Nat'l Fed'n of the Blind v. Container Store, Inc.
U.S. Court of Appeals9/14/2018
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Full Opinion
United States Court of Appeals
For the First Circuit
No. 16-2112
NATIONAL FEDERATION OF THE BLIND, on behalf of their members and
themselves; MIKA PYYHKALA, on behalf of herself and all others
similarly situated; LISA IRVING, on behalf of herself and all
others similarly situated; JEANINE KAY LINEBACK, on behalf of
herself and all others similarly situated; ARTHUR JACOBS, on
behalf of himself and all others similarly situated,
Plaintiffs, Appellees,
MARK CADIGAN, on behalf of himself and all others similarly
situated; HEATHER ALBRIGHT, on behalf of herself and all others
similarly situated,
Plaintiffs,
v.
THE CONTAINER STORE, INC.,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nathaniel M. Gorton, U.S. District Judge]
Before
Thompson, Circuit Judge,
Souter, Associate Justice,*
And Selya, Circuit Judge.
Gregory F. Hurley, with whom Michael J. Chilleen and Sheppard,
Mulin, Richter & Hampton LLP were on brief, for Appellants.
* Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
Karla Gilbride, with whom Jeremy Y. Weltman, Kerstein, Coren,
Lichtenstein LLP, Jana Eisinger, Law Office of Jana Eisinger, Dani
Zylberberg, Public Justice, P.C., Scott C. LaBarre, LaBarre Law
Offices, P.C., Timonthy Elder, and TRE Legal Practice were on
brief, for Appellees.
September 14, 2018
THOMPSON, Circuit Judge. Appellees/Plaintiffs, the
National Federation of the Blind ("NFB"), Mika Pyyhkala, Lisa
Irving, Jeanine Kay Lineback, and Arthur Jacobs ("individual
plaintiffs"),1 filed a complaint in district court against
Appellant/Defendant, the Container Store, Inc. ("Container
Store"), alleging several violations of federal and state
discrimination laws. The allegations stem from the Container
Store's failure to utilize at the time tactile keypads on its
point-of-sale ("POS") devices in its stores that could be
independently used by customers who are blind. Citing an
arbitration provision in the terms and conditions of a loyalty
program of which the individual plaintiffs were members, the
Container Store sought to stay the proceedings in district court
and compel arbitration.2 The district court denied the motion and
the Container Store appealed to this court. Finding no error, we
affirm.
1 Two other named plaintiffs, Mark Cadigan and Heather
Albright, are not parties to this appeal. Defendant never sought
to have their claims moved to arbitration because they were not
enrolled in the loyalty program (where apparently the arbitration
provision was at play).
2 The Container Store also sought to enforce a class action
prohibition found in the terms and conditions of the loyalty
program; however, neither party made specific arguments regarding
this provision either to the district court or to us. Therefore,
we consider only its motion to compel arbitration and treat as
waived for purposes of this appeal its attempt to enforce any class
action waiver entered into by Plaintiffs.
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BACKGROUND
A. The Container Store
The Container Store is devoted to selling storage and
organization products. At the time this litigation commenced in
2015, it operated roughly seventy stores in the United States.3
The Container Store offers a loyalty program to its customers,
known as the POP! Program, where customers are given a card to use
during their purchases to accumulate redeemable points.
Membership offers customers several perks, including discount
coupons and special deals. The loyalty program also gives
customers additional benefits including the ability to get full
refunds for purchased products without a receipt.
Enrollment in the loyalty program can be done in-store
or online; for in-store enrollment, customers need to use the
Container Store's POS devices to enter their contact information
-- specifically, phone numbers and email addresses. Customers
must also register their consent to the terms and conditions of
the program by checking a box that appears on the touch screen POS
device indicating agreement. Customers wanting to receive a copy
of the terms and conditions on the spot may do so only upon request
to the store associate facilitating the enrollment process.
Pertinent here, the terms and conditions of the loyalty program
3These include stores in the states Plaintiffs reside: 3 in
Massachusetts, 11 in California, 4 in New York, and 12 in Texas.
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contain a mandatory arbitration and class action waiver provision,
found on the fourth page, which provides the following:
You agree that The Container Store and you
will resolve any disputes through binding and
final arbitration instead of through court
proceedings. YOU HEREBY WAIVE ANY RIGHT TO A
JURY TRIAL OF ANY DISPUTE YOU HAVE WITH THE
CONTAINER STORE. NEITHER YOU NOR THE CONTAINER
STORE MAY BRING A CLAIM AGAINST THE OTHER AS
A CLASS ACTION, REPRESENTATIVE ACTION, OR
PRIVATE ATTORNEY GENERAL ACTION. NEITHER YOU
NOR THE CONTAINER STORE MAY ACT AS A PRIVATE
ATTORNEY GENERAL OR CLASS REPRESENTATIVE, NOR
PARTICIPATE AS A MEMBER OF A CLASS OF
CLAIMANTS WITH RESPECT TO ANY DISPUTE OR CLAIM
BETWEEN US. These POP! Program terms evidence
a transaction in interstate commerce, and thus
the arbitration will be subject to the Federal
Arbitration Act . . . .
In the event of any dispute concerning the
POP! Program or these terms, the parties
unconditionally and irrevocably agree the
dispute will be resolved by arbitration . . .
exclusively in Dallas, Texas, in accordance
with the rules of the American Arbitration
Association. The arbitration will be heard
and determined by a single arbitrator. The
arbitrator's decision will be final and
binding upon the parties and may be enforced
in any court of competent jurisdiction. The
prevailing party will be entitled to recover
its attorneys' fees and arbitration costs from
the other party. . . .
Once enrollment is complete, a "welcome" email is sent
to the new member also containing an electronic link to the terms
and conditions. Thereafter, members are sent monthly promotional
emails as part of the loyalty program that likewise contain a link
to the terms and conditions. To register individual purchases to
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their loyalty card, customers must provide their phone number or
email address to the store clerk at the time of each purchase.
