Consumers ignore new Microsoft policy, sue company over Xbox Live

Microsoft (s msft) this year joined a growing number of companies that forbid users from filing class action lawsuits. The new policy, however, has failed to stop at least one disgruntled Xbox user.

In a complaint filed in Seattle, Ann Talyancich claims that Microsoft wrongfully banned her from Xbox LIVE, a service that lets players interact online. She also says the company confiscated Microsoft credits she had bought. She wants to use the lawsuit to represent every other Xbox user in the same position.

Microsoft has long reserved the right to ban Xbox consoles that violate its terms of services by, say, playing pirated content or using unauthorized software. Talyancich says she was kicked off the service because she used an independent repairman to fix a broken DVD drive on the device. Banned users (there are reportedly at least 1 million) are excluded not only from Xbox’s free LIVE service but also lose any money they have spent for a premium version of LIVE or on “credits.”

The case raises interesting questions about how much companies should be allowed to use terms of service to control how users interact with their machines. But it could also be an important test of the “no class action” policies that are springing up all over.

Companies like Microsoft hate class actions because they let opportunistic lawyers demand millions of dollars over what are often trivial offenses. Defenders of the class action system say it is the only way that consumers can fight back when a company gouges them for a relatively small amount of money.

To short-circuit the class action process, phone giant AT&T (s T) introduced clauses into their contracts several years ago that required consumers to address all complaints through arbitration. In a controversial decision last year, the Supreme Court found the phone contracts were legal even though they seemed to shut off the right to go to court. Since then, other companies, including Microsoft, have taken up AT&T’s strategy but with mixed success.

Last week, the publisher Penguin failed to exclude Amazon (s amzn) Kindle owners from a class action over e-book pricing (Penguin argued the Kindle’s terms of service forced them into arbitration.) And earlier this year, an important appeals court refused to let American Express use an arbitration clause to prevent small businesses from suing it over fees.

In the Xbox Live controversy, Microsoft will likely try to shut down the case by declaring that the Xbox owner doesn’t have the right to sue in the first place. Gadget owners may not be the only ones watching the outcome. In the future, as online platforms like Google (s goog) and Facebook (s fb) face a growing stack of class actions, the companies may also become tempted to introduce arbitration clauses of their own.

Update: A Microsoft spokesperson said the company does not plan to invoke the arbitration provision against Talyancich because the incident she describes occurred prior to Microsoft’s imposition of the arbitration clause in its terms of service.

Xbox Users v Microsoft

The Microsoft case was first reported by Law 360 (sub req’d).

(Image by Joyce Michaud via Shutterstock)