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WBK Industry News - Litigation Developments

2nd Circuit Vacates and Remands Decision to Deny Arbitration

On August 17, 2017, the U.S. Court of Appeals for the Second Circuit Court vacated and remanded a district court decision that found a putative class representative of customers of a popular ride sharing application (the “App”) was not bound by the mandatory arbitration provision contained in the App’s Terms of Service.  The Court of Appeals found the App’s registration screens were clear enough to put the potential customer on inquiry notice of the arbitration process because the App used the following design features: (1) hyperlinked text to terms and conditions appeared right below the registration button; (2) the entire screen was visible at once; (3) the screen was “uncluttered;” and (4) the small font was in dark print which contrasted with the white background.

The Second Circuit reviews de novo the denial of a motion to compel arbitration.  Further, whether the parties have contractually bound themselves to arbitrate is a legal conclusion subject to de novo review.  Factual findings are reviewed for clear error.  Under this legal framework, the Second Circuit reviewed the applicable contract to determine if an arbitration agreement existed between the parties, and in doing so the Court applied California law.  Under California law, the undisputed facts must establish “reasonable conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to those terms.”

Unambiguous manifestation of assent may be shown through actual notice or inquiry notice.  Where there is no evidence that the offeree had actual notice of an arbitration agreement, the offeree will still be bound by the agreement if a reasonably prudent person would be on inquiry notice of the agreement.  Whether a reasonably prudent person has inquiry notice turns on the “clarity and conspicuousness of arbitration terms.”  For web-based contracts, clarity and conspicuousness are a function of the design and content of the relevant interface.

The Second Circuit disagreed with the district court’s determination that the location of the arbitration clause was itself a “barrier to reasonable notice.”  The Court determined that although the contract was lengthy and must be reached by hyperlink, the instructions were clear and reasonably conspicuous.  Next, although not express assent, the Court ruled that the users of the App unambiguously manifested their assent because they had the ability to review the Terms of Service prior to registration, and the payment screen expressly warned the user that by creating an account the user was agreeing to be bound by the linked Terms of Service.

The Court vacated the district court’s order denying defendants’ motion to compel arbitration and remanded the case to the district court to consider plaintiffs’ argument that defendants have waived their right to arbitration.  The plaintiffs argued that the defendants had waived their right to arbitrate because they actively litigated the underlying lawsuit.  While the arbitrator ordinarily decides a waiver defense brought in opposition to a motion to compel arbitration, the Second Circuit held that, because the plaintiff’s waiver argument is based on defendants’ defense of this litigation in the district court, the district court should decide the question.