MacKinnon v. IMVU, Inc., No. H039236 (Cal. Ct. App. Oct. 30, 2014)
MacKinnon sued IMVU, which runs an entertainment service, the
“instant messaging virtual universe,” alleging that IMVU deceived users about
music purchases and wrongfully restricted users’ ability to play music after
they bought it. He alleged conversion,
breach of contract, and negligent misrepresentation along with California
statutory claims. The trial court dismissed all of his claims because IMVU’s
contract said it could do whatever it wanted to its customers. The court of appeals reversed.
To get the IMVU app, users have to provide information and
click the “Create IMVU Account” button on IMVU’s website. Below that button is
small print stating “[b]y clicking Create IMVU Account you are indicating that
you have read and agree to the Terms of Service Agreement and Privacy Policy,”
and a hyperlink to the Terms of Service Agreement and Privacy Policy.
IMVU users have avatars and can buy virtual products for
them using real money. They can also buy
audio products, including “trigger music,” audio clips or songs users play by
typing the appropriate trigger. IMVU
users create audio products and submit them to IMVU’s catalog; users can listen
to the full product before buying it by clicking a “try” button. After a purchase, a screen pops up displaying
the product and the phrase “You own this.” IMVU’s site says that purchases are
“available to be used whenever you like.”
The ToS, however, say that IMVU can do anything at any time, that users
have no rights in anything they buy (called a “license” in the ToS, naturally),
that purchases are nonrefundable.
In 2008, IMVU announced that, because of bandwidth issues,
“new [audio] products submitted” to the virtual catalog would be “cut down to
20 seconds,” but that the restriction “will not affect products already in the
catalog.” In 2011, IMVU applied the 20
second limit to all audio products, including previously purchased ones, and
said that refunds would be offered only for purchases made on or after December
1, 2010. MacKinnon, however, had already
spent hundreds of dollars on IMVU credits, and when he bought audio he sampled
them using the “Try” button to make sure it was full length and not limited by
the 20 second rule.
The court first found that the contract indeed said that
IMVU could do whatever it wanted with respect to the files. MacKinnon argued that this interpretation
rendered the contract terms unconscionable.
Oppression and surprise are the relevant factors in procedural
unconscionability. As to oppression, the
availability of alternative online social gaming platforms and the “nonessential
nature” of the recreational activity made the degree of oppression low. (This undercounts the stickiness of
particular sites: the operator intends to become important to the consumer, and
the consumer may find it very difficult to leave once s/he spends significant
time on a platform because of the social connections there—given the relational
nature of the service and the operator’s intent that the consumer become
invested, this conclusion doesn’t make sense in the context of contracts that
consumers just don’t read.)
As to surprise, the ToS was a 10-page, single-spaced
document. The provision at issue appeared in the Terms and Conditions of Sale
section, where the court said one would expect to find it (though note that
it’s called “sale”), in the same typeface and font as most of the
document. So the agreement didn’t call
special attention to the no-refund provision, but it wasn’t hidden in fine
print. And length alone doesn’t establish surprise. (In other words, we’re just going to pretend
that consumers read these contracts; nothing to see here—literally nothing to
see, since it was just a hyperlink.) Thus “we cannot say the element of
surprise is present.”
As a result, the court of appeals concluded, there was a low
degree of procedural unconscionability. Comment: Contrast empirical research on
consumers’ practical ability to read and understand multiple pages of text,
presented online, when they have to do that with every service they encounter. See, e.g., Jeff Sovern et al., "Whimsy
Little Contracts" with Unexpected Consequences: An Empirical Analysis of
Consumer Understanding of Arbitration Agreements. I’d say procedural unconscionability
is routinely high. That it might go
higher in more concentrated markets doesn’t make it absolutely low. (Indeed, I’m
not convinced consumers can figure out terms well enough to use differences to
judge competitors and thus competitors will rarely if ever compete on contract
terms and competitive markets will still be packed with unconscionable terms.)
Substantive unconscionability: contracts of adhesion are
substnatively unconscionable when they’re overly harsh, unduly oppressive, so
one-sided as to shock the conscience, or unfairly one-sided. It’s not just a bad bargain, but a contract
that’s unreasonably favorable to the more powerful party: there’s no
justification for the contract’s one-sidedness, and the allocation of risks or
costs is overly harsh given the circumstances. The court of appeals found that
the record was insufficient to make that determination, which depends on a
contract’s “commercial setting, purpose, and effect.” Thus, the court of appeals considered whether
the dismissal could be affirmed on other grounds.
