A court found Zappos' Terms of Use unenforceable because users never had to agree to them, which voided its arbitration clause after a breach affecting 24 million consumers. The lesson for startups is to have your terms professionally drafted and make users actively agree to them.
It was a bad year for Zappos in 2012. First, the company suffered from a massive data security breach affecting 24 million consumers. Second, when the plaintiff lawyers came swarming in to pounce on Zappos for this security breach, the company’s Terms of Use agreement (intended to protect the company) was struck down.
Your terms of use is the agreement that users agree to when they use your website or mobile application. It can be a binding agreement between the company and the user. The intent is to explain what your service does and signs the user up to certain contractual promises, including those that help protect the company against user lawsuits. Learn more about best practices for your terms of use. This post is general information, not legal advice. Rules on online agreements and arbitration clauses vary by jurisdiction and have changed since it was written, so confirm with counsel.
One of the contractual promises that is of utmost importance is the “arbitration clause” found at the end of the terms of use. By agreeing to this, users forgo their ability to join a class action against the company, and instead agree to an arbitration arrangement to settle any dispute with the company in one-on-one arbitration (vs. in a class action lawsuit). When this was written, these arbitration clauses were increasingly enforced and had deterred many class action suits. Learn more about how arbitration clauses can avoid class action lawsuits.
In order for your terms of use to be upheld, the user must actually “agree” to the Terms of Use. This was the focal point of the ruling against Zappos. At no point did Zappos have users physically agree to the terms of use (e.g. clicking a checkbox or scrolling through the terms of use). Zappos’s Terms of Use came into effect simply by using the application, or what is called a “Browserwrap” agreement. The court found that this was not sufficient to form a binding contract with Zappos users, thereby finding their Terms of Use unenforceable, including the all important arbitration clause. With no arbitration clause in place, users could join class action suits against Zappos. With 24 million users affected, that was likely to be an expensive battle.
Zappos will survive, but their mistake should signal to everyone to take their Terms of Use seriously. Not only should you have your Terms of Use professionally drafted, but you should take measures to have users agree to it. This is especially important as you grow your company and you begin to bring on thousands and potentially millions of users. Your Terms of Use is one of the most important protections your company has, it should not be taken lightly.
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Frequently asked questions
What is a browserwrap agreement?
A terms of use that takes effect by using the website or app, with no checkbox or other action by the user. The court found this wasn't enough to form a binding contract with Zappos users.
What does an arbitration clause do?
Users give up the ability to join a class action and agree to settle disputes one-on-one in arbitration. The post says that when it was written these clauses were increasingly enforced and had deterred many class action suits.
How do you make sure your terms of use are enforceable?
Have users actually agree to them, for example by clicking a checkbox or scrolling through the terms. The post also recommends having the terms professionally drafted.
Why did the Zappos ruling matter?
With the arbitration clause unenforceable, users can join class action suits, and the post notes 24 million users were affected by the breach.
