Executive Summary and Takeaway. User agreements for websites and apps have become increasingly prevalent in recent years, and courts have had to adapt traditional rules of contract interpretation to the new digital frontier. On June 25, 2018, the First Circuit reversed a district court decision enforcing an arbitration clause contained in the terms of service for the defendant’s smartphone app, finding that those terms were not sufficiently “conspicuous” for a user to know that he or she had agreed to be bound by them. The First Circuit’s decision continues a trend of judicial hostility to arbitration clauses, and is notable for its scrutiny of the record below: the court studied in minute detail the design and content of the registration screen containing a hyperlink to the terms of service—including the size, shape, color, font, and location of the hyperlink—and concluded that the link to the terms of service failed “to grab the user’s attention.” Businesses with similar user agreements governed by Massachusetts law or that could potentially apply to Massachusetts consumers should review their websites and/or apps to ensure that their platforms disclose any terms of use in a clear and conspicuous manner in relation to the rest of the content on the screen.

Additional Background. To use the services provided by the defendant company (the “Company”) via its smartphone app, a customer must first register with the Company by creating an account. As part of the registration process, users are shown a screen that requests their payment information and notifies them that by creating an account they are agreeing to the Company’s Terms of Service and its Privacy Policy:

The words “Terms of Service & Privacy Policy” are in a clickable box that includes a hyperlink. Upon clicking on that hyperlink, the user is directed to a screen with two other links: one to the Terms of Service, and the other to the Privacy Policy. The user can view either document by clicking on the appropriate link.

Continue Reading First Circuit Invalidates Arbitration Clause in Mobil App User Agreement

On Monday, the U.S. Supreme Court issued its highly-anticipated opinion in  DirecTV, Inc. v. Imburgia et al., 577 U.S. ___ (2015), which reaffirmed its ruling in AT&T Mobility LLC v. Concepcion, 56 U.S. 333 (2011), dealing yet another blow to California Courts’ attempts to invalidate class action waivers.

Background

The plaintiffs in Imburgia filed their lawsuit in 2008, arguing that class action arbitration waivers were per se unenforceable in California under Discover Bank v. Super. Ct., 36 Cal. 4th 148, 162-163 (2005).  Under the Discover Bank rule, California courts were free to find such provisions, when contained consumer contracts of adhesion, unconscionable and to rule that they should not be enforced. Id.

The DirecTV service agreement at issue in Imburgia provided for arbitration of customer disputes and included a class action waiver but also stated that “[i]f . . . the law of your state would find this agreement to dispense with class arbitration procedures unenforceable, then this entire [arbitration waiver] is unenforceable.”  While the Imburgia case was pending, the Supreme Court issued its decision in Concepcion, which ruled that the Discover Bank rule was preempted by the Federal Arbitration Act (“FAA”).  Despite Concepcion, the California Court of Appeals still found the class action waiver provision in the DirecTV service agreement unenforceable under the theory that the parties had chosen the law of California to govern at the time of drafting and, absent federal preemption, California law would not enforce such provisions.

Opinion

Justice Breyer delivered the opinion of the Court, which began with this “elementary” lesson:  “The Federal Arbitration Act is the law of the United States, and Concepcion is an authoritative interpretation of that Act.  Consequently, the judges of every State must follow it.”  (Slip Op. at 5). Unsurprisingly, the Supreme Court went on to rule that the California Court’s failure to do so indicated that it was not placing arbitration contracts “on equal footing with other contracts” and had therefore run afoul of the FAA.  (Id. at 10-11).

Justice Ginsburg and Justice Sotomayor dissented, opining that, given the specific language of the service agreement and the fact that it was drafted before Concepcion, the state court was free to interpret the contract as it had, and to find the class action arbitration waiver unenforceable.  (See Ginsburg Dissent at 3).  They also lamented that the Court’s recent decisions in Concepcion and Italian Colors had effectively deprived “consumers’ rights to seek redress for losses” and “insulated powerful economic interests.”  (Id. at 10-11).

Implications

Imburgia eliminates any doubt as to the enforceability of class action arbitration waivers.  Retailers and service providers wishing to avoid class action claims are encouraged to include them in their contracts and to be aggressive in enforcing them in litigation, even in the face of arguably ambiguous language.

 

On June 26, 2013, in Brown v. DirecTV, LLC, et al., Case No. 2:12-cv-08382, Judge Gee, sitting in the Central District of California, granted DirecTV’s motion to compel arbitration, rejecting two efforts by the Plaintiff to keep the matter in federal court: (1) that TCPA claims did not “arise under or relate to” the agreement or service provided; and (2) an exception clause should be read to preclude claims under both the Communications Act of 1934 and a separate portion identified in that section, 47 U.S.C.  605.

