Ninth Circuit Upholds Arbitration in Data Breach Case: A Reminder for Businesses on the Importance of Terms and Conditions

From JDSupra, Alexis Buese and Erin Jane Illman discuss a recent case in which the court upheld an arbitration agreement in terms of a website because the website provided reasonably conspicuous notice of the terms and conditions and the user manifested assent  by clicking the ‘Place Order’ button. Arbitration agreements are important for companies engaging with independent contractors to avoid class action lawsuits alleging misclassification. Alexis and Erin write:

The frequency of class actions related to data breaches has significantly increased, with no indication that this upward trajectory will plateau. This raises the question: Are there more efficient alternatives to settling these disputes in the public eye of the courts? Moreover, is it possible to mitigate the financial burden associated with these legal battles? The short answer: Incorporating arbitration clauses and class action waivers into terms and conditions presents a viable strategy — if done correctly.

In a recent ruling by the Ninth Circuit, a significant message was sent to businesses about the critical nature of employing clear and effective website terms and conditions incorporating an arbitration clause and class action waiver. The case of Patrick v. Running Warehouse, LLC, — F.4th —- (2024), stemmed from a data breach in October 2021, leading to the alleged exposure of consumers’ personally identifiable information. The consumers’ attempt to bring forward class actions for negligence, breach of contract, and other claims against the retailer was met with a motion to compel arbitration.

The Ninth Circuit found that “Plaintiffs other than Craig Arcilla acknowledged seeing a hyperlink to the websites’ Terms of Use and therefore had inquiry notice of the arbitration provision.With respect to Arcilla, “the panel agreed with the district court’s finding that Defendant Running Warehouse’s website provided sufficient information to put him on inquiry notice. The website provided reasonably conspicuous notice of the Terms, and Arcilla manifested assent to the Terms by clicking the ‘Place Order’ button to complete his purchase.”

The ruling underscores the necessity for businesses to ensure that their terms of service are not only present but also prominently displayed and easily accessible to consumers. In this instance, the court noted that the plaintiffs had acknowledged seeing a hyperlink to the Terms of Service, placing them on “inquiry notice” of the arbitration provision. This concept, supported by prior decisions, suggests that while consumers may choose not to read the terms, the availability of these terms still binds them legally, as they are considered to have been given sufficient notice.

For background, arbitration offers a practical alternative to the costly and time-consuming nature of court litigation. It is favored by many larger entities for its ability to circumvent protracted trial procedures, maintain the privacy of legal disputes, and allow involved parties to have a hand in selecting the arbitrator. Traditionally, the inclusion of class action waivers within arbitration clauses can deter the amalgamation of individual claims into a single, large-scale lawsuit. These advantages, combined with class action waivers, are particularly appealing to businesses aiming to reduce the financial and reputational risks associated with data breach lawsuits, which often involve extensive class sizes and substantial potential for reputational harm. However, recent developments have made arbitration less enticing with respect to the current surge in mass arbitration cases where thousands of identical claims from consumers or employees are filed against companies. This movement is propelled by a savvy group of plaintiff lawyers who are increasing the use of data breach and privacy class numbers to strong-arm settlements as an alternative to incurring single plaintiff arbitration fees for thousands of cases.

As the legal landscape surrounding mass arbitrations evolves, there are proactive measures a company can take to mitigate these risks. However, for these strategies to be effective, they need to be implemented before the company is notified of a mass arbitration. Companies must carefully revise their arbitration agreements to avoid any provisions that could be deemed unconscionable, potentially jeopardizing the entire agreement. Instituting a pre-dispute resolution process with mandatory individualized conferences before arbitration can ensure that only serious claims proceed, potentially decreasing costs. Additionally, requiring claimants to submit individual requests for arbitration with comprehensive details about the claim and a good faith estimate of the dispute amount can help deter baseless claims. Modifying cost-splitting provisions to remove blanket commitments to cover arbitration filing fees and introducing the possibility of fee shifting for frivolous claims can further protect companies. Moreover, adopting a clause for batch arbitration, where similar claims filed simultaneously are consolidated into manageable groups, can streamline the resolution process and benefit both companies and consumers by enabling more efficient adjudication with reduced administrative burdens. These measures, carefully tailored to comply with applicable laws and arbitration rules, can significantly mitigate the risks associated with mass arbitration scenarios.

It’s important to note that not every arbitration clause and class action waiver holds up legally. Errors and oversights can elevate the likelihood of a company having to face a class action lawsuit in court, despite efforts to circumvent such scenarios through waivers. This case is a clear reminder of the need for businesses to use terms and conditions effectively. By ensuring that these legal agreements are clearly communicated and accessible, companies can better protect themselves from legal disputes.

Bradley has extensive expertise in guiding clients through mass arbitration claims and stands in a unique position to help businesses tailor dispute resolution clauses that best fit their specific requirements.

Source: Ninth Circuit Upholds Arbitration in Data Breach Case: A Reminder for Businesses on the Importance of Terms and Conditions | Bradley Arant Boult Cummings LLP – JDSupra

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