What are the limits of Terms of Service as a legal shield for a company?

Question

This question has a more specific flavor to it, but it's ultimately a general legal question that just uses some examples as illustration. Consider the following scenario. For simplicity, assume the jurisdiction is the US and/or EU.

1. I agree to the Terms of Service (TOS) in order to use a certain service offered by a company.
2. I use the service for a while.
3. I spend real money and buy something that I own, that the company manages or keeps for me.
4. Eventually, the company informs me that I have violated the TOS (for whatever reason they provide).
5. The company terminates my service permanently.
6. Anything of value that I own, that the company controls (as a consequence of me using the service), is no long accessible, and/or usable.
7. I ask for a refund of all the money I spent.
8. Company denies this because "you violated the TOS".

The is the typical situation for live-service style video games, where microtransactions are frequently used. People pay real money to own digital goods that are only useful within the game(s) that the company controls. If the company terminates the account, the user loses access to his digital goods. The company claims that it has no reason to refund anything to the user because the TOS were violated (something that is unilaterally decided by the company).

This has not actually happened to me. But recently I was (I'll say, incorrectly, and frivolously) warned for a TOS violation, and it got me thinking about the legality of these situations, and why there aren't more lawsuits. Are TOS so air-tight of a legal defense that no one bothers to sue? It seems to me that, despite the TOS being a contract that one "signs" (i.e. agrees to when making an account with any service), it can't be truly legal to make such a contract. The contract is essentially:

Here are our requirements for your participation (the TOS). At any time, we may unilaterally decide to stop serving you. If and when that happens, we may keep your money.

The decision of the company to stop serving a user is not in question. It may choose to terminate service any time it wants. The question here is whether they can make TOS that allows them to keep your assets even after termination of service.

If I imagine other services that manage money, physical property or other assets of value in the real world, this would never fly as TOS. For example:

• I sign up for a commodities broker's service, such as a gold broker, and agree to their TOS.
• I buy physical gold that the broker service holds for me and manages.
• At some point, the broker claims that I have violated its TOS and terminates my account.
• The broker keeps my gold, and tells me "Tough luck, the TOS said we could".

Obviously, this would never be considered valid TOS. It would inherently violate the very idea of property rights. Not all contracts are valid or legal just because both parties sign them. The phrase "You cannot sign away your fundamental rights" comes to mind. In many places, the right to property is among the most sacred, and often listed along with the right to life and freedom of speech/expression. There is no legal TOS that I can sign where the company could kill or imprison me as a consequence of violating those TOS, for example.

Is it possible to challenge violations of Terms of Service by claiming that they were never legal? How often is this done? Why isn't this a more common challenge for modern services that manage real-money-valued digital assets? I'm not asking if TOS are contracts. I'm asking if they can be challenged, how often that is done, and perhaps, examples of TOS being proven to be illegal or invalid contracts.

Answer 1

TOS are contracts

By agreeing to the terms of service you are entering into a legally enforceable contract, just as binding as a contract for buying a car, taking out a mortgage, or buying a cup of coffee. The common law makes no distinction between contracts just because of their size.

Also, the law is that if you enter a contract, you know what you are doing. It is not the law’s job to help you just because you knowingly made a bad bargain.

Now, these contracts can be void or have unenforceable clauses for the same reasons that any other contract can. For example, the common law has long refused to enforce unconscionable terms. More recently, many jurisdictions have passed consumer protection laws which may further limit what is and what is not legal in a contract.

Refunds

You are only entitled to a refund if there has been total failure of consideration. That is, if the other party has done nothing they promised to do.

So, for example, if you paid for a skin and technical issues meant that you could never access it, you would be entitled to a refund. However, if you could have used it at all, even briefly, you have no legal claim for a refund.

Now, in the modern world, many businesses will offer refunds as a goodwill gesture or a business strategy even when these are not legally required. But that’s a business decision, not a legal one.

Ownership

Go and read the TOS, I’m really sure that they don’t give you ownership of anything - they give you a licence to use the virtual goods and services, not an ownership right. This is fundamentally different from your gold broker example where you do actually own the physical gold.

