Alert: 9th Circuit Holds Changes To Customer Contracts Are Unenforceable Absent Notice And Consent

July 31, 2007

In a case of first impression, the 9^th Circuit recently held that a service provider cannot change the terms of its service contract with customers by merely posting the revised contract on its website.  In order for contract changes to be enforceable, some form of notice to and consent from the customer is required. 

In Douglas v. Talk America, Inc., No. 06-75424 (9^th Cir. July 17, 2007), Talk America acquired a long distance telephone service from AOL.  After acquiring the service, Talk America made several changes to the customer service contract, including (1) additional service changes; (2) a class action waiver; (3) an arbitration clause; and (4) a choice of law provision pointing to New York Law.  Talk America posted the revised contract on its website but did not notify customers, including Douglas, of the revised terms.

The District Court ruled that the changes were enforceable and granted Talk America's motion to compel arbitration, suggesting that Douglas could have reviewed the revised contract when he paid his bills online through Talk America's website.  However, Douglas claimed he did not visit Talk America's website when paying his bills because he had authorized AOL (the original service provider) to charge his credit card automatically.

In vacating the District Court's order compelling arbitration, the 9^th Circuit noted 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."  "Indeed," the court further stated, "a party can't unilaterally change the terms of a contract; it must obtain the other party's consent before doing so."

In terms of what would qualify for consent in the online world, the 9^th Circuit did suggest that consent could be inferred in some cases where notice of changes to the contract is provided to customers (via email or regular mail) and the customer continues to use the service after receiving notice.  However, the court noted an important exception under California law to inferred consent by citing a California Court of Appeal case, Badie v. Bank of Am., 67 Cal. App. 4^th 779, 801 (Ct. App. 1998), which held a revised contract containing an arbitration clause is unenforceable against existing customers, even when they are given notice by mail. 

Thus, companies who post their customer contracts online should, at a minimum:

(i)  consider providing notice (via email or regular mail) to customers of any change to an existing contract;

(ii)  consider providing the customer a reasonable period of time before the change takes affect (e.g., 30 days from notice); and

(ii)  for changes to dispute resolution procedures, such as requiring arbitration, consider taking additional steps such as specifically noting the change to the dispute resolution procedure, and requiring some affirmative manifestation of consent (e.g., requiring customers to click on an "I agree" button or otherwise acknowledge their agreement to the revised terms).