Drafting Enforceable Arbitration Agreements: Hottest Issue in Contract Law

By: Timothy Murray, Murray, Hogue and Lannis

Arbitration agreements are supposed to ensure that disputes are resolved outside of court, and that’s why it’s an irony of almost cosmic proportions that “the enforceability of arbitration agreements is likely ‘the single most litigated contractual issue’ today . . . .”¹

WHAT EXACTLY ARE WE DOING WRONG WHEN WE DRAFT clauses that are supposed to keep disputes out of court—but that don’t keep disputes out of court? It happens with alarming frequency.

The enforceability of arbitration agreements is a white-hot topic in a milieu that is notoriously staid (dull may be a more accurate description) and where change usually comes at a glacial pace. Court battles over whether arbitration provisions are enforceable are so prevalent that, not long ago, we did something we do neither lightly nor often: we added a new—and hefty—chapter to the iconic Corbin on Contracts treatise. It’s called, “Agreements to Arbitrate Challenged Due to the Absence of Mutual Assent.”²

Commercial practitioners need to be aware of the seismic activity in this area of the law—it’s important to advising clients, drafting, and litigating. This short article will highlight some of the most contentious issues that affect the enforceability of arbitration provisions.³

Lamps Plus v. Varela

A barometer of the turbulence in this area of the law is the U.S. Supreme Court’s decision in Lamps Plus v. Varela,⁴ where the court sharply divided over the construction of an arbitration provision. Lamps Plus was a battle over class arbitration, which seems to be ground zero for much of the opposition to arbitration.⁵

Frank Varela filed a putative class action against his employer, Lamps Plus, after a fraudulent federal income tax return was filed in his name—a hacker impersonating a Lamps Plus official had tricked another Lamps Plus employee into disclosing Varela’s and other employees’ tax information. Lamps Plus moved to compel arbitration on an individual, as opposed to a classwide, basis pursuant to an arbitration agreement that Varela signed at the time he started working for Lamps Plus. That agreement provided that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.” The district court granted the motion to compel arbitration, but it authorized arbitration on a classwide basis. The U.S. Court of Appeals for the Ninth Circuit affirmed, holding that the arbitration agreement was ambiguous on the question of individualized versus class arbitration, so it applied the canon of construction contra proferentem and construed it against the drafter, Lamps Plus, to allow class arbitration. Contra proferentem provides that where two reasonable meanings are possible, “the court will often adopt the meaning that is less favorable in its legal effect to the party who chose the words.”⁶

The Supreme Court reversed. Chief Justice John Roberts, writing for the majority, held that under the Federal Arbitration Act (FAA), arbitration is a matter of consent, and an arbitration agreement that is ambiguous as to whether it allows class arbitration does not provide the necessary “contractual basis” to compel class arbitration. Justice Roberts explained that class arbitration is markedly different from the traditional, individualized arbitration contemplated by the FAA and that class arbitration undermines the most important benefits of individual arbitration. In short, a court will not allow class arbitration unless the parties expressly agree to it.

Critical to the Supreme Court’s holding was its refusal to apply contra proferentem to construe the ambiguous agreement against Lamps Plus. Chief Justice Roberts cited Corbin on Contracts to explain that contra proferentem is only triggered when a court cannot discern the parties’ intentions. Since the FAA requires that arbitration be premised on the parties’ consent, a court will not infer consent by applying contra proferentem—a canon that has nothing to do with consent—to an ambiguous provision.

The majority opinion was met with vociferous opposition. In her colorful dissent, Justice Ruth Bader Ginsburg wrote: “Piling Pelion on Ossa, the Court has hobbled the capacity of employees and consumers to band together in a judicial or arbitral forum.” Justice Sonia Sotomayor’s dissent took issue with the majority’s insistence that class-action arbitration was not envisioned by the FAA. Justice Elena Kagan wrote that contra proferentem should be applied in any contractual setting where it might apply as a matter of pure contract law, including this one. She wrote: “Nothing in the FAA shields a contracting party, operating against the backdrop of impartial state law, from the consequences of its own drafting decisions.”

