What Made News?

A recent ruling out of West Texas in Mendoza v. Microsoft, Inc., 5:13-CV-00378 (W.D. Tex. March 5, 2014) serves as a reminder that companies must make sure their service agreements and online privacy policies conform to industry best practices, as well as legal requirements. The structure and format of these agreements can be critical to their enforceability and companies should not take any aspect for granted.

What Did the Court Rule?

According to the recent decision in Mendoza v. Microsoft by the US District Court for the Western District of Texas, a forum selection clause in an electronic “Terms of Use” agreement is contractually valid. In upholding the validity of the forum selection clause, the Court noted that the clauses are “presumed enforceable” in the Fifth Circuit and should be upheld unless the party opposing enforcement can show that the clause is unreasonable.

Why was the Suit Brought?

The dispute stems from a consumer class action targeting Microsoft and its Xbox LIVE gaming portal, which provides online gaming and video services. The Plaintiffs brought suit against Microsoft in the Western District of Texas, claiming that the company had improperly retained and used consumers’ personal information after they had cancelled their Xbox LIVE subscriptions. The Terms of Use for Xbox LIVE, however, include a forum selection clause that sets Washington State as the exclusive jurisdiction and venue for all disputes relating to the Terms or the Xbox service.

“The Court noted that the clauses are ‘presumed enforceable’ in the Fifth Circuit and should be upheld”

The Plaintiffs did not dispute that by agreeing to the Terms of Use before using Xbox LIVE they had entered into a contract with Microsoft. However, they argued that the Court should not enforce the forum selection clause because it was not “reasonably communicated” to them before they subscribed to Xbox LIVE. Specifically, they argued that because the clause “was buried in a 13-page contract, in 4-point font, and [was] not highlighted nor distinguished from any other portions of the contract” it should be struck down. The Court rejected the Plaintiffs’ argument, noting that it relied in large part on a case from the Second Circuit, where forum selection clauses are subject to a different legal standard.

What was the Basis of the Court’s Finding?

In the Fifth Circuit, the Court explained, forum selection clauses are subject to the four prong test first annunciated in Haynsworth v. The Corp., 121 F.3d 956, 962 (5th Cir. 1997). In that case, the Fifth Circuit held that the clauses are unenforceable only if the following conditions are met:  

  1. The incorporation of the forum selection clause into the agreement was the product of fraud or overreaching;
  2. The party seeking to escape enforcement will for all practical purposes be deprived of his day in court;
  3. The chosen law is fundamentally unfair; or
  4. Enforcement of the clause would contravene a strong public policy of the forum state.  

According to the Court, the Xbox LIVE clause did not meet any of the Haynsworth factors. It also noted that the Terms of Use repeatedly stated that the Terms constituted a contract between Microsoft and the users of Xbox LIVE and that the Plaintiffs themselves were required to agree to the Terms before they could access the Xbox LIVE services. Although the Court agreed that Microsoft could have displayed the forum selection clause more prominently, it also found the clause perfectly legible and easy to read. Accordingly, the case has been transferred to the US District Court for the Western District of Washington.

What is the Takeaway?

This case demonstrates the importance of ensuring that consumers are given an opportunity to review the Terms of Use for any online service prior to providing them with that service. This becomes increasingly important when a company is collecting personal information from end users or if there is some concern about intellectual property infringement or theft. In these instances, the owner should ensure the platform enables users to review and affirmatively accept the Terms of Use and Privacy Policy prior to participation. Also, attorneys should carefully think through the forum selection clause to ensure that the appropriate forum is named in the Terms of Use.