separate retainer agreement . . . so the only way it can work is if they start winning case after case individually, otherwise it’s an economic catastrophe,” said Paul Bland, an arbitration expert and attorney at the plaintiff law firm Berger Montague, which represents class action lawsuits.

While these waivers are widely decried by consumer advocates, they have been effectively deemed untouchable by a landmark 2011 Supreme Court decision, AT&T Mobility LLC v. Concepcion, which found federal arbitration law preempted a California state restriction on such clauses.

A Two-Tiered System

Ticketmaster, however, tried to push the limits of the Supreme Court decision by pioneering a new mass arbitration system that further tilted the playing field in its favor. The details of this arbitration process were exposed by the recent court case, Heckman v. Live Nation, which Ticketmaster lost in both the district court and appeals and currently sits before the Supreme Court.

“The Live Nation clause sets up this super-convoluted [two-tiered system] where they basically get class actions for things that Live Nation wants and individual cases for the things human beings want,” said Bland.

Ticketmaster’s arbitration system emerged from a separate legal dispute in 2020, Oberstein v. Live Nation, which challenged an earlier Ticketmaster arbitration clause. That class action antitrust complaint accused Live Nation-Ticketmaster of exploiting its monopoly power to charge high ticketing fees and sought to void the arbitration clause because of a 2005 California rule prohibiting class action waivers.

Ticketmaster ultimately won that case, but while the case was being decided, the company switched to a different arbitration company, New Era ADR, Inc., ostensibly to manage the flood of individual arbitration cases that it expected after the case.

While on paper a separate legal entity, New Era appears to have been created as a shell company of Ticketmaster, with the arbitration process exhibiting a “remarkable degree of coordination” with the corporation, according to Fletcher’s ruling in the Ninth Circuit Court of Appeals.

Ticketmaster was initially New Era’s only client, and the two parties shared the same defense law firm, Latham & Watkins LLP. While there’s ample evidence that arbitration courts favor corporations, the companies managing the arbitration courts are legally required to at least be independent from the company hiring them.

In coordination with the newly formed New Era, Ticketmaster devised a set of arbitration practices to bundle together related cases. Known as “batching,” New Era would make a court decision it delivered in one arbitration case apply across the board to all related cases in a given batch. Ticketmaster could then extend favorable decisions while saving time and money. And if initial decisions didn’t go the company’s way, Ticketmaster could bog down other similar cases by continuing to litigate them one by one.

Ticketmaster effectively “sought to gain in arbitration some of the advantages of class-wide litigation while suffering few of its disadvantages,” according to Fletcher’s assessment.

In his decision, Fletcher ruled that these contract terms were “unconscionable,” and that consumers didn’t have the ability to reject them because Ticketmaster exclusively controls ticket processing for most live entertainment venues. As Fletcher wrote, “[I]t is hard to imagine a relationship with a greater power imbalance than that between defendants and its consumers, given defendants’ market dominance in the ticket services industries.”

Under contract law, an agreement can be deemed invalid if “it was oppressive due to ‘an inequality of bargaining power that result[ed] in no real negotiation and an absence of meaningful choice.’”

According to Hepner at the American Economic Liberties Project, Fletcher’s decision on this matter could potentially be a gamechanger if interpreted as saying “that contracts imposed by monopolists or entities with market power are inherently unconscionable.”

“State Arbitration Laws Don’t Govern”

In its new arbitration agreement, however, Ticketmaster retains a class action waiver and an arbitration clause, despite these measures being deemed unenforceable by the court, at least as they were written before. The main difference is that just like in 2020, Ticketmaster switched arbiters amid ongoing litigation on the matter.

Now, in place of New Era, the company’s arbitration cases will be overseen by JAMS, the country’s second largest arbitration provider. The procedures for these cases have been slightly adjusted; for example, plaintiffs now have a modified “limited right to appeal” and some leeway in gathering evidence during the discovery phase of litigation.

The agreement also includes a new line stipulating that: “State arbitration laws don’t govern in any respect.” Live Nation, which is registered in California, appears to be trying to sidestep any future legal complications posed by the California rule prohibiting class action waivers. According to Hines at Consumer Advocates, this broadly written language may not be enforceable because it could negate many state laws outside the scope of the federal arbitration act.

JAMS has never been sued for deploying the illegal “batching” practices employed by New Era, but it utilizes other common practices across the industry that are coming under heightened legal scrutiny.

JAMS’s main competitor, the American Arbitration Association, stands accused in a class action case of monopolizing the sector and using a variety of predatory tactics to rig the court system for companies. According to the lawsuit, the firm’s arbitrators ruled against consumers 76 percent of the time.