Factual Background

Plaintiff ordered his DirecTV satellite service online, requiring him to review and accept the terms and conditions of service.  Id. at * 2.  One of the terms of the contract contained an arbitration provision stating that “You and DIRECTV agree that any dispute arising under or relating to your agreement or service with DIRECTV, which cannot be resolved informally, will be resolved through binding arbitration as fully set forth in the DIRECTV Customer Agreement (a copy is sent with your first bill but may also be viewed at DIRECTV.com).  Arbitration means you waive your right to a jury trial.”    Id. at * 3.  He also signed a form during installation related to the DIRECTV Equipment Lease containing a similar arbitration provision. Id. at *4.  Finally, the Customer Agreement also contained a clause that excluded certain statutory claims, stating: “Notwithstanding the foregoing… any dispute involving a violation of the Communications Act of 1934, 47 U.S.C. 605, the Digital Millennium Copyright Act, 17 U.S.C. 1201, the Electronic Communications Privacy Act, 18 U.S.C. 2510-2521 or any other statement or law governing theft of service, may be decided only a court of competent jurisdiction.”  Id. at * 5.  After failing to make payments on the contract, DirecTV, through a third party, began making collection calls to Brown.  In turn, Brown brought suit under the Telephone Consumer Protection Act (“TCPA”) and the California UCL.

The Court’s Decision

In addition to other typical arguments raised related to arbitration clauses (lack of knowledge, unconscionability), Brown also argued that the TCPA claims should not be covered because they do not arise under or relate to the Agreement or services and/or the matter was excepted, as the clause should be read to exclude claims under both the Communications Act of 1934 and 47 U.S.C. 605.  In rejecting the first argument, the court noted that under Ninth Circuit law, a court should interpret “arising under” narrowly, while interpreting “relating to” more broadly.  The court held that the “relating to” language was narrowly tailored, and further observed that the contract specifically contemplated collection calls as part of the contract.  Id. at * 9-11.  In rejecting the second argument, the court opined that taking Plaintiff’s interpretation would render the exceptions “nonsensical,” as it would read as a highly broad exclusion, followed by an extremely narrow exclusion contained within the previously broad exclusion.  Id. at *11.

Implications

As the law continues to evolve related to arbitration clauses in consumer contracts, companies should take time to review the language of their agreements in light of decisions such as Brown.  Specifically, they should review whether their consumer contracts contain appropriate limiting language  and whether any exclusions noted could be read broadly enough, in a sensible way, to exclude TCPA claims.

In American Express Co. v. Italian Colors Restaurant, the Supreme Court held in a 5-3 decision that class waivers in arbitration agreements are enforceable, even if the plaintiff’s cost of arbitrating her federal statutory claim exceeds her potential recovery.

Background

Italian Colors brought a class action against American Express for alleged federal antitrust violations under the Sherman Act.  American Express sought to enforce an agreement to arbitrate all disputes individually, with no “class arbitration.”  The restaurant argued that enforcing the class arbitration waiver would bar the “effective vindication” of its federal statutory rights.  The costs to prove its antitrust claim would require several hundred thousand dollars in expert witness fees, while her maximum recovery totaled less than $40,000.  Essentially, the restaurant argued that it would not be economically feasible for plaintiffs to pursue their claims on an individual basis.

The Second Circuit sided with the merchants and found the class waiver unenforceable, but the Supreme Court reversed.

Decision

In an opinion authored by Justice Scalia, the Supreme Court ruled that the arbitration agreement must be enforced according to its terms under the Federal Arbitration Act absent a “contrary congressional command.”  Scalia wrote, “the antitrust laws do not evince an intent to preclude a class action waiver.”  The Court continued and said that although effective vindication concerns arise where there is a provision in an arbitration agreement “forbidding the assertion of certain statutory rights,” and “would perhaps cover filing and administrative fees attached to arbitration that are so high as to make access to the forum impracticable . . . . the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”

In other words, a class waiver in an arbitration agreement cannot be found unenforceable under the Federal Arbitration Act merely because it would be too expensive for a party to prove her claims on an individual basis.  Absent exorbitantly expensive filing and administrative fees, this decision should foreclose the use of the “effective vindication” or “economic feasibility” argument that plaintiffs’ lawyers have used to circumvent the Supreme Court’s seminal class-waiver decision, AT&T Mobility LLC v. Concepcion.  Indeed, the Italian Colors majority found that its decision in Concepcion, “all but resolves this case” because the Court there “specifically rejected the argument that class arbitration was necessary to prosecute claims that might otherwise slip through the legal system.”

In her dissent, Justice Kagan (joined by Justices Ginsberg and Breyer) criticized the majority for an unwarranted attack on class actions and undue deference toward individual arbitration as an alternative.  As she put it, “To a hammer, everything looks like a nail.  And to a Court bent on diminishing the usefulness of Rule 23, everything looks like a class action, ready to be dismantled.”  Justice Sotomayor took no part in the consideration of the case because she was on a Second Circuit panel that heard the case.

Implications

Italian Colors sends the clear message that an arbitration agreement should be enforced according to its terms, even when it is not economically feasible for a plaintiff to pursue her claims through individual arbitration.  Although the decision arose in the antitrust context, it has a direct impact on all consumer class actions, and should allow companies to compel individual arbitration – and avoid class arbitration – if the agreement at issue clearly prohibits class procedures.