In an opinion that coins new terms and uses the insouciant tone of a blogger, the 11th Circuit just shut down a putative class action brought by homeowners against a vendor of roof shingles.  The Court found that the terms and conditions printed on the exterior of the shingle packaging formed an enforceable contract (with a class arbitration waiver), and when the roofing contractors opened the shingles, the roofers bound the homeowners who had hired them.  Dye v. Tamko Building Products, Inc., 2018 WL 5729085 (11th Cir. Nov. 2, 2018).

The Dye decision relies heavily on two decades of case law finding that consumers are bound to terms and conditions that accompany software or consumer products or phone apps.  Indeed, the Court suggests that consumers have been on notice that they are bound by terms on the outside of packaging, or with a product, since the 1997 decision in Hill v Gateway 2000, 105 F.3d 1147 (7th Cir. 1997).  Those types of terms are called “shrinkwrap” or “clickwrap” or “scrollwrap” agreements.  And the Court found no reason to treat this agreement, which it termed a “shinglewrap” agreement, any differently.  Therefore, the Court found that by printing its arbitration clause, with a class action waiver, on the exterior of the shingle packaging, the defendant had formed an enforceable contract.

The harder part of the opinion, in my view, is with whom did the defendant form an enforceable contract.  It was not the homeowners who opened the shingle packaging, it was their roofers.  And there are no facts suggesting that the roofers informed the homeowners of the terms on the packaging, or that there were terms at all.  But the Court found that because the roofers were the homeowners’ agents for the purpose of purchasing and installing roof shingles, and because accepting the purchase terms is the kind of thing that should have been expected of the agents, the roofers bound the homeowners to the arbitration agreement (along with the rest of the terms).

[I am aware of at least one court that came out on the opposite side of this “shinglewrap” issue.  In 2015, the Missouri Court of Appeals refused to enforce the same vendor’s arbitration agreement, finding the circumstances distinguishable from cases like Hill v. Gateway.]

Although the Court makes short work of the agency portion of this opinion, I think it merits a deeper analysis.  Usually, even in the case of contracts of adhesion, courts note that the party had some semblance of choice: either to not buy the product, or not work for that employer, etc.  Here, it is hard to see how the homeowners had a choice, since they were unaware that their roofers were considering shingles that would preclude class actions.  Should owners (commercial and residential) put clauses in all their construction contracts revoking the right of contractors and subcontractors to enter into agreements on their behalf??  Is that their only option for unwittingly entering contract terms to which they may object?  I’d love to hear your thoughts.

______________________________________________

And now, a postscript on last month’s post reporting that New Jersey and Missouri refused to enforce arbitration clauses where there was a problem identifying the administrator.  Turns out, other courts have been thinking about the same issue, but resolving it differently.  In Paulozzi v. Parkview Custom Homes, 2018-Ohio-4425 (Ohio Ct. App. Nov. 1, 2018), the Ohio Court of Appeals enforced the parties’ arbitration agreement, even though it called for administration by a now-defunct ADR institution (not NAF).  The Ohio court just severed that aspect of the arbitration clause and called on the trial court to appoint a replacement arbitrator.  In Beltran v. AuPairCare, Inc., 2018 WL 5571319 (10th Cir. Oct. 30, 2018), the arbitration agreement allowed the employer to select the arbitration provider.  The court found that unconscionable, but instead of invalidating the entire arbitration agreement, it also severed that provision and noted that both the FAA and California’s arbitration statutes provide alternate methods of selecting an administrator.

Those two cases make Missouri and New Jersey look out of step.  But, Missouri may now be alone.  I understand that the New Jersey courts have “withdrawn” the decision in Flanzman, and indeed I cannot find it on Westlaw.

**Big thanks to my friends in NJ, Ohio, and NY who alerted me to these developments.

 

The First Circuit just faced a fascinating formation issue: if a customer cannot see what she is signing, and no employee reads it to her or ensures she knows there are legal terms, is there a contract?  With Justice Souter sitting by designation on the panel, the court answered “no,” and thereby kept a class action in the courts. National Federation of the Blind v. The Container Store, Inc., 2018 WL 4378174 (1st Cir. Sept. 14, 2018).

