Learn From Zappos’s Expensive Mistake2 min read

It has

not been a good year for Zappos. First, the company suffered from a massive data security breach affecting 24 million consumers. Second, when the plaintiff lawyers came swarming in to pounce on Zappos for this security breach, the company’s Terms of Use agreement (intended to protect the company) was struck down . . . ouch.

Your terms of use is the agreement that users agree to when they use your website or mobile application. It can be a binding agreement between the company and the user. The intent is to explain what your service does and signs the user up to certain contractual promises, inacluding those that help protect the company against user lawsuits. Learn more about best practices for your terms of use.

One of the contractual promises that is of utmost importance is the “arbitration clause” found at the end of the terms of use. By agreeing to this, users forgo their ability to join a class action against the company, and instead agree to an arbitration arrangement to settle any dispute with the company in one-on-one arbitration (vs. in a class action lawsuit). Most recently, these arbitration clauses have become increasingly enforceable and have deterred many class action suits. Learn more about how arbitration clauses can avoid class action lawsuits and view the UpCounsel Terms of Use.

In order for your terms of use to be upheld, the user must actually “agree” to the Terms of Use. This is was the focal point of the ruling against Zappos. At no point did Zappos have users physically agree to the terms of use (e.g. clicking a checkbox or scrolling through the terms of use). Zappos’s Terms of Use came into effect simply by using the application, or what is called a “Browserwrap” agreement. The court found that this was not sufficient to form a binding contract with Zappos users, thereby finding their Terms of Use unenforceable, including the all important arbitration clause. With no arbitration clause in place, users will be able to join into class action suits against Zappos. With 24 million users affected this will turn out to be an expensive baffle.

Zappos will survive, but their mistake should signal to everyone to take their Terms of Use seriously. Not only should you have your Terms of Use professionally drafted, but you should take measures to have users agree to it. This is especially important as you grow your company and you begin to bring on thousands and potentially millions of users. Your Terms of Use is one of the most important protections your company has, it should not be take lightly.

Matt is the co-founder and CEO of UpCounsel (www.upcounsel.com), a legal services marketplace. UpCounsel makes it easy to find and hire a great attorney for anything. Matt started his career as a startup and venture capital attorney.

Comments 7

  1. Great post Matt. Thanks for taking the time to remind startup founders that they need to protect their company and themselves actively. 

  2. Really early startup founders (pre-funding) probably do not need to worry about things like this . . . they do not have enough money to go after :) Good practice to start early though. But, this is becoming more important for venture backed companies to pay attention to.

  3. “In order for your terms of use to be upheld, the user must actually “agree” to the Terms of Use.” +1

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