Fashion Nova’s Arbitration Clause Fades Away

Online retailers routinely include arbitration clauses in the terms of service for their website, seeking to send any consumer claims to arbitration and to eliminate a consumer’s right to file a class action lawsuit. Companies adopting this approach—and indeed, the drafters of any arbitration clause—should pay careful attention to the questions of (1) who will decide whether particular claims are subject to arbitration; and (2) the scope of any carve-outs from the arbitration provision, as the recent decision in Dembiczak v. Fashion Nova, LLC demonstrates.[1]

The Dembiczak case is a putative class action alleging that Fashion Nova falsely advertised discounts on its products. After the plaintiff filed suit in federal district court, Fashion Nova sought to compel the plaintiff to arbitrate her claims based on the Terms of Service on the company’s website, which require arbitration in certain instances. 

Initially, the court confronted the question of which decisionmaker decides the scope of the arbitration provision, or the “arbitrability” of the dispute at hand. The court applied the long-standing rule that a court should decide this threshold question unless “there is clear and unmistakable evidence” that the parties delegated the question of arbitrability to the arbitrator. 

Parties often seek to delegate this question to the arbitrator by incorporating in their agreements the rules of an arbitral forum that does so, like the rules of the American Arbitration Association (“AAA”). Although Fashion Nova attempted to incorporate the AAA rules for consumers in its terms of service, the court found that the version of the AAA “rules” cited by Fashion Nova did not in fact exist. Finding Fashion Nova’s incorporation of AAA rules anything but “clear and unmistakable,” the court determined that it, and not an arbitrator, had the authority to decide whether plaintiff’s claims were subject to arbitration.

The court then concluded that the plain language of Fashion Nova’s Terms of Service had a carveout for injunctive relief that removed plaintiff’s entire putative class action from the scope of the arbitration provision. The court’s decision turned primarily on language in the Terms of Service providing that “an action by a party for temporary, preliminary, or permanent injunctive relief” is one category of disputes that “shall not be subject to arbitration.” This language, the court reasoned, was more expansive than if Fashion Nova had carved out only “a claim” seeking injunctive relief. Because the plaintiff sought injunctive relief on behalf of the putative class, the court concluded that this was “an action by a party” seeking injunctive relief and denied the motion to compel arbitration.

Whether or not one agrees with the court’s interpretation of the Fashion Nova arbitration provision, the decision underscores the need for precision in the drafting of any arbitration provision. With respect to providing “clear and unmistakable evidence” of intent to delegate questions of arbitrability, drafters of an arbitration provision must either (a) explicitly delegate this gateway question to the arbitrators, in the text of the arbitration provision itself; or (b) explicitly and clearly incorporate the rules of an arbitral forum that supports delegation and ensure that the cited rules continue to exist and are readily identifiable. The court’s decision also strongly suggests that, had Fashion Nova carved out “claims” or the “remedy” of injunctive relief instead of “actions” seeking injunctive relief, the outcome of the arbitration question would have been different. Expect further developments on both of these key issues as courts across the country continue to grapple with the meaning of delegation and carveout clauses of arbitration provisions. 

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