Contract Law And Its Majesty Over Digital Deals

 Contract Law
Contract Law

On September 25, 2012, Adam Berkson was on a Delta Airlines flight from New York City to Indianapolis. Needing the internet to conduct important business, he flipped open his lap top and followed the log-on instructions on Gogo’s in-flight Wi-Fi service. Between options of $10 for the day or $35 for the month, he clicked the sign-up button for the month, entered his American Express payment information, and was surfing the web within one minute.

A few months later, however, Berkson discovered that Gogo was billing his AmEx card every month—as if he had subscribed—and when he requested a refund, Gogo refused. While AmEx reversed the charges as a customer courtesy, in 2014 Berkson nevertheless banded together with other aggrieved Gogo customers to file a federal class action lawsuit for additional damages. Gogo moved to dismiss the case by citing yet another surprising term on its web site, one providing that all disputes go to arbitration, not litigation.

This case is one of scores of disputes arising from electronic contracts formed on the internet, mostly between consumers and merchants. While billions of dollars change hands amid trillions of Internet transactions, most raising no issue, the novelty, dynamism, and ingenuity surrounding e-commerce and technology produces disagreements about how offers to contract are made, how they may be accepted, and what terms they contain. And while there is ongoing contention about how electronic contracting is or should proceed, the setting vividly shows the remarkable durability and capaciousness of venerable contract doctrine.

Most fundamentally, mutual manifestation of assent is the touchstone of contract formation and an essential element. When there is clearly an offeror and clearly an offeree, then the acceptance of the offer must be unequivocal. Such principles signify that asset and acceptance on line must stimulate a degree of intentionality that many website formation devices lack.

Next, it is common in contemporary commerce to offer and form contracts without negotiation—standard terms on take-it-or-leave bases which are generally referred to as adhesion contracts. In order for traditional principles of assent and acceptance to work, law must assure that offerees at least have an opportunity to review terms if not negotiate them.

Finally, when assent is largely passive, as with electronic adhesion contracts, it becomes more important to probe whether the offeree had notice of the term at issue. Actual notice certainly suffices but inquiry notice would suffice too—that is the offeree need not know the specifics of the term but be on notice to inquiry about it.

Carnival Cruise

A prominent pre-internet illustration is Carnival Cruise Lines, Inc. v. Shute, whre the U.S. Supreme Court held that the terms of adhesion contracts are “subject to judicial scrutiny for fundamental fairness”. In Carnival Cruise, vacationers bought cruise tickets through a travel agent it later received by mail. A legend on the front read, in bold type and all capital letters: “SUBJECT TO CONDITIONS OF CONTRACT ON LAST PAGES IMPORTANT! PLEASE READ CONTRACT ON LAST PAGES 1, 2, 3.”

The passenger was injured on the cruise due to alleged carrier negligence and sued in Washington state court. The carrier, citing a clause in the contract selecting Florida courts for any such suits, moved to dismiss the case. While the passenger said the clause was unenforceable because not freely bargained for.

The Supreme Court thought that that absence of bargaining was irrelevant to the clause’s validity. It is unreasonable to expect bargaining over such terms, either from the offeror’s or offeree’s perspective. The issue, rather, was whether the clause was reasonable and fair. Nothing about the cruise line’s choice of Florida suggested unfairness or absence of good reason; to the contrary, its headquarters and commonly used ports are in Florida. Nor did it appear that the line exacted the passenger’s assent by fraud or overreaching. Finally, and of greatest relevance to the Gogo analysis, the Court stressed that the passenger received notice of the clause and therefore could have rejected the offer.

These basic principles of general contract law apply whether one is addressing exchanges made in-person, by mail, or on-line—and to all the various devices different web sites use—whether offers invite acceptance only after scrolling through, by clicking “I agree” or merely by browsing or signing-in.

Facebook

A recent case against Facebook evokes that of Carnival Cruise. In Fteja v. Facebook, Inc., a user charged emotional distress and reputational damage when Facebook disabled his account and sued in New York. Facebook, citing its terms of use that called for litigating in California, moved to transfer the case. The user countered that he not accepted the terms. It was both similar to and different from Carnival Cruise.

On Facebook’s web site, users are asked to provide fields of information before clicking sign-up, whereupon a security check intervenes, after which it prompts another “sign-up,” this one announcing that by clicking “you are indicating that you have read and agree to the Terms of Service”—with the latter phrase appearing as a hyperlink (underlined and italicized and leading to those terms). To have a Facebook account, a user must have so clicked; if the accompanying phrase is given effect, the user did indeed agree to the terms.

