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When Does Stealth Contracting for Arbitration Become Too Sneaky?

Related Lawyers: Walter D. Kelley Jr.
Related Practice Areas: Antitrust / Competition
Authors: By Walter D. Kelley Jr.

Over the past twenty years, the United States Supreme Court has construed the Federal Arbitration Act to permit arbitration of such previously exclusive federal causes of action as antitrust, securities, RICO, Truth in Lending Act, Magnuson-Moss Warranty Act and Credit Repair Organizations Act. [1] The Supreme Court has also upheld waivers of jury trials, class actions, collective actions and representative actions.[2]

Not surprisingly, many consumer-facing businesses have taken advantage of these decisions by inserting into their contracts of adhesion customer waivers of certain rights granted by the United States Constitution (jury trials, access to public courts) and the Federal Rules of Civil Procedure (class and collective actions). The vast majority of these so-called “contracts” are entered into over the internet.

There are four basic types of internet contracts: (1) Browserwrap contracts occur when the seller merely states that use of its website or app constitutes an assent to all terms and conditions; (2) Clickwrap contracts are formed when the seller requires the consumer to click “I Agree” or similar words before making a purchase, but does not require the consumer to review the applicable terms and conditions; (3) Scrollwrap contracts require the consumer physically to scroll through the seller’s terms and conditions and then click “I Agree” before making a purchase; and, (4) Sign-In Wrap contracts couple agreement to the website’s terms and conditions with registration to use the website.[3] All types have been enforced in certain iterations, although the likelihood of enforcement increases as the waivers of rights are displayed more conspicuously and as the consumer is forced to engage in more affirmative acts of agreement.

Why, then, would a consumer-facing business obscure mandatory arbitration provisions and class action waivers in its internet contracts? The Supreme Court has essentially granted web-based businesses carte blanche to put their customers on terms, and the businesses probably don’t fear losing sales due to full disclosure. After all, the premise underlying a contract of adhesion is that the other party will sign anything. Studies have shown that most consumers do not bother to read sellers’ terms and conditions, even when semi-forced to do so in Scrollwrap and Sign-In Wrap contracts. Prominent disclosure coupled with multiple clicks of consumer assent is the safest legal course of action.

Despite all this, consumers facing companies continue to engage in what I have previously termed stealth contracting for arbitration, [4] i.e., burying arbitration and waiver provisions in fine print that is located many screens away from the homepage. Two recent Federal Courts of Appeal cases, both involving Uber, illustrate the risk a company runs when it settles for anything less than a strikingly prominent disclosure of what will happen in the event of a dispute.

In Meyer v. Uber Technologies, Inc[5], the Second Circuit reversed the district court’s refusal to enforce Uber’s standard arbitration/waiver contract because the district court judge concluded that the applicable provisions were not reasonably conspicuous as required by California law. The district court judge noted that the second screen in Uber’s registration process had several buttons that a customer must click. Below, not above, those buttons, the screen stated, “By creating an Uber account, you agree to the Terms of Service & Privacy Policy.” The words “By creating an Uber account, you agree to” were in barely legible font. The words “Terms of Service” were underlined and in blue, thereby indicating an active hyperlink. However, the user did not have to click on the hyperlink to register, and the hyperlink did not actually take the user to Uber’s contractual conditions (which included mandatory arbitration and a class action waiver). The user who clicked on the Terms of Service hyperlink instead encountered yet another screen that contained a button which also had to be clicked. Only then did the user get to see the Terms of Service which the district court described as “nine pages of highly legalistic language that no ordinary consumer could be expected to understand.”[6]

The Second Circuit panel did not disagree with the district court’s description of the consumer’s website experience, but deemed it adequate from “the perspective of a reasonably prudent smartphone user.” [7] By applying this standard, the Court of Appeals found clarity where the district court saw opacity bordering on deliberate obfuscation. The Second Circuit stated:

The Payment Screen is uncluttered, with only fields for the user to enter his or her credit card details, buttons to register for a user account or to connect the user’s pre-existing PayPal account or Google Wallet to the Uber account and the warning that “By creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY.” The text, including hyperlinks to the Terms and Conditions and Privacy Policy appears directly below the buttons for registration. The entire screen in visible at once, and the user does not need to scroll beyond what is immediately visible to find notice of the Terms of Service. Although the sentence is in a small font, the dark print contrasts with the bright white background, and the hyperlinks are in blue and underlined.

In addition to being spatially coupled with the mechanism for manifesting assent—i.e., the register button—the notice is temporally coupled…[N]otice of the Terms of Service is provided simultaneously to enrollment, thereby connecting the contractual terms to the services to which they apply. We think a reasonable smartphone user would understand that the terms were connected to the creation of a user account.

(emphasis added).[8]

The Second Circuit’s opinion in Meyer was, at the time it was issued, the most recent addition to an unbroken string of decisions enforcing Uber’s arbitration and waiver provisions. This record of success might lead an alert reader (such as a general counsel) to conclude that Uber’s processes and procedures constitute a model that consumer-facing businesses can imitate to ensure that their customers won’t see the inside of a courtroom. However, the reader would be wrong - - at least in the First Circuit, with jurisdiction covering New England and Puerto Rico.

