Sirius XM is a satellite radio service that broadcasts commercial-free audio content, including music, news, and sports channels, to subscribers. It has entered into agreements with a variety of auto manufacturers, including Toyota, to install satellite radio receivers in new cars. The sale of such a car includes a free trial subscription to the Sirius service, which purports to be governed by an agreement provided to the purchaser by Sirius after buying the car. The Ninth Circuit recently invalidated the arbitration agreement contained in this agreement in Knutson v. Sirius XM Radio.
The plaintiff, Knutson, bought a Toyota Tacoma truck, which came with a 90-day trial subscription to Sirius XM radio. Knutson bought the truck in November, 2011, and his subscription was activated on November 11. Knutson received a Sirius “Welcome Kit” in the mail more than a month later, on December 12, 2011. The Welcome Kit included a Customer Agreement providing that the failure to cancel the trial subscription within three days of activation legally binds the customer to the agreement.
The Customer Agreement also included an arbitration clause which offered the customer a choice of arbitration or small claims court in the event of a dispute. The arbitration clause provided that by electing arbitration, a consumer would waive his or her right to arbitrate any claims “on a class action basis.” Under this clause, the consumer would not “have the right to act as a class representative or participate as a member of a class of claimants with respect to any Claim submitted to arbitration.” The arbitration provision further stated that the class action waiver was “material and essential to the arbitration of any disputes … and is nonseverable from this agreement to arbitrate.”
During the trial subscription period, Knutson received three telemarketing calls on his cell phone from representatives of Sirius. He brought a purported class action suit against Sirius, alleging that these calls were “unauthorized and unsolicited,” and violated the Telephone Consumer Protection Act. Sirius moved to compel arbitration. Knutson opposed the motion, arguing that he was unaware that the Customer Agreement included an arbitration clause and because the Customer Agreement was mailed after the three-day cancellation period, there was no mutual assent. The district court granted Sirius’ motion and dismissed Knutson’s action. Knutson appealed.
The Ninth Circuit embraced Knutson’s argument regarding the lack of mutual assent, and invalidated the arbitration agreement. Arbitration is a creature of contract, and a party cannot be forced to arbitrate a dispute that he or she has not agreed to arbitrate. Mutual assent is required for contract formation. Knutson argued that he was never given the opportunity to accept or reject the arbitration agreement, and therefore he never assented to it. The Ninth Circuit considered two questions: (1) whether a reasonable person would understand that he or she had assented to an arbitration agreement; and (2) whether Knutson’s failure to cancel his subscription after he received the Customer Agreement constituted acceptance.
The Ninth Circuit found that a reasonable person in Knutson’s position would not understand that he or she had assented to an arbitration agreement, because nothing communicated to Knutson at the time he purchased his truck that he was entering into a relationship with Sirius. He was provided no documentation from Sirius at the time of purchase, and did not receive the Customer Agreement until more than one month later. Although failure to read a contract before signing it does not, alone, invalidate the contract, this rule does not apply where the “writing does not appear to be a contract and the terms are not called to the attention of the recipient.” Because Knutson dealt only with Toyota, and there was no direct transaction between Knutson and Sirius, Knutson could not reasonably be expected to understand that he was entering into a contractual relationship with Sirius.
The Knutson opinion underscores the importance of transparency and clear communications in arbitration agreements, particularly where those agreements are distributed on a mass basis to consumers. The Ninth Circuit noted that the lack of clarity in Knutson “could be easily remedied by Toyota. The Toyota purchase agreement could clearly state that Toyota has a relationship with Sirius XM to provide Toyota customers with a trial service, and that therefore the Toyota customer is entering into a contractual relationship with Sirius XM. Toyota could also provide its customers with literature that similarly explains the agreement between Sirius XM and the Toyota customer and ask for assent to such agreement.”
Although case law strongly favors the policy underlying agreements to arbitrate, such agreements will not be indiscriminately enforced. Drafters should take care to consider the particular circumstances of the transaction giving rise to the arbitration agreement, and ensure that the agreement’s terms are clearly communicated to the other party and that the other party is given a meaningful opportunity to assent to its terms.