At the oral argument of the case, Justice Ginsburg pointed out that the entire dispute could have been avoided if the contract had clearly stated that class action arbitration was prohibited: “So, here, . . . the concern is lawyers that are less than the best and didn’t put in a class action waiver . . . .”⁷

Justice Ginsburg was exaggerating, of course—“the best lawyers” don’t always get it right, and, as it turned out, the absence of an explicit waiver of class arbitration did not prove fatal to Lamps Plus here. But Justice Ginsburg was right that an explicit waiver likely would have avoided the entire dispute. For that matter, an express provision allowing class arbitration would have avoided it, too. The best way to win a lawsuit over contract interpretation is to avoid it altogether by drafting with clarity. No judge has ever complained that a contract is too clear for him or her.

The lesson of Lamps Plus is that class arbitration will not be ordered without an express contractual provision allowing it. But since arbitration agreements are invariably drafted by the employer or the business selling a product or service, such a provision is unlikely.

Arbitration Agreements In-The-Box

Sellers of services and mass-produced products often want to bind consumers to an arbitration provision that the consumer either does not receive or does not see until after the sales transaction is completed. A common example of this phenomenon is when the buyer purchases a smart phone or other electronic device and the manufacturer has inserted an arbitration provision in the documentation found in-the-box that the phone comes in—which the consumer doesn’t see, if at all, until after he or she gets home.

In these money now, terms later scenarios, the U.S. Court of Appeals for the Seventh Circuit’s solution is the prevailing one—though it has generated controversy because it jumbles the traditional chronology of contract formation: previously undisclosed terms that the consumer receives or sees only after the sales transaction are enforceable against the buyer if the buyer is afforded the opportunity to reject the terms and return the product for a refund within the time set forth in the terms.⁸ The Seventh Circuit’s probusiness rule ratifies the way business actually is conducted.

But lately, some courts are saying that the Seventh Circuit’s rule doesn’t do enough to provide consumers notice of important contract terms that will be binding on them—such as arbitration provisions. Without sufficient notice, there is no mutual assent, and the arbitration provision is unenforceable. The underlying rationale for these decisions is that neither the box for the smart phone nor the documentation inside-the-box look like contracts, so there is no duty to read them, and that’s why, for arbitration and other contract terms found in-the-box, the terms are enforceable only if the consumer is on inquiry notice of the contract terms^.9 The leading case is Norcia v. Samsung Telcoms. Am., LLC.¹⁰ I wrote the following in Corbin on Contracts:

Inquiry notice is the sine qua non of assent under Norcia and its progeny. In order to bind a party to an arbitration provision, it is not necessary for the party to see the entirety of the terms at the time of contract formation so long as (1) he or she knows at the time of contract formation that important terms imposing obligations on him or her will apply, (2) the terms are subsequently made available to the party, and (3) he or she has the ability to opt out after a reasonable opportunity to review the terms.¹¹

Thus, the exterior of the box containing the product needs to conspicuously alert the buyer that there are important legal terms contained in-the-box that will be binding on the buyer (and it can’t just indicate that warranty provisions are contained in the box since warranty provisions generally confer rights on the buyer and don’t impose obligations). The document inside the box containing the arbitration and other important contract terms must conspicuously notify the consumer that important terms are contained inside.¹²

For transactions where a buyer does not sign off on a document that looks like a contract, the seller must make sure—by providing conspicuous notice—that the buyer knows that he or she will be bound by contract terms. The trend in the law is to place a greater emphasis on the necessity of inquiry notice of arbitration and other provisions.

Internet Arbitration Agreements: The Hottest of the Hot Contract Law Issues

Website owners often want contract terms to govern the use of their sites. These terms are typically set forth on a separate webpage and are accessed by the user via a hyperlink. Almost all of the disputes in this area are over hyperlinked arbitration provisions. A common scenario is for a consumer who purchased goods or services online to file a putative class action for some claim or other, and the website owner then moves to compel arbitration based on the hyperlinked arbitration provision. There is a staggering amount of litigation over the enforceability of arbitration provisions contained in contract terms that are hyperlinked on websites.

