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A federal court in Pennsylvania has ruled that an arbitration agreement between the operator of a virtual world and its participant was unconscionable because the agreement lacked mutuality, imposed unfair costs, and contained a burdensome venue provision. Accordingly, the Court denied the operator's motion to compel arbitration.
In Bragg v. Linden Research, Inc., No. CIV-A-06-4925 2007 WL 1549013 (E.D. Pa. May 30, 2007), Bragg, an attorney, participated in "Second Life," which is a multiplayer role playing game set in a virtual world. Second Life participants may buy, own, and sell virtual goods. Transactions are accomplished through the exchange of a virtual currency (called "lindens") that may be purchased with U.S. dollars.
In the course of his participation, Bragg bought several parcels of virtual land, including a parcel named "Taessot" that he bought for $300. After Bragg bought Taessot, the operator of Second Life, Linden Research (Linden), froze Bragg's account, claiming that Taessot had been improperly acquired.
Bragg sued Linden. In response, Linden filed a motion to compel arbitration pursuant to the terms of service (TOS) that Bragg agreed to when he signed up for Second Life. In opposing the motion, Bragg argued that the arbitration agreement was unconscionable and therefore unenforceable.
The TOS included a California choice-of-law provision, so the Court analyzed the unconscionability question under California law. In accordance with California law, the Court used a "sliding scale" approach, whereby "the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa."
The Court cited several indicia of procedural unconscionability. First, the TOS were presented to Bragg on a take-it-or-leave it basis. Second, there were no "reasonably available market alternatives" because even though Second Life "is not the only virtual world on the Internet, [it] was the first and only virtual world to specifically grant its participants property rights in virtual land." Finally, there was an element of surprise because the arbitration clause was "buried" in a lengthy paragraph with a generic heading.
The Court also found several indicia of substantive unconscionability. First, the arbitration agreement lacked mutuality because Linden retained a unilateral right to modify the agreement along with the right to exercise self-help remedies (e.g., the termination of Bragg's account). Second, Bragg's share of the arbitration costs would be "significantly greater" than the amount he would have to pay to sue in court. Third, the arbitration agreement's provision for venue in San Francisco was unreasonable in light of the small amounts at issue and nationwide participation in Second Life. Finally, the designated arbitration rules imposed confidentiality requirements that heightened the Court's concern over the fairness of the agreement.
Linden argued that instead of invalidating the arbitration agreement, the Court should "blueline" the agreement and excise its troublesome provisions. The Court declined this invitation on the ground that unconscionability permeated the agreement.
In this case, the unfair terms of the arbitration agreement precluded arbitration of the parties' dispute. However, as a forward-looking means of dispute resolution, arbitration is especially conducive to the resolution of Internet-based disputes (e.g., click fraud).
For instance, the parties to an Internet-based dispute are often separated by a physical gulf. This gulf heightens the expense of litigation because resolution in court generally requires in-person appearances and in-state attorneys. Conversely, with the availability of non-participatory hearings (e.g., document hearings), arbitration enables parties to resolve their disputes without even stepping away from the computer. See, e.g., Rule 28 of the National Arbitration Forum Code of Procedure.
Parties can avoid a judicial decision like this by selecting a neutral, independent, and fair arbitration provider whose rules provide all parties with all their legal rights and remedies and whose fees make arbitration affordable and accessible to all parties, including consumers.
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