A federal appeals court has ruled that companies can't change their contracts and post those revisions online without notifying customers first.
The ruling (download PDF) by the U.S. Court of Appeals for the Ninth Circuit paves the way for Joe Douglas, a customer of telephone company Talk America Holdings Inc., to file a class-action suit against the company. Talk America has since merged with Cavalier Telephone LLC in Richmond, Va. Cavalier could not be reached for comment.
Privacy experts and others have been grappling with the issue of how companies service customers online, as well as how they use their personal information after mergers or acquisitions, since the emergence of e-commerce in the 1990s.
"It seems as if this was born of someone trying to get something out of someone," said Sucharita Mulpuru, an analyst at Forrester Research Inc. in Cambridge, Mass.
Mulpuru said companies should always notify customers before making any changes to their policies.
"How hard is it to send out an e-mail letting people know about [any changes]?" she said.
According to the court documents, Douglas signed a contract for service with America Online Inc. The business was then acquired by Talk America, which continued to provide telephone service to AOL's former customers. However, Talk America changed the contract AOL had with its customers and posted those changes on its Web site without notifying the customers first.
The company added several provisions, including an increase in prices, an arbitration clause and a class-action suit waiver.
Douglas continued using the service for four years, unaware that the new company had made any changes. Since his monthly charges were automatically billed to his credit card, Douglas didn't realize that the cost of his service had changed. When Douglas became aware of the new charges, he sued in federal court in California, charging Talk America with violating the Federal Communications Act, breach of contract and violating other California consumer protection laws.
Talk America asked the court to force Douglas into arbitration, which it did. Douglas then appealed that decision to the federal appeals court, which ruled that companies couldn't arbitrarily change their contracts and post those changes on their Web sites without notifying their customers.
The court said that because a contract was an agreement between two parties, one of the parties couldn't change it unless the other party agreed to the change.
Talk America argued that since the new contract was on the Web site, where Douglas paid his bills, he should have seen the changes. However, Douglas said he didn't pay his bills online; the monthly bills were automatically charged to his credit card. But even if he had paid his bills online, the appeals court shot down Talk America's argument.
"Even if Douglas had visited Talk America's Web site to pay his bills, he would have had no reason to look at the contract posted there," the court said. "Parties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side."
The appeals court also said the district court was wrong to grant Talk America's request for arbitration.
"The district court thus erred in holding that Douglas was bound by the terms of the revised contract when he was not notified of the changes," the appeals court said.