Litigation Alert: Effect of Change-of-Terms Provisions on the Enforceability of Online Terms of Use – Recent Developments

We all know that online terms of use, terms of service, terms and conditions and the like are almost always one-sided in favor of the website operator. We also know that the average website user does not actually read these terms. A common provision in these online terms is one by which the operator purports to reserve the right to unilaterally modify their online terms at any time without giving notice of the modifications to the users. These provisions often provide that the user agrees to periodically review the online terms and that continued use of the website following any revisions or modifications to the terms constitutes the user's acceptance. Depending on what state you are in and the exact language contained in the "change-of-terms" provisions, the changes can render other specific provisions in the terms, such as mandatory arbitration agreements, and possibly the entirety of the terms unenforceable.

Website user agreements generally fall into one of three categories:

• Clickwrap Agreements – require a user to agree to the terms of a contract by selecting an "I accept" or "I agree" button on the website after being presented with the terms or a link thereto.
• Browsewrap Agreements – do not require an express manifestation of acceptance; rather, a user gives their assent simply by using the website. The defining feature of browsewrap agreements is that the user can continue to use the website or its services without visiting the page containing the terms of use or even knowing that such a page exists.
• Sign-In Wrap Agreements – notifies the user of the existence of the website's terms and conditions and advises the user that they are agreeing to the terms when registering an account or signing up. The user is presented with a hyperlink to the terms and must affirmatively click to accept the terms.

Courts generally enforce clickwrap agreements. The validity of browsewrap and sign-in wrap agreements, on the other hand, turns on whether the user has actual or constructive knowledge of a site's terms and conditions prior to using the site. This is usually a fact-intensive inquiry.

The effect of change-of-terms provisions on the enforceability of these three types of user agreements and, specifically, mandatory arbitration provisions contained therein, has been the subject of increased litigation over the past five years. One of the more recent cases is Stover vs. Experian Holdings, Inc., issued by the 9^th Circuit in October 2020.¹

In June 2014, Stover purchased a service called “Experian Credit Score,” which provides subscribers with a way to monitor their credit score. When Stover purchased the Experian subscription, she agreed to the terms and conditions then existing. Those 2014 terms included an arbitration provision whereby the subscribers agreed that all claims arising out of the subscription transaction were subject to arbitration "to the fullest extent permitted by law," and that the users waived the right to be part of a class action. The 2014 terms also included a change-of-terms provision, which provided "[e]ach time" users "accessed" the website, they would be manifesting assent to "the then current" terms of use. Stover cancelled her subscription in July 2014. Experian subsequently modified the arbitration provision, adding an exemption for some types of claims from binding arbitration, including disputes arising out of or relating to the Fair Credit Reporting Act. The Court noted that the agreement at issue was a "hybrid," explaining that Stover agreed to a clickwrap agreement in 2014, but the new agreement in 2018 was more properly characterized as a browsewrap agreement.

In 2018, Stover filed a putative class action complaint in California federal district court, alleging various claims against Experian, including violation of the Fair Credit Reporting Act. The day before she filed the complaint, Stover accessed the Experian website, but claimed she did not receive notice of the terms of use then in effect. Experian moved to compel arbitration. The district court granted the motion, holding the 2018 terms of use applied because the 2014 terms, to which Stover agreed, indicated that continued use of the website constituted agreement to any changes or modifications to the terms.

In an interesting twist, Experian argued on appeal that the broader 2014 arbitration clause should control because Stover's "mere website visit" in 2018 after the parties terminated their business relationship was not enough to "activate" the change in terms. The 9^th Circuit agreed, holding that a single website visit four years after assent to a contract containing a change-of-terms provision is not enough to bind the parties to terms in the current version of the contract of which the visitor is unaware. In so holding, the court explained, "Stover had no obligation to investigate whether Experian issued new terms without providing notice to her that it had done so. Indeed, the opposite rule would lead to absurd results: contract drafters who included a change-of-terms provision would be permitted to bind individuals daily, or even hourly, to subsequent changes in the terms."

Miracle-Pond v. Shutterfly, Inc., decided by the Northern District of Illinois in May 2020,² also addressed these issues. Miracle-Pond created a Shutterfly account in August 2014. During the registration process, Miracle-Pond agreed to Shutterfly's then-existing terms of use by clicking an "Accept" button on a pop-up screen that also included a link to the terms of use. The 2014 terms of use included a change-of-terms provision that provided:

By visiting any of our Sites and Apps, you are signifying your assent to these Terms and our Privacy Policy, which is incorporated herein by reference. Any products ordered or services used through any of our Sites and Apps are also governed by these Terms. We may revise these Terms from time to time by posting a revised version. YOUR CONTINUED USE OF ANY OF THESE SITES AND APPS AFTER WE POST SUCH CHANGES WILL CONSTITUTE YOUR ACCEPTANCE OF SUCH CHANGES. IN ADDITION, BY ORDERING PRODUCTS OR USING SERVICES, YOU ACKNOWLEDGE THAT YOU HAVE READ AND REVIEWED THESE TERMS IN THEIR ENTIRETY, YOU AGREE TO THESE TERMS AND THE PRIVACY POLICY AND THESE TERMS CONSTITUTE BINDING AND ENFORCEABLE OBLIGATIONS ON YOU.

