More Legal Defeats for Nasty Sneakwrap Terms

There’s lots of depressing stories coming out of our legal system these days, but on one small front at least there’s been a surprising run of what I consider really good news. More and more judges are reaffirming the traditional view of “contracts of adhesion” and ruling that the onerous terms of shrinkwrap, clickwrap, and browserwrap agreements which deprive customers of any real recourse are not binding.

We noted last month the rulings in several cases where the courts in particular chose not to enforce one-sided mandatory arbitration clauses. Shortly thereafter came word of another case, Gatton vs T-Mobile, which might prove to be the biggest blow against unfair arbitration clauses yet. T-Mobile was attempting to block class action lawsuits from customers on such issues as non-prorated early termination fees and handsets locked into using the T-Mobile cell phone service. Under the mandatory arbitration clause and a ban on class-action lawsuits in T-Mobile’s contracts, the company argued that the lawsuits must be dismissed and the customers forced to submit to arbitration instead.

Because T-Mobile’s agreement was an actual signed contract in which the arbitration clause was reasonably prominent, it looked like it would be hard for the customer side to prove the arbitration clause was unconscionable. Nonetheless, the California appeals court ruled that “the high degree of substantive unconscionability arising from the class action waiver rendered the arbitration procedure unenforceable.” The court cited a landmark California Supreme Court decision (Discover Bank vs Superior Court 2005) that said that class-action waivers “in a consumer contract of adhesion … when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money … are unconscionable under California law and should not be enforced.”

The decision against T-Mobile has the potential to make it a lot harder for all vendors to use mandatory arbitration and class-action waivers to escape responsibility for their actions. A more recent decision by a higher court goes even further, calling into question the fundamental sneakwrap licensing tactic whereby the vendor can modify terms of the “contract” just by posting changes to a website. The recent decision by the U.S. Court of Appeals 9th Circuit in Douglas vs Talk America actually follows along the same lines as the court in the T-Mobile case on the potential unconscionability of mandatory arbitration and class-action waiver clauses under state law, but it also looked at an even broader issue.

Plaintiff Douglas had sued over modifications that Talk America made to his terms of service without notification to him other than posting the changes on its website. A lower court had ruled that the modifications including a new arbitration clause were valid, but the 9th Circuit (which you may recall has a spotty history when it comes to licensing issues, most notably its boneheaded ruling in the MAI vs Peak case) seemed to have its act together this time. “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,” the court said in overturning the lower court’s ruling. “This is the first time any federal court of appeals has considered whether to force a modified contract with a customer where the customer claims that the only notice of the changed terms consisted of posting the revised contract on the provider’s website. This issue is also of some significance, as it potentially affects the relationship of numerous service providers with millions of customers, and thus deserves immediate resolution.”

While both of these decisions are very good news indeed, I should point out that those of you ready to sue will discover that your results may vary, particularly if you live nearer Chesapeake Bay than California. There are some differences in state laws (such as UCITA still being on the books in Virginia and Maryland), but it’s not just a matter of what the statutes say. California has a number of precedents like the Discover Bank case that protect consumers, not only from nasty sneakwrap terms but also from having the laws of other states applied to its citizens. Your state may have some great consumer laws on the books too, but you could still find that the sneakwrap jurisdiction clauses ship your case off to a place like Delaware, where for some reason it seems like the consumer always loses to the big corporate entities.

So even with these recent wins, it’s definitely not yet time to be popping open the champagne bottles. But at least there is some hope that the courts are starting to come back to a more balanced view on the validity — or the invalidity — of all those nasty terms that hide deep in the sneakwrap’s small print.

Have you been bitten by sneakwrap license terms? Post your comments on my website or write me at Foster@gripe2ed.com.

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