In an important opinion on the enforceability of online contract terms, Senior Circuit Judge Robert D. Sack walks through the last decade and a half of online contracting law on the way to invalidating an arbitration provision in an agreement involving a so-called Web loyalty program. Judge Sack concluded in Schnabel v. Trilegiant Corp., 2012 U.S. App. LEXIS 18875 (2d Cir. 2012), that an arbitration provision contained in an e-mail sent to consumers after they enrolled in such a program did not provide sufficient notice to support a conclusion that they had assented to arbitrate.

It is worth noting that two forms of notice of the arbitration provision were actually alleged to have been provided to the consumer: the post-transaction e-mail, and a clickable link to the “Terms and Conditions” of the agreement that was presented at the time of enrollment in the disputed program. The efficacy of the second form of notice was not before the court, however, because that issue was deemed to have been waived at the lower court level. Thus, whether the presentation of the clickable link to the terms was sufficient notice of the arbitration provision was addressed with the comment that it “might have created a substantial question” as to whether the arbitration provision was enforceable.

(Trilegiant proffered screen shots purporting to depict a transaction confirmation page similar to that displayed to the plaintiffs, which the court made available on its Web site here, along with screen shots of the enrollment offer page purporting to be similar to the display of the clickable link to the plaintiffs, here and here.)

Data Pass Marketing

This case involves a “data pass” marketing program. These programs, also referred to as “Web loyalty” programs, typically are presented by third-party marketers to consumers at the conclusion of a transaction with an online retailer, in the form of a discount or cash back offer. If the consumer responds to the offer, whether by an affirmative “click” or by the provision of personal information, their payment data is provided directly to the third-party marketer by the online retailer who collected it in connection with the underlying transaction. The consumer is then enrolled in a program in which their payment card is charged a monthly fee.

As of 2010, the direct passing of payment data in this manner is prohibited by the Restore Online Confidence Act unless, among other things, the consumer’s “express informed consent” is obtained. The Act also imposes other requirements aimed at clearly differentiating these third-party programs from the underlying retail transaction in which they are typically presented. The transactions involved in this case took place in 2007 and 2009, before the Act was passed, and this case raises some of the same issues that are addressed in that legislation. (The Act is discussed further in this prior blog post.)

Agreement Now, Arbitration Provision Later

The plaintiffs in this case brought suit in the U.S. District Court for the District of Connecticut alleging that at the time they responded to the offer at issue, they did not realize they were enrolling in a fee-based program. In response to the consumers’ lawsuit, Trilegiant and its parent company responded with a motion to compel arbitration. They cited the arbitration provision included in the Terms and Conditions to which, they argued, the consumers had assented at the time they enrolled in the program. The arbitration provision was included in the post-transaction e-mail sent to the plaintiffs.

The district court held that the arbitration provision was unenforceable  and the Second Circuit upheld, holding that under either California or Connecticut law, the e-mail did not provide sufficient notice to the consumers to support the conclusion that they had assented to the provision.

The Law is Unsettled

Although courts have increasingly embraced “assent now, terms later” contracting, Judge Sack stated, judicial acceptance of this principle has resulted in the “conventional chronology of contract-making” becoming “unsettled.” Two analytical approaches are possible on the facts presented, the court said. The first possibility is that the agreement between the parties, including the terms and conditions including the arbitration provision, became effective only after the receipt of the e-mail by the plaintiffs and their failure to cancel their memberships. The second approach is that an agreement to pay a fee in return for program benefits was formed at the time of the consumers’ initial enrollment, with the additional provisions of the terms and conditions, including the arbitration provision, constituting proposals for amendment to the existing contract.

But the analytical approach did not ultimately matter, the court concluded, because under either analysis, the e-mailed terms, including the arbitration clause, were never accepted by the consumers.

Assent to Post-Transaction Terms May Be Based on Conduct, but Conduct Must Be Coupled with Knowledge

The court did not dispute that assent to contract terms may be manifested by conduct, including the acceptance of a benefit, citing v. Verio (2d Cir. 2004). But that act of assent the court stressed, must be coupled with actual or constructive knowledge of the terms to which assent is being given. While that knowledge may be actual or constructive, the court said, there was no actual knowledge in this case.

To the argument that the failure to cancel constituted assent, the court concluded that, where “the purported assent is largely passive,” the issue of contract formation turns on whether a “reasonably prudent offeree” would be on notice of the provision. In the absence of actual knowledge, the question becomes whether the consumers were on inquiry notice of the provision. Only then, the court reasoned, would their failure to cancel constitute “an objective manifestation of their assent” to arbitration.

