There’s been plenty of news regarding a recent trend that contract provisions precluding class actions and mandating arbitration may have hit their high water mark and appear to be receding. I recently wrote about this in an article entitled “Does the Ninth Circuit’s Ernst & Young Ruling Signal a Tipping Point; Is the Tide Turning Against Class-Action Waivers?“

In further news of this trend, the U.S. Department of Education just issued final regulations prohibiting participating schools “from using certain contractual provisions regarding dispute resolution processes, such as predispute arbitration agreements or class action waivers.”

A student/borrower seeking to avoid repaying his or her student loan “has a defense to repayment on a loan based on an act or omission of a school.” Prior to the Department of Education’s rule, such students were subject to contract provisions requiring that, even if there were thousands of similarly situated student/borrowers, each student/borrower had to arbitrate his or her dispute singly against his or her school, rather than in court or as a member of a larger class action.

College Student Class-Actions

There have been numerous student class-actions claiming that, particularly with for-profit schools, the schools have misrepresented their post-graduate placement rates ,  overcharged students for fees, and in one noted case involving one Donald J. Trump, overpromised but under delivered on revealing Mr. Trump’s secret real estate techniques as taught by Mr. Trump’s “hand picked” professors.

Affected Federal Loan Programs

The Department of Education’s rule applies to colleges or universities that participate in the Federal Perkins Loan Program, the Federal Family Educational Loan Program, the William D. Ford Federal Direct Loan Program, and the Teacher Education Assistance for College and Higher Education Grant program.

Department of Education Following in Consumer Financial Protection Bureau’s Footsteps

The Department of Education indicated that it was following the same logic as the Consumer Financial Protection Bureau’s recent decision to preclude similar provisions in consumer financial agreements. “The CFPB identified several features of class actions in the consumer financial services markets that we consider applicable to the postsecondary education market.”  (at pg. 54).

The Department of Education determined that its new rule was not preempted by the Federal Arbitration Act, (at pg. 57) finding that it “has clear authority to regulate the conduct of institutions that wish to participate in the Direct Loan Program. https://ifap.ed.gov/fregisters/attachments/FR061616BorrowerDefenseRepayment.pdf at 57.

It’s Anybody’s Guess Where the Next Assault on Class-Action Waivers/Mandatory Arbitrations Will Come From

So add student loan contracts to consumer financial contracts and employment contracts (at least in the Seventh and Ninth Circuits) to the list of contracts where class-action waivers/mandatory arbitration provisions may not be enforceable.

It is a familiar issue. When should a consumer “be on the hook” for all of the terms and conditions in a company’s agreement accompanying its product or service?

The permeations relating to this problem are extensive. Are all of the terms buried in the fine print enforceable?  Does the consumer ignore such terms at his or her peril when the consumer fails to read the agreement?  Is it enough that the customer was given a chance to read the terms at the time of purchase? What manner or degree of consent is enough to bind the consumer to the letter of the written terms?  These are all problems of contract formation.  The question of acceptance of terms and conditions is especially tricky in the context of online commerce.

The California Court of Appeal (Second District) recently considered this issue as it relates to the “terms and conditions” or “terms of use” to which users are often asked to agree as part of an online purchase. The court’s decision in Long v. Provide Commerce, Inc., dealt with an appeal by Provide Commerce, Inc., the operator of ProFlowers.com.  See Long v. Provide Commerce, Inc. (Cal. Ct. App. Mar. 17, 2016) 2016 WL 1056555, at *1.  After a customer sued over an online purchase, the Internet-based flower purveyor sought to enforce a clause in the company’s “Terms of Use” that required its customer to arbitrate disputes, including a waiver of the right to a jury trial.

The type of online terms and conditions used by ProFlowers is often known as a “browsewrap” agreement. With that type of agreement, a user does not have to affirmatively click anything to signal his or her consent to the terms of the company’s written agreement.  Rather, “a user’s assent is inferred from his or her use of the website.” Long, supra, at *1.

