Planet Money - Surprise, you just signed a contract! How hidden contracts took over the internet

Episode Date: July 15, 2023

When you make an account online or install an app, you are probably entering into a legally enforceable contract. Even if you never signed anything. These days, we enter into these contracts so often, it can feel like no big deal.But then there are the horror stories like Greg Selden's. He tried to sue AirBnB for racial discrimination while using their site. But he had basically signed away his ability to sue AirBnB when he made an account. That agreement was tucked away in a little red link, something most people might not even bother to click through. But, it wasn't always like this. On today's show, we go back in time to understand how the law of contracts got rewritten. And why today, you can accept a contract without even noticing it. This episode was hosted by Emma Peaslee and Jeff Guo, and was produced by James Sneed. It was edited by Jess Jiang and fact-checked by Sierra Juarez. It was engineered by James Willetts. Alex Goldmark is our Executive Producer. Help support Planet Money and get bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney. Always free at these links: Apple Podcasts, Spotify, Google Podcasts, NPR One or anywhere you get podcasts.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

This is Planet Money from NPR. You know when you're downloading an app or signing up for a website, there's those little check boxes, or sometimes it's just a link, read our terms of service. They're like everywhere. Yeah, well, I never used to read those things. Me neither. We're all just like clicking next, next, next, next, next, and we never think about it.

Yeah, it's like that warning label on a mattress. But then there are these stories about how these terms of service have real legal consequences. At that time, the only real thing on our mind was, you know, we're about to go have a good time. Back in 2015, Greg Seldon was planning this little romantic getaway to Philly.

He heard about Airbnb and he thought he'd try it out to find a place to stay. So he made an account. And we should say Airbnb is a financial supporter of NPR. I'm clicking the button and thinking, you know, we're good to go. I'm not looking for, oh, where's the terms of service at? That's not my concern. I mean, it is now, of course, but during that time, it wasn't a concern for me. Greg starts browsing and finds this cute little row house right in the middle of downtown.

Perfect. Except when he goes to rent it out, the host tells him, actually, this isn't available anymore. Sorry. But later, Greg notices that listing is still up. At that point, that's when I started to grow a little more curious. Like, hey, something isn't right here. So he decides to run an experiment. Greg is Black, and he wonders if the place would be available if he were white. So he creates two new profiles with white profile pictures and these white-sounding names, Jesse and Todd. It's genius, because Jesse and Todd like the whitest sounding names. Yeah. And he uses these new profiles to message the same Airbnb host trying to book the same row house for the same weekend. And this time?

And to my surprise, the host actually accepted both of the profiles, not realizing that it was me behind both of the profiles. Greg decides to sue Airbnb. He launches a lawsuit, a class action. But very quickly, Airbnb's lawyers drop this bomb. They tell him, Greg, you basically can't sue Airbnb. You agreed to give up that right when you signed up. See, Greg had overlooked something really important. At the very beginning, when he was signing up for Airbnb, next to that sign up button was this little red link.

And I'm like, there's no way I would have even noticed that. I mean, just to put things in perspective, like we sign up for things daily and nobody really reads the fine print. And especially if it's not directly in your face, if you're just checking a button and then signing up, I'm just like, you got to be kidding me. If Greg had noticed that link, he would have learned that by hitting that sign up button, he was agreeing to a 17 page legal document, a contract, a contract that really did say he basically couldn't sue Airbnb. And just because of that, Greg loses his case. The courts throw out his discrimination lawsuit.

And Greg's story left me wondering, how is this even legal? How could a judge hold him to a contract that he never read, that he never even noticed? Hello and welcome to Planet Money. I'm Emma Peasley. And I'm Jeff Guo. And the absurd situation that Greg found himself in, it's kind of all of us these days. Every time you register for a website or install an app, you're probably entering into a legally enforceable contract,

even if you never signed anything. But it wasn't always like this. Today on the show, we're going back in time to understand how the law of contracts got rewritten. There are sewing machines. There's a get-rich-quick scheme involving CDs. There's even a hypothetical donkey. It is a 200-year saga about how the economy fought the law and the economy won.

So how did we get to this place where we're signing up for an account and somehow accidentally fall into a contract? To understand this, we're going to dive into history. We look at three major revolutions in contracts that fundamentally changed how we come to these legally binding agreements. Our guide through this history, Nancy Kim. I really love talking about contracts because I'm a big contracts nerd. Nancy is a law professor at Chicago Kent and an expert in how contracts went wrong. So do you read every word of the contracts that you sign? I think I did, or I really tried to in the early days. But I certainly don't do that now. Because if I did that now, I wouldn't be here. I would be

at home crying and reading Terms of Service, right? That's how out of hand things have gotten. Nancy starts this history of contracts with the first of our three revolutions, the birth of the modern contract. So think about why we even need contracts. Contracts solve a major problem in the economy, a problem of trust. Nancy says, imagine we're two strangers trying to make a deal. I have a carrot harvest coming in at the end of the summer. I'm a carrot farmer. And I want to buy your donkey. I promise I'll be good for it. I'll pay for it in a few months. Why would either of us believe the other person's going to

make good on their promise? How do I know? I don't know you. I don't know any of your family members. I don't know any of your neighbors. I don't know where you live. So in order for strangers to make deals with each other, they needed a way to ensure that each side would hold up their end of the bargain. So a contract distilled to its essence is a legally enforceable promise. And courts are supposed to enforce that promise. But in the beginning, judges would kind of meddle. They'd weigh in on people's deals. They might cancel a contract if they thought the deal was unfair.

But by the 1800s, the economy was getting a lot more complicated. The deals were more complicated. This is where we enter the era of the modern contract. And with modern contracts, courts mostly got out of the business of deciding whether a deal was fair or not. Instead, they focused on whether people were entering into these deals freely and voluntarily. We don't want a court to decide that was a bad exchange. You know, you shouldn't have traded the donkey for the carrot because the carrots are worth less than the donkey. We don't want a judge to decide that. We want the person who owns the donkey to be able to decide the value of the

donkey. This modern way of thinking about contracts was based on a fundamental capitalist idea that everyone is better off when we're free to make whatever deals we want. And a key part of the modern contract is whether people are entering into the contract out of their own free will, meaning each side has a chance to negotiate and both parties understand what they're getting out of the deal. The underlying sort of philosophy is, it's my property. I should be able to do what I want with it. And so in this society, we really value the ability of people to make choices for themselves.

So really, the revolution in the 1800s is that the modern contract creates a society full of people making choices for themselves, making their own deals. And all these transactions were supposed to be good for the overall economy. After a few decades, the second big revolution in contracts comes along. It's around the 1850s, and something's emerging that challenges the idea of how a contract is supposed to be formed. And one of the main culprits is the sewing machine. There were these products that really improved the lives of consumers, like the sewing machine. The problem was these products were very expensive. Most people couldn't afford to pay for a sewing machine all at once. So if you were a sewing

machine company, you'd offer your customers a payment plan, which meant you needed a contract. But negotiating all those contracts for all those customers, that was going to be a huge headache. So the sewing machine companies decided we're just going to make things simple. In order to sell these standardized mass-produced sewing machines, we're going to give our customers standardized mass-produced contracts. It just makes the transactions go much quicker, much more smoothly. And it's easier for the salesperson because they can say, oh, I can't negotiate. Sorry, this is our standard form. And we've all heard that, right?

That's still something companies say to consumers. And of course, these mass-produced contracts weren't just for sewing machines. Companies started to use them to sell pianos, washing machines, cars. They even became the norm in a lot of other industries. And as these contracts became popular, they kind of caused a scandal because big companies were using them to impose their terms on customers. People weren't even sure these contracts were valid because they were missing something fundamental.

There's no negotiating. There's no bargaining. And it was just this outrage. How dare you call this a contract? This idea that you could call anything a contract when it was just unilaterally imposed. But these standardized contracts helped make the transactions quick and easy. This whole new mass-produced economy was hanging in the balance. So there was a lot of pressure for courts to say these kinds of contracts were valid. Judges started to squint and say,

this looks close enough. There's still a piece of paper. People still have to sign it. So they're still like agreeing to these contracts. Sure, they're not negotiating terms, but they have an opportunity to read them. So if they sign it, it means that they're okay with the terms. It was a compromise, but a compromise that more or less seemed to work. So courts adopted this newer, looser definition of a contract. Contract law shifted a little bit in the sense that it became not just about promoting the free will of the parties. Now we also are considering things like transaction costs, you know, because we think, well, we don't want to slow down these transactions.

This was the key breakthrough in the second revolution in contracts. This was the key breakthrough in the second revolution in contracts. Courts decided that in the name of efficiency, in the name of lowering transaction costs, as long as you accepted the contract, you know, signed on the dotted line, it didn't really matter how you arrived at the deal. That was the law of contracts for several decades. There are some caveats and exceptions, but for a long time, this was basically how contracts worked. And when Nancy's teaching contract law to her students, she tells them, up until this point, the law mostly makes sense. And then you move along and then you, you stop, you put the brakes on and you say, okay, well, now we're going to talk about internet contracts. After the break, the third and final revolution in contracts.

How the internet broke contracts. Or maybe how contracts broke the internet. And the one case that opened the door to the stream of contracts we see today. see today. Our final revolution, the rise of internet contracts, began in the 90s. There was this huge court case that totally changed what it means to enter into a contract. It all started with a broke grad student and his get-rich-quick scheme. Scheme, you're making something so nefarious. That is Matt Zidenberg. These days, he's a computer science professor at NYU, but he's also kind of a celebrity in the legal world. Because about 25 years ago,

he got tangled up in one of the most controversial cases in the history of contracts. I was the defendant in a lawsuit, Proceedee v. Eidenberg. A landmark lawsuit. Yeah, I guess. This is not exactly a fond memory for Matt. To set the scene, it's the 90s, and Matt's at the University of Wisconsin-Madison.

He's getting a PhD in computer science. And the internet is becoming a thing. This is before Google, before Facebook. and like a lot of computer science students at the time, Matt sees this as a gold rush. I had no money, and I got to come up with some way to make a buck on the internet. That was the whole idea behind this whole thing. So this was Matt's idea. There's this company that had been digitizing phone books and putting them on CDs.

We're just going to use the term CD. We know that technically they're CD-ROBS. We know there's a difference. Nerds, please don't email us. And Matt looks at these CDs and he's like, this information isn't proprietary. This company is just copying the phone book and putting it on CDs. copying the phone book and putting it on CDs. So Matt decides he is going to copy the names and numbers off the CDs and put everything on a website and sell some banner ads.

So Matt buys the CDs and inside the box with the CDs is this new type of contract. It was called a shrink wrap contract because software used to be sold in shrink wrap boxes. It's kind of funny that I have to explain these things to people. You have to go to a store and buy the software, right? And it was in a box, and it was shrink-wrapped plastic around the box. And you rip the plastic off, and then you open the box. That was how they could tell whether or not it had been sold or not. Matt buys the CDs, opens the box, and out falls a contract.

A contract that says, by purchasing and keeping these CDs, you're agreeing not to copy the software. These new so-called shrink wrap contracts, they were becoming pretty common in the software industry. Because in the beginning, software companies were worried that there was nothing stopping their customers from kind of doing exactly what Matt was planning to do, copy their CDs and rip them off. Software companies tried to protect themselves with a contract, but they didn't want to make every customer go through the hassle of signing a contract just to buy their software. So they stuff a contract in the box, which Matt chooses to ignore. Did you have any sense that you might get in trouble for this?

Oh, definitely. In Matt's defense, these shrink-w wrap contracts were in this legal gray area. No court had ever enforced them and most lawyers didn't think they were valid. That's because he never signed on any dotted line. He couldn't even read the contract until he opened the box. So Matt goes ahead with his plan and his website ends up taking off. That's when the software company fights back. They send him a cease and desist letter and Matt's like, whatever, I never agreed to your contract.

So he neither ceases nor desists. So the company files a lawsuit. They're like, no, Matt, that actually was a real contract. So they sued me for a lot of money and that was intimidating. And then So they sued me for a lot of money and that was intimidating. And then the fancy lawyers that they brought in and the deposition was intimidating. And I didn't really have a, my lawyer was my boss's husband who'd literally just been admitted to the bar like a week ago. Did you ever feel like you were in over your head? Yeah, I mean, I was very stressed out. I was a bit depressed, and I was very anxious, and I just thought that I was going to be crushed like a bug. Eventually, Matt's case ends up in federal circuit court, and one of the judges, Frank Easterbrook, he writes this landmark opinion. We reached out to Judge Easterbrook, but he told us judges must let their opinions speak for themselves.

He actually said that. So we asked our resident contracts nerd, Nancy Kim, to explain the Matt Zidenberg decision for us. What Zidenberg represents is a big break in contract doctrine in the sense that- It broke contracts. It sort of did, or it disrupted it, I should say. Judge Easterbrook decided that shrink wrap contracts are valid, that in the eyes of the law, Matt did accept the contract.

So it was this idea that, okay, well, even though you didn't agree to the contract before you bought the software, when it fell out of the box, you had noticed that there were terms because there it is. It's a piece of paper that fell out of the box. Now, if you had read them and you didn't like the terms, you could have brought the software back. That was the theory. Okay, so it opened the door to the idea that, hey, there are other ways that we can enter into a contract. This was a radical new theory. Not only was there no bargaining or negotiating, but now you could agree to a contract without actively doing anything, just because a contract fell out of a box. And Nancy says Judge Easterbrook, he's known as this practical minded judge. And it seems like he's worried that without these

easy shrink wrap contracts, this new software age might struggle to take off. Like in his decision, he wrote that if you made people sign contracts before they bought your software, it would, quote, return transactions to the horse and buggy age. So Judge Easterbrook decides in this case to stretch the law a little bit. He loosens the definition of what it means to accept a contract. And Easterbrook's compromise sets off the third revolution in contracts. In the first revolution of contracts, the question was, did customers negotiate and bargain freely? In the second revolution of contracts, the question was, well, did customers at least accept the terms and sign on the line? In this third revolution, the question has become, did customers get a chance to notice the contract?

Instead of looking at whether there was an offer that was accepted and the timing of when the contract was formed, now in this post-Zeidenberg world, we use a different standard, a standard of notice. Was the notice reasonable? And did the offeree, did the user manifest consent? The Seidenberg decision seemed reasonable at first, but over the last couple decades, it's opened the floodgates to all these new ways of getting customers to accept contracts, where companies can rope you into a contract just by like waving it in your direction and saying, well, you manifested consent because you didn't

run away. This world, the post-Zeitenberg world, is the world that we're living in today. Shrinkwrap contracts have spawned all these new different types of contracts. And if you've been on the internet, you've probably consented to a bunch of these. There's clickwrap, when you accept a contract just by checking a box. There's sign-in wrap, where you automatically agree to a contract when you sign up for a website. There's scroll wrap, which I think is the worst because it just makes you scroll, scroll, scroll, scroll, scroll. No, Jeff, browse wrap is definitely the worst. It's very sneaky and basically everywhere. A browse wrap is a hyperlink that's usually at the bottom of a website that says something like legal or terms of service or just simply terms. And you have to click on it in order to read it. BrowseRap contracts are still

in this legal gray area, but they help illustrate this game that companies are playing today. Companies are trying to make contracts noticeable enough that courts will say the contract is valid, but they don't want to make the contract too annoying, too obvious. Because of course they want to get you through the process as quickly as possible, right? It's not a good user experience. It's not supposed to be a good user experience if you're signing a legally binding contract. Those have always been uncomfortable. You know, you're not supposed to take those things lightly. So they try to make them as unobtrusive as possible. And that's where we run into issues.

The focus of courts these days is on how noticeable the contract is. Yeah. So like there was this one case where the court said, well, this contract is not valid because the link to the contract wasn't underlined. So people might not know that there's a contract hiding behind there. In another case, the court said the contract was valid because the notice was in all caps. And then there's Greg Seldon's case, the guy from the top of the show who tried to sue Airbnb. The courts decided that Greg had entered into a valid contract, that he did give up his right to sue, that Greg should have noticed the link to the contract because it was a red link on a white background. And this, this is where we are now with contracts, arguing over font size and link color.

And it's kind of wild because each of these three revolutions and contracts, these compromises, they made sense at the time. They made transactions go more smoothly, protected budding industries, prioritized economic growth. But each of these revolutions also eroded what it meant to accept a contract. And they brought us to this place where it's so easy to enter into a contract that a lot of time it's happening by accident. So easy to enter into a contract that a lot of time it's happening by accident. Nancy says contracts in this age, they are a far cry from how contracts started out. So what a contract has become is the exact opposite of what it used to mean. Before, a contract was sort of a sign of empowerment, of control over your things, things that belong to you, what you could do.

Now a contract is really a joke, right? It's a sign of giving up. Okay, I really want the thing, so I'm just going to agree to it. I have no choice. It's really a sign not of empowerment, but of helplessness, right? It's learned helplessness. Of acquiescence. Exactly. We've ended up in this kind of dystopian world where we've traded a piece of our free will just for the convenience of making an online dinner reservation or buying a shirt from a website or really just doing anything on the internet. And there are so many contracts that we've all become numb.

Nobody even really reads them anymore. We just click and accept, click and accept, click and accept. You can email us planetmoney at npr.org or find us on TikTok, Facebook, or Instagram. We're at Planet Money. Our show today was produced by James Sneed. It was edited by Jess Zhang and fact-checked by Sierra Juarez. It was engineered by James Willits. Alex Goldmark is our executive producer. A special thanks to Kerry Welsh for talking to us about his experience with these online contracts.

I'm Jeff Guo. And I'm Emma Peasley. This is NPR. Thanks for listening.