How Do I Build an Enforceable Online Agreement? — Not (Always) the Way SalesForce.com or Google Would

The issue comes up on an increasingly frequent basis. A client is preparing to begin delivery of a new service (or product) through their web site. As part of their preparations, the client involves me (or, let’s say “an attorney”) to help them implement an online (“click-through” or “click-to-accept”) contract covering the terms under which the new service (or product) will be provided to their users. While almost all clients understand that this will entail the preparation of an online “terms of service” contract, not all also appreciate that the contract document itself is really only part of the equation. Creating a legally enforceable online agreement is also dependent on how that contract is implemented and whether the implementation is sufficient to create a legally binding agreement with each user. Examples of how to implement online contracts certainly abound — and in addition to contacting legal counsel many clients will also naturally look to major web sites for guidance on how to implement their own online contracts. However, it is not always a given that even these larger players have made the best decisions in designing their online contracting practices. As a result, simply asking “What would SalesForce.com and Google Do?” is not always the best approach.

At last year’s American Bar Association (ABA) Annual Meeting in San Francisco a panel hosted by the ABA Committee on Cyberspace Law discussed the results of a year-long working group on legal best practices for electronic contracting. Given the increasing frequency with which all companies (technology vendors or otherwise) must deal with online contracting issues, the findings of the working group are likely to be of interest to many companies (particularly if the alternative involves simply relying on whatever practices have been adopted by other web sites). While the current law in the area of online contracting is certainly still developing and in places resembles more of a patchwork of seemingly inconsistent legal decisions, the working group found that certain basic principles have emerged for establishing legally enforceable online agreements. In particular, the panel indicated that the working group had identified four “bottom line” steps for forming legally binding online agreements:

1. The user must have adequate notice that the proposed terms exist;
2. The user must have a meaningful opportunity to review the terms;
3. The user must have adequate notice that taking a specified, optional action manifests assent to the terms; and
4. The user must, in fact, take that action.

Among these four steps, adequate notice of the existence of the proposed terms is among the most important. The concept here is nothing new. Online contracts are not different from traditional paper contracts when it comes to notice of terms. As the panel indicated, the standard here asks quite simply whether a reasonable user entering into the agreement would understand what the terms were. The panel suggested that this generally means making the terms immediately visible to the user before assent is given — for example, through an on-screen window with a button that the user must click before moving on to the next screen. While there are many examples of what would be deemed “reasonable” under the circumstances, the more the notice of the terms is not straightforward, the greater the risk that the notice will not be deemed reasonable to form a binding agreement.

Despite the urging of counsel, the panel noted (and I would concur) that this simple step is often abused or simply not followed. Many times, it is a failure to provide the terms of the contract or at least a functioning hyperlink to a separate page containing the terms. Sometimes it is more subtle in that certain terms are only presented after the transaction has been completed on a confirmatory screen or email. Recently, I was working with a client who was reluctant to present the terms of their online contract as in fact being part of a “binding” agreement. Instead, the client wanted to present the terms merely as a request (or suggestion) to the users of their web site. As the panel noted, not only must the terms be presented to the user, but it must also be explicit and clear that the terms form a binding agreement between the parties.

While notice is a continual hot-button issue, the other “bottom line” steps are also important. It is of note that providing a “meaningful opportunity” to read the terms of the contract does not necessarily require that the user actually read the terms of the contract, only that they be given the opportunity to read the terms (you can lead a horse to water, but you can’t make it. . . ). The discussion by the panel specifically cautioned against using separate pop-up windows for purposes of accomplishing this step. As someone who has a pop-up blocker set on his own browser, I would agree that there is definitely a risk in this practice.

The issue of assent is also not to be overlooked. While the now ubiquitous “I Agree” button is the norm, I have reviewed sites that instead allow the use of standard browser navigation buttons to manifest assent. The panel noted this issue and stated that assent must be through some action that the user would not otherwise take automatically (like using the buttons on their browser to navigate to the “next” page of the web site). Instead, assent should be through an “optional action manifesting assent” to the terms of the contract.

In addition to the four bottom line steps, the panel also noted that the ultimate issue in any contracting situation is one of proof — can the party seeking to enforce the contract prove that the necessary steps were followed to form a binding agreement? The situation is no different in the context of online contracting. This means proving that a user either clicked a box (or was presented with a set of terms and continued forward anyway). While many web sites are set up to help provide this proof, it is worth considering what you would do if your agreement was challenged by a user and you had to prove that your web site implemented these four “bottom line” steps when the user accessed the site. While not always an easy task, the panel noted that particularly where a web site has gone through multiple updates or revisions (and what web site hasn’t), retaining records of the prior iterations of the site can be a valuable aide in helping to prove that users of the previous versions of the site did in fact enter into a binding agreement.

As I have mentioned in prior posts, the law in this area continues to evolve. The “bottom line” steps provided by the working group of the ABA Committee on Cyberspace Law are certainly of assistance — particularly, as noted above, when the alternative involves relying on whatever practices have been adopted by other web sites. However, best practices for online contracting are likely to continue to change as the law of online contracting continues to evolve. As a result, continued periodic review and update of online contracts and contracting practices will continue to be a must to help ensure continued legal compliance.

