When you sign up for an online service do you read the terms and conditions? Few people do, not even the lawyers that are hired to write these things. While online agreements are ridiculed for their length and complexity they are important to the online service companies – companies like Uber, Airbnb and countless others that have to deal with the risk of customer lawsuits. Companies use online agreements to protect themselves in a variety of ways – against jury trials (often by requiring arbitration), to establish the location where customer lawsuits must be filed (often the merchant’s home state), and to limit damages customers can recover.
The strange reality is that when a customer challenges the enforceability of an online agreement the courts have to disregard the fact that the customer likely wouldn’t have read the agreement no matter how it was presented. When was the last time you read the terms and conditions when registering for a service on your smartphone? If you’re like most people, never.
Assume that you were signing up for Uber on your smartphone, and after navigating through two screens where you entered your contact info and created a password you were presented with this third, final screen (click on the image for clarity):
These factors made a big difference to the Massachusetts Supreme Judicial Court when it was presented with the question whether Uber’s online agreement formed an enforceable contract. On these facts the SJC held that no contract had been formed.
The case was brought by Christopher Kauders, a blind man who alleges that on three occasions Uber drivers discriminated by refusing to pick him up because he was accompanied by a seeing eye dog, in violation of a Massachusetts statute that protects handicapped people with dog guides. Uber claimed that during the online registration process Mr. Lauder had agreed to its terms and conditions, one of which required him to resolve any claim by arbitration, another of which absolved Uber of any monetary damages.
After a byzantine procedural history the case eventually found its way to the SJC, which held that the framework for analyzing issues of online contract formation requires a two-part test: first, was there reasonable notice of the terms, and second, did the customer provide a reasonable manifestation of assent to those terms?
While this may sound straightforward (although I doubt it), in a case like this the devil is in the details – or, as the court put it, “the trick here is to know how to apply these general principles to newer forms of contracting over the Internet.”
What is “reasonable notice”? The court explained: “In examining the interface, we evaluate the clarity and simplicity of the communication of the terms. Does the interface require the user to open the terms or make them readily available? How many steps must be taken to access the terms and conditions, and how clear and extensive is the process to access the terms?”
What is a “reasonable manifestation of assent”? According to the court, “when considering whether the user assented to the terms of the online agreement, we consider the specific actions required to manifest assent.” Not surprisingly, the court noted that clickwrap agreements are the clearest manifestation of assent.
What about an online agreement such as Uber’s, which is not a clickwrap agreement, but rather a “browsewrap”? To analyze Uber’s agreement – and ultimately reach the conclusion that a contract had not been formed – the court applied a “totality of the circumstances” test. Among the factors the court considered were –
– The nature of the online transaction
– The scope of the agreement
– The interface design
Applying this criteria the court found that factors 2 and 3 favored a finding that Uber’s online contract was not enforceable – the agreement was broad, and the interface design was inadequate to provide reasonable notice that a new subscriber was entering into a contract.
What does this mean for online service providers?
First, online service providers should pay close attention to this case, whether they are based in Massachusetts or not, since almost any online provider could be sued in Massachusetts based on principles of personal jurisdiction. As a practical matter, the most conservative state sets the “lowest common denominator” standard for online providers nationwide. After the Kauders case, and at least for the moment, Massachusetts is that state.
Second, “browsewrap” agreements are now a thing of the past. No online provider wants to go through what Uber went through in this case – having their online contracting process and content picked apart in minute detail and argued over by lawyers and judges who have shown an inexhaustible capacity to do just this. While allowing users to register via a streamlined process that doesn’t force them to scroll through terms and conditions may be desirable, it’s not worth the risk. Clickwrap agreements are now the standard for every online company.
Third, even a clickwrap agreement is not totally immune from challenge. Online providers need to be careful to structure the registration process so that the user cannot register without being presented with the online agreement in a standard font size, being required to scroll through the agreement to the bottom of the screen, and to then either check a box indicating assent (preferable) or click a link stating “I Agree.”
Postscript for lawyers and other legal beagles: Uber faced an uphill fight in this case. In 2018 the same online agreement was at issue before the First Circuit, which held that the agreement was not enforceable. Cullinane v. Uber Techs., Inc. (1st Cir. 2018). See If Everything Is Conspicuous, Nothing Is Conspicuous: Forming an Online Contract in the First Circuit (July 2, 2018). While a First Circuit decision on a matter of state contract law is not binding on the SJC, it is highly persuasive. During oral argument before the SJC Uber’s lawyer described the First Circuit’s Cullinane decision as an “outlier.” The SJC didn’t buy that, and Uber now faces trial in a Massachusetts state court.
Kauders v. Uber Technologies, Inc. (Jan 4, 2021)
Additional posts on this topic:
Sloppy Online Agreements Costs Plaintiff Its Breach of Contract and CFAA Claims (Nov. 16, 2012)
“Yet Another Hierarchical Officious Oracle” Is Unable to Create an Enforceable Online Agreement (May 14, 2013)
Ninth Circuit Finds Barnes & Noble’s “Browsewrap” Unenforceable (Sept. 12, 2014)
The Copyright Workaround and Reputation Management: Small Justice v. Ripoff Report (Jan. 8, 2018)
[Disclosure: Kevin Peters and Jennifer Henricks, attorneys at Gesmer Updegrove LLP, represented Dr. Hlatky in the case discussed below]
Contact law is complicated. It dates back centuries, and is mostly common law, meaning it evolves case-by-case in judicial opinions. There are thousands of cases, involving thousands of fact patterns, and it seems like there’s always room for one more variation. This was the case in the Massachusetts Supreme Judicial Court’s (SJC) April 28, 2020 decision in Hlatky v. Steward Health Care System LLC, where the plaintiff was awarded $10.2 million for damage to an asset — a cancer research lab — that she didn’t own.
