ContractsProf Blog

New Scholarship: Nancy Kim on the Proposed Restatement of Consumer Contracts Law

Nancy Kim, our Nancy Kim, has posted "Ideology, Coercion, and the Proposed Restatement of the Law of Consumer Contracts" on SSRN.  Her essay focuses on Sections 2 and 3 of the proposed Restatement (RLCC), which adopt the standard of notice and manifestation of assent and permit modifications under that standard.  According to Nancy, these provisions entail two significant shifts from what the case law establishes. First, the RLCC assumes a coherence and stability with respect to the law of electronic contracts that is without support in the case law.  Second, it ignores the different ways that courts have dealt with different categories of wrap contracts. As a result of these two moves, the RLCC ignores the purpose of a law of consumer contracts. By prioritizing efficiency over fairness, the RLCC dismisses the value of consent and sanctions coercive contracting.

Nancy begins by explaining why people are generally bound by contracts they sign under the so-called "duty to read."  She then notes that the duty to read makes less sense in the context of consumer contracts that are often contracts of adhesion.  Legislatures responded to the harsh terms in such contracts of adhesion by creating defenses, such as unconscionability, and by creating implied warranties in the Uniform Commercial Code.  In addition, courts will enforce the reasonable expectations of the consumer.  So, for example, if an insurance contract creates a reasonable expectation of coverage, courts will require the insurer to pay the claim.  In some jurisdictions, courts require that the contract terms be communicated to the consumer in a manner that is clear and understandable (the "reasonable communicativeness test").

According to Nancy, the two-pronged test adopted by the RLCC, reasonable notice and manifestation of assent, derives from Judge Easterbook's opinions in ProCD v. Zeidenberg  & Hill v. Gateway, the latter of which we have previously discussed (in passing) on the blog.  Those cases gave rise to the "rolling contract theory" in which a vendor can offer terms after the contract has been formed, which the consumer accepts by retaining and using the goods.  But Easterbrook's reasoning is not universally adopted, as the then-Judge Gorsuch noted, and as Klocek v. Gateway illustrates.  

Determinations of reasonable notice and a manifestation of assent must be sensitive to the various forms of wrap contracts now in use.  Easterbrook was addressing shrink-wrap contracts, but there are now "click-wraps," involving clicking a box on a web-based form, and "browse-wraps," which involve links to terms and conditions that most consumers never open.  Courts have not adopted a uniform approach to determining what constitutes meaningful assent to contractual terms in these contexts.  Rather, the analysis tends to be context-specific.  In recent cases, courts have been more attuned to the different technologies of electronic contracting and have adjusted their standards for establishing consent accordingly.

In Nancy's view, the RLCC errs in adopting the rolling contract theory, which transforms the notice and manifestation standard into an "if/then safe-harbor rule."  Sanctioning such a standard, Nancy argues, "would impede the development of the common law in a particularly unhelpful manner."  Courts are working out ways to contextualize the questions of assent relevant to contract formation.  We need to give them time to arrive at consensus rather than force consensus through premature efforts at standardization.  The RLCC's § 3 goes farther still, construing rolling contracts so broadly as to eliminate the requirement of consideration in connection with contract modification. In the context of ubiquitous mandatory arbitration clauses and class action waivers, combined with form contracts, the RLCC's approach undermines the fundamental principle that contractual obligations are based on disclosure of terms and voluntary consent.

A Match Made in Hell?

Can you get your money back from a contract for dating services if the matchmaking service either does not produce enough dates or enough quality dates?

That was discussed recently in connection with a business model by a Colorado matchmaking company that might not be that unusual in the industry (I wouldn’t know and it’s irrelevant anyway as the issue is, at the end of the day, one between the client and the service provider):

The company explains to clients that the company will only match clients when the company feels that it has a good match for someone.  That might take some time.  However, clients are often impatient…. says the company.

Clients say that, in one case, instead of the promised active, rough, Kris Kristofferson type, a retired and injured police officer notified the female who contacted him that he could not meet for at least another couple of months because he could neither drive nor sit up.  In another case, a man showed up wearing a pair of super tight sweatpants with a black, badly stained shirt tucked in.  The man’s personal hygiene also seemed to be subpar…

The company responds that they are not responsible for the clothes people wear on dates and that the police offer was injured after signing up for the service.  The company was sued a few times in small claims court and lost.  It defends itself as follows:

"Small claims court judges don't have to rule by the letter of the law," he said. "They don't have to rule by the contract. I've been to small claims court a handful of times. Small claims court judges rule based on the emotion in the courtroom. When a damsel in distress or a guy who is emotional goes in front of a judge versus a matchmaker, sometimes small claims court judges buy into the emotions of the story. We tell our clients that matchmaking takes time."

