Drafting Consumer Arbitration Clauses for Electronic Agreements

New York Law Journal | August.18.2015

In AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), the U.S. Supreme Court held that the Federal Arbitration Act (FAA) prohibits states from invalidating arbitration provisions that promote streamlined and efficient arbitration proceedings. Concepcion specifically held that state courts may not find an arbitration agreement unconscionable for failure to provide a right to class-wide arbitration. Two years after Concepcion, the Supreme Court decided yet another case in which it found an improper invalidation of a class-wide arbitration waiver. In American Express Co. v. Italian Colors Rest., 133 S.Ct. 2304 (2013), the Supreme Court held that a contractual waiver of class arbitration may not be invalidated on the grounds that the plaintiff's practical cost for arbitration of an antitrust claim exceeds the potential recovery. Many businesses have taken advantage of this Supreme Court precedent to expand and bolster the arbitration provisions in their consumer agreements.

Notwithstanding the Supreme Court's broad holdings on the scope of the FAA's protection of arbitration clauses, careful drafting and implementation remain important to maximize the enforceability of arbitration clauses, particularly in e-commerce consumer agreements. Plaintiffs continue to challenge the validity of arbitration agreements in favor of proceeding in court, and the lower courts continue to be receptive to those challenges and attacks. Consumers may still take advantage of traditional state law contract defenses to attack arbitration provisions. See 9 U.S.C. §2 (an arbitration agreement "shall be valid, irrevocable, and enforceable, save upon grounds as exist at law or in equity for the revocation of any contract.").
In light of the frequency of challenges to arbitration provisions, any arbitration terms and class action waivers should be drafted with care to withstand legal and equitable scrutiny. The most common grounds of challenge to arbitration provisions involve claims of unconscionability and attacks on the sufficiency of the contract formation process. We will take each in turn.
Avoiding Unconscionability
Unconscionability challenges remain an impediment to enforcing arbitration clauses and class action waivers. For example, in Berkson v. GoGo, No. 14-CV-1199, Memorandum & Order (E.D.N.Y. April 8, 2015) the district court found the arbitration terms in the e-commerce agreement of in-air wireless Internet access provider Gogo Inc. to be unconscionable. Based on that determination, Gogo lost the right to arbitrate the consumer contract claims.
When crafting arbitration provisions, drafters and their business clients should be cognizant of procedural and substantive unconscionability standards in major jurisdictions where challenges are common, such as New York and California, and should take those standards into account. The New York and California courts weigh procedural and substantive unconscionability on a sliding scale to determine overall unconscionability. Deficiencies in one aspect of unconscionability, such as procedural shortcomings, may be counterbalanced by strengths in the other aspect, such as substantive fairness, Sanchez v. Valencia Holding Co., 14 C.O.D.S. 8433, (Cal. Supreme Ct., Aug. 3, 2015) (applying California's balancing test to hold an arbitration clause enforceable).
Procedural Unconscionability. The procedural unconscionability analysis considers whether the party challenging the contract suffered from both "oppression" and "surprise." Kilgore v. Keybank National Association, 718 F.3d 1052, 1058-59 (9th Cir. 2013).Oppression originates from a lack of negotiating power and meaningful choice. Id. Consumer contracts, which are generally contracts of adhesion entered into without any opportunity to negotiate, already have one procedural strike against them in the "oppression" category. Thus, the "surprise" element of procedural unconscionability becomes most important for consumer contracts. Kilgore, 718 F.3d at 1059.
An e-commerce company's best defense against a procedural unconscionability challenge is to deflect any claims of "surprise" by making sure that the salient arbitration terms are hard to miss. Any business contemplating the inclusion of an arbitration provision and class action waiver should consider including a brief and prominent notice on the first page of the agreement to alert consumers that the agreement requires arbitration of any disputes and includes a waiver of class action rights. Kilgore, 718 F.3d at 1059. Failure to telegraph these terms may result in their unenforceability.
