March 2, 2010
Recent case law confirms once again: if online agreements are presented properly to end-users, they’re legally enforceable.
This continuing trend is good news for websites that contract with registered users though SaaS Agreements, Membership Agreements, Subscription Agreements, Terms of Sale, Content License Agreements, and the like.
Why? Among other things, this means that important legal disclaimers and limitations of liability are legally enforceable.
But what about liability exposure arising out of customer contracts entered into by your resellers? Are you liable for actions of your resellers?
The Direct Revenue Case
In the case of People v. Direct Revenue, the New York Attorney General in 2008 attempted to nail Direct Revenue for its distribution of software that served pop-up advertising software on consumers’ computers.
Direct Revenue is in the advertising business. It’s software client serves pop-up advertisements to consumer’s computer screens through the Internet. Direct Revenue does not charge fees to consumers. Instead, it charges fees to the companies whose products it advertises.
It’s interesting to note that one line of attack by the New York Attorney General focused on Direct Revenue’s “click-wrapped” (where the user clicks on “I ACCEPT”) end user license agreement (EULA) and Direct Revenue’s alleged deceptive and illegal practices. The court granted Direct Revenue’s motion to dismiss the claims noting that sufficient disclosure was given in the EULA, and the required elements for an enforceable agreement were followed.
Having failed with its first line of attack, New York’s additional line of attack focused on the customer agreements of Direct Revenue’s resellers in an attempt to hold Direct Revenue liable. The result was the same as with the EULA — Direct Revenue was held not liable.
New York conceded that Direct Revenue’s resellers were independent contractors rather than agents. Generally, a principal is not liable for acts of an independent contractor due to the lack of control over how the contractor’s work is performed. In addition, the court noted that Direct Revenue’s software distribution agreement required its distributors to obtain consent of consumers consistent with the EULA and prohibited distributors from holding themselves out as agents of Direct Revenue.
New York argued that Direct Revenue should be liable because it’s servers interacted with the consumers’ computers in the software installation process. The court pointed out that participation in installation was not enough for liability in the absence of participation in deceptive conduct that induced the installation.
Finally, New York argued that Direct Revenue should be held liable for the actions of its resellers on the ground that Direct Revenue ratified the conduct of its resellers. The court ruled that mere knowledge of consumer complaints was insufficient to impose liability on Direct Revenue, especially in light of the fact that when Direct Revenue had actual knowledge of a reseller misconduct, it took steps to remedy the problem.
3 Tips To Avoid Liability For Actions of Resellers
Potential liability for acts of online resellers is a major concern of ecommerce businesses which use reseller networks.
The Direct Revenue case teaches us that ecommerce sites may not be held liable for actions of their resellers if these 3 tips are followed:
- if you transfer anything to a user’s computer, require your resellers to obtain consent of end-users consistent with your EULA – this means consent in clear and easy-to-understand (not deceptive) terms,
- prohibit your resellers from holding themselves out as your agents, and
- if a reseller does engage in misconduct, take affirmative steps to deal with the situation, including termination, if warranted (particularly if the reseller’s actions tend to indicate an agency relationship).
These 3 tips won’t guarantee that you have no exposure, but they’ll go a long way to protecting you from liability for actions of your resellers.