The Second Circuit recently ruled that an arbitration clause is unenforceable for a lack of notice where it is contained in an online membership program’s terms and conditions, and those terms are emailed to a consumer after he or she has already enrolled in the program. See Schnabel v. Trilegiant Corp., No. 11-1311 (2d Cir. Sept. 7, 2012). In affirming the district court’s denial of the defendant marketer’s motion to compel arbitration, the Second Circuit explained that the emails at issue created neither actual nor inquiry notice that additional terms applied to the membership agreement that customers had already entered. Accordingly, the court held that the members could not be bound by these terms, and that their failure to affirmatively act to cancel their memberships could not, alone, constitute assent.

Immediately after making a purchase on a third-party website, the plaintiffs in Schnabel were each presented with a webpage offering them a reward for choosing to enroll in a marketer’s online membership program. The offer required that the plaintiffs provide certain non-payment-related information to sign up, and once they did so, the third-party website transmitted their payment information to the defendant marketer. Having enrolled in the program, the plaintiffs later received a welcome email that included the terms and conditions—including an arbitration clause—that purportedly governed their membership in the defendant’s program.

In issuing its ruling in this case, the Second Circuit was careful to distinguish the facts from the later-delivered terms and conditions held enforceable by the Second Circuit in Inc. v. Verio Inc., 356 F.3d 393 (2d Cir. 2004). In, a website development service provider was found to be on legally sufficient notice of contractual terms restricting its use of the plaintiff’s data—notwithstanding the fact that the terms had been transmitted to the developer after it had already downloaded the information—because the developer accessed this data on a daily basis and was repeatedly shown the terms at issue. In Schnabel, however, the Second Circuit distinguished on the grounds that the plaintiffs had no prior dealings with the defendant marketer.

The court similarly distinguished the shrinkwrap licenses enforced in cases like Hill v. Gateway 2000 Inc., 105 F.3d 1147 (11th Cir. 1997) and ProCD Inc. v. Zeidenberg 86 F.3d 1447 (7th Cir. 1996). In those cases, various courts of appeal, including the Seventh and Eleventh Circuits, recognized that a software license included within product packaging becomes enforceable upon the customer’s receipt based on a theory of inquiry notice. That is, although a consumer does not manifest assent to the terms of the shrinkwrap license at the time of purchase, his or her failure to return the product after having an opportunity to read the terms constitutes assent.

Unlike in the shrinkwrap cases, however, the Schnabel court reasoned that the plaintiffs could enjoy the benefits of the program without ever opening the email that contained the terms at issue. Indeed, it noted that merely receiving an email, without more, does not put a consumer on notice that the terms disclosed in that email relate to a service in which he or she has already enrolled. “(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, especially where the enrollment required as little effort as it did for the plaintiffs here.”

Notably, the court mentioned that providing a hyperlink to an arbitration clause on the enrollment screen may be sufficient to create a substantial question regarding whether the provision was part of the contract between the parties. It found, however, that the defendant had forfeited this argument by failing to raise it in the district court.

Any company that provides customers with terms and conditions via email should carefully consider the potential implications of this case, and should have appropriate legal counsel review both its terms and conditions and its method of delivery for the same.