WSGR ALERT

Federal Appellate Court Enforces Terms of Use, Including Arbitration Provision, Entered During Mobile Application Registration Process

August 22, 2017

On August 17, 2017, the U.S. Court of Appeals for the Second Circuit issued an important decision in a high-profile case against Uber Technologies that has broad implications for the enforceability of terms of use entered on mobile device apps. In Meyer v. Uber Technologies, Inc.,1 the Second Circuit, whose jurisdiction includes New York, applied California law and reached a decision that echoes previous rulings by the U.S. Court of Appeals for the Ninth Circuit, i.e., that users are bound by online terms of use if, after being presented with "reasonably conspicuous notice" of the terms, the user voluntarily continues with the transaction by clicking on a "Register" or other similar button, thereby manifesting their assent to the terms.

The Meyer decision reverses a previous ruling by the U.S. District Court for the Southern District of New York that created confusion in this area of the law and represents a significant step in providing additional clarity regarding the circumstances in which courts will enforce terms of use, including arbitration provisions, entered in the mobile app environment. Despite a number of cases that enforce these terms, many courts remain skeptical to consumer and employee agreements that they view as "one-sided" by, for example, including an arbitration provision accompanied by a class action waiver. It is therefore critical that companies with consumer-facing products ensure that their methods of assent comply with best practices in this rapidly evolving area of the law.

Background

In 2014, the plaintiff (an Uber passenger) downloaded and registered for Uber's mobile app. As part of Uber's registration process at issue in this case, users were directed to a screen called "Register," which asked for certain information about their users, or allowed them to link third-party accounts. After clicking "Next," the user advanced to a second screen where they enter their payment information.

The final step of the registration process required that the user click a "Register" button that was accompanied by language stating, "[b]y creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY." The capitalized letters were a hyperlink, and were bright blue and underlined. If a user clicked this hyperlink, they would be redirected to a separate screen containing an additional button that, when clicked, would display Uber's then-current "Terms of Service and Privacy Policy," which in turn contained the arbitration provision.2

The plaintiff recalled providing contact and payment information, but did not recall seeing the hyperlink or clicking through and seeing Uber's Terms of Service and Privacy Policy.

Notwithstanding the arbitration provision, the plaintiff filed a complaint, on a class action basis, in the Southern District of New York, asserting price-fixing by Uber and its former CEO. When Uber moved to compel arbitration under the terms of use, the plaintiff argued that he was not bound by the arbitration provision because he had not received sufficient notice of, or agreed to, the terms generally, or the arbitration provision in particular. The lower court agreed and held that the plaintiff was not bound by the company's terms of use because he "did not have reasonably conspicuous notice of Uber's user agreement, including its arbitration clause, or evince unambiguous manifestation of assent to those terms."

The court denied Uber's motion to compel arbitration3 and Uber appealed the decision to the Second Circuit.

The Second Circuit Analysis

The Second Circuit began its analysis by reiterating the well-established law that, "an agreement to arbitrate exists where the notice of the arbitration provision was reasonably conspicuous and manifestation of assent unambiguous."4 The Second Circuit disagreed, however, with the lower court's application of these principles and reversed.

Because the plaintiff contended that he lacked actual notice of the arbitration provision (i.e., that he had not seen it), the Second Circuit used an objective standard to analyze whether the plaintiff had "inquiry notice" based on the perspective of a "reasonably prudent smartphone user."5 The court found the notice to be reasonable based on the following: (1) the screen was "uncluttered," or without excessive information; (2) relevant text could be viewed on the screen without scrolling; (3) the black text contrasted with the white background and the hyperlink was bright blue, in contrast to the other text; and (4) the relevant text was spatially and temporally adjacent to the registration button, in a way that "connect[ed] the contractual terms to the services to which they apply."6

Although the plaintiff did not expressly consent to the arbitration provision itself, the court again relied on an objective standard, finding that assent to the entire terms of use, including arbitration, was "unambiguous in light of the objectively reasonable notice of the terms."7

The Second Circuit remanded the case for further proceedings (i.e., to determine whether Uber had waived its right to arbitration by participating in the litigation), but the principal holding is a clear pronouncement that Uber's terms of use, and others like it in substance and in manifestation of assent, are binding and enforceable.

