Terms: The Background

Why do we care about a web site’s Terms and Conditions? Everyone knows that a site needs to have legal Terms. Few people think about the obvious question: Why?

While our statutes, regulations and past cases are full of laws and their applications when it comes to everyday interactions, few laws and cases exists with respect to online interactions. Why? Our cyber universe, as a mature legal arena, has existed for only some ten or fifteen years. When compared to the hundreds of years of “real world” interactions, its easy to see why many legal “holes” exists in our system.

Under US law, these legal “holes” are filled up with with either judge-made interpretations or privately drafted contract law. Given that on any single day, a judge reviewing an online case may have come from family, criminal or juvenile courts, we would rather leave as little for judges to decide on their on as possible. We achieve this through proper negotiation, drafting and implementation of site Terms.

Luckily for us, the US, as opposed to many civil code jurisdictions, respects privately negotiated contracts. Web site Terms are nothing more than privately negotiated contracts. Unless you realize this important point, you will end up leaving too much for judges to decide.

Three Common Mistakes

Failing to realize that web Terms are privately negotiated agreements, most web site operators make three common mistakes.

They Copy Other Sites’ Terms: The most common way for site administrators to “draft” site Terms is by copying it from other sites. Worse, they copy it from some site touting its Terms as a standard that once edited can be used by anyone. Why? because, few administrators understand how important these Terms are. Fewer still understand the impact Terms have on each and every future online dispute.

They fail to Negotiate the Terms: The most common mistakes made by site administrators is believing that if they post Terms on the internet, they will bind visitors. That is equivalent to posting mortgage papers on the wall of a bank and believing that everyone who enters will be bound by those documents. Web site Terms must be negotiated to be valid. This is a critical component of online compliance; few, however, understand how online negotiations take place.

They Don’t Change with the Times: Internet laws “develop” or “mature” through case law on a daily basis. Since so few cyber laws are codified through statutes, compliance can only be reached through Terms amendments reflecting these latest rulings. Many site Terms, however, were drafted 6 months to 3 years ago. Administrators must start thinking about making key changes to Terms on a regular basis.

The Risk of Non-Compliant Terms

In our representation of online companies, we see four main areas of risks faced by clients. These risks are easily avoidable; however, due to a lack of understanding risks often mature into costly if not destructive forces for a young company.

Many online companies unknowingly make promises to online users that they never intend. I’ve seen clients with subscription based pricing models having copied Terms relevant only to one time charge sites. As a result, they were liable for wrongful charges. Some clients with upstart e-tail sites, ended up making consumer support promises which only the like of Amazon or Buy.com could make.

Important contract provisions get struck down. When online companies fail to understand that Terms must be “negotiated” with users, they end up surprised when judges strike down provisions that are employed by countless other sites. The typical response is, “How could a judge do this? It is Standard industry practice.”

The Company assumes unnecessary levels of liability. When Terms are not properly drafted and negotiated, incorrect provisions can result in substantial corporate liability. There are countless class-action websites run by attorneys soliciting clients for class action law suits against online companies. Having the wrong Terms can be devastating.

Administrators facing personal liability. Hard to believe, but when Terms are drafted improperly the owners and operators of sites can face liability personally, not just as a corporation.

Step 1: Define Your Goals

It may sound strange, but before you can start drafting any Terms you need to figure out what your goals are. The Terms must reflect your goals. More importantly, they need to avoid saddling you with unnecessary obligations.

If you are building an affiliate marketing campaign and deploying squeeze pages, what are your goals? You want to build a mailing list, that’s obvious. But what are the Terms of the transaction? You may want to give them a free gift or service in exchange for information. Alternatively, you may want them to read product descriptions. Either way, what do you want you customers to do?

If you are building a forum or soliciting product reviews, what do you want users to do? You want them to post comments but you want them to behave in accordance with the law. What does that mean? How can their behavior make you liable to third parties?

If you are building an e-tail site, what do you want to accomplish? You obviously want to make sales, but you also don’t want to be liable for faulty products, lost shipments or false advertising.

What if you are designing software that runs on the internet? You want to make sure it is deployed in accordance with legal allowances. You also want to make sure that its not distributed without your consent. What about a dating site? Here you want to make sure that members are truthful and that people interact safely.

Every online product or service is unique. Start by defining your goals. There can never be too many. The mistake is to just ignore this stage.

Step 2: Where is Your Liability?

Once you figure out what your goals are, you need to think about where potential liability can come from.

If you’re developing an affiliate marketing campaign, you face liability from potential false advertising and product liability.

If you you built a widget that runs off of tweeter, you face potential trademark and copyright violations in redisplaying tweets.

If you run a forum, you face publisher liability for comments made by users.

If you developed software that automates posting to Craigslist, you face liability for enabling your users’ unintentional violation of that site’s terms of service.

If you develop a squeeze page you may face privacy concerns due to follow up advertising.

If you develop a digital entertainment download site, you may face liability due to copyright infringement for ringtones and games.

If you build a social network site, you face liability for intellectual property infringements for users’ posting.

There is unlimited forms of liability faced by online companies. The trick is to give some thought to all potential issues that can arise in the future, however remote. Always ask, what can someone end up being unhappy about? Even a $2.99 download product can result in millions of dollars in liability.

Step 3: Define Your Customer’s View

It’s one thing to figure out what you want. It’s quite another thing to figure out what your customer wants to achieve. Don’t forget what we said earlier on: A web site’s Terms is a negotiated agreement. It can never be one sided or it risks being thrown out by a judge. So what do your customer want?

A customer who clicked on an advertisement to an affiliate marketing site, wants truth in advertising regarding the product.

A visitor to a squeeze page wants an exchange of his information for value. The e-product must be delivered as promised.

