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Contract Formation

Massachusetts Supreme Court Holds That Uber’s Registration Process Did Not Provide Reasonable Notice of Terms and Conditions and That Arbitration Was Therefore Improper

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The Massachusetts Supreme Judicial Court recently held that Uber’s notification of its “terms and conditions” during the registration process for its app did not provide “reasonable notice” to users of Uber’s terms, that there was therefore no valid contract between Uber and the users who were suing it, and that arbitration that had occurred had therefore been improper.

The Kauders sued Uber in Massachusetts Superior Court claiming, among other things, that it had unlawfully discriminated against Mr. Kauders on the basis of his disability because three Uber drivers refused to give him rides because he is blind and was accompanied by a guide dog.

Uber moved to compel arbitration under its terms and conditions. The court granted Uber’s motion and the parties arbitrated the case. The arbitrator ruled in favor of Uber.

Shortly thereafter, the First Circuit held, in a different case against Uber, that “Uber’s registration process did not create a contract because it did not provide reasonable notice to users of the terms and conditions” and there was “no enforceable contract requiring arbitration.”

In the Kauders litigation, Uber then moved to confirm the arbitration award. At the hearing on that motion, the Kauders raised the First Circuit’s decision and subsequently moved for reconsideration of the court’s decision compelling arbitration. The court granted that motion in light of the First Circuit’s decision and denied Uber’s motion to confirm. Uber appealed.

The Massachusetts Supreme Court agreed with the First Circuit and the Kauders that Uber’s registration process did not provide reasonable notice of its terms and conditions.

Uber argued that (1) the trial court lacked authority to deny its motion to confirm because the Kauders “failed to move to vacate the award within thirty days”; (2) the Kauders’ motion for reconsideration was untimely and improper “because there was no change in fact or law”; and (3) Uber’s registration process created a valid, enforceable contract requiring arbitration.

The Supreme Court rejected Uber’s argument about the Kauders’ failure to move to vacate the award, explaining that, unlike federal law, it “d[id] not consider participation in the arbitration process as requiring revisitation of the arbitrability issue within the thirty-day time period.”

Although the Supreme Court agreed with Uber’s argument that it was an abuse of discretion for the trial court to grant the Kauders’ motion for reconsideration, it declined to remand the case to require the trial court to confirm Uber’s arbitration award because “the issue of arbitrability would [still] be preserved for appeal” and the Kauders “would then undoubtedly appeal on that ground, and the case would be right back before” the Supreme Court.

Applying a “two-prong test” asking “whether there is reasonable notice of the terms and a reasonable manifestation of assent to those terms,” the court determined that Uber’s terms of service did not create a valid contract. When the Kauders created user accounts, a link to Uber’s “terms and conditions” was on the bottom of the third screen they saw during the registration process. The screen stated: “By creating an Uber account, you agree to the Terms & Conditions and Privacy Policy.” “Terms & Conditions and Privacy Policy” was “in a rectangular box and in boldface font,” while the rest of the sentence in question was in ordinary type. The court described Uber’s “terms and conditions” as “extensive” and conferring broad indemnity on Uber.

The court concluded that Uber’s registration process did not provide “reasonable notice” of Uber’s “terms and conditions” under the circumstances, finding it significant that (1) “the interface did not require the user to scroll through the conditions or even select them,” even though Uber required its drivers to review its terms and conditions for drivers before registering to drive; (2) the notification about the “terms and conditions” was “oddly displayed,” with the important language notifying users that they were agreeing to something “being displayed less prominently than” the phrases “terms and conditions” and “privacy policy”; (3) the placement of the “terms and conditions” notification was on the “third screen” without any prior reference to the terms; and (4) the “title of the screen” and “the information on” it focused on payment, not conditions.

In sum, “the design of the interface for the app … enable[d], if not encourage[d], users to ignore the terms and conditions” and “[n]othing about [the] third screen … conveyed to a user that he or she should open a link that would reveal an extensive set of terms and conditions at the bottom of the screen.” “Instead of requiring its users to review [its] terms and conditions as it appear[ed] to do with its drivers, Uber ha[d] designed an interface that allow[ed] the registration to be completed without reviewing or even acknowledging the terms and conditions.” Thus, Uber “failed to show that it provided the [Kauders] with reasonable notice.”

There was therefore “no enforceable agreement between Uber and the [Kauders], and therefore the dispute [in this case] was not arbitrable.” Accordingly, the court remanded the case.

Kauders v. Uber Technologies, Inc., No. SCJ-12883 (Jan. 4, 2021).