B. The Plaintiffs
Founded in 1940, the NFB is the largest and oldest
advocacy organization for individuals who are blind. It initiated
this suit against the Container Store on behalf of (and in addition
to) the individual plaintiffs who are blind persons who shop at
the Container Store (collectively, "Plaintiffs"). Plaintiffs
allege they cannot enroll or participate in the loyalty program
without having to verbally disclose their email addresses or phone
numbers to the sales associate (and presumably, also to those
standing nearby who can overhear) because of the Container Store's
exclusive use of visual touch screen interfaces, without tactile
keypads on its POS devices.4 Plaintiffs further allege that blind
persons are unable to enter their personal identification numbers
("PINs") when making certain debit and credit card purchases due
to the machine's inaccessibility to them.
Pyyhkala, Irving, and Jacobs ("the in-store plaintiffs")
each enrolled in the loyalty program while at the Container Store
with the assistance of a sales associate. According to the in-
store plaintiffs, none were presented with the terms and conditions
4 Plaintiffs allege that they notified the Container Store of
this problem prior to filing suit, but that the Container Store
failed to address it.
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of the loyalty program, including the mandatory arbitration
provision and class action waiver, nor did they agree to those
terms.
Meanwhile, Plaintiff Lineback, who had originally
attempted to enroll in the loyalty program at her local store but
was unable to do so because she could not use the POS device,5
enrolled from her computer at her home. As part of her at-home
enrollment process, Lineback had to first check a box to the
immediate left of "I agree to the POP! terms and conditions"
(hyperlinked to the terms and conditions). While it is undisputed
that she enrolled, Lineback does not recall being presented with
or reviewing any arbitration agreement.
C. This Litigation
As a class action in September 2015, Plaintiffs filed a
twelve-count first amended complaint6 alleging a violation of Title
II of the Americans with Disabilities Act ("ADA"), 42 U.S.C.
5At that time, an Accessibility Overlay, which contained
tactical portions and was used by the Container Store in an attempt
to enable visually impaired customers to use the POS device, was
being utilized. The overlay, however, did not make the POS device
discernable to Lineback.
6Plaintiffs later filed a second amended complaint following
the decision on Defendant's motion, but we cite the first amended
complaint given it was the operative complaint when the motion was
decided.
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§ 12181, several violations of Massachusetts, New York, Texas, and
California discrimination laws,7 and seeking declaratory relief.
The complaint alleges that the Container Store "is
knowingly denying blind individuals throughout the United States
equal access to the goods and services it provides to its sighted
customers who shop at its retail store." Specifically, the
complaint highlights that because of the Container Store's use of
a visual, touch screen interface on its POS device at many of its
locations, blind customers are unable to: (1) independently pay
for merchandise at the Container Store with a debit or credit card
requiring a PIN; (2) enroll in the loyalty program; or (3) register
each purchase they make to their loyalty program membership.
Instead, and unlike sighted customers, Plaintiffs have to verbally
disclose this private information to the store clerk (and
presumably anyone who is nearby and can hear), thus subjecting
them to privacy concerns every time they shop at the Container
Store.
7 These allegations include violations of the following: the
Massachusetts Public Accommodations Act, Mass. Gen. Law ch. 272,
§ 98; the Massachusetts Equal Rights Act, Mass. Gen. Law ch. 93,
§ 103; the Consumer Protection Act, Mass. Gen. Law ch. 93A, § 9;
the Unruh Civil Rights Act, Cal. Civ. Code §§ 51 et seq.; the
California Disabled Persons Act, Cal. Civ. Code §§ 54-54.3; the
Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200, et seq.;
the New York Human Rights Law, N.Y. Exec. Law §§ 290 et seq.; the
New York Civil Rights Law, N.Y. Civ. Rights Law §§ 40 et seq.; the
New York City Human Rights Law, NYC Admin. Code §8-107; and the
Texas Human Resources Code, Tex. Hum. Res. Code § 121.001, et seq.
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In response to the amended complaint, the Container
Store, citing the relevant provision in the terms and conditions
of the loyalty program, filed a motion to compel arbitration,
enforce class action waivers, and to stay action. Attached to and
in support of its motion, Defendant submitted an affidavit of Joan
Manson, its Vice President of Loss Prevention, Payroll, Benefits
and Legal, in which she outlined both the at-home and in-store
process of enrolling in the loyalty program. Plaintiffs objected
to the motion on the basis that the Container Store had "fail[ed]
to demonstrate that any enforceable contract to arbitrate was ever
formed." Plaintiffs also claimed that certain terms in the loyalty
program (specifically, the change-in-terms provision) were
illusory and that the arbitration provision was unconscionable.
A magistrate judge filed a report and recommendation on
the Container Store's motion, which denied its requested relief
and the Container Store objected to the report and recommendation
before the district judge. In support of its objection, the
Container Store submitted a new piece of evidence: excerpts from
a training manual for Container Store employees indicating they
were trained to "[a]llow the customer the opportunity to review
[the terms and conditions on the POS device/screen] and then ask
them to press the I Accept button," and that, "[i]n the event the
customer cannot enter their information on the tablet and would
like to enroll in [the loyalty program], at the customer's request,
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you can turn the tablet around and enter the information on the
customer's behalf." The Container Store did not, however, present
any evidence that the store clerk in the relevant transactions did
in fact read the terms and conditions to Plaintiffs, nor that the
in-store plaintiffs were made aware that terms and conditions
existed.8
In a written decision adopting the magistrate judge's
report and recommendation, the district court denied Defendant's
motion to compel arbitration, enforce class waivers, and stay
action -- concluding that this one piece of new evidence did not
change its agreement with the magistrate judge's recommendation.