But off on the horizon, a storm is brewing about whether traditional contract law should be fundamentally overhauled to deal with these sorts of contractual terms, and commercial practitioners need to be aware of it. But first, it’s necessary to briefly review the legal landscape of internet contracts.

Internet Contracts in a Nutshell

There is a duty to read things that look like contracts—one can’t sign or accept the benefits of a document that looks like a contract and later claim that its terms aren’t binding because he or she didn’t read it.¹³ But a “web page does not look like a contract,”¹⁴ so there is no inherent duty to read it—and that includes the terms hyperlinked to it. A party “is not bound by inconspicuous contractual provisions of which he was unaware, contained in a document whose contractual nature is not obvious.”¹⁵ The duty to read rule is critical here—if there were a duty to read a website, we would not be talking about any of this.

Since there is no duty to read a website, the website owner can create a duty to read hyperlinked contract terms if the design and content of the site puts the user on inquiry notice of the terms.¹⁶ This is done by (1) making the hyperlink so conspicuous (in terms of size, color, and proximity) that a reasonable person would have seen it,¹⁷ and (2) including conspicuous language making clear to a reasonable internet user that the hyperlinked terms will contractually bind the user if he or she proceeds to use the website to order the goods or services.¹⁸

The Gathering Storm: Contract Law Traditionalists Versus Reformers

Against that backdrop, there is the brouhaha that’s been forming just over the horizon for years—about whether contract law in this area needs to be fundamentally overhauled. It pits contract law traditionalists versus reformers.

The Traditionalists. The traditionalists insist that internet contracts do not change the fundamental rules of contract law, which means that there must be mutual assent to make arbitration provisions enforceable. If there is no duty to read, the website owner must put users on inquiry notice of the terms as discussed above. This is the prevailing view in the United States, grounded in long-settled contract law and expressed in case after case—rarely with as much zeal in as Judge Ronald B. Leighton’s opinion in Wilson v. Huuuge, Inc.¹⁹ In Huuuge, plaintiffs filed a class action to recover money lost playing defendant’s electronic gambling games available via a mobile app. Defendant moved to compel arbitration pursuant to the arbitration provision hyperlinked to the app page in the defendant’s “Terms of Use.” The court held that the hyperlink was inconspicuous and did not put a user on inquiry notice.

Judge Leighton rejected the defendant’s argument that the court “apply a blanket presumption that users these days just assume that every app they download is riddled with binding terms and provisions, many of which remove or limit important rights, and it is their duty to ferret out these terms wherever they may be.” In the opinion’s coup de grace, Judge Leighton wrote:

While online users today are savvier than in the past, this does not mean that the rules of contract law no longer apply. If an app developer wishes to bind a user to their copious terms, the onus is on the developer to at least provide reasonable notice and easy access. This is not a difficult thing to do when designing an app … . The fact is, [defendant] chose to make its Terms non-invasive so that users could charge ahead to play their game. Now, they must live with the consequences of that decision.

The Reformers. Pitted against the traditionalists are the reformers, who reject the notion that long-settled rules of contract law still work when it comes to internet contracts—they advocate a fundamental overhaul of contract law. This view has been expressed in various ways in the law reviews for a long time, but judges have almost uniformly ignored it. In Nicosia v. Amazon.com, Inc.,²⁰ however, a senior federal judge named I. Leo Glasser has written a bombshell of a judicial opinion that ranks as the most progressive to date on internet contracts.

Judge Glasser was obligated to adhere to the traditionalist, prevailing view in deciding the actual dispute before him, but then he devotes a significant portion of his opinion to advocating a sea of change in the law of contracts. Judge Glasser suggests that the focus on ensuring that internet users have inquiry notice is misguided. Users are already aware that websites have terms and conditions—“it would be difficult to exist in our technological society without some generalized awareness of the fact.” But “most consumers will not read the terms and conditions, no matter how prominently the notice is displayed, and those that do will usually not understand them.” Further, “[a]mong those that both read and understand the terms of use, most will proceed with the transaction anyway, because the terms are presented on a take-it-or-leave-it basis. The ‘reasonably conspicuous’ notice rule is therefore one which is unlikely to have much effect, if any, on overall consumer welfare.”

