NAM PERSPECTIVE

November, 2015

ADR AND THE INTERNET: "CLICKWRAP" AND THE ARBITRATION AGREEMENT

By: Richard Brodsky, Esq.

Richard Brodsky, Esq. Arbitration Clauses in Consumer Mass Marketing Agreements: Clarity and Consent By: Richard Brodsky, Esq. A valid and enforceable contract is predicated on the agreement of both parties. This rule is taught in the first week of the first contracts course in the first year of law school. Yet there are too many examples of the lack of such consent invalidating arbitration clauses. Recently, the Ninth Circuit issued a decision invalidating an arbitration clause for lack of consent in ways that may affect many other contracts used in mass marketing of consumer goods and services. In Knutson v. Sirius XM Radio, the Court reversed a district court decision compelling arbitration in a dispute over violations of federal telemarketing laws (See No. 12-56120 D.C.; No. 3:12-cv-00418-AJB-NLS; .http://cdn.ca9.uscourts.gov/datastore/opinions/2014/11/10/12-56120.pdf). Plaintiff Knutson had purchased a new vehicle which came with a three-month trial subscription for Sirius XM radio. A month later he received an unsolicited packet from Sirius which set forth conditions for use including termination of the service within three days of its start, and an arbitration clause. The arbitration clause stated, inter alia, that “You are hereby waiving the right to go to court, including the right to a jury” and the “right or authority for any claims to be arbitrated on a class action basis.” Knutson soon began receiving a series of unsolicited marketing calls from Sirius. He responded by bringing a class action suit in federal District Court alleging violation of the federal Telephone Consumer Protection Act and seeking damages. Sirius responded by moving to dismiss on the grounds that arbitration was Knutson's sole remedy. The District Court agreed and dismissed without prejudice. Knutson appealed to the Ninth Circuit on the grounds that he had never agreed to an arbitration clause and that the clause itself was unconscionable. The Circuit agreed and reversed the District Court. The Circuit opinion stated the fundamental principle clearly: “A party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.... It is undisputed that under California law mutual assent is a required element of contract formation. Mutual assent may be manifested by written or spoken words, or by conduct....This principle of knowing consent applies with particular force to provisions for arbitration.” (Citations omitted). Sirius argued that, by his continual use of the radio service, Knutson had consented to the service agreement including the arbitration clause and the cancellation requirement. The Court rejected this argument holding that Knutson “could not be under obligation to act where there was no effective notice that action was required.” The mere purchase of a vehicle did not obligate him to the provider of an ancillary service. “Here...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.” Interestingly, the Ninth Circuit then went on to adopt the reasoning of the 2nd Circuit which found a similar lack of consent to arbitration in a case involving Priceline, Schnabel v. Trilegiant Corp., 697 F 3d 110, 2012). The reasoning and holding in both cases therefore apply to such disputes in New York. At the heart of these decisions is a particular wrinkle arising from mass-market consumer contracts when an ancillary service is provided by a third party not privy to the original contract between the business and consumer. In this case, there was no direct contractual relationship between Sirius and Knutson; the existence of a new contractual relationship required clear evidence of knowledge and consent; no such evidence existed. This ruling may be helpful to those resisting arbitration of disputes originating in complicated mass-market consumer agreements. It is similarly instructive to businesses which rely on such agreements. If you want your arbitration agreements to be effective, make sure that the language of the agreement is clear and that the consumer clearly indicates his or her consent. _________________________________________________________________________________ Richard Brodsky, Esq., a former New York State Assemblyman, is a member of NAM’s (National Arbitration and Mediation) Hearing Officer Panel and is available to arbitrate and mediate cases throughout the New York Metro area. For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at jsilvey@namadr.com or direct dial telephone at 516-941-3228. The internet has opened new pathways for alternative dispute resolution. While care must be exercised in how a business creates and implements arbitration policies, courts continue to favor arbitration of claims arising out of the use of computers and e-commerce. The shorthand for computer acceptance of arbitration clauses is “clickwrap,” an arbitration agreement that arises from a consumer “clicking” a computer-screen box which directly or indirectly sets forth an arbitration agreement.

