Arbitration Agreements in the Clouds : The Pitfalls of Over-Reliance on Technology When Creating Arbitration Agreements

On September 7, 2012 the Second Circuit struck a blow for all of those consumers that have been fooled by data pass marketing programs, especially those that contain an arbitration clause hidden within its terms. In the case of Schnabel v. Trilegiant Corp. the court examined the enforceability of online contract terms, most relevant- and telling, however, was the fact that the court specifically invalidated the arbitration provision of the agreement. The likelihood is that you know what a data pass marketing program is- you just have never heard the name associated with the activity. A “data pass” marketing program occurs when a consumer is presented with a ‘discount’ or cash-back offer from a third-party marketer at the conclusion of a transaction with an online retailer. If the consumer responds to the offer, whether by an affirmative “click” or by the provision of personal information, their payment data is provided directly to the third-party marketer by the online retailer who collected it in connection with the original underlying transaction. The consumer is then enrolled in a program and their payment card is charged a monthly fee. Of course, as of 2010 the direct passing of payment information in this manner is prohibited by the Restore Online Confidence Act unless, among other things, the consumer’s “express informed consent” is obtained. However, issues still remain in relation to the agreement that arises in these types of transactions. Most concerning is the presence of an arbitration clause within these agreements and the absence of the need to present this information to the consumer. While on its face, the Schnabel case underscores the importance of presenting online terms and conditions to purchasers and website users clearly and conspicuously, ideally at the time of purchase or registration. The Second Circuit's opinion suggests that the traditional policy rationales surrounding a shrink-wrap license may not exist in the context of online service subscriptions and downloads, where it is easy to provide notice that purchasers can read at their leisure and a click-through means for them to acknowledge their receipt and assent. This article will explore the issues in a greater depth as the central issue for the readership is the enforceability of hidden online terms, especially hidden arbitration clauses and the need to provide notice when these clauses are present