WSGR ALERT

Developments in Enforceability of Arbitration Provisions in
Consumer-Facing Online Agreements

May 3, 2019

Courts throughout the country continue to express skepticism over, and go to lengths to deny the enforceability of, arbitration provisions in consumer online agreements. A recent example from the New York Supreme Court for Kings County involved the popular "Tough Mudder" race. In Scotti v. Tough Mudder1, the court denied a motion to compel arbitration and held that the mandatory arbitration provision in the online consumer-facing registration form was void because it failed to put the consumer on notice of relevant terms of the contract, particularly the mandatory arbitration provision. Portions of the court's opinion also suggest that some courts continue to raise the bar for enforceability of online click-wrap (also referred to as "click-through") agreements in the consumer context, and that "scroll-wrap" may be emerging as the best practice for online contract formation. This ruling—while not the prevailing view—has the potential to impact consumer-facing organizations with customers in New York if other courts follow Tough Mudder's more stringent requirement that a mandatory arbitration provision in a click-wrap agreement must be highlighted for the user and given extra attention during the contract formation process.

Background

In July 2016, plaintiffs Richard E. Scott and Joseph Russo (collectively, the plaintiffs) sustained injuries after participating in an obstacle course event operated by Tough Mudder. Both plaintiffs had completed an online internet registration form prior to participating in the event. During the registration process, aspiring registrants needed to scroll down through the website to a section of the website with a text box containing a document entitled "Participant Waiver and Course Rules" (the waiver). Initially, only a portion of the text of the waiver was visible to the user in the box and the registrants had to continue scrolling within the text box to read the entirety of the waiver. The initially visible content of the scrollable box which preceded the full waiver read as follows:

Participant Waiver: Tough Mudder Incorporated

ASSUMPTION OF RISK, WAIVER OF LIABILITY, AND INDEMNITY AGREEMENT

PARTICIPANTS: READ THIS DOCUMENT CAREFULLY BEFORE ACCEPTING. THIS DOCUMENT HAS LEGAL CONSEQUENCES AND WILL AFFECT YOUR LEGAL RIGHTS AND WILL ELIMINATE YOUR ABILITY TO BRING FUTURE LEGAL ACTIONS...

Visible only if the user scrolled through many screens of the waiver, there was an arbitration provision stating that all disputes arising out of participation in the Tough Mudder event would be subject to mandatory arbitration. Below the scrollable text box, there was a checkbox beside text that read "I agree to the above waiver." All aspiring participants were required to check the box in order to complete the registration. The plaintiffs brought a court action based on the injuries they sustained injuries during an event. Tough Mudder moved to dismiss and to compel arbitration, based on the arbitration provision in the waiver.

New York Supreme Court of Kings County Decision

The Tough Mudder court noted that there are various methods by which online contracts may be formed (e.g., browse-wrap, click-wrap, scroll-wrap, etc.), but that "[t]he creation of online contracts 'has not fundamentally changed the principles of contract'" and, in order for a valid contract to exist, a user must have assented to its terms. Such assent is shown if a user had actual or constructive knowledge of the terms of the contract and properly manifested her assent through the user's actions. A user does not need to have actual notice of the terms of an online agreement as long as they have "inquiry notice" (meaning that the terms of the contract are reasonably communicated to the user such that a reasonably prudent person would be put on notice of the terms of the contract).2 Whether a user had inquiry notice of the contents of a contract requires a factual inquiry. Moreover, a valid agreement to arbitrate only exists where the notice of the arbitration provision was reasonably conspicuous and the manner of assent is unambiguous as a matter of law.3 To assess whether proper assent has been shown, courts generally look for evidence of how the terms are presented to a user when using the website and the method of acceptance of those terms.4

The court found that Tough Mudder failed to establish that the webpage presented to the plaintiffs during registration provided reasonable notice (actual or inquiry) of the mandatory arbitration provision. In particular, the court distinguished between terms that a consumer might understand to be "default rights" versus other "significant" contract terms that materially affect a consumer's rights, and noted that even if a user was on notice of the existence of contract terms generally, they must also be on notice of the existence of these specific "significant" terms in order for the significant terms to be enforceable. The court expressly identified the right to sue in court and/or broad exculpatory clauses such as waiving liability for negligence as the kinds of "significant" contract terms for which a user must be put on specific notice. Whether there was adequate notice of the existence of these significant contract terms depends heavily on whether the design and content of the website made the existence of those terms reasonably conspicuous (i.e., merely requiring a user to scroll through the entire agreement may not make those significant terms sufficiently conspicuous).