First, it held that pursuant to the requirements of the ADA, the
Container Store did not provide Plaintiffs the "minimal level of
notice" that by enrolling in the loyalty program they were agreeing
to waive their rights to pursue any future ADA claim in court --
thus, any arbitration provision was not enforceable as to
Plaintiffs' ADA claims. Second, as to Plaintiffs' state-law
claims, the district court found (contrary to the Container Store's
position9) that it was the proper forum to decide whether
8
A hearing on the pending motion was held on March 9, 2016
but a transcript was not provided to this court.
9
We'll talk more about this later -- the Container Store
insisted then (and does again now) that the arbitrator should
decide the merits of Plaintiffs' "we-never-agreed-to-arbitrate"
defense.
- 10 -
Plaintiffs had in fact entered into an agreement to arbitrate any
future dispute with the Container Store. It concluded that
pursuant to Massachusetts law no contract to arbitrate was formed
between the Container Store and any of the in-store plaintiffs
primarily because there was no evidence that the store clerk
informed them of the existence of any terms and conditions
applicable to the loyalty program. It rejected the Container
Store's argument that the in-store plaintiffs were on constructive
notice of the terms. In a footnote, the district court likewise
rejected the Container Store's "suggestion" at oral argument that
by continuing enrollment in the loyalty program, in-store
plaintiffs had ratified the arbitration agreement -- therefore
rendering it enforceable. In doing so, it highlighted that the
Container Store had wholly failed to present any evidence that the
in-store plaintiffs reaped any benefits of the loyalty program.
Lastly, the district court found that Lineback -- unlike
the in-store plaintiffs -- had entered into an agreement when she
enrolled in the loyalty program at home and was "bound by the
[l]oyalty [p]rogram's terms and conditions." It concluded,
however, that she too should not be compelled to arbitrate any of
her claims because pursuant to Texas law10 the agreement to
arbitrate was illusory as to all Plaintiffs and therefore
10The terms and conditions of the loyalty program provide
that Texas law applies to any dispute between the parties.
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unenforceable (because it contained a change-in-term provision
that allowed the Container Store to unilaterally change the terms
of the agreement and was silent on that term's retroactive
application). It also found that the agreement was unconscionable
with respect to the in-store plaintiffs (but not Lineback).
Accordingly, the judge entered an order denying the
Container Store's motion to compel arbitration, enforce class
action waiver, and stay action. Defendant appealed to this court.11
DISCUSSION
A. Standard of Review
We review a district court's denial of a motion to compel
arbitration de novo. Kristian v. Comcast Corp., 446 F.3d 25, 31
(1st Cir. 2006). "In conducting our inquiry, '[w]e are not wedded
to the lower court's rationale, but, rather, may affirm its order
on any independent ground made manifest by the record.'" Campbell
v. Gen. Dynamics Gov't Sys. Corp., 407 F.3d 546, 551 (1st Cir.
2005) (quoting InterGen N.V. v. Grina, 344 F.3d 134, 141 (1st Cir.
2003)).
B. Arguments
On appeal, the Container Store characterizes this case
as a "classic[] example of judicial hostility towards arbitration"
11The district court later granted the Container Store's
motion to stay any proceedings in district court pending this
appeal.
- 12 -
and assigns five errors to the district court's decision.
According to the Container Store, the district court overstepped
its boundaries and erred as a matter of law when it: (1) ruled in
the first instance on whether Plaintiffs had agreed to arbitrate
all their claims -- an issue it insists should have been decided
not by the court but by an arbitrator; (2) found that the parties
had not formed an agreement to arbitrate their ADA or state-law
claims; (3) determined that Plaintiffs had not ratified post
initial enrollment the loyalty program agreement (including the
arbitration provision) when they participated in its loyalty
program after signing up; (4) found the contract was illusory; and
(5) ruled the contract was unconscionable.
For their part, Plaintiffs maintain that the district
court got everything right.12
12
As a threshold matter, Plaintiffs claim the Container Store
has forfeited any right to appeal the magistrate judge's report
and recommendation, which the district court adopted. Plaintiffs
argue that the Container Store's objection to the report and
recommendation was untimely pursuant to Federal Rule of Civil
Procedure 72(a) and therefore not preserved for appellate review.
This argument can be easily dismissed. Although the magistrate
judge ordered that any objection be filed within fourteen days of
the report and recommendation's entry, and Defendants objected on
the seventeenth day, Rule 6(d) -- relating to parties being served
electronically (as was the case here) -- awards a three-day
extension. Fed. R. Civ. P. 6(d). Rule 6(d) was later amended to
disallow a three-day extension on documents served electronically,
but this amendment was not effective until December 1, 2016 --
roughly eight months after the applicable filings. Because the
three-day extension was still in effect, Defendant's objection was
timely and, consequently, the district court appropriately
considered it, leading to the appeal before this court. See Park
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C. Merits
1. Legal Framework of Arguments Presented
We begin with a brief primer on the relevant statutory
framework in order to better understand the parties' arguments.
Almost a century ago (in 1925), Congress passed the Federal
Arbitration Act ("FAA") "to replace judicial indisposition
to arbitration with a 'national policy favoring [it] and
plac[ing] arbitration agreements on equal footing with all other
contracts.'" Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S.
576, 581 (2008) (quoting Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 443 (2006)). As enacted, the FAA promotes
a liberal federal policy favoring arbitration and guarantees that
"[a] written provision in . . . a 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." 9
U.S.C. § 2.
Section 3 of the FAA, 9 U.S.C. § 3, affords a mechanism
by which a party can request a court to stay a judicial proceeding
when the matter before the court involves an issue governed by an
agreement to arbitrate. Section 4, 9 U.S.C. § 4, allows a party
Motor Mart, Inc. v. Ford Motor Co., 616 F.2d 603, 605 (1st Cir.
1980). We therefore proceed to the merits.