What remains important in this and all consumer transactions is to be sure that you don’t sign any contracts unless you have read and understood all terms.  Courts may hold you to have done so even if you did not.  Make sure that all important contractual aspects are in writing and that you retain a copy.  If you do not understand any terms, make sure you ask for clarification before you sign.  Make sure you understand all charges.  You should probably also not sign up for anything as uncertain as a dating service if you cannot afford the fee if you do not meet the man or woman of your dreams.  It becomes really difficult from a legal point of view that a company has not fulfilled its promise if it did, for example, give you a chance to go on several dates.  Having to argue that the person you met was not who you had hoped for may be impossibly difficult in most cases.

Companies Cannot Impose Arbitration by Stealth

U.S. District Judge William Orrick (ND CA) has just held that companies must still provide online customers with adequate notice of arbitration and other provisions.  This is so in at least the Ninth Circuit after Nguyen v. Barnes & Noble(763 F.3d 1171 (Ninth Cir. Ct. of App.)).  (I proudly note that Kevin Nguyen was a student in one of my 1L Contracts classes years ago!)

As reported by Reuters, it’s become standard operating procedure for companies to require online or mobile customers to agree to mandatory arbitration by clicking their assent to terms of service. But there’s still a roaring debate about exactly howcompanies can bind their customers (and employees, for that matter) to arbitration in other contexts. Do customers assent to arbitration merely by visiting a website or downloading a mobile app that provides a link to service terms mandating arbitration? Or must consumers specifically acknowledge that they’ve surrendered their right to litigate?

Courts have had to scrutinize websites and apps to decide whether they provide consumers with enough information to allow informed assent. Judges have come to be generally skeptical of so-called browse-wrap agreements, in which companies merely post mandatory arbitration conditions and contend that customers have consented by continuing to use their services. Click-wrap agreements – in which companies present consumers with their terms of service and specifically require assent – are generally deemed to be enforceable.  In the case just resolved by J. Orrick, the arbitration provision fell into an in-between category known as a “sign-in wrap.”  Beginning in February 2018, when customers registered at the company’s website, they were required to click their assent to Juul’s terms of service, which prominently mentioned mandatory arbitration.  But to see those terms of service, consumers had to click on a separate link.

Juul did not prominently highlight the hyperlink to its terms of service. The link, said J. Orrick, was virtually indistinguishable from the surrounding text – no color change, underlining, capitalization or italicization signaled to consumers that they could click to read Juul’s specific terms and conditions.  One of the plaintiffs registered via a subsequent log-in iteration in which Juul underlined the hyperlink to its service terms, but J. Orrick found even that notice to be inadequate.

The case is Bradley Colgate, et al. v. Juul Labs, Inc., et al.,2019 WL 3997459.

Court finds HomeAway gives sufficient notice of its terms and conditions online

A recent case out of the Western District of Texas, May v. Expedia, Inc., No. A-16-CV-1211-RP (behind paywall), examines the enforceability of HomeAway.com's online contract. HomeAway is a website that offers vacation rental properties. Property owners can buy one-year subscriptions to HomeAway to list their properties for rent on the website. May was a property owner who had purchased successive annual subscriptions to HomeAway, and who now sues based on several breach of contract and fraud allegations, together with related state claims. HomeAway moved to compel arbitration, pointing to its terms and conditions. Specifically, in July 2016 HomeAway amended its Terms and Conditions to include a mandatory arbitration clause. May allegedly agreed to this clause when he renewed his HomeAway subscription in September 2016, and again when he booked his property through the website in October 2016. 

May argued that he did not agree to the terms and conditions when he renewed his annual subscription because he changed the name on the account to his wife's name in an effort to avoid being bound by the new terms, but the court found that had no effect on the effectiveness of the terms and conditions and that May bound himself when he renewed his subscription, regardless of changing the name on the account. May was trying to take advantage of the benefits of the subscription without binding himself to the terms, and the court found that to be inequitable. 

The court  already found May to be bound but for the sake of completeness also analyzed May's argument that he was not bound when the property was booked because he did not receive sufficient notice of the terms and conditions, which gives us further precedent on how to make an enforceable online contract. The HomeAway site required the clicking of a "continue" button, and wrote above the button that the user was agreeing to the terms and conditions if they clicked the button, with a hyperlink to the terms and conditions. The court found this to be sufficient notice of the terms and conditions. 

Trump Seeks to Alter Post Office Contracts with Amazon

As widely reported in, for example, the Washington Post, whose owner founded Amazon, President Trump has pushed Postmaster General Megan Brennan to double the rate that the post office charges Amazon.com and some, but not all, similar online retailers.  

The contracts between the Postal Service and Amazon are secret out of concerns for the company's delivery systems.  They must additionally be reviewed by a regulatory commission before being changed.  That, perhaps unsurprisingly, does not seem to phase President Trump who appears to be upset at both Amazon and the Washington Post.   The dislike of the latter needs no explanation, but why Amazon?  Trump has accused it of pushing brick-and-mortar stores out of business.  Others point out that if it weren't for Amazon, it is the post office which may be out of business.

