On November 3, the Second Circuit reversed a lower court decision denying a motion to compel arbitration in a putative class action against Klarna.  See Edmundson v. Klarna, Inc., 85 F.4th 695 (2d Cir. 2023).  The decision offers guidance (and support) for companies looking to enforce similar “click-wrap” agreements with mandatory arbitration provisions.

Klarna offers a “buy now pay later” service that allows consumers to purchase products and pay for them over time in four installments without incurring any interest or fees.  Plaintiff used Klarna’s services to make two online purchases, but when Klarna automatically deducted the partial repayments from Plaintiff’s checking account, the account lacked sufficient funds and, as a result, Plaintiff allegedly incurred overdraft fees from her bank.  Plaintiff filed a class action lawsuit alleging that Klarna misrepresented and concealed the risk of bank-overdraft fees that consumers face when using Klarna’s pay-over-time service.

Klarna moved to compel arbitration of Plaintiff’s claims on the ground that, when Plaintiff made her purchases using Klarna, she was repeatedly presented with and agreed to Klarna’s Services Terms, which include a mandatory arbitration provision.  For example, Plaintiff was presented with the below “Klarna Widget” before finalizing her purchase.  The phrase “payment terms” was a hyperlink that, when clicked, would direct the consumer to Klarna’s “Pay Later in 4 Agreement,” which incorporated by reference the mandatory arbitration provision in Klarna’s Services Terms.  Plaintiff was required to click “Confirm and continue” to complete her purchase(s).

The district court concluded that the above Widget could not support an inference that Plaintiff unambiguously assented to the arbitration provision, but the Second Circuit disagreed.  The appellate court found that several factors weighed in favor of finding that Klarna provided “reasonably conspicuous notice” of its Services Terms (and, thus, the arbitration agreement) such that Plaintiff should be bound by those Terms:

• Lack of clutter.  There is only one hyperlink (to Klarna’s Terms) and one button to click (“Confirm and continue”), all of which is visible at once, meaning the user does not need to scroll beyond what is immediately visible to find the notice of Klarna’s Terms.  The court distinguished Klarna’s Widget from other cases where consumers were presented with a screen with dozens of links, varying text sizes and colors, and multiple buttons, promotional advertisements, and other purchase information.
• Contrast.  The hyperlink to Klarna’s Terms is set apart from surrounding information by being underlined and in a color that contrasts to the color of the interface’s background (i.e., black text on white background).  That contrast, according to the Second Circuit, outweighed the fact that the hyperlink was in a smaller font relative to other text on the Klarna Widget screen.
• Spatial and temporal proximity.  Spatially, the hyperlink to Klarna’s Terms appears directly above the “Confirm and continue” button, which the user is required to click to complete her purchase using Klarna.  Temporally, the placement of the terms at the point when the consumer is about to finalize a purchase would lead a reasonably prudent user to understand that the terms presented on the interface signal, and govern, the user’s future relationship with Klarna.
• Language signaling agreement.  The language used on the Klarna Widget—“I agree to the payment terms”—adequately signals to users that they would be agreeing to Klarna’s Terms through their conduct (i.e., by clicking “Confirm and continue”).

That said, the court also offered its views on how Klarna could have improved upon its notice:

• More readily identifiable hyperlinks.  The court noted that blue font is arguably a better signal to consumers that text contains a hyperlink, as opposed to the black font used by Klarna.
• Clearer instructions.  The court noted that Klarna’s instruction could have more clearly indicated that the consumer would be agreeing to its Services Terms, and it offered the following suggested language: “By selecting ‘Confirm and continue,’ I agree to the terms set forth under this hyperlink: payments terms.”

Importantly, though, the court confirmed that there are “no particular features that must be present to satisfy the reasonably conspicuous standard.”  Under the circumstances of this case, the court held that reasonable internet users would understand that selecting “Confirm and continue” on the Klarna Widget would constitute their confirmation that they “agree to the payment terms” and thus the arbitration agreement.