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aggrieved by another party's refusal to arbitrate to petition a
district court to compel arbitration in accordance with the
parties' preexisting agreement.
A party seeking to compel arbitration "must demonstrate
that a valid agreement to arbitrate exists, that the movant is
entitled to invoke the arbitration clause, that the other party is
bound by that clause, and that the claim asserted comes within the
clause's scope." Soto-Fonalledas v. Ritz-Carlton San Juan Hotel
Spa & Casino, 640 F.3d 471, 474 (1st Cir. 2011) (internal quotation
marks omitted).
However, "[a] court may order parties to arbitrate a
given dispute only if they have agreed to submit such a dispute to
arbitration." Escobar-Noble v. Luxury Hotels Int'l of P.R., Inc.,
680 F.3d 118, 121 (1st Cir. 2012). Therefore, "a court should not
compel arbitration unless and until it determines that the parties
entered into a validly formed and legally enforceable agreement
covering the underlying claims(s)." Id. at 121-22. "To satisfy
itself that such agreement exists, the court must resolve any issue
that calls into question the formation or applicability of the
specific arbitration clause that a party seeks to have the court
enforce." Granite Rock Co. v. Int'l Bhd. of Teamsters, 561 U.S.
287, 297 (2010).
The requirement that a party seeking to compel
arbitration establish that a contract to arbitrate was formed
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recognizes that, "[t]hough a person may, by contract, waive his or
her right to adjudication, see 9 U.S.C. § 2, there can be no waiver
in the absence of an agreement signifying an assent." McCarthy v.
Azure, 22 F.3d 351, 355 (1st Cir. 1994). In this manner,
"arbitration is a matter of contract," AT&T Techs., Inc. v. Commc'n
Workers, 475 U.S. 643, 648 (1986) (quoting United Steelworkers v.
Warrior & Gulf Navig. Co., 363 U.S. 574, 582 (1960)), and for the
most part, general principles of state contract law control the
determination of whether an agreement to arbitrate exists, see
Perry v. Thomas, 482 U.S. 483, 492 n.9 (1987) ("[S]tate law,
whether of legislative or judicial origin, is applicable if that
law arose to govern issues concerning the validity, revocability,
and enforceability of contracts generally."); see also Mirra Co.
v. Sch. Admin. Dist. # 35, 251 F.3d 301, 304 (1st Cir. 2001);
Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d
1, 19 (1st Cir. 1999).13
13 The parties dispute whether Massachusetts or Texas law
applies in this case. This litigation commenced in Massachusetts.
Therefore, Plaintiffs contend Massachusetts law applies.
Meanwhile, as we previously indicated in footnote 10, the terms of
the loyalty program specify that Texas law applies to any dispute
between the parties. Therefore, the Container Store asks us to
apply Texas law. We agree with the district court that the
principles governing our decision are so fundamental and basic,
the outcome does not change whether we apply Massachusetts or Texas
law. Compare Momentis U.S. Corp. v. Weisfeld, 05-13-0105-CV, 2014
WL 3700697, at *2 (Tex. App. July 22, 2014) (pursuant to Texas
law, a party seeking to compel arbitration must show that the
agreement meets all contract elements such as offer, acceptance,
meeting of the minds, consent, and consideration), with Ajemian v.
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Pursuant to established Supreme Court precedent,
however, there's an important distinction between arguments
challenging the validity of an agreement and those challenging an
agreement's formation. See Buckeye, 546 U.S. at 444 n.1 ("The
issue of the contract's validity is different from the issue [of]
whether any agreement . . . was ever concluded. Our opinion today
addresses only the former."); Rent-A-Center, West, Inc. v.
Jackson, 561 U.S. 63, 70 n.2 (2010) (same).
"[C]ontract law defines formation as acceptance of an
offer on specified terms." Granite Rock Co., 561 U.S. at 304 n.11;
TLT Const. Corp. v. RI, Inc., 484 F.3d 130, 137 (1st Cir. 2007).
One could challenge the formation of a contract by claiming one of
the essential elements (offer, acceptance, and consideration) is
missing. See, e.g., Amedisys, Inc. v. Kingwood Home Health Care,
LLC, 437 S.W.3d 507, 513 (Tex. 2014). A challenge to formation
can also be done by showing that one party never agreed to the
terms of the contract, that a signatory did not possess the
authority to commit the principal, or that the signor lacked the
mental capacity to assent. Buckeye, 546 U.S. at 444 n.1; see also
In re Morgan Stanley & Co., 293 S.W.3d 182, 187 (Tex. 2009)
Yahoo!, Inc., 987 N.E.2d 604, 612 (Mass. App. Ct. 2013) (as the
"essential" elements to forming a contract pursuant to
Massachusetts law, an "unambiguous manifestation of assent,"
offer, acceptance, and bargained-for exchange of consideration are
required). Accordingly, we apply Defendant-requested Texas law
(because even doing so, it still cannot prevail).
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(concluding that in Texas, issues of mental capacity call into
question the ability of a party to assent and, therefore, challenge
the existence of a contract). Under Texas law, asserting that an
agreement is illusory raises a challenge to the formation of the
agreement because when an agreement is illusory it is unsupported
by consideration, and thus, "there is no contract." See Lizalde
v. Vista Quality Mkts., 746 F.3d 222, 225–26 (5th Cir. 2014)
(finding that an agreement to arbitrate is illusory if one party
can avoid arbitration by amending or eliminating the arbitration
clause).