What all this means, Judge Glasser says, is that “unscrupulous merchants are able to insert any contractual term they wish into the” agreement, and that concern should be our focus—the substance and fairness of the terms, not mutual assent. What does Judge Glasser suggest? He says that the late Professor Karl Llewellyn, the chief architect of Article 2 of the Uniform Commercial Code, had the answer: “[T]he consumer offers his ‘blanket assent to whatever terms the merchant deems appropriate, provided they are not ‘unreasonable or indecent.’” Judge Glasser suggests that courts ought to scour internet terms and aggressively ferret out unconscionability to ensure that the terms are fair.

What Does the Future Hold? Given the foothold that the traditionalist view has on our jurisprudence, the law is unlikely to change in a significant way any time soon. But floods can start as a trickle, and Judge Glasser has sounded an alarm bell that can’t be unrung. On the one hand, Judge Glasser’s opinion gives voice to fears that have been percolating for years in the dim, dark recesses of the law reviews. His concerns ought to be confronted head-on in the discourse over hyperlinked arbitration provisions.

But on the other hand, Judge Glasser’s opinion is troubling because it is terribly dismissive of the idea that internet users should be given notice (whether actual or inquiry) of the terms that will bind them—as if notice is scarcely worth the bother. But the absence of notice is anathema to the very notion of contract.

Beyond that, isn’t the fear that “unscrupulous merchants are able to insert any contractual term they wish into the” internet agreement a tad overblown? Which terms, exactly, is Judge Glasser concerned about? And how is the doctrine of unconscionability not being employed properly to police them? The disputes in this area are rarely about weird or draconian clauses that unscrupulous merchants sneak into the boilerplate of hyperlinked terms. The disputes are almost always about arbitration provisions—and newsflash: courts love arbitration. One wise jurist wrote: “It is wellestablished that federal public policy strongly favors arbitration.”²¹ That jurist was I. Leo Glasser.

Further, courts already police clauses to ensure at least a measure of fairness. When a website describes a product being sold, that description is an express warranty, and courts will not enforce a disclaimer of that warranty hidden away in the legal underbrush of hyperlinked boilerplate.²² Moreover, courts insist that buyers have a fair quantum of remedy for breaches,²³ and they do not enforce penalty provisions disguised as liquidated damages.²⁴

Perhaps most fundamentally, aside from these protections that the law insists on, why should a website owner not have the right to insist on contract terms of its choosing? And shouldn’t website users have the choice not to read the site’s terms of use but to plow ahead and use the site anyway? Aren’t these choices the price of freedom of contract, and isn’t freedom of contract indispensable to a free society? We routinely bind people to all manner of non-internet contracts even though they choose not to read the terms—does this mean that all of contract law must be knocked over and rebuilt? I leave the answers to these questions to you—it’s all beyond my pay grade.

Miscellaneous

There are many other issues related to the enforceability of arbitration provisions that can’t be covered here due to limited space, but here are quick takes on three other important issues.

Scope: Broad Versus Narrow. When a party brings a claim related to a contract, he or she often tacks on extra-contractual claims along with a claim for breach of contract. But when parties to a contract agree to arbitration, generally they don’t want some claims to be subject to arbitration and others to be resolved in court—that largely defeats the whole purpose of the arbitration provision. To help ensure that this doesn’t happen, the arbitration agreement has to be broadly worded. Here’s one of many, many examples. In Garcia v. Kendall Lakes Auto., LLC,²⁵ plaintiff purchased a vehicle from defendant, and the contract contained a provision providing for arbitration of claims “arising out of or relating to this [sales] Order or the parties[’] relationship . . . whether statutory or otherwise . . . .” Plaintiff subsequently filed an action against the defendant alleging that the defendant violated the Telephone Consumer Protection Act (TCPA) because, he claimed, he did not consent to an unsolicited telephone message. Defendant moved to compel arbitration.