In 2015, Shutterfly added an arbitration provision to the terms of use. Miracle-Pond continued to access her account and place orders in 2015, 2017, 2018 and 2019. Miracle-Pond subsequently filed a putative class action against Shutterfly in 2019. Shutterfly moved to compel arbitration per the modified terms of use.

Miracle-Pond argued that the modified terms of use were not enforceable because they constituted a browsewrap agreement. However, the court held that Shutterfly's agreement was a valid clickwrap agreement as Miracle-Pond was presented with a link to the terms of use and had to click "Accept" to continue with her account registration.

Miracle-Pond also argued that the 2015 arbitration clause was illusory because Shutterfly reserved a unilateral right to modify the terms of use. However, the court noted that, under Illinois law, parties may agree for one party to have the unilateral right to modify terms of an agreement. Because Miracle-Pond agreed to the terms of use that (1) allowed Shutterfly to unilaterally modify the terms of use and (2) that provided Miracle-Pond's continued use of the website and Shutterfly's services would constitute assent to any modified terms of use, the court held that the modified terms of use, including the arbitration provision, were enforceable.

Unlike California and Illinois, Texas law does not allow parties to retain an unrestrained right to unilaterally modify arbitration agreements retroactively and without notice. Any attempt to do so renders the arbitration agreements illusory and, therefore, unenforceable. Under Texas law, contracts must be supported by consideration. In the arbitration agreement context, that consideration is typically a mutual agreement to arbitrate. However, if one party can avoid its promise to arbitrate by amending the agreement retroactively, there is no consideration and, therefore, an enforceable agreement was never formed. Put differently, a promise is illusory if it does not effectively bind the promisor.

It should be noted that the vast majority of cases addressing the effect of change-of-terms provisions in online terms of use do so in the arbitration context – i.e., the website operator seeking to compel arbitration pursuant to the modified terms. However, one federal court applying Texas law has held that an impermissible change-of-terms provision that gave an operator an unrestrained right to unilaterally change the terms and conditions of its loyalty program rendered the entirety of the loyalty program terms and conditions void.³

In 2018, the 1^st Circuit was faced with a challenge to the enforceability of a mandatory arbitration clause in the terms and conditions for the Container Store's loyalty program. A blind customer signed up for the loyalty program online, which required her to check a box to the immediate left of "I agree to the [loyalty program] terms and conditions," which were hyperlinked. In the litigation, the customer denied she was aware of any arbitration agreement.

The loyalty program agreement contained a "Change to the Terms" provision, which provided:

We [,the Container Store,] reserve the right, at our discretion, to change, modify, cancel, add or remove any or all portions of these terms, any policy, FAQ, or guideline pertaining to the [loyalty program] at any time. If any terms change in the future, we will let you know by posting an update to www.containerstore.com/pop with the most recent modification date. Any changes or modifications will be effective immediately upon posting the revision and you waive any right you have to receive special notice of such change. By continuing to use the [loyalty program], you agree to the revised terms.

...

[The Container Store] reserves the right, without limitation, to terminate, change, limit, modify, or cancel any [Loyalty Program] terms, conditions, rules, regulations, benefits ... at any time, with or without notice, even though such changes may affect the value of already-issued ... benefits.

The Court held that the provision allowing the Container Store to unilaterally change the terms of the loyalty program at any time was a "text-book definition of illusory" under Texas law.

Notably, the Container Store also argued that any illusory provision of the terms could be severed per the loyalty program agreement's severance clause. That severance clause provided that "[i]f any provision of these terms is found to be unlawful, void, or unenforceable, then that provision will be deemed severable from these terms and will not affect the validity or enforceability of any remaining provisions." However, the Court rejected this argument, explaining that if the Court did so, it "would be reviving a contract we have found was never formed for its lack of consideration, omitting the change-in-term clause that was fatal to the contract's proper formation, to therefore conclude a contract was formed." Therefore, the Court affirmed the district court's order denying the Container Store's motion to compel arbitration "because no agreement was formed between [the customer] and the Container Store relating to her enrollment in the loyalty program."

While it is not necessarily a new concept under Texas law that a reservation in online terms of use to unilaterally modify the terms retroactively can render the terms unenforceable, it is something that warrants attention. In fact, a quick review of various websites revealed many whose terms of use (with Texas choice of law provisions) run afoul of Texas law. It is immensely important for companies to make sure their terms of use comply with the law of the jurisdiction chosen to govern the terms. Otherwise, there is a risk of having a court rule the terms are unenforceable if a dispute arises.

Even if the applicable jurisdiction's laws regarding change-of-terms provisions are followed, companies may still run into trouble if they choose to rely on browsewrap-type agreements, which is still common practice. If a dispute arises over such agreements, the user will likely argue that they were not aware of the terms. Therefore, if a company intends to use a browsewrap agreement on its site (i.e., not requiring express user acceptance of the terms), it is best practice to include some type of banner or other feature that clearly draws the user's attention to the terms of use while on the site. This will put the company in the best position to argue that the terms are, in fact, enforceable.

¹ Stover v. Experian Holdings, Inc., 978 F.3d 1082 (9th Cir. 2020).

² Miracle-Pond v. Shutterfly, Inc., 19 CV 04722, 2020 WL 2513099, at *6 (N.D. Ill. May 15, 2020).

³ See Nat'l Fed'n of the Blind v. The Container Store, Inc., 904 F.3d 70 (1st Cir. 2018).

Change of Terms Provisions, Terms of Use