9th Circuit Requires Notification of New Contract Terms

Some companies change the terms of their consumer contracts frequently. Sometimes, they do so without providing direct notice to consumers. But it's likely that this practice will become much rarer in the wake of a recent court decision.

In Douglas v .U.S. District Court, the U.S. Court of Appeals for the Ninth Circuit recently -- and rightly -- held that the company's failure to provide notice means that the altered contract does not bind the consumer. Unfortunately, however, the Court did not discuss what type of notice is adequate.

The Facts and Allegations of the Case

The plaintiff in the case, Joe Douglas, was a subscriber for AOL's long distance telephone service. When Talk America took over AOL's phone service contracts, it added four new terms: additional service changes; a waiver of the right to bring class actions, an arbitration clause and a clause choosing New York law to govern any disputes arising under the contracts. It did not provide consumers like Douglas any notice of the change, but did post the new contract online.

Douglas says that he did not find out about the new contract terms for four years. When he did, he filed a federal class action suit against Talk America in U.S. District Court in California, alleging claims for breach of contract and violations of the Federal Communications Act and various California consumer protection statutes.

Citing the modified agreement, Talk America moved to compel arbitration. However, the Ninth Circuit held that because Talk America had not provided Douglas with sufficient notice of the contract changes, the altered contract - including its arbitration clause - did not bind him.

One reason the Court saw the notice as insufficient was that Douglas authorized AOL to charge his credit card automatically and that Talk America did so as well. Thus, Douglas never had a need to visit either website, and thus had no reason to come across the altered contract.

An Unusual Grant of a Writ of Mandamus, Based on Black-Letter Contract Law

The district court had held for Talk America, and was about to send Douglas to arbitration. Direct appeal was not available to him, due to the Federal Arbitration Act. However, he sought and obtained an unusual remedy from the Ninth Circuit: a writ of mandamus. (A writ of mandamus is an extraordinary remedy compelling a court to act; its sister remedy, a writ of prohibition, compels a court not to act.)

The Ninth Circuit correctly applied black letter contract law: An amendment to an existing contract is invalid unless both parties consent. A suggestion that a contract should be amended is treated, under the law, as simply an offer, and a contract requires - as first-year law students know, offer, acceptance, and consideration.

Talk America argued that Douglas's continued use of its services constituted acceptance. In response the Ninth Circuit pointed out that, even assuming for the purposes of argument that continued use could legally count as acceptance, it would still be the case that "such assent [could] only be inferred after [Douglas] received proper notice of the proposed changes." And, the Court concluded, proper notice had not been received.

The Remaining Questions: What Constitutes Proper Notice? Can the Right to Proper Notice Be Waived by the Consumer?

Credit card companies and other routinely send consumers notice of changes as inserts with their statements. Other companies send consumers notices via email.

The Ninth Circuit did not state expressly which forms of notice are proper. However, it did distinguish Douglas's case from cases where notice was provided by mail. In other cases, companies have also let the consumer know that he or she can view the revised contract terms online or speak to a customer service representative to learn more about the changes.

The opinion also leaves another question open: Can an original service contract -- which the customer must directly accept, and of which she has full notice -- includes a term which states that continued use of the service after subsequent changes are available online constitutes "acceptance" of those changes? Could a contract include a clause requiring a consumer to assent up front to future modifications without receiving notice?

Finally, what is the remedy if a customer refuses to accept changes to a contract? Must the company still provide service on the original terms if the contract is one for multiple years of service?

In sum, while the Ninth Circuit's decision rightly held that notice is required to alter a consumer contract, it did not make clear what kind of notice is sufficient, whether the right to notice can be waived, and what the consequences are if a consumer refuses to accept proposed changes of which he has notice. For the answers to these questions, we will have to await a subsequent case.

Anita Ramasastry is an Associate Professor of Law at the University of Washington School of Law in Seattle and a Director of the Shidler Center for Law, Commerce & Technology. She has previously written on business law, cyberlaw, computer data security issues, and other legal issues for this site, which contains an archive of her columns.