By Brandi M. Bennett, Esq., Bennett IP Law
Earlier this month, Sony massively revised the Terms of Service for the Playstation Network, requiring all users to waive their right to collectively sue. This means no more class actions the next time PSN gets hacked and your credit card information gets stolen.
Wait, what? Is that even legal?
Unfortunately so, at least following a United States Supreme Court decision last April.
All software license agreements between users and the owner of the software are considered adhesion contracts, which mean they’re non-negotiable. Take it or leave it. Courts judge adhesion contracts on a higher standard, requiring the drafter to be fair(er) and consider the user’s interests. This is called unconscionability and means the court will look at the adhesion contract to determine whether both parties had an opportunity to bargain – in the case of an adhesion contract, no – and whether the terms place an unfair burden on the party who didn’t write the contract.
Arbitration
Generally speaking, I and many other attorneys advise clients to solve their disputes using arbitration. It’s cheaper and faster than litigating in most cases. So when we write TOS, we require users to consent to settle all disputes using arbitration in the forum of our choice –usually down the block from our legal department’s headquarters because the legal department is always understaffed and overworked and we don’t have time to be trekking across the country to settle matters or the budget to hire outside counsel to handle the issue for us. Federal and state courts share a strong public policy in favor of arbitration because it is cheaper and more efficient than litigation. Numerous cases in every jurisdiction in the United States have held that arbitration clauses must be carefully crafted in adhesion contracts to pass the fairness test.
Sony’s new terms of service
Sony’s new terms of service go a step further than just requiring mandatory arbitration. They also require users to waive their right to join a class action. Here’s the specific language:
Class Action Waiver. ANY DISPUTE RESOLUTION PROCEEDINGS, WHETHER IN ARBITRATION OR COURT, WILL BE CONDUCTED ONLY ON AN INDIVIDUAL BASIS AND NOT IN A CLASS OR REPRESENTATIVE ACTION OR AS A NAMED OR UNNAMED MEMBER IN A CLASS, CONSOLIDATED, REPRESENTATIVE OR PRIVATE ATTORNEY GENERAL LEGAL ACTION, UNLESS BOTH YOU AND THE SONY ENTITY WITH WHICH YOU HAVE A DISPUTE SPECIFICALLY AGREE TO DO SO IN WRITING FOLLOWING INITIATION OF THE ARBITRATION. THIS PROVISION DOES NOT PRECLUDE YOUR PARTICIPATION AS A MEMBER IN A CLASS ACTION FILED ON OR BEFORE AUGUST 20, 2011.
That’s as clear as any legal language ever is. Your dispute, if you choose to accept, becomes a veritable Mission Impossible. An army of one versus the global Sony conglomerate, worth some $40 billion. Good luck.
Past court actions
This seems to be the sort of language the courts would strike down as unconscionable, and indeed, the California courts and the Ninth Circuit have ruled multiple times that it is. The general rule was laid down by the California Supreme Court in Discover Bank v. Superior Court in 2005:
We do not hold that all class action waivers are necessarily unconscionable. But when the waiver is found in a consumer contract of adhesion in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and when it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small sums of money, then, at least to the extent the obligation at issue is governed by California law, the waiver becomes in practice the exemption of the party “from responsibility for[its] own fraud, or willful injury to the person or property of another.” (Civ.Code, § 1668.) Under these circumstances, such waivers are unconscionable under California law and should not be enforced. [Emphasis added]
California is not alone in generally disallowing class action waivers in adhesion contracts. According to an amicus brief filed by the NAACP, at least 19 other states have invalidated such waivers.
AT&T: The game changer
The whole game changed last April in AT&T Mobility v. Concepcion, however, when the USSC ruled 5-4 in favor of AT&T Mobility in a case that questioned whether federal law – in this case the Federal Arbitration Act – could be limited by state law. The USSC held that the principle purpose of the FAA was to encourage arbitration and that it could not be limited by any state policy to the contrary.
Contrary to the dissent’s view, our cases…have repeatedly described the Act as “embod[ying] [a] national policy favoring arbitration,” and “a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary,” (Citations omitted and emphasis added).
However, this decision appears to misconstrue the position of California state law regarding class action waivers. As the dissent by Justice Breyer points out, class action waivers in certain circumstances have been upheld by the California courts. The Discover Bank rule is not a blanket policy, but is instead a very carefully designed three-part test that defines the circumstances in which such waivers would be invalid.
