February 13, 2005
Termination of Accounts in Virtual Worlds
I attended Santa Clara’s Rules & Borders conference on Friday, and the subject of virtual worlds came up extensively. One issue in particular is continuing to vex me. Some virtual world participants invest significant time and money in their online characters—earning (or otherwise obtaining) virtual money or items, gaining experience/levels, creating or customizing online “property” (such as houses or widgets that are for sale in the virtual economy) and forming social networks. In some cases, participants purchase items, cash or characters with real cash either directly from the provider or in a secondary market like eBay. All of these “investments” can be lost or diminished if a virtual world provider terminates the individual’s account or otherwise changes the rules or environment of the world.
Intuitively, it seems problematic that participants can lose their investments. On the other hand, most (all?) EULAs says a provider can terminate accounts or change rules at any time. Let’s assume that the EULA is properly formed as a contract (i.e., there are mutual manifestations of assent). With a EULA like this, there seems to be a conundrum: the participant has invested time/money in a world in which the fundamental ground rules appear to provide no protection for those investments. Given the shaky foundation, why should we care if participants in fact lose those investments?
I’ve been trying to think of other circumstances where a customer’s investments in a vendor relationship are protected even if the contract clearly says that the vendor may terminate the contract for convenience. I have been able to think of only two examples of this:
· franchise agreements. Franchising programs involve the sale of a business and share a lot of similarities with other sales of securities. As a result, many state laws limit franchisors’ rights to terminate the franchise as a way to protect the franchisees’ investments in the business.
· distributor protection laws. Some states restrict a manufacturer’s rights to terminate distributors of their products. Like franchise laws, these distributor protection laws implicitly protect investments made by distributor in the distribution business.
There are, of course, other ways in which a contracting party’s termination rights may be limited beyond the contract terms, such as rescission rights for fraud or other remedies for marketing misrepresentations. In addition, there may be statutory limits on a vendor’s ability to fire a customer for illegitimate reasons (such as racial or gender discrimination).
One other analogy comes to mind, even though it’s not a classic vendor/customer relationship—the laws limiting employment termination at will. In some (increasingly rare) cases, laws limit an employer’s right to terminate an employee at will. While these laws do not explicitly protect an employee’s “investment” in the relationship, they do so implicitly (protecting out-of-pocket and opportunity costs incurred by the employee by joining the employer).
I am sure there are other situations that limit a vendor’s ability to terminate a customer for convenience. I’m opening comments on this post—if you can think of any, please speak up.
However, for now I’m struck by how rarely the law protects a customer’s investment in a contract relationship when the relationship says that the contract may be terminated for convenience. The general approach seems to be that customers who make those investments without a solid contract footing are making speculative investments.
The recent Second Circuit opinion in Hall v. Earthlink Networks provides a good case study. Hall opened up a personal Earthlink account (not to be used for business purposes). Earthlink’s backbone provider erroneously notified Earthlink that Hall’s account was sending spam, so Earthlink terminated the account and put the account on the spam watch list. Hall’s lawsuit for breach of contract and breach of implied covenant of good faith and fair dealing got zero traction (although, interestingly, the court didn’t even discuss the EULA to dismiss the complaint).
As the case illustrates, Hall was told not to use his email account for business purposes, did so anyways, had his economic expectations frustrated when Earthlink did exactly what it said it could do in its EULA, and walked away empty-handed in court. Is there any reason why should we treat virtual world participants any differently? If the EULA clearly says that all investments the participant makes are at their risk, I’m struggling to think of any reason why we should be sympathetic when, in fact, the participants lose those investments.