Parallel Proceedings in the Ninth Circuit

As mentioned above, Uber has faced challenges to arbitration provisions in other contexts (e.g., its agreements with drivers), including by the Ninth Circuit—the appellate court whose jurisdiction includes California. For example, in Mohamed v. Uber Technologies, Inc., the Ninth Circuit reversed a decision by the U.S. District Court for the Northern District of California. In that case, drivers were also bound by click-through terms they had assented to. The Ninth Circuit held that questions regarding enforceability of Uber's arbitration provision were properly delegated to, and should have been determined by, the designated arbitrator, and not the courts.8

Notwithstanding the directive from Mohamed, other plaintiffs have continued to press claims in court, which Uber routinely appeals if the lower court denies its motions to compel arbitration. Earlier this year, for instance, the Ninth Circuit began coordinating multiple pending appeals that raise similar issues, i.e., the validity of the arbitration class action waiver in its driver agreements, and continues to hear arguments on them. The consolidated cases are scheduled to have a hearing in September 2017.

Even after the Ninth Circuit resolves the pending appeals, it appears there will be additional cases as well, including Metter v. Uber Technologies, Inc. In an order dated April 17, 2017, the Northern District of California denied Uber's motion to compel arbitration on the basis that the user was "without inquiry notice of Uber's terms of service and without understanding that registering is a manifestation of assent to those terms."9 This decision involved the same registration process as the Meyer case, with the added facts that, when the plaintiff reached the second screen, the hyperlink was blocked by a pop-up keypad, and Uber did not dispute that the obstruction occurred.10 Uber has appealed this decision.

State of the Law

Since the U.S. Supreme Court's decision in AT&T Mobility LLC v. Concepcion, the law regarding the enforceability of agreements with consumers and employees, especially those containing arbitration clauses with class action waivers, continues to evolve. The Second Circuit's decision in Meyer v. Uber further clarifies the enforceability of terms of use where assent is obtained through a mobile app, like Uber, if affirmative consent is obtained through a click-box or with a "Register" button in conjunction with clear notice that the user is agreeing to be bound by the terms. This decision, and the likely trend in the Ninth Circuit, stands in contrast to situations (discussed in prior client alerts, including cases involving Barnes & Noble and Zappos) where courts have declined to enforce terms of use where the consent was obtained through a so-called "browsewrap" method. But this decision is, by no means, the end of the battle over enforcing arbitration provisions.

Since the AT&T decision in 2011, WSGR has drafted terms of use for numerous companies, and its litigators have successfully enforced arbitration provisions in federal and state courts around the country, including on appeal. For example, last month, in Aanderud v. Superior Court,11 California's Fifth District Court of Appeal affirmed the lower court's decision compelling arbitration where the agreement contained an enforceable "delegation clause" that requires challenges be resolved by the arbitrator rather than the courts.

Generally speaking, the federal courts have been a more favorable forum for entities seeking to enforce arbitration clauses, while the California state courts continue to view them with suspicion. The California Supreme Court's recent decision in McGill v. Citibank, N.A.12 is a recent example. In that case, the court held that companies cannot prohibit consumers from seeking a so-called "public injunction" in any forum, and that Citibank's effort to do so was not enforceable. Although it is unclear if McGill v. Citibank will receive further review from the U.S. Supreme Court, companies with arbitration clauses applicable to California consumers should review their arbitration provisions and consider whether changes to their terms may be required.

Given the importance of arbitration provisions, we recommend that companies review their terms of use on a regular basis and regularly consult your WSGR contacts for recent developments and best practices. Attorneys in WSGR's technology transactions and litigation practices are happy to assist with that analysis.


1 Nos. 16-2750-cv, 16-2752-cv, 2017 WL 3526682 (2d Cir. Aug. 17, 2017).
2 Id. at *2.
3 Meyer v. Kalanick, 200 F. Supp. 3d 408, 422 (S.D.N.Y 2016).
4 Meyer v. Uber, 2017 WL 3526682, at *6 (citing Specht v. Netscape Commc'ns Corp., 306 F.3d 17, 28 (2d Cir. 2002)).
5 Id. at *7.
6 Id. at *8.
7 Id. at *9.
8 848 F.3d 1201, 1208 (9th Cir. 2016) ("[A]ll of Plaintiff's challenges to the enforceability of the arbitration agreement, save Gillette's challenge to the enforceability of the [California Privacy Attorney General Act] waiver in the 2013 Agreement, should have been adjudicated in the first instance by an arbitrator and not in court.").
9 No. 16-cv-06652-RS, 2017 WL 1374579, at *3 (N.D. Cal. Apr. 17, 2017).
10 Id.
11 No. F073277, 2017 WL 3185218 (Cal. Ct. App. July 26, 2017).
12 2 Cal. 5th 945 (2017).