Law of virtual worlds essay from a few years back by Nick Founder

Words: 3625
Choose one virtual world, other than Second Life, as the focus of your study.
Provide a brief overview of the nature and function of that world, how you join what its key objectives and functions are. Analyse the terms of service (or end user licence agreement) that applies to that world and identify and discuss key legal issues that may arise from the application and interpretation of those terms of service. Identify any other forms or rules and/or governance that operate within the world and analyse the relevant legal issues arising from such rules or governance. Are there any other legal issues that you can foresee with respect to the participation in or continuation of this environment?

The focus of my essay is Facebook as it is the social networking site that I use on a daily basis and have in depth practical experience using it. There are a number of issues that arise from the terms of service (which includes rules governing user conduct), including whether the terms as a whole are a contract of adhesion, whether certain clauses such as liability and arbitration are enforceable (or not on the grounds of unconscionability), ownership of intellectual property and in particular copyright, and finally, jurisdiction. As Facebook is a U.S. based website and most of its users are based in the U.S. and also because most of the jurisprudence to date on Facebook has arisen in the U.S., the legal focus will be on the law in the U.S.
About Facebook
1. In the “About Facebook” section on its website, Facebook describes itself as a social utility that connects people with friends and others who work, study and live around them. It states that people use Facebook to keep up with friends, upload an unlimited number of photos, share links and videos, and learn more about the people they meet. Facebook is also made up of Networks based on geographic region or based on universities. Users can alter their privacy settings, add third party applications which range from Vampires, Super poke, dating, star signs, and many more, and users can join all kinds of groups ranging from “World Friends”, “Add me as a Facebook friend”, “Melbourne is better than Sydney”, to a group about AFL football or cats.
2. In my experience, I have found that Facebook enables you to reconnect with old friends that you have lost touch with or to maintain a connection to friends that you may have worked with or had some association with previously but are not in regular contact with, in addition to making new “world friends”.
3. In terms of joining Facebook, all you need is a valid email address. After completing a few mandatory boxes such as name and age, there is a “Sign Up” button to click on and above that box appear the words “By clicking “Sign Up, you are indicating that you have read and agree to the Terms of Use and Privacy Policy”.

Are the Terms of Use enforceable – is there a contract and if so are the Terms of Use unconscionable?
4. The Facebook Terms of Use can best be described as a standard form contract or contract of adhesion, where the user has no choice but agree to Facebook’s terms and has no ability to negotiate its terms. The ordinary principle of contract is that promises become binding when there is a meeting of the minds and consideration is exchanged. Assent may be registered by a signature, a handshake, or a click of a computer mouse transmitted across the invisible ether of the internet. For a contract to be formed a manifestation of mutual assent is necessary which can be by written or spoken words, or by conduct. This is also consistent with the current Uniform which provides in section 2-204(1) provides that a contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.
5. Facebook is like a hybrid between clickwrap and browsewrap because there is a button to click assenting to the terms, but the user must manually click on the Terms of Use link to read the terms as it is not displayed in full above the “Sign Up” icon. Thus, Facebook’s terms of service are somewhat analogous to a clickwrap software licence agreement and judicial decisions pertaining to clickwrap agreements are relevant in analysing the enforceability of Facebook’s terms of service.
6. For example, in DeJohn v The TV Corporation International 245 F. Supp. 2d 913, it was held that the plaintiff entered into a binding online click-wrap agreement by clicking an ‘I agree’ icon which indicated he had read and understood and agreed to the terms of the parties’ contract which were available for review online by clicking on a link which appeared on the website just above the ‘I Agree’ icon. By contrast in Specht v Netscape Communications Corp 306 F. 3d 17 users consented to the license terms by clicking an ‘I Agree’ icon, however, the only reference to the license agreement appeared in the text of a link well below the software download symbol for the download of SmartDownload. The Court of Appeals held that there must be “reasonably conspicuous notice” and “unambiguous manifestation of assent”. Also the words “please review and agree to the terms” was couched in a mild request more in the form of an invitation.
7. A relevant browsewrap case (also being somewhat analogous) is v Verio Inc 126 F. Supp. 2d 238, where the court held that the browsewrap agreement was enforceable even though the user was not asked to click an icon indicating acceptance of the terms and Verio manifested its assent by proceeding to submit a WHOIS query and Verio visited the website daily to access WHOIS data and each day saw the terms of use on the website. An analogy can be drawn to this case, since users of Facebook arguably manifest their assent to the Terms of Use not only by clicking the “Sign Up” (akin to a clickwrap assent), but also through conduct of continued usage. This is also stated in the first paragraph of Facebook’s Terms of Use – “By accessing or using our website…you…signify that you have read, understood and agree to be bound by these Terms of Use…whether or not you are a registered member of Facebook.”
