A recent Law360 article notes that “a growing number of state court rulings” have invalidated arbitration agreements in online contracts. As an example of this “trending pushback” by state courts, the article discusses Chilutti v. Uber Technologies, Inc., in which a divided panel of the Pennsylvania Superior Court refused to enforce an arbitration agreement contained in Uber’s online terms and conditions.
The Chilutti court framed the issue before it as “whether a party should be deprived of their constitutional right to a jury trial when they purportedly enter into an arbitration agreement via a set of hyperlinked ‘terms and conditions’ on a website or smartphone application that they never clicked on, viewed, or read.” The opinion emphasized:
The evolution and effect of arbitration provisions has substantially weakened the constitutional right to jury trial in civil proceedings …. [T]he copious usage of arbitration agreements in present day contracts and the ramifications of these agreements on a party’s right to a jury trial raises concern, especially in the context of Internet contracts like the one at issue herein where the parties are of purported unequal bargaining power …. [T]he need for greater scrutiny regarding a party’s waiver of their constitutional right to a jury trial in terms of these arbitration agreement matters is imperative.
While the Chilutti court acknowledged that Pennsylvania has a “well-established public policy favoring arbitration” that “aligns with the federal approach expressed in the Federal Arbitration Act (‘FAA’),” its call for “greater scrutiny” of arbitration agreements in online contracts is inconsistent with the federal statute. Under the FAA, an arbitration agreement must be contained in a written “contract” to be enforceable. Accordingly, courts such as the Ninth Circuit in Berman v. Freedom Financial Network, LLC typically apply generally applicable state contract law to determine whether the website provided reasonably conspicuous notice of its terms and the user manifested assent to those terms. But the Chilutti court concluded that the Berman standards are “insufficient” and that a “stricter burden of proof” is required in Pennsylvania given that the constitutional right to a jury trial is involved:
[B]ecause the constitutional right to a jury trial should be afforded the greatest protection under the courts of this Commonwealth, we conclude that the Berman standard is insufficient under Pennsylvania law, and a stricter burden of proof is necessary to demonstrate a party’s unambiguous manifestation of assent to arbitration. This is accomplished by the following: (1) explicitly stating on the registration websites and application screens that a consumer is waiving a right to a jury trial when they agree to the company’s “terms and conditions,” and the registration process cannot be completed until the consumer is fully informed of that waiver; and (2) when the agreements are available for viewing after a user has clicked on the hyperlink, the waiver should not be hidden in the “terms and conditions” provision but should appear at the top of the first page in bold, capitalized text.
Importantly, however, the Supreme Court has held that states do not have the power to “adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial”—because such a rule reflects “the kind of ‘hostility to arbitration’ that led Congress to enact the FAA” and “flout[s] the FAA’s command to place those agreements on an equal footing with all other contracts.” According to the Court, the FAA “preempts any state rule discriminating on its face against arbitration … [and] also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that … have the defining features of arbitration agreements” or that rely “on the uniqueness of an agreement to arbitrate as [its] basis.”
In a seminal opinion by Justice Ginsburg, the Supreme Court held that the FAA preempted a Montana statute that provided: “Notice that a contract is subject to arbitration . . . shall be typed in underlined capital letters on the first page of the contract; and unless such notice is displayed thereon, the contract may not be subject to arbitration.” The Court explained:
Courts may not … invalidate arbitration agreements under state laws applicable only to arbitration provisions. By enacting § 2 [of the FAA], we have several times said, Congress precluded States from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed ‘upon the same footing as other contracts.’ …. Montana’s § 27-5-114(4) directly conflicts with § 2 of the FAA because the State’s law conditions the enforceability of arbitration agreements on compliance with a special notice requirement not applicable to contracts generally. The FAA thus displaces the Montana statute with respect to arbitration agreements covered by the Act.
The fact that the Pennsylvania constitution makes the right to a jury trial “inviolate,” as Chilutti stressed, does not displace federal arbitration law. The Supreme Court has instructed that state courts “must abide by the FAA, which is ‘the supreme Law of the Land,’ U. S. Const., Art. VI, cl. 2, and by the opinions of this Court interpreting that law.” Accordingly, the FAA imposes limits on efforts by state courts to “pushback” on the enforcement of arbitration agreements in online contracts.