Things are not looking good for Zappos. You have probably heard that the company suffered from a massive data security breach affecting 24 million consumers. To make matters worse, it looks like the company has a lot more on their hands . . . plaintiff lawyers. A court recently struck down Zappos’s Terms of Use agreement which was in part, intended to protect the company against class action lawsuits.

A 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. Through a Terms of Use agreement, users agree to certain contractual obligations important to protecting your company. Learn more about best practices for your terms of use. 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). Most recently, these arbitration clauses have become increasingly enforceable and have deterred many class action suits. Learn more about how arbitration clauses can avoid class action lawsuits.

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#1 Users Must Actually Agree To Your Terms of Use

In order for your terms of use to be upheld, the user must actually “agree” to the Terms of Use. This is 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.

#2 Courts Do Not Like Unilateral Amendment Clauses

The Zappos terms of use also allows the company to amend the the terms of use at any time. This isn’t as much a concern for an e-commerce site, where the user is signing up to a new agreement every time they enter into a new transaction, but for sites that provide continued services, it gets a bit more complicated. In the later case, it sounds like the court is suggesting that services must have users agree to the new terms of use each time it is amended (i.e. users agree upon logging in following a terms of use update). There is a substantial amount of grey area here as the line between e-commerce and continued service is constantly fading.

With no arbitration clause in place, users will be able to join into class action suits against Zappos. With 24 million users affected this will turn out to be an expensive baffle. 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 take lightly.

About Author Matt Faustman


Matt is the co-founder and CEO at UpCounsel. Matt believes in the power of online platforms to change antiquated ways of life and founded UpCounsel to make legal services efficiently accessible. He is responsible for our overall vision and growth of the UpCounsel platform. Before founding UpCounsel, Matt practiced as a startup and business attorney.

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