Internet Library of Law
and Court Decisions

Arbitration - Internet Library of Law and Court Decisions - Updated September 22, 2007

Court holds that both PayPal's User Agreement, and the arbitration clause found therein, are unconscionable under California law.  The Court accordingly denies motions by PayPal to compel users who commenced putative class action suits arising out of PayPal's allegedly inappropriate handling of customer accounts and/or complaints to resolve their claims via arbitration.  The Court held that the User Agreement and the arbitration clause therein are unconscionable because they: (1) permit PayPal to issue binding amendments to the User Agreement at any time without notice to users; (2) obligate users to arbitrate their disputes pursuant to the commercial rules of the AAA, which is cost prohibitive in light of the average size of a PayPal transaction; (3) obligate users who reside nationwide to arbitrate in Santa Clara county, California, where PayPal is located; (4) permit PayPal to freeze and maintain possession of the funds in customer accounts until any dispute is resolved; and (5) require users to pursue their claims individually, and not via a class action.  Taken together, the Court held these provisions made the User Agreement unconscionable, and appear to represent an attempt by PayPal "to insulate itself contractually from any meaningful challenge to its alleged practices."

Reversing the court below, an Illinois intermediate appellate court, applying Texas law, holds purchasers of Dell computers bound by Terms and Conditions of Sale posted and available on Dell’s website at the time of purchase.  Importantly, the court held plaintiffs bound by these terms notwithstanding the fact that they were only available via hyperlink on Dell’s site, and further, that the consumer did not have to affirmatively click an “I accept” icon to indicate his assent to be bound thereby.  The Court held that by purchasing their computers online, plaintiffs entered into an online contract which included the Terms and Conditions, because they were advised on Dell’s website that their purchases were subject thereto.

As a result, the court held plaintiffs bound by the arbitration clause contained in the Terms, which mandated that they arbitrate disputes arising out of the purchase of their computers before the National Arbitration Forum.  In reaching this result, the court rejected plaintiffs’ claims that such a clause was procedurally and substantively unconscionable.

Quick Hits

Court held plaintiffs, purchasers of Dell computers and related service agreements, are not bound by the Terms and Conditions Agreement that accompanied such machines on shipment.  The Court held that a browse-wrap agreement was not created upon the initial ordering of the machines, because the link to the Terms and Conditions Agreement at issue was found “inconspicuously” at the bottom of the web page of Dell’s website at which such products were ordered.  According to the Court “this was not sufficient to put plaintiffs on notice of the terms and conditions of the sale of the computer.  As a result, a browse wrap agreement found on Dell’s webpage cannot bind the parties to the arbitration agreement” found in the Terms and Conditions.

The Court further held that a shrink-wrap agreement was not formed between Dell and the plaintiff purchasers, binding plaintiffs to the Terms and Conditions, notwithstanding the fact that those Terms accompanied the computers on shipment to plaintiffs, and were also sent with acknowledgements of plaintiffs’ orders.  The Court reached this conclusion because the Terms at issue did not give plaintiffs the option to reject them by returning the computer to Dell.  Said the Court:

This Court, employing the same logic, finds that the binding effect of the Terms and Conditions Agreement also hinges on whether a reasonable person would have known that return of the product would serve as rejection of those terms.  Accordingly, this Court finds that Plaintiffs did not “knowingly consent” to the terms and conditions of the agreement because they were not given sufficient notice of the method to reject those terms.  Therefore, Plaintiffs are not bound by the arbitration clause therein. 

Because the plaintiffs were not party to the Terms and Conditions, the court denied Dell’s motion to stay this action and compel plaintiffs to arbitrate their claim that Dell improperly charged tax on both the sale of ancillary services plaintiffs purchased with their Dell computers, as well as associated transportation costs.

Applying Texas law, the Court also held that the arbitration provision found in Dell’s Terms and Conditions was in any event an unenforceable illusory contract.  Thus, the Terms and Conditions provided that “these terms and conditions are subject to change without prior written notice at any time, in Dell’s sole discretion …”.  Because Dell retained such an unfettered right to modify or terminate the contract at any time, the Court held that “the language in the Terms and Conditions Agreement fails to bind Defendants in any genuine way.  Accordingly, this Court finds that the arbitration agreement is illusory and therefore unenforceable.” 

