Zappos’ Focus on Fashion, and Not on Terms of Use, Leads to Contractual Faux Pas

recent case brought against the online retailer Zappos demonstrates the importance of thought-out drafting when constructing website policies. While it may be tempting to leave terms of use as an inconspicuous hyperlink rather than put them right up front, the consequences can be that those terms are not enforceable at all.

In January 2012, Zappos suffered a major customer data security breach at the hands of hackers, which led to a number of class action lawsuits on behalf of customers. Zappos attempted to have these proceedings kicked out of federal court on the ground that Zappos’ website terms of use contained a provision requiring all disputes related to customers’ use of the website to be brought in an arbitration proceeding in Zappos’ home state of Nevada, rather than allowing disputes to be filed in court and heard before a judge.

The Nevada District Court rejected Zappos’ argument, finding that, despite their inclusion by a hyperlink at the bottom of the company’s website, the terms of use did not create a valid contract between the company and its customers. The website did not direct users to the terms of use, and Zappos had no direct evidence to show that users had ever viewed, much less agreed to, the terms – including the terms regarding arbitration. As a result, the arbitration clause, along with the rest of the agreement, was of no force and effect, leaving Zappos exposed to suit in court.

The Zappos case is instructive on a number of points for those launching and operating existing websites, including the following:

• “Browsewraps” may not be enough to create a contract.

The elements of any contract include “offer and acceptance” or, in other words, a meeting of the minds. A “browsewrap” is an agreement that is posted as a link on a website that users can click on and view when browsing the site. The court noted that Zappos’ terms of use was “a highly inconspicuous hyperlink buried among a sea of links” and that “the website never directs a user to the terms of use.” As a result, the court found that customers were not given sufficient notice of the agreement and, because a party cannot assent to terms of which it has no knowledge, no contract existed between the parties.

• “Clickwrap” terms of use may be a better way to go.

A clickwrap agreement is one requiring the viewer of a website to actively give their consent to something, often by clicking an “OK” button on a popup window. By requiring users to actively assent to your terms of use, a company will be in a better position to argue that the users were put on notice and the terms were accepted and are thus valid (to the extent the terms themselves are in compliance with the law). In Zappos’ case, the use of a clickwrap agreement, either upon a user’s point of first contact with the website or at checkout, would have helped establish a valid contract.

• Avoid unilateral amendment language that can create an “illusory contract”

If someone approaches you on the street and says “let’s make a deal, but after we agree, I can change the deal however I want,” you would probably decline. Similarly, courts have long held that an agreement that allows one party to unilaterally change the terms without restriction is in fact not a valid agreement at all. Zappos’ terms of use included an amendment provision allowing the company to “change this Site and these terms . . . at any time,” language that is not entirely uncommon on the web today. The court noted that this clause had the practical effect of allowing Zappos to bind its users to arbitration (under the agreement’s arbitration clause) while giving the company the freedom to seek arbitration or bring a lawsuit, since it would be able to do the latter simply by changing the terms to that effect. As there was no “mutuality of obligation” between the parties, the court held that the unilateral amendment language rendered the entire agreement invalid. The lesson here is that terms of use or privacy policies should avoid unilateral amendment language, and those drafting these agreements should carefully consider any language related to subsequent modifications of the terms.

The internet is a fast-changing field and those operating websites need to be mindful of the evolving nature of relevant case law and best practices related to terms of use, privacy policies and other matters. Otherwise, companies will leave themselves, like Zappos, at risk of running afoul of the law and being exposed to terms that – in the company’s view – are completely out of style.