While not completely accurate, a licence is more like a rental agreement than a purchase agreement. Think Avis rather than Ford.

So, you don’t own your account, avatar, skins, etc., you have licence to use them as permitted by the TOS. If the TOS allow the supplier to revoke your Licence, then, providing they followed the TOS, you can’t use them anymore.

Answer 2

Terms of service may be challenged as any other contract might be. Ordinary contract principles apply. They are also often consumer contracts of adhesion, so they may draw special scrutiny for unfair terms.

For example, in Douez v. Facebook, Inc., 2017 SCC 33, the Supreme Court of Canada found that a forum-selection clause in Facebook's terms of use was unenforceable.

In Uber Technologies Inc. v. Heller, 2020 SCC 16, the Court found that a mandatory arbitration clause was unenforceable.

Answer 3

united-states

Here are our requirements for your participation (the TOS). At any time, we may unilaterally decide to stop serving you. If and when that happens, we may keep your money.

This is not a real contract. By which I mean, it does not afford valuable consideration, and would not be upheld by a judge as binding (with the literal meaning that you seem to intend). Under a totally literal reading of this text, the company may simply take your money and immediately tell you it has "decided to stop serving you," and purport to have discharged its obligation under the contract. Such a refusal, by itself, cannot be good consideration, and so if the contract is to be valid, it cannot allow that.

In practice, real video game contracts do not (always) look like this. Instead, let's take a look at the Steam Subscriber Agreement, a real contract that covers all video games distributed on Steam.

The contract is rather long, so I'm only going to quote the parts I consider relevant. Starting with this:

As a Subscriber you may obtain access to certain services, software and content available to Subscribers or purchase certain Hardware (as defined below) on Steam. The Steam client software and any other software, content, and updates you download or access via Steam, including but not limited to Valve or third-party video games and in-game content, software associated with Hardware and any virtual items you trade, sell or purchase in a Steam Subscription Marketplace are referred to in this Agreement as "Content and Services;" the rights to access and/or use any Content and Services accessible through Steam are referred to in this Agreement as "Subscriptions."

This is basically just defining some language. The term we're going to focus on is "Subscriptions." As the contract says, a "Subscription" is an umbrella term referring to the right to use any individual digital good or service through Steam, regardless of whether (e.g.) you're paying an ongoing fee to use it, and regardless of how you acquired that digital good or service. For example, every time you buy a game on Steam, this contract says that you have bought a "Subscription" to that game. I want to ensure that this terminology is clear, because it is used throughout the rest of the agreement, and so it is important to understand precisely what it entails.

Steam and your Subscription(s) require the download and installation of Content and Services onto your computer. Valve hereby grants, and you accept, a non-exclusive license and right, to use the Content and Services for your personal, non-commercial use (except where commercial use is expressly allowed herein or in the applicable Subscription Terms). This license ends upon termination of (a) this Agreement or (b) a Subscription that includes the license. The Content and Services are licensed, not sold. Your license confers no title or ownership in the Content and Services. To make use of the Content and Services, you must have a Steam Account and you may be required to be running the Steam client and maintaining a connection to the Internet.

This is possibly the most complicated part of the contract (that we will be looking at), but it is very important, because it is the heart of the whole agreement. In short:

0. Games ("Content and Services") need to be installed onto your computer to work.
1. Valve gives you permission (a "license") to install games, but only for personal and non-commercial use.
2. This permission ends when one of two things happens: Either your account is closed (for whatever reason), or the individual Subscription is terminated.

Item (1) is good and valuable consideration, unless some other provision of the contract gives Valve the right to unilaterally rescind it for no reason. But there is no such provision in the contract, except possibly for the following:

Valve may restrict or cancel your Account or any particular Subscription(s) at any time in the event that (a) Valve ceases providing such Subscriptions to similarly situated Subscribers generally, or (b) you breach any terms of this Agreement (including any Subscription Terms or Rules of Use). In the event that your Account or a particular Subscription is restricted or terminated or cancelled by Valve for a violation of this Agreement or improper or illegal activity, no refund, including of any Subscription fees or of any unused funds in your Steam Wallet, will be granted.

