Court Order Finding Arbitration Provision Unconsionable & Rosedale stays in suit - Bragg v. Linden Lawsuit

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
: CIVIL ACTION
MARC BRAGG, : NO. 06-4925
:
Plaintiff, ::
v. ::
LINDEN RESEARCH, INC. and :
PHILIP ROSEDALE, ::
Defendants. :
M E M O R A N D U M
EDUARDO C. ROBRENO, J. May 30, 2007
This case is about virtual property maintained on a
virtual world on the Internet. Plaintiff, March Bragg, Esq.,
claims an ownership interest in such virtual property. Bragg
contends that Defendants, the operators of the virtual world,
unlawfully confiscated his virtual property and denied him access
to their virtual world. Ultimately at issue in this case are the
novel questions of what rights and obligations grow out of the
relationship between the owner and creator of a virtual world and
its resident-customers. While the property and the world where
it is found are “virtual,” the dispute is real.
Presently before the Court are Defendants’ Motion to
Dismiss for Lack of Personal Jurisdiction (doc. no. 2) and Motion
to Compel Arbitration (doc. no. 3). For the reasons set forth
below, the motions will be denied.
The virtual world at issue is an interactive computer 1
simulation which lets its participants see, hear, use, and even
modify the simulated objects in the computer-generated
environment. See Woodrow Barfield, Intellectual Property Rights
in Virtual Environments: Considering the Rights of Owners,
Programmers and Virtual Avatars, 39 Akron L. Rev. 649, 649 (2006)
(defining virtual world).
Second Life is hosted at http://secondlife.com. 2
The term “avatar” derives etymologically from the 3
Sanskrit word for crossing down or descent and was used
originally to refer to the earthly incarnation of a Hindu deity.
Webster’s II New Riverside University Dictionary 141 (1998).
Since the advent of computers, however, “avatar” is also used to
refer to an Internet user’s virtual representation of herself in
a computer game, in an Internet chat room, or in other Internet
fora. See Wikipedia, Definition of Avatar, available at
http://en.wikipedia.org.
Judge Richard A. Posner has apparently made an 4
appearance in Second Life as a “balding bespectacled cartoon
rendering of himself” where he “addressed a crowd of other
animated characters on a range of legal issues, including
property rights in virtual reality.” Alan Sipress, Where Real
Money Meets Virtual Reality, the Jury is Still Out, Washington
Post, Dec. 26, 2006, at A1.
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I. BACKGROUND
A. Second Life
The defendants in this case, Linden Research Inc.
(“Linden”) and its Chief Executive Officer, Philip Rosedale,
operate a multiplayer role-playing game set in the virtual world1
known as “Second Life.” Participants create avatars to 2 3
represent themselves, and Second Life is populated by hundreds of
thousands of avatars, whose interactions with one another are
limited only by the human imagination. According to Plaintiff, 4
many people “are now living large portions of their lives,
Although participants purchase virtual property using 5
the virtual currency of “lindens,” lindens themselves are bought
and sold for real U.S. dollars. Linden maintains a currency
exchange that sets an exchange rate between lindens and U.S.
dollars. Third parties, including ebay.com, also provide
additional currency exchanges.
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forming friendships with others, building and acquiring virtual
property, forming contracts, substantial business relationships
and forming social organizations” in virtual worlds such as
Second Life. Compl. ¶ 13. Owning property in and having access
to this virtual world is, moreover, apparently important to the
plaintiff in this case.
B. Recognition of Property Rights
In November 2003, Linden announced that it would
recognize participants’ full intellectual property protection for
the digital content they created or otherwise owned in Second
Life. As a result, Second Life avatars may now buy, own, and
sell virtual goods ranging “from cars to homes to slot machines.”
Compl. ¶ 7. Most significantly for this case, avatars may 5
purchase “virtual land,” make improvements to that land, exclude
other avatars from entering onto the land, rent the land, or sell
the land to other avatars for a profit. Assertedly, by
recognizing virtual property rights, Linden would distinguish
itself from other virtual worlds available on the Internet and
thus increase participation in Second Life.
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Defendant Rosedale personally joined in efforts to
publicize Linden’s recognition of rights to virtual property.
For example, in 2003, Rosedale stated in a press release made
available on Second Life’s website that:
Until now, any content created by users for
persistent state worlds, such as Everquest®
or Star Wars Galaxies , has essentially TM
become the property of the company developing
and hosting the world. . . . We believe our
new policy recognizes the fact that
persistent world users are making significant
contributions to building these worlds and
should be able to both own the content they
create and share in the value that is
created. The preservation of users’ property
rights is a necessary step toward the
emergence of genuinely real online worlds.
Press Release, Linden Lab, Linden Lab Preserves Real World
Intellectual Property Rights of Users of its Second Life Online
Services (Nov. 14, 2003). After this initial announcement,
Rosedale continued to personally hype the ownership of virtual
property on Second Life. In an interview in 2004, for example,
Rosedale stated: “The idea of land ownership and the ease with
which you can own land and do something with it . . . is
intoxicating. . . . Land ownership feels important and tangible.
It’s a real piece of the future.” Michael Learmonth, Virtual
Real Estate Boom Draws Real Dollars, USA Today, June 3, 2004.
Rosedale recently gave an extended interview for Inc. magazine,
where he appeared on the cover stating, “What you have in Second
Life is real and it is yours. It doesn’t belong to us. You can
Plaintiff has inundated the Court with press releases, 6
newspaper articles, and other media containing representations
made by Rosedale regarding the ownership of property on Second
Life. Plaintiff states in an affidavit that he reviewed and
relied on some of these representations. Bragg Decl. ¶¶ 4-10,
65-68. It is of no moment that Plaintiff did not rely upon every
single representation that Rosedale ever made regarding ownership
of virtual property on Second Life. The immense quantity of such
representations is relevant to showing that these are not
isolated statements, but rather, part of a national campaign in
which defendant Rosedale individually and actively participated.
Linden taxes virtual land. In fact, according to 7
Bragg, by June 2004, Linden reported that its “real estate tax
revenue on land sold to the participants exceeded the amount the
company was generating in subscriptions.” Compl. ¶ 42.
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make money.” Michael Fitzgerald, How Philip Rosedale Created
Second Life, Inc., Feb. 2007.6
Rosedale even created his own avatar and held virtual
town hall meetings on Second Life where he made representations
about the purchase of virtual land. Bragg Decl. ¶ 68. Bragg
“attended” such meetings and relied on the representations that
Rosedale made therein. Id.
C. Plaintiffs’ Participation in Second Life
In 2005, Plaintiff Marc Bragg, Esq., signed up and paid
Linden to participate in Second Life. Bragg claims that he was
induced into “investing” in virtual land by representations made
by Linden and Rosedale in press releases, interviews, and through
the Second Life website. Bragg Decl. ¶¶ 4-10, 65-68. Bragg also
paid Linden real money as “tax” on his land. By April 2006, 7
Bragg’s complaint contains counts under the 8
Pennsylvania Unfair Trade Practices and Consumer Protection Law,
73 P.S. § 201-1, et seq. (Count I), the California Unfair and
Deceptive Practices Act, Cal. Bus. & Prof. Code § 17200 (Count
II), California Consumer Legal Remedies Act, Ca. Civ. Code §
1750, et seq. (Count III), fraud (Count IV), the California Civil
Code § 1812.600, et seq. (Count V), conversion (Count VI),
intentional interference with a contractual relations (Count
VII), breach of contract (Count VIII), unjust enrichment (Count
IX), and tortious breach of the covenant of good faith and fair
dealing (Count X).
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Bragg had not only purchased numerous parcels of land in his
Second Life, he had also digitally crafted “fireworks” that he
was able to sell to other avatars for a profit. Bragg also
acquired other virtual items from other avatars.
