United States: Potential Limitations Placed On Unilateral Right To Modify Terms Of Use

Contractual provisions giving a website operator the unilateral right to change its end user terms of service are ubiquitous and appear in the online terms of many major social media sites and other websites, including Facebook, Twitter, Instagram and Google. Although amendments to terms of service quite often cause consumers to complain, litigation regarding such changes is relatively rare. A recent decision from the U.S. District Court in the Northern District of Ohio, however, challenges the enforceability of unilateral amendments to online terms of service in at least some circumstances.

In Discount Drug Mart, Inc. v. Devos, Ltd. d/b/a Guaranteed Returns, Discount Drug Mart, a distributor of pharmaceuticals, sued Guaranteed Returns, a company that processes pharmaceutical product returns, for Guaranteed Returns' failure to remit credits due under a written distribution agreement between the parties. Guaranteed Returns pointed to the forum selection clause on its website, which it argued required the parties to bring suit in either Nassau or Suffolk County in the State of New York. This provision appeared in Guaranteed Returns' online "standard terms and conditions," which Guaranteed Returns claimed were incorporated into the parties' written distribution agreement.

The court held otherwise, citing the Sixth Circuit case Int'l Ass'n of Machinists and Aerospace Workers v. ISP Chemicals, Inc. and stating that "[i]ncorporation by reference is proper where the underlying contract makes clear reference to a separate document, the identity of the separate document may be ascertained, and incorporation of the document will not result in surprise or hardship." The court also pointed out that Guaranteed Returns' purported right to change its standard terms and conditions unilaterally could result in Discount Drug Mart being subject to surprise or hardship. Further, the court noted that there was no evidence that the forum selection clause had been included in the standard terms and conditions at the time the distribution agreement was signed (and Guaranteed Returns did nothing to try to prove this fact). Thus, the court concluded that the standard terms and conditions were not properly incorporated into the distribution agreement (although the court ended up finding in favor of Guaranteed Returns on other grounds).

It is difficult to say what, if any, precedential force Discount Drug Mart will have. Putting aside the facts that the case was brought in the Northern District of Ohio and was ultimately dismissed on grounds unrelated to this holding, the underlying background of the case was nuanced. First, although the court stated in dicta that "one party to a contract may not modify an agreement without the assent of the other party," a statement that could be interpreted to mean that unilateral amendment of contracts is never permitted, the holding itself was limited to situations in which terms and conditions are incorporated by reference. That said, even this limited holding may be relevant to many website operators in the social media world, as the larger social media sites often use a network of contracts that reference each other (for example, Facebook's "Platform Policies" requires developers to agree to the company's "Statement of Rights and Responsibilities," which are "requirements for anybody who uses Facebook" and which can be unilaterally modified by Facebook).

Second, the Discount Drug Mart court did not elaborate on the "surprise or hardship" standard, so it is possible that unilateral changes to end user terms would be upheld if the website operator gave proper notice to its end users of such changes in order to avoid causing surprise or hardship. The leading social media platforms currently have different approaches to providing notice of changes to their online terms of use. For example, Facebook provides seven days' notice (although "notice" here includes posting on Facebook's site governance page); Twitter will notify users of changes to its terms of service via an "@Twitter" update or through email (but only for changes that Twitter deems to be material in its sole discretion); and Instagram notifies users of its changes to its terms of use by posting them on Instagram. A court could find that notification of changes using one or more of these methods is sufficient to avoid subjecting an end user to surprise or hardship.

Finally, the court seemed to give weight to the lack of any evidence that the forum selection clause was included in Guaranteed Returns' standard terms and conditions at the time that the parties entered into the distribution agreement. Today, however, most Internet service providers include "last modified" dates in their terms of use. Recording version dates and keeping copies of older terms of use could help a website operator show that a particular provision existed in terms of use at the time that the parties entered into an agreement referencing such terms (although these practices could also provide evidence to the contrary).

Discount Drug Mart is not the first decision to challenge a company's right to unilaterally modify its online terms and conditions. In the 2007 case Douglas v. Talk America, the Ninth Circuit Court of Appeals held that Talk America could not enforce an arbitration clause against an individual who had initially accepted the applicable terms of service prior to Talk America's unilateral addition of the arbitration clause. Although Talk America posted the amended terms online, the court noted that the individual's assent to the new terms could only be inferred "after [the individual] received proper notice of the proposed changes." Discount Drug Mart seems consistent with this decision to the extent that the case suggests that failure to provide adequate notice to end users of changes to online terms may invalidate such changes.

A decision in the Northern District in the U.S. District Court of Texas in 2009, Harris v. Blockbuster Inc., went further than the Douglas court by holding an arbitration clause in Blockbuster's online terms of use rendered the terms of use illusory and unenforceable. The court's holding was based on the fact that Blockbuster could, in theory, unilaterally modify the arbitration provisions and apply those modified provisions to earlier disputes. Harris cited the Fifth Circuit case, Morrison v. Amway Corp., in which the court had held an arbitration clause in online terms of use to be illusory under Texas law when defendant Amway attempted to apply arbitration terms that been had modified after the plaintiff had agreed to Amway's standard terms. Although limited to the Northern District of Texas (for now), the implications of Harris could be troubling to online service providers, as the case suggests that if a company includes language allowing it to make unilateral changes to its terms by simply posting the revised terms on its website, those terms could be deemed invalid. In fact, at least one legal scholar has suggested that companies should not include such language in their online terms. For more on Harris, see our client alert here.

Discount Drug Mart does not necessarily provide any clear guidelines that online service providers must follow for their online terms to be valid and enforceable. Because the court based its holdings on specific factual circumstances and provided little insight into its reasoning, it is unclear at this point whether other courts will follow this opinion and impose limitations on companies' rights to unilaterally change their online terms of service under different circumstances. However, given the legal precedent on the subject, it will likely behoove companies that incorporate their online terms into other documents to consider re-evaluating their amendment and notification practices to minimize any chance of subjecting end users to "surprise or hardship."

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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