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When are Online Arbitration Agreements Enforceable?

Do you read the Terms of Use every time you buy something online? It’s OK, neither do I. Those Terms of Use often include provisions requiring any dispute to go to arbitration rather than a jury trial in a court. Are online arbitration agreements always enforceable?

In 2011, Kevin Khoa Nguyen (“Nguyen”) purchased two HP Touchpads (HP’s failed competitor to the iPad) through barnesandnoble.com. The model was being discontinued, so Barnes & Noble was selling the remaining inventory at a discounted price. The next day, Barnes & Noble sent Nguyen an email stating that his order was being cancelled due to high demand. Nguyen sued as the lead plaintiff in a class action. His claim was that the cancellation of the sale prevented him from purchasing the product elsewhere at a similarly discounted price.

Barnes & Noble moved to compel arbitration under their website’s Terms of Use, which appeared in a link on the bottom left-hand corner of each page of their website, including during the checkout process. According to the recent 9th Circuit Court of Appeals ruling in the case:

Nguyen neither clicked on the “Terms of Use” hyperlink nor actually read the Terms of Use. Had he clicked on the hyperlink, he would have been taken to a page containing the full text of Barnes & Noble’s Terms of Use, which state, in relevant part: “By visiting any area in the Barnes & Noble.com Site, creating an account, [or] making a purchase via the Barnes & Noble.com Site . . . a User is deemed to have accepted the Terms of Use.” Nguyen also would have come across [the] arbitration provision…

 The ruling in question didn’t address whether Nguyen is entitled to receive damages due to Barnes & Noble’s cancellation of the order. That issue remains to be resolved. The only question before the Court of Appeals was whether or not the District Court (the lower court) was correct in ruling that Nguyen was not bound to the Terms of Use with respect to the arbitration provision.

The court began its analysis by stating (quoting previous cases):

“While new commerce on the Internet has exposed courts to many new situations, it has not fundamentally changed the principles of contract.” …One such principle is the requirement that “[m]utual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract.”

That should give you a hint of where the court was going. They continued:

Contracts formed on the Internet come primarily in two flavors: “clickwrap” (or “click-through”) agreements, in which website users are required to click on an “I agree” box after being presented with a list of terms and conditions of use; and “browsewrap” agreements, where a website’s terms and conditions of use are generally posted on the website via a hyperlink at the bottom of the screen…Barnes & Noble’s Terms of Use fall in the latter category.

So: clickwrap agreements require the customer to click “I Agree” or something along those lines in order to proceed; browsewrap agreements are posted elsewhere on the website and don’t require any affirmative action by the consumer.

As you might expect at this point, the Court of Appeals upheld the District Court’s ruling in favor of Nguyen:

In light of the lack of controlling authority on point, and in keeping with courts’ traditional reluctance to enforce browsewrap agreements against individual consumers, we therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice.

Barnes & Noble’s browsewrap agreement, with respect to the arbitration provision, was invalid. Barnes & Noble hasn’t lost the core of the case – whether or not Nguyen was damaged by their cancellation of the order – but in order to proceed, they’ll have to have an actual court trial (or appeal to the U.S. Supreme Court.)

Does this mean that every e-commerce website must force consumers to click “I Agree” before completing a transaction? Not necessarily. Note that the court did not rule that all browsewrap agreements are unenforceable:

 Whether a user has inquiry notice of a browsewrap agreement…depends on the design and content of the website and the agreement’s webpage…Where the link to a website’s terms of use is buried at the bottom of the page or tucked away in obscure corners of the website where users are unlikely to see it, courts have refused to enforce the browsewrap agreement…On the other hand, where the website contains an explicit textual notice that continued use will act as a manifestation of the user’s intent to be bound, courts have been more amenable to enforcing browsewrap agreements…In short, the conspicuousness and placement of the “Terms of Use” hyperlink, other notices given to users of the terms of use, and the website’s general design all contribute to whether a reasonably prudent user would have inquiry notice of a browsewrap agreement.

If a company wants to make their e-commerce website arbitration clauses (and, presumably, other terms) enforceable, the safest way to do so is to require affirmative agreement by consumers. It’s understandable, however, that online vendors want to remove every impediment to consumers clicking through and completing a sale. So the next best approach would be to make the terms as conspicuous as possible. One thing we know for sure, in the 9th Circuit, at least, is that a “Terms of Use” hyperlink at the bottom of the page is not enough.

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