As reported in Public Citizen’s Consumer Law & Policy Blog, the Pennsylvania Supreme Court recently agreed to review Chilutti v. Uber Technologies, Inc., in which a divided panel of the Pennsylvania Superior Court (and later the Superior Court en banc) held that courts must apply a “stricter burden of proof” when asked to enforce an arbitration agreement in a company’s online terms and conditions because arbitration waives the constitutional right to a jury trial. The Court will consider, among other things, whether “the Superior Court’s new special-notice rule for enforcing online arbitration agreements violate[s] the [Federal Arbitration Act], as interpreted and applied by the Supreme Court of the United States,” and whether “[a]s a matter of Pennsylvania law, online arbitration agreements [should] be enforced under the same rules applicable to contracts generally.”

In determining whether an “agreement to arbitrate” has been formed when the arbitration provision is part of a company’s online terms and conditions, courts generally distinguish between “clickwrap” and “browsewrap” agreements. “Clickwrap” agreements are generally enforceable because they present website users with explicit terms and require them to check an “I agree” box in order to proceed further. By contrast, in “browsewrap” agreements the terms are typically disclosed through a hyperlink and assent is manifested by continued use of the website. Under the widely applied standard formulated by the Ninth Circuit in Berman v. Freedom Financial Network, LLC, a contract can be based upon evidence the consumer had actual knowledge of the terms and conditions. Even absent such evidence, a contract can be based upon “inquiry notice” if (1) the website provided “reasonably conspicuous” notice of the contract terms, and (2) the consumer took some action that unambiguously manifested assent to those terms. Coincidentally, just a few days after the Pennsylvania Supreme Court granted review in Chilutti, the Seventh Circuit in Domer v. Menards, Inc. relied heavily on Berman in affirming the grant of the company’s motion to compel arbitration.

Nevertheless, the Superior Court in Chilutti held that the Berman test was legally insufficient under Pennsylvania law because in arbitration the right to a jury trial is relinquished. The Superior Court emphasized:

Central to this case is whether a party should be deprived of their constitutional right to a jury trial when they purportedly enter into an arbitration agreement via a set of hyperlinked “terms and conditions” on a website or smartphone application that they never clicked on, viewed, or read …. We emphasize at the outset that this Commonwealth guarantees its citizens a constitutional right to a jury trial ….

[B]ecause the constitutional right to a jury trial should be afforded the greatest protection under the courts of this Commonwealth, we conclude that the Berman standard is insufficient under Pennsylvania law, and a stricter burden of proof is necessary to demonstrate a party’s unambiguous manifestation of assent to arbitration. This is accomplished by the following: (1) explicitly stating on the registration websites and application screens that a consumer is waiving a right to a jury trial when they agree to the company’s “terms and conditions,” and the registration process cannot be completed until the consumer is fully informed of that waiver; and (2) when the agreements are available for viewing after a user has clicked on the hyperlink, the waiver should not be hidden in the “terms and conditions” provision but should appear at the top of the first page in bold, capitalized text.

Because Chilutti formulated a standard that was predicated on the primary characteristic of an arbitration provision—the waiver of the right to a jury trial—it contravened the Federal Arbitration Act (FAA). As we previously noted in analyzing the panel decision in Chilutti, the U.S. Supreme Court has held that states do not have the power to “adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial”—because such a rule reflects “the kind of ‘hostility to arbitration’ that led Congress to enact the FAA” and “flout[s] the FAA’s command to place those agreements on an equal footing with all other contracts.” According to the Court, the FAA “preempts any state rule discriminating on its face against arbitration … [and] also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that … have the defining features of arbitration agreements” or that rely “on the uniqueness of an agreement to arbitrate as [its] basis.”

In a seminal opinion by Justice Ginsburg, the Supreme Court held that the FAA preempted a Montana statute that provided: “Notice that a contract is subject to arbitration . . . shall be typed in underlined capital letters on the first page of the contract; and unless such notice is displayed thereon, the contract may not be subject to arbitration.” The Court explained:

Courts may not … invalidate arbitration agreements under state laws applicable only to arbitration provisions. By enacting § 2 [of the FAA], we have several times said, Congress precluded States from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed ‘upon the same footing as other contracts.’ …. Montana’s § 27-5-114(4) directly conflicts with § 2 of the FAA because the State’s law conditions the enforceability of arbitration agreements on compliance with a special notice requirement not applicable to contracts generally. The FAA thus displaces the Montana statute with respect to arbitration agreements covered by the Act.

Thus, the fact that the Pennsylvania Constitution makes the right to a jury trial “inviolate,” as Chilutti stressed, does not displace federal arbitration law. As the U.S. Supreme Court has instructed, state courts “must abide by the FAA, which is ‘the supreme Law of the Land,’ U. S. Const., Art. VI, cl. 2, and by the opinions of this Court interpreting that law.”

According to the Chilutti docket, Uber’s appeal brief is presently due on or before October 7, 2024. We will be watching for further developments in this important appeal and will keep you updated.