Digital Media Lawyer Blog

While some courts are willing to enforce click-wrap or browse-wrap agreements that a consumer may have never read, a Federal judge in the Southern District of Florida drew the line at enforcing an agreement that a consumer never received.

The case is Williams v. MetroPCS Wireless, Inc., S.D. Fla, No. 1:09-cv-22890, Order (Jan. 5, 2010), a proposed class action against a pre-paid wireless phone carrier. The complaint alleged that MetroPCS marketed itself as a provider of unlimited nationwide coverage, but that in reality, its coverage reached less than half of the U.S. population and excluded 11 of the top 25 metropolitan areas. The complaint further alleged that MetroPCS offered flat rate plans in which customers were to pay by the month, not the minute, and were not required to sign a contract. However, lead plaintiff Marcia Williams claimed that after purchasing an unlimited $45/month plan, she was charged $225 for one month's service. The complaint sought equitable and declaratory relied, damages, attorneys' fees and a trial by jury.

MetroPCS contended that the allegations had no merit, and that Williams had entered into an arbitration agreement with MetroPCS, so the matter had to be settled in front of an arbitrator. According to MetroPCS . its standard business practice was to provide customers with several forms at the time service is initiated. These included an Agreement, a Start of Service Request Form and a Welcome Guide. The Welcome Guide referred customers to the MetroPCS website. At the footer of the website was a "Terms and Conditions" hyperlink that instructed users to review the Agreement. The Agreement contained an arbitration clause, requiring that claims or controversies relating to or arising out of the Agreement be resolved through individual binding arbitration.

MetroPCS claimed that under its standard business practices, Williams would have received these forms and hence had notice of the arbitration clause. However, MetroPCS was unable to provide testimony or other evidence showing that Williams actually received these forms.
Williams contended that she never received the Agreement or the Welcome Guide and never accessed MetroPCS's website. Williams further contended that the MetroPCS advertisements repeatedly stated that there was "no contract." One such advertisement allegedly featured a unicorn and a mermaid stating that no contract was required. Another commercial featured a contract being passed through an animated paper shredder and a drawing of a contract with a circle and diagonal line over it.

There is a liberal federal policy favoring enforcement of arbitration agreements. However, the policy only applies if the parties have actually entered into an agreement to arbitrate. Here there was no evidence that Williams had assented to the Agreement or its arbitration clause.

Continue reading "Williams v. MetroPCS: Consumer Cannot be Bound by Terms of Contract She Never Received" »

Digital media law: Online contracts typically fall into two categories: clickwrap and browsewrap agreements. In clickwrap agreements, a user expressly indicates his/her assent to a website's terms of use by clicking on a button that says "I agree" or "OK." In browsewrap agreements, a user does not expressly indicate his/her assent by clicking on a button, but ostensibly indicates his/her assent to the site's terms of use in some other fashion - such as by submitting information or clicking other buttons.

Courts routinely enforce clickwrap agreements. See our post of November 13, 2009. However, the FTC has begin to subject such agreements to increased scrutiny and found some to be unfair where users were asked to register their assent to the agreement before being aware of all their terms. See our post of September 21, 2009. Courts often have difficulty enforcing browsewrap agreements for similar reasons -- because it is often difficult to demonstrate that the user ever read the terms of use or assented to them.

However, in recent case, a Missouri Court of Appeals upheld a browsewrap agreement - but one that verged on actually being a clickwrap agreement. The case, Major v. McCallister, Missouri Court of Appeals, No. CD29871 (Dec. 23, 2009), involved a website operated by ServiceMagic, which offered users free referrals to construction contractors.

A visitor to the ServiceMaster website first encountered several screens in which he/she inputted information about his/her remodeling project. Each of these pages contained a hyperlink to ServiceMaster's Terms of Use. A user was not required to click on the hyperlink or read the Terms of Use to proceed.

After the user entered his/her project information, the ServiceMaster site would produce a screen stating that the user had been matched to several contractors. The screen also contained space for the user to enter his/her contact information, followed by a "Submit for Matching Pros" button. Next to the button was a blue hyperlink to the website's Terms of Use and the statement "By submitting you agree to the Terms of Use."

Continue reading "Major v. McCallister: Browsewrap Agreement Upheld by Missouri Court of Appeals" »

Living on the west side of Los Angeles puts me smack in the middle of the entertainment industry. I have often seen promotional copies of DVDs of TV shows and feature films or music CDs being exchanged at parties, and even seen stacks of these being left out by the side of the street for trash pickup. Studios and labels don't want this content distributed to the public because early distribution can foul up marketing campaigns, and because promotional versions of content may be remixed or reedited. But can the studios and labels prevent recipients from giving away or even reselling these lightly-controlled promotional discs? A June 2008 case said "No".

