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Ninth Circuit Invalidates Arbitration Clause in Website’s Terms of Use for Lack of Mutual Assent

Uniform_Commercial_Code.jpgLaws governing the formation of contracts, including the creation of an enforceable obligation, go back for centuries. The internet has changed many aspects of how businesses interact with their customers, but it has not changed the basic nature of contract formation. A California federal district court held that that an arbitration clause in a website’s Terms of Use (TOU) was unenforceable because the defendant business did not make the plaintiff adequately aware of the clause. The clause therefore lacked mutual assent. Nguyen v. Barnes & Noble, Inc. (“Nguyen I“), No. 8:12-cv-0812, order (C.D. Cal., Aug, 28, 2012). The Ninth Circuit Court of Appeals affirmed. Nguyen v. Barnes & Noble, Inc. (“Nguyen II”), No. 12-56628, slip op. (9th Cir., Aug. 18, 2014).

The defendant, Barnes & Noble, operates a nationwide chain of retail bookstores and a website. It advertised HP Touchpad Tablets, an unsuccessful competitor to Apple’s iPad tablet, for a “fire sale” price of $101.95 each. Nguyen II at 4. The plaintiff ordered two tablets, based on this advertisement, on August 21, 2011. Barnes & Noble allegedly sent him an email message the following day stating that it would not honor his order, “due to unexpectedly high demand.” Id. The plaintiff had to purchase substitute goods at a much higher price.

In April 2012, the plaintiff filed a putative class action in a California superior court against Barnes & Noble. He asserted causes of action for breach of contract and violations of various California and New York statutes, including California’s Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 et seq., the False Advertising Law, Cal. Bus. & Prof. Code § 17500 et seq., and the Consumers Legal Remedies Act, Cal. Civ. Code § 1750 et seq. The defendant removed the case to federal court and then filed a motion to compel arbitration under the Federal Arbitration Act (FAA), 9 U.S.C. § 1 et seq.

Under the FAA, federal district courts must stay proceedings when a claim is covered by a written, enforceable arbitration agreement. The defendant argued that such an agreement existed based on the TOU, which states that a person accepts the TOU simply “by visiting any area on the Barnes & Noble.com Site.” Nguyen I at 3. This type of TOU, in which a customer is deemed to have accepted the TOU by using the website, is known as a “browsewrap” agreement. Nguyen II at 9. A “clickwrap” agreement, meanwhile, requires customers to click an “I Agree” button. The plaintiff argued that the website’s browsewrap agreement did not adequately notify him of the TOU’s arbitration clause, that the clause was unenforceable, and that the FAA did not apply. The district court agreed.

By affirming the district court’s ruling, the Ninth Circuit sent a clear message that businesses must follow common-law contract rules when creating TOUs and other agreements. The design of the defendant’s site and the placement of the link to the TOU did not give the plaintiff sufficient notice, the court held. The defendant failed to prove that the plaintiff knew or should have known about the arbitration clause. This sounds similar to a contract of adhesion, where one party to a contract presents unfavorable terms on a “take it or leave it” basis. The difference here is that there is no evidence that the plaintiff even knew the unfavorable terms existed.

Business and commercial law attorney James G. Schwartz has represented Bay Area businesses and individuals for the past 38 years. To schedule a free and confidential consultation with a member of our team, contact us today online or at (925) 463-1073.

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Photo credit: Coolcaesar at en.wikipedia [CC-BY-SA-3.0 or GFDL], via Wikimedia Commons.