Your NFT project’s terms of use are probably unenforceable
One of the topics that generates the most passionate debate within the NFT community is the enforceability of projects’ terms of use. The terms often contain provisions limiting liability for NFT projects, like binding arbitration clauses and class action waivers, and are usually posted on the project’s website. But how enforceable are these terms? Although the answer depends on the facts of the case, applying some well-established legal principles doesn’t bode well for NFT projects seeking to enforce terms against buyers.
Contracts of Adhesion
The essential question is whether the NFT project and the NFT buyer entered into a valid contract. But before diving into the law, it’s helpful to review some relevant vocab regarding online contracts of adhesion:
“clickwrap”: users assent to the TOU by clicking a button. In many cases, the actual terms are not presented on the same page (e.g., there’s a link to a separate page).
“scrollwrap”: similar to clickwrap, but user must scroll through entire agreement to find the “I agree” (or similar) button.
“sign-in-wrap”: a website’s sign up screen says that a user accepts the TOU by signing up for the website, but users aren’t required to indicate they’ve read the TOU before signing up.
“browsewrap”: the user accepts the TOU, which is accessible via a link usually at the bottom of the page, merely by browsing the site.
California, like many other jurisdictions, requires both parties to demonstrate a clear manifestation of assent for a contract to be enforceable. In the online context, this can be inferred from the user’s actions on a website, like checking boxes or clicking buttons. The key is that the user must be put on constructive or actual notice of the contractual terms.
Clear Notice and Unambiguous Consent
A couple of cases illustrate how courts may treat the enforceability of contracts of adhesion. In Sellers v. JustAnswer LLC, 73 Cal. App. 5th 444 (Cal. Ct. App. 2021), the defendant’s website had a link to the TOU a few lines below a “Start my trial” button:
The last line says, “By clicking ‘Start my trial’ you indicate that you agree to the Terms of Service, Privacy Policy, and are over 13 years old.”
Clicking the “Start my trial” button would actually sign up the user for a recurring monthly payment, contrary to what was implied by the “Join for $5” heading. The court, consistent with federal precedent on this issue, acknowledged that these types of sign-in-wrap agreements are not “automatically” suspect, as long as the layout and language of the site give users reasonable notice that a click will manifest assent to an agreement. However, the court held that the disclosure at the sign-up screen was not sufficient to show that a reasonable user would clearly manifest assent to the TOU given the small print, lack of colored text or capital letters, and out-of-the-way placement.
The decision is somewhat contrary to the trend in federal law, which the court characterized as finding such agreements enforceable based on “essentially any textual notice.” One way the court distinguishes the federal cases is by noting that (1) the latter largely involved continuing, forward-looking relationships (e.g., signing up for Uber), in contrast to the $5 (seemingly) one-time payment at issue in Sellers, and (2) federal courts view the reasonable user as being more familiar with contracting in the online world than California courts do.
But despite the purported differences between Sellers and federal courts, the Ninth Circuit in Berman v. Freedom Financial Network, LLC, 30 F.4th 849 (9th Cir. 2022) found a similar disclosure also insufficient to form a contract. As shown below, the terms were hyperlinked in tiny gray font above the “Continue” button.
Above the “Continue” button, it says, “I understand and agree to the Terms & Conditions which includes mandatory arbitration and Privacy Policy.”
Applying California and New York law (which, according to the court, apply “substantially similar rules for determining whether the parties have mutually assented to a contract term”), the court held there was no valid contract because of both the lack of “reasonably conspicuous notice” to users of the contractual terms, and because of the lack of an “unambiguous manifestation of assent.” Notice was absent given the font size, color, failure to set apart the hyperlinks, and the overall design of the page, which directs users’ attention elsewhere. And assent was missing because clicking a “Continue” button was not enough to prove that users assented to the terms. A button click would be sufficient only if the user is “explicitly advised” that clicking will constitute assent.
Given the nature of our judicial system, different jurisdictions may have different outcomes given the same set of facts, but it is nevertheless possible to distill some general takeaways:
Failing to properly implement a TOU can result in a court finding no contract with its users.
Users need clear notice and unambiguous consent.
Best practice (although still not guaranteed) is a scrollwrap agreement.
Factors like font size, placement on the page, color, and all-caps affects the analysis.
NFTs and TOU
So what does this mean for NFT projects’ TOU? It’s helpful at this point to separate NFT buyers into those who mint directly from the NFT project (i.e., initial buyers) and those who buy on the secondary market from the initial (or other secondary) buyers.
NFT projects usually host initial mints of NFTs on their own websites, over which they have complete control. Thus, when a buyer goes on the website to mint an NFT for the first time, the NFT project can require that buyer to accept the TOU before doing so. Easy enough (although many NFT projects still don’t do this).
The complication comes with secondary buyers. Secondary buyers usually buy NFTs on third-party marketplaces, like OpenSea or LooksRare. On these marketplaces, however, a buyer often isn’t shown anything regarding a project’s TOU. For instance, Decentraland, a metaverse where users can buy virtual plots of land as NFTs, has its TOU here. Notably, it contains a binding arbitration provision (section 18.2) and a class action wavier (section 18.3). But when buying a plot on OpenSea (e.g., Parcel 113,-130), not even a link to the TOU is available. Secondary buyers would have very good arguments that they neither had notice of the TOU, nor consented to them, meaning that the arbitration provision and class action waiver—along with the rest of the TOU—would be unenforceable against them in court.
To make matters worse for NFT projects, in Sifuentes v. Dropbox, Inc., No. 20-cv-07908-HSG, Dkt. No. 40 (N.D. Cal. June 29, 2022), a California federal court recently ruled that Dropbox’s amendment to its TOU to include an arbitration provision isn’t enforceable unless the user manifested assent through something more than just continued use of the service. Dropbox emailed a notice of the change to the plaintiff, and its previous TOU (which the plaintiff agreed to) stated that Dropbox could change the TOU at will. Nevertheless, the court held that because the plaintiff never opened the email, he lacked notice. But even if he did have notice, continuing to use Dropbox was not sufficient for manifesting assent to the amendment.
Notably, some NFT projects’ current TOU do exactly what the court ruled was unacceptable. For example, Azuki’s TOU states: “We may modify this License from time to time. If we make changes that are material, we will use reasonable efforts to attempt to notify you, such as by placing a prominent notice on the first page of our website. However, it is your sole responsibility to review this License from time to time to view any such changes. Your continued access or use of the Azuki NFTs or Azuki NFT Art after the License has been updated will be deemed your acceptance of the modified License.”
So what can NFT projects do to mitigate the risk of having their TOU held unenforceable by a court? Talk to an attorney, as this issue is very fact-specific. There are, however, some general best-practices. First, make sure to have a TOU; many don’t. Second, at initial mint, have buyers accept the TOU via, for example, a scrollwrap agreement. Third, on secondary markets like OpenSea, have the TOU available at least in the “About” (or similar) section. You may even consider placing a link to the TOU in the metadata of the NFT. There are also new companies that are attempting to solve this problem by converting TOU into smart contracts that are integrated with the NFT.
Even after taking all these steps, it is still possible that an NFT buyer can successfully argue lack of notice or consent. Although greater clarity will come only when an issue like this is litigated, it is important for NFT projects to talk to an attorney to discuss their options.
If you have an NFT project and have questions about your TOU, contact us.
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