United States: Ensuring Enforceability Of Online E-Commerce

Online terms of service, terms of use or "terms and conditions" ( collectively, "TOS") are ubiquitous-rarely do we see a website without some form of TOS, typically accessed through a link at the bottom of a site's home page. This runs the gamut from sites that are purely informational and passive, having no end-user interactions and posting no third party content, to those focusing on user-generated content ("UGC") and e-commerce, be it at the consumer or business-to-business level. But merely posting TOS on a site does not make them enforceable. To ensure enforceability, an end-user must either provide clear affirmative electronic assent to the TOS or have actual or constructive notice of conspicuously posted TOS before proceeding to interact with a site. Specific provisions of TOS, particularly waivers of material rights, must also pass muster under applicable state law.

In this context, online TOS are no different than any other form of contract, which, as we all learned in our first year of law school, requires both a clear offer and acceptance under applicable state law.1 As the Second Circuit has observed: "While new commerce on the Internet has exposed courts to many new situations, it has not fundamentally changed the principles of contract."2 In the context of the Internet, this "meeting of the minds" must occur digitally, such that courts can unequivocally conclude that a user had at least constructive, if not actual, notice of the TOS and an opportunity to review them before taking action on a website or in connection with an online purchase.3 Even if TOS are deemed "accepted" by end-users, they still can be challenged-and often are from the defense side-as contracts of adhesion or as being unconscionable, either in whole or as to specific terms, such as forum selection and liability limitation clauses.

For a purely passive informational site, TOS typically only need to provide basic disclosures, including notice of intellectual property rights, company contact details and site administration information. Enforceability is therefore not a major concern. But once a site becomes interactive in any way, those TOS sitting at the bottom of a web page are meaningless unless they are reasonably communicated to, and form a legally binding contract with, end-users.

Among the most critical provisions in TOS from the provider's perspective are those concerning choice of law, mandatory forum selection, arbitration and class action waivers, warranty disclaimers and limitations of liability. Where UGC, merchant or other third party content is posted on a site, additional key terms will include content license terms dictating what usage rights are ceded to the service provider in that content, and a requisite "takedown" policy and agent designation under the Digital Millennium Copyright Act ("DMCA"), which is necessary for a non-publisher service provider to take advantage of the secondary liability "safe harbor" under the DMCA.4 From an online provider's perspective, the enforceability of these types of material terms is critical to controlling exposure to potentially substantial liabilities and the costs attendant to litigating multiple claims throughout the country in different legal jurisdictions.

"[M]erely posting TOS on a site does not make them enforceable. To ensure enforceability, an end-user must either provide clear affirmative electronic assent to the TOS or have actual or constructive notice of conspicuously posted TOS before proceeding to interact with a site."

Where such terms are material to a provider's business model, existing TOS and the applicable website interface should be reviewed carefully and revised as necessary to insure enforceability on an ongoing basis. TOS should also incorporate by reference, and hyperlink to, a website's applicable privacy policy, which then becomes part of the overall contract with an end-user.

Browsewrap vs. Clickwrap TOS

Online TOS generally fall into one of two categories: "browsewrap" or "clickwrap" agreements, although there are nuances within each category. "Browsewrap" refers to TOS that typically are posted on a site and do not require any affirmative assent by an end-user to use the site or its services.5 Browsewrap TOS often sit passively as a hyperlink at the bottom of a website home page, but may also be brought to a user's attention and accessed through one or more links on a site, without requiring an end-user to affirmatively accept or read them. Browsewrap TOS that are merely posted on a site with no conspicuous notice to end-users of their existence are not enforceable because there is no evidence that an end-user consented to the TOS or even had actual knowledge of them.6 Tell-tale signs of unenforceability include burying a TOS hyperlink in an inconspicuous location on a website so as not to provide reasonable notice of their existence to a user; making sure the TOS link itself is no more, and perhaps even less, prominent in terms of font size and color than other non-material links on a site; and a failure to direct users to the TOS when they are subscribing for services, opening an account or making a purchase.7