CLRA: the complaint alleged that IMVU violated the CLRA by
deceiving users into believing that full-length audio products would not be
truncated and by including unconscionable provisions in the ToS. MacKinnon pointed to (1) IMVU’s announcement
that the 20-second restriction “will not affect products already in the
catalog” and (2) the message “You own this” that users received after
purchasing audio products. He alleged that these constituted representations
that the goods at issue had characteristics or qualities they didn’t have; that
IMVU had advertised goods/services with intent not to sell them as advertised;
and that IMVU had represented “that a transaction confers or involves rights,
remedies, or obligations which it does not have or involve,” as specifically
barred by the CLRA. (I like that last
theory! If online services insist that
they aren’t making “sales,” they darn well ought to stop telling us that they
are.)
A CLRA deceptive conduct claim requires conduct that was
likely to mislead or deceive a reasonable consumer, which is usually a question
of fact, and a causal connection between the defendant’s allegedly deceptive
representation and the alleged harm—reliance. IMVU argued that, in view of the ToS, no
reasonable consumer was likely to be deceived.
But a factfinder could conclude otherwise based on the September 2008
announcement and the “You own this” representation. Regardless of the ToS provision (which may or
may not be enforceable), it was possible that reasonable consumers would be
misled. Even if the September 2008
announcement was true, true statements can be misleading. “A reasonable consumer may have understood
those representations to mean that IMVU would not exercise any contractual
right to truncate certain audio products postpurchase.” The CLRA makes consumer protection claims
available when collateral representations differ from contractual
language.
And then the court of appeals muddies the waters by stating
that “[w]hether a reasonable consumer who read the Terms of Service Agreement
and the representations would have been misled by the latter is a question of
fact.” So reasonable consumers, as a
matter of law, read the contract—and what is the level of understanding of such
consumers? Can they read at a
twelfth-grade level? Anyway, MacKinnon
adequately alleged deceptive conduct. He also alleged reliance, at least as to
the September 2008 announcement, which he alleged he reviewed; he never
specifically alleged that the saw the “You own this” statement. (Did he see the “buy” button? Why wouldn’t “buy” indicate that he had
“bought” the particular item he sought to buy?)
And MacKinnon didn’t show there was a reasonable possibility of curing
the defect in the pleading by amendment.
The CLRA also allows unconscionability-based claims where an
unconscionable provision in a contract is intended to result in or which does
result in the sale or lease of goods or services to any consumer. MacKinnon couldn’t
state a claim based on the class action waiver because IMVU hadn’t yet sought
to enforce that term of the agreement against MacKinnon, so he hadn’t suffered
any damage, but as to the unconscionability discussed above he did state a
claim.
UCL fraud, FAL, and negligent misrepresentation claims also
survived as to the September 2008 announcement.
Conversion: Conversion requires actual interference with
ownership or right of possession. IMVU
argued that MacKinnon had no property rights in the audio products because of
the ToS stating (1) “you acknowledge that you have no right, title or interest
in or to this Site, any Products, Materials or Software”; and (2) “Credits”
“can . . . be exchanged on this Site for limited license right(s) to use a
feature of our Product or a virtual product when, as, and if allowed by IMVU
and subject to the terms and conditions of these Terms.”
But the first provision was inapplicable, since IMVU
carefully distinguished in the ToS between “Products” it offered and virtual
products created by third party users (Submissions), which was what MacKinnon
bought. And the second provision didn’t define the scope of the user’s license
rights or whether they included any ownership interest.
Breach of contract claims also survived based on MacKinnon’s
acceptance of IMVU’s post-September 2008 offering of full-length audio products
for purchase. This claim wasn’t based on
the ToS itself, but an alleged subsequent contract, so the claim was that the
parties subsequently implicitly modified their integrated writing.
Also, a breach of the implied covenant of good faith and
fair dealing was adequately pled, even though the ToS might expressly authorize
truncating audio products. A discretionary power must still be exercised in
good faith. However, courts can’t imply
a covenant directly at odds with a contract’s express grant of discretionary
power “except in those relatively rare instances when reading the provision
literally would, contrary to the parties’ clear intention, result in an
unenforceable, illusory agreement.” If
the no-refund portion of the contract, which gives IMVU unfettered authority to
truncate audio products without a refund, is enforceable, then no covenant of
good faith and fair dealing could be implied; if it was unconscionable, then
there was also a claim of a breach of the covenant. (OK, I’m not a contracts person, but this
seems … weird. I thought the whole point
of the covenant of good faith and fair dealing was to make contracting parties
exercise their discretion within some boundaries, even when the contract
provision at issue was valid.)
However, MacKinnon couldn’t bring a Song-Beverly Act breach
of warranty claim because he didn’t buy the audio products in California, but
rather in Utah where he resided.
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