On the other hand, a challenge to validity requires
consideration of the enforceability of the agreement and if it is
void or voidable. Granite Rock Co., 561 U.S. at 301; Buckeye,
546 U.S. at 448-49. Like formation, this challenge requires a
look at relevant state law. Perry v. Thomas, 482 U.S. 483, 492
n.9 (1987). Some challenges that attack the validity of an
agreement include duress, inducement, and fraud. See S.C. Maxwell
Family P'ship, Ltd. v. Kent, 472 S.W.3d 341, 344 (Tex. App. 2015)
(stating that in Texas fraud or inducement are challenges to a
contract's validity).14
14 See also 7 Philip L. Bruner & Patrick J. O'Connor
Construction Law § 21:73 (2018) ("Broad arbitration agreements
have been found to cover challenges to the validity of the entire
contract on such grounds as duress, unconscionability, coercion,
frustration of purpose, lack of mutuality, capacity, confusion in
signing and, of course, fraud.") (collecting cases).
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Even within the "validity challenge" realm, there's
another distinction: A challenge to the validity of an entire
contract containing an arbitration provision must go to an
arbitrator. See Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
388 U.S. 395, 402-04 (1967).15 Meanwhile, a challenge to the
validity of the arbitration provision itself must be decided by
the court. Buckeye, 546 U.S. at 443-45.
2. Discussion
a. Forum (in-store plaintiffs)
The Container Store's first argument is that the in-
store plaintiffs' objection to its motion to compel arbitration
should have been rejected below because their challenge
(supposedly) is not based on defects in contract formation but on
their inability to read the entire agreement -- meaning (at least
as the Container Store sees it) their challenge is an attack on
the validity of the loyalty program agreement in its entirety (and
not just the validity of the arbitration provision itself). And
the Container Store believes this is precisely the issue that
belongs before an arbitrator, not the court.
15 In Prima Paint, the Supreme Court established the
severability doctrine. 388 U.S. at 402-04. This doctrine (with
certain limitations) requires that challenges to the
enforceability of the parties' agreement as a whole rather than
specifically directed at the agreement to arbitrate go to an
arbitrator. Id. In essence, it creates a legal fiction in which
the arbitration agreement is a separate or separable contract from
the underlying contract that is being challenged. See id.
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The in-store plaintiffs disagree with the Container
Store's characterization of their own arguments. They highlight
that the Container Store's motion only sought to compel enforcement
of the arbitration clause (and enforce class action waivers and
stay of the proceedings), and "Plaintiffs' opposition -- including
their argument that an agreement was never formed -- was directed
specifically at the [arbitration] [c]lause." Therefore, they
insist they are challenging the formation of the arbitration
agreement.
A close look at the heart of their arguments in support
of their objection to arbitrate reveals they are challenging the
very basic elements of contract formation relative to the
arbitration provision: i.e., offer and acceptance of same. The
in-store plaintiffs primarily argue that they could not have
accepted the terms of a contract to arbitrate that was never
communicated to them. See Dialysis Access Ctr., LLC, 638 F.3d at
378 (a challenge to offer and acceptance is a challenge to contract
formation). Therefore, we reject the Container Store's attempt to
re-package Plaintiffs' arguments as one regarding validity of the
entire agreement rather than formation of a contract to
arbitrate.16
16
While Plaintiffs describe their challenge as a challenge
to the formation of the arbitration agreement, they also recognize
the broader implication (as the district court did) that "any
failure by Plaintiffs to consent would render the entire contract
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Accordingly, we agree with the district court that it
was the proper forum to consider the issue. See Buckeye, 546 U.S.
at 443-45.
b. Contract Formation
The essential elements to forming a contract pursuant to
Texas law include: "(1) an offer, (2) an acceptance, (3) a meeting
of the minds, (4) each party's consent to the terms, and
(5) execution and delivery of the contract with the intent that it
be mutual and binding." DeClaire v. G & B McIntosh Family Ltd.
P'ship, 260 S.W.3d 34, 44 (Tex. App. 2008) (citation omitted).
There can be no mutual assent or meeting of the minds -- and hence
no contract -- if the one to whom the offer is supposedly made is
unaware of the contract's terms and conditions. See Broadnax v.
Ledbetter, 99 S.W. 1111, 1111-12 (Tex. 1907); see also 64 Tex.
Jur. Rewards § 8 (3d ed. 2018). And "[t]he offer must be clear
and definite just as there must be a clear and definite acceptance
of all terms contained in the offer." Advantage Physical Therapy,
Inc. v. Cruse, 165 S.W.3d 21, 26 (Tex. App. 2005).
a nullity." On that note, Plaintiffs argue in the alternative
that even if their argument is viewed as a challenge to the
formation of the entire agreement containing an arbitration
provision, the court was still the proper forum. Whether narrow
(just the arbitration clause) or broad (the entire agreement),
according to Plaintiffs, challenges to formation always belong
with the court. Because we agree that their challenge is to the
formation of the arbitration agreement, we need not reach this
issue at this time. We will, however, have to cross that bridge
when dealing with Plaintiff Lineback.
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The Container Store -- which sought arbitration and has
the burden of showing that an arbitration agreement had been
entered into by the parties -- maintains that even if we decide
that the district court was the proper forum to consider
Plaintiffs' objection to its motion to compel arbitration (as we
just did), it should still win on the merits because it has met
its burden and the district court erred in deciding otherwise.
The Container Store's argument is two-fold and we'll take each
argument in turn.
First, it insists that the in-store plaintiffs were
aware of all of the terms and conditions of the loyalty program,
including the arbitration agreement, "[a]s evidenced by [its]
training materials," which indicate that "the customer is
affirmatively told of the existence of terms and conditions and
given an opportunity to review them."
However, as Plaintiffs argue, the record is devoid of
any evidence that the arbitration agreement was reasonably
communicated to the in-store plaintiffs and is also devoid of any
evidence that they manifested their assent to arbitrate during
enrollment. The Container Store did not "suppl[y] any evidence to
contradict the plaintiff[s'] claim that [they] never read" or were
otherwise made aware of the terms and conditions of the loyalty
program. See Campbell, 407 F.3d at 549. It is undisputed that
the in-store plaintiffs had no way of accessing the terms of the
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loyalty program, including the arbitration agreement, that
appeared on the touch screen. And it is uncontradicted that no
store clerk actually informed them that an arbitration agreement
existed as a condition of entering the loyalty program.17 Moreover,
the Container Store's contention that store associates were
present to inform the in-store plaintiffs of the terms and
conditions applicable to the loyalty program is unavailing without
any evidence that it was actually done.
