Contracts – Attorney Evan Brown

October 19, 2024 Contracts, Litigation

Online agreement to arbitrate not enforceable

website terms and conditions

Plaintiff sued defendant gaming company alleging violation of Washington state laws addressing gambling and consumer protection. Plaintiff claimed that after starting with free chips in defendant’s online casino games, users had to buy more chips to keep playing. Plaintiff had spent money on the games and argued that defendant’s practices were unfair.

Defendant moved to dismiss the case and asked the court to compel arbitration. Defendant argued that plaintiff had agreed to defendant’s terms of service, which included an arbitration clause. The company claimed that by playing the games, plaintiff was bound to these terms, even though plaintiff did not explicitly sign a contract.

The court denied the motion to dismiss. It found that defendant did not provide enough information to show that plaintiff had been given proper notice of the terms of service or that he agreed to them. The notice on the game’s homepage was not clear or conspicuous enough for a reasonable person to understand that they were agreeing to the terms, including arbitration, just by playing the games.

Three reasons why this case matters:

Consumer Protection: It highlights the importance of businesses providing clear and understandable terms to consumers.
Online Contracts: The case shows that courts are careful when it comes to online agreements, requiring companies to ensure consumers are fully aware of the terms.
Arbitration Clauses: This case reinforces that arbitration clauses must be clearly presented and agreed upon to be enforceable.

Kuhk v. Playstudios, Inc., 2024 WL 4529263 (W.D. Washington, October 18, 2024)

September 29, 2024 Contracts, Cybersquatting, Licensing, Trademarks

Counterfeit lubricant case gets preliminary injunction based on defendant’s slick conduct

A German-based lubricant manufacturer sued a U.S.-based distributor, alleging that the distributor produced and sold counterfeit versions of its products with branding that closely resembled plaintiff’s trademarks. Plaintiff brought claims for trademark infringement, cybersquatting, unfair competition, and other related violations, moving for a preliminary injunction against defendant, which the court granted.

The parties initiated a business relationship in 2019, but they never formalized a distribution agreement. Although plaintiff sent a draft agreement outlining trademark rights and restrictions, it was never executed. Plaintiff asserted that the relationship involved a limited license for defendant to distribute plaintiff’s authentic products, but defendant registered a “GP” mark in the U.S. without plaintiff’s consent. According to plaintiff, this was an unauthorized move, and defendant falsely represented itself as the mark’s legitimate owner.

Plaintiff further alleged that defendant continued to produce and sell lubricants with packaging mimicking plaintiff’s design, misleading consumers into believing they were purchasing legitimate products. Defendant also registered several domain names closely resembling plaintiff’s, which were used to display content imitating plaintiff’s branding and operations.

The court found plaintiff’s evidence of irreparable harm and likelihood of success on the merits compelling, issuing an injunction to stop defendant’s operations and prevent further distribution of the alleged counterfeit goods.

General Petroleum GmbH v. Stanley Oil & Lubricants, Inc., 2024 WL 4143535 (E.D.N.Y., September 11, 2024).

June 6, 2024 Contracts, Section 230

No Section 230 immunity for Facebook on contract-related claims

Plaintiffs sued Meta, claiming that they were harmed by fraudulent third-party ads posted on Facebook. Plaintiffs argued that these ads violated Meta’s own terms of service, which prohibits deceptive advertisements. They accused Meta of allowing scammers to run ads that targeted vulnerable users and of prioritizing revenue over user safety. Meta moved to dismiss claiming that it was immune from liability under 47 U.S.C. § 230(c)(1) (a portion of the Communications Decency Act (CDA)), which generally protects internet platforms from being held responsible for third-party content.

Plaintiffs asked the district court to hold Meta accountable for five claims: negligence, breach of contract, breach of the covenant of good faith and fair dealing, violation of California’s Unfair Competition Law (UCL), and unjust enrichment. They alleged that Meta not only failed to remove scam ads but actively solicited them, particularly from advertisers based in China, who accounted for a large portion of the fraudulent activity on the platform.

The district court held that § 230(c)(1) protected Meta from all claims, even the contract claims. Plaintiffs sought review with the Ninth Circuit.

On appeal, the Ninth Circuit affirmed that § 230(c)(1) provided Meta with immunity for the non-contract claims, such as negligence and UCL violations, because these claims treated Meta as a publisher of third-party ads. But the Ninth Circuit disagreed with the district court’s ruling on the contract-related claims. It held that the lower court had applied the wrong legal standard when deciding whether § 230(c)(1) barred those claims. So the court vacated the dismissal of the contract claims, explaining that contract claims were different because they arose from Meta’s promises to users, not from its role as a publisher. The case was remanded back to the district court to apply the correct standard for the contract claims.

