New Court Decision Prompts Websites to Revise their Terms

As a Silicon Valley corporate attorney, I work with a lot of Internet law and cyberspace law issues and am often asked by businesses to make sure their websites keep them free from trouble. Whether you are a large, multi-national corporation, a mid-size company, or a small business owner, chances are you run and operate a commercial website. One way to minimize the risk that comes from operating a commercial website is to create the conditions, sometimes called Terms of Use, that govern a visitor’s use of the site. A court decision in September, however, found that website terms could be invalid and therefore fail to provide any protection to website operators. Because the court is located in the federal district that includes California, it is a critical decision that affects California website operators.

The case, In re Inc., Customer Data Security Breach Litigation, 2012 WL 4466660 (D. Nev. Sept. 27, 2012) arises out of Zappos’ customer data security breach in January of this year. As is typical in a data breach situation, Zappos notified all persons whose personally identified information may have been compromised. When the inevitable lawsuit was filed, Zappos attempted to enforce an arbitration clause in the Terms of Use found on its website. A federal court in Nevada said “not so fast”.

Some background is helpful. Terms of Use are often created with little thought, and can often be changed at any time by the website operator. They typically are submitted as a “browse-wrap” agreement, which, unlike a “click-wrap” agreement, does not require the user to click on a box to confirm the user’s consent to the agreement. Browse-wrap agreements are usually referenced with an inconspicuous link at the bottom of a home page.

Courts have previously upheld website Terms of Use where users consent to them, such as in a click-wrap agreement, or where users knew about them, such as in a browse-wrap agreement. Like many things in the law, knowledge does not just mean that the user actually knew about the terms of use, but that the user was properly (or, in legalese, “reasonably”) notified that the Terms of Use existed. As we will see, this is where Zappos ran into problems.

The court said the Zappos’ Terms of Use failed for two reasons.

First, the court said that the Zappos Terms of Use were not set up to create a binding contract. The problem is that the link to the Terms of Use was not conspicuous, so a user would not have notice of its terms. The court said that a link that “is the same size, font, and color as most other non-significant links” will not work to form a contract. The court also noted that the website did not direct a user to the Terms of Use when creating an account, logging in, or making a purchase. Absent any direct proof that the user had read the Terms of Use, no contract existed.

Second, even if a contract was formed, the Zappos Terms of Use could be changed by Zappos, but not the user, at any time and without notice. Specifically, the court said that Zappos’ ability to change the arbitration requirement allowed Zappos to change its mind about whether to arbitrate or litigate, notwithstanding the same option was not provided to users. In legalese, this meant that the arbitration clause lacked a “mutuality of obligation”. The court looked to other federal courts that had examined the same issue, and said that this one-sided ability to follow a provision rendered the provision invalid, or, in legalese, “illusory”. In other words, when it came to arbitration, there was not a deal. Therefore, Zappos could not enforce its arbitration clause.

In light of this case, any website operator should review its Terms of Use, preferably with the assistance of counsel, to make sure the website’s Terms of Use can adequately protect the operator and business from liability.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.