Category Archives: Contracts

California court invalidates Alienware arbitration provision in online terms and conditions

Oestreicher v. Alienware Corp., —F.Supp.2d—-, 2007 WL 2302490 (N.D. Cal. Aug. 10, 2007)

Plaintiff Oestreicher bought a laptop on the Alienware website. Six months later the computer overheated and was irretrievably broken. Oestreicher filed a class action suit against Alienware in California state court, and Alienware removed the case to the U.S. District Court for the Northern District of California. Alienware then moved to compel arbitration, citing to the terms and conditions of purchase, which had been presented to Oestreicher in the form of a “click-wrap” agreement during check-out.

The court denied the motion to compel arbitration. The first two-thirds of the opinion addressed the question of whether California or Florida law should govern the enforceability of the arbitration provision. Disregarding the express provisions of the agreement providing for application of Florida law “without regard to conflicts of laws principles,” the court decided that California law should apply. It held that enforcement of the provision requiring arbitration (and the attendant waiver of the right to pursue a class action) violated a fundamental policy of the state of California. Furthermore, California had a materially greater interest in the litigation, based on the fact that California residents were invoking consumer protection laws to seek recovery for allegedly defective products shipped into California.

Applying California law, the court determined that the class action waiver was unconscionable and unenforceable. It was procedurally unconscionable because it was a take-it-or-leave-it contract of adhesion. It was substantively unconscionable because the dispute implicated by the class action waiver involved a small amount of damages and Oestreicher had alleged Alienware carried out a scheme to deliberately cheat large numbers of customers out of individually small sums of money.

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Court upholds limitation of liability clause in Internet services agreement

Asch Webhosting, Inc. v. Adelphia Business Solutions Inv., LLC, No. 04-2593, 2007 WL 2122044 (D.N.J. July 23, 2007).

Plaintiff Asch Webhosting entered into a three year contract with Adelphia Business Solutions for “internet services.” About two months after the agreement was finalized, Adelphia sent Asch a letter informing it that the services would be terminated because of alleged violations by Asch of the service’s acceptable use policy. The parties worked out an agreement whereby Asch had thirty days to find another provider. After those thirty days were over, Adelphia pulled the plug.

Asch filed suit alleging breach of contract, claiming $1.4 million in consequential damages due to the loss of business stemming from the termination of the agreement. Adelphia moved for summary judgment, citing to an “exculpatory clause” in the agreement which limited the amount of recovery for consequential damages to the amount paid by Asch for the services.

The court granted Adelphia’s motion for summary judgment. It held that the exculpatory clause was reasonable and that Asch demonstrated no conduct by Adelphia sufficient to overcome the expressed limitations on liability. The transaction at issue was made at arms length and was between two private commercial entities. Moreover, there were no public policy concerns implicated by the agreement. Given this scenario, the court refused to “engage in judicial revision of the parties’ [a]greement.”

Adelphia’s conduct in terminating the agreement, according to the court, did not render the exculpatory clause void. Adelphia had received complaints that Asch was using the service to spam other customers. Regardless of the “ultimate accuracy or veracity” of those complaints, the court found that Adelphia was entitled to rely on them so long as it did so in good faith.

New provisions in online terms of service of no effect without notice to customer

Questions remain, however, as to whether right to notice may be waived

Douglas v. U.S. Dist. Court for the Central Dist. of Ca, — F.3d —-, No. 06-75424, 2007 WL 2069542 (9th Cir. July 18, 2007)

Plaintiff Douglas signed up for long distance service with AOL. Some time later, Talk America acquired AOL’s rights under the contract, and changed the terms, which were posted online. Talk America added provisions relating to additional charges, a waiver of the right to class action suits, an arbitration clause, and a forum selection clause providing for suits to be brought in New York. Douglas claimed he was not provided with notice of the changed provisions when they purportedly became effective.

Douglas did not find out about the new charges until four years later, and when he finally did, he filed a federal class action suit against Talk America. Citing to the later-modified agreement, Talk America moved to compel arbitration. The district court granted the motion. Because the Federal Arbitration Act at 9 U.S.C. 16 does not authorize interlocutory appeals of a district court order compelling arbitration, Douglas sought a writ of mandamus from the Ninth Circuit. The court granted the writ, vacating the district court’s order compelling arbitration.

The Ninth Circuit applies a five-factor test, from Baughman v. U.S. Dist. Court, 557 F.2d 650 (9th Cir. 1977), to determine whether a writ of mandamus should be issued. The most important factor in this test is whether the district court’s order was “clearly erroneous as a matter of law.”