The dispute ultimately at issue in this case arose on
April 30, 2006, when Bragg acquired a parcel of virtual land
named “Taessot” for $300. Linden sent Bragg an email advising
him that Taessot had been improperly purchased through an
“exploit.” Linden took Taesot away. It then froze Bragg’s
account, effectively confiscating all of the virtual property and
currency that he maintained on his account with Second Life.
Bragg brought suit against Linden and Rosedale in the
Court of Common Pleas of Chester County, Pennsylvania, on October
3, 2006. Linden and Rosedale removed the case to this Court 8
(doc. no. 1) and then, within a week, moved to compel arbitration
(doc. no. 3).
II. MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION
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Defendant Philip Rosedale moves to dismiss all claims
asserted against him for lack of personal jurisdiction.
A. Legal Standards
A federal district court may exercise jurisdiction to
the same extent as the state in which it sits; a state, in turn,
may exercise jurisdiction over a non-resident defendant pursuant
to its so-called “long-arm statute.” Because the reach of
Pennsylvania’s long-arm statute “is coextensive with the limits
placed on the states by the federal Constitution,” the Court
looks to federal constitutional doctrine to determine whether
personal jurisdiction exists over Rosedale. Vetrotex Certainteed
Corp. v. Consol. Fiber Glass Products Co., 75 F.3d 147, 150 (3d
Cir. 1996); 42 Pa. C.S.A. § 5322(b).
Personal jurisdiction can be established in two
different ways: specific jurisdiction and general jurisdiction.
See Helicopteros Nacionales de Colombia v. Hall, 466 U.S. 408,
414-16 (1984). Specific jurisdiction is established when the
basis of the “plaintiff’s claim is related to or arises out of
the defendant’s contacts with the forum.” Pennzoil Products Co.
v. Colelli & Assoc., Inc., 149 F.3d 197, 201 (3d Cir. 1998)
(citations omitted). General jurisdiction, on the other hand,
does not require the defendant’s contacts with the forum state to
be related to the underlying cause of action, Helicopteros, 466
In the conclusion of the argument section of his brief, 9
for example, Bragg argues that Rosedale’s “representations and
inducements properly form the basis of specific jurisdiction
against Defendant Rosedale.” Pl.’s Resp. at 14.
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U.S. at 414, but the contacts must have been “continuous and
systematic.” Id. at 416.
Bragg does not contend that general jurisdiction exists
over Rosedale. Rather, he maintains that Rosedale’s
representations support specific personal jurisdiction in this
case. The Court therefore need only address whether specific 9
jurisdiction exists.
In deciding whether specific personal jurisdiction is
appropriate, a court must first determine whether the defendant
has the minimum contacts with the forum necessary to have
reasonably anticipated being haled into court there. Pennzoil,
149 F.3d at 201 (citing World-Wide Volkswagen Corp. v. Woodson,
444 U.S. 286 (1980)). Second, once minimum contacts have been
established, a court may inquire whether the assertion of
personal jurisdiction would comport with traditional conceptions
of fair play and substantial justice. Id. at 201 (citing Burger
King Corp. v. Rudzewicz, 471 U.S. 462, 476 (1985) and Int’l Shoe
Co. v. Washington, 326 U.S. 310, 320 (1945)). The first step is
mandatory, but the second step is discretionary. Id.
After a defendant has raised a jurisdictional defense,
as Rosedale has in this case, the plaintiff bears the burden of
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coming forward with enough evidence to establish, with reasonable
particularity, sufficient contacts between the defendant and the
forum. Provident Nat’l Bank v. Cal. Fed. Savings & Loan Assoc.,
819 F.2d 434, 437 (3d Cir. 1987). “The plaintiff must sustain
its burden of proof in establishing jurisdictional facts through
sworn affidavits or other competent evidence. . . . [A]t no point
may a plaintiff rely on the bare pleadings alone in order to
withstand a defendant’s Rule 12(b)(2) motion to dismiss for lack
of in personam jurisdiction.” Patterson by Patterson v. F.B.I.,
893 F.2d 595, 604 (3d Cir. 1990). “Once the motion is made,
plaintiff must respond with actual proofs not mere allegations.”
Id.
B. Application
In support of the Court’s exercising personal
jurisdiction over Rosedale, Bragg relies on various
representations that Rosedale personally made in the media “to a
national audience” regarding ownership of virtual property in
Second Life. Bragg maintains that Rosedale made these
representations to induce Second Life participants to purchase
virtual property and that such representations in fact induced
Bragg to do so. Bragg also relies on the fact that he “attended”
town hall meetings hosted in Second Life where he listened to
Rosedale make statements about the purchase of virtual land.
The Supreme Court has also held, under different 10
circumstances, that defamatory statements distributed in the
national media may support specific personal jurisdiction where
those statements are relevant to a plaintiff’s claims. In Calder
v. Jones, a Californian plaintiff sued a group of Floridian
defendants for placing a defamatory article about her in a
nationally circulated publication. 465 U.S. 783, 788-89 (1984).
The plaintiff claimed that the defendants should be subject to
jurisdiction in her home state of California. Id. The Supreme
Court held that, because the defendant’s intentional and
allegedly illegal actions were expressly aimed at California and
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1. Minimum Contacts
The first question the Court must answer, then, is
whether Rosedale has minimum contacts with Pennsylvania
sufficient to support specific personal jurisdiction. The Court
holds that Rosedale’s representations--which were made as part of
a national campaign to induce persons, including Bragg, to visit
Second Life and purchase virtual property--constitute sufficient
contacts to exercise specific personal jurisdiction over
Rosedale.
Wellness Publishing v. Barefoot provides useful
guidance, albeit in a non-precedential opinion. 128 Fed. App’x
266 (3d Cir. 2005). In that case, the Third Circuit recognized
that an advertising campaign of national scope could not, on its
own, provide the basis for general jurisdiction in any state
where advertisements were aired, but that under the appropriate
circumstances, such contacts could provide the basis of
exercising specific jurisdiction over a defendant in a particular
state where the advertisements were aired. Id.10
caused harm there, jurisdiction over the defendants was “proper
in California based on the ‘effects’ of their Florida conduct in
California.” Id. at 789. Here, as in Calder, Rosedale’s alleged
misrepresentations are relevant to Bragg’s claims of fraud and
deceptive practices, but Bragg has not argued that jurisdiction
is proper based on Calder’s effects-based jurisprudence.
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In Barefoot, a group of defendants produced
infomercials for calcium supplements and related products that
ran nationally, including in New Jersey. Id. at 269. The
defendants also processed telephone orders for products promoted
in the infomercials. Id. The District Court dismissed the
plaintiff’s case for lack of personal jurisdiction in New Jersey.
Id. at 270. On appeal, however, the Third Circuit reversed,
holding that specific personal jurisdiction existed over the
defendants that ran the infomercials in New Jersey. Id. In
doing so, it analogized the defendants’ promotional activities to
the maintenance of a website. Id. (citing Toys “R” Us, Inc. v.
Step Two, S.A., 318 F.3d 446, 452 (3d Cir. 2003)).
Under the Third Circuit’s jurisdictional analysis of
websites, if a defendant website operator intentionally targets
the site to the forum state and/or knowingly conducts business
with forum state residents via the site, then the “purposeful
availment” requirement is satisfied. Toys “R” Us, 318 F.3d at
452. In addition, a court may consider the level of
interactivity of the website and the defendant’s related
non-Internet activities as part of the “purposeful availment”
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calculus. Id. at 453.
