Online Agreements – Easy To Get Right, Easy To Get Wrong

by Lee Gesmer on October 16, 2012

Online Agreements - Easy To Get Right, Easy To Get Wrong

It’s easy to create an enforceable online “click-wrap” agreement.  But, as two recent cases remind us, it’s also easy to do it wrong.  Two recent cases are a reminder of this.

In the first case, In re Zappos.com Security Breach Litigation, Zappos was sued in connection with a large data security breach. Responding to the predictable class action lawsuit, Zappos argued that the plaintiffs were required to arbitrate under Zappos’ online user agreement. However, Zappos didn’t have a ‘user agreement,” it only had terms and conditions.  And, it did not require purchasers to “click through” to indicate acceptance of those terms.  The terms, which included the arbitration requirement, were under a link users were not even required to access while making a purchase, much less consent to. Quoting the court:

we cannot conclude that Plaintiffs ever viewed, let alone manifested assent to, the Terms of Use. The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use. No reasonable user would have reason to click on the Terms of Use, . . .

. . . The arbitration provision found in the Zappos.com Terms of Use purportedly binds all users of the website by virtue of their browsing. However, the advent of the Internet has not changed the basic requirements of a contract, and there is no agreement where there is no acceptance, no meeting of the minds, and no manifestation of assent. A party cannot assent to terms of which it has no knowledge or constructive notice, and a highly inconspicuous hyperlink buried among a sea of links does not provide such notice. Because Plaintiffs did not assent to the terms, no contract exists, and they cannot be compelled to arbitrate.

To make those terms enforceable Zappos needed to require purchasers to affirmatively signal their assent by “clicking” their agreement to be bound.  It failed to do this, and therefore the terms were not binding.  Zappos might have been better off in arbitration, but it’s stuck in court.

The second case, Schnabel v. Trilegiant  (2d Cir.,  Sept. 7, 2012), is not an online license case per se, but it makes the same point.  In this case the web site, a membership organization, emailed (or, if the email bounced, snail-mailed) terms and conditions to new members after they had already joined.  The terms contained an arbitration clause.  Could the plaintiff be required to arbitrate based on this “after the fact” mailing?  Not under the circumstances in this case.  The Second Circuit held:

a reasonable person would not be expected to connect an email that the recipient may not actually see until long after enrolling in a service (if ever) with the contractual relationship he or she may have with the service provider, especially where the enrollment required as little effort as it did for the plaintiffs here. In this context the email would not have raised a red flag vivid enough to cause a reasonable person to anticipate the imposition of a legally significant alteration to the terms of conditions of the relationship with [the defendant].

Much of the case law on online contract formation between vendors and purchasers comes from the Second Circuit.  See: Specht v. Netscape Communications Corp., 306 F. 3d 17 (2nd Cir. 2002); Register. com, Inc. v. Verio, Inc., 356 F. 3d 393 (2nd Cir. 2004).

You might not know it from these two cases, but this is not rocket science: require customers to affirmatively consent to online terms before they perform the transaction, and the agreement likely will be enforceable.

Oh, one more thing – don’t state that the terms can be changed at any time, at the whim of the site owner, without obtaining new assent by the customer.  A lot of terms contain a provision to this effect, but as the court noted in the Zappos case, where the site owner reserves the unilateral right to revise the online terms the contract becomes “illusory, and therefore unenforceable.”  The district court in Zappos cites many of the cases applying this principle to online agreements.  For a 2009 blog post discussing this aspect of online agreements, see here.

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