8. The above cases have followed on from the decision of ProCD, Inc. v. Zeidenberg 86 F.3d 1447, which is the leading case in the U.S. on enforceability of software licence contracts of adhesion. In that case, it was held that shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable). Furthermore, the court noted that the software user had no choice but to accept, “because the software splashed the license on the screen and would not let him proceed without indicating acceptance” and thus the conduct of continued use manifested the user’s acceptance.
9. Before analysing whether Facebook’s Terms of Use are unconscionable, it is necessary to firstly examine the law in this regard.
10. In “Enforcement of Contractual Terms in Clickwrap Agreements”, the author discusses the principle of law that “A lack of competition with no negotiation possibilities in a typical contract of adhesion, such as a clickwrap, will meet the criteria for procedural unconscionability. However, even if an agreement is procedurally unconscionable, it may nonetheless be enforceable if the substantive terms are reasonable.” Based on case law, substantive unconscionability requires proof of overly harsh or one-side terms that “shock the conscience”. Therefore invalidating clickwrap (or similar agreements) on the basis of unconscionability requires evidence than an unfair use of superior bargaining power resulted in contractual conditions so exceedingly calloused as to be unreasonably burdensome to the agreeing party.
11. The author of “On Virtual Worlds: Copyright and Contract Law at the Dawn of the Virtual Age”, discusses unconscionability as follows:
Procedural unconscionability generally concerns the absence of meaningful choice or bargaining power on the part of one party, while substantive unconscionability concerns the existence of contract terms which unreasonably favour one party.
Courts often state that a substantively unconscionable term is one that is “overly harsh” or “one-sided”, is “so one-sided as to be oppressive” is “unreasonably favourable to the drafter” or “shocks the conscience”
12. Considering the relevant case law above and the principles governing unconscionability I will examine Facebook’s Terms of Use in this light.
13. As stated the Terms of Use are presented to the user on a take it or leave basis and is thus a standard form contract or contract of adhesion. The relevant contractual issue is whether Facebook can enforce all of its Terms of Use on the basis that a binding legal contract is formed between it and the User. In terms of the user manifesting its assent (i.e. acceptance of the terms), applying the judicial authority to the situation at hand, the user has manifested its acceptance by clicking on the “Sign Up” button and in the context where the Terms of Use are easily accessible by clicking on a link above the “Sign Up” button and there has been sufficient notice of the terms brought to the user’s attention. Prima facie therefore a binding contract is formed.
14. The only basis to hold that a contract has not been formed therefore is if the ground of unconsionability is made out. Procedural unconscionability is not too difficult to make out – “the absence of meaningful choice or bargaining power on the part of one party” – although arguably as there is sufficient competition with Facebook from other social networks like MySpace, Facebook could argue that there is “meaningful choice”. In any case, a contract is still enforceable if it is not substantially unconscionable.
15. Turning to the ground of substantially unconscionability, assuming that procedural unconscionability is made out, the terms in Facebook’s Terms of Use which might be considered “overly harsh” or “one-sided”, is “so one-sided as to be oppressive” is “unreasonably favourable to the drafter” or “shocks the conscience” include:
a. Facebook’s right at its sole discretion to change, modify, add, or delete portions of the Terms of Use at any time without further notice;
b. That in no case will Facebook’s liability exceed $1000 and relief is limited to injunctive relief, unless otherwise permitted by law;
c. Facebook can terminate a membership, delete a user’s profile and any content or information posted on the Site for any reason, or no reason, at any time in its sole discretion, with or without notice;
d. The user agrees to final and binding arbitration conducted by the American Arbitration Association under its Commercial Arbitration Rules.
16. In my view, none of the above terms would be sufficient to strike out the entire Terms of Use on the ground of unconscionability, considering that Facebook is a free of charge service and mere use of the Site in the ordinary way is not going to cause a user financial loss (i.e. it is not analogous to a person purchasing expensive computer software then running it on their computer and the software not working). As to Facebook’s right to alter the Terms of Use, even though it can do this at its sole discretion, if changes are made it notifies users of any changes through updates to the Terms of Use which provide that it is the user’s responsibility to regularly check the Site to see if any changes have been made.
17. The strongest argument against this term being unconscionable is that users are notified of the changes and since the user is bound by the Terms of Use, they have contractually agreed that they are responsible for checking any updates to the Terms of Use. Furthermore the fact that the user accesses the website on the basis that they will comply with the Terms of Use, is conduct indicating assent to the terms as they stand at the time of becoming contractually bound and assent to the terms as amended from time to time.
