Last Thursday, the Second Circuit found that the arbitration agreement in Uber’s Terms of Service was conspicuous enough to be binding and enforceable.  As a result, the claims of a putative class of consumers will be dismissed unless they can show that Uber waived its right to arbitrate their claims.  Meyer v. Uber Technologies, Inc., 2017 WL 3526682 (2d Cir. Aug. 17, 2017).  [This proves my point from last week, that formation is one of the big issues this year in arbitration law.]

For those of you who still take yellow taxis, Uber is a “ride-hailing service,” where customers use an “app” on their smart phones to alert a nearby Uber driver that the customer wants a ride to a specific location. Critically to this case, when customers open an account with Uber, they see black text at the bottom of the registration screen advising that “by creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.”  The phrase “terms of service” is in blue font and hyperlinked to a page where the customer can read those terms.  The terms include an arbitration agreement that waives the right to any class or consolidated action.

A potential class of Uber customers started a lawsuit in New York alleging that Uber allows illegal price fixing.  In response, Uber first moved to dismiss for failure to state a claim.  Upon losing that motion, Uber moved to compel arbitration and the federal district court denied that motion also, finding that the parties never formed an arbitration agreement because the consumers did not meaningfully consent.

On appeal, the Second Circuit vacated and remanded.  It applied California contract law in its de novo review, and applied California’s rule that a customer who lacks actual notice of the terms of an agreement can be bound if a “reasonably prudent user would be on inquiry notice of the terms.”  In its analysis, the court noted that Uber did not use a “clickwrap” agreement, which involves consumers having to click “I agree” after being presented with a list of terms and conditions, and which is “routinely uph[e]ld” by courts.  Even so, the court concluded that the design of the registration screens were clear enough to put the plaintiff on inquiry notice of the arbitration provision.  What were those design features?

  • Hyperlinked text to terms and conditions appears right below the registration button;
  • The entire screen is visible at once (no scrolling required);
  • The screen is “uncluttered”; and
  • Although font is “small,” dark print contrasts with white background.

Therefore, the Second Circuit concluded that the named plaintiff “agreed to arbitrate his claims with Uber.”  However, the Court threw the class a bone by remanding on the question of whether Uber waived its right to arbitrate by bringing the motion to dismiss on the merits.

What’s fascinating about this opinion is not just that Uber is a famous company that is facing intriguing antitrust allegation.  No, what’s fascinating from the arbitration angle is that the Second Circuit came out on the opposite side of this same issue almost exactly one year ago in Nicosia v. Amazon.com, Inc., 2016 WL 4473225 (Aug. 25, 2016).  The same judge wrote both opinions.

In Nicosia, the named class representative had placed an order on Amazon in 2012.  Instead of a true “clickwrap” agreement, there was simply language on the Order Page stating that “by placing your order, you agree to Amazon.com’s privacy notice and conditions of use.” The conditions of use were hyperlinked to the relevant terms.  Sounds pretty much the same as Uber’s setup, right?  Well, applying Washington law, the Second Circuit found that reasonable minds could differ about whether that notice was sufficiently conspicuous to be binding.  It complained that the critical sentence was in a “smaller font,” that there were too many other distracting things taking place on the order page (summary of purchase and delivery information, suggestions to try Amazon Locker, opportunity to enter gift cards and have a free trial of Amazon Prime, for example.)  There were other links on the page, in different colors and fonts.  Critically, it found “[n]othing about the’Place your order’ button alone suggests that additional terms apply, and the presentation of terms is not directly adjacent to the ‘Place your Order” button…”  Therefore, the Second Circuit reversed the district court’s dismissal based on the arbitration provision.

As the fundamental context of on-line purchases has not changed in the last year, and the Second Circuit’s recitation of California and Washington law appears pretty similar, one has to conclude that the difference between these two cases is the graphic design of the key pages.  In particular, the level of “clutter” on Amazon’s page is the primary difference-maker between these two cases.  I imagine many internet retailers will reconsider the number of fonts, colors, and promotions on their final “order” pages this next week…

 

While state courts have been busy articulating novel interpretations of arbitration law this summer, federal courts seem intent on getting back to basics.  In recent weeks, federal appellate courts have reminded parties who has the burden of proving an agreement to arbitrate, what should happen to the case when arbitration gets compelled, how parties waive their right to arbitration, and what is a “reasoned award.”