Further, according to the dissent, federal arbitration law has often left routine contract law to the states to define. In Doctor’s Associates, Inc. v. Casarotto, the USSC itself held that arbitration agreements “may be invalidated by ‘generally applicable contract defenses’”. Unconscionability applies not just to adhesion contracts and arbitration clauses, but to all contracts. Justice Breyer writes, “The Discover Bank rule amounts to a variation on this theme. California is free to define unconscionability as it sees fit, and its common law is of no federal concern so long as the State does not adopt a special rule that disfavors arbitration.”
Anti-Consumer?
As troubling as the legal implications are here, the anti-consumer implications are even more so. The USSC majority appears to believe that individual arbitration for miniscule damages will be a viable alternative to class actions (whether in court or arbitration). But with a requirement that the parties split the costs of arbitration, it seems readily apparent that no individual will ever seek arbitration where the dollar amount is insufficient to outweigh the costs of a $300/hour arbitrator. As Justice Breyer writes, “What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?…’The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30’ (quoting Carnegie v. Household Int’l, Inc., 376 F. 3d 656, 661 (CA7 2004)).”
Nothing the Supreme Court ever considers is of limited application. Disputes don’t rise to the highest court in the country unless they have broad implications and applicability. This decision isn’t just applicable to AT&T’s contracts or telephone contracts or even Terms of Service Agreements on Sony and Xbox. This new rule applies to every service you join on the internet, to every credit card and bank account you apply for, to every cable company and utility you sign up for. Welcome to a world where corporations get to dictate how you can resolve your disputes and where your resolution mechanism is extraordinarily narrow.
Sony, however, clearly believes the USSC’s opinion isn’t anti-consumer.
“The Supreme Court recently ruled in the AT&T case that language like this is enforceable. The updated language in the TOS is designed to benefit both the consumer and the company by ensuring that there is adequate time and procedures to resolve disputes,” a Sony representative told CNN.
A serious blow to class actions
In the absence of legislation to overturn the USSC’s decision, consumers are left with little recourse. The Supreme Court’s decision to approve class action waivers in adhesion contracts may have the unintended side effect of killing class actions. Class actions exist to create efficiency and fairness. A class action keeps every court in the country from litigating the same issue over and over ad nauseum, wasting not only the court’s time, but also that of the defending corporation. They also help create uniformity of law, something internet companies that potentially reach every jurisdiction in the world clearly need and desire. Class actions also make it possible to find recourse for individuals with damages that make traditional litigation impractical. AT&T Mobility v. Concepcion appears to leave the average consumer at risk of being defrauded by corporations for $10, $20, $50 without any practical remedy. If one million customers are damaged for $20 each, a corporation can improperly realize a $20 million gain. Class actions serve to prevent that.
Don’t get me wrong. It’s completely understandable that Sony would attempt to limit class actions against it. After all, Sony could lose $2 billion resolving the class action formed by Playstation Network users whose information was hacked in April. Everyone at Sony, including the lawyers, has an obligation to the shareholders to do what they can to limit losses, especially those in the eleven figures. But that doesn’t make class action waivers right and it shouldn’t make them legal.
Opt out
Although only about 1% of users, according to estimates, will use them, the new TOS includes a mail in opt out provision in anticipation of the unconscionability defense. Patrick Klepek at GiantBomb.com has kindly provided a template letter for users to choose to opt out of the class action waiver here. I encourage everyone to preserve their right by sending it certified. Mine’s already in the mail.
About Brandi M. Bennett
Brandi M. Bennett, Esq. is an attorney licensed in California who specializes in all intellectual property law for the entertainment industries. She has worked in house for a comic book publisher and a Chinese video game developer and publisher. She currently has her own practice, Bennett IP Law, in Los Angeles, CA helping entertainment and technology clients around the world with their intellectual property, contract, and general business needs.
When she’s not working, Brandi can be found in a sports bar following the Green Bay Packers and Phoenix Suns or at home working on her first novel.
Brandi can be reached nearly 24/7 at bbennettesq@gmail.com.
Contents of The Fall 2011 Edition of the WIGI Newsletter
WIGI News
-GameMentorOnline: The First-of-its-Kind Mentoring Program in the Gaming Industry Returns
-WIGI to Participate in Girl Scouts’ GIRLTOPIA
-On Finding Women Speakers for New Game: Your Input
-LeVar Burton Creating Reading Rainbow iPad App
Sponsor News
-Develop AND Publish Online 3D Games Affordably…Really