As websites today develop increasingly complex relationships with visitors, the contracts that define those relationships have become more difficult for companies to impose as binding.  Recent litigation surrounding “Terms of Service” (ToS) agreements has put pressure on companies to draft agreements that courts will actually enforce.

Today’s ToS contracts generally come in two forms: clickwrap and browsewrap.  Clickwrap agreements require users to affirmatively review the terms and, at the end, to press the “I accept” or “I agree” button to indicate their assent.  Browsewrap agreements, on the other hand, are passive.  On most websites, the terms are connected to the main page via hyperlinks and do not require any affirmative action.  Instead, visitors signal their acceptance of the ToS by using the website.  Both types derive their names from “shrink-wrap agreements,” which were the extremely long, fine print ToS’s that appeared under the plastic wraps of prepackaged software.  Browsewraps, in particular, have fallen under heavy scrutiny in recent years.

In re Zappos.com, Inc., Customer Data Security Breach Litigation

In January 2012, Zappos.com suffered a security breach through which hackers obtained customers’ names and addresses, though not their financial information. Several plaintiffs independently filed suit against Zappos.com, alleging that the company failed to protect their valuable information.  The cases were consolidated in the District of Nevada where Zappos.com was headquartered.  Shortly thereafter, the company filed a motion to compel arbitration because, it argued, the ToS on its website had a clause that required all disputes to be “submitted to confidential arbitration in Las Vegas, Nevada.”

The clause appeared as part of a browsewrap agreement that customers were not required to affirmatively “accept.”  In fact, the company placed the “Terms of Use” hyperlink in the left-hand column towards the bottom of its website, which, if you were to print it, would appear on page three of four. The District of Nevada Court concluded that plaintiffs never viewed, “let alone manifested assent to,” the Zappos.com’s ToS. The court pointed out that “[n]o reasonable user would have reason to click on the Terms of Use,” as the company never directs the user to review it, and “[a] party cannot assent to terms of which it has no knowledge or constructive notice.”

Thus, in October 2012 the court held that the arbitration provision contained therein was unenforceable, noting that “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.”  Indeed, the court found that a “highly inconspicuous hyperlink buried among a sea of links” does not provide the customer with adequate notice.  Without acceptance and a manifestation of assent, “no contract exists” and plaintiffs cannot be compelled to arbitrate.

Nguyen v. Barnes & Noble, Inc.

Similarly, in August 2014 the Ninth Circuit held that Barnes & Noble failed to provide adequate notice of its 2011 Terms of Use and, therefore, the plaintiff was not bound by the arbitration provision.  Nguyen filed a class action suit after the company canceled his order for two tablets because of “unexpectedly high demand.”  Barnes & Noble presented the ToS to its customers as a browsewrap agreement, which appeared on the bottom left-hand corner of every screen and did not require the customers to affirmatively accept.

The court explained that the central issue in cases with browsewrap agreements is whether users received actual or constructive noticed of the ToS.  Here, there was no evidence that the user had any actual knowledge of the agreement, let alone the arbitration clause. The validity of the agreement, then, turns on whether the website puts a “reasonably prudent user on inquiry notice of the terms of the contract.” The court considered the placement of the link, notices to users of the terms, and the layout of the website. Ultimately, the court held that “the proximity or conspicuousness of the hyperlink alone” is insufficient to give rise to constructive notice.  And because Nguyen did not receive adequate notice of the terms of the contract, the court held that he could not be bound by the arbitration provision therein.

Transparency

On the other side of the equation, some tech start-ups are working to make ToS agreements more transparent for consumers.  Terms of Service; Didn’t Read is one such project, aiming to fix “the biggest lie on the web: almost no one really reads the terms of service we agree to all the time.”  Indeed, this was confirmed by a 2008 study by Carnegie Mellon professors, which found that the average internet user encounters almost 1,500 privacy policies a year, most of them exceeding 2,500 words. With few people willing to spend time reviewing each and every ToS that comes their way, Terms of Service; Didn’t Read intends to fill that gap. The organization has generated a peer-review process to rate various companies’ ToS policies from “Class A,” signaling it is among the best, through “Class E,” warning that it is very troubling for consumers.

As courts such as the Ninth Circuit invalidate arbitration clauses in browsewrap ToS agreements, the pressure will be on companies to adapt their agreements so that courts will enforce them. Companies may well have a better chance with clickwraps.

 
 
 
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