The appellate court held that the district court erred in holding that Douglas was bound by the terms of the revised contract, through a “fundamental misapplication[] of contract law,” going “to the heart of [Douglas's] claim.” The court cited to cases holding that a party cannot unilaterally change the terms of a contract, but must obtain the other party’s consent before doing so, as a revised contract is merely an offer and does not bind the parties until it is accepted. Further, citing to Williston on Contracts, the court held that “an offeree cannot actually assent to an offer unless he knows of its existence.” In this case, “[e]ven if Douglas’s continued use of Talk America’s service could be considered assent, such assent [could] only be inferred after he received proper notice of the proposed changes.”

The case is silent on what might constitute proper notice. It is also not clear from the opinion (and the district court pleadings are not available on PACER), whether the original AOL terms of service included a provision stating that continued use of the service after changes had been posted would constitute acceptance of those changes. So although the case establishes that an e-commerce customer has the right to receive notice of changes to online terms of service, the question of whether that right can be waived is not answered in the opinion.

Appellate court lifts injunction against website owner in defamation case

Pennsylvania appellate court reverses trial court’s determination that former patient agreed to never again mention doctors on gripe site.

Nevyas v. Morgan, — A.2d —-, 2007 WL 704998 (Pa.Super. March 9, 2007)[Download opinion.]

A former patient unhappy with the LASIK surgery he received started a website to warn others of the procedure’s possible dangers. The website contained allegedly defamatory statements about the LASIK doctors who performed his procedure.

lasik.jpg

An attorney for the doctors sent a cease and desist letter to the patient, threatening to file a lawsuit against him if he failed to remove the content about the doctors. The patient responded with his own letter, agreeing to “conform to [the] request insofar as to remove any stated libelous reference to the [doctors] and their practice only.” The patient went on to state that he would not remove the site in its entirety, and would continue to publish “within the legal guidelines as allowed by . . . the First Amendment.”

The patient quickly lived up to his promise. He replaced the site with an earlier version that made no reference to the doctors at all. Nonetheless, a few days after that, the hosting provider removed the site at the doctors’ request.

Understandably perturbed by the deletion of his website, the patient got a new web host and reposted the version of the site containing the references to the doctors. A few months later, the doctors filed suit. As one would expect, the doctors sued for defamation, but they also sued for breach of contract and sought specific performance. They argued that by posting the earlier version of the site (which made no mention of the doctors) in response to the cease and desist letter, the patient entered an agreement to never again mention the doctors in any manner, whether defamatory or not.

The case went to trial on the claim for specific performance, and the court ruled in the doctors’ favor. It found that the parties had entered into an agreement whereby in exchange for the doctors not filing a lawsuit against the patient, the patient would remove all defamatory statements about the doctors from the site and refrain from defaming them in the future. But the trial court’s order went a bit further — it forbade the patient from mentioning the doctors at all.

On appeal, the court vacated the lower court’s order and remanded for further proceedings. The appellate court held that the trial court was correct that the actions of the patient in response to the cease and desist letter constituted an agreement to remove the defamatory content already on the site . But the appellate court also held that the patient’s action of uploading the original website, which contained no reference to the doctors, did not constitute an agreement on his part to never again mention them. Rather, the court held, the letter the patient sent in response to the cease and desist letter reserved the right to continue to update the site to mention the doctors.

Because the trial court did not consider whether the statements on the later version of the website were the same as what the patient had agreed to remove (or were otherwise defamatory), the case was remanded for further proceedings to consider that question.

Case against Internet Archive and Brewster Kahle proceeds in Colorado federal court

[This case came down over a month ago, but is worth writing about. Read more coverage about it here.]

Suzanne Shell, the owner of the website profane-justice.org, discovered that multiple copies of her site had been added to the Internet Archive. She threatened the Internet Archive with litigation, invoking her site’s terms of use which included provisions that purported to charge users $5,000 each time they made a copy of a page on the site. The terms included a bunch of other onerous provisions as well, purporting to impose a number of draconian penalties on Internet users making unauthorized copies of the website.

Wayback Machine

In response to Shell’s threats of litigation and demands for payment, Internet Archive filed a declaratory judgment action in the Northern District of California, seeking a determination that its activities did not infringe Shell’s copyright. The action was later transferred to the District of Colorado.

