Monday, December 2, 2013
Over at the Huffington Post, Sam Fiorella takes note of the egregious terms in Facebook Messenger's Mobile App Terms of Service. These terms include allowing the app to record audio, take pictures and video and make phone calls without your confirmation or intervention. It also allows the app to read your phone call log and your personal profile information. Of course, an app that can do all that is also vulnerable to malicious viruses which can share that information without your knowledge. But, of course, this is allowed only with your "consent."
Sunday, November 24, 2013
I want to thank all the experts who participated in last week's symposium on WRAP CONTRACTS: FOUNDATIONS AND RAMIFICATIONS . They raised a variety of issues and their insights were thoughtful, varied and very much appreciated. I also want to thank Jeremy Telman for organizing the symposium and inviting the participants.
Today, I’d like to respond to the posts by Michael Rustad, Eric Zacks and Theresa Amato. Eric Zacks emphasizes the effect that form has on users, namely that the form discourages users from reviewing terms. Zack notes that contract form may be used to appeal to the adjudicator rather than simply to elicit desired conduct from the user and that forms that elicit express assent - such as “click” agreements - help the drafter by aiding “counterfactual analysis surrounding the ‘explicit assent’” issue. In other words, drafters may use contract forms to manipulate adjudicator’s decisionmaking and not necessarily to get users to act a certain way. (This is a topic with which Zachs is familiar, having just written a terrific article on the different ways that drafters use form and wording to manipulate adjudicators’ cognitive biases).
Both Michael Rustad and Theresa Amato focus, not on form, but on the substance of wrap contracts – the rights deleting terms that contract form hides so well. Amato comes up with an alternative term to wrap contracts – online asbestos – to highlight the not-immediately-visible damage caused by these terms. As a consumer advocate and an expert on how to get messages to the general public, Amato understands the need to overcome the inertia of the masses by communicating the harms in a way that can drown out the siren call of the corporate marketing masters. So yes, a stronger term may be required to jolt consumers out of their complacency although the real challenge will be getting heard and beating the marketing masters at their own game.
Michael Rustad notes that my doctrinal solutions fall short of resolving the problem of predispute mandatory arbitration and anti-class action waivers. He’s right, of course, although I think reconceptualizing unconscionability in the way I propose (by presuming unconscionability with certain terms unless alternative terms exist or the legislature expressly permits the term) would reduce the prevalence of undesirable terms including mandatory arbitration and class-action waivers. Rustad, who has considerable expertise on this subject, mentions that many European countries are further along than we are in dealing with unfair terms. Many of those jurisdictions, however, also have legislation which limits class actions, tort suits or damages awards. In addition, they don’t have the same culture of litigation that we do in this country. Wrap contracts have their legitimate uses, such as deterring opportunistic consumer behavior and enabling companies to assess and limit business risks. In order to succeed, any proposal barring contract terms or the enforceability of wrap contracts must also consider those legitimate uses.
I believe there is a place for wrap contracts and boilerplate generally but their legitimate uses are currently outweighed by illegitimate abuses of powers. Wrap contract doctrine has moved too far away from the primary objective of contract law – to enforce the reasonable expectations of the parties-- and my solutions were an attempt to move the train back on track. My focus was on doctrinal solutions but the problems raised by wrap contracts are complex and my solutions do not foreclose or reject legislative ones. I’m a contracts prof, so my focus naturally will be on contract law solutions (if you have a hammer, everything looks like a nail, I guess). Doctrinal responses have the advantage of flexibility and may be better adapted to dynamic environments than legislation which can be quickly outdated when it comes to technology or business practices borne in a global marketplace.
Admittedly, when it comes to wrap contracts, doctrinal flexibility hasn’t really worked in favor of consumers, but that only makes it more important to keep trying to sway judicial opinion. I know there are those who question whether judges read legal scholarship, but I know that there are many judges (and clerks) who do. The case law in this area has spiraled out of control so that it makes no sense to the average “reasonable person” and has opened the door to the use of wrap contracts that exploit consumer vulnerabilities.
My book was not intended as a clarion call to rid the world of all wrap contracts; rather, it was intended to point out how much damage wrap contracts have done, how much more they can do, and to provide suggestions on how to rein them in and use them in a socially beneficial manner.
I’m grateful to have had the opportunity to hear the insightful comments of last week’s highly respected line-up of experts and to share my thoughts with blog readers.
Thursday, November 21, 2013
It’s my pleasure to respond to Tuesday’s posts from Juliet Moringiello and Woodrow Hartzog. Juliet Moringiello asks whether wrap contracts are different enough to warrant different terminology. Moringiello’s knowledge in this area of law is both wide and deep and her article (Signals, Assent and Internet Contracting, 57 Rutgers L. Rev. 1307) greatly informed my thinking on the signaling effects of wrap contracts. The early electronic contracting cases involved old- school clickwraps where the terms were presented alongside the check box and their signaling effects were much stronger than browsewraps. Nowadays, the more common form of ‘wrap is the “multi-wrap,” such as that employed by Facebook and Google with a check or click required to manifest consent but the terms visible only by clicking on a hyperlink. Because they are everywhere, and have become seamlessly integrated onto websites, consumers don’t even see them. Moringiello writes that today’s 25-year old is more accustomed to clicking agree than signing a contract. I think that’s true and it’s that ubiquity which diminishes their signaling effects. Because we are all clicking constantly, we fail to realize the significance of doing so. It’s not the act alone that should matter, but the awareness of what the act means. I’m willing to bet that even among the savvy readers of this blog, none has read or even noticed every wrap agreement agreed to in the past week alone. I wouldn’t have made such a bold statement eight years ago.
Woodrow Hartzog provides a different angle on the wrap contract mess by looking at how they control and regulate online speech. With a few exceptions, most online speech happens on private websites that are governed by “codes of conduct.” In my book, I note that the power that drafting companies have over the way they present their contracts should create a responsibility to exercise that power reasonably. Hartzog expands upon this idea and provides terrific examples of how companies might indicate “specific assent” which underscore just how much more companies could be doing to heighten user awareness. For example, he explains how a website’s privacy settings (e.g. “only friends” or authorized “followers”) could be used to enable a user to specifically assent to certain uses. (His example is a much more creative way to elicit specific assent than the example of multiple clicking which I use in my book which is not surprising given his previous work in this area).
