For many, this time of year ushers in the era where we all seem to find ourselves decluttering our homes, scrubbing baseboards, or changing the batteries on our smoke detectors!  This year, as a part of your annual refresh, it’s an opportune time for app and software companies to dust off and revisit their Terms of Service (TOS). In the rapidly evolving technology landscape, a TOS written just a few years ago could be alarmingly out of date. Just as we dust things off as we get ready for summer, scrubbing up your TOS can protect your company and keep it running smoothly in the ever-changing tech landscape. And just like the latest operating system update, no TOS tips are complete without quick fixes to protect against the latest scams and vulnerabilities. We have a suggestion here (it’s not legal advice, but hopefully helpful guidance) about a particularly pernicious one that may affect small businesses in particular.

Where to Start

A TOS typically includes what is known as a pre-dispute arbitration agreement. In the event of a dispute between users and the app company, this agreement requires the use of a dispute resolution process with a designated third-party arbitrator instead of a court. Independent arbitration has benefits for both companies and users, as the process is often significantly faster and less costly than the court system. Users get their issues resolved in a faster and more straightforward manner, and companies are protected from aggressive litigation tactics and the possibility of punitive damages and other outcomes disproportionate to the dispute.

Recently, however, plaintiffs’ lawyers have found a way to achieve the same damaging outcomes of longstanding sue-and-settle tactics within the arbitration system itself despite that system’s intent to mitigate those tactics. The new method is so lucrative, in fact, that some plaintiffs’ law firms have converted their entire business model to pursuing it.

How it Works

An enterprising lawyer will pick an app with a typical arbitration provision in its TOS and put out a call to that app’s users via social media post or targeted ad (for example, “If you played this mobile game, you may be entitled to hundreds in compensation!”). After collecting enough users, the lawyer will begin issuing individual arbitration demands on their behalf. Each demand triggers a separate process with the arbitration provider, and each process begins with an automatic filing fee charged to the app company.

If each filing fee is $2,000, and the plaintiffs’ lawyer has assembled a few tens of thousands of users, then the app company could be immediately on the hook for tens of millions of dollars in filing fees. This is all before an arbitrator looks at the underlying merit of the complaints. And indeed, it is unlikely that an arbitrator will ever review the merits, because the enterprising lawyer will offer to make it all go away for just a few million. What a bargain!

Shine Some Sunlight on Your TOS

Fortunately, app companies can make themselves less attractive targets in this new file-and-settle gold rush by making updates to their TOS. Check out your TOS for the following:

  • Who is your arbitration provider? Make sure the arbitration provider specified in the agreement does not require high filing fees. As of this writing, Judicial Arbitration and Mediation Services, Inc. (JAMS) assesses a $2,000 filing fee, whereas the American Arbitration Association (AAA) has a fee structure that scales with the amount of the claim, with the lowest fee at $800.
  • Did you set limits? Include language stating that substantially similar claims brought within a short time frame and/or with the assistance of the same law firm be resolved in batches (Coinbase’s terms, for example, resolve such arbitrations in batches of 100). This can potentially decrease the total filing fees by orders of magnitude.

It sounds scary, but with a few simple updates to your TOS, it’s a simple process to dissuade these arbitration trolls from doing real damage to you or your business.

Other TOS Elements to Check for Dust

While you’re sprucing up your TOS, here are some additional issues to consider:

  • Privacy Laws: If you haven’t updated your TOS in a few years, it’s possible privacy laws such as the European Union’s General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA) had not yet come into force since your last revision. These laws in other jurisdictions establish various user rights regarding their data, such as a right to access data about them and to request that it be deleted. There may also be sector-specific privacy laws regarding health data, data about minors, etc. Make sure your TOS is clear about which privacy laws you are in compliance with.
  • Third-Party Content: If your product or service allows users to post content, several issues should be addressed in your TOS:
    • How liability will be apportioned between the company and the user;
    • Types of moderation the company will be required to perform;
    • Specified types of content that the service will not accept, such as policies regarding harassment or hate speech;
    • Restrictions on users posting content whose copyright they do not own, along with a process for complying with the Digital Millennium Copyright Act (DMCA).

Make sure your TOS clearly answers the questions outlined above and that you have a process in place to deal with third-party content.

  • New Platforms: If your product or service has recently been released on a new platform, such as mobile, wearables, or a web app, the TOS should describe these uses and how they may impact your users’ permissions.
  • Type of business model: In the past, End User License Agreements were written for traditional software models where licenses to use the software were purchased, often for a one-time fee. Today, many other business models are common, including ad-supported or subscription-based models. TOS should be updated to reflect the business models currently used by the app in question.

Conclusion

Taking a little time to check on your TOS and making sure it is up to date improves your cyber hygiene and can save you from several future headaches. If you have any questions, or if there are any other parts of your TOS you think app makers should be checking on, reach out and let us know!

Reminder – This blog has been prepared for informational purposes. The information here should not be considered legal advice.