Zappos Gets Zapped. Browsewrap Agreements Are Collateral Damage.

You know Zappos.  That's where you ordered those 5 inch stiletto clear heeled stripper shoes.  And some of you women bought from there too.  Zappos is a part of Amazon and a year or so ago, Zappos suffered a really bad security breach.  Exposed something like 24 million customers' information.  Well, as almost always happens when something like this occurs, our legal comrades descended in droves and many lawsuits ensued (I guess that's a pun).  These were consolidated in a court in Nevada and procedural motions were filed. 

Zappos claimed that class actions were not justified because Zappos' terms of use agreement specified that all claims by customers had to be settled by arbitration.  The result would have been that each individual customer would be required to have his or her claim settled by a separate arbitration and presumably actually appear at the arbitration rather than be represented in a class.  So, instead of one lawsuit with 24 million plaintiffs in a class, it would have required 24 million individual arbitrations with one claimant in each.  This would have been good for the tourism industry in Nevada but not good for the individual claimants (or their class representing attorneys).

Zappos' terms of use agreement stated that by using the web site, the users consented to the terms of the user agreement, which contained the aforementioned arbitration requirement.  While a link to the terms of use was included on each page, it was in the same font and same color as the rest of the page and nothing compelled the user to look at the terms of use nor take any action that indicated assent to the terms of use.  In addition, Zappos reserved the right to amend the terms of use at any time.

Zappos' terms of use agreement has been referred to as a "browse wrap" agreement or a "click through" agreement.  We discussed the differences in a "clickwrap" agreement (which requires some evidence of assent, such as clicking a box) and a browse wrap agreement in a prior post.  We indicated that some courts have upheld these agreements and that the trend might be toward their acceptability but this court says "Not so fast".  The Nevada court held that a requirement to arbitrate is strictly a contractual matter and therefore, to compel the plaintiffs to arbitrate would require a binding agreement between Zappos and the plaintiff.  The court failed to find such a creature in this situation.  They found: "...we cannot conclude that Plaintiffs ever viewed, let alone manifested assent to, the Terms of Use.  The Terms of Use is inconspicuous, buried in the middle to bottom of every webpage among many other links, and the website never directs a user to the Terms of Use.  No reasonable user would have reason to click on the Terms of Use...".  The court also found that because Zappos reserved the right to unilaterally change the Terms of Use, the contract Zappos sought to enforce was "illusory" and therefore unenforceable.

It is possible that if the issue was not the requirement for 24 million folks to arbitrate in Nevada and something less impactful, like whether you could return your stripper heels, the result might have been different.  However, the fact remains that this case makes the enforcement of such browse wrap agreements tenuous and therefore, we should all review our policy regarding how we get people to agree to our terms of use.  It could become very important.

Updates and Breaking News on Gene Patents, PHI in the Cloud, Class Actions on ClickWraps and SEC Disclosures On Cybersecurity.

Some recent developments in the great, wide world of technology include:

(i)  The Supremes, in a unanimous decision (what?) ruled that naturally occurring genes could not be the subject of patent protection.  However, if you can create a gene artificially, you might still qualify.  Therefore, the creative force described in the Hebrew bible, missed his or her chance when on the sixth day, he or she created all those man genes.  Further, the one year bar and the first to file things have cluttered up the claim.  Also, since man was supposedly created in the image of the creator, there's that pesky prior art issue.  See Assn. for Molecular Pathology v. Myriad Genetics, Inc

(ii)  The recently released rules under HIPAA provide that entities that store protected health information ("PHI") for a covered entity are business associates even if the storage provider does not routinely access the information.  [See 45 CFR Parts 160 and 164 IV(3)]On the other hand, a data transmission organization (such as the U.S. Postal Service or internet service providers) that serve as a mere conduit are not business associates even if they do access the information occasionally in order to provide the service.  So, cloud providers of storage of PHI must sign a business associate agreement.  It is not clear how long one must hold on to a piece of information to be a storer as opposed to a transferor or if encrypting the information in storage without the key would serve to exclude the storage provider from the definition of a business associate.