The Third Circuit applied this same jurisdictional
analysis in Barefoot to hold that the defendants who ran the
infomercials in New Jersey could be subject to personal
jurisdiction in that state. 128 Fed. App’x at 270. First, it
reasoned that, as with the mere operation of a website, “an
advertising campaign with national scope does not by itself give
rise to general jurisdiction in a state where it is broadcast.”
Id. That principle was inapplicable, however, because it
involved precedents where the plaintiff’s injuries were unrelated
to the broad case of the advertisement in the forum state, which
were therefore inapplicable to a specific-jurisdiction inquiry.
Id. (citing Gehling v. St. George’s Sch. of Med., Ltd., 773 F.2d
539 (3d Cir. 1985); Giangola v. Walt Disney World Co., 753 F.
Supp. 148 (D.N.J. 1990)). Second, and most important for this
case, the Third Circuit reasoned:
[T]he advertisement in this case induced
viewers to establish direct contact with [the
defendant] by calling its toll-free phone
number to place orders. This inducement
destroys any semblance of the passive
advertising addressed in Giangola, 753 F.
Supp. at 155-56, which expressly
distinguished advertisements in the form of
direct mail solicitations. For purposes of
jurisdictional analysis, an infomercial
broadcast that generates telephone customers
is the equivalent of an interactive web-site
through which a defendant purposefully
directs its commercial efforts towards
residents of a forum state.
The Third Circuit has consistently held that 11
advertising in national publications does not subject a defendant
to general jurisdiction in every state. See, e.g., Gehling, 773
F.2d 539 at 542; Giangola, 753 F. Supp. at 156 (“In an age of
modern advertising and national media publications and markets,
plaintiffs’ argument that such conduct would make a defendant
amenable to suit wherever the advertisements were aired would
substantially undermine the law of personal jurisdiction.”). In
Giangola, for example, a district court held that plaintiffs’
viewing of advertisements displaying Walt Disney World “as a must
visit” on plaintiffs’ vacation agenda, and which in fact induced
plaintiffs to visit Disney World, did not constitute “minimum
contacts” sufficient to justify personal jurisdiction in the
plaintiffs’ subsequent personal injury action, because the
advertisements were not in any way related to the plaintiffs’
personal injury action. 753 F. Supp. at 155. Moreover, as the
Third Circuit noted in Barefoot, the advertisements were passive
in nature and did not involve any interactivity with the
plaintiffs. Id.; Barefoot, 128 Fed. App’x at 270.
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Id. at 270 (some internal citations omitted).
Barefoot’s analysis applies to the facts of this case.
First, Bragg has provided evidence that Rosedale helped
orchestrate a campaign at the national level to induce persons,
including Bragg, to purchase virtual land and property on Second
Life. As part of the national campaign, Bragg made
representations that were distributed nationally, including in
Pennsylvania. Moreover, this case does not involve “injuries
unrelated to the broadcast of the advertisement in the forum
state,” as was the case in Gehling or Giangola. Cf. Barefoot, 11
128 Fed. App’x at 270. Rather, Rosedale’s representations
constitute part of the alleged fraudulent and deceptive conduct
at the heart of Bragg’s claims in this case.
Second, like the role of the infomericals in Barefoot,
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Rosedale’s personal role was to “bait the hook” for potential
customers to make more interactive contact with Linden by
visiting Second Life’s website. Rosedale’s activity was designed
to generate additional traffic inside Second Life. He was the
hawker sitting outside Second Life’s circus tent, singing the
marvels of what was contained inside to entice customers to
enter. Once inside Second Life, participants could view virtual
property, read additional materials about purchasing virtual
property, interact with other avatars who owned virtual property,
and, ultimately, purchase virtual property themselves.
Significantly, participants could even interact with Rosedale’s
avatar on Second Life during town hall meetings that he held on
the topic of virtual property.
Viewed in context, Rosedale’s marketing efforts in this
case are more “interactive” rather than “passive.” C.f. Barefoot,
128 Fed. App’x at 270 (emphasizing that “interactive” contacts
are more significant for jurisdictional purposes than “passive”
contacts). Thus, they provide more than just “tangential”
support for specific personal jurisdiction. See Mesalic v.
Fiberfloat Corp., 897 F.2d 696, 700 n.10 (3d Cir. 1990) (noting
that a defendant’s marketing strategy, including advertising in
national publications distributed in the forum, provided only
Because the Court bases its holding on the interactive 12
nature of the marketing scheme, the its holding does not “mean
that there would be nationwide (indeed, worldwide) jurisdiction
over anyone and everyone who establishes an Internet website” or
made representations posted on a website accessible throughout
the world. Weber v. Jolly Hotels, 977 F. Supp. 327, 333 (D.N.J.
1997).
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“tangential” support for specific personal jurisdiction).12
The Court’s decision is also consistent with the
decisions of courts in other jurisdictions which have extended
specific jurisdiction over defendants who have made
representations in national media when the dispute arose directly
from those representations. See, e.g., Indianapolis Colts, Inc.
v. Metro. Baltimore Football Club Ltd. P’ship, 34 F.3d 410, 412
(7th Cir. 1994) (holding that national television broadcast into
the forum state was sufficient for personal jurisdiction); Caddy
Prods., Inc. v. Greystone Int’l., Inc., No. 05-301, 2005 U.S.
Dist. LEXIS 34467, *4-5 (D. Minn. 2005) (holding that the
defendant had sufficient contacts to support the exercise of
specific personal jurisdiction, which included the defendant’s
marketing efforts, such as attending a national trade show and
advertising in a national trade publication, coupled with
defendant’s shipment of the product into the forum state); Hollar
v. Philip Morris Inc., 43 F. Supp. 2d 794, 802-03 (N.D. Ohio
1998) (holding specific personal jurisdiction existed over
tobacco company that made false representations regarding smoking
to a national audience, which induced plaintiffs to continue
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smoking; it is “axiomatic that what is distributed and broadcast
nationwide will be seen and heard in all states.”) (internal
quotation omitted); Thomas Jackson Publ’g Inc. v. Buckner, 625 F.
Supp. 1044, 1046 (D. Neb. 1985) (holding that performance of
songs and interviews on national television supported finding of
specific personal jurisdiction over a defendant whose songs
infringed the plaintiff’s copyright).
Rosedale relies heavily on cases from other
jurisdictions for the proposition that his statements do not
subject him to personal jurisdiction in Pennsylvania because none
of the statements were targeted directly at Pennsylvania as
opposed to the nation at large. See Dfts.’ Reply at 3.
Rosedale’s first cited case, however, involves representations
specifically targeted at one state, as opposed to a national
audience, that merely could be accessed worldwide because they
were available on the Internet. See Young v. New Haven Advocate,
315 F.3d 256, 263 (4th Cir. 2002) (“[T]he fact that the
newspapers’ websites could be accessed anywhere, including
Virginia, does not by itself demonstrate that the newspapers were
intentionally directing their website content to a Virginia
audience. Something more than posting and accessibility is
needed to indicate that the newspapers purposefully (albeit
electronically) directed their activity in a substantial way to
the forum state. . .”). Rosedale did not target his
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representations at any particular state, but rather to the nation
at large. The other two cases cited by Rosedale are also
distinguishable, because they involved isolated statements that
were not, as is the case here, an integral part of a larger
publicity campaign of national scope. See Revel v. Lidov, 317
F.3d 467, 475 (5th Cir. 2002) (finding that the court lacked
personal jurisdiction over author of an Internet bulletin board
posting “because the post to the bulletin board was presumably
directed at the entire world” and was not “directed specifically
at Texas”); Griffis v. Luban, 646 N.W. 2d 527, 536 (Minn. 2002)
(“The mere fact that [the defendant], who posted allegedly
defamatory statements about the plaintiff on the Internet, knew
that [the plaintiff] resided and worked in Alabama is not
sufficient to extend personal jurisdiction over [the defendant]
in Alabama, because that knowledge does not demonstrate targeting
of Alabama as the focal point of the . . . statements.”). See
also Growden v. Ed Bowlin & Assoc., Inc., 733 F.2d 1149, 1151-52
& n.4 (5th Cir. 1984) (holding no personal jurisdiction existed
based on ads in two national publications for the sale of an
airplane, the crash of which was the subject of the litigation).
