Website Terms of Use: Recent New York Rulings

On a nearly daily basis, each of us is asked or asks others to agree to be bound by “terms of use” or “terms of service” (TOS) as a condition of using an Internet website or obtaining goods or services offered through a website. Whether or not TOS are enforceable continues to be a question that reaches New York courts with some regularity. This column reviews a number of recent decisions analyzing this issue, in which the “process” used to present the TOS and secure consent to be bound thereby was at least as important as the terms themselves.

Arbitration

Several weeks ago, the U.S. District Court for the Southern District of New York decided Starke v. Gilt Groupe, Inc.[1] In this case, Adam Starke brought a putative class action against Gilt Groupe, Inc., alleging that Gilt had misrepresented that the textile products it sold on its website were made of bamboo fibers because, in fact, they were woven from bamboo derivatives.

Gilt moved to dismiss, arguing that the terms of Starke’s use of Gilt for his purchase (referred to as a “membership”), included his agreement that any dispute would be resolved by arbitration. The court granted Gilt’s motion, finding that it was “clear” that Starke had assented to the arbitration clause in Gilt’s website’s TOS and that Starke’s claims were subject to that clause (which also precluded any class action claims).

In its decision, the court explained that, under New York law, to create a binding contract, there had to be a manifestation of mutual assent sufficiently definite to assure that the parties were “truly in agreement with respect to all material terms.”[2]  Pursuant to this principle, the court continued, in the context of agreements made over the Internet, contracts were binding where the user took some action demonstrating that the user had at least constructive knowledge of the terms of the agreement, from which knowledge a court could infer acceptance. [3]

The court went on to explain the specific process that a consumer was required to go through to become a Gilt member. It noted that Gilt’s website included a sign-up box that stated that the consumer would become a Gilt member, that the consumer agreed to be bound by the “Terms of Membership,” and that by joining Gilt through email or Facebook sign-up, “you agree to the Terms of Membership for all Gilt Groupe sites.”

It was significant to the court that one mouse-click brought up “Gilt Terms and Conditions,” which governed “membership on Gilt.com and its associated mobile sites … and your purchases and use of products and services available through the Gilt Sites,” which also were governed by the website’s TOS – and which were produced by one more click. The TOS provided that if a dispute arose, “such dispute shall be resolved, at the filing party’s election, in either a small claims court or by final and binding arbitration administered by the National Arbitration Forum or the American Arbitration Association, under their rules for consumer arbitrations. The venue for all disputes arising under these Terms of Use shall be New York, the State of New York. All disputes in arbitration will be handled solely between the named parties, and not on any representative or class basis.”

The court decided that Starke was bound by the TOS even if he had not seen or read them because he was aware that there were terms that governed his purchase – and that he could have read them by one or two clicks of his mouse. The court found that when Starke clicked “Shop Now,” he was informed that by doing so, and by giving his email address, “you agree to the Terms of Membership for all Gilt Groupe sites.” The court concluded that, regardless of whether he actually had read the contract’s terms, Gilt Groupe’s process directed Starke exactly where to click to review those terms, and his decision to click the “Shop Now” button represented his assent to them.

Venue

The question of the enforceability of TOS often arises when a defendant moves for a change of venue. Consider the recent decision by the Eastern District of New York in 5381 Partners LLC v. Sharesale.com, Inc.[4]

In this case, 5381 Partners LLC sued Shareasale.com, Inc., in New York, alleging that ShareASale marketed 5381 Partners’ products on the Internet and 5381 Partners paid ShareASale commissions for successful purchases, but that 5381 Partners had paid ShareASale over $100,000 in fraudulent commissions based on transactions that never had occurred.

ShareASale moved to transfer venue to the U.S. District Court for the Northern District of Illinois, arguing that venue in the Eastern District of New York was improper based on the forum selection clause contained within the Merchant Agreement on its website. That clause provided that all claims brought in connection with the Merchant Agreement had to be brought in the state or federal courts of Illinois.

The court found the clause to be valid and enforceable, determining that it had been “reasonably communicated” to 5381 Partners, and that 5381 Partners had failed to satisfy its burden of showing that enforcement of the clause would be either unreasonable or unjust.

The court explained that ShareASale’s process for becoming a merchant with it required that the entity first agree to the website’s TOS.  It extrapolated from the general “uncontroverted” evidence describing ShareASale’s process that 5381 Partner specifically could not have become a merchant with ShareASale without first agreeing to the website’s Merchant Agreement, which included the forum selection clause. Notably, the court did not require that ShareASale produce evidence that the 5381 Partner employee who entered into the agreement (who was no longer employed by 5381 Partner) actually had read the terms of the Merchant Agreement. Instead, because there was unrefuted evidence that 5381 Partner “had to encounter the aforementioned sign up process,” the court found that 5381 Partner had “clicked the box confirming that it had agreed to the Merchant Agreement.”

