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Section 2 of the Federal Arbitration Act (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.S. § 2. Thus, generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2. 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.
This case was about virtual property maintained on a virtual world site on the Internet. The owner contended that the operators of the site unlawfully confiscated his virtual property and denied him access to their virtual world. The CEO for the operators of the site contended that the court lacked personal jurisdiction over him.
Should the motion to compel arbitration be granted?
The court determined that the CEO made representations in a national campaign to induce persons to visit the site and purchase virtual property, and that those actions constituted sufficient contacts to exercise specific personal jurisdiction over the CEO in this case. With respect to the operators' motion to compel arbitration, the court found that the site's arbitration provision could not be enforced on the basis that it was both procedurally and substantively unconscionable. The provision was buried in a take-it-or-leave-it set of terms presented to customers before they could participate on the site. The provision's lack of mutuality, the costs of arbitration, the forum selection clause, and the confidentiality provision demonstrated that the arbitration clause favored the site operators over the participants.