At the time the plaintiff placed his order, the website’s “Terms of Use” could be found by clicking on a capitalized and underlined hyperlink at the bottom of each web page on the ProFlowers.com site. The court noted that the “hyperlink was displayed in what appears to have been a light green typeface on the website’s lime green background, and was situated among 14 other capitalized and underlined hyperlinks of the same color, font and size.” Long, supra, at *2.  The “Terms of Use” were also accessible by a hyperlink embodied in an email order confirmation, though the link was in small grey font toward the very bottom of the email and relatively obscured by other information and links.

The court observed that while Internet commerce presents new issues, it does not fundamentally alter the key requirement that for a party to be bound by a contractual provision, there must be a sufficient manifestation of consent. In the context of a “browsewrap” agreement, the courts have held that “the determination of the validity of the browsewrap contract depends on whether the user has actual or constructive knowledge of a website’s terms and conditions.” Long, supra, at *4 (quoting the federal Ninth Circuit Court of Appeal’s decision in Nguyen v. Barnes & Noble Inc. [(9th Cir. 2014) 763 F.3d 1171]).  In the absence of actual notice, the validity of the browsewrap agreement “turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract.” Id.

The court noted the elements that the courts have considered in deciding whether to conclude that a website design puts the user on sufficient notice of the company’s terms and conditions, including the proximity of the hyperlink (linking to the written terms) to the areas likely to be in view of the user as he or she interacts with the website and completes the transaction and whether the website design includes “something more to capture the user’s attention and secure her assent” to the terms and conditions. Long, supra, at *5.

Here, the court found that the hyperlinks and the overall design of the ProFlowers.com website failed to put a reasonably prudent Internet user on notice of the company’s Terms of Use. The court found that the placement, color, size and other qualities of the hyperlinks to the Terms of Use were too inconspicuous, relative to the overall website design.  Most of the user’s interactions were in a separate bright white box in the center of the page that contrasts sharply with the lime green background.  To find the Terms of Use hyperlinks on various pages, the user must look below the area that has the information fields and the buttons he or she must otherwise click to proceed with the transaction.  Even then, the hyperlinks themselves are buried below multiple other links and in a light green font that blends in with the lime green background of the website.

The lesson for the day is that conspicuousness means conspicuousness. If no affirmative user click is required demonstrating the user’s consent to the terms and conditions, the website design should ensure that a link to a terms and conditions page will be hard to miss.  The visual prominence of the link is key.  Avoid having the link situated in a submerged page (i.e., where the user must scroll down to see it).  Certainly avoid having the link be in a font difficult to distinguish from the webpage background.  The link should be in what one would expect to be the plain view of the user as he or she interacts with the site.

Last week the Seventh Circuit’s decision in Lewis v. Epic Systems Corporation, invalidated employment contract provisions requiring employees to arbitrate employment disputes and precluding them from bringing class-actions.

The Seventh Circuit found such provisions violate the National Labor Relations Act.   This decision contradicts decisions by the Second, Fifth, Eighth, Ninth and Eleventh Circuits. which have upheld such provisions.  But those decisions rested at least partially on the Supreme Court’s 2011  AT&T Mobility LLC v. Concepcion decision, which upheld contract provisions requiring arbitration and precluding consumer class-actions.

The Concepcion decision was five to four, with the late Justice Scalia writing the majority opinion for the conservative block of the Court.  With Justice Scalia’s passing, Supreme Court observers are questioning whether a reconstituted Court might scale back or even reconsider the Concepcion decision.    The battle over mandatory arbitration and class-actions waivers must also be viewed in the wider context of the Consumer Financial Protection Bureau’s recent proposed rule prohibiting such provisions in financial services contracts and House Republican’s efforts to quash the rule and reign in the agency.

The Seventh Circuit’s decision sets the stage for a potential showdown regarding whether and when such provisions are enforceable, but in the meantime, employers should continue to include and enforce such provisions.