ContractsProf Blog

Guest Post: Should We Stop Worrying and Learn to Love Smart Readers?

Should We Stop Worrying and Learn to Love Smart Readers? Contracts in the Age of Real-Life Babel Fish

By Yonathan Arbel & Samuel Becher

Famously, the Hitchhiker’s Guide to the Galaxy features a Babel fish, which is a fictional “small, bright yellow fish, which can be placed in someone's ear in order for them to be able to hear any language translated into their first language.”

Yonathan Arbel

Much of consumer contract law rests on the assumptions that consumer form contracts are unreadable, that consumers in fact do not read such contracts, and that consumers are unable to properly assess the content of these complex forms. This reality facilitates a market failure in the form of information asymmetry, which allows sellers to offer low-quality non-salient contract terms.

Interestingly, however, this troubling equilibrium is now facing disruption. Advances in language models, a branch of artificial intelligence, have given rise to a new type of technology – one we dub “Smart Readers.” As we note in Contracts in the Age of Smart Readers, smart readers are a real-life version of Babel fish. In essence, they are capable of no less than simplifying, personalizing, constructing, and even benchmarking contracts.

Smart readers can effectively read contracts and explain their content to ordinary people, employing plain language. Using a Smart Reader, a prospective consumer can pull out her phone, scan any contractual clause, and click ‘explain.’ The smart reader will respond by providing a summary that is succinct, personalized, and direct.

In our article, we consider a few interesting illustrations. One of them is the following standardized clause, which is packed with legalese:

12. Controlling Law and Severability. This License will be governed by and construed in accordance with the laws of the State of California, excluding its conflict of law principles. This License shall not be governed by the United Nations Convention on Contracts for the International Sale of Goods, the application of which is expressly excluded. If you are a consumer based in the United Kingdom, this License will be governed by the laws of the jurisdiction of your residence. If for any reason a court of competent jurisdiction finds any provision, or portion thereof, to be unenforceable, the remainder of this License shall continue in full force and effect.

By clicking ‘explain’, the smart readers produces the following:

[The clause] means that if there are any disputes about the contract, the courts will rely on the law of the state of California to make their decision.

If the reader is young, the smart reader will tailor its explanation to the reader’s age, by clarifying that: 

The parties want the law that will apply to this contract to be California law. This is where the company is located. If there is a problem with the contract, the judge will look to California law to solve it.

 

At the same time, for users who think better in terms of examples, tapping on the ‘example’ function of the smart reader produces the following illustration:

Lets [sic] say you and the record company disagree about something to do with this contract . . . So the judge will rely on California state law when deciding what the contract means.

We did not write these examples. It is GPT-3, a recently released version of a language model, that produced these outputs. Remarkably, we used a weak version of this model, and we did not use any fine-tuning.

Samuel Becher

Some readers may nevertheless think that consumers would be unwilling to read even such simplified terms or able to understand them. Here comes handy the capability of smart readers to benchmark; that is, to mark the contract at stake and compare with other contracts offered in the market. Smart readers can even suggest specific alternative contracts that have a better overall score.

An app’s ability to respond intelligently to queries about an unfamiliar legal text, score it and suggest seemingly superior alternatives, represents a technological breakthrough. What would such innovation entail for the law of consumer contracts?

Ideally, smart readers would be affordable (if not free of charge) and accessible. Used by many consumers, these readers will make consumers more aware of their contracts and the risks in accepting them. Smart readers will also empower consumers to compare various contracts, so to choose the ones that best suit their preferences. This, in turn, will pressure firms to compete over contract terms and offer contracts that better serve consumers.

But if this optimistic scenario materializes, what remains from the case for pro-consumer regulation? If consumers can easily read, understand, compare, and shop among contracts, the fundamental market failure of information asymmetry will cease to exist. If consumers are well-informed about their contracts, consumer protection tools and justifications ought to be revisited and refined.

That said, smart readers are not a panacea and it would be imprudent to adopt Dr. Strangelove’s advice and stop worrying. For starters, there are also less optimistic scenarios that require attention. For instance, what if consumers are reluctant to adopt such apps, even if they are cheap, quick, and user-friendly? Surely, low consumer uptake will undermine the potential to improve the market for contract terms. But would that also entail that, contrary to what many consumer protection proponents believe, consumers truly don’t care about their contracts? And if consumers are not concerned about their contracts, to what extent should the law nevertheless strive to protect them?

