Recent case law confirms that online contracting produces enforceable legal agreements. This is good news for ebusiness sites that contract directly with customers with Membership Agreements, Subscription Agreements, Terms of Sale, SaaS Agreements, Content License Agreements, and the like. This means that important legal disclaimers and limitations of liability are readily enforceable.

But what about liability exposure arising out of customer contracts entered into by your resellers? Are you liable for actions of your resellers?

In the case of People v. Direct Revenue, LLC, No. 401325/06 (N.Y. Sup.Ct., N.Y. Cty., March 12, 2008), the New York Attorney General attempted to nail Direct Revenue for its distribution of software that served pop-up advertising software on consumers' computers.

Direct Revenue is in the advertising business. It's software client serves pop-up advertisements to consumer's computer screens through the Internet. Direct Revenue does not charge fees to consumers. Instead, it charges fees to the companies whose products it advertises.

It's interesting to note that one line of attack by the New York Attorney General focused on Direct Revenue's click-wrapped end user license agreement (EULA) and Direct Revenue's alleged deceptive and illegal practices. The court granted Direct Revenue's motion to dismiss the claims noting that sufficient disclosure was given in the EULA, and the required elements for an enforceable agreement were followed. The result was that Direct Revenue's Disclaimer of Warranty clause and its Limitation of Liability clause were enforceable.

New York's additional line of attack focused on the customer agreements of Direct Revenue's resellers in an attempt attach liability to Direct Revenue. The result was the same as with the EULA -- Direct Revenue was held not liable.

New York conceded that Direct Revenue's resellers were independent contractors rather than agents. Generally, a principal is not liable for acts of an independent contractor due to the lack of control over how the contractor's work is performed. In addition, the court noted that Direct Revenue's software distribution agreement required its distributors to obtain consent of consumers consistent with the EULA and prohibited distributors from holding themselves out as agents of Direct Revenue.

New York argued that Direct Revenue should be liable because it's servers interacted with the consumers' computers in the software installation process. The court pointed out that participation in installation was not enough for liability in the absence of participation in deceptive conduct that induced the installation.

Finally, New York argued that Direct Revenue should be held liable for the actions of its resellers on the ground that Direct Revenue ratified the conduct of its resellers. The court ruled that mere knowledge of consumer complaints was insufficient to impose liability on Direct Revenue, especially in light of the fact that when Direct Revenue had actual knowledge of a reseller misconduct, it took steps to remedy the problem.

Potential liability for acts of online resellers is a major concern of ecommerce businesses which use reseller networks. The case indicates that, if ecommerce businesses are careful to incorporate the contractual approach of Direct Revenue, liability for actions of resellers can be avoided.

Copyright © 2008 Chip Cooper

This article is provided for educational and informative purposes only. This information does not constitute legal advice, and should not be construed as such.

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