Accordingly, the Court finds that Rosedale has minimum
contacts with Pennsylvania sufficient to support specific
personal jurisdiction.
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2. Fair Play and Substantial Justice
The Court also finds that the exercise of personal
jurisdiction in this case would not offend due process. See
Lehigh Coal, 56 F. Supp. 2d at 569 (citing Burger King, 471 U.S.
at 477). The factors to be considered in making this fairness
determination are: (1) the burden on the defendant, (2) the forum
State’s interest in adjudicating the dispute, (3) the plaintiff's
interest in obtaining convenient and effective relief, (4) the
interstate judicial system’s interest in obtaining the most
efficient resolution of controversies and (5) the shared interest
of the several states in furthering fundamental substantive
social policies. Id.
Nothing on the record counsels strongly against
jurisdiction based on considerations of any undue burden to
Rosedale. Rosedale has not claimed that he does not have the
financial ability or that he would otherwise be irreparably
prejudiced by litigating this case here in Pennsylvania. The
Court also notes that Rosedale has able counsel on both coasts,
i.e., in both his home state of California and here in
Pennsylvania. Additionally, Pennsylvania has a substantial
interest in protecting its residents from allegedly misleading
representations that induce them to purchase virtual property.
Pennsylvania also has an interest, more particularly, in
vindicating Bragg’s individual rights. Finally, Bragg may obtain
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convenient and effective relief in Pennsylvania, the state in
which he initiated this action.
C. Fiduciary Shield Doctrine
The Court must also address Rosedale’s argument that,
because Rosedale made the alleged representations in his
corporate capacity as Chief Executive Officer of Linden, he
cannot be subject to personal jurisdiction based on those
representations.
The applicability of this so called “fiduciary shield”
doctrine is in dispute. Although it has not definitively spoken
on the issue, the Supreme Court appears to have rejected the
proposition that this doctrine is a requirement of federal due
process. See Calder v. Jones, 465 U.S. 783, 790 (1984)
(“[Defendants’] status as employees does not somehow shield them
from jurisdiction. Each defendant’s contacts with the forum
state must be assessed individually.”); Keeton v. Hustler, 465
U.S. 770, 781 n.13 (1984) (“We today reject the suggestion that
employees who act in their official capacity are somehow shielded
from suit in their individual capacity.”). Moreover, neither the
Pennsylvania Supreme Court nor the Third Circuit has squarely
addressed the applicability of the fiduciary shield doctrine.
See, e.g., Irons v. Transcor Am., 2002 WL 32348317, at *5 (E.D.
Pa. 2002).
Some Third Circuit precedent suggests that, where the 13
alleged contacts involve a corporate agent’s personal
involvement, the “corporate shield” doctrine is obviated. See
Al-Khazraji v. St. Francis College, 784 F.2d 505, 518 (3d Cir.
1986) (“An individual, including a director, officer, or agent of
a corporation, may be liable for injuries suffered by third
parties because of his torts, regardless of whether he acted on
his own account or on behalf of the corporation.”). On other
occasions, however, after finding personal jurisdiction has
existed over a corporation, the Third Circuit has remanded to
address the question of whether the individual corporate agents
were not subject to personal jurisdiction because their relevant
contacts were established in their roles as corporate officers.
See Barefoot, 128 Fed. App’x at 269.
Numerous recent cases within this district have applied
the fiduciary shield doctrine in one form or another. E.g.
Schiller-Pfeiffer, Inc. v. Country Home Prods., Inc., 2004 WL
2755585 (E.D. Pa. 2004) (“[A] defendant is not individually
subject to personal jurisdiction merely based on his actions in a
corporate capacity.”) (citing TJS Brokerage & Co. v. Mahoney, 940
F. Supp. 784, 789 (E.D. Pa. 1996); D&S Screen Fund II v. Ferrari,
174 F. Supp. 2d 343, 347 (E.D. Pa. 2001) (“As a general rule,
individuals performing acts in their corporate capacity are not
subject to the personal jurisdiction of the courts of that state
for those acts.”).
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Fortunately, it is not necessary to untangle the
confused knot of caselaw surrounding the fiduciary shield’s
status within the Third Circuit. The Court will, in Gordian 13
fashion, cut directly through the knot, because even if the
doctrine did apply, the fiduciary shield would not protect
Rosedale under these circumstances.
When corporate agents invoke the fiduciary shield as a
protection, courts “have held that in order to hold such a
defendant subject to personal jurisdiction, it must be shown that
[1] the defendant had a major role in the corporate structure,
Defendants concede that the Court has personal 14
jurisdiction over Linden. However, Bragg does not argue that
personal jurisdiction was appropriate over Rosedale based on his
direction of Linden as it made contacts with Pennsylvania. Bragg
relies, instead, solely on Linden’s individual contacts. Had
Plaintiff argued the former, the Court’s application of the
fiduciary shield doctrine could have been a closer call.
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[2] the quality of his contacts with the state were significant,
and [3] his participation in the tortious conduct alleged was
extensive.” TJS Brokerage, 940 F. Supp. at 789. First, as to
his role in the company, Rosedale acted as the CEO and public
face of Linden. Second, as to the quality of Rosedale’s
contacts, Rosedale made numerous representations that were
broadcast through the national media and through the Internet,
via town hall meetings, that reached Pennsylvania. These were
not isolated statements, but part of a national campaign to
distinguish Second Life from other virtual worlds and induce the
purchase of virtual property. Third, and finally, Rosedale did
not simply direct others to publicize virtual property on Second
Life. He personally participated in creating such publicity and
its dissemination. Representations made as part of that
publicity are at the heart of Bragg’s case.14
Even if the fiduciary shield doctrine were expressly
recognized by the Third Circuit, Rosedale’s representations,
though made on the behalf of Linden, would still count as
contacts in the analysis of whether the Court may exercise
personal jurisdiction over him. Therefore, the Court will
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exercise personal jurisdiction over Rosedale.
III. MOTION TO COMPEL ARBITRATION
Defendants have also filed a motion to compel
arbitration that seeks to dismiss this action and compel Bragg to
submit his claims to arbitration according to the Rules of the
International Chamber of Commerce (“ICC”) in San Fransisco.
A. Relevant Facts
Before a person is permitted to participate in Second
Life, she must accept the Terms of Service of Second Life (the
“TOS”) by clicking a button indicating acceptance of the TOS.
Bragg concedes that he clicked the “accept” button before
accessing Second Life. Compl. ¶ 126. Included in the TOS are a
California choice of law provision, an arbitration provision, and
forum selection clause. Specifically, located in the fourteenth
line of the thirteenth paragraph under the heading “GENERAL
PROVISIONS,” and following provisions regarding the applicability
of export and import laws to Second Life, the following language
appears:
Any dispute or claim arising out of or in connection
with this Agreement or the performance, breach or
termination thereof, shall be finally settled by
binding arbitration in San Francisco, California under
the Rules of Arbitration of the International Chamber
of Commerce by three arbitrators appointed in
accordance with said rules. . . . Notwithstanding the
foregoing, either party may apply to any court of
-23-
competent jurisdiction for injunctive relief or
enforcement of this arbitration provision without
breach of this arbitration provision.
TOS ¶ 13.
