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

May, 2009

 Summary: You might not have read it here first but you have read it here often: Courts aretaking 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 thatdistrict. 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 whatcan 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.

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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 unimportantboilerplate. 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.