Burden of Proof

The Eleventh Circuit took the opportunity to clarify that when the plaintiff denies the existence of an arbitration agreement, state contract law determines who has the burden of proving the existence of the agreement.  (Distancing itself from its own 1993 precedent.)  In this case, Georgia law applied, and it provided that the defendant seeking to enforce the alleged arbitration agreement bears the burden of proving a valid arbitration agreement exists.  Because the defendant credit card issuer had no proof that the plaintiff agreed to any terms at all when she completed her on-line application, and could not prove that it sent a Welcome Kit containing the arbitration agreement at issue, or even establish which cardholder agreement it sent to plaintiff, the appellate court affirmed the district court’s denial of the motion to compel arbitration.  Furthermore, having presented “woefully inadequate” proof with its motion, defendant was not entitled to try and prove the existence of an arbitration agreement at a later trial.  Bazemore v. Jefferson Capital Systems, LLC, 2016 WL 3608961 (11th Cir. July 5, 2016).

Just Stay

In the course of a “summary order” affirming the district court’s grant of a motion to compel arbitration, the Second Circuit took time to issue a reminder to lower courts.  In that Circuit, the language of Section 3 is read quite literally.  Section 3 says when there is an applicable arbitration agreement  the court “shall on application of one of the parties stay the trial…”.  Even if all claims are referred to arbitration, courts are not to dismiss an action if any party seeks a stay instead.   To dismiss in that instance is an abuse of discretion.    Virk v. Maple-Gate Anesthesiologists, PC, 2016 WL 3583248 (2d Cir. July 1, 2016).

Don’t Waffle, Or You’ll Waive

Everyone knows you can waive your right to arbitrate, right?  But sometimes you need a good example of someone doing that, so that you can see exactly what to avoid.  Martin v. Yasuda, 2016 WL 3924381  (9th Cir. July 21, 2016) can provide that example.  Here the putative class of students at a private cosmetology school had all signed an enrollment agreement calling for arbitration.  Yet in response to the students’ Fair Labor Standards Act (FLSA) case, the school moved to dismiss for a substantive failure to state a claim.  When they were not completely successful, they filed an answer in which arbitration was one of 43 affirmative defenses.  Finally, after engaging in some discovery, the defendant moved to compel arbitration, 17 months after the start of the case.  Both the district court and the appellate court found the defendant had waived its right to arbitrate.  (Key factors: defendant had told court it was not likely to enforce arbitration agreement and had forced court to decide motion on merits.)  The court also confirmed that whether a party has waived its right to arbitrate by its litigation conduct is an issue for determination by the courts, not arbitrators.

Within Reason

In arbitration, parties can usually choose among three levels of award: simple award, reasoned award, or findings of fact and conclusions of law.  But, the lines delineating those three levels are awfully fuzzy and undefined.  Why does that matter?  Because a party who contracted for “findings of fact” might be able to vacate its award if the arbitrator issued only a “reasoned award.”  In the spirit of helpfulness, the Second Circuit defined a “reasoned award” in Leeward Construction Co. v. American Univ. of Antigua-College of Medicine, 2016 WL 3457266 (2d Cir. June 24, 2016).  They held “that a reasoned award is something more than a line or two of unexplained conclusions, but something less than full findings of fact and conclusions of law on each issue raised before the panel.  A reasoned award sets forth the basic reasoning of the arbitral panel on the central issue or issues raised before it.  It need not delve into every argument made by the parties.”

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Two courts recently refused to compel arbitration because the defendants could not prove that the parties had entered into an arbitration agreement at all.  Therefore, the musical accompaniment to this post is “Do Re Mi” from The Sound of Music.  “Let’s start at the very beginning, a very good place to start.  When you read, you begin with ABC,” [and I add]  “when you compel you begin with we agree.”

