THE VALIDITY OF ONLINE CONTRACTS:  What The Big Guys Do

Ivan Hoffman, B.A., J.D.


        On occasions, when I advise clients about what the law requires, I am sometime met with a response to the effect: “But I looked on the Internet and that’s not what the big guys do.”  And my response to that response is: It is most often the “big guys” who are doing it wrong and it is often the “big guys” who, as a result of doing it wrong, end up making the case law that explains how to do it right.

        In “The Validity of Online ‘Contracts’” I described the legally-mandated procedure for seeking to establish that a site’s terms of use and any other site-based “contract” might have a tenable claim to being enforceable.  You should read that article carefully but in sum it requires some means of establishing a consent on the part of the site visitor or user to those terms of use (to use terms of use as but an example).  Without that consent, you have no binding agreement.

        Having said the above, even following the said procedural rules is absolutely no guarantee that your agreement will be held valid.

        And the big guys are often at fault for not following these legally required approaches.  A case out of the Ninth Circuit, Douglas vs. Talk America, Inc. et. al. is but the latest in a string of “big guy” losses.

        The Court phrased the issue succinctly:

We consider whether a service provider may change the terms of its service contract by merely posting a revised contract on its website.
        And equally succinctly stated the facts:
Joe Douglas contracted for long distance telephone service with America Online. Talk America subsequently acquired this business from AOL and continued to provide telephone service to AOL’s former customers.   Talk America then added four provisions to the service contract: (1) additional service charges;
(2) a class action waiver; (3) an arbitration clause; and (4) a choice-of-law provision pointing to New York law. Talk America posted the revised contract on
its website but, according to Douglas, it never notified him that the contract had changed. Unaware of the new terms, Douglas continued using Talk America’s
services for four years.
        The Court went on:
Douglas alleges that Talk America changed his service contract without notifying him. He could only have become aware of the new terms if he had
visited Talk America’s website and examined the contract for possible changes. The district court seems to have assumed Douglas had visited the website when it
noted that the contract was available on “the web site on which Plaintiff paid his bills.” However, Douglas claims that he authorized AOL to charge his credit card automatically and Talk America continued this practice, so he had no occasion to visit Talk America’s website to pay his bills. Even if Douglas had visited the website, he would have had no reason to look at the contract posted there.   Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side.1 Indeed, a party can’t unilaterally change the terms of a contract; it must obtain the other party’s consent before doing so. [emphasis added] [citations omitted]
        And the Court noted in the footnote above:
Nor would a party know when to check the website for possible changes to the contract terms without being notified that the contract has been changed and
how. Douglas would have had to check the contract every day for possible changes. Without notice, an examination would be fairly cumbersome, as Douglas
would have had to compare every word of the posted contract with his existing contract in order to detect whether it had changed.
        The Court continued:
This is because a revised contract is merely an offer and does not bind the parties until it is accepted. [citations omitted]. And generally “an offeree cannot actually assent to an offer unless he knows of its existence.” [citations omitted] (“An offer may not be accepted until it is made and brought to the attention of the one accepting.”). Even if Douglas’s continued use of Talk America’s service could be considered assent, such assent can only be inferred after he received proper notice of the proposed changes. Douglas claims that no such notice was given.

Crawford v. Talk America, Inc., No. 05-CV-0180-DRH, 2005 WL 2465909, at *4 (S.D. Ill. Oct. 6, 2005), and Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097,
1103–06 (C.D. Cal. 2002), on which the district court relied, are not to the contrary. The customers in these cases received notice of the modified contract by
mail. The service provider in Bischoff mailed the contract to the customer, 180 F. Supp. 2d at 1101, and the service provider in Crawford gave notice to the
customer that she could see the contract terms online or call the service provider to learn of the terms. 2005 WL 2465909, at *3 n.3. Furthermore, Crawford and
Bischoff involved new customers who necessarily would be on notice that they were required to assent to contract terms as a predicate for using the service. By
contrast, the California Court of Appeal has held that a revised contract containing an arbitration clause is unenforceable against existing customers, even when they are given notice by mail. Badie v. Bank of Am., 67 Cal. App. 4th 779, 801 (Ct.App. 1998).

The district court thus erred in holding that Douglas was bound by the terms of the revised contract when he was not notified of the changes.  The error reflects
fundamental misapplications of contract law and goes to the heart of petitioner’s claim.

Conclusion

        Being big does not necessarily mean being right.
 

Copyright © 2007 Ivan Hoffman.  All Rights Reserved.

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This article is not legal advice and is not intended as legal advice.  This article is intended to provide only general, non-specific legal information.  This article is not intended to cover all the issues related to the topic discussed.  The specific facts that apply to your matter may make the outcome different than would be anticipated by you.  This article is based on United States law.  You should consult with an attorney familiar with the issues and the laws of your country.  This article does not create any attorney client relationship and is not a solicitation.

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