November 09, 2007

A company cannot unilaterally change the terms of a service contract by posting a revised contract online without providing notice to customers. Douglas v. U.S. Dist. Court, 495 F.3d 1062 (9th Cir. 2007). The court came to this conclusion after evaluating changes made by Talk America, Inc., to its existing service contract with customers. The changes included an additional service charge, a class action waiver, an arbitration clause, and a choice-of-law provision. Talk America, Inc., did not notify customers of the changes and, instead, merely posted the revised contract on its Web site. Douglas, the named plaintiff, filed a class action suit upon discovering the additional service charges resulting from the added provisions.

The court explained that simply because Douglas had authorized Talk America, Inc., to automatically bill his credit card, Talk America, Inc., could not assume a revised contract posted on the Web site was enforceable against Douglas without providing him with notice. The court indicated that customers do not assent to a modified contract merely by continuing to use the company’s services. The court also stated that a party to a contract has no obligation to check the terms of a contract to verify that they have not changed because such monitoring of the terms is too burdensome on customers. Notably, the court explained that implicit acceptance can only occur after the customer receives notice of the changes. Thus, under this holding, a customer who receives an e-mail specifying changes to a contract who does not object to the new terms may be bound to the modified contract.

The U.S. Court of Appeals for the Ninth Circuit distinguished this case from the two prior decisions of Crawford v. Talk America, Inc., No. 05-CV-0180-DRH, 2005 WL 2465909 (S.D. Ill. Oct. 6, 2005), and Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097 (C.D. Cal. 2002). The courts in Crawford and Bischoff held that the customers were subject to the modified contracts because they had received notice either by mail or by telephone. Additionally, the customers were new, rather than existing, customers, and should have been aware that they would have to agree to some form of terms and conditions before service would begin. Douglas, 495 F.3d at 1066-67. The Ninth Circuit left unresolved what constitutes adequate notice in the context of online contracts; however, two more recent cases give some insight on what form of notice is required.

In order to alter the terms of a contract with a customer, recent cases indicate that a company may enforce the contract terms if it provides explicit notice to the customer that the contract terms have changed and gives the customer a copy of the modified contract, either in hard copy or electronically. This issue was reviewed by ConferenceAmerica, Inc. v. Conexant Systems, Inc., where a federal court in Alabama held that a company was bound to the terms of an online contract because it had received oral notice of the contract from a teleconference provider and had been provided access to the contract. Specifically, after Conexant terminated its services with ConferenceAmerica Inc., ConferenceAmerica provided oral notice to Conexant that all future services would be subject to the terms displayed on ConferenceAmerica Inc.’s Web site. No. 2:05-cv-01088-WKW, 2007 WL 2670041 (M.D. Ala. Sept. 10, 2007). The court found this sufficient to bind Conexant to the terms of ConferenceAmerica Inc.’s online contract for future transactions between the two companies.

In another case, a federal court in Michigan found that customers were not bound by additional contract terms referenced on their phone bills because the notice was insufficient. Manasher v. NECC Telecom, No. 06-10749, 2007 WL 2713845, at *6 (E.D. Mich. Sept. 18, 2007). The notice was included in a phone bill that contained an inconspicuous statement informing customers that “NECC’s ‘Disclosure and Liabilities’ can be found online at www.necc.us or you can request a copy by calling us at (800) 766-2642.” The court held that this notice was insufficient to incorporate the terms by reference because the language did not explicitly state that the “Disclosure and Liabilities” applied to the customer’s contract and the language was the last of five statements, written in plain text, on the second page of the invoice.

These decisions indicate that a company must take several steps when attempting to alter customers’ contracts, including providing explicit notice that the changes apply to the contract and access to the modifications, either in hardcopy or online. If customers are not provided notice of contract modifications, a company will be unable to enforce the modifications. The type of notice required concerning contracts posted online remains unclear after the Douglas decision; however, language from ConferenceAmerica and Manasher suggests that providing explicit notice that the modifications apply to the specific customer’s contract along with either an actual copy of the modifications or access to the modifications may be sufficient.