EULA’s, TOS, and unconscionability

In this digital age, most people have purchased something in an online store, joined a social networking site, or become a member of a virtual world. The problem is that the law is slow to evolve to the rapidly advancing technologies of the internet. As it stands, the bulk of the “law” of the internet is dictated by Terms of Service (TOS) or End User License Agreements (EULA) that users are required to accept before engaging in online activities. Unfortunately, most users do not read these agreements because of their length and complexity, they do not understand what they are agreeing to, or they feel forced to accept the terms because they otherwise could not continue with the activity. Recent case law gives us some guidance in this emerging area of law, but the law is far from “caught up” with the digital world.
EULA’s and TOS are contracts of adhesion, “standardized contract[s], which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.” In other words, the user must “take it or leave it” by accepting the terms in full or by discontinuing the activity. These contracts bind users to terms that are often disadvantageous to them, which raises the issue of whether these contracts are invalid under the doctrine of unconscionability.

The case of Bragg v. Linden Research, Inc. illustrates the unconscionable nature of some TOS or EULA’s. In this case, Bragg sued Linden Research, the creators of the virtual world, Second Life, for terminating his account, thereby seizing virtual property he had paid for while utilizing the site. Linden asserted that Bragg was bound by an arbitration and choice of law provision of their TOS, which stated that all disputes would be settled through binding arbitration by three arbitrators in San Francisco, California, under the laws of the International Chamber of Commerce. Linden filed a motion to compel arbitration as per this arbitration clause. The Eastern District of Pennsylvania court struck down the provision on the grounds of procedural and substantive unconscionability and denied the motion to compel arbitration.

The Court defined procedural unconscionability as “(1) oppression through the existence of unequal bargaining positions or (2) surprise through hidden terms.” The parties were in unequal bargaining positions because Bragg had to accept the Terms in full or cease to use the site, and there was no reasonable alternative site that offered the same advantages as Second Life. The Court also held that the terms were “hidden” within a lengthy paragraph called “GENERAL PROVISIONS” and that nowhere were costs and rules of arbitration set forth in the contract, such that Bragg was “surprise[d]” by the terms he had agreed to.

The Court also struck down the provision on the grounds of substantive unconscionability, or “the overly harsh or one-sided results that ‘shock the conscience’.” It cited the complete lack of mutuality, because (1) Linden dictated the terms fully without the input of the user, (2) Linden had the right to terminate the user’s account at any time for any reason without notice, and (3) Linden alone could modify the arbitration clause as they pleased. The contract was also unconscionable because of the inconvenience of the user travelling cross-country to California for arbitration, and because Linden could impose costs on the user well beyond those that he would incur if he filed in court (e.g. the high cost of paying three arbitrators to hear the case). Furthermore, the confidential nature of the arbitration proceedings would unfairly shield Linden from other users having access to precedent regarding related suits and would provide them with insight as to how to litigate in this area in the future.

Linden attempted to “blueline” the provision by amending it so that it was no longer unconscionable. They stated that they would post the cost of arbitration, waive the requirement that it be heard by three different arbitrators, and agree to arbitrate in Philadelphia rather than San Francisco. The Court held that the contract was “so permeated” by unconscionability that it could not be fixed without being rewritten, and denied the motion to compel arbitration.
This case illustrates the problem with internet contracts and the lack of bargaining that occurs. In my opinion, this situation is the definition of unconscionability in contract law. Because the user has no opportunity to bargain face-to-face with the internet host, they are forced to accept a unilateral contract that they may not otherwise agree to. Large internet companies take advantage of the “little guys,” the users, by crafting their TOS to dictate terms that favor them only. They create long documents with complex legal language and fine print that confuse users and “hide” important terms. There is no meeting of the minds when a user simply checks a box on their screen and agrees to the terms, without understanding what they are subscribing to or being able to modify it in any way. The user is left with no choice but to agree to a contract that “shocks the conscience” or be left out of the virtual world entirely. Courts such as the Pennsylvania District Court are leading the way in providing protections for internet users who would otherwise be at the mercy of adhesion contracts. The Bragg case has forced Linden to amend its TOS to be fairer to its users, and has spurred other online platforms to craft their terms more responsibly, as well.

