Two More Cases Compel Arbitration for Dubious Online Contracts (Guest Blog Post)

by guest blogger Kieran McCarthy

The intersection of the Federal Arbitration Act and the law of online contracts has become utterly corrosive to our legal system.

Many people think this is true. But not enough lawyers say it often enough. Or loudly enough.

When Congress enacted the Federal Arbitration Act (FAA), it did so to establish a policy favoring arbitration when contracting parties sought to resolve their disputes by arbitration. See, e.g., Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 22, 24 (1983). That’s all well and good. If sophisticated parties want to settle their disputes through arbitration, mediation, or a OUIJA board, nobody’s going to lose much sleep over their decision to do so.

The problem with the FAA and online contracts, of course, is that no one is agreeing to arbitrate anything. Customers use popular services. Popular services leave them no choice but to click a button (or click near a hyperlink that mentions a contract or click on a button that never even mentions a contract) that binds them to arbitration. And even though the creators of popular services know, and you know, and I know, and the Supreme Court knows, and every judge that decides every opinion on these issues knows, that no one is reading these documents, the legal system has collectively decided this system sufficient to bind everyone to a legal agreement. And almost without exception, those legal agreements require users of digital platforms to waive their right to a jury trial, a class-action lawsuit, and various other civil rights.

This has been true for a while now. Many people have written about it before me.

But the problem is only getting get worse. And the reason that the problem continues to get worse is that as software “eats” more industries, online contracts gobble up the legal domains for more commercial transactions. Which results in the FAA eviscerating civil rights and consumer protections for an ever-broader range of commercial transactions.

20 years ago, you didn’t enter a contract when you had someone watch your dog or buy groceries or use a hotel room or when you got a cab. But when you use Rover, Instacart, Airbnb, or Lyft, you do enter into an online agreement when you use those services.

10 years ago, it was a joke when people said, “there’s an app for that.” Now, it’s not even a joke. After COVID, there is hardly any industry that does not have a convenient digital substitute. Or that requires you to access the offline service through a digital interface.

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Simply put, consumers in 2024 have two options: 1) acquiesce to a systemic regime that requires them to waive their constitutional rights with every online transaction, or 2) have no access to the world of digital commerce, or even to access services that have an online or digital component.

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Two recent cases illustrate the extent to which courts today are willing to enforce this regime.

The first is Jane Doe #1 v. Massage Envy Franchising, LLC, 2023 WL 8801517 (Court of Appeal, 6th District California). According to the Court:

On June 12, 2019, while Doe was checking in for a massage at a franchised location in San Jose, she completed a digital “Wellness Agreement” on a tablet given to her by staff. The Wellness Agreement was between Doe and the franchised location and did not contain an arbitration agreement. At the end of the Wellness Agreement, which followed several pages soliciting information about treatment instructions, Doe was presented with a checkbox adjacent to the text “I Agree and assent to the Terms of Use Agreement,” presented in the same way as it had been on the profile creation screen and linking to the same Terms of Use Agreement. The check-in process was generally rushed and required Doe to provide treatment instructions for the therapist. Reading Doe’s uncontradicted declaration in the context of Massage Envy’s uncontradicted business records, Doe quickly completed the form, including checking the box, without realizing that the text “Terms of Use Agreement” was a hyperlink.

Doe declares that, on January 26, 2020, she was sexually assaulted during a massage at the San Jose franchised location. Doe filed the present lawsuit asserting claims against Massage Envy and Chaoju Investment arising out of the sexual assault.

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To use Massage Envy’s online booking service, customers must create an online user profile. On a single page titled “CREATE YOUR ONLINE SCHEDULING PROFILE,” there are fields for the customer’s first name, last name, email address, phone number, and for the creation of a password. Below that field, there is a check box to the left of text reading “I agree and assent to the Terms of Use Agreement.” The words “I agree and assent to the” are in black and the words “Terms of Use Agreement” are a slightly different shade of purple. The words “Terms of Use Agreement” are a hyperlink, which if clicked will redirect the customer to that agreement.

The trial court ruled that because of how rushed the sign-in process was, the agreement unconscionable, and therefore the arbitration agreement was unenforceable. On appeal, the appeals court ruled that because the agreement included a valid delegation clause, the question of unconscionability was for the arbitrator to decide.

