Why Online Contracts Are Eating the Law


Online contracts are a farce. Everyone knows they’re a farce.

But every year, more areas of the law are consumed by the law of online contracts.

In 2011, Marc Andreesen wrote a landmark blog post called, “Why software is eating the world.” It was so prescient that the phrase is now embedded in the Silicon Valley lexicon.

He predicted that software would soon revolutionize many industries, even those that we do not perceive as “tech,” by eating much of the value chain in sectors that provide traditional brick-and-mortar services. 

Airbnb ate much of the hotel industry. It did not exist 20 years ago, and now it is larger and more profitable than any hotel conglomerate, even though it owns no properties.

Uber and Lyft ate much of the transportation sector. They are now larger and more consequential than any taxi or rental car company, even though the fleet of cars that powers their empires is owned by the (mostly) independent contractors that work for them.

And so on.

As software eats more offline industries, online contracts eat up more areas of the law.

Software companies use online contracts to replace the default settings for traditional areas of the law with the preferences of software providers. Mass torts, copyright, civil procedure, personal property law, even computer fraud statutes—they’ve all had their domains increasingly consumed by the law of online contracts.

For example, items that were once purchased outright, such as books, are now licensed to you by Amazon through concepts like “Kindle Content.” In the offline world, when you bought a book, you owned the book. You could then lend it to your friend. Or sell it again online. But that’s not true with Kindle Content: the items that you “buy” remain in your Kindle, but you can’t then give them to someone else. You don’t even really own your Kindle Content. It’s licensed to you. And while the books you “buy” typically remain on your Kindle, on occasion, for a variety of reasons, they disappear, without notice or opportunity from redress. What you have “bought” might disappear one day, and because of the fine print in the license you agreed to when you signed up for Amazon services, you have no legal recourse when it goes away. This is a subtle but important erosion of property rights. And most kindle users have no idea it’s happening.

As another example, historically, if a business engages in illegal conduct according to a consistent fact pattern, the most common way for the legal system to address this is with a class-action lawsuit. This allows lawyers to aggregate minor legal grievances together to redress the harm on behalf of all victims of the conduct.

But most online contracts now have clauses where consumers waive the right to pursue a class action when they use software. Which means the default mechanism by which the law has traditionally given consumers the ability to push back against illegal conduct is also stripped away by the law of online contracts.

Among the other consequences of this proliferation of online contracts:

Fifteen years ago, when buying groceries, finding someone to watch your dog, or hailing a taxi, the idea that you might need a legal contract to do any of those things would have seemed absurd. They’re simple transactions; why would you need a contract?

But today, if you use Instacart, Rover, or Uber, you do indeed enter into a supposed online agreement whenever you use those service services. Since Marc Andreesen wrote “Why Software is Eating the World” in 2011, the percentage of online transactions has doubled. That percentage is increasing by about 3% a year.

And every time a new industry is made simpler through an app that makes the user experience of consuming something online easier than buying it offline, a new area of the law is consumed by the law of online contracts.

Regardless of whether you think this good or bad, this transition represents a massive shift from public law to private law.

A generation ago, common law principles governed nearly all simple business transactions between businesses and consumers. Now, according to most estimates, more a quarter of all consumer transactions are governed by the online contractual preferences of private businesses. In a generation, if the rate of increase continues at its current pace, that number will likely double again.

Every year, legal domains where the law of online contracts had no importance become dominated by the law of online contracts.

This didn’t happen because of a conscious change initiated by legislators, judges, or lawyers. It is a phenomenon driven by the software industry and changing market dynamics. Judges and lawyers are just along for the ride.

Whenever courts analyze the enforceability of online contracts, they say something along the lines of, “The fundamentals of online contract formation should not be different from ordinary contract formation; the touchscreens of Internet contract law must reflect the touchstones of regular contract law.” See, e.g. Kauders v. Uber Technologies Inc. at 571.

But of course, that isn’t true. That’s not the reality of online commerce.

The reason that online contracts are unlike offline contracts is because there are so many of them. The average knowledge worker is confronted with orders of magnitude more online contracts than offline contracts. The average person might sign a couple of dozen offline contracts per year. The average information worker is likely confronted by 100 times that number in digital life.

