In a fascinating decision, the Second Circuit has ruled that an internet merchant cannot compel arbitration with a consumer, when it only emailed the consumer the arbitration agreement after the consumer agreed to the purchase, without any requirement that the consumer affirmatively assent to the term.
In Schnabel v. Trilegiant Corp., __ F.3d __, 2012 WL 3871366 (2d Cir. Sept. 7, 2012), a father and son each purchased items through on-line websites (Priceline.com and Beckett.com). As they were finalizing their purchases, they clicked on a hyperlink inviting them to get cash back on their purchases. (Lesson #1 in this post – watch out for post-transaction marketing!) By entering their city and a password (but not their credit card information), they ended up agreeing to a monthly membership in “Great Fun” — a program offering discounts on products and services. The father and son later realized they had been paying $12-$15 per month for this membership, and brought a putative class action alleging they had never intended to join Great Fun and their membership was the result of deceptive practices.
The defendant then moved to compel arbitration, relying on “terms and conditions” of its Great Fun membership that mandated binding arbitration and precluded class-wide arbitration. Those terms and conditions were available to the father and son if they had clicked on another hyperlink from the page where they entered their city and a password. The defendant also had a practice of sending its full terms and conditions to all purchasers by email. The district court and appellate court denied the defendant’s motion to compel arbitration, finding no arbitration agreement had been formed.
The court’s analysis focused exclusively on whether the terms and conditions Great Fun emailed to the plaintiffs put them on notice of the arbitration provision. (The court refused to consider whether the hyperlink on the sign up page was sufficient, even though it acknowledged that “might have created a substantial question as to” whether there an arbitration agreement was formed, because defendant failed to raise that issue in the district court. Lesson #2 in this post — make every argument in the district court.) The court summarized applicable contract law by saying that where plaintiffs were not on actual notice of the arbitration provision (because it was not on the sign up page), they can only be bound by it if they were on “inquiry notice” of the term and assented through their conduct. In this case, the Second Circuit concluded “[w]e do not think that an unsolicited email from an online consumer business puts recipients on inquiry notice of the terms enclosed in that email . . . and that a failure to act affirmatively to cancel the membership will, alone, constitute assent.”
While courts have allowed terms to be unilaterally imposed by one party after the parties’ initial agreement, the Second Circuit notes that in those cases the original agreement gave notice that additional terms would follow, and/or the industry standards and history of the parties meant that reasonable people would be on notice that additional terms would become part of the original agreement. “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” with the service provider.” (In reaching this decision, the Second Circuit disagreed with an Alabama Supreme Court decision that had upheld an arbitration agreement that was sent to the consumer after he had joined a club by phone.)
Lesson #3 in this post comes from the Second Circuit itself. It noted that e-mailed terms, sent after the initial agreement, can be enforceable if merchants require consumers to “expressly manifest assent to the arbitration provision” and the consumers do assent.