Specifically, when information is posted in a public area, "in connection with the operation of [Microsoft and its affiliates and sub-licensees] Internet business." That sounds like a whole different kettle of fish, but we're sure we could find lawyers to argue that Passport conditions apply to Hotmail - since Passport is the authentication mechanism for Hotmail - and that email can be construed as public.
Of course neither of these is a sensible position - but that hasn't prevented bad law being made - as the US DMCA Act and the British RIP Act demonstrate.
Passport to hell
We've had letters from Hotmail users ranging from IT consultants to Hollywood screenwriters vowing never to use the service again. (We'll post a selection shortly). And some websites are reciprocating Microsoft's Passport terms, by beginning to block Hotmail email too. Steve Litt of Troubleshooters.com revised his own terms to block Passport services. Moongroup simply blocks incoming postings from Hotmail, MSN, or Microsoft itself.