A subscriber to a newsletter wants his information kept confidential from 3rd party marketers.

A member to a dating site wants his personal information kept confidential from other members unless he wishes them revealed.

A customer of a digital entertainment site wants his digital game to operate properly.

A customer downloading a ringtone wants to make sure that he is paying for one download and not paying for a subscription.

A buyer from an e-tail site wants to know who to return the product to in the event of a complaint.

A client posting a review wants to make sure you keep his identity confidential.

If you haven’t given thought to what your customers want, a judge will. The negotiation starts by you thinking about your customers needs.

Step 4: Enable through Negotiation

So how do we put everything together? How do we enable our goals, while minimizing potential liability and allowing for customer wishes? We negotiate with the customer. I know this sounds strange. How can you ever negotiate with a visitor to a splash page?

Terms of service are worth little if a court is likely to later dismiss many of the key provisions. Courts over the past few years have struck down many important sections of leading sites’ Terms as being too one sided. How do you avoid it?

Focus on the best form of “consent”. Most web sites at best offer a link at the bottom of a page to the site’s Terms. Others go a little further by requiring the users to check a box as having “agreed” to the site’s Terms. However, if you have a provision that you “must” make sure that a court will uphold you can do better. There are countless options available to make sure that a client reads and consents to important terms (e.g. displaying summarized terms of service).

For some key issues, like dispute resolution, afford the user options. Most attorneys, inexperienced in online law, draft straight forward terms. As they try to bind users, they fail to understand that unless they build options into the Terms (like how to best resolve disputes) judges are likely to strike the provisions down.

Don’t fail this step. Negotiate fair Terms with your customers by giving them ample chance to consent to important provisions and providing them with options on how to best implement the Terms.

Step 5: How to Make Changes?

You can be assured of one thing. You’ll have to make ongoing changes to your Terms. Not only are your business practices likely to change over time, online laws change on a regular basis. As online legal cases make it through the court system, we must incorporate into existing Terms any new legal interpretations and findings. Failing to do so, assures us of stale and irrelevant Terms. Basically, absent amendments to our Terms, the goals we set up earlier while minimizing liability will be ineffective.

But how do we make changes? If we look at the typical terms of service agreement, we are likely to see a statement such as this: “XYZ reserves the right to amend these terms of service at any time, with or without notice to the users. It is the user’s obligation to check this page from time to time to see if any changes to the terms were made.”

Does this provision seem strange? How often have you heard of a contract that can be amended unilaterally by one side without notice or the option to back out? Not often! That’s because, in our normal daily lives we would never agree to such a contract. So why should such a contract apply online?

Courts have, in online cases, consistently rejected contract provisions which were deemed too onerous when one side did not have the opportunity to choose among alternatives, negotiate or withdraw. From cases concerning arbitration clauses to subscription pricing, courts have rejected provisions that are too one sided.

While this provision is widely accepted in the industry, I would not advise building an online business based on the broad application of unproven and legally weak provisions. Avoid the risk of a court rejecting your Terms. The solution: NOTICE. Go out of your way to provide your users with notifications of any changes made to your policies. Send out email and txt messages. Post notices of revisions to your site. Have members “re-accept” the new Terms.

You can never do too much when it comes to providing notice of changes.

Step 6: How to Control Liability

So by now, we negotiated compliant Terms for our online business. Is that enough to control our liability. No! To assure that any potential future liability is contained, you must follow these three steps:

Follow the Terms: This may seem so simple, but so few actually follow it. You need to know your Terms and you need to follow the Terms. If you made promises, keep them. If you provided customers with procedures they need to follow, respect them. Don’t create a situation where you actually create liability for yourself by having drafted compliant Terms but having failed to follow them. Remember, since there are many “holes” in the online legal system, judges rely on privately negotiated contracts such as Terms. Your failure to follow your own Terms will be read against you. You would have effectively breached your agreement with your clients.

Teach your Clients: So you “negotiated” your Terms through proper usage of the “acceptance” procedure. But do your clients know what to do? Often you liability is tied to your clients’ behavior. So go out of your way to teach them proper and lawful behavior. From support forums to seminars, from conference calls to newsletters – Build a culture of education by teaching your clients the lessons that are important to you.

AND… Build Liability Proof Domestic and Offshore Corporate Structures.

Build Liability Proof Corporate Structure

After all is said and done, don’t forget that your best ally when it comes to managing potential liability is the corporate structure that you’ve set up.

Basic corporate structures, if properly set up and managed over the years, will provide you with some liability protection. That might be enough for some simple online businesses such as squeeze page powered affiliate marketing campaigns and e-tailers.

For other online businesses, a more sophisticated form of domestic and offshore corporate structure is needed. Believe it or not, your greatest risk will not come from government. It will come from competitors. Everyday, large tech companies compete with smaller more nimble companies using the court system. And why not? In court, the larger companies have an advantage – money.

Many entrepreneurial companies have gone out of businesses after being dragged into court by larger companies. For many online and software companies, compliant Terms will not suffice. They need to supplement those Terms with a structure that evens out the odds in court.

This is a topic too large for this eGuide. Speak with an attorney about the design of domestic and offshore networks of online compliant corporate businesses.

Where Do We Go Next?

Sit back and start designing your site’s Terms. The more questions you have, the better it will end up. And remember what we said in the beginning of this eGuide: A Site’s Terms is only one component of its overall online compliance.

Make sure your Terms integrate and support your business’ overall online compliance strategy including:

Online Privacy Software Compliance Mobile Compliance Direct Marketing (email and txt) Intellectual Property Compliance (trademark and copyright) Online Advertising Online Promotions (contests and sweepstakes).

Once you design an overall compliance strategy, examine your business’ liability exposure and the ability to incorporate an online liability management system based on both domestic and offshore corporate structures.