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The Business Lawyer

Winter 2021-2022 | Volume 77, Issue 1

Developments in Digital “Wrap” Contracts

Nancy S. Kim


  • This article covers developments in online contract formation. As in the past few years, this year’s cases demonstrate that courts are focusing on website design and transactional context and expecting companies to do more to make notices on their websites conspicuous.
Developments in Digital “Wrap” Contracts

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I. Introduction

This essay covers cases involving digital wrap contracts, which include browsewraps, clickwraps, sign-in wraps, and other variants. As was true last year, arbitration clauses involving gig economy companies dominate the cases this year and courts continue to provide greater guidance regarding how to apply the standard of “reasonable notice.” The cases illustrate the careful attention of courts to context, including the nature of the interaction, user experience, and website design.

Part II focuses on the factors courts consider in applying the two-prong test of “reasonable notice” and “manifestation of assent.” Part III focuses on specific terms in these contracts. One case finds that mandatory arbitration clauses are unenforceable against drivers engaged in food delivery services. Another sounds a cautionary note about the pitfalls of wrap contracts for the drafter. A third case involves terms in a privacy notice that are referenced in the company’s Terms of Service to the company’s chagrin. The survey ends, not with a case, but with a brief discussion of a wrap contract involving one of the world’s biggest companies. It underscores that even though contract terms may be unilaterally drafted, they are mutually enforceable and can have unintended consequences.

II. The Totality of the Circumstances—Including the Nature of the Interaction —To Assess the Reasonableness of Notice

In Kauders v. Uber Technologies, Inc., the Massachusetts Supreme Judicial Court for the first time considered what standard should be used to determine formation of online contracts. Significantly, the court recognized that although the “fundamentals of online contract formation should not be different from ordinary contract formation,” the experience of contracting online is different from paper transactions and reasonable Internet users may not realize that they are entering into a contractual relationship.

Plaintiff Christopher Kauders sued Uber, alleging that several drivers refused to provide him with rides because he was blind and accompanied by a guide dog. Uber moved to compel arbitration pursuant to the terms and conditions that it claimed applied to users such as the plaintiff.

The court considered Uber’s registration process at length. During the process of registering to use the Uber app Kauders filled out information on several screens, with the final screen containing the words LINK PAYMENT. The user was required to enter credit card information on this page. The court explained:

Under the box, white, boldface text stated “scan your card” and “enter promo code.” In the middle of the screen, below the word “OR” in white text, there was a large, dark button labeled “PayPal” that provided another mechanism for entering payment information.

At the bottom of the screen, there was white text that stated, “By creating an Uber account, you agree to the Terms & Conditions and Privacy Policy.”

The court observed that the terms were “extremely favorable” to Uber and touched on a “wide variety of topics.” Furthermore, the terms stated that Uber could amend them at any time without notice.

The court adopted the standard of “reasonable notice of the terms” and “reasonable manifestation of assent to those terms” to determine online contract formation. It noted that “[s]etting out these general fundamental contract principles is not, however, the difficult part of analysis”; rather, the difficulty lay in how to apply the standard to a given situation. Actual notice would satisfy the first prong. In the absence of actual notice, however, “the totality of the circumstances must be evaluated” to determine whether the user received reasonable notice.

According to the court, this “fact-intensive inquiry” required consideration of several factors, including the “form of the contract,” meaning whether the presentation appears to be contractual, as well as “the nature, including the size, of the transaction, whether the notice conveys the full scope of the terms and conditions, and the interface by which the terms are being communicated.”

“For Internet transactions,” the court continued, “the specifics and subtleties of the ‘design and content of the relevant interface’ are especially relevant in evaluating whether reasonable notice has been provided.” The examination of the interface should include evaluating the “clarity and simplicity of the communication of the terms” by considering such factors as:

Does the interface require the user to open the terms or make them readily available? How many steps must be taken to access the terms and conditions, and how clear and extensive is the process to access the terms? Ultimately, the offeror must reasonably notify the user that there are terms to which the user will be bound and give the user the opportunity to review those terms.