In Specht v. Netscape Commc'ns Corp., 306 F.3d 17, 23 (2d Cir. 2002), the U.S. Court of Appeals for the Second Circuit refused to enforce terms of use that "would have become visible to plaintiffs only if they had scrolled down to the next screen." Similarly, in Mohamed v. Uber Technologies, Nos. C-14-5200, C-14-5241, 2015 WL 3749716 (N.D.Cal. June 9, 2015), the Northern District of California found an arbitration provision procedurally unconscionable, because the relevant terms were "hidden" within an adhesion contract.
Businesses may also reduce the risk of a finding of "oppression" through utilization of an "opt-out" mechanism that might provide the consumer with an opportunity to decline the arbitration terms. In Circuit City Stores v. Ahmed, 283 F.3d 1198, 1199 (9th Cir. 2002), the U.S. Court of Appeals for the Ninth Circuit found that an opt-out choice for an arbitration clause made the contract less adhesive. But the California Supreme Court held in Gentry v. Superior Court, 42 Cal.4th 443, 470-72 (2007), abrogated on different grounds by Iskanian v. CLS Transp. L.A., 59 Cal.4th 348 (2014), that an opt-out choice is not a cure-all for claims of procedural unconscionability.
This does not end the inquiry. Even if a particular arbitration clause is found procedurally unconscionable, the agreement may still be enforceable if it survives a substantive unconscionability test. See Swift v. Zynga Game Network, 805 F.Supp.2d 904, 915 (N.D.Cal. 2011) ("To be unenforceable, a contract must be both procedurally and substantively unconscionable.") (emphasis added).
Substantive Unconscionability. Whether an agreement is substantively unconscionable is a fact-sensitive inquiry that examines whether the terms of the agreement are unreasonably harsh or one-sided. Kilgore, 718 F.3d at 1058. In protecting against substantive unconscionability, the drafter should be sensitive to the fairness of the agreement and the mutuality of its provisions. The drafter should be careful not to create an arbitration agreement that is so one-sided that a court would find it unduly harsh and be mindful that provisions that are unfairly favorable to the company, at the consumer's expense, could undermine enforceability.
In Trompeter v. Ally Financial, 914 F.Supp.2d 1067, 1073-76 (N.D.Cal. 2012), the California district court found that terms that left the parties unequal in their ability to pursue their respective claims were substantively unconscionable. In Bragg v. Linden Research, 487 F.Supp.2d 593, 611 (E.D.Pa. 2007), the Pennsylvania district court found that an agreement reserving the right to the company to unilaterally modify the arbitration clause was substantively unconscionable. In these cases, the arbitration provisions unfairly favored the company. However, as the California Supreme Court recently ruled, substantive unconscionability requires more than a "bad bargain." Sanchez v. Valencia Holding Co., 14 C.O.D.S. 8433, (Cal. Supreme Ct., Aug. 3, 2015). It requires terms that are "sufficiently unfair, in view of all relevant circumstances[,]" to render them "overly harsh" or "unduly oppressive." Id.
Assuring Meaningful Assent
Enforceability also requires meaningful assent by the consumer to the contract terms. See Specht v. Netscape Commc'ns Corp., 306 F.3d 17, 29 (2d Cir. 2002) ("[m]utual manifestation of assent, whether by written or spoken word or by conduct is the touchstone of contract."). Without meaningful assent, an arbitration clause and class action waiver will not be enforceable. In the world of e-commerce consumer contracts, assent to the contract terms typically takes one of two forms: clickwrap or browsewrap. See Nguyen v. Barnes & Noble, 763 F.3d 1171, 1175-76 (9th Cir. 2014); see also Berkson v. GoGo, No. 14-CV-1199, Memorandum & Order (E.D.N.Y. April 8, 2015) (also discussing Scrollwrap and Sign-in-wrap alternatives).
Clickwrap agreements require a user to "click" on a button to agree to presented terms of service. Nguyen, 763 F.3d at 1175-76. This "click" action that requires consumers to affirmatively assent to contract terms placed in front of them significantly reduces the consumers' ability to challenge contract formation. See Centrifugal Force v. Softnet Commc'n, No. 08-CV-5463, 2011 US Dist. LEXIS 20536, at *18-21 (S.D.N.Y. 2011) (enforcing clickwrap license agreement). It does not matter whether the consumer took the time to read the agreement, so long as the consumer was made aware of the agreement's existence. See Hirsch v. Citibank, 542 F. App'x 35, 37 (2d Cir. 2013) (if a person had reason to know of a contract, he cannot avoid the contract's terms by failing to read it); Nicosa v. Amazon.com, No. 14-CV-4513, Memorandum & Order (E.D.N.Y. Feb. 4, 2015) (it is not relevant whether a party actually read the contract to which it assented).