The Container Store's second argument is that the in-
store plaintiffs' inability to read the terms and conditions of
the contract offer (including the arbitration provision) is no
defense to arbitration. On that note, the Container Store suggests
that they had (at a minimum) constructive notice of the terms of
the arbitration agreement, from which a court could infer
acceptance.
While we agree that inability to read is not a defense
to contract formation, see Villa Garcia v. Merrill Lynch, Pierce,
17
While Defendant maintains for the first time on appeal that
the store clerks did inform the in-store plaintiffs that terms and
conditions applied to the loyalty program, the only evidence
Defendant cites to support this assertion is an excerpt from the
training manual. But as the district court noted, the training
manual does not instruct the associate to inform the customers
what the terms and conditions are, nor that terms and conditions
even exist. Instead, the manual instructs the associates to give
the customers an opportunity to review the terms and conditions
that appear on the screen -- something Plaintiffs cannot
independently do (hence this litigation).
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Fenner & Smith Inc., 833 F.2d 545, 548 (5th Cir. 1987), at the
same time, a party cannot enter into a contract to arbitrate when
it does not know or have reason to know the basic terms of the
offer. See generally DeClaire, 260 S.W.3d at 44 (noting that "a
meeting of the minds" on the essential terms of the contract is
necessary to form an enforceable agreement). Because all three
in-store plaintiffs challenge that they were ever aware of the
arbitration agreement, this case boils down to whether the terms
of the clause were so conspicuous that they nevertheless will be
charged with constructive notice of its existence.
In support of its argument, the Container Store
maintains that the district court completely ignored well-
established law that an inability to read is not a defense to
contract formation. The cases cited by the Container Store,
however, are easily distinguishable. They involve parties
entering into a contract (who later plead ignorance) when there
was a presumption that the documents signed described contractual
relationships and implicated legal rights -- like initiating
loans, employment, and being admitted into a nursing home. See
Soto v. State Indus. Prod., Inc., 642 F.3d 67, 77-79 (1st Cir.
2011); Washington Mut. Fin. Grp., LLC v. Bailey, 364 F.3d 260,
264-66 (5th Cir. 2004); Am. Gen. Fin. Servs., Inc. v. Griffin, 327
F. Supp. 2d 678, 683 (N.D. Miss. 2004). There, the parties were
treated as knowing the terms despite being illiterate or blind
- 24 -
because of the very nature of the agreements they entered into.
See id. On the other hand, a duty to read did not apply in a case
where the arbitration provision at issue was buried in a "Health
and Safety and Warranty Guide" with zero hint that binding terms
would exist. Noble v. Samsung Elecs. Am., Inc., 682 F.App'x 113,
116 (3d Cir. 2017); see also Sgouros v. TransUnion Corp., 817 F.3d
1029, 1035-36 (7th Cir. 2016) (agreement to arbitrate not formed
where TransUnion failed "to get the message through to the site
user that purchasing a consumer credit score means agreeing to the
Service Agreement"). Similarly here, there is "zero hint" that
terms and conditions (specifically, an arbitration agreement)
applied to the in-store-plaintiffs' enrollment in the loyalty
program.18
Based upon the lack of any evidence that the in-store
plaintiffs had any knowledge, actual or constructive, that
arbitration terms applied to their enrollment in the loyalty
18 In support of its argument that Plaintiffs were on
constructive notice of the arbitration agreement, the Container
Store also cites to several cases in different jurisdictions
involving "clickwrap" agreements and the principle that a party
who signs an agreement is bound by its terms whether or not he
reads or understands them. See, e.g., Momentis U.S. Corp. v.
Perissos Holdings, Inc., 2014 WL 3756671, at *2-3 (Tex. App. July
30, 2014); In re Online Travel Co., 953 F. Supp. 2d 713, 718-19
(N.D. Tex. 2013); Sanders v. Forex Capital Mkts., LLC, 11-cv-0864,
2011 WL 5980202, *3-5 (S.D.N.Y. Nov. 29, 2011); Swift v. Zynga
Game Network, Inc., 805 F. Supp. 2d 904, 910-12 (N.D. Cal. 2011).
However, the cases cited by the Container Store are again easily
distinguishable in that the contracting party had minimal notice
of the terms of the agreement -- either actual or constructive.
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program, we conclude that the Container Store failed to meet its
burden of establishing that an agreement to arbitrate was ever
consummated between it and the in-store plaintiffs. See Norcia v.
Samsung Telecomms. Am., LLC, 845 F.3d 1279, 1285 (9th Cir. 2017)
("an offeree . . . is not bound by inconspicuous contractual
provisions of which he was unaware"); see also Nicosia v.
Amazon.com, Inc., 834 F.3d 220, 236-38 (2d Cir. 2016). Therefore,
the district court correctly denied the Container Store's motion
to compel arbitration as to the in-store plaintiffs.19
c. Illusory
Next, the Container Store argues that the district court
erred in finding that the loyalty program agreement was illusory
19 The Container Store further argues that the district court
erred in concluding that it was not appropriate to arbitrate
Plaintiffs' ADA claim because there was not a sufficient "minimal
level of notice" to Plaintiffs of the agreement to arbitrate. When
a party relies on the FAA to compel arbitration of a claim arising
under the ADA, the court must undertake a supplemental
"appropriateness" inquiry. Campbell v. Gen. Dynamics Gov't Sys.
Corp., 407 F.3d 546, 552 (1st Cir. 2005); see 42 U.S.C. § 12212.
