Texas Federal Court Finds Blockbuster’s Online User Agreement ‘Illusory’ and Denies Motion to Compel Arbitration

[Ed. note: This case is a bit old, but an important one. It somehow got lost in the pile of papers sitting on my desk. Thanks to San Antonio arbitrator and mediator Don Philbin for bringing this case to our attention back in April. ]

The United States District Court for the Northern District of Texas held that an arbitration clause in Blockbuster’s Online User Agreement is illusory, thus, unenforceable and denied Blockbuster’s motion to compel arbitration in a class-action privacy suit.

In Harris v. Blockbuster, Inc., No. 3:09-cv-217-M (N.D. Tex. Apr. 15, 2009), Harris is a customer of Blockbuster’s Online movie rental service. Blockbuster’s “Terms and Conditions” provision in the User Agreement includes an arbitration clause that states that “[a]ll claims, disputes or controversies . . . will be referred to and determined by binding arbitration.” The agreement also purports to waive the right to commence a class-action suit. In order to join the movie rental service, customers were required to click on a box certifying that they had read and agreed to Blockbuster’s Terms and Conditions. The User Agreement also includes the following clause:

Blockbuster may at any time, and at its sole discretion, modify these Terms and Conditions of Use, including without limitation the Privacy Policy, with or without notice. Such modifications will be effective immediately upon posting. You agree to review these Terms and Conditions of Use periodically and your continued use of this Site following such modifications will indicate your acceptance of these modified Terms and Conditions of Use. If you do not agree to any modification of these Terms and Conditions of Use, you must immediately stop using this Site.

On the other hand, Blockbuster has an agreement with Facebook, in which Facebook displays Blockbuster’s customers movie rental choices in the customers’ Facebook profile and then broadcasts the rental choice to the customers’ Facebook “friends.” Harris filed a class-action lawsuit claiming that the release of the movie rental records by Blockbuster violates the Video Privacy Protection Act, which prohibits a videotape service from providing personal identifiable information without the customer’s consent. The Act provides for liquidated damages of $2,500 for each violation. Blockbuster filed a motion to compel arbitration.

Addressing the plaintiffs allegations that the arbitration provision is unenforceable because it is illusory (not supported by consideration), the court highlighted the legal standard articulated by the Fifth Circuit in Morrison v. Amway Corp. 517 F.3d 248 (5th Cir. 2008);

The Morrison court held that the provision was illusory because “[t]here is no express exemption of the arbitration provisions from Amway’s ability to unilaterally modify all rules, and the only express limitation on that unilateral right is published notice. While it is inferable that an amendment thus unilaterally made by Amway to the arbitration provision would not become effective until published, there is nothing to suggest that once published the amendment would be inapplicable to disputes arising, or arising out of events occurring, before such publication.

After discussing Morrison at length, the court held that Blockbuster’s arbitration agreement is illusory because Blockbuster has sole discretion to unilaterally amend the arbitration provision and the arbitration agreement contains no clause limiting the application of the amendment to disputes occurring after the date of the amendment.

Finally, because the court concluded that the arbitration provision is illusory, the court did not discuss the issue of unconscionability. Accordingly, the court denied Blockbuster’s motion to compel arbitration.

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