Your Terms of Use Might Be Illegal

Here's how to tell if you're at risk for lawsuit--the way Zappos was when a court recently struck down its online Terms of Service agreement.

If your business has a website, and especially if you conduct business online, then pay attention.

Recently, online shoe retailer Zappos found out the hard way that there are strict rules around contracting--even for those barely visible online contracts. That's because a federal court struck down the Zappos online Terms of Use agreement.

Before we get into the particular problem with Zappos's terms, it is helpful to think about how we legally contract with each other over the Internet. (Hint: It happens all the time.)

Here's a primer. First, understand that there are two main buckets that online agreements fit into: "browsewrap" and "click-through."

Think of a browsewrap agreement like a notice posted near the entrance of an airport. Ok, you might not have noticed the signs, but every time you visit an airport you pass some sort of sign that lets you know that your presence on the property means that you consent to a search. This is similar to a browsewrap agreement, where continued "browsing" of a website means that you implicitly consent to the terms--terms that are usually linked at the bottom of the home page and throughout the website.

Although there are a few cases upholding the enforceability of browsewrap agreements, it is my opinion that businesses should not heavily rely on them when contracting with paying customers. Instead, they should be used to give notice to consumers about the website generally and the principles that govern your non-commercial use of the site. They can even give notice to potential purchasers of the contract to come--the click-through agreement.

Click-through agreements are very common for e-commerce websites and take many forms. But the one thing that they all have in common is that the user--the purchaser--has to take some affirmative step to "agree" to the terms, whether clicking a button, or scrolling to the bottom of the terms and accepting them. When used properly, click-through agreements are highly effective and will generally be held up in court, provided that the actual terms in the click-through agreement comport with applicable law.

I like to think that online consumers generally come in three types--passive visitors, active visitors, and purchasers. For passive visitors, a browsewrap agreement is usually fine to alert them of their rights and obligations as a window shopper. Many commercial websites also allow for active visitors--visitors that may provide some information about themselves to help shape their online shopping experience. This may be as simple as providing a user name and password, or contact information. For these active visitors, you need an additional layer of protection--typically in the form of a privacy policy that gives the visitor information on how you will collect and use any personally identifiable information. Many states have specific laws that govern privacy policies, so be sure that yours complies.

In addition, there are special laws that apply to collecting information from children, so be very cautious if your site is geared towards youngsters. Privacy policies are generally browsewrap agreements, but you should be sure that each active visitor can easily navigate, find, and read your policy. Last but not least, the customer. Here is where a click-through agreement wins hands down. When a visitor turns into a customer, as the business owner you should take all reasonable steps to make sure that the terms of the sale will hold up in court. A click-through agreement requires the potential customer to take affirmative action--usually by clicking a button--to show that they are agreeing to the terms of the sale.

So what went wrong for Zappos? After a security breach affected millions of customers, Zappos was sued by class-action lawyers. Zappos tried to compel these customers to arbitrate the claims out of court, based on a clause in its user agreement.

Unfortunately, Zappos didn't require its customers to click-through its agreement and instead relied on a browsewrap agreement. The federal court hearing the matter struck down the agreement and is allowing the lawsuits to go forward in court. This will undoubtedly cost Zappos a lot of extra money and time to resolve these issues. There was another issue regarding Zappos' ability to amend the terms at any time unilaterally, but that is a bigger issue for another article. The sad fact is that something so simple--not requiring the customer to click a button--will probably cost that company dearly.

The lesson? When it comes to electronic contracting, make sure that the terms that matter most to the business are put behind some sort of affirmative consent--with a well-drafted click-through agreement.

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