Concerning the Substitution of Privacy Rights by Arbitration
In November 2007, social networking site Facebook launched its Beacon advertising program, which broadcasts a user’s interaction with an advertiser to the feeds of that user’s friends. Beacon broadcasts information from third party websites such as Overstock.com, Ebay, or Blockbuster. Facebook promises advertisers that all they need to do is “[a]dd 3 lines of code and reach millions of users.” The advertisers determine which user actions on their website — such as adding a movie to queue, or purchasing an item, or signing up for the site — will generate feed messages.
In 2008, Cathryn Elaine Harris, a Facebook user, filed a class action complaint in the District Court for the Eastern District of Texas, against Blockbuster for violations of the Video Privacy Protection Act. The Video Privacy Protection Act bans the disclosure of personally identifiable rental information unless the consumer consents specifically in writing. Harris claimed that Blockbuster violated this provision by reporting the rental activity of users to Facebook, without their permission, and even when the users were not logged into the social networking site.
On April 15, 2009, the District Court for the Northern District of Texas ruled that Blockbuster Online’s Terms and Conditions were unenforceable because they gave Blockbuster too much discretion in modifying the terms of the agreement. Following the reasoning in a Fifth Circuit case, Morrison v. Amway Corp., the court found that Blockbuster’s arbitration provision was illusory, because there was nothing in the Terms and Conditions that would prevent Blockbuster from “unilaterally changing any part of the contract.” As a result of the decision, the class action would remain in the court system.
Blockbuster filed an interlocutory appeal in the Fifth Circuit. In its appeal, Blockbuster raised three issues: (1) “whether the district court erred in considering Plaintiff’s claim that the change-in-terms provision rendered [Blockbuster’s Terms and Conditions] illusory, because challenges to the contract as a whole, such as this one, must be heard in the first instance by an arbitrator; (2) whether the change-in-terms provision does in fact render Blockbuster’s Terms and Conditions illusory; and (3) “whether Plaintiffs’ other attacks on the Arbitration Clause, which the district court did not address, lack merit.” Blockbuster ultimately withdrew its interlocutory appeal in February 2010 following a settlement with Appellees.
In a similar case brought against Facebook as a class-action lawsuit, Facebook entered into an agreement to end Facebook Beacon. Under the settlement terms, Facebook terminated Beacon and contributed $9.5 million towards the creation of a foundation dedicated to protecting online privacy. Despite objections, the 9th Circuit upheld the settlement and the Supreme Court declined to hear the case.
EPIC has a strong interest in protecting consumers and consumer privacy. Mandatory arbitration clauses, like Blockbuster’s, are becoming increasingly prevalent in consumer contracts. Such clauses can be found in the Terms and Conditions of your cell phone or credit card agreements. Mandatory arbitration clauses prevent consumers from bringing a claim against a company in court. If the company sues the consumer, the consumer is bound to arbitration board rulings and in many cases must waive his right to an appeal.
Mandatory arbitration clauses implicate privacy interests, as they prevent consumers from availing themselves of strong statutory protections already in place. In Blockbuster, Harris sued under the Video Privacy Protection Act, which provides for civil penalties of at least $2,500 per violation. However, Blockbuster’s arbitration clause would have prevented users from litigating claims in court, and as a result, benefiting from the Act’s privacy protections. Consumers simply do not have the same privacy rights in arbitration proceedings than in court proceedings, where they are protected by state and federal statutes.
The enforcement of mandatory arbitration clauses has been a topic of discussion in Congress lately. On July 22, 2009, the House Oversight and Government Reform’s Domestic Policy Subcommittee held a hearing to discuss the fairness of mandatory arbitration clauses in consumer contracts. The House Subcommittee on Commercial and Administrative Law held another hearing on September 15, 2009 to discuss the same issue.
There is also legislation aimed at prohibiting mandatory arbitration clauses in consumer contracts. The Arbitration Fairness Act, introduced by Rep. Johnson (D-Ga.), is currently in the House. The act, if passed, would end the imposition of mandatory arbitration clauses on consumers, but would allow for voluntary arbitration if both parties consent.