Modified browsewraps have, however, been enforced on a case by case basis. This has occurred where a user was expressly notified that his or her continued activity on the site was subject to specified TOS and a conspicuous link was provided to access those TOS one or two clicks away. In these instances, legally sufficient constructive notice of the TOS was deemed provided to the end-user. For example, in dismissing a class action complaint, the Eastern District of New York recently enforced arbitration and class action waiver clauses in Amazon.com's TOS, a hybrid browsewrap/clickwrap agreement, as characterized by the court.8 Amazon endusers were prominently notified at final checkout that by placing an order "you agree to Amazon's privacy notice and conditions of use." The words "conditions of use" were a colored hyperlink that took users to Amazon's TOS. To confirm a purchase, the user had to then click "Place your order," which was positioned just below the TOS notification. Although users were not required to specifically accept the TOS, the court held that the TOS notification and hyperlink were sufficiently conspicuous on the checkout page so as to notify an end-user each time a purchase was made that purchases were subject to the TOS and that this placed end-users at least on "inquiry" notice.

On the heels of its Amazon decision, however, Senior Judge Jack B. Weinstein of the Eastern District of New York refused to enforce hybrid browsewrap TOS and an arbitration clause contained therein in a class action involving in-flight WiFi service fees, where an end-user was not required to click through to TOS which were posted eight pages down after a sign-in screen.9 The court assessed an average Internet user's "capacity and understanding" and concluded that average end-users would not have been informed that they were binding themselves to any TOS. As a result, forum selection and arbitration clauses in the TOS were not enforceable. As an evidentiary matter, the court placed the burden on the defendant to show "special circumstances indicating that the plaintiffs were aware, or should have been aware, of such clauses because of their special knowledge."

"Clickwrap" agreements, on the other hand, require users to affirmatively "accept" TOS as an express condition to initially engage with a website, whether to purchase or sell goods online, post videos, subscribe to video-on-demand services or download games. Clickwraps are generally enforced because end-users must affirmatively accept the TOS that are conspicuously posted on or linked to directly from the same page as the acceptance mechanism (such an "I accept" icon), even if they chose not to read the TOS.10 In some cases, the site will require an end-user to scroll through the TOS before acknowledging acceptance (sometimes referred to as a "scrollwrap" agreement), a procedure that ensures enforceability.11 The more direct the end-user's interaction is with the TOS and the acceptance procedure, the most secure the website owner will be in enforcing its TOS.

Formation of a Valid TOS Agreement

The starting point is whether a valid and enforceable online contract is formed. As the Second Circuit made clear in an early case addressing online contracts: "Mutual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract."12 This manifestation of assent can be direct in the form of TOS that are clearly presented to an end-user for prior review and must be affirmatively "accepted," as in a traditional clickwrap agreement scenario. Here, state courts and federal courts applying state contract law are nearly unanimous in upholding such direct acceptance as creating a binding agreement.

New York courts have regularly upheld the validity of such clickwrap agreements. As an example, in a 2008 criminal proceeding involving alleged online deceptive advertising, the New York Supreme Court held that the TOS posted on the website of Direct Revenue, LLC, constituted a binding agreement and all end-users were bound by express disclosures in the TOS respecting the use of pop-up ads and other practices, as well as limitations on liability. This all precluded any claims of misrepresentation and deceptive business practices and required dismissal of fraud claims.13 All website users were required to click a "Yes" button within a dialog box to confirm their assent to the TOS, which they had the opportunity to read. As the court emphasized, "jujnder New York law, such contracts are enforced so long as the consumer is given a sufficient opportunity to read the EULA [end-user license agreement], and assents thereto after being provided with an unambiguous method of accepting or declining the offer..."14

Assent also can be established where a site provides prominent notice that use is subject to the posted TOS, which are accessible through one or two clearly identifiable links, and the user then must click a link acknowledging this disclosure without being compelled to read the TOS themselves. A recent example is 5381 Partners v. Sharesale.com, involving an online merchant agreement that was enforced where there was clear and uncontroverted evidence that the user could not have become a merchant and used the site without first affirmatively agreeing to the applicable merchant terms by clicking a box confirming agreement with the TOS, even if such terms were not actually read.15