Hartzog also explains how wrap contracts that incorporate community guidelines may also benefit users by encouraging civil behavior and providing the company with a way to regulate conduct and curb hate speech and revenge porn. I made a similar point in this article. I am, however, skeptical that community guidelines will be used in this way without some legal carrot or stick, such as tort or contract liability. (Generally, these types of policies are viewed in a one-sided manner, enforceable as contracts against the user but not binding against the company). On the contrary, the law – in the form of the Communications Decency Act, section 230- provides website with immunity from liability for content posted by third parties. Some companies, such as Facebook, Twitter or Google, have a public image to maintain and will use their discretionary power under these policies to protect that image. But the sites where bad stuff really happens– the revenge porn and trash talking sites – have no reason to curb bad behavior since their livelihood depends upon it. And in some cases, the company uses the discretionary power that a wrap contract allocates to it to stifle speech or conduct that the website doesn’t like. A recent example involves Yelp, the online consumer review company that is suing a user for posting positive reviews about itself. Yelp claims that the positive reviews are fake and is suing the user because posting fake reviews violates its wrap contract. What’s troubling about the lawsuit, however, is that (i) Yelp almost never sues its users, even those who post fake bad reviews, and (ii) the user it is suing is a law firm that earlier, had sued Yelp in small claims court for coercing it into buying advertising. To make matters worse, the law firm’s initial victory against Yelp (where the court compared Yelp’s sales tactics to extortion by the Mafia) for $2,700 was overturned on appeal. The reason? Under the terms of Yelp’s wrap contract, the law firm was required to arbitrate all claims. The law firm claims that arbitration would cost it from $4,000-$5,000.
I agree with Hartzog that wrap contracts have the potential to shape behavior in ways that benefit users, but most companies will need some sort of legal incentive or prod to actually employ them in that way.
Wednesday, November 20, 2013
I’m thrilled to have the opportunity this week to engage with an outstanding line-up of scholars on the topic of wrap contracts. In today’s post, I will respond to posts by Ryan Calo and Miriam Cherry.
Miriam Cherry observes that wrap contracts raise much of the same issues raised by contracts of adhesion and my book canvasses those similarities. But they also raise different issues, primarily because their digital form makes it easier for companies to abuse and for consumers to ignore and also because courts don’t adequately recognize how form affects the behavior of both parties. The difference in form leads to a difference of degree so that it’s virtually impossible (pun intended) to engage in any online activity without agreeing to the terms of an unreadable wrap contract. My proposals aim to respond to the ways in which form affects perception to get us closer to the underlying objective of contract law – to fulfill the reasonable expectations of the parties. The form of wrap contracts raises issues that are unique to them and consequently, call for different solutions - solutions that respond to the problem of form.
Ryan Calo focuses on the role of technological design in contract formation and enforcement which is not surprising given his extensive expertise and research in this area regarding effective notice. The way that technological design of contracts affects parties’ behavior is underappreciated in the literature on contracts of adhesion. Calo observes that the potential for mischief through the use of standard terms is even worse than the examples I give in my book (this is a great relief since I am often accused of exaggerating the dangers of wrap contracts). As Calo notes here and elsewhere, the digital contracting environment has made it easier for companies to understand the consumer and so manipulate the consumer’s perceptions and behavior. I agree and would like to respond to his wish that I had addressed the argument made by Scott Peppet and others (who I’ll call “digital solutionists”) who claim that this very environment might aid the consumer and that increased digitalization could ameliorate the limits of freedom of contract. I agree with the first part, but disagree with the second. Greater access to information and the digital landscape may, in many cases, aid consumers who can research products, announce their “likes” and dislikes, and tweet their dissatisfaction to attract the customer service departments of large companies. This shouldn’t, however, influence the discussion regarding freedom of contract. There is a distinction to be made between the product or service that is the subject of the contract and the terms of the contract itself. The former is salient to consumers and they will often research that information before they act. For a variety of reasons, including cognitive biases but also tricky design employed by companies, the latter is not. Anyway, comparing terms does no good if the terms are all the same – it’s the old fiction about “shopping for terms” reincarnated in digital form.
Even assuming that the current state of affairs changes and there is awareness and competition for contract terms, the consumer is already inundated with too much information online. Are we really going to impose a requirement or an expectation that they read through online reviews or download an app simply in order to understand the contract terms? Even if the reviews exist (which they may not for some products or companies) and even if they are accurate (which they may not be), they add a layer of complexity to consumer transactions which may hamper effective decision-making and aggravate cognitive biases. How much research is a consumer expected to do simply to be able to buy a product, bank or communicate online? And is that something we want as a society – wouldn’t this negatively impact productivity, increase transaction costs for the consumer, and muck up the wheels of commerce (and isn’t this why we tolerate standard form contracts in the first place, to improve productivity, reduce transaction costs and grease the wheels of commerce)?
Drafting companies have all the power in the digital contracting environment – they have the bargaining power of old school drafters of adhesive contracts but they also have the power to present the terms in a multitude of ways. They decide whether and how to attract user attention. They determine whether to use clickwraps, browsewraps, multi-wraps, graphics or sounds. They exercise that power in a way that meets very minimal legal requirements of notice. The onus is on the consumer to ferret out terms, chase down hyperlinks, understand dense legalese and reconcile conflicting language. Are we going to require even more of consumers, expecting them to “go beyond” the contract by reading online contract reviews and downloading the “compare contracts” app (assuming one exists)? Maybe digitalization or augmented reality will make it easier for consumers to compare terms --but it will likely make it more complicated especially when those terms are constantly changing thanks to modification at will provisions. Doesn’t it make more sense to require the company to draft the terms so they are easy to find and understand? There’s more to say about the digital solutionist view but I will leave that for another forum. For now, my response is that the digital solutionist view is actually part of the problem, rather than the solution because it, like wrap contract doctrine, demands nothing from drafting companies and creates more work for consumers, exacerbating the lopsided balance of burdens that currently exists.