In Cullinane v. Uber Technologies, Inc[9], the First Circuit considered the same Uber processes and procedures upheld in Meyer, but applied Massachusetts law and reached the opposite conclusion. The court summarized its ruling as follows:

It is thus the design and content of the “Link Card” and “Link Payment” screens of the Uber App interface that lead us to conclude that Uber’s “Terms of Service & Privacy Policy” hyperlink was not conspicuous. Even though the hyperlink did possess some of the characteristics that make a term conspicuous, the presence of other terms on the same screen with a similar or larger size, typeface, and with more noticeable attributes diminished the hyperlink’s capability to grab the user’s attention. If everything on the screen is written with conspicuous features, then nothing is conspicuous.

Furthermore, when we consider the characteristics of the text used to notify potential users that the creation of an Uber account would bind them to the linked terms, we note that this phrase was even less conspicuous than the “Terms of Service & Privacy Policy” hyperlink. This notice was displayed in a dark gray small-sized non-bolded font against a black background. This notice simply did not have any distinguishable feature that would set it apart from all the other terms surrounding it.

Because both the “Link Card” and “Link Payment” screens were filled with other very noticeable terms that diminished the conspicuousness of the “Terms of Service & Privacy Policy” hyperlink and the notice, we find that the terms of the Agreement were not reasonably communicated to the Plaintiffs.

(emphasis added).[10]

How does one reconcile the two cases? The First Circuit did not acknowledge the Second Circuit’s contrary holding in Myer v. Uber, even though the First Circuit’s opinion was issued approximately nine months after the Second Circuit’s, and the parties had briefed Meyer extensively.

One obvious possible answer is choice of law. The First Circuit applied Massachusetts law, whereas the Second Circuit applied California law. However, the reasonable notice tests applied by the two courts don’t seem meaningfully different, and the Second Circuit observed that New York and California law are essentially the same.[11] Presumably New York and Massachusetts common law on contract formation are also nearly identical.

Another possible explanation lies in the smartphones involved in each case. The plaintiffs in Cullinane accessed the Uber app through iPhones, while the Meyer plaintiffs used Android devices. The screen shots reproduced in each opinion show that the smartphones displayed the Uber app in different ways. Specifically, the Android presentation had a white background while the iPhone version had a dark background.[12] While the First Circuit commented on the difficulty of reading text against the dark background, [13] its decision really centered on the fact that Uber’s business-related text was more prominent than its legal-related text.          

Uber’s executives undoubtedly saw more value in promoting the app’s business purpose (facilitating use of the ride hailing app and getting paid for doing so) than they did in notifying customers of what will happen in the event of a dispute. After all, businesses are organized and operated to make a profit. Monetizing a web site can be slowed if the legal tail is allowed to wag the business dog.

However, emphasizing legal disclosures over business/finance instructions may be the price a business has to pay to deny its customers access to court. The Frist Circuit’s decision can be understood best as reflecting a general unease over mandatory arbitration provisions and class action waivers imposed on an unsophisticated public. While the Supreme Court repeatedly has promoted arbitration, state contract law provides a way for lower courts to slow down (and occasionally derail) the speeding train.

Footnotes

[1] See CompuCredit v. Greenwood, 132 S.Ct. 655, 669 (2012); Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 26 (1991); Walter D. Kelley, Jr. Mandatory Arbitration in the United States and Europe, Hausfeld Competition Bulletin (Winter 2016) at 1-2, reprinted in www.lexology.com/library/detail.aspx?g=55e3ffe2-4176-4dac-9e76-31bd93da9be7 [hereinafter “Mandatory Arbitration”]

[2] See Direct TV, Inc. v. Imburgia, 136 U.S. 463, 468 (2015) AT&T Mobility, LLC v. Concepion, 563 U.S. 333, 346-52 (2011); Stolt-Nielsen, S.A. v. Animal-Feeds Int’l Corp., 559 U.S. 662, 681-86 (2010); Mandatory Arbitration at 2.

[3] Berkson v. Gogo, LLC, 97 F. Supp.3d 359, 394-95 (E.D.N.Y. 2015)

[4] See Walter D. Kelley, Jr., United States Arbitration Update, Hausfeld Competition Bulletin (Spring 2017) at 1, reprinted in www.lexology.com/library/detail.aspx?g=e5b84582-e369-48f9-9075-4e3dfbccbc2d [hereinafter “Arbitration Update”]

[5] 686 F. 2d 66 (2d Cir. 2017)

[6] Meyer v. Kalanick, 200 F. Supp.3d 408, 415 (S.D.N.Y. 2016), vacated sub nom, Meyer v. Uber Technologies, Inc., 868 F. 3d 66 (2d. Cir. 2017); Arbitration Update at 2.

[7] Meyer v. Uber, 868 F.3d at 77.

[8] Id. at 78

[9] 893 F. 3d 53 (1st Cir. 2018)

[10] Id. at 63-64

[11] Meyer v. Uber, 868 F. 3d at 74.

[12] Compare id. at 81-82 with Cullinane v. Uber, 893 F. 3d at 57-58.

[13] Cullinane v. Uber, 893 F. 3d at 63-64.

*Walter D. Kelley Jr. is a partner in the Washington, D.C. office, and a former United States District Judge for the Eastern District of Virginia.