Federal District Court Refuses to Compel Arbitration, Holding That Zappos.com's "Browsewrap" Agreement Was Not a Valid Contract

by Wilson Sonsini Goodrich & Rosati
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The recent decision in In re Zappos.com Inc., Customer Data Security Breach Litigation is an important reminder to online businesses that rely on browsewrap agreements to ensure that they effectively bind their end users to a terms of use agreement. As the Zappos decision reflects, companies using browsewrap agreements (i.e., by merely posting a link to the terms of use on the site, without requiring a click-through or other expression of agreement) need to make certain that such agreements are, at a minimum, conspicuous enough to put users on notice that use of the site is subject to the company's terms of use. Otherwise, companies risk losing the protection of their terms of use.

After a cyber attack in mid-January 2012 in which a hacker attempted to access personal account information of Zappos.com end users, end users filed a number of class action lawsuits against Zappos.com, Inc. (a subsidiary of Amazon.com) for damages resulting from the security breach. Zappos moved to compel arbitration of these actions based on an arbitration clause contained in the "Dispute" section of its online terms of use. The court denied Zappos' motion on the grounds that Zappos and its users had not formed a binding, enforceable contract. The court held that the Zappos.com terms of use, which were implemented as a "browsewrap agreement," did not create an enforceable contract with end users. In particular, the court focused on the fact that website users were not required to take any affirmative action to agree to the terms of use. In addition, the court noted that even if the end users had assented to the terms, the contract may not have been enforceable given that Zappos had reserved the unilateral right to change the terms at any time.

Browsewrap vs. Clickwrap Agreements

Website operators typically choose between so-called "browsewrap" and "clickwrap" agreements to form binding contracts with their users. As explained in Zappos, "with a browsewrap agreement, a website owner seeks to bind website users to terms and conditions by posting the terms somewhere on the website, usually accessible through a hyperlink at the bottom of the home page; in contrast, a 'clickwrap' agreement requires users to expressly manifest assent to the terms by, for example, clicking an 'I accept' button."

Because they require express, affirmative consent, clickwrap agreements typically are recognized as valid, enforceable agreements so long as the substantive terms are not "unconscionable" or do not otherwise violate applicable law. Courts have been more reluctant to uphold browsewrap agreements, generally doing so only where the end user knows or has reason to know that the site is offered subject to acceptance of the terms of use. This analysis is highly dependent on the specific details of the manner in which the terms are presented to the user.

The Zappos Decision

The Zappos terms of use were presented (a) in the footer of every page of the Zappos.com website with dozens of other links, (b) "below the fold," requiring users to scroll down to see them, and (c) in the same size, font, and color as other "non-significant" links in the footer. The court found that in this context, no reasonable user would have reason to click on the link to the terms.

In keeping with the United States Supreme Court decision in AT&T Mobility LLC v. Concepcion, the court acknowledged that the Federal Arbitration Act articulates a liberal federal policy favoring arbitration. The court noted, however, that arbitration will only be compelled where there is an enforceable agreement to arbitrate, which is analyzed under the state contract law. At a minimum, the court must find that there was mutual assent. Zappos found that no such assent existed because the terms of use were "inconspicuous . . . buried in the middle to the bottom of every Zappos.com webpage among many other links." The court found that users of the site had no reason to look at the terms and were not directed to them. Accordingly, the court refused to require arbitration.

Changes Without Notice

The court also expressed doubt that the terms of use would be enforceable from a substantive perspective because they contained a provision stating that Zappos "reserve[s] the right to change this Site and these terms and conditions at any time" without notice to the website user. According to the court, this blanket right of revision created an illusory contract, or in other words, no contract at all, because Zappos could decide at any time to alter its arbitration provision to suit its needs while the website user would remain bound. As such, the court suggests that even had a contract been formed, the unilateral right to modify the arbitration clause renders it unenforceable because the "agreement" to arbitrate is unfixed.

Implications for Companies That Use Browsewrap Agreements

At a minimum, Zappos suggests that website owners should require affirmative consent when their terms include arbitration provisions. To help ensure that their terms of use are valid and enforceable contracts in general, companies should consider utilizing clickwrap, rather than browsewrap, agreements. To reduce the intrusiveness of the clickwrap agreements and to ensure compliance, companies could integrate such contracts into common web user activities on their sites, such as sign-up, registration, or check out, and engage in periodic updates in which companies obtain "re-assent," especially when material changes are made to the terms of use, including modifications to arbitration provisions.

If a company nevertheless chooses to use browsewrap terms, it is important that notice of those terms, as well as of material changes, is conspicuous. Although it is unclear whether systematic notification procedures would have changed the outcome of Zappos, other courts, including in recent federal opinions such as Van Tassell v. United Mktg. Grp., 795 F. Supp. 2d 770 (N.D. Ill. 2011), and Hines v. Overstock.com, Inc., 668 F.Supp.2d 362 (E.D.N.Y. 2009), have held that browsewrap agreements can constitute binding contracts. As explained in those cases, the nature and substance of user notification are key factors in determining whether a particular browsewrap agreement constitutes a valid contract.

As the Zappos case illustrates, whether to use a clickwrap agreement or a browsewrap agreement is an important decision for companies. The decision depends heavily on the nature of the particular service, a company's litigation risk profile, and the importance of the enforceability of the particular terms.

>Wilson Sonsini Goodrich & Rosati is actively following developments around the country with respect to the enforceability of online contracts, and the firm is available to assist companies with counseling and litigation regarding these issues. Attorneys in the firm's technology transactions practice are available to review, or help draft, enforceable online contracts. For more information, please contact one of the authors of this alert, Suzanne Bell and John McGaraghan in the firm's technology transactions practice or Rodney Strickland and Dale Bish in the firm's consumer litigation practice, or your regular firm contact.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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