New California District Court Ruling Provides Guidance on Arbitration Provisions in Online ContractsA recent California District Court ruling in Savetsky v. Pre-Paid Legal Services, Inc. has invalidated an online service provider’s arbitration clause in its wrap agreement due to lack of assent by the plaintiff to arbitrate the dispute.

Pre-Paid Legal Services, Inc., which does business as LegalShield, is an online provider of pre-paid legal services. When a consumer visits the LegalShield website, he or she has the option to “Buy Now” or “Learn More”. If the “Buy Now” option is selected, the consumer selects his or her state and is then given an overview of available services. A “More Plan Details” button is also on this page, which takes the consumer to a page that includes a general overview of services as well as a “More Specific Details” link to a sample version of LegalShield’s member contract. Consumers were not required to click on the “More Plan Details” or “More Specific Details” links prior to making a purchase.

Michael Savetsky purchased an online membership from LegalShield. His contract included an arbitration agreement. Payment was made by debiting his account for recurring payments. Later, Savetsky filed a putative class action on behalf of all buyers of LegalShield memberships, alleging that the recurring payment plan violated a number of California consumer laws. LegalShield moved to compel arbitration pursuant to its contract with Savetsky.

In its ruling, the district court recognized that this case did not fit neatly into three common scenarios for online contracts: clickwrap, shrinkwrap and browsewrap agreements. A clickwrap agreement is where a consumer has to check a box to acknowledge that they have read the terms and conditions of the agreement. Shrinkwrap agreements come inside a software box and the software itself is labeled to notify a consumer that the use of the software acknowledges the consumer’s assent to the terms and conditions of the agreement. Browsewrap agreements are notices on a website that tell consumers their further use of the site means they agree to its terms and conditions.

Relying on prior case law in United Steelworkers of Am. v. Warrior & Gulf Nav. Co., the court said that since contracts create arbitration obligations, the parties must assent to arbitration. The court found that since the design of LegalShield’s website allowed consumers to “Buy Now” without reviewing the membership contract — which was in effect “hidden” behind two additional links — there was no assent that would create an enforceable agreement such that a “reasonable person” would understand they had agreed to arbitration.

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