Late last week, influential federal judge Jed Rakoff of the Southern District of New York denied a motion to compel arbitration of an antitrust class action complaint pending against ride-hailing pioneer Uber Technologies. The case, Meyer v. Kalanick and Uber Technologies, Inc., Case No. 15 Civ. 9796 (S.D.N.Y. July 29, 2016), may represent an installment in the pendulum swing against mandatory arbitration and class action waiver clauses in consumer contracts.
Uber’s mobile app contains a hyperlink to terms and conditions that include a mandatory arbitration clause. But Judge Rakoff, applying California law, ruled that consumers registering for Uber service were not obligated to visit or click through those terms in the app version at issue, and therefore never assented to arbitration. The court also found that Uber’s terms of service hyperlink was presented to Android users in “barely legible” fine print at the bottom of the screen, and that its arbitration clause was buried in “nine pages of highly legalistic language that no ordinary consumer could be expected to understand.” Crediting plaintiff’s allegation that he did not notice the terms of service while registering to use Uber, the court found there was “no basis” for claiming that plaintiff had actual notice of the arbitration agreement.
The decision noted a fundamental difference between so-called “click-wrap” and “browse-wrap” theories of assent to internet commerce terms. Click-wrap assent arises when a user is required to click a box to manifest consent to disclosed terms of an internet transaction. Uber’s registration process allegedly presented no click-box requirement. Browse-wrap consent may arise in the absence of a user’s outward manifestation of assent, but courts recognizing this category of online assent require the contract terms at issue to be so conspicuously disclosed that actual or constructive notice is indisputable. Judge Rakoff found that Uber’s arbitration clause lacked the requisite high profile because it was buried in multi-page terms of service that were themselves hidden within two layers of fine-print hyperlinks. The court also confined browse-wrap consent to cases where businesses and other sophisticated purchasers are involved – not individual consumers. And the decision distinguishes a Massachusetts federal case from two weeks ago that held Uber’s arbitration clause was sufficiently disclosed. Judge Rakoff held that the terms of service hyperlink at issue in the Uber app that Meyer saw was “much smaller and more obscure, both in absolute terms and relative to the ‘Register’ button.”
The Meyer decision ultimately denied Uber’s motion to compel arbitration on the narrow ground of an inconspicuous disclosure. But that ruling came only after the court denounced a routine loss of “precious and fundamental rights” through arbitration agreements that consumers “had no realistic power to negotiate or contest and often were not even aware of.” Calling these consumer arbitration contracts “legal fictions,” Judge Rakoff openly questioned whether the 1925 Federal Arbitration Act could “remotely contemplate” contract formation in the electronic age.
Both the sentiment and ruling of Meyer could be part of a growing backlash against mandatory arbitration in consumer agreements. Merchants and financial institutions adopted arbitration and class action waiver clauses in response to the 1990’s class action boom, and initially courts were evenly split about whether these clauses were enforceable to avoid class actions in state or federal court. Citing the same concerns Judge Rakoff expressed at the outset in Meyer, California’s highest court set up a judicial presumption against mandatory individual arbitration in consumer contracts. But the Supreme Court’s 2011 Concepcion decision struck down California’s judicial rule, holding that class action waivers in arbitration clauses in consumer contracts are entitled to enforcement under the Federal Arbitration Act (FAA), which compels courts to recognize these clauses absent common law grounds for invalidating a contract. In the five years since Concepcion, these provisions have received nearly universal enforcement in federal courts. In that span, the plaintiff bar has made a couple of runs at Concepcion in the Supreme Court, but each time the Court has doubled down on the primacy of arbitration under the FAA. In CompuCredit, the Supreme Court ruled that a federal statute creating a right to sue, and mandating related disclosures, does not override the FAA’s strong protection of arbitration agreements. And in Italian Colors, the court reversed the Second Circuit and held that the FAA does not permit courts to invalidate a contractual waiver of class arbitration just because a plaintiff’s cost of arbitrating a federal claim exceeds the potential recovery. The late Justice Scalia authored each of these three Supreme Court decisions invalidating judicial rules against the enforceability of mandatory arbitration clauses in consumer contracts.
The Meyer decision represents one of the very few decisions refusing to enforce a mandatory arbitration clause, and its skepticism of Concepcion’s reasoning is plainly evident. Interestingly, the decision comes weeks before the August 22 deadline for public comment on the Consumer Financial Protection Bureau’s (CFPB) proposed rule prohibiting financial product and service providers from relying on pre-dispute arbitration agreements to avoid class action suits. There is something to learn from Meyer (make those terms of service and arbitration clauses conspicuous!), but the CFPB’s new rule simply reopens the financial sector to class action attack. If that rule becomes law, the financial sector may become a vector for class action proxy litigation as plaintiff lawyers try to portray consumer claims as disputes about financial products and services. The good news is that as one pendulum swings away from Concepcion’s blanket enforcement of consumer arbitration clauses, momentum remains with rigorous standing requirements under Spokeo, and meaningful application of class certification requirements under Dukes.