The Need to Reform Abusive Contracts For Internet Connected Toys.

AuthorKoenig, Thomas H.

"Imagine a profoundly unfair legal world in which businesses redirect consumer lawsuits away from state and federal courts into secret tribunals, in which a privately hired judge decides cases without precedents and with only limited grounds for an appeal. Under secretive forced arbitration, the social media service determines the arbitral provider and selects the rules that govern disputes with consumers. Visualize further that social media providers place legally binding terms of use ... "agreements" that are seldom, if ever, read. Even if they are read, the [terms of use] are composed of unnecessarily complex terminology, which is drafted at the comprehension level of a typical college graduate. In this dystopian legal world, users are required to waive their constitutional right to a jury trial, the right of liberal discovery, and the right of appeal by agreeing to 'take-it-or-leave it' terms of use.

This is not a law professor's far-fetched hypothetical. This legal dystopia is already here." (1)


    Online consumers commonly acquiesce to mandatory arbitration clauses, "anti-class action waivers, damage caps, shortened statutes of limitations, 'loser pays' rules, and choice-of-forum clauses that are buried thousands of words deep in poorly indexed boilerplate." (2) For example, "a growing number of social media platforms contain predispute mandatory arbitration clauses specifying that hearings be conducted in the provider's home forum, which shifts the cost of air travel, hotels, and other expenses onto the consumer." (3) The great majority of social media providers draft one-sided contract terms that give the stronger party "the right to unilaterally change or modify the rules of the game 'at any time without further notice.'" (4) Such oppressive contractual clauses historically have been enforced in the United States. (5)

    In this Article, I look at the newest frontier in unfair contract terms: the Internet of Connected Toys (IoCT). This new world is where the intersection of contract law, cloud computing, and the Internet of Things (IoT) intersect. Internet connected devices gather, process, store, and transfer data to the cloud. That data is then accessible anywhere and everywhere so that connected device manufacterers can efficiently commodify it. The functionality of a smart toy is dependent upon this process of constantly monitoring, processing, harvesting, and sharing personally identifiable information.

    Part II introduces the rapidly expanding use of Internet-connected "smart" devices and the imbalanced clauses commonly included in IoT standard form contracts. (6) These pro-provider terms of use (ToU) are "take it or leave it" contracts that are presented to the user without any possibility of negotiation. (7) ToU are often difficult to read and contain multiple clauses that foreclose consumer rights. Mandatory predispute arbitration and anticlass action clauses make it cost prohibitive to seek a remedy against the smart toy provider should its product's negligent design cause harm to the user. In many cases, U.S. courts enforce ToU that purport to bind users who have merely visited the website. (8)

    Part III critically examines the standard form contracts of five leading Internet-connected toys in the U.S. marketplace. (9) With respect to European Union law, the contracts of these five toys illustrate the widespread "non- transparent and illegal terms and conditions" that characterize this industry. (10) These one-sided ToU are generally enforceable in the United States, but they are particularly problematic because the toys are marketed to children, who have a limited awareness of the risks involved. IoCT contract terms violate many of the consumer due process principles promulgated by the leading arbitral provider, JAMS (formerly known as Judicial Arbitration and Mediation Services, Inc.). (11) Congress and state legislatures need to enact statutes that give consumers and small businesses a minimum adequate remedy in the event of breach.

  2. THE IoCT

    1. What is the IoT?

      The IoT is defined as "the network of physical objects that contain embedded technology to communicate and sense or interact with their internal states or the external environment." (12) IoT devices "connect 'things' like phones, appliances, machinery, and cars to the Internet; share and analyze the data generated by these things; and extract meaningful and actionable insights." (13) These digital products communicate and interact with the environment and other online devices. (14) Internet connections permit the creation of "interdependences between products, gathered or generated data[,] and service providers." (15)

      The IoT is expanding exponentially, with the number of IoT devices already outnumbering the world's population. (16) Manufacturing operation investments in IoT totaled $102.5 billion in 2016. (17) Manufacturers are deploying IoT "to optimize their processes, monitor equipment, and do preventative and predictive maintenance on that equipment." (18) Internet-enabled cameras, baby monitors, thermostats, health-monitoring bracelets, and security devices increasingly record, send, and receive data. Smart refrigerators, driver assisting vehicles, and other complex products are expected to become commonplace in the foreseeable future.