This provision allows Valve the right to terminate either the whole agreement or particular Subscriptions, if it "ceases providing such Subscriptions to similarly situated Subscribers generally," which would either imply that the game in question has been pulled from the store, or that Steam as a whole is shutting down.

But it is striking that the "no refund" provision only applies in cases where you violate the terms of the agreement. They could easily have said that there would be no refund in any event, but the contract is explicitly worded to avoid denying refunds in the event of mass unilateral cancellation by Valve. Nevertheless, Valve has taken the position that a refund is not obligatory in at least one instance of an individual game being pulled, according to an inherently impossible-to-confirm report on the Steam forums.

As far as I can tell, Valve has only ever pulled games from users' libraries in cases where the game was no longer functional, usually as a result of the developer ceasing to operate online servers that were required for the game to work. Such games, as a rule, will have their own separate EULAs (which the Steam Agreement explicitly provides for), and so determining exactly who (if anyone) may owe the user a refund in this case is complicated and game-specific. In general, the developer may be able to reasonably argue that it made a good-faith effort to provide the service for as long as commercially practicable, and that this period was long enough to constitute good and valuable consideration in practice. Valve, on the other hand, can probably argue impossibility or impracticability, since they do not operate these servers and have no practical ability to fix the problem.

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So let's look at one of those individual agreements. I did find an EULA that has a unilateral termination right:

The EULA is effective from the earlier of the date You purchase, download or use the Product, until terminated according to its terms. You and UBISOFT (or its licensors) may terminate this EULA, at any time, for any reason. Termination by UBISOFT will be effective upon (a) notice to You or (b) termination of Your UBISOFT Account (if any) or (c) at the time of UBISOFT’s decision to discontinue offering and/or supporting the Product. This EULA will terminate automatically if You fail to comply with any of the terms and conditions of this EULA. Upon termination for any reason, You must immediately uninstall the Product and destroy all copies of the Product in Your possession.

For the reasons I explained above, I am skeptical that this contract offers the user good and valuable consideration if read completely literally. However, it likely does not matter, because this EULA also has a severability clause. If a court (or arbitrator) did find a problem with this provision, it would be severed from the agreement. In practice, this probably does not matter, because an entirely different provision of the agreement prohibits a broad range of "bad behavior" that an end user might plausibly engage in, and so in any real dispute, Ubisoft would likely have an independent basis for terminating the agreement anyway.

Another possible outcome is that a court (or arbitrator) would try to reconcile this provision with the implied covenant of good faith and fair dealing, and construe it to apply only to situations where Ubisoft has a good faith basis for terminating someone's account (e.g. because the user is doing something that is potentially harmful to the service or to other users). That too would fix the problem, and would probably be less invasive than full-blown severance of the provision. But it would also create a gray area around account terminations, and I imagine that Ubisoft's lawyers would not be thrilled with that outcome.

Answer 4

In the EU, those terms of service may well be invalid under the Unfair Contract Terms Directive, though it would take a court (ultimately the ECJ) to rule on any specific scenario.

Contract terms are unfair and, therefore, not binding on consumers if, contrary to the requirements of good faith, they cause significant imbalance in the parties’ rights and obligations to the detriment of the consumer.

It seems to me, a non-lawyer, that terms allowing the company to reclaim its content at any time even in the absence of significant wrongdoing, without counter-balancing terms allowing you to reclaim your money at any time, are unfairly biased against the consumer.

Answer 5

To address the other part of your question: Recall that (at least in the US) most TOS include a clause requiring binding arbitration for dispute resolution. That means almost any type of lawsuit would not be permitted. You don't hear about these types of disputes because arbitration generally requires an NDA, so participants are prohibited from talking about it. You'll never know how common or uncommon these types of disputes are, but it's safe to assume the success rates are extremely low because it's extremely unlikely for a customer to win an arbitration hearing. Few would even take the issue all the way to arbitration, because the costs of doing so tend to be higher than the value of the asset in dispute.