Can a business change the terms of its contracts with customers by just posting a revised contract on its Web site? The first federal appeals court to address this issue recently said no.

In Douglas v. U.S. District Court for the Central District of California, the plaintiff had contracted for long distance telephone service from AOL. Subsequently, Talk America acquired this business from AOL and added four provisions to the service contract:

  • Additional charges
  • A class action waiver
  • An arbitration clause; and
  • A choice-of-law clause pointing to New York law

Talk America posted the revised contract on the Web site for the service, but did not notify customers of the changes. Mr. Douglas did not learn of these changes until later. Upon learning about the changes, he filed a class action lawsuit on behalf of himself and other Talk America customers, arguing that Talk America had breached its agreement with customers, and violated the federal Communications Act and California consumer protection laws. Talk America countered, and asked the trial court to compel arbitration under the arbitration clause in the revised agreement. The trial court agreed and ordered arbitration to proceed.

Mr. Douglas appealed. Among other things, he argued Talk America could not change his service contract without at least notifying him; and that the mere posting of changes to the contract on the Talk America Web site didn’t constitute notification. The appeals court agreed with Mr. Douglas and remanded the case to the trial court. The appeals court said a business may not unilaterally change the terms of a contract; under contract law, it must obtain the other party’s consent first. The court noted that this was the first time a federal court of appeals had considered whether to enforce a modified Web-based contract where the only notice of the change was the posting of the revised contract on the Web site. Importantly, the court added that "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."

Analysis. This case reaffirms that the rules of contract formation online are no different than the rules governing contract formation off-line. Accordingly, where the Web site operator has the contact information for its customers, it’s a good idea to notify customers of the exact nature of the proposed contract changes via e-mail, regular mail, or phone several days before the changes are implemented; and to keep in mind that, generally, companies will need to obtain customer consent to those changes. Indeed, as reported by the Bureau of National Affairs Electronic Commerce and Law Report, members of the American Bar Association’s Cyberspace Law Committee recently recommended four steps companies should take to ensure "valid e-contract formation":

  • The user must have adequate notice that the proposed terms exist.
  • The user must have a meaningful opportunity to review the terms.
  • The user must have adequate notice that taking a specified, optional action manifests assent to the terms.
  • The user must, in fact, take that action.

We note that the Douglas decision involved a company that had contracts with customers for the sale of goods or services other than through their Web site. It does not apply to the myriad online situations where a company has not entered into agreements with casual visitors to its Web site.

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