On the other hand, the absence of a means for a user to affirmatively accept posted TOS will preclude the formation of an enforceable online contract, unless there is unequivocal evidence that a user had actual or constructive knowledge of a website's TOS. In defending a consumer complaint tied to an online purchase, for example, Barnes & Noble recently lost a bid to enforce an arbitration clause in its browsewrap agreement TOS, which were accessible through links at the bottom of its website pages, because its site "did not provide reasonable notice of its Terms of Use" and consumers were not prompted to assent thereto.16 In that case, the Ninth Circuit, applying both New York and California law, emphasized that even in the absence of affirmative consent, such as through an "I accept" button, the TOS would likely have been enforceable if the user had actual notice of the agreement. In the absence of actual knowledge, the enforceability of browsewrap TOS depends "on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract"—and this, in turn, "depends on the design and content of the website and the agreement's webpage."17

Similarly, the New Jersey Appellate Division refused to enforce a forum selection clause in TOS where the "clause was unreasonably masked from the view of the prospective purchaser because of its circuitous mode of presentation" and was not visible on the purchaser's computer without scrolling down to a submerged portion of a webpage where a disclaimer containing the clause appeared.18 In that case, there also was no requirement before concluding a purchase that the plaintiff had to affirmatively accept the posted terms, putting a final nail in the TOS coffin.

One observation gleaned from the case law is that courts scrutinize browsewrap-type TOS more closely in matters involving consumers, rather than those concern- ; ing more sophisticated merchants and other businesses. This was recently emphasized by Senior Judge Weinstein in Berkson v. GoGo LLC, who wrote: "Because of the passive nature of acceptance in browsewrap agreements, courts closely examine the factual circumstances surrounding a consumer's use."19 There, Judge Weinstein refused to enforce TOS against consumers where the "design and content of the website, including the homepage, did not make the 'terms of use' readily and obviously available.... The hyperlink to the 'terms of use' was not in large font, all caps, or in bold.. .Nor was it accessible from multiple locations on the webpage. "20

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1. See, e.g., Express Indus, and Term. Corp. v. New York State Dept, of Transp., 93 N.Y.2d 584,589,715 N.E.2d 1050,1053 (1999) ("To create a binding contract, there must be a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.").

2. Register.com, Inc. v. Verio, Inc., 356 F.3d 393,403 (2d Cir. 2004). As this court also emphasized: "To form a valid contract under New York law, there must be an offer, acceptance, consideration, mutual assent and intent to be bound." Id. at 427 (internal quotations omitted).

3. . See Starke v. Gilt Groupe, Inc., 2014 WL1652225 (S.D.N.Y. April 24, 2014), where the court upheld Gilt Groupe's membership sign-up process, which included a sign-up box with a hyperlink to TOS through a single "click," where a user was prominently notified . that membership was governed by the posted TOS. Plaintiff was deemed to have constructive notice of the TOS and was bound thereby because he was aware the TOS existed and governed his purchases, despite not actually having viewed or read the TOS.

4. 17 U.S.C. § 512. The DMCA, which applies only to copyright claims, absolves an online service provider from secondary infringement liability if the provider fully complies with the statutory conditions, which include posting and abiding by a notice and "take-down" process, and listing and recording with the Copyright Office an agent to receive DMCA claims. Section 512 also permits users who posted challenged content to contest wrongful takedowns. A broader discussion of the DMCA is beyond the scope of this article.

5. See, e.g., Hines v. Overstock.com, Inc., 668 F.Supp.2d 362,366-67 (E.D.N.Y.2009) ("Unlike a clickwrap agreement, a browsewrap agreement does not require the user to manifest assent to the terms and conditions expressly... [a] party instead gives his assent simply by using the website."). Hines held that an online retailer's TOS were not enforceable because users were not prompted to review them and the TOS were not prominently displayed.

6. See, e.g., In re Zappos.com, Inc., Customer Data Security Breach Litigation, 893 F.Supp.2d 1058 (D. Nev. 2012) (browsewrap agreement was unenforceable where users were not required to take affirmative action to assent to the terms and there was no evidence that users consented to such terms or were even aware of the terms.).

