TechLaw

After long distance provider Talk America bought America Online's long distance business, it made several additions to the service contract: inserting a class action waiver, an arbitration clause, and a choice of law provision calling for New York law. Typical risk-shifting strategies.

The contract modifications were posted on Talk America's Web site -- but, one customer alleged, no additional notice of the modification was given. No e-mail notice, no mention stuffed into a monthly billing envelope. Only a modified contract posted to the provider's Web site.

The Ninth Circuit, in a case of apparent first impression at the circuit level, held that the Web posting alone was insufficient to bind the customer to the terms of the new deal. "Parties have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side," the court wrote.

The court said that it would be unreasonable to expect the customer to periodically visit the provider's Web site to inspect the contract for possible changes. "Without notice," the court wrote, "an examination would be fairly cumbersome, as [the customer] would have had to compare every word of the posted contract with his existing contract in order to detect whether it had changed."

So, in the Ninth Circuit, at least, online postings of contract modifications will be effective only when (1) the customer is informed of the change, and (2) the precise nature of the change is explained to the customer in the notice. Merely including language in the original contract informing the customer that the contract could be modified at some future date by posting changes to the Web would seem to fall short of the court's test.

The case is Douglas v. U.S. District Court for the Central District of California, No. 06-75424 (9th Cir. July 18, 2007).

Linden Research, creator and operator of the Second Life virtual world, suffered a tough loss in federal court the other day.  The trial court, in a case where a Pennsylvania plaintiff alleged that Linden Research unlawfully confiscated his "virtual property" when it terminated his right to keep playing the game, held that California-based Linden Research and its CEO were both subject to suit in Pennsylvania.

And matters went downhill from there. The court denied Linden Research's motion to compel arbitration, holding that the Second Life terms of service agreement -- which called for arbitration -- was procedurally and substantively unconscionable.

Essentially, Judge Eduardo C. Robreno rolled up the court's opinion in Comb v. Paypal Inc., 218 F. Supp.2d (N.D. Cal. 2002), and proceeded to beat Linden Research over the head with it for about a dozen pages.

The Second Life TOS was a take-it-or-leave-it clickwrap deal. The site operator had superior bargaining power over the plaintiff and, Judge Robreno found, there were no reasonable available market alternatives to Second Life. Of all the virtual worlds out there, only Second Life granted its users property rights in virtual land. Judge Robreno also faulted Linden Research for putting the arbitration provision in a "lengthy paragraph under the benign heading `GENERAL PROVISIONS.' "

Linden Research fared no better on the substantive unconscionability inquiry. Judge Robreno faulted the Second Life TOS on numerous grounds:

• lack of mutuality. The TOS gave Linden Research the right to terminate users "for any reason or no reason," the right to invoke several one-sided remedies to protect its own rights, and the right to modify the TOS at any time, including the arbitration provision.
• excessive arbitration costs. Up-front costs for arbitration were significantly greater than the costs of filing a federal court action.
• venue in California.  The TOS unreasonably demanded that Second Life users travel to California to  arbitrate claims  commonly involving minimal sums.
• confidentiality agreement. The gag order on arbitration proceedings called for by the TOS allows Linden Research to accumulate knowledge about arbitrations involving the TOS, while individual plaintiffs must begin from scratch in every case.
• business realities. Judge Robreno said that Linden Research made no showing that such a one-sided agreement was necessary to conduct its business.

On balance, the court concluded, the Second Life TOS seeks to impose a one-sided dispute resolution scheme that tilts unfairly, "in almost all situations," in Second Life's favor.

The upshot of all this is that a federal court, not an arbitration panel, will decide in an open court the novel cyberlaw issues present in this case. That's a positive outcome, regardless of where the court ultimately comes down.

The case also contains lessons for attorneys drafting online terms of service agreements. A fair reading of this case and Comb should lead counsel to reign in their natural impulse to write every single deal point in favor of their client and against the user. 

The case is Bragg v. Linden Research Inc., No. 06-4925 (E.D. Pa. May 30, 2007).