The recent U.S. Court of Appeals for the Ninth Circuit decision of Douglas v. Talk America Inc., 2007 WL 2069542 (9th Cir. 2007) (“Douglas v. Talk America”) may significantly affect business entities engaged in online contracting with customers. In an apparent case of first impression, the court in Douglas v. Talk America was called upon to consider whether a service provider could unilaterally change the terms of an existing service contract with its customers by posting a revised version of the contract on its website. Emphasizing that “a revised contract is merely an offer,” not binding upon the other party until accepted, the court determined that one party merely posting online changes to an existing service contract is insufficient to provide notice of contract changes to the other party.

In Douglas v. Talk America, former AOL subscribers sued Talk America (which was acquired by AOL) in a class action for attempting to change the terms of an existing service contract by posting a revised contract on its website without further notice.1 The contract changes Talk America sought to introduce included the addition of certain service charges, a class-action waiver, an arbitration clause and a New York choice-of-law provision. Talk America posted the revised contract online, but did not otherwise attempt to notify its customers of the changes. In response to the lawsuit, Talk America sought to compel arbitration as provided for under the terms of the revised contract. The trial court ordered arbitration. The plaintiff class filed a petition for writ of mandamus with the Ninth Circuit, requesting that it vacate the trial court’s order to arbitrate.

The Ninth Circuit granted the plaintiffs’ petition and vacated the order to arbitrate. Overruling the trial court, the Ninth Circuit held that the plaintiffs were not bound by the terms of the revised contract because they were not notified of the changes. The court recognized that the plaintiffs could have become aware of the new terms only if they had visited Talk America’s website periodically and examined the contract for possible changes. The court held that the plaintiffs “had no obligation to check the terms on a periodic basis to learn whether they had been changed by the other side….” Talk America argued that continued use of their services could be construed as assent. However, the court refuted this argument, finding that “assent can only be inferred after a party receives proper notice,” and proper notice was not given under the facts presented.

The Douglas v. Talk America decision emphasizes that companies contracting online who wish to change contract terms with existing customers should do more than just post the desired contract terms changes on their website. While the reported decision did not state whether the original contract permitted posting of changes online, even the presence of such a provision would not seem to override the court’s insistence on the customers receiving notice of the change. Indeed, terms in online agreements that provide that “continued use” of an online service constitutes acceptance of any changes to that agreement are quite common. Despite their near ubiquity in online contracting, this case underscores the fact that any change to an online agreement should be accompanied by notice, and possibly consent if the changes are material, in order to avoid possibly significant enforceability challenges regarding the changed provision(s). On the subject of how that notice should be provided, the court implicitly suggested that mailed or e-mailed notice may be sufficient by distinguishing cases using various methods of notice.2

Douglas v. Talk America may also impact a company’s ability to modify non-contractual online policies to the extent such policies are incorporated by reference in, or otherwise made a part of, an online contract. Consider, for example, privacy policies, which are often incorporated by a link or by reference in website terms of use or other online contracts. Although privacy policies by themselves are generally not construed as binding contracts3, the court’s decision in Douglas v. Talk America may impact a company’s ability to post changes to its privacy policy to the extent such privacy policy is considered a part of a binding online customer agreement. While the Federal Trade Commission (“FTC”) already requires notice and acceptance of “material changes” to privacy policies4, the Talk America ruling seems to extend the obligation of at least notice to nonmaterial changes in circumstances in which a privacy policy has been structured so that it is considered an online contract. Companies should also carefully evaluate whether the mechanisms they have in place to notify customers of changes to customer agreements (and privacy policies, if applicable) are sufficient to effect a binding change.

Given our experience in the areas of both online contracting and privacy and data management across the globe, we consider and work with these issues frequently and look forward to working with you as these areas of the law and your business continue to evolve.