In examining the waiver, how it was presented to users, and the process through which users accepted the waiver, the court held that the all-caps language stating that "THIS DOCUMENT HAS LEGAL CONSEQUENCES AND WILL AFFECT YOUR LEGAL RIGHTS AND WILL ELIMINATE YOUR ABILITY TO BRING FUTURE LEGAL ACTIONS," coupled with the check box, did not adequately notify users of the existence of the mandatory arbitration provision because the language did not make express reference to arbitration and the arbitration provision itself was buried within the main text of the contract.

Implications

It remains to be seen whether the Tough Mudder decision will stand the test of time and review by other courts. However, in order to bolster the likelihood that "significant" provisions of click-wrap agreements materially affecting a user's rights and obligations (such as mandatory arbitration, waiving liability for negligence, and limitations on liability) will be enforceable, online service providers should conspicuously alert users to the specific existence of each of these significant additional terms.5 Therefore, to increase the likelihood that users are on proper notice of the terms of an online agreement, and, in particular, of terms that materially affect a user's rights and obligations, companies should consider:

  • requiring users to scroll through the entire contents of an online agreement before being able to check a box next to language of agreement;
  • making prominent the significant provisions, including arbitration and limitations of liability:
    • through both font and color choices (e.g., highlighting arbitration provisions, making the sections bold and/or all caps, including other graphic elements that direct users to those section in particular); and
    • by including text specifically calling out the existence of these sections at the beginning of the online agreement (preferably in the first screen viewed by the user) in addition to another location of the agreement (such as at the bottom of the agreement above the "I agree" checkbox);
  • include additional individual checkboxes next to each significant section that says "I acknowledge that I have read and agree to this [Arbitration/Waiver of Liability/etc.] provision"; and
  • after scrolling through the entire agreement, require users to click a box next to language reading: "I acknowledge that I have read and agree to the above terms and conditions, and hereby acknowledge that I am [INSERT DESCRIPTION OF SIGNIFICANT TERMS HERE—e.g. waiving my right to go to trial and agreeing that all claims will be subject to mandatory arbitration and other terms]."

Wilson Sonsini Goodrich & Rosati's technology transactions department works closely with the firm's commercial litigators and regularly advises clients on issues relating to arbitration provisions as well as the drafting, negotiating, and due diligence of commercial contracts and IP licenses.

Please contact Manja Sachet, Audrey Garfield, or another member of the firm's technology transactions department or commercial litigation practice to discuss any questions that you may have regarding this decision.

Blair Nelson contributed to the preparation of this WSGR alert.


1 Richard E. Scotti v. Tough Mudder, Inc., N.Y. Slip Op No. 29098, 2019 WL 1511148 (N.Y. Sup. Ct., March 29, 2019).
2 Id. (citing Schnabel v. Trilegiant Corp., 697 F.3d 110, 120 (2d Cir. 2012) ("[I]nquiry notice is 'actual notice of circumstances sufficient to put a prudent man upon inquiry'" [quoting Specht v. Netscape Comm'ns Corp., 306 F.3d 17, 27 n.14 (2d Cir. 2002)]).
3 Id.
4 Tough Mudder at 3 (citing Schnabel v. Trilegiant Corp., 697 F.3d 110, 120 (2d Cir. 2012)).
5 The court's reasoning does not provide clear-cut rules regarding the enforceability of the various forms of online contract formation (browse-wrap, click-wrap, scroll-wrap, or otherwise). The court determined that the agreement was a click-wrap as distinguished from scroll-wrap, because users could check the box without scrolling through and viewing the entire agreement, the court did not, however, suggest that merely requiring users to scroll through the entire agreement, without more, would have saved the arbitration provision. Tough Mudder at 3 (citing Berkson v. Gogo LLC, 97 F. Supp. 3d 359, 394-403 (E.D.N.Y. 2015); see also Applebaum at 394-403 (S.D.N.Y. 2017) (applying New York law and denying a motion to compel arbitration where notice of the contract terms was insufficient to bind the plaintiff).