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Contracts In Today’s Sharing Economy: Limitation of Liability Clauses Have Come A Long Way

By Mhare O. Mouradian

This article was previously published in the Association of Business Trial Lawyers Report summer 2016 issue.

With the explosion of smartphones, tablets and laptops, innovative tech startups are being created in the sharing economy marketplace. Sharing economy services include ridesharing and house hiring, with companies like Uber, Lyft and Airbnb dominating their respective industries.  The sharing economy marketplace is also evolving and infiltrating other industries, including the banking industry—referred to as  “fintech,” short for financial technology—with companies like SoFi.   They are conducting business at light speed through the use of “apps” on your smartphone.  Most of these tech startups attempt to limit their liability through Terms of Service or Terms and Conditions (collectively, “TOS”).

The term “sharing economy” refers to a new economic model in which individuals and companies are able to use or rent physical assets owned by someone else in exchange for money. A contract can be entered into by a simple mouse click on a laptop or  the touch of a finger on a smartphone or tablet.  With certain exceptions, such a written contract between two parties is binding and enforceable and may be a trap for the unwary.  An individual or company will be bound by the terms of such contracts.  Therefore, it is important to review and understand such contract provisions.  This article discusses contracts in the sharing economy space, particularly limitation of liability clauses, to help illustrate the need to carefully review contract terms in the TOS.  Doing so will help to safeguard  a business and eliminate potential litigation.

Sharing economy companies use the Internet to facilitate the connection between users and providers in the sharing economy. Sharing economy companies are part of the fabric of today’s culture, providing more efficient, affordable and attractive services than their traditional counterparts.  However, contractual implications may arise when conducting business with a sharing economy company.   Most people download the company’s application (“app”), complete the registration process,  quickly zip through and agree to the TOS without reading them, and are ready to use the app within minutes.  But these contracts contain many protections for the sharing economy companies and limitations of user rights.  Although the TOS are not negotiable, an understanding of how these contracts can affect liability is important.

The TOS typically limit the sharing economy company’s liability exposure through limitation of liability clauses. These provisions “ ‘have long been recognized as valid in California.’ ” (Lewis v. YouTube, LLC (2015) 244 Cal.App.4th 118, 125.)  In Lewis, a user sued the video-sharing service operator YouTube for breach of contract, alleging that YouTube temporarily removed users’ videos from public view and permanently removed records of the videos having been watched and commented upon by other users.  (Id. at pp 121-122.)   YouTube’s TOS provided that YouTube was not liable for any damages for any omissions in any “content,” and defined “content” to include the “text, software, scripts, graphics, photos, sounds, music, videos, audiovisual combinations, interactive features and other materials” that the user “may view on, access through, or contribute to the Service.”  (Id. at  pp. 125-126.)  The trial court sustained YouTube’s demurrer without leave to amend, and the user appealed.  The Court of Appeal affirmed holding that (1) the limitation of liability clause in the TOS precluded the user from establishing the damages element of her breach of contract claim, and (2) the TOS did not require YouTube to continue displaying comments or an accurate view count for the user’s videos.  (Id. at pp. 125-127.)

Sharing economy tech companies also limit their liability by distancing themselves from the person who owns the physical asset. The TOS typically state that the sharing economy company does not endorse third-party services and content and in no event shall be responsible or liable for any products or services of such third-party providers. For example, if a rider uses Uber’s mobile app for transportation, the TOS distance Uber from the driver of the vehicle by stating that Uber “does not provide transportation logistics services or function as a transportation carrier.”  Uber’s TOS also attempt to insulate Uber from any liability from the driver’s wrongful conduct.

Additionally, the TOS typically state that the agreement a user enters into to use the third party’s asset is only between the user and the owner of the physical asset. The sharing economy company is not a party to that agreement.  For example, if a user books an apartment using the mobile app, the TOS state that the agreement is between the user (whom Airbnb refers to as the Guest) and the owner of the apartment (whom Airbnb refers to as the Host).

Sharing economy companies also utilize several provisions requiring a user to indemnify the sharing economy company and limit its liability to a nominal amount or an amount no greater than the amount a user has paid or owes for using the asset. For example, Uber’s TOS limit its total liability “to an amount that shall not exceed $500.00.”  Airbnb’s TOS also limit its liability to either $100 or an amount not to exceed the amount a user paid or owes for bookings, whichever is less.

Limitation of liability clauses in TOS are not a guaranteed constraint. They are not enforceable if they are unconscionable—that is, the improper result of unequal bargaining power—or contrary to public policy. (Food Safety Net Services, Inc. v. Eco Safe Systems USA, Inc. (2012) 209 Cal.App.4th 1118, 1126 (Food Safety Net Services); Markborough California, Inc. v. Superior Court (1991) 227 Cal.App.3d 705, 714-715.)  Furthermore, such clauses are not enforceable with respect to claims for ordinary negligence where the underlying transaction “affects the public interest” under the criteria specified in Tunkl v. Regents of University of California (1963) 60 Cal.2d 92, 98–100.  (See Food Safety Net Services, supra, 209 Cal.App.4th at p. 1126; McCarn v. Pacific Bell Directory (1992) 3 Cal.App.4th 173, 178–179.)  Additionally, limitation of liability clauses cannot bar claims for fraud and misrepresentation.  (Civ.Code, § 1668; Food Safety Net Services, supra, 209 Cal.App.4th at p. 1126; Blankenheim v. E.F. Hutton & Co. (1990) 217 Cal.App.3d 1463, 1471–1473.)

Sharing economy companies will continue to attempt to safeguard their businesses and reduce potential litigation through the effective use of TOS. Even though the legality of some of these practices is being challenged and efforts are underway to address the lack of regulation in this area, the sharing economy is here to stay and users should carefully review TOS before clicking or touching “agree.”

Thank you for joining us on ClarkTalk .  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.   If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Mhare O. Mouradian by email at mmouradian@clarktrev.com  or telephonically by calling the author at (213) 629-5700.