The Facts. Dr. Lynn Hlatky is a prominent cancer researcher. She has over three decades of research experience, including at one time a faculty position in the radiation and oncology department at Harvard Medical School. Her research targets the development of a cancer vaccine. In 2010 Dr. Hlatky had been the principal researcher of a cancer research lab at Boston’s St. Elizabeth’s Hospital for five years. As 2010 began, little could she imagine the difficulties she would soon face. That year Steward Health Care System LLC (Steward), a for-profit hospital chain, acquired St. Elizabeth’s.
To comply with federal law regulating research grants the assets of Dr. Hlatky’s cancer lab were moved into a non-profit corporation, controlled by Steward, which would administer grant money and the lab’s operations. This is a common “business model” in federally grant-funded research labs. Dr. Hlatky continued as the lab’s principal researcher, and Steward entered into a three year contract with her committing, inter alia, to pay her an annual salary and to “continue to provide support and suitable office space” for the lab (the “support clause”). Dr. Hlatky anticipated that if this agreement was not renewed or extended at the end of three years, she would move her program (lab equipment, grants and cell samples) to another institution, a process that is not unusual in the world of grant-supported medical research.
Shortcutting a complicated story, Steward withdrew its support before the end of the three year period and left the non-profit and its assets in the hands of three unqualified individuals who drove the non-profit into bankruptcy. The lab equipment was sold and tens of thousands of cell samples were incinerated. For the gruesome details and machinations (what lawyers euphemistically call “bad facts”) behind these events see Death of a Cancer Lab in the April 2017 issue of Commonwealth Magazine.
Dr. Hlatky claimed breach of contract by Steward, and the case went to trial in Suffolk Superior Court in Boston. The jury found for Dr. Hlatky, and after the dust settled on post-trial motions she was awarded $10.2 million, almost all of which was the amount Hlatky testified it would cost her to reestablish the cancer research lab. Steward appealed, arguing that Dr. Hlatky was not entitled to the damages suffered by the lab. At most, she was entitled to her personal financial losses, such as lost compensation. An award of $10 million to Dr. Hlatky personally, Steward argued, would be a windfall to her. And, it asked, what would present her from using the money for her own personal interest, for example to fund her retirement? Dr. Hlatky responded that she had an individual, legally protected interest in continuing her life’s scientific work, which Steward’s breach had destroyed. The “support clause” referenced above spelled a loss for Steward before the jury, and then again before the SJC, which stated:
It is important to recognize that the contract that Hlatky entered into with Steward was not merely an employment contract; Steward committed not only to employ Hlatky as the director of the [cancer center], . . . but also to “provide support” to the [cancer center], which it envisioned would evolve, under Hlatky’s leadership, “into an internationally competitive program.” The structure and terms of the contract, which Steward, a sophisticated entity, negotiated, involved more than contracting for Hlatky’s labor.. . . The jury determined that Steward committed a breach of the contract by withdrawing support for the [center], and the judge further found that this breach foreseeably resulted in the destruction of Hlatky’s life’s work.
So while damages principles are difficult to apply in this case, the [trial court] judge did not err in concluding that Hlatky personally suffered harm from the foreseeable destruction of her life’s work. Nor did she err in concluding that the jury reasonably could have sought to restore Hlatky to the position she would have been in if Steward had complied with its obligations under the contract by awarding her the amount of money needed to reestablish a functioning cancer laboratory — which, based on Hlatky’s testimony, the judge determined to be $10 million.
Having decided this issue in favor of Dr. Hlatky, the SJC decision then took an odd turn, from a legal perspective. Six judges sat on the appeal (a seventh was recused), and the six split over how Dr. Hlatky should be awarded the money. Three justices voted to require the trial judge to fashion a form of judgment to ensure that the money in fact went toward a new cancer lab – presumably a trust that limited the use of the money for this purpose.
However, the remaining three judges disagreed with this restriction. Justice Barbara Lenk, writing for those judges, stated: “whether Dr. Hlatky wishes to start again, whether she even could start again after so much time has passed and her faculty position has been lost, whether she wishes to use the money to fund different research or others’ research in the same field, or whether she wants to hike the Appalachian trail — these matters simply are not our concern. . . . Hlatky should receive the money damages the jury awarded, just as she would in any other case of breach of an employment contract.” Because the trial judge had entered damages for Dr. Hlatky without restriction, and because the court split 3-3 on the restriction/no restriction issue, the trial court’s decision stands – she will receive this money without restriction. This means Dr. Hlatky won’t have to suffer the indignities of a trustee scrutinizing her expenditures, not to mention a trustee’s fees and bureaucratic complications in obtaining federal grant funding that could result from use of a trust.
Implications. To say that this case was unusual is an understatement. The SJC itself noted that out of the thousands of cases applying contract law nation-wide, only one case came close to the unique circumstances of this case. It’s difficult to know whether this case represents the origin of a new branch of contract law in Massachusetts, or whether, based on its unusual facts, it’s a one-off, never to be repeated. However, we can make a couple of general observations. At the very least, organizations that administer grant-funded research labs — especially those in Massachusetts — will review their current contracts to see if they are vulnerable in the way that Steward was in this case. This may lead to the renegotiation of existing contracts to block potential damages, or to ensure that principal investigators such as Dr. Hlatky are employees of the non-profit administering their grant money, and have no direct contractual relationship with a deep-pocketed parent company (in this case Steward).
And, of course, well-represented research institutions won’t follow the “split duty” approach that Steward used here, where there is a fiduciary duty toward the non-profit that owns the grant-funded assets and a separate employment contract with the principal researcher. Whether the case will have consequences outside the realm of research grants is uncertain. Lawyers will take every opportunity to push the envelope on behalf of their clients, and the “destruction of life’s work” theory could provide the basis for damages theories in contexts far removed from the Hlatky case.
A last word on damages.While the base damages in the case are $10.2 million, Dr. Hlatky will receive a judgment for substantially more than that. Under Massachusetts law interest for breach of contract runs at 12% per year from the filing of the complaint in February 2014. As of February 2020 six years has passed, adding 72% in interest to the judgment, or $7,344,000, for a total of $17,544,000, plus 1/365 of $10.2 million per day after that date, until the judgment is paid. Hlatky v. Steward Health Care Systems, LLC (Mass. April 28, 2020)
Genius Media Group Inc., the owner of the music lyric site genius.com has sued Google and LyricFind for “scraping” lyrics from the genius.com website. Two aspects of this new case (only a complaint so far) are interesting – the way that Genius established that Google was scraping, which is quite clever, and the basis for Genius’s legal claim which appears to be quite weak.