In Bellman v. i3Carbon, LLC, 2014 WL 2210739 (10th Cir. May 29, 2014), two plaintiffs sued for securities fraud, alleging that defendants had made misstatements when convincing plaintiffs to invest $600,000 in an energy company.  Defendants then moved to compel arbitration based an arbitration agreement in the (unsigned) Operating Agreement.   However, Defendants were unable to prove that there was any meeting of the minds with respect to an arbitration agreement, so the district court denied the motion and the appellate court affirmed the denial.  As the Tenth Circuit explained:

Defendants’ argument essentially boils down to their assertion that Plaintiffs’ mere investment in i3Carbon following their receipt of a binder containing an unsigned Operating Agreement somehow establishes that Plaintiffs agreed to, and accepted, the terms of the Operating Agreement, including its arbitration provision.  However… this argument is unpersuasive.

Because the plaintiffs had never signed the Operating Agreement at issue, nor was there any evidence that the parties understood the Operating Agreement to be necessary to the investment, the court found defendants had not created any genuine issue of material fact “as to whether or not there was a meeting of the minds” that would require a trial on the issue.  It affirmed the trial court’s denial of the motion to compel arbitration.  [The Tenth Circuit reiterated its recent guidelines for when formation issues can be decided on motion versus by a trial: the court may decide the existence of an arbitration agreement if “there are no genuine issues of material fact regarding the parties’ agreement.”  If such a genuine dispute exists, the court shall move to a summary trial.”]

The Tenth Circuit also rejected the defendants’ argument that plaintiffs were equitably estopped from denying their acceptance of the Operating Agreement.  Importantly, plaintiffs were not claiming a breach of the Operating Agreement, nor trying to enforce any rights or remedies contained in the Operating Agreement.

Bank of the Ozarks, Inc. v. Walker, __S.W.3d__, 2014 WL 1946742 (Ark. May 15, 2014), reached a similar holding.  In that case, a putative class of customers sued a bank over overdraft fees, and the bank moved to compel arbitration.  The trial court denied the motion, finding the arbitration clause unconscionable, and the court of appeals reversed that decision.  The Supreme Court of Arkansas found both courts had jumped the gun.  In response, the plaintiffs argued that not all of the bank’s account agreements had arbitration clauses and the bank had waived any right it had to arbitrate by moving to dismiss.  However, the lower courts did not make any findings about whether arbitration agreements existed for all customers.  Therefore, the court “reverse[d] and remand[ed] to the [trial court] to determine, in the first instance, whether there is a valid agreement to arbitrate between the parties.”

In a beautifully written opinion, the Tenth Circuit examined an under-used aspect of the Federal Arbitration Act this week: having a jury or court trial. Usually disputes about arbitrability can be determined on a motion akin to summary judgment, but the FAA states in Section Four: “If the making of the arbitration agreement or the failure, neglect, or refusal to perform the same be in issue, the court shall proceed summarily to the trial thereof.”  The Tenth Circuit held that’s what needs to happen in Howard v. Ferrellgas Partners, L.P., __ F.3d__2014 WL 1363963 (10th Cir. April 8, 2014).

Ferrellgas involves a class of propane customers who sued Ferrellgas for alleged overcharges.  Ferrellgas moved to compel individual arbitration.  The named plaintiff responded that he had no arbitration agreement with Ferrellgas because the parties reached a complete oral contract in their initial phone call that covered all subsequent orders, and negated the subsequent form contract sent by the company.  In response to open questions of fact raised on the motion, the district court allowed discovery and another set of motions.  When that second round of motions did not resolve the factual dispute, the court invited more discovery and a third round of motions.  Finally, the district court found that material disputes of fact remained and denied the motion to compel arbitration.

The Tenth Circuit reversed.  It found the district court erred in two respects.  First, the district court erred by allowing “death by discovery” on the issue of whether an arbitration agreement existed instead of calling for the “summary trial” envisioned in the FAA.  The court said that when “a quick look at the case suggests material disputes of fact do exist on the question whether the parties agreed to arbitrate, round after round of discovery and motions practice isn’t the answer.  Parties should not have to endure years of waiting… merely to learn where their dispute will be heard.”  (Another good line: “We appreciate both sides’ evident frustration at how long this case has lingered at the transom without having entered either the door into arbitration or litigation.”)

