This Is the (Next-to) Last Smartcontracts Case You’ll Ever Read
This is the (Next-to) Last Smartcontracts Case You’ll Ever Read
“Because ‘defendant [has] offered no competent evidence to demonstrate the existence of a genuine issue of material fact concerning the existence of an arbitration agreement, [the] motion to compel arbitration must be denied as a matter of law without the need for a trial.”
I was catching up on some smartcontracts cases and read Rensel v. Centra Tech. The above statement above caught my eye because vanishingly few consumer cases get past arbitration clauses anymore. In Rensel the eponymous plaintiff was able to avoid an arbitration agreement contained within the Defendant Centra Tech’s “clickwrap” Token Sales Agreement. This is because Rensel did business not with Centra Tech’s website (where he would have had to click through an agreement including an arbitration clause), but instead, his smart wallet interacted with Centra Tech’s smart contract.
A smartcontract is code with a wallet. Both the code and the wallet run on a distributed ledger (usually a blockchain), which means the code and money execute and transfer value without further human input, and do not reside on any one entity’s servers. Smartcontracts differ in one important way from previous technology-enabled contracts. A smartcontract is usually a computer-to-computer interaction. In the Centra Tech smartcontract, when a consumer’s wallet transferred ether (Ethereum’s cryptocurrency), the Centra Tech smartcontract automatically transferred Centra Tech’s own cryptocurrency, CTR.
The computer-to-computer nature of this deal matters. Online contracts in the past have relied on one side being a computer and the other side being a human that clicks or interacts with an “I agree” statement to bind them to the computer’s terms. Think about it: when you order from Amazon, you’re bound to their terms and conditions. You’re a person, talking to their computer. You are deemed to have agreed to their terms and conditions. But the reverse is not true. If you typed your own contract terms up and sent them to Amazon’s server, judges would not deem Amazon to have accepted your terms, the way they deem you to have accepted Amazon’s. Here’s the interesting bit. The lack of any human interaction with a set of terms turned out to be important for the court’s decision in Rensel. Because Rensel’s wallet transacted directly with the CTR smartcontract, Rensel was able to bypass Centra Tech’s Token Sales Agreement containing the arbitration clause and avoid consenting to it. The court suggested that if the Centra Tech smart contract had itself included “I Agree” buttons or checkboxes forcing arbitration, things would have been different, but that raises an entirely new can of worms. How deep in the coding of a smart transaction can these legal terms be buried? When my wallet pays your smartcontract, and your smartcontract responds, do terms fired into the dark to uncomprehending computers count as binding humans?
Rensel’s treatment of smartcontracts presents us with an interesting moment to understand the way in which technology law has developed, or more accurately failed to develop due to the black hole of arbitration, which I call the arbitration oubliette. First, arbitration has strangled the development of common law and cases surrounding technology. Second, arbitration agreements have become so disastrous because of the way courts have interpreted parties' consent when contracting online. Third, smartcontract technology may represent an opportunity to get out from under the thumb of the oppressive arbitration regime, but it is unlikely to lead to any real change due to the way we have misconstrued consent when using technology in the past.
The Arbitration Oubliette
An oubliette is a particularly noxious hole in a medieval dungeon. Below the main dungeon, there would be a room that could only be accessed through a hole in the ceiling. That room is the oubliette. It is the King’s forgetting hole. The oubliette exists not so that the King can punish the individual, but so the King can forget the individual. Arbitration is the oubliette for technology law cases. In the same way that the king would banish his most hated criminals to the oubliette, courts and big tech companies have dropped potential technology cases into the arbitration oubliette.
Technology cases are vanishing from court dockets and into the arbitration oubliette. Because technology makes it easy to deliver terms and conditions, consumers are often subject to those terms by merely interacting with a service. One of those terms and conditions is always an arbitration clause. That clause removes the consumer’s right to go to court and substitutes arbitration, which provides little to no remedy, especially where many people have been harmed.
Entities that use these arbitration clauses aren’t interested in dispute resolution, they are interested in benefiting from Supreme Court holdings allowing arbitration to ban class actions. Without class actions, consumers are required to bring their claims individually and bear the costs of counsel and arbitration which is often higher than the consumer’s loss. The inability of consumers to substantively recover any damages makes it worthwhile to let the problem slide, and companies are able to bilk consumers out of millions as long as they don’t hurt anyone consumer too much. If Amazon harms you, but only causes you $35 worth of damage then it would be ridiculous to sue them. When this happens in other industries, people are able to form a class action and recover damages while sharing the costs of the litigation. Under our current regime, all the potential class actions are tossed to the arbitration oubliette. The rope that has lowered us into the oubliette is the false belief that we agree to the arbitration whenever we click “I accept.”
