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District Court Looks Unfavorably Toward Unilateral Contract Amendments through Web Page Updates
By Katie Booth – Edited by Esther Kang

Roling v. E*Trade Securities, LLC, No. 10-0488  (N.D. Cal. Nov. 11, 2010)
Slip Opinion hosted by Scribd.com

The U.S. District Court for the Northern District of California held that plaintiffs’ claim that E*TRADE’s brokerage agreement was unconscionable was sufficient to survive a motion to dismiss. E*TRADE could change the terms of the brokerage agreement by posting revised terms on its website. According to Judge Marilyn Patel, plaintiffs’ allegations that E*TRADE’s brokerage agreement was both unilateral and did not provide for adequate notice of changes to consumers  were sufficient to allege a claim for unjust enrichment based on unenforceability.

Eric Goldman comments on the decision. He particularly notes that agreements like E*TRADE’s brokerage agreement, which allow companies to make unilateral modifications to contract terms by posting changes on the their websites, pose great risks that courts will find these provisions unconscionable and ultimately invalidate the entire contract.

In Roling v. E*Trade, plaintiffs Joseph Roling and Alexander Landvater brought a class action lawsuit against E*TRADE for imposing a $40 fee on customers who did not make trades during a given quarter. They also complained that E*TRADE liquidated their accounts when necessary to cover the fee charges. The plaintiffs brought four claims against defendant E*TRADE, alleging:

(1) E*TRADE breached its contract with plaintiff by charging the $40 inactivity fee; (2) E*TRADE was unjustly enriched through these fees; (3) the inactivity fee was a liquidated damage in violation California Civil Code section 1671; and (4) charging a $40 inactivity fee constituted an unlawful, unfair, and fraudulent business practice in violation of California’s Unfair Competition Law (“UCL”).  Roling at 2.

The key issue regarding the breach of contract claim was whether the contract was ambiguous. Judge Patel found that there were two reasonable interpretations of the contract. Under one interpretation, the fee terms at issue would only apply to a subset of E*TRADE customers who were former customers of Brown Company, which E*TRADE purchased in 2005. Under the second interpretation, the terms at issue would apply more broadly. Judge Patel found that because the contract ambiguity issue could not be resolved without extrinsic evidence, the motion to dismiss this claim must be denied.

With regards to the unjust enrichment claim, Judge Patel pointed to two key features of E*TRADE’s click-wrap contract: First, it was a unilateral contract. Second, E*TRADE did not provide adequate notice to consumers of revisions (consumers had to “scour” the website to find the revised fee agreement). Roling at 11. Patel found that much of the case law on which the defendant relied was “inapposite, distinguishable or unpersuasive” because in these cases, courts dismissed contract unenforceability claims on grounds other than unilateralism or lack of notice.  Judge Patel dismissed plaintiffs’ third and fourth claims.

In his blog, Eric Goldman critiques Judge Patel’s analysis of the unjust enrichment claim for not including a discussion about quasi-contract restitution in case the contract is completely voidable. Goldman also argues that companies like E*TRADE should avoid writing contracts that attempt to make unilateral revisions to contracts by posting changes on a website. The risk is that a court, finding these clauses unconscionable, will strike down the entire contract and leave the company legally exposed in all the other areas that the contract originally covered. However, Goldman notes that this case probably does not prevent a company from changing its fee structure unilaterally. If companies give adequate notice to their customers, they can presumably still make unilateral fee changes.

Katie Booth is a 1L at the Harvard Law School.

Posted On Dec - 7 - 2010 Comments Off

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