The Tenth Circuit also found the district court erred in denying the motion to compel arbitration after concluding that material disputes of fact remained.  It explained: “That’s like mixing apples and oranges, like saying someone who fails to win a summary judgment motion must necessarily lose after trial.”  Therefore, the court remanded the case for the summary trial called for in the FAA.

Of course, the Tenth Circuit had a relatively easy target in this particular instance.  Not many district court judges would allow three rounds of motions and multiple rounds of discovery on the issue of arbitrability.  But, it may be less clear in the future where the line is between allowing reasonable discovery on arbitrability and “death by discovery.”  Should judges allow just one round of discovery and say any factual disputes after that point will be decided by trial?  The Tenth Circuit does not try to set forth any rules about when exactly to push parties over the transom, if you will.

 

** P.s.:  SCOTUS denied cert in Walia v. Dewan on Monday.  The circuit split over manifest disregard will continue.

The Sixth Circuit recently answered a question I get asked regularly: does an arbitration clause survive the termination of the contract containing it?  I usually say yes, and thankfully the Sixth Circuit backed me up.

In Huffman v. The Hilltop Cos., LLC, __ F.3d __, 2014 WL 1243795 (6th Cir. March 27, 2014), a class of employees alleged FLSA violations by their employer.  Each of their employment agreements had an arbitration clause and a “survival clause” which listed a few of the contractual clauses that survive termination of the agreement.  But the survival clause did not mention the arbitration clause.  The employees attacked the enforceability of the arbitration clauses with an onslaught of latin phrases (“expressio unius est exclusion alterius!” and “contra proferentem!”) intended to convey the idea that if the employer had wanted the arbitration clause to survive, it would have listed it in the survival clause.  The district court agreed and denied the employer’s motion to compel arbitration.

The Sixth Circuit reversed.  It reached way back to a 1991 SCOTUS decision, Litton v. NLRB, 501 U.S. 190 (1991), which “recognized a ‘presumption in favor of postexpiration arbitration of matters unless negated expressly or by clear implication [for] matters and disputes arising out of the …contract.'”  In this case, because the survival clause was silent about arbitration as well as about other clauses that would logically survive the contract’s termination (like the severability clause and integration clause), the court found that silence was not enough to expressly negate the survival of the arbitration clause.

After finding the dispute was arbitrable, the Sixth Circuit applied its recent precedent allocating decisions about whether to allow classwide arbitration to courts.  The court found class arbitration was not authorized because the arbitration agreement did not say anything about classwide arbitration, and it ordered plaintiffs to proceed individually in arbitration.

BY JEFF MASON

The First and Ninth Circuits recently issued opinions concerning the validity of state laws requiring “informed consent” to, or “full disclosure” of, arbitration clauses in attorney retainer agreements.  Although the First Circuit found its way around the issue, the Ninth Circuit took it squarely on, holding that such requirements, at least as set forth by Washington state law, are not preempted by the FAA.

In Bezio v. Draeger, __ F.3d __, No. 13-1910, 2013 WL 6570920 (1st Cir. Dec. 16, 2013), an investment adviser sued a law firm that had represented him in a securities enforcement action, alleging malpractice and disputing the firm’s fees.  The firm moved to compel arbitration under the arbitration clause in the parties’ engagement agreement.  In opposition, the adviser argued the arbitration clause was unenforceable because the Maine Rules of Professional Conduct demand “informed consent” for agreements requiring arbitration of malpractice claims.

To support this interpretation of Maine law, the adviser relied on Hodges v. Reasonover, 103 So. 3d 1069 (La. 2012), in which the Supreme Court of Louisiana held that “attorney[s] must disclose the following legal effects of binding arbitration, assuming they are applicable” to the attorney’s retainer agreement:

• Waiver of the right to a jury trial;

• Waiver of the right to an appeal;

• Waiver of the right to broad discovery under . . . Federal Rules of Civil Procedure;

• Arbitration may involve substantial upfront costs compared to litigation;

• Explicit disclosure of the nature of claims covered by the arbitration clause, such as fee disputes or malpractice claims;

• The arbitration clause does not impinge upon the client’s right to make a disciplinary complaint to the appropriate authorities; [and]

• The client has the opportunity to speak with independent counsel before signing the contract.

