Beware of Arbitration Clauses in Terms of Service: Should an Attorney Agree to Them When Investigating a Client’s Claim?
Posted on Categories Arbitration, Arbitration Agreements, Consumer, Court Decisions, Fed Arbitration ActTags , , ,

By Mackenzie Connick*

When determining if there is an agreement to arbitrate, a court should proceed to trial and therefore is not authorized to dismiss a motion to compel until all questions of fact have been resolved.

Knapke v. PeopleConnect, Inc., No. 21-35690 (9th Cir. Jun. 29, 2022), considers whether an attorney can bind a client to an arbitration clause. In the underlying complaint, Barbara Knapke asserts that PeopleConnect, Inc. used her name and likeness on their Website and for advertisements, Classmates.com, without her consent. Knapke’s attorney, Christopher Reilly, created an account on Classmates.com, during which he agreed to the Terms of Service (the “Terms”). The Terms included an arbitration agreement that could have been waived in writing within 30 days of account formation. It is unclear if Reilly was acting as Knapke’s agent or if he had the authority to do so at the time he agreed to the Terms.

Motion to Compel

PeopleConnect moved to compel arbitration, arguing that Knapke was bound by the arbitration agreement signed by her attorney. Knapke does not contest that her claim falls under the arbitration agreement, but rather that she is not bound by the agreement, as she never signed it. She also argues that Reilly had no authority to create an account or sign the agreement on her behalf, pointing out that the Terms did not permit an account to be created on another’s behalf. She further argues that Reilly created the account to satisfy his obligations of due diligence under the Federal Rules of Civil Procedure. The issue at hand is whether Knapke may be bound by her agent’s actions in accepting the Terms.

District Court Declines to Compel

Knapke wanted to pursue both an individual and class action right of publicity claim under Ohio law on behalf of herself and other Ohio residents affected by PeopleConnect’s advertising policies. PeopleConnect moved to compel arbitration based on an arbitration agreement in their Terms of Service and asked for the right to conduct arbitration-related discovery. Knapke is an Ohio resident; PeopleConnect, Inc. is incorporated in Delaware with a principal place of business in Washington. The District Court applied Ohio law and rejected PeopleConnect’s arguments, finding that no evidence existed of Knapke giving Reilly authority. The District Court dismissed PeopleConnect’s motion to compel arbitration as well as its request to proceed with discovery.

Issue on Appeal: Whether an Agreement has Been Formed

On appeal, PeopleConnect argues that Reilly was acting as Knapke’s agent when he created his Classmates.com account. The record, however, does not provide an exact time frame for when an agency relationship was formed. This is a material issue of fact in determining if Knapke is bound by the arbitration provision. Because the District Court did not permit discovery on this issue, the Ninth Circuit holds that the trial court improperly denied the motion. PeopleConnect further argues that Knapke is bound by Reilly’s assent to the Terms.

District Court Reversed

The Circuit Court considers this issue under Washington law, finding the District Court improperly applied Ohio law. Under Washington law, a nonsignatory may be bound under several theories. The Court determined that there still existed a dispute over whether Reilly had “implied actual authority” to act of Knapke’s behalf. An agent may have implied authority to perform the usual and necessary acts associated with the authorized services. A question remained as to whether Reilly created the Classmates.com account with Knapke’s implied authority and warranted further discovery. There also existed a question as to whether Knapke ratified Reilly’s agreement to the Terms. The Court states that: “acquiescence is one method of ratification.” The record did not establish whether Knapke knew of Reilly’s agreement. Therefore, PeopleConnect is also entitled to discovery on this issue. The Ninth Circuit further considered whether Knapke’s status as an undisclosed principal impacted the outcome. Here again, further factual development was necessary to determine whether Reilly intended to act on Knapke’s behalf. Finally, the Court determined that Reilly’s obligations under the Federal Rules were not necessarily determinative; Reilly could have opted out of the arbitration clause but did not. Therefore, the Circuit Court vacated the District Court's decision and remanded the case.

(ed: *This squib was authored by Mackenzie Connick, a 2L at St. John’s University School of Law, interning with the Securities Arbitration Clinic.)