Federal Court Decision Provides Useful Guidance to Companies Offering Products and Services Pursuant to Online Terms of Use

by Wilson Sonsini Goodrich & Rosati

On July 29, 2016, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York issued an opinion and order in Meyer v. Kalanick, denying Uber Technologies' motion to compel arbitration of a consumer's antitrust conspiracy claim. The court's order has important implications for businesses that provide products and services pursuant to online terms of service.

Plaintiff Spencer Meyer filed suit against Uber CEO Travis Kalanick in December 2015. Uber later joined the lawsuit and filed a motion to enforce the arbitration agreement contained in the company's terms and conditions. The plaintiff opposed the motion, arguing that he did not have adequate notice that the arbitration agreement existed, and that therefore, no such agreement was formed. The court ultimately agreed with the plaintiff and denied Uber's motion. To fully understand the court's decision, it is important to consider the circumstances and placement of Uber's terms and the way in which Uber obtained user consent to them.

Uber's arbitration agreement was part of its terms and conditions. When Meyer registered for an Uber account via his Android smartphone, he entered his name and contact information on one screen and entered his credit card information on a second screen, then clicked a button that said "REGISTER." Below the "REGISTER" button, Uber included the following: "By creating an Uber account, you agree to the TERMS OF SERVICE & PRIVACY POLICY" (capitalization in original). The words "TERMS OF SERVICE & PRIVACY POLICY" were a hyperlink which, when selected, took the user to an intermediate screen containing another button that could be used to access the Terms and Conditions and Privacy Policy. The arbitration agreement was on the seventh page of a nine-page "User Agreement" that, the court found, contained "highly legalistic language that no ordinary consumer could be expected to understand."

The court began its analysis by reviewing case law addressing two ways in which companies obtain online consent: "clickwrap" agreements and "browsewrap" agreements. In a "clickwrap" agreement, users affirmatively click a box that states "I agree" (or similar language) to the designated the terms and conditions. In a "browsewrap" agreement, terms and conditions are posted via a hyperlink that often appears at the bottom of the screen. WSGR has issued previous alerts discussing these different approaches, including this one that followed the Ninth Circuit's Barnes & Noble decision in August 2014.

Consistent with these prior decisions, the court observed that clickwrap agreements "are more readily enforceable," whereas browsewrap agreements are only enforceable in certain limited circumstances. The court went on to conclude, however, that Uber's agreement did not fall into either category and that "these labels can take courts only so far." Instead, the court was guided by traditional principles of contract formation, which require (1) "reasonably conspicuous notice of the existence of contract terms" and (2) "unambiguous manifestation of assent to those terms." The court pointed to several factors demonstrating that Uber's terms did not meet these standards.

First, Judge Rakoff found it significant that users were not required to click a box stating "I agree." Second, Judge Rakoff noted that the license terms did not appear on the registration screen, nor was the hyperlink "prominently displayed." Instead, the "Terms of Service" hyperlink was not in close proximity to the Register button, which makes it less likely that users were exposed to the type of language that would have put them on notice of the contract terms, e.g., "by clicking 'Register,' you agree to the Terms and Conditions." Finally, the court noted that the "Terms of Service" hyperlink did not actually send the user directly to those terms, but rather to an intermediate landing page.

Taken together, these factors led the court to conclude that a reasonably prudent consumer would not have been aware of the relevant terms of the contract, including the arbitration clause, and did not sufficiently manifest their intent to be bound by them. The arbitration agreement was therefore unenforceable.

The Uber decision provides useful guidance to any company offering products and services pursuant to online terms of use. First, the decision reaffirms that clickwrap agreements in which users affirmatively click a box with unassailable consent continue to be the gold standard from an enforceability perspective. Second, the decision continues to caution against using browsewrap agreements to bind consumers. Third, the decision recognizes that there are hybrid solutions to obtain consumer consent, but there are risks in these approaches.

Because companies are increasingly using alternatives to "click boxes," including buttons that say "Register," "Continue," "Start," and other manifestations of assent, companies should consider:

  • Placing the "consent" language in immediate visual proximity to the button (as opposed to requiring users to scroll down)
  • Including the license terms on the registration page itself or through a conspicuous hyperlink that takes users directly to the terms (as opposed to nested, intermediate pages)
  • Using conspicuous words of assent (e.g., "By clicking this box, I agree to be bound by the Terms of Service")
  • Drafting terms of service in plain language that ordinary users can understand

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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