Can a Clause Permitting a Website Operator to Unilaterally Change the Terms of the Website User Agreement Be Enforced?

website terms and conditionsThe clickware or browse-ware on many websites contain clauses permitting the operator to unilaterally change the terms of use. For example, a number of websites that I reviewed recently, and that offer services throughout the U.S. or North America, contain clauses along these lines:

“We may amend, modify or update these terms of use at our sole discretion, and all users
shall be bound by any such amendment, modification or update. We may, but are under no
obligation, to provide notice of any amendment, modification or update of these terms of use.”

Are clauses like this enforceable? The answer is . . . it depends.

website-tos-featured-image-1200x467On one hand, many website customers would argue that because this kind of clause gives so much discretion over the terms of the contract to the website operator, there really has been no agreement at all — no meeting of the minds as to the terms of the contract. Others would argue that because the website owner can modify his obligations at will, the website owner has offered by real “consideration”, so the contract is illusory.

California courts have held that such discretion does not necessarily make a contract invalid, because it is assumed that the party with the discretionary power — in this case, the website operator — has a duty to exercise its discretion in good faith and in accordance with fair dealing. So even if the agreement permits a material term, like the price, to be modified, as long as the actual modification that is made is reasonable or in proportion to some objective standard, the right to modify will generally be upheld. (fn1) For example, California courts have upheld contracts in which banks have reserved the right to increase interest rates on a loan, as long as the increases that were actually imposed were determined to be reasonable. (fn2)

X3-B-300x300However, in many cases, website operators have attempted to insert entirely new terms in later versions of an agreement that were not present at the time that the customer used a website or agreed to its contractual terms. I have seen cases where subsequent terms of use added such items as arbitration clauses (fn3), forum selection clauses (fn4), choice of law clauses (fn5), or attorneys fees’ (fn6) provisions.

Some California cases have held that such added terms may not be enforceable — despite the presence of a unilateral modification clause. Here are some examples:

glossaryIn a 1998 case, the Bank of America sent “bill stuffers” to credit card account customers in which it announced that all future account disputes would be settled by arbitration and “if you continue to use your account, this new provision will apply to all past and future transactions.” The Bank argued that it had a right to impose this new term because provisions in its agreements with credit card holders stated: “We may change any term, condition, service or feature of you account at any time. We will provide you with notice of the chance to the extent required by law.” (fn7)

glossary-of-web-terms-710x341The Court disagreed. It found that while a clause permitting unilateral modification can be upheld, modifications must be limited in scope to terms “whose general subject matter was anticipated when the contract was entered into.” Here, the Court found that “there is nothing about the original terms that would have alerted a customer to the possibility that the Bank might one day in the future invoke the change of terms provision to add a clause that would allow it to impose ADR on the customer.” Accordingly, the Court held that the new ADR clause was not enforceable. (fn8)

terms_of_useIn a 2002 case, a customer sued PayPal, arguing that a later version of a user agreement that included a new arbitration clause that contained such things as a prohibition against consolidation of claims and a forum selection in favor of venue in Santa Clara County, California, was invalid.

PayPal created accounts with customers using an online application. A prospective customer clicked a box at the bottom of the application that read, “[you] have read and agree to the User Agreement and [PayPal’s] privacy policy.” The “clickwrap” User Agreement apparently agreed to by the plaintiff contained a clause stating that “this Agreement is subject to change at any time without notice.” (fn9)

website-accessibility-featured-imageUsing an “unconscionability” analysis, the Court found that PayPal contract was “procedurally unconscionable” because it was a “contract of adhesion.” A contract of adhesion is a standardized contract, which is drafted and imposed by a party with superior bargaining power, and which gives the subscribing party the opportunity only to accept or reject it. (fn10) Many (but certainly not all) website contracts would fit this definition. (fn11)

The Court noted that a contract that is procedurally unconscionable may nonetheless be enforceable if it is substantively conscionable. However, the new terms also failed this test. First, the new terms CG11BDprovided that PayPal could unilaterally freeze funds in disputed accounts, forcing the customer to engage in expense court proceedings to unfreeze them. Second, the prohibition against consolidation of claims effectively meant that few claims could be pursued by customers, since most claims involved small amounts of money. Third, the new requirement that arbitration proceed under the commercial rules of the American Arbitration Association (AAA) and that the costs of arbitration be equally shared meant that, in most cases, the cost to arbitrate would far exceed the amount of the claim — again effectively precluding customers from pursuing recovery. Fourth, limiting venue to Santa Clara County, California was also unreasonable, since PayPal’s customers were spread across the U.S. and could not afford to pursue claims if this meant traveling to California. Accordingly, the Court found that the new arbitration clause was not enforceable.