There are also various risks involved in the emergence of smart readers. One risk is that courts and policymakers will over-rely on such apps, hastily relaxing consumer protection principles. Some consumers may not be able to afford smartphones, or not use such app for other legitimate reasons. Furthermore, these apps are black boxes that can be attacked by sophisticated parties. Smart readers may as well make innocent mistakes, or just oversimplify legal text and thus mislead users.

Either way, smart readers can have broad implications on the law of contracts, and they should get us all thinking about the future of contract law. As the cliché goes, the future is already here.

This post is based on Yonathan Arbel & Shmuel I. Becher, Contracts in the Age of Smart Readers, available here. Comments and criticism are most welcome; please email Samuel.becher@vuw.ac.nz or yarbel@law.ua.edu.

Parler's Motion for a Temporary Restraining Order Against Amazon Denied

Nancy Kim posted last week about Parler's lawsuit against Amazon Web Services (AWS) for, among other things, breach of contract.  Nancy's prediction was that Parler's chance of winning on its breach of contract claim didn't look good.  Yesterday, U.S. District Court Judge Barbara Jacobs Rothstein agreed, denying Parler's motion for a temporary restraining order.

On the breach of contract claim, Judge Rothstein pretty much stuck to the Nancy Kim playbook.  Parler alleged that AWS had breached its Customer Service Agreement (CSA) with Parler by failing to accord Parler thirty days to cure any alleged breaches of the CSA.  Parler contends that it was given only a few hours' notice of breach before AWS suspended its web-hosting services.  However, the CSA clearly gives AWS the right to suspend or terminate its services for material breach of the CSA's conditions, and Parler does not dispute that it did terminate those conditions by violating AWS's Acceptable Use Policy.  AWS provided multiple examples of content posted on Parler that violated that Policy, which proscribes “'activities that are illegal, that violate the rights of others, or that may be harmful to others, our operations or reputation'” and "'content that is defamatory, obscene, abusive, invasive of privacy, or otherwise objectionable.'” 

Nancy Kim's post specifically noted Sections 4, 6, & 7 of the CSA.  Here is Judge Rothstein's conclusion on the breach of contract claim:

Parler has not denied that at the time AWS invoked its termination or suspension rights under Sections 4, 6 and 7, Parler was in violation of the Agreement and the AUP. It has therefore failed, at this stage in the proceedings, to demonstrate a likelihood of success on its breach of contract claim.

Good call, Nancy!

Ticketmaster and Hidden Notice

A notice is supposed to be, well, noticeable.  A hidden notice is an oxymoron.  Unfortunately, the law of digital contracts seems to be a law of oxymorons.  Another such oxymoronic case, Hansen v. Ticketmaster Entertainment, Inc., was decided this week by a federal court that allowed Ticketmaster to use its Terms of Use (TOU) to shunt a pandemic-related contract dispute to arbitration. The plaintiff, Derek Hansen, purchased two Rage Against the Machine concert tickets in February 2020 and filed a class action against Ticketmaster and Live Entertainment, claiming that it retroactively changed its refund policy in response to the coronavirus pandemic. Ticketmaster filed a motion to compel arbitration claiming that Hansen agreed to its TOU at three distinct points:  account creation, account sign-in, and at ticket purchase.  The court considered only the sign-in page for the purposes of the motion. 

In order to purchase his tickets, Hansen had to sign in to his account.  Hansen argued that he did not have actual knowledge of the arbitration agreement and that constructive knowledge could not be reasonably inferred.  Judge Edward Chen of the Northern District of California, disagreed, referencing an earlier case, Lee v. Ticketmaster L.L.C., No. 18-cv-05987 (N.D. Cal.), which was subsequently affirmed by the Ninth Circuit.

The first page of the TOU contained two bolded headers.  The second bolded header stated the following:

NOTICE REGARDING ARBITRATION AND CLASS ACTION WAIVER:

These terms contain an arbitration agreement and class action waiver, whereby you agree that any dispute or claim relating in any way to your use of the Site, or to products or services sold, distributed, issued, or serviced by us or through us will be resolved by binding, individual arbitration, rather than in court, and you waive your right to participate in a class action lawsuit or class-wide arbitration. We explain this agreement and waiver, along with some limited exceptions, in Section 17, below.

