Will Your SaaS Agreement be Unenforceable for a User’s Lack of Contracting Authority?

Courts continue to hold that online SaaS agreements, where the user clicks through on an I ACCEPT button during the online registration process, are legally enforceable… if the agreement is presented correctly.

Two recent cases deal with the issue of contracting authority. In these cases, the users’ employees clicked through on the I ACCEPT button, and the online agreements were presented correctly, but the users later claimed that contracts were unenforceable because their employees who clicked through did not have the authority to do so.

Are there important lessons from these two cases for SaaS webmasters?

The Nextag Agreement Held Enforceable

Nextag, Inc. operates a commercial comparison shopping website.

Nextag utilized the typical registration process for online contracting. During the registration process, after entering its contact information and before entering payment information, user’s were required to affirmatively “check” a box next to the statement “I accept the Nextag Terms of Service” by “clicking” that box on the web page. The Nextag Terms of Service Agreement stated (among other things) “By accepting the… Terms of Service (the ‘Agreement’), you (‘Merchant’ or ‘You’) are entering a legal agreement with Nextag… .”

The plaintiff’s nineteen-year-old website manager-employee registered in the name of the plaintiff and clicked through on the online Terms of Service.

After using the online service for a while, a dispute arose regarding trademarks, and the user filed suit alleging that the online agreement was not enforceable on several grounds, including the alleged lack of contracting authority of its employee who clicked through the agreement during the registration process.

The plaintiff presented no evidence to support its claim of lack of contracting authority. The court held that the Nextag’s Terms of Service was enforceable, noting that Nextag’s Terms of Service Agreement was typical for the online industry, that it was clearly labeled, and that it had a check box to manifest assent to the contract terms. Ironically, the court also noted that the plaintiff also used a similar online contracting process with similar contracting language on the plaintiff’s own website. In addition, the court found that the plaintiff’s employee had the apparent authority to enter into the agreement.

The Syslocate Agreement Held Not Enforceable

Syslocate, Inc. sells Global Positioning System (GPS) units for purposes of tracking motor vehicles. Syslocate also provides its website to customers to track motor vehicles.

The opposing party, a customer that purchased GPS units from Syslocate, alleged that the GPS units were defective. Syslocate and the customer began settlement negotiations to resolve the dispute. During the negotiations, the customer notified Syslocate that only its officers were authorized to bind the company and that all communications should be directed to the customer’s attorneys.

Subsequently, Syslocate posted an amended “click-to-accept” end user license agreement (EULA) on its website that would have limited its customers’ ability to recover losses from defective GPS units. Syslocate’s website was configured so that Syslocate’s customers could not access the website to track vehicles without clicking through and accepting the EULA.

After the amended EULA was posted on Syslocate’s website, two employees of the customer with alleged defective GPS units accepted the amended EULA in order to track vehicles on Syslocate’s website.

In subsequent litigation, Syslocate argued that the employees had apparent authority to accept the amended EULA. The court noted that there are three elements to establish apparent authority:

  • a representation by a purported principal,
  • reliance on that representation, and
  • a change of position in reliance.

The court held that there was no apparent authority to bind the customer in this case because the customer had notified Syslocate that only its officers were authorized to bind the company. The court reasoned that it would be unreasonable for Syslocate to believe that the individuals who accepted the EULA were authorized to do so.

Conclusion

What are the lessons to be learned from these cases?

First, assuming a click-wrapped agreement is presented properly, it will usually be enforceable against a user, particularly where the situation involves a business-to-business (B to B) relationship. An unsupported claim of lack of contracting authority will not fly.

Second, we might infer that language in the click-wrapped agreement stating that acceptance indicates that the person accepting the agreement has the authority do so would significantly strengthen an online vendor’s argument for authority to contract.

Third, where an online vendor has been notified by a user regarding lack of contracting authority, subsequent acceptance by unauthorized user-employees of a click-wrapped agreement should not bind the user, particularly where the user has previously paid for the service and would be denied the use of the service unless the agreement was accepted.

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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