Category: Contracts

Questions remain, however, as to whether right to notice may be waived

Douglas v. U.S. Dist. Court for the Central Dist. of Ca, — F.3d —-, No. 06-75424, 2007 WL 2069542 (9th Cir. July 18, 2007)

Plaintiff Douglas signed up for long distance service with AOL. Some time later, Talk America acquired AOL’s rights under the contract, and changed the terms, which were posted online. Talk America added provisions relating to additional charges, a waiver of the right to class action suits, an arbitration clause, and a forum selection clause providing for suits to be brought in New York. Douglas claimed he was not provided with notice of the changed provisions when they purportedly became effective.

Douglas did not find out about the new charges until four years later, and when he finally did, he filed a federal class action suit against Talk America. Citing to the later-modified agreement, Talk America moved to compel arbitration. The district court granted the motion. Because the Federal Arbitration Act at 9 U.S.C. 16 does not authorize interlocutory appeals of a district court order compelling arbitration, Douglas sought a writ of mandamus from the Ninth Circuit. The court granted the writ, vacating the district court’s order compelling arbitration.

The Ninth Circuit applies a five-factor test, from Baughman v. U.S. Dist. Court, 557 F.2d 650 (9th Cir. 1977), to determine whether a writ of mandamus should be issued. The most important factor in this test is whether the district court’s order was “clearly erroneous as a matter of law.”

The appellate court held that the district court erred in holding that Douglas was bound by the terms of the revised contract, through a “fundamental misapplication[] of contract law,” going “to the heart of [Douglas’s] claim.” The court cited to cases holding that a party cannot unilaterally change the terms of a contract, but must obtain the other party’s consent before doing so, as a revised contract is merely an offer and does not bind the parties until it is accepted. Further, citing to Williston on Contracts, the court held that “an offeree cannot actually assent to an offer unless he knows of its existence.” In this case, “[e]ven if Douglas’s continued use of Talk America’s service could be considered assent, such assent [could] only be inferred after he received proper notice of the proposed changes.”

The case is silent on what might constitute proper notice. It is also not clear from the opinion (and the district court pleadings are not available on PACER), whether the original AOL terms of service included a provision stating that continued use of the service after changes had been posted would constitute acceptance of those changes. So although the case establishes that an e-commerce customer has the right to receive notice of changes to online terms of service, the question of whether that right can be waived is not answered in the opinion.

[This case came down over a month ago, but is worth writing about. Read more coverage about it here.]

Suzanne Shell, the owner of the website profane-justice.org, discovered that multiple copies of her site had been added to the Internet Archive. She threatened the Internet Archive with litigation, invoking her site’s terms of use which included provisions that purported to charge users $5,000 each time they made a copy of a page on the site. The terms included a bunch of other onerous provisions as well, purporting to impose a number of draconian penalties on Internet users making unauthorized copies of the website.

In response to Shell’s threats of litigation and demands for payment, Internet Archive filed a declaratory judgment action in the Northern District of California, seeking a determination that its activities did not infringe Shell’s copyright. The action was later transferred to the District of Colorado.

Not surprisingly, Shell filed several counterclaims against the Internet Archive and members of its board of directors. She alleged causes of action for copyright infringement, conversion, civil theft, breach of contract, and racketeering under RICO and the corresponding Colorado statute.

Internet Archive filed a 12(b)(6) motion to dismiss the conversion, civil theft, breach of contract and racketeering claims. The court dismissed all but the breach of contract claim.

In dismissing the conversion and civil theft claims, the court held that although the claims were not preempted by the Copyright Act (as each claim included at least one element not included in a prima facie case of infringement), Shell failed to allege facts sufficient to support the causes of action. As for the conversion claim, it was undisputed that the Internet Archive had complied with Shell’s request to remove the cached pages from the archive. Accordingly, Shell would not be able to prove that the Internet Archive refused to return any property to her. Moreover, Shell had failed to allege that Internet Archive exercised dominion or control over her website, since it was undisputed that she continued to own and operate the site when it was archived.

The racketeering claims failed because Shell failed to allege that Internet Archive was involved in any racketeering enterprise.