In concluding that there was “sufficient notice for constructive assent,” Judge Chen cited the following factors:

-a “relatively uncluttered” sign-in page

- express language of agreement right above the “Sign in” button

- phrase “Terms of Use” in contrasting blue font

This is yet another case involving digital contract formation decided by a federal judge applying state law.  IMHO it may send the wrong message to businesses regarding best practices when it comes to drafting and presenting TOU. As I noted in this year’s annual survey of digital contracts for the ABA’s Business Lawyer, courts have become increasingly more attuned to the realities of online contracting and are examining the specific layout of websites from the standpoint of the user in assessing contractual assent, including website flow, notice of specific terms, and whether notice is presented multiple times. Although Hansen may have had notice that terms of use exist, he did not have notice of the specific terms requiring mandatory arbitration at the time he clicked “Accept.”  Although the arbitration clause was conspicuous on the TOU page, it was only conspicuous if he clicked on the hyperlink to the TOU.  That, as blog readers know, was unlikely to happen. It would have been far better for Ticketmaster to put notice of the mandatory arbitration and class action waiver immediately adjacent to the “Sign in” button, and not hidden on a different page accessible only by clicking.

Peacock Terms of Service

I'm not ashamed to admit that I did not know that NBC has a streaming service called Peacock.  I am bit ashamed that I just learned from a friend of the blog (thanks Robyn Meadows!) that Peacock's Terms of Service (ToS), which they call "Terms of Use," include a recipe for chocolate cake.  Yes, the cake at left is not chocolate, but it is public domain, so close enough!

Now we are not your typical website that will believe whatever palaver the company serves up about its motivation for including the cake recipe.  So we will not endorse the idea that the aim was to get consumers to more carefully scrutinize the ToS.  If you want that fairy tale, you can read it here.  But the real reason for the recipe is more obvious from stories you can read here and here.  The rollout of NBC's streaming service was delayed.  It had to do something to get people to notice the rollout and to distract from the ugliness that delayed it.  So, some clever marketing person came up with the cake dealy, and they threw it into the ToS.  Cute.

Make no mistake, the chocolate cake recipe may be original to "Grandma," but the ToS are pure, nasty, corporate boilerplate, including:

• terms that can be modified by updating the ToS online and that online modification counts as "notice";
• provision that a consumer's continued use of services after a modification will be treated as assent to modified terms;
• incorporation by reference of a complicated, multi-layered privacy policy available through hyperlink, which also is subject to revision with or without notice (unless you think updating a website constitutes notice);
• expansive claims to licenses to make use of uploaded user content, including an express renunciation of any expectation of privacy or confidentiality with respect to such content;
• warranty disclaimers;
• limitations of liability;
• indemnification;
• an arbitration clause;
• a class action/class relief waiver;
• a provision that consumers will not disclose of facts relating to arbitration

Bake that for 30-40 minutes at 325 degrees, and Grandma will no doubt box your ears for bargaining away your legal rights so that you can stream Supernatural. 

Anti-competitive Contracting

In what promises to one of the biggest fights of the decade, the Justice Department has accused Google of engaging in illegal, monopolistic practices.  At stake are billions of dollars, a battle over what consumers want and -- contracts!  Despite what some of our colleagues might think, it’s not all about constitutional law.  As contracts profs have always known, in a free market capitalist society, it’s all about contracts and contracts are everywhere.  The sure-to-be expensive and lengthy lawsuit claims that Google entered into business contracts with partners, namely makers of mobile phones, which hindered competition.  These “anticompetitive and exclusionary” agreements, according to the Justice Department complaint, make Google the default search engine on Android phones and iPhones in exchange for a share of the advertising revenue that it derives from search queries on those devices.  The amounts are nothing to sneeze at according to the complaint– Google’s payments to Apple accounted for “roughly 15 to 20 percent of Apple’s profits.”  Given that Apple’s gross profit last year was something around $100 billion dollars, that’s a lot of $$$.  (I had to check that ginormous profit number from a few different sources to make sure I was reading that correctly).  In other words, Google thinks the value of being the default search engine on iPhones is worth approximately $15-20 billion dollars (the Justice Dept. filing says public estimates are a bit lower, $8-$12 billion dollars).  Apparently, Google thought losing its status as the default search engine on iPhones would be a “Code Red” situation.  We’ll be hearing more about the terms of these agreements as the case heats up.  

Of course, I couldn't help wondering about the political motivations of this filing given the timing and recent complaints from conservatives about Big Tech bias.  Especially noticeable was the line-up of Attorney Generals who were all from red states and the total absence of any blue state AGs.  It's ironic given the way that conservatives/progressives traditionally line up when it comes to antitrust and consumer protection issues.  In any event, I think it would be a mistake to think that this is a partisan issue (even if politics affected the timing of the filing) - concerns have been raised by both sides for years about the increasing power of Big Tech companies over our lives.  It will be interesting to see how all of this plays out.

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.