(iii)  In a recent decision by the Seventh Circuit in Harris v. comScore, Inc., the court allowed the certification of a class to stand.  The class was composed of entities that had downloaded comScore's software that gathered information on the user's activities and sent the information back to comScore's servers.  One of the basic allegations of the plaintiff class was that comScore's clickwrap license was ineffective.  We have discussed this before in this post.  The court did not make factual finding as to any issues and this is only a class certification hearing and comScore may have legitimate individual defenses to many of the allegations.  However, comScore will have to deal with this in the context of a class action.

(iv)  The Securities and Exchange Commission has regulations in place regarding a publicly traded company's obligation to disclose its controls for cybersecurity and is now considering increasing the stringency of those rules.  A recent study by Willis Fortune 500 finds that a substantial percentage of  reporting companies fails (in Willis' opinion) to adequately disclose such company's exposure to cybersecurity issues and the impact on the company if an event occurs.  Look for this to increase in importance as the supposed cybersecurity wars increase in intensity.

Common Contract Clauses We Never Think Much About, But Should.

This is for all you contract nerds out there.  You know who you are.  You become aroused at the sight of a well crafted limitation of liability provision.  OK, then.  Well, me neither.

A recent case dealt with a choice of law provision that we routinely use and routinely don't think much about.

Oh, we fight over the choice of law provision.  We usually want the choice of our state with venue and jurisdiction to follow.  We haggle over New Jersey vs. New York when we probably don't have a clue as to the difference it would make on most issues.  We're just looking for some home cooking.  So, what happens when the parties agree in a contract as to the state whose law will be applied?  In Ruiz v. Affinity Logistics Corp. (9th Cir. Case No. 10-55581, Feb. 8, 2012) the issue was whether truck drivers were independent contractors or employees and the two states involved were Georgia and California.  Georgia law has a rebuttable presumption that they are independent contractors and California law would favor them being employees.  The contract in question chose Georgia law and Georgia was where the defendant had its principal place of business and was incorporated.  Ergo, slam dunk, right?  The parties were grownups and capable of making this decision.  The chosen law (Georgia) applies.  The Ninth Circuit says, 'Not so fast, my friends".

The Ninth Circuit decided that Section 187 of the Second Restatement of Conflicts of Law applies. Section 187 says in pertinent part that for things that parties can resolve by a specific provision in the agreement, the choice of law of the parties will prevail.  "In such instances, the forum will apply the applicable provisions of the law of the designated state in order to effectuate the intentions of the parties. So much has never been doubted." [Emphasis added]

Section 187 goes on to say that for matters that the parties can not resolve by a specific provision (e.g. making an illegal contract legal, agreeing that a party has capacity to contract when he doesn't), the choice of law in the contract will still be enforced unless the chosen state has no substantial relationship to the parties or the transaction, there is no other rational basis for selecting the state and the laws of the chosen state are contrary to a fundamental policy of another state and such state would be the choice of law absent the choice by the parties.

The Ninth Circuit then decides, without much discussion or explanation, that the provisions of the second part of Section 187 (the part about matters that the parties can not resolve by a specific contractual provision) should be applied and finally opines that California law should be applied instead of the state (Georgia) chosen by the parties.  The most common reading of Section 187 of the Restatement would mandate that after the court determined that the parties chose the law of a particular state and that such choice was not obtained by fraud or misrepresentation and that the parties were capable of contracting for such a provision, the discussion would be over and the consideration of the second part of Section 187 would be unnecessary.  This Ninth Circuit decision would require the consideration of all the factors listed in Section 187.

Why should we care?  Well, if we know that a particular issue is treated in a particular way in a particular state and both parties desire that treatment, there should be no reason why the parties can't agree to that.  It is common practice to chose Delaware law for corporations that have no contact with Delaware except that they are incorporated there because Delaware courts are perceived to be better at dealing with commercial and corporate issues.  This decision calls those provisions into question.

Forget About Stomping On Public Unions, Wisconsin Is Now Stomping On Automatic Renewals In Contracts.