Not surprisingly, Shell filed several counterclaims against the Internet Archive and members of its board of directors. She alleged causes of action for copyright infringement, conversion, civil theft, breach of contract, and racketeering under RICO and the corresponding Colorado statute.

Internet Archive filed a 12(b)(6) motion to dismiss the conversion, civil theft, breach of contract and racketeering claims. The court dismissed all but the breach of contract claim.

In dismissing the conversion and civil theft claims, the court held that although the claims were not preempted by the Copyright Act (as each claim included at least one element not included in a prima facie case of infringement), Shell failed to allege facts sufficient to support the causes of action. As for the conversion claim, it was undisputed that the Internet Archive had complied with Shell’s request to remove the cached pages from the archive. Accordingly, Shell would not be able to prove that the Internet Archive refused to return any property to her. Moreover, Shell had failed to allege that Internet Archive exercised dominion or control over her website, since it was undisputed that she continued to own and operate the site when it was archived.

The racketeering claims failed because Shell failed to allege that Internet Archive was involved in any racketeering enterprise.

So that left the breach of contract claim, the only claim to survive the motion to dismiss. Shell contended that Internet Archive entered into a contract with her when it copied her web pages, and that it breached that contract when it failed to pay her according to her terms of use. Internet Archive argued, on the other hand, that it did not learn about the terms of service until after it copied the pages, and accordingly there was no mutual assent to the terms. Furthermore, there was no human acting on behalf of Internet Archive to copy the pages, just the automatic crawler. Internet Archive argued that without actual knowledge, there could not be an enforceable contract.

The court rejected Internet Archive’s argument at this stage of the litigation, however, determining that the factual question of whether it knew about the terms could not be determined on the record before the court. Shell had satisfied the pleading requirements for federal litigation, by alleging the existence of a contract, breach and damages, which was sufficient to make out a claim for breach of contract.

Internet Archive v. Shell, (Slip Op.) 2007 WL 496680 (D.Colo., Feb. 13, 2007)

Suzanne Shell has been involved in other copyright litigation recently. Read more here. As has the Internet Archive and its founder Brewster Kahle. Read about that here.

Terms of e-commerce agreement not part of previous franchise agreement

Arbitration provision in later agreement not applicable to previous agreement, where contracts independent, collateral, and not inconsistent with one another.

Defendant AMF, the well-known manufacturer of bowling and billiards equipment, entered into an oral franchise agreement with plaintiff Suburban Leisure Center, whereby Suburban would sell AMF’s products in the St. Louis area. Later, the parties entered into a written “e-commerce” agreement, whereby Suburban agreed to service products in its geographic area that were sold through AMF’s website.

After AMF sought to terminate the oral franchise agreement, Suburban filed suit, claiming, among other things, that AMF had not provided the proper notice of termination under Missouri law. AMF moved to dismiss Suburban’s claim, arguing that under the terms of the e-commerce agreement, the exclusive method of dispute resolution between the parties was through arbitration. The district court denied the motion to dismiss, and AMF sought review. On appeal, the Eighth Circuit affirmed.

AMF had argued that the e-commerce agreement (which contained the arbitration provision) fully set forth the terms of the contract. AMF pointed to a “merger clause” (also known as an “integration clause” or “entire agreement” clause) in the agreement. Because of this clause, AMF contended, the parol evidence rule prohibited considering the terms of the oral franchise agreement, which contained no mention of arbitration.

The court disagreed, however. Applying Virginia law as required by the choice of law provision in the e-commerce agreement, the court examined the “collateral contract doctrine.” It noted that the oral franchise agreement addressed a contractual relationship between the parties that was not covered in any manner by the e-commerce agreement. As a result, the oral franchise agreement was “independent of, collateral to, and not inconsistent with” the e-commerce agreement. Examination of parol evidence, namely, the terms of the oral agreement, was therefore proper.

Because the agreements were independent of each other, the e-commerce agreement’s arbitration language could not be attributed to the oral franchise agreement. After all, the dispute was over the termination of the franchise, not the agreement to service products that had been sold through AMF’s website. The oral franchise agreement did not provide for arbitration. Because a “party cannot be required to submit to arbitration any dispute which he has not agreed so to submit,” the matter was properly before the court, and the lower court’s denial of the motion to dismiss was proper.

Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc., — F.3d —-, No. 06-1865, 2006 WL 3332965 (8th Cir., November 17, 2006).

