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Commercial Litigation Alert >> 'I Agreed to What?' – Federal Court Decision May Increase Scrutiny of Online Terms and Conditions

September 13, 2016

Can a consumer be bound by an arbitration agreement contained in online terms and conditions by merely signing in to an Internet-connected service? In a recent opinion that should strike a note of caution among businesses, a federal judge in New York held such an arbitration agreement unenforceable. This decision should serve as a reminder to businesses operating online to ensure that consumers are given clear, conspicuous notice of online terms and conditions, an opportunity – and encouragement – to review those terms, and, where possible, a manner of actively assenting to the terms.

Virtually all successful companies now conduct some portion of their business over the Internet. Despite the relatively new medium for that business, however, traditional principles of contract law – offer, acceptance, consideration – still provide the foundation that defines relationships between companies and consumers. Increasingly, the tangible, signed paper contracts of the past have given way to online terms and conditions, presented or made available to consumers at some point in the course of their interaction with the company’s website or Internet-connected services. The recent court ruling in a dispute between a consumer and a well-known online transportation service focused on the enforceability of these online terms and conditions.

In December 2015, a passenger named Spencer Meyer – on behalf of himself and a putative class of passengers – sued Travis Kalanick, founder of the now-ubiquitous ride-sharing company Uber Technologies, in federal court. Meyer claims that Kalanick has orchestrated a price-fixing conspiracy through Uber’s ride-pricing algorithm in violation of federal antitrust laws. While Meyer did not initially sue Uber itself, the company soon joined the case as a party and then immediately moved to compel Meyer to arbitrate all of his claims. In support of the motion to compel arbitration, Uber cited its Terms of Service, which include an arbitration agreement and a waiver of the passenger’s right to a jury trial and to participate in class action proceedings.

Meyer opposed Uber's motion, arguing that he never agreed to this arbitration clause. Specifically, Meyer asserted that at the time he signed up for Uber, he was not given adequate notice that he was agreeing to arbitrate any disputes with Uber.

The Decision
Judge Jed Rakoff of the U.S. District Court for the Southern District of New York sided with Meyer. Judge Rakoff's opinion examines the general framework in which courts examine electronic agreements and discusses the two primary types of such agreements that have been scrutinized in recent years.

The first type, "click-wrap" agreements in which the user must affirmatively click on an "I agree" box after having been presented with the terms and conditions, have generally been found to be enforceable. The second type, "browse-wrap" agreements in which the terms are posted somewhere on a company website and available via a hyperlink but the user can continue to the site without visiting that link, are subject to higher levels of scrutiny. Courts generally enforce "browse-wrap" agreements only if it can be demonstrated that users have actual or constructive knowledge of the terms based on "reasonably conspicuous notice" of those terms, and that they have somehow manifested their assent to the terms.

Judge Rakoff concluded that, while Uber’s Terms of Service do not fit squarely in either category, they are more similar to a type of "browse-wrap" agreement, in which Uber notifies the user of the existence of terms and conditions posted elsewhere, but the user can sign in to the service without ever actually reviewing those terms.

Expressing general doubt as to whether consumers can really be said to have "agreed" to provisions contained in lengthy, non-negotiable electronic terms and conditions, Judge Rakoff held that the arbitration provision within Uber’s Terms of Service is not enforceable for a number of reasons, including:

  1. The lack of a box or button for riders to actively click indicating that they agree to the terms, including the arbitration provision;
  2. The fact that users had to follow a link to a separate page in order to read the terms, but could register without actually doing so;
  3. The lack of prominence of the link to the page containing the terms, which appeared below the registration and payment information in smaller font; and
  4. The possibility that riders might not even understand that the "Terms of Service" contained binding legal agreements affecting their rights, rather than a description of the services that Uber would provide.

In addition, despite the fact that the arbitration agreement in the Terms of Service included bold-faced type discussing the waiver of a jury trial and the right to proceed in a class action, Judge Rakoff found that even if a rider actually clicked to and saw the terms, that rider would need to scroll down several pages before ever seeing the arbitration agreement. Finding that these circumstances rendered the arbitration agreement unenforceable, the court denied Uber’s motion to compel arbitration and allowed the case to proceed in federal court.

The Bottom Line

Well-crafted terms and conditions are critical for companies doing business over the Internet. Even the best terms and conditions are of little use, however, if consumers can avoid reading and agreeing to them. Online terms and conditions, and electronic arbitration agreements in particular, may be subject to increased scrutiny after the Meyer decision. Companies should make sure that their websites provide clear, conspicuous, up-front notice to consumers that they are agreeing to legal terms that impact their rights, and – ideally – include some way for consumers to actively manifest their agreement to those terms before they can continue browsing the sites.



Senior Attorney