The Container Store case involves blind plaintiffs who allege the retailer violated discrimination laws by failing to use tactile keypads on its point-of-sale (POS) devices.  In response, the retailer moved to compel individual arbitration for the plaintiffs who had enrolled in a loyalty program (which has an arbitration agreement and class action waiver).  The customers who enrolled in the loyalty program in a store alleged that they enrolled with the assistance of a sales associate, and were never presented with the terms and conditions of the program, including the arbitration provision.   In response, the retailer presented excerpts from a training manual, which instructed employees to give blind plaintiffs the opportunity to review the terms on the POS device.  Critically, the retailer did not have evidence that the employee who helped sign up the named plaintiffs had in fact read the terms and conditions to those plaintiffs or otherwise made them aware that there were any terms and conditions.  Therefore, the district court found no agreement to arbitrate was formed between the Container Store and those plaintiffs, and denied the motion to compel arbitration.

On appeal, the First Circuit affirmed.  It first disagreed with the Container Store’s argument that this dispute was one about the validity of the loyalty agreement as a whole, such that it must be heard by an arbitrator.  Instead, it concluded that this was a fundamental dispute about the formation of the arbitration agreement, which was properly addressed by the court.  (The First Circuit even got punny:  “We reject the Container Store’s attempt to re-package Plaintiffs’ arguments as one regarding validity…”)

It then got into the guts of the argument.  It affirmed the critical findings of the district court: “it is undisputed that the in-store plaintiffs had no way of accessing the terms of the loyalty program, including the arbitration agreement”; and “No store clerk actually informed them that an arbitration agreement existed as a condition of entering the loyalty program.”  Therefore, even though “inability to read” is not generally a defense to contract formation, the court found no arbitration agreement was ever formed with these plaintiffs.  Unlike other situations where plaintiffs who could not read knew or should have known that they were signing documents that implicated legal rights, in this case the court found “zero hint” that the loyalty program involved terms and conditions.

Finally, with respect to a class of plaintiffs who had signed up for the loyalty program online, and thereby did have notice of the terms and conditions, the court still denied the motion to arbitrate.  It found the arbitration agreement was illusory and therefore unenforceable under Texas law.  The court found language in the arbitration agreement gave the Container Store “the right to alter the terms of the loyalty program, including the arbitration provision, ‘at any time'” and the change would have retroactive effect, affecting even parties who had already invoked arbitration.

This case reminds me of the First Circuit’s big decision in Uber  in June, when the court found that the arbitration agreement in Uber’s terms also was not conspicuous enough to be binding.  In other words, this issue is not limited to individuals who have disabilities, but gets at the fundamental question of how much information do consumers need to validly form a contract.

This case also makes me smile because guess which firm represented the Container Store?  Sheppard Mullin, the same firm that was not able to enforce its own arbitration agreement with its client in the last post.   Rough arbitration month for those attorneys.

 

Today’s post concerns a perennially hot topic: class actions.  In particular, do courts decide whether an arbitration agreement allows for class actions?  Or do arbitrators?  (Because, it turns out, there are actually some corporations who have not inserted class action waivers in their consumer contracts.)  To date, four circuit courts have held that class arbitrability is an issue that is presumably for courts (not arbitrators) to decide, even if the parties incorporate rules that generally delegate issues of arbitrability to an arbitrator (3rd, 4th, 6th, 8th).  In recent weeks, the Tenth Circuit and Eleventh Circuit disagreed.  Because the Second Circuit had also previously disagreed, there is now a 4-3 split among the circuits over whether the incorporation of AAA (or similar) rules is sufficient to authorize an arbitrator to decide whether arbitration can proceed on a class-wide basis.

In Spirit Airlines v. Maizes, 2018 WL 3866335 (11th Cir. Aug. 15, 2018), members of Spirit Airlines’ “$9 Fare Club” started a class arbitration with the AAA.  Spirit then brought an action to federal court, seeking a declaration that the arbitration clause did not authorize class arbitration.  (You may recall that the outcome of the Stolt-Nielsen and Sutter cases is that there can be no class arbitration unless the parties agreed to that process in their arbitration clause, but the language does not have to be explicit.)  The district court found that the arbitrator should determine the issue of whether a class action could proceed in arbitration.

