Enforceability of Mandatory Arbitration in Online Contracts

This article focuses on the differing results reached in recent cases involving defendants' motions to compel arbitration, including the Seventh Circuit's refusal to enforce an arbitration provision absent adequate notice to the consumer, and the opposite holding in a federal district court opinion issued in late June.

Seventh Circuit: Arbitration Clause in a Credit Score Package 'Actively Misleads The Consumer'

In Sgouros v. TransUnion, 817 F.3d 1029, No. 15-1371 (7th Cir. 2016), Gary Sgouros (plaintiff) purchased a “credit score” package from TransUnion (defendant). He was directed to a page to input personal information, and then he created an account and entered his payment details. On this page, there was a scroll window which read “Service Agreement” (the Agreement) across the top.

The scroll window had text informing plaintiff that the Agreement constituted “the [binding] terms and conditions.” Under the scroll window and to the right were the small hyperlinked words “Printable Version.” “Buried” on page 8 of the printable version of the Agreement was an arbitration clause. Sgouros was required to click a button labeled “I Accept & Continue to Step 3.” What Sgouros accepted was delineated in a bolded paragraph immediately above the button, which stated that he was providing “written instructions ' authorizing [defendant] to obtain your personal credit profile from [the three main credit bureaus.]“

Prior to manifesting assent, plaintiff did not have to click on the scroll window “or to scroll down to view the complete contents of the arbitration agreement.” Using this company-provided number, he went to a car dealership to get an advantageous loan. However, this number turned out to be useless for this purpose because it was 100 points higher than the score used by the dealership.

The plaintiff sued, alleging, inter alia, violations of the Fair Credit Reporting Act, 15 U.S.C. '1681g(f)(7)(A). The company moved to compel arbitration pursuant to the Agreement.

Seventh Circuit Chief Judge Diane Wood held the arbitration clause unenforceable under “general contract principles.” She analogized the Agreement to agreements governing the purchase of cruise-ship tickets, which are subject to the “reasonable communications” test, which inquires: 1) whether the physical characteristics of the ticket reasonably communicate the existence of the terms and condition”; and 2) whether the circumstances surrounding the passenger's purchase and subsequent retention of the tickets permitted the passenger to become meaningfully informed of its contractual terms. “Translated to the Internet,” the dispositive, fact-intensive question was “whether the Web pages presented to the consumer adequately communicate all the terms and conditions of the agreement, and whether the circumstances support the assumption that the purchaser receives reasonable notice of those terms.” This inquiry does not presume that a person who clicks on a box has notice of all the contents of the page.

According to the court, the Agreement failed to satisfy either prong. First, the defendant did not “ensure that the purchaser would see the critical language before signifying ' assent.” Specifically, the company's “Step 2″ Web page did not notify the plaintiff that he was assenting to the terms of the Agreement by purchasing the credit score package. The court determined that the Web page “contained no clear statement that his purchase was subject to any terms and conditions of sale.”

Second, the court characterized the bold text immediately below the scroll box, which informed plaintiff that by clicking the assent button he authorized the company to obtain his personal information, as evidence that the website “actively misleads the customer.” It is unrelated to assent to the Agreement, and therefore “[n]o reasonable person would think that hidden in this disclosure was also the message that the same click constituted acceptance of the Service Agreement.” Accordingly, the company “undid” any notice potentially communicated in this bold text block by including text that distracted the reader from the fact that clicking the button was assent to the Agreement.

The court refused to compel arbitration and remanded to the district court for further proceedings.

Mandatory Arbitration Clause Enforceable When Consumer Provided Notice Of Terms on Multiple Occasions

In Keena v. Groupon, 2016 WL 3450828 (W.D.N.C. June 21, 2016), Erin Keena (plaintiff) purchased a massage voucher through Groupon (defendant), a “web-based company that partners with retail businesses” and offers such businesses products and services for a discount if purchased through the defendant's website. Prior to purchasing the voucher, the plaintiff acknowledged the terms of use of the defendant's website, which included a mandatory arbitration provision, on two separate occasions. The arbitration provision was in bolded text on page 7 of 8. It delineated Illinois law as governing any disputes

First, to create an account, plaintiff had to agree to the Terms of Use (which appeared on the page in a “prominent” blue hyperlink) by clicking a box next to the words “I agree to the Terms of Use and Privacy Statement.” Second, a prerequisite to purchasing the voucher was that she click a button that said “Complete Order.” Directly above the button was a sentence stating that “[b]y clicking 'Complete Order' I accept the current Terms and Conditions ' .” “Terms and Conditions” was again hyperlinked.

Plaintiff was unable to contact the company to schedule a massage and redeem her voucher. Groupon refunded her purchase by crediting her account with money that could only be used on its website. In October 2015, she filed suit alleging, among other causes of action, breach of contract and breach of the covenant of good faith and fair dealing. Defendant moved to compel arbitration or in the alternative, to dismiss under FRCP 12(b)(6).

The court granted the defendant's motion to compel arbitration. It first dismissed the plaintiff's threshold argument that the Federal Arbitration Act (FAA) did not preempt Illinois law if a conflict arose. But see, Epps v. JP Morgan Chase Bank, N.A., 675 F.3d 315 (4th Cir. 2012) (FAA does not preempt choice of law provision that refers to specific state statute, instead of a generalized body of state common law). This discussion was however academic, since the plaintiff “correctly contends that Illinois law applies in this case.”

Rather, the court devoted most of the opinion to rejecting the plaintiff's argument that the Terms of Use were unconscionable. First, it observed that defendant provided access to the terms of use on multiple occasions during the online ordering process. Notably, it also cited the general proposition espoused in Sgouros that a website can bind users to terms of use by placing a clearly labeled hyperlink next to an acceptance button. Since plaintiff had checked a box directly beside a link to the terms of use and affirmed her consent to such terms, she had “expressly consented to them.” As such, the terms of use could not be procedurally unconscionable. Accordingly, the plaintiff was required to arbitrate and the motion to dismiss was moot.

Richard Raysman is a Partner at Holland & Knight. Peter Brown is the principal at Peter Brown & Associates and a member of this newsletter's Board of Editors. They are co-authors of Computer Law: Drafting and Negotiating Forms and Agreements (Law Journal Press).