Aside from the political aspects of this, does Trump have a point?  Is Amazon to blame for regular stores going out of business?  I am no business historian, but it seems that Amazon and others are taking advantage of what the marketplace wants: easy online shopping.  Yes, it is very sad that smaller, "regular" stores are closing down, most of us probably agree on that.  But retail shopping and other types of business contracting will evolve over time as it has in this context.  That's hardly because Amazon was founded; surely, the situation is vice versa.  Such delivery services are fulfilling a need that arose because of other developments.

From an environmental point of view, less private vehicle driving (for shopping, etc.) is better.  Concentrating the driving among fewer vehicles (FedEx, UPS, USPS, etc.) is probably better, although I have done researched this statement very recently.  One fear may be the additional and perhaps nonexistent/overly urgent need for stuff that is created when it becomes very easy to buy, e.g., toilet paper and cat litter online even though that may in and of itself create more driving rather than just shopping for these items when one is out and about anyway, but that is another discussion.

Suffice it to say that Trump should respect the federal laws governing the Postal Service _and_ existing contracts. What a concept!  If the pricing structure should be changed, it clearly should not be done almost single-handedly by a president.  

Meanwhile, the rest of us could consider if it is really necessary to, for example, get Saturday snail mail deliveries and to pay only about 42 cents to send a letter when the price of such service is easily quadruple that in other Western nations (Denmark, for example, where national postal service has been cut back to twice a week only and where virtually all post offices have been closed).  Fairly simple changes could help the post office towards better financial health.  This, in turn, would help both businesses and private parties.  

 

Minor's disaffirmance of a contract frees them from the arbitration provision, too

I never spend a lot of time on minors and contracts, because I teach a one-semester Contracts course and it just has to keep moving, but this is an interesting case delving into the issue in much more detail than I can get around to, recently out of the Northern District of California, T.K. v. Adobe Systems Inc., Case No. 17-CV-04595-LHK (behind paywall). 

T.K. was a minor who was given a license to access Adobe's Creative Cloud Platform. In order to access the platform, T.K. agreed to the terms of service. The license auto-renewed after a year, and T.K. contacted Adobe to disaffirm renewal of the license. Adobe eventually (although apparently not immediately) refunded T.K.'s money for the renewal, but T.K. sued alleging injury because she was deprived for some time of use of the funds auto-debited by Adobe. T.K. alleged that Adobe initially refused to allow T.K. to disaffirm the auto-renewal, in contravention of law. (T.K. also alleged that Adobe's terms of service implied that users still had to pay even after cancellation, also in contravention of law. I'm not going to focus on that, but the allegation did survive the motion to dismiss.)

Adobe argued that T.K. was relying on the choice of law provision in the disaffirmed contract and so should also be held to the arbitration provision of that contract, because minors cannot cherry-pick which portions of a contract they disaffirm. The court, however, said that T.K. was not cherry-picking. Rather, T.K. had disaffirmed the entire contract. The reference to the choice of law provision was only to buttress her independent choice of California law to resolve the dispute between the parties. Therefore, T.K. was not bound by the arbitration provision. 

The opinion discusses lots more causes of action, if you're curious. 

 

 

The Disney/Redbox dispute's contract angle

Lots of people have been discussing the recent Central District of California ruling, Disney Enterprises v. Redbox Automated Retail, Case No. CV 17-08655 DDP (AGRx) (those links are a random selection), a lawsuit brought by Disney against Redbox's resale of the digital download codes sold within Disney's "combo pack" movies, which allow instant streaming and downloading of the movie. There is an obvious copyright component to the dispute, but I thought I'd highlight the breach of contract portion of the decision. 

The DVD/Blu-Ray combo packs were sold with language on the box reading "Codes are not for sale or transfer," and Disney argued that Redbox's opening of the DVD box formed an enforceable contract around that term, which Redbox breached by subsequently selling the codes. However, the court found no likelihood of success on the breach of contract claim, based on the fact that the language on the box did not provide any notice that opening the box would constitute acceptance of license restrictions. The court distinguished other cases that provided much more specific notice. Redbox's silence could not be interpreted as acceptance of the restrictions. This was especially so because the box contained other language that was clearly unenforceable under copyright law (such as prohibiting further resale of the physical DVD itself). Therefore, the court characterized the language as "Disney's preference about consumers' future behavior, rather than the existence of a binding agreement." 

The court ended up denying Disney's motion for preliminary injunction. 

Noncompete in the online-auction industry found unenforceable

A recent case out of Minnesota, Oberfoell v. Kyte, A17-0575, reminds all of us that noncompete agreements need to have a justification. Kyte worked for Oberfoell's online-auction business and signed a contract that contained a noncompete clause. He later left to start his own online-auction business and Oberfoell sued.