On appeal, the Eleventh Circuit found that no special rules apply to class arbitration.  It assumed that class arbitration is a gateway issue of arbitrability, such that the court has presumptive authority to decide it.  Here, the Spirit agreement called for the AAA rules, which the court found included the Supplementary Rules for Class Arbitration, and those supplementary rules empower an arbitrator to decide whether claimants may proceed as a class action.  The court found that incorporation of AAA rules was clear and unmistakable evidence that the parties intended the arbitrator to decide the availability of a class action in arbitration.  It relied on earlier precedent finding that AAA rules are sufficient to delegate jurisdictional issues to arbitrators, and disagreed that SCOTUS rulings provide for any different outcome in the case of class arbitration.

In Dish Network v. Ray, 2018 WL 3978537 (10th Cir. Aug. 21, 2018), a former employee of Dish Network started a class and collective arbitration with the AAA.  The appointed arbitrator issued a Clause Construction Award, finding that he had authority to decide the issue and that the arbitration agreement permitted a collective action.  The arbitrator’s award included ten pages of analysis interpreting the text of the arbitration agreement to shed light on whether they agreed to allow class/collective actions in arbitration.  The district court denied Dish’s motion to vacate the Clause Construction Award, and the Tenth Circuit affirmed that decision.

On appeal, the court assumed without deciding that the availability of class arbitration is a gateway dispute for court to decide.  Even so, it found that the parties’ selection of AAA rules to govern the arbitration was sufficient to clearly and unmistakably delegate the issue of class arbitration to the arbitrator.  It acknowledged that four circuits had “require[d] more specific language delegating the question of class wide arbitrability,” but noted that the Second Circuit had disagreed with that holding earlier this year.  Following the lead of the Second Circuit, the court relied on precedent from Colorado and the Tenth Circuit finding that incorporation of AAA rules is sufficient to delegate arbitrability to the arbitrator.  Having concluded that the arbitrator had authority to determine whether the parties’ arbitration agreement allowed for class/collective actions, the court had little trouble finding that the arbitrator’s Clause Construction Award could not be vacated.  The court found that the arbitrator “interpreted the parties’ contract, which is all we are allowed to consider” and did not manifestly disregard the law.

The fact that this circuit split is heating up is interesting in light of one of the arbitration cases that SCOTUS will hear on October 29.  That case, Lamps Plus, presents the question of how specific the language of an arbitration agreement must be in order to authorize class arbitration.

_______________________________

A class action postscript.

A putative class of plaintiffs sued Bluestem Brands in federal court in Minnesota for claims related to its credit programs.  In response to a motion to compel arbitration, the district court compelled arbitration of some claims, but denied others, finding they fell outside the scope of the credit agreement’s arbitration clause.  On appeal, the Eighth Circuit found all claims fell within the arbitration clause.  Parm v. Bluestem Brands, 2018 WL 3733424 (8th Cir. Aug. 7, 2018).  After finding the arbitration clause was “broad” (because it used the magic phrase “arise out of”), it found the factual allegations for all claims “touch[ed] matters covered by the arbitration agreement,” because all allegations related to the financing agreements.

And, in further fallout from Epic Systems, roughly 1600 employees of Kelly Services alleged violations of the Fair Labor Standards Act in federal court.  Gaffers v. Kelly Services, 2018 WL 3863422 (6th Cir. Aug. 15, 2018).  Kelly Services compelled individual arbitration with the employees who had arbitration agreements (about half).  As those employees’ only defense was that the Federal Arbitration Act should take a backseat to the FLSA or NLRA, the employees lost on appeal and will have to arbitrate.

Almost a year ago, the Second Circuit praised the clean, readable design of Uber’s app.   Because the reference to Uber’s terms of service was not cluttered and hyperlinked to the actual terms, the Second Circuit held Uber could enforce its arbitration agreement and the class action waiver within it.  But, just last week, the First Circuit disagreed.  In Cullinane v. Uber Technologies, Inc., 2018 WL 3099388 (1st Cir. June 25, 2018), it refused to enforce an arbitration clause in Uber’s terms of service and allowed a putative class action to proceed.  The First Circuit found customers were not reasonably notified of Uber’s terms and conditions, because the hyperlink to those terms was not conspicuous.

