Designer Skin LLC v. S & L Vitamins, Inc., et al.
Robert Pichey, et al. v. Ameritech Interactive Media Services, Inc., et al.
File No. 5:05-CV-102 (W.D. Mich., February 8, 2006)
Contract Provision Limiting Website Developers' Liability To Fees Paid Is Enforceable
Court dismisses plaintiffs' claim for $3 million in lost profits arising out of Ameritech's failure to register plaintiffs' website with search engines, holding such claims barred by the limitation of liability clauses contained in the parties' contracts. These clauses limited recoverable damages to the $1,600 in fees paid by plaintiffs to Ameritech under the parties' agreements in this case. In reaching this result, the Court rejected plaintiffs' claim that these limitation of liability provisions were unconscionable, and hence unenforceable. This claim failed because the services provided by Ameritech that were the subject of the parties' agreements were available from multiple sources and hence Ameritech had the right to offer its services on such terms as it saw fit. This claim also failed because the limitation on liability contained therein did not 'shock the conscience', particularly in light of the fact that plaintiffs themselves could have performed the very services defendants failed to provide - the registration of their website.
Defendant Allegedly Fails To Register Plaintiff's Domain Name With Search Engines
In January 1998, plaintiffs started a retail furniture business. Plaintiffs entered into three contracts with Ameritech Interactive Media Services, Inc. and Ameritech Interactive Media Inc. (collectively "Ameritech"). Pursuant to these contracts, Ameritech was to both register a domain name for plaintiffs, and build a custom website to support their new business. In addition, Ameritech was to provide a free text advertisement in its online yellow pages, which was to be linked to plaintiffs' website. Plaintiffs claimed, based on promotional materials provided by Ameritech, that it was also to host the website, provide email services, and register the site with major internet search engines. For these services, plaintiffs paid Ameritech the agreed sum of $1,600.
According to plaintiffs, they were informed approximately 18 months later that their website could not be located on major internet search engines. Some four to six months after that, and almost 26 months after the parties had first contracted, Ameritech allegedly admitted that it had failed to register the site with major search engines, and promised again to do so. At that time, Ameritech also agreed to continue to host plaintiffs' website, free of charge, for an additional 18 months. Plaintiffs claimed Ameritech, in breach of both this promise and the parties' agreements, never attempted to register the site. As a result, plaintiffs commenced this suit, seeking "damages exceeding $3,000,000 in the form of lost opportunity and exposure, out-of-pocket expenses, and lost profits."
Claims Barred By Limitation Of Liability Clause
Defendants moved for summary judgment, arguing that plaintiffs' claims were barred by limitation of liability clauses contained in each of the parties' agreements. Each clause provided:
The Court agreed, and dismissed plaintiffs' claims.
Limitation Of Liability Clause Not Unconscionable
In reaching this result, the Court rejected plaintiffs' claim that the limitation of liability clause was unenforceable because it was unconscionable. To establish unconscionability under Michigan law, a party must establish "that the [challenged] provisions are both procedurally and substantively unconscionable." This requires a party to "demonstrate 'an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.'"
The Court held plaintiffs failed to make such a showing. The services plaintiffs sought from Ameritech under the parties' agreements were readily available from numerous parties. As such, plaintiffs could not demonstrate procedural unconscionability, because they were not forced by the only supplier of the services in question to accept unreasonable terms. Given the availability of these services from others, Ameritech was free to offer its services on such terms as it saw fit. If plaintiffs did not like those terms, they were free to do business with others.
The Court also found that the limitation set forth in the contract was not substantively unconscionable. To establish substantive unconscionability, a party must demonstrate that "the inequity of the term is so extreme as to shock the conscience." Particularly in light of the fact that plaintiffs could have registered their site with the search engines themselves, the court determined that a claim which limits plaintiffs' recovery to the amounts it paid under the contract "is not shocking to the conscience."
The Court also rejected plaintiffs' attempts to avoid this contractual provision on the grounds that they did not read it when they entered into the agreement and that it was contained on the back of a preprinted form.
Finding the clause valid and binding, the Court dismissed plaintiffs' claims for $3 million in lost profits, as they sought recovery of damages not permitted by the contract's limitation of liability, which limited plaintiffs' damages to $1,600.