Assume you have a work that you want to protect from copying but that you can’t copyright. You might be unable to use copyright law because it’s a database or compilation that lacks sufficient originality. Or, perhaps you’ve licensed the components of the database and you don’t own the copyright in them.
This is the position Genius is in. Genius publishes song lyrics online. Many of these lyrics are crowd-sourced by the Genius user community. However, Genius doesn’t own the lyrics – it licenses the right to publish them from authors and publishers. So it owns a compilation of lyrics, but can’t assert a copyright in that content.
Since Genius has no copyright ownership, it tries to use contract law to prevent copying. It’s website contains the following terms of service:
“you agree not to modify, copy, frame, scrape, rent, lease, loan, sell, distribute or create derivative works based on the Service or the Genius Content, . . . In connection with your use of the Service you shall not engage in or use any data mining, robots, scraping or similar data gathering or extraction methods.”
A couple of years ago Genius noticed that some song lyrics published in Google “Information Boxes” were suspiciously similar to Genius lyrics based on punctuation, contractions and line breaks. However, Genius couldn’t be sure that Google copied lyrics from its site and hadn’t acquired them somewhere else. This was complicated by Genius’s knowledge that Google licensed song lyrics from third parties, specifically LyricFind. If Google’s lyrics were scraped or copied from Genius in violation of the terms of service who was responsible, Google or LyricFind?
Here’s where the lawsuit gets interesting.
To determine whether the Genius song lyrics were being copied Genius laid two traps for Google and LyricFind. First, Genius embedded a pattern of straight and curly apostrophes in song lyrics, as shown at the right. Genius calls this “Watermark #1.” The “dot-dash” pattern formed by the apostrophes spelled out “red handed” in Morse code. Google and LyricFind were unlikely to notice this small deviation, and it would allow Genius to see if its lyrics were being copied. Using Watermark #1, Genius concluded that Google was using lyrics copied from genius.com, and that in some instances these lyrics were sourced from LyricFind. In other words, Google and LyricFind had copied and pasted the lyrics from genius.com either manually or using an automated scraper.
Genius complained to Google, and disclosed Watermark #1 to Google to prove that Google was copying. However, according to Genius this was to no effect – Google continued to publish lyrics copied from genius.com.
Genius then laid a second trap based on a spacing pattern (Watermark #2). Genius’s complaint explains this as follows:
[Genius replaced] the 15th, 16th, 19th, and 25th spaces of each song’s lyrics with a special whitespace character called a “four-per-em space.” This character (U+2005) looks identical to the normal “space” character (U+0020), but can be differentiated via Unicode character codes readable by a computer. If one ignores the first 14 spaces of a song’s lyrics, then interprets the four-per-em spaces as dashes, and regular spaces as dots, the sequence spells out the word “GENIUS” in Morse code . . ..
Again, it was extremely unlikely that Google or LyricFind would notice this if they were copying from genius.com, but Genius would be able to identify copying.
To make a long and somewhat complicated story short (again, see the complaint), based on its analysis of song lyrics published by LyricFind and Google, Genius concluded that both companies were scraping lyrics from the Genius website, although LyricFind appears to be the primary offender.
Case closed? Not yet – this only takes us to the second question in this case: did Google or LyricFind violate the law? Remember, Genius has no copyright in the lyrics.
The complaint is vague on this point. It states:
Per the Genius Terms of Service, “[b]y accessing or using the Service, you signify that you have read, understand and agree to be bound by the terms of service and conditions set forth below. . . . Registration may not be required to view content on the Service, but unregistered Users are bound by these Terms.
Based on this it appears that Genius is unable to allege that Google or LyricFind entered into a “click-wrap” agreement that would have bound them to these terms of service.
The problem with this is that Genius may have a difficult time establishing that Google or LyricFind agreed to be bound by these terms and conditions.
Admittedly, the law of online contract formation is a mess. Companies regularly fail to take proper steps to create enforceable online contracts, and the court decisions (which are usually based on state contract law) are confusing and non-uniform. I’ve written about the difficulties online companies have creating enforceable agreements many times.
And, cases are highly fact specific – courts carefully dissect and analyze web interfaces to determine whether users are put on notice of the website’s terms and have agreed to them. However, in this case Genius appears to be at the weak end of the law. Users are not required to enter into a click-wrap agreement to access lyrics, and the terms quoted above are accessible only via an inconspicuous link at the bottom of the screens. Nor are users warned that by using the site they are bound by the terms and conditions accessible via that link.
This case has a lot of history, much of which is discussed by Mike Masnick on TechDirt here. Bottom line, Genius has been complaining to Google about lyric scraping for over two years, and apparently it’s been unable to get a satisfactory response from Google. Maybe this complaint is just Genius’s way of raising the volume on that process. And since it appears that Google sources/licenses almost all of its lyrics from LyricFind, Google will look to LyricFind to solve the problem and pay any (unlikely) damages.
It’s also worth noting (in passing) that Genius alleges that Google’s display of lyrics in Google Information Boxes ahead of genius.com links in response to search queries (greatly reducing the number of click-throughs to genius.com) is unfair competition under New York common law. However, this allegation rests on Genius’s ability to establish that Google breached a contract with Genius which, as discussed above, appears unlikely.
Update: This case was removed to federal court and was dismissed in August 2020. All of Genius’s claim were preempted by the Copyright Act. This ruling was affirmed by the Second Circuit in March 2022.
As we get older many of us own Individual Retirement Accounts (IRAs). These can hold money contributed directly during our working lives, or through a “rollover” from a 401K plan when we retire from a job. Either way, the money in IRA accounts (which in the U.S. totals more than $2.5 trillion), is held by financial institutions (such as Fidelity, Vanguard and Schwab) who act as custodians for this money. We rely on these custodians to transfer this money to our designated beneficiaries upon our death.