A party may prevail on its demand for arbitration of an ADA claim
if it can establish: (1) that the provision for mandatory
arbitration is part of a valid contract within the purview of the
FAA; and (2) enforcement of the arbitration provision would be
appropriate (meaning, there is a minimal level of notice given to
the party being compelled to arbitrate). Campbell, 407 F.3d at
554-55. Here, we need not reach the second prong requiring a
"minimal level of notice" (where the Container Store appears to
hang its hat), because for reasons just explained in this opinion
it fails to meet the first, i.e., establishing that the arbitration
agreement is a "valid contract." Therefore, the district court
was correct in denying the Container Store's motion to compel
arbitration on Plaintiffs' state and ADA claims.
- 26 -
and therefore void. The Container Store's illusory arguments (and
Plaintiffs' response) are directed to all Plaintiffs; however,
because the Container Store has failed to establish that it entered
into an arbitration agreement with the in-store plaintiffs on offer
and acceptance grounds (and Lineback does not dispute she clicked
accepting the terms and conditions), the issue of illusoriness is
homed in just to Lineback (the remaining plaintiff).
In support of its argument that the district court erred
in its illusory finding -- a finding driven by the court's
conclusion that the loyalty program's terms gave the Container
Store carte blanche to modify the terms at any time -- the
Container Store raises four distinct arguments, which we discuss
in turn, beginning with its contention that an arbitrator should
have decided the illusoriness issue given it is a challenge to the
entire loyalty program agreement (and not just the arbitration
agreement). Naturally, Lineback disagrees and, in response,
contends that we should not consider the Container Store's argument
that the district court should not have reached the issue of
contract illusoriness because (1) it was not raised in the district
court or (2) properly developed before us. Alternatively, she
argues that even if we consider the issue, the district court was
the proper forum because (a) under Texas law, illusory challenges
go to contract formation; (b) she challenges the formation of the
arbitration agreement exclusively; and (c) absent the parties'
- 27 -
contracting otherwise, issues of "enforceability or applicability"
of an arbitration agreement go to the court.
i. Forum
In their objection to the Container Store's motion to
compel arbitration, Plaintiffs argued that the contract was
illusory. In its reply to Plaintiffs' objection, the Container
Store argued that it was not for three distinct reasons, but never
specifically challenged the district court's ability to consider
the illusoriness defense.20 In its brief to us regarding the
district court's consideration of the issue of illusoriness, the
Container Store argues: "As a threshold matter, the arbitrator
should have decided this issue since this claim is directed at the
entire agreement, and not just the arbitration provision. The
'change-in-terms' provision indisputably applies to the entire
loyalty program membership agreement, not just the arbitration
provision." Its discussion on the matter begins and ends there.
As noted, in Plaintiffs' brief they argue that the Container Store
has waived this argument by failing to raise it with the district
court or provide a meaningful analysis before us. In its reply
20 Its argument challenging the appropriateness of the
district court considering Plaintiffs' objections to the motion to
compel arbitration was directed at Plaintiffs' inability-to-read
defense. Plaintiffs' illusory argument is distinct.
- 28 -
brief the Container Store does not discuss waiver -- instead, it
focuses on the merits.
An argument not raised to the district court cannot be
debuted on appeal. McCoy v. Mass. Inst. of Tech., 950 F.2d 13, 22
(1st Cir. 1991). Therefore, the Container Store's failure to
challenge the appropriateness of the district court deciding
Lineback's illusory defense to its motion to compel arbitration
(opting instead to simply discuss the merits of the illusoriness
issue) renders this argument forfeited. See id. Forfeited
arguments are only considered for plain error. Dávila v.
Corporación De P.R. Para La Difusión Pública, 498 F.3d 9, 14 (1st
Cir. 2007) (citation omitted). Plain error requires appellants to
demonstrate: "(1) an error occurred (2) which was clear or obvious
. . . (3) affected [his] substantial rights [and] (4) seriously
impaired the fairness, integrity, or public reputation of the
judicial proceedings." Id. at 14-15. Because we have yet to
decide whether challenges regarding the formation of a contract,
where arbitration is but one provision in that contract, should be
decided by an arbitrator or a court, Farnsworth v. Towboat
Nantucket Sound, Inc., 790 F.3d 90, 99 n.7 (1st Cir. 2015), any
error of the district court in reaching the merits was not clear
and obvious.
- 29 -
Therefore, the Container Store's newly-articulated
argument on appeal that the district court should not have
considered the issue of illusoriness fails.
ii. Merits
Container Store offers us three additional reasons for
reversing the district court's illusory findings: (1) the duty of
good faith and fair dealing renders the agreement non-illusory;
(2) Plaintiffs could cancel their membership in the loyalty program
at any time and so the contract was not illusory; and (3) even if
the change-in-terms provision rendered the contract illusory, that
provision alone should have been severed, not the entire contract
found to be unenforceable. Unsurprisingly, Lineback disagrees.
But before we address the Container Store's contentions,
a discussion of what constitutes illusoriness would be helpful.
Under Texas Law, an arbitration clause is illusory if a party to
a contract "can avoid its promise to arbitrate by amending the
provision or terminating it altogether." In re 24R, Inc., 324
S.W.3d 564, 567 (Tex. 2010); see also Morrison v. Amway Corp., 517
F.3d 248, 257 (5th Cir. 2008) (reversing district court order
compelling arbitration because party retaining the right to alter
the arbitration agreement rendered it illusory and unenforceable);
Carey v. 24 Hour Fitness, USA, Inc., 669 F.3d 202, 205 (5th Cir.
2012). As noted, a contract that is illusory was never formed,
because it lacked the necessary consideration -- in other words,
- 30 -
there was never a bargained-for exchange. "Where no consideration
exists, and is required, the lack of consideration results in no
contract being formed." 3 Williston on Contracts § 7:11 (4th ed.).