The court granted the motion to compel and rejected plaintiff’s argument that the arbitration provision did not encompass the TCPA claim. The provision contained the words “relating to,” which are broad in scope and apply to claims having a significant relationship to the contract at issue. In contrast, the words “arising from” or “arising out of” are narrow and require a direct relationship to a contract’s terms and provisions. Here, the language of the arbitration provision encompassed the consent issue of the statutory claim.

Delegation Provisions. The parties can delegate issues regarding the validity of arbitration (e.g., unconscionability, fraudulent inducement) to the arbitrator, but not the threshold question of whether an agreement exists in the first place.²⁶ An example is a clause that gave the “Arbitrator . . . exclusive authority to resolve any dispute relating to the [Agreement’s] enforceability . . . including . . . any claim that all or any part of this Agreement is void or voidable.”²⁷ Delegation provisions are useful to give arbitration agreements more teeth, but even with a delegation provision, the disputes discussed above about in-the-box and internet contracts would need to be resolved by a court.

Provisions Making Arbitration the Exclusive Dispute Resolution Method. It is critical that the agreement’s language about submitting disputes to arbitration should be couched in mandatory, not permissive, terms. The agreement needs to make clear that there is no choice about whether to submit disputes to arbitration.²⁸

Note that “when the parties have designated an organization to administer their arbitration, and have indicated that this is the exclusive or only ‘forum’ in which they wish their arbitration to take place, if that organization is unable to administer the arbitration, the arbitration agreement is considered void and unenforceable.”²⁹

Timothy Murray, a partner in the Pittsburgh, PA law firm Murray, Hogue & Lannis, writes the biannual supplements to Corbin on Contracts, is author of Volume 1, Corbin on Contracts (rev. ed. 2018), and is co-author of the Corbin on Contracts Desk Edition (2017).