18. With regard to the limitation of liability clause, this clause is not unreasonable in the context of a free service and is also qualified by the statement “unless otherwise permitted by law” and reference to certain state laws not allowing limitations on implied warranties or the exclusion or limitation of certain damages. This is not a clause that would provide cause to strike out the entire Terms of Use as unconscionable and at the most any offending parts of the clause could be severed. This can be done ordinarily by a court and the Terms of Use explicitly state in the last paragraph “If any provision of this Agreement is held invalid, the remainder of this Agreement shall continue in full force and effect. If any provision of these Terms of Use shall be deemed unlawful, void or for any reason unenforceable, then that provision shall be deemed severable from these Terms of Use and shall not affect the validity and enforceability of any remaining provisions”. Thus the Terms of Use are qualified by the severance provision, but in any event reference to the limitation of liability position being different if inconsistent with statute law (e.g. in the Australian context the Trade Practices Act, certain warranties cannot be excluded) should be sufficient for the clause not to be considered substantively unconscionable.
19. With regard to Facebook being able to terminate membership or delete a user’s profile or content or information posted on the site for any reason, appears on its face, to be substantively unconscionable. However, the rule of contract interpretation is that a contract must be read as a whole and a clause should not be read in isolation. Arguably, this term is qualified by the clause on “User Conduct” and other clauses such as “User Content Posted on the Site” and if Facebook terminated a membership or deleted user content with no cause whatsoever, the user would have a right to arbitration and an arbitrator could award damages or specific performance to reinstate the user’s account.
20. Finally, in terms of the arbitration clause, in determining whether it is substantively unconscionable, it is relevant to consider it comparatively with other arbitration clauses that have been struck down. For example, in Brower v Gateway 2000, Inc 1998. 246 A.D.2d 246, 676 N.Y.S.2d 569, the Supreme Court of New York held the arbitration clause to be unconscionable on the basis of an unreasonable cost to the plaintiff as it required all disputes relating to the agreement to be settled by arbitration by the International Chamber of Commerce, whose head quarters are in France, conducted in Chicago by an official arbitrator and an advance fee of $4000 (more than the product in question) was payable, of which $2000 was non-refundable. Furthermore PayPal’s customers were only allowed to resolve disputes after PayPal had control over their disputed funds for an indefinite period. In Bragg v. Linden Research, Inc. Linden Research required users to arbitrate in San Francisco, where their corporate headquarters was located and the court held that the arbitration clause requiring arbitration to take place in San Francisco was substantively unconscionable because under Californian law dictates that it is not “reasonable for individual consumers from throughout the country to travel to one locale to arbitrate claims involving such minimal sums.” It was further held that the unconscionability could not be cured through severance or restriction and it must void the entire agreement.
21. A partner in the law firm Paul, Hastings, Janofsky & Walker, David M. Klein, suggests that for arbitration clauses to be enforceable the following should apply:
a. Arbitration clauses should be a separate clause in the contract so as to be sufficiently drawn to the user’s attention.
b. The cost and applicable rules of the arbitration should be clearly indicated in the contract.
c. Should the terms of service change, users should be given prior notice of the change.
d. Where legitimate business realities exist, such as avoiding the burden of litigating claims across the country or avoiding the negative publicity that may result from lawsuits in the absence of a confidentiality clause, then such business realities should preferably be clearly explained in the contract.
22. In the present context, the arbitration clause in Facebook’s Terms of Use, is in a separate clause and is very visible (parts of it in bold). Furthermore, it does mandate that disputes are resolved through arbitration in accordance with the American Arbitration Associations Rules, including jurisdiction. Furthermore, it provides that if costs are deemed to be excessive that Facebook will pay all arbitrator compensation in excess of what is deemed reasonable. Thus the arbitration clause does not mandate a given jurisdiction and is not punitive with regard to costs and is therefore likely to be considered both procedurally and substantively fair and thus not unconscionable by a court.
Other Issues
23. There are a number of other issues arising from a user’s use of Facebook. There is not space in this essay to discuss every issue, but I will address a few key legal issues below.
