Schnabel v. Trilegiant Corp., No. 11-1211 (2d Cir. Sept. 7, 2012)

Plaintiffs -- putative class action representatives -- unwittingly enrolled in Defendants’ online membership program.  At issue was whether Plaintiffs were bound to arbitrate their dispute with Defendants as a consequence of an arbitration provision that Defendants asserted was part of a contract between the parties.

Upon making purchases on third-party websites, Plaintiffs were presented with hyperlinks offering them rewards for enrolling in Defendants’ online membership program, which Plaintiffs unwittingly did.  The enrollment process concluded with Plaintiffs clicking a “yes” button on-screen, thereby acknowledging that the enrollee had read the “Terms & Conditions” of the agreement.  Below that button appeared a hyperlink to “Terms & Conditions.” After enrolling, payment-related information was then provided by the third-party website to Defendants.  After receiving the enrollment information, Defendants sent each Plaintiff an email with the terms and conditions of the membership program.  The Terms and Conditions included an arbitration clause. 

Plaintiffs continued to pay for the membership for several months before requesting a refund of the payments.  When Defendants refused to provide a full refund, Plaintiffs brought a class action suit against defendants on behalf of themselves and similarly situated plaintiffs, alleging that Defendants engaged in “unlawful, unfair, and deceptive practices [through]… unauthorized enrollment practice[s] [known as]… ‘post transaction marketing’ and ‘data pass.’”

Defendants moved to dismiss the case based on the arbitration provision in the Terms and Conditions, and the district court denied the motion to dismiss.  Defendants thus appealed.

On appeal, the Second Circuit identified the threshold question as whether the parties had in fact agreed to arbitrate the dispute between them, which is a question of state contract law.  Here, the applicable state law would be either California, the home of Plaintiffs, or Connecticut, the domicile of Defendants.  The court held that it need not decide the choice of law issue, however, since with respect to the question at hand there was no conflict between the two states' laws.  Under either state's laws, the question was whether the parties had outwardly manifested their assent to the contract and the arbitration provision.  In a case such as this, where the Plaintiffs' assent was largely passive, the court looks to whether Plaintiffs were on "inquiry notice" and assented to the contract through conduct that a reasonable person would understand to constitute assent.  For a contracting party to be on inquiry notice, the court stated that the "clarity and conspicuousness of the [contract] term is important."  In this case, the question for the court was whether the post-enrollment e-mails sent to Plaintiffs, and their failure to cancel their membership before the free trial period ended, constituted inquiry notice.

Defendants argued that the contract at issue here was a form of "terms-later" contracting -- that is the terms are added to the contract by the offeror subsequent to the establishment of the contracting relationship.  An analogy is the so-called “shrinkwrap license” cases where the terms at issue are provided inside the packaging of consumer goods.  Courts in such cases have found licenses to become enforceable contracts upon the failure to return the product after reading the terms and conditions.  In the alternative, the e-mailed terms and conditions may be seen as an amendment to the contract, an amendment accepted by Plaintiffs continued payment of the monthly fee, and their failure to cancel the service in a timely manner.

In this case, the Second Circuit held that the unsolicited email did not put Plaintiffs on inquiry notice.  The court distinguished the facts in this case from the “terms later” provisions held enforceable by the Second Circuit in Register.com Inc. v. Verio Inc., 356 F.3d 393 (2d Cir. 2004).  There, a website developer was found to be on legally sufficient notice of contractual terms restricting its use of plaintiff’s data provided after downloading the information because those terms were provided to the developer each time it accessed the data, which the developer did on a daily basis.  However, in the instant case, the court noted that Plaintiffs had no prior dealings with Defendants and were not put on inquiry notice, that is, when “reasonable people in the position of the parties would have known about the terms and the conduct that would be required to assent to them.”

The court also distinguished the facts of the instant case from the shrinkwrap agreements found valid in previous cases.  The court found merely receiving an email, without more, would not put a reasonable person on notice that the terms disclosed in that email relate to a service in which he or she has already enrolled and that, unlike shrinkwrap agreements, enrollees in defendants’ program “would not have been confronted with the existence of additional terms before being able to benefit” from the membership program.  The court also noted that the arbitration provision lacked a critical element of shrinkwrap contracting, “the connection of the terms to the goods (in this case the services) to which they apply,” because the delivery of the provision was “both temporally and spatially decoupled” from the act of enrolling in the membership program. 

Similarly, the court held the facts here were distinguishable from the amendment cases, since in those cases it is within the reasonable expectation of the parties that the offeror will add terms to the contract subsequent to the creation of the contractual relationship. 

According to the court, “a reasonable person would not be expected to connect an email that the recipient may not actually see until long after enrolling in a service (if ever) with the contractual relationship he or she may have with the service provider.”  The court noted that the inclusion of a requirement that Plaintiffs express manifest assent to the arbitration provision together with such assent would likely have overcome the email’s defects in providing notice.  Here, the court held that the continued payment of the monthly service fee did not constitute such assent, where their continued credit-card payments were auto-debited from their credits cards.

As such, the court found that the email did not provide sufficient notice to Plaintiffs of the arbitration provision and that, as a result, Plaintiffs could not have assented to it solely by failing to cancel their enrollment in Defendant’s program.  The court held that Plaintiffs were not bound by the arbitration clause provided in the email from Defendants and affirmed the district court’s order denying Defendants’ motion to compel arbitration.