In Rensel, the plaintiff Rensel was able to avoid the arbitration agreement by using the smartcontract. Rensel argued that Centra Tech violated securities law in the sale of its cryptocurrency, CTR. Under the main agreement, CTR buyers were stripped of their legal rights by an arbitration clause. But buyers who purchased CTR through the Centra smart contract “were NOT [emphasis in original] required to check any boxes or click any buttons in order to complete their purchase; the transaction was completed automatically upon transmission of consideration to the smart contract wallet address.” As a result, the court held, there was no arbitration agreement and that part of the case was permitted to continue. Because he never clicked “I accept,” Rensel was able to narrowly avoid the arbitration oubliette.
There are a few things to unpack here. First, the court is treating smartcontracts as if they were contracts presented to a consumer by a website: a typical “I Agree” contract. The implication is that if there had been boxes to check or buttons to click, then Centra’s arbitration agreement would have been enforceable, and the case would have vanished into the arbitration black hole. That matters, because the court is baking in some strange features of online contract law. Contracting parties are supposed to be equal before the law. Online, though, they’re not. When I buy something from Amazon, I send bits to Amazon’s server, they send bits to my computer. But their bits are deemed to have legal force and effect; mine don’t. This is because theirs reach me, theoretically, a human, in the form of my vague intuition that I could click and find the terms if I wanted to. Never mind that no-one does and no-one could read all of these terms: courts hold that as long as a computer sends a contract term to some human, the human is bound.
Note that the opposite is true in the other direction. If I were to insert into my handshake protocol with the Amazon server that “I do not agree to any arbitration,” a court would find that unenforceable, because the server couldn’t understand that comment. It wasn’t programmed to handle data outside of the accepted fields. In this sense, then, the very rigidity of computers gives them a tremendous advantage in contracting. They’re considered too dumb to do anything but accept and enforce the terms of the company.
This matters in the smartcontracts arena, because smart wallets are often going to be switching between various currencies: this will be a computer-to-computer transaction, a smartcontract-to-smartcontract one, not a computer-to-human one. Indeed, human-to-computer deals may well be a hybrid arrangement that falls out of fashion as automated agents do our shopping (or investing, or what have you) for us. The Rensel judge clearly thought that the arbitration agreement would have been valuable if a purchase from the Centra smart contract had contained some sort of statement or checkbox about arbitration. But in the case in which an automated agent made such a purchase, that kind of legal checkbox would make as much sense as binding Amazon’s servers to statements that I inserted into the handshake protocol.
How “I Agree” Killed Contractual Consent
How have online contracts contributed to the mangling of consent in the law? What role did the emergence of online contracts have in creating the arbitration oubliette? To understand the relationship between technology and the law, we have to understand how these things actually interact with each other. The current hype around smartcontracts exposes the way technology influences legal interactions.
Smartcontracts enthusiasts have, in the usual fashion of new-tech evangelists, claimed that these automated arrangements will cause regular contracts and lawyers to wither away. In the same usual fashion, academics have pointed out that smart contracts are a way of performing a contract, not of making one or of interpreting whether the result of the process was what the parties had legal reason to expect. These two waves — “everything is new” and “nothing is new” are pretty common patterns in technology law.
What is more interesting than the waves of emerging technology is the way that legal doctrines, words, and phrases ride along those waves. Technology creates the landscape that legal language works upon. An example: consent to a contract used to be a matter of signing a document on the bottom line. With physical paper, a person signing a contract could redline provisions they did not want and alter the contract to contain their own terms before signing. Online contracts have changed the shape of consent. Now, we consent to Facebook’s terms of service merely by viewing a website. “Viewing a website” is a radically different action than “signing a piece of paper.” Yet as the form of the technology has changed, we have mutated the law of contractual consent to make those two actions equal.
Online contracting has altered the meaning of the word consent in contracting. When we merely log onto a website, we consent to their terms and conditions. There is no opportunity for negotiation and not opportunity to change those terms. As above, courts generally recognize Amazon’s power to put words on a screen and claim that you agreed to those terms and consented to the contract. However, if you try to add a note to your order or email Amazon with a revised term, the court will find that your disagreement with the contract terms has no legal force and effect. In the eyes of the law, you consent to an online platform merely by using it. The power of negotiation that used to give full force and meaning to the act of consenting has been replaced with mere existence in an online space. In effect, the courts have replaced the full robust doctrine of consent in contracts with an improper belief that you have “consented” whenever you go online.
