UNCONSCIONABLE TERMS PREVENT ENFORCEABILITY OF E-COMMERCE CONTRACT CLAUSES
FAIRNESS COMES WITH A FAIR PRESENTATION OF THE TERMS
By Jonathan Bick Bick is counsel to WolfBlock of Roseland and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of 101 Things You Need To Know About Internet Law (Random House) .
E-commerce, like traditional commerce, relies upon contracts. Unlike traditional commerce, e-commerce relies utterly upon agreements drafted and presented by one party on a take-it-or-leave-it basis. Such contracts' validity arises from the recipient's 'adherence' to the terms given. These so called 'adhesion' contracts are enforceable except to the extent a term is found unconscionable. With escalating frequency, courts are discovering unconscionable e-commerce contract clauses and refusing to enforce them.
Courts have long tolerated e-commerce adhesion contracts because they are important to the Internet marketplace. Initially, e-sellers used adhesion contracts to affiliate Internet transaction and offer a standard operating procedure for novel transactions. More recently, their use is intended to take unfair advantage by e-commerce merchants.
The Internet allows one party to mass market a product under terms it believes appropriate in light of the price it is charging and another party to acquire, or refuse to acquire, the product under those terms. That choice marks the assent. As e-commerce expands, the number of e-transactions with unconscionable terms will follow in its expansion.
Traditionally, 'adhesion contracts' share four elements: (1) adhesion contracts are drafted to drastically favor one party; (2) general enough to apply to numerous transactions; (3) offered with the representation that, except for price, the drafting party will enter into the transaction only on the terms contained in the document; and (4) minimize the actionable obligations of the adhering party, predominantly to the payment of the money.
As a rule, a court will not enforce an unconscionable contract clause. An unconscionable clause is one whose purpose is contrary to public policy, is overly harsh or has one-sided results that shock the conscience of the court. For instance, a clause which purports to release one party for its intentional torts would be unconscionable and unenforceable.
California courts have been at the vanguard of deeming e-commerce contract clauses unconscionable and hence unenforceable. See Comb v. PayPal, Inc., 218 F. Supp. 2d 1165 (2002), where the court found that the e-commerce agreement obligated users to arbitrate their disputes pursuant to the commercial rules of the American Arbitration Association, which is cost prohibitive in light of the average size of a PayPal transaction. Accordingly, the court denied motions by PayPal to compel users who commenced putative class action suits arising out of PayPal's allegedly inappropriate handling of customer accounts and/or complaints to resolve their claims via arbitration.
The court noted several important factors in deciding as to why the contract clauses of Paypal were unconscionable: The court reasoned that PayPal could issue binding amendments to the User Agreement at any time without notice to users. Furthermore, the court argued that the dispute resolution program of PayPal was unconscionable because: (i) it was mandatory and required that it was resolved in Santa Clara county, California, where PayPal is located; (ii) PayPal maintained possession of customer funds until any dispute is resolved; and (iii) no class actions were allowed. The court found these provisions were an attempt by PayPal 'to insulate itself contractually from any meaningful challenge to its alleged practices.'
More recently, the court in Bragg v. Linden Research, 487 F. Supp. 2d 593 (2007), found that an Internet site's arbitration provision could not be enforced on the basis that it was both procedurally and substantively unconscionable. In this case the plaintiff, an owner of virtual property on an Internet site, sued defendants, operators of the Internet virtual world, for the removal of certain virtual property he purchased from the virtual world and for freezing of the plaintiff's account. The defendants contended that the terms of the use agreement for the site compelled arbitration.
In this matter the arbitration provision was buried in a take-it-or-leave-it set of terms presented to customers before they could participate on the site. The provision's lack of mutuality, the costs of arbitration, the forum selection clause, and the confidentiality provision demonstrated that the arbitration clause favored the site operators over the participants. Consequently, the court denied the motion to compel arbitration.
The legality of 'shrink-wrap' agreements and its e-commerce counterparts have been validated by the Uniform Commercial Code ('UCC'). In particular, the UCC § 2-204 (1) states that a contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties, which recognizes the existence of such contract.
Both the e-commerce and 'shrink-wrap' agreements are adhesion contracts and hence share procedural and substantive aspects. In particular, they each share the following three characteristics. First, these contracts are not entered into between the parties as a result of meaningful negotiation. Second, the agreements are impossible to change. Third, the buyer's or user's assent to the terms may be either absent or ambiguous. It is these three distinguishing traits that form the legal basis for challenging the enforceability of such agreements.
In Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991), the Supreme Court found that adhesion contracts are valid. In particular, it found a forum selection clause in the cruise line's passage contract ticket --; a type of standard form contract printed on the back of the ticket --; to be enforceable. It emphasized that forum selection clauses contained in form passage contracts were subject to judicial scrutiny for fundamental fairness. It specifically disagreed with the Court of Appeals' determination that a nonnegotiated forum selection clause in a form ticket contract is unenforceable because it is not subject to negotiation.
Subsequently, in the case, ProCD, Inc. v. Zeidenburg, 86 F.3d 1447 (7th Cir. 1996), the court found that 'shrink-wrap' license agreement were valid. It found that an enforceable contract may be formed when the buyer used the software after having an opportunity to read the license at leisure.
Contracts of adhesion differ significantly from the traditional process of contract formation. In an adhesion contract, the parties do not negotiate because the terms and conditions that are presented to adherents are nonnegotiable. The lack of meaningful bargaining between the parties leaves the adherent in the position that the deal is accepted or there is no deal.
The adherent may only passively accept whatever is being offered and bears whatever obligation is being imposed. Thus, the issue arises as to whether the adherent has in fact assented to the agreement's terms.
Assent is a rudimentary concept of contract formation. It stems from the settled legal principle that the formation of a contract requires the mutual assent of the parties. Contracts of adhesion, at first glance, do not conform to the norm of mutual assent. It appears that contracts of adhesion fail to have a legitimate basis for finding the parties' assent. However, courts have found that an adherent ability to refrain from engaging in the agreement is the legal basis for supporting his actions when he enters into the adhesion contract.
In the case of In re RealNetworks, Privacy Litigation (2000 WL 631341 (N.D.Ill.) 2000), it was alleged that RealNetworks's software secretly accessed and intercepted users' electronic transmissions. An arbitration clause barred a suit in Illinois in favor of arbitration in Washington. The court specifically addressed the conscionable act of requiring a consumer to cross the country to submit to arbitration. It found both parties intended to be bound.
This finding is consistent with the application of existing law to traditional agreements. In particular, arbitration provisions containing forum selection clauses have previously been upheld. See Doctor's Ass'n. Inc. v. Hamilton, 150 F.3d 157, 163 (2d Cir. 1998), which upheld the forum selection clause in the arbitration clause designating Connecticut as forum.
The two-factor theory was set forth in Discover Bank v. Superior Court, 36 Cal. 4th 148 (2005). The court found that a contract clause becomes unconscionable when it is both part of a consumer contract of adhesion and it involves small amounts of damages. Under such conditions the party with superior bargaining power can deliberately cheated numerous consumers out of small sums of money with impunity. When these two conditions are met, certain clauses, such as foreign jurisdiction clauses, become an exculpatory clause that protects the wrongdoer and prevents consumers from employing the most effective method of redress.
Similarly, a California Court of Appeals for the Second Appellate District found that the forum selection clause in defendant EarthLink, Inc.'s membership contract to be unconscionable. In particular, the court found the contract to be one of adhesion and it found that some California consumers travel 2,000 miles to Georgia in order to recover claims of about $50. See Aral v. Earthlink, Inc., 134 Cal. App. 4th 544 (2005).
In e-commerce agreements, thus far the three clauses that are most likely to cause legal difficulties are those related to dispute resolution. In particular, the three clauses are: (a) arbitration clause providing for resolution of disputes through arbitration, (b) choice of forum clause designating a jurisdiction to which the disputes, if they arise, are to be submitted for adjudication, and (c) choice of law clause selecting an applicable law by which the contract in question will be governed.
These three clauses are easy to manipulate and are on the whole determinative of the entire outcome of any contract dispute. In freely negotiated contracts, these clauses are the result of extensive bargaining. In contracts of adhesion, however, the dispute resolution clauses frequently become the means by which businesses maintain legal certainty and predict their own advantage. For example, the forum selection clause, which commonly appears in e-commerce agreements, is employed by the licenser to bring certainty to Internet-based transactions that lack any fixed geographic location.
The normal process for adherents to bring these dispute resolution clauses into play is by claiming that the contract writers adequately brought these clauses to the attention of the adherent, so the adherent may claim it did not manifest assent to the clauses. This tactic is successful because dispute resolution clauses are not highlighted.
There are few exceptions to enforceability of e-commerce agreements in the cases and they most often can be explained by flaws in how terms were presented. To ameliorate unexpected outcomes, e-commerce contracts should place the dispute resolution clauses near the 'I agree' icon or provide a separate 'I agree' icon for the dispute resolution clauses. This procedure will reduce unconscionable claims due to lack of affirmative assent.