Monday, November 18, 2013
I'm enjoying the posts from Ryan Calo and Miriam Cherry about my book, Wrap Contracts: Foundations and Ramifications and plan to post a response later this week. A common question I get (after, Are these things really legal?) is What harm can these contracts cause anyway? Well, one woman claims that a company can use them to ruin your credit. The woman, Jen Palmer, ordered some trinkets from KlearGear.com but she claims that she never received them and canceled the payment. After she allegedly failed to reach someone at the company, she wrote a negative review of KlearGear.com on a consumer reporting website stating that they have "horrible" customer service. KlearGear allegedly emailed her, claiming that her negative review ran afoul of a non-disparagement clause in their online terms of sale. She says that they told her to remove the post or face a $3500 fine. Ms. Palmer was unable to get the post removed and alleges that KlearGear.com reported her to a credit bureau! She claims that she is now fighting the negative mark on her credit report which is preventing her from getting loans for a new car and house repairs.
I don't think the terms of sale are enforceable against Ms. Palmer but that's almost beside the point. Contracts are used in a variety of ways - one of those ways is to deter problems. Not many consumers are willing to fight to test the enforceabilty of a contract in court.
But I have a question: Why would a credit agency ding someone's record simply because they received a call from an online retailer about someone who wasn't even a customer breaching the terms of sale? I checked KlearGear's website and couldn't find the non-disparagement clause in their terms of sale- they might have removed it after the negative publicity or it might not be in another agreement that doesn't appear until a customer places an order. There's got to be more to this story...or else we've just entered a new era of abuse by wrap contracts.
Wednesday, November 13, 2013
Starbucks lost an arbitration fight with Kraft Foods and is being fined nearly $2.8 billion. Yes, you read that right - that's billion with a B. At the center of a dispute was a 1998 contract that required Kraft to distribute and market Starbucks brand coffee to U.S. retailers. The agreement was supposed to terminate in 2014 but Starbucks didn't want to wait that long. It complained that Kraft wasn't doing a good job promoting its coffee and offered Kraft $750 million to terminate the contract. Kraft rejected but Starbucks ended it in 2011 anyway (and entered into a deal with Green Mountain Coffee Roasters) which led Kraft to commence arbitration proceedings.
Another reminder to think carefully about those long durations in contracts - you can never predict how things will go and it's a good idea to really think about those termination provisions.
In a situation that underscores the importance of thinking twice about very long term contracts, the NBA wants to end a contract which requires it to pay two brothers a percentage of its broadcast revenues. Back in 1976, the Silna brothers owned an ABA franchise, the Spirits of St. Louis. When the ABA merged with the NBA, the Silnas agreed to this bargain - they would dissolve their team in exchange for 1/7 of the television revenues for the four ABA teams that were merged. The four teams were the Indiana Pacers, the San Antonio Spurs, the Brooklyn Nets and the Denver Nuggets.
Sure, back in 1976, the Silnas might have looked silly for giving up a huge buyout for something that seemed pretty worthless (the NBA wasn't even televised prime time) but now the deal is being called "the greatest sports deal of all time."
Not kidding about that "all time" either - the Silvas reportedly received $19 million under the contract last season and the contract term is "in perpetuity." Fat chance the NBA will be able to scream foul on the basis of lack of mutuality...
Thursday, October 31, 2013
According to this scary report from National Public Radio, children are not entirely rational. Well, perhaps we should not overstate the conclusions one can draw based on the relevant research. Children are only boundedly rational when it comes to Halloween candy.
A psychologist at Dartmouth College discovered that children were happier when they got a candy bar than they were when they got a candy bar and a piece of gum. This research calls into question our earlier assumption that more is better.
And it turns out that, according ot the same NPR report, Halloween candy is not the only realm in which people's responses to experiences can defy our expectations. It turns out that, while colonoscopies are bad, colonoscopies in which a tube is left inserted in the patient for a while, causing additional discomfort, are . . . (if you guessed worse, you're getting colder), at least according to a survey of patients on what they thought of the experience.
The trick (or treat) is to save the best (or the least bad) for last. If y0u are handing out candy tonight, and you don't want to get your house egged back into the stone ages, give the children some prunes, and then as they reach for their mace, offer a candy bar. They will leave happy and nominate you for a Nobel Prize. Similarly, if you are going to perform an invasive procedure on someone, make sure you have something less bad with which to follow it up.
Wednesday, October 16, 2013
Just when you start to lose faith in the judiciary, a couple of cases come along that suggest that some judges are willing to exercise common sense. I blogged about Judge Koh’s opinion regarding consent in a case involving Google and email scanning in a previous post. Today, I want to talk about a case that was even more delightful because it bucked the wave of arbitration clause cases ruling against consumers. In Clark v. Renaissance West, LLC, the Superior Court of Maricopa County found an arbitration clause substantively unconscionable and therefore unenforceable -- and the Court of Appeals affirmed!
The plaintiff was John H. Clark, an eighty-eight year old man who was admitted into a nursing facility owned by Renaissance West. After checking in, he signed an arbitration agreement which required him to arbitrate all disputes with Renaissance West. After he was discharged, he filed a complained alleging that while he was at the nursing facility, he had been neglected and consequently, suffered a severe pressure ulcer that required medical treatment and long term case. Renaissance West moved to dismiss and compel arbitration. The trial court held an evidentiary hearing at which Clark’s expert witness testified that it would cost Clark approximately $22,800 in arbitrator’s fees to arbitrate the case. The trial court ruled that based upon Clark’s limited income (he was retired and living on a fixed income), the arbitration agreement was substantively unconscionable. The Court of Appeals agreed.
There were several noteworthy aspects to this case. First, the trial court found that the arbitration agreement was not procedurally unconscionable. The Agreement was a separate document from other paperwork signed at the time of admission, it was conspicuous and in bold font and large print. It was also not offered on a take-it-or-leave-it basis and it could have been rescinded within thirty days of signature. But, as Maxwell v. Fidelity held, you don’t need both procedural and substantive unconscionability in Arizona. Substantive unconscionability will do.
The Court of Appeals noted that an arbitration agreement “may be substantively unconscionable if the fees and costs to arbitrate are so excessive as to ‘deny a potential litigant the opportunity to vindicate his or her rights.’” The question of whether arbitration is prohibitively expensive depends “on the unique circumstances of each case” and courts consider the following factors.
