A few months ago, the Ninth Circuit found that the arbitration agreement in Barnes & Noble’s website was not enforceable.  This week, the Ninth Circuit found that the arbitration agreement Sirius XM Radio relied upon was not enforceable because the user did not know he had any agreement with Sirius XM, let alone an arbitration agreement.  Knutson v. Sirius XM Radio Inc., __ F.3d__, 2014 WL 5802284 (9th Cir. Nov. 10, 2014).

The plaintiff in this case purchased a Toyota truck.  The truck came with a 90-day trial subscription to Sirius XM satellite radio.  The plaintiff did not have to sign any documents to receive or activate the radio, it was activated just after his purchase.  Over a month later, the plaintiff received a “Welcome Kit” in the mail from Sirius XM.  The kit had a customer agreement with an arbitration provision.  The plaintiff did not pay any attention to the Welcome Kit. The plaintiff also did not ask to end his trial subscription.

Five days after the trial subscription ended, the plaintiff brought a putative class action suit against Sirius XM.  He alleged that Sirius XM made three unauthorized calls to him that violated the Telephone Consumer Protection Act.  Sirius XM quickly moved to compel arbitration, pointing out that not only did the dispute belong in arbitration, but the plaintiff had waived his right to a class action in the arbitration provision.  The district court granted the motion and the Ninth Circuit reversed.

The Ninth Circuit found that Sirius XM and the plaintiff never formed any contract at all.  First, applying California contract law, the court found that at the time of the truck purchase, no reasonable person would understand that he had agreed to arbitrate with Sirius XM.   Indeed, there was no reason to think the plaintiff had entered into a contract with anyone but Toyota.  Second, the court found that the plaintiff’s continued use of the radio service after receiving the Welcome Kit did not operate to form a contract with Sirius XM. (The Welcome Kit stated that if the subscription was not canceled within 3 days of activation, the customer was deemed to have accepted the terms.)  The court concluded the customer was not obligated to review the entire Welcome Kit and act on it because “there was no effective notice that action was required.”

Although the court refused to acknowledge three “shrinkwrap” cases from California district courts were rightly decided, it distinguished them anyway.  (Those cases had all upheld agreements provided to a customer after the initial point of sale.)  It summarized that “[h]ere, by contract, there is no evidence that Knutson purchased anything from Sirius XM, or ever knew that he was entering into a  contractual relationship with the satellite radio service provider.”  Because there was no initial transaction between the parties, in other words, the customer had no reason to closely review things in the mail from Sirius.  As a public service, the court even explained how Toyota and Sirius XM could remedy this situation going forward.  (Give notice in Toyota’s purchase agreement or other literature.)

A retailer/service provider should now consider that: a general term of use on its website is not sufficient to bind customers to arbitration; an arbitration agreement provided after the customer agrees to the service may not be sufficient (whether paper or electronic); and any arbitration agreement will not be upheld if the customer did not have reasonable notice of the terms at the time of purchase (see Zakaib and these cases).  This is fair.  If companies are going to be able to reap major litigation benefits by using arbitration agreements (precluding class actions and restricting types of damages, for example), consumers should at least have the option of reviewing those provisions and saying “no thanks.”