So what does the new smartcontracts technology mean for how we will consent to contract terms in the future? Specifically, how will we consent or not consent to arbitration agreements? When we contracted by paper, the arbitration term was contained in the contract, and the parties could negotiate about it with a red pen. When we moved online, we submitted to the arbitration agreement through clicking boxes or presence on the website. Central to that design is that the party with lesser contracting power is not permitted to add or change the terms of the electronic agreement presented to them. The internet has no red pen.
Online contracting did not cause contract law to wither away, it forced it to adapt to a new context. Similarly, smartcontracts are not going to replace law — it is going to change the context. Smartcontracts offer a rich new context for contract law to inhabit. Smartcontracts certainly create a new opportunity for technology to once again affect the shape of the law, but not to put lawyers and judges out of business as techno-utopians may have hoped. In fact, smartcontracts may have created a new space for the law to undo one of technology law’s greatest mistakes — click-wrap arbitration, but it is unlikely that courts will seize this opportunity.
Why It’s the (Next-to) Last One You Will See
In the case of Rensel, then, the court is making a fairly innocent move, but one that foresees changes to come. The court applied the law of human-to-server contracting to a situation that is all about smartcontract-to-smartcontract purchasing. It assumes that inserting such a checkbox or a button-click into code — not into legal language, but into the code and process of the contract — will have force and effect. What seemed like an opportunity to get past arbitration agreements will turn out to be just another way that courts say we agree to arbitration agreements, with even less involvement from us than viewing a website. All that is required is a click box in the code or a statement that by using the smartcontract, you are agreeing to the arbitration oubliette.
It is not smartcontracting technology that is causing law to wither away, it’s more law: the effect of arbitration in technology cases is that no new cases get decided. Anyone who is interested in smartcontracts as contracts — as actual enforceable legal arrangements — is likely to wait in vain for courts to sound off on the subject. They can’t. As soon as companies start to insert buttons to click or boxes to check into their smartcontracts, then any dispute arising from the transaction again gets thrown into the arbitration oubliette. No law emerges: common law courts can’t create law because they can’t hear the cases.
Right now we are bound to lose our legal rights any time we click “I Agree,” or even use a website or service, since our use is deemed consent. Smartcontracts will remove consent one step further, put into the code of a smartcontract. Deals with that smartcontract will often be executed by other smartcontracts. If we are not cautious, we will carry the intuition that the seller’s robot and contract control the transaction (even if the buyer’s robot and contract beg to differ) for reasons of history. The sellers’ robots will be rewarded with huge exemptions from liability, while buyers’ robots are treated as the same kind of second-class citizens as humans who shop online are now. Again, go to Amazon. Their deal governs. Not yours. If we are not careful, their robot’s terms will govern. Not yours.
This baking in of consumer contract discrimination with respect to arbitration really matters. The cheaper contract terms are to present and bind, the more likely it is that a contract term will come to dominate the legal landscape. For example, the default rule is that you and I can go to court when a company harms us. But through weakened views of consent and streamlined contracting experience, simply using a site or service is enough to change that rule. The background rule online, then is that the courts are unavailable, and it is a rare exception to be able to bring a lawsuit.
Rensel found that a direct purchase from a smartcontract does not bind a purchaser to an arbitration agreement — and that’s good. But it’s worth noting that this is an exception to the rule, and after Rensel, other smartcontracts will promptly include an arbitration provision in the code, and courts like Rensel are likely to enforce that, despite the real fairness problems in doing that. If that happens, Rensel is the next-to-last case, because the last case will uphold an arbitration agreement embedded in smartcontract code, and down the oubliette the whole area goes.
If we do bake present online contract law’s anti-consumer (or, more accurately, anti-human — again, why do Amazon’s server’s terms trump yours?) bias into court interpretations of smartcontracts, then the moves that determine our legal rights will happen far underneath our own level of experience, buried in code and exchanges between protocols that do not understand the rights they are giving away, but are simply documenting and memorializing the loss of rights. Smartcontracts are supposed to facilitate transfers and reduce transaction costs to near-zero by permitting code to execute value transfers at speed. In the long term, the transfer smartcontracts are most likely to affect is the transfer of legal rights away from humans who use them.
If we are not careful, we will lose smartcontracts to the arbitration oubliette along with all the other potential technology cases. Smartcontracts could be a real moment to pull technology out of the arbitration oubliette and begin to make real law. If we avoid the old and incorrect intuitions around contracting and consent, we can close the door on the oubliette. This doesn’t have to be the last smartcontracts case you ever see.
