Business Law

Starke v. SquareTrade, Inc. (2nd. Cir.) – Arbitration Clause Contained in Consumer Contract Is Unenforceable Because Provision Was So Obscure That It Never Became Part of Contract

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The following is a case update prepared by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, analyzing a recent decision of interest:


The Second Circuit has held that an arbitration clause contained in a consumer contract was unenforceable because the provision was so obscure that it never became part of the contract at all. [Starke v. SquareTrade, Inc., 2019 Westlaw 149628 (2nd. Cir.).]

Facts: A consumer purchased a product and also purchased a “consumer protection plan” for the product. Later, the consumer brought suit against the vendor of the protection plan. The vendor moved to compel arbitration, asserting the benefit of an arbitration clause contained in the parties’ contract.

The consumer opposed the motion, arguing that the arbitration clause was never part of the contract because it was buried on the vendor’s webpage. The district court denied the motion to compel, and the Second Circuit affirmed.

Reasoning: The court first acknowledged that under the Federal Arbitration Act (“FAA”), 9 U.S.C.A. §2, there is a strong policy favoring the enforcement of arbitration provisions, notwithstanding state law to the contrary. The court reasoned, however, that if an offeree does not have actual or inquiry notice of the terms of the contract, the offeree has not meaningfully assented to those terms.

The court then held that the design of the webpage meant that the consumer had no reasonable notice of the existence of the arbitration clause. The interface was cluttered and distracting. Therefore, the arbitration clause never became part of the parties’ contract at all.

Author’s Comment: This is the latest salvo in a running battle between the Supreme Court and most of the rest of the federal court system. The Supreme Court has construed the FAA very broadly in an effort to enforce arbitration clauses, thus depriving consumers of the opportunity to litigate their claims in court, striking down state rules that affect arbitration disproportionately. Many trial courts (and a few circuit courts) have invoked the doctrines of procedural and substantive unconscionability, only to run up against an expansive reading of the FAA.

Here, the Second Circuit has developed a different way of approaching the problem: instead of reasoning that the arbitration clause was an unenforceable contractual term, the court held that the provision never even became part of the contract because it was hidden: the required “meeting of the minds” never happened. The border between procedural unconscionability (“too obscure to be enforced”) and “no meeting of the minds” is very blurry. It will be interesting to see whether the Supreme Court grants certiorari and whether the Court stretches the FAA once again, holding that the Second Circuit’s approach disproportionately affects arbitration clauses (which are, of course, well-hidden by those who draft consumer contracts). Perhaps the “plain language” faction of the Court will take control and will actually read 9 U.S.C.A. § 2 (West):

A written provision in any … contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

That last clause means what it says: an arbitration provision is valid, “save upon such grounds as exist at law or in equity for the revocation of any contract.” If Congress had wanted to add a limiting qualifier to that clause, it would have added “but not if those grounds have a disproportionate effect on arbitration clauses.” There is a good reason that arbitration clauses are disproportionately attacked as unconscionable: it is because they are disproportionately unconscionable. That fact should not shield them from attack.

For discussions of cases dealing with related issues, see:

  • 2018-21 Comm. Fin. News. NL 42, Arbitration Clause in CC&Rs is Enforceable Against Homeowners, and FAA Preempts State Contract Doctrine of Unconscionability.
  • 2013-28 Comm. Fin. News. NL 58, Arbitration Clause Contained in Contract of Adhesion Is Valid Despite State Rule Governing Adhesion Contracts Because State Rule Disproportionally Invalidates Arbitration Clauses.

These materials were written by Dan Schechter, Professor Emeritus, Loyola Law School, Los Angeles, for his Commercial Finance Newsletter, published weekly on Westlaw. Westlaw holds the copyright on these materials and has permitted the Insolvency Law Committee to reprint them

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