Doe raises several unconscionability arguments, all directed to the unconscionability of the arbitration agreement as a whole and not the delegation clause in particular. Doe argues that even if the delegation clause clearly and unmistakably delegates arbitrability, we may reach her unconscionability arguments because the delegation clause is unconscionable for the same reasons that the arbitration agreement as a whole is unconscionable, including because the contract is adhesive. (See Bruni v. Didion (2008) 160 Cal.App.4th 1272, 1289 [a contract of adhesion is a standardized contract imposed and drafted by the party of superior bargaining strength on a take-it-or-leave-it basis].) Whether a contract term is so fundamentally unfair or unreasonably one-sided that it is unconscionable requires evaluation of both the procedure by which the term was adopted as well as its substance. (OTO, L.L.C. v. Kho (2019) 8 Cal.5th 111, 125-137 (OTO); see also Rest., Consumer Contracts (Tent. Draft No. 2, supra), § 6, com. 2 [noting that the unconscionability doctrine applies a “sliding-scale approach”].) The use of standardized terms presented “ ‘on a take-it-or-leave-it basis’ ” and the difficulty in understanding those terms—while not preventing the formation of mutual assent—are factors to be considered in assessing the procedural aspect of unconscionability. (OTO, supra, 8 Cal.5th at p. 126.) Substantive unconscionability, in turn, “examines the fairness of the contracts terms” to assess whether that are “ “unreasonably more favorable to the more powerful party.” ’ ” (Id. at pp. 129-130.) “Unconscionable terms” may include “unreasonably or unexpectedly harsh terms regarding … central aspects of the transaction[ ] and terms that undermine the nondrafting parties’ reasonable expectations.” (Id. at p. 130.) Given the unambiguous delegation clause and the absence of any challenge directed specifically thereto, we express no opinion on the procedural or substantive unconscionability of the arbitration agreement as a whole. We hold only that Doe’s general unconscionability arguments are properly left for the arbitrator. (See Nickson v. Shemran, Inc. (2023) 90 Cal.App.5th 121, 132; Najarro, supra, 70 Cal.App.5th at p. 889; Tiri, supra, 226 Cal.App.4th at p. 240; see also Mendoza, supra, 75 Cal.App.5th at p. 767.)

Id. at 7.

A user of a popular service is forced to sign a series of forms as a condition of receiving a service. The plaintiff alleges the user is pressured to do so quickly without reading the agreements. Then the user is allegedly assaulted.

The fact that we let the language of the purported arbitration agreement itself dictate the outcome here is nonsensical. If there is evidence in the record that the process by which the user that encountered this “agreement” was unconscionable, then it makes no sense to let the “agreement” dictate the outcome. Stated another way, we should not delegate questions of unconscionability to an arbitrator because a company that allegedly did the unconscionable things said so. This creates an incentive for companies who create online agreements to have unconscionable sign-in processes. Because when they do, they still get what they want with respect to the procedural posture of their cases.

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The other recent case that got my blood boiling was Derriman v. Mizzen and Main LLC, 2023 WL 9022723 (M.D. Fla. Dec. 29, 2023).

Plaintiff visited the Mizzen and Main website on his mobile device, which advertised the company’s messaging program and offered a discount to customers who signed up for emails and texts. Doc. 25 at 3–4.

Plaintiff then clicked a button labeled “GET 15% OFF NOW when you sign up for email and texts.” Id. at 4. This action triggered Defendant’s system to pre-populate a text message onto Plaintiff’s phone. Id. at 4–5. The pre-populated message indicated that Plaintiff was opting into Mizzen and Main’s program and agreed to receive marketing alerts. Id. at 5 … The enrollment screen for Mizzen and Main’s messaging program included a hyperlink to the terms of the offer in a box above the sign-up button. Id. at 6.

The court went further to say:

The Messaging Agreement is a browsewrap agreement, as Plaintiff was not required to confirm his agreement with the terms, although he had to press the “GET 15% OFF” button to sign up. Under Florida law, the Court can find that the agreement is enforceable if Plaintiff had constructive notice of the terms and conditions. Porter, 273 So. 3d at 1028. Thus, the Court considers “the clarity and conspicuousness of the terms” to determine whether a reasonably prudent user would be put on notice of the agreement. Fridman, 554 F. Supp. 3d at 1260 (citation and internal alterations omitted). “In the context of web-based contracts, clarity and conspicuousness are a function of the design and content of the relevant interface.” Id. (citation omitted).

Plaintiff’s arguments are unpersuasive. First, he fails to cite evidence or relevant authority that would allow the Court to find that Defendant’s form was intentionally designed to distract or mislead a reasonable consumer. Plaintiff also fails to mention that the “Terms” and “Privacy” links are underlined, indicating that they are hyperlinks. While it is true that the hyper-linked text pertaining to the Messaging Terms could have been bolder and larger, the text was prominently placed on top of the (contrasting) dark blue “GET 15% OFF” button.

Id. at *8.

This makes me want to puke. If clicking on a button that says “GET 15% OFF” creates a legally binding contract (because a tiny, not-that-prominent hyperlink is sort of near it), then we really have thrown out any rational notions of assent in the context of online contracts.

This is an “agreement” only in the most Orwellian sense of the term.

There’s no way that anything like this would have pass muster in the offline world. But for some reason, courts let companies like this get away with this nonsense online.

Imagine a grocery store putting a contractual agreement in fine print next to large sign advertising a 15% sale off milk, with a clause demanding arbitration in the case of rotten produce or slips-and-falls. Then imagine that grocery store going into court and trying to enforce that, with the only evidence that the customer agreed to the contract being that they bought a gallon of milk.

That’s not a contract.

Nor is clicking on a button that says “GET 15% OFF.” But bit-by-bit, courts like this one have stretched all rational notions of notice and assent to make online contracts unrecognizable or unfathomable to fundamental principles of contract.

My guess is that most courts around the country would not have enforced this threadbare notice-and-assent process. But the fact that some do is appalling.

Such is the state of online contracts in 2024.