Court’s Invalidation of Zappos.com’s Arbitration Provision Offers Lessons for Company Websites

Late last year, the United States District Court of Nevada handed down a ruling that has significant consequences for companies engaged in commerce on the internet.[1] In the case, customers of online retailer Zappos.com sued the company seeking damages resulting from a security breach in which a hacker accessed Zappos’ customer information in 2012. Zappos attempted to invoke the arbitration provision contained in its website’s Terms of Use, but the court held that the Terms of Use did not constitute a valid or enforceable agreement to arbitrate.

The Terms of Use provided as follows: “We reserve the right to change this Site and these terms and conditions at any time. ACCESSING, BROWSING OR OTHERWISE USING THE SITE INDICATES YOUR AGREEMENT TO ALL THE TERMS AND CONDITIONS IN THIS AGREEMENT, SO PLEASE READ THIS AGREEMENT CAREFULLY BEFORE PROCEEDING.” The court’s reasoning was based on two issues that this language presented. First, users had not actually agreed or accepted the website’s Terms of Use because the link to the Terms of Use was inconspicuous and the website did not direct users to view or indicate their assent to the agreement. Second, the language gave Zappos the unrestricted, unilateral right to amend the agreement without consent or notice rendered the agreement illusory. For instance, if Zappos had decided it did not want to adhere to the arbitration provision, it could have simply amended the Terms of Use midway through the litigation. Since Zappos had made no binding promise to arbitrate, the agreement to arbitrate in the Terms of Use was not an enforceable contract.

There are two main lessons that any company with an online presence should note.

Use Clickthrough Agreements

Make sure your terms of use are of the “clickthrough” variety rather than of the “browsewrap” variety. The Terms of Use posted on Zappos’ website were of the sort that courts categorize as “browsewrap” agreements. Browsewrap agreements ostensibly bind website users to the agreement by virtue of the fact that the agreement is accessible somewhere on the website, usually via a link. Clickthrough agreements require website users to affirmatively indicate their acceptance of the agreement by, for example, clicking a button labeled “I Accept.”

While the courts haven’t condemned browsewrap agreements entirely, if you found yourself in a litigation situation, you would have to either produce evidence that the customer had actual knowledge of the terms or demonstrate that your site provides “reasonable notice” of the terms, either of which might be difficult to do. On Zappos’ website, the link to the Terms of Use was located on every page on the site between the middle and bottom of the page, below the fold. The court described the link as being the same size, font, and color as other insignificant links and users were not prompted to review the Terms of Use when creating an account, logging in, or making a purchase. The court held that because the link to the Terms of Use was inconspicuous and users were not directed to them, the plaintiff customers had not agreed to the Terms of Use and thus no valid agreement existed.

Simply avoiding browsewrap agreements eliminates this problem. Website users should have to click on a button to indicate that they have read and accepted the terms. It is easy enough to require new users to do this when they create individual accounts. Those who already have accounts can indicate their assent by clicking on an appropriate button at the point of their next purchase or other transaction. If you have customers who use your website, but you don’t have an opportunity to elicit their consent to the terms, you may want to consult your lawyer to come up with a way to enable your customers to review and accept the revisions.

Do Not Reserve the Unilateral Right to Amend

Do not reserve the sole right to change your terms of use at any time without consent. Zappos’ unrestricted, unilateral right to amend its Terms of Use was found by the court to render the agreement illusory and therefore unenforceable, especially because Zappos was not required to give notice or obtain the users’ consent to any amendment. While some court decisions highlight only the failure to give notice of an amendment as being key, at least one court has found an agreement illusory when the defendant reserved the right to amend the agreement at any time by giving notice to the customer — despite the obligation of notice. It is clear, then, that simply promising to provide notice of any amendment is insufficient; user consent must be obtained in some fashion. In addition, if your business model makes it appropriate, you may wish to consider including some mechanism to allow users to propose amendments that would be effective only with your consent. Your attorney can help you craft language to enable you to revise your terms of service as your industry and your business needs change and grow.


Footnotes

[1] In re Zappos.com Inc., Customer Data Security Breach Litigation, 2012 WL 4466660 (D. Nev. Sept. 27, 2012)


© 2013 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

About Alexander Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

You can read more about Alex here.

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