B. Legal Standards
1. Federal law applies
The Federal Arbitration Act (“FAA”) requires that the
Court apply federal substantive law here because the arbitration
agreement is connected to a transaction involving interstate
commerce. State Farm Mut. Auto. Ins. Co. v. Coviello, 233 F.3d
710, 713 n.1 (3d Cir. 2000); Marciano v. MONY Life Ins. Co., 470
F. Supp. 2d 518, 524 (E.D. Pa. 2007) (Robreno, J.); see also
Wright & Miller, Federal Practice and Procedure § 3569, at 173
(1984) (“[I]n a diversity suit . . . , the substantive rules
contained in the [Federal Arbitration] Act, based as it is on the
commerce and admiralty powers, are to be applied regardless of
state law.”).
Whether the arbitration agreement is connected to a
transaction involving interstate commerce is a factual
determination that must be made by the Court. State Farm, 233
F.3d at 713 n.1. Here, Bragg is a Pennsylvania resident. Linden
is a Delaware corporation headquartered in California. Rosedale
is a California resident. Bragg entered into the TOS and
purchased virtual land through the Internet on Second Life as a
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result of representations made on the national media. The
arbitration agreement is clearly connected to interstate
commerce, and the Court will apply the federal substantive law
that has emerged from interpretation of the FAA.
2. The Legal Standard Under the FAA
Under the FAA, on the motion of a party, a court must
stay proceedings and order the parties to arbitrate the dispute
if the court finds that the parties have agreed in writing to do
so. 9 U.S.C. §§ 3, 4, 6. A party seeking to compel arbitration
must show (1) that a valid agreement to arbitrate exists between
the parties and (2) that the specific dispute falls within the
scope of the agreement. Trippe Mfg. Co. v. Niles Audio Corp.,
401 F.3d 529, 532 (3d Cir. 2005); PaineWebber, Inc. v. Hartmann,
921 F.2d 507, 511 (3d Cir. 1990).
In determining whether a valid agreement to arbitrate
exists between the parties, the Third Circuit has instructed
district courts to give the party opposing arbitration “the
benefit of all reasonable doubts and inferences that may arise,”
or, in other words, to apply the familiar Federal Rule of Civil
Procedure 56(c) summary judgment standard. Par-Knit Mills, Inc.
v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 54 & n.9 (3d Cir.
1980); see also Berkery v. Cross Country Bank, 256 F. Supp. 2d
359, 364 n.3 (E.D. Pa. 2003) (Robreno, J.) (applying the summary
This challenge must be determined by the Court, not an 15
arbitrator. Bellevue Drug Co. v. Advance PCS, 333 F. Supp. 2d
318 (E.D. Pa. 2004) (Robreno, J.). Bragg does not challenge
enforceability by claiming that a provision of the arbitration
agreement will deny him a statutory right, a question of
interpretation of the arbitration agreement which an arbitrator
is “well situated to answer.” Id. (citations omitted). Rather,
Bragg claims that the arbitration agreement itself would
effectively deny him access to an arbitrator, because the costs
would be prohibitively expensive, a question that is more
appropriately reserved for the Court to answer. Id.
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judgment standard to a motion to compel arbitration). While
there is a presumption that a particular dispute is within the
scope of an arbitration agreement, Volt Info. Scis., Inc. v. Bd.
of Trustees, 489 U.S. 468, 475 (1989), there is no such
“presumption” or “policy” that favors the existence of a valid
agreement to arbitrate. Marciano, 470 F. Supp. 2d at 525-26.
C. Application
1. Unconscionabilty of the Arbitration Agreement
Bragg resists enforcement of the TOS’s arbitration
provision on the basis that it is “both procedurally and
substantively unconscionable and is itself evidence of
defendants’ scheme to deprive Plaintiff (and others) of both
their money and their day in court.” Pl.’s Resp. At 16.15
Section 2 of the FAA provides that written arbitration
agreements “shall be valid, irrevocable, and enforceable, save
upon such grounds as exist at law or in equity for the revocation
of any contract.” 9 U.S.C. § 2. Thus, “generally applicable
Both parties agree that California law should govern 16
the question of whether the arbitration provision is
unconscionable.
-26-
contract defenses, such as fraud, duress, or unconscionability,
may be applied to invalidate arbitration agreements without
contravening § 2.” Doctor’s Assocs. v. Casarotto, 517 U.S. 681,
687 (1996) (citations omitted). When determining whether such
defenses might apply to any purported agreement to arbitrate the
dispute in question, “courts generally . . . should apply
ordinary state-law principles that govern the formation of
contracts.” First Options of Chicago, Inc. v. Kaplan, 514 U.S.
938, 944 (1995). Thus, the Court will apply California state
law to determine whether the arbitration provision is
unconscionable.16
Under California law, unconscionability has both
procedural and substantive components. Davis v. O’Melveny &
Myers, __ F.3d __, 2007 WL 1394530, at *4 (9th Cir.
May 14, 2007); Comb v. Paypal, Inc., 218 F. Supp. 2d 1165, 1172
(N.D. Cal. 2002). The procedural component can be satisfied by
showing (1) oppression through the existence of unequal
bargaining positions or (2) surprise through hidden terms common
in the context of adhesion contracts. Comb, 218 F. Supp. 2d at
1172. The substantive component can be satisfied by showing
overly harsh or one-sided results that “shock the conscience.”
Id. The two elements operate on a sliding scale such that the
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more significant one is, the less significant the other need be.
Id. at 743; see Armendariz v. Foundation Health Psychcare Servs.,
Inc., 6 P.3d 669, 690 (Cal. 2000) (“[T]he more substantively
oppressive the contract term, the less evidence of procedural
unconscionability is required to come to the conclusion that the
term is unenforceable, and vice versa.”). However, a claim of
unconscionability cannot be determined merely by examining the
face of the contract; there must be an inquiry into the
circumstances under which the contract was executed, and the
contract’s purpose, and effect. Comb, 218 F. Supp. 2d at 1172.
(a) Procedural Unconscionability
A contract or clause is procedurally unconscionable if
it is a contract of adhesion. Comb, 218 F. Supp. 2d at 1172;
Flores v. Transamerica HomeFirst, Inc., 113 Cal. Rptr. 2d 376,
381-82 (Ct. App. 2001). A contract of adhesion, in turn, is a
“standardized contract, which, imposed and drafted by the party
of superior bargaining strength, relegates to the subscribing
party only the opportunity to adhere to the contract or reject
it.” Comb, 218 F. Supp. 2d at 1172; Armendariz, 6 P.3d at 690.
Under California law, “the critical factor in procedural
unconscionability analysis is the manner in which the contract or
the disputed clause was presented and negotiated.” Nagrampa v.
MailCoups, Inc., 469 F.3d 1257, 1282 (9th Cir. 2006). “When the
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weaker party is presented the clause and told to ‘take it or
leave it’ without the opportunity for meaningful negotiation,
oppression, and therefore procedural unconscionability, are
present.” Id. (internal quotation and citation omitted); see
also Martinez v. Master Prot. Corp., 12 Cal. Rptr.3d 663, 669
(Ct. App.2004) (“An arbitration agreement that is an essential
part of a ‘take it or leave it’ employment condition, without
more, is procedurally unconscionable.”) (citations omitted);
O’Melveny & Myers, __ F.3d __, 2007 WL 1394530 at *6 (holding
arbitration agreement presented on a take-it-or-leave-it basis
was procedurally unconscionable, notwithstanding the fact that
employee was provided three months to walk away from employment
before agreement became effective).