The district court in Bezio concluded that the holding in Hodges would be preempted by the FAA, and it thus compelled arbitration of the adviser’s claims against the law firm.

On appeal, the First Circuit found it unnecessary to opine on the viability of Hodges, holding instead that Maine law clearly rejected the necessity of “informed consent” for arbitration clauses in attorney retainer agreements (and noting that the ABA has released an ethics opinion giving a stamp of approval to arbitration clauses within retainer agreements).  “That other jurisdictions may follow different interpretations of their professional liability rules,” the First Circuit noted, “is of no moment.”

While Maine may not require special informed consent to arbitration with counsel, Washington state does.  In Smith v. JEM Group, Inc., __ F.3d __, No. 11-35810, 2013 WL 6570899 (9th Cir. Dec. 16, 2013), a debt-settlement company appealed the denial of a motion to compel arbitration of claims asserted against it by a debtor.  The relevant arbitration clause was found in the attorney retainer agreement embedded in a contract for debt-settlement services.  The district court found the arbitration clause unconscionable under Washington state law that makes arbitration clauses material provisions in attorney retainer agreements and, as such, enforceable only if “fully disclosed.”

On appeal, the debt-settlement company contended the FAA preempts relevant Washington case law interpreting  the Washington Rules of Professional Conduct.  The Ninth Circuit disagreed.  It held the relevant Washington state law is not preempted because (1) it does not make arbitration “slower, more costly, [or] more likely to generate [a] procedural morass”; (2) it does not specify “the manner in which the arbitration could or should be conducted,” but relates instead only to “defects in the process of contract formation” under “general principles of contract law”; and (3) it does not “single out or place any additional burden on arbitration provisions” since it merely “clarifies” that arbitration clauses are material provisions of attorney retainer agreements and that, accordingly, they must be fully disclosed like other material provisions of such agreements.

Although the debt-settlement company had not argued that the arbitration clause in question complied with Washington state law, the Ninth Circuit noted (perhaps tellingly) that “[t]here was no explanation of the arbitration clause” in the attorney retainer agreement or the larger debt-settlement contract.  Therefore it affirmed the district court’s conclusion that the arbitration clause was unenforceable.

This leaves us asking a similar question to the one from last week.  Are lawyers’ clients really such a special group of consumers that their arbitration clauses should be held to different standards?

 

 

I see more and more arbitration agreements that contain their own limitations period (the timeline for bringing a dispute in arbitration).  Are all of those necessarily enforceable?  No. 

In Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586 (1947), the Supreme Court held that contracts may shorten the statute of limitations so long as the period is reasonable. (This blog has previously addressed who hears the limitations argument — courts or arbitrators.)  However, there are very few hard-and-fast guidelines that courts offer on what amount of time is reasonable in the arbitration context.  Periods as short as ninety days have been found reasonable, while periods as long as two years have been found unreasonable.  See, e.g., Letourneau v. FedEx Ground Package Sys., Inc., No. Civ. 03-530-B, 2004 WL 758231, at *1 (D.N.H. Apr. 7, 2004) (upholding ninety-day limitations period); McKee v. AT&T Corp., 191 P.3d 845, 859-60 (Wash. 2008) (invalidating two-year limitations period). 

In determining reasonableness, courts look at the unique facts of each case and the relevant policy considerations.  Here are three factors that will make it less likely for a court to uphold the contract’s limitation period:

