18 May 2009

On-Line Contracts that May Be Modified at any Time per Notice Held Unenforceable

A United States district court in Texas issued an important ruling regarding the enforceability of online terms of use agreements, in a dispute between users of Blockbuster Online, an on-line video rental service Blockbuster Inc. controls, and the users of such service who alleged that Blockbuster violated the Video Privacy Protection Act. The Act prohibits disclosure of personally identifiable information in connection with video rentals. Blockbuster Online caused user's movie rental choices to be published on each user's Facebook pages.

Blockbuster moved to dismiss the case based on the service's on-line terms of use, which mandated that disputes be resolved via binding arbitration. Plaintiffs defended the dismissal notion by arguing that the arbitration provision was illusory and not supported by consideration, because Blockbuster reserved the right to at any time to modify the terms in its sole discretion, with such modifications purportedly becoming binding immediately upon such terms' posting on the site.

The district court agreed with the plaintiffs and denied Blockbuster's motion to compel arbitration. The court so held despite that Blockbuster had never modified the terms of service to add the arbitration provision post hoc. The mere existence of a right to unilaterally modify terms without notice was sufficient to render the arbitration clause unenforceable. The court stated "[T]he ability to change the rules at any time made the contract merely illusory …."

Given that thousands of websites contain on-line terms of use or terms of service, and that most expressly contemplate unilateral modifications with or without notice, the court's decision if withheld on appeal could prove highly significant.

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