You’re reading through some notes for your meeting with the CEO later today when you get an email from your head of litigation: the company has just been sued for $25 million in a class action in another state’s defendant “hellhole” over some products it sells on its website. The email says “don’t worry, we should be in good shape because we have a strong user agreement that protects the company in a number of ways from lawsuits like these.” You’re relieved to read this but then you start thinking — you’ve never really read your company’s user agreement and you have literally no idea what it says, how it works, or, more importantly, whether is it enforceable. If this describes you, you’re not alone but don’t worry. This edition of “Ten Things” will discuss website user agreements and things you can do to understand them and make them as protective and bullet-proof as possible.
- Do we need a user agreement? If your company sells goods and services over the Internet, collects data from users, provides a forum for users to post content or buy and sell goods and services, or otherwise engages in commerce online, you need a user agreement. A user agreement defines the rights of the user and the website owner (i.e., your company), protects the interests of the website owner, limits the legal obligations of the owner, sets out how disputes will be handled and where and under what law, provides for indemnity to the company, governs IP rights and acceptable use of the site, and a host of other important things. If your company’s website is solely for purposes of providing information and is not transacting any business nor gathering any data, then you can probably go forward without a user agreement but the better course of action for any business is to have some statement of the conditions of use of their website.
- Where do I begin? First, grab a cup of coffee or a Diet Coke, get comfortable, and read your company’s user agreement – start to finish. When was the last time it was updated? Does it still address the key elements of your business? Is it clear and easy to understand (could your mom understand it)? Does it contain the most recent and up-to-date language regarding dispute resolution, limitations on liability, etc.? Second, take a look at some third party user agreements. Start with those of your competitors. What clauses do they have and how does your agreement compare? Then check out some non-competitor companies (e.g., sites you visit a lot) and see how their user agreements work. Third, after you get the lay of the land, set up a cross-business team to meet and discuss the user agreement and any changes or updates needed to give your company the best agreement with the most protection. This team will involve legal, marketing, CIO, and people from business operations. There will likely be others needed and you can figure that out as you move along in the process. Once you get the group together, schedule at least a yearly review of your user agreement to keep it up-to-date going forward.
- How do I prove the user agreed to my agreement? If you are sued by a user can you quickly do the following: (a) know when the user accepted the agreement; (b) prove (technically) that the user accepted; (c) know which version of the user agreement the user accepted (and have copies of all versions of the user agreement); (d) show when modifications to the user agreement were made; and (e) show when the user accepted any modifications? If the answer to these questions is “yes”, you are way ahead of the curve. If the answer is “no”, then you may not be able to prove that the user agreed to your agreement and all of the elaborate protections you drafted go right out the window. If you are in the latter situation, it’s time to sit down with the developers and get the right process in place. In a pinch, you may be able to reconstruct the agreement history by using hard copies you saved of the different versions of the agreement, or locating copies of your website pages from past dates via the “Wayback” machine at Archive.org). That said, don’t pin the company’s legal strategy on the “Wayback” machine.
- Forum Selection/Choice of Law. Take advantage of both of these clauses to best protect your company. A forum selection clause is an agreement as to where any litigation or dispute resolution will be heard. A company typically wants the forum to be in its local courts, e.g., the state and federal courts located in Austin, Texas, or Philadelphia, PA. The same is true for arbitration hearings (more on that below). A choice of law provision sets forth which law applies, for example, New York law or Utah law. You can have the laws of one state apply in a lawsuit pending in another state. There are many reasons to pick the law of a particular state and you should work through this issue with your outside counsel. That said, for both clauses, there should be some reasonable connection between the company and the forum/law, e.g., where your headquarters is located, where you are incorporated, or where you have a large plant or warehouse, etc. If there is no reasonable connection between your business and the forum/law selected and it may appear that you are trying to game the system. If so, a court may not honor the provision. Note that you can also set out a contractual time limit for when claims need to be raised, e.g., no more than two years from the date such claim arose or accrued. For a good example of Forum/Choice of Law provisions in a user agreement read the eBay user agreement.
