Commercial and Consumer Contracts.
When a written agreement contains a clear, well-crafted, broad arbitration clause, parties will be bound to arbitrate. An excellent example is the recent case of Fox v. Transunion, 2018 U.S. Dist. LEXIS 183937 (S.D. Ohio Oct. 26, 2018), a customer sued a bank for defamation and violation of a federal banking statute. The bank’s account card contained a broad arbitration clause which stated that:
“any claim, dispute or controversy between you and us (called ‘Claims’). All Claims (whether based on contract, tort, statute, or any other basis) arising out of or related to your account, a previous related account or our relationship may be arbitrated.”
The Court held that the account card was a binding contract to arbitrate and compelled arbitration.
Recent cases have tested the boundaries of what constitutes a binding contract. Internet marketing has presented some interesting challenges. How often do consumers or even we lawyers actually take the time to scroll through all of the terms of agreement when we open accounts or engage in transactions on the internet? In Starke v. SquareTrade, Inc., No. 17-2474, 2019 WL 149628 (2d Cir. Jan. 10, 2019), the Second Circuit found that the internet customer was presented with multiple documents which contained different sets of terms. The Court examined the webpage design and the detailed components of the internet webpage, hyperlinks, fonts, the complexity or clarity of process, prompts and interfaces used and the timing of disclosure of terms (in this case, terms communicated to the consumer via hyperlink in a post-sale email) and concluded that the customer did not have reasonable notice of the arbitration provision and refused to compel arbitration. (For a detailed discussion analysis of the case, you can read the New Media & Technology Law Blog article written by Jeffrey Neuburger of Proskauer Rose, LLP.)
Contrast that case with the following, somewhat notorious, “shinglewrap” case. In. Dye v. Tamko Building Products, Inc., 2018 WL 5729085 (11th Cir. Nov. 2, 2018), a homeowner entered into a contract with a roofing contractor to install a new shingle roof. The roofer purchased shingles from a vendor of shingles. The shingles came in shrink wrapped bundles. Affixed to the shingle bundles was a disclosure of terms which contained an arbitration agreement with a prohibition of class action and a notice that opening the shinglewrap and using the shingles constituted acceptance of the terms. The homeowner who had not signed any contract with the roofer or the shingle vendor that contained an arbitration clause sought to litigate and to bring class action claims. The Court ruled that the roofer was an agent of the homeowner. Thus, when the roofer purchased, opened the shinglewrap and utilized the shingles, it accepted the terms on the wrapping and bound the homeowner to the arbitration provision and the class action waiver. The Court followed cases that held consumers bound to the terms contained on the outside of product packaging. See, Hill v Gateway 2000, 105 F.3d 1147 (7th Cir. 1997).
In another recent home appliance warranty consumer case, Amanda Kernahan v. Home Warranty Administrator of Florida, Inc. (January 10, 2019), the New Jersey Supreme Court ruled a mediation-arbitration provision unenforceable because it was unclear, confusing and misleading. The critical portions of the ADR clause provided as follows:
G. MEDIATION In the event of a dispute over claims or coverage …The parties agree to mediate in good faith before resorting to mandatory arbitration in the State of New Jersey. …if the dispute cannot be settled through direct discussions you agree that: …Any and all disputes, claims and causes of action arising out of or connected with this Agreement …shall be resolved exclusively by the American Arbitration Association … under its Commercial Mediation Rules. Controversies or claims shall be submitted to arbitration regardless of the theory under which they arise, including without limitation contract, tort, common law, statutory, or regulatory duties or liability. …Under no circumstances will you be permitted to obtain awards for, and you hereby waives [sic] all rights to claim, indirect, punitive, incidental and consequential damages and any other damages, other than for actual out-of-pocket expenses, and any and all rights to have damages multiplied or otherwise increased. (Underscoring added.)
The Court found the following contractual shortcomings:
1. Discussing arbitration under a paragraph entitled “Mediation” was confusing and misleading;
2. Failing to state that agreeing to arbitration meant that one was waiving the right to a jury trial was incomplete and unclear to a consumer who is not expected to know the difference between mediation and arbitration;
3. Referring to the AAA mediation rules and not referring to its arbitration rules was confusing and unclear;
4. The use of a small font violated the plain language law; and
5. The “confusing ordering of sentences” contributed to lack of clarity.
As a result, the Court concluded that there was a failure of mutuality of assent and thus a failure in the formation of an enforceable contract.
Similarly, in the employment context, courts have closely scrutinized all aspects of employer proposed or imposed arbitration agreements. Courts have examined the presence and adequacy of consideration, the adequacy of notice to employees, the clarity and consistency of arbitration provisions (See, Khosravi-Babadi v. Hawaiian Telcom, Inc., 2018 U.S. Dist. LEXIS 215499 (Haw. Dec. 21, 2018)), the presence of power imbalance, the allocation of the financial burden of arbitration costs and the procedural and substantive fairness or conscionability of the arbitration agreement. An example is the case of Amy Skuse v. Pfizer Inc. et al., case number A-3027-17T4 where a trial court rejected an arbitration provision that was discussed during an employee training program where employees were required to acknowledge that they attended the training. The employer attempted to have employees confirm through an email “acknowledgment” that they were aware of and assented to arbitration. The Court said: “The employer must also obtain its employees explicit, affirmative, and unmistakable assent to the arbitration policy, in order to secure their voluntary waiver of their rights under the law.” (Underscoring added.) Again, the Court found insufficient mutual assent to form a binding contract to arbitrate.
Consider also, Ramos v. Superior Court of San Francisco County, 28 Cal. App. 5th 1042, (Nov. 28, 2018), a recent and very informative California Court of Appeals decision rejecting an arbitration provision in a law firm’s partnership agreement. The case involved a highly educated, credentialed and very sophisticated and experienced “income partner’s” wrongful discharge, sex discrimination and statutory employment practices claims. The Court addressed many aspects of the arbitration agreement and, after analyzing and applying its procedural and substantive unconscionability test, found multiple deficiencies and concluded that the agreement was invalid.
All of these cases illustrate that facts and context matters. Courts will continue to closely scrutinize the fairness of arbitration provisions as part of their function and role as guardians of fairness, equity and justice. Employees, consumers, franchisees and others presented with adhesion contracts will receive greater protection than parties perceived as being sufficiently sophisticated, knowledgeable and having greater bargaining power.