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Wednesday, October 1, 2008

Court Addresses Modification of Clickwrap Agreement

The U.S. District Court for the District of Maryland (Titus, J.) recently had occasion to address the modification of a clickwrap agreement. Plaintiffs, real estate appraisers, used defendant FNC’s internet-based service, “Appraisal Port.” Plaintiffs brought a class action against FNC, alleging that FNC falsely claimed that information entered in Appraisal Port would be kept private and would be transmitted securely. FNC moved to stay the proceedings pending arbitration of plaintiffs’ claims, pointing to an arbitration provision contained in the user agreements that plaintiffs acknowledged when joining the service.

Plaintiffs argued that they were not parties to a valid arbitration agreement because FNC amended their user agreements during their memberships, replacing them with a new agreement that did not include any arbitration clause. FNC recognized that it “attempted” to so amend the user agreements but argued that its attempt “failed” because plaintiffs did not acknowledge the changes. Based on the language of the original clickwrap agreement, which included a clause about modification, the court concluded that the modification was effective and, thus, plaintiffs were not bound to arbitrate. The court denied the motion to stay.

(Note the interesting posture here. Usually, the party seeking arbitration is arguing effective unilateral modification to include arbitration terms; here, it is the parties opposing arbitration that point to a unilateral modification as effective, because the modification did not include arbitration terms).

(The court's reasoning is after the jump).

The court reasoned:

FNC argues that any modification to the prior user agreements was ineffective because it neither (1) complied with specific provisions in the prior agreement governing such modifications nor (2) complied with general principles of law governing the formation of contracts, including notice to the existing users. In considering these arguments, the Court should first clarify that, while parties may agree in advance to a method for modifying an agreement, such method is not exclusive, and the parties are free to choose another method of modification, thereby waiving the originally agreed provisions for modification. See 17A C.J. S. Contracts § 409. As explained herein, the Court concludes that FNC's modification through issuance of the 2005 Agreement either complied with the explicit provisions of the 2000 and 2002 Agreements, or, alternatively, such provisions were otherwise waived by the Arbitration Plaintiffs. 
 (a) Compliance with Modification Provisions

Both the 2000 and 2002 Agreements contain the following provision permitting FNC to modify the agreements unilaterally under certain conditions:

This User Agreement may be modified at any time. Whenever changes are made, the revised agreement will be posted at this location. New terms will be effective 30 days after the changes are posted. You will be asked to acknowledge your acceptance of the changes the first time you log in after the changes have been made.

(Emphasis added.) Under the plain terms of the first sentence, therefore, the 2000 and 2002 Agreements purport to give FNC the unilateral right to modify them at any time. FNC argues that the second, third, and fourth sentences in the modification paragraph create mandatory conditions that must be satisfied before a modification is valid. As discussed above, it is undisputed that FNC did not ask previously registered users to acknowledge the 2005 Agreement the first time they logged in after it was introduced or, for that matter, at any time they logged in. For this reason, FNC contends, its attempted modification was ineffective.


The Court disagrees for two reasons. First, the modification provisions of the 2000 and 2002 Agreements are, at the very least, ambiguous as to whether asking the user to “acknowledge” acceptance of the changes is truly a necessary condition to effect a modification. In a case cited by FNC, the Supreme Court of Mississippi ruled that “[a]mbiguities in a contract are to be construed against the party who drafted the contract.” Union Planters Bank, Nat'l Ass'n v. Rogers, 912 So.2d 116, 120 (Miss.2005)(citing Miss. Transp. Comm'n v. Ronald Adams Contractor, Inc. ., 753 So.2d 1077, 1084)). FNC cites Rogers, of course, because the Supreme Court there found that a bank customer's continued use of an account by itself was insufficient to effect a modification, at least where a prior mailing had stated that the customer's agreement would be effected by “signing a signature card and using your account.” 912 So.2d at 118-19. Critical to the result in Rogers, however, was the fact that it was the drafter of the modification provisions who sought to validate its own attempted modification, not invalidate it, as FNC seeks to do here. In stating the above-quoted passage as one of the bases of its decision, therefore, Rogers stands less for the strict construction of modification provisions in general, than it does for the strict construction of them against the drafter. (More on Rogers, infra.)

Turning to the facts of this case, the Court recognizes that all three sentences in the modification provision in the 2000 and 2002 Agreements include the phrase “will be.” Only one of those sentences, however, includes the effectiveness of the modification as being linked to the “will be” language. Specifically, while the second sentence states that the new terms “will be posted,” and the fourth sentence states that the user “will be asked to acknowledge,” only the third sentence purports to state explicitly the condition(s) under which the new, unilaterally imposed terms “will be effective.” By using the phrase “will be effective” in this manner, the third sentence creates an ambiguity because it is at least capable of being understood as stating that posting of the new terms for thirty days is not merely one in a series of necessary conditions but is, in fact, sufficient by itself to effect a modification. The implication of such a reading, of course, is that asking the user for acknowledgment is not necessary to effect a modification, but is rather mere “icing on the cake.”

The Court recognizes that FNC stated in the fourth sentence that it would “ask” prior users to acknowledge their acceptance of the changes the first time they log in after the new terms are posted. The question is: what are the consequences if it fails to do so? Nothing in the fourth sentence or in any other term explicitly indicates that asking for customer acknowledgment is a condition precedent to the effectiveness of FNC's unilateral modifications. The fourth sentence simply does not state that the revisions “will be effective” after they have been posted for thirty days and after users are asked to acknowledge their acceptance. And while such a requirement, as drafted, is capable of being read as a condition precedent to the effectiveness of a modification, such a reading is not clear in light of the explicit provision just before it that effectiveness “will” occur after the new terms are posted for thirty days. In sum, where it is ambiguous whether such an acknowledgment inquiry is a condition precedent to the effectiveness of a modification, and where FNC's legal position would benefit from its admitted failure to do so, the Court construes the language against FNC and concludes that the 2000 and 2002 Agreements permit modification by FNC at any time and that such modifications will be effective after they are posted for thirty days.

(footnotes omitted). Other interesting arguments were addressed in the opinion, including plaintiffs' argument that FNC should be precluded by the doctrines of estoppel and waiver from arguing that the 2005 Agreement does not apply.

Harold H. Huggins Realty, Inc. v. FNC, Inc., --- F.Supp.2d ----, 2008 WL 4135997
( D.Md. Aug. 28, 2008).

[Meredith R. Miller]

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