Three reasons why this case matters:

It clarifies that § 230(c)(1) of the CDA does not provide blanket immunity for all types of claims, especially contract-related claims.
The case underscores the importance of holding internet companies accountable for their contractual promises to users, even when they enjoy broad protections for third-party content.
It shows that courts continue to wrestle with the boundaries of platform immunity under the CDA, which could shape future rulings about online platforms’ responsibilities.

Calise v. Meta Platforms, Inc., 103 F.4th 732 (9th Cir., June 4, 2024)

May 7, 2024 Contracts

Software contract was not unconscionable

software contract

Software vendor sued its customer because the customer stopped paying the vendor during implementation. Customer filed a counterclaim asserting that the contract between the parties was unconscionable because, if enforced, it would provide a “gross disparity in the values exchanged.” In other words, customer would be required to pay, but vendor would not have to provide the software.

The court rejected customer’s argument and dismissed the claim of unconscionability. It observed that “[i]n essence, [customer’s] argument is that the Agreement is unconscionable because [vendor] did not perform on its promise to deliver software that could provide and perform certain functions. These are allegations supporting a claim for breach of contract, not unconscionability.”

PCS Software Inc. v. Dispatch Services, 2024 WL 1996126 (S.D. Texas, May 6, 2024)

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April 9, 2024 Contracts

So-called “Mutual Non-Disclosure Agreement” only protected one party’s information

mutual NDA

Eastern sued Herbalife for breach of the “Mutual Non-Disclosure Agreement” into which the parties had entered. Eastern claimed Herbalife breached the agreement by disclosing Eastern’s confidential information to a competitor. Herbalife moved for summary judgment on Eastern’s claim for breach of the NDA. The court granted the summary judgment motion.

Was there trickery in drafting?

The NDA in many respects read like an NDA that would bind both parties to protect the other party’s confidential information. Its title contained the word “mutual”. It referred to a “Disclosing Party” and a “Receiving Party”. And it defined “Confidential Information” not by referring to the parties by name, but by saying that Confidential Information was comprised of certain information that the Disclosing Party makes available to the Receiving Party. So on quick glance, one might think it bound both parties to protect the other’s information.

But one critical feature of the agreement was fatal to Eastern’s claim. The word “Disclosing Party” was defined to include only Herbalife.

But what about other parts of the agreement?

Eastern argued that the parties intended the NDA to be mutually binding by pointing to the title of the agreement, references to the obligations of the “Parties”, and discussion of the remedies section which discussed remedies to which a “non-breaching party” would be entitled. Eastern argued that these instances of language showed that a remedy for breach should not be considered as available only for Herbalife.

Plain definitions prevailed

The court rejected Eastern’s argument, looking at the plain language of the agreement and noting that the general references that Eastern emphasized did not “vitiate” the NDA’s express definitions of “Disclosing Party” and “Confidential Information”.

Herbalife Int’l of America, Inc. v. Eastern Computer Exchange Inc., 2024 WL 1158344 (C.D. Cal., March 18, 2024)

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March 21, 2024 Blockchain, Contracts, Cryptocurrency

Bitcoin miner denied injunction against colocation service provider accused of removing rigs

Plaintiff Bitcoin miner sued defendant colocation hosting provider for breach of contract, conversion, and trespass to chattels under Washington law. After filing suit, plaintiff filed a motion for temporary restraining order against defendant, seeking to require defendant to restore plaintiff’s access to the more than 1,000 mining rigs that defendant allegedly removed from its hosting facility. The court denied the motion, finding that plaintiff had established only possible economic injury, not the kind of irreparable harm required for the issuance of a temporary restraining order.

The underlying agreement

In July 2021, the parties entered into an agreement whereby plaintiff would collocate 1,610 cryptocurrency mining rigs at defendant’s facility. Plaintiff had obtained a loan to purchase the rigs for over $6 million. Defendant was to operate the rigs at a high hash rate to efficiently mine Bitcoin, with defendant earning a portion of the mined BTC.

After plaintiff defaulted on its loan, however, in early 2023, defendant allegedly reduced the available power to the rigs, despite plaintiff having cured the delinquency. Plaintiff claimed this reduced power likewise reduced the amount of Bitcoin that imined, and claims that defendant reallocated resources to other miners in its facility from whom it could earn more money.

The discord between the parties continued through late 2023 and early 2024, with 402 rigs being removed, and then defendant’s eventual termination of the agreement. The parties then began disputing over the removal of the remaining rigs and alleged unpaid fees by plaintiff. In early March 2024, plaintiff attempted to retake possession of its rigs, only to allegedly find defendant’s facility empty and abandoned. This lawsuit followed.

