How to Ensure Your Online Arbitration Agreement is Enforceable

Most (if not all) online merchants and membership clubs do not want to be sued by their customers, and therefore include a mandatory arbitration provision in their online terms and conditions.  A recent court case has helped clarify how to make such provisions enforceable.

In the recent case of  Schnabel v. Trilegiant Corp., the plaintiffs purchased  items online from Priceline.com and Beckett.com.  As they started the checkout process, they were offered the opportunity to get cash back on their purchases.  Each of them responded to the offer and were then prompted to enter their home city and a password.  By doing so, they agreed to a monthly membership in the “Great Fun” program, which purported to offer discounts on various products and services.  The plaintiffs later realized they had been paying $12-$15 per month for this membership, and brought a class action lawsuit, alleging that the defendants deceived them into joining the program.

The defendants then moved to compel arbitration, relying on the terms and conditions of the Great Fun membership agreement, which required binding arbitration of all claims.  Those terms and conditions were made available for review if the plaintiffs if they clicked on a link featured on the sign up page where they entered their city and a password.  The defendants also sent its full terms and conditions to all purchasers in an e-mail sent after they signed up.

The court held that no arbitration agreement had been formed.  Due to a technicality,  the court refused to consider whether the hyperlink on the sign up page was sufficient to provide adequate notice.  Had it done so, the outcome may have been different.   The court’s decision focused solely on whether the the post transaction e-mail that included the arbitration provision gave sufficient notice to the plaintiffs that they agreed to binding arbitration.  The court determined it did not.  

The court made it clear that, if an online merchant fails to include an arbitration provision on a registration page, consumers have not been provided with actual notice of its existence.  Consumers can only be bound by such a provision if they were on “inquiry notice” of the term and assented through their conduct.  A post transaction e-mail fails to meet that standard.  It is important to note that courts have allowed terms to be unilaterally imposed by one party after the parties’ initial agreement.  However, in those cases the notice provided on the sign-up page adequately informed consumers that additional terms would follow.   

This case provides online merchants desiring an enforceable arbitration provision with the following lessons:

The most important lesson:  Provide customers with the opportunity to review the terms and conditions of their purchase or membership on the sign-up page.  Don’t rely on a link buried at the bottom of the page.  Make the notice clear, and if additional terms will be sent via e-mail, make that clear as well.

The second most important lesson:  If additional terms such as an arbitration provision will be sent via a post-transaction e-mail, require customers confirm their agreement by clicking on a link.  You should also consider incorporating language such as: “Additional terms of membership: please read” in the subject matter line, in order to bring it to their attention.

The final lesson:  When presenting your customers with additional offers after an initial purchase, be certain to focus on every step of the process.