A recent case decided by the Massachusetts Supreme Judicial Court, UBS v. Aliberti, shows how this after-death transfer can go awry, and how difficult it can be to punish an IRA custodian that acts improperly or negligently.
The facts are convoluted, but in essence are as follows.
UBS acted as custodian for a large IRA owned by Patrick Kenney. After Kenney died in 2013 his friend, Craig Gillespie, sent UBS a letter informing UBS that Gillespie had a claim on the money in the IRA. UBS may have been confused (at least at first), since Kenney had attempted to make Gillespie a beneficiary to two other much smaller IRAs. However, it should have quickly become apparent to UBS that Gillespie had no claim on the money in the large IRA, and the money should have been promptly transferred to the sole proper beneficiary, Kenney’s longtime girlfriend, Donna Aliberti.
A family conflict may have played some part in this situation. The UBS financial advisor who had originally assisted Patrick Kenney in setting up his IRAs and who was responsible for transferring the IRA to Donna Aliberti was Patrick Kenney’s one-time sister-in-law — Margaret Kenny. When Margaret Kenny first received Donna Aliberti’s request for disbursement of the IRAs she responded by attacking Donna Aliberti as “”a whore” and “the . . . worst piece of filth I have ever encountered.”
Regardless of motive, there then ensued what the Massachusetts Supreme Judicial Court (the SJC) described as one and one-half years of “bureaucratic indifference or incompetence and hypersensitivity to risk exposure” by UBS. After 18 months UBS added insult to injury by filing a lawsuit asking the court to determine ownership of the IRA.
Ms. Aliberti counterclaimed for breach of fiduciary duty and violation of M.G.L. c. 93A, the Massachusetts “little FTC act,” which allows successful plaintiffs to recover up to three times their actual damages plus attorney’s fees.
Finally, after two and one-half years, UBS transferred the IRA to Ms. Aliberti. However, Mr. Kenney’s girlfriend was not appeased, and she refused to dismiss her case against UBS. As improbable as it seems, her case ultimately ended up before the highest appeals court in Massachusetts.
The SJC was faced with two legal issues: did UBS have a fiduciary duty to Ms. Aliberti, and did Ms. Aliberti have a valid claim for violation of 93A?
The court concluded that the answer to the first question was no. The relationship between UBS and Ms. Aliberti was merely a “retail consumer relationship governed by contract.” The fact that the UBS custodial agreement expressly disclaimed a fiduciary relationship was a factor in the court’s conclusion on this issue. In fact, although the court was not called upon to decide it in this case, based on the court’s reasoning UBS (or any other IRA custodian that uses a similar contract), would have a strong argument that it never owed Mr. Kenney a fiduciary duty.
However, Ms. Aliberti was not out-of-court yet. Surprisingly, the court held that UBS could be liable for a violation of 93A, and it remanded the case for a trial on this issue. Surprising, because Chapter 93A is alleged in almost every civil lawsuit in Massachusetts, but it is rarely successful. It hits the mark in cases involving fraud or deception, but infrequently where (as here), the facts suggest negligence or incompetence in the performance of a contract.
At the heart of Chapter 93A is its prohibition of “unfair or deceptive acts or practices.” However, the statute provides no definition of what constitutes an unlawful unfair or deceptive act. The SJC has held that conduct is “unfair” in violation of Chapter 93A if it lies “within at least the penumbra of some common-law, statutory, or other established concept of unfairness;… whether it is immoral, unethical, oppressive, or unscrupulous; [and] whether it causes substantial injury to consumers …” (link) UBS argued that it’s conduct fell outside this definition – rather Ms. Aliberti’s 93A claim amounted to nothing more than an “‘unsatisfactory experience’ in the beneficiary payment process.” (link) The Superior Court judge that heard the case had agreed and dismissed the case.
The SJC reversed, holding that UBS’s conduct may have met the standard for unfairness. UBS dragged its feet in informing Ms. Aliberti that it was freezing the proceeds, willfully failed to communicate with her, forced her to retain counsel, filed an implausible lawsuit, and held back funds to which Gillepsie (Mr. Kenney’s friend), had no valid claim, all of which may rise to the level of “unfairness” under 93A. The case will now go back to the Massachusetts trial court for trial , but the SJC has sent a message that it views UBS’s conduct as violative of Chapter 93A.
More broadly, the case may have expanded the scope of chapter 93A liability where consumers are the subject of bureaucratic indifference and ill treatment at the hands of large corporations like UBS. As UBS argued (unsuccessfully) “allowing someone who merely had an ‘unsatisfactory experience’ to pursue a Chapter 93A claim would establish a dangerous precedent and flood the courts of Massachusetts with disgruntled customers (or, in this case, non-customers) complaining of bad customer service experiences in the guise of ‘unfair or deceptive’ acts or practices.” (link)
While the SJC didn’t go so far as to create a new legal test for bad customer service, it did seem to open the door to 93A claims based on extreme customer mistreatment. The implication of its decision is that this is a fact-based inquiry, and to some extent it is in the eye of the beholder. Here, there were two beholders – the Superior Court judge (who dismissed the 93A claim), and the SJC, which reinstated it. Going forward, I would expect Superior Court judges to take a more pro-consumer look at 93A claims like the one in this case, and perhaps for corporations to be a bit less bureaucratically indifferent to avoid the risk of 93A liability.
UBS Financial Services, Inc. v. Aliberti, 483 Mass. 396 (2019)
Update: the case settled out of court in December 2021
Online agreements are nothing new to the Internet but companies are still struggling to implement them in a way that will assure their enforceability.
The latest company to fail this test is Uber Technologies. A June 2018 decision issued by the First Circuit Court of Appeals in Boston held an online agreement presented to the users of the Uber smartphone app in 2012 and early 2013 was not sufficiently conspicuous to be enforceable. The terms and conditions stated that users of the app could not participate in a class action and were required to resolve any dispute with Uber by means of binding arbitration. Because the First Circuit held that this agreement is not enforceable the plaintiffs in this case—who claim that Uber engaged in unfair and deceptive pricing —will now be free to proceed with a class action against Uber.
