Jed Morris - Ninth Circuit Issues Ruling on Online Contracts with Implications for Washington Businesses

The recent decision in Douglas v. Talk America Inc. (9th Cir. July 18, 2007) may substantially affect the manner in which online service providers manage their contractual relations with customers in the State of Washington. In its ruling, the Ninth Circuit held that unilateral contract modifications are unenforceable against customers where the modified contract is merely posted on the service provider’s website. The Court further held that a service provider must give some form of notice to its customers of any contract modifications and the customers must consent to such modifications, in order for the modifications to be binding. The Ninth Circuit is the first federal appeals court to weigh in on the enforceability of such contract modifications.

The case arose when Talk America acquired America Online’s long-distance business, and subsequently added new terms to the long-distance service contract. The new terms included provisions imposing additional charges, mandating arbitration of all disputes, and requiring application of New York law. Talk America did not notify its customers of the modifications, but rather merely posted the modified contract on its website. Douglas, a Talk America and former AOL long distance customer, filed a consumer protection class action lawsuit against Talk America. Talk America sought to avoid the lawsuit by compelling arbitration of the dispute, as required by the new provisions. However, the Ninth Circuit held that it was a “fundamental misapplication of contract law” to bind the plaintiff to the terms of the revised contract when he had not been notified of nor had he consented to the changes. The Court reasoned that it is a fundamental rule of contract law that “a party cannot unilaterally change the terms of a contract; it must obtain the other party’s consent before doing so.” Douglas’ continued use of his long distance service subsequent to the contract modifications could not be considered consent to such terms because Douglas had not been notified of the changes.

The Ninth Circuit’s ruling is consistent with Washington contract law. In Washington, a party cannot unilaterally modify the terms of a contract without obtaining the consent of the other party. Jones v. Best, 134 Wn.2d 232, 240 (1998); Hanson v. Puget Sound Navigation Co., 52 Wn.2d 124, 127 (1958). This is the same fundamental rule of contract law relied upon by the Ninth Circuit in Douglas. Therefore, it is very likely that Washington courts would reach the same conclusion if presented with a factually similar case.

Thus, businesses that post their service contracts online should consider providing their customers with some form of notice when modifying the terms of service contracts. The Ninth Circuit suggests that notice via regular mail would be effective. Notice via email is problematic because such mass emails are often filtered out as “spam,” and the customer may never receive it in his inbox. Providing customers with a notification message upon visiting the service provider’s website would not likely be effective as many customers do not regularly visit their service provider’s website as their credit cards are being automatically charged for the service or they pay by check via regular mail. Some companies allow customers to choose the type of notification they would prefer for future contract modifications when they sign up for their service. This option puts the ball in the customer’s court, and binds them to the type of notice they select.

Moreover, businesses should consider highlighting the specific changes to the contract within the notification to its customers. The Ninth Circuit noted that looking for all of the changes in the actual contract would be fairly cumbersome for the customer.

Additionally, a service provider should consider allowing a reasonable period of time before the modification goes into effect so as to give the customer time to decide whether to continue using the service under the modified terms. The Ninth Circuit suggests that a customer’s continued use of the service after the customer has been notified of changes to the original contract may be sufficient consent to the new terms. Thus, a service provider may also want to consider including a provision in the service contract stating that continued use of the service subsequent to being notified of changes to the contract would constitute the acceptance of such new terms.

Back to Publications Archive