Blockbuster Online: Threatening enforceability of online Terms of Use

Background: It was a bad idea. Blockbuster Online participated in Facebook’s Beacon program. As part of the program, when someone with a Facebook account ordered a video through Blockbuster Online, Blockbuster would transmit information on the video ordered to Facebook, which would in turn distribute this information to the purchaser’s Facebook friends. Beacon was very controversial when first launched, and cries of privacy violations resulted in Facebook revising the program. However, in addition to a possible privacy violation, Blockbuster’s participation may have also violated the Video Privacy Act (18 U.S.C. Sec. 2710), which prohibits a videotape service provider from disclosing personally identifiable infomation about a customer and video titles ordered without consent. As a result, a class action was initiated against Blockbuster. One would have thought that Blockbuster would be quite on top of the requirements of the Video Privacy Act … oh well…

Defense: Blockbuster’s initial defense focused on a technicality. A provision in its website terms requires two things: disputes must be resolved by binding arbitration and customers waive the right to join in a class action. Customers accepted the website terms by checking off a “checkbox” before ordering videos. The plaintiffs claimed that the arbitration and class action waiver clauses were illusory, and should not be unenforceable against them. The U.S. District Court for the Northern District of Texas issued a decision on April 15, 2009, essentially agreeing with the plaintiffs’ claims.

Holding:  The Blockbuster court’s decision may be an example of desiring to reach a conclusion – in spite of the precident it relied on. The court held that since Blockbuster, under its website terms, had the unilateral right in its discretion to change the website terms at any time, and the website terms did not limit the application of amendments to the dispute resolution terms to disputes arising after the amendment, the arbitration clause was illusory. The court relied on a prior ruling in Morrison v. Amway Corp. (517 F.3d 248 (5th Cir. 2008)).

The problem is that the court in Morrison dealt with a case where Amway sought to apply an arbitration clause which was added at Amway’s discretion by amendment after the original agreement was entered into and Amway sought to apply the arbitration to a cause of action that arose prior to the addition of the arbitration clause. Both of these factors where not present in Blockbuster, where the arbitration clause was present in the original agreement. As a matter of fact, the Morrison court itself distinguished the case from another case where the arbitration clause was applicable from the date of the original signing of the agreement.

Impact: The Blockbuster court’s reliance on Morrison is questionable, as discussed above, and may be overturned on appeal. If not, then the issue can probably be resolved by providing in website terms that changes to dispute resolution provisions will only apply to disputes that arise after the change goes into affect.

The problem with Blockbuster is that the rationale is stated in somewhat broad terms and could be viewed as holding that website terms in general that may be unilaterally modified are illusory and unenforceable. Almost all website terms allow for unilateral modifications – so such an interpretation would have extremely broad impact.

Practical suggestions/pointers:

Regardless of whether the Blockbuster decision is overturned on appeal, there is a trend in the courts to attempt to weaken website’s one-sided control over website terms. Therefore, the following is recommended:

  • Website terms should be reasonable and mutual to avoid claims of unconscionability.
  • Since website terms will continue to contain language giving the website the right to unilaterally change the terms, the website terms should state that these changes should not apply retroactively and, in particular to dispute resolution provisions, changes should not apply to causes of action arising prior to the effective date of the changes.

Websites should use the best means practically available to notify users of changes to the website terms (email, posting notices on website home page, including version dates for all website terms and highlighting material changes that are made).

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William Galkin manages GalkinLaw. Mr. Galkin has dedicated his legal practice to representing Internet, e-commerce, computer technology and new media businesses across the U.S. and around the world. He serves as a trusted adviser to both startup and multinational corporations on their core commercial transactions.


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