Facebook and the Value of Getting it in Writing

The Sunday New York Times this week ran an article by Jason Pontin covering the ongoing lawsuit against Mark Zuckerberg, the founder of Facebook, brought by Tyler and Cameron Winklevoss, the founders of another social networking site called ConnectU. In case you have not been following the lawsuit, the Winklevoss brothers claim that Zuckerberg stole the source code and business plan of ConntectU during the time that Zuckerberg worked for ConnectU as an unpaid programmer while he and the Winklevoss brothers were students at Harvard.The facts of the case (which are described in detail in the article) read not unlike a good law school essay exam fact pattern. It is not disputed that Zuckerberg agreed to assist in the development of software for ConnectU.  The terms under which he provided this assistance are, however, far less clear.  In fact, other than an unwritten understanding as to compensation, there may have been no real agreement between the parties at all.  While Zuckerberg did do some work for ConnectU, he later abandoned the project and proceeded to start his own social networking site. As we now know, Zuckerberg’s own site went on to become the phenomenon that is now Facebook, while ConnectU went on to become yet another also-ran in the world of social networking sites.

Pontin does a solid job of discussing the legal issues around the ownership of intellectual property rights upon which much of this case turns. In doing so, he also makes a key point — in the absence of any contract between ConnectU and Zuckerberg, ConnectU is in essence arguing that they have some innate legal right to Zuckerberg’s imagination and experiences. This is (at best) a very difficult case to make and (at worst) one that is simply not true.  More importantly, it is one that could have been avoided entirely had ConnectU simply required Zuckerberg to sign an agreement assigning ownership of the work product he produced to ConnectU and agreeing maintain the secrecy of the business plan and other proprietary information of ConnectU.
It is true that actually getting a contractor to sign an invention assignment and nondisclosure agreement can be more easily said than done.  Perhaps as a result, I have even heard some companies (particularly start-ups) complain that such agreements may “poison” the relationship with the contractor before it even starts (particularly when the contractor is also a friend).  That said, as this case and others like it continue to underscore, not signing such an agreement early on in the relationship with any contractor, particularly one involved with the development of intellectual property, can do a lot more to “poison” the future prospects of the company.

Changes in the Enforceability of Online Licenses and Contracts

As many of you know, my law practice deals in large part with contracts involving technology and intellectual property. Not surprisingly given the day and age in which we live, a number of these contracts are in the form of so called “click-through” or “click-to-assent” contracts in which a would-be licensee (in the case of software) or user (in the case of a service) is presented with a set of contractual terms on their computer and required to “click” a button displayed on their screen before being able to download, access, install or use the software or service in question. While it has long been established (and even longer taken for granted by those in the technology industry) that contracts are not legally unenforceable simply because they are implemented to using a click-through format rather than a more traditional signature format (or even more traditional wax seal format), the law continues to evolve around the boundaries within which these contracts are in fact enforceable.

One area of particular activity has involved notice. Contract law generally requires that a contracting party be given some level of notice of the terms of the contract before they can be bound by those terms. It is at least in part for this reason that when a party initially signs a contract, the contract typically includes a copy of all language included in the contract — whether in the body of the contract or in an exhibit, schedule or other attached document. Of course, some contracts are structured to reference separate terms not actually attached to the contract (e.g., conditions, policies, etc.) and purport to make those terms a legally binding part of the contract. In my practice, I have seen it become quite common for click-through contracts to be drafted in this manner, with the references to additional terms made via a link to a separate web page containing those terms.

A related issue for click-through contracts drafted in this way involves the level of notice required to modify the contract (including the linked-to terms). Many click-through contracts purport to allow modification without an actual “click” by other party to the contract — for example, simply by continuing to use the software or services in question after a modification has been posted to the web page liked to by the original contract. This situation has raised a number of questions regarding the extent to which changes to the linked-to terms are themselves actually binding upon the licensee/subscriber under the original contract, despite what the terms of the original contract may purport. The 9th Circuit Court of Appeals (which covers California, Washington and Oregon) recently opined on this question in the somewhat oddly titled case Douglas v. U.S. District Court for the Central District of California. In its decision, the 9th Circuit indicated that a proposed modification of the terms of a services contract, which was posted to a company’s web site, was not enforceable against an existing customer who was not provided with notice of the modification. In particular, the court said that the parties to a contract have “no obligation to check the terms [on the web site] on a periodic basis to learn whether they have been changed by the other side” and indicated that requiring the parties to do so would be tantamount to allowing one party to a contract to change the terms of the deal without the consent of the other party to that change.

The opinion of the 9th Circuit is not binding legal precedent in all areas (including my home state of Colorado). And, while it is too early to tell whether the other Circuits will move to follow the 9th Circuit, this case is of note for any company that employs click-through contracts to license their software or provide access to their services for at least two reasons. First, it underscores the fact that the law surrounding the enforceability of click-through contracts is still evolving and can vary (sometimes significantly) from jurisdiction to jurisdiction and state to state. Contracts often specify a chosen jurisdiction or state law under which the contact is to be interpreted, and this decision once again emphasizes the importance of paying careful consideration to this language in any click-through contract. Second, and more substantively, this case appears to place the burden squarely on the vendor/provider to provide reasonable notice of any changes to a click-through contracts (or any of the terms referenced by that contract), rather than on the customer to actively monitor the vendor’s web site for any such changes. This case (and any others that follow in its wake) provide important guidance to any company attempting to implement a modification to its existing click-through contracts, particularly if those contracts are structured in the same manner as the contract in this case. Of course, given that this is likely not the last we will hear on this issue, this case also provides strong justification for the periodic review and update of online contracts and contracting practices to ensure continued compliance as the law in this area continues to evolve. Stay tuned.
For those interested, you can read the case, ruling here: Douglas v. U.S. District Court for the Central District of California.