Arbitration Provisions in Online Contracts

March 22, 2015

As businesses move online the way they create contracts with consumers continues to change. This ever evolving area of business law impacts not only the way businesses interact with your customers but also the way they resolve any disputes with them should they arise. This makes it extremely important for business owners and those who draft their online contracts to understand the most recent rulings regarding online contract formation. One recent California decision affects the nature of arbitration provisions in online contracts.

Savetsky v. Pre-Paid Legal Services, Inc.

This recent court decision is called Savetsky v. Pre-Paid Legal Services, Inc. The underlying lawsuit is a class action case alleging that Pre-Paid Legal Services, which did business as LegalShield, charged recurring payments for pre-paid legal services without making proper disclosures and without the the customers' consent. LegalShield filed a motion to compel arbitration, which the court has now denied. This motion and the court's decision regarding the motion is what is important about the case for our purposes.

A Hidden Arbitration Agreement

When a customer logged on to LegalShield's website, he or she was presented with an option to "Buy Now" and an option to "Learn More." If the customer clicked "Buy Now," the site directed the customer to a section where the customer picked his or her state and then the site displayed the service plans available for that state. A link next to each plan offered more details about each plan, but a customer did not have to click on that link in order to make a purchase. Even if a customer did click on the "details" link, he or she would have to click yet another link to get to a sample member contract. That sample member contract is what contained the arbitration agreement.

Customers Must Assent to Arbitrate Disputes

The Court, relying on United Steelworkers of Am. v. Warrior & Gulf Nav. Co., said that because arbitration obligations are created by contracts, the parties must assent to arbitration. California courts determining whether arbitration clauses, including online arbitration clauses, are binding, must determine whether the parties outward manifestations of consent would lead a reasonable person to believe that the party has assented to the agreement.

Browsewrap, Clickwrap, and Shrinkwrap

The Court recognized three scenarios that often come up with online contracts: "clickwrap," "shrinkwrap," and "browsewrap" agreements. Clickwrap is where a customer has to check a box or click "I agree" to acknowledge they have read the terms and conditions of a contract. These agreements are generally enforceable. Shrinkwrap agreements are those where the terms and conditions are inside a software box but the software is clearly labeled notifying the customer that using the software will indicate assent to the terms and conditions. These agreements are also usually enforceable. Browsewrap agreements involve websites that contain a notice that further use of the website means that the user agrees to the terms and conditions of the website. These are also often enforceable, but only if the user has actual or constructive knowledge of the terms and conditions. The situation here, in Savetsky, does not fall neatly into any of these three categories.

Arbitration Agreement in Savetsky is Not Enforceable

The Court determined that the arbitration agreement in this case is not enforceable. No evidence exists that Savetsky had actual notice of the sample member contract or that Savetsky acknowledged the existence of such a contract before purchasing his membership. The context of the membership agreement does not put users on inquiry notice of the contract or its terms. Therefore the court concluded that a reasonable person in Savetsky's position would not understand that he or she had assented to an arbitration provision.