Binding Arbitration Agreements

When a contract contains a binding arbitration agreement, the parties to the contract are generally agreeing to waive their right to go to court when they want to litigate issues that arise under the contract. When the parties arbitrate a claim it  is submitted to an arbitrator who will have the power to make an enforceable decision in the case. An arbitration agreement is enforceable as long as it is not “unconscionable,” meaning it cannot be unfair or oppressive to one party.  If a party fails to read the terms of a contract before signing it, such as an arbitration clause, they cannot use their ignorance as a defense to being held to the terms of the contract. However, a recent case illustrates a unique exception  to this rule.

Erik Knutson, the plaintiff, sued Sirius XM for calling his cell phone without permission. Sirius XM claimed that the suit was subject to a binding arbitration agreement that was part of the service agreement between the two parties. The U.S. Court of Appeals for the Ninth Circuit, however, held that Knutson was not bound to the arbitration provisions in the agreement.

Knutson unknowingly became a Sirius XM customer in 2011 because he bought a truck that came with a free trial subscription to the satellite radio service. A month after the purchase, Knutson received a Sirius XM’s arbitration agreement, which stated that he was bound to arbitrate unless he canceled his satellite radio subscription within three business days.

The Ninth Circuit Court found that Knutson did not consent to arbitration just because he did not cancel his service. The Court’s decision reversed a 2012 ruling by a judge from the U.S. District Court for the Southern District of California.

The court reasoned that, “a reasonable person in Knutson’s position could not be expected to understand that purchasing a vehicle . . . would simultaneously bind him or her to any contract with Sirius XM, let alone one that contained an arbitration provision without any notice of such terms.”

The court also said this case warranted an exception to the general rule that it cannot avoid a contract’s provisions by failing to read the terms, citing the U.S. Court of Appeals for the Second Circuit’s 2012 decision in Schnabel v. Trilegiant, which held that a party cannot be held to a contract’s arbitration provision if he or she doesn’t know that the contract exists.

Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses.  Contact us at (310) 277-7747 to see how we can help you with your business law concerns.