Gauthier Guest Post: Spotify Modifies Not Just Privacy Policy, But Also Arbitration Clause: The Results Are Outrageous

Guest Post by Gregory Gauthier:

Late last week, many media outlets drew attention to broadly-worded terms in Spotify’s new privacy policy.  Although Spotify’s CEO later explained the intent of the changes to the privacy policy, another change to Spotify’s terms has yet to be explained by Spotify or discussed by the media.  The change, which Spotify characterized as providing “[g]reater detail around the arbitration process for dispute resolution”, is far from innocuous.  The two most outrageous terms added to the arbitration clause (original version here) are an exceptionally broad gag clause and a clause requiring some arbitration hearings to take place in San Francisco or New York City, the consumer’s residence and the locations’ convenience for the consumer notwithstanding.

Arbitration gag clause

Section 24.3.5 of the new terms states:

All documents and information disclosed in the course of the arbitration shall be kept strictly confidential by the recipient and shall not be used by the recipient for any purpose other than for purposes of the arbitration or the enforcement of arbitrator’s decision and award and shall not be disclosed except in confidence to persons who have a need to know for such purposes or as required by applicable law. Except as required to enforce the arbitrator’s decision and award, neither you nor Spotify shall make any public announcement or public comment or originate any publicity concerning the arbitration, including, but not limited to, the fact that the parties are in dispute, the existence of the arbitration, or any decision or award of the arbitrator.

The confidentiality provision in the new terms is not to be confused with the general principle that, in contrast to litigation, arbitration proceedings are not open to the public and arbitration papers are not public records.  Rather, this gag clause goes much farther.  Here are just some examples of the gag clause restricts core First Amendment activity:

  • It may prohibit consumers from sharing information about previous Spotify arbitrations to better prepare for arbitration hearings against a business that already has all the information about all Spotify arbitrations.
  • Some consumers dissatisfied with the arbitration process publicize faults they find in the arbitration process.  Jon Perz created a website documenting his frustration with an arbitration proceeding with a car dealer.  Nicole Mitchell and Debbie Brenner provided their narratives on their dissatisfaction with their arbitration proceedings and outcomes for the Alliance for Justice film Lost in the Fine Print.  Yet, none of this robust commentary would be possible for consumers in an arbitration with Spotify, for Spotify users’ core First Amendment rights have been erased like “a pinky hitting the delete key”.  Licitra v. Gateway, Inc., 189 Misc. 2d 721, 728 (N.Y.C. Civ. Ct. Richmond County 2001).
  • Congress has regularly heard testimony from participants criticizing the fairness of arbitration proceedings in conjunction with bills limiting the scope of the Federal Arbitration Act (FAA).  Yet Spotify can veto any attempt by fed-up consumers to tell their arbitration story before their elected officials.
  • It is doubtful that a consumer dissatisfied with a Spotify arbitration could even submit complaints about the fairness of the arbitration proceeding to their representatives or administrative agencies.  After all, Spotify could argue that government officials do not have a “need to know” about the complained-of arbitration.
  • Most disturbingly, Spotify can use the aegis of the FAA to achieve what KlearGear could not: complete suppression of criticism.  Suppose that a consumer makes a public complaint about Spotify.  In order to erase this complaint, all Spotify needs to do is initiate arbitration about that dispute.  Voila!  Now, the consumer’s original complaint is “publicity concerning…the fact that the parties are in dispute” that is prohibited under the contract.  Moreover, Spotify can “seek injunctive relief in a court of law” under Section 24.3.2 to obtain a court order gagging the consumer from talking about the dispute.  At least the couple in the KlearGear case were only subject to the threat of a fine, not possible contempt of court, which Spotify users could face.

The gag clause is probably illegal under California law, which prohibits consumer contracts from “includ[ing] a provision waiving the right to make any statement regarding the seller or lessor or its employees or agents, or concerning the goods or services” and is likely unconscionable under 9th Circuit precedent, see Davis v. O'Melveny and Myers, 485 F. 3d 1066, 1078 (2007), Ting v. AT&T Corp., 319 F. 3d 1126, 1151 (2003), although some pro-arbitration advocates may argue that the FAA preempts such a holding.

Location provision

Another added provision in Section 24.3.3 requires arbitrations involving more than $10,000 to take place in San Francisco of New York, regardless of where the consumer lives.  This location provision is a plain violation of principle 7 of the American Arbitration Association’s Consumer Due Process Protocol requiring arbitration locations to be convenient for the consumer.  As a sophisticated business drafting an arbitration clause in 2015, Spotify should know better.

So why is Spotify adding unfair arbitration provisions?

Here are few hypotheses for why Spotify, a sophisticated business, is adding these unfair arbitration provisions:

  • Because Spotify has nothing to lose.  The worst that can happen for Spotify is that it gets the arbitration clause it wanted, albeit without the bonus of the unfair terms drafted in its favor.
  • Because Spotify wants to enforce the unfair terms against consumers not sophisticated enough to raise a defense to enforcement.  This happened in Duran v. J. Hass Group LLC, 531 Fed. App’x. 146 (2nd Cir. 2013), where the court ordered a New York consumer challenging a clause requiring arbitration in Arizona to arbitrate that challenge in Arizona, while suggesting that the result may have been different if Duran had made a different unconscionability challenge.
  • Because Spotify wants to create an arbitration process that seems unfair so consumers will give up their claims rather than invoke it.
  • Most troublingly, because Spotify wants to stretch the FAA to prohibit all state law that would prevent the enforcement of arbitration clauses, so long as they stop short of the clause from Hooters of America, Inc. v. Phillips, 173 F. 3d 933 (4th Cir. 1999).

I would like to an additional apology by Spotify CEO Daniel Ek together with a reversal of the changes to the arbitration clause.  There should be no dispute among arbitration scholars that the unfair additional terms I identified have no place in a fair consumer arbitration clause.

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