February 2012

Companies that provide services to consumers have often sought to reduce the risk of class action lawsuits by requiring that their customers agree to arbitrate any disputes.  Such arbitration agreements may require customers to arbitrate on an individual basis only, with customers being obligated to waive any rights they might otherwise have to pursue claims through class actions.  In recent years, many such arbitration provisions, particularly those that included class action waivers, had been held unenforceable under state law contract doctrine.  In April 2011, however, the U.S. Supreme Court held in AT&T Mobility v. Concepcion that the Federal Arbitration Act preempts most state law challenges to class action waivers.

How broadly lower courts will interpret the AT&T decision remains to be seen.  For example, on February 1, 2012, the Second Circuit held in In re American Express Merchants’ Litigation that the AT&T decision did not preclude invalidation of an arbitration waiver where the practical effect of enforcement would impede a plaintiff’s ability to vindicate his or her federal statutory rights.

Nonetheless, in the wake of AT&T, many companies that provide online products or services to consumers are exploring whether to include an arbitration clause and class action waiver in their online Terms of Service.  For those companies that decide to adopt an arbitration provision, whether with or without a class action waiver, it is important to ensure that such arbitration provision will not be invalidated on the ground that no contract was formed with the consumer.

Courts have enforced the arbitration provision in an online Terms of Service agreement where the consumer clearly assents to – or “click-accepts” – the terms and conditions of such agreement, e.g., by checking a box stating “I agree” to such terms and conditions.  For example, in Blau v. AT&T Mobility, decided in December 2011, the plaintiff consumers, who were arguing that AT&T Mobility’s network was not sufficiently robust to provide the promised level of service, had specifically assented to AT&T Mobility’s Terms of Service, which included an arbitration clause.  One of the plaintiffs was bound by an e-signature collected by AT&T Mobility at a retail store.  He asserted that he was not bound because another user of his account had provided the signature.  The court rejected this argument because the user who signed was an authorized user of the plaintiff’s account.  A second co-plaintiff had accepted the Terms of Service by pressing a button on his mobile phone’s keypad; the court held that this acceptance was valid even though the co-plaintiff could not recall whether he had seen the AT&T Mobility Terms of Service.

The enforceability of an arbitration provision becomes more problematic where there is evidence that the consumer did not affirmatively assent to the agreement containing such provision.  In Kwan v. Clearwire Corp., decided in January 2012, the Western District of Washington denied the defendant’s motion to compel arbitration in a putative class action against Clearwire, an Internet service provider, under a variety of state and federal consumer protection statutes in connection with allegedly poorly performing modems.  Clearwire sought to compel arbitration based on an arbitration provision in its online Terms of Service.  Two named plaintiffs, Brown and Reasonover, argued that they could not be bound by the arbitration provision because they had never agreed to the Terms of Service.  The court held that an evidentiary hearing would be required to determine whether an arbitration agreement had been formed with respect to Brown after she introduced evidence that a Clearwire technician who installed her modem, and not Brown, had click-accepted the Clearwire Terms of Service.  Likewise, an evidentiary hearing was required as to Reasonover because Clearwire could not produce a record of a click-acceptance for Reasonover, who testified that she had “abandoned” the Clearwire website without click-accepting the Terms of Service.

What lessons can be drawn from the Blau and Kwan decisions?  First, for an arbitration provision contained in an online Terms of Service agreement to be enforceable against a consumer, there should be clear consent by the consumer to be bound by the agreement.  If the arbitration provision is contained in a passive “browsewrap” Terms of Service, requiring no affirmative consent from the consumer, this may be insufficient – absent other factors – to bind the consumer with respect to arbitration.  In addition, an online Terms of Service containing an arbitration provision should be presented to customers in a reasonably conspicuous manner before the consumer click-accepts the Terms of Service; the agreement should not be “submerged” within a series of links, placed on a part of the screen not visible before the consumer reaches the “I accept” button or buried in small print at the footer of a long email message.

Second, robust records documenting individual consumers’ “click-acceptances” of an online Terms of Service agreement incorporating an arbitration provision will substantially improve the likelihood that such agreement (and the incorporated arbitration provision) will be enforced.  A click-accept record that is linked to the individual who actually click-accepted the agreement is best.  Moreover, the Terms of Service agreement should be drafted to make clear that it applies not only to the individual who originally click-accepted such agreement, but also to other users to whom the individual provides access to his or her account.

“Man, what do I write here? And what’s it going to be valued at?” So read Noah Kravitz’s Twitter profile soon after Magistrate Judge Maria-Elena James of the Northern District of California denied Kravitz’s motion to dismiss a number of claims brought against him by his former employer related to the Twitter account. While Kravitz continues to control the @noahkravitz Twitter account currently, the case raises questions as to whether he will retain control of the account and how the account should be valued.