- Arbitration or Not? Confidential arbitration can be an excellent way to resolve disputes. Especially for smaller matters, as it tends to be much faster and less expensive/intrusive than litigation in the courts. An arbitration clause plus a class action waiver (see below) can be the difference between quickly resolving a simple customer service issue vs. gearing up to spend millions defending a class action in a plaintiff-friendly court. Arbitration clauses are now relatively straight forward and be sure to set out that all disputes under, relating to, or pertaining to the use of your website must be submitted to binding arbitration in a forum near your offices. You must be sensitive, however, to the fact that no court will want to see a consumer locked into an arbitration process that seems patently unfair. So, resist the urge to make your arbitration clause aggressively one-sided, especially with respect to smaller size claims. One way to solve this is to provide for a consumer-friendly process whereby smaller claims are subject to telephone arbitration (and you potentially offer to pay the filing fees of the user for such claims). Meaning the user will not have to travel to arbitrate and the cost to them to bring a claim is small or zero. Additionally, consider putting in a clause that provides for your costs and nullifies any attempt by the user to bring a claim outside of the provisions of the user agreement. Here is a good sample:
Mandatory Arbitration – Any Claim where the total amount in controversy is less than US$10,000, shall be resolved via binding arbitration initiated through the American Arbitration Association (“AAA”). The arbitration will be governed by the Commercial Arbitration Rules and the Supplementary Procedures for Consumer Related Disputes (collectively, “AAA Rules”) of the American Arbitration Association (“AAA”), as modified by this Agreement, and will be administered by the AAA. The AAA Rules are available online at http://www.adr.org or by calling the AAA at 1-800-778-7879. AAA and the parties must comply with the following rules: (a) if either party requests an in-person hearing the process shall be governed by subsection (c) below, otherwise, the arbitration shall be conducted by telephone, online and/or be solely based on written submissions, the specific manner shall be chosen by the party initiating the arbitration; (b) the arbitration shall be conducted by an arbitrator in Tarrant County, Texas who is approved or otherwise affiliated with the AAA; (c) if either party requests an in-person hearing, (i) the arbitrator shall decide whether a hearing is necessary or whether the arbitration shall proceed as described in subsection (a) above, (ii) if the arbitrator deems that a hearing is necessary, the hearing shall occur at a mutually agreed upon location, or, if the parties are unable to agree on a location, at a location that is reasonably convenient to you and is selected by the arbitrator, and (iii) either party may elect to participate in an in-person hearing by phone, unless the arbitrator decides otherwise; (d) the arbitrator may award injunctive or declaratory relief only in favor of the individual party seeking relief and only to the extent necessary to provide relief warranted by that party’s individual claim; (e) unless otherwise mutually agreed by the parties in writing, the arbitrator may not consolidate more than one person’s claims, and may not otherwise preside over any form of a representative or class proceeding; and (f) any judgment on the award rendered by the arbitrator may be entered in any court of competent jurisdiction. If subparagraph (e) above is found to be unenforceable, then the entirety of this Mandatory Arbitration provision shall be null and void. Only a court and not the arbitrator can decide issues relating to the scope and enforceability of this “Resolution of Disputes” section. YOU UNDERSTAND AND AGREE THAT, BY ENTERING INTO THESE TERMS, YOU AND [COMPANY] ARE EACH WAIVING THE RIGHT TO A TRIAL BY JURY OR TO PARTICIPATE IN A CLASS ACTION WITH RESPECT TO THE CLAIMS COVERED BY THIS MANDATORY ARBITRATION PROVISION. Notwithstanding the foregoing, either party may bring an individual action in small claims court in Tarrant County, Texas.
Improperly Filed Claims– All Claims you bring against us must be resolved in accordance with this “Resolution of Disputes” section. All Claims filed or brought contrary to this “Resolution of Disputes” section shall be considered improperly filed and void. Should you file a Claim contrary to this “Resolution of Disputes” section, we may recover attorneys’ fees and costs up to $1,000, provided that we have notified you in writing of the improperly filed Claim, and you have failed to promptly withdraw the Claim.
Regardless of whether you choose arbitration or not, be sure to include a provision in your user agreement that awards attorney’s fees to the prevailing party in any dispute. Nothing stops bogus lawsuits faster than if a plaintiff has to worry about paying your attorney’s fees if they lose.