In deciding this case the First Circuit applied Massachusetts contract law, specifically the 2013 decision of the Massachusetts Appeals Court in Ajemian v. Yahoo!, Inc.
In Ajemian the state court established the following two-part test for the enforceability of an online agreement: the contract terms must (1) be “reasonably communicated” to the user and (2) accepted by the user.
The hyperlink appears at the bottom of the left screen, and above the phone numbers in the right screen. Users of the app were not required to view the terms and agree to them, and therefore Uber’s agreement may best be viewed as a “browsewrap” agreement, where assent is given merely by using the site.*
*In contrast, a “clickwrap” agreement requires the user to click “I agree,” but not necessarily view the contract. A “scrollwrap” requires users to physically scroll through the agreement and click on a separate “I agree” button in order to assent to the terms and conditions of the website.
This was not enough for the First Circuit, which found that the hyperlink was not sufficiently conspicuous to form a contract between Uber and the users of its app.
This case is yet another warning to online companies to be careful when designing online agreements. This can be challenging, and as this case illustrates it is even more difficult when the user must agree to terms and conditions via the interface of a smartphone app.
It’s in the interest of the company designing an app to make registration as quick and easy as possible, and in this case Uber made the decision not to require prospective users to click any screen buttons to accept its terms or access and view the terms before completing the registration process. Instead they designed a smartphone screen that, at least in the eyes of the First Circuit, was inadequate to communicate the existence of these terms to users.
While this case was decided under Massachusetts law and courts in other states might view this issue differently (indeed, might even have reached a different outcome in this case), the decision is a warning that while browsewraps may be convenient they are vulnerable to enforcement challenges, and companies must be particularly careful when attempting to implement them on smartphones.
Cullinane v. Uber Technologies, Inc. (1st Cir. June 25, 2018).
The first time I heard of a “buy/sell agreement” was around 1970 when I was 19 – just a few years before I fell in love with Steely Dan’s music.
Back then my father owned a textile business in Haverhill, Massachusetts with a 50-50 “partner,” and he explained that the business had insurance policies on both of their lives. If either partner died, the insurance would fund the purchase of the deceased partner’s shares, and the surviving partner would end up owning 100% of the company.
This, he explained was a “buy/sell agreement” – the deceased partner’s estate was bound to sell, and the surviving partner’s estate was bound to buy.
Fortunately, neither my father or or his partner ever had to exercise rights under this agreement – my father retired in 1981, and sold his half of the business to his partner.
It turns out that at around the same time that I first heard of a buy/sell agreement Donald Fagan and Walter Becker, the creative geniuses behind Steely Dan, were doing something similar.
In 1972 Fagan, Becker and several other band members, entered into a buy/sell agreement providing that upon the death of any owner of shares in Steely Dan, Inc., the company would buy back that member’s shares. A classic, simple buy/sell agreement that my father would have recognized. The most significant difference is that Steely Dan didn’t fund the purchase of the deceased member’s shares with insurance – instead the shares would be purchased based on the “book value” of the company, which would be determined by the company’s accountants.
According to Fagen this agreement has remained in effect and unaltered for 45 years, and by 2017 Fagen and Becker were the only two remaining shareholders in Steely Dan. If true, when Walter Becker died in October 2017 his heirs became obligated to sell Becker’s shares back to Steely Dan, leaving Fagen the sole owner of Steely Dan, Inc.
However, according to a lawsuit filed by Fagen this month (November 2017), Becker’s heirs have refused to honor the buy/sell agreement, claiming it is no longer in effect. Fagen’s lawsuit attempts to force them to sell Becker’s shares back to Steely Dan.
What to make of all of this?
Forty-five years is a long time, and perhaps Becker’s estate has some basis for claiming that the buy/sell agreement was terminated or superseded. At this point we don’t know their side of the story. But given the existence of this agreement (which is not notarized but appears authentic), Becker’s estate faces an uphill fight.
If the agreement is enforceable, what can Becker’s estate expect to receive for Becker’s shares in Steely Dan, Inc.? Book value is simply assets minus liabilities, and Fagan’s complaint doesn’t disclose what Steely Dan’s assets and liabilities are. However, it’s worth noting that the agreement excludes from book value the “good will” of Steely Dan, which if included would have complicated and increased the determination of book value – the monetary value of “good will” can be difficult to establish, and by excluding this the members of Steely Dan likely were trying to keep things simple.
The agreement also doesn’t make any reference to who owns the most valuable assets associated with Steely Dan – the copyrights in the band’s compositions and the band’s recording contracts. It seems likely that revenues from these sources go directly to Becker and Fagen as composers and performers, but at this point we don’t know. If this is in fact the case, the only assets in Steely Dan, Inc. may be the name of the band (and therefore the right to perform in concert under the name), the domain name “steelydan.com” (which is referenced as an asset in the complaint) and the right to make commercial use of the “Steely Dan” trademark.
Most likely this case will settle out of court. If it doesn’t, we may learn more about the legal and business relationship between these musicians.
Fagen v. Estate of Walter Becker (buy/sell attached)
Update: Becker family response
I’ve often advised vendor-clients that one of the best ways to protect themselves is to include an acceptance clause in their agreements. This can be accomplished either through an explicit acceptance clause or a short warranty period, which can function as a de facto acceptance clause. For some reason, many customers seem to forget about the acceptance clause, giving the vendor a strong defense to a claim of breach.
This is what happened in Samia v. MRI Software, decided by Massachusetts federal district court judge Nathaniel Gorton on October 9, 2014.
Samia purchased computer software, consulting and technical support from MRI. The License and Services Agreement provided for a 30 day warranty period, during which Samia could notify MRI of any non-conformities and trigger a “repair-and-replacement” clause. This was, in effect, a 30 day acceptance period – Samia had 30 days to vet the software and notify MRI of any defects. This was the sole and exclusive remedy, and all other remedies were disclaimed.