Put differently, where one party to an arbitration
agreement seeks to invoke arbitration to settle a dispute, if the
other party has the right to change the terms of the agreement to
avoid arbitration, then the agreement was illusory from the outset.
Id. The crux of this issue is whether the Container Store has the
power to make changes to its arbitration policy that have
retroactive effect, meaning changes to the policy that would strip
the right of arbitration from a party who has already attempted to
invoke it. See Carey, 669 F.3d at 205. A reading of the "Changes
to the Terms" provision answers this in the affirmative. This
section in the loyalty program's terms and conditions provides
that:
We [,the Container Store,] reserve the right,
at our discretion, to change, modify, cancel,
add or remove any or all portions of these
terms, any policy, FAQ, or guideline
pertaining to the [loyalty program] at any
time. If any terms change in the future, we
will let you know by posting an update to
www.containerstore.com/pop with the most
recent modification date. Any changes or
modifications will be effective immediately
upon posting the revision and you waive any
right you have to receive special notice of
such change. By continuing to use the
[loyalty program], you agree to the revised
terms.
. . .
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[The Container Store] reserves the right,
without limitation, to terminate, change,
limit, modify, or cancel any [Loyalty Program]
terms, conditions, rules, regulations,
benefits . . . at any time, with or without
notice, even though such changes may affect
the value of already-issued . . . benefits.
Clearly, based on the change-in-terms clause, the
Container Store unilaterally retains the right to alter the terms
of the loyalty program, including the arbitration provision, "at
any time." Pursuant to Texas law, this is a text-book definition
of illusory. See Morrison, 517 F.3d at 257. Moreover, because
Texas law treats illusoriness as an issue regarding consideration
needed to enter into a contract, the presence of an illusory
agreement therefore indicates no agreement to arbitrate exists
between the parties.
The three arguments made by the Container Store in an
attempt to challenge the district court's illusoriness
determination are not persuasive. First, while the Container Store
argues that the duty of good faith and fair dealing renders this
contract not illusory, it provides no legal support pursuant to
Texas law for this proposition. Other jurisdictions have
recognized that the duty of good faith and fair dealing "limits
the authority of [a contracting] party retaining discretion under
the contract" and that this alone "is enough to avoid the finding
of an illusory promise." Fagerstrom v. Amazon.com, Inc., 141 F.
- 32 -
Supp. 3d 1051, 1066 (S.D. Cal. 2015). But the Texas cases the
Container Store cites -- Cleveland Const., Inc. v. Levco Const.,
Inc., 359 S.W.3d 843, 853-54 (Tex. App. 2012), and Budd v. Max
Int'l, LLC, 339 S.W.3d 915, 918-20 (Tex. App. 2011) -- say nothing
about good faith and fair dealing and so offer nothing to back up
its lead argument.21
Similarly unconvincing is the Container Store's argument
that the contract cannot be found to be illusory because Plaintiffs
can terminate the agreement at any time. We agree with Plaintiffs
that their "ability to cancel their [loyalty program] memberships
does not 'prevent [Defendant] from retroactively eliminating its
arbitration policy, which is the critical inquiry for determining
whether an agreement is illusory."
Lastly, the Container Store's argument that any illusory
provision of the contract could simply be severed and the remainder
of the contract stand would require us to engage in an absurd
process.22 In essence we would be reviving a contract we have
found was never formed for its lack of consideration, omitting the
21 Which perhaps explains why the Container Store cites the
Southern and Eastern District of California, the Eastern District
of New York, as well as both the Second and Eighth Circuit.
22 The loyalty program agreement also contains a severance
clause. The clause provides that "[i]f any provision of these
terms is found to be unlawful, void, or unenforceable, then that
provision will be deemed severable from these terms and will not
affect the validity or enforceability of any remaining
provisions."
- 33 -
change-in-term clause that was fatal to the contract's proper
formation, to therefore conclude a contract was formed. Because,
again, pursuant to Texas law the issue of illusoriness goes to
formation (and not to validity or enforceability), we think this
would be an inappropriate exercise.
We therefore also affirm the district court's order
denying the Container Store's motion to compel arbitration as to
Lineback because no agreement was formed between her and the
Container Store relating to her enrollment in the loyalty program.
d. Ratification
Lastly, according to the Container Store, Plaintiffs
received an email following their enrollment with the terms and
conditions of the loyalty program. It maintains that the district
court erred in rejecting its argument that by continuing to
participate in the loyalty program, Plaintiffs ratified the
agreement.
While a party may ratify a contract to which it otherwise
was not bound by reaping the benefits awarded in a contract's
terms, Rennie v. Mut. Life Ins. Co. of N.Y., 176 F. 202, 206 (1st
Cir. 1910), we agree with Plaintiffs that the Container Store has
not shown how Plaintiffs benefited from the loyalty program
following their initial enrollment. Moreover, while there was
testimony that this email was customarily sent following
enrollment, the Container Store failed to present a copy or sample
- 34 -
of the "welcome" email containing the arbitration terms, or of the
monthly promotional emails that also contained the provisions.
CONCLUSION
For the reasons discussed above, we affirm the district
court order denying the Container Store's motion to compel
arbitration.23
Affirmed. Costs to Appellees/Plaintiffs.
23
We need not decide the issue of whether the agreement was
unconscionable, since we conclude that no agreement to arbitrate
was formed. See Rent-A-Ctr., W., Inc. v. Jackson, 561 U.S. 63, 67
(2010) (reversing Ninth Circuit's determination that when "a party
challenges an arbitration agreement as unconscionable, and thus
asserts that he could not meaningfully assent to the agreement,
the threshold question of unconscionability is for the court").
Similarly, given we are affirming the district court's denial of
the Container Store's motion to compel arbitration, we need not
address Defendant's argument that we should stay the district court
proceeding if any of the plaintiffs are compelled to arbitrate.
- 35 -