- Class Action/Jury Waiver. In the pecking order of pain, right after a root canal without anesthesia comes a consumer class action lawsuit. A claim that might be worth $1,000 can turn into $10,000,000 if a class is certified. The simplest way around this is to put a class action (and jury) waiver into your user agreement’s dispute resolution section (and be sure to carve out class action resolution from the arbitrator’s powers in your arbitration provision). Go out of your way to make sure the clause is conspicuous. The clause will read something like this: ANY AND ALL PROCEEDINGS TO RESOLVE CLAIMS WILL BE CONDUCTED ONLY ON AN INDIVIDUAL BASIS AND NOT IN A CLASS, CONSOLIDATED OR REPRESENTATIVE ACTION. IF FOR ANY REASON A CLAIM PROCEEDS IN COURT RATHER THAN IN ARBITRATION WE EACH WAIVE ANY RIGHT TO A JURY TRIAL. Such clauses have been upheld, all the way up to the Supreme Court. One of the companies I worked for (Travelocity) had its user agreement class action waiver/arbitration clause upheld in a recent antitrust case. Needless to say, the court’s ruling was a good day at the office.
- Limit your liability. You should include limitation of liability provisions in your user agreement. First is a waiver of liability for certain types of actions or problems, e.g., the user waives any liability for information provided by third parties or for errors on your website. Similarly, you will want to disclaim any warranties to the extent possible. Second, you should limit the amount and types of damages a party to the agreement can recover. For example, you can preclude punitive damages or consequential damages and you can put a cap on the total amount of damages a plaintiff can recover against you. Here is some user agreement language capping the amount of damages: If, despite the limitation above, the [Company] is found liable for any loss or damage which arises out of or in any way connected with any of the occurrences described above, then the liability of the [Company] will in no event exceed, in the aggregate, the greater of (a) the service fees you paid to [Company] in connection with such transaction(s) on this Website, or (b) One-Hundred Dollars (US$100.00) or the equivalent in local currency.
- What is ‘DMCA’ and do I need one in my user agreement? Yes, you do, especially if you operate a website that allows others to post content (photos, documents, videos, music, etc.) on your site — for example a travel site with lots of pictures of hotels and attractions. When you allow other parties to post such content, there is a real risk of a potential copyright violation. The Digital Millennium Copyright Act (“DMCA”) provides a safe harbor to websites that establish and follow specific “notice and takedown” procedures. Basically, copyright owners can inform the website of potentially infringing uses. The website then gives notice to the party who posted the content and then blocks further access to the infringing content. There is also a process to “unblock” the content. For a useful flow chart of how the DMCA works, click here.
- Acceptable use of the website/Right to change terms. Lastly, be sure to spend time on the user agreement provisions that set forth the acceptable uses of your site (i.e., how the site can be used and any limits on what can and cannot be done on your site). Click here for a good example. It’s difficult to generalize here because what is written depends on how your business and website operate. So, this is an area worth spending time with the business and outside counsel to figure out the parameters. Finally, include a catch-all provision that provides your company the ability to change the terms of the user agreement at any time upon reasonable notice.
There are a number of user agreement issues I was not able to get to, such as privacy policies, use of “cookies”, indemnity, payment terms, EULA, linking off to third parties, intellectual property notices, etc. Fortunately, there are resources available to you to get more information. For example, the Association of Corporate Counsel website has some useful materials. Likewise, a simple web search will generate a lot of good information. One website with helpful materials regarding user agreements is the PactSafe site. Your outside counsel can help as well. The best thing to do, however, is to look at user agreements of other companies (e.g., Netflix, Amazon, Uber, Microsoft, etc.) Companies with good businesses and good reputations will have structure and terms that you may wish to work into your user agreement. The most important thing is that you/Legal take charge of your company’s user agreement process, regularly review the agreement to stay current with the law, understand how the different parts of the agreement work, and ensure the agreement covers the things that are important to how your company operates day-to-day and will pass muster with a court if and when the time comes.
June 9, 2015
Follow me on Twitter @10ThingsLegal where I post articles and stories of interest to in-house counsel daily.
(If you find this blog useful, please pass it along to colleagues or friends and/or “Tweet” it. “Ten Things” is not legal advice or legal opinion. It is intended to provide practical tips and references to the busy in-house practitioner and other readers. You can find this blog and all past posts at www.TenThings.net.)