October 15, 2010 was Kravitz’s last day at PhoneDog, an “interactive mobile news and reviews web resource.” After about four and a half years of providing product review and video blogging services for PhoneDog, Kravitz moved on to work at a competing website called TechnoBuffalo. While at PhoneDog, Kravitz used the Twitter account @PhoneDog_Noah to publish content related to mobile products and services. During the course of Kravitz’s employment at PhoneDog, the @PhoneDog_Noah account accumulated approximately 17,000 Twitter followers.

After Kravitz ended his employment with PhoneDog, the company requested that he relinquish use of the Twitter account. Instead, Kravitz kept the account and changed the account handle to “@noahkravitz.” Kravitz’s farewell post, published on the PhoneDog website days after Kravitz left the company, told PhoneDog website visitors that they could continue to follow Kravitz using the new @noahkravitz handle. As of February 2012, the @noahkravitz Twitter account more than 26,900 Twitter followers.

PhoneDog proceeded to file a complaint against Kravitz in the United States District Court for the Northern District of California that asserted a number of claims, including trade secret misappropriation, conversion, and intentional and negligent interference with economic advantage. Kravitz filed a motion to dismiss PhoneDog’s complaint based on, among other things, the argument that PhoneDog could not establish that it had suffered damages over the $75,000 jurisdictional threshold.

The jurisdictional amount-in-controversy issue raises interesting questions regarding the ownership and proper valuation of a Twitter account and its followers. PhoneDog asserted that Kravitz’s continued use of the @noahkravitz Twitter account resulted in at least $340,000 in damages to the company, using a calculation based on the total number of followers, the time during which Kravitz had controlled the account, and a purported industry standard value of $2.50 per follower. Kravitz disputed PhoneDog’s calculations and argued that any value attributed to the account came from his efforts in posting tweets and the followers’ interest in him, not from the account itself. Kravitz also argued that, to the extent a value can be placed on a Twitter account, it cannot be determined simply by multiplying the number of followers by $2.50, but rather requires consideration of a number of factors, such as: (1) the number of followers, (2) the number of tweets, (3) the content of the tweets, (4) the person publishing the tweets, and (5) the person placing the value on the account.

Kravitz also disputed whether PhoneDog had any ownership interest in the Twitter account or its followers at all. Kravitz argued that Twitter’s terms of service state that all Twitter accounts belong to Twitter, not to Twitter users such as PhoneDog. Kravitz also asserted that Twitter followers are “human beings who have the discretion to subscribe and/or unsubscribe” to the account and are not PhoneDog’s property. Finally, Kravitz argued that “[t]o date, the industry precedent has been that absent an agreement prohibiting any employee from doing so, after an employee leaves an employer, they are free to change their Twitter handle.”

For its part, PhoneDog claimed that it had an ownership interest in the @noahkravitz Twitter account based on the license granted to it by Twitter to use and access the account, and in the content posted to the account. PhoneDog also argued that it had an “intangible property interest” in the Twitter account’s list of followers, which PhoneDog compared to a business customer list. Finally, PhoneDog asserted that, regardless of any ownership interest in the account, it was entitled to damages based on Kravitz’s interference with PhoneDog’s access to and use of the account, which (among other things) affected PhoneDog’s economic relations with its advertisers.

The court determined that the amount-in-controversy issue was intertwined with the factual and legal issues raised by PhoneDog’s claims and, therefore, could not be resolved at the motion-to-dismiss stage. Accordingly, the court denied without prejudice Kravitz’s motion to dismiss for lack of subject matter jurisdiction. The court also denied Kravitz’s motion to dismiss PhoneDog’s trade secret and conversion claims, but granted Kravitz’s motion to dismiss PhoneDog’s interference with prospective economic advantage claims.

While we wait to learn the final disposition of the @noahkravitz Twitter account, employers should consider explicitly addressing ownership of company-related social media accounts in their agreements with their employees and independent contractors, including providing for transfer of control (including passwords) of such accounts to the company at the end of the employment or independent contractor relationship. In addition, if a social media account is intended to constitute the employer’s property, the account name or handle should refer only to the company and should not include the employee’s name.

In a recent case of first impression, the National Advertising Division of the Council of Better Business Bureaus (“NAD”) – an industry forum for resolving disputes among advertisers – addressed an advertiser’s use of Facebook’s “like” feature in connection with an online promotion.  Such promotions – referred to as “like-gated” promotions, typically ask a Facebook user to “like” the advertiser’s Facebook page in order to receive a discount, rebate or other deal.  If the user chooses to “like” such page or content, this information will appear on such user’s Facebook wall and possibly his or her Facebook news feed, where it can be viewed by the user’s Facebook friends.  Moreover, the user’s name and image may be displayed in connection with the “liked” page or content.  As a result, Facebook’s “like” feature can generate invaluable exposure for an advertiser, transforming a user’s interest in the advertiser into a public endorsement of such advertiser’s products and services. 

