In Knutson v. Sirius XM Radio Inc., No. 12-56120 (9th Cir. Nov. 10, 2014) (click here for a copy of the decision), the Ninth Circuit held that Sirius could not enforce an arbitration clause used in connection with a free 90-day trial subscription to Sirius satellite radio. The plaintiff in this case purchased a Toyota truck, which came with the 90-day free trial. One month after purchasing the truck and activating the satellite radio, the plaintiff received a welcome kit in the mail from Sirius, which included a Sirius customer agreement containing the arbitration clause. The plaintiff did not read the customer agreement when it arrived in the mail.
After the plaintiff filed a class action against Sirius for allegedly making unauthorized calls to the plaintiff’s cellphone, Sirius tried to enforce the arbitration clause. However, the Ninth Circuit found that the arbitration clause was not enforceable because of lack of mutual assent. The Ninth Circuit found that a reasonable person in the plaintiff’s position would not expect that the purchase of a vehicle from Toyota would bind him to a separate contract with Sirius. Also, the Ninth Circuit reasoned that the plaintiff’s continued use of the radio after receiving the customer agreement did not constitute assent to be bound by the agreement because Sirius did not clearly communicate the terms of its offer. Not expecting or not having any awareness of a contractual relationship with Sirius, the plaintiff had no reason to read the welcome kit and customer agreement he received in the mail.
This case reminds me of the importance of examining the making of an arbitration agreement, and not simply the terms of the arbitration agreement itself. I have presented arbitration clauses to my law students, asking whether a particular clause is enforceable. Students will tend to focus on whether the terms are substantively unconscionable and forget to ask about the circumstances surrounding the making of the agreement. For example, a company may use certain language for an arbitration clause, but customers may enter into transactions with the company in a variety of ways, some of which may not result in a binding arbitration agreement. Although the Federal Arbitration Act contains many drafting flaws, the language found in section 4 correctly directs a court to examine “the making” of the arbitration agreement, not merely the terms of the arbitration agreement, before compelling arbitration. Also, this Ninth Circuit case reminds me of a particular problem with class arbitrations. I have many concerns regarding class arbitrations, and one concern is that an arbitrator construing an arbitration clause in connection with the named plaintiff cannot assume that the entire class has binding arbitration agreements because the circumstances surrounding the making of each individual agreement may vary.