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April 17, 2012 Articles

Recent Developments in Enforcement of Online Consumer Contracts

Courts around the country weigh in on the reach and scope of online user agreements.

By Whitty Somvichian – April 17, 2012

As consumer transactions have shifted increasingly to the Internet, courts have had to grapple with applying existing legal standards to a new and continually evolving online environment. For example, courts have had to determine when a binding contract is formed in the context of “clickwrap” agreements (agreements in which Internet users affirmatively click to agree to terms) and “browsewrap” agreements (agreements formed by a user’s interaction with a website without an explicit manifestation of assent). Beyond this initial question of contract formation, however, several additional factors may also impact the enforceability of an online contract term, as highlighted by recent case law.

Enforceability of Amendments Imposing New Terms
Take, for example, a clickwrap agreement that states that users will be bound to future terms added by amendment if they continue to use the website. While clickwrap agreements are generally recognized to be enforceable, will an amended term be binding without an additional manifestation of assent? What if the new term is an arbitration clause, a new privacy disclosure, or some other provision that could significantly affect the rights of the parties? Courts have taken divergent approaches in addressing the enforceability of amended terms in these circumstances.

For example, in LLC v. Google, Inc., 693 F. Supp. 2d 370, 374 (S.D.N.Y. 2010), the court enforced a forum-selection clause added by amendment where the original term of service provided “Google may modify . . . these Terms at any time without liability and your use of the Program after notice that Terms have changed indicates acceptance of the Terms.” The court noted “the fact that one party reserves the implied power to terminate or modify a unilateral contract is not fatal to its enforcement, if the exercise of the power is subject to limitations, such as fairness and reasonable notice.”  Id. at 376 (quotation and citation omitted). Similarly, in MySpace, Inc. v. The, Inc., No. CV 06-3391, 2007 WL 1686966, at *9–10 (C.D. Cal. Feb. 27, 2007), the court enforced a liquidated-damages provision added by amendment where the original terms of service provided: “You agree to be bound to any changes to this Agreement when you use the Service after any such modification is posted.”The court held that the party was bound to the liquidated-damages provision because “it knew, or should have known” of the amended term by virtue of creating new MySpace user accounts after the amendment.

In contrast, the Ninth Circuit Court of Appeals in Douglas v. U.S. Dist. Court, 495 F.3d 1062, 1066 (9th Cir. 2007) refused to enforce an amendment to a consumer contract where the amendment was posted on the defendant’s website, stating that “[p]arties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side. Indeed, a party can’t unilaterally change the terms of a contract; it must obtain the other party’s consent before doing so.” While the court did not rule out the possibility that acceptance could be inferred from continued use of the website, it suggested that “proper notice” would be a minimum requirement of enforceability: “Even if [plaintiff’s] continued use of Talk America’s service could be considered assent, such assent can only be inferred after he received proper notice of the proposed changes.” IdSee also Comb v. PayPal, Inc., 218 F. Supp. 2d 1165, 1172 n.9 (N.D. Cal. 2002) (declining to enforce an amendment adding an arbitration clause where the agreement provided that “this Agreement is subject to change at any time without notice,” and noting in dicta that “PayPal’s unilateral and apparently unfettered right to revise the User Agreement does bear on the question of whether the User Agreement is substantively unconscionable”).

As another example, the district court in Sawyer v. Bill Me Later, Inc., No. CV 10-4461, 2010 WL 5289537, at *3 (C.D. Cal. Oct. 4, 2010),found that a plaintiff had adequate notice of the term at issue (a forum-selection clause) where (1) the defendant emailed notices to its users with a direct link to the amended terms and (2) the plaintiff had clicked on the link multiple times and continued to use the website. But the court nonetheless refused to enforce the forum-selection clause based on an analysis of the state-law interests at issue.

As these authorities show, even where the initial formation of an online contract is clear, the enforceability of an amended term may require a separate and potentially fact-intensive analysis. The relevant factors could include the methods used to notify users of the amendments (email, posting, etc.), the user’s actual or constructive notice of the terms, and the ability for users to opt out of the amendment, among others. For online businesses seeking to amend their terms of service, it will be critical to evaluate each of these factors in assessing the likelihood of enforceability of their amended terms.