In the NAD case, Coastal Contacts, Inc., offered a free pair of glasses to each person who “liked” its Facebook page.  A competitor, 1-800 Contacts, Inc., challenged the offer, alleging that Coastal Contacts had failed to adequately disclose the offer’s material terms.  1-800 Contacts also charged that, on account of that failure, the “likes” that Coastal Contacts received were not legitimate, and the company’s use and promotion of such “likes” on the Facebook platform and in press releases were therefore fraudulent.  1-800 Contacts urged the NAD to recommend that Coastal Contacts remove and stop promoting the “likes” that it received via the allegedly misleading promotion, in order to remedy its allegedly unfair social gain.

The NAD agreed with the challenger that Coastal Contacts had failed to clearly and conspicuously disclose the terms of its free offer; however, the NAD did not agree that such failure rendered the resulting “likes” invalid, and it therefore declined to recommend that Coastal Contacts remove or stop promoting those “likes.”  The NAD explained that, although Coastal Contacts’ promotion required modification, there was no evidence showing that participants were denied free pairs of glasses because they failed to understand the offer terms.  In the NAD’s view, because actual consumers “liked” Coastal Contacts’ Facebook page and the consumers who participated in the offer received the benefit of such offer, Coastal Contacts did, in fact, have the general social endorsement that the “likes” conveyed. 

What About the Endorsement Guides?

The case raises an issue that the NAD did not address:  Should an advertiser be required to disclose that the Facebook “likes” received through a like-gated promotion were received in exchange for consideration?  Under the Federal Trade Commission’s (“FTC”) Endorsement Guides, an advertiser is required to disclose any material connection between itself and a consumer who endorses its business.  So, should a “like” given in exchange for a discount or other deal be accompanied by a disclosure of the connection?  Is such a disclosure even possible? 

To our knowledge, the FTC has not publicly addressed this issue, but we think that it could challenge an advertiser’s failure to disclose the consideration received in exchange for an endorsement conveyed by a “like.”  Any disclosure that the FTC would seek to prescribe in connection with “likes” displayed within the Facebook platform would most likely have to be built into Facebook’s “like” feature itself – something that is not within advertisers’ direct control.  This does not rule out an FTC action, as the FTC could take the position that advertisers should not use like-gated promotions if they are unable to make the disclosures required under the Endorsement Guides.  The FTC may also assert that corporate Facebook users have the power to impress upon Facebook the need to modify the “like” feature to allow for necessary disclosures. 

An advertiser considering a like-gated Facebook promotion should keep these issues in mind (and keep an eye out for further developments).  It should also ensure compliance with the FTC’s Endorsement Guides to the extent possible (i.e., where it can make required disclosures), such as on its own Facebook page and in other online and offline media in which it promotes the “likes” that it has received as a result of any promotion.

Don’t Forget the Facebook Promotions Guidelines.

When structuring a contest, sweepstakes or similar promotion using Facebook, an advertiser must also comply with the Facebook Promotions Guidelines, which Facebook revises from time to time.  Among other things, the Guidelines set limits on a promotion sponsor’s use of Facebook’s “like” feature.  For instance, while “liking” a sponsor’s own Facebook page is a permissible requirement under the Guidelines for a user’s participation in a promotion, the act of “liking” such a page cannot function to automatically register the user for the promotion.  Further, if a sponsor does condition participation on “liking” the sponsor’s Facebook page, the sponsor must extend eligibility for the promotion to users who previously “liked” the page, as well as to users who “like” the page from the first time in connection with the promotion. 

Sponsors of promotions are also prohibited under Facebook’s Guidelines from requiring prospective participants to take any action using any Facebook features or functionality other than either “liking” the sponsor’s own Facebook page, checking into a particular location or connecting to the sponsor’s Facebook app.  Nor may a sponsor require prospective participants to “like” any content other than the sponsor’s own Facebook page – for example, a sponsor may not condition a user’s participation on “liking” a specific wall post or any other particular piece of content.  The Guidelines do not explain the reason for this distinction; however, it may be that the “News Feed” and other posts that result when a user “likes” particular content (as opposed to a Facebook page generally) may often constitute “unauthorized commercial communications,” which are prohibited by Facebook’s Statement of Rights and Responsibilities

All this serves as an important reminder that running a successful and legally compliant promotion requires the promotion’s sponsor to be familiar with applicable laws, the social media platform provider’s various guidelines and contractual terms, and emerging best practices.