The case is UMG Records, Inc. v. Augusto, C.D. Cal., No. CV-07-03106. UMG is a well-known record label and frequently produces promotional CDs. UMG's promotional CDs are labeled with language stating that "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."

The defendant Augusto was not one of the original recipients of UMGs CDs, but came into possession of many of these promotional CDs through music shops and online auctions. Augusto then resold the promotional CDs via eBay, as rare collectibles that were not available in stores. After discovering the sales, UMG attempted to get eBay to take down Augusto's auction sites. However, after initially taking them down, eBay eventually reinstated Augusto's sites.

UMG then filed suit against Augusto for copyright infringement, arguing that the language on its CDs created a license agreement precluding sale or distribution of the CDs. Augusto defended, relying primarily on the "first sale" doctrine. Under the first sale doctrine, a copyright holder's right to distribute a work is limited to the initial distribution of copies of a work, not to the resale or further transfer of possession of those copies. 17 U.S.C. § 109.
Central District Judge Otero held that principal issue in the case was whether UMG had transferred title when it sent out the promotional CDs. If the answer was yes, then the first sale doctrine applied and Augusto did not infringe UMG's distribution rights when he resold the CDs on eBay.

Continue reading "UMG Recordings v. Augusto: First Sale Doctrine Protects Reseller of Promo CDs" »

Digital media law update: A judge in the Southern District of New York has upheld a clause contained in a click-wrap user agreement that required any suit regarding use of the Match.com site to be brought in north Texas. The opinion actually commended Match.com for including this forum selection clause in its User Agreement. It noted that Match.com's headquarters are in Dallas, Texas and that failure to include such a clause in its User Agreements would have subjected Match to suit in all 50 states.

The case is Brodsky v. Match.com LLC, S.D.N.Y., No. 1:09-cv-05328, a class action that alleged that subscribers to Match.com allegedly suffered harm from a misleading distinction between users and subscribers and from problems with email communications between these two groups. The complaint alleged causes of action under RICO, New York's deceptive trade practices and false advertising laws, and common law, for breach of contract and fraud. The plaintiffs included people from around the country, including persons from New York, California, Connecticut, Michigan and Florida.

Prior to completing the registration process, each of the class members was required to check a box on the website which stated "I agree to the Match.com terms of use." This statement was hyperlinked to an 11-page User Agreement. The first paragraph of the User Agreement stated, "If you object to anything in this Agreement or the Match.com Privacy Policy, do not use the Website or the Service." The User Agreement also contained a choice of law clause in favor of Texas law and a forum selection clause in favor of jurisdiction in Dallas or Collin County -- adjacent counties in north Texas.

On Match.com's motion, Judge Naomi Buchwald ordered that the case be transferred to the Northern District of Texas.

Continue reading "Brodsky v. Match.com: Court Upholds Forum Selection Clause Contained in Click-Wrap Agreement" »

Digital media law: The FTC's recent complaint against Sears Holding Management Corporation targeted an Internet contracting practice that has heretofore been widely approved of by U.S. courts -- placing key disclosures or terms for an online "clickwrap" agreement in a scrollbox. The courts have often overlooked the fact that placing contract terms in scrollboxes may mean that a consumer never actually reads them, because to do so often requires the consumer to click through multiple tiny scrollbox screens. Instead, many courts have held that a consumer who clicks her acceptance to such terms should beheld to her word. In its case against Sears Holding, which was resolved via consent decree on August 31, 2009, the FTC has now stated that in certain circumstances such "hidden" disclosures will not be enough.

The case is In re Sears Holding Management Corp., FTC Docket No. C-4264. Sears Holding handles marketing operations for the Sears Roebuck and Kmart retail stores, and operates the sears.com and kmart.com online retailing sites. In 2007-2008, Sears Holding created and tried to get customers to voluntarily agree to participate in an online market research program. According to the FTC complaint, the program would run in the background on users' computers and transmit information on virtually all of the users' Internet use to Sears Holding. This included information on web browsing, filling shopping baskets, transacting business during secure sessions, completing online application forms, checking online accounts, and use of web-based email and instant messaging services.

