Will Online Indemnification Agreements Be Enforced?

Most consumers in the United States purchase goods and services online. And most of them never read the “terms and conditions” that are often embedded in their transactions. Yet, those unread terms can include important obligations regarding future disputes, such as provisions requiring the consumer to indemnify the vendor and hold it harmless.

Are such online indemnification provisions enforceable? Little case law directly addresses this question. To be sure, courts have upheld some online indemnification provisions. For example, in One Beacon Insurance Co. v. Crowley Marine Services, Inc., the Fifth Circuit held that a ship- repair contractor was obligated to indemnify a barge owner based on online terms and conditions referenced in the parties’ hard-copy repair service order. 648 F.3d 258, 267–71 (5th Cir. 2011). Similarly, a New York court enforced an indemnification provision found on the defendant’s website, where the purchase order stated that it was governed by the terms and conditions on that website. Bogdanowicz v. N.Y. Univ. Med. Ctr. Condo., 2014 WL 3349644 (Sup. Ct., N.Y. Cty. June 30, 2014). But neither of these rulings arose out of a consumer transaction that occurred wholly online.

In Song fi, Inc. v. Google Inc. & YouTube, LLC, the court enforced a forum-selection clause in YouTube’s “Terms of Service,” noting in dictum that the indemnification provision, like other terms in the contract, was not substantively unconscionable. 72 F. Supp. 3d 53, 63 (D.D.C. 2014). Likewise, in Kraft Real Estate Investments, LLC v. Homeaway.com, Inc., the court held enforceable online terms and conditions that included an indemnification provision. Neither case focused on indemnification, however.

It is interesting that a 2012 Department of Justice opinion implicitly acknowledges that online indemnification agreements may be enforceable—even though such clauses would not be enforceable against the United States. See Anti-Deficiency Act Implications of Consent by Gov’t Emps. to Online Terms of Serv. Agreements Containing Open-Ended Indemnification Clauses, 2012 WL 5885535, at *2 (O.L.C. Mar. 27, 2012).

Further guidance can be gleaned from the many cases analyzing other types of significant online provisions, such as forum-selection clauses and mandatory arbitration provisions. Those cases teach that to determine whether an online provision will be enforced, the first step is to ask whether a contract has actually been formed. If the answer is yes, then the question becomes whether the particular provision is vulnerable to defenses such as unconscionability.

Mutual Assent

Off-line and online, the same fundamental contract principles apply. See, e.g.Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004). However, the question of mutual manifestation of assent—“the essential element of contract formation,” Berkson v. Gogo LLC, 97 F. Supp. 3d 359, 383 (E.D.N.Y. 2015)—is centrally important for courts confronted with online agreements formed outside the more staid world of ink signatures and rustling papers.

For enforceability, online presentation matters. Courts identify two main types of online agreements: (1) “clickwrap” agreements, where the Internet user cannot move forward with the transaction unless he or she affirmatively consents to viewable—but not necessarily viewed— terms and conditions by clicking “I agree” or something similar; and (2) “browsewrap” agreements, where the terms and conditions are typically posted as a hyperlink, and the user need not provide any express manifestation of assent. See, e.g.id.at 394–95; Hines v. Overstock.com, 668 F. Supp. 2d 362, 366–67 (E.D.N.Y. 2009), aff’d, 380 F. App’x 22 (2d Cir. 2010). Courts occasionally articulate other categories of online agreements, such as “scrollwrap,” which “requires users to physically scroll through an internet agreement and click on a separate ‘I agree’ button in order to assent to the terms and conditions of the host website”; and “sign-in- wrap,” which “couples assent to the terms of a website with signing up for use of the site’s services.” Berkson, 97 F. Supp. 3d at 395.