The first is “the party seeking to invalidate the arbitration agreement must present evidence concerning the cost to arbitrate.” This evidence “cannot be speculative,” and must be based upon “specific facts showing with reasonable certainty the likely costs of arbitration.” The court found that the expert testimony was adequate to establish the estimate cost of $22,800 in arbitrators’ fees alone.
The second factor is that a party must make a “specific individualized showing as to why he or she would be financially unable to bear the costs of arbitration” based upon his or her specific income/assets. Here, the plaintiff testified that he was retired, living on a fixed income, and did not have any financial resources such as savings or stocks. His total monthly income of $4,630, consisted of social security benefits, a pension and veteran’s assistance payments. The court deferred to the trial court’s finding that in light of these facts, arbitration would be cost-prohibitive.
The third factor is “whether the arbitration agreement or the applicable arbitration rules references in the arbitration agreement permit a party to waive or reduce the costs of arbitration based on financial hardship.” In this case, the arbitration agreement did not provide for a reduction or waiver of fees based upon financial hardship. Strike three.
Based upon an analysis of the three above factors, the court concluded that there was reasonable evidence to support the trial court’s finding that plaintiff would be unable to afford to arbitrate his claims. Consequently, the arbitration agreement “effectively precludes Plaintiff from obtaining redress for any of his claims, and is therefore substantively unconscionable and unenforceable.”
Friday, October 11, 2013
One of the dangers of constructive contractual consent (a foundational principle of wrap contract doctrine) is that it might be used to prove statutory consent and thereby strip unknowing consumers of rights provided by law. Scholars such as Wayne Barnes and Woody Hartzog have argued that constructive contractual consent can undermine privacy protections provided by federal law. While there aren’t too many federal laws protecting consumer privacy, the ones that do exist generally provide that a practice is permissible if consumers consent. Google raised that very argument recently in its defense to a lawsuit that claimed that Google’s practice of scanning users' emails violated federal and state wiretapping laws.
The Wiretap Act, as amended by the Electronic Communications Privacy Act, prohibits the interception of “wire, oral, or electronic communications,” but it is not unlawful “where one of the parties to the communication has given prior consent to such interception.” Plaintiffs argued that Google violated the Wiretap Act when it intentionally intercepted the content of emails to create profiles of Gmail users and to provide targeted advertising. One of Google’s contentions was that Plaintiffs consented to any interception by agreeing to its Terms of Service and Privacy Policies. The court states:
“Specifically, Google contends that by agreeing to its Terms of Service and Privacy Policies, all Gmail users have consented to Google reading their emails.”
Yes, that’s right-- Google is arguing that by agreeing to its Terms of Service and Privacy Policies, you – yes YOU Gmail user – have agreed to allow Google to read your email!
Even more alarming, Google claims that non-Gmail users who have not agreed to its Terms of Services or Privacy Policies have impliedly consented to Google’s interception when they send email to or receive email from Gmail users.
Thankfully, Judge Lucy Koh is nobody’s fool. Without stepping into the muck and goo of wrap contract doctrine, she notes that the “critical question with respect to implied consent is whether the parties whose communications were intercepted had adequate notice of the interception.” Then she does something astounding , admirable and all-too-rare - - she interprets adequate notice in a way that actually makes sense to real people:
“That the person communicating knows that the interception has the capacity to monitor the communication is insufficient to establish implied consent. Moreover, consent is not an all-or-nothing proposition.”
Even with respect to Gmail users, she notes that “those policies did not explicitly notify Plaintiffs that Google would intercept users’ emails for the purposes of creating user profiles or providing targeted advertising.”
Judge Koh’s nuanced opinion reveals an understanding of online consent that’s based on reality. She notes that that “to the extent” that the user has consented to the Terms of Service, it is “only for the purposes of interceptions to eliminate objectionable content,” not for targeted advertisements or the creation of user profiles. She analyzes the contract from the standpoint of a reasonable user, rather than blindly following the all-or-nothing-constructive consent model mindlessly adopted by ProCD-lemming courts.
The opinion states that “it cannot conclude that any party – Gmail users or non-Gmail users- has consented to Google’s reading of email for the purposes of creating user profiles or providing targeted advertising.” I think most reasonable people - Gmail users and non-Gmail users alike – would agree.
Monday, October 7, 2013
I’ve been meaning to blog about a Fourth Circuit opinion that went under noticed, although it should have raised alarm bells. That opinion, rendered in Metropolitan Regional Information Systems, Inc. v. American Home Realty Network, Inc.,722 F.3d 591 (July 17, 2013) held that copyright could be transferred via a clickwrap.
The TOU states:
“All images submitted to the MRIS Service become the exclusive property of (MRIS). By submitting an image, you hereby irrevocably assign (and agree to assign) to MRIS, free and clear of any restrictions or encumbrances, all of your rights, title and interest in and to the image submitted. This assignment includes, without limitation all worldwide copyrights in and to the image, and the right to sue for past and future infringements.”
The defendant, AHR, operates a website, NeighborCity.com which displays real estate listings using a variety of sources, including photographs taken from the MRIS website.
MRIS sued AHR for copyright infringement. Photographs are protected under the Copyright Act. Section 204 of the Copyright Act requires that transfers of copyright ownership require a writing that is signed by the owner. AHR argued that MRIS did not own the copyright to the photographs because its TOU failed to transfer those rights. The issue then was whether a subscriber who clicks agreement to a TOU has “signed” a “written transfer” of the copyright in a way that meets the requirement of Section 204. The Fourth Circuit found that “(t)o invalidate copyright transfer agreements solely because they were made electronically would thwart the clear congressional intent embodied in the E-Sign Act. We therefore hold that an electronic agreement may effect a valid transfer of copyright interests under Section 204 of the Copyright Act.”
Given the reality that few read wrap contracts, holding that an author/creator can give up copyright with a click is alarming. The opinion is a prime example of a court doing what is arguably the right thing for reasons of business competition but creating an alarming precedent in the process. Shades of ProCD! Online businesses will certainly benefit from this decision, but creators - not so much. They may realize too late that when they clicked to upload content, they also assigned their rights to their work. This is especially problematic since the primary reason creators use some of these sites is to get publicity for their work. The bargain, in other words, may be quite different from what the creator might have intended.
