Seventh Circuit Rebuffs Software Company’s Attempt to Enforce Arbitration Agreement in Third Party User Agreement

It is not at all uncommon for a company to require individuals to agree to its Terms of Use when they sign up for an online service or when creating an account on a website or mobile app. It is also not uncommon for that service, website, or app to incorporate technology from multiple different providers. Such was the case in a case recently decided by the federal Seventh Circuit Court of Appeals. In its opinion, the Seventh Circuit rebuffed arguments by a technology company that it should be entitled to enforce certain arbitration provisions in a user agreement between OfferUp and its users.

Onfido owns and licenses the TruYou facial recognition software, which is marketed as software aimed at helping online resellers verify their identity. OfferUp, an online marketplace for buying and selling used items, uses the TruYou software in its mobile app to verify the identities of its users.

One of OfferUp’s users, Fredy Sosa, sued Onfido, alleging that its TruYou software violated the Illinois Biometric Information Privacy Act (BIPA). Sosa signed up to become a verified user on OfferUp’s mobile app. The identity verification process involved uploading photographs of his driver’s license and face. OfferUp’s verification process allegedly involved using Onfido’s TruYou software to extract and store biometric identifiers contained in the uploaded photos to verify that the face in the photograph matches the face on the driver’s license. Sosa subsequently filed a putative class action lawsuit against Onfido alleging that the company violated the BIPA by failing to provide him with a biometric data retention policy or to advising him whether and when it will permanently delete the biometric identifiers that it derived from his face. Sosa additionally alleged that Onfido violated the BIPA by failing to require him to sign a written release allowing it to “collect, use, or store his biometric identifiers derived from his face.”

After Onfido removed the case to an Illinois federal court, it sought to have the lawsuit dismissed and to compel arbitration of Sosa’s claims. The company relied on an arbitration provision in OfferUp’s Terms of Service which Sosa agreed to when signing up as a user of the OfferUp marketplace as the basis for seeking to compel arbitration of Sosa’s claims. The district court denied Onfido’s motion to stay Sosa’s complaint and compel individual arbitration, finding that Onfido cannot enforce the arbitration provision because it wasn’t a party to the agreement between OfferUp and its users.

Following denial of its motion, Onfido filed an interlocutory appeal of the district court’s ruling in the U.S. Seventh Circuit Court of Appeals. Onfido argued that it should be allowed to enforce the arbitration provision in OfferUp’s Terms of Service under three legal theories: (1) as a third-party beneficiary of the Terms of Service, (2) through its alleged agency relationship with OfferUp, and (3) on equitable estoppel grounds. In a victory for Sosa, the Seventh Circuit upheld the district court’s decision “in all respects.”

The Court began its analysis by reviewing the language of OfferUp’s Terms of Service, which contain the arbitration agreement that Onfido argued it should be allowed to enforce. The Court noted that, although the agreement mentioned TruYou, Onfido was not mentioned anywhere in the Terms of Service.

The Court then turned to its legal analysis noting that under Illinois law “a nonsignatory to a contract typically has no right to invoke an arbitration provision contained in that contract.” To overcome the “strong presumption against conferring contractual benefits on noncontracting third parties” Onfido was required to establish that “the implication that the contract applies to third parties must be so strong as to be practically an express declaration.” Onfido could only do this, the Court explained, by identifying an express provision in the contract identifying it by name or describing a class to which it belongs, which it could not do.

The Court also rejected Onfido’s agency theory explaining that “OfferUp encouraged users to register their identities with the app’s TruYou feature and that Onfido and OfferUp partnered to provide this technology through the app establishes nothing more than a business relationship between the parties—not agency.” The Seventh Circuit also ruled that Onfido failed to identify any equitable considerations supporting adoption of its position.

The Court’s full opinion is available here.

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