The court described the process to assure that it met requirements of enforceability. It noted that merchants encountered two screens when signing up for ShareASale. On the first screen, a merchant entered basic information, such as name, website and tax-ID number. The ShareASale website stated, “Make sure to read and understand our Privacy Policy and Terms of Agreement”; the notice contained a hyperlink to a webpage containing the Merchant Agreement.

After merchants completed this page, the court continued, they were taken to a second page to activate their account. The website advised prospective merchants, “By clicking and making a request to Activate, you agree to the terms and conditions in the Merchant Agreement.” The phrase “Merchant Agreement” was a hyperlink to a webpage containing the Merchant Agreement; a merchant had to click to activate its account and proceed. The court then ruled that 5381 Partners must have encountered this sign up process and, therefore, that 5381 Partners had clicked the box confirming that it had agreed to the Merchant Agreement.

The court also found that the forum selection clause had been reasonably communicated to 5381 Partners. The court pointed out that the reference to the Merchant Agreement appeared on the same screen as the button a prospective merchant had to click to activate its account and, moreover, that 5381 Partners did not have to scroll or change screens to be advised of the Merchant Agreement – the existence of, and need to accept and consent to, the Merchant Agreement was “readily visible.” The court also observed that ShareASale’s reference to its Merchant Agreement appeared adjacent to the activation button, thereby making it “even more clear” that prospective merchants of ShareASale were aware that by clicking the button to activate their account, they manifested their assent to the Merchant Agreement.

Finally, the court rejected 5381 Partners’ contention that it should not be held to the forum selection clause because the Merchant Agreement never appeared on the screen during sign up and activation because it had to click on a hyperlink to view the Merchant Agreement (rather than view the agreement on the same page where it had to indicate its assent to the terms).  The court reasoned that 5381 Partners “was shown precisely where to access the Merchant Agreement before it agreed to them, and it should have clicked on them.” The court also pointed out that 5381 Partners had to click to activate its account, and the button 5381 Partners was required to click appeared next to the statement, “By clicking and making a request to Activate, you agree to the terms and conditions in the Merchant Agreement,” which contained the forum selection clause. In these circumstances, the court declared, “[a] reasonably prudent offeree would have noticed the link and reviewed the terms before clicking on the acknowledgement icon.”

Accordingly, the court granted ShareASale’s motion to transfer the case to the Northern District of Illinois.[5]

Unenforceable

A recent decision by the Queens County Civil Court highlights the importance of having an adequate process that requires the website user to affirmatively assent to TOS – and the risk of not including them on the website.

Okeke v. Cars.com[6] was a negligence lawsuit that Benjamin Okeke brought against Cars.com. Okeke alleged that he had seen an advertisement listing a 2012 Toyota Sequoia for sale on Cars.com’s website, www.cars.com, and that he had submitted his name, zip code and phone number using an interactive feature on that website. Okeke said that he had received an e-mail from Cars.com indicating that his information was being sent to the seller. Thereafter, according to Okeke, he exchanged e-mails with the seller and wire transferred the purchase price of the vehicle to the seller. Okeke asserted, however, that he had never received the car and had never heard from the seller again.

Cars.com moved to dismiss the lawsuit, arguing that it violated the TOS provisions relating to forum selection, warranty disclaimer and limitations of liability. The court denied the motion.

The court explained that the TOS was located in a hyperlink at the bottom of the Cars.com website, and advised a user that “[b]y using the Site, you hereby agree that you are at least eighteen (18) years of age and bound by all of the following provisions of these Terms of Service.” The court, however, rejected Cars.com’s argument that merely by using the website, Okeke had agreed to be bound by the agreement’s terms, which included a forum section clause providing that all litigation was required to be resolved in Cook County, Illinois.

The court reasoned that, in the context of agreements made over the Internet, New York courts have found that binding contracts were made when the user took some action demonstrating that the user had at least constructive knowledge of the terms of the agreement, from which knowledge a court could infer acceptance. In this case, the court ruled, there was “no evidence” that Okeke had possessed actual or constructive knowledge of referenced terms. Simply stated, the mere fact that the TOS was located on the site was not sufficient to bind Okeke.

Conclusion

In determining issues of enforceability, New York courts clearly consider the process provided by the websites to demonstrate that users in general and the claimant in particular were given easy access to the TOS and took some affirmative step to denote their agreement to be bound. Ironically, despite the virtual landscape in which the cases occur, one is reminded of those three most important factors regarding physical real estate:  location, location and location.  Companies typically should try to design their websites so that users – whether consumers or other businesses – are provided with easily accessible, prominent access to TOS and to require some affirmative act of consent as a condition of website use.