Court examines conversion claim in breach of EULA case

Plaintiff Meridian Project Systems, Inc., a purveyor of construction project management software, was peeved to see that a couple of its licensees collaborated to reverse engineer Meridian’s flagship software product. Meridian filed suit, alleging numerous claims, including conversion. It claimed that the defendants converted both tangible property relating to the licensed software, as well as “concepts, logic, processes, features and functions of [the software] to the extent not covered by its copyrights.”

The defendants moved to dismiss, alleging that Meridian had failed to state a claim upon which relief could be granted. Furthermore, the defendants argued that the claim of conversion of the intangible aspects of the software was preempted by the Copyright Act. The court denied the motion in part, and granted it in part.

The court held that Meridian adequately alleged conversion of the physical components of the software. The End User License Agreement (“EULA”) provided that upon any violation of the agreement, the licensees were to either destroy or return the software’s physical components. In this case, Meridian sufficiently alleged a breach of the agreement, namely, the act of reverse engineering the software. Because the defendants did not thereupon return the “disks, files, and other documents,” such items were “unlawfully retained.” These allegations supported a claim of conversion.

There could be no conversion, however, of the intangible aspects of the software. The court held that the elements which Meridian claimed were converted fell within the general subject matter of copyright, even though they were not actually entitled to copyright protection. Meridian’s claim arising out of the alleged conversion was one seeking to assert rights equivalent to a claim for copyright infringement. Accordingly, this portion of the conversion claim was preempted by the Copyright Act.

Meridian Project Systems, Inc. v. Hardin Construction Co., (Slip Op.) 2006 WL 1062070 (E.D. Cal., April 21, 2006).

Cell phone contract not unconscionable

Florida case provides good example of why one should actually read a contract before filing a lawsuit

Appellant Briceno took her camera phone to a Sprint store to have it worked on. She claimed that employees of the store, using her phone, accessed and distributed “personal photographs of her body to third persons by the internet.” Briceno filed suit against Sprint in Florida state court alleging various privacy-related causes of action.

The court never got to the merits of the case, however, because Sprint successfully moved to compel arbitration, pursuant to a clause found in Sprint’s “Terms and Conditions of Service.”

Briceno sought review of the trial court’s order compelling arbitration. The appellate court affirmed.

Unlike the recent Illinois case of Hubbert v. Dell Corp., this case did not involve the question of whether the terms and conditions containing the arbitration clause were part of the contract between the customer and the provider. The main issue in this case was whether the arbitration clause was unconscionable. The court held that it was not.

Because of a choice of law provision in the terms and conditions, the Florida court found itself in the unusual position of applying Kansas law to determine the question of whether the arbitration clause was unconscionable. It held that the agreement did not unfairly exploit any disadvantaged position of Briceno. On the contrary, the court noted that she was “college educated . . . certainly not illiterate, uneducated, or unsophisticated.” She simply ignored the terms and conditions because “she did not care about reading them and . . . did not like to read.”

The court then concluded that Sprint had not unfairly concealed amendments to the terms and conditions containing the arbitration clause. It noted that alerts to changes in the terms and conditions had been provided on an invoice sent to Briceno. She could have looked online to read them, or could have requested a paper copy by telephone. It was also customary for Sprint to include the terms and conditions with new telephones, and Briceno had exchanged her telephone for a new one four times within the course of three years.

Given these factors, the court held that the arbitration clause was not unconscionable. It was therefore enforceable, and the trial court properly ordered the parties to arbitrate the dispute.

Briceno v. Sprint Spectrum, L.P., — So.2d —, 2005 WL 2093681 (Fla.App. 3 Dist., August 31, 2005).

[Link to opinion]

“Terms and Conditions of Sale” provided by hyperlink created binding contract

[Thanks to the Technology & Marketing Law Blog and the ContractsProf Blog for alerting me to this case.]

Several purchasers of Dell computers filed a class action lawsuit against Dell in an Illinois court. Dell moved to dismiss the action, or to compel arbitration, based on an arbitration clause found in the “Terms and Conditions of Sale” that were available for viewing by clicking on a blue hyperlink found on each of the pages that website visitors saw during the purchasing process.

Although the plaintiffs admitted that by purchasing computers online they entered into contracts with Dell, they claimed that the Terms and Conditions of Sale containing the arbitration clause were not a part of the contracts. They argued that merely making a link to the Terms and Conditions of Sale available was insufficient, and that Dell should have required purchasers to affirmatively manifest their assent by clicking an “I Accept” box.

Dell argued that it had done enough to make purchasers aware of the Terms and Conditions of Sale. It had provided the link by means of a contrasting blue hyperlink. It had also stated on numerous pages on its website, used for marketing and for purchase, that all sales were subject to the Terms and Conditions of Sale.