In Whitt v. Prosper Marketplace, 1:15-cv-136-GHW, 2015 WL 4254062 (S.D.N.Y. July 14, 2015), United States District Court Judge Gregory Woods upheld a mandatory arbitration clause which had been agreed to by plaintiff, Larry Whitt, when he clicked a screen box containing a “hyperlink” to a lengthy “registration agreement.” The agreement itself did not appear on the computer screen.

Mr. Whitt, who is deaf, had brought a claim in Federal Court under the Americans With Disability Act alleging that Prosper had refused to accommodate his disability by refusing to let him use a Video Relay Service, which allows the hearing impaired to communicate by telephone using a sign language interpreter. Prosper operates a peer-to-peer lending service website to which Whitt had applied.

Prosper brought a Motion To Dismiss the suit and to compel arbitration under the terms of the Federal Arbitration Act. Prosper asserted that, in the course of applying for the loan, Whitt had clicked on a screen box labeled “Clicking the box below constitutes your acceptance of the ...borrower registration agreement” and led to a hyperlink to the full registration agreement. The agreement contain’s a binding arbitration clause. The loan application could not be completed if the box was not clicked. Mr. Whitt clicked and completed his application.

Mr. Whitt argued that, under New York law, he had not agreed to arbitrate because the hyperlink to the registration agreement made it too remote and inaccessible for him to fully understand its terms and conditions. In other words, he had neither actual nor constructive knowledge of the arbitration clause.

The Court placed the burden of showing that the arbitration clause was invalid on Mr. Whitt. “The party resisting arbitration bears the burden of proving that the claims at issue are unsuitable for arbitration.” citing Green Tree Fin. Corp v. Randolph, 531 U.S. 79, 91 (2000). The Court held that Mr. Whitt had not offered sufficient facts to meet that burden, and that by clicking the box, he had assented to the arbitration clause. It went beyond the factual findings and cited what it called “an abundance of persuasive authority” that a sufficiently conspicuous hyperlink means that “a reasonably prudent offeree would have noticed the link and reviewed the terms before clicking on the acknowledgment icon” citing Zaltz v. JDATE, 952 F. Supp 2d. 439, 454 (E.D.N.Y. 2013). Such hyperlinks create “actual or constructive notice” of the arbitration clause.

It remains the law that “In New York, clickwrap agreements are valid and enforceable contracts.” Centrifugal Force, Inc. v. Softnet Comm., Inc. 2011 WL 744732 at 7, (S.D.N.Y March 1, 2011)

Mr. Whitt, an indigent, also claimed that the cost of arbitration made it prohibitive and “unconscionable” for him to be forced into its use. The Court held that he had not offered factual support for that claim, and that the arbitration rules governing his case provided protections which limited his economic exposure. In light of these holdings, the Court chose to dismiss rather than stay the case, as there were no justiciable claims that survived the court decision.

The lessons for proponents of arbitration clauses in internet commerce are clear. While use of hyperlinks to the text of binding agreements remains permissible, the physical layout of the hyperlink and its accessibility can be the basis for a successful challenge to the validity of such agreements including arbitration clauses. There remains an undercurrent of concern that the reality of e-commerce makes it unlikely that consumers can be assumed to have constructive notice of terms they in fact do not read. Practitioners and website operators who make arbitration clauses accessible and easy to understand will avoid any such challenges to current law.

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Richard Brodsky, Esq., a former New York State Assemblyman, is a member of NAM’s (National Arbitration and Mediation) Hearing Officer Panel and is available to arbitrate and mediate cases throughout the New York Metro area.

Click here to view Richard Brodsky's resume.

For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at jsilvey@namadr.com or direct dial telephone at 516-941-3228.
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