One need look no further than the recent Instagram controversy to realize that Terms of Service are not just legalese, but crucial contracts and statements to the public about businesses’ products, services, and policies.

Instagram, a popular online photo sharing company, faced a storm of public backlash in December 2012 after announcing the following proposed language for its new Terms of Service:

You agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.

In other words, if you upload a picture to Instagram, you consent to have that picture used in a sponsored advertisement without notice or compensation to you. In addition, due to new language that allows Instagram to share information with its parent company, Facebook, such advertisements could also appear on the massive Facebook network.

When word of the proposed new language spread over the Internet, Instagram faced a public relations crisis. Much of the backlash came from celebrities like Kim Kardashian and pop singer Pink, who earn large sums of money by endorsing products. The proposed language threatened to eat into this advertising revenue. In addition, for the average American there were concerns over invasion of privacy and the ability to control when and where their photographs were displayed. In response to growing public outcry and reports of users abandoning the service, Instagram retracted the proposed new language. Kevin Systrom, Instagram’s CEO, issued a public statement, noting, “I want to be really clear: Instagram has no intention of selling your photos, and we never did. We don’t own your photos, you do.”

Notably, while Instagram removed the aforementioned paragraph, it did not remove new arbitration language that states that unless the user opts-out or the claim is related to one of a limited number of exceptions (e.g. intellectual property infringement), the user consents to mandatory arbitration, waives the right to a jury trial, and waives the right to participate in a class action lawsuit. There is also a one-year limitation on the ability to bring claims against Instagram. The new language states that claims related to “rights of privacy and/or publicity” are covered by the arbitration provision and that customers waive their right to participate in class action lawsuits regarding infringements of these rights.

Such provisions have become quite common in online agreements. In the case of Instagram, the insertion of this language is likely a response, in part, to the recent class action lawsuit Fraley v. Facebook Inc., N.D. Cal. No. 5:11-cv-01726, faced by Instagram’s parent company, Facebook Inc. That case concerned right of publicity claims related to “sponsored stories” on Facebook.com. To settle the case, Facebook agreed to make a 10 million dollar cy pres payout, along with additional payments for attorneys’ fees and costs. For more information on that case, please see Arent Fox’s prior alert. Given the expense of settlement, Instagram may be doing everything in its power to avoid similar class actions in the future.

Instagram did, however, add opt-out language to the arbitration provision. To opt-out, users must mail a written letter to Instagram within 30 days of becoming bound by the arbitration provision. The courts have maintained that arbitration provisions are more likely to be enforceable if there is an opt-out, although many companies still proceed without the opt-out option.

Presently, Instagram is facing at least one federal lawsuit in response to the recent Terms of Service changes. That case, which is currently pending before the U.S. District Court, Northern District of California, is Lucy Funes, individually and on behalf of all others similarly situated vs. Instagram Inc., 12-cv-6482. Since Instagram’s new mandatory arbitration provision is not yet in effect, Instagram could potentially face a large class action lawsuit there.