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Verizon's New Online Master Terms Highlight Risks of Online Service Agreements

Service guides and other Internet-based agreements that "supplement" a customer's contract are among the most challenging aspects of network services agreements. They allow carriers to change existing provisions unilaterally and impose potentially costly (and risky) terms and conditions with little or no notice, thereby giving carriers enormous power to change a deal. And service guides are moving targets: A customer can override problematic provisions a, b, and c, but what happens if the carrier adds d, e, and f to the guide after signing the master services agreement (MSA)?

Staying focused on the risks of these online terms is hard for customers. Multiple service guides can apply to a single telecom agreement, and most of them stay the same from month to month. But significant changes do happen, and they create serious new risks for enterprises, such as when Verizon sought in May of 2012 to expand its ability to exploit its customers' confidential information.

For customers that remain unconvinced, Verizon's recent revisions to its online master terms illustrate almost every problem inherent in online terms. This article describes some of these changes, explains why they create risk, and suggests ways customers can mitigate the damage.

Why We Hate Service Guides
Service guides are not inherently evil. Customers and carriers alike need them for important aspects of a contract. Without service guides, for example, every facet of a deal--from the service descriptions to the base pricing--would have to be spelled out, leading to 1000-page network services agreements.

The problems arise when carriers give in to temptation and inject terms and conditions that really belong in the master agreement. At that point the service guides become tools for increasing carrier leverage. We have struggled over the years at our semi-annual telecom negotiation conference to devise the right metaphor to highlight the perils. We have called them "sleeper cells"--hidden provisions that lie dormant until activated by a particular situation. Alternatively, we have cast them as Trojan Horses, spiriting in dangerous terms via innocuous-looking URLs. However you want to think of them, service guides can be trouble.

Some carriers are especially eager to employ Internet-based service guides as the primary source of terms and conditions. They do this in response to (misguided) customer requests for brief and "simplified" contracts. Using service guides lets carriers replace dozens of pages of terms and conditions with a "simple" 5-page contract. As long as the customer remains ignorant of the 40+ pages of terms lurking behind the URL casually referenced in the agreement, illusions about the simplicity and brevity of the contract can remain intact.

Service guides are increasingly designed to discourage all but the most dogged customer from actually reading them. Specific provisions are hard to find. URLs are sometimes broken or lead to sites of Byzantine complexity, as in the case of AT&T, which maintains TWO service guide sites. Getting actionable notice of changes is difficult (most customers get little or no notice when service guide terms change beyond an email or a billing insert), and carriers normally don't show changes in redline, as they did in the "good old days" of tariffs.

The result is that dealing with service guide provisions becomes a game of contract whack-a-mole--customers have to spend scarce time and resources assuring themselves that the deal they signed remains the actual deal.

A final problem is that many customers do not take service guides seriously. For some, there is the "out of sight, out of mind" syndrome: Enterprises think that their contract consists of the document that they signed, and somehow cannot believe that terms incorporated by reference carry the same weight. Other customers believe that "a deal is a deal," discounting the possibility that their deal really could change without their knowledge and consent.

Verizon's New Online Master Terms
All of which brings us to Verizon's new terms.

First, some background. In late 2010, Verizon substantially reworked its master terms and conditions with the goal of simplifying and rationalizing its default online terms. As part of this process, Verizon took 46 distinct provisions and revised and reorganized them, effective November 30, 2010, into 26 sections organized into four main categories: Scope, Rates, Services and Legal Terms

Now, two years later, Verizon has again made substantial changes to its online terms. While it would be an exaggeration to say that Verizon threw everything out and started over, the changes do illustrate the inherent threat that online service guides pose to customers.

Service Guides are Difficult to Read and Track
One of the most frustrating aspects of online terms for customers is that they are difficult to read and track. In its latest re-write, Verizon actually made its online terms harder to use by jettisoning the table of contents.

Second, in a contractual game of "52 pickup," Verizon shuffled provisions around. Service Suspension, for example, moved from §4.4 in the old terms to §12 in the revised terms.

Third, Verizon boosted the number of discrete sections from 26 in the previous version to 47 in the new one. Finally, while Verizon provided a summary of the changes, it did not provide an actual redline (perhaps because the end product would be so daunting to look at).

