Online shopping by American consumers now totals well over a trillion dollars a year. That means millions of times every day shoppers complete a checkout process that almost always requires agreeing to a lengthy “terms and conditions” document that few buyers glance at or even think about.

Routinely included in that document is an arbitration agreement that says any dispute arising out of the purchase transaction must be submitted to binding arbitration rather than to litigation in a court of law. But just how far beyond the customer and the merchant does the obligation to arbitrate extend? That was the issue recently presented to the California Court of Appeal (Consumer Advocacy Group v. Walmart).

Michael Marcus, the Secretary and Chief Financial Officer of Consumer Advocacy Group, Inc. (CAG), purchased several items from Walmart.com in 2021 and 2022. All parties agree that Marcus was acting as an agent of CAG when he made the purchases.

To complete these transactions, the website required a buyer to click a “Place Order” button. By doing so, the website said, the customer agreed to its Terms of Use. This included an arbitration clause.

The clause stated that “except for disputes that qualify for small claims court, all disputes arising out of or related to these Terms of Use or any aspect of the relationship between [the website user] and Walmart, whether based in contract, tort, statute, fraud, misrepresentation, or any other legal theory, will be resolved through final and binding arbitration.”

The agreement also provided that the website user and Walmart “are each waiving the right to sue in court” and “agree that any arbitration will take place on an individual basis; class arbitrations and class actions are not permitted.”

The Terms of Use document, linked in the website’s footer, has changed slightly from year to year, according to court documents. The current version is nearly 13,000 words or 32 pages long.

The arbitration agreement stated that arbitrations would be administered by Judicial Arbitration Mediation Services, Inc. (JAMS) under that organization’s rules and procedures. One of those rules states that “jurisdictional and arbitrability disputes … shall be submitted to and ruled on by the Arbitrator.”

CAG, based in Beverly Hills, was formed with the goal of enforcing California’s Proposition 65, the Safe Drinking Water and Toxic Enforcement Act of 1986, which requires businesses to warn individuals before exposing them to chemicals known to cause cancer or reproductive harm.

The items Marcus purchased included seaweed snacks, cassava chips, canned sardines, bags, phone mounts, tools, and other items.

From January of 2022 to February of 2023, CAG sent notices to Walmart of alleged violations of Proposition 65 involving these products. In May and October of 2023 it filed lawsuits against the company and other entities, alleging they had unlawfully failed to warn that these products could expose consumers to chemicals that could cause cancer or reproductive issues.

Walmart asked the court to compel arbitration of the dispute, noting that Marcus had agreed to this course of action when he completed the purchases online.

The trial court denied Walmart’s request. It said the website’s arbitration agreement addressed only disputes between an individual consumer and the retailer. CAG’s lawsuit, brought under Proposition 65, was a “qui tam action,” the court said, meaning it was brought by a private citizen on behalf of the government.

(The concept of qui tam actions, named for the Latin phrase for “who sues on behalf of the King as well as for himself,” goes back to ancient Rome. It underlies many laws that allow whistleblowers and private watchdogs who suspect fraud or waste to sue on behalf of the government and retain a portion of any damages recovered.)

Walmart and the other defendants appealed.

The appellate justices noted that the goal of Proposition 65 is to ensure that businesses do not expose the public to dangerous chemicals “without first giving clear and reasonable warning” to consumers. The statute allows a person acting “in the public interest” to sue an alleged violator after giving at least 60 days’ notice to state and local prosecutors, if none of these officials have acted on the alleged violation.

If the lawsuit filed by the private individual or group is successful, 75% of any civil penalties recovered go to the state, and 25% are paid to the plaintiff.

The justices noted that, although plaintiffs are entitled to their share of any recovery, “they do not have an individual property right at stake” in the litigation, because they are acting on behalf of the public. Anyone can sue the seller of an allegedly dangerous product; they do not have to have purchased the product, nor to have suffered injury or damages.

Walmart argued that the JAMS rules citied in its arbitration agreement required issues of arbitrability of a dispute to be decided by the arbitrator. The appellate justices disagreed. Parties must consent to arbitration; they cannot be coerced to participate in it. That means an arbitrator cannot decide whether a party who has not agreed to arbitration is required to submit to it.

As the trial court ruled, any agreement Marcus entered in when he made his online purchases did not preclude an action brought by the state, since he was not acting as an agent of the state when he made the purchases. There may have been an arbitration between Walmart and CAG, which employed Marcus. But there was none between Walmart and the state, “the real party in interest,” the justices said. 

The justices affirmed the trial court’s order denying Walmart’s petition to compel arbitration and awarded CAG its costs on appeal.

By Laurie Murphy