On August 17, 2017, the Second Circuit vacated a district court order denying defendants’ motion to compel arbitration of a consumer price-fixing putative class action and remanded for determination of whether participation in litigation in the district court waived defendants’ rights to arbitration. The decision may have a more enduring legacy beyond enforcement of arbitration rights, however, because it represents a victory for developers of smartphone apps in obtaining judicial recognition of their terms of service agreements.14
Factual Background and Procedural History. Spencer Meyer downloaded a software application (“app”) offered by Uber Technologies, Inc. (ʺUberʺ) onto his smartphone, and after downloading the app, he created and registered for an account with Uber using his smartphone. Meyer used the app approximately ten times and then filed an action against Uberʹs co‐founder and former Chief Executive Officer, Travis Kalanick, on December 16, 2015, on behalf of a putative class of Uber riders. Meyer alleged that Uber’s app allows drivers to fix prices amongst themselves, in violation of the Sherman Act, 15 U.S.C. § 1, and the Donnelly Act, N.Y. Gen. Bus. Law § 340. Uber later was joined as a necessary party. The parties proceeded to conduct discovery, and Kalanick and Uber then filed motions to compel arbitration. The district court denied the motions to compel arbitration, ruling that Meyer lacked reasonably conspicuous notice of the Terms of Service and did not unambiguously manifest assent to the terms. Having ruled that no agreement to arbitrate existed, the district court did not address Meyerʹs other arguments opposing arbitration, including whether Kalanick could enforce an arbitration agreement to which he was not a signatory and whether the defendants waived their arbitration rights by actively participating in the litigation.
Pursuant to 9 U.S.C. § 16, which permits interlocutory appeal from an order denying a motion to compel arbitration, defendants timely appealed. Defendants also moved to stay proceedings in the district court pending appeal. The district court imposed a stay, noting ʺthe need for further appellate clarification of what constitutes adequate consent to so-called ʹclickwrap, ʹ ʹbrowsewrap, ʹ and other such website agreements.ʺ Amici representing both consumers and internet companies filed appellate briefs weighing in on this issue.
Enforceability of Mandatory Arbitration Clause Contained in Terms of Service. The Second Circuit began its legal analysis by quoting the Federal Arbitration Act and noting the ʺliberal federal policy favoring arbitration agreements.ʺ After discussing the scope and standard of review, and applicable substantive contract law (California, but the court noted that New York law was substantially similar), the court undertook its assessment of whether Meyer had “reasonably conspicuous notice of the existence” of the arbitration clause contained in the Terms of Service and whether he unambiguously manifested assent to those terms.
The court discussed the nature of web-based contracts and contrasted common methods of manifesting assent (“clickwraps”- which require users to click a box after being presented with terms; “browsewraps”- which typically present a hyperlink to terms and conditions; “scrollwraps”-which require a user to scroll through the terms before clicking “I agree;” and “sign-in wraps”-where a site advises users that they agree to terms by registering or signing up). The court observed that “clickwrap” and “scrollwrap” agreements regularly are enforced because a user must affirmatively manifest assent, often after having seen assented-to terms on the screen, whereas “browsewrap” agreements are less frequently enforced because they do not “solicit an explicit manifestation of assent” and do not adequately notify users of the terms.
Waiver of Right to Arbitrate. Although the Second Circuit noted that waiver of the right to arbitrate ordinarily is determined by an arbitrator, if a “party seeking arbitration has participated in litigation regarding the dispute, the district court can properly decide the question of waiver.” Because Meyer argued that defendants waived their rights to arbitrate by defending this litigation in the district court, the Second Circuit concluded that the district court rather than an arbitrator should decide the waiver issue.
Conclusion. The Uber decision represents continued judicial recognition of the FAA’s policy favoring arbitration. It also is a boon to app developers in achieving enforcement of their terms of service and in providing guidance to the industry in presenting enforceable terms of service. For app users, it provides an important reminder to read before you click.