United States: Ninth Circuit Holds That Putative TCPA Class Action Is Not Subject To Arbitration Clause In Shrinkwrap Contract

Action Item: Companies utilizing "shrinkwrap" or form contracts within product packaging or in "Welcome Kits" should take steps to conspicuously disclose the terms of such agreements. The disclosures to consumers must be explicit and preferably written in bold type so that the consumer is aware he or she may be entering into a contract.

The Ninth Circuit recently held that a putative class action asserting violations of the federal Telephone Consumer Protection Act ("TCPA") was not subject to arbitration because the representative plaintiff was unaware of the purported contract containing the arbitration provision.

In Knutson v. Sirius XM Radio Inc., No.12-56120 (9th Cir. Nov. 10, 2014), the plaintiff purchased a new Toyota that came with a 90-day trial subscription to Sirius XM satellite radio. After the plaintiff received the trial subscription, he received a Welcome Kit containing a Customer Agreement, which included an arbitration clause containing a class action waiver. Although the Customer Agreement in the Welcome Kit indicated that he had three days after the activation of his subscription to determine whether to cancel the subscription or it would automatically continue, the Welcome Kit arrived long after the three-day period had expired. The plaintiff did not contact Sirius XM either to continue or terminate his subscription.

During the 90-day trial subscription, he received three unauthorized telemarketing calls from Sirius XM on his cell phone, and brought a putative class action alleging violations of the TCPA. In response to the putative class action, Sirius moved to compel arbitration. The plaintiff opposed the motion, claiming that the Customer Agreement was not binding because he received it more than a month after the three-day cancellation period expired and, as a result, there was no mutual assent to the terms of the Customer Agreement. Sirius XM contended that the Customer Agreement was binding and thus the plaintiff was required to arbitrate the dispute. The trial court dismissed the case and granted Sirius XM's motion to compel arbitration.

On appeal, the plaintiff argued that he had not entered into a binding contract with Sirius XM because there was no mutual assent to enter into the Customer Agreement, since he was not given the opportunity to accept or reject the Customer Agreement. Sirius XM asserted that after Knutson received the Customer Agreement, he had the opportunity to both review it and to notify Sirius XM if he wished to cancel his subscription, but that he had not done so. The Ninth Circuit rejected Sirius XM's arguments, noting courts may decline to enforce these agreements if there are legal or equitable grounds to do so. Mutual assent is a principle to any contract and a party cannot be required to arbitrate a dispute if the party had not agreed to do so as part of the contract. Here, the plaintiff never agreed to the arbitration clause because he was not given the opportunity to accept or reject the Customer Agreement. Further, the Customer Agreement was within the Welcome Kit, which the plaintiff had not opened and read. The plaintiff believed that the Sirius XM trial subscription was a complimentary service for marketing purposes, and he did not know that he was entering into a contractual relationship with Sirius XM. The Court found that a reasonable person who had purchased a Toyota would not think that they had entered into a binding contract with another company, such as Sirius XM.

The Ninth Circuit also indicated that, although a "shrinkwrap agreement" (where a consumer buys a product before getting the detailed terms of the contract) is generally enforceable and a party cannot generally avoid the terms of a contract by failing to read the contract before signing it, this does not apply when the writing does not appear to be a contract and the terms are not conspicuous. Further, a "shrinkwrap agreement" is between the customer and the service provider. Here, the plaintiff had no idea that he was entering into a contract with Sirius XM, since the terms of the Customer Agreement were contained in the Welcome Kit, which the plaintiff did not think he needed to read. Because the plaintiff was not aware that he had entered into a purportedly binding contract with Sirius XM, the arbitration clause in the Customer Agreement was unenforceable.

The Ninth Circuit heavily relied on Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012), a Second Circuit Court of Appeals case that interpreted California law regarding the enforceability of arbitration clauses. In Schnabel, the plaintiffs clicked on a website, which indicated they had received a "Special Award." In small print, the website advised that the customer would receive membership information and that there was no obligation to continue to receive benefits, but the plaintiffs' credit cards were automatically charged until they cancelled their membership. Similar to Knutson, the Schanbel plaintiffs claimed that they did not intentionally or knowingly enroll into the discount service; however, unlike Knutson, the Schnabel plaintiffs entered their information into a separate enrollment form and had to click on a "Yes" button to indicate that they had read the terms and conditions of the discount membership website, which included an arbitration provision. The Second Circuit found that the arbitration provision was unenforceable because the plaintiffs received the terms of the contract after they enrolled in the service; there was no prior commercial relationship between the parties that would have suggested that terms sent after the initial enrollment would become part of their agreement with that merchant. Further, automatically charging the plaintiff's credit cards was too "passive" to show that the plaintiffs had understood and agreed to be bound by the terms of the arbitration provision.

The Ninth Circuit found that Knutson had done even less than the Schnabel plaintiffs to manifest intent to enter into a binding contract, as he did not affirmatively enroll into a subscription service with Sirius XM, nor did he indicate that he had read the terms of the Customer Agreement. Thus, Knutson could not assent to Sirius XM's arbitration provision because he did not know that he was entering into a contract with Sirius XM. Accordingly, the Ninth Circuit reversed the dismissal of the case and the granting of the motion to compel arbitration.

Based on Knutson, companies selling products or services to consumers with "shrinkwrap agreements" should take steps to conspicuously disclose the terms of such agreements. Consumers should receive explicit disclosures that purchasing the product or using a trial or gift subscription for a different product or service may cause a binding contract to be formed. In addition, consumers should be made aware that the product being purchased includes provisions that will control any future disputes based on the product.

Mr. Streibich would like to thank Diana M. Eng and Joseph J. Patry for their assistance in developing this Alert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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