The trial court determined that the online terms and conditions had not been “adequately communicated” to the plaintiffs, because Dell did not “provide a display text on the Web site that manifested a clear assent to the terms and conditions,” and because the terms and conditions themselves were not visible on the pages viewed while placing the orders. Accordingly, the trial court denied Dell’s motion to dismiss or to compel arbitration. Dell sought review. The appellate court reversed.

On appeal, the court held that the plaintiffs were properly made aware of the terms and conditions. The hyperlinks appearing on the web pages made the pages “the same as a multipage written paper contract. The blue hyperlink simply takes a person to another page of the contract, similar to turning the page of a written paper contract.” The contrasting blue color of the hyperlink served to make it conspicuous. Finally, the court noted that because the plaintiffs were purchasing computers online, they were not novices, and should have known that more information would have been available by clicking on the link.

Because the Terms and Conditions of Sale were part of the online contract, the court held that the arbitration clause applied. It reversed the decision of the trial court and remanded it with directions to either stay or dismiss the action so that the parties could arbitrate their disputes.

Hubbert v. Dell Corp., — N.E.2d —, 2005 WL 1968774 (Ill.App. 5th Dist., August 12, 2005).

Forum selection clause upheld in content scraping case

In the case of Cairo, Inc. v. CrossMedia Services, Inc., decided on April 1, 2005, the U.S. District Court for the Northern District of California has held that although a company using scrapers to gather content from a competitor’s website did not expressly assent to the website’s terms of use, the scrapers’ “repeated and automated” access to the site created imputed assent to the terms of service and the forum selection clause appearing therein.

Both parties to this case operate database-driven websites that users can access to get information about local retail sales. Soon after Cairo launched its site in late 2004, CrossMedia noticed that Cairo was “scraping” content and images from CrossMedia’s sites and implementing that material on Cairo’s sites. Cairo also created “deep links” in its site leading to pages within CrossMedia’s sites. According to CrossMedia, Cairo automatically accessed CrossMedia’s servers thousands of times each month to gather information.

CrossMedia sent a cease and desist letter to Cairo in November 2004. Soon thereafter, without waiting to be sued for infringement, Cairo filed the present case in federal court in California, asking for a declaratory judgment. Cairo sought a determination that, among other things, Cairo’s website did not infringe any of CrossMedia’s copyrights or trademarks.

Cairo is a California company and CrossMedia is located in Chicago. CrossMedia moved to dismiss the action, citing a forum selection clause appearing in the terms of service of its various websites. This forum selection clause stated that “[j]urisdiction for any claims arising under this Agreement shall lie exclusively with the state or federal courts in Chicago, Illinois where CrossMedia has its principal place of business.”

The court sided with CrossMedia by determining that the forum selection clause applied and dismissed the action.

Cairo had argued the action should not be dismissed because it had no agreement with CrossMedia. Cairo contended that it never assented to the websites’ terms of use, thus it was not bound by the forum selection clause.

The court found these arguments unpersuasive. It looked to the decision in Register.com v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004) to determine that “when a benefit is offered subject to stated conditions, and the offeree makes a decision to take the benefit with knowledge of the terms of the offer, the taking constitutes acceptance of the terms, which accordingly become binding on the offeree.” Cairo’s visits to CrossMedia’s sites with knowledge of the terms of use constituted acceptance of the terms.

Similarly, the court rejected Cairo’s argument that the Specht v. Netscape Comm. Corp. case (306 F.3d 17 (2d Cir. 2002)) should apply. In that case, the Second Circuit ruled that a click-wrap agreement did not bind the parties where users had to scroll down their screens without reason to do so in order to see the terms of the agreement. In the present case, the court found that Cairo had imputed knowledge of the terms of use through its “repeated and automated use” of CrossMedia’s sites. “[E]ven accepting Cairo’s allegation that it did not explicitly agree to [CrossMedia]‘s Terms of Use, the Court finds that Cairo’s use of [the] web site under circumstances in which Cairo had actual or imputed knowledge of [the] terms effectively binds Cairo to [the] Terms of Use and the forum selection clause therein.”

Cairo, Inc. v. CrossMedia Services, Inc., 2005 WL 756610 (N.D. Cal., April 1, 2005).

See also Dix v. ICT Group, — P.3d —, 2005 WL 372483 (Ct. App. Wash., Feb. 17, 2005).