A rare victory in challenging an arbitration provision

Watch what you sign when you enter into a customer agreement. You may unwittingly sign an arbitration provision that says any lawsuit you may have against the company will be arbitrated and not litigated in court. You may not care at the moment because most people don't wish to initiate any proceedings against the company, but if you do, and even if you want a class action, you are stuck in arbitration. Most plaintiffs would rather be in court.

The case is Lipsett v. Popular Bank, a summary order issued on January 10. Courts are inclined to uphold most arbitration agreements. One way to challenge them is to argue that the box you checked online was not conspicuous enough for you to know it was even there. In this case, plaintiff and the potential class want to sue the bank in federal court. The court ruling does not tell us what the dispute was about. But when plaintiffs filed this lawsuit, the bank moved to compel arbitration. 

Plaintiff argued that he never consented to the arbitration provision. The general rule is this:"where an offeree lacks actual notice of certain contract terms, he is nevertheless bound by such terms if he is on inquiry notice of them and assents to them through conduct that a reasonable person would understand to constitute assent. Whether an individual is on inquiry notice turns on whether the contract terms were presented to the offeree in a clear and conspicuous way, taking into account the totality of the circumstances.” This legal standard requires judges to determine what a reasonable person would know and what they would not know.

Plaintiff wins the appeal and the case remains in federal court. The arbitration provision that plaintiff supposedly agreed to was too confusing. The Court of Appeals (Sack, Lohier, Kahn) says:

While the 2014 Notice draws attention to the arbitration provision, it misleadingly states that there “continues to be a Mandatory Arbitration Provision.” This statement signals to a reasonable customer like Lipsett, who was not previously informed of the arbitration provision or consented to arbitration and therefore not bound by any previous iteration of the arbitration provision, that it does not apply to him and that his agreement with the Bank remained effectively unchanged.

In other words, the provision mistakenly presumes that plaintiff already knew about an arbitration provision that he was not previously informed about. In signing the agreement, plaintiff was not consenting to continue the terms of the prior arbitration agreement because such an agreement did not apply to him. In addition, the agreement that plaintiff signed did not expressly tell plaintiff about the terms upon which he could accept or deny the arbitration provision. 

This is all very complex, and the courts, as I said, have to put themselves in the shoes of the average consumer in determining whether the consumer knowingly agreed to a legitimate arbitration provision.