In a case intersecting the 89-year-old Federal Arbitration Act (FAA) and the digital era, the Ninth Circuit has 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.

For that reason, the appeals court in Nguyen v. Barnes & Noble, Inc. affirmed the district court’s denial of the company’s motion to compel individual arbitration of the named plaintiff’s class action claims. This ruling demonstrates that, even though the U.S. Supreme Court has affirmed the enforceability of class action waivers in arbitration agreements, proof of a contractual agreement to arbitrate is still required.

In Nguyen, if the plaintiff had clicked on the “Terms of Use” hyperlink, he would have been taken to a page containing the full text of the terms, which stated, among other things, that making an online purchase would constitute acceptance of the terms including the arbitration agreement. The plaintiff argued that he was not bound by the arbitration agreement because he did not click on the hyperlink. The company contended that plaintiff had constructive notice of the terms because the hyperlink conspicuously appeared at the bottom of each website page.

The Ninth Circuit agreed with the plaintiff. It characterized the company’s terms as a “browsewrap” agreement, where the terms and conditions of use are posted on the website through a hyperlink at the bottom of the screen. It contrasted this with a “clickwrap” agreement, in which website users are required to click on an “I agree” box after being presented with the terms.

The court concluded that the mere presence of the hyperlink did not establish the plaintiff’s consent to the arbitration agreement: “[W]e … hold that where a website makes it terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice.”

The appeals court acknowledged the longstanding general principle that failure to read a contract does not relieve a party of its terms, but ruled that “the onus must be on website owners to put users on notice of the terms to which they wish to bind consumers.” The court emphasized that “consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.”

The Nguyen opinion is a potent reminder that even after the Supreme Court upheld the validity of class action waivers in AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurants, courts 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 FAA or frustrate its purpose of ensuring that arbitration agreements are enforced according to their terms.

Ballard Spahr’s Consumer Financial Services Group pioneered the use and implementation of pre-dispute arbitration provisions in consumer financial services agreements. It is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

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