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The Zappos Case: Paradigm Shift in E-Commerce Law?

By Jonathan Watts, Esq.

January, 2012, found the online retailer Zappos.com admitting to a gargantuan data security break affecting about 24 million of its customers. Plaintiff class action attorneys promptly filed numerous lawsuits. In response, Zappos invoked the arbitration clause in their Terms of Use agreement in an attempt to smother the bad publicity and resulting damages. In re Zappos.com Inc., Customer Data Security Breach Litigation, 2012 WL 4466660 (D. Nev. Sept. 27, 2012).

Like many e-commerce sites, Zappos.com’s Terms of Use was accessible by means of a hyperlink at the bottom of each page. Users were not required to click “I accept” when setting up an account or making a purchase (i.e., a “click-wrap” agreement). Instead, users were supposed to locate and click on the hyperlink to the Terms of Use that purportedly governed their relationship with Zappos. (This type of setup is sometimes referred to as a “browse-wrap” agreement.) The hyperlink to the Terms of Use was not prominently displayed.

This arrangement was weighed in the balance and found wanting. By the stroke of a pen, District Judge James denied Zappos the right to send their goof-up to arbitration (and thus save themselves a lot of money, further embarrassment and a massive headache) because Zappos’ customers never agreed the Terms of Use in the first place. In the judge’s words:

“A court cannot compel a party to arbitrate where that party has not previously agreed to arbitrate…. A party cannot assent to terms of which is has no knowledge or constructive notice, and a highly inconspicuous hyper link buried among a sea of links does not provide such notice. Because Plaintiffs did not assent to the terms, no contract exists, and they cannot be compelled to arbitrate.”

The Zappos case illustrates the dangers of relying on a “browse-wrap” Terms of Use. In a dispute, the site owner may have an uphill battle proving that the users had notice of the Terms of Use. In the case of Zappos, the fact that each page had a link to the Terms of Use was not enough, because “The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use.” More succinctly, the Terms of Use were not prominently displayed, and the user was never directed to view them.

A better agreement is the click-wrap agreement. This agreement requires that your customer, the user, take some sort of action to confirm their agreement to your terms. For example, a user who clicks on a button that clearly states that that the user is agreeing to be bound by your terms of use. So is a user who manually checks a box that indicates agreement. Properly constructed click-wrap agreements have been favorably held up by the courts and are an effective means to legally protect your online business.

This issue is far from over, but it’s a cautionary tale for all of us who have websites that contain browse-through agreements.

This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at jcw@eastbaybusinesslawyer.com, call him at 925-327-1019, or visit his website.

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