Perhaps overshadowed in the raging battle over the Consumer Financial Protection Bureau's proposal to ban the use of class action waivers in consumer arbitration agreements involving consumer financial products or services is the need to create an enforceable "agreement" in the first place. In a recent decision that highlights the pitfalls that can arise when attempting to create an enforceable arbitration agreement in Internet transactions, a federal court in New York ruled that a consumer who had not read a company's terms of service when registering for its service on its website was not bound by the terms' arbitration agreement.

The decision also serves as reminder of the importance of having legal counsel review not only the form and content of arbitration agreements but also any online or mobile process used for entering into such agreements. In particular, this case underscores the necessity of having legal counsel work closely with digital teams to ensure that disclosures concerning arbitration are prominent and readable.

In Spencer Meyer v. Travis Kalanick and Uber Technologies, Inc., the court denied the defendants' motions to compel arbitration based on an arbitration agreement contained in Uber's "Terms of Service & Privacy Policy." After entering his or her name and certain other information on the first screen displayed during Uber's registration process and clicking "Next," a consumer would see a second screen that had fields at the top for the consumer to insert his or her credit card details. Below those fields, as described by the court, was "a large, prominent button whose width spans most of the screen" labeled "Register." Beneath that button were two additional buttons that a consumer could use to elect to make payments via PayPal or Google Wallet instead of by credit card. Beneath those two additional buttons, in what the court described as "considerably smaller font," were the words "By creating an Uber account, you agree to the Terms of Service & Privacy Policy." According to the court, while the phrase "Terms of Service & Privacy Policy" was "in all-caps, the key words 'By creating an Uber account, you agree to' are not in any way highlighted and, indeed, are barely legible."

The phrase "Terms of Service & Privacy Policy" were highlighted with a hyperlink. However, a consumer could click on the "Register" button and complete the registration process without clicking on the hyperlink. In addition, if a consumer did click, the actual terms would not immediately appear. Instead, the consumer would be taken to another screen that contained a button on which the consumer could click to access the terms. The court observed that, even if a consumer were to arrive at the terms, they consisted of "nine pages of highly legalistic language that no ordinary consumer could be expected to understand. And it is only on the very bottom of the seventh page that one finally reaches [the arbitration agreement]."

Since Uber did not contest the plaintiff's statement that he did not recall noticing the Terms of Service hyperlink when he registered or believe that he clicked on it, the court found no basis for a claim that the plaintiff had actual knowledge of the arbitration agreement. In also finding that the plaintiff was not on "inquiry notice" of the terms, the court distinguished Uber's terms from "clickwrap" agreements, in which website users are required to click on an "I agree" box after being presented with the terms and conditions of use. The court viewed Uber's terms as similar to "browsewrap" agreements, where the terms and conditions of use are posted on the website through a hyperlink at the bottom of the screen but do not require a consumer to view the terms to use the website (with the distinction that Uber included language notifying the consumer of the terms' "existence and applicability" but in a font described by the court as "barely legible on the smartphone device that a would-be Uber registrant could be expected to use").

Applying the standard used in the Second Circuit's 2002 decision in Specht v. Netscape Communications Corp., the court concluded that the plaintiff did not have "reasonably conspicuous notice" of the terms, including the arbitration agreement, or evince "unambiguous manifestation of assent to those terms." According to the court, Uber's registration screen "did not adequately call a user's attention to the existence of Terms of Service, let alone to the fact that, by registering to use Uber, a user was agreeing to them."

In addition to noting the flaws in the registration screen's overall design, the court observed that the hyperlink’s wording added to the "relative obscurity" of the terms. In the court's view, "[t]he reasonable user might be forgiven for assuming that 'Terms of Service' refers to a description of the types of services that Uber intends to provide, not to the users' waiver of his constitutional right to jury trial or his right to pursue legal redress in court should Uber violate the law." The court commented that "[u]ser interfaces designed to encourage users to overlook contractual terms in the process of gaining access to a product or service are hardly a suitable way to fulfill [the] legal mandate" for users of electronic contracts to provide consumers with "'reasonable notice' of contractual terms." The court's comment reinforces the need for consumer interfaces to be reviewed as they will actually appear, particularly if disclosures will be presented on small smartphones.

Last year, in Nguyen v. Barnes & Noble, Inc., the Ninth Circuit affirmed the district court's denial of the company's motion to compel individual arbitration of the named plaintiff's class action claims. Characterizing the company's terms as an example of a "browsewrap" agreement, the Ninth Circuit ruled that a consumer who did not read the company's terms of use when ordering a product on its website was not bound by the terms' arbitration agreement. The court reasoned that the hyperlink to the terms did not prompt users to agree to them and did not constitute constructive notice of the terms. The district court in Uber cited Nguyen in support of its decision.

Like Nguyen, the Uber decision is a further reminder that although the Supreme Court has upheld the validity of class action waivers in AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurants, a court will still require proof that an agreement to arbitrate was formed contractually. Even the Concepcion majority noted that "[s]tates remain free to take steps addressing the concerns that attend contracts of adhesion—for example, requiring class-action waiver provisions in adhesive agreements to be highlighted," as long as such steps do not conflict with the Federal Arbitration Act or frustrate its purpose of ensuring that arbitration agreements are enforced according to their terms.