No contract? No arbitration.

Knutson v. Sirius XM Radio, No. 12-56120 (9th Cir. Nov. 10, 2014).

Erik Knutson bought a Toyota, one of whose benefits was a 90-day trial subscription to Sirius satellite radio. During the trial subscription period, Knutson received three telemarketing calls from Sirius. Alleging that these calls violated the Telephone Consumer Protection Act, Knutson filed a class action on behalf of a nationwide class who he said had received similar calls from Sirius.

Sirius, though, filed a motion to compel arbitration, pointing to the customer agreement that had been mailed to Knutson as part of the “Welcome Kit” he received during the 90-day trial period. That customer agreement contained a provision that required “any dispute” to be resolved by arbitration. The district court granted Sirius’s motion to compel arbitration.

The question, however, is whether a valid contract even exists between Knutson and Sirius. Arbitration is a creature of contract. Without a valid contract, you can’t compel somebody to arbitrate.

The Ninth Circuit decides that there’s no valid contract. A contract requires an offer and an acceptance. Here there was no acceptance. By buying the car, Knutson had no idea that he was entering into an agreement with Sirius, since he wasn’t given any documents from Sirius at the time of buying the car. As far as he knew, he was in a contractual relationship only with Toyota, the seller of his car. Nor did Knutson’s use of the service during the 90-day trial period constitute an acceptance. It’s true, concedes the Ninth Circuit, that you can enter into a contract by voluntarily retaining a benefit from the contract. But that’s only true when you know there’s an offer to contract in the first place—and here Knutson had no reason to know that the Welcome Kit contained a contract, since he was under the reasonable impression that he had a contractual relationship only with Toyota, not with Sirius. And while “shrinkwrap” contracts are valid—contracts under which the consumer buys the product before getting the detailed terms of the contract—those contracts only come into being when the contract is called to the attention of the purchaser. Here the contract with Sirius was not called to Knutson’s attention, because, once again, Knutson reasonably thought he had a relationship with Toyota only. 

Because there is no contract at all, there is no agreement to arbitrate. The Ninth Circuit, noting that Toyota and Sirius could have easily solved this problem by including the Sirius agreement along with the Toyota purchase agreement, allows Knutson’s action to proceed in court.