Nicole Zachman brought a putative class action against the Hudson Valley Federal Credit Union (HVCU) for breach of contract and violation of the federal Electronic Fund Transfer Act, among other claims, based on HVCU’s alleged practice of collecting overdraft or insufficient funds fees on accounts that were not actually overdrawn. HVCU moved to compel arbitration based on an arbitration provision included in the modified account agreement Zachman signed in 2019 when she opened her online account with HVCU. Zachman countered that the account agreement she signed in 2012, when she originally opened her account with HVCU, did not contain an arbitration agreement and further that she was not bound by the arbitration provision added in 2019 because she was never provided notice of its addition.

In response, HVCU argued that Zachman was on “inquiry notice” of the arbitration provision’s inclusion in the 2019 modified account agreement. Under New York law, an offeree who does not have actual notice of contract terms is nevertheless bound by those terms if he or she is on inquiry notice of them and assents to them through conduct. “In determining whether an offeree is on inquiry notice of contract terms, New York courts look to whether the term was obvious and whether it was called to the offeree’s attention. This often turns on whether the contract terms were presented to the offeree in a clear and conspicuous way.” When applied to web-based contracts, the courts “look to the design and content of the relevant interface” to determine if the contract terms were presented to the offeree in a way that would put him or her on inquiry notice of the terms.

Here, the Second Circuit determined that the record was insufficiently developed to permit a determination as to whether the presentment of the arbitration provision to users like Zachman was sufficiently “clear and conspicuous” to put her and other users on inquiry notice. The record contained evidence that the modified account agreement containing the arbitration provision was published on the HVCU website. HVCU customers could access the agreement by searching the HVCU website using its built-in search bar or clicking through the website’s “resources” tab to the “account disclosures” webpage. Users could also obtain a hard copy of the agreement by requesting it be mailed to them or by visiting a brick-and-mortar branch. However, HVCU did not post a notice of the added provisions in its quarterly newsletters or in members’ electronic statements, nor did it provide notice in any other fashion, such as by posting a “banner” notification on its webpage.

When HVCU established its new online banking system in 2019, it required users to first register their accounts. To register, users had to click through various “clickwrap” or “scrollwrap” agreements, including an “internet banking agreement.” The internet banking agreement incorporated the modified account agreement and provided links to it. The modified account agreement included the mandatory arbitration provision at issue.

The district court ruled that HVCU failed to demonstrate that Zachman’s registration for online banking put her on inquiry notice of the arbitration provisions. The court found that HVCU “provides no visual aid or description of any layout or design of the webpages that a user sees when registering for online banking services.” HVCU provided a copy of the internet banking agreement “but did not provide screenshots of the webpage(s) presenting the Internet Banking Agreement to online banking registrants.” Reviewing the copy of the internet banking agreement that had been provided, the court found that the relevant hyperlink and language “appear to be buried” in the agreement and, therefore, that HVCU had failed to establish Zachman was on inquiry notice. As a result, it denied the motion to compel.

The Second Circuit, however, vacated and remanded for further proceedings. The appellate court noted that HVCU did not submit any evidence of how the internet banking agreement was presented to users. “As a result, the district court could not resolve whether Zachman was on inquiry notice because, as it noted, it was unable to assess whether the relevant language and hyperlink are clear and conspicuous.” The district court could not properly engage in the required analysis based on the copy of the internet banking agreement in the record; rather, it was necessary to know “the design and content of the webpage and how the terms were presented.” Because no such evidence was presented by either party, the Second Circuit vacated and remanded for further proceedings to develop the record on this issue.

Zachman v. Hudson Valley Federal Credit Union, No. 21-999 (2d Cir. Sept. 14, 2022).