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~ by casey87 on September 8, 2009.

11 Responses to “EULA’s, TOS, and unconscionability”

  1. How is this any different than contracts or “boilerplate” agreements that you have to sign as consumers when you buy, let’s say a microwave. Limits of Liability, Warranties and Representations, even Terms are standard in contracts ranging from consumer products, M&A agreements, or stock purchases? Everything that is sold has some sort of restrictions on its use, so why shouldn’t Second Life with its “virtual world”?

    Basically, why because it is a virtual world, should the laws that we have in the real world not apply? I understand the lack of bargaining power, but in reality, if you don’t want to play Second Life, there are a multitude of other online games out there that you could play, some with different universes, rule sets, and guidelines. The reason why the Judge probably ruled in favor of Bragg was that the EULA was so unconscionable, so one-sided, that if it dealt with an oven in RL, it would still be overturned.

    I understand what the case said, but my question to you is if this was not about LL’s Second Life, but rather let’s say a microwave from Company X, would the result have been any different? I don’t believe so, and to me, that means internet law and real law are doing pretty well.

  2. To create your own kingdom, and yet not have free reign to set the rules you want over it. If I were Linden Labs, I would be frustrated. Every person who joins has to “read” these rules, and they do have the choice to not join if they do not like the ground rules. The lack of bargaining powers is not something that can easily be dealt with because of the sheer number of transactions that occur. We do not try to bargain the price of cereal we buy at the supermarket, nor do we say that the newspaper subscription is not how we like it. We simply look for an alternative. There are usually similar services that are available, albeit, not at the same level of quality, but isn’t the more limiting terms of service just one more cost you pay for the better service?

    Certainly, Linden should try to make sure that the vague parts of the ToS are fleshed out, but after that, caveat emptor. Maybe I’m being a bit rough here, but I think that people who rush blindly into things, such as joining a service without reading the agreement, should be given an opportunity to learn from their mistakes, rather than being sheltered.

  3. Why should the contracts that govern virtual worlds be treated any differently than those that affect our daily lives? The unconscionability in Bragg should not have been decided on the fact that mediation was required, but the fact that Linden Labs had the absolute ability to alter the contract at any time. Think of a lease contract that a photographer has with an art studio. The photographer can create intellectual property and sell copies of that property to other consumers. However, the right to use the studio is governed by a contract. If the photographer violates the terms of the contract, she can be evicted. Just like an art studio, Second Life is an environment where intellectual property can be created, and copies sold. In a real sense, it is like a virtual art studio. When the lease, or license as it may be, is terminated, the tenant or user has to leave, of course maintaining right to the property that she created. However, if the landlord who leased out an art studio changed the terms at will and without the continuing consent of the photographer, the contract would be voidable without question. Why should a virtual studio be any different?

  4. I agree that TOS and EULA leave no room for bargaining or choice beyond accepting them in full or not using the program at all. But that seems to be the case with a lot of contracts for real-life services too. For example, I just got an email from my cell phone provider reminding me that when I signed my 2-year contract, I agreed that any dispute between us would be resolved by arbitration. That was news to me. Apparently that was just another contract which I signed and initialed dutifully without really reading it. Precisely the reason I rarely read contracts is that I feel like I’d have no control over the provisions even if I was aware of them. How much bargaining power would I really have with AT&T? Had I taken exception to the arbitration clause, they probably would have told me to find another provider. It wouldn’t have mattered that the signing took place face-to-face rather than on a computer screen. I still wouldn’t have been able to bargain my way into a substantially different contract.

  5. I agree with the principle blogger in that internet users are essentially forced to agree to the terms of EULA’s and TOS agreements because of adhesion contracts where there is no meeting of the minds. The other option for an unsatisfied internet user is to be left out in the virtual cold. The case of Bragg v. Linden Research, Inc. is a step in the right direction for internet users because the court struck down certain provisions of the TOS agreement citing procedural and substantive unconscionability. The court noted that because there was no reasonable alternative site that offered the same advantages as Second Life, and therefore Bragg had to accept the terms of the TOS agreement.