7. Id. at 1064.

8. Nicosia v. Amazon, 84 F.Supp.3d 142 (E.D.N.Y. Feb. 4,2015) (Second Circuit appeal pending as of the writing of this article). Note the Supreme Court held in AT & T Mobility LLC v. Concepcion, 563 U.S. 321 (2011) that class-action waiver and mandatory arbitration clauses were enforceable under the Federal Arbitration Act, which preempted California law that might otherwise find such clauses unconscionable in consumer contracts under the test set forth in Discover Bank v. Superior Ct., 36 Cal.4th 148,30 Cal.Rptr.3d 76 (2005). Accord American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013) (FAA does not permit courts to invalidate a contractual waiver of class arbitration on the ground that the plaintiff's cost of individually arbitrating a federal statutory claim exceeds the potential recovery).

9. Berk son v. Gogo LLC, 97 F. Supp. 3d 359 (E.D.N.Y. April 8,2015) (Second Circuit appeal pending as of the writing of this article; motion for preliminary approval of class action settlement granted at 2015 WL 7960042 (Dec. 4,2015)).

10. See, e.g., Whitt v. Prosper Funding LLC, 2015 WL 4254062 (S.D.N.Y. July 14,2015) (a reasonably prudent website user does not lack sufficient notice of terms of an agreement that are viewable through a conspicuous hyperlink adjacent to a clickable box indicating acceptance of the TOS); Centrifugal Force, Inc. v. Softnet Commc'n, Inc., 2011 WL 744732, at *7 (S.D.N.Y. Mar. 1,2011) ("In New York, clickwrap agreements are valid and enforceable contracts."); Rudgayzer v. Google Inc., 2013 WL 6057988 (E.D.N.Y. Nov. 15,2013) (upholding Google's clickwrap agreement that required a "user's assent as a prerequisite for using the services," finding the terms were "reasonably communicated."); Feldman v. Google, Inc., 513 F. Supp. 2d 229,233 (E.D. Pa. 2007) (forum selection clause enforced in TOS between Internet advertising service and advertiser where TOS conspicuously notified users in bold at the top to "Carefully read the following terms and conditions," required users to click on an "accept" box and the TOS were presented in a scrollable window).

11. See Berkson, supra, 97 F. Supp. 3d at 395 -97 (also discussing at length variations of click-wrap and browsewrap agreements and degrees of enforceability).

12. Specht v. Netscape Communications Corp., 306 F.3d 17,32 (2d. Cir. 2002) ("where consumers are urged to download free software at the immediate click of a button, a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms."). The Second Circuit applied California law to refuse enforceability of an arbitration clause in TOS that were buried at the bottom of a download web page.

13. People v. Direct Revenue, LLC, 2008 NY Slip Op. 50845 (Sup. Ct., N.Y. Co., 3/12/2008).

14. Id. '

15. 5381 Partners v. Sharesale.com, 2013 WL 5328324 (E.D.N.Y. Sept. 23,2013). Although the end user argued that the merchant terms were not "readily visible" because one had to click a link to access those terms, the court found the agreement enforceable because the plaintiff "was shown precisely where to access the Merchant Agreement before it agreed to them, and it should have clicked on them." See also Rudgayzer, supra.

16. Nguyen v. Barnes & Noble, Inc., 763 F.3d 1171 (9th Cir. 2014). The TOS also provided for application of New York law, and the Ninth Circuit noted that its decision comported with both New York and California law. 763 F.3d at 1175.

17. Id. at 1177 (also citing to Specht, 306 F.3d at 30-31).

18. Hoffman v. Supplements Togo Mgmt., LLC, 419 N.J. Super. 596,611 (App. Div. 2011). See also Edme v. Internet Brands, Inc., 968 F. Supp. 2d 519,525-26 (E.D.N.Y. 2013) (court refused to enforce forum selection clause in TOS under New York law because no evidence was presented to show how an end user was presented with the TOS on a website).

19. Berkson, supra, 97 F. Supp. 3d at 395.

20. Id. at 404.

Originally published in Vol. 34, No. 1 of the spring/summer 2016 issue of Inside, a publication of the Corporate Counsel Section of the NYS Bar Association.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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