The Cullinane opinion was applying Massachusetts law on contract formation.  Massachusetts has not specifically addressed online agreements (or smart phone apps), but in analogous contexts has held that forum selection clauses should be enforced if they are “reasonably communicated and accepted.”  In particular, there must be “reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent.”  The Meyer opinion was applying California law on contract formation.  But the test was identical, because both states had borrowed it from a Second Circuit decision about Netscape.  So, the state law at issue does not explain the different outcome.

The one thing that might explain the different outcome is that the two federal appellate courts appear to have analyzed slightly different versions of Uber’s app.  In Cullinane, the lead plaintiffs had signed up between Dec. 31, 2012 and January 10, 2014.  (The court reproduced the actual screen shots early in its opinion.)  In Meyer, the lead plaintiff had signed up in October, 2014, and Uber had altered the design of its sign-up screens.  (There, the screen shot is an addendum to its opinion.)  For example, the background was now white in late 2014, instead of black, and the “Terms of Service & Privacy Policy” were in teal, instead of white text.

And, those are some of the aspects of the design that the First Circuit pointed to as critical.  It noted that hyperlinked terms are usually in blue text and underlined, but that the Cullinane plaintiffs’ were faced with hyperlinked “Terms of Service” that were not blue or underlined.  Instead, they were in white text in a gray box, no different than other non-hyperlinked text like “scan your card” on the same screen.   In addition, the First Circuit found the text stating “by creating an Uber account you agree to the [Terms]” was insufficiently conspicuous for similar reasons.  For those reasons, the Cullinane opinion found “the Plaintiffs were not reasonably notified of the terms of the Agreement, they did not provide their unambiguous assent to those terms.”

This is another example of how unsettled some aspects of arbitration law are (and maybe consumer contracting in general).  In Meyer, the district court had denied Uber’s motion to compel arbitration, and the appellate court reversed, granting the motion to compel arbitration.  And in Cullinane, the district court had granted Uber’s motion to compel arbitration, and the appellate court reversed, denying the motion to compel arbitration.  Those four courts were applying the exact same legal standard of conspicuousness, and reached opposite conclusions in the span of less than a year.

The lesson here is two-fold.  First, there is no clear standard for when terms on a website (or on a receipt, or in a box) are sufficiently conspicuous, so judges are left to their own devices (pun intended) to answer that question.  Second, unless an on-line provider wants judges — who are likely untrained in the psychology of consumer design related to five inch screens (and may not even have any apps) — to keep on getting to whatever result they please, the only solution is to require a consumer to actually click “I agree” after viewing a screen of the terms and conditions.  Unless, of course, SCOTUS grants certiorari of this new “circuit split” and issues guidance…

 

I have been making my way through the rest of the May arbitration cases (the photo shows how high my stack got), and one thing that stands out is this: I was right.  Delegation clauses remain a hot topic in arbitration law.

Three recent cases demonstrate the power of having a delegation clause in an arbitration agreement.

The Fifth Circuit enforced a delegation clause in Edwards v. DoorDash, 2018 WL 1954090 (5th Cir. Apr. 25, 2018), a case involving a putative FLSA class action brought by “Dashers.”  Not to be confused with reindeers who pull Santa’s sleigh, these Dashers  deliver restaurant food to people’s homes.  And they all signed an Independent Contractor Agreement with an arbitration agreement.  That agreement called for AAA rules and waived class and collective actions.  In response to the filing of the class action, DoorDash successfully moved to compel individual arbitration. On appeal, the class representative argued the arbitration agreement was unconscionable.  But once the Fifth Circuit was satisfied that the independent contractor agreement was validly formed, it found the incorporation of AAA rules was a valid delegation clause that the plaintiffs had failed to challenge.  The case was sent to arbitration.

In another Fifth Circuit case, Arnold v. HomeAway, Inc., 2018 WL 2222661 (5th Cir. May 15, 2018), incorporation of AAA rules also served as the parties’ delegation clause.  In that case, consumers filed putative class action complaints against a company that facilitates short-term vacation rentals.  HomeAway argued that its 2016 terms and conditions applied, which contained an arbitration clause providing that arbitration would be governed by AAA rules and that awards would be “on an individual basis.”  The consumers argued that the 2015 terms and conditions applied, which lacked an arbitration agreement (and that any subsequent modification was invalid).  The district court denied the motion to compel arbitration, finding the arbitration agreement illusory.

