The key issue before the US District Court for the District of Nevada was whether the arbitration clause in Zappos.com's terms of use was enforceable against consumers in a suit for damages resulting from a data security breach. The validity of a browsewrap agreement depends on whether the user has actual or constructive knowledge of a website's terms.

In January, 2012, Zappos.com, an online retailer, suffered an online security breach when hackers accessed its files containing customer information. It notified its users of the security breach and several customers (plaintiffs) filed suits for damages against Zappos.com (defendant) resulting from the security breach in multiple federal districts.

On June 14, 2012, the US Judicial Panel for Multi-District Litigation (MDL Panel) transferred nine of the pending actions to the district court for the for coordinated or consolidated pretrial proceedings. On the same day, the defendant filed a motion to compel arbitration and stay the litigation. On July 16, 2012, the MDL Panel transferred an additional case into the consolidated actions. Certain plaintiffs filed oppositions to this motion on August, 30, 2012, with other parties submitting joinders to one of these oppositions on the same day. Zappos.com filed its reply on September 6, 2012 and the district court conducted a hearing on the motion and heard oral arguments from both parties on September 19, 2012.

Zappos.com claimed that the district court should compel arbitration under the arbitration clause in the website's terms of use. The terms of use were in the form of a browsewrap agreement, which website owners employ to bind users to the terms and conditions posted on the website, usually using a hyperlink. Courts will generally enforce arbitration provisions if the parties entered into a valid agreement to arbitrate.

On September 27, 2012, the district court published its order, denying the motion to compel and holding that the arbitration clause is not enforceable against the plaintiffs because the plaintiffs did not agree to the terms of use. The court focused on the inconspicuous nature of the browsewrap agreement. While each Zappos.com webpage linked to it, the link was located somewhere between the middle of each page and the bottom.

The district court found that it could not be assumed that the users had knowledge of the terms of use because:

Because the district court could not conclude that the plaintiffs ever viewed the terms of use, it was impossible to assume that the plaintiffs agreed to their terms. This decision followed a line of cases showing that courts are not enforcing terms of use in browsewrap agreements that the customers did not see or where a reasonable customer would not have seen the agreement.

The district court also held that the terms of use were an illusory contract because the terms of use granted the defendants the unilateral right to modify the arbitration clause. This would have allowed Zappos.com to avoid any promise to arbitrate by simply unilaterally modifying the provision, while binding Zappos.com users.

Companies operating websites that collect information should ensure that they make their terms of use known to users of their website. Companies may also want to consider using clickwrap agreements or an agreement that requires users to actively accept the terms of use by clicking a button or taking some other action.

For a sample website terms of use, see Standard Document, Website Terms of Use.