Friday, July 27, 2007

Ninth Circuit Says Company Can't Change Contract Terms Without Notice

It may seem obvious to any first-year law student that one party to a contract can't change the terms of that contract without notifying the other. But the Ninth Circuit in Douglas v. US District Court ex rel Talk America, No. 06-75424 (9th Cir. July 18, 2007), had to remind the district court of this basic principle. In Douglas, Talk America had posted revised contract terms on its website, which included a mandatory arbitration clause for its customers. When Douglas, a Talk America customer, filed a class action lawsuit against the company, the company moved to compel arbitration based on the revised contract, and the district court granted the motion. Douglas petitioned the Ninth Circuit for mandamus. In granting the petition, the Ninth Circuit held that "[p]arties 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." The district court's decision, according to the Ninth Circuit, "reflect[ed] fundamental misapplications of contract law."

An unfortunately large number of companies try to get around this principle of contract law by requiring their customers to agree in advance that they will periodically review their contracts on the company's website for possible changes. One example is the service agreement that Network Solutions requires customers to agree to before signing up for its domain-registration and web-hosting services. When pasted into Microsoft Word, the agreement is 102 pages of single-spaced legalese. On page 8 is this provision:

Except as otherwise provided in this Agreement, you agree, during the term of this Agreement, that we may: (1) revise the terms and conditions of this Agreement; and/or (2) change part of the services provided under this Agreement at any time. Any such revision or change will be binding and effective 30 days after posting of the revised Agreement or change to the service(s) on Network Solutions Web sites, or upon notification to you by e-mail or United States mail. You agree to periodically review our Web sites, including the current version of this Agreement available on our Web sites, to be aware of any such revisions. . . . By continuing to use Network Solutions services after any revision to this Agreement or change in service(s), you agree to abide by and be bound by any such revisions or changes.

The Ninth Circuit's decision does not seem to resolve the question whether parties can agree in advance to bind themselves to unilateral changes to the contract without notice, as Network Solutions requires. But in a contract of adhesion like this, it is difficult to believe that a court would enforce this term. The Ninth Circuit in Douglas noted how cumbersome such a requirement would be, forcing customers to "check the contract every day for possible changes" and "compare every word of the posted contract with [the] existing contract in order to detect whether it had changed." With a 102-page contract, that could be tricky.