Ninth Circuit Strikes Down Contract Amendment Without Notice–Douglas v. Talk America

By Eric Goldman

Douglas v. US District Court ex rel Talk America, No. 06-75424 (9th Cir. July 18, 2007)

In this case, the plaintiff initially procured telephony services from AOL, which subsequently sold its telephony business to Talk America. Talk America posted revised terms (including a new arbitration clause) to its website. When Douglas sued Talk America in court, Talk America sought to compel arbitration. The district court agreed, but the Ninth Circuit reversed. It pointed out that Douglas hadn’t been back to Talk America’s website, and even if he did, there was no reason he would have investigated the user agreement. The court says curtly, “Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side.”

But, could the parties agree otherwise at the outset? Unfortunately, the opinion is vague about whether AOL’s initial contract with Douglas had a provision whereby he agreed that AOL could amend the user agreement simply by posting changes to its website. If AOL didn’t, then of course one party to an already-existing valid contract can’t simply change terms either by unilaterally notifying the other party or by posting its desired new terms to its website. But I’m assuming the court bounced this amendment despite a contract provisions putatively permitting unilaterally posted website amendments which put the onus on users to check back frequently for updates.

I’ve never been a fan of these “we can amend simply by posting new terms to the website” provisions for two reasons. First, as the court points out, “Douglas would have had to check the contract every day for possible changes. Without notice, an examination would be fairly cumbersome, as Douglas would have had to compare every word of the posted contract with his existing contract in order to detect whether it had changed.” This isn’t practical or sensible, so it’s not surprising that courts will reject such an obligation. Second, even if the court was willing to accept this method as a valid amendment process, there would be strict limits on the substantive changes that a website can make unilaterally. Indeed, the court independently concludes the arbitration clause is unconscionable. I expect courts will aggressively police these unilateral amendments using unconscionability and other limiting doctrines.

So, what should a website do? There are three main options when a website wants to amend its user agreement terms, none of them ideal:

1) Get all existing users to re-up to the amendment using normal contract formation processes (including offer, acceptance, consideration). This isn’t ideal because the website will have to create new consideration, plus no website wants to lose any customers who say no. And in many cases, websites have a large group of dormant users that won’t respond to a call to action.

2) Include a provision in the initial contract saying that the website can amend the terms unilaterally after providing notice to users. Ideally this is coupled with a bona fide right to reject the terms, but this would involve giving the users an ability to terminate the contract. Even if not, merely giving notice would appear to satisfy the Ninth Circuit here, at least with respect to unconscionable amended provisions. However, in practice, giving users notice isn’t all that easy. A mass-email to the userbase is likely to get flagged as spam by many IAPs, plus many users will be annoyed by the seemingly worthless email (or may discard it instantly as a possible phish). Alternatively, notice can be given when the user comes back to the website and logs in, but obviously only a limited number of legacy users come back to the website to log in. I like eBay’s approach, which lets users self-configure the notification about user agreement amendments.

3) Assume that it’s impossible to unilaterally amend the contract, regardless of any specified unilateral amendment rights in the initial contract. In this case, if the website wants to change terms, it can only apply those new terms against new users; legacy users will be stuck on the old terms. This method is the only guaranteed method to work from a legal standpoint, but it creates some difficult situations dealing with users on different versions of the contract, and it hinders websites’ freedom to evolve their offerings over time.

Although I don’t have any great practice-oriented recommendations based on this opinion, I do hope this opinion will help contribute to the demise of the “check back frequently for amendments” provisions in online user agreements. I’ve always considered those among the worst excesses of the dot com era.