Bragg v. Linden Research Inc.
487 F. Supp. 2d 593 (2007)
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Rule of Law:
A mandatory arbitration clause in an online clickwrap agreement is unenforceable as unconscionable if it is both procedurally and substantively unfair, such as when it is presented on a take-it-or-leave-it basis and contains one-sided terms regarding remedies, costs, venue, and confidentiality that effectively prevent the weaker party from vindicating their rights.
Facts:
- Linden Research, Inc. ('Linden'), with its CEO Philip Rosedale, operates the virtual world 'Second Life'.
- Linden and Rosedale engaged in a national promotional campaign, representing that users could acquire and own intellectual property rights in virtual land and goods within Second Life.
- Induced by these representations, Marc Bragg, Esq., signed up to participate in Second Life, accepting its Terms of Service (TOS), and invested real money to purchase virtual land and other assets.
- In 2005, Bragg created and sold digital 'fireworks' and acquired numerous parcels of virtual land.
- On April 30, 2006, after Bragg purchased a parcel of virtual land named 'Taessot' for $300, Linden claimed the purchase was made through an 'exploit'.
- Linden confiscated 'Taessot' from Bragg, froze his account, and seized all of his virtual property and currency.
Procedural Posture:
- Marc Bragg sued Linden Research, Inc. and its CEO, Philip Rosedale, in the Court of Common Pleas of Chester County, Pennsylvania, which is a state trial court.
- Linden and Rosedale removed the case to the United States District Court for the Eastern District of Pennsylvania.
- Defendant Rosedale filed a motion to dismiss the claims against him for lack of personal jurisdiction.
- Defendants Linden and Rosedale filed a motion to compel arbitration pursuant to the Second Life Terms of Service.
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Issue:
Is a mandatory arbitration clause in a clickwrap Terms of Service agreement unconscionable and therefore unenforceable when it is procedurally adhesive and substantively one-sided with respect to remedies, costs, venue, and confidentiality?
Opinions:
Majority - Robreno, J.
Yes, the mandatory arbitration clause is unconscionable and therefore unenforceable. A contract provision is unconscionable under California law if it is both procedurally and substantively unconscionable. The court found the arbitration clause was procedurally unconscionable because the Terms of Service (TOS) was a non-negotiable contract of adhesion presented on a 'take-it-or-leave-it' basis, and the clause itself was hidden within a long paragraph under a generic heading, creating surprise. The clause was substantively unconscionable due to: (1) lack of mutuality, as Linden reserved for itself various self-help remedies while forcing users into arbitration; (2) prohibitive costs, as the required ICC arbitration fees were substantially higher than court filing fees; (3) an unfair venue clause requiring arbitration in Linden's home city of San Francisco; and (4) a confidentiality provision that favors Linden as a 'repeat player' by preventing the development of public precedent. Because the clause is permeated with multiple unconscionable elements, the court declined to sever the offending terms and refused to enforce the agreement to arbitrate. The court also denied CEO Rosedale's motion to dismiss for lack of personal jurisdiction, finding his nationwide marketing efforts were sufficiently interactive and targeted to establish minimum contacts with the forum state.
Analysis:
This case is a landmark decision in cyberlaw, particularly concerning the enforceability of online 'clickwrap' agreements. It establishes that courts will apply traditional contract doctrines like unconscionability to modern online terms of service, scrutinizing them for fundamental fairness. The ruling serves as a significant check on the power of online service providers to impose one-sided dispute resolution clauses that effectively insulate them from liability. For future cases, Bragg provides a clear analytical framework for challenging arbitration clauses that impose prohibitive costs, inconvenient venues, and asymmetrical remedies on consumers, influencing how companies draft their terms of service.
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