No irreparable harm

The court observed that under applicable law, a party seeking injunctive relief must proffer evidence sufficient to establish a likelihood of irreparable harm and mere speculation of irreparable harm does not suffice. Moreover, the court noted, irreparable harm is traditionally defined as harm for which there is no adequate legal remedy, such as an award of damages. Further, the court stated that it is well established that economic injury alone does not support a finding of irreparable harm, because such injury can be remedied by a damage award.

In this situation, the court found there to be no problem of irreparable harm to plaintiff. The court distinguished this case from the case of EZ Blockchain LLC v. Blaise Energy Power, Inc., 589 F. Supp. 3d 1102 (D.N.D. 2022), in which a court granted a temporary restraining order against a datacenter provider who had threatened to sell its customer’s rigs. In that case, the court found irreparable harm based on the fact that the miners were sophisticated technology and could not be easily replaced.

The court in this case found there was no evidence defendant was going to sell off plaintiff’s equipment. It was similarly unpersuaded that the upcoming Bitcoin halving (anticipated in April 2024) created extra urgency for plaintiffs to have access to their rigs prior to such time, after which mining Bitcoin will be less profitable. Instead, the court found that any losses could be compensated via money damages. And since plaintiff had not provided any evidence to support the idea it would be forced out of business in these circumstances, the court found it appropriate to deny plaintiff’s motion for a temporary restraining order.

Block Mining, Inc. v. Hosting Source, LLC, 2024 WL 1156479 (W.D. Washington, March 18, 2024)

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February 29, 2024 Contracts, Litigation

Nvidia forces consumer lawsuit into arbitration

arbitration provisoin

Plaintiffs filed a class action suit against Nvidia alleging that Nvidia falsely advertised a game streaming feature for its Shield line of devices which was later disabled, thus depriving consumers of a paid feature and devaluing their devices. The suit included claims of trespass to chattels, breach of implied warranty, and violations of various consumer protection laws.

Nvidia filed a motion to compel arbitration, citing an agreement that users ostensibly accepted during the device setup process. This agreement provided that disputes would be resolved through binding arbitration in accordance with Delaware laws and that any arbitration would be conducted by an arbitrator in California.

The court looked to the Federal Arbitration Act, which upholds arbitration agreements unless general contract defenses like fraud or unconscionability apply. Nvidia emphasized the initial setup process for Shield devices, during which users were required to agree to certain terms of use that included the arbitration provision. In light of Nvidia’s claim that this constituted clear consent to arbitrate disputes, the court examined whether this agreement was conscionable and whether it indeed covered the plaintiffs’ claims.

The court found the arbitration agreement enforceable, rejecting plaintiffs’ claims of both procedural and substantive unconscionability. The court concluded that the setup process provided sufficient notice to users about the arbitration agreement, and the terms of the agreement were not so one-sided as to be deemed unconscionable. Furthermore, the court determined that plaintiffs’ claims fell within the scope of the arbitration agreement, leading to a decision to stay the action pending arbitration in accordance with the agreement’s terms.

Davenport v. Nvidia Corporation, — F.Supp.3d —, 2024 WL 832387 (N.D. Cal. Feb 28, 2024)

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February 18, 2024 Contracts, Licensing

Software reseller not entitled to preliminary injunction to protect customer relationships

Plaintiff CD appointed defendant SST to be the exclusive reseller to certain customers of CD’s software development platform. CD sued SST for breach, and SST likewise filed counterclaims for breach of contract and fraudulent inducement. SST sought a preliminary injunction against CD, asking that the court prohibit CD from unilaterally terminating the reseller agreement.

SST asserted, among other things, that it would suffer irreparable harm from this termination, citing potential loss of solicited clients and reputational damage. CD argued, however, that these asserted harms could be remedied monetarily, and thus did not qualify as irreparable.

The court agreed with CD, finding SST’s arguments regarding reputational damage and loss of client relationships to be speculative and unsupported by concrete evidence. As such, these claims did not meet the stringent criteria for irreparable harm, which requires a clear, immediate threat of injury that monetary compensation could not redress.

Further undermining SST’s claim of irreparable harm was the notion that any potential financial losses due to CD’s actions, including the costs associated with resolving issues with target accounts or transitioning to alternative software solutions, were quantifiable and thus recoverable in monetary terms. The court noted that SST’s reluctance to make additional payments to CD for resolving software access issues did not constitute irreparable harm, as those could be recouped in resolution of the contract dispute. Moreover, the court pointed out that SST’s concerns about CD not restoring access post-payment were speculative and lacked evidentiary support, given the record showing ongoing negotiations and concrete offers from CD.

