By, Clara Martin and David Oshinsky
Shaw Pittman LLP
we go again. Thanks to a recent appellate court decision, the
enforceability of shrinkwrap licenses-and of their electronic
and online counterparts, so-called "click-wrap" and
"browse-wrap" licenses-is being questioned.
cause for the recent frenzy? Specht v. Netscape Communications Corp.
A Second Circuit appeals court decided this case in October 2002,
upholding a lower court's refusal to enforce an arbitration clause.
The clause in question had been included in a license agreement
for a Netscape "plug-in" application (called "SmartDownload"),
which worked with Netscape's Communicator web browser.
court's ruling serves as a cautionary note to software developers
and Web site operators who don't want to require users to take extra
steps prior to accessing or using software or Web sites. The message
is that if you fail to require users to review and agree to license
providing SmartDownload, Netscape did not require its users specifically
to read and agree to the terms of the applicable license agreement.
License terms were available for review, but users had to scroll
down below the "download" button and click on a hyperlink
in order to read the terms. In addition, at no time were users actually
obligated to indicate their agreement to those terms.
argued that the act of downloading the software signaled a user's
agreement, but the court disagreed: "clicking on a download
button does not communicate assent to contractual terms if the offer
[to enter into the license agreement] did not make clear to the
consumer that clicking on the download button would signify assent
to those terms."
its face, the court's refusal to enforce terms of a click-wrap agreement
seems to run contrary to the majority of cases that have considered
the enforceability of agreements of this type, tracing back to a
1996 case called ProCD, Inc. v. Zeidenberg. ProCD was an early test
case, upholding the enforceability of "shrinkwrap" license
agreements (so termed because they came packaged inside the plastic
packaging-or "shrinkwrap"-of a box of software). Because
a software user did not have the opportunity to review and accept
these license agreements before opening (and, thus, before purchasing)
the software packages, many had questioned the legal enforceability
of these agreements.
federal appeals court in the ProCD case held that a shrinkwrap license
is enforceable, provided that: 1) customers have an opportunity
to review the terms of the license before making a final decision
regarding use of the software, and 2) the license contains no terms
that are objectionable (or "unconscionable"). A consumer
signaled his or her agreement to the terms of the license by installing
and using the software. The court did not require evidence that
the consumer actually read the entire license, only that they had
an opportunity to review it.
the mid 1990s, when the ProCD case was decided, the Internet and
the World Wide Web have changed how consumers purchase software.
More and more, online purchasing and delivery via download is used
in place of packaged software products. This shift raises new questions
about licenses that appear electronically in dialog boxes, rather
than on paper in cardboard boxes.
the transition from paper to electrons, courts have continued to
enforce click-wrap licenses, provided that they meet the requirements
outlined in the ProCD case. Legally, the Specht case has not changed
the law or told us anything we didn't already know. The criteria
highlighted in the ProCD case -opportunity to review and reasonableness
of terms-continue to apply, and parties to a contract must still
affirmatively indicate their agreement. Practically, however, the
Specht case suggests that it is time to re-evaluate certain online
behaviors that have become commonplace in the world of Internet
the wake of the initial district court decision in the Specht case,
an American Bar Association working group convened to assess strategies
for creating enforceable click-wrap agreements, ultimately recommending
the following six principles as guidance in the structuring and
implementation of online agreements:
Users should have easy, automatic access to the terms of the agreement,
as well as a subsequent opportunity to review the terms;
2. Terms should be displayed in a way that complies with applicable
laws on format and content, such as laws that apply to notice,
disclosure and conspicuousness;
3. Users should be required to assent to terms, and should be
informed of the consequences of clicking on the "I AGREE"
4. Users should be given a clear means by which they can reject
the proposed terms, and should be informed of the consequences
of rejecting the agreement terms;
5. The agreement process should include a method for users to
avoid, or to detect and correct, errors likely to be made by the
6. Users should be able to print out a version of the agreement
terms, and software vendors should have a method for preserving
records of the terms and of the manner in which users indicated
assent to those terms.
single, "right" way exists to implement these principles,
and the particular manner of implementation will likely vary depending
upon the type of product offered and the means by which that product
is provided to users. In addition, these principles do not address
the substance of click-through agreements, and companies should
keep in mind that courts may reject any terms that they deem "unreasonable"
or "unconscionable." The question of what is reasonable
depends on the facts and circumstances of each licensing transaction,
and clear standards have yet to emerge. In fact, courts that have
been asked to answer this question have not been consistent in their
Earlier this year, two federal courts reached seemingly opposite
results when evaluating similar clauses in the context of click-wrap
agreements. In California, a federal district court refused to enforce
a click-wrap agreement governing online payment services offered
by PayPal, Inc., finding two "unreasonable" aspects of
the agreement. First, the court criticized a provision that required
all disputes with the company be submitted to binding, individual
arbitration. Second, the court objected to a forum selection clause
that required arbitration take place in Santa Clara, California.
did the court find these clauses unreasonable? Simply put, the expense
of complying with either of these clauses effectively left those
consumers who had simple, small-dollar-amount disputes with no remedy.