So - all you creators out there - BEWARE and check out those terms before you click. They may not be as harmless as you think.
H/T to my former student, Leslie Burns and her blog.
Friday, September 20, 2013
"By now, you’ve heard the stories of passengers urinating in bags, slipping on sewage, and eating stale cereal aboard the Carnival Cruise ship that was stranded in the Gulf of Mexico — not exactly the fun-filled cruise for which the passengers had signed up and paid." My post on "Carnival Cruise and the Contracting of Everything" is available here.
Friday, September 6, 2013
I start my first year contracts course with consideration. For the first time, I’m also teaching a contracts drafting course. Based upon the contracts drafting texts that I reviewed, the general consensus seems to be that recitals of consideration are basically pointless. While I think that’s somewhat true in that they don’t contain performance obligations, it’s misleading, too. Courts not only consider recitals in construing clauses and the parties’ intent, a recital of consideration may create a rebuttable presumption or may estop a party from claiming lack of consideration. In other words, in some cases, it can save a party from a claim that consideration was insufficient.
A recent case involving a patent assignment, Network Protection Sciences v. Fortinet, 2013 WL 4479336 (N.D. Cal 2013), seemed to go even further when the court, applying Texas law, held that a recital was conclusive. The recital in question stated that the patent was assigned “for good and valuable consideration, the receipt of which is hereby acknowledged.” The party contesting the assignment argued that it was invalid because it was “beyond dispute” that no consideration was paid for it. The court, applying Texas law, rejected that argument finding the recital conclusive and that “(e)ven if no actual consideration were paid…NPS’s agreement to be bound by the choice-of-law provision would be deemed adequate consideration.” In other words, according to the court, the recital is conclusive with respect to the issue of whether there was consideration for the assignment but even if it weren’t, agreeing to the choice of law provision was sufficient consideration. Is this the law in Texas, is it unique to Texas, or did the judge make new law? Any contracts profs care to weigh in?
In any event, it seems that consideration wasn't the way to go anyway because (although the parties didn't raise the issue) the assignment seems to fall under Restatement section 332 regarding gratuitous assignments that are irrevocable if signed and delivered to the assignor. This makes sense to me because a written assignment can affect third parties who rely upon it.
The case is also noteworthy because it opens with a quote from a recent NYT oped, coauthored by Santa Clara law prof Colleen Chien, which discusses the problem of “patent trolls” (companies that buy up patents with the intent to sue for infringement, rather than to practice the patented invention). The court’s decision denying the defendant's motion to dismiss the patent infringement action was a bit disappointing given the way it began its opinion and the less-than-admirable behavior of the plaintiffs and their trollish behavior in pursuing the action. Where are the activist judges when you need them?
Wednesday, August 7, 2013
This post responds to the thoughtful comments offered by my co-blogger Jeremy Telman in his post about my op-ed. As he hinted, an op-ed provides a great forum for raising issues to a larger, non-academic audience but it is hardly the place to be thorough. Jeremy’s post gives me an opportunity to briefly touch upon the issues that I address in my forthcoming book. (Note: If you use the promotion code 31998 and click here you get a 20% discount).
Jeremy raised the issue of the inadequacy of doctrinal solutions. In fact, all of my proposed solutions are doctrinal. There are undoubtedly more effective way to achieve societal changes, but doctrine obviously matters and right now, the law of wrap contracts is a mess. It’s in a mess in a lot of different ways, yet the courts seem to be in denial, repeating the refrain that wrap contracts are “just like” other contracts. This is simply not so. Much of my scholarship looks at how technology shapes behavior and argues that courts should consider the role of technology when they interpret and apply the law. With respect to wrap contracts, courts ignore the ways that digital form affects both user perception and drafter behavior (i.e. overuse). My proposed solutions seek to make the effects of the digital form part of the court’s analysis.
One of these solutions, briefly mentioned in the op-ed and discussed in the book and elsewhere, is a “duty to draft reasonably” which acts to counter the burden of the “duty to read.” The duty to draft reasonably has very little to do with getting consumers to read contracts – it’s about getting companies to ask for less by making it less palatable for them to ask for more. As I explain in great length in my book, there are plenty of reasons why I am not a big fan of the duty to read –and why I think trying to get consumers to read is an inadequate solution. Consumers shouldn’t be expected to read online contracts, at least, not as they are now drafted. Reading wordy online contracts is not efficient and would hurt productivity. It’s also useless, since consumers can’t negotiate most terms. Instead, we should try to get companies to present their contracts more reasonably/effectively. We should require them to signal the information in an effective manner, the way that road signs signal dangerous conditions. For example, I propose using icons, such as the danger icon that accompanies this post, to draw consumers’ attention to certain information. Currently, courts construe “reasonable notice” to mean something other than “effective notice” – and this places too heavy a burden on consumers to ferret out information. A “duty to draft reasonably” shifts the focus from the consumer's behavior to the drafting company’s behavior. Could the company have presented the information in a better way? And if so, why didn’t it? This is a question that courts used to ask with paper contracts of adhesion – but for some reason, they have moved away from this with wrap contracts.
A related doctrinal adjustment that I propose in my book is specific assent. For terms that take away user rights (which I refer to as “sword” and “crook” provisions), the user should be forced to actively assent by, for example, clicking on an icon. The idea here is also not to get users to read, but to hassle them! Imagine having to click to give away each use of your data. What a pain – and that’s the point. The incorporation of a transactional hurdle or burden damages the relationship between the website and the user – and the more hurdles, the more annoying it becomes to complete the transaction.
Both proposals try to signal the type of company to the consumer. A website full of danger icons sends a very different message than one with only one or two danger icons. A website which requires a user to click forty times to complete a transaction won’t be around too long.
As for better solutions, there are ways to address specific problems by using third party tools and I am all in favor of technical solutions. For example, you can use duckduckgo or Tor to try to cover your tracks. But technical solutions have their shortcomings or limitations because they only address one part of the larger problem and it gets to be a bit like whack-a-mole as technology shifts and improves.
Ultimately, any comprehensive solution has to be implemented by the government – either the legislature or the judiciary. But it’s up to us, the consumers, to raise the issue as one needing a solution and we can do this through the democratic process and by marching with our feet. I agree with Jeremy that there are problems with collective action – there are coordination and resource issues as well as cognition limits, but that doesn't mean we shouldn't do anything. I don’t want to get into the thicket of that in this already too-long post, but I address this issue at great length in my book and propose that one way to deal with this is by reconceptualizing unconscionability.