The contract contained a separate provision addressing defects related to custom work authorizations. Here, Samia had a 30 day acceptance period during which it could “test any project elements … and notify [MRI] of all potential deficiencies relative to the applicable specification for such work.”
To make a long story short, Samia claimed to have found non-conformities and deficiencies, but it failed to given written notice to MRI during the 30 day period following delivery. On this basis, the court allowed MRI’s motion for summary judgment on most of its claims, leaving alive only a claim of negligent misrepresentation based on oral promises allegedly made to Samia. However, little is left of Samia’s case at this point.
If you are a vendor, do your best to include an acceptance clause (or a short warranty period) in your agreements. If you are a customer, challenge this, but if you are forced to accept it, be sure to rigorously test any deliveries in a timely manner, to avoid the defense that defeated Samia in this case.
Samia Companies LLC v. MRI Software LLC (D. Mass. Oct. 9, 2014)
Online companies have often found it challenging to create enforceble terms of service (“TOS”), and the courts aren’t making it any easier. Perhaps the courts have concluded that, now that the Internet is an established commercial medium, they are not going to cut vendors any slack.
The latest decision illustrating this is the Ninth Circuit’s August 18, 2014 holding in Nguyen v. Barnes & Noble, holding that Barnes and Noble’s browsewrap agreement was not enforeable.
A website “browsewrap” agreement is where the online terms are posted on a site, typically via a link on the site’s homepage. By contrast, a “clickwrap” requires the website user to take some affirmative action before engaging in a transaction (such as an online purchase). Typically this amounts to clicking a box on the site indicating that the user agrees to the site’s terms and conditions.
Where the user is not asked to “check the box” and the website relies on the posting alone, things can get messy. Barnes & Noble tried to impose an arbitration clause on a consumer based on a browsewrap, but the Ninth Circuit held that B&N’s browsewrap was not enforceable. Here, as is often true in these cases, the issue came down to vague factors such as where the terms were presented, and whether “a reasonably prudent user” would be put on notice of the terms. In this case, B&N didn’t do enough:
It is far from clear what constitutes a “conspicuous hyperlink” that would satisfy the test in this decision, but online business should stick with clickwrap agreements, rather than push the envelope with browsewraps. For a similar case that I wrote about in 2012, see Online Agreements – Easy To Get Right, Easy To Get Wrong.
Nguyen v. Barnes Noble (9th Cir. Aug. 18, 2014).
A lot of non-disclosure agreements (NDAs) provide that if one party gives the other a document and expects it to be treated as confidential, the document must be marked “confidential.” Or, if the confidential information is communicated orally, the party that wants to protect it must notify the receiving party in writing within a specified number of days. (“Hey, the stuff we told at our meeting on Monday relating to our fantastic new product idea? That’s all confidential under our NDA”).
This was the situation in Convolve, Inc. v. Compaq Computer, decided by the Court of Appeals for the Federal Circuit on July 1, 2013. The NDA at issue in that case provided that to trigger either party’s confidentiality obligations “the disclosed information must be: (1) marked as confidential at the time of disclosure; or (2) unmarked, but treated as confidential at the time of disclosure, and later designated confidential in a written memorandum summarizing and identifying the confidential information.”
Big mistake. People sign agreements like this and a year later they have completely forgotten that they need to follow them. Or, employees come and go, the NDA is buried away someplace, and new employees are blithely unaware that they need to follow the terms of the NDA.
That’s what happened to Convolve. It had trade secrets relating to hard disk drive technology. It disclosed the secrets at a meeting, but it failed to follow-up and designate it confidential under the NDA. Its argument that the parties knew the information was confidential (even though it wasn’t designated), went nowhere with the CAFC:
Convolve contends the district court erred when it found that Compaq failed to protect the confidentiality of certain information because it failed to designate it as such pursuant to its obligations under the NDAs. Convolve asserts that the parties understood that all of their mutual disclosures were confidential, notwithstanding the marking requirements in the NDAs. … Convolve … contends that the parties’ course of conduct did not require a follow-up letter. … The plain language of the NDA unambiguously requires that, for any oral or visual disclosures, Convolve was required to confirm in writing … that the information was confidential. … The intent of the parties, based on this language, is clear: for an oral or visual disclosure of information to be protected under the NDA, the disclosing party must provide a follow-up memorandum. … Convolve argues that, regardless of whether the confidentiality of the trade secrets was confirmed in writing, … the parties understood their mutual disclosures were confidential, notwithstanding the NDA strictures. … [However], the NDAs do not appear reasonably susceptible to the interpretation Convolve urges.
Don’t put provisions like this in your NDAs if you want to protect your trade secrets or confidential information. Include a provision that everything you give to your business partner is confidential, and keep your options open. If something isn’t confidential, no harm done. If you think it is and the recipient disagrees, let the recipient prove it in court, should that become necessary. Better overkill than underkill.
Earlier this year, on the eve of trial in Baker v. Goldman Sachs in federal district court in Boston, I published a blog post describing the facts behind this unusual case, which involved the acquisition of Dragon Systems by Lernout & Hauspie in a $600 million all-stock deal. Soon after the acquisition closed the market discovered that Lernout had fabricated its Asian sales figures. This was quickly followed by Lernout’s bankruptcy, which left Dragon (owned by the Bakers, husband and wife founders) holding worthless Lernout stock. (Baker v. Goldman Sachs – The Business Deal From Hell).
The acquisition was negotiated and concluded in the first half of 2000, just as the technology bubble was beginning to deflate.
After a lengthy trial the jury ruled in favor of Goldman Sachs on all issues except the claim that Goldman violated M.G.L. c. 93A, the Massachusetts statute that makes illegal “unfair or deceptive acts or practices.” Under Massachusetts law, that claim must be decided by the judge.
Now, Massachusetts federal district court judge Patti Saris has issued her decision on the Baker’s 93A claims, holding that Goldman Sachs did not violate 93A. This ruling is not a surprise; judges rarely find a violation of 93A when a jury rules against a plaintiff on the underlying claims, which in this case were negligence, breach of fiduciary duty and fraud.