Sixth Circuit Reverses Order Finding Employment Arbitration Agreement Void Due to Coercion

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An employee sued her former employer and coworkers in the Eastern District of Michigan for sexual harassment, defamation, and for subjecting her to a hostile work environment. The employer argued that the employee’s claims fell within the scope of an arbitration agreement, but the district court held that the agreement was void because the employee had been coerced into signing it.

The employee argued that her boss told her that if she did not sign the agreement she would be fired. She stated that the agreement was presented to her in the middle of the workday, when she had little time due to her pressing work duties, and that her boss stood behind her and waited while she attempted to review it, ratcheting up the pressure. In addition, the plaintiff employee noted that she was a single mother with a disabled child and could not afford to lose her job.

The Sixth Circuit reversed, holding that “fear of financial ruin alone is insufficient to establish economic duress; it must also be established that the person applying the coercion acted unlawfully.” Where a party does not threaten anything that the party is not legally entitled to do, then there is no duress. Michigan is an at-will employment state, meaning that the employer’s conditioning the plaintiff’s continued employment on her signing the arbitration agreement did not amount to unlawful conduct. Therefore, the employee could not show that she was coerced into signing the agreement.

The plaintiff also argued that she did not knowingly and voluntarily waive her right to a judicial forum for her prospective claims under Title VII of the Civil Rights Act of 1964. The court applied a five-factor test to determine whether the waiver of Title VII claims was valid. The plaintiff had a high school-level education with some post-secondary education and experience reviewing and executing car sales contracts, which was held to be sufficient under the first prong. The court also found that the employee was given sufficient opportunity to review the contract, emphasizing the fact that she failed to request more time or the opportunity to consult a lawyer before signing. The court quickly dispatched the remaining factors, whether the agreement was sufficiently clear, whether sufficient consideration was provided, and the totality of the circumstances, and held that the contract was a valid waiver of the plaintiff’s right to adjudicate her Title VII claims in a judicial forum.

Solomon v. Carite Corporate LLC, No. 20-1020 (6th Cir. Nov. 23, 2020).

Ninth Circuit Holds That a Change-of-Terms Provision Cannot Bind Parties To a New Browse-Wrap Agreement

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The Ninth Circuit recently concluded that a consumer was not bound by updated terms merely because she accessed a website that contained new terms in a “browse-wrap” agreement on the website. The court also concluded that an arbitration clause in the original “click-wrap” terms that did apply did not preclude arbitration under a California rule invalidating arbitration clauses that preclude public injunctive relief actions under the California Unfair Competition Law.

In 2014, Rachel Stover purchased a credit monitoring product called Experian Credit Score. In so doing, she assented to certain terms and conditions, including an arbitration clause requiring arbitration of any claims arising out of the transaction “to the fullest extent permitted by law” and a change-of-terms provision stating that “[e]ach time” she “accessed . . . the . . . Product Website,” she manifested to “the then-current” terms of the agreement.

Stover cancelled her subscription in 2014, but accessed the website again in 2018. The following day, she filed a putative class action in California federal court alleging violations of, inter alia, the Fair Credit Reporting Act and California’s Unfair Competition Law.

Experian moved to compel arbitration. The District Court granted that motion. It concluded that (1) the dispute was governed by Experian’s 2018 terms because the change-of-terms clause in the 2014 terms made the 2018 operative as soon as Stover logged onto the website in 2018, (2) a carve out for Fair Credit Reporting Act claims in the 2018 terms did not apply, and (3) Stover’s claims were not exempt from arbitration under the California Supreme Court’s decision in McGill v. Citibank, N.A., 393 P.3d 85, 94 (Cal. 2017), which held that “a provision in any contract . . . that purports to waive, in all fora, the statutory right to seek public injunctive relief under the [California Unfair Competition Law (UCL)] is invalid . . . .”

The Ninth Circuit affirmed on appeal, albeit on different grounds.

The court held that “[i]n order to bind parties to new terms pursuant to a change-of-terms provision, consistent with basic principles of contract law, both parties must have notice that the terms have changed and an opportunity to review the changes.” In this case, “[b]ecause Stover ha[d] not alleged that she had such an opportunity, the 2018 terms did not form a valid contract.” The court also explained “that mere inquiry notice of changed terms is [not] enough to bind the parties to them” and that “Stover had no obligation to investigate whether Experian issued new terms without providing notice to her that it had done so.” The 2014 terms applied.

The court then concluded that arbitration was not precluded by McGill. The arbitration clause in the 2014 terms provided for arbitration “to the fullest extent allowed by law.” That phrase “presumably exclude[d] claims for public injunctive relief in California.” Stover’s claims, the court explained, did not meet the Article III standing requirement for seeking public injunctive relief. As a result, “the McGill rule d[id] not excuse Stover from binding arbitration.”