Consumer advocacy groups and the websites referred to by Jeremy in his post certainly help with the collective action problem. They inspire us to get off the couch. Not easy when companies make it so comfortable for us to do nothing but that’s the nature of the beast here – it’s the same in other areas where consumers face the corporate marketing machinery and its expertise in manipulation. As Kate O'Neill notes in the comments to Jeremy's post, we contracts profs have a role which is to point out the inconsistencies and contradictions in judicial application of doctrine and propose better ways to evaluate legal issues. Some may scoff that judges don’t read law review articles --or books written by academics-- but it’s our job to keep trying.
Wednesday, July 24, 2013
The Ninth Circuit recently decided an interesting case involving video on demand – or is the Hopper a DVR? That was one of the questions at the heart of Fox Broadcasting Company v. Dish Network. (Jeremy Telman had previously blogged about the case when the complaint was first filed a year ago). At issue was the Dish Network’s PrimeTime Anytime service which only works with the Hopper, a set top box with digital video recorder and video on demand functionalities. PrimeTime Anytime records Fox (and other) network shows and stores the recordings for a certain number of days (typically eight) on the Dish customer’s Hopper. Dish does not offer video on demand from Fox (but see discussion below). Dish started to offer a new feature called “AutoHop” that allows users to skip commercials on shows recorded on PrimeTime Anytime (although it doesn’t delete the commercials, the user can press a button to skip them). Fox sued Dish for copyright infringement and breach of contract and sought a preliminary injunction. The Ninth Circuit upheld the district court’s denial of the motion. The copyright issues are interesting, but I’m going to skip over them using this blog’s virtual AutoHop feature and get right to the contract issues, which are much more interesting to readers of this blog.
There were two agreements at issue here. There was a 2002 license agreement and a subsequent 2010 letter agreement (there were others but these were the two relevant ones). Pursuant to the 2002
agreement, Fox granted Dish a limited right to retransmit Fox’s broadcast signal to Dish’s subscribers. It also contained several restrictions and conditions and prohibited video on demand. A 2010 letter agreement, however, agreed to video on demand provided that Dish agreed to certain conditions, the primary one being that it couldn’t show the content without commercials.
So the basic questions (overly simplified for blog purposes) were – did Dish distribute Fox video on demand content? If so, did it comply with the terms of the 2010 letter? (Okay, that’s not exactly how the court or the parties put it, but those were the issues stripped down to their essence).
Fox argued that Dish breached this provision of the 2002 contract:
“EchoStar acknowledges andagrees that it shall have no right to distribute all or any portion of the
programming contained in any Analog Signal on an interactive, time-delayed, video-on-demand
or similar basis; provided that Fox acknowledges that the foregoing shall not restrict EchoStar’s practice of connecting its Subscribers’ video replay equipment.”
The district court construed the word “distribute” as requiring a copyright work to “change hands” (analogous to under the Copyright Act). Because the copies remained in users’ homes,they did not change hands and there was no distribution. Fox challenged this construction and argued that the prohibition against distribution meant that Dish would not make Fox programming available to its subscribers on the aforementioned basis. The Ninth Circuit found both Fox’s and the district court’s constructions plausible (yes I realize there’s a distinction between interpretation and construction but I don’t want to go there right now, although you may).
The Ninth Circuit withheld judgment on which construction was better but stated that “in the proceedings below, the parties did not argue about the meaning of ‘distribute.’ We express no view on whether, after a fully developed record and arguments, the district court’s construction of ‘distribute’ will prove to be the correct one.”
The court did, however, express skepticism that PrimeTime Anytime was not “similar” to video-on- demand (remember, the 2002 contract prohibited “video-on-demand or similar basis”)(emphasis added by yours truly). The “distribution” of that, therefore, would violate the 2002 contract. Dish argued that its service was not “identical” to VOD but, as the Ninth Circuit noted, did not explain why it was not “similar.” (Note: I hope all you contracts profs are feeling ever more relevant! And our students thought we were just making mountains out of molehills when we focused on the importance of contract language). The addition of that word “similar” might just save Fox when the case goes to trial. Especially since, as even the district court held, if PrimeTime Anytime is VOD, then Dish clearly breached the contract which prohibited skipping commercials. The district court, however, wasn’t convinced that it was VOD. Rather, the district court concluded that it was a hybrid of DVR and VOD and “more akin” to DVR than VOD.
In other words, the district court’s analysis went along these lines – the 2002 contract was not breached because there was no distribution of VOD (or similar) content. The 2010 contract was not breached because this was not VOD but DVR. In short, this was not VOD and there was no distribution of a VOD-like service.
Query if the 2010 amendment had adopted the “VOD or similar” language instead of just “VOD”; in other words, what if it permitted Dish to offer Fox’s programming as VOD or “similar” service? My guess is that they specifically drafted it narrowly to include just “VOD” to limit the scope of the license – but that it ended up backfiring to exclude the conditions on “similar” services. Funny how drafting rules of thumb can sometimes come back to bite you. Note the problem was created because the definitions were not consistent in the 2002 and 2010 agreements – it created a gap regarding a service (a “VOD similar service”) which required judicial construction. Distribution of VOD or similar services was prohibited under the 2002 contract but VOD was permitted under the 2010 provided commercials were not skipped. And what happens to showing (not distributing) "similar services to VOD"? Mind the gap!
There was a final issue regarding a “good faith” in performance type clause. The Ninth Circuit concluded that there was no evidence that Dish launched PrimeTime Anytime “because it was unwilling to comply with the requirements to offer Fox’s licensed video on demand service, rather than because Dish lacked the technological capability to do so.” Frankly, I’m not sure why this was not a bigger issue since it seems, at least to me, that Dish is trying to get around the “no commercial skipping” restriction in the 2010 agreement by using the Hopper.
