January 22, 2013
By Oliver Herzfeld
The underlying dispute involved a father and son named Schnabel who each signed up online for a program that provides discounts on products and services in consideration of monthly fees. Following the Schnabels’ enrollment, they received an email from the defendant, Trilegiant, with additional terms and conditions including a mandatory arbitration provision. After being charged membership fees for a number of months, the Schnabels each canceled their membership and sought a full refund. When Trilegiant refused to provide more than a partial refund, the Schnabels commenced a class action lawsuit against Trilegiant claiming unlawful, unfair and deceptive practices. Trilegiant responded by seeking to enforce the arbitration provision in its terms and conditions. The district court concluded that the Schnabels never agreed to the additional terms and conditions, including the arbitration provision, and the defendant appealed.
The Legal Standard
Following prior court decisions regarding contract law and enforceability in the context of shrinkwrap and electronic agreements, the emailed terms and conditions would be binding on the Schnabels if the Schnabels:
- After receiving actual notice or, at a minimum, inquiry notice (i.e., sufficient information as would cause a reasonable person to inquire further) regarding the terms;
- Manifested their assent.
I will consider each of the two requirements in turn.
On appeal, the Second Circuit stated that the inquiry notice requirement could be fulfilled by factors such as the conspicuousness of the terms or the course of dealing of the parties. For example, courts have deemed the inquiry notice requirement to be satisfied by shrinkwrap software license agreements that can only be read and accepted by a licensee after breaking the plastic wrap around the product package since (i) the licensee cannot commence use of the product without being confronted by the conspicuous terms, and (ii) reasonable licensees recognize that if they do not return the product, they will be legally bound by the license terms. Similarly, in a prior case, inquiry notice was established for certain terms where a party was repeatedly exposed to the terms following a daily download of data thereby establishing a course of dealing. The key is that there must be actual notice of the terms or sufficient facts or circumstances to cause a reasonable person to make further inquiries.
In this case, however, the Second Circuit determined the inquiry notice requirement was not fulfilled because (i) unlike the situation with shrinkwrap agreements, the Schnabels had no reasonable expectation of receiving after-agreement terms via email, the emailed terms were not sufficiently conspicuous since they were separated in time and space from the parties’ prior contract formation, and the Schnabels could commence using the service without being confronted by, or having to acknowledge the existence of, the emailed terms, and (ii) unlike the course of dealing case, the Schnabels were not repeatedly provided with the terms as part of their ongoing subscription relationship with Trilegiant.
Section 19(2) of the Restatement (Second) of Contracts, a major codification of contract law, states assent may be manifested through conduct with or without words or action provided that “[t]he conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents.” In this case, Trilegiant tried to argue that the Schnabels manifested their assent to the arbitration provision through continued membership payments. The Second Circuit disagreed and denied Trilegiant’s motion to compel arbitration stating:
[A]cceptance need not be express, but where it is not, there must be evidence that the offeree knew or should have known of the terms and understood that acceptance of the benefit would be construed by the offeror as an agreement to be bound. . .That is not the case here. The plaintiffs were never put on inquiry notice of the arbitration provision, and their continued credit-card payments, which were auto-debited from their credit cards, were too passive for any reasonable fact-finder to conclude that they manifested a subjective understanding of the existence of the arbitration and other emailed provisions and an intent to be bound by them in exchange for the continued benefits [membership] offered.
What Should Companies Do?
- Provide clear, actual and conspicuous notice of all terms;
- Require counterparties to scroll through to the bottom of the terms and then type in their name in a signature box, click an “I Agree” button or otherwise expressly andactively manifest their assent to the terms;
- Prohibit any use of the website or commencement of the relevant services prior to such express and active manifestation of assent; and
- Periodically have counterparties reconfirm their agreement to the terms.