Browsewrap agreements seek to bind any user who makes use of a website, by virtue of such use alone, and do not require an affirmative expression of assent. As recognized by the court in Nguyen v. Barnes & Noble, "The defining feature of browsewrap agreements is that 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." 763 F.3d at 1176. For browsewrap agreements, the question of contract formation turns on whether the user had actual or constructive notice of the existence of terms and conditions of use. Without such notice, the browsewrap agreement is unenforceable and useless to the business. Id.
When actual notice can be shown, courts are likely to find an enforceable agreement. See Id. (assembling the following actual notice browsewrap cases: Register.com v. Verio, 356 F.3d 393, 401-04 (2d Cir. 2004) (admitted knowledge of terms); Sw. Airlines Co., 2007 U.S.Dist. LEXIS 96230 at *4-6 (consumer had actual notice of terms in cease and desist letter); Ticketmaster Corp. v. Tickets.com, No. CV-997654, 2003 U.S. Dist. LEXIS 6483 at *2 (receipt of letter containing browsewrap terms).)
Constructive or inquiry notice presents a more difficult enforceability issue. A user who is informed of the existence of an agreement, even if not specifically presented with it, is more likely to be found to have assented to the agreement's terms than a user who is completely unaware. This was true in Zaltz v. JDATE, 952 F.Supp.2d 439, 451-54 (E.D.N.Y. 2013) where the Eastern District of New York found a user who was required to check a box confirming the reading of and agreement to the website's terms to be bound by those terms, even though the terms were not specifically presented.
Whether sufficient constructive notice might be found depends on "whether the website has put a reasonably prudent user on inquiry notice of the terms of the contract." See Nguyen, 763 F.3d at 1177 (citing Specht, 306 F.3d. at 30-31; In re Zappos.com, Inc. Customer Data Sec. Breach Litig., 893 F.Supp.2d 1058, 1064 (D. Nev. 2012)). Notice requires more than a conspicuous hyperlink in proximity to the site tools used by the consumer. See Nguyen, 763 F.3d at 1179. A prominent notice that any use of a site will bind the user to the site's terms of use has been found sufficient by several courts to provide constructive notice of the site's contract terms and establish binding assent. See Cairo, Inc. v. Crossmedia Servs., No. 04-04825, 2005 U.S.Dist. LEXIS 8450, at *4-5, *12-14 (N.D.Cal. April 1, 2005); see also Nicosa v. Amazon.com, No. 14-CV-4513, Memorandum & Order (E.D.N.Y. Feb. 4, 2015).
In contrast, terms that are inconspicuous are unlikely to be binding. For example, in Specht, the court took issue with the fact the terms were visible only after scrolling. 306 F.3d at 23. Likewise, In re Zappos.com held that a "Terms of Use" hyperlink "buried" amongst other links on every page was insufficient to bind a site user. 893 F.Supp.2d at 1064. The same has been held for terms submerged within multiple website layers. See Jerez v. J.D. Closeouts, 943 N.Y.S.2d 392 (2012).
While Concepcion and its progeny are helpful in protecting the enforceability of arbitration clauses and class action waivers in consumer agreements, drafters and their clients should still be careful to assure that their specific provisions will be enforceable by considering unconscionability and contract formation standards in crafting their contracts. To ensure mutual assent to e-commerce consumer contracts, it is best to require that the consumer affirmatively "click" to demonstrate assent to the contract terms. To protect against unconscionability attacks, it is helpful to consider the overall fairness of the contract to the consumer and the mutuality of its terms.
Elyse D. Echtman is a partner at Orrick, Herrington & Sutcliffe in New York and can be reached at [email protected] Katie DeWitt is a managing associate at the firm in Sacramento. She can be reached at [email protected]
Reprinted with permission from the August 8, 2015 edition of the New York Law Journal © 2015​ ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 - [email protected] or visit www.almreprints.com. ​