The lower court found the noncompete agreement to be unenforceable and this appellate court agreed. Oberfoell simply couldn't justify its necessity because he failed to assert a legitimate business interest protected by the noncompete clause. Oberfoell made general allegations that Kyte had personal relationships with many of Oberfoell's customers and thus possessed goodwill belonging to Oberfoell. But Oberfoell never identified any customers who he was worried about, nor did he ever introduce any evidence that Kyte had used any of Oberfoell's customer lists improperly. The court concluded that Kyte did not seem to be the "face" of the business nor was he the exclusive contact the customers had with the business. There was no evidence that any of Oberfoell's customers were concerned about Kyte leaving and no evidence that any of them followed Kyte to his new business. Therefore, Oberfoell failed to prove that the noncompete was protecting a legitimate business interest. 

Oberfoell also tried to assert that his customer lists and other materials were taken by Kyte and qualified as a violation of the noncompete. The court pointed out that the customer lists weren't secret and weren't treated as secrets by Oberfoell, and so couldn't qualify as trade secrets. The other materials suffered from the same lack of confidential protection. 

Finally, the noncompete also failed on the basis of reasonableness. It prohibited Kyte from competing in a radius of 150 miles for five years. The court found the 150-mile restriction to be "arbitrary," and Oberfoell produced no evidence justifying his choice of such a large radius. The five-year restriction was also unreasonable because the evidence showed Oberfoell could have replaced Kyte easily and quickly, so there was no reason to keep Kyte from competing for so long (in fact, Oberfoell apparently never hired anyone to replace Kyte, delegating his responsibilities to already-existing employees). There was no evidence that Kyte had received any extensive training that gave him an advantage in establishing his business, which took him a few months to get started. 

But what does the HQ stand for????

Everyone is talking about HQ Trivia right now, it seems. I'll be honest, though: Last week was the first time I've ever heard of the app. "It's a live trivia show," I was told. "You play twice a day with hundreds of thousands of your closest friends and try to win money." 

I downloaded the app because I was curious, and everything about it was an odd, surreal experience. I hadn't expected there to be a live host making uncomfortable one-sided banter to fill time while the start of the game was delayed. Then, when the questions started up, I...had no idea what to do, because nothing about my screen ever changed. I was just staring at the host the whole time. I couldn't figure out how to answer a question. 

I found out later that the question is supposed to pop up on your screen. It didn't on my screen, an issue that I saw other people online complaining about, so I know it at least wasn't my own incompetence. I didn't really stick around for more, though. I deleted the app, thinking it was just something that didn't seem to be my kind of thing. 

While I was Googling my app experience, though, I came across this pretty wild article from The Daily Beast and it made me think about a thought exercise I like to make my contracts students engage in at the very beginning of the semester: What does each party to a transaction want from the relationship they're about to enter into, and how will that translate into the contract? The article recounts an interview the Daily Beast conducted with the app's main host, and then their interactions with the app's CEO. At the end, it's revealed that the app is in a negotiation for a long-term contract with the main host. The rest of the article provides a lot of meat for speculation as to how those negotiations might go, based on the comments of both the main host and the CEO. The CEO appears to be very worried about the app's trade secrets being revealed, so one can assume that the contract would be very strict about the host's interactions with the media. Doubtless the parties will discuss a non-competition clause as well.  And how much will the negotiations be impacted by the newness of the HQ app phenomenon; the uniqueness of its setup; and the fuzziness of its future plans? All interesting things to consider. 

As long as an idea is new to you, New York court finds it can serve as consideration

If you're looking for fact patterns involving consideration, a recent case out of the Northern District of New York, West v. eBay, Inc., 1:17-cv-285 (MAD/CFH) (behind paywall), has one for you. 

The following allegations appeared in the complaint: West worked as a consultant for eBay. As a consultant, West told eBay about a business plan he had which represented a "unique business model" for virtual marketplaces. West said he was cautious about sharing his business plan, and eBay promised to keep the business plan confidential. West then sent the business plan to eBay. eBay subsequently promised to compensate West if it used the business plan. eBay then developed a mobile app that West alleged used the business plan. eBay, however, stated that the app was "independently conceived" by other eBay employees. This lawsuit followed, and eBay moved to dismiss West's complaint. 

One of eBay's asserted grounds for dismissal was a lack of adequate consideration for the contract alleged in West's complaint. eBay claimed that the business plan was not "novel" and so had no value and could not serve as consideration. The court noted that under New York law, a not-novel idea can be adequate consideration if it was novel to the party to whom it was being disclosed. This requires a fact-specific inquiry. At the motion to dismiss stage, West had asserted enough facts that the business plan was idea was novel to eBay, meaning that it could serve as adequate consideration for the contract. 

There were other causes of action and arguments involved that I'm not going to get into here, but the complaint also contained promissory estoppel and unjust enrichment claims that also survived the motion to dismiss, if you're interested. 

“Making Money is Still Allowed” – As Are False Pricing Strategies

The United States Court of Appeals for the Second Circuit has held that retail stores, including online vendors, are free to advertise “before” prices that might in reality never have been used.

Although the particular plaintiff’s factual arguments are somewhat unappealing and unpersuasive, the case still shows a willingness by courts, even appellate courts, to ignore falsities just to entice a sale.