  • Unequal bargaining power. Often in the employer-employee context, the court views the employee as the party with weaker bargaining power, less access to counsel and fewer financial resources. For those reasons, whether the limitations period is thirty days or six months, courts are hesitant to enforce these periods when the arbitration agreement is signed on a non-negotiable basis. E.g., Plaskett v. Bechtel Int’l, Inc., 243 F. Supp. 2d 334, 341 (D.V.I. 2003); Openshaw v. FedEx Ground Package Sys., Inc., 731 F. Supp. 2d 987, 992-94 (C.D. Cal. 2010).  On the other hand, in non-employment contexts, such as purchase of property, courts are more likely to find that equal bargaining power existed. E.g., Freeman v. Skogen, No. C5-93-348, 1993 WL 318927 (Minn. Ct. App. Aug. 24, 1993);
  • Precluding recovery under federal law.  In Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2001), for example, the court invalidated a one-year limitations period because it precluded the plaintiff from recovering for continuing violations under the Fair Labor Standards Act, which permits recovery of damages for a two- or three-year period depending on the type of violation; and
  • Lack of mutuality.  Courts are more apt to wipe out provisions that shorten the statute of limitations for one party but allow the other party more time to bring their claims. E.g., Pokorny v. Quixtar, Inc. 601 F.3d 987 (9th Cir. 2010).

The biggest mistake counsel can make, however, when fighting a short limitation period in the arbitration agreement is to not provide justification for the provision’s unreasonableness. The plaintiff in Letourneau v. FedEx Ground Package Sys., Inc., No. Civ. 03-530-B, 2004 WL 758231 (D.N.H. Apr. 7, 2004) was stuck with a ninety-day limitations period for failing to articulate why ninety days was unreasonable under the circumstances of his case.

This is unheard of!  There were two circuit court decisions finding no binding agreement to arbitrate in a single week.  (The first is here.)  In this new decision from the Third Circuit, an employer’s submission of forms to a union fund along with fringe benefits is held insufficient to compel that employer to arbitration with the fund.

In New Jersey Regional Council of Carpenters v. Jayeff Construction Corp., 2012 WL 3984454 (3d Cir. Sept. 12, 2012), the employer was a construction company whose employees were mostly not members of a union.  However, it employed some members of the local carpenters union.  For those union employees, it paid their benefits into the union fund.  Each time it sent those payments, it used a form provided by the fund, and the form included this language “[t]he Employer hereby acknowledges his or its agreement to the Collective Bargaining Agreement [CBA].”   The employer never signed the CBA, however. 

After an audit, the fund assessed the employer about a quarter of a million dollars.  When the employer would not pay, the fund started an arbitration proceeding, based on the arbitration agreement in the CBA.  The employer refused to participate in the arbitration, arguing it never signed the CBA or otherwise agreed to arbitrate with the fund.  After a hearing in which only the fund presented, the arbitrator awarded almost $400,000 to the fund.  The fund then attempted to confirm the arbitration award.

The courts refused to confirm the arbitration award.  Both the district court and the appeals court found that the forms submitted by the employer were not sufficient to create a binding agreement to arbitrate.  Furthermore, the employer had not done anything else to show it intended to be bound by the CBA.  The court also noted that the fund’s own actions showed it had not believed the employer was bound by the CBA.

This opinion is important for at least two reasons.  First, it serves as a reminder that not all attempts to incorporate terms and conditions (including arbitration provisions) into form contracts will succeed.  And second, it shows there are two ways to respond if a party finds itself the recipient of an arbitration demand when it believes there is no binding arbitration agreement.  It can either immediately start a court proceeding seeking a declaration that there is no valid agreement to arbitrate and an injunction against the arbitration proceeding.  E.g.UBS Fin. Servs., Inc. v. Carilion Clinic,2012 WL 3112010 ( E.D. Va. July 30, 2012).  Or, it can do what Jayeff did here, which is to clearly lodge an objection to the authority of the arbitration, refuse to participate, and then wait to object until after it the arbitrator has issued its award. 

 

In a fascinating decision, the Second Circuit has ruled that an internet merchant cannot compel arbitration with a consumer, when it only emailed the consumer the arbitration agreement after the consumer agreed to the purchase, without any requirement that the consumer affirmatively assent to the term.

In Schnabel v. Trilegiant Corp., __ F.3d __, 2012 WL 3871366 (2d Cir. Sept. 7, 2012), a father and son each purchased items through on-line websites (Priceline.com and Beckett.com).  As they were finalizing their purchases, they clicked on a hyperlink inviting them to get cash back on their purchases.  (Lesson #1 in this post – watch out for post-transaction marketing!)  By entering their city and a password (but not their credit card information), they ended up agreeing to a monthly membership in “Great Fun” — a program offering discounts on products and services.  The father and son later realized they had been paying $12-$15 per month for this membership, and brought a putative class action alleging they had never intended to join Great Fun and their membership was the result of deceptive practices.