I'm pretty sure that activists didn't occupy the State Capitol building in response to this bill, but it could have some ramifications for companies that enlist language that purports to let contracts automatically renew, unless one of the parties takes some affirmative action.

There is a pretty common provision in a lot of contracts, including those that provide for technology consulting and services that goes something like this:

"This Agreement has a one year initial term, beginning on the Effective Date ("Initial Term"). The Agreement will automatically renew on each anniversary of the Effective Date for subsequent one year terms (each a "Renewal Term") unless either party gives written notice to the other at least thirty (30) days prior to the expiration of the Initial Term or the Renewal Term that the Agreement will terminate at the end of the present term."

Nothing sinister here.  It is designed to take some administrative work out of renewals and vendors like them because of the inertia that induces customers to not think about nor terminate an agreement.

The Wisconsin legislature, having solved all of the harder problems, turned its attention to agreements like this in the present session.

They have decreed that after May 1, 2011, agreements between businesses to lease equipment or provide business services (supposedly technology services would qualify) can not have an enforceable automatic renewal clause unless adequate notice was given and the customer's initials appeared in a certain place on the contract. 

There are several exceptions to this of course.  Lobbyists are good at their jobs.  However, anybody that does business in Wisconsin and leases equipment or provides services should look at this statute and determine if they would profit from adjusting their forms.  There is also a provision that provides for a right of private action for failure to comply.  The amount of recovery provided for in an individual contract is relatively minor and repair is simple but one could envision class actions under this statute that would be a real nuisance.

And just when you thought it was safe to go back into Wisconsin.

UMG v. Augusto - "First Sale" Doctrine In Relation To Promotional CDs

UMG sends unsolicited, promotional CDs to potential reviewers, music critics and radio programmers to try to promote the sale, play and mention of such CDs. UMG does not charge for the CDs but it does put notices on the CDs.
One such notice reads:
"This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws."
Another, more terse notice reads:
“Promotional Use Only—Not for Sale.”

Defendant, Augusto, bought some of these CDs from the recipients and attempted to sell them on eBay. UMG sought to stop this by claiming copyright infringement and claiming that the language above and the acceptance by the recipient constituted a license rather than a sale under the provisions of Vernor v. Autodesk, which we discussed in length here. Therefore, the recipients could not sell the CDs without violating the copyright holder’s right of exclusive distribution.

Mr. Augusto claimed that the unsolicited delivery of the CDs constituted a “sale” for the purposes of our old friend the “First Sale Doctrine”. See our earlier discussions of this doctrine here, here and here.

The Court agreed with Mr. Augusto and stated that the mere receipt of the CDs without some other kind of action did not constitute an assent to the terms of the “license” and therefore, it had to be a sale. In addition, the Court also relied on the “Unordered Merchandise Statute” 39 U.S.C. § 3009(a), (b) (2006), which states that unsolicited merchandise may be treated as a gift. Hence, First Sale Doctrine applies and subsequent sales can be made without claims by the copyright holder. The Court’s opinion can be found here.

Lessons to be learned here are that in order to come under the license standards set out in Vernor v. Autodesk, the right kind of language has to be present and some overt act of acceptance of such language has to be displayed.

You are now free to buy those promotional Lady Gaga CDs you’ve had your eye on.

Browsewrap Agreements: The Contract You Never See

Many people would be surprised to learn that they are bound by contracts several times throughout the day and they don’t even know it. Every time you visit a website you are generally bound by its terms and conditions even if you never actually see them.

A recent case out of Missouri highlighted the trend towards enforcing these types of agreements. In, Major v. McAllister, the court upheld a browsewrap agreement. A browsewrap agreement is one in which the user is never actually required to consent to the terms and conditions, but is usually behind a hyperlink at the bottom of the homepage. In that case, the user was presented with the browsewrap agreement at every page, and when she submitted her contact information to complete a purchase she was given the notice that by clicking through, she agreed to the terms and conditions. She never actually clicked through to read the terms and conditions of the website, and it happened to contain a forum selection clause that she would later dispute.

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