Posted by: schild @ 00:36:36 on 6/4/07
Submitted by CmdrSlack.
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Various sites are reporting that there has been a decision in the latest (and most publicized) lawsuit against Linden Labs. For those who aren’t in the loop, Linden Labs is the creator of Second Life, a virtual world client known around these parts for its contingent of furries and other perverts. The lawsuit, Bragg v. Linden Lab, et. al., was filed by a Pennsylvania attorney who was banned from the service for exploiting SL’s web server to purchase virtual land at a highly discounted price. His suit alleged that the Second Life Terms of Service were unconscionable at best and that by freezing and ultimately banning his account, Linden Lab was in breach of its contract with him. The original complaint, as filed in Chester County, PA, is available here (warning: PDF).
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Various sites are reporting that there has been a decision in the latest (and most publicized) lawsuit against Linden Labs. For those who aren’t in the loop, Linden Labs is the creator of Second Life, a virtual world client known around these parts for its contingent of furries and other perverts. The lawsuit, Bragg v. Linden Lab, et. al., was filed by a Pennsylvania attorney who was banned from the service for exploiting SL’s web server to purchase virtual land at a highly discounted price. His suit alleged that the Second Life Terms of Service were unconscionable at best and that by freezing and ultimately banning his account, Linden Lab was in breach of its contract with him. The original complaint, as filed in Chester County, PA, is available here (warning: PDF).
When the suit was filed, it was declared a non-starter because it was clearly the action of an exploiter trying to get back at the company that rightfully banned him. However, it turns out that the case has legs. Before people begin claiming that Second Life or that EULAs are doomed, let’s take a look at what was actually decided.
At the outset of the case, Linden Lab had the case removed from Pennsylvania state court to the U.S. District Court for the Eastern District of Pennsylvania. It then moved to dismiss the case for lack of jurisdiction and to compel Bragg to submit to arbitration in San Francisco. For lack of a fancier term, those motions failed. Badly. The text of the court’s order is available here. The jurisdiction claim, that Philip Rosedale, CEO of Linden Labs, was not subject to being sued in a Pennsylvania court, was dismissed because of the LL’s aggressive marketing campaign. Mr. Rosedale played an essential part in that campaign, and thus was subject to suit in the PA District Court. While interesting to a law nerd like myself, the particulars of a jurisdiction battle likely aren’t interesting to others. The important point is that by advertising to the nation as a whole, and as an active advocate of Second Life, Philip Rosedale was free to be hauled into a court of law in Pennsylvania.
What has most people pulling a Chicken Little is the part of the order that invalidates portions of the Second Life Terms of Service. I’ve commented in the past that the SL TOS is shaky at best, and I stand by those assertions. While this order doesn’t debunk my claims, it’s also not the death knell of the TOS or the EULA. It does mean that game companies need to start re-thinking their abusive contract terms.
There is a federal law entitled the Federal Arbitration Act. It governs the enforceability and enforcement of arbitration clauses in contracts. In general, these clauses are enforceable, so long as they would be valid based upon general contract principles. Unfortunately for Linden Lab, that is where their TOS has failed. The pertinent part of their TOS states:
Bragg argued that this term, as placed in the TOS, was unconscionable. The important elements are that the contract term is one-sided and hidden (procedurally unconscionable) and/or that the contract term “shocks the conscience” (substantively unconscionable). In this case, the arbitration clause was tucked away in an unmarked paragraph in the “general provisions” section of the TOS. If you examine the rest of the TOS, most paragraphs are numbered and the “truly important” ones are sub-numbered (i.e. 4.1, 4.2, etc.). On its face, it certainly seems that the arbitration clause is hidden. In all honesty, it’s probably just sloppy drafting. Many contracts contain a catch-all clause.
The court determined that the Second Life TOS was a “contract of adhesion.” Since the contract is a take-it-or-leave-it deal, it’s a contract of adhesion. Just about every TOS satisfies this standard, as does every EULA. That is generally not enough to make a contract unenforceable. In fact, courts have upheld EULAs in many instances, including Blizzard’s EULA for all of its battle.net products. In this case, since Bragg was not offered an opportunity to bargain with Linden Lab and since there were no “reasonably available” alternatives to Second Life, the TOS was even yet still more suspect. Before you call shenanigans, SL is the only VW on the web to offer users ownership rights in virtual land and in their online creations. Since that’s the case, there’s really no alternative for people who want to have that experience. It’s SL or nothing.
