Web Site Terms of Use Describing Service Fees as "Covering Costs" - When Those Fees Include Profits - Constitute Breach of Contract

A trial court in Washington state ordered Expedia to pay class action plaintiffs $184 million after it concluded that the web site’s terms of use – that said “service fee goes to covering costs” – constituted a breach of contract. Plaintiffs alleged that more than costs were included in the service fees and relied on an internal Expedia email that estimated service fees would generate $2-$3 million in net profit for the company in one quarter. The court stated that “plaintiffs correctly conclude that profits, not costs, are the subject matter of these ‘service fees.’” Therefore, according to the court, Expedia’s contractual definition of service fees that was found in its Terms of Use constituted a breach of contract because Expedia “collected profits along with covering costs.”

The court also addressed plaintiffs’ claim that Expedia’s practice of bundling taxes and service fees was misleading and violated Washington’s Consumer Protection Act because Expedia failed to disclose that the taxes it collected from consumers were based on the retail rate of the hotel reservation, rather than the wholesale rate that Expedia actually remitted to the hotel. Under Washington law, both affirmative conduct and failure to disclose material information are actionable as unfair or deceptive practices.

Expedia argued that this practice is reasonable, but the court said whether or not this practice is reasonable is a genuine issue of material fact that precludes summary judgment. However, in a footnote, the court referred to another decision in which a company’s "bogus" charge was deemed deceptive and said “the court here accepts the same argument that a failure to disclose the full extent of service fees and the differences between costs and profit is a material omission.”

Although this case is still in the early stages, this court’s opinion suggests that web site operators should be careful (and not misleading) as to how they characterize their service fees, i.e., not say that they're just for covering costs if they include a mark-up for profit.