In most instances, when a large number of consumers have small dollar
claims, the claims are aggregated and handled through class action
litigation. PayPal's requirement that complaints be handled through
arbitration entirely eliminated the possibility for class action
suits. In addition, the forum selection clause requiring consumers
fly to Santa Clara to have cases heard further eliminated the likelihood
that someone with a small claim could get the matter resolved.
the court found these two elements unreasonable, they refused to
enforce the entire agreement. The court denied PayPal's attempt
to compel binding arbitration and allowed a class action lawsuit
contrast, in a case decided in the same week, a Washington, D.C.
appeals court upheld a forum selection clause included in a click-wrap
agreement for high-speed Internet service offered by Verizon Communications.
The clause provided that subscribers to Verizon's Internet service
"consent to the exclusive personal jurisdiction of and venue
in a court of competent jurisdiction located in Fairfax County,
Virginia." The court held that it would not be unreasonable
to require consumers to bring suit against Verizon in Virginia,
even though it would entail travel to Virginia and require the consumer
forgo the right to a class action lawsuit since the state does not
permit them. The court was not persuaded by the plaintiff's argument
that a class action would be the only practical remedy for the type
of claim he was pursuing, given the relatively small dollar amount
this question of what is "reasonable" continues to be
debated, companies should consider whether their click-wrap agreements
contain any terms that could be considered surprising or unfair
by the average software consumer. Such terms include arbitration
clauses, forum selection clauses, and limitations on liability for
damages. (Although it is worth noting that many courts have considered
and upheld these types of terms in click-wrap agreements.)
increase the likelihood that click-wrap agreements survive enforcement
challenges, companies are advised to create click-wrap licenses
that follow the American Bar Association principles. Agreements
structured in accordance with the ABA's principles have the following
terms and conditions of the contract are prominently displayed
and easily reviewed-ideally, with an option for the user to review
a printable version of the contract.
for "I AGREE" and "I DO NOT AGREE" are placed
at the end of the terms and conditions, together with statements
indicating (1) the effect of clicking on "I AGREE" (e.g.,
"These terms will form a binding legal contract between us
as soon as you click the 'I AGREE' button."), and (2) the
effect of clicking on "I DON'T AGREE" (e.g., "If
you do not agree to accept these terms, click 'I DO NOT AGREE'
below, and you will not be permitted to install or use this software.").
users are presented with choices, or are asked to enter any information
in connection with their agreement to the contract, they are asked
to review those choices or that information via a confirmation
screen. It is important that customers have a chance to correct
any errors before confirming their agreement to the contract.
the Specht case confirms what we've known all along about contracts-that
parties need to be informed of all contract terms and must affirmatively
indicate their agreement to those terms. The Specht case therefore
suggests that, in addition to software click-wrap agreements, Web
site owners and developers should consider the viability and enforceability
of "click-free" agreements such as Web site terms of service
in which users are expected to review terms on their own and are
not typically required to indicate their assent to any terms. Instead,
users are told that their continued use of a Web site or software
product signals their agreement to all of the terms and conditions
contained in the terms of service or agreement update, which is
sometimes made available to be viewed by following a hyperlink.
companies that update or revise their license agreements simply
by posting a notice to their Web sites should consider instead obtaining
users' specific agreement to the revised terms.
the Specht case as a precedent, simple agreement-by-use conditions
may no longer be sufficient to bind users. If Web site operators
are serious about enforcing terms of service, and if software companies
want better assurance that users will be bound by updated license
terms, it would be wise to actually present the terms to users and
require consent to the terms. In the case of Web sites, this should
be done before permitting a user access to the Web site. While such
measures may cause some unwanted technical hassles, a little technical
hassle could go a long way toward preventing unwanted legal exposure.
Martin and David Oshinsky practice in the areas of corporate, licensing,
technology and Internet law with Shaw Pittman LLP. Their clients
include organizations in the entertainment, software, hardware,
telecommunications, wireless and interactive game industries.