No Contract Formed by New Car Satellite Radio Trial Subscription Offer

This case is not a copyright case or even an intellectual property law case.  However, this case discusses contract formation issues that every intellectual property owner would benefit from knowing.  This case discusses contract formation for a digital service.  Since many business owners rely on licenses (a type of contract) to help protect their intellectual property rights, understanding when and how a contract is formed is essential.

Satellite radio service Sirius XM Radio Inc. broadcasts commercial-free radio channels to over 20 million subscribers.  A trial subscription of Sirius XM radio comes with many new vehicles. Erik Knutson activated the Sirius XM radio trial subscription that came with his new truck on November 7, 2011.  Knutson afterward received telemarketing calls on his cell phone from Sirius XM.  Knutson brought a class action lawsuit against Sirius XM, claiming federal Telephone Consumer Protection Act violations.  The district court ruled that Knutson was bound by the arbitration provision in the Sirius XM Customer Agreement and dismissed Knutson’s case.  The Ninth Circuit Court of Appeals reversed and remanded.

Knutson received a Welcome Kit from Sirius XM via snail mail over a month after he activated his trial subscription.  The Welcome Kit included a copy of the Sirius XM Customer Agreement.  The Sirius XM Customer Agreement states that it legally binds the customer to the agreement unless the customer cancels the trial subscription within 3 business days of activation.  The Customer Agreement contains an arbitration provision in which the consumer waives the right to go to court.  Consumers also waive the right to proceed against Sirius XM on a class action basis under the Customer Agreement. 

Arbitration agreements are generally valid, irrevocable and enforceable under the Federal Arbitration Act (FAA).  9 U.S.C. §2.  A court may refuse to enforce an arbitration agreement when there are grounds to revoke the contract. 

Under the FAA, the basic role for courts is to determine (1) whether a valid agreement to arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute at issue.

(Opinion pdf page 10).

The Ninth Circuit “concluded that no valid agreement to arbitrate exists between Knutson and Sirius XM because Knutson never assented to the Customer Agreement.”  (Opinion pdf page 10).

“Arbitration is a matter of contract.”  (Opinion pdf page 10).  State law governs whether the parties agreed to arbitrate. 

A party cannot be required to submit to arbitration any dispute which he has not agreed so to submit.  It is undisputed that under California law, mutual assent is a required element of contract formation.  Mutual assent may be manifested by written or spoken words, or by conduct, and acceptance of contract terms may be implied through action or inaction. Thus, an offeree, knowing that an offer has been made to him but not knowing all of its terms, may be held to have accepted, by his conduct, whatever terms the offer contains.  Courts must determine whether the outward manifestations of consent would lead a reasonable person to believe the offeree has assented to the agreement.

(Opinion pdf page 11).

The Ninth Circuit analyzed 1) whether a reasonable person in Knutson’s situation would understand that he had agreed to the Sirius XM Customer Agreement arbitration provision when he bought his new car, and 2) whether Knutson’s conduct in failing to cancel the Sirius XM trial subscription after he received the Customer Agreement indicates that he agreed to the arbitration provision.

An offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he was unaware, contained in a document whose contractual nature is not obvious. This principle of knowing consent applies with particular force to provisions for arbitration.  If a party wishes to bind in writing another to an agreement to arbitrate future disputes, such purpose should be accomplished in a way that each party to the arrangement will fully and clearly comprehend that the agreement to arbitrate exists and binds the parties thereto.

(Opinion pdf page 12).

Knutson did not receive documents from Sirius XM when he bought his new car.  He also did not know he was entering into a contractual relationship with Sirius XM by using the trial subscription.  He thought the Sirius XM trial subscription was complimentary.

A reasonable person in Knutson’s position could not be expected to understand that purchasing a vehicle from Toyota 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. Neither expressly or impliedly, neither directly or indirectly, did the parties ever discuss arbitration or bargain about it, and certainly they reached no agreement thereon.

(Opinion pdf page 13).

The Ninth Circuit ruled that Sirius XM did not clearly and effectively communicate an offer to Knutson by mailing him the Customer Agreement. 

Knutson would only have had notice of his opportunity to cancel his subscription, or the effect of his continued use of the service, if he opened the Welcome Kit from Sirius and read all of the documents therein, which—in view of his lack of awareness of any contractual relationship with Sirius—he had no reason to do. He could not be obligated to act where there was no effective notice that action was required. Accordingly, Knutson’s continued use of the service after his receipt of the Customer Agreement did not manifest his assent to the provisions in the Customer Agreement.

(Opinion pdf pages 13 -14).

Sirius XM next argued that its Customer Agreement was a valid “shrinkwrap” agreement.  In a shrinkwrap agreement, the consumer does not receive the detailed contract terms until after the consumer makes the purchase. 

The Ninth Circuit ruled that Sirius XM’s shrinkwrap argument was irrelevant.  Knutson did not purchase anything from Sirius XM or know that he was entering into a contractual relationship with Sirius XM.

The Ninth Circuit provided further reasons why the Customer Agreement arbitration clause was unenforceable.

Knutson could not assent to Sirius XM’s arbitration provision because he did not know that he was entering into a contract with Sirius XM. Knutson did not affirmatively enroll in a subscription service with Sirius XM. He did not separately provide his personal information to Sirius XM. He did not indicate that he had read the terms of the Sirius XM Customer Agreement. And he did not pay Sirius XM at any point during the trial subscription period. Instead, Knutson responded to an offer that did not carry an immediately visible notice of the existence of contract terms or require unambiguous manifestation of assent to those terms.

(Opinion pdf page 19).

The Ninth Circuit reversed the district court’s decision and remanded the case to the district court.

This case is Knutson v. Sirius XM Radio, Inc., No. 12-56120, Ninth Circuit Court of Appeals.

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