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Incorporating Online Terms By Reference: Avoid the Common Mistakes

Terms of Service agreements are used to outline the legal relationship between a party providing a service and a party receiving or using a service. The Terms typically include contractual components such as definitions, rights and responsibilities, and representations and warranties. Service providers may offer Terms of Service in several ways, including by paper, by attachment to an order form, or during the process of “click through” ordering, either on a website or mobile application. Additionally, service providers are increasingly providing their Terms of Service online, and incorporating them into contracts and order forms by reference.

 

Benefits of Incorporating Online Terms of Service By Reference

Incorporating Terms of Service by reference can provide several advantages over traditional methods. First, incorporating online terms significantly reduces the amount of physical paper used by both parties. Reducing paper consumption and waste is not only an increasingly popular initiative for companies concerned about the environment, it can also increase efficiency and reduce costs.

Second, incorporation by reference allows companies to establish uniformity across all of their contractual agreements. Service providers often contract with hundreds or thousands of customers, and the more consistency those agreements have, the less time and effort is required to track, analyze, and report the company’s legal exposure.

Another valuable benefit is the ease with which a company can rollout updates to its standard Terms of Service. By incorporating Terms by reference, a company can simply update the agreement online and it will subsequently apply to all contractual provisions that incorporate those terms (assuming the incorporation language is worded correctly, as discussed below). This method of updating standard terms by one upload can save massive amounts of time as compared to the alternative: sending the updated terms individually to every customer.

Lastly, providing terms online offers customers a valuable, easy-to-access portal to the contractual agreement. Customers can certainly retain their own copies, but online availability can provide a quicker, easier resource than clunky contract retention systems.

 

Are Incorporated Terms Enforceable?

While the digitization of traditional business practices is nothing new, incorporating online terms into purchase orders is a relatively recent development. Yet courts at both the federal and state levels have held such incorporated terms enforceable, and several courts note that failing to inquire about incorporated terms is no defense. Where courts have found terms unenforceable, the incorporating language did not make clear that the online terms were binding.

Additionally, all U.S. states but Washington and Georgia have adopted the Uniform Electronic Transactions Act of 1999 (“UETA”), which states, “a contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.” However, under the UETA, the electronic records must also be “capable of retention by the recipient.”

Another issue is the enforceability of updates to the incorporated terms. While few courts have considered the issue, generally it appears courts will uphold updates as enforceable when the party to be bound was made aware that updates could occur, even if the party is not provided notice of the actual update. In Briceno v. Sprint Spectrum, L.P., a Florida appellate court held a customer was bound by updated terms because the invoice noted that the terms could be periodically updated.

 

Best Practices for Incorporating Online Terms

To ensure enforceability, companies should not simply state the location to find additional terms. Companies must state the binding nature of the terms in clear, specific, and conspicuous language (e.g., “Parties agree to be bound by the terms of this order form as well as ACME’s Service Terms found at www.acme.com/Terms.”).

Additionally, companies must be sure to provide incorporated terms on an easily accessible website. Companies should not use barriers like login requirements or other security measures that make it difficult for the counterparty to copy, download, or print the terms.

Even if enforceable, companies should consider the best way to apply updated terms to their contracts. Some companies do not have long-term agreements with their customers, and each purchase order constitutes a new contract. For these types of relationships, it likely makes sense for updated terms to apply immediately to any new purchase orders.

Other companies maintain existing contractual agreements with their customers, and each purchase order may simply constitute a means for the customer to request goods, or to periodically change business terms, such as upgrades to the number of subscriptions or users, within the overarching framework of a master agreement. For these companies, it may be contrary to their customers’ expectations if, for example, a simple user upgrade suddenly binds them to an entirely new and different set of terms than had previously governed the relationship. Additionally, for these customers, having different subsets of users bound to different terms may unnecessarily complicate the contractual situation rather than streamlining it.

Lastly, companies should consider whether it’s even desirable for standard terms to apply to all of their customers. If customers are situated in a variety of international jurisdictions, or if customers have widely divergent needs, it may be advisable to tailor contractual terms to the different customer bases.

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The Dangers of Copying Terms of Service and How to Avoid Them

It might be tempting to copy the Terms of Use from another website, but should you? Attribution: Cathy Olson.

It might be tempting to copy the Terms of Use from another website, but should you? Attribution: Cathy Olson.

Facebook has 1.55 billion users, and each of them has a contract with the company. At their scale, there are few documents more important than their Terms of Service (ToS). Understandably, many Internet entrepreneurs are and should be concerned about this critical part of their business, even if they don’t have the same reach as the Facebooks of the world. Unfortunately, many resort to simply reproducing an existing ToS from a comparable company, but such copying can be risky, in addition to painting companies as cheap knock-offs of their competitors.

Sometimes, another company’s ToS will be very attractive because it contains specific provisions that are relevant to your company as well. If you’ve built an application that tracks your users’ location, then it will be very tempting to copy Uber’s ToS, for example (or large parts of it). But would doing that be in the best interest of your company? Further, would it even be lawful?