The Ninth Circuit noted a few times that it was applying a “deferential standard of review” given the request for a preliminary injunction so I don’t think Dish can rest easy just yet. I think Fox’s case will eventually hinge upon how the contract issues are resolved. What is the meaning of “distribute”? (I don’t know enough about how Dish technology works to determine whether distribution occurred. Even under the district court’s definition, could it have occurred? Does rebeaming signals constitute distribution? Is the service analogous to a lease? I think there’s room here). Is the PrimeTime Anytime service VOD or not? And isn’t that 2002 agreement relevant in determining what the meaning of VOD is under the 2010 amendment? Finally, why did the court give the “good faith in performance of contract” such short shrift?
I didn't get to review the actual agreements, but I would look at what exactly is being licensed under the 2002 agreement. Does it exclude the VOD-like service or include it? The gap seems odd to me - it must be addressed in one of the agreements. What exactly does Dish have the right to do? That seems to me one of the keys to unlocking the "correct" interpretation of the contract - and help determine whether the obligation of good faith is being fulfilled.
The real hammer here is going to be contract renewal - if Dish pisses off Fox and the other networks then it may kiss its business goodbye if they don't renew their contracts. (As I mentioned, I haven't seen the contracts so don't know what the terms are).
As the court notes, the parties probably didn’t contemplate a hybrid DVR and VOD (this is the old “anticipating the future and new technologies” problem that contract drafters have to which I’ve previously referred) I think the copyright issues weigh more heavily in favor of Dish whereas Fox has the better argument re the contract issues. Of course, the much larger policy issue is how to strike the balance between contract and copyright – a recurring issue since the late eighties…Generally, it's been advantage contracts.
Monday, July 15, 2013
As Jeremy Telman noted in his post, the OUP website which sells my forthcoming book on wrap contracts contains a wrap contract that requires users to the site to accept cookies. This type of wrap is what I refer to as "contract as notice", and much better than what most websites do, which is implement a "notice as contract". The OUP website requires specific assent to a particular term which raises the salience of the term. My guess is that OUP provides this because its parents company is based in the U.K. which has better laws about this kind of stuff. Most US corporate websites throw a bunch of terms into a browse wrap to which the user is deemed to have given blanket assent. Visitors to OUP's website -- which requires specific assent -- are made aware of the cookies, whereas most visitors to other sites aren't even aware that a contract governs. This is the difference between effective notice and ineffective notice, aka contracts that nobody reads but that courts deem are still enforceable via constructive assent.
The real problem with not reading is the nature of the terms that go unread--if you don't read terms, what's to stop a company from piling them on, adding more intrusive privacy stripping terms and rights deleting provisions ( to use a Radin-esque term). According to case law, not much.
I set my browser to alert me when I visit a website with cookies and I just couldn't visit any site without having to press the "allow" icon several times. Now I allow first party cookies, and ask for a "prompt" from third parties. I wouldn't be able to use my computer otherwise.
And now, we have the pleasure of being tracked in person. This morning, the NYT reported that some physical stores have started testing technology that allows tracking of customers' movements by using their smart phone signals. Nordstrom tried the old "Notice as Contract" method, by posting a sign telling customers they were being tracked. Those customers who saw the sign were creeped out. How long before we get used to these notices - and start to ignore them? How long before they are so ubiquitous that we have as little choice as we do online to stop a company from tracking and collecting information about us?
BTW, you can't read the NYT article unless your browser is set to allow cookies.....
Thursday, July 11, 2013
I cover all of this ground (and more) in my forthcoming book but more on that later....
Wednesday, July 3, 2013
The NYT's (new) ethicist, Chuck Klosterman tackled the issue of non-disparagement clauses in last Sunday's magazine (you have to scroll down past the first question about the ethics of skipping commercials). Klosterman stated that, "(n)ondisclosure provisions that stretch beyond a straightforward embargo on business-oriented “trade secrets” represent the worst kind of corporate limitations on individual freedom — no one should be contractually stopped from talking about their personal experiences with any company." He adds, "You did, however, sign this contract (possibly under mild duress, but not against your will)." A non-disparagement clause, however, is quite different from a blanket nondisclosure provision - the ex-employee may presumably talk about her personal experiences, as long as she leaves out the disparaging remarks. "Mild duress" is an oxymoron since duress, by its definition, is not mild and if you sign something under duress, you are signing it against your will. Despite getting the nuances wrong, the advice -- which is basically to say nothing bad but say nothing good either -- is sound. Sometimes silence speaks volumes.
Non-disparagement clauses in settlement agreements are fairly common and I don't think they are necessarily outrageous (it is a settlement agreement afterall). That's not the case with this agreement, posted courtesy of radaronline and discussed at Consumerist. The agreement doesn't contain a non-disparagement clause but still manages to be overreaching. The agreement, purportedly from Amy's Baking Company , requires that its employees work holidays and weekends, and extracts a $250 penalty for no-shows. It also forbids employees from using cell phones, bringing purses and bags to work, and having friends and family visit during working hours. The contract also contains a non-compete clause, prohibiting employees from working for competitors within a 50 mile radius for one year after termination. What the agreement doesn't contain is a non-disparagement clause - and a clause prohibiting employees from sharing the terms of the agreement with others. My guess is that those clauses will probably show up in the next iteration of the contract....
Friday, June 14, 2013
I just finished reading contracts prof Amy J. Schmitz's article, Sex Matters: Considering Gender in Consumer Contracting, 19 CARDOZO J. LAW & GENDER 437 (2013) which I thought was particularly timely given all the interest in consumer contracts. As Schmitz points out, too often discussions about "context" are left out of discussions about consumer contracts, especially from efficiency theorists who "mistakenly assume that market competition and antidiscrimination legislation address any improper biases in contracting." Schmitz's article is a thoughtful and comprehensive work that canvasses and synthesizes existing research, including behavioral economics and consumer legislation, in this area. She does a great job of highlighting ways in which existing legislation falls short of protecting against gender discrimination and incorporates a great deal of empirical and cognitive research regarding how gender affects both parties in consumer contracting scenarios. She notes that the available data suggests that women receive "less financially attractive sales and loan contracts, which may lead to higher debt loads for women." (at 447) Schmitz also conducted her own survey and shares the results which indicated gender disparities in areas such as confidence in ability to negotiate terms and ability to get companies to change terms. She argues in this article (as she has elsewhere) that context and "contracting culture" matters, and argues that gender be considered among the factors contributing to a contracting culture. For those who think that the free market is a fair market, Schmitz's paper should provide food for thought (as should this article that discrimination in housing persists against non-whites).
