In a recent decision from the US Court of Appeals for the Ninth Circuit, Lee v. Intelius Inc., 9th Cir., No. 11-35810, 12/16/13, the Court held that an online consumer could not be compelled to arbitrate a class action because the essential elements of a contract were not present.

The plaintiff, Donovan Lee, purchased a background check report online from Intelius Inc. After completing his credit card purchase, he was directed to an Intelius-branded thank you page that also featured a survey and a request to enter his email address. Small, light-grey print above the space to enter his email address read: “By typing your email address below, it will constitute your electronic signature and is your written authorization to charge/debit your account according to the Offer Details to the right.” Small, light-grey print below the space to enter his email address read: “By clicking ‘Yes’ I have read and agree to the Offer Details displayed to the right and authorize Intelius to securely transfer my name, address, and credit/debit card information to Family Safety Report, a service provider of Intelius.” Below the print was a large orange “YES and show my report” button and a smaller “No, show my report” button. The report was the background check report Lee had purchased from Intelius. The Offer Details described a free seven-day trial of “Family Safety Report” and a membership fee of $19.95 per month and indicated that the report was administered and provided by Intelius and is subject to their Terms of Site Use and Terms & Conditions. Small hyperlinks to a Privacy Policy and Terms and Conditions appeared underneath the Offer Details. The Terms and Conditions, which generally referred to the “Provider,” contained an arbitration provision.

Lee clicked “YES” without appreciating that he was signing up for a “Family Safety Report” membership and without reading the Terms and Conditions. Some months later, Lee noticed that his credit card had been charged $19.95 per month for the “Family Safety Report” by a company called Adaptive Marketing. Lee and other named plaintiffs brought a state-law class action against Intelius. Intelius impleaded Adaptive, which filed a motion to compel arbitration based on the arbitration provision in the Terms and Conditions.

The US District Court for the Western District of Washington held that Lee agreed to the Offer Details but not to the Terms and Conditions, and denied Adaptive’s motion to compel on those grounds. On appeal, the Ninth Circuit found that Lee neither agreed to the Offer Details nor the Terms and Conditions. The Ninth Circuit was skeptical that mutual assent to the contract was manifest merely by Lee entering his email address and clicking “YES” to view the background check report he had already purchased from Intelius. However, the Court declined to deny Adaptive’s motion to compel for this reason alone given the “lack of clarity in Washington law surrounding whether and under what circumstances a click may constitute an objective manifestation of assent.” Rather, the Court reasoned that there was no agreement to arbitrate because an essential element of the contract — the identification of the parties to the contract — was missing, all of which must be in writing under Washington law. What was missing was the identification of the parties to the contract.

The Court relied on the absence of Adaptive’s name on the thank you page offering the Family Safety Report and the Terms and Conditions, and was not swayed by Adaptive’s argument that “Family Safety Report” and “service provider of Intelius” were sufficient to identify any contracting party other than Intelius or an affiliate of Intelius. The Ninth Circuit further agreed with the District Court that “even an exceptionally careful consumer” would reasonably have understood that the hyperlink to Terms and Conditions was to the Intelius terms and conditions (and not Adaptive’s terms and conditions), to which Lee had already agreed and which did not contain an arbitration provision.

We reiterate the Ninth Circuit’s reminder that the data pass of credit card information from a seller to a third party and the authorization of a transaction by email address alone, as seen in Intelius, are now illegal under the federal Restore Online Shoppers’ Confidence Act.

Intelius is an important reminder to companies to ensure that the essential elements of a contract are met in online transactions with consumers and that the terms and conditions (including any arbitration provision) are clearly incorporated in that contract.