Next page: How providers take advantage of service guides

Service Guides Let the Provider Alter Legal and Financial Risk Allocation
A system that allows carriers (but not the customers) to make unilateral changes to an agreement puts customers on the defensive and complicates their ability to manage financial and legal risks.

Verizon's new master terms change the financial equation by adding three new so-called "Ancillary Charges" in §8.3 for paper invoices, use of credit cards, and service calls where the technicians do not find problems with the service.

The revised master terms also expand the customer's indemnification obligations (now in §27.1) by adding violations of the acceptable use policy as well as unauthorized use of, or access to, the services or Verizon's network "by any person"--including hackers or other third parties over whom the customer has no control--"using Customer's systems or network."

And Verizon altered the balance of legal, operational and financial risks when it changed security deposits and suspension rights. Under §2.1 of the old online terms, Verizon could not demand security deposits from existing customers unless their "financial condition" was "either unknown or unacceptable."

Under the new terms, by contrast, Verizon has "absolute discretion" to extend or vary credit limits. And there are no longer any criteria governing when Verizon can impose a security deposit; the carrier can do so for any customer at any time for any reason (or no reason at all).

The new deposit requirements might not be so worrisome to existing customers if Verizon had not also expanded its suspension rights as well. Under the new §12, Verizon may cut off service if the customer "fails to provide or increase the Security as requested by Verizon."

These revisions underscore another important point: Changes to service guides create risks not just for new customers, but also for existing customers. Unless an existing customer's master agreement contains a provision that overrides the new security deposit and suspension language, the new term will control.

Service Guides Allow the Provider to Create Unilateral Provisions for its Own Benefit
When it comes to attorneys fees, the general rule in the United States is that each party pays its own legal fees regardless of who prevails. Section 9.1.1 of the new master terms, by contrast, imposes one half of the so-called English rule: "Customer agrees to pay Verizon its reasonable expenses, including legal and collection agency fees, incurred in enforcing its rights. . . ." Naturally, the provision works only for Verizon's benefit--a customer that incurs expenses to enforce its rights has no similar right. It is worth noting that a possible drafting error makes this provision even more advantageous for Verizon than the traditional English rule because it does not say that Verizon must actually prevail in order to be entitled to reimbursement for its legal fees and other expenses. To paraphrase Mel Brooks, "It's good to be a carrier."

Service Guide Changes Let Carriers Whittle Down Customers' Rights
Carriers prefer broad force majeure clauses because service providers are more likely than customers to have difficulty performing under the contract. One of the few situations where a broad force majeure clause could benefit a customer is where the customer fails to meet its minimum volume commitment because of a business downturn that results in downsizing and/or dampens demand. But the revised terms foreclose that argument by stating that "[m]arket conditions or fluctuations are not force majeure events."

What Customers Can Do
There are steps that enterprises can take to mitigate the risk posed by service guides.

The first is to take the service guides seriously. Like it or not, they are part of your agreement, and generally serve as the default or "gap-filling" terms when the MSA is silent. As a result, you can't resolve a disagreement with the carrier over a thorny term in the carrier's draft MSA by agreeing to delete the offending provision because there is a good chance that the service guide contains a term that is as bad as the MSA term that you were trying to eliminate.

Second, address the service guides within your MSA

* Get the order of precedence right: put service guides last in the event of a conflict among the documents comprising your agreement. You weren't allowed to do this with tariffs, but you absolutely can do it with service guides.

* Review the pertinent service guides and, where appropriate, insert provisions in your MSA that expressly override risky or unfavorable service guide provisions.

* If there are favorable provisions in a service guide, consider adding them to the MSA to avoid losing them if the carrier later deletes or weakens them.

* If you have the leverage, add an MSA provision stating that service guides will not be interpreted to supplement certain key legal terms and conditions (e.g., termination, indemnification, limitation of liability, payment terms, and suspension).

* Demand that the carrier provide you actual notice (as opposed to billing inserts or generic email notices) of service guide changes.

* Remember that termination rights in the event of a material and adverse change to the service guide are not that helpful: you want to keep using the service, after all. Give the carrier the chance to exempt you from the offending change (or otherwise make you whole).

* If you do have to terminate your agreement in whole or in part as a result of a material and adverse service guide change, make sure that you have a reasonable time to give notice and to transition to a successor carrier.

Service guides are an unfortunate fact of life in network services agreements. Implementing the steps outlined above will help safeguard your enterprise against the many risks of service guides.