Online terms often govern the relationship between companies and their customers or end-users. At least, that’s what they’re intended to do. As we’ve highlighted in a recent blog, however, the enforceability of online terms and conditions—and in particular, the mandatory arbitration clauses within them—have become increasingly subject to judicial scrutiny, with many judges refusing to enforce online terms when they find an absence of affirmative assent by the user. While the enforceability of online terms is often hotly contested, by far the most litigated issue is the enforceability of arbitration clauses. In fact, the Supreme Court is currently dealing with a case involving an arbitration clause from Coinbase, the largest cryptocurrency exchange in the United States.

For those unfamiliar, arbitration is an out-of-court process where parties have their disputes resolved by a neutral third party called an arbitrator. The American Arbitration Association (AAA) and JAMS, formerly known as Judicial Arbitration and Mediation Services, are two of the largest providers of arbitration services in the U.S. Arbitration is private and typically faster and more convenient than going to court. Mandatory arbitration provisions can be essential for companies with thousands of customers or end-users to keep expensive class action lawsuits and other litigation at bay. But an arbitration agreement isn’t worth the paper it’s written on unless it’s enforceable.

One recent decision involving cryptocurrency exchange OKCoin, Nguyen v. OKCoin USA Inc., 2023 WL 2095926 (N.D. Cal. Feb. 17, 2023), demonstrates the importance of careful drafting and meeting specific requirements with arbitration clauses in online terms for consumers.

Generally, courts deciding whether a dispute is subject to an arbitration agreement must determine the “gateway issue” of whether a valid agreement to arbitrate exists and, if it does, whether the agreement encompasses the dispute at issue. As noted in our previous blog, parties can allow an arbitrator rather than a court to decide those threshold issues, but only where that is expressly set forth in the agreement using a so-called “delegation clause.” 

In Nguyen, the court decided the narrow issues of whether to enforce two delegation clauses in OKCoin’s online terms—one delegation clause to JAMS, and a second “backup” delegation clause to AAA, “in the event that arbitration before JAMS is unavailable or impossible.” Ultimately, the court found the delegation clause to JAMS unenforceable, but the delegation clause to AAA valid, allowing OKCoin to compel arbitration. But why the inconsistent results?

Both JAMS and AAA publish their own minimum standards of procedural fairness for consumers (available here and here, respectively) requiring, among other things, that arbitration clauses be fair, reasonable, and clearly and conspicuously disclosed. Although JAMS has fewer requirements than AAA, JAMS’s policy on consumer arbitrations explains that it will administer arbitration pursuant to a pre-dispute agreement “only if” the arbitration clause complies with its minimum standards of fairness for consumers. Because OKCoin’s terms of service (1) failed to specify that consumers may seek remedies in small claims court; (2) required that the parties split arbitration fees and expenses equally; and (3) required that the arbitration be conducted in San Francisco, California, absent agreement to a different location, the court concluded that the arbitration clause failed to satisfy JAMS’s minimum standards. Thus, the court held that arbitration before JAMS was unavailable, rendering the delegation clause to JAMS void.

In contrast, the court upheld the delegation to AAA because AAA’s consumer rules provide more flexibility, including because an arbitrator has “the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope, or validity of the arbitration agreement or to the arbitrability of any claim[.]” The court noted that, unlike with JAMS, it could not conclude that AAA would refuse to administer the arbitration. AAA states it will decline to administer arbitration where “an arbitration clause contains material violations of the AAA Consumer Due Process Protocol,” but it’s “unclear” what constitutes a material violation because AAA’s rules offer more flexibility than JAMS’ rules. For example, the court noted that AAA’s rules state that agreements “should” make clear that parties can seek relief in small claims court, but “does not appear to explicitly require it.”

Key Takeaways:

  • Arbitration clauses are the one of the most important and most often litigated provisions in online terms and conditions
  • Consumer arbitration clauses must be carefully drafted and meet specific requirements to be enforceable
  • The requirements for popular arbitration service providers, including JAMS and AAA, vary in terms of substance and flexibility
  • Failing to comply with the minimum standards for consumer due process set by JAMS or AAA for arbitration may invalidate an arbitration agreement