However, her opinion is a fascinating look into how a transaction of this magnitude can go wrong. In addition, I read her opinion to imply that, in her view, the jury should have found Goldman Sachs negligent. Of course, there is no explanation for why the jury ruled against the Bakers – perhaps the Bakers were unsympathetic witnesses, or they drew a hostile jury. Perhaps the jury failed to understand the case, or the Baker’s case was poorly tried. These are the risks of the jury system–you may be convinced you have a great case and the jury can still rule against you. And, to rub salt in your wounds, you will never know why.
But, the case shows what goes on behind the scenes in a transaction of this sort, especially when your investment banker is Goldman Sachs, which was paid $5 million for its services to Dragon Systems. Here are a few points from Judge Saris’ opinion that caught my attention:
The Goldman Sachs Investment Banking Team Was Very Young. The team was comprised of three people. The leader of the team was only 31 years old. The second team member was 25 years old and was job hunting at the time. The third investment banker was a 21 year old recent college graduate. No senior Goldman Sachs investment banker did any work on the transaction.
=> The fact that Dragon allowed a 31 year old Goldman employee to be the leader on a $600 million deal of this importance to Dragon’s owners is a mystery. This brings to mind the saying, “young doctors, old lawyers.” For this case, I would change that to read, “young doctors, old lawyers and old investment bankers.” A degree from a prestigious business school does not equal experience.
Dragon Made a Critical Decision Without the Involvement of Its Investment Bankers. The sale of Dragon to Lernout initially had a large cash component – 50% cash/50% Lernout stock. But, this changed at a meeting at which Goldman Sachs was not present. Judge Saris wrote that “Janet Baker chose to pursue an all-stock transaction with [Lernout] for $580 million. By the end of the meeting, Janet Baker and [Lernout] signed a handwritten agreement setting forth a fixed exchange ratio for an all-stock acquisition of Dragon. … Janet Baker made this napkin agreement without consulting Goldman.”
=> The fact that the Bakers modified the deal without consulting Goldman Sachs suggests a lack of business sophistication on the part of the Bakers. A “napkin agreement” to sell your company for 100% stock, without including your investment banker in the decision? This was a huge decision, and by the time it was made it was too late for Goldman Sachs to advise against it. If you’re going to pay your New York investment bankers $5 million, keep them in the loop.
Goldman Sachs C.E.O. Lloyd Blankfein and C.O.O. Gary Cohn, in the boardroom of Goldman’s headquarters, in New York City
The Investment Bankers Are Not Your Friend, So Get Their Opinions and Assurances in Writing. Judge Saris wrote that “Goldman was dissatisfied with respect to Lernout’s answers on many due diligence questions up until the last moment. The transaction would likely not have gone forward if Goldman had voiced its ongoing concerns about financial due diligence. In his deposition, Wayner said he did not disclose any concerns he had about due diligence at the March 27 meeting because ‘the client did not ask.’”
=> Wow. Wayner was the senior Goldman team member. His testimony that he was concerned about due diligence but didn’t voice his concerns because “the client did not ask” shows how careful a client must be in dealing with its investment banker. When you are about to sell your company for $600 million in stock you should be waking up in the middle of the night worrying. And, before you fall back to sleep you should be emailing your investment banker and asking, “is there anything about this deal you’re concerned about that we should know before we jump?” The fact that an investment banker as prestigious, expensive and (supposedly) competent as Goldman Sachs took a “don’t ask, don’t tell” position toward its client says a lot about where investment banker interests lie. Could their $5 million fee on the sale of the company been in the back of Wayner’s mind when he weighed whether to tell the Bakers about his concerns?
Don’t Assume the Investment Banker is Creating a File You Can Use to Sue The If Things Go Wrong. Judge Saris wrote that Goldman Sachs has a “written policy encouraging its mergers and acquisitions department not to safeguard their written notes. The policy tells investment bankers to keep ‘[n]otes supporting due diligence,’ to throw out ‘[n]otes to self-citing unresolved problems,’ and ‘[w]hen in doubt, throw them out,’ unless litigation has commenced.”
=> In case you had any doubts, that’s what’s going on behind the scenes at Goldman Sachs, and probably other New York investment bankers. If you make a note to yourself regarding an unresolved problem in an M&A transaction, throw it out. Why? So it can’t be used in litigation against Goldman Sachs if there is a legal problem later.
Near the end of her lengthy opinion Judge Saris observes that “The reasons why small startup companies like Dragon go to a place like Goldman to assist with hatching their golden eggs is because they don’t have their own expertise to analyze revenue projections by asking tough questions to potential merger partners.” Reading between the lines of her opinion, one could conclude that Judge Saris felts that Goldman Sachs did not provide that expertise to Dragon. However, this decision was the province of the jury, and the jury ruled for Goldman Sachs on all of Dragon’s legal claims. Judge Saris’ ruling on Dragon’s Chapter 93A claims was Dragon’s last chance, and she concluded that Goldman Sachs did not engage in conduct that met the test of “unfair and deceptive practices,” as that law has been interpreted by the courts. Absent an appeal, her decision marks the end of a long road, strewn with missteps by Dragon and its advisors. Perhaps it will serve as a lesson for the future.
“Yet Another Hierarchical Officious Oracle” is Yahoo!, of course. And, its lawyers should be embarrassed by Yahoo!’s inability to create enforceable online Terms of Service (TOS).
The issue arose in Ajemian v. Yahoo!, decided by the Massachusetts Appeals Court on May 7, 2013. In this case the plaintiffs were the administrators of a decedent’s estate. They wanted access to the decedent’s email account to let his friends know of his death and memorial service, and later to locate assets of his estate. Yahoo! refused to provide the online password, and the administrators filed suit in Massachusetts to compel access.