On appeal, the Fifth Circuit faulted the district court for ignoring the delegation clause in the terms and conditions.  It found the incorporation of AAA rules was a clear and unmistakable delegation of questions relating to the validity of the arbitration agreement to an arbitrator.  Because the plaintiffs’ challenge to the arbitration agreement was not specific to the delegation clause, arbitration must be compelled.

Not far away, in the Supreme Court of Alabama, another delegation clause was enforced.  Eickhoff Corp. v. Warrior Met Coal, LLC, 2018 WL 2075985 (Alabama May 4, 2018), did not involve a putative class action, but something just as sexy: five agreements between the parties, only two of which had arbitration clauses (both calling for AAA rules).  When one party filed in court, the other moved to compel arbitration.  The party opposing arbitration claimed that its court claims were based on the three contracts without arbitration clauses and the trial court agreed.  The Supreme Court reversed, finding that the incorporation of AAA Rules was an enforceable delegation clause, delegating questions of scope to an arbitrator, and it should have resulted in an order compelling arbitration.

SCOTUS finally delivered its decision today in Epic Systems Corp. v. Lewis, the consolidated case that addresses whether employers can require employees to give up their right to class or consolidated litigation as part of an arbitration agreement.  In a 5-4 decision authored by Justice Gorsuch, the Court found that class action waivers are enforceable under the FAA, and nothing in the labor laws preclude that conclusion.

As usual, how the Court frames the question gives away its answer.  Justice Gorsuch began the majority opinion by asking: “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?”* In contrast, Justice Ginsburg’s dissent frames the issue as “Does the [FAA] permit employers to insist that their employees, whenever seeking redress for commonly experienced wage loss, go it alone, never mind the right secured to employees by the National Labor Relations Act . . . ‘to engage in . . . concerted activities’ for their ‘mutual aid or protection'”?

The majority opinion started by painting the NLRB’s opposition to class action waivers as a sudden shift after 77 years of peaceful coexistence with the FAA.  It then finds that the NLRA cannot be applied via the savings clause of Section 2 of the FAA because it interferes with one of arbitration’s fundamental attributes — individual resolution — and therefore is not the type of defense that applies to any contract. (It cites Concepcion for the proposition that individual resolution is fundamental to arbitration.)

After finding nothing in the FAA itself that would prevent enforcement of the class action waivers at issue, the majority opinion looks to see if the NLRA clearly and manifestly indicates that Congress intended to override the FAA.  It finds no statutory or contextual evidence of that clear intent.  It also made short work of the employees’ argument for Chevron deference to the NLRB.  [One of the best lines from the opinion is in that section.  Noting that Chevron was based, in part, on the idea that policy choices should be left to the executive branch which voters can hold accountable, the majority writes: “whatever argument might be mustered for deferring to the Executive on grounds of political accountability, surely it becomes a garble when the Executive speaks from both sides of its mouth, articulating no single position on which it might be held accountable.”]

Interestingly, the majority decision acknowledges that there is a vigorous policy debate over the merits of class action waivers in arbitration.  At multiple points during the opinion Justice Gorsuch bows to the possibility that the FAA could be flawed: “You might wonder if the balance Congress struck in 1925 between arbitration and litigation should be revisited in light of more contemporary developments.”  And later “This Court is not free to substitute its preferred economic policies for those chosen by the people’s representatives.”  But each time he returns to the idea that the Court is bound by the law to rigidly enforce arbitration agreements.  In her dissent, Justice Ginsburg agrees that Congress is now the right branch of government to act.  The dissent states: “Congressional correction of the Court’s elevation of the FAA over workers’ rights to act in concert is urgently in order.”

The dissent would hold that Section 7 of the NLRA does guarantee the right to pursue collective litigation and trumps the FAA.  The dissent reviews the text and legislative history of the NLRA to support its conclusion and addresses the majority’s arguments.  What I found most interesting in the dissent, however, was its review of the legislative history behind Section 1 of the FAA.  Apparently, organized labor was concerned about the FAA’s impact, and Herbert Hoover amended the legislation to specifically exclude workers’ contracts.  Congress passed the amended version and labor withdrew its opposition.  [Justice Ginsburg’s research on that topic may come in handy next term when the Court addresses the New Prime case.]