Sears Holding marketed this research program via a popup box that it delivered to 15% of visitors to the sears.com and kmart.com websites. The popup box marked the research program as a method for customers to "talk directly" to a retailer, and to "tell them about the products, services and offers that would really be right for you . . ." The popup box invited viewers to enter their email address to receive a follow-up email with more information.

The follow-up email introduced recipients to the "MY SHC Community," which was billed as "a dynamic and highly interactive online community. It's a place where your voice is heard and your opinion matters . . . " To become a member of MY SHC Community, the email directed recipients to complete a registration process. It explained, "You'll be asked to take a few minutes to download software . . . This research software will confidentially track your online browsing . . ." The email apparently contained no further details on the extent of the information that Sears Holding could obtain from the tracking software. The email also offered visitors a $10 payment for joining the "online community."

The email contained a "Join Now" button. If recipients clicked the button, they were directed to an Internet landing page which further directed them to a registration page. To complete registration, recipients were asked to enter basic biographical information. Below the fields for entering this data, the site presented a scroll box which contained a "Privacy Statement and User License Agreement." While the scroll box contained apparently well over 100 lines of text, it only displayed 10 lines at a time.

Beginning on the 75th line of the scrollbox was information explaining the full extent of the information that MY SCH Community would be able to obtain from participants' computers. The disclosures made in the scroll box appear to have been fairly complete. They revealed that the tracking software would provide the speed, memory capability and Internet connection speed of participants' computers, as well as information on related routers and peripherals. They stated that the software "monitors all of the Internet behavior that occurs on the computers on which you install the application, including both your normal web browsing and that activity you undertake during secure sessions, such as filling a shopping basket, completing an application form or checking your online accounts, which may include personal financial or health information . . ."

Below the scrollbox was a link that users could click to get a printable version of these terms. Below this was a checkbox next to a statement confirming that the user have read, agreed to, and obtained the agreement from all other computer users to these terms. Users were required to check this box to complete the registration process.

Sears Holding probably thought it had done everything right. Its initial "come on" to MY SHC Community may not have disclosed all the details about the function of its tracking software, but these details were eventually provided in full. And, consumers were required to certify that they had read and assented these details before being permitted to participate in the MY SHC Community. Moreover, courts regularly enforce click-through or clickwrap agreements that are presented in a form substantially identical to that used by Sears Holdings here -- with detailed terms and conditions contained in a scrollbox to which a user is required to assent by clicking a box stating that she has read and accepted their terms. See, e.g, Feldman v. Google, Inc., 513 F.Supp.2d 229, 235-38 (E.D.Pa. 2007); Forrest v. Verizon Communications, Inc., 805, A.2d 1007, 1010-11 (D.C. 2002); Barnett v. NSI, 38 S.W.3d 200 (Tex. Ct. App. 2001); Caspi v. Microsoft Network, LLC, 323 N.J. Super. 118 (1999).

Continue reading "FTC v. Sears: Is Placing Material Internet Contract Terms in a Scrollbox Now Taboo?" »

How do you bind someone to contract terms that you can't disclose until after the contract is signed? That's the question that a California Court of Appeal addressed in its August 12, 2009 decision in DVD Copy Control Assn., Inc. v. Kaleidescape, Inc., --- Cal.Rptr.3d ---, 2009 WL 2450711. The defendant, Kaleidescape, sells a DVD storage and filing system that permits users to manage their DVD's by uploading them onto a Kaleidescape home system for future playback. For a father of young children, as I am, the Kaleidescape sounds like a neat alternative to the dozens of "Dora the Explorer" and "Thomas the Tank Engine" disks that I constantly find myself kicking across floors of our house.

To lessen the concerns of the motion picture industry about piracy, the DVD industry created the Content Scramble System (CSS), to encrypt the material on DVDs. CSS scrambles material on the DVD so that it cannot be reader unless the DVD player has the right descrambling technology. Over the course of extensive negotiations, a standard CSS license agreement was adopted. The Plaintiff, DVD Copy Control Association, Inc. (Association), was created to manage these licenses.

The Association does not negotiate agreements with licensees. Rather, under the CSS licensing scheme, to obtain a license, a licensee signs the standard agreement in which it agrees to maintain the confidentiality of the CSS technology. The only licensee-specific portion of the contract is a section in which the licensee identifies the type of device it wishes to make by selecting from a list of 14 "membership categories."

At the time a license agreement is signed, the licensee is not aware of the specifications that he will be required to comply with. Only after the license agreement is signed, and the licensee pays the requisite fees, does the licensee receive a master key to incorporate into its system and specifications on how CSS works.

