What can you say about an internet contracting strategy that died?

I’m referring, of course, to General Mills’ abortive attempt to include new terms of service on all its internet and social media products, including an agreement to arbitrate and to waive any right to a class action, that came and went so fast I couldn’t blog about it until it was over. If you’re on Facebook or Twitter, you probably had a friend, like I did, who tried to turn the tables on General Mills and posted some snarky “terms of service” for themselves. As you might guess, those aren’t enforceable.


What about what General Mills did? Putting aside the market, especially the PR market, speaking quite loudly about it, to what extent might it have worked? That’s a critical question that involves not just contract law, but the Federal Arbitration Act and the Supremacy Clause of the U.S. Constitution, and it’s something on which the U.S. Supreme Court has a view that’s not too hard to discern. What I’ve tried to do is to analyze it in a more systematic way than simply piling on with conventional wisdom.


Some analysis of the case has been pretty good, in that it has pointed out the U.S. Supreme Court’s quite solicitous view of arbitration. Essentially, if the question is “is it arbitrable?” the Supreme Court has recently pretty much said, “yes.” The Federal Arbitration Act is a deceptively short and simple statute, the connection to interstate commerce that is all that is needed to come under the act isn’t hard to find in most cases and enforcing the act has a way of cutting down the workloads of courts, something the Supreme Court likes. 


But I wanted to focus on another recent case, a case that passed under the radar somewhat since it was decided the same day as the McCutcheon case on campaign finance, which, to mix metaphors, sucked up all the oxygen of Supreme Court coverage. In this case, Northwest, Inc. v. Ginsberg, which was decided unanimously, the Supreme Court walked a fine line between different ways in which a common law doctrine, which is technically “state law”, can apply to a contract that is governed by federal law under the Supremacy Clause. 


The case involved a rabbi who had the highest possible status in Northwest Airlines’ World Perks Club, its frequent flyer club. According to Northwest, he had made so many complaints, particularly about luggage, that they had kicked him out of the club. He claimed that they had done so because of an ulterior motive: to lower the cost of their club upon Northwest’s merger into Delta Airlines. Under Minnesota law, which applied, this was considered a violation of the “covenant of good faith and fair dealing”, which is implied into every contract under most jurisdictions’ common law. Northwest countered that to incorporate this provision of Minnesota common law into its contract would violate a provision of the Airline Deregulation Act that gave airlines the right to set all contract terms. 


The Supreme Court agreed and would not enforce Minnesota’s version of the covenant. In doing so, the court distinguished between application of the covenant to situations where the covenant was used “to effectuate the intentions of parties or to protect their reasonable expectations”, which it found not preempted, contrasted with cases where it is used “to ensure that a party does not violate community standards of decency, fairness, or reasonableness.” (internal quotations and cites omitted) The first of these are issues that go toward enforcing a contract the parties have clearly made. The second, in the Supreme Court’s view, were preempted by the express language of the federal legislation.


How does this apply to what General Mills sought, for a short time, to do? A good way to look at it is to break a contract down into basic constituent parts.


First, we have the issue of contract formation. This comes down to three things:


1.      Capacity to contract

2.      Offer and acceptance

3.      Consideration


The first issue takes care of anyone’s concerns about denying a ten-year old the right to sue because he or she clicked that they “Like” Cheerios®. Minors are among the group of people who can’t form contracts under the law; the Supreme Court is not going to enforce the Federal Arbitration Act against them.


Offer and acceptance goes to the question of whether clicking “I Accept” can be enough to bind you to terms you haven’t read or understood. The answer is “yes” in general. We’ll revisit that in a moment.


Third is the “peppercorn” in the title. There must be an exchange of value or of promises in order to have an enforceable contract. A coupon or a prize can certainly be enough; the classic definition of the consideration necessary to enforce a simple contract is indeed a peppercorn. Can it be an electronic photo of a peppercorn? That might be a close question, but the indications are again the Supreme Court might defer to a non-discriminatory state law.


Once you have a contract under state law, what we learn from the arbitration cases and the case of the flying Rabbi is that you won’t be able to use state laws to save you from enforcement of an arbitration clause. You won’t be able to have it declared “unconscionable” or “unfair or deceptive”, because Congress has declared that arbitration clauses are the opposite. And you won’t be able to apply a broader definition of the covenant of good faith and fair dealing, one that might have the effect of invalidating the clause in any way. 


Similarly, you won’t be able to use any of those doctrines to invalidate the effect of clicking “I Accept”, at least so long as you had the theoretical opportunity, whether you exercised it or not, to read the terms before you did so. 


If no one has told you to be careful when you click on things on the internet, consider yourself warned (and wonder how you’ve missed that message so far).