Max Gerboc bought a pair of speakers from www.wish.com for $27. A “before” price of $300 was juxtaposed and crossed out next to the “sale” price of $27. There was also a promise of a 90% markdown. However, the speakers had apparently never been sold for $300, thus leading Mr. Gerboc to argue that he was entitled to 90% back of the $27 that he actually paid for the speakers. Mr. Gerboc argued unjust enrichment and a violation of the Ohio Consumer Sales Practices Act (“OCSPA”).

The appellate court’s opinion is rife with sarcasm and gives short shrift to Mr. Gerboc’s arguments. Among other things, the court writes that although the seller was enriched by the sale, “making money is still allowed” and that the plaintiff got what he paid for, a pair of $27 speakers that worked. He thus did not unjustly enrich the seller, found the court. (Besides, as the court noted, unjust enrichment is a quasi-contractual remedy that allows for restitution in lieu of a contractual remedy, but here, the parties did have a contract with each other).

Interestingly, the court cited to “common sense” and the use of “tricks,” as the court even calls them, such as crossed out prices to entice buyers. “Deeming this tactic inequitable would change the nature of online, and even in-store, sales dramatically.”

So?! Where are we when a federal appellate court condones the use of trickery, even if a large amount of other large vendors such as Nordstrom and Amazon also use the same “tactic”? Is this acceptable simply because “shoppers get what they pay for”? This panel apparently thought so.

Of course, Mr. Gerboc would disagree. He cited to “superior equity” under both California case law and OCSPA. The court again merely cited to its argument that Mr. Gerboc had suffered no “actual damages” that were “real, substantial, and just.”

I find this line of reasoning troublesome. Sure, most of us know about this retail tactic, but does that make it warranted under contract and consumer regulatory law? If a vendor has truly never sold items at a certain “before” price, courts in effect condone outright lies, i.e. misrepresentation, in these cases just because no actual damages were suffered. This court said that Mr. Gerboc “at most … bargained for the right to have the speakers for 90% less than $300.” But if the speakers were indeed never sold at that price, is that not a false bargain? And where do we draw the lines between fairly obvious “tricks” such as this and those that may be less obvious such as anything pertaining to the quality and durability of goods, fine print rules, payment terms, etc.? Are we as a society not allowing ourselves to suffer damages from allowing this kind of business conduct? Or has this just become so commonplace that virtually everyone is on notice? Does the latter really matter?

I personally think courts should reverse their own trend of approving what at bottom is false advertising (used in the common sense of the word). Of course it is still legal to make money. But no court would allow consumer buyers to “trick” the online or department store vendors. Why should the opposite be true? The more sophisticated parties – the vendors – can and should figure out how to make a profit without resorting to cheating their customers simply because everyone else does it too. Statements about facts of a product should be true. Allowing businesses to undertake this type of conduct is, I think, a slippery slope on which we don’t need to find outselves.

The case is Max Gerboc v. Contextlogic, Inc., 867 F. 675 (2017).

Uber Arbitration Clause Win

The U.S. Court of Appeals for the Second Circuit recently reversed a district court’s decision to deny Uber’s move to compel arbitration in a contract with one of its passengers, Spencer Meyers.

The district court had found that Meyer did not have reasonably conspicuous notice of Uber’s terms of service (which contained the arbitration clause) when he registered a user, that Meyer did not unambiguously assent to the terms of service, and that Meyer was not bound by the mandatory arbitration provision contained in the terms of service.

The Second Circuit summed up the usual difference between clickwrap agreements, which require a user to affirmatively click on a button saying “I agree” and which are typically upheld by courts, and browsewrap agreements, which simply post terms via a hyperlink at the bottom of the screen and which are generally found unenforceable because no affirmative action is required to agree to the terms.

In the case, Meyer had been required to click on a radio button stating “Register,” not “I agree.” But in contrast to browsewrap agremeents, Uber also informed Meyer and other users that by creating an account, they were bound to its terms. Uber did so via a hyperlink to the terms on the payment screen.

Meyer nonetheless claimed that he had not noticed or read the terms. The Court thus analyzed whether he was at least on inquiry notice of the arbitration clause because of the hyperlink to the terms. This was the case, found the court, because the payment screen was uncluttered with only fields for the user to enter his or her payment details, buttons to register for a user account, and the warning and related hyperlink. Further, the entire screen was visible at once and the text was in dark blue print on a bright white background. Thus, the fact that the font size was small was not so important.

Mayer was bound to the arbitration clause because he had assented to that term after getting “reasonably objective notice.”

The case is Meyer v. Uber Technologies, Inc., No. 16-2750 (2d Cir. 2017).

 

Is Amazon Selling Products or Services?

As first reported on Above the Law, the Federal Circuit Court of Appeals has just ruled that Amazon is nothing but a simple purveyor of “online services” and does not make “sales” of goods. Although the issue in the case was one of intellectual property infringement and thus not the UCC, the differentiation between “goods” and “services” is also highly relevant to the choice of law analyses that our students will have to do on the bar and practitioners in real life.