The second prong, reasonable manifestation of assent, required considering the “specific actions” necessary to manifest assent. For example, the interface could require a user to check a box to indicate agreement to terms and conditions. Actions the user takes in the context of clickwraps are the “clearest manifestations of assent.” The court explained the “several important purposes” of requiring an affirmative act of assent:

It puts the user on notice that the user is entering into a contractual arrangement. This is particularly important regarding online services, where services may be provided without requiring compensation or contractual agreements, and the users may not be sophisticated commercial actors. Without an action comparable to the solemnity of physically signing a written contract . . . we are concerned that such users may not be aware of the implications of their actions where agreement to terms is not expressly required. . . . Requiring an expressly affirmative act, therefore, such as clicking a button that states “I Agree,” can help alert users to the significance of their actions. Where they so act, they have reasonably manifested their assent.

The task of determining assent is more difficult in the absence of any requirement that the user take an express action, such as clicking, and the court was disinclined to find assent through inference:

Where the connection between the action taken and the terms is unclear, or where the action taken does not clearly signify assent, it will be difficult for the offeror to carry its burden to show that the user assented to the terms.

The court examined Uber’s interface at length. It noted many deficiencies, including that Uber did not require the user to scroll or select terms and did not require the user to click the link to the terms and conditions (even though the user did have to click the “Done” button), and that the connection between account creation and the terms was “oddly displayed” and not prominent enough.

The court found that Uber’s terms and conditions did not constitute a contract because the registration process did not provide users with “reasonable notice.” It contrasted Uber’s registration process for users with that for its drivers, which required that the driver click twice, once to indicate agreement, and again to indicate receipt and review of ALL THE DOCUMENTS and ALL THE NEW CONTRACTS. It concluded that in the absence of reasonable notice, “a contract cannot have been formed here.”

In Emmanuel v. Handy Technologies, Inc., the plaintiff, Maisha Emmanuel, filed a class action lawsuit claiming that Handy, the operator of an online platform that connected individuals with house cleaners, had misclassified her and other class members as independent contractors rather than employees in violation of state and federal laws. Handy filed a motion to compel arbitration claiming that Emmanuel was bound by its Independent Contractor Agreement.

Emmanuel had completed Handy’s online application form and then checked a box next to the words “I agree to Handy’s Terms of Use” with the words “Terms of Use” displayed as a blue hyperlink. If the link was clicked, the mandatory arbitration clause was visible only by scrolling on the screen. When Emmanuel used an assigned personal identification number to access Handy’s app, she saw a screen with bulleted statements indicating that she was an independent contractor, and not an employee. She was required to click a blue button labeled Confirm below the bulleted statements or a button labeled “Click here to return to portal home and see the newest jobs,” which would have refreshed the screen and returned her to the page with the bullet points. Emmanuel selected Confirm, and a second screen appeared that required acceptance of an Independent Contractor Agreement. Only a portion of that agreement was visible without scrolling. A blue button labeled Accept at the bottom of the screen partially obscured the Agreement and was visible even without scrolling through the rest of the Agreement. The only other option was to click a gray button that was again labeled, “Click here to return to portal home and see the newest jobs,” which resulted in the screen being refreshed. Visible only by scrolling was the arbitration clause. Emmanuel testified that she did not scroll through the terms but clicked Accept.

The district court held that under Massachusetts law, Emmanuel had entered into an arbitration agreement with Handy. The First Circuit agreed, stating that the precedent established in Kauders v. Uber Technologies, Inc. compelled it to do so. According to the court, the “reasonable notice of the terms” and the “reasonable manifestation of assent to those terms” standard articulated in Kauders was satisfied. Notably, the court chose to focus its analysis, not on whether the plaintiff clicked the box next to the link to the Terms of Use, but on her selection of the Accept button on the screen containing the initial sentences of the Agreement. The court noted that although only part of the Agreement was visible without scrolling, the portion that was visible “made clear” that there was additional text. Furthermore, the court stated that a website does not have to require a user to scroll through the entire Agreement for the manifestation of assent to be valid. More significantly, the court distinguished the facts in Kauders by noting that Emmanuel did not “simply download the app and open it,” but instead went through a multi-step screening process that included an online application, a telephone interview, a background check, and an in-person training session.

Thus, based upon the “totality of the circumstances,” the court found that a contract was formed. However, rather than focusing solely on a single moment of contract formation such as an isolated instance of clicking a button, it considered the multiple interactions Emmanuel had with Handy—which included, but were not limited to, the online contracting process. The case indicates that even if the precise moment of contract formation is unclear, a court may consider the “totality of the circumstances” to determine whether there was reasonable notice and manifestation of consent.

