Alert May 01, 2009

Is a Mandatory Arbitration Provision in Website Terms of Use Agreement With a Unilateral Modification Right Enforceable? Northern District of Texas Says No

In a decision that could have important implications for all companies with an online presence, the U.S. District Court for the Northern District of Texas recently held that an arbitration provision in a website user agreement that reserved a website operator’s right to unilaterally modify the agreement was an unenforceable “illusory contract.” Harris v. Blockbuster Inc., 2009 U.S. Dist. LEXIS 31531 (N.D. Tex. Apr. 15, 2009).  The case is noteworthy given that it’s very common for website operators to reserve the right to make unilateral changes to terms of use agreements at any time, in a manner that is very similar to what was done by the defendant in this case. Many website operators consider it to be critically important to have the right to make changes to their website user agreements at will in order to address changes in their businesses and in the applicable legal environment.

Background

The underlying case that prompted the analysis of the terms of use is interesting and timely, as it involved behavioral advertising, a topic likely to be the subject of continued controversy in years to come. Harris, the plaintiff in the Blockbuster case, alleged that Blockbuster violated the federal Video Privacy Protection Act (18 U.S.C. § 2710 (“VPPA”) by sharing information about her movie selections with third parties without first obtaining her consent. The VPPA prohibits movie rental service providers from disclosing consumers’ personally identifiable information, including movie rental selections, to third parties without the informed written consent of the consumer at the time of the disclosure, and allows for damages of $2,500 for each violation.

The alleged VPPA violation arose out of Blockbuster’s participation in Facebook’s Beacon behavioral advertising initiative. This program allowed companies partnered with Facebook to advertise by posting notices in Facebook users’ “news feeds” when the applicable Facebook user took an action, such as making a purchase, playing a game or posting a product review on a third-party website that participated in Facebook’s Beacon program. When initially launched, Facebook users had the right to opt-out of Beacon, but, in response to consumer complaints, Facebook later changed Beacon from an opt-out to an opt-in system. Apparently, Harris did not wish for her video rental data to be broadcast to her Facebook friends, and brought an action, seeking $2,500 per VPPA violation for herself and for a class of similarly situated individuals.

Court Determines Unilateral Right to Modify Terms is Problematic

Blockbuster’s user agreement that was in effect at the time was displayed as a “clickwrap” style agreement. Significant to the issue at hand, the agreement included clauses providing for binding arbitration and a waiver of any class action litigation against Blockbuster. Blockbuster filed a motion to compel arbitration based on the arbitration clause in its terms of service. Denying the motion, Judge Barbara M.G. Lynn ruled the arbitration provision of the terms of service an unenforceable illusory contract because Blockbuster had reserved to itself the right to change the terms at any time. On this issue of modification, the Blockbuster agreement provided:

Blockbuster may at any time, and at its sole discretion, modify these Terms and Conditions of Use, including without limitation the Privacy Policy, with or without notice. Such modifications will be effective immediately upon posting. You agree to review these Terms and Conditions of Use periodically and your continued use of this Site following such modifications will indicate your acceptance of these modified Terms and Conditions of Use. If you do not agree to any modification of these Terms and Conditions of Use, you must immediately stop using this Site.

In reaching its decision, the Harris court followed closely the recent decision of Morrison v. Amway Corp., 517 F.3d 248 (2008). In Morrison, the U.S. Court of Appeals for the Fifth Circuit held that the arbitration provision of Amway’s contract with its distributors was illusory because Amway reserved to itself the right to unilaterally modify all aspects of its deal with the distributors by publishing notice of the changes. It was important to the Morrison court that the Amway contract did not include language precluding retroactive modification of the arbitration provision with respect to disputes that arose prior to the date of modification.

The court found the Morrison reasoning to be convincing and concluded that the Blockbuster provision was illusory for the same reason it was in Morrison. The court contended that “other than providing that such changes will not take effect until posted on the website,” there is nothing in the Blockbuster agreement that would prevent Blockbuster from unilaterally changing any part of the contract. The court also seemed to be concerned that changes made to the arbitration clause in the user agreement may not only be prospective in nature. The court concluded that the limitation that the changes would not come into effect until posted online was not enough to save the arbitration clause. Because the court concluded that the agreement was illusory and thus unenforceable, it did not address the plaintiff’s argument that the arbitration clause was also unconscionable.

Implications

Given the prevalence of unilateral modification rights in online agreements, this is potentially a very significant ruling. Although it and the cases to which it refers deal primarily with the arbitration provisions of contracts, dicta in the Blockbuster decision indicate that Blockbuster’s terms of service themselves, and not just the arbitration provision, are illusory. Not only does it open the door for others to join in the class action suit against Blockbuster, it also opens the door for other lawsuits challenging terms of use agreements that can be changed at will. If challenged, it is not clear how well the decision will fare on appeal. However, at this time, there is cause to give thought to the potential implications of the decision. This is not the first time that a court has sided with a party that has challenged the enforceability of an online agreement and it is not likely to be the last.  As online agreements continue to be litigated, further guideposts are likely to continue to emerge. In the meantime, companies with website or other terms of use or online contracts that allow unilateral modification may wish to explore whether they should take additional steps in order to bolster the likelihood that their online agreements will be enforceable.