The Supreme Court has once again ruled that the Federal Arbitration Act (FAA) cannot be overridden by state courts in enforcing online arbitration agreements.

The opinion was published in connection with the state court ruling in the case Chilluti v. Uber Technologies.

The Supreme Court Opinion, issued by the late Justice Ginsburg, came in the wake of a Pennsylvania state court ruling, which stated that hyperlinked arbitration agreements eroded jury trial rights.

The case was heard before Justices J. Stabile, J. Dubow and J. McCaffery, with the opinion penned by the latter, in April 2021. 

But, Justice Ginsburg disagreed emphatically, stating that states have no power to “Adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial.”

State court rulings have reflected ‘hostility to arbitration’ – Justice Ginsburg

The opinion goes on to state that such a rule reflects “the kind of ‘hostility to arbitration’ that led Congress to enact the FAA” and “flout[s] the FAA’s command to place those agreements on an equal footing with all other contracts.”

This is, by no means, the first time that state courts have attempted to place arbitration agreements on an unfair footing.

Back in 2011, the US Supreme Court confirmed that arbitration agreements are protected by Federal Law in the case entitled AT&T Mobility LLC v. Concepcion.

Returning to the matter at hand, the Pennsylvania court framed the issue as one of “whether a party should be deprived of their constitutional right to a jury trial when they purportedly enter into an arbitration agreement via a set of hyperlinked ‘terms and conditions’ on a website or smartphone application that they never clicked on, viewed, or read.” 

The state court said that the evolution and effect of arbitration agreements have substantially weakened the constitutional right to a jury trial in civil proceedings.

Pennsylvania State Court opines against arbitration

In his opinion, Justice McCaffery said: “The copious usage of arbitration agreements in present-day contracts and the ramifications of these agreements on a party’s right to a jury trial raises concern, especially in the context of Internet contracts like the one at issue herein where the parties are of purported unequal bargaining power ….

“The need for greater scrutiny regarding a party’s waiver of their constitutional right to a jury trial in terms of these arbitration agreement matters is imperative.”

The Chilutti court acknowledged that Pennsylvania has a “well-established public policy favoring arbitration” that “aligns with the federal approach expressed in the Federal Arbitration Act (‘FAA’),” its call for “greater scrutiny” of arbitration agreements in online contracts is inconsistent with the federal statute.  

The FAA stipulates that an arbitration agreement must be contained in a written “contract” to be enforceable.  

As a result, courts such as the Ninth Circuit in Berman v. Freedom Financial Network, LLC generally apply state contract law to determine whether websites provide reasonably conspicuous notice of terms and whether the user manifested assent to those terms.  

But the Chilutti court concluded that the Berman standards are “insufficient” and that a “stricter burden of proof” is required in Pennsylvania given that the constitutional right to a jury trial is involved:

The court ruled that the above could be accomplished by:

(1) Explicitly stating on the registration websites and application screens that a consumer is waiving a right to a jury trial when they agree to  the company’s “terms  and  conditions,” and the registration process cannot be completed until the consumer is fully informed of that waiver; and 

(2) when the agreements are available for viewing after a user has clicked on the hyperlink, the waiver should not be  hidden in the “terms and conditions” provision but should appear at the top of the first page in bold, capitalized text.

State courts have no power over arbitration – Supreme Court

The highest court in the land, however, shut down the argument. States do not have the power to “adopt a legal rule hinging on the primary characteristic of an arbitration agreement—namely, a waiver of the right to go to court and receive a jury trial”

The Supreme Court stated: the FAA “preempts any state rule discriminating on its face against arbitration … [and] also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that … have the defining features of arbitration agreements” or that rely “on the uniqueness of an agreement to arbitrate as [its] basis.” 

It also held that the FAA preempted a Montana statute that provided: “Notice that a contract is subject to arbitration . . . shall be typed in underlined capital letters on the first page of the contract; and unless such notice is displayed thereon, the contract may not be subject to arbitration.” 

Justice Ginsburg explained: “Courts may not … invalidate arbitration agreements under state laws applicable only to arbitration provisions.  By enacting § 2 [of the FAA], we have several times said, Congress precluded States from singling out arbitration provisions for suspect status, requiring instead that such provisions be placed ‘upon the same footing as other contracts.’ …. Montana’s § 27-5-114(4) directly conflicts with § 2 of the FAA because the State’s law conditions the enforceability of arbitration agreements on compliance with a special notice requirement not applicable to contracts generally.  The FAA thus displaces the Montana statute with respect to arbitration agreements covered by the Act.”

The fact that the Pennsylvania constitution makes the right to a jury trial “inviolate,” as Chilutti stressed, does not displace federal arbitration law. 

The Supreme Court has instructed that state courts “must abide by the FAA, which is ‘the supreme Law of the Land,’ U. S. Const., Art. VI, cl. 2, and by the opinions of this Court interpreting that law.” 

Accordingly, the FAA imposes limits on efforts by state courts to “push back” on the enforcement of arbitration agreements in online contracts.

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