Thursday, March 14, 2013

Legal Analysis on Killing Internet Services

On the Internet, many services appear and fade away everyday. For example, the recent killing of Google's Reader service caused controversy. Also, in Japan, many terminations of Internet services have been rigorously debated. For example, when Rakuten started focusing on Kobo, it closed down the eBookstore it had been managing  called Raboo. This means that the users of Raboo who downloaded books can lose everything if the disk breaks or somehow the data in the local drive is lost (Had the service continued, the users would have been able to download the same book again for nothing in such a case.). Although Rakuten made some mitigation effort such as offering a 10% discount for Kobo store, some people criticized Rakuten's conduct.

What should the companies think of when terminating their services? I believe that there are three issues.

First, they should consider whether the service is an accumulation of a one time contract or a continuous contract. A typical example of the former is a brick-and-mortor bookstore. Closing down one of the branches would not cause many legal problems with customers. But if the service is based on a continuous contract, such as an Internet connection service contract, it is more problematic than the former case. Although some Internet services are located somewhere in the middle, this approach can work as a starting point of the analysis.

Second, companies should check their terms of service. If the terms enable the company to unilaterally end the service, the company has a stronger case. However, in BtoC contract, the Consumer Contract Act is applicable and the terms unilaterally impairing the interests of consumers can be nullified by the court. Article 10. Especially in the case of a pay-for service (not free), although it depends on case-by-case analysis, the court might nullify the unilateral termination clause, or only validate it when the company has reasonable grounds for termination. Also, although there is no Japanese precedent, it should be noted that click-wrap terms of service are more likely to be enforceable than browse-wrap. 

Third, companies should consider mitigation efforts. Although there are no precedents in the context of Internet service, the courts rely on mitigation efforts of firms when they deny users' claims for compensation for damage because of unilateral termination of services (See. e.g., an unreported court opinion of Tokyo District Court on May 31, 2005.) The mitigation efforts can be recommending alternative services, monetary compensation, and/or taking a reasonable notice period before termination. The mitigation efforts are not only legally important but also they will protect the company's reputation, especially if the companies want to continue their prospering service and shut down only services in the red.

Although the legal analysis should be conducted on a case-by-case basis, I understand both the ever-changing nature of Internet services and "expectation" (Note that by saying "expectation", I am not focusing on whether it is legally protected or not, but rather focusing on the intuitive expectation users would have. ) of users on their favorite service and thus the balance between the two would be very important.

DISCLAIMER: "IT Law issues in Japan" only provides general information about Japanese information technology law and does not, under any circumstances, constitute legal advice. You should first obtain the advice of professional legal counsel who is qualified in Japan before acting or refraining from acting based on this blog.

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