This is the result that everyone expected based on oral argument and the current politics of the court.  But still, when I read the “Justice Gorsuch delivered the opinion of the Court,” I can’t help feeling like it should say “Justice Gorsuch delivered on President Trump’s promises of a conservative court.”  Would it have been better to just let the new appointments to the NLRB reverse the Board’s course of action, much like the reversals of other agencies, and save the Court from this particular insertion into politics?

*  (Do you hear that growly “one on one” from this song when you read that?   Maybe it’s just me.)

 

Today the Supreme Court of the United States granted certiorari in another case involving the Federal Arbitration Act.  The case, Lamps Plus, Inc. v. Varela, comes from the Ninth Circuit and raises a variation of the question from Sutter: how clear does an arbitration agreement need to be to show the parties authorized class arbitration?

My initial summary of the Ninth Circuit opinion is here.  It didn’t even merit an entire post of its own, but shared time with another circuit court opinion.  In my view, the issue of class arbitration has largely been hammered out.  SCOTUS ruled in Stolt-Nielsen that class arbitration is only allowed if the parties’ arbitration agreement authorizes it.  More recently, courts have generally concluded that courts, not arbitrators, should decide whether the parties’ arbitration agreement allows for class arbitration.  Finally, state law governs the question of how to interpret whether the parties’ arbitration agreement authorizes class arbitration.  Yet, now we will have a new decision on whether an interpretation of state law (interpreting ambiguity against a drafter to find class arbitration is authorized) should be preempted by the federal policy favoring arbitration (and particularly, favoring non-class arbitration).

In fact, the other two arbitration cases on SCOTUS’s docket also relate to class actions.  The NLRB case (whether forcing employees to waive their right to class actions in arbitration agreements is a violation of labor statutes) is still under consideration (it was argued last October).  And another upcoming case, New Prime, Inc. v. Oliveira, stems from a putative class action brought by independent contractors, even though the narrow issue before SCOTUS is whether an arbitrator or court should determine the applicability of the FAA.

If any Supreme Court clerk or justice had called me and asked “what are some of the really hot arbitration questions that this Court should resolve in order to ensure consistent decision-making around the country?,” class arbitration would not have been on my list.  I read every arbitration opinion that issues from the federal circuit courts and state high courts, and the issues I see courts struggling with most often include delegation clauses and issues relating to non-signatories.  Maybe I am not giving enough credit to the few class action opinions that come out (despite the fact that they impact many people), or alternatively maybe the Court’s emphasis on class arbitration highlights a political aspect of the cert process, or a particular interest of a majority of justices, or just the persuasiveness of this team.

 

A new Seventh Circuit case answers the age-old question: if a fourteen-year-old swipes her mom’s credit card to complete a smoothie purchase at the mall, is she bound to the credit card agreement?

The case, A.D. v. Credit One Bank, N.A., __ F.3d __, 2018 WL 1414907 (Mar. 22. 2018), addressed whether the lead plaintiff in a putative TCPA class action was bound to an arbitration agreement.  The lead plaintiff was a teenager when the case was filed, and she alleged that the defendant bank called her cell phone multiple times to collect on her mother’s credit card debt.  (A practice which is precluded by the Telephone Consumer Protection Act (TCPA).)  During the course of discovery, the defendant bank realized that it had linked the teenager’s cell phone number to the mother’s credit card account when the mother used the teen’s cell phone to call the defendant.   It also discovered that the teenager had completed a few smoothie purchases at the mall using her mother’s credit card.  The defendant bank then made a motion to compel arbitration  (and to deny class certification) based on the arbitration agreement in the mother’s cardholder agreement.  The district court granted the motion, but the Seventh Circuit reversed.

On appeal, the Seventh Circuit tried to clear up any ambiguity in its previous treatment of cases regarding non-signatories.  It established two analytical steps needed to resolve the arbitrability question: whether the daughter is directly bound by the arbitration agreement; and if not, whether any of the arguments for binding non-signatories apply.