In HomeAdvisor, Inc. v. Waddell, appellees sued HomeAdvisor under the Texas Deceptive Trade Practices Act when contractors they found through the website abandoned jobs before they were completed. HomeAdvisor filed a motion to compel arbitration which the trial court denied. HomeAdvisor appealed, arguing that there was a valid agreement to arbitrate between it and the appellees.

The Court of Appeals agreed with HomeAdvisor and reversed the trial court’s order, stating as the governing standard that “an agreement to arbitrate exists where notice of the arbitration provision was reasonably conspicuous and manifestation of assent is unambiguous.” It noted that HomeAdvisor had submitted the declaration of its vice president of software development which stated that each of the appellees had created an account with HomeAdvisor and had submitted service requests through its website. To complete their service requests, the declaration continued, appellees must have clicked an orange button immediately below which appeared an express statement that the use of HomeAdvisor’s services was subject to its Terms & Conditions. The court characterized this as a sign-in wrap. The declaration included screenshots of each submittal page, an image of which the court included in its opinion. The declaration also stated that there was a hyperlink to the Terms and Conditions on “nearly every webpage” of the website.

The court applied the standard of a “reasonably prudent computer or smartphone user” to determine whether the terms were conspicuous, stating that to meet this standard it was not necessary for the terms themselves to appear on the page where the user indicates assent: “it is enough that the page contains a conspicuous hyperlink.” The court noted that the submittal page was “uncluttered” with only a “few spaces” to enter information and that the hyperlinked text was “dark against a bright white background, clearly legible, and the same size” as the other text on the screen. Furthermore, the “entire screen is visible at once with no scrolling necessary” and the user may click on the hyperlink and view the terms before submitting a request for service.

The Terms and Conditions contained an arbitration provision, which the court reproduced in its opinion. The words ARBITRATION AND GOVERNING LAW and other important terms, such as YOU GIVE UP YOUR RIGHT TO GO TO COURT, were in bold and all-caps, which distinguished them from the surrounding text. The court stated that the provision was “prominently noted with bolded and capitalized print” and that there was “nothing misleading or confusing” about the presentation of its user agreement. Furthermore, the appellees’ assent was “unambiguous” because they clicked the submit button which was “temporally coupled” with the receipt of the company’s services and they were “clearly advised” that clicking the orange button indicates assent. The court stated, “the reasonably prudent user would have understood that they could only receive HomeAdvisor’s referral services by agreeing to the company’s terms and conditions.”

Thus, the court considered the issue of reasonable notice and contract formation not by examining any single factor in isolation, but by considering the presentation of the terms and the entire contracting experience from the vantage point of the “reasonably prudent” user. Finally, the court held that the issue of unconscionability was delegated to the arbitrator pursuant to the arbitration agreement.

The Texas court’s approach regarding what constitutes reasonable notice contrasts with that adopted by a New Jersey court. In C.D. v. Massage Envy Franchising, LLC, the plaintiff alleged that a massage therapist committed assault and battery during a massage, and in doing so breached the contract between the parties which prohibited such conduct. Massage Envy claimed that the plaintiff agreed to arbitration when she clicked “agree” on a check box at the bottom of an electronic consent form which Massage Envy presented to plaintiff on a tablet device when she arrived for the service. The check box was at the end of a multi-page General Consent form and next to the words “I agree and assent to the Terms of Use Agreement,” with the italicized words being a hyperlink. Tapping on the hyperlink opened a new screen that presented a ten-page document titled Terms and Conditions. The Terms and Conditions contained a mandatory arbitration clause. Underneath the check box was a signature line where the plaintiff signed her name and then tapped a box that said CONTINUE. Massage Envy argued that the claim should be submitted to arbitration. The court disagreed, finding that the General Consent form failed to clearly direct the plaintiff to the Terms and Conditions which was where the arbitration lurked.

The court framed the question as “whether or not the arbitration clause presented here was done so ‘unfairly’ or ‘with a design to conceal or de-emphasize its provisions,’” defining “design” in a footnote as “arrangement, or format, or layout” and not “intent, a plan, or a state of mind.” It found that the design was defective but clarified that it was not holding that clickwrap agreements as a form of contract were unenforceable; rather, it was that “this particular arbitration provision” was unenforceable

because its placement, within a lengthy electronic document reached only by a hyperlink, which was accessible only adjacent to a signature line, which signature line followed a lengthy list of rules and disclaimers contained on an extended series of screens through which the user was required to scroll, was not under any fair analysis placed in such a way so as to give the plaintiff notice that there was more to consider in agreeing to the defendants’ membership rules.

