Blockbuster 'Illusory' Contract Re-Ignites Concerns over Enforceability of Online User Agreements

Blockbuster 'Illusory' Contract Re-Ignites Concerns over Enforceability of Online User Agreements

Publications

A federal court in Texas has held that the arbitration clause of the user agreement for Blockbuster Online—the web presence of the video rental giant—cannot be enforced against plaintiffs in a class-action privacy suit because of Blockbuster's reservation of the right to unilaterally modify the agreement at any time. Harris v. Blockbuster, Inc., No. 3:09-cv-217-M (N.D. Tex. April 15, 2009). According to the court, such unilateral power to amend the arbitration clause renders it "illusory" and invalid. While this holding will likely be tested on appeal, the decision has revived the broader debate over the enforceability of online agreements that purport to bind website users who cannot negotiate terms and may be unaware of the existence of a contract.

The plaintiff class in Harris v. Blockbuster alleged that Blockbuster violated the Video Privacy Protection Act (18 U.S.C. § 2710) through its agreement with the online social networking website Facebook. Based on that agreement, Facebook users could add a Blockbuster "beacon" to their Facebook page. If a user with the beacon rented a movie through Blockbuster's online service, the name of the movie would be broadcast to his or her Facebook friends. Blockbuster moved to arbitrate the claims based on its online user agreement, to which all users had to agree via a checkbox on the registration form. In the same agreement, Blockbuster claimed the right to modify the terms of the user agreement "at any time, and at its sole discretion."

The district court ruled that the arbitration clause was not binding on the parties. Under contract law, both parties to a contract must promise something of value, or consideration. In an "illusory" contract, one of the parties reserves a choice that effectively frees him from any obligation. In the classic example, if a buyer promises to pay a seller a certain price for any goods ordered in the next month, there is no contract because the buyer can choose not to buy any goods. Because Blockbuster similarly retained the right to unilaterally modify or remove the arbitration clause—even with respect to legal claims already accrued—the court found that Blockbuster had promised nothing of value, and thus could not force plaintiffs to arbitrate their claims. The ruling extends only to Blockbuster's arbitration clause, but the logic of the court's holding potentially could apply to all terms of the user agreement.

While it is too early to tell how influential this decision will be or how it will fare on appeal, the case highlights the continuing uncertainty concerning the enforceability of online user agreements. User agreements are ubiquitous on the Internet, setting the terms on which providers make available their content and services, but some courts have refused to enforce them in various circumstances. In the Specht v. Netscape decision, 306 F.3d 17 (2d Cir. 2002), the Second Circuit held that plaintiffs weren't bound by Netscape's user agreement because they were not required to manifest affirmative consent to the agreement (e.g., via a "click through") and it was not posted in a conspicuous manner where the user clicked to download the Netscape software. Other cases have held forum selection clauses invalid as unconscionable. And, as the Blockbuster case illustrates, there remains uncertainty about how a site can best change the terms of online agreements governing the use of websites and whether such a change will apply retroactively. Many judges are clearly uncomfortable strictly enforcing user agreements where evidence indicates a lack of bargaining power or insufficient notice. As the caselaw in this area evolves, businesses should think carefully about how they draft their user agreements and communicate the terms to their users, and whether they need to take additional steps to ensure the agreement constitutes a binding, enforceable contract.