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.

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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.

 

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.”