The TOS are a contract of adhesion. Linden presents
the TOS on a take-it-or-leave-it basis. A potential participant
can either click “assent” to the TOS, and then gain entrance to
Second Life’s virtual world, or refuse assent and be denied
access. Linden also clearly has superior bargaining strength
over Bragg. Although Bragg is an experienced attorney, who
believes he is expert enough to comment on numerous industry
standards and the “rights” or participants in virtual worlds, see
Pl.’s Resp., Ex. A ¶¶ 59-64, he was never presented with an
opportunity to use his experience and lawyering skills to
negotiate terms different from the TOS that Linden offered.
-29-
Moreover, there was no “reasonably available market
alternatives [to defeat] a claim of adhesiveness.” Cf. Dean
Witter Reynolds, Inc. v. Superior Court, 259 Cal. Rptr. 789, 795
(Ct. App. 1989) (finding no procedural unconscionability because
there were other financial institutions that offered competing
IRA’s which lacked the challenged provision). Although it is not
the only virtual world on the Internet, Second Life was the first
and only virtual world to specifically grant its participants
property rights in virtual land.
The procedural element of unconscionability also
“focuses on . . . surprise.” Gutierrez v. Autowest, Inc.,7 Cal.
Rptr. 3d 267, 275 (Ct. App. 2003) (citations omitted). In
determining whether surprise exists, California courts focus not
on the plaintiff’s subjective reading of the contract, but
rather, more objectively, on “the extent to which the supposedly
agreed-upon terms of the bargain are hidden in the prolix printed
form drafted by the party seeking to enforce the disputed terms.”
Id. In Gutierrez, the court found such surprise where an
arbitration clause was “particularly inconspicuous, printed in
eight-point typeface on the opposite side of the signature page
of the lease.” Id.
Here, although the TOS are ubiquitous throughout Second
For example, both the “Auctions” and the “Auctions FAQ” 17
webpages in Second Life contain hyperlinks to the TOS. See Bragg
Br., Ex. 2 at 9, 15.
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Life, Linden buried the TOS’s arbitration provision in a 17
lengthy paragraph under the benign heading “GENERAL PROVISIONS.”
See TOS ¶ 13. Compare Net Global Mktg. v. Dialtone, Inc., No.
04-56685, 2007 U.S. App. LEXIS 674 at *7 (9th Cir. Jan. 9, 2007)
(finding procedural unconscionability where “[t]here was no
‘clear heading’ in the Terms of Service that could refute a claim
of surprise; to the contrary, the arbitration clause is listed in
the midst of a long section without line breaks under the
unhelpful heading of ‘Miscellaneous’”) and Higgins v. Superior
Court, 45 Cal. Rptr. 3d 293, 297 (Ct. App. 2006) (holding
arbitration agreement unconscionable where “[t]here is nothing in
the Agreement that brings the reader’s attention to the
arbitration provision”) with Boghos v. Certain Underwriters at
Lloyd’s of London, 115 P.3d 68, 70 (Cal. 2005) (finding
arbitration clause was enforceable where it was in bolded font
and contained the heading “BINDING ARBITRATION”). Linden also
failed to make available the costs and rules of arbitration in
the ICC by either setting them forth in the TOS or by providing a
hyper-link to another page or website where they are available.
Bragg Decl. ¶ 20.
Comb is most instructive. In that case, the plaintiffs
challenged an arbitration provision that was part of an agreement
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to which they had assented, in circumstances similar to this
case, by clicking their assent on an online application page.
218 F. Supp. 2d at 1169. The defendant, PayPal, was a large
company with millions of individual online customers. Id. at
1165. The plaintiffs, with one exception, were all individual
customers of PayPal. Id. Given the small amount of the average
transaction with PayPal, the fact that most PayPal customers were
private individuals, and that there was a “dispute as to whether
PayPal’s competitors offer their services without requiring
customers to enter into arbitration agreements,” the court
concluded that the user agreement at issue “satisfie[d] the
criteria for procedural unconscionability under California law.”
Id. at 1172-73. Here, as in Comb, procedural unconscionability
is satisfied.
(b) Substantive Unconscionability
Even if an agreement is procedurally unconscionable,
“it may nonetheless be enforceable if the substantive terms are
reasonable.” Id. at 1173 (citing Craig v. Brown & Root, Inc.,
100 Cal. Rptr. 2d 818 (Ct. App. 2000) (finding contract of
adhesion to arbitrate disputes enforceable)). Substantive
unconscionability focuses on the one-sidedness of the contract
terms. Armendariz, 6 P.3d at 690; Flores, 113 Cal. Rptr. 2d at
381-82 . Here, a number of the TOS’s elements lead the Court to
The Court notes that the Third Circuit has found that 18
“parties to an arbitration agreement need not equally bind each
other with respect to an arbitration agreement if they have
provided each other with consideration beyond the promise to
arbitrate.” Harris v. Green Tree Fin. Corp., 183 F.3d 173,
180-81 (3d Cir. 1999). In Green Tree, however, the Third Circuit
was applying Pennsylvania law, not California law. Id. In any
event, Pennsylvania courts have criticized this aspect of Green
Tree’s holding. E.g. Lytle v. Citifinancial Servs., 810 A.2d
643, 665 (Pa. Super. Ct. 2002) (holding that, under Pennsylvania
law, the reservation by a company to itself of access to the
courts, to the exclusion of the consumer, created a presumption
of unconscionability, “which in the absence of ‘business
realities’ that compel inclusion of such a provision in an
arbitration provision, render[ed] the arbitration provision
unconscionable and unenforceable”).
-32-
conclude that Bragg has demonstrated that the TOS are
substantively unconscionable.
(i) Mutuality
Under California law, substantive unconscionability has
been found where an arbitration provision forces the weaker party
to arbitrate claims but permits a choice of forums for the
stronger party. See, e.g., Ticknor v. Choice Hotels Int’l, Inc.,
265 F.3d 931, 940-41 (9th Cir. 2001); Mercuro v. Superior Court,
116 Cal. Rptr. 2d 671, 675 (Ct. App. 2002). In other words, the
arbitration remedy must contain a “modicum of bilaterality.”
Armendariz, 6 P.3d at 692. This principle has been extended to
arbitration provisions that allow the stronger party a range of
remedies before arbitrating a dispute, such as self-help, while
relegating to the weaker party the sole remedy of arbitration.18
-33-
In Comb, for example, the court found a lack of
mutuality where the user agreement allowed PayPal “at its sole
discretion” to restrict accounts, withhold funds, undertake its
own investigation of a customer’s financial records, close
accounts, and procure ownership of all funds in dispute unless
and until the customer is “later determined to be entitled to the
funds in dispute.” 218 F. Supp. 2d at 1173-74. Also significant
was the fact that the user agreement was “subject to change by
PayPal without prior notice (unless prior notice is required by
law), by posting of the revised Agreement on the PayPal website.”
Id.
Here, the TOS contain many of the same elements that
made the PayPal user agreement substantively unconscionable for
lack of mutuality. The TOS proclaim that “Linden has the right
at any time for any reason or no reason to suspend or terminate
your Account, terminate this Agreement, and/or refuse any and all
current or future use of the Service without notice or liability
to you.” TOS ¶ 7.1. Whether or not a customer has breached the
Agreement is “determined in Linden’s sole discretion.” Id.
Linden also reserves the right to return no money at all based on
mere “suspicions of fraud” or other violations of law. Id.
Finally, the TOS state that “Linden may amend this Agreement . .
. at any time in its sole discretion by posting the amended
Agreement [on its website].” TOS ¶ 1.2.
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In effect, the TOS provide Linden with a variety of
one-sided remedies to resolve disputes, while forcing its
customers to arbitrate any disputes with Linden. This is
precisely what occurred here. When a dispute arose, Linden
exercised its option to use self-help by freezing Bragg’s
account, retaining funds that Linden alone determined were
subject to dispute, and then telling Bragg that he could resolve
the dispute by initiating a costly arbitration process. The TOS
expressly authorized Linden to engage in such unilateral conduct.