The court then turned to whether the arbitration clause “shocked the conscience.” Looking at past California precedents, the court determined that since the TOS gives Linden Lab broad and sweeping discretionary power, while providing the consumer with very little power, the arbitration clause was also substantively unconscionable. This would seem to be true of most EULAs. There are, of course, exceptions to this rule, and many of them were addressed by the court. The most interesting for the game industry as a whole is the “business realities” exception. Even a contract that would normally be unconscionable can be redeemed by the simple fact that there is serious business afoot. Unfortunately for the industry as a whole, Linden Lab dropped the ball and didn’t argue that the business realities of the MMO/VW industry required a contract like its TOS.
In my opinion, this argument could have been a winner. When arguing motions, there is no jury, a party must only convince the judge. Doing some hand-waving and saying that the Internet requires special rules goes a long way, especially given that many judges and attorneys are less than tech savvy. I still feel that most MMO terms of service are unfair at best and severely unconscionable at worst, but I don’t have the luxury of being a federal judge. Let’s face it, EULAs provide no room for the consumer to bargain. Sure, you can refuse to play WoW, and play EQ2 or LoTRO instead. Fantasy dikus are a dime a dozen. SL, on the other hand, is a unique experience – its land ownership rules are one-of-a-kind and its player-created content is similarly unique.
All of that said, this case doesn’t do much to invalidate EULAs as a whole. In fact, it doesn’t even invalidate the SL TOS. It simply states that the arbitration clause in this case is unenforceable. It does not address the rest of Bragg’s claims, nor does it give him an “I win” button. From a legal perspective, it does draw into question whether the rest of the Second Life TOS is enforceable. My sense is, and has always been, that it is not. Linden Lab has spent a ton of time claiming that you can make REAL MONEY in SL. It has hyped itself via its PR agency and in the media at large as a ZOMG Serious Business Platform. Given those assertions, and given the fact that Linden Lab retains all of the draconian control that every MMO EULA gives the game developer, it is doubtful that most of the TOS will survive an unconscionability challenge.
The gaming industry as a whole should pay attention to this case. This order may not be an EULA-killer, but it does indicate that courts may not be likely to tolerate hinky behavior on the part of companies that promise special things. It may also mean that other MMO EULAs are unconscionable, but the number of comparable options that a gamer has cuts against this idea. While the difference between WoW and EQ2 may be very clear to the average reader, it is not that clear to a judge or jury. The law doesn’t care whether a feature is evolutionary, revolutionary, or the height of craptacularity. However, based on the court’s analysis of the arbitration clause, it seems likely that many MMO providers would do well to re-examine their EULAs and modify or remove clauses that seem suspect. It would also be wise for the in-house counsels of those companies to develop arguments for why the nature of the MMO business requires that the agreements be written as they are.
[discuss]
At the outset of the case, Linden Lab had the case removed from Pennsylvania state court to the U.S. District Court for the Eastern District of Pennsylvania. It then moved to dismiss the case for lack of jurisdiction and to compel Bragg to submit to arbitration in San Francisco. For lack of a fancier term, those motions failed. Badly. The text of the court’s order is available here. The jurisdiction claim, that Philip Rosedale, CEO of Linden Labs, was not subject to being sued in a Pennsylvania court, was dismissed because of the LL’s aggressive marketing campaign. Mr. Rosedale played an essential part in that campaign, and thus was subject to suit in the PA District Court. While interesting to a law nerd like myself, the particulars of a jurisdiction battle likely aren’t interesting to others. The important point is that by advertising to the nation as a whole, and as an active advocate of Second Life, Philip Rosedale was free to be hauled into a court of law in Pennsylvania.
What has most people pulling a Chicken Little is the part of the order that invalidates portions of the Second Life Terms of Service. I’ve commented in the past that the SL TOS is shaky at best, and I stand by those assertions. While this order doesn’t debunk my claims, it’s also not the death knell of the TOS or the EULA. It does mean that game companies need to start re-thinking their abusive contract terms.
There is a federal law entitled the Federal Arbitration Act. It governs the enforceability and enforcement of arbitration clauses in contracts. In general, these clauses are enforceable, so long as they would be valid based upon general contract principles. Unfortunately for Linden Lab, that is where their TOS has failed. The pertinent part of their TOS states:
Any dispute or claim arising out of or in connection with this Agreement or the performance, breach or termination thereof, shall be finally settled by binding arbitration in San Francisco, California under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with said rules. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Notwithstanding the foregoing, either party may apply to any court of competent jurisdiction for injunctive relief or enforcement of this arbitration provision without breach of this arbitration provision.
