March 11, 2019 Practice Points

Second Circuit Refuses to Enforce Mandatory Arbitration Clause in Warranty Agreement

This case is entirely consistent with traditional concepts in contract law, but the result is nevertheless surprising.

By David Y. Loh

On January 10, 2019, the Second Circuit held that a mandatory arbitration clause in a warranty agreement was unenforceable. The appellant SquareTrade, Inc. sells warranty protection for consumer electronics via the web. The appellee Adam Starke purchased a SquareTrade plan through Amazon to cover a CD player ordered from Staples. When the CD player broke, Mr. Starke submitted a claim that was denied because the particular SquareTrade plan only covered products purchased through Amazon. SquareTrade did offer to refund the money paid by Mr. Starke, but he remained unsatisfied and commenced a putative class action in the Eastern District of New York, which seeks to hold SquareTrade responsible for the breach of various consumer protection laws.

SquareTrade moved to enforce the mandatory arbitration clause. The arbitration clause appeared in a document accessible via hyperlink in a confirming email from SquareTrade, which was sent to Mr. Starke after he purchased the warranty plan from Amazon. The district court denied the motion and SquareTrade filed an interlocutory appeal to the Second Circuit.

In affirming the district court, the Second Circuit applied New York contract law and asked whether a reasonable argument could be made that Mr. Starke was placed on reasonable or “inquiry” notice of the arbitration clause and thereby assented to arbitration by his conduct. The Second Circuit then conducted a detailed review of all emails exchanged between Mr. Starke and SquareTrade concerning the purchase of this particular warranty plan. In conducting its review, the Second Circuit concluded that there was nothing on the SquareTrade website that would have put Mr. Starke on notice of this arbitration clause. Indeed, there was no reference to the terms and conditions of the protection anywhere on the SquareTrade website. The Second Circuit also took notice that there were links to documents containing terms and conditions of the warranty plan, but the only time Mr. Starke received any link to a document with the arbitration provision after he purchased the plan from Amazon.

The Second Circuit ruled the arbitration clause was unenforceable even though Mr. Starke had previously purchased other warranty plans from Amazon and one through Staples to cover other consumer items.

This case is entirely consistent with traditional concepts in contract law, but the result is nevertheless surprising since there is a strong federal policy favoring arbitration. Many litigants have attempted to avoid the application of arbitration or other forum selection clauses on numerous grounds, including the lack of reasonable notice of same. These arguments often fall on deaf ears because courts usually find there was a reasonable incorporation by reference of the arbitration clause. Starke v. SquareTrade is the rare instance in which the lack of notice of the arbitration clause prevented its enforcement.

David Y. Loh is a member with Cozen O'Connor in New York City, New York.

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