How did the Court come to its somewhat bizarre decision? Amazon, as you know, sells millions, if not billions, of dollars worth of tangible, physical products ranging from toilet paper to jewelry, books to toys, and much, much more. They clearly enter into online sales contracts with buyers and exchange the products for money. “Amazon” is the name branded in a major way in these transactions whereas the names of the actual sellers – where these differ from Amazon itself – are listed in much smaller font sizes. Often, it is Amazon itself that packages and ships the products to the buyers, whereas at other times, third party buyers are responsible for the shipping. Amazon “consummates” the sale when the buyer clicks the link that says “buy” on the Amazon website. Amazon then processes the payments and receives quite significant amounts of money for this automated process.

Clearly a “sale,” right? Nope. I guess “a sale is not a sale when a court says so.” As regards the IP dispute, the crucial issue was whether or not Amazon could control the acts of the third-party vendors. You would think that even that would clearly be the case given the enormous control Amazon has over what is marketed on its website and how this is done. Amazon, however, argued that it sells so many items that it cannot possibly police all of them. Thus, it won on its argument that it was not liable under IP law for a knock-off item that had been sold on the Amazon website as the real product (cute animal-shaped pillowcases).

Had this been an issue of contracts law and had the court still found that the transaction was not a sale of goods under UCC Art. 2, would it have erred? Arguably so. Under the “predominant factor test” used in many, if not most, jurisdictions, courts look at a variety of factors such as the language of the contract, the final product (or service) bought and sold, cost allocation, and the general circumstances of the case. When you buy an item on Amazon, it is true that you obtain the service of being able to shop from your computer and not a physical location, but at the end of the day, it is still the product that you want and buy, not the service. Apart from the relatively small service fee (which gets deducted from the price paid to the seller), the largest percentage of the sales price is for the product. Modernly, online buyers have become so used to that “service” being provided that it is arguably not even that much of a service anymore; it is just a method enabling buyers to buy… the product. Clearly, it seems to me, a “sale” under Art. 2.

Again, this was not a UCC issue, but it does still show that courts apparently still produce rather odd holdings in relation to e-commerce, even in 2017.

The case is Milo & Gabby LLC v. Amazon.com, Inc., (Fed. Cir. 2017)

Company's Pledge to Donate to a Charity Did Not Create a Contract

A recent case out of the Second Circuit, McCabe v. ConAgra Foods, Inc., 16-3301-cv, adds to the jurisprudence on promotions and offers and unilateral contracts. 

ConAgra ran an annual promotion whereby it pledged to donate to a charity every time a certain code from its packaging was entered on its website, up to a certain maximum amount. McCabe alleged that this promotion created a contract and alleged that ConAgra breached the contract. A promotion is generally not considered an offer to enter into a contract unless it is clear, definite, and explicit, leaving nothing left to negotiate. ConAgra's promotion did not rise to that level, not least because the promotion was clearly limited to a certain maximum amount. For that reason, a person entering the code into ConAgra's website would never have any way of knowing if its code would trigger a donation on ConAgra's part, because the maximum donation amount might have already been achieved. ConAgra's promotion was not an offer, and McCabe could not accept it. 

McCabe then tried to characterize the promotion as an invitation for offers, with people "offering" when they input the code onto ConAgra's website, and ConAgra "accepting" when it acknowledged receipt of the code. However, the promotion was too indefinite to set any terms for the "offer," and the code entry itself did not clarify any of the terms further. 

At any rate, even if there had been a contract, the court found that there weren't sufficient allegations ConAgra had breached it. There was no allegation that ConAgra did not donate to the charity every time it received the code, up to the maximum amount. McCabe's disagreement was really with the charity's own methodology, which was not ConAgra's issue. 

You can listen to the oral argument in this case here. 

Terms and Conditions Hyperlink at Bottom of Page Not Conspicuous Enough to Be Binding on Users

We have blogged about arbitration clauses in contracts lots of times before, including in the Internet context, and including in the diet pill context. Now a recent case out of Florida, Vitacost.com, Inc. v. McCants, No. 4D16-3384, adds to the pile, in the Internet diet pill context. In this case, McCants sued Vitacost, from which he purchased dietary supplements that he alleged seriously damaged his liver. In response, Vitacost sought to compel arbitration based on the arbitration clause in the terms and conditions on its website. In Florida, the enforceability of Vitacost's "browsewrap" terms and conditions was a matter of first impression. 

Vitacost claimed that the hyperlink to its terms and conditions was located at the bottom of every page of its website and that that was sufficient to put McCants on notice of them. However, the court noted that the constant positioning of the hyperlink at the bottom of the page required every user to have to scroll to the bottom of the page to notice the terms and conditions. Even upon buying something and "checking out," the hyperlink remained positioned toward the bottom of the page. McCants alleged that he had not seen the terms and conditions, and the court found that the hyperlink's location was not conspicuous enough to put McCants on notice. 

