In nationwide data security breach class action lawsuit, Sixth Circuit rules that arbitrator – not federal district court – should decide whether the claims must be arbitrated
The Sixth Circuit ruled against e-commerce provider StockX in a nationwide data security breach putative class action lawsuit on December 2, 2021, deciding that an arbitrator - not the federal district court – will decide whether parties to an arbitration agreement have to arbitrate their dispute unless a party specifically challenges the delegation clause in an arbitration agreement. The Sixth Circuit’s ruling affirmed the district court’s order compelling arbitration and dismissing the case.
Factual and Procedural Background
Since 2015, StockX’s terms of service always included an arbitration agreement, a delegation provision, a class action waiver, and instruction for how to opt out of the arbitration agreement. But the terms changed over time. Specifically, in 2015 the Terms of Service contained arbitration terms that appeared to be conflicting. On one hand, the 2015 Terms of Services provided that a court shall decide “issues relating to arbitrability” and the “scope or enforceability of [the] Agreement to Arbitrate.” But the very next sentence appeared to directly conflict with the prior sentence and stated that “the arbitrator, and not any … court or agency, shall have exclusive authority to resolve any dispute … relating to the interpretation, applicability, enforceability or formation of … all or any part of this Agreement to Arbitrate or the User Agreement.”
StockX later changed its terms of service on two occasions. First, on October 17, 2017, it added a provision that StockX may in its discretion change the terms of service without notice, and that a user’s continued use on the site constitutes acceptance of the changes; if not, a user must cancel her account. Second, on October 9, 2018, StockX revised its delegation provision in the “Arbitration Procedures” section to state that other than issues related to the class action waiver, the arbitrator – and not any court – shall have the “exclusive authority to resolve” any and all disputes arising out of or relating to the Agreement to Arbitrate. The delegation provision further provided that the arbitration will be conducted by the American Arbitration Association (“AAA”) under its rules and procedures. The 2018 delegation provision – similar to the 2017 terms – also provided that continued use of the site constitutes a user’s acceptance of the changes, and that a user must cancel her account if she does not agree to any of the changes.
There were eight named plaintiffs in the class action. Four of them created their StockX accounts before StockX issued its October 2018 Terms containing the revised delegation provision. The other four plaintiffs created their StockX accounts after StockX issued its October 2018 terms.
Plaintiffs allege that in May 2019, a computer hacker breached StockX’s system, stole personal information from 6.8 million StockX user accounts, and listed the data on the “dark web.” Plaintiffs filed this nationwide putative class action case against StockX asserting violations of federal and state consumer protection laws.
StockX filed a motion to dismiss the lawsuit and compel arbitration under the Federal Arbitration Act or, in the alternative, to dismiss the action for lack of subject matter jurisdiction or failure to state a claim. Plaintiffs opposed the motion, arguing that: (1) there is an issue of fact as to whether four of the plaintiffs accepted the October 2018 terms; (2) the arbitration provision is unenforceable for the minor plaintiffs due to the state law infancy doctrine; (3) the arbitration provision is invalid as to all the plaintiffs because it is unconscionable; and (4) the delegation provision is invalid and unenforceable as to the minor plaintiffs under the infancy doctrine.
The district court rejected Plaintiffs’ arguments, granted StockX’s motion to compel arbitration, and dismissed the action. In doing so, the district court reasoned that under the delegation provision in the October 2018 terms, the infancy and unconscionability defenses plaintiffs had asserted must be decided by an arbitrator, not a court. Plaintiffs appealed the district court’s order.
The Sixth Circuit’s Majority Ruling
The Sixth Circuit rejected the same principal arguments Plaintiffs made before the district court. As a threshold matter, the Sixth Circuit recognized that “arbitration is a matter of contract” and “courts must rigorously enforce arbitration agreements according to their terms.” The Sixth Circuit held that the October 2018 delegation provision in this case was “clear and unmistakable evidence requiring that an arbitrator shall decide the ‘applicability, enforceability,” or validity of both the arbitration provision and the entire contract.”
The Sixth Circuit further noted that - even when a delegation provision exists - a court must determine whether a valid arbitration agreement exists before referring a dispute to an arbitrator. The Sixth Circuit recognized that while “the Supreme Court has not addressed the situation where, in this case, a delegation provision purports to require arbitration of the formation or existence of the contract containing the provision,” the Supreme Court has instructed that such issues are always for courts to decide at the outset.
If an arbitration agreement exists, the Sixth Circuit – citing Supreme Court precedent - stated that “as a matter of federal arbitration law, an arbitration provision and a delegation provision are severable from the remainder of the contract.” Where, as in this case, a delegation provision calls for an arbitrator to decide the validity and enforceability of both the provision and the contract in which it appears, “courts may only decide a challenge to the delegation provision specifically” or “claims that the agreement to arbitrate was never concluded.” Thus, “if a valid arbitration agreement exists, and if the agreement delegates the arbitrability issue to an arbitrator and that delegation provision stands, a court may not decide the arbitrability issue.”
The Sixth Circuit also rejected the minor Plaintiffs’ argument that the infancy doctrine invalidates the October 2018 Terms and renders the entire arbitration agreement unenforceable, and that the district court should have decided this defense because it is an attack on the contract as a whole. The Sixth Circuit’s rationale for rejecting Plaintiffs’ infancy argument is that it does “not concern the formation or existence of a contract,” and that the Supreme Court was clear in another case that “it is irrelevant whether the challenge at issue would render the contract void or voidable under the relevant state’s contract law.” Instead, the Sixth Circuit stated that the relevant inquiry is “whether the minor Plaintiffs’ infancy defense amounts to an argument that the agreement was never concluded.” The Sixth Circuit held that is not the case here because “Plaintiffs’ infancy defense is a matter of enforceability covered under the delegation provision.” And “because the delegation provision requires the arbitrator to decide whether any claim that all or any part of the arbitration provision is void or voidable, plaintiffs must specifically attack the validity or enforceability of the delegation provision itself.”
The Sixth Circuit held that the district court was correct in leaving the arbitrator to resolve Plaintiffs’ delegation and infancy arguments. That is because courts may only decide the validity of the agreement to arbitrate and not other challenges to the contract as a whole. An arbitrator must decide Plaintiffs’ argument that the arbitration agreement and delegation provision are procedurally and substantively unconscionable.
Because a contract exists and the delegation provision itself is valid, the Sixth Circuit said “we have no business weighing the merits or any challenge to the arbitration agreement or the October 2018 terms. It emphasized, however, that “today’s decision is narrow” because “it’s not about the merits of the case” or “even about whether the parties have to arbitrate the merits.” Instead, it’s about “who should decide whether the parties have to arbitrate the merits.”
Sixth Circuit Dissenting Opinion
One Sixth Circuit judge dissented from the majority’s ruling. The dissent opined that delegation clauses should not bind minor individuals to arbitrate when they have disaffirmed that contract, and that parties who challenge an arbitration delegation clause as unconscionable should not be bound by it.
While the Sixth Circuit’s cast its ruling as “narrow,” it has potentially far-reaching consequences in class action lawsuits and follows a line of similar cases strictly enforcing delegation provisions in arbitration agreements. A plaintiff who wants a court to determine whether an arbitration agreement is enforceable must challenge a delegation clause directly. If not, under StockX, these plaintiffs will likely find themselves in front of an arbitrator arguing about whether they should even be in arbitration.