ARBITRATION CLAUSES IN CONSUMER MASS MARKETING AGREEMENTS: CLARITY AND CONSENT

By: Richard Brodsky, Esq.
December, 2014

A valid and enforceable contract is predicated on the agreement of both parties. This rule is taught in the first week of the first contracts course in the first year of law school. Yet there are too many examples of the lack of such consent invalidating arbitration clauses.

Recently, the Ninth Circuit issued a decision invalidating an arbitration clause for lack of consent in ways that may affect many other contracts used in mass marketing of consumer goods and services.

In Knutson v. Sirius XM Radio, the Court reversed a district court decision compelling arbitration in a dispute over violations of federal telemarketing laws (See No. 12-56120 D.C.; No. 3:12-cv-00418-AJB-NLS; .http://cdn.ca9.uscourts.gov/datastore/opinions/2014/11/10/12-56120.pdf).

Plaintiff Knutson had purchased a new vehicle which came with a three-month trial subscription for Sirius XM radio. A month later he received an unsolicited packet from Sirius which set forth conditions for use including termination of the service within three days of its start, and an arbitration clause. The arbitration clause stated, inter alia, that “You are hereby waiving the right to go to court, including the right to a jury” and the “right or authority for any claims to be arbitrated on a class action basis.”

Knutson soon began receiving a series of unsolicited marketing calls from Sirius. He responded by bringing a class action suit in federal District Court alleging violation of the federal Telephone Consumer Protection Act and seeking damages. Sirius responded by moving to dismiss on the grounds that arbitration was Knutson's sole remedy. The District Court agreed and dismissed without prejudice.

Knutson appealed to the Ninth Circuit on the grounds that he had never agreed to an arbitration clause and that the clause itself was unconscionable. The Circuit agreed and reversed the District Court.

The Circuit opinion stated the fundamental principle clearly: “A party cannot be required to submit to arbitration any dispute which he has not agreed so to submit…. It is undisputed that under California law mutual assent is a required element of contract formation. Mutual assent may be manifested by written or spoken words, or by conduct….This principle of knowing consent applies with particular force to provisions for arbitration.” (Citations omitted).

Sirius argued that, by his continual use of the radio service, Knutson had consented to the service agreement including the arbitration clause and the cancellation requirement. The Court rejected this argument holding that Knutson “could not be under obligation to act where there was no effective notice that action was required.” The mere purchase of a vehicle did not obligate him to the provider of an ancillary service. “Here…there is no evidence that Knutson purchased anything from Sirius XM or ever knew that he was entering into a contractual relationship with the satellite radio service provider.”

Interestingly, the Ninth Circuit then went on to adopt the reasoning of the 2nd Circuit which found a similar lack of consent to arbitration in a case involving Priceline, Schnabel v. Trilegiant Corp., 697 F 3d 110, 2012). The reasoning and holding in both cases therefore apply to such disputes in New York.

At the heart of these decisions is a particular wrinkle arising from mass-market consumer contracts when an ancillary service is provided by a third party not privy to the original contract between the business and consumer. In this case, there was no direct contractual relationship between Sirius and Knutson; the existence of a new contractual relationship required clear evidence of knowledge and consent; no such evidence existed.

This ruling may be helpful to those resisting arbitration of disputes originating in complicated mass-market consumer agreements. It is similarly instructive to businesses which rely on such agreements. If you want your arbitration agreements to be effective, make sure that the language of the agreement is clear and that the consumer clearly indicates his or her consent.

_________________________________________________________________________________

Richard Brodsky, Esq., a former New York State Assemblyman, is a member of NAM's (National Arbitration and Mediation) Hearing Officer Panel and is available to arbitrate and mediate cases throughout the New York Metro area.

For any questions or comments, please contact Jacqueline I. Silvey, Esq. / NAM General Counsel, via email at jsilvey@namadr.com or direct dial telephone at 516-941-3228.