By Trey Wassdorf, a Judge K.K. Legett Fellow at Washington Legal Foundation in the summer of 2016 who is currently a third-year student at Texas Tech University School of Law.
Recently, online video-on-demand service Hulu decided to migrate from a business model that had provided either a free ad-supported service or a subscription-based premium service. The new service is a bit complicated; there will be a $7.99 per month ad-supported service, an $11.99 per month ad-free service, and users will still be able to watch some Hulu content for free through their distribution partners, most notably Yahoo’s new Yahoo View. Hulu will also offer customers that currently use its free service a 30-day free trial to the subscription service.
Hulu’s decision is one that many digitally-based businesses, especially developers of mobile-device applications, are making. They accept that some users won’t be thrilled with having to pay for what they previously got gratis, but it’s unlikely that many businesses have contemplated the threat of litigation when making such a move. Recent litigation against app developer LogMeIn, however, should act as a wake-up call to digital businesses large and small.
LogMeIn offers app purchasers the ability to remotely access a separate computer from a computer on which the app is installed. The company offered both a free app, LogMeIn Free, and a $29.99 app called Ignition. In 2014 users were notified that LogMeIn would be migrating to a subscription-based model that offered some additional features. In order to ease the transition, the company offered a free six-month subscription to the new service and continued to support Ignition until it was discontinued later.
The move inspired a class-action lawsuit filed in the Eastern District of California: Handy v. LogMeIn, Inc. Plaintiffs brought suit under California’s False Advertising Law and Unfair Competition Law claiming that: 1) LogMeIn misled and failed to notify users that the product could be discontinued; and 2) LogMeIn led users to believe that the apps were companion services and failed to inform them that discontinuation of one would make the other less valuable.
On January 27, 2016, Magistrate Judge Jennifer Thurston granted LogMeIn’s motion for summary judgment. Two months later, rather than appeal the ruling, Handy and LogMeIn stipulated to dismissal of the case with prejudice to the named plaintiffs, but without prejudice to the class members. Thus far, no other purported class member has taken up Handy’s grievance against the company.
In her January 27 decision, Magistrate Judge Thurston explained why Handy could not state a claim for relief under either state law. It was “unclear,” she stated, how LogMeIn could have misled Handy with a statement, provided twice to users in a one-month span, that current Ignition subscribers would receive a six-month free trial and could use it after that for as long as the company maintained Ignition. In fact, Handy continued to use Ignition and was not “tricked” into buying a subscription. The court also concluded that LogMeIn’s migration of users to a monthly subscription plan did not constitute false advertising. With reference to LogMeIn’s terms of service, to which every purchaser must agree before being able to use the app, Magistrate Judge Thurston noted that the defendant was not contractually obligated to provide any notice. Finally, Handy failed to show that the “free” and “Ignition” apps were “companion services,” having used the free app for a year before purchasing Ignition and using that app for a year after the free app was discontinued.
While ultimately dismissed, the Handy suit highlights the dangers faced by app developers in bringing their products to market and maintaining relevance in today’s fast-paced marketplace. Many apps are developed by very small companies or several individuals sitting around a computer who identify a problem and design an app to solve it. Such entrepreneurs likely cannot afford to hire high-priced defense counsel to fight off consumer class actions.
One strong defense mechanism that app developers do have, however, is their products’ end user license agreement (EULA). LogMeIn’s EULA played a prominent role in defeating Handy’s suit. The company not only complied with its duties under the agreement, but went beyond what was required by providing numerous notices of its plan change to users. Even if it had not offered such notice, LogMeIn likely would have prevailed in the suit due to its EULA. Magistrate Judge Thurston wrote, “The failure of a consumer to read the terms and conditions before accepting them is insufficient to avoid the contract.” She added, “where users must affirmatively agree to the terms as a condition of using the product, courts routinely enforce the agreement.” As noted previously, LogMeIn’s EULA required users to agree to its terms before first launch of the app.
The “App Economy” has grown at an astonishing pace. Sales have risen by $141 billion in the last eight years. Regretfully, in the US, where revenues rise, the plaintiffs’ bar follows close behind, looking for opportunities to siphon off hard-earned profits. The Hardy case demonstrates that an app developer can draft a solid EULA agreement, not only comply with, but exceed the terms of that agreement, and still be sued when it alters its business model. Judges should dismiss any future suits as forcefully as did Magistrate Judge Thurston.
When app makers decide they want to change their pricing practices, there should not be a lawsuit for that.