Membership, Subscription and SaaS Agreements – How To Avoid Unenforceable Amendments

If you’re like most small ecommerce businesses, you’ll need to amend your Customer Agreement from time to time. You might want to add a new membership option… or add a clause for a money-back guarantee, just to name a couple of examples.

Note that your Customer Agreement may go by any one of several names — such as Membership Agreement, Subscription Agreement, Terms of Sale, Content License Agreement, etc.

Will your amendments be effective? That’s the question you should ask. If the new provisions are worth adding, it’s worth it to make sure that they’re legally enforceable.

Up to now, the solution adopted industry-wide was to be sure that the original agreement had a clause that goes something like this:

“We may amend these contract terms at any time; your continued use of this site indicates your acceptance of these modified terms.” It’s been generally believed that a clause like this is probably legally effective… that is, until the case of Douglas v. Talk America, No. 06-75424 (9th Cir. July 18, 2007).

Douglas v. Talk America

Talk America needed to make typical amendments to its online agreement which included additional charges, a clause that required arbitration of disputes instead of litigation, and a change of controlling state law. The plaintiff filed a class action against Talk America claiming that the amendments were not enforceable due to lack of notice.

Talk America sought to dismiss the class action suit by compelling arbitration, but the 9th Circuit stated that it would be a “fundamental misapplication of contract law” to hold that the plaintiff was bound by the revised contract terms when he was not notified of the revisions.

In the Douglas case, the 9th Circuit ruled that contract revisions are not enforceable where the only notice is merely posting the revised contract online. With this ruling, the 9th Circuit became the first federal appellate court to rule on the enforceability of these types of contract provisions. This ruling has the effect of shifting a significant burden in terms of contract management to you. And it’s a major pitfall to avoid.

The Court reasoned that the plaintiff could have known of the new contract terms only after visiting Talk America’s website, but that even if he had visited the website, he would have had no reason to look for revisions to contract terms.

In its opinion, the Court stated: “[p]arties 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.” The court went even further stating that if “continued use of Talk America’s service could be considered assent, such assent can only be inferred after proper notice of the proposed changes.”

How To Provide Notice?

The 9th Circuit did not provide a discussion of how notice is to be provided. At this time, online notices sent by email or by posting in the user’s account would seem to be sufficient if the online agreement provides for these types of notice for the purpose of amendment of online agreements. Of course, offline notices sent by old fashioned, “snail mail” should also suffice, but that’s a very expensive alternative.

So, as a result of the Douglas case, you would be advised to add clauses similar to these to your customer agreements:

  • “Modification of Agreement. We reserve the right to modify this Agreement at any time by posting an amended Agreement that is always accessible on this site’s home page and by giving you prior notice of such amendments. Your continued use of this site after notice of a modification indicates your acceptance of the amended Agreement. You should check this Agreement through this link periodically for modifications by clicking on the link provided near the top of the Agreement for a listing of material changes and their effective dates.”
  • “Notices. We may give notice to you by means of (i) a general notice in your account information, (ii) by email to your e-mail address on record in your Registration Data, or (iii) by written communication sent by first class mail to your address on record in your Registration Data. Such notice shall be deemed to have been given upon the expiration of forty eight (48) hours after mailing or posting (if sent by first class mail) or twelve (12) hours after sending (if sent by email).”

Conclusion

The lesson learned… online agreements offer significant flexibility in terms of contracting and contract management. However, the important lesson to be learned from the Douglas v. Talk America case is that flexibility has its limits. You just can’t post contract amendments and expect them to be enforceable. You have to give notice.

Copyright © 2008 Chip Cooper

For additional information, visit our SaaS Legal Resource.

This article is provided for educational and informative purposes only. This information does not constitute legal advice, and should not be construed as such.

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