Second Life Arbitration Clause Unenforceable

NewYorkCountryLawyer writes "In a decision that could have far-reaching implications, a federal court in Pennsylvania has held that the California arbitration clause in the 'take it or leave it' clickwrap agreement on the Second Life website is unconscionable, and therefore unenforceable. In its decision (pdf) in Bragg v. Linden Research, Inc., No. 06-4925 (E.D. Pa. May 30, 2007), the Court concluded that the Second Life 'terms of service' seek to impose a one-sided dispute resolution scheme that tilts unfairly, 'in almost all situations,' in Second Life's favor. As a result, the case will stay in Pennsylvania federal court, instead of being transferred to an arbitration forum in California."

Comments

Precedent?

[evanbd]

Unless I'm mistaken, this isn't an appeals court, and therefore doesn't actually set precedent. Other courts can still apply the same logic though.

Re:Precedent?

[Qzukk]

It doesn't set a "real" precedent, but a lawyer can walk into a court in Texas and say "well, in this parallel case here, the decision was..." and the judge can either ignore it or not, at his discretion.

Re:Precedent?

[nomadic]

Persuasive authority is a lot more useful than most people realize, especially federal court decisions.

Re:Precedent?

[NewYorkCountryLawyer]

You are absolutely correct, nomadic. Those who say it's not a precedent do not understand how the common law system works.

Judges are looking for reasoning that helps them to resolve the case that is before them. When they find that another judge has thought these issues through carefully, and has fashioned an eminently sensible and just conclusion, they will usually go for it.

Of course it's easier for a judge if there's an appellate decision from his circuit telling him what he must do, but many, perhaps, most, litigated issues don't have the benefit of that kind of binding 'precedent'.... otherwise the issue would not even be in litigation. The lawyers would have read the binding precedent and followed it rather than frivolously ignore it.

Re:this seemed to be the important one for most ga

[Liberaltarian]

Sadly, no! The most that will happen, save it reaching the Supreme Court, is that the decision will apply to the users/companies in the 3rd Circuit court's jurisdiction alone.

A majority of Federal courts have ruled that shrinkwrap licenses are in general unenforceable, though a minority have affirmed that it is indeed a legally-binding document.

However, we're dealing with what's called a "clickwrap" license, which hasn't nearly the legal history that shrinkwrap licenses have. This decision, if upheld (I guarantee it's going to be appealed), is certainly an important early move in the right direction.

Re:Not a good decision, really

[Zironic]

I think you missed what the judge decided.

So far the judge has decided it is unreasonable to expect users to have to go through Arbitration court since it gives all the benefits to the company and all the downsides to the user.

The case itself though will most likely be lost by the user since virtual property doesn't have any real value (if it had you would have to pay tax for it and I wouldn't want to do that).

What I would like to see is that admins get to keep their ability to ban people for whatever reason but that users get a fair chance to defend themselves if they feel they became unjustly banned.

Re:EULAs?

[flyingfsck]

As I wrote elsewhere, EULAs are mostly bull. Go and read your state's "Sale of Goods Act" - it should have one and that is pretty much all that matters. The reason is that a Sale is the default action. For a transaction to be a Lease, the parties have to jump through very specific hoops and EULAs seldom do. Therefore, If it Looks like a Sale, Quacks like a Sale and Flies like a Sale, then it is a Sale, meaning that you most likely OWN your copy of MS Windows outright, despite what MS likes to pretend for example and that is why you can resell the CDs on Ebay.

Don't forget the FAA!

[CubanCorona]

Remember, the Federal Arbitration Act strongly favors the enforceability of arbitration agreements. This case likely came out the way it did because the practical implications of arbitration (in this specific case) would result in an unjust bias favoring Second Life or would make dispute resolution prohibitively expensive. A classic case regarding the enforceability of arbitration clauses is Adkins v. Labor Ready, Inc., 303 F.3d 496 (4th Cir. 2002) (upholding an arbitration agreement in an employment contract where the plaintiff could not show unconscionability or failure of consideration). While the enforceability of clickwrap agreements is a contemporary and evolving area of contract law, I don't think the implications of this decision are very far-reaching. This case deals specifically with an arbitration clause and so is a unique situation. I haven't read the opinion, but I suspect that the court held specifically that the arbitration clause was unconscionable as opposed to the entire clickwrap agreement. That is certainly important to note--the agreement may still be otherwise enforceable notwithstanding the arbitration clause.

