January 19, 2021

Volume XI, Number 19


January 18, 2021

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Avoiding Formation Challenges To Your Arbitration Clause With Consumers

In prior posts (here and here), we raised questions that companies may want to ask when evaluating their arbitration clauses and making changes to them.  In this third installment, we look at what companies should be doing to ensure that they can present proof of their arbitration agreements if ever required to do so in court.  Your company may have a perfect arbitration clause, but if a customer claims never to have signed the arbitration agreement or not to have seen the website providing notice of the terms and conditions, you will have to present evidence that the customer is wrong.

As we highlighted in our prior posts, to form a contract, a party must have notice of the proposed contract’s material terms and agree to those terms.  This post assumes that proper notice and assent were obtained; the question now is what proof companies needs to retain.

The decision in Fabian v. Renovate America, Inc. (2019) 42 Cal.App.5th 1062 demonstrates the issue.  In that case, the plaintiff argued that even though her name appeared on a Docusigned contract, she did not place it there.  She asserted that someone at the company placed her name on the contract without her consent.  The California Court of Appeal noted that once a challenge to formation is made, the company has the burden of proving by a preponderance of the evidence (more likely than not) that the consumer placed his or her name on the agreement.  You can read more about the case here.

In Fabian, the court held that the company’s evidence – the contract itself with the customer’s name on it – was not enough to overcome the plaintiff’s statement that she did not sign the contract.  The court, however, identified the types of information that a company can maintain and provide to satisfy its burden of proof.  This includes, for example, information on how electronic signatures are obtained (i.e., who sends contracts to consumers and how), how names are placed onto Docusigned contracts, how contracts are returned to the company after they have been signed, and any authentication that the company uses to verify that the consumer actually signed the agreement.  Id., 1069.

Based on the above, if you are contracting with customers through formally executed documents, you should consider at least the following:

  1. Do you ensure that your customers execute those documents?

  2. Do you have a central repository for electronically signed agreements? If so, who has access to it and how is it managed?

  3. If you use a third-party provider to manage the electronic signature process, does the provider offer any security features on which the company can rely to later demonstrate that a name appearing on a signed contract was put there by the customer?

  4. Do you email fully executed versions of contracts to the customer?

Fabian did not address contracts formed online, but its principles still apply – a company will need to provide proof of what its website looked like and how it worked to meet its burden of proof on formation.  As a result, if you engage customers online and rely on their agreement to a set of terms and conditions, you should consider at least the following:

  1. If your website has changed over time, do you maintain images or other reproducible information showing what your website looked like? Can you demonstrate at what point in a contracting process or where on your website the customer would have encountered the company’s terms and conditions?

  2. Do you have copies of all versions of the company’s terms and conditions? Are you tracking when the various versions were in effect?  If you use hyperlinks to terms and conditions, can you show that the hyperlink went to the particular set of terms and conditions?

  3. If your company website permits customers to create user IDs to log in, do you maintain any tracking that shows when a customer logged in and/or made a purchase?

  4. Are you using any software or other services to track a customer’s experience of your website or terms and conditions? Would tracking this information be a value-add for the business?

As we noted in our prior posts, these questions may not cover everything that you and your company should consider regarding formation challenges and electronically signed documents.  Crafting a solution for each company, while satisfying the concerns and desires of the legal department, the marketing department, and the business teams can sometimes be challenging, but it should be done.  There is no reason to risk unnecessary exposure to consumer class actions.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 202



About this Author

Jay Ramsey, Sheppard Mullin Law Firm, Litigation Attorney

Mr. Ramsey is an associate in the Business Trial and Entertainment, Technology and Advertising Practice Groups in the firm's Century City Office.

Areas of Practice

Mr. Ramsey represents clients in all types of commercial litigation. In the media and entertainment field, he represents studios, producers, and broadcasting companies in claims relating to distribution rights, profit participation, and other accounting issues. Mr. Ramsey also represents clients in complex and general business...

Meyer, associate, orange county, construction, litigation

Abby Meyer is an associate in the Business Trial Practice Group in the firm’s Orange County office, and a member of the firm’s Construction, Food & Beverage, and Consumer Class Action teams.

Ms. Meyer represents clients facing or pursuing complex litigation arising from software implementations, construction, and real estate projects, including alleged construction defect and business disputes. These matters have included claims for breach of contract, lender liability, fraud, and misrepresentation, among other claims. Ms. Meyer has...