Courts Turn Against Abusive Clickwrap Contracts

by Jennifer Granick

Do you, Jennifer Granick, by the act of opening this box of software, agree to the terms and conditions set forth on the 62-page legal document enclosed in this box and also available on our website, so help you God?

Since 1996, the answer has been, "Yes, I do, whether I want to or not." That's when the influential appeals court Judge Frank H. Easterbrook ruled that an end-user licensing agreement, or EULA, stopped one Matthew Zeidenberg from copying and reselling a telephone directory he'd purchased on CD. At its simplest, the court ruled, contract law binds parties to make good on their mutual promises. So if a customer manifests her agreement to a sales proposal by opening a box and failing to return the product -- after she's had the opportunity to see what the vendor expects she will and won't do -- then she is legally required to keep her word, no matter how onerous the contract's demands.

In the past month, however, two new court rulings suggest that judges are developing a more sophisticated sense of how corporations conduct online and technology transactions with their customers.

The EULAs or terms-of-service agreements are long and legalistic, the deals are offered on a take-it-or-leave-it basis and the terms are often oppressive and one-sided. As a result, the legal hegemony of the EULA is cracking. This is a good development for consumers, who would otherwise be saddled by oppressive terms they have neither the legal sophistication to understand nor the bargaining power to avoid, and for the public interest, which suffers when customers are forced to waive rights that capitalist democracies rely on for innovation and accountability.

In Gatton v. T-Mobile (.pdf), the California Court of Appeal struck down a provision in the mobile phone company's EULA requiring consumers to go through arbitration to challenge termination fees or the practice of selling locked handsets that can't switch carriers with the customer. The court held that both the way customers entered into the EULA contract, and the arbitration terms of that contract, were unconscionable, and therefore the provision would not be enforced.

The reasons the court gave for holding the EULA procedurally unconscionable apply to most EULAs. Even though the arbitration term was fully disclosed to consumers, the contract was one of "adhesion": an agreement imposed and drafted by the party with superior bargaining strength, which gave the consumer only the opportunity to accept or reject the contract, not to freely negotiate it. As a result, the customer's unequal bargaining power results in an absence of meaningful choice. The fact that the customers could choose a different carrier may mitigate, but not cure, the procedural unconscionability.

Next, the court ruled that the substance of the arbitration term, which denied consumers the right to bring a class action, was unconscionable because that form of litigation is often the only means of stopping and punishing corporate wrongdoing. Even though there was only some procedural unconscionability, when weighed on a sliding scale with the substantive harm to consumers, the court refused to dismiss the class action.

Gatton is an important case because it recognizes that every clickwrap, shrink-wrap, browsewrap and box-wrap contract has an element of procedural unconscionability that requires the court to consider whether the challenged term of the contract is overly harsh or one-sided. This opens up the content of contracts to legal supervision, which is great in a situation where the customer hasn't really been able to bargain, negotiate or otherwise exercise market power.

The federal courts seem to be following suit. In Douglas v. U.S. District Court (Talk America) (.pdf), the 9th U.S. Circuit Court of Appeals ruled last month that a service provider may not change contract terms by posting those changes on its website without notification to the customer. In this case, the plaintiff sought to invalidate an arbitration provision like the one in Gatton and a provision stating that New York law would apply to the agreement, because the terms were added to the service agreement after the customer had signed up. The court held that the customer could not be bound to new terms, even by continuing to use the service, if he is not given notification that the terms have changed.

The 9th Circuit noted, as the Gatton court did, that under California law, the mere fact of market choice was not enough to save an adhesion contract. The Douglas court also confirmed that class-action waivers were substantively unconscionable under California law.

The Douglas court refused to apply New York law, even though the contract said so, because that was one of the new terms for which the plaintiff hadn't received notice. However, even though New York law appears to be less consumer-friendly than California law, there's reason to believe that even in New York, the legal system is growing more skeptical of EULAs than Judge Easterbrook was back in 1996. Earlier this year, the New York attorney general's office successfully sued security company Blue Coat Systems over the company’s use of EULAs that tried to prevent consumers from testing and criticizing Blue Coat products. The company settled the suit by agreeing not to enforce this anti-benchmarking provision and by paying a fine. The attorney general's office won despite New York's stricter rules about unconscionability and even though some consumers were notified of these terms before they purchased Blue Coat products.

Together, these cases show that courts are beginning to understand that modern contracting practices are a far cry from the arms-length negotiations between equals that traditional contract law imagines. Modern customers are at a real disadvantage against the bargaining power of technology corporations, some of which have shown no restraint at trying to limit consumer remedies, or even product testing and review. Gatton and Douglas show courts are moving away from applying a simplistic theory of contract formation toward developing legal rules that are more attuned with the modern marketplace and balance of power. This is a welcome development, and one which could protect consumer interests and the public interest by developing rules and limitations on the otherwise extremely useful practice of mass-market contracting.