Many business’ natural inclination is to draft service contracts to vigorously and comprehensive protect the business’ interests over those of its customers or other third parties. However, in the effort to maximize contractual protections, it is often possible to overreach and to end up with a document in which protective measures are determined to be unenforceable or, perhaps worse, in which certain overprotective measures negatively affect the enforceability of other provisions.
Blockbuster, Inc. learned this lesson the hard way in a 2009 trial court opinion from the U.S. District Court in the Northern District of Texas. There, one of Blockbuster’s customers sued the company for alleged violations of the U.S. Video Privacy Protection Act for sharing information about the movies she rented with Facebook through the Blockbuster Online service. (Blockbuster had entered into a contract with Facebook under which Facebook’s Beacon software was able to collect and broadcast the customer’s rental choices to the her Facebook friends.) Aside from being a highly questionable business decision from a customer privacy perspective, Blockbuster’s arrangement with Facebook also directed light to a significant problem with Blockbuster’s customer agreement.
In response to the plaintiff’s claims, Blockbuster sought to enforce an arbitration clause in the “Terms and Conditions” of its customer agreement to take the matter out of federal court. However, on the plaintiff’s objection, the court refused to do so based on its opinion that the arbitration provision was unsupported by adequate consideration and, thus, illusory and unenforceable. The court based its holding on another provision in the customer agreement, titled “Changes to Terms and Conditions,” that read as follows:
Blockbuster may at any time, and at its sole discretion, modify these Terms and Conditions of Use, including without limitation the Privacy Policy, with or without notice. Such modifications will be effective immediately upon posting. You agree to review these Terms and Conditions of Use periodically and your continued use of this Site following such modifications will indicate your acceptance of these modified Terms and Conditions of Use. If you do not agree to any modification of these Terms and Conditions of Use, you must immediately stop using this Site.
With regard to the agreement’s arbitration provision, the problem with the above language is that it does not clearly indicate that Blockbuster’s unilateral decision to modify the Terms and Conditions will not apply to disputes, otherwise subject to arbitration, that arose out of events occurring prior to publication on Blockbuster’s site. Thus, Blockbuster theoretically could change the terms of the agreement after the accrual of a claim against it, with that change then retroactively applying to the dispute. The court held that even if Blockbuster never intended this to be the effect of the agreement, it had no alternative but to rely on the agreement’s language in light of prevailing law. The court therefore denied Blockbuster’s motion to compel arbitration.
The court also noted that other courts have considered similar agreements that were held to be enforceable due to the presence of appropriate savings clauses in the terms of the agreements at issue. One such provision read as follows:
[N]o amendment shall apply to a Dispute of which the Sponsor [Halliburton] had actual notice on the date of amendment…termination [of the arbitration agreement] shall not be effective until 10 days after reasonable notice of termination is given to Employees or as to Disputes which arose prior to the date of termination.
(Quoted from In re Halliburton Co., 80 S.W.3d 566, 569-70 (Tex.2002).) Because the above provision specifically limited the company’s ability to make unilateral changes to the agreement, thereby leaving enforceable an arbitration clause found elsewhere in the agreement.
All businesses owe it to their owners or shareholders to ensure that they obtain as much benefit as possible out of their service agreements. To move new agreements into production without the benefit of the opinion of counsel has the potential to result in consequences that are both unintended and unwanted.
The Blockbuster opinion is from the case of Harris v. Blockbuster, Inc., Case No. 3:09-cv-217-M.
Posted by Mariqus Alexander at 06/23/2009 11:20:03 AM