Yahoo!, in turn, argued the suit should have been brought in California and, in any event, it was too late. These arguments were based on Yahoo!’s terms of service which provide, in part, as follows:
You and Yahoo agree to submit to the personal and exclusive jurisdiction of the courts located within the county of Santa Clara, California…. You agree that regardless of any statute or law to the contrary, any claim or cause of action arising out of or related to use of the Service or the TOS must be filed within one (1) year after such claim or cause of action arose or be forever barred.”
The decedent in this case had opened his account in 2002, and he died in 2006. In the interim Yahoo! had updated its TOS to provide that “any rights to your Yahoo! ID or contents within your account terminate upon your death,” providing Yahoo! with another basis on which to deny the administrators access to the email account.
According to the Appeals Court, this was the first time a Massachusetts state court had been asked determine to the enforceability of an online agreement of this sort. The court found that Yahoo! was unable to establish the legal requirements necessary to enforce this provision:
Yahoo! submitted nothing to establish whether or how the provisions of the 2002 TOS were accepted by [Yahoo! end users] or how the provisions of the amended TOS were accepted by [Yahoo! end users] , or how they manifested their assent.
Although forum selection clauses contained in online contracts have been enforced, courts have done so only where the record established that the terms of the agreement were displayed, at least in part, on the user’s computer screen and the user was required to signify his or her assent by clicking “I accept.” … This is known as a “clickwrap” agreement. … By contrast, a “browsewrap” agreement is one “where website terms and conditions of use are posted on the website typically as a hyperlink at the bottom of the screen.” Although forum selection clauses have almost uniformly been enforced in clickwrap agreements, we have found no case where such a clause has been enforced in a browsewrap agreement.
The fact that this case arose in the context of administrators seeking access to a decedents email account made it a harder case. In fact, the Appeals Court held that even if Yahoo! had used a clickwrap agreement, it would not be reasonable to enforce the forum selection and limitations clause against the administrators based on a variety of considerations, including the fact that the case was in probate court, that the decedent lived in Massachusetts, that the administrators are in Massachusetts and the scope of the forum selection clause (which, the Court of Appeals noted, was of unreasonable breadth for a consumer contract).
Nevertheless, the court’s holding with respect to the enforceability of “clickwrap” agreements and lack of enforceability with respect to “browsewrap” agreements stands as the current state of the law in Massachusetts, probate court or not. Simply put, browsewrap areements are not enforceable under Massachusetts law.
The inability to create an enforceable online license seems almost endemic to online companies. Craigslist failed in the 3Taps case (post here). Zappos failed in the Security Breach Litigation (post here). CollegeSource failed in its case against AcadamyOne (post here).
And, companies seem not to realize that even if they do have a proper clickwrap agreement, they cannot retain the right to modify the agreement unilaterally. See “Sign This Contract. By the Way, We Can Modify It At Any Time.” Is This Enforceable?
In the Yahoo! case the Massachusetts courts joins the majority across the country: get consent by means of a click, and if you update your TOS, get consent again.
Of course, this case also raises a bigger issue surrounding email accounts and social media – who is entitled to access an email account after the owner’s death? What about a Facebook, Twitter or other social media account? Facebook has addressed the digital afterlife by allowing relatives to memorialize an account after its owner has died. And, Google lets account owners “plan their digital afterlives” with “inactive account manager.” So, perhaps a second lesson from this case—and a more important one—is to exercise one of these options where it is available, or make sure your heirs are able to access your online accounts by using your passwords after your death.*
*Personal note: when my father died in 2010 he had not left a record of his AOL email log-in information. However, AOL was more accommodating than Yahoo! A phone call to AOL was all it took to get his user name/password.
Assume a software vendor makes advertising clams regarding its product’s functionality. However, its end-user license agreement (EULA) is very narrow – it provides a 30 day express warranty that (i) “the medium (if any) on which the [s]oftware is delivered will be free of material defects” and (ii) that “the software will perform substantially in accordance with the applicable specification.” Assume further that that software performs in a manner consistent with the “applicable specification” (the user manual) but inconsistent with advertising claims for the product. In fact, not surprisingly given that this case is in federal court, it malfunctions and wipes out the data on the purchaser’s hard drive.
You might think that the EULA would prevent a purchaser from claiming breach of express warranty, but under Delaware law (and the law of most states) you would be incorrect.
AVG Technologies is the seller of PC TuneUp. In Rottner v. AVG Technologies, Massachusetts U.S. District Court Judge Richard Stearns, applying Delaware law (as stipulated in the EULA) ruled on this issue in the context of AVG’s motion to dismiss. He held that AVG’s advertising claims must be viewed as part of the express warranty for PC TuneUp, despite the EULA’s attempt to disclaim them:
I am confident that the Delaware courts would consider PC TuneUp’s claimed functionality as an express warranty separate and apart from the EULA’s content-less warranty provisions. … Here, although the EULA disavowed previous representations, PC TuneUp software trumpets announcements about its functionality (which track the internet advertising claims) each and every time it is run. These claims, therefore, also form an express warranty on which Rottner may properly allege to have relied.
Judge Stearns further held that because the express warranties form a basis of the parties’ bargain, the plaintiff had also fairly alleged claims for breach of contract and the implied covenant of good faith and fair dealing. And, as if this were not enough, to make matters worse the plaintiff is seeking class action certification on these claims.
This decision addresses a number of other issues, including the enforceability of the Delaware choice-of-law provision and whether the sale of the software at issue should be treated as a service or a good (in the latter case it would be subject to the provisions in the Uniform Commercial Code). On the “service vs. good” issue, Judge Stearns ruled that a straightforward software download should be treated as a “good,” and therefore was subject to the UCC, a conclusion that favored the plaintiff and led to the holding that the EULA did not protect AVG from a claim of breach of express warranty.
But, the most important take-away from this case is that a software vendor’s EULA does not create an impenetrable legal wall of safety for the vendor. Marketing claims may be deemed to be part of the express warranty, notwithstanding attempts to disclaim them in the EULA.
Rottner v. AVG Technologies (D. Mass., May 3, 2013)
Update: Commentary on this case on Prof. Eric Goldman’s Blog