24. Copyright is always a key issue with licence agreements akin to Facebook’s Terms of Use. Relevantly, in the “User Content Posted on the Site” clause the user grants to Facebook an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) use copy, publicly perform…for any purpose the user content. Apart from the fact that the licence is non-exclusive, this is the broadest form of licence that can be granted and amounts to a waiver of rights under statutory copyright law. This is in contradiction of copyright law, but courts have enforced contractual provisions that limit the application of copyright law. For example in Matthew Bender & Co. v LLC 991 F. Supp. 2d 677, the district court held that a shrinkwrap agreement prohibiting copying of uncopyrightable legal publications was enforceable against a competitor. In Bowers v Baystat Technologies, Inc. 320 F. 3d 1317, the Federal Circuit enforced a shrinkwrap agreement that prohibited reverse engineering even though courts have recognised this as a fair use under copyright law because it allows the public access to ideas contained in the copyrightable work and “a prohibition on all copying whatsoever would stifle the free flow of ideas without serving any legitimate interest of the copyright holder”. The author of “Determining Ownership in Virtual Worlds: Copyright and License Agreements” is critical of Facebook’s (and similar) stifling of copyright. He is of the view that legislators should define the limits of power and the extent to which contract should be able to bypass the policies of copyright and that economic efficiency should not earn contract the right to displace balance embraced by copyright.
25. In my view, the position for the user of Facebook is not ideal, however an unrestricted licence to use the user’s intellectual property for free (in the context of the user being provided with a free service) is not patently unfair as would for example an automatic assignment to Facebook of all the user’s intellectual property.
26. Notwithstanding the jurisdiction clause in the Terms of Use that provides that California is the governing law and has exclusive jurisdiction, a court still has jurisdiction to determine its own jurisdiction. In determining which state’s laws apply to a contract dispute, “the court evaluates the ‘center of gravity’ or ‘grouping of contact’ with the purpose of establishing which state has “the most significant relationship to the transaction and the parties” – Zurick Ins. Co. v Shearson Lehman Hutton, Inc. 618 N.Y.S. 2d 609.
27. In the Australian context, in Dow Jones & Company Inc v Gutnick [2002] HCA 56, the matter involved material downloaded in Victoria from a web site in the USA. The High Court allowed the defamation case brought against the American publisher to proceed in a Victorian court on the basis that in the case of the Internet, published material was not available in comprehensible form until downloaded on to the computer of a person who had used a web browser to pull the material from the web server and that it was where that person downloaded the material that the damage to reputation might have been done.
28. Therefore, with this in mind it would be interesting to see whether an Australian court would accept jurisdiction for example if an Australian resident sought to bring proceedings against Facebook and the extent to which an Australian court would exclude the operation of the arbitration clause to allow a court to exercise its jurisdiction (e.g. breach of copyright licence by Facebook of the user’s copyright).

In conclusion, I am of the view that whilst Facebook’s Terms of Use are a contract of adhesion that users of Facebook become bound through being sufficiently made aware of and having access to the terms and manifesting that assent by clicking “Sign Up” and through their conduct of continuing use. As to the issue of unconscionability, although some of Facebook’s Terms of Use are onerous, in my view, none of those onerous terms are sufficient to give grounds for a court to void the entire contract and any unconscionable provisions would be capable of severance at law and pursuant to the severance clause in the Terms of Use. There are a number of further issues that arise from the use of Facebook, in addition to copyright and jurisdiction, which I have not had the opportunity to discuss given word length constraints, but wish to allude to those further issues. Further issues include, privacy of user’s information, whilst Facebook may undertake to meet its privacy obligations it is virtually impossible to control how information posted on Facebook is disseminated by users at large. It is often said “don’t put anything on Facebook that you don’t want the whole world to know”, an important consideration considering any embarrassing content that could be drawn to the attention of employers, potential employers or others you intended to keep the information private from. Likewise defamation is a potential issue as again it is virtually impossible for Facebook to monitor and control the conduct of millions of users. The final issue is harassment and online sexual predators in the context of a lot of users being minors.


1. Binder v Aetna Life Ins. Co. 75 Cal. App. 4th 832
2. Erez Reuveni, “On Virtual Worlds: Copyright and Contract Law at the Dawn of the Virtual Age”, 82 Indiana Law Journal 261 at 387
3. “How to Avoid a Bad TOS for Virtual Worlds” (accessed 25/8/08)
4. Daniel C Miller, “Determining Ownership in Virtual Worlds: Copyright and License Agreements” 22 Rev. Litig. 436 (2003)
5. DeJohn v The TV Corporation International 245 F. Supp. 2d 913
6. Specht v Netscape Communications Corp 306 F. 3d 17
7. v Verio Inc 126 F. Supp. 2d 238
8. ProCD, Inc. v. Zeidenberg 86 F.3d 1447
9. Brower v Gateway 2000, Inc 1998. 246 A.D.2d 246, 676 N.Y.S.2d 569
10. Bragg v. Linden Research, Inc. No. CIV-A-06-4925 2007 WL 1549013 (E.D. Pa. May 30, 2007)


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