Digital Media Lawyer Blog

It is common for internet contracts to include clauses permitting the website operator to make unilateral amendments. However, as discussed in our entry of March 31, 2009, these clauses are problematic. In many states, they can make other contract provisions subject to challenge as illusory.

This was the result in an April 15, 2009 ruling by a Federal judge in the Northern District of Texas, in Harris v. Blockbuster, Inc., a case involving the Blockbuster Online website, a site which lets users rent movies online. (fn 1) The plaintiff alleged that Blockbuster Online had violated the Video Privacy Protection Act by transmitting information about her video rental choice to Facebook. Blockbuster attempted to invoke an arbitration clause in its online contract with the plaintiff and brought a motion to compel arbitration.

The court's analysis was simple. It started by noting that under Texas law, a contract must be supported by consideration, or it is illusory and cannot be enforced. It then cited a similar case, Morrison v. Amway Corp in which the Fifth Circuit had found that an arbiration clause was illusory which had permitted Amway to "unilaterally modify all rules" with the only express limitation being that the rules had to be published before they could be enforced (but could still be enforced retroactively). (fn2)

The Blockbuster online contract contained the following clause:

Blockbuster may at any time, and at its sole discretion, modify these Terms and Conditions of Use . . . with or without notice. Such modifications will be effective immediately upon posting. You agree to review these Terms and Conditions of Use periodically and your continued use of this Site following such modifications will indicate your acceptance of these modified Terms and Conditions of Use. If you do not agree to any modification of these Terms and Conditions of Use, your must immediately stop using this Site.

The District Court found that the Blockbuster Online contract suffered from the same defect as the contract in the Amway case, because it gave Blockbuster the right to modify its terms and conditions, including the section that contained the arbitration clause, "at its sole discretion" and "at any time" and that all modifications would be effective immediately upon being posted on the site. Because Blockbuster could modify the terms of the arbitration clause at will, the arbitration provision was illusory. As a result, the Court denied Blockbuster's motion to compel arbitration. (fn3)

The court did give some indication of changes that could be made to save this clause: namely, it could preclude application of amendments to disputes which arose, or of which Blockbuster had notice, before the amendment.

The take-away from this decision is that care must be taken in deciding to include and in drafting a clause permitting unilateral amendment of a contract. Inartful drafting can cause the loss of the benefit of critical terms, such as occurred here. If you have questions about drafting or enforcement of an internet contract, please feel free to contact me at any time.

David D. Johnson is a business lawyer whose practice focuses on litigation and other issues relating to digital media and consumer electronics companies. David can be contacted at (310) 785-5371 or DJohnson@jmbm.com.

Continue reading "Texas Court Rules that Internet Contract Giving Website Owner the Right to Make Unilateral Amendments Is Illusory" »

The recent relaxation in product return policies by retailers means that return rates on consumer electronics are likely to rise in 2009. (See our January 15, 2009 posting). This news is not entirely bad. Economic studies have shown that liberal return policies increase customer sales. (fn1) This, of course, is why many U.S. retailers have chosen to liberalize their return policies during the current economic downturn.

If you are a manufacturer or a supplier, cooperating with a retailer's liberal return policy can increase your sales, as well. If, of course, you can afford it. OEMs often work on gross profit margins that hover around 10%. Distributors often operate on even lower margins. While you may have projected that you can earn a profit based on a retailer's conservative return policy that produced a 5% return rate, a sudden liberalization that increases the return rate to 15% could wipe out your profits.

Continue reading "Minimizing Risks from Product Returns" »

The consumer electronics world saw a tightening of customer return policies by big box retailers such as Costco in 2007. However, the slowing of the U.S. economy in 2008 has caused many retailers to reverse course. A November 2008 survey by the National Retail Federation (NRF) found that 52% of retailers planned to have more lenient return policies during the 2008 holiday season, compared to 35% in 2007. The NRF survey also reported that retailers expected customer returns for 2008 to rise to over $219 billion -- a 23% increase over 2007. (fn1) Among retailers with more lenient return policies were Macy's, Sears and Circuit City. (fn2) Given this recent liberalization in return policies by retailers, distributors and manufacturers of electronic goods should get ready for higher returns in 2009.

Product Return Rates Are Linked to Retailer Marketing Strategies

Foreign entrants into the U.S. consumer electronics market are often blind-sided by the liberal return policies of U.S. retailers. These policies push U.S. return rates on retail sales to levels much higher than those found in comparable economies, such as the E.U. (fn3) According to a 2008 report by Accenture, the average return rate for consumer electronics devices "ranges between 11-20 percent in the US and 2 to 9 percent in Europe. (fn4)

Continue reading "Returns of Consumer Electronics Set to Increase in 2009: Time for Manufacturers and Distributors to Assess and Minimize their Risks" »