TechLaw

Arbitration Clause in Second Life TOS Found Unconscionable

Linden Research, creator and operator of the Second Life virtual world, suffered a tough loss in federal court the other day.  The trial court, in a case where a Pennsylvania plaintiff alleged that Linden Research unlawfully confiscated his "virtual property" when it terminated his right to keep playing the game, held that California-based Linden Research and its CEO were both subject to suit in Pennsylvania.

And matters went downhill from there. The court denied Linden Research's motion to compel arbitration, holding that the Second Life terms of service agreement -- which called for arbitration -- was procedurally and substantively unconscionable.

Essentially, Judge Eduardo C. Robreno rolled up the court's opinion in Comb v. Paypal Inc., 218 F. Supp.2d (N.D. Cal. 2002), and proceeded to beat Linden Research over the head with it for about a dozen pages.

The Second Life TOS was a take-it-or-leave-it clickwrap deal. The site operator had superior bargaining power over the plaintiff and, Judge Robreno found, there were no reasonable available market alternatives to Second Life. Of all the virtual worlds out there, only Second Life granted its users property rights in virtual land. Judge Robreno also faulted Linden Research for putting the arbitration provision in a "lengthy paragraph under the benign heading `GENERAL PROVISIONS.' "

Linden Research fared no better on the substantive unconscionability inquiry. Judge Robreno faulted the Second Life TOS on numerous grounds:

• lack of mutuality. The TOS gave Linden Research the right to terminate users "for any reason or no reason," the right to invoke several one-sided remedies to protect its own rights, and the right to modify the TOS at any time, including the arbitration provision.
• excessive arbitration costs. Up-front costs for arbitration were significantly greater than the costs of filing a federal court action.
• venue in California.  The TOS unreasonably demanded that Second Life users travel to California to  arbitrate claims  commonly involving minimal sums.
• confidentiality agreement. The gag order on arbitration proceedings called for by the TOS allows Linden Research to accumulate knowledge about arbitrations involving the TOS, while individual plaintiffs must begin from scratch in every case.
• business realities. Judge Robreno said that Linden Research made no showing that such a one-sided agreement was necessary to conduct its business.

On balance, the court concluded, the Second Life TOS seeks to impose a one-sided dispute resolution scheme that tilts unfairly, "in almost all situations," in Second Life's favor.

The upshot of all this is that a federal court, not an arbitration panel, will decide in an open court the novel cyberlaw issues present in this case. That's a positive outcome, regardless of where the court ultimately comes down.

The case also contains lessons for attorneys drafting online terms of service agreements. A fair reading of this case and Comb should lead counsel to reign in their natural impulse to write every single deal point in favor of their client and against the user. 

The case is Bragg v. Linden Research Inc., No. 06-4925 (E.D. Pa. May 30, 2007).

Will Rise of Virtual Worlds Turn EULAs Into Marketing Opportunities?

It is not often that legal notices can play a role in bringing customers to the client’s online doorstep, but virtual worlds might present just such an opportunity.

Many of these virtual worlds host robust marketplaces that are a major draw for users. Yet, almost none of them confer any rights over virtual property. For example, under the terms of use for World of Warcraft, users "have no interest, monetary or otherwise, in any feature, content or availability of World of Warcraft" or in "any Game Data" associated with the virtual world.

Of course, there are good reasons for this, such as limiting liability, controlling gold farming, and avoiding the mediation of property disputes between players. But as the operators of Second Life have pointed out, there is an inevitable friction between denying users property protection while encouraging them to invest substantial time in developing their world.

Some of that friction has become evident in recent squabbles over virtual property. Earlier this spring, players of EVE Online, a space opera, lost billions in in-game currency to the Eve Intergalactic Bank. The third-party bank offered interest on deposits, albeit in ISK, the in-game currency. It was nothing more than a Ponzi scheme. When it collapsed, there was no FDIC to pick up the pieces. Nor did CCP Games, the service provider, view this as anything that justified punishing the culprit. Instead, it shrugged off the incident as a natural byproduct of the rough and tumble of gameplay.

More recently, Marc Bragg has refiled a lawsuit against the operator Second Life, claiming that the service ought to compensate him for the virtual land, currency, and in-game goods it confiscated from him when it suspended his account following his exploit of the game's land auction system.

That lawsuit makes much of Second Life's decision to confer intellectual property rights to users. Second Life's terms of service provides that users "retain any and all applicable copyright and other intellectual property rights" with respect to the content they create. Though, the scope of ownership is rather limited; Linden Lab still owns all the underlying data and disclaims any liability for deletion. Bragg will have a hard time finding refuge in the TOS.

It may take a few more Ponzi schemes and lawsuits to elevate the property rights issue to the level that consumers start factoring that into their choice of online worlds. But as Second Life has attempted to prove, giving users some legal control over their property is one way to differentiate itself from the pack, albeit with some additional legal risk.