Recurring Online Subscriptions Face a New Arbitration Standard in California

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In a case of first impression, the California Court of Appeal, Fourth District (San Diego), considered "under what circumstances a 'sign-in wrap' agreement … is valid and enforceable" between consumers and online companies that offer subscription-based products or services on a recurring basis.1 Here for the first time, an appellate court applied the "clear and conspicuous" standard from California's Automatic Renewal Law2 (ARL) to the analysis of whether the consumer entered into a binding contract by agreeing to online terms of use that contained an arbitration provision and class action waiver.

This decision potentially changes the landscape for similarly situated companies that desire all disputes with their customers go to individual arbitration.

Facts Key to the Decision

JustAnswer offers a service on its website that lets users ask questions of various "experts" on an extensive list of topics. To do so, users must join and sign up for a seven-day free trial that costs $5—then $46 per month after the trial expires.3

The enrollment process consists of two stages. First, users type in their question and click a button labeled "Continue."4 Second, they advance to the payment page where they are prompted to input their bank card information in a white box and click a red button labeled "Start my trial."5 "Once a user submits their payment information and clicks on the 'Start my trial' button, they are automatically enrolled in a recurring monthly membership."6

The dispute at issue focused on the following sentence that appears in a smaller green box underneath the white box and red button: "By clicking 'Start my trial' you indicate that you agree to the terms of service and are 13+ years old."7 By underlining the "terms of service" language, JustAnswer intended to indicate it was hyperlinked to a different web page setting forth the Terms of Service (TOS) governing the use of the website and JustAnswer service8—as well as a binding arbitration provision and class action waiver.9

Plaintiffs filed a class action complaint alleging the disclosure of the recurring $46 monthly membership charge was not "clear and conspicuous," and the enrollment pages thus violated the ARL and other consumer protection laws.10

JustAnswer moved to compel individual arbitration because plaintiffs agreed to the TOS, including binding arbitration, by clicking the "Start my trial" button as explained by the sentence in the green box.11 Plaintiffs opposed, arguing they lacked notice of the TOS and corresponding arbitration provision because the language was "not sufficiently conspicuous to provide them constructive notice" and thus they did not enter into a binding agreement to the TOS by clicking the button.12

The trial court ruled plaintiffs "had not agreed to binding arbitration [b]ased on the inconspicuous language" and denied JustAnswer's motion.13 JustAnswer appealed.

The question before the Fourth District was whether a contract was formed over the internet, i.e., plaintiffs assented to the TOS via a "sign-in wrap" agreement such that they had to pursue their claims in binding individual arbitration.

The Court's Analysis

"'Sign-in-wrap' agreements are those in which a user signs up to use an internet product or service, and the sign-up screen states that acceptance of a separate agreement is required before the user can access the service. While a link to the separate agreement is provided, users are not required to indicate that they have read the agreement's terms before signing up."14

Further, "the consumer is purportedly bound by clicking some other button that they would otherwise need to click to continue with their transaction or their use of the website—most frequently, a button that allows the consumer to 'sign in' or 'sign up' for an account. Thus, it is not apparent that the consumer is aware that they are agreeing to contractual terms simply by clicking some other button. Instead, 'the consumer's assent is "largely passive,"' and the existence of a contract turns '"on whether a reasonably prudent offeree would be on inquiry notice of the terms at issue."'"15

JustAnswer presented a "sign-in wrap" agreement to plaintiffs because the webpage indicated that by clicking the "Start my trial" button they also were agreeing to the TOS.16

The Fourth District's analysis is groundbreaking for two reasons. One, as the first appellate court in California to consider the enforceability of "sign-in wrap" agreements, it refused to follow prior federal decisions on the issue, criticizing them for finding "nearly any textual notice sufficient to bind a consumer, while also applying largely subjective criteria that, at times, results in inconsistent conclusions."17

