Sign Up

Stay current with GH&R Newsletters. Click here to sign up.

E-Commerce News

COURT UPHOLDS LIQUIDATED DAMAGE CLAUSE; ADWARE SETTLEMENT IN ILLINOIS CHANGES

June 6, 2006

COURT UPHOLDS LIQUIDATED DAMAGE CLAUSE

Is a clause in a Web site designer's contract, which limits the customer's damages for breach to the contract price paid "unconscionable" and, therefore void?  A federal trial court in Michigan thinks not, according to a recent decision.  

The plaintiffs in the case were retail furniture dealers who contracted with AIM and AIMS, two affiliates of Ameritech, for the design, registration and hosting of a custom Web site.  The contract required AIM to register the site with a number of search engines.  Some time after the Web site was completed,  the plaintiff heard from a furniture wholesaler who said he couldn't find the Web site, despite using major search engines. 

When the plaintiff complained, AIM admitted that it had not registered the site.  In an effort to correct the problem, the parties agreed to extend the contract for 18 months and to add certain specific key words and to submit the site to five major Internet search engines: Lycos, Alta Vista, Excite, Infoseek, and Yahoo.  Apparently, however, this never happened, and ultimately plaintiff sued, seeking damages exceeding $3,000,000 for lost opportunity and exposure, out-of-pocket expenses, and lost profits.

Because they had no real argument on their liability, the AIM defendants immediately pointed to a contract clause that provided:  "Unless the parties negotiate a higher limit of liability, if Ameritech should be found liable for loss or damage due to a failure on the part of Ameritech ... the liability shall be limited to an amount equal to the contract price or [sic] the disputed services, or that sum of money actually paid by customer toward the disputed services, which sum shall be less ..."

In plain English, the clause said that, even if AIM breached, the most plaintiffs could recover would be the contract price, here, $1600.  Plaintiffs argued that this provision was "unconscionable" and therefore unenforceable.  "Unconscionable" is a legal term that essentially means "unfair."

The court was not sympathetic.  It noted that a provision is unconscionable only when the inequity is so extreme as to shock the conscience. The court found a number of reasons why the clause here did not "shock the conscience" (sounds like a song by some 80's metal band, doesn't it?).

First, the limited liability provision permitted the plaintiffs to recover the full amount of their contract price of $1,600.  Coupled with the fact that the plaintiffs had already received a substantial extension of the term of their agreement as a result of the alleged breach, such a provision was not conscience shocking.

Second, there was no dispute that  the defendant completed all of the contract promises, except  for registering the Web site with the major Internet search engines.  Third, the plaintiffs acknowledged that, in addition to being able to contract with other providers, the plaintiffs themselves could have registered their Web site with the Internet search engines. Fourth, the plaintiffs introduced no evidence to contradict testimony that even if a Web site were registered with a search engine, there was no guarantee that the search engine would post it.

Ultimately the court determined that the contract did not put plaintiff in a "take it or leave it" position, because plaintiff had any number of other providers from which to use.  In addition, plaintiff received most of the benefit of the service, so it could not argue that AIM completely failed to perform.  These factors led the court to uphold the harsh result mandated by the contract's terms.

The moral of the story?  Read your contracts thoroughly, and run them by a lawyer to spot landmines.  That's not too shamelessly self serving is it?

ADWARE SETTLEMENT IN ILLINOIS CHANGES BUSINESS PRACTICES

Two adware companies -- DirectRevenue LLC and The Best Offers Network LLC - have agreed to a proposed settlement of a federal class action suit pending in Illinois.  The proposed  settlement will require the two companies to obtain consumers' prior express consent for the downloading of adware programs.

DirectRevenue also agreed to make it easier for consumers to remove DirectRevnue from their computers.  Under the proposed settlement, DirectRevenue pop-ups will feature information on how to remove the software.  DirectRevenue also agreed to refrain from collecting any personally identifiable information from consumers and will destroy any such data it currently holds. Under the settlement, Direct Revenue and Best Offers will need to reform over 20 business practices.

The case presented one of the first lawsuits challenging "drive-by downloads" --  programs attached to software such as games, that bombard consumers with pop-up ads and other marketing materials.

The trial court had ruled in August 2005 that the plaintiffs could maintain a  "trespass to chattels"  claim. A claim for trespass to chattles essentially states that, in this case, DirectRevenue and the other defendants "trespassed" against the plaintiffs' personal property (their computers) by interfering with their use of their computers.

The settlement agreement requires that the defendants:

  • include a detailed disclosure that explains that adware will be deposited onto the computer and how that adware works; 
  • include information on how to uninstall the software; 
  • provide consumers e-mail and toll-free support for help on uninstalling software; 
  • refrain from distributing its software to Web sites targeting children; 
  • refrain from using the word "free" in banner ads to describe the underlying software (such as a game) unless it is also disclosed that the program is ad-supported; 
  • refrain from displaying adult content ads unless the user is viewing adult Web sites; 
  • facilitate the removal of unwanted software by making them appear in the Microsoft Windows "Add/Remove Programs" list and refrain from reinstalling programs that the user has uninstalled; 
  • include a "?" link on each ad, which when clicked provides details about why the consumer is receiving this ad, the application the consumer downloaded that caused this ad to appear, and instructions on how to uninstall it from the system; 
  • refrain from modifying the user computer's security settings; 
  • limit ads to 10 or less per computer per 24-hour period; and 
  • use sponsored links to help consumers find information on how to remove DirectRevenue software from their computers.

 

The scope of the settlement class will cover anyone who owned computers in Illinois and who downloaded the defendants' targeted advertising software anytime after March 31, 2002.  The settlement permits individual class members to file individual claims seeking damages. Counsel for the plaintiffs will be paid $250,000 for attorneys' fees and $50,000 for expenses.

That's some pretty costly spam! 

That's some pretty costly spam! 

This Newsletter is a periodic publication of Graydon Head & Ritchey LLP and should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult your own advisor concerning your situation and any specific legal question you may have.