Of note, the court held that the fact that the arbitration provision, if binding, would bar plaintiffs from pursing their claims as a class action was not, by itself, a ground to invalidate such a clause under Texas law or render it unconscionable.

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Ninth Circuit holds that customer is not bound by contractual amendments to service contract posted by long distance company on its website of which customer had no notice.

Talk America undertook to provide phone services to customers previously serviced by AOL.  Thereafter, Talk America attempted to change the terms of its contracts with these customers by including in the parties’ contracts provisions that increased applicable service charges and compelled customers to arbitrate any disputes they may have with the company.  These new amendments also included a class action waiver, and a New York choice of law provision.  These changes were posted on defendant Talk America’s website.  However, according to plaintiff, a former AOL customer who continued to use Talk America’s services after the changeover, he was given no notice of these contractual changes.  He alleged that he had no need to visit Talk America’s site as he had set-up his account so that applicable charges were automatically billed to, and paid by, his credit card.

In these circumstances, the Ninth Circuit held that plaintiff could not be compelled to arbitrate his disputes with Talk America arising out of these contractual revisions, and particularly the rate increases they mandated.  The Ninth Circuit accordingly granted plaintiff’s writ of mandamus, holding that the District Court clearly erred in granting Talk America’s motion to compel arbitration.

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Court holds that an individual who access America Online’s (“AOL”) services via the account of another is not bound by its Terms of Service merely as a result of such use, absent notice that the Terms provide that by such use, he is agreeing to be bound thereby.  The Court stated that “the Second Circuit seems to require that the license terms appear on the screen, in view of the user, for the user to be on notice of them.”  In this case, the user claims that he was able to access AOL’s services via his step-father’s account without either being presented with AOL’s Terms of Service, or being asked to accept them.
 
The Court further held, however, that by accessing AOL’s service via the account of another, plaintiff became a sublicensee, with no greater rights to use AOL’s service than the actual account holder himself.  As that account holder himself had agreed to be bound to AOL’s Terms of Service when he signed up for its service, plaintiff too was bound by those Terms of Service.

As a result, the Court held that plaintiff was bound by the Forum selection clause contained in AOL’s Terms of Service, and accordingly transferred the case to Virginia, where the clause mandated all disputes be litigated.

Court holds that a License Agreement that appears on-screen in a pop-up window is a writing within the meaning of the Federal Arbitration Act (“FAA”).  As such, the Court directs plaintiffs, in accordance with the terms of their License Agreement with RealNetworks, to arbitrate their claims that RealNetworks was impermissibly invading their privacy and trespassing on their property by secretly monitoring the listening and internet usage habits of users of its products.

To be enforceable under the FAA, an arbitration agreement must be contained in a writing.  Popular dictionaries at the time of the statute’s enactment defined a writing as “1.  the act or art of forming letters or characters on paper, wood, stone, or other material, for the purpose of recording the ideas which characters and words express, or of communicating them to others by visible signs. 2.  Anything written or printed; anything expressed in characters or letters.”  Relying on this definition, the Court held that a license agreement that appeared on screen was such a writing, because it constituted letters or characters formed on screen to record or communicate ideas, and could be easily printed and/or saved.  Notably, the court reached this latter conclusion despite the absence of a print or save button on the pop-up window in which the License terms appeared.  It was sufficient, held the court, that the user’s computer allowed him to right click his mouse over the terms of the License agreement, and copy and paste them into a word processing program.  The Court also noted that, once accepted by the user, the License Terms were downloaded to his computer, and stored in a file titled either  “RealPlayer License Agreement” or “RealJukebox License Agreement” depending on the product used.  As such, held the Court, the agreement between the parties qualified as a written arbitration agreement, which could be enforced in accordance with the FAA.

Finally, the court rejected the intervenor’s challenge to the Arbitration agreement on the grounds of procedural and substantive unconscionability.  As a result, the Court affirmed its earlier decision, and directed plaintiffs to arbitrate their disputes with RealNetworks.

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