Courts generally enforce clickwrap agreements. See, e.g.id. at 397. Enforceability of browsewrap agreements tends to be more complicated, however. Actual or constructive notice of the terms and conditions, before use of the site, is usually a prerequisite. See, e.g.Hines, 668 F. Supp. 2d at 367. Inquiring into constructive notice may require a court to wade into details of website design. Nguyen v. Barnes & Noble Inc., 763 F.3d 1171, 1177 (9th Cir. 2014). The court in In re Zappos.com refused to enforce an arbitration provision in a browsewrap agreement when there was no direct evidence that the plaintiffs had clicked on the provision containing the terms of use. As the court explained, “[t]he Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use.” In re Zappos.com, Inc., Customer Data Sec. Breach Litig., 893 F. Supp. 2d 1058, 1064 (D. Nev. 2012). The more that a browsewrap agreement resembles a clickwrap agreement, the more likely a court is to find the requisite constructive notice. See Nguyen, 763 F.3d at 1176.

Unconscionability

Even when a contract has been formed, the applicable defenses can render an online indemnification provision unenforceable. While an indemnification provision is not unenforceable simply because it is part of an online agreement, some judicial commentary does suggest that the defense of unconscionability may have particular traction in cases that involve such agreements.

Online contracts for the purchase of goods or services are commonly contracts of adhesion. That is, they are presented “on a take-it-or-leave-it basis,” without opportunity to discuss or negotiate terms. See, e.g.Bynum v. Maplebear Inc., 2016 WL 552058, at *7 (E.D.N.Y. Feb. 12, 2016). While not per se unenforceable, contracts of adhesion generally are subject to heightened scrutiny. For example, the court in Berkson sets forth a four-part inquiry for determining the enforceability of electronic contracts of adhesion. The Berkson court also placed on the vendor, “who designed the website and puts into it terms favoring itself,” the burden of impressing on the consumer “the importance of the details of the binding contract being entered into.” 97 F. Supp.3d at 382, 402–3.

Showing a contract term to be unconscionable generally requires that the contract was both procedurally and substantively unconscionable when made, meaning that there was “an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” Id. at 391.

The ease with which consumers can enter into online agreements has raised special unconscionability concerns for some judges. A concurrence in Major v. McCallister, which upholds an online forum-selection clause, expresses this concern:

I write this separate opinion to note that the same contract principles hold on the internet. When the consumer is presented with a contract of adhesion containing lengthy provisions and hidden terms, I believe courts should consider whether the process of assent or terms of the contract are unconscionable. Here, the dispute involves a forum- selection clause assented to by Appellant’s use of a free service—terms that are not so onerous as to rise to the level of unconscionability; however, I do not want our opinion to indicate that consumers assent to any buried term that a website may provide simply by using the website or clicking “I agree.”

302 S.W.3d 227, 232 (Mo. Ct. App. 2009) (Rahmeyer, J., concurring).

Such a view leaves room for a procedural-unconscionability argument that would be based on the minimal process of assenting to an online contract of adhesion, as well as a substantive- unconscionability argument based on the potentially onerous financial burden associated with an indemnification provision, particularly in the case of an individual consumer. See Lhotka v. Geographic Expeditions, Inc., 181 Cal. App. 4th 816, 825–26, 104 Cal. Rptr. 3d 844, 852–53 (2010) (in non-online case, holding that arbitration clause was substantively unconscionable where, among other things, it required the plaintiffs to indemnify defendant for costs and attorney fees without imposing reciprocal indemnification obligations on the defendant).

In Song fi, Inc. v. Google Inc. & YouTube, LLC, on the other hand, the court held that an online agreement with an indemnification provision was not procedurally unconscionable because the conditions for use of service were neither obscured nor hidden, the plaintiffs had the opportunity to understand the terms, and there was no lack of meaningful choice. 72 F. Supp. 3d 53 (D.D.C. 2014). Further, as the court noted in dictum, the indemnification clause was not substantively unconscionable given that it was not “so outrageously unfair as to shock the judicial conscience.” Id. at 63.

 

Julie Cilia is an associate in Wilk Auslander's  litigation department. She represents clients in a broad range of complex judgment enforcement, commercial, and securities litigation matters. Her practice includes a particular focus on dispositive motions, and she regularly drafts briefs at the trial and appellate levels.  She may be reached at: 212-981-2297 or jcilia@wilkauslander.com.

 

Published in The Woman Advocate, Volume 21, Number 3, Spring 2016. © 2016 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.