Bragg argued that this term, as placed in the TOS, was unconscionable. The important elements are that the contract term is one-sided and hidden (procedurally unconscionable) and/or that the contract term “shocks the conscience” (substantively unconscionable). In this case, the arbitration clause was tucked away in an unmarked paragraph in the “general provisions” section of the TOS. If you examine the rest of the TOS, most paragraphs are numbered and the “truly important” ones are sub-numbered (i.e. 4.1, 4.2, etc.). On its face, it certainly seems that the arbitration clause is hidden. In all honesty, it’s probably just sloppy drafting. Many contracts contain a catch-all clause.
The court determined that the Second Life TOS was a “contract of adhesion.” Since the contract is a take-it-or-leave-it deal, it’s a contract of adhesion. Just about every TOS satisfies this standard, as does every EULA. That is generally not enough to make a contract unenforceable. In fact, courts have upheld EULAs in many instances, including Blizzard’s EULA for all of its battle.net products. In this case, since Bragg was not offered an opportunity to bargain with Linden Lab and since there were no “reasonably available” alternatives to Second Life, the TOS was even yet still more suspect. Before you call shenanigans, SL is the only VW on the web to offer users ownership rights in virtual land and in their online creations. Since that’s the case, there’s really no alternative for people who want to have that experience. It’s SL or nothing.
The court then turned to whether the arbitration clause “shocked the conscience.” Looking at past California precedents, the court determined that since the TOS gives Linden Lab broad and sweeping discretionary power, while providing the consumer with very little power, the arbitration clause was also substantively unconscionable. This would seem to be true of most EULAs. There are, of course, exceptions to this rule, and many of them were addressed by the court. The most interesting for the game industry as a whole is the “business realities” exception. Even a contract that would normally be unconscionable can be redeemed by the simple fact that there is serious business afoot. Unfortunately for the industry as a whole, Linden Lab dropped the ball and didn’t argue that the business realities of the MMO/VW industry required a contract like its TOS.
In my opinion, this argument could have been a winner. When arguing motions, there is no jury, a party must only convince the judge. Doing some hand-waving and saying that the Internet requires special rules goes a long way, especially given that many judges and attorneys are less than tech savvy. I still feel that most MMO terms of service are unfair at best and severely unconscionable at worst, but I don’t have the luxury of being a federal judge. Let’s face it, EULAs provide no room for the consumer to bargain. Sure, you can refuse to play WoW, and play EQ2 or LoTRO instead. Fantasy dikus are a dime a dozen. SL, on the other hand, is a unique experience – its land ownership rules are one-of-a-kind and its player-created content is similarly unique.
All of that said, this case doesn’t do much to invalidate EULAs as a whole. In fact, it doesn’t even invalidate the SL TOS. It simply states that the arbitration clause in this case is unenforceable. It does not address the rest of Bragg’s claims, nor does it give him an “I win” button. From a legal perspective, it does draw into question whether the rest of the Second Life TOS is enforceable. My sense is, and has always been, that it is not. Linden Lab has spent a ton of time claiming that you can make REAL MONEY in SL. It has hyped itself via its PR agency and in the media at large as a ZOMG Serious Business Platform. Given those assertions, and given the fact that Linden Lab retains all of the draconian control that every MMO EULA gives the game developer, it is doubtful that most of the TOS will survive an unconscionability challenge.
The gaming industry as a whole should pay attention to this case. This order may not be an EULA-killer, but it does indicate that courts may not be likely to tolerate hinky behavior on the part of companies that promise special things. It may also mean that other MMO EULAs are unconscionable, but the number of comparable options that a gamer has cuts against this idea. While the difference between WoW and EQ2 may be very clear to the average reader, it is not that clear to a judge or jury. The law doesn’t care whether a feature is evolutionary, revolutionary, or the height of craptacularity. However, based on the court’s analysis of the arbitration clause, it seems likely that many MMO providers would do well to re-examine their EULAs and modify or remove clauses that seem suspect. It would also be wise for the in-house counsels of those companies to develop arguments for why the nature of the MMO business requires that the agreements be written as they are.
[discuss]