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…

 

In the past week, the Third Circuit has issued two important decisions on the formation of arbitration agreements.  (Sing it Beyoncé! “Okay ladies, now let’s get in formation.”)  In one, a class action was allowed to proceed in court because the defendant did not obtain explicit enough agreement to the arbitration, and in another an arbitration award was initially vacated due to questions about whether there had been an arbitration agreement at all.

In James v. Global Tellink Corp., __ F.3d __, 2017 WL 1160893 (3d Cir. Mar. 29, 2017), a putative class of New Jersey inmates sued the sole provider of inmate telecommunication services, and the Defendant moved to compel individual arbitration.  The class representative who created her account through the website and actively clicked a button accepting the terms and services was dismissed.  But, the class representatives who had created accounts by telephone were a different story.  They received an audio notice that “your account…[is] governed by the terms of use at [defendant’s website].”  The system did not require those telephone users to take any affirmative step to indicate consent to the terms.

As a result, the district court refused to compel those telephone members of the class to arbitration and the Third Circuit affirmed.  Applying New Jersey law, the court distinguished this situation from those involving on-line services, where a link is easily accessible to terms, and from shrinkwrap cases, where consumer received physical copies of the terms when they open the product. It suggested the telephone situation may be closer to “browsewrap” agreements that do not require a manifestation of express consent, and which courts have refused to enforce if the terms are obscured.  In sum, the court said the telephone users “neither received GTL’s terms of use, nor were they informed that merely using GTL’s telephone service would constitute assent to those terms” and therefore there was no arbitration agreement to enforce.

In Aliments Krispy Kernels, Inc. v. Nichols Farms, __ F.3d __, 2017 WL 1055569 (3d Cir. Mar. 21, 2017), Aliments was attempting to confirm an arbitration award it received, and Nichols Farms was trying to vacate that award.  Aliments and Nichols had exchanged some sales confirmations to purchase pistachios, none of which were signed.  However, Nichols ended up refusing to deliver the pistachios without advance payment, based on Aliments’ credit application.  Aliments bought elsewhere, and then sought to recoup the extra cost from Nichols at arbitration (in which Nichols refused to participate).  In the action to confirm or vacate the award, the district court allowed months of discovery and then vacated the award, finding no genuine issue of fact on that issue.  On appeal, the Third Circuit vacated and remanded for further proceedings.  In the course of its decision, the Third Circuit noted that its previous expressed standard — that there must be express and unequivocal agreement to an arbitration contract — is outdated and that nothing more than relevant state law on contract formation is required.

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.”

In a case between an on-line customer and Barnes & Noble, the Ninth Circuit recently refused to enforce the arbitration agreement found in the website’s “Terms of Use.” Nguyen v. Barnes & Noble Inc., __ F.3d__, 2014 WL 4056549 (9th Cir. Aug. 18, 2014). The decision further calls into question the validity of “browsewrap” agreements, which the consumer does not have to assent to or acknowledge before making a purchase.

The plaintiff’s case against B&N stemmed from his attempt to buy a Touchpad during a “fire sale” on those devices in 2011. The plaintiff purchased two Touchpads on the B&N website and received an email confirmation. But the next day, B&N cancelled his order due to high demand. Plaintiff then brought a putative class action for false advertising and deceptive business practices against B&N. In response, B&N moved to compel arbitration. Both the district court and the Ninth Circuit refused to compel arbitration.

The issue was whether the plaintiff had “assented” to the website’s “Terms of Use,” which provided for binding arbitration on an individual (not consolidated or class) basis, thereby making them part of his contract. The Terms of Use were available to visitors of the B&N website via a hyperlink in the bottom left-hand corner of every page, and the hyperlink was underlined and in green typeface. However, the plaintiff never had to click on a box indicating he agreed to the Terms of Use. Indeed, the plaintiff never did click on the Terms of Use or otherwise read them. That structure made the Terms of Use a “browsewrap agreement”, which is one where “the user can continue to use the website or its services without visiting the page hosting the browsewrap agreement or even knowing that such a webpage exists.” (A “clickwrap” agreement requires the user to “click” on a box indicating agreement with the terms.)

The court found that the website did not put a reasonably prudent user “on inquiry notice of the terms of the contract.” It explained that

in keeping with courts’ traditional reluctance to enforce browsewrap agreements against individual consumers, we therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on–without more–is insufficient to give rise to constructive notice.

This case should give pause to any on-line retailers that still use browsewrap agreements.  If they want their arbitration agreements (with those valuable waivers of class actions) to be enforceable, the customers should have to read and assent to those terms before making a purchase.