So that left the breach of contract claim, the only claim to survive the motion to dismiss. Shell contended that Internet Archive entered into a contract with her when it copied her web pages, and that it breached that contract when it failed to pay her according to her terms of use. Internet Archive argued, on the other hand, that it did not learn about the terms of service until after it copied the pages, and accordingly there was no mutual assent to the terms. Furthermore, there was no human acting on behalf of Internet Archive to copy the pages, just the automatic crawler. Internet Archive argued that without actual knowledge, there could not be an enforceable contract.

The court rejected Internet Archive’s argument at this stage of the litigation, however, determining that the factual question of whether it knew about the terms could not be determined on the record before the court. Shell had satisfied the pleading requirements for federal litigation, by alleging the existence of a contract, breach and damages, which was sufficient to make out a claim for breach of contract.

Internet Archive v. Shell, (Slip Op.) 2007 WL 496680 (D.Colo., Feb. 13, 2007)

Suzanne Shell has been involved in other copyright litigation recently. Read more here. As has the Internet Archive and its founder Brewster Kahle. Read about that here.

Arbitration provision in later agreement not applicable to previous agreement, where contracts independent, collateral, and not inconsistent with one another.

Defendant AMF, the well-known manufacturer of bowling and billiards equipment, entered into an oral franchise agreement with plaintiff Suburban Leisure Center, whereby Suburban would sell AMF’s products in the St. Louis area. Later, the parties entered into a written “e-commerce” agreement, whereby Suburban agreed to service products in its geographic area that were sold through AMF’s website.

After AMF sought to terminate the oral franchise agreement, Suburban filed suit, claiming, among other things, that AMF had not provided the proper notice of termination under Missouri law. AMF moved to dismiss Suburban’s claim, arguing that under the terms of the e-commerce agreement, the exclusive method of dispute resolution between the parties was through arbitration. The district court denied the motion to dismiss, and AMF sought review. On appeal, the Eighth Circuit affirmed.

AMF had argued that the e-commerce agreement (which contained the arbitration provision) fully set forth the terms of the contract. AMF pointed to a “merger clause” (also known as an “integration clause” or “entire agreement” clause) in the agreement. Because of this clause, AMF contended, the parol evidence rule prohibited considering the terms of the oral franchise agreement, which contained no mention of arbitration.

The court disagreed, however. Applying Virginia law as required by the choice of law provision in the e-commerce agreement, the court examined the “collateral contract doctrine.” It noted that the oral franchise agreement addressed a contractual relationship between the parties that was not covered in any manner by the e-commerce agreement. As a result, the oral franchise agreement was “independent of, collateral to, and not inconsistent with” the e-commerce agreement. Examination of parol evidence, namely, the terms of the oral agreement, was therefore proper.

Because the agreements were independent of each other, the e-commerce agreement’s arbitration language could not be attributed to the oral franchise agreement. After all, the dispute was over the termination of the franchise, not the agreement to service products that had been sold through AMF’s website. The oral franchise agreement did not provide for arbitration. Because a “party cannot be required to submit to arbitration any dispute which he has not agreed so to submit,” the matter was properly before the court, and the lower court’s denial of the motion to dismiss was proper.

Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc., — F.3d —-, No. 06-1865, 2006 WL 3332965 (8th Cir., November 17, 2006).

Plaintiff Meridian Project Systems, Inc., a purveyor of construction project management software, was peeved to see that a couple of its licensees collaborated to reverse engineer Meridian’s flagship software product. Meridian filed suit, alleging numerous claims, including conversion. It claimed that the defendants converted both tangible property relating to the licensed software, as well as “concepts, logic, processes, features and functions of [the software] to the extent not covered by its copyrights.”

The defendants moved to dismiss, alleging that Meridian had failed to state a claim upon which relief could be granted. Furthermore, the defendants argued that the claim of conversion of the intangible aspects of the software was preempted by the Copyright Act. The court denied the motion in part, and granted it in part.

The court held that Meridian adequately alleged conversion of the physical components of the software. The End User License Agreement (“EULA”) provided that upon any violation of the agreement, the licensees were to either destroy or return the software’s physical components. In this case, Meridian sufficiently alleged a breach of the agreement, namely, the act of reverse engineering the software. Because the defendants did not thereupon return the “disks, files, and other documents,” such items were “unlawfully retained.” These allegations supported a claim of conversion.