Some studies estimate that reading the average American’s digital contract load would require 250 hours a year. All the “notice” in the world cannot change that. All the “notice” in the world cannot change the fact that no reasonable cost-benefit analysis ends with consumers having the ability to read and agree to these contracts.

The digital contract load of the average American grows every year.

Which makes the extent of the farce of the law of online contracts larger every year.

Courts considering whether to enforce online contracts focus on two concepts: 1) notice and 2) assent. As a rule, if you were given clear notice of the existence of an online contract, and you manifested some form of agreement to the contract (usually in the form of a single click, but sometimes by virtue of continued use), you’re bound by it.

This legal enforceability analysis drives software providers to engage in A/B testing to determine the minimum degree of prominence they can give to contractual assent while minimizing the impact on user engagement in the software.

It’s an interesting dance, and one that’s fun to observe for us nerds who are immersed in this area of the law. But it has no bearing on whether users read these agreements, whether they’re aware of their content, or whether two parties agree to be bound by a “contract,” in any meaningful sense.

There is a fairly clear and consistent set of hoops that you have to jump through to get your contract enforced.

But the bottom line is this: if you’re a software provider that has the capacity to generate demand, the law allows you to impose your legal preferences on your users, if you’re smart enough to jump through the right hoops.

The fact that users cannot, do not, and never will read these contracts is irrelevant. As long as the software provider jumps through the right hoops, they’re golden.

None of this is to say the sky is falling.

Apple’s products famously have as egregious of an online terms of use as any business. But that hasn’t reduced its popularity among consumers. If this system were so oppressive, people would demand different terms. But most people don’t seem to care.

There are smart people who argue that this online contractual regime is economically efficient and counter-intuitively pro-consumer.

When people buy iPhones and iPads with superior functional features and inferior boilerplate for a price that they consider worth waiting in a long line on a rainy day to pay, and when they diligently return to this line every two years, knowing all too well that there is a grotesque fine print attached, what breach of autonomy occurs? What is the consumer protection crisis that would justify punishing their vendors with tort liability, exemplary damages, and attorneys’ fees? When these consumers install apps that provide them with useful daily services, and instead of paying the service providers, they allow the collection of location and other personal data, what is the liberal theory that renders such currency unacceptable? What is the public value that tells people that they can no longer enjoy such bargains and must instead pay for mandated modules of these services with top money and real sacrifice?

Omri Ben Shahar, Regulation Through Boilerplate: An Apologia

The average person doesn’t read or understand the online contracts that they’re supposedly bound by, but the average person doesn’t understand the nuances of the default rules of the legal system, either. Each is equally opaque to the average consumer.

By allowing companies the flexibility to impose these contracts on consumers, the terms of these contracts likely result in lower prices on average for consumers. And that’s a tradeoff that most people seem perfectly willing to make.

The opinions of University of Chicago economists notwithstanding, it still seems a little strange to me that we’ve decided to give the most well-resourced businesses nearly unfettered ability to tilt the scales of justice in their own favor without pushback or a challenge.

But I am not optimistic that this regime will ever change.

First, the law of online contracts is a state-law issue. And even though the history of this law is heavily influenced by federal cases, for this legal regime to change, 50 states’ legal systems would have to change. For an industry where inertia is deeply baked into the system, that’s hard to imagine.

Even if there were some sort of theoretical or ideological consensus on what to do about this issue—which there is not—it’s hard to imagine the Congress and Senate overcoming lobbying efforts from, say, all online businesses. And it’s even harder to imagine state legislative bodies doing anything useful to resolve the problem.

The only possible solution that I could imagine would be a broader regime of copyright preemption. But that’s not something I’m expecting any time soon either.

The one piece of low-hanging fruit that I can think of is that small businesses should be putting more time and energy into their terms of use. Whereas the Fortune 500 company knows full well the value of jumping through the right hoops, most small businesses and startups often think the best strategy is to copy, paste, and link, without thinking through the actual process required to make these agreements enforceable. In so doing, they’re ignoring what might be the most powerful tool in the law to limit liability in their favor.

Even though I have little hope or expectation that this will change, I still feel compelled to write about it. The fact that effectively half of business transactions might change from domain of public to private law in a couple of generations seems worth talking about. Even if no one if few lawyer, judges, or scholars quite know what to do about it.