Federal Court on TOUs: Don’t Make Them Too Onerous.

Summary:  You might not have read it here first but you have read it here often:  Courts are taking on—and deciding against—what they consider to be unfair terms in EULAs or TOUs.  In this case, it was the federal district court for Northern Texas, finding that the arbitration clause was illusory.  It is important to note that this case, in our opinion, does not stand alone but adds more case law attacking the terms of these online agreements.  These cases are—and in particular this case is—consistent with one of the principal points central to the new FTC staff guidelines.  The message:  Complicated TOUs put the client at greater risk.

In Harris v. Blockbuster, the court for the Northern District of Texas held that the arbitration provision of the online agreement for the use of Blockbuster was illusory.  Dicta suggest even broader implications for the decision, but that alone was enough to cause some concern (we do not yet know if there will be an appeal, though it is probable).

As far as the court was concerned the main problem with Blockbuster’s online agreement was sort of a double-whammy.  The agreement stated that Blockbuster could change the provisions at any time—which would, of course, mean that changes with retroactive effect would, in the opinion of Blockbuster, be enforceable.  In this case, some disputes arose and Blockbuster then added an arbitration provision, which was to apply retroactively and thus eliminate much of the risk (from a trial).

So What?

So, online agreements (what we call EULAs and TOUs) with retroactive changes inserting (or affecting) arbitration provisions will run afoul of this opinion—of course, in that district.  Moreover, the opinion carries some weight with other claims about online agreements.  Many online agreements—perhaps a majority, perhaps many more—have such provisions enabling the publisher (in this case Blockbuster) the right to make retroactive changes to the terms.  Suddenly, then (if you believe in Chicken Little), these provisions are at risk.

Ammunition & Guidance. Really, though, the opinion builds on a string of previous opinions that, taken together, provide both substantial ammunition for plaintiffs’ assaults on these agreements and, if you think about it, guidance on what to include—and exclude—from online agreements.

It is not necessarily a bad thing.  The FTC staff report gives pretty clear guidance on what can be done:  If a party wants a right to changes, then they should not be retroactive and the user must have some kind of right to agree (or not) to those changes going forward.

This is not some rogue court.  The cases cited include some in the Fifth Circuit and some in Texas itself.  With some serious contortions and impressive legal reasoning, one could distinguish this case from the facts and holdings of those precedents.  But it is not so simple.

In just the last several years, quite a few courts have taken on the online agreements.  They include courts in the Ninth Circuit and in Pennsylvania.  The reasoning can be distinguished but not here.  They all come to a smell test:  Does this really smell like a contract?

These cases fall within an even longer line of opinions regarding the nature of agreements between corporations and consumers.  As the FTC staff report pointed out (with copious footnotes), “fine print” cases have a long history.  And it is a history where the “victor” has swung from the consumer to corporations and back.  Now, with the new administration, with the FTC’s stiffer attitude about consumer rights (rightly or wrongly), and with these cases, we can expect history’s pendulum to swing the other way.

Conclusion

Write “Gooder.” These agreements do not have to be so dense and they do not have to have such onerous terms.  The right of retroactive modification was a term just waiting to be shot down.  Too often, lawyers just copy and paste a TOU from another site.  Or, perhaps they have to justify their legal fees on a topic that is perceived by clients as unimportant boilerplate.  Whatever the reason, this case should be a shot across the bow that attorneys put their clients at greater risk with such legal intricacies as we now see in EULAs.

Perhaps we’ll get some online agreements that are actually well-drafted;  that do not read like fine print;  and that provide better terms.  But then, we believe in the Easter Bunny, too.

Court to Plaintiff: “Equitable Relief” Provisions in a TOU Aren’t Compelling.

Summary:  In an opinion arising from a hearing for a preliminary injunction, a US district court in California rejected a contractual term and concluded that the plaintiff failed to demonstrate irreparable harm–and, with a bit of an indirect warning:  Contract terms do not limit the authority or role of courts.  In the case of preliminary injunctions, the court makes the findings.  And, they also pointed out that this is not new law.  (However, we think that this is one of the first cases on TOUs–or EULAs.)  We recently wrote about the FTC and EULAs/TOUs.  Might become a more important topic–given that hundreds of millions of people are bound by them.

Call it the Inspection Management decision (it has not yet been named), but a software company sought a preliminary injunction against a competitor that had created an account, and contrary to the End User License Agreement (the EULA or a TOU), let others use his login, etc.  The plaintiff went after the defendant on the basis of a breach of the EULA and, in particular, the “Equitable Relief” provision.  This said:

“You agree that the information being provided by IMS,Inc. is confidential and derives its value, in part, from its confidential nonpublic nature. You further agree that in the event you breach this agreement, IMS,Inc., will suffer irreparable harm.”

This provision can be found in just about every EULA, every license and a very large portion of agreements.  Well, what the court first cared about was that the plaintiff failed in it evidentiary burden about irreparable harm.

That alone would have been sufficient to decide this case.  Then, they noted that the plaintiff relied on the contract language quoted above, which they considered just about “settled law.”  That lineage of cases was prominent in the decision.  Here is what they said:

Plaintiff cannot rely on the contractual provisions of the EULA to show irreparable harm. Instead, the court must make an independent determination of whether such harm is present.  As the Second Circuit stated in Baker’s Aid. v. Hussmann Foodservice Co., 830 F.2d 13, 16 (2d Cir. 1987), “contractual language declaring money damages inadequate in the event of a breach does not control the question of whether preliminary injunctive relief is appropriate.” The Tenth Circuit expounded on this principle in Dominion Video Satellite, Inc. v. Echostar Satellite Corp.,supra.

So What?

So why did the court go farther than they had to?  Obviously we do not know what the court thinks, but we do think the opinion has these ramifications.

1. Courts do not like their authority or specified role limited, whether by contract or by legislation.  Provisions that can be interpreted on their face to do so might be unfavorably scrutinized.
   
2. Courts have not rendered many opinions on EULAs and this was an opportunity.  As the saying goes “Watch this space.”
   
3. Some courts in California are not really thrilled with the level of drafting in agreements.  This provision is clearly treated as “boilerplate”  when agreements are drafted.

So we are forewarned.

Data, The New York Times, Basketball & Agreements

We are trying an experiment here.  Rather than rewrite a post we have made on another of our blogs we have set forth the link below.  That blog is for general counsel but the point is applicable to digital matters.

Here is a summary:

An article in The New York Times Magazine on Sunday March 14th on basketball provides an object lesson that you should own whatever data may emerge from any digital initiatives memorialized in a legal agreement.

http://globalgeneralcounsel.wordpress.com

Hollywood Pros to Post on YouTube?

The William Morris Agency just cut a deal with YouTube that will enable YT to display professionally-produced videos–presumably with the famous actors in the WM stables.  We like this idea:  In fact, it’s about time.  Here’s why:

1.  Low production quality is he standard on YT; it will be good to see something worth seeing.

2.  Almost paradoxically, that which is of good (production) quality is the copyrighted material from the studios–i.e., professionaly-produced.

3.  The problem with the material mentioned in #2 above is that most of it is pirated–or at least no one is getting paid for it.

4.  This (and their other deals with the studios) may actually make some money.

5.  Besides, YT is a good platform–now it can get better.

6.  Oh yes, I forgot:  YT now has credible competition in this space. Hulu.com.