    Because of the rapid evolution of the internet, and the wildfire-speed that websites are created, I wonder if the Bragg court today would still find that there are no reasonable alternative sites that offer the same opportunities as in Second Life. This brief analysis should begin by evaluating just what Second Life offers. Specifically, it is a virtual world that offers real-time interaction with other users connected via the internet. It is a world where the users create avatars, use virtual currency, and purchase virtual property. Although some may argue that Second Life is simply a game, others will characterize Second Life as an alternate reality where users are able to act out their fantasies. Viewing Second Life from this frame of reference, other virtual world websites can be evaluated to see whether they offer comparable amenities to that of Second Life.

    Although there are many virtual world platforms online today, I will briefly discuss http://www.there.com for comparison purposes. There.com is a virtual world geared towards teens. Here, users ages 13 and up can ‘hangout’ in-world and play paintball, go to fashion shows, and participate in trivia contests among other activities. Just as in Second Life, there.com offers users the capability of interacting in real time with other users of there.com. In the same way, users create male or female avatars, and then customize them according to preference. Additionally, there.com, just like Second Life is initially free. However, if the user prefers to customize his avatar, there is an option to exchange real currency for virtual currency, known as Therebucks. Regarding content, there.com adheres to a strict PG-13 rating. This diverges from the mature and adult ratings accepted at Second Life.

    It seems that one of the best ways to determine if there is a reasonable alternative to a virtual world platform to Second Life would be to evaluate what the user wants to get out of their virtual experience. If the user prefers to simply interact in a non-violent and non-sexual manner with other users, then a platform such as there.com would be an appropriate means to this goal because of the PG-13 content rating. However, if the user would rather express himself through his avatar in such as way as to ratchet up the content rating, a virtual world such as Second Life may be the only reasonable alternative. I wonder if in determining that there were no reasonable alternatives to Second Life, whether the court in Bragg engaged in a meaningful analysis of other virtual worlds, more thorough and in depth than the one presented here. Only then can we know if the court reached the proper conclusion. However, as previously mentioned, new websites are created in real time, just as quickly as it takes to create an idea. It is entirely possible that the Bragg court today would find that there are indeed reasonable alternatives to the Second Life platform available to Bragg.

  6. I agree that most people do not read the TOS or EULA’s because they are extremely overwhelming. I myself have tried to read them on a few occasions, but I have always been unsuccessful at completely understanding them. They are lengthy and very complicated. I seems as if the creator makes them that difficult because they can. They know that a lay person can not read the TOS or EULA and understand, so they use it to their advantage. Also, there is no one currently regulating them, so why would they be fair if they don’t have to.

    The creators also know that we, as consumers have no bargaining power and so we are going to check that little box because we want whatever services that they are providing and we can’t get it from anywhere else. I agree with the decision that was reached in Linden because of the fact that the TOS and EULA puts consumers at such a huge disadvantage.

    Just because the creators have all of the power does not meant that it is right. I do feel that the law needs to be regulated in this area and that we are moving extremely too slow in making it happen.

  7. I also wanted to mention a few things about some of the TOS and EULA’s that I read personally. As I was reading the Myspace.com TOS, I thought that it was interesting to find that the terms apply to the members as well as the people whom they called visitors. If I was just browsing on the site then I would not think that I would be bound to the terms of the documents since I didn’t take the time out to sign up to become a member. Also, the site allows me to browse without having to agree to the terms by checking a box or doing anything along those lines. It made me wonder about what kind of suits could be files by a person who was not even a member of the site. In opposition, Second Life will not even allow you to look at the terms or browse the site without agreeing to the TOS.

    I found those TOS and EULA’s to be very interesting and they reconfirmed the fact that the internet does need to be monitored more closely. It needs to be safeguarded with the same measures that are put in place in the actual world. The creators of these sites should not be allowed to take advantage of their users simply because they can. Hopefully the decision in Linden will make the creators think twice about the way that they word their TOS and EULA’s and the way in which they use them. Honestly at this point, I don’t think that it will, but we can only hope.

  8. Besides the obvious fact that Linden Lab’s TOS was uneforcable because of it was unconscionable, there is one very important reason that it is in their best interests to not go overboard with such a flagrantly restrictive TOS agreement: The Free-Market.