Leaving You Vulnerable

The most significant downside of copying a ToS is that it will not contain the provisions tailored to your particular business. If a user or customer were to take legal action against your company, you would be missing the language that could make all the difference in settling or winning the dispute.

Competitors may be using a surprisingly different process to provide similar services. For example, if you’re providing a service based on wireless communication protocols, your competitor might be operating with a different technology, and the provisions of their ToS will very likely reflect that. There might be clauses arising specifically from the technology used, such as the reliability of connectivity, say over the RFID protocol (radio-frequency identification), that are irrelevant to your company, which might be using the NFC protocol (near-field communication). If for whatever reason a dispute arises that implicates the reliability clause, having a custom-tailored ToS is essential.

Governing Law

A ToS can in fact be protected by copyright, and entrepreneurs and their lawyers should take heed. At least one court has found a company liable for copyright infringement when they have copied important sections of public-facing contracts used by competitors.  In AFLAC of Columbus v. Assurant, Inc. et al (2006), a federal district court in Atlanta found that the non-boilerplate sections of AFLAC’s insurance policies were protected by copyright, and that competitors in the insurance market would be liable for infringement if a court found substantial copying. Since an insurance policy is a contract like any other, the same logic would hold for a ToS.

It may come as a surprise, since any practicing lawyer knows that the building blocks of most contracts are copied from others, but contracts that are sufficiently original and creative may be entitled to copyright protection. Accordingly, a contract containing many commonly used provisions can still be protected by copyright because the particular arrangement of provisions could constitute an “original” (and thus copyrighted) compilation.

Practical Risks

The risk of being sued for copyright infringement is small. However, there is a non-legal risk of others viewing the product or service as derivative and unoriginal, making competitors look like the first-mover and innovator in the relevant market. This is especially true for more sophisticated readers of the agreement, such as strategic customers or investors, who may look at the ToS more closely. This obviously doesn’t apply to the standard boilerplate provisions that can be found in almost all contracts, such as a force majeure clause, but in the areas of the Terms that are unique to that particular business, it will look bad.

Open Source Contracts

On the other hand, some companies have generously made their ToS available for the public to use, so long as they provide attribution. Automattic, the company behind the popular WordPress.com, recently open sourced their ToS (in the spirit of their own open source software). They’ve made it available under a Creative Commons Sharealike license, which enables others to copy and repurpose the document so long as internal references are relabeled and attribution is given to WordPress.com.

In conclusion, if you’re tempted to copy another company’s ToS, you may be infringing on their copyright if you take provisions that are unique or distinct from industry custom. If instead you copy just boilerplate or commonly accepted industry provisions, you should be in the clear.

The question then is, if you’re a lawyer, or even an entrepreneur who’s not afraid to draft a ToS, how should you draft solid language that is not a direct rip-off of your competitor’s? See Part 2 of our ToS series to find out!

Part 2: Drafting a Unique and Effective Terms of Service

Lawyers have an ethical obligation to provide fundamentally sound legal advice to their clients. This advice often includes work product that is memorialized, and in the case of a ToS, publicly displayed. This presents an interesting issue: How can the new ToS be distinguished from the original without sacrificing the client’s objective of superior work product? The original document  might be legally sound, comprehensive, well-organized, and narrowly tailored to your market. Yet, completely plagiarizing an existing document has ethical implications, as well as the issue of outside perception mentioned above.

To that end, it’s advisable to start with a series of strong sample documents from sources like CooleyGo, UpCounsel, or Docracy. These are released into the public domain and thus present no copyright concerns.

One process used at our Clinic allows practitioners to create effective ToS documents without plagiarizing. You begin by finding several samples. We found it helpful to begin with documents from the most successful technology companies. By comparing the ToS’s of Apple, Facebook, Google, Uber, and others, we were able to more readily identify boilerplate language common to software and Internet companies. We were able to identify how these companies dealt with specific risks, like server failure, data breach, and personal injury.

Armed with the knowledge of how the biggest and best tech companies minimize risk, we then looked for smaller companies that were in the same field as our clients and had more relevant language to reference. We identified the sections of these ToS’s that were not boilerplate and we stripped them of their legalese. Once we had a version in entirely laymen’s terms, we then translated back to legalese using our own verbiage and adding our own relevant language. This created an authentic ToS that was tailored perfectly to our client’s business.

Other Information

For other information on this topic:

http://newsroom.fb.com/company-info/

http://pub.bna.com/ptcj/1051462Jan11.pdf

https://www.quora.com/Does-copyright-apply-to-contracts

http://scholarship.law.umassd.edu/cgi/viewcontent.cgi?article=1083&context=fac_pubs

http://www.law360.com/articles/5247/insurance-policies-can-be-copyrighted-judge-rules

http://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/model_rules_of_professional_conduct_preamble_scope.html