Post-Transaction, E-Mailed Terms Are Not Expected by Consumers

On the issue of inquiry notice, the court commented: “We do not think that an unsolicited e-mail from an online consumer business puts recipients on inquiry notice of the terms enclosed in that email and those terms’ relationship to a service in which the recipients had already enrolled, and that a failure affirmatively to cancel the membership will, alone, constitute assent.”

The “touchstone” on this issue, the court said, is “whether reasonable people in the position of the parties would have known about the terms and the conduct that would be required to assent to them.” Those circumstances involve conspicuousness of the term, the course of dealing between the parties, and industry practices. On these last two factors, it is not surprising that the court found e-mailed notice to be lacking in this consumer transaction.

The court noted, that, unlike the parties in, there was no prior relationship between the parties, and there was no other means by which a reasonable person would understand that disputes would have to be resolved by arbitration.

Shrinkwrap Cases Are No Help Here

The court particularly rejected the argument that a finding of assent to the e-mailed terms, at least in a consumer transaction, was supported by the rulings in Hill v. Gateway 2000, Inc. (7th Cir. 1997) and ProCD, Inc. v. Zeidenberg (7th Cir. 1996). In those shrinkwrap cases, the court reasoned, notice of the terms was provided when the customer opened the packaging for the goods, as the terms were “necessarily included with the product,” and the consumer would understand that unless the goods are returned, the consumer takes the product subject to those terms.

In contrast, Judge Sack said, e-mail notice was “temporally and spatially decoupled from the plaintiffs’ enrollment in and use of [the service].” Thus, e-mail notice “lacks a critical element of shrinkwrap contracting – the connection of the terms to the goods (in this case the services) to which they apply.” Further, because of the ease with which the consumer was able to enroll in the program, the receipt of the e-mail was unlikely to “raise a red flag” to alert the consumer to the proffer of legally significant terms.

What the program provider did in this case, the court found, was to effectively obscure the terms and conditions and the passive manner in which they would be accepted, and “made it appear – falsely – that being a member imposed virtually no burdens on the consumer besides payment.”

Judge Sack gave a nod to the policy reasons supporting the endorsement of the agreement now – terms later model endorsed by the Seventh Circuit in the shrinkwrap cases, but concluded that no policy rationale supported the manner in which the provider presented the terms in this case. Requiring express acknowledgement of receipt of the terms was just one of the “plethora of other ways” in which the provider could have met the minimum requirements of notice. Such an express manifestation of assent could not be found in the auto-debiting of the consumer’s payment card, either, as the court deemed those payments “too passive” to manifest assent to be bound.

Browsewrap and Clickwrap Cases Are No Help Either

While the issue of notice based on the presentation of the hyperlink was deemed to have been waived, the court did address it in a lengthy footnote, finally concluding that it “fell outside the browsewrap and clickwrap categories.” The court distinguished the presentation of the hyperlink as follows:

The presentation of terms on the screens in the case before us falls outside both the clickwrap and browsewrap categories. Unlike the paradigmatic browsewrap agreement,  in this case there is some indication near the button that a user must “click” in order to subscribe to the service, that the service includes additional terms and that the user assents to these terms by clicking the button. In contrast to the typical clickwrap agreement, however, the button itself does not make explicit reference to these terms in asking the end-user whether he or she assents to them. It only suggests that a user can sign up for the benefits of the membership by clicking “Yes.”

Where Does This Leave Service Providers?

Perhaps the most telling aspect of the opinion is the court’s expressed view that the program provider in this case sought to “obscure” the terms and conditions and make it “falsely” appear that there were no burdens imposed upon the consumer aside from monthly payments. Given that perspective on the facts, it is perhaps not surprising that the court concluded that there was no assent.

And, the opinion may reflect a general judicial hesitation to enforce certain kinds of ancillary provisions in consumer contracts, and in particular, a hesitation to enforce arbitration provisions. There are plenty of examples of such opinions, several of which we have blogged in the past: Defontes v. Dell (R.I. 2009) and Hines v., Inc. (E.D. N.Y. 2009).

More broadly applicable principles that may be gleaned from the ruling include a strong judicial skepticism on the efficacy of assent now – terms later contracting involving consumers where the transaction does not fall in the shrinkwrap category. The opinion suggests that in transactions where the delivery of the good or service is not closely tied to the presentation of the terms, unmistakable notice of them should be provided, whether by e-mail or otherwise. And consideration should be given to requiring a specific act of assent following the notice.