Scholarship Spotlight: "Trust and Enforcement in Banking, Bitcoin, and the Blockchain" (Catherine Christopher - Texas Tech)

 

Bitcoin and other alternative currencies have been of particular interest in the contracts scholarly community for many reasons, including the potential elimination of intermediaries in electronic financial transactions and also the possibility of self-enforcing "smart contracts." In both cases, the major touted feature of the blockchain technology underlying bitcoin is that it allows for transactions to be "trustless." Catherine (Cassie) Christopher (Texas Tech) suggests in a new article, however, that the purported lack of need for trust is overblown and that intermediaries still have an important role to play.

Here is Professor Christopher's abstract:

Bitcoin has long been touted as a currency and a payment system that relies on cryptography and mathematics rather than trust. But is Bitcoin really trustless? And if so, would that be a good thing? This article under-takes a critical deconstruction of Bitcoin and the blockchain, their themes of democracy and transparency, and the idea that they are trustless. The article then proposes a new conceptualization of the role of trust in business and contracting: the bridging model, which allows for a more nuanced understanding of the interplay between enforcement and trust in contract formation. The bridging model is applied first to traditional banking, to illustrate and analyze the enforcement mechanisms underpinning the U.S. dollar as currency and the banking system as a whole, and to demonstrate that the enforcement mechanisms (government backing and regulation) are not as robust as generally believed. The bridging model is then applied to Bitcoin, to show not only that the system requires more trust than is generally understood, but also that both currency and payment systems benefit from the involvement of trusted intermediaries in response to problems and crises.

"The Bridging Model: Exploring the Roles of Trust and Enforcement in Banking, Bitcoin, and the Blockchain" is published in the Nevada Law Review at 17 Nev. L. Rev. 1 (2016), and is available for SSRN download here.

Payments Law Meets Free Speech at the Supreme Court

Yesterday, the United States Supreme Court granted certiorari in the case of Expressions Hair Design v. Schneiderman, which could result in a significant change in the way end users perceive credit card use. The issuing banks and card networks would, for obvious reasons, prefer a system in which the costs of card usage are borne by merchants and are hidden from the card-using customers who then perceive card use as free. Since that preference has found its way into the law of several states, it has raised a First Amendment issue.

Tony Mauro of law.com summarizes the case as follows:

In the Expressions case, the court will be asked to decide the constitutionality of laws in 10 states that allow merchants to charge customers more for credit-card transactions—but require them to call the difference a cash “discount,” not a credit-card “surcharge.” California, Connecticut, Florida, Massachusetts, New York and Texas are among the states with similar statutes on the books.

The credit-card industry has lobbied for such laws since the 1980s, critics say, because using the word “surcharge” would discourage shoppers from using credit cards.

“A ‘surcharge’ and a ‘discount’ are just two ways of framing the same price information—like calling a glass half full instead of half empty,” Deepak Gupta of Gupta Wessler wrote in his petition challenging New York’s law. “But consumers react very differently to the two labels, perceiving a surcharge as a penalty for using a credit card.”

Expressions Hair Design posted a sign that said it would charge three percent more for paying by credit “due to the high swipe fees charged by the credit-card industry.” It and other merchants challenged the law as a violation of their First Amendment speech rights. The U.S. Court of Appeals for the Second Circuit rejected the claim, finding that the law regulates “merely prices,” not speech.

*   *   *

A coalition of large merchants including Albertsons, Rite Aid and Spirit Airlines sided with the petitioners in urging the court to take the case.

Contracting by Robots

A British start-up company called Luminance, which is also the name of its flagship due diligence analysis, “promises” to read documents and speed up the legal process around contracting, “potentially cutting out some lawyers.” (See here and here).

Luminance says that its software “understands language the way humans do, in volumes and at speeds that humans will never achieve. It provides an immediate and global overview of any company, picking out warning signs without needing any instruction.” Really? When I was working in the language localization things more than a decade ago, I heard the same promises then… but they never come to fruition. We’ll see how this program fares.

The software is said to be “trained by legal experts.” Talk about personification of an almost literary-style. We see the same trend in the United States, though. Just think about phone and internet programs that pretend to be your “assistant” and use phrases such as “Hi, my name is [so-and-so], and I’m going to help you today…”

Meanwhile, if a law firm used software to analyze documents, would it not be subject to legal malpractice if it did not discover contracting or other issues that a human would have, in this country at least? It would seem so… and for that reason alone perhaps also be a breach of contract unless clients were made aware that cost-cutting measures include having computers analyze documents that attorneys normally do.

Amazon’s Arbitration Clauses: A Hyperlink May Suffice

The Second Circuit just ruled in a case involving Amazon that "reasonable minds could disagree on the reasonableness of the notice" of the arbitration agreement provided by Amazon.

