Legal Aspects on Clickwrap Licenses in USA
By Chen Jihong
Before the coming of information era, we have not realized the importance of information related transactions as today. The ease of reproduction of software makes the software companies worrying, how can they protect their huge investment in the research and development of a software program? The most important difference between software and physical property is that the holder of a copy of software can easily produce and distribute additional copies to other ones without any losing to his original copy. These information companies found that the clickwrap licenses were necessary to give them some protection.
Before clickwrap licenses, shrinkwrap licenses were broadly used by software manufacturers. Shrinkwrap agreements (or shrinkwrap licenses) are the terms and conditions of use that accompany software that is distributed in store. They usually begin with something like the following: “By opening this envelope, you are bound by the terms and conditions of the license.” Following the development of internet technology, more and more information related transactions are performed online. Clickwrap agreements (or clickwrap license) are a variation of “shinkwrap”. They are used when someone on the World Wide Web clicks “I accept” online to a website’s terms and conditions of use. The same term is used to describe a situation when a person clicks “I accept” to finish installing software.
When the software manufacturers applaud clickwrap license, the users, particularly the private end users express their dislike to such licenses. How many persons will read the whole clickwrap license before clicking to accept the license? Furthermore, one could argue that basic principles of contract law, including the requirement of offer and acceptance, equality of the parties, and lack of duress, are not present in a typical clickwrap transaction.
1 The Enforceability of a Clickwrap License
a) Formation of a clickwrap License. Based on the basic premises of American contract law, there are a few basic principles to be considered in the formation of a contract, which include 1) a contract require an offer and an acceptance; 2) the parties should have fairly equal power to negotiate terms, and 3) there should be no duress involved in a party’s assent to the contract.
For a mass-market product, such as personal computer application software it is impossible for the user and the buyer to have a chance to hold a negotiation face to face. At the same time, the manufacturer or vendor always hold a more powerful situation in such a transaction. “Take it or leave it”, the buyers have no more choice. Someone doubts the validity of a clickwrap on the ground that there is no “meeting of minds” in the transaction. Obviously, in many aspects, clickwrap license has deviated traditional contract.
But, more and more peoples are accepting such a notion that there is an offer and acceptance in the formation of a clickwrap contract. In ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (1996), the United States Court of Appeals for Seventh Circuit pointed out that “computer software shrinkwrap licenses are enforceable unless their terms are objectionable on the grounds applicable to contract in general.” Then, the judges, according to UCC 2-204(1) stated “A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kinds of conduct that constitutes acceptance. A buyer may accept by performing that acts the vendor proposes to treat as acceptance.” The defendant, Zeudenberg bought and used this software, he would accept the license by using the software after having an opportunity to read the license at leisure. UCC Section 2-606 defined the “acceptance of good”. A buyer accepts goods under section 2-206 (1) (b) when, after an opportunity to inspect, he fails to make an effective rejection under section 2-602 (1). It seems that a clickwrap license could be an enforceable contract if the buyer has opportunity to review and may reject if he does not satisfy these terms and conditions.
UCITA is an effort of NCCUSL to make a uniform law in information transaction. The UCITA section 59.1-502.9 is clause related to the formation and terms of mass-market license. Clickwrap license is a typical mass-market license. This clause stipulates that a party adopts the terms of a mass-market license only if the party agrees to the license. A term is not part of the license if the term is unconscionable, or conflicts with term expressly agreed, or is not available for viewing. A person manifests assent to a record or term if the person authenticate the record or term with intent to adopt or accept it, or intentionally engages in conduct or make statements with reason to know that the other party may infer the assents. See UCITA section 59.1-501.12.
According to section 59.1-502.8 of UCITA, a party adopts the terms of a record if the party agrees to the record. And the record will constitute a part of the contract. Further, the terms of a record may be adopted after beginning performance or use if the parties had reason to know that their agreement would be represented by a later record. If a party adopts the terms of a record, the terms become part of the contract without regard to the party’s knowledