3 Reasons Your Online Marketplace Needs a Terms of Service

Mar 12, 2019 7:07:00 AM

3 reasons your online marketplace needs a terms of service

The Terms of Service (otherwise called the Terms of Use or Terms and Conditions) is the set of agreements that governs the way users interact with your website, mobile app, or online store. This set of guidelines protects the marketplace from liability and protects the user from abuse. Think of it as a strong handshake, but at the beginning of a meeting instead of at the end. In this post, we'll show you 3 reasons why your online marketplace needs a Terms of Service -- and how to make sure it's enforceable.

Unlike a Privacy Policy, which you are required to have if you collect user information on your site, a Terms of Service is not legally mandatory. However, because of the sheer volume of signers and the speed at which it moves, your online marketplace needs a Terms of Service as your first line of defense.

It is, however, a good idea to define acceptable usage of your online space – otherwise, users will define it for you. So, here are 3 reasons your online marketplace needs a Terms of Service:

  1. To limit liability
  2. To protect your intellectual property
  3. To stipulate how disputes will be resolved 

Let’s break these down some more.

3 reasons your online marketplace needs a Terms of Service: 

1. To limit liability

Online marketplaces are inherently rife with risk. While they do not own their inventory, they own the space in which the transaction occurs. As a result, users may try to hold you responsible for faulty goods and services sold through your platform. 

For example, in 2015, Heather Oberdorf bought a retractable dog leash from a third-party seller on Amazon called Furry Gang. While walking her dog, the leash snapped backward and partially blinded her. 

But because of Amazon’s Terms of Service, a judge ruled that Amazon was not responsible for the damage.

"The Amazon Marketplace serves as a sort of newspaper classified ad section, connecting potential consumers with eager sellers in an efficient, modern, streamlined manner," the judge wrote. "It cannot be liable to the Oberdorfs under a strict products liability theory." (via CNBC)

Online marketplaces need a Terms of Service agreements to outline what they are and are not responsible for to protect them from risk.

Read our guide: How to Minimize Online Marketplace Risk in the On-Demand Economy.

2. To Protect Your Intellectual Property

Anything your company creates — images, logos, content, analyses, etc., — is considered its intellectual property. While registering your intellectual property is the start of protecting it, including protection provisions in your Terms of Service can go a long way.

Intellectual property concerns include but are not limited to trademark abuse, copyright infringement, and unauthorized patent use. For online marketplaces specifically, since they facilitate transactional relationships between buyers and sellers, these issues may arise from a seller’s behavior.

For example, in 2013, Milo & Gabby, an online seller of animal-shaped pillows, sued Amazon for a host of intellectual property infringements. Milo & Gabby allege that a seller on the marketplace used Milo & Gabby’s pictures and likeness to sell a product that was also a knock-off of theirs. Milo & Gabby sued Amazon for abusing their intellectual property, since Amazon “fulfilled” the knock-off orders.

However, courts ruled in Amazon’s favor, because they decided that Amazon was not the actual “seller,” and therefore not actually infringing upon Milo & Gabby’s intellectual property.  

Define your role in the marketplace

For the above reason, it is important that online marketplaces define their roles. The owners of the marketplace do not own any of the inventory, but rather facilitate the transaction between buyer and seller. Because of the volume of users on either side, it is impossible to know the minutiae of everything happening.

The best place to define your role in your own marketplace is in your Terms of Service. Within it, you tell users on both sides of the transaction what actions are allowed, which are not, and which you as the owner of the space will be responsible for. 

Related: Why your CMS is terrible for hosting legal content.

3. To stipulate how disputes will be resolved

In a litigious society like America, people don’t really need an excuse to sue you. To protect yourself from these negative possibilities, your Terms of Service should outline how you want to resolve disputes.

Most companies (and online marketplaces) include an arbitration clause in their terms. Without this, a marketplace is at risk for class action, a ridiculously expensive endeavor that costs companies millions. Arbitration, on the other hand, is cheaper, shorter, and less formal than class action.

For example, in December 2015, Spencer Meyer sued Uber for price fixing. And while a district court ruled in favor of Meyer because of Uber’s clickwrap design, a second circuit court reversed the decision and compelled Meyer to resolve his dispute via arbitration as per Uber’s Terms of Service (Reuters). 

Ensure your Terms of Service agreement is enforceable

There is no denying how crucial the Terms of Service to the online marketplace. If wisely crafted, your Terms of Service can protect you from costly, time-consuming, and reputation-damaging litigation.

And while it is important for you to have all these outlined in your Terms of Service, it is even more important that your Terms of Service are enforceable in court. This means considering everything from presentation to acceptance methods and the content of the terms themselves. (Pro tip: don’t host your legal terms on your CMS.) PactSafe’s robust clickthrough solution can help with the enforceability.

Learn more about how your Terms of Service can work for or against you; download our Clickthrough Litigation Trends white paper, in which we talk about what factors can make or break your online legal terms.

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Gizelle Fletcher

Written by Gizelle Fletcher

Gizelle leads the content team at PactSafe. She's driven by content that relays the significance of technology in legal departments and is always look at how consumer behavior influences new technologies.