The court’s conclusion reflects how “notice” is affected by the design of the website which, in this case, negatively affected the plaintiff ’s inclination to read the terms:

While it is undisputed that plaintiff did not read the electronic agreement reachable only by hyperlink, that is attributable, in this court's opinion, not to laziness, disinterest, or blithe indifference, but rather to an objectively confusing, nay misleading, design of the website. As a result, plaintiff's ignorance of the document's terms cannot fairly be ascribed to anything she did wrong.

These cases indicate that a finding of notice and manifestation of consent for purposes of contract formation may, depending upon the context, require more than an overt act in connection with a statement that acknowledges that terms and conditions apply to the transaction. In other words, the standard of reasonable notice should not be equated with a single presentation of a conspicuous notice; rather, courts will consider and evaluate the context of the transaction, the interaction of the user and the company, and the contracting process. Where a user is presented with notice of terms multiple times or on multiple occasions (for example, at account creation and then each time an order or request is made), a court is more likely to find reasonable notice and contract formation. By contrast, a single presentation of terms, even if prominent, will require evidence of deliberate or specific assent in order for a court to find contract formation.

III. Problems with the Substance of Terms

A. Class Action Waivers and Food Delivery Drivers

In Archer v. GrubHub, Inc., the plaintiffs were delivery drivers who sued Grubhub alleging that it unlawfully retained delivery charges and failed to reimburse them for travel expenses. Each plaintiff electronically signed a statement acknowledging that she had “read, understand[s], and/or agree[s] to be bound by the terms” of the Arbitration Agreement.

Grubhub moved to compel arbitration and the plaintiffs opposed, claiming that they did not agree to arbitration because the electronic pages did not “specifically reference” the arbitration agreement and did not “unambiguously reference” consent to arbitration. The court disagreed with the plaintiffs, finding that each signature page was time- and date-stamped and explicitly referenced the Arbitration Agreement and informed the signor that the signor was agreeing to be bound by the “conspicuous terms” of the Arbitration Agreement.

However, the court agreed with the plaintiff’s second argument that the Arbitration Agreement was not enforceable under section 1 of the Federal Arbitration Act (“FAA”) because the action relates to “contracts of employment of . . . workers engaged in . . . interstate commerce.” Furthermore, it concluded that because the FAA did not apply, the Massachusetts state policy against class action waivers was not preempted by federal law. Accordingly, the class action waiver provision in GrubHub’s Arbitration Agreement was unenforceable because it was against public policy.

B. Drafters Arguing Against Their Own Terms

In Stover v. Experian Holdings, Inc., Rachel Stover purchased Experian’s credit score subscription and assented to its terms and conditions. The terms included an arbitration provision, a class action waiver, and a change-of-terms provision stating that each time she accessed the website she was manifesting assent to the “then current” terms. Stover cancelled her subscription in 2014 and accessed it again only in 2018, at which time the arbitration provision had been changed to include a carve-out for disputes arising out of the Fair Credit Reporting Act (“FCRA”). Stover subsequently filed a class action complaint alleging violation of the FCRA and Experian moved to compel arbitration. The district court granted Experian’s motion, finding that the 2018 agreement applied but that Stover’s claims were not within the FCRA carve-out. Stover appealed claiming that the agreement was unenforceable under California law. Experian, too, argued against the district court’s order but on the grounds that “a mere website visit” was not enough to “activate” a change in terms. In other words, Experian was in the interesting position of arguing that its unilaterally modified updated terms did not apply to Stover.

The Ninth Circuit agreed with Experian, noting that Stover assented “only once” to a single contract that Experian modified without notice, and that she had “no obligation to investigate” whether there were new terms if she was not provided with notice. “Indeed,” continued the court,

the opposite rule would lead to absurd results: contract drafters who included a change-of-terms provision would be permitted to bind individuals daily, or even hourly, to subsequent changes in the terms. The absence of limits on the frequency or substance of changes in terms subverts the basic rule of contract law that “[a] contract exists where the parties assent to the same thing in the same sense, so that their minds meet.”

The court held that “in order for changes in terms to be binding pursuant to a change-of-terms provision in the original contract, both parties to the contract—not just the drafting party—must have notice of the change in contract terms.”