The ruling is based on California law, though :-(

[Anonymous Coward]

IANAL, but when I read the decision, they based large parts of the reasoning on California law (due to the license saying that it was governed by California law). So that may make it harder to apply in other states. I think they even mentioned some cases under another state (PA?) and said that that precedent didn't apply because of that clause putting it under CA law.

I think this sets some precedent already, but also that it can end up in the Federal Court of Appeals, and eventually the Supreme Court if it gets to that. However, IANAL, so I'm not sure if this is even an appealable order (not every order is).

One of the most interesting parts to me were the notion that this is a LOT less expensive than arbitration. Or, at least, the judge thought so. That seemed to be a major factor in the decision per my non-lawyer reading. Which is odd to me because I thought that companies liked binding arbitration because it was supposedly faster and cheaper. Or maybe they just don't end up paying out as much money, I dunno. I was kinda surprised that we have a federal case made out of $300 of virtual land, though. Couldn't that go to small claims? Or maybe their whole account was worth more, who knows?

Now, unfortunately, I don't see this destroying EULAs so much as rewriting them, but I DID find it very interesting that, at least using the CA law they did, the contract might be unconscionable if you can't find anyone who doesn't give such harsh terms of service ("we can disconnect you if we feel like it", which is WAY too "standard" when you sign up for internet service). There was some other talk about that being except if there are "business realities" (which you either have to prove or describe in your contract), but I'd dearly LOVE to see the "CYA clause" as I call it stricken from ISP terms of service. Comcast with their "abuse of service" crap if you break their secret bandwidth limits on their "unlimited" service (by which they allegedly mean "always on", not "without limit").

I wonder if anyone will retain a lawyer and become the test case for that one?

The difference doesn't matter

[rewt66]

IANAL.

But the judge didn't rule it unenforceable because there was no law stating that clickwrap agreements were valid. He ruled that the terms were so one-sided that it was "unconscionable" (horribly one-sided), and therefore invalid. If the same terms were in a shrinkwrap license, or even a signed contract, the same terms would have had the same problem.

The statement that it doesn't apply everywhere until upheld by the Supreme Court is, however, quite correct.

Re:The difference doesn't matter

[asuffield]

He ruled that the terms were so one-sided that it was "unconscionable" (horribly one-sided), and therefore invalid. If the same terms were in a shrinkwrap license, or even a signed contract, the same terms would have had the same problem.

Obligatory proviso: while this is basically true, a signed contract may be valid anyway - if it can be shown that the party who loses out to the contract was fully aware of this at the time when they signed it, that the terms of the contract were negotiated by both parties, and they were not under any form of duress, then any contract is valid no matter how unconscionable. Licenses or contracts are only rejected in this manner when one party failed to understand the implications of the contract (and "would not have signed it if they had known") or when the terms were dictated by one party alone ("contract of adhesion", which is normal for clickwrap and shrinkwrap, but unusual for a signed contract).

There are some rules which apply to all contracts, but this isn't one of them. Be careful what you sign. For an important example, you can't often play this card for your job contract.

Re:Finally

[KiahZero]

no judge has ever ruled that they don't have juristiction. Not even close to true.

Wrong wrong wrong

[unassimilatible]

The interesting thing about this is that is being adjudicated under *Federal* law, rather than state law, because it involves interstate commerce.

No, federal district court jurisdiction is granted either via diversity jurisdiction (plaintiffs and defendants from different states in suits exceeding $75K) or federal question jurisdiction. In this case, since the court is obviously using state law, diversity is how they got into court (and of course the judge finding CA arbitration unenforceable). Pennsylvania plaintiff, California defendant, = federal court diversity jurisdiction using state substantive law (but federal civil procedure and evidence).

The next thing that they should go after is the concept that you don't actually *own* software that you purchase, you only "license" it. That could certainly be seen as a "contract of adhesion" ('procedurally unconscionable') imposed in a one-sided way and thus unlawful as well.

Also wrong! Read the case or the article, for a contract to be unenforceable, it must be both procedurally and substantively unconscionable. Contracts of adhesion are enforceable if they do not contain grossly unfair terms. And software licenses are generally considered enforceable (assuming no grossly unfair terms - read the article or case!).

Yes, but

[unassimilatible]

unilateral "cancel at any time" clauses can be illusory (a promise that isn't real, therefore non-binding, therefore no contract). What is generally required is a minimum time before they can cancel (e.g., "after 30 days") or notice requirement (e.g., "on 5 days notice"). A contract which allowed you to cancel or alter it 5 minutes after it was signed (or clicked) would not be a contract; it would be illusory.