With respect to whether the daughter was bound by the plain language of the arbitration agreement, the Court had no trouble concluding she was not.   The arbitration agreement specifically applied to claims made by authorized users of the account.  The district court had relied on one sentence in the paragraph defining “Authorized Users” of the card: “If you allow someone to use your Account, that person will be an Authorized User.”  That, plus the fact that the mother had ordered smoothies, but then sent her daughter up to the counter to swipe the credit card when the smoothies were ready, led the district court to conclude the daughter was an “authorized user” bound by the cardholder agreement.  The appellate court, however, noted that the full definition of Authorized User required multiple steps for someone to qualify, none of which had been completed for the teenage plaintiff.  Furthermore, the cardholder agreement limited authorized users to people over fifteen, and the relevant state law also did not allow fourteen-year-olds to enter into binding contracts.    Therefore, the Seventh Circuit found the “terms of the cardholder agreement do not bind” the teenage plaintiff.

With respect to the second analytical step, the Court found the principles of equitable estoppel (which can bind non-signatories to arbitration agreement) did not bind the daughter to the cardholder agreement.  Critically, equitable estoppel requires the bank to prove that the teenage daughter received a “direct benefit” from the cardholder agreement.  In this case, the bank’s whole argument hinged on the smoothie.  [I wonder if there was testimony about how much it cost, and how delicious it was!  Did it have vitamin boosters?!]  And the Court was not impressed.  It reasoned:

“any ‘benefit’ that [daughter] received with respect to the credit card was limited to following her mother’s directions to pick up the smoothies that her mother had ordered previously. . . Her mother, [] benefited from the agreement, which allowed her, not [the daughter] to buy the smoothies.”

The Court also concluded that the class action claims did not seek benefits under the cardholder agreement, which would have been a separate basis for estoppel.

As a result, the Seventh Circuit reversed the decision to grant the motion to compel arbitration and directed the district court to reconsider its denial of the class certification as well.

 

Pencils down.  (Is the modern equivalent “cursors down”?)  All the attorneys who were drafting new form consumer agreements to comply with the CFPB rule prohibiting class action waivers can now trash those documents.  Pursuant to the Congressional Review Act, the Senate voted 51-50 last night (with the VP as tie-breaker) to nullify the CFPB’s rule.  (The House of Representatives had cast a similar vote earlier this summer.)  And President Trump has signaled he will sign the bill.  But you already know all that.  The news came out last night.

So, what’s next?

After deleting all the new draft agreement, of course.  And I’m not being facetious about that.  The rule required that new agreements be in effect by March 2018 and it takes large companies significant time to approve and roll out new consumer agreements, so many were already in the works.  Especially since the Senate waited until almost the end of its 60 session day deadline to act.  But, most large institutions would rather eat those attorneys’ fees than be the subject of new class action lawsuits, so they won’t complain.

There are many constituencies that are very unhappy with the U.S. Supreme Court’s interpretations of the Federal Arbitration Act.  They are not going to give up just because 50 Senators disagree.  Those constituencies had been largely unsuccessful in the federal courts in the last dozen years, but more successful in federal agencies in the last few years. Under the Obama administration, multiple agencies had issued rules limiting the use of arbitration with consumers and employers.  All of those have been reversed in the first ten months of the Trump administration.  Which leaves those who are still concerned about arbitration with a dilemma — how can they make change?  Do they push for smaller legislative victories, adding riders to federal statutes so that claims brought under them must be heard in a court of law?  That’s not a terrible idea, since the slimmest majority voided the CFPB rule.  Or do they develop new, creative legal theories in state and federal courts?  Theories like “wholly groundless” and that the FAA does not apply to motions to vacate in state court that nip at the edges of FAA jurisprudence?  I think that is the most likely result.

What about those who are happy with this outcome, what’s next for them?  I predict more companies will make use of class action waivers.  In the last few years, with the proposed (and then actual) rule-making by various agencies, any move to add a class action waiver carried with it some risk that it would be soon made ineffective.  But now, the Supreme Court and its conservative majority are firmly in favor of enforcing those class action waivers.  And the federal agencies are also supportive of class action waivers.  So, some of those companies who were kept on the fence by administrative action are likely to jump off and land on the side of adding class action waivers to their arbitration agreements.

I’d love to hear what you think may happen in arbitration law as a result of the Senate vote to trump the CFPB.  Send me a line.

 

 

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…