As in Comb, “[f]or all practical purposes, a customer may resolve
disputes only after [Linden] has had control of the disputed
funds for an indefinite period of time,” and may only resolve
those disputes by initiating arbitration. 218 F. Supp. 2d at
1175.
Linden’s right to modify the arbitration clause is also
significant. “The effect of [Linden’s] unilateral right to
modify the arbitration clause is that it could . . . craft
precisely the sort of asymmetrical arbitration agreement that is
prohibited under California law as unconscionable. Net Global
Mktg., 2007 U.S. App. LEXIS 674, at *9. This lack of mutuality
supports a finding of substantive unconscionability.
(ii) Costs of Arbitration and Fee-Sharing
Bragg claims that the cost of an individual arbitration
The Court’s calculations are based on its finding that 19
$75,000 is at issue, the minimum necessary to satisfy the
requirements of diversity jurisdiction in this case. After a
hearing on Bragg’s motion to remand this case back to state
court, the Court found that this jurisdictional threshold had
been met (doc. no. 14).
-35-
under the TOS is likely to exceed $13,540, with an estimated
initiation cost of at least $10,000. Pl.’s Reply at 5-6. He has
also submitted a Declaration of Personal Financial Information
stating that such arbitration would be cost-prohibitive for him
(doc. no. 41). Linden disputes Bragg’s calculations, estimating
that the costs associated with arbitration would total $7,500,
with Bragg advancing $3,750 at the outset of arbitration. See
Dfts.’ Reply at 11.
At oral argument, the parties were unable to resolve
this dispute, even after referencing numerous provisions and
charts contained within the ICC Rules. See Tran. of 2/5/07 Hrg.
at 65-74. The Court’s own calculations, however, indicate that
the costs of arbitration, excluding arbitration, would total
$17,250. With a recovery of $75,000, the ICC’s administrative 19
expenses would be $2,625 (3.5% of $75,000). See ICC Rules at 28.
In addition, arbitrator’s fees could be set between 2.0% ($1,500)
and 11.0% ($8,250) of the amount at issue per arbitrator. Id.
If the ICC set the arbitrator’s fees at the mid-point of this
range, the arbitrator’s fees would be $4,875 per arbitrator. Id.
Here, however, the TOS requires that three arbitrators be used to
At oral argument, Bragg asserted repeatedly that the 20
schedule of arbitrator’s fees in the ICC Rules represents the fee
“per arbitrator,” which would have to be tripled in this case as
the TOS provides for three arbitrators. See Tran. of 2/5/07 Hrg.
at pp. 68, 74. Defendants never refuted this point. See id.
-36-
resolve a dispute. TOS ¶ 13. Thus, the Court estimates the
costs of arbitration with the ICC to be $17,250 ($2,625 + (3 x
$4,875)), although they could reach as high as $27,375 ($2,625 +
(3 x $8,250)).20
These costs might not, on their own, support a finding
of substantive unconscionability. However, the ICC Rules also
provide that the costs and fees must be shared among the parties,
and an estimate of those costs and fees must be advanced at the
initiation of arbitration. See ICC Rules of Arbitration, Ex. D
to Dfts.’ Reply at 28-30. California law has often been applied
to declare arbitration fee-sharing schemes unenforceable. See
Ting v. AT&T, 319 F.3d 1126, 1151 (9th Cir. 2003). Such schemes
are unconscionable where they “impose[] on some consumers costs
greater than those a complainant would bear if he or she would
file the same complaint in court.” Id. In Ting, for example,
the Ninth Circuit held that a scheme requiring AT&T customers to
split arbitration costs with AT&T rendered an arbitration
provision unconscionable. Id. See also Circuit City Stores v.
Adams, 279 F.3d 889, 894 (9th Cir. 2002) (“This fee allocation
scheme alone would render an arbitration agreement
unenforceable.”); Armendariz, 6 P.3d at 687 (“[T]he arbitration
-37-
process cannot generally require the employee to bear any type of
expenses that the employee would not be required to bear if he or
she were free to bring the action in court.”) (emphasis in
original); Ferguson v. Countrywide Credit Indus., 298 F.3d 778,
785 (9th Cir. 2002) (“[A] fee allocation scheme which requires
the employee to split the arbitrator’s fees with the employer
would alone render an arbitration agreement substantively
unconscionable.”) (emphasis added).
Here, even taking Defendants characterization of the
fees to be accurate, the total estimate of costs and fees would
be $7,500, which would result in Bragg having to advance $3,750
at the outset of arbitration. See Dfts.’ Reply at 11. The
court’s own estimates place the amount that Bragg would likely
have to advance at $8,625, but they could reach as high as
$13,687.50. Any of these figures are significantly greater than
the costs that Bragg bears by filing his action in a state or
federal court. Accordingly, the arbitration costs and feesplitting
scheme together also support a finding of
unconscionability.
(iii) Venue
The TOS also require that any arbitration take place in
San Francisco, California. TOS ¶ 13. In Comb, the Court found
that a similar forum selection clause supported a finding of
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substantive unconscionability, because the place in which
arbitration was to occur was unreasonable, taking into account
“the respective circumstances of the parties.” 218 F. Supp. 2d
at 1177. As in Comb, the record in this case shows that Linden
serves millions of customers across the United States and that
the average transaction through or with Second Life involves a
relatively small amount. See id. In such circumstances,
California law dictates that it is not “reasonable for individual
consumers from throughout the country to travel to one locale to
arbitrate claims involving such minimal sums.” Id. Indeed,
“[l]imiting venue to [Linden’s] backyard appears to be yet one
more means by which the arbitration clause serves to shield
[Linden] from liability instead of providing a neutral forum in
which to arbitrate disputes.” Id.
(iv) Confidentiality Provision
Arbitration before the ICC, pursuant to the TOS, must
be kept confidential pursuant to the ICC rules. See ICC Rules at
33. Applying California law to an arbitration provision, the
Ninth Circuit held that such confidentiality supports a finding
that an arbitration clause was substantively unconscionable.
Ting, 319 F.3d at 1152. The Ninth Circuit reasoned that if the
company succeeds in imposing a gag order on arbitration
proceedings, it places itself in a far superior legal posture by
-39-
ensuring that none of its potential opponents have access to
precedent while, at the same time, the company accumulates a
wealth of knowledge on how to negotiate the terms of its own
unilaterally crafted contract. Id. The unavailability of
arbitral decisions could also prevent potential plaintiffs from
obtaining the information needed to build a case of intentional
misconduct against a company. See id.
This does not mean that confidentiality provisions in
an arbitration scheme or agreement are, in every instance, per se
unconscionable under California law. See Mercuro v. Superior
Court, 116 Cal. Rptr.2d 671, 679 (Ct. App.2002) (“While [the
California] Supreme Court has taken notice of the ‘repeat player
effect,’ the court has never declared this factor renders the
arbitration agreement unconscionable per se.”) (citations
omitted). Here, however, taken together with other provisions of
the TOS, the confidentiality provision gives rise for concern of
the conscionability of the arbitration clause. See also
O’Melveny & Myers, __ F.3d __, 2007 WL 1394530, at *11 (“The
concern is not with confidentiality itself but, rather, with the
scope of the language of the [arbitration agreement.]”).
Thus, the confidentiality of the arbitration scheme
that Linden imposed also supports a finding that the arbitration
clause is unconscionable.
-40-
(v) Legitimate Business Realities
Under California law, a contract may provide a “margin
of safety” that provides the party with superior bargaining
strength protection for which it has a legitimate commercial
need. “However, unless the ‘business realities’ that create the
special need for such an advantage are explained in the contract
itself, . . . it must be factually established.” Stirlen v.