Citizen Developer, LLC v. System Soft Tech., Inc., 2024 WL 554140 (M.D. Penn. February 12, 2024)

Online retailer’s browsewrap agreement was not enforceable

browsewrap

Plaintiff sued defendant Urban Outfitters under California law over the way that the retailer routed messages sent using the company’s website. Defendant moved to compel arbitration, arguing that the terms and conditions on defendant’s website required plaintiff to submit to arbitration instead of going to court. The court denied the motion.

The key issue in the case was whether plaintiff, by completing her purchases on defendant’s website, was sufficiently notified of and thus agreed to the arbitration agreement embedded via hyperlinks on the checkout page. Defendant maintained that the language and placement of the hyperlinks on the order page were adequate to inform plaintiff of the arbitration terms, which she implicitly agreed to by finalizing her purchases. Plaintiff argued that the hyperlinks were not conspicuous enough to alert her to the arbitration terms, thus negating her consent to them.

The court looked at the nature of the online agreement and whether plaintiff had adequate notice of the arbitration agreement, thereby consenting to its terms. The court’s discussion touched upon the differences between “clickwrap” and “browsewrap” agreements, emphasizing that the latter, which defendant’s website purportedly used, often fails to meet the threshold for constructive notice due to the lack of explicit acknowledgment required from the user.

The court examined the specifics of what constitutes sufficient notice, pointing out that for a user to be on inquiry notice, the terms must be presented in a way that a reasonable person would notice and understand that their actions (such as clicking a button) indicate agreement to those terms. The court found that defendant’s method of presenting the arbitration terms – through hyperlinks in small, grey font that were not sufficiently set apart from surrounding text – did not meet this standard.

Rocha v. Urban Outfitters, 2024 WL 393486 (N.D. Cal., February 1, 2024)

Unauthorized press release caused drone software deal to crash

drone software

Usually back in the boilerplate section, technology contracts often contain a provision saying the parties will not issue press releases without the prior written consent of the other party. Here is a recent case where failure to strictly abide by such a requirement resulted in the breakdown of an important licensing arrangement, followed by expensive and difficult litigation.

An exciting drone software collaboration

Plaintiff entered into a software licensing agreement with defendant whereby plaintiff could use defendant’s avionics software for drones. The agreement gave plaintiff a limited exclusive license to certain functionality in the software.

The licensing agreement defined confidential information to include the terms of the agreement. The parties could not use any confidential information other than as required to exercise a right or perform an obligation under the agreement. The agreement also restricted the parties from issuing press releases without the other party’s prior written approval.

Fateful quick email exchange right before vacation

On a Sunday in August 2022, an employee of defendant wrote to defendant’s CEO, letting defendant know that plaintiff was developing a press release. The message concluded with, “Let me know if you have any objections, or if you want to send us a quote or have our PR team make a quote[.]”

Three minutes later the CEO wrote back with the following: “That sounds great. I’m on vacay all week up in the Adirondacks. You guys can make up some quote – I’m sure it will be fine or at least a great start.”

Going public with what should have stayed private

On Wednesday of that week – without further contact with defendant – plaintiff issued a press release discussing the parties’ relationship. The press release stated, in part, that under the terms of the software licensing agreement between the parties, the “software will only be made available to [plaintiff],” and that “[c]ompetitors will have to develop their own software or secure licenses from others with inferior test performance.”

On Friday (probably the last day of the CEO’s “vacay . . . up in the Adirondacks”), defendant sent a letter to plaintiff terminating the agreement. Defendant cited to a provision of the agreement enabling it to terminate immediately upon breach of the agreement’s confidentiality provision. The letter explained that plaintiff had issued the press release without defendant’s consent and that the press release included confidential information.

And then the lawsuit

Plaintiff sued, asserting breach of contract, namely, that defendant improperly declared the agreement terminated, and improperly ceased fulfilling its obligations under the agreement. Defendant moved to dismiss the claims. The court granted the motion.

Court: defendant had the right to terminate

The court found that it was “express and plain” that the definition of confidential information included the terms of the agreement. And when plaintiffs disclosed language from the agreement discussing the exclusive license, plaintiffs breached the agreement, giving defendant a right to terminate, which it exercised.

The court also rejected plaintiff’s argument that defendant’s CEO’s Sunday pre-vacation quick response email gave consent for the press release. The court found that rather than serving as approval of the press release that was issued, the consent the CEO provided was for the continued development of a press release and qualified permission to make up a quote for him as part of the development process. Moreover, the harms to defendant arising from plaintiff’s mischaracterization of the parties’ relationship were “precisely the effects that are avoided by requiring ‘prior written consent’ before publication of Confidential Information in a press release.”

Red Cat Holdings, Inc. v. Autonodyne LLC, 2024 WL 342515 (Del. Ch., January 30, 2024)