In 2013, the plaintiff, Dean Nicosia, bought diet pills on Amazon containing the ingredient sibutramine, a controlled substance that was withdrawn from the market by the FDA in 2010 because of concerns over severe health risks. Mr. Nicosia stated that the presence of sibutramine was not disclosed to him and that he was never notified nor offered a refund, even after Amazon stopped selling the product. Amazon moved to dismiss on the grounds that Nicosia's claims were covered by a mandatory arbitration provision. The district court granted that motion, finding that Nicosia had constructive notice of the arbitration clause.

When Nicosia bought the product, the final checkout screen stated “Review your order” and “[b]y placing your order, you agree to Amazon.com’s privacy notice and conditions of use.” The words “conditions of use” were hyperlinked to the actual text of the terms including the arbitration agreement, but were “not bold, capitalized, or conspicuous in light of the whole webpage.” Proximity to the top of a webpage also does not necessarily make something more likely to be read in the context of an elaborate webpage design. Additionally, said the court, “[a]lthough it is impossible to say with certainty based on the record, there appear to be between fifteen and twenty‐five links on the Order Page, and various text is displayed in at least four font sizes and six colors (blue, yellow, green, red, orange, and black), alongside multiple buttons and promotional advertisements. Further, the presence of customers’ personal address, credit card information, shipping options, and purchase summary are sufficiently distracting so as to temper whatever effect the notification has.”

The court made the further analogy:

“It is as if an apple stand visitor walks up to the shop and sees, above the basket of apples, a wall filled with signs. Some of those signs contain information necessary for her purchase, such as price, method of payment, and delivery details, and are displayed prominently in the center of the wall. Others she may quickly disregard, including advertisements for other fruit stands. Among them is a sign binding her to additional terms as a condition of her purchase. Has the apple stand owner provided reasonably conspicuous notice? We think reasonable minds could disagree.”

The court cited to Nguyen v. Barnes and Noble (Ninth Circuit), which found that the inquiry of “whether a website puts a reasonably prudent user on inquiry notice of the terms of the contract … depends on the design and content of the website … Where the link to a website’s terms of use is buried at the bottom of the page or tucked away in obscure corners of the website where users are unlikely to see it, courts have refused to enforce” the disputed term. However, “where the website contains an explicit textual notice that continue use will act as a manifestation of the user’s intent to be bound, courts have been more amenable to enforcing [the] agreements.”  (Mr. Nguyen is a former Contracts student of mine. It’s a small world.)

The Amazon case raises some interesting questions, I think. First and as always: is an online customer – a consumer in this case - truly put on notice just because of a hyperlink on a website? The Second Circuit will now get a chance to resolve that issue. Second, and perhaps much more troubling here is the weight the district court gave to the mere fact that Mr. Nicosia had “signed up for an account” with Amazon. In today’s day and age, we all sign up for numerous accounts to conduct all sorts of life matters from the simple to the complex. I, for one, don’t like to shop or conduct much other business online, but I have an entire spreadsheet full of usernames and passwords to various websites that I have used or still sometimes use. In and of itself, that hardly means that I am aware of any contractual terms contained anywhere on those websites. In my opinion, holding users to such “notice” is unreasonable and unrealistic in today’s busy world (it is simply too time-consuming to study all possible legal requirements listed on all these website in detail to do by far most of the things I do online, and I am sure many other consumers are in my situation.). Even worse, the district court seemed willing to hold consumers to the very high burden of having to familiarize themselves with perhaps frequently changing terms online after having created an online account with a certain company. Again, that is just not realistic with the modern barrage of necessary and/or required website usage. Finally, the court found that users do not actually have to read the terms to be bound by them. It is apparently enough that they could have “inquired” of these terms. That’s giving an online company tremendous legal weight and, arguably, presents split authority in comparison with that of the Ninth Circuit.

The case is Nicosia v. Amazon.com, Inc.

Hat tip to Matthew Bruckner of Howard Univesity School of Law for bringing this story to my attention. http://www.law.howard.edu/1831

Service Fees Are Annoying...But Not Bad Faith

A recent case out of the District of Connecticut, Singer v. Priceline Group, Inc., No. 15-cv-1090 (VAB), tackles an issue familiar to all who travel: service fees. The plaintiff, on behalf of a class, sued Priceline over the fact that service fees were added on to the price that he bid to pay for a hotel room. We've all been beset by service fees tacked onto the prices quoted for various travel-related items, from hotel rooms to flights, and to be honest I feel like I, to some extent, have just grown used to and resigned to them. The court seems to feel the same way about them here. The service fees weren't a breach of contract, since Priceline's Terms of Use explicitly stated that service fees might be charged above the quoted price, nor were they a breach of the covenant of good faith and fair dealing because, again, Priceline was upfront about the fact that Singer might owe more money in service fees from the hotel. Priceline never made any representation that it wouldn't provide Singer with quotes that might require further service fees and so did not act in bad faith when it did so in a way that the court found was open and reasonable.

I might wish that more places would just tell me the end price without the extra fees, but, for now, I think the widespread acceptance of these fees in the course of transactions indicates they're here to stay for the time being.