Rachel Stover v. Experian Holdings, Inc., No. 19-55204 (9th Cir. Oct. 21, 2020).

Determining Whether “Clickwrap Agreement” Provides “Reasonable Notice” of an Arbitration Agreement Is a Fact-Intensive Inquiry

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Timothy Hidalgo sued the Amateur Athletic Union of the United States Inc. (AAU) on behalf of a purported class for damages emanating from a data breach suffered by the AAU. The court granted the AAU’s motion to compel arbitration.

Hidalgo used the Safari web browser on his iPhone to access and complete the AAU membership application. Because the AAU application was “not compatible for smartphone use,” the plaintiff “had to move the screen back and forth for each line of text and zoom in and out because the full application was not visible on the iPhone screen at one time.” The application contained a “clickwrap agreement” that required Hidalgo to click an “I agree” box after being presented with a list of terms and conditions of use. The court noted that to be bound by an arbitration agreement contained within the clickwrap agreement, the web user must have “reasonable notice of the arbitration provision.” The parties disputed whether the web-based application provided sufficiently reasonable notice of the arbitration provision.

The court discussed several recent cases that examined the enforceability of arbitration provisions contained within clickwrap agreements and identified the following facts as relevant:

  • The font size, bolding, and capitalization of the relevant language;
  • The color of the hyperlink directing the user to the full agreement and whether it “stands out” from the other language;
  • Whether the language next to the checkbox sufficiently notifies the user that he or she is entering into an agreement (as opposed to merely completing a purchase or step, e.g., clicking “place your order” does not specifically manifest assent to additional terms);
  • The layout of the page, including whether the page is “cluttered”;
  • Whether the relevant language directing the user to the full agreement is conspicuously placed on the webpage;
  • The number of other links on the same webpage;
  • The number of different font types and sizes used on the same webpage;
  • Whether the page contains distracting elements, such as other “buttons” or “promotional advertisements”; and
  • Whether notice of the full agreement is provided contemporaneously with the user’s agreement (i.e., on the same page), or later in time (i.e., via a follow-up email).

In sum, the “inquiry whether a web user had ‘reasonable notice’ of contract terms contained in a contract accessible by hyperlink depends on the ‘totality of the circumstances.'” Here, the “AAU application screen clearly draws a reasonable user’s attention to it because of the blue hyperlinks, the red asterisks, the normal font size, and the clear contrast between the mostly black text and the yellow background.” In addition, the terms and conditions box was “prominently placed squarely in the middle of the very end of the application, which is a conspicuous part of the application because it is the last place an applicant looks before finishing the application process.” After discussing other characteristics of the webpage, the court found that the user had sufficient “reasonable notice” of the arbitration provision contained within the clickwrap agreement, and therefore the arbitration agreement was enforceable.

Hidalgo v. Amateur Athletic Union of the United States, Inc., No. 1:19-cv-10545 (S.D.N.Y. June 16, 2020).

Sixth Circuit Affirms Ruling That Arbitrator Is to Determine Arbitrability of Employment Dispute Between Franchise Employees and Domino’s

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The plaintiffs filed a class action against Domino’s, alleging that the company’s franchise agreement violated federal antitrust law as well as state law. Domino’s moved to compel arbitration, and the plaintiffs opposed on the basis that Domino’s couldn’t enforce the arbitration agreements because Domino’s hadn’t signed the agreements; only their franchises had. However, incorporation of the AAA rules in the plaintiffs’ agreements provided “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability.”

The plaintiff offered several arguments against such conclusion: (1) the arbitration agreement incorporates the AAA rules only as to claims that fall within the scope of the agreement; (2) the relevant AAA rule addresses only the “existence, scope, or validity” of his agreement, not whether non-signatories may enforce arbitration agreements under the FAA; (3) even if the relevant AAA rule gives arbitrators the power to decide the question of “arbitrability,” it does not give them the exclusive power to do so; (4) Sixth Circuit precedent has held, in certain instances, that incorporation of the AAA rules does not provide “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability”; (5) the incorporation of the AAA rules is not “clear and unmistakable” evidence that the parties agreed to arbitrate “arbitrability”; and (6) a ruling for Domino’s would mean that anyone could force him to arbitrate “arbitrability” no matter how frivolous the argument for arbitration. The circuit court did not find these arguments availing and affirmed the Eastern District of Michigan’s ruling referring the matter to arbitration.

Blanton v. Domino’s Pizza Franchising LLC, No. 19-2388 (6th Cir. June 17, 2020).