*Yes, I knew that putting "sex" in the title would increase traffic.
Friday, May 24, 2013
Given all the excitement over boilerplate on this blog, I thought it would be a good time to remind readers of problems that might arise that don't exactly involve (just) boilerplate, It's not just the words in the contract -- the way the contract is presented can create problems, too. I've been meaning for a while to discuss this NYT article about a lawsuit against Dollar Rent a Car. According to the article and the complaint, the plaintiffs were customers who specifically declined the insurance coverage that car rental companies are always pushing (and which is often covered by customers’ personal auto insurance policy and/or credit card). They were then handed a tablet and asked to sign electronically. When they returned the car, they were surprised with a much larger-than-expected bill that included a “loss damage waiver” which, like insurance, “waives” the customer’s liability for loss or damage to the car.
I planned to blog about this last month, but just as I was about to, I received a reprint of Russell Korobkin’s article, recently published in the California Law Review. The title, The Borat Problem in Negotiation: Fraud, Assent and the Behavioral Law and Economics of Standard Form Contracts, sounded intriguing and as I started to read it, I realized that the article addressed a lot of the issues raised by the car rental form contract/electronic signature situation. I thought it might be fun (er, contracts prof style-fun) to view the Dollar Rent a Car problem through the lens of Korobkin’s proposed Borat solution.
According to the article, the Dollar-Rent-A-Car plaintiffs explicitly told the car rental agent that they were declining insurance coverage yet unknowingly signed for it on an electronic tablet. This illustrates one way that contracting form matters –I suspect it was easier for customers to be misled by the “loss damage waiver” language because they didn’t have an easy way to read the surrounding language. While paper consumer contracts are generally adhesive, customers do have the option of declining insurance coverage. While many customers may still have overlooked the meaning of the language, others may have scanned the few sentences immediately before the signature line (this seems particularly true of the plaintiffs, who one of whom is an insurance lawyer).
Sales agents are typically paid a commission to upsell the insurance coverage and each of the plaintiffs paid a hundred to several hundred dollars more than they expected to pay.
I tried to get a copy of Dollar’s rental agreement off their website. While their general policies are posted, which references their rental agreement, the agreement itself is not available. That’s already a strike against them in my book – why not post the rental agreement on your website since you’re going to have your customer sign it anyway? I think it’s because the company doesn’t really expect anyone to read the agreement. Most people don’t read, but that doesn’t mean they wouldn’t if the company made more of an effort to make the agreement accessible and readable.
Without a copy of Dollar’s actual rental agreement, I can only make assumptions about what it contains but my guess is that it contains an integration clause and a no-oral modification or “NOM” clause. The latter may not be enforced but the former brings the contract into the grip of the parol evidence rule. The PER rule won’t effectively block a fraud claim, but fraud claims may be difficult to prove in this context. The other avenue for redress is under a consumer protection statute claiming unfair or deceptive trade practices. But what about contract law – can it do anything here to help the consumers?
Korobkin’s article doesn’t specifically address consumer actions, but he tackles the “Borat Problem” which often occurs in consumer contracting situations. According to Korobkin, the Borat Problem occurs when two parties “reach an oral agreement. The first then presents a standard form contract, which the second signs without reading or without reading carefully. When the second party later objects that the first did not perform according to the oral representations, the first party points out that the signed document includes different terms or disclaims prior representations and promises.”
As readers of this blog are well aware, contractsprofs went through a slight obsessive period with the Borat contract when it first arose. To quickly summarize, several people who were in the 2006 movie, Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan sued the producer, Twentieth Century Fox, claiming that they were misled into appearing in it. Korobkin states that these plaintiffs claimed that the studio obtained their consent using a two part strategy, “false representations followed by standard form contracts that included language designed to contradict or disclaim those representations.”
Sound similar to the Dollar situation? Although the Dollar agent didn’t expressly make false representations, they allegedly acted in a way that misled the plaintiffs into believing they were acting consistent with their wishes, and that the contract they were signing reflected their understanding. Korobkin discusses existing legal remedies to the Borat problem and concludes they are not so satisfying for various reasons. He then discusses the risk of “bilateral opportunism,” meaning that a “pure duty to read” rule leaves nondrafting parties vulnerable to exploitation by drafters and a “no-exploitation rule” leaves drafters vulnerable to opportunistic behavior (i.e. bad faith claims) by nondrafters. He discusses the different ways that each party might take advantage of the other under either rule and throws in a good amount of behavioral economics to back up his arguments – for example, “confirmation bias” makes it difficult for even sophisticated nondrafters to notice when a contract term contradicts a prior representation made by the drafter. Korobkin also discusses the role of trust, specifically that reading a contract may signal that the nondrafter doesn’t trust the drafter. I think trust plays a role (even if small) in the Dollar scenario – afterall, nobody wants to be that jerk in line who challenges the smiling service rep. There's also social pressure in that nobody want to be that jerk holding up the line of foot tapping customers by asking questions about fine print (believe me, I know).
Korobkin’s “Borat Solution” would require specific assent to written terms that are inconsistent with prior representations. This effectively puts the burden on drafters to include a “clear statement” that the particular provision takes precedence over prior representations and “realistic notice” which would generally mean that the parties actively negotiated the term. I like this proposal (and have proposed something very similar to it in the context of online agreements) because it recognizes that drafters have the power to make terms more salient. The notion of blanket assent puts too much of a burden on the nondrafting party instead of the party that has the power to actually communicate the terms more effectively.
So would the Borat solution have changed anything in the Dollar scenario? I think so, but for a different reason than the actual Borat scenario. A clear statement and realistic notice would preclude having customers sign on an electronic tablet without also making immediately visible the relevant provision. In other words, the customer wouldn't be asked to sign without being able to read the waiver provision. Although it's not expressly stated, it seems implied from the NYT article that the contract provision was not viewable on the tablet. If that's the case, that provision would not be enforceable.
So, for those of you planning to research the consumer contracts conundrum this summer, in addition to Margaret Jane Radin’s book, Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law and Oren Bar-Gill’s book, Seduction by Contract, I recommend that you add Korobkin’s article to your summer reading list.