I find the phrase "legally naked" to be suspect. The point is that terms of use statement on a website does not constitute a contract because there is no meeting of the minds and no assent from both sides. Moreover, judges don't accept a unilateral statement that that terms can change at any time. Hence, Zappos' TOS was found to not be a legal contract.
The linked-to article says "Zappos governed by the default legal rules, which aren't nearly as favorable to it. Losing its contract provisions meant Zappos is legally naked."
Naked means unprotected, correct? But the default legal rules include protection, yes? So naked here can only be a euphemism, rather like in the first warm days of spring where I go outside without a coat and feel 'naked' because I'm missing clothing that I expected. Zappos has protections, just not the protection that it wants. This isn't "naked."
Yet I get the feeling that the author believes that the management provisions that Zappos had in its TOS ("its disclaimer of warranties, its waiver of consequential damages, its reduced statute of limitations, its clause restricting class actions in arbitration") are almost morally necessary. These of course are provisions that so-called "bricks and mortar" stores doesn't have.
> But the default legal rules include protection, yes?
1. Without a contractual disclaimer of 'consequential' damages [1], Zappos could find itself forced to defend against exorbitant claims for such damages --- and disputes about the underlying facts will usually mean that such claims would have to be resolved via an expensive and uncertain jury trial, as opposed to being disposed of on summary judgment [2] by the trial judge.
2. Different states have different degrees of legal protection for businesses. A brick-and-mortar store generally will be sued only in the jurisdiction where the store in question is located (or a chain might be sued at the location of its headquarters or other, limited venues) [3]. On the other hand, Zappos could be vulnerable to being sued just about anywhere a customer places an order --- the rules about 'personal jurisdiction' are a little fuzzy when it comes to Web sites [4].
So by not having contractual protections, Zappos arguably is exposing itself to the vagueries of whatever the default legal rules happen to be, in whatever state an unhappy consumer happens to live in.
3. The actual business risk to Zappos might not be terrifying here, because the potential harm to consumers from buying an ill-fitting pair of shoes seems manageable (although Zappos does carry more than just shoes). It might be a different story for other e-commerce Web sites. So the object lesson of the Zappos case is worth heeding.
I made a mistake in referring to a bricks-and-morter store. I should have asked how mail-order catalog companies survived and thrived for decades under the same laws that Zappos and seemingly also you find sufficiently worrisome as to require a special contract in order to avoid.
I recognize the legal principles which you listed, but is it realistic for this case? That is, of the over 100 years of mail-order catalogs in the US, how many such "expensive and uncertain" trials have occurred, how many were won or lost by the company, and what was the overall business cost?
I say this because I believe that the laws are already, and in general, in favor of the company over the consumer.
Let's take this specific lawsuit as the most relevant case. It wasn't, as you wrote, a case of ill-fitting shoes. It was a data security breech where personal information from some 24 million Zappos customers was copied. A customer claims that Zappos did not follow "federal consumer credit laws by failing to protect her personal information." If that was the case, should that customer not have the right to sue?
Note that as this is a federal law, it does not fall under your #2 point, that "Different states have different degrees of legal protection for businesses."
Should it be so easy for a company and customer to enter into a contract via a TOS which waives those federal protections? If so, should we extend that flexibility to other companies? I think the answers are "no" and "no."
This issue deals with risk management, I know. There are other solutions to risk management. For example, data breeches are a known risk, and can be planned for by designing the system to reduce the impact of the risk, by setting aside funds in order to handle litigation which might arise, and by purchasing insurance coverage should those funds prove insufficient. These make operations more expensive for the company, certainly, while a TOS which waives federal data protections is cheap. There should be no way that exorbitant claims - if unfounded! - based on data security issues should have a severe impact on Zappos.
I'm certain that some restaurants would like customers to waive food protection laws in the interests of cheaper food. Is that acceptable via a TOS-like contract agreement between the restaurant owner and the customer? Why should it be common for an online company, like Zappos, to have a TOS which waives certain customer rights?
1. At least on first reading, I don't disagree with anything in your analysis responding to my own; in particular, your mail-order catalog analogy seems quite apt.
2. You're correct that the risk-management precautions to which you refer have costs associated with them. Within limits worked out over decades in legislatures and courts, the law allows companies to use contracts to reduce such costs by shifting the associated risks to others.
When a company has sufficient bargaining power, its management typically attempts to do just that: Use standard-form contracts to shift risks to others, and thus reduce the company's costs.
(I spend some of my time helping to negotiate such contracts. As you might imagine, the standard-form contract of a powerful customer will usually be very different from that of a supplier.)
At the risk of belaboring the obvious, this is the same principle that's behind self-service gasoline pumps and self-service checkout lines in grocery stores: The more of a company's costs that the company can get its customers (or its suppliers) to take on, the higher the company's margins will be for the same amount of revenue. Not least, companies' managements are motivated to do this because eventually a company's aggregate costs will necessarily be reflected in the price, and thus the competitiveness, of the company's products and services.
(The costs of a company whose stock is publicly traded will also be reflected eventually in the price of the company's stock. That's generally high on the list of management concerns as well.)
3. The question you seem to pose is whether we should simply forbid contracting parties from contractually shifting risk as described in #2. Various state- and federal laws already do that to a certain extent; see, for example, consumer-protection laws, as well as article 2 of the Uniform Commercial Code (which in most states governs the sale of goods), not to mention employee-protection laws.
Whether a given jurisdiction should attempt go even further in that direction is a question that comes up every so often. One example is the recent controversy over the U.S. Supreme Court's 5-4 decision that companies can legally include mandatory arbitration provisions in their consumer contracts, thereby largely eliminating the possibility of class-action lawsuits and thus considerably reducing consumers' leverage [1].
Whenever the issue does come up, representatives of various affected interests converge from all directions --- including but not limited to so-called consumer lawyers eager to gain, or preserve, sources of contingent fees and/or statutory attorneys' fees awards.
Ultimately the issue boils down to a political question: What should or should not the law be? As with so many such questions these days, the deep ideological divisions among the American people often result in no change to the status quo.
Hence my analogy to a winter coat. During summer in many parts of the world, one does not need clothing as protection against the elements. As the most obvious example, people at a nudist beach survive the entire day without clothing.
It's only when the weather is bad where one needs clothing as protection.
Under this analogy, are business conditions in the US so bad that online stores need "clothing", in the form of special TOS which waive certain consumer protections otherwise available to customers of physical or mail-order stores?
If so, why haven't these considerations become these become part of the law? Otherwise it represents a barrier to entry, since every new online business must remember to set up those TOS correctly. The linked-to article shows that doing so is hard enough that a large, highly successful company makes mistakes. Why not just incorporate the needed changes as part of the UCC and not worry about it?
The linked-to article says "Zappos governed by the default legal rules, which aren't nearly as favorable to it. Losing its contract provisions meant Zappos is legally naked."
Naked means unprotected, correct? But the default legal rules include protection, yes? So naked here can only be a euphemism, rather like in the first warm days of spring where I go outside without a coat and feel 'naked' because I'm missing clothing that I expected. Zappos has protections, just not the protection that it wants. This isn't "naked."
Yet I get the feeling that the author believes that the management provisions that Zappos had in its TOS ("its disclaimer of warranties, its waiver of consequential damages, its reduced statute of limitations, its clause restricting class actions in arbitration") are almost morally necessary. These of course are provisions that so-called "bricks and mortar" stores doesn't have.