How not to force arbitration on consumers

Courts often enforce arbitration agreements on the basis that the parties to that agreement know what they are getting into, even if the balance of power is one-sided, such as an arbitration agreement between a large employer and a new employee. But sometimes the courts find a way to hold the agreement is not enforceable, usually because the process is flawed and the objecting party did not have a fair shake. This is one of those cases.

The case is Sudakow v. CleanChoice Energy, Inc., issued on August 27. The plaintiffs contracted with CleanChoice to buy electricity. Defendant then sent plaintiffs a dispute-resolution form which contained an arbitration agreement. Companies like arbitration because any dispute will be resolved by a private arbitrator, not a court, which issues its rulings in public and must comply with the Federal Rules of Civil Procedure or its state-law counterpart. Plaintiffs did not sign the arbitration agreement, and when a real dispute arose two years later, they sued CleanChoice for breach of contract and deceptive business practices. CleanChoice moved to compel arbitration.

The district court found, and the Court of Appeals (Carney, Park and Kahn) agrees, that this case cannot be arbitrated and must be resolved in open court because plaintiffs never had sufficient notice that they were assenting to arbitration. The complication is this: “Under New York law, when an offeree does not have 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.” "New York courts look to whether the term was obvious and whether it was called to the offeree's attention."

The record contains no evidence of "actual notice" that would bind plaintiffs to any arbitration agreement. While defendant, later on, sent plaintiff the arbitration provision, it was "temporally and spatially decoupled" from plaintiff's enrollment in the service. In other words, the arbitration provision was sent too long after the original contract was signed. "And nothing in the Enrollment Agreement itself called attention to the possibility of any such forthcoming change. Accordingly, a reasonable person would not have understood that the Subsequent Terms altered her contract with CleanChoice." Nor was the arbitration provision sent to plaintiffs "in a clear and conspicuous way," arriving in a nondescript package that did not identify CleanChoice as the sender. The body of the letter inside obscured the existence of the arbitration provision. "CleanChoice thus failed to 'raise[] a red flag vivid enough to cause a reasonable person to anticipate the imposition of a legally significant alteration to the terms and conditions.'”

The anomaly in all of this is that if CleanChoice did it right and had plaintiffs sign the arbitration agreement from the outset, without shielding the agreement, plaintiffs may have signed it without giving the agreement much thought. The average consumer does not anticipate bringing a lawsuit against an energy provider (or any other entity) upon signing the initial contract. Nor do employees anticipate a wrongful discharge lawsuit two years later. Yet, once things went sideways with CleanChoice and plaintiffs went to see a lawyer who determined the arbitration agreement was unenforceable, it was too late for CleanChoice to undo the mistake and compel arbitration.