    At the moment, virtual worlds such as Second Life are an emerging untapped market. While there have been online games such as Ultima Online and WoW since the 1980’s, there have been very few virtual worlds where the purpose was strictly social and economic. If Linden Labs insists on forcing such a restrictive TOS for the right to use their product, users WILL go elsewhere to get their fix. While there are few virtual worlds like Second Life out there right now, they are out there, and there will be more with prettier graphics and less abusive TOS agreements.

    Examples of what I am talking about can be seen everywhere in the software industry. A recent example involves the game Spore. Spore was a heavily hyped computer game created by the famous Will Wright (SimCity and The Sims), and published by Electronic Arts. In order to curb software piracy and possibly to make certain users purchase the game multiple times, Electronic Arts put a very restrictive DRM scheme on the game, which allowed the game to only be installed on one computer, a set number of times, which would also attempt to disable certain legitimate virtual drive programs on a computer. The outcry by video game fans was legendary. Within hours, thousands of negative reviews flooded the product’s page on Amazon.com. In an effort to keep a potentially harmful DRM program from their computers, Spore became the most pirated game in HISTORY. The DRM scheme was also a public relations nightmare for Electronic Arts, which worked feverishly to defend their decision.

    The above example is not an isolated one. When companies attempt to sneak abusive TOS agreements or DRM programs into their software, people DO notice. When people notice that one software company is trying to take advantage of them, it is not too difficult to find another software company that is willing to cater to those disaffected users. Linden Labs and other software companies should be well advised of this fact…if they want to stay in business.

  9. I think the issue of “reasonable alternatives” to certain websites brings up some interesting issues. A commentator several posts above me refers to another more teen-oriented site that’s similar to Second Life and poses the idea that the court might have found differently if they had found similar sites. I think all popular internet sites sooner or later will create a legion of copy sites. Take Friendster, Myspace, Facebook, and the countless other social networking sites out there. For a court to determine equivalents to something as relatively novel and infamous as Second Life presents the problem of whether something can be truly equivalent. For example, why a user would specifically choose to use Facebook over Myspace. Both sites provide essentially the same service and are very similar in function, concept, and user profiles; but to a particular user Facebook might have something that’s difficult to quantify as the factor that makes it reign supreme over the other sites. This could be attributed to something akin to a online reputation of a site, and I wonder if this can be factored into a court’s analysis.

    I also agree with comments about how contracts in real life are rarely read fully and often concluded with unequal bargaining power (especially in the cell phone industry!) but I think online there’s the added component of speed. Most people click through webpages quickly, only skimming the contents. The constant upgrading of internet and computer speed has made the internet and computer usage something that no longer tolerates a languid approach to anything. It also greatly encourages multitasking. Putting speed and multitasking together, it’s hard to believe anyone reads any TOS or EULA that is longer than a few sentences. There’s also the psychological phenomenon of having a “real life” persona and an online one, which can greatly differ from the former. Unlike a contract for something tangible in the real world, contracts online will always seem (unless there is a paradigm shift in which people begin to envision the internet self and real self as one) like they only apply in the digital world.

  10. Does the Bragg decision really make TOS more fair? Appearances can be deceiving. Contract Law is by no means an area of expertise for me. However, I do remember that courts shy away from rewriting a contract unless it is absolutely necessary to provide relief and prevent and extremely unjust result. Do we trust courts, likely made up of a generation of judges unfamiliar with virtual communities, to rewrite or require the rewriting (and subsequent approval) of TOS agreements? This becomes particularly sticky when various districts make contradictory findings as to the appropriateness of a TOS provision. It seems that congressional legislation is needed to even the playing field.

  11. It seems impractical to expect companies to negotiate ToS with each individual user – WoW currently has over 9,000,000 monthly users. It would be exceedingly inefficient for Blizzard (WoW’s creators) to use much less than a standard agreement for all users. Isn’t there already a check/balance in place for consumers’ power via free market? Can’t consumers vote with their money, choosing to subscribe to virtual worlds with less restrictive agreements? Consumer education would need to increase in order for such selection to occur, but it seems more likely and practical than a broad sweeping change or individual negotiations.

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