The timing of Sony’s addition of a binding arbitration clause to the PlayStation Networks Terms of Use (“PSN Terms”) is, in no doubt, directly correlated the Supreme Court’s recent decision in AT&T v. Concepcion 131 S. Ct. 1740 (2011). In that case, the Court upheld a contract which barred class-action suits and forced arbitration to all users of the service provided.

A quick explanation of the case is necessary. Section 2 of the Federal Arbitration Act (“FAA”) says that a “contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction… shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract” (9 U.S.C. §2). The Supreme Court in Concepcion clarified that any grounds that exist in law or equity for revocation of any contract include fraud, duress, mutual mistake or unconscionability.  

The Supreme Court of California had a doctrine known as the Discover Rule. This rule makes all waivers in a consumer contract of adhesion unconscionable, so long as two requisite elements are present. A contract of adhesion is a standard-form contract that is signed by a party who has little choice about the terms. The first element required to satisfy the Discover Rule is to show that any disputes between the contracting parties will predictably involve small amounts of damages. The second element is that the party with superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individual sums of money. In Concepcion, the parties disputed whether the Discover Rule was a ground which existed to revoke the contract under §2 of the FAA. The Court declared that the FAA preempts any state-law rules that stand as an obstacle to the accomplishment and execution of the FAA’s objectives. Since the Discover Rule was believed to stand as an obstacle to arbitration, the Discover Rule was effectively eliminated from California law.

Since the PSN Terms are governed by the laws of California, rejection of the Discover Rule allowed Sony to insert arbitration and class action waivers without much fear of it being rejected by the courts.

So on what grounds can a PSN user challenge the PSN Terms that exists in law or equity? In Harris v. Blockbuster (similar to Douglas v. U.S. District Court), the court found that the Blockbuster Terms were illusory because, analogous to the PSN Terms, Blockbuster reserved the right to modify the terms of use at any time. A contract is illusory when one party makes a promise that is so insubstantial that it would impose no duty to them. However, Sony’s facts can be distinguished from the Blockbuster case, because Sony provided notice of the new terms. Blockbuster failed to notify its users when they made modifications to the terms, which made it almost impossible for Blockbuster users to know what they agreed to. Sony takes affirmative steps by notifying users via email of changes to their PSN Terms and requiring PSN users to accept the new terms prior to using their system. Although Sony reserves the right to modify their terms, the company overcomes the illusory argument by requiring users to re-accept their new terms.

A user could attempt to argue that the agreement is unconscionable. Under California Law, an arbitration agreement is unenforceable if it is both procedurally and substantively unconscionable. The courts use a sliding scale test; substantial evidence of procedural unconscionability will offset the amount of evidence required to prove substantive unconscionability, and vice versa. Procedural unconscionability addresses unequal bargaining power between the parties, hidden terms, or guile on the part of the powerful party. For example, the use of incomprehensible fine-print standard form contracts can satisfy this test. Substantive unconscionablility focuses on unreasonable or unfairly harsh terms within the contract. For example, a clause which provides exclusive jurisdiction for arbitration in Tanzania within a contract solely provided to residents of the United States will probably be deemed substantively unconscionable.

However, there is no contract of adhesion if the contract provides an opportunity to opt-out of arbitration. Although the PSN Terms do have some characteristics of a contract of adhesion, the opt-out provisions within section 15 of the PSN Terms remove it from the classification as such since it is not inconspicuous. Furthermore, the third introductory paragraph of the PSN Terms advise a user to view the modified terms. Moreover, Sony took affirmative steps to email all users to notify them of the change and provided a red-lined version to view. Similar to the contract in Meyer v. T-Mobile United States, it is more likely than not that a Court would find the PSN Terms not procedurally unconscionable because the arbitration agreement contains a clearly presented opt-out provision. (2011 U.S. Dist. LEXIS 108249 (N.D. Cal. Sept. 23, 2011)) Although the PSN Terms appear to have substantively unconscionable terms, it is not enough to find the PSN Terms as a whole unconscionable. For example, a user must negotiate with a Sony Entity for a minimum of 60 days prior to initiating arbitration while the Sony Entity need not. Therefore, because of the inclusion of the opt-out procedure, a court will most likely find the PSN Terms to not be unconscionable.

An interesting caveat that has been left open by the Supreme Court’s decision is the Second Circuit’s American Express II rule. Trial Courts in the Second Circuit, in light of the Concepcion, still apply this rule. American Express II states that an arbitration provision which precludes any plaintiff from enforcing their federal statutory rights is unenforceable. Therefore, if for any reason Sony violates any federal statutory right, for example, COPPA, the Second Circuit may strike down the arbitration provision and allow the user to pursue their rights. Whether the Supreme Court and other circuits agree with this rule still requires resolution and may leave the PSN Terms susceptible to claims in federal court.