N.D. Tex. Rejects Blockbuster Terms and Conditions as Illusory

Judge Lynn of the Northern District of Texas issued an order rejecting Blockbuster's attempt to enforce an arbitration provision contained in its online "terms and conditions."  Enforcement of online terms and conditions (particularly arbitration provisions) is becoming an increasingly complicated affair.  (The case is Harris v. Blockbuster Inc., 2009 U.S. Dist. Lexis 31531, 3:09-CV-217-M.)

Background:  This dispute arose out of Facebook's ill-fated "beacon" program, through which the video rentals of Facebook users would be "broadcast to the customer's Facebook friends."  (There are a couple of related disputes in other jurisdictions, but this lawsuit appears to be only against Blockbuster.)  Plaintiff sued alleging that the practice of broadcasting video rentals was a violation of the Video Privacy Protection Act (enacted after people probed around in an attempt to discover US Supreme Court Nominee Robert Bork's "video rental habits").  Blockbuster sought to invoke the arbitration provision in its online terms.*  The terms contained a then-standard arbitration provision pursuant to which the user signed up for arbitration and waived their right to proceed as a class. 

Decision:  Courts have found arbitration clauses in form agreements unenforceable due to procedural or substantive unconscionability.  Confidentiality provisions, unilateral terms, and class action bars, all have been factored into the unconscionability mix.  Online service provider and cell phone terms have been hard hit.  The court here finds that the arbitration provision is not enforceable not because the terms are unconscionable, but because the terms were illusory.  The court (relying on Texas law) focused on the fact that Blockbuster reserved the right to modify the terms at any time, and the modifications are not necessarily prospective.  It cites to an earlier Fifth Circuit case which invalidated an Amway arbitration provision because "the rules of arbitration" could be modified at any time.  According to the Blockbuster court, the Amway case (Morrison v. Amway Corp., 517 F.3d 248, 254 5th Cir. 2008) focused on a limitation on modifications  (whether modifications were solely prospective).  Because the Amway agreement did not contain any limitation, the Amway court found the agreement (and the arbitration provision) illusory.  The Blockbuster agreement suffered from the same flaws in the court's view.  The agreement provided that Blockbuster could modify the terms "at its sole discretion . . . at any time," and the modifications would be effective immediately (upon posting). 

My Takeaway:  This could be a stop the presses ruling.  It was interesting that the Amway case focused on the ability to modify the arbitration rules (or at least that's how the ruling played out, since the arbitration was subject to "Amway's rules," not third party rules).  That didn't seem to be the case here.  I'm guessing the arbitration in Blockbuster was subject to third party rules.  This is a key difference in my mind and I was disappointed that the court did not delve into this a bit more.  The implications of the decision are pretty serious, since virtually every terms of service agreement contains a provision that the service provider has the right to modify.  Many provide that modifications are effective upon posting or upon notice, but do not specify that the changes are only prospective (this is obvious, and why not let the user argue the point - would be the drafter's rationale).  Poking a hole in terms as illusory based on the right to modify  which is not specified as being prospective would undermine many existing online terms.  NB: there was a Ninth Circuit case which held that modified terms are not enforceable to the extent no notice was provided (Douglas v. U.S. District Court [pdf]) but this decision goes way beyond this.  Maybe I'm missing something?

* I struggle with whether "terms of service" or "terms of use" or some other variant, is best. 

Added:  in conversation, someone asked whether Lori Drew could make an argument that the terms of service which she supposedly violated were illusory.  I don't know the answer to that, but it certainly illustrates how using a terms of service to support a Computer Fraud and Abuse Act violation (particularly a criminal one) seems flimsy.  If they are often unenforceable in the civil context, shouldn't they be given less credence in the criminal context?
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