      A House of Representatives Committee cited an empirical study that concluded:

      IoT has "a total potential economic impact of $3.9 trillion to $11.1 trillion a year by 2025." Further, by 2025, IoT is projected to create $1.1 trillion to $2.5 trillion in value annually in the health sector; $.9 trillion to $2.3 trillion in value annually in manufacturing; $100 billion to $300 billion in value in urban infrastructure; approximately $100 billion in value in agriculture; and approximately $50 billion in value in vehicle use. (19) Extensive consumer, economic and societal benefits are expected from this rapid technological advance. (20) For example, self-driving cars have the potential of sharply reducing the epidemic of automobile accident deaths. (21) IoT is transforming the health care sector as providers increase their ability to monitor millions of patients remotely. (22) The utilities sector uses IoT as the backbone of its Smart Grid for electricity and gas in both the United States and several European countries. (23) Internet-connected toys are beginning to revolutionize children's playthings, which is raising security concerns. (24)

    2. IoT Devices Continuously Gather, Store, and Share Information in the Cloud

      The term "cloud" is an imperfect metaphor used to describe remote storage of software applications, tools, and data accessed via the Internet. (25) Despite the image that services and software are stored in some nebulous location in the sky, cloud computing always has a physical location. (26) The National Institute of Standards and Technology (NIST) defines cloud computing as a "model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction." (27) For example, consumers use cloud computing whenever they post to a social media site or save data to Dropbox, Microsoft OneDrive, or Google Drive. Cloud computing refers to "a category of sophisticated on-demand computing services," (28) including Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS), and related agreements. (29) IBM's Cloud Data Service, for example, provides "a hybrid, open source-based approach that application developers, data scientists and IT architects use to address [their] data-intensive needs and deliver both immediate and longer-term benefits." (30) Amazon, Apple, Google, Rackspace, and Microsoft are leading companies in the business of renting cloud computing and storage. (31) Cloud computing is replacing the use of stand-alone servers. (32) Users praise the wide variety of benefits created by contracting with a cloud storage provider rather than maintaining their individual computing systems. (33) Cloud computing was prefigured by providers that offered companies "common data processing tasks, such as payroll automation, operated time-shared mainframes as utilities which could serve dozens of applications and often operated close to 100% of their capacity." (34) It is comparable to "plugging an electric appliance into an outlet," as "we care neither how electric power is generated nor how it gets to that outlet." (35) IoT is not limited to cars and appliances--the toys of adults and Internet-connected children's toys now make extensive use of cloud technology. (36)

    3. IoCT

      The IoCT, which consists of online "smart" toys, is still in its infancy. This term refers to a future where toys not only relate to children but are wirelessly connected to each other. (37) "Smart" toys offer new experiences for children consisting of online, connected play. (38) "They also promise educational benefits: from literacy and numeracy skills to digital literacies and coding skills. Further opportunities include collaborative play, creative and rational thinking, and specific knowledge gains such as 3D printing." (39)

      "Existing toy companies and start-ups are eagerly innovating in this area, as this could become the largest market for them with increasing number of customers." (40) The smart toy market includes a diverse typology of playthings, including: toys based on voice or image recognition (e.g., Hello Barbie or the Hatchimals); app-enabled robots, drones, and other mechanical toys (e.g., Dash and Dot); toys-to-life, which connect action figures to video games (e.g., Skylanders or Lego Dimensions); puzzle and building games (e.g., Lego Fusion). (41) Other popular smart toys include "Talk-to-Me Mikey, SmartToy Monkey, and Kidizoon Smartwatch DX...

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