Realizing that its system would require an CSS license, Kaleidescape executed the license agreement, paid the required fees and checked the boxes indicating that it needed technical specifications for Descramblers and Authenticators. The Association then sent Kaleidescape the specifications for Descramblers and Authenticators, along with General Specifications applicable to all DVDs and players.

Here came the rub: the General Specifications require that an original DVD disk be inserted into a player every time a DVD is played. However, the very purpose of Kaleidescape's system is to eliminate the need to insert individual DVDs into the player in order to view them. When the Association discovered how Kaleidescape's system worked it sent a cease and desist letter and eventually filed suit.

The trial court sided with Kaleidescape, based on a venerable contract law doctrine called "incorporation by reference." Under the form of this doctrine in California law, text not found within the four corners of a contract will be deemed to be part of the contract if referred to in the contract and: (1) the reference is clear and unequivocal, (2) the reference is called to the attention of the other party, and he consents to it, and (3) the terms of the incorporated document are known or easily available to the contracting parties. See Shaw v. Regents of University of California (1997) 58 Cal.App. 4th 44, 54. Because the General Specifications were not mentioned in the license, the trial court found that these terms were not incorporated into the agreement.

The Court of Appeal rightfully reversed this decision. It entirely rejected the trial court's application of the incorporation by reference doctrine to the facts of the case. After all, the terms of none of the three sets of specifications Kaleidescape received were "known or easily available" to it at the time it signed the license agreement. Indeed, since what Kaleidescape was to receive was encryption technology, it makes sense that at least some portion of the specifications could not be provided prior to its at least signing the confidentiality portions of the agreement.

Continue reading "DVD Copy Control Assn. v. Kaleidescape: California Court of Appeals Upholds License Agreement which Committed a Licensee to "Secret" Specifications" »

On July 30, 2009, two customers filed a class action suit in a Seattle federal court over Amazon.com's remote deletion of copies of George Orwell's 1984 from their Kindle "Devices." (Fn1) The suit alleges that in its Terms of Use, Amazon.com provided that customers were granted the "right to keep a permanent copy" of content obtained from Amazon, and "to view, use, and display such Digital Content an unlimited number of times . . ." Amazon.com's deletion of their copies of 1984 violated these promises. The plaintiffs have alleged several legal theories against Amazon.com, including breach of the Terms of Use, damaging the plaintiffs' computers in violation of CFAA, trespass to chattels (the plaintiffs' Kindle Devices), conversion (of the deleted material) and other grounds.

While Amazon.com has yet to file a response, provisions in its Terms of Use for the Kindle provide clues as to how it may proceed.

As widely commented on in the press and by other bloggers, Amazon's Kindle electronic book reading device represents a significant departure from the way that book content has previously been distributed. For printed books, once the publisher sells the book, it is practically impossible for the publisher to exert significant control what happens to the individual copies of the book. The publisher has no ability to obtain royalties except from the first purchaser. The publisher has no real ability to prevent users from making copies of books to share with others. Moreover, if the publisher mistakenly sells content for which it has not secured the copyrights, it is virtually impossible for it to retrieve the books and minimize the damages. (Fn2)

Amazon.com's Terms of Use for the Kindle attempt to change all of that. While Amazon.com's Kindle webpages often use the term "buy" or "bought" in connection with books offered on the site, its "clickwrap" Terms of Use paint a different picture.

On one hand, some of the provisions in the Terms of Use, make a Kindle book transaction look like the traditional purchase of a book. According to the Terms of Use, "[u[pon your payment of the applicable fees set by Amazon, Amazon grants you the non-exclusive right to keep a permanent copy of the applicable Digital Content and to view, use, and display such Digital Content an unlimited number of times . . ."

However, the provisions that immediately follow limit those rights. According to the Terms of Use, a customer has the right to keep and view this Digital Content ". . . solely on the Device or an authorized by Amazon as part of the Service and solely for your personal, non-commercial use." In other words, the user has lost the traditional book buyer's rights transfer the content to others, or to use the content for whatever non-infringing purpose he or she desires. (Fn3) The Terms of Use further restrict traditional book purchaser's powers by providing that "[y]ou may not use the Device, the Service or the Digital Content for any illegal purpose."

Continue reading "The Kindle Content Deletion Flap: Predictions on how Amazon.com Will Respond to the Newly-Filed Class Action" »

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 clickware or browseware 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.

On 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)

However, 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:

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