Enforceability as to Minors
Additional issues may also arise where the online contracts at issue involve minors. In some actions brought by or on behalf of minors, the minors have sought to avoid enforcement of particular contract terms by relying on state-law principles that allow minors to disaffirm contracts in certain circumstances. For example, in A.V. v. IparadigmsLLC, 544 F. Supp. 2d 473 (E.D. Va. 2008), the minor plaintiffs sought to avoid a waiver of liability in an online clickwrap agreement by disaffirming the contract under state law. The court rejected that argument, finding that “Plaintiffs cannot use the infancy defense to void their contractual obligations while retaining the benefits of the contract. Thus, Plaintiffs’ infancy defense fails.”  Id. at 481. Similarly,the court in E.K.D. v. Facebook, Inc., 3:11-cv-00461-GPM-SCW (S.D. Ill. Mar. 8, 2012) enforced a forum-selection clause in Facebook’s terms of service over the minor plaintiff’s objection, explaining that “[t]he infancy defense may not be used inequitably to retain the benefits of a contract while reneging on the obligations attached to that benefit.” Given the ease with which minors can now enter into online contracts, these issues are likely to be litigated with increasing frequency. See, e.g., Meguerian v. Apple, Inc., No. 5:11-cv-01758-EJD (N.D. Cal.) (ongoing litigation involving minors’ online purchases in connection with apps on the Apple platform).

Enforceability of Arbitration Clauses and Class-Action Waivers
Nearly a year ago, the U.S. Supreme Court issued its decision in AT&T Mobility, Inc. v. Concepcion, holding that the Federal Arbitration Act (FAA) preempts a California state-law rule that precluded enforcement of class-action waivers in consumer contracts. At the time, many commentators predicted that Concepcion could mean the beginning of the end of consumer class actions as more and more companies took advantage of the holding to impose arbitration clauses with class-action waivers. The reality has been far more nuanced, as several state and federal courts since Concepcion have refused to construe the Supreme Court’s ruling as a rubber stamp of approval on all class-action waivers.

At the federal level, two recent court of appeals decisions have highlighted the limitations of Concepcion. First, the Second Circuit Court of Appeals held in In re American ExpressMerchants’ Litigation, 677 F.3d 204, 212 (2nd Cir. 2007) that Concepcion does not address the question of whether an arbitration clause and class action-waiver can be applied where “the practical effect of enforcement would be to preclude [the plaintiffs’] ability to vindicate their federal statutory rights.” The court then went on to invalidate the defendant’s arbitration clause and class-action waiver, finding that forcing plaintiffs to pursue individual arbitrations of their antitrust claims would effectively prevent enforcement of the federal statutory rights at issue—a rationale that has potentially broad implication in many different consumer contexts. Id. at 217–219.

In Kilgore v. KeyBank, N.A., the Ninth Circuit Court of Appeals invalidated California’s so-called Broughton-Cruz rule that prohibited arbitration of claims seeking “public injunctions” of deceptive advertising and similar issues. Nos. 09-16703, 10-15934, 2012 WL 718344, at *10 (9th Cir. March 7, 2012). Applying Concepcion, the court of appeals held that the FAA preempts the Broughton-Cruz rule because it purports to “prohibit[] outright the arbitration of a particular type of claim.” Id. (quotation and citation omitted). The Ninth Circuit did not end its analysis there, however. Instead, it went on to consider whether the arbitration clause at issue was enforceable under generally applicable unconscionability principles, ultimately finding that the term was binding because it was conspicuous and included an opt-out provision. Id. at 13–14. This latter aspect of the Kilgore ruling highlights the type of fact-specific inquiry that will still be required to assess enforceability of class-action waivers, even after Concepcion.

Far from applying a per se rule enforcing all class-action waivers, the authorities since Concepcion would seem to require a close analysis of the individual circumstances of each case. In the online context, these would likely include the following in many cases: how the terms are presented, whether a consumer can opt out, the nature of the transaction, and the viability of individual claims.

Keywords: litigation, consumer rights litigation, clickwrap, browsewrap, terms of service, Federal Arbitration Act

Whitty Somvichian is a partner with Cooley LLP in San Francisco, California, and is a cochair of the Consumer Litigation Committee.

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