The Fourth District distinguished the federal cases by noting they "mostly involve a consumer signing up for an ongoing account and, thus, it is reasonable to expect that the typical consumer in that type of transaction contemplates entering into a continuing forward-looking relationship."18 In the Fourth District's estimation, the JustAnswer consumer, on the other hand, expected to enter into a one-time transaction (paying once to ask a single question).19

Two, the Fourth District became the first California Court of Appeal to rule a "sign-in wrap" agreement that requires a consumer to individually arbitrate alleged ARL violations must be considered in the context of the law's clear and conspicuous standard.20 "Since the Legislature has specifically addressed the notice requirements for this type of transaction under the ARL, we consider those requirements when evaluating the transaction as a whole."21 "[A] textual notice of the existence of contractual terms that limit the consumer's ability to address ARL violations should, in our view, be at least as conspicuous as the notice required by the statute in the first instance."22

The Fourth District held the specific notices in JustAnswer "were less conspicuous than the ARL's statutory notice requirements" and affirmed the decision denying the motion to compel arbitration.23

Impressions and Takeaways

JustAnswer clearly diverges from the existing body of federal decisions and seeks to establish a new standard governing the formation of online terms of service/use contracts between consumers and companies offering recurring services online via the "sign-in wrap" process.

According to JustAnswer, the notice of those terms to consumers must be "clear and conspicuous," i.e., "in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks, in a manner that clearly calls attention to the language."24 The notice also must be in "visual proximity … to the request for consent."25

However, by the terms of JustAnswer itself, some companies should be exempt from this new rule, specifically (1) where consumers clearly expect to be in an ongoing relationship with the company, and/or (2) those that require consumers to check a box indicating their agreement to the terms of use/service ("clickwrap") or physically scroll through the terms ("scrollwrap").26

Further, JustAnswer is a departure from the existing body of law on arbitration agreements. Thus, it is possible other districts or the California Supreme Court could review this issue and decide to follow the reasonable inquiry notice standard used in federal court. Indeed, as JustAnswer itself recognized, the ARL is intended to "end the practice of ongoing charging of consumer credit or debit cards … without the consumers' explicit consent."27

Nothing in the ARL itself or its legislative history suggests the law was intended to govern the formation of terms of use/service contracts containing binding arbitration provisions and class action wavers. Stay tuned for potential future developments on this issue.

All that said, given this new decision, it behooves any online company offering recurring subscription products or services to California consumers to evaluate their enrollment pages and determine whether the disclosure of its terms of service/use requiring individual arbitration in a "sign-in wrap" environment meets this clear and conspicuous standard and to use best efforts to make any necessary adjustments. Another alternative is forgo "sign-in wrap" agreements altogether and employ "clickwrap" or "scrollwrap" methods instead.

FOOTNOTES

1 Sellers v. JustAnswer LLC, No. D077868, 2021 Cal. App. LEXIS 1102, at *2-3 (Cal. Ct. App., 4th App. Dist., Div. 1, Dec. 30, 2021).
2 Business & Professions Code §§ 17600 et seq.
3 JustAnswer, 2021 Cal. App. LEXIS 1102, at *4-5.
4 Id. at *4.
5 Id.
6 Id. at *5.
7 Id.
8 Id.
9 Id. at *8.
10 Id. at *9-12.
11 Id. at *12.
12 Id. at *12-13.
13 Id. at *2.
14 Id. at *22-23, quoting Selden v. Airbnb, Inc., No 16-cv-00933 (CRC), 2016 WL 6476934, at *5 (D.D.C., Nov. 1, 2016).
15 Id. at *36 (italics in original).
16 JustAnswer, 2021 Cal. App. LEXIS 1102 at *25.
17 Id. at *27, 37 (emphasis in original).
18 Id. at *37.
19 Id. at *37-38.
20 Id. at *49-50.
21 Id. at *50.
22 Id. at *54-55.
23 Id. at *50, 63.
24 Id. at 52, quoting B&P § 17601(c) (italics in original).
25 Id. at 53, quoting B&P § 17602.
26 Id. at *46-47.
27 Id. at *10.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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