There could be no conversion, however, of the intangible aspects of the software. The court held that the elements which Meridian claimed were converted fell within the general subject matter of copyright, even though they were not actually entitled to copyright protection. Meridian’s claim arising out of the alleged conversion was one seeking to assert rights equivalent to a claim for copyright infringement. Accordingly, this portion of the conversion claim was preempted by the Copyright Act.

Meridian Project Systems, Inc. v. Hardin Construction Co., (Slip Op.) 2006 WL 1062070 (E.D. Cal., April 21, 2006).

Florida case provides good example of why one should actually read a contract before filing a lawsuit

Appellant Briceno took her camera phone to a Sprint store to have it worked on. She claimed that employees of the store, using her phone, accessed and distributed “personal photographs of her body to third persons by the internet.” Briceno filed suit against Sprint in Florida state court alleging various privacy-related causes of action.

The court never got to the merits of the case, however, because Sprint successfully moved to compel arbitration, pursuant to a clause found in Sprint’s “Terms and Conditions of Service.”

Briceno sought review of the trial court’s order compelling arbitration. The appellate court affirmed.

Unlike the recent Illinois case of Hubbert v. Dell Corp., this case did not involve the question of whether the terms and conditions containing the arbitration clause were part of the contract between the customer and the provider. The main issue in this case was whether the arbitration clause was unconscionable. The court held that it was not.

Because of a choice of law provision in the terms and conditions, the Florida court found itself in the unusual position of applying Kansas law to determine the question of whether the arbitration clause was unconscionable. It held that the agreement did not unfairly exploit any disadvantaged position of Briceno. On the contrary, the court noted that she was “college educated . . . certainly not illiterate, uneducated, or unsophisticated.” She simply ignored the terms and conditions because “she did not care about reading them and . . . did not like to read.”

The court then concluded that Sprint had not unfairly concealed amendments to the terms and conditions containing the arbitration clause. It noted that alerts to changes in the terms and conditions had been provided on an invoice sent to Briceno. She could have looked online to read them, or could have requested a paper copy by telephone. It was also customary for Sprint to include the terms and conditions with new telephones, and Briceno had exchanged her telephone for a new one four times within the course of three years.

Given these factors, the court held that the arbitration clause was not unconscionable. It was therefore enforceable, and the trial court properly ordered the parties to arbitrate the dispute.

Briceno v. Sprint Spectrum, L.P., — So.2d —, 2005 WL 2093681 (Fla.App. 3 Dist., August 31, 2005).

[Link to opinion]

In a recent decision in the case of Dix v. ICT Group, Inc., reversing the lower court, the appellate court in the state of Washington held unenforceable a forum selection clause in AOL’s terms of service which stated that Virginia courts have exclusive jurisdiction over any dispute arising in connection with the services.

The plaintiffs had sued AOL (and its independent contractor ICT to answer customer service questions) in Washington state court, claiming that they had been swindled when AOL started charging them for secondary accounts for which the plaintiffs had never signed up. AOL moved to dismiss, claiming that under the terms of service, Virginia was the only place in which such suit could be brought. The trial court agreed, and dismissed the lawsuit. The appellate court held otherwise, reversing the lower court’s dismissal and remanding the case for further proceedings.

The appellate court began its analysis by reminding us that a party to a contract challenging a forum selection clause bears a heavy burden. In the state of Washington, absent evidence of fraud, undue influence, or unfair bargaining power, courts are reluctant to invalidate forum selection clauses because they enhance contractual predictability.

The plaintiffs put forward two arguments to invalidate the forum selection clause. The court did not accept the plaintiffs’ first argument of fraud: that AOL began billing them for the new accounts without giving them the opportunity to sign new terms of service. The second argument, that enforcing the provision would violate public policy, passed muster.

Washington is not the first state to have had the opportunity to rule on the enforceability of AOL’s forum selection clause. The court looked to some mixed decisions on the issue coming from such states as California, Maryland and Florida. In the end, the court’s decision to hold the forum selection clause unenforceable was based mostly on the policy underlying the state’s consumer protection statue. Denying the ability to litigate the question in a Washington court would “undermine the very purpose” of the consumer protection act, which is to offer broad protection to its citizens.

Dix v. ICT Group, Inc., — P.3d —, 2005 WL 372483 (Ct. App. Wash., Feb. 17, 2005)