This case reflects the limits of a company’s ability to impose a unilateral modification clause, even in those jurisdictions that enforce them (and not all do). In order to bind a user, notice of upcoming changes should be presented to that user each time there is a change to the terms. As this case demonstrates, a unilateral modification clause is not notice of that change; rather, it is a notice that the company may change terms in the future. Accordingly, a company should not expect that a unilateral modification clause will bind existing users to subsequent changes unless there is specific advance notice of that subsequent change and a manifestation of the user’s assent to the new terms.

In Calhoun v. Google, LLC, the plaintiffs alleged that Google collected their personal data when they used the Chrome browser even when they chose not to use the “sync” feature, in violation of various state and federal laws. They argued that Google expressly promises to Chrome users that their personal information will not be sent to Google unless the user chooses to store that data in the user’s Google account by turning on sync. Google argued that it explicitly disclosed the data collection in its Privacy Policy which was incorporated by reference into its Terms of Service, and that the plaintiffs consented to Google’s data collection because they consented to the Terms of Service.

The court, however, disagreed and found that the disclosure was insufficient. It noted that there were four relevant documents: (1) Google’s Terms of Service; (2) Google’s Privacy Policy; (3) Chrome’s Terms of Service; and (4) Chrome’s Privacy Notice. As of March 31, 2020, the Terms of Service explicitly excluded the Privacy Policy by stating that “[a]lthough it’s not part of these terms, we encourage you to read” the Privacy Policy. According to the court, a “reasonable user consenting to Google’s Terms of Service on or after March 31, 2020 might have concluded that she was not consenting to Google’s Privacy Policy.”

Furthermore, the court stated that the Chrome Privacy Notice made “specific representations that could suggest to a reasonable user that Google would not engage in the alleged data collection,” including “You don’t need to provide any personal information to use Chrome,” and “The personal information that Chrome stores won’t be sent to Google unless you choose to store that data in your Google account by turning on sync.” Thus, a “reasonable user could have concluded that if he or she used Chrome without sync, his or her personal information would not be sent to Google.” Accordingly, “Google cannot show that Plaintiffs expressly consented to Google’s collection of data.”

In addition, the court denied Google’s motion to dismiss plaintiffs’ breach of contract claim. Google had claimed that the Chrome Privacy Notice was not contractual but merely “informational.” The court disagreed and found that the Terms of Service state that “by using our services, you’re agreeing to these terms,” and that the terms explicitly incorporated the Chrome Privacy Notice. Consequently, the court found that “rather than being an informational resource, the Chrome Privacy Notice is part of the contract between Plaintiffs and Google.” Finally, it denied Google’s motion to dismiss plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing because the allegations went beyond the breach of contract claim and alleged that Google acted in bad faith by, for example, circumventing cookie blockers.

C. Revisiting Arbitration Clauses

One of the most notable changes to digital wrap contracts took place outside of the courtroom. Amazon quietly dropped its mandatory individual arbitration clause from its Conditions of Use. While the May 2018 version of Amazon’s Conditions of Use contained multiple paragraphs providing that all disputes and claims are subject to binding individual arbitration, the current version eliminates those provisions and substitutes a clause stating that the state and federal courts in King County, Washington, are the exclusive forums for adjudication of disputes and that both parties waive their right to a jury trial. An article in the Wall Street Journal speculated that the change may have come about because the company received “more than 75,000” individual arbitration demands on behalf of Amazon Echo users who were suing over various privacy-related claims. These hefty arbitration filing fees were discussed in last year’s survey of digital contracts.

IV. Conclusion

Courts continue to provide more clarity about what it means for notice to be “reasonable” for purposes of online contract formation. Although the font and presentation of the terms themselves are relevant, the courts focus more sharply on the nature of the transaction and the totality of the user’s interaction with the company; they do not limit their attention to the moment when the terms are presented. Courts also take into account the nature of the relationship between the parties and the type of dispute. Thus, where a user is alleging assault and battery (as in C.D. v. Massage Envy Franchising, LLC) or discrimination (as in Kauders v. Uber Technologies, Inc.), courts may require specific notice and evidence of deliberate and intentional manifestations of consent.

In addition to the form of the terms, the substance was at issue in several notable cases. Terms may have unintended consequences for companies, even when unilaterally drafted. Companies should assess whether voluminous boilerplate terms actually serve their interests before imposing them upon website visitors as these terms can be used against them. If they have multiple documents containing digital adhesive terms, companies should consider how the terms interact with each other.