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Another Online Arbitration Agreement Invalidated in Court

Online Terms of Use: You don’t like them, I don’t like them, nobody likes them. I have yet to have someone tell me, “I found the greatest website, their terms of use are the coolest!”

However, these terms are somewhat important, as they govern our activities online, which is where we spend 47.1% of our day. The process of settling disputes in this area is often governed by an online arbitration agreement. So maybe it’s worth taking another look (following my September 2014 blog post, When Are Online Arbitration Agreements Enforceable?) at arbitration language in light of a recent case.

Wait, What’s Arbitration Again?

Very simply, an arbitration agreement, or arbitration clause, is language that requires any dispute to go to arbitration rather than a jury trial in a court.

Imagine you’re a user of your favorite website: YourFavoriteWebsite.com (YFW to their fans). Their terms include arbitration language. One way or another, you get into a dispute with the YFW folks. Maybe you think they’re not effectively guarding the privacy of your personal information. Maybe you need a refund and they won’t give it to you.

Finally, you yell at your computer screen, “I’ll see you in court!”

(If you’ve never yelled at your computer screen, you’re a better person that I am.)

Well, if the arbitration language is enforceable, you won’t actually see them in court. You’ll air out the dispute before a professional arbitrator – who’s often a retired judge. There’s no jury of your peers. The arbitration process is like a trial, but it’s private, and not all of the rules of evidence and other court-like procedures are observed.

Essentially, you’ve signed away your right to your “day in court.” I’m not saying that’s a bad thing or a good thing. The court system isn’t always operating at peak efficiency. Juries make dumb decisions all the time. And going to court is extremely expensive and time-consuming. Businesses like arbitration because it tends to be faster and less costly – and because some firms believe that arbitrators are more likely to find in favor of a business than juries are. That may be the case – I haven’t done a deep dive into that question myself, although I’d like to do so one of these days.

A Recent Case: Savetsky v. Pre-Paid Legal Services d/b/a LegalShield

In Savetsky v. Pre-Paid Legal Services, the US District Court [also known as Federal Court] for the Northern District of California considered the online arbitration agreement in the terms of use of LegalShield, which is owned by Pre-Paid Legal Services.

The Court laid out the facts as follows:

When a prospective customer logs on to LegalShield’s website, he is presented with the option to “Buy Now” or “Learn More.” If he chooses to “Buy Now,” the customer is prompted to select his state and given an overview of the pre-paid legal service plans available in that state. Alongside those options is a link to “More Plan Details.” A customer need not review those additional details to purchase the plan, however, if he does, he is informed that the details are “a general overview,” and “[f]or more specific information, please view our member contract.”…The words “member contract” are a link that takes the prospective customer to a sample version of LegalShield’s member contract. (Italics mine.)

The member contract included this language – pay attention, this is the stuff that nobody reads that ends up causing all sorts of problems:

Settlement of Disputes: All disputes or claims relating to the Company, this Contract, any Company products or services or any claims or causes of action between you and the Company, and any of the Company’s officers, directors, employees or affiliates, whether in tort or contract, shall be settled totally and finally by arbitration according to the Commercial Arbitration Rules of the American Arbitration Association . . . . If you file a claim or counterclaim against the Company . . . in any such arbitration, you may do so only on an individual basis and not with any other member or as part of a class action. . . .

That last part is what the Court ruling linked to above was all about. More on that in a second.

After enrolling, LegalShield mailed its customers a full list of the member contract. So not only was the language provided to customers via a link, but it was also mailed to them.

An unhappy customer, Savetsky, filed a putative class action lawsuit against LegalShield. LegalShield responded that the request to create a class action should be rejected due to the terms of the arbitration agreement. Remember how class actions were mentioned in the member contract? Here’s where that comes into play.

OK, so Savetsky allegedly “agreed” to this arbitration clause in two ways:

  1. He signed up to become a customer of LegalShield and didn’t object to the terms of the member contract.
  2. He received a copy of the member contract in the mail and once again didn’t object.

What LegalShield didn’t make its customers do is click a button to affirmatively state that they agreed to the member contract. And, for that reason, the Court found the online arbitration agreement unenforceable. Win for the plaintiff, Savetsky, loss for LegalShield.

From the Court’s Order Denying Motion to Compel Arbitration:

…[T]here is no evidence Savetsky had actual notice of the sample member contract on LegalShield’s website, or acknowledged the existence of such a contract prior to purchasing his membership. In fact, by simply checking the desired services and clicking the “BUY NOW” button, a consumer can order a LegalShield plan without even being aware a member contract exists.

[A] reasonable person could easily conclude that “More Plan Details” are simply an even fuller list of features LegalShield offers to its members, not the member contract or additional terms and conditions…[The] Court cannot conclude that “a reasonable person in [Savetsky’s] position would understand that he had assented to the arbitration provision in the [LegalShield member contract] when he purchased” his membership.

Nor would a reasonable person in Savetsky’s position understand that by not cancelling his LegalShield membership after receiving a copy of the membership contract he was assenting to the arbitration provision. “[A] person can assent to terms even if he or she does not actually read them, but the ‘offer must nonetheless make clear to a reasonable consumer’ both that terms are being presented and that they can be adopted through the conduct that the offeror alleges constituted assent.”…Here nothing in the membership contract indicated that inaction by Savetsky would constitute assent to the terms of the contract. Accordingly, a reasonable consumer reading the membership contract would have no way of knowing that failing to cancel his membership could be construed as assent to arbitrate all disputes with LegalShield.

What Have We Learned?

If You’re a Consumer: take the time to read the terms and conditions of websites, especially if you’re going to be giving them a significant sum of money. Yes, the Court in this case found in favor of the plaintiff, but that was only after a significant amount of time and money had been spent to get to this point. And there’s no guarantee that the class action will be successful from this point on.

If You’re a Website Owner: make sure that your site requires your customers to affirmatively agree to your terms and conditions if you want them to be enforceable.

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