Friday and the weekend were pretty quiet in the reporting of new cases, with only one really worth mentioning. However, it covers three big issues in arbitration enforcement – whether an agreement was formed; whether it is unconscionable; and whether objectionable provisions can simply be severed, with arbitration proceeding. It is also a good tutorial in on-line contract drafting.

Have a good day.  See you Wednesday.

Agreement formation and unconscionability

The world of electronic commerce keeps adding new dimensions to the question of whether the parties have formed an agreement to arbitrate.  Last week we had “browsewrap” and “clickwrap.”  Today we see the issues raised when the parties substitute DocuSign for signatures by pen.  In Yeomans v. World Fin. Grp. Agency, Inc., 2020 U.S. Dist. LEXIS 166725 (N.D. Cal.) (Sept. 11, 2020), plaintiffs claimed that members of the plaintiff class, who sold financial products and recruited other “Associates” on behalf of World, were employees of the Defendant, not independent contractors. A threshold issue, addressed in this opinion, arose because the “Associate Membership Agreement” (“AMA”) which World presented to its Associates, contained an arbitration provision.

The first issue presented was whether the Associates ever saw, let alone agreed to, the arbitration provision.  The entire contract formation process took place electronically, with signatures via DocuSign.  Plaintiffs claimed that they only saw the signature page, not the entire agreement, and were not aware of the arbitration clause.  Judge Chen went through the evidence in detail – providing a great guide to litigators addressing this issue elsewhere – and concluded as to one named plaintiff, Mr. Rodriguez, and implied as to the others that Defendants had no notice of the full terms in the AMA, particularly the arbitration clause. As to the non-Rodriguez plaintiffs, though, the court held that, since they ultimately got notice of the arbitration clause and continued to perform services, they are bound to arbitrate.  What makes this otherwise fairly routine analysis interesting is the court’s analysis of the DocuSign process.  Defendants claimed that Plaintiffs must have seen the arbitration clause contained in the AMA because the DocuSign process required a scroll through the entire document to reach the signature page (“browsewrap”).  Conversely, Plaintiffs claimed that DocuSign brought one directly to the signature bloc on the last page. For some reason, neither party offered the court a demonstration of the process and Judge Chen made no factual finding on the issue.  Questions also arose as to whether someone other than the proposed Associate could execute sign the DocuSign signature block.  In other words, if the signature said “John Doe,” could Mary Roe have been the actual signer?  Again, the court made no finding, but, in light of the significant use of electronically contract formation, the issues must be considered by drafters. A couple of suggestions from this technically challenged observer.  First, just as paper documents often require the signers’ initials on each page, do the same with your electronically signed agreement; it is cumbersome, but a lot easier than undertaking subsequent litigation over whether an arbitration clause was seen by the signer.  Second, assuming that the electronic platform permits this, require the use of a numerical code, sent to the signer’s cell phone or a separate email address from that being used to negotiate the agreement, to gain access to the document.  Yes, oh skeptic, I know this process can be circumvented, but it provides an extra level of evidentiary proof.

In a second portion of the opinion, Judge Chen, after a detailed analysis of the law of procedural and substantive unconscionability, invalidated the entire arbitration clause. On the procedural side, he relied upon the failure of World to present the full agreement to the proposed Associates until after they began recruiting others to the program.  In addition, the language of the arbitration clause was presented in nine-point type, like this, which the court held was “visually impenetrable” and “challenges the limits of legibility,” quoting OTO, LLC v. Kho, 447 P. 2d 680 (Cal. 2019). Finally, several of the crucial terms of the arbitration clause, like “Good Faith Arbitration” and “Rules” of the arbitration, were either undefined, referenced in some other portion of the seven-page application, or contained in a separate seventeen-page agreement.  As to substantive unconscionability, he found “at least three” unconscionable provisions – a provision permitting World, but not the Associate, to seek “extraordinary” and equitable relief in court; the requirement that any such litigation be in Georgia (an unusual conclusion by Judge Chen in light of the general enforceability of forum selection clauses): and a mandatory, not discretionary, award of fees to the prevailing party.  Rejecting World’s claim that the objectionable clauses should simply be severed and arbitration ordered, the court, without any real discussion beyond case citations, held that the unconscionability “permeated” the arbitration provision and refused enforcement.

While the case is a good resource for litigators, it is an important read for those drafting agreements which will be posted and executed on-line.  Difficulties in viewing an agreement on screen, trying to “flip” back through multiple pages or documents, and assuring a true signature require a different thought process in the drafter than is used in a paper agreement.

 

Education Program Reminder

Today is the first day of the ABA Dispute Resolution Section’s Technology Expo; registration is still available at https://www.americanbar.org/groups/dispute_resolution/   The cost is only $25, so even one day of the program is a steal.  Tomorrow, the Chartered Institute holds its webinar “Schein”ing a Light on Circuit Splits.  For more information and registration go to ciarbnab.com/webinars/   The program is free.

Dave Reif
Reif ADR
Dreif@reifadr.com
Reifadr.com