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Related Content

1. Richard Frankel, The Arbitration Clause as Super Contract, 91 Wash. U. L. Rev. 531, 551 (2014). 2. 15 Corbin on Contracts § 83.5A. 3. Proposed bills of one kind or other have been floating around Congress for years designed to ensure that disputes involving employees and consumers are resolved in courts instead of arbitration. E.g., the Forced Arbitration Injustice Repeal Act, 116 S. 610, introduced February 28, 2019, and the Restoring Justice for Workers Act, 116 S. 1491, introduced May 15, 2019. Given the current political divide in Washington, D.C., it is unlikely that any such bill will become law in the near future. 4. 139 S. Ct. 1407, 203 L. Ed. 2d 636 (2019). 5. “Perhaps the true motivation for resisting arbitration lies [in] the arbitration clause’s accompanying class action waiver.” Nicosia v. Amazon.com, Inc., 2019 U.S. Dist. LEXIS 100162, *21 (E.D.N.Y. June 14, 2019). 6. Margaret Kniffin, 5 Corbin on Contracts § 24.27. 7. U.S. Supreme Court Tr. of Oral Arg. 34 (Oct. 29, 2018). 8. Hill v. Gateway 2000, 105 F.3d 1147 (7th Cir. 1997). 9. Norcia v. Samsung Telcoms. Am., LLC., 845 F.3d 1279 (9th Cir. 2017). 10. Id.. 11. John E. Murray & Timothy Murray, Corbin on Contracts § 83.5A (Supp. 2018). 12. Aside from Norcia, supra, see Noble v. Samsung Elecs. Am., Inc., 682 Fed. Appx. 113 (3d Cir. 2017); Robinson v. OnStar, LLC, 721 Fed. Appx. 704 (9th Cir. 2018). 13. Murray v. Cunard S.S. Co., 139 N.E. 226, 228 (N.Y. 1923). 14. John E. Murray & Timothy Murray, Corbin on Contracts § 83.5A (Supp. 2018). 15. Windsor Mills, Inc. v. Collins & Aikman Corp., 25 Cal. App. 3d 987, 993 (1972). See also Starke v. Squaretrade, Inc., 913 F.3d 279 (2d Cir. 2019). 16. John E. Murray & Timothy Murray, Corbin on Contracts § 83.5A (Supp. 2018). 17. The caselaw is replete with disputes over whether the terms were sufficiently conspicuous. “If a hyperlink is contained in inconspicuous font and is relegated to a portion of the webpage that the user would not reasonably look to, courts will find the hyperlinked terms unenforceable.” Id. See, e.g., Rushing v. Viacom Inc., 2018 U.S. Dist. LEXIS 176988 (N.D. Cal. Oct. 15, 2018); Benson v. Double Down Interactive, LLC, 2018 U.S. Dist. LEXIS 193492 (W.D. Wash. Nov. 13, 2018); Vitacost.com, Inc. v. Mccants, 210 So. 3d 761 (Fla. Dist. Ct. App. 4th Dist. 2017); Herman v. SeaWorld Parks & Entm’t, Inc., 2016 U.S. Dist. LEXIS 181173 (M.D. Fla. Aug. 26, 2016). Other cases hold that hyperlinks contained on pages filled with all sorts of information may be inconspicuous because of clutter. See, e.g., Cullinane v. Uber Techs, 893 F.3d 53, 64 (1st Cir. 2018) (“If everything on the screen is written with conspicuous features, then nothing is conspicuous.”); Nicosia v. Amazon.com, Inc., 834 F.3d 220 (2d Cir. 2016). 18. Nguyen v. Barnes & Noble Inc., 763 F.3d 1171 (9th Cir. 2014); Motley v. ContextLogic, Inc., 2018 U.S. Dist. LEXIS 192447 (N.D. Cal. Nov. 9, 2018). 19. 351 F. Supp. 3d 1308 (W.D. Wash. 2018). As of the date this article was written, this case was on appeal to the Ninth Circuit. It is cited here because Judge Leighton’s language is emblematic of the traditionalist view. 20. 2019 U.S. Dist. LEXIS 100162 (E.D.N.Y. June 14, 2019). 21. Bakon v. Rushmore Serv. Ctr., LLC, 2017 U.S. Dist. LEXIS 85038, *3 (E.D.N.Y. June 2, 2017). 22. E.g., Dakota Style Foods, Inc. v. SunOpta Grains & Foods, Inc., 329 F. Supp. 3d 794 (D.S.D. 2018). 23. U.C.C. § 2-719 cmt. 1. See also In re: Yahoo! Inc. Customer Data Sec. Breach Litig., 313 F. Supp. 3d 1113 (N.D. Cal. 2018) (customers of web services provider pled an actionable claim that the provider’s exclusion of consequential damages for data breaches was substantively unconscionable). 24. E.g., Dobson Bay Club II DD, LLC v. La Sonrisa de Siena, LLC, 242 Ariz. 108 (2017). 25. 2019 U.S. Dist. LEXIS 50317 (S.D. Fla. Mar. 26, 2019). 26. In re Uber Text Messaging, 2019 U.S. Dist. LEXIS 102007, *18 (N.D. Cal. June 18, 2019); King v. AxleHire, Inc., 2019 U.S. Dist. LEXIS 72861 (N.D. Cal. Apr. 30, 2019); Doctor’s Assocs. v. Kirksey, 2018 U.S. Dist. LEXIS 197515 (D. Conn. Nov. 19, 2018); McFadden v. Van Chevrolet-Cadillac, LLC, 2018 U.S. Dist. LEXIS 130554 (W.D. Mo. Aug. 3, 2018). 27. Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 65, 130 S. Ct. 2772, 2774, 177 L. Ed. 2d 403, 408 (2010). 28. Tex. Health Res. v. Kruse, 2014 Tex. App. LEXIS 7567 (July 11, 2014). 29. Ridge Nat. Res., L.L.C. v. Double Eagle Royalty, L.P., 564 S.W.3d 105, 147 (Tex. App. 2018).