Recalling Carnival Cruise, the Facebook court wondered:

What is the difference between a hyperlink and … a cruise ticket saying “SUBJECT TO CONDITIONS OF CONTRACT ON LAST PAGES IMPORTANT! PLEASE READ CONTRACT—ON LAST PAGES 1, 2, 3”? The mechanics of the internet surely remain unfamiliar, even obtuse to many people. But it is not too much to expect that an internet user whose social networking was so prolific that losing Facebook access allegedly caused him mental anguish would understand that the hyperlinked phrase “Terms of Use” is really a sign that says “Click Here for Terms of Use.” So understood, at least for those to whom the internet is an indispensable part of daily life, clicking the hyperlinked phrase is the twenty-first century equivalent of turning over the cruise ticket. In both cases, the consumer is prompted to examine terms of sale that are located somewhere else. Whether or not the consumer bothers to look is irrelevant. “Failure to read a contract before agreeing to its terms does not relieve a party of its obligations under the contract.”

Gogo

Returning to the Gogo case, its motion to dismiss was decided by Judge Jack Weinstein, a distinguished 93-year old appointed to the bench by President Lyndon Johnson. He wrote a law-review length opinion denying the motion. After quoting the foregoing passage from the Facebook case, Weinstein quarreled with his colleague in that case, as follows:

The phrase “for those to whom the internet is an indispensable part of daily life” in Fteja is curious. It presupposes intensive and extensive use of the internet, an assumption not easily justifiable when the user is buying only one or a few items through this system. What of those less devoted to computers? Should a survey be taken on how they view some of these directions? Judges and law clerks tend to be sophisticated about navigating the internet and website. Are they attributing their superior knowledge to that of “read-less and run” types? A “hyperlink,” which is activated by clicking on an underlined word or term, with its serious legal ramifications, may not be fully understood by many consumers.

The Gogo court read the law differently and, after discerning the principles from the cases, built an analytical framework to evaluate the validity of electronic contracts of adhesion—and found Gogo failed: (1) more evidence needed to be developed about whether the customers knew they were binding themselves to more than a one-time deal; (2) the site design did not make the terms of use conspicuous (e.g., in large font, all caps, or in bold, or in multiple locations) while SIGN IN was not only conspicuous but user-friendly; (3) the importance of the terms of use was accordingly obscured; and (4) nothing was said about the relative importance of arbitration versus litigation yet such terms are important.

True, sign-in-wrap of Gogo closely resembled that in Fteja. But Judge Weinstein explained:

But Fteja, and lower court cases that follow its lead, mischaracterize important Supreme Court and Court of Appeals precedent regarding contracts and the reasonable person standard that must be applied to inquiry notice of, and manifestation of assent to, the terms in a contract of adhesion. The offeror must show that a reasonable person in the position of the consumer would have known about what he was assenting to. There are significant differences between a hyperlink available near a sign-in button, which is never subsequently mailed in hardcopy or softcopy to a consumer, as is the case here, and a hardcopy cruise ticket saying in all caps, “SUBJECT TO CONDITIONS OF CONTRACT ON LAST PAGES IMPORTANT! PLEASE READ CONTRACT ON LAST PAGES 1, 2, 3.”

The court enumerated several: (1) the hyperlink is unrelated to any in-person transaction; (2) Gogo had no practice of emailing or mailing its terms of use to customers; (3) Gogo made no effort to draw Berkson’s attention to its terms of use; the passenger in Carnival Cruise acknowledged receiving notice of the terms—not so in Gogo.

While many judges seem to assume the validity of terms of use in electronic contracts, Weinstein stressed the need for assent in contract formation that makes such an assumption irresponsible. True, one can hypothesize an informed minority of consumers wielding disciplining power in competitive markets against allowing offerors to sustain lopsided terms. But Judge Weinstein found that research into the behavior of online consumers cast doubt on its efficacy. On the other hand, experts urge web site designs to promote efficacious manifestations of assent and access to terms. And many web sites follow such a practice, dubbed “scroll-wrap,” including prominent participants such as Google.

Despite significant commercial strides the internet has enabled, it has not and is unlikely to fundamentally change contract law—its sturdy, venerable and elastic principles may adjust and stretch but long-established doctrines both facilitate the freedom of contract and constrain abuse. Indeed, as attested by the work of researchers, policy groups, and law courts, any sense of the wild on the internet is soon tamed, whether overreaching, hidden terms, or other chicanery that is equally venerable if conducted in a new environment using novel tools.

Lawrence Cunningham, a professor at George Washington University, is in the midst of revising for a second edition his book, Contracts in the Real World: Stories of Popular Contracts and Why They Matter, from which this is adapted.

CITATIONS

Berkson v. Gogo LLC, — F.Supp.3d —-, 2015 WL 1600755 (E.D.N.Y. 2015).

Carnival Cruise Lines, 499 U.S. 585 (1991).

Facebook, 841 F.Supp.2d 829 (S.D.N.Y. 2012).