Supercuts, Inc., 60 Cal. Rptr. 2d 138, 148 (Ct. App. 1997). When
a contract is alleged to be unconscionable, “the parties shall be
afforded a reasonable opportunity to present evidence as to its
commercial setting, purpose, and effect to aid the court in
making the determination.” Cal. Civ. Code § 1670.5. The
statutory scheme reflects “legislative recognition that a claim
of unconscionability often cannot be determined merely by
examining the face of the contract, but will require inquiry into
its setting, purpose, and effect.” Stirlen, 60 Cal. Rptr. 2d at
148 (citations and internal quotations omitted).
Here, neither in its briefing nor at oral argument did
Linden even attempt to offer evidence that “business realities”
justify the one-sidedness of the dispute resolution scheme that
the TOS constructs in Linden’s favor.
(c) Conclusion
When a dispute arises in Second Life, Linden is not
-41-
obligated to initiate arbitration. Rather, the TOS expressly
allow Linden, at its “sole discretion” and based on mere
“suspicion,” to unilaterally freeze a participant’s account,
refuse access to the virtual and real currency contained within
that account, and then confiscate the participant’s virtual
property and real estate. A participant wishing to resolve any
dispute, on the other hand, after having forfeited its interest
in Second Life, must then initiate arbitration in Linden’s place
of business. To initiate arbitration involves advancing fees to
pay for no less than three arbitrators at a cost far greater than
would be involved in litigating in the state or federal court
system. Moreover, under these circumstances, the confidentiality
of the proceedings helps ensure that arbitration itself is fought
on an uneven field by ensuring that, through the accumulation of
experience, Linden becomes an expert in litigating the terms of
the TOS, while plaintiffs remain novices without the benefit of
learning from past precedent.
Taken together, the lack of mutuality, the costs of
arbitration, the forum selection clause, and the confidentiality
provision that Linden unilaterally imposes through the TOS
demonstrate that the arbitration clause is not designed to
provide Second Life participants an effective means of resolving
disputes with Linden. Rather, it is a one-sided means which
tilts unfairly, in almost all situations, in Linden’s favor. As
Having determined that the arbitration provision is 21
unenforceable as an unconscionable agreement, the Court need not
determine whether the specific dispute in this case falls within
the scope of that agreement. The Court notes, however, that the
arbitration clause clearly exempts from its scope claims for
“injunctive relief.” See TOS ¶ 13. At the hearing on the motion
to compel arbitration, the Court asked whether Bragg wanted the
Court to decide the motion to compel arbitration, or allow
Plaintiff file an amended complaint seeking only injunctive
relief. See Tran. of 2/5/07 Hrg. at pp. 89-90, 108. He elected
to file an amended complaint. Id. Subsequently, however, he
filed supplemental briefing in support of his original complaint,
and after Defendants objected, filed a Proposed Amended Complaint
“[a]s promised.” Pl.s’ Suppl. Brf. in Opp. to Mot. to Compel at
12 (doc. no. 43). During a telephone conference on May 8, 2007,
however, Bragg finally clarified that he intended to stand on his
original complaint.
-42-
in Comb, through the use of an arbitration clause, Linden
“appears to be attempting to insulate itself contractually from
any meaningful challenge to its alleged practices.” 218 F. Supp.
2d at 1176.
The Court notes that the concerns with procedural
unconscionability are somewhat mitigated by Bragg’s being an
experienced attorney. However, “because the unilateral
modification clause renders the arbitration provision severely
one-sided in the substantive dimension, even moderate procedural
unconscionability renders the arbitration agreement
unenforceable.” Net Global Mktg., 2007 U.S. App. LEXIS 674, at
*9 (internal citations omitted).
Finding that the arbitration clause is procedurally and
substantively unconscionable, the Court will refuse to enforce
it.21
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2. “Bluelining” the Arbitration Agreement
Alternatively, Linden has offered to ameliorate the
one-sidedness of the TOS’s arbitration provision by suggesting
that Linden could waive the requirements for three arbitrators,
post the initial fees of arbitration, and agree to arbitrate in
Philadelphia instead of San Francisco. See Dfts.’ Sur-Reply Brf.
at 2-3 (doc. no. 2).
California law allows a court to “blueline” an
arbitration agreement to remove an element that renders it
substantively unconscionable. See Cal. Civ. Code § 1670.5(a)
(“If the court as a matter of law finds the contract or any
clause of the contract to have been unconscionable at the time it
was made the court may refuse to enforce the contract, or it may
enforce the remainder of the contract without the unconscionable
clause, or it may so limit the application of any unconscionable
clause as to avoid any unconscionable result.”). However, a
court is not obligated to blueline when an “arbitration provision
is so permeated by substantive unconscionability that it cannot
be cured by severance or any other action short of rewriting the
contract.” Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1293 (9th
Cir. 2006). Where an arbitration provision has “multiple defects
that indicate a systematic effort to impose arbitration on [the
plaintiff], not simply as an alternative to litigation, but as an
inferior forum that works to [the defendant’s] advantage,” and
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there simply is “no single provision [the court] can strike or
restrict in order to remove the unconscionable taint from the
agreement,” the court can simply refuse to enforce the
arbitration provision. Id. (citing Armendariz, 6 P.3d at 696).
The arbitration clause before the Court is simply not
one where a single term may be stricken to render the agreement
conscionable. “The unilateral modification ‘pervade[s]’ and
‘taint[s] with illegality’ the entire agreement to arbitrate,
[and] severance of terms within the arbitration clause would not
cure the problem. Net Global Mktg., 2007 U.S. App. LEXIS 674, at
*9 (quoting Circuit City, 279 F.3d at 895 (citations omitted));
see also Armendariz, 6 P.3d at 697 (“[M]ultiple defects indicate
a systematic effort to impose arbitration on an employee not
simply as an alternative to litigation, but as an inferior forum
that works to the employer’s advantage. . . . Because a court is
unable to cure this unconscionability through severance or
restriction, and is not permitted to cure it through reformation
and augmentation, it must void the entire agreement.”).
Davis, 2007 WL 1394530, at * 15 (refusing to rewrite arbitration
agreement that contained four substantiviely unconscionable or
void terms because “[t]hese provisions cannot be stricken or
excised without gutting the agreement”). Bluelining in this case
will require the redrafting of the agreement.
The Court declines to rewrite the agreement, at
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Linden’s request, to save an unconscionable arbitration provision
which Linden itself drafted and now seeks to enforce. Rather
than provide a reasonable alternative for dispute resolution,
this agreement compels a one-sided resolution of disputes between
the parties.
IV. CONCLUSION
For the reasons set forth above, the Court will deny
Rosedale’s motion to dismiss for lack of jurisdiction. The Court
will also deny Defendants’ motion to compel arbitration. An
appropriate order follows.
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IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
: CIVIL ACTION
MARC BRAGG, : NO. 06-4925
:
Plaintiff, ::
v. ::
LINDEN RESEARCH, INC. and :
PHILIP ROSEDALE, ::
Defendants. :
ORDER
AND NOW, this 30th day of May, 2007, it is hereby
ORDERED that defendant Philip Rosedale’s Motion to Dismiss for
Lack of Jurisdiction (doc. no. 2) and defendant Linden Research,
Inc.’s Motion to Compel Arbitration (doc. no. 3) are DENIED.
It is FURTHER ORDERED that Plaintiff’s Motion for Leave
to File Supplemental Briefs in Opposition to Defendants Motions
to Dismiss and to Compel Arbitration to Address Issues Raised by
the Court at Argument on February 5, 2007 (doc. no. 34) is DENIED
as moot.
AND IT IS SO ORDERED.
S/Eduardo C. Robreno
EDUARDO C. ROBRENO, J.