The defendant then moved to compel arbitration, relying on “terms and conditions” of its Great Fun membership that mandated binding arbitration and precluded class-wide arbitration.  Those terms and conditions were available to the father and son if they had clicked on another hyperlink from the page where they entered their city and a password.  The defendant also had a practice of sending its full terms and conditions to all purchasers by email.  The district court and appellate court denied the defendant’s motion to compel arbitration, finding no arbitration agreement had been formed.

The court’s analysis focused exclusively on whether the terms and conditions Great Fun emailed to the plaintiffs put them on notice of the arbitration provision.  (The court refused to consider whether the hyperlink on the sign up page was sufficient, even though it acknowledged that “might have created a substantial question as to” whether there an arbitration agreement was formed, because defendant failed to raise that issue in the district court.  Lesson #2 in this post — make every argument in the district court.)    The court summarized applicable contract law by saying that where plaintiffs were not on actual notice of the arbitration provision (because it was not on the sign up page), they can only be bound by it if they were on “inquiry notice” of the term and assented through their conduct.  In this case, the Second Circuit concluded “[w]e do not think that an unsolicited email from an online consumer business puts recipients on inquiry notice of the terms enclosed in that email . . .  and that a failure to act affirmatively to cancel the membership will, alone, constitute assent.”

While courts have allowed terms to be unilaterally imposed by one party after the parties’ initial agreement, the Second Circuit notes that in those cases the original agreement gave notice that additional terms would follow, and/or the industry standards and history of the parties meant that reasonable people would be on notice that additional terms would become part of the original agreement.  “A reasonable person would not be expected to connect an email that the recipient may not actually see until long after enrolling in a service (if ever) with the contractual relationship” with the service provider.”    (In reaching this decision, the Second Circuit disagreed with an Alabama Supreme Court decision that had upheld an arbitration agreement that was sent to the consumer after he had joined a club by phone.)

Lesson #3 in this post comes from the Second Circuit itself.  It noted that e-mailed terms, sent after the initial agreement, can be enforceable if merchants require consumers to “expressly manifest assent to the arbitration provision” and the consumers do assent.

 

The Eleventh Circuit has decided to proactively preempt Florida law, before it could get in the way of the FAA by favoring class arbitrations (despite contract language precluding them).

In Pendergast v. Sprint Nextel Corp., __ F.3d. __, 2012 WL 3553466 (11th Cir. Aug. 20, 2012), a wireless customer wanted to bring a class action alleging improper roaming fees.  The arbitration agreements in the plaintiff’s contracts all waived class actions (for example: “We each agree not to pursue arbitration on a classwide basis”).  But the plaintiff argued that the waivers were unconscionable under Florida law, because they effectively shield Sprint from liability from claims that are too small for consumers to pursue on an individual basis.  Nevertheless, the district court granted Sprint’s motion to compel arbitration, and the plaintiff appealed.

In January of 2010, the Eleventh Circuit found that the appeal turned on unsettled questions of Florida unconscionability law and certified four of those questions to the Florida Supreme Court.  However, the decision in Concepcion came out before the Florida Supreme Court had spoken.  Sprint then successfully moved the Florida Supreme Court to decline jurisdiction in light of Concepcion and the case was bounced back to the Eleventh Circuit.  At that point, the Eleventh Circuit affirmed the district court.

The final time around, the Eleventh Circuit said that it doesn’t matter what Florida law says about the conscionability of precluding class actions.  Because either way, the language of the agreement must be enforced under the FAA.  (If the Sprint agreement were unconscionable under Florida law, then that common law rule would be preempted by the FAA under the reasoning of Concepcion and the agreement would be enforced.  If the Sprint agreement were hunky-dory under Florida law, then the agreement would also be enforced.)

This is the first time I have seen a court of appeals find that state law, which has not yet been made, is preempted!