Limits On Updating and Retroactivity

1. Limits On Updating and Retroactivity Richard Warner

2. The Obligation of Good Faith • An obligation of good faith is implied in every contract. • Common law: the obligation of the parties to deal with each other honestly, fairly, and in good faith in order not to violate the right of other party to receive the benefits of the contract. • UCC 1-201(20): “Good faith . . . means honesty in fact and the observance of reasonable commercial standards of fair dealing.”

3. Compare the EU • “A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.” • Directive on unfair terms, Article 3, 1.

4. Good Faith and Reasonable Expectations • Good faith performance of the discretionary power to affect the other party's rights requires the party holding such power to exercise it for purposes “within the reasonable contemplation of the parties at the time of [contract] formation.” • Burton, Breach of Contract and the Common Law Duty to Perform in Good Faith (1980) 94 Harv.L.Rev. 369. • How do you determine what was “within the reasonable contemplation of the parties at the time of [contract] formation”?

5. Sources of Reasonable Expectations Type of transaction Reasonableness of the business practices Reasonable expectations Words of the agreement

6. Badie v. Bank of America • The addition: an alternative dispute resolution clause to its agreements with its deposit account and credit card account customers. • The notice: It notified the customers of the change in an insert in the statements it mailed every month. • The original offer: The bank assumed “that adding the ADR clause is not really a modification [of the sort that requires consent] . . . because, by entering the original account agreements, the customers agreed ahead of time to be bound by any term the Bank might choose to impose in the future.” • Cancellation: There was no clause giving the customer a right to cancel the agreement if the customer disagreed with the change.

7. Type of Transaction • “The Bank reserved to itself the unilateral and nonnegotiable right to vary every aspect of the performance required by the parties to the account agreements.” • Suppose I said, “I respect your reasonable expectations concerning our contractual relationship, but I reserve “the unilateral and nonnegotiable right to vary every aspect” of what I promised to do. Would you trust me to respect your reasonable expectations? • Yes • No • Not sure

8. What Does This Mean? • “The Bank's interpretation of how broadly it may exercise that right, with no limitation on the substantive nature of the changes it may make as long as it complies with the de minimis procedural requirement of ‘notice’ virtually eliminates the good faith and fair dealing requirement from the Bank's relationship with its credit account customers.” • But almost every online agreement looks like this.

9. The Standard Practice • “1.1 If you choose to use NYTimes.com . . . you will be agreeing to abide by all of the terms and conditions of these Terms of Service between you and The New York Times Company. • 1.2 We may change, add or remove portions of these Terms of Service at any time, which shall become effective immediately upon posting . . . by continuing to use this Site, you agree to any changes.”

10. The Interpretation As Lack of Good Faith • “The Bank's interpretation of how broadly it may exercise that right, with no limitation on the substantive nature of the changes it may make . . . eliminates the good faith and fair dealing requirement from the Bank's relationship with its credit account customers.” • But isn’t that how LinkedIn, for example, must interpret its right to make changes?

11. LinkedIn Example • LinkedIn: 16 privacy policy changes,10/23/15. • https://www.linkedin.com/legal/pop/pop-privacy-policy-summary. • “information we receive through address book imports may include phone numbers.” • “advertising partners may associate personal information collected by the advertiser directly from you with our cookies and similar technologies.” • “we use member information for research and development.”

12. Good Faith Requires Limited Interpretation • No limitation on the substantive nature of the changes = lack of good faith. • So what are the limits? • A once-and-for-all list • Determined case by case contextually. • Courts appear to be adopting the second course mostly—asking: Is the extent of the right claimed to vary terms in this case consistent with good faith?

13. This Could Allow These Changes • LinkedIn: 16 privacy policy changes,10/23/15. • https://www.linkedin.com/legal/pop/pop-privacy-policy-summary. • “information we receive through address book imports may include phone numbers.” • “advertising partners may associate personal information collected by the advertiser directly from you with our cookies and similar technologies.” • “we use member information for research and development.”

14. Reasonableness of the Business Practice • The court discusses the reasonableness of the waiver provision in the context of a standard form contract. • “Although an effective waiver, particularly in a nonadhesive contract, need not expressly state, “I waive my right to a jury trial” or words to that effect,

15. Reasonableness of the Business Practice • Requiring binding arbitration is a reasonable business practice for businesses. • Reasonableness is less clear for customers • arbitration has pluses and minuses for customers, • the right to jury trial is constitutionally protected, and only courts provide that. • The court’s question: What notice is required to update a contract to eliminate judicial forums and replace them with binding arbitration?

16. The Notice Requirement • The bank “must clearly and unambiguously show that the party has agreed to resolve disputes in a forum other than the judicial one.” • Compare Steven: Where terms conflict with a customer’s reasonable expectation, the business must bring it to the customer’s attention.

17. The Words of the Contract • “Our focus is on whether [1]the words of the original account agreements mean that the Bank's customers, by agreeing to a unilateral change of terms provision, intended to give the Bank the power in the future to [2] terminate its customers' existing right to have disputes resolved in the civil justice system, including their constitutionally based right to a jury trial.”

18. The Words of the Contract • Badie concludes “Based solely on the language of the credit account agreement, we cannot conclude that either party's interpretation of the change of terms provision is clearly untenable.” • So as in Steven the court finds the contractual language ambiguous.

19. Summary of Badie • Good faith: An unlimited unilateral right to change terms violates the obligation of good faith. • Reasonableness of the business practice: changes that take away substantive legal rights require specially conspicuous notice. • Contractual language: does not address the weight of unambiguous language.

20. Rodriguez v. Instagram • Old terms: Instagram disclaimed ownership rights in content users post. • New terms: Instagram disclaims ownership of content. • Old terms: Instagram had a non-exclusive limited license to use, modify, delete from, add to, publicly perform, publicly display, reproduce, and translate content users posted on Instagram. • New terms: a transferable and sub-licensable license to use the content users post with no explicit limitations. New terms added a liability waiver.

21. Breach of Obligation of Good Faith? Type of transaction Reasonableness of the business practices Reasonable expectations Words of the agreement

22. Type of Transaction • Like bank in Badie, Instagram “reserved to itself the unilateral and nonnegotiable right to vary every aspect of the performance required by the parties.” • So—if we follow Badie—this is itself a breach of the obligation of good faith.

23. Reasonableness of the Business Practice • Instagram changed the contract to take away substantive intellectual property rights. • If we follow Badie (and Steven), this requires that Instagram draw customers attention to this change in a specially conspicuous way. • Instagram did not do so.

24. Words of the Contract • When Rodriquez agreed to the unilateral change of terms provision, did she intend to give Instagram an unlimited sublicensing power to transfer ownership rights to third parties? • The court looks to the language of the contract to answer this question, and it answers “no.”

25. Rodriquez -- No Breach of Good Faith? • “Badie is distinguishable. Plaintiff had a [1] full and perfectly reasonable opportunity to read, [2] and did read, the New Terms; [3] she could have declined the revised agreement. [4] She could have, under the plain language of the New Terms, avoided the New Terms if she stopped using the service, but she continued to use it: Thus Plaintiff must have consented to the New Terms.”

26. The Argument Reconstructed • Rodriquez had the right to cancel the agreement. • Badie’s contract did not explicitly give her that right. • Cancelation would mean she is not subject to the new terms. The original contract would govern cancelation and its consequences. • How real is the opportunity to walk away? • She knowingly consented to continue under the new terms. • Knowingly because she read the contract. Opportunity to read enough? • So there can be no breach of good faith.

27. What Happened to Reasonable Expectations? Type of transaction Words of the agreement Reasonable expectations Reasonable business practices Is this all irrelevant under Rodriquez?

28. The Current Practice • The New York Times: • 1.2 We may change, add or remove portions of these Terms of Service at any time, which shall become effective immediately upon posting . . . • 1.3 If any of these rules or any future changes are unacceptable to you, you may cancel your membership. • 1.4 We may change, suspend or discontinue any aspect of the Services at any time . . . We may also impose limits on certain features and services or restrict your access to parts or all of the Services without notice or liability.

29. Rodriquez Is Wrong • “The implied duty of good faith and fair dealing is limited by the original bargain: it prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprive the other party of the contemplated value.” • Metcalf Constr. Co. v. United States, 742 F.3d at 991.

30. More Constraints from Language: The FTC • The Federal Trade Commission (FTC) is the primary regulator of privacy in the US. • It has important views on the effect of language inside and outside the written contract.

31. 15 US Code Section 45(a) • Illegality: “(1) Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” • FTC authority: “(2) The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.”

32. What Counts as Unfair? • The FTC has “no authority . . . to declare . . . an act or practice . . . unfair unless the act or practice • [1] causes or is likely to cause substantial injury to consumers • [2] which is not reasonably avoidable by consumers themselves and • [3] not outweighed by countervailing benefits to consumers or to competition.” • 15 US Code Section 45(n)

33. Two Kinds of Inconsistency • Promises that a business does not use information in a certain way. • You may be able to update these. • Promises that a business will never use information in a certain way. • You cannot update these.

34. FTC Letter to Facebook • WhatsApp's privacy policy clearly states, among other things, that users' information will not be used for advertising purposes or sold to a third party for commercial or marketing use without the users' consent. Facebook's purchase of WhatsApp would not nullify these promises and WhatsApp and Facebook would continue to be bound by them. Further, Facebook has recently promised consumers that it would not change the way WhatsApp uses customer information. Therefore, any use ofWhatsApp's subscriber information that violates these privacy promises, by either WhatsApp or Facebook, could constitute a deceptive or unfai practice under the FTC Act.

35. Insights from the Regulation of Advertising • “The FTC could go further in policing privacy practices based on precedent in advertising.” • Chris Jay Hoofnagle, Federal Trade Commission Privacy Law and Policy.

36. FTC on Deception in Advertising • (1) A representation, omission, or practice that is likely to mislead a consumer. • (2) The interpretation of that act or practice is considered from the perspective of a reasonable consumer; • (3) The representation must be material. • How do you tell what is reasonable and material?

37. Overall Net Impression • “District courts consider the overall, common sense “net impression” of the representation or act as a whole to determine whether it is misleading . . . • A misleading impression is material if it “involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.” • Federal Trade Commission v. Commerce Planet

38. Assessing the “Overall Impression” • The words the consumer is intended to read. • “When looking at the landing page, the most prominent graphic is the red boxed message on the upper left corner . . .” • The overall context in which those words occur. • “Overall, the predominant message is that consumers can order a free kit . . .” • The business’s purposes in presenting those words and actions. • “Defendants offered a free internet auction kit as a ruse to enroll consumers in OnlineSupplier.”

39. “Intend To Read” Material • What happens when words a business intends a consumer to read conflict with the provisions in a privacy policy or terms of use agreement? • This is what happens in FTC v. Planet Commerce.

40. FTC v. Planet Commerce • “While the terms of the continuity program are disclosed in a separate, hyperlinked “Terms of Membership” page, this is an insufficient cue. Disclaimers do not automatically exonerate deceptive activities. See FTC v. Gill, 71 F.Supp.2d 1030, 1044 (C.D.Cal.1999), aff’d,265 F.3d 944 (9th Cir.2001). “A solicitation may be likely to mislead by virtue of the net impression it creates even though the solicitation contains truthful disclosures.” Cyberspace.com, 453 F.3d at 1200.”

41. The Expectations Puzzle Again • The FTC is talking about what consumers actually read and the expectations they actually have. • It says contradictory claims in a terms of use or privacy policy may not be enforceable given those expectations. • But our treatment of reasonable expectations sees contractual terms (and businesses practices) as sources of expectations. • How can that be?