The Shrinking Relevance of Shrinkwrap Decisions

The Second Circuit released today a very important opinion on the application of contract law to online contracting practices. In Schnabel v. Trilegiant Corp., No. 11–1311 (2d Cir., Sept. 7, 2012), a case involving the enforceability of an arbitration clause mentioned in an email sent to the plaintiffs after they had enrolled in a discount purchasing program, Judge Robert D. Sack writes a mini-treatise on how contract law notions of “rolling contracts” and “inquiry notice” of terms should be applied to common online contracting scenarios: such as where the entire contract must be stitched together from multiple electronic documents, or where additional contract terms are presented after an initial contract has been formed.

Importantly, I thought, was Judge Sack's refusal to apply contract law principles announced in the 1996-2000 era of shrinkwrap decisions to modern-day online business. I think the judge appreciated that there really is no reason anymore for contract terms to not be fairly and conspiciously presented to consumers at the time the contract is formed.

The court held that an arbitration clause first mentioned by an email that the defendant sent to the plaintiffs after they had (allegedly unwittingly) signed up for the “Great Fun” discount shopping program, was not a part of the parties’ contract and thus could not be raised to bar their racketeering and consumer fraud lawsuit. It was undisputed that the arbitration clause was not disclosed on the website pages where the plaintiffs enrolled in the “Great Fun” program. However, the defendant-marketer argued that the plaintiffs were put on notice of the arbitration clause (1) via a “terms and conditions” hyperlink on the enrollment form[1] and (2) via an email that was sent to the plaintiffs after they had enrolled in the program.

The path the court took to rejecting the defendant's argument that post-purchase email was adequate notice is a great read. The most interesting aspect of the court’s discussion, I thought, were the passages where the court distinguished this case from numerous rulings enforcing post-purchase contract terms in shrinkwrap licenses. Judge Sack observed:

By contrast [to shrinkwrap licenses], the arbitration provision here was both temporally and spatially decoupled from the plaintiffs’ enrollment in and use of Great Fun; the term was delivered after initial enrollment and Great Fun members such as the plaintiffs would not be forced to confront the terms while enrolling in or using the service or maintaining their memberships. In this way, the transmission of the arbitration provision lacks a critical element of shrinkwrap contracting – the connection of the terms to the goods (in this case the services) to which they apply.  

 A reasonable person may understand that terms physically attached to a product may effect a change in the legal relationship between him or her and the offeror when the product is used. But a reasonable person would not be expected to connect an email that the recipient may not actually see until long after enrolling in a service (if ever) with the contractual relationship he or she may have with the service provider, especially where the enrollment required as little effort as it did for the plaintiffs here.  

Shrinkwrap decisions such as Hill v. Gateway 2000 Inc., 105 F.3d 1147 (7th Cir. 1997), and ProCD Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), “often sprinkle their analyses” of the notice issue with discussions about the social utility of shrinkwrap contracting, Judge Sack remarked, singling out Judge Posner’s suggestion in Hill that shrinkwrap contracting was a benefit to consumers, who are able to read the voluminous terms at post-purchase leisure. Judge Sack said that their is no policy rationale supporting the manner in which the defendant attempted to use email to supply additional contract terms because, he said, there were so many other ways the the defendant could have given adequate notice of its contract terms.

I am glad to see that Judge Sack, who assumed “senior” or semi-retired status in 2009, is still on the bench writing opinions. Schnabel is the third important cyberlaw opinion from him in recent years. Judge Sack also wrote the opinions in Barclays Capital Inc. v. Inc., No. 10–1372 (2d Cir., June 20, 2011) (New York "hot news" misappropriation claim is preempted by federal copyright law), and Tiffany (NJ) Inc. v. eBay Inc., No. 08–3947 (2d Cir., April 1, 2010) (online auction service eBay Inc. cannot be held directly or contributorily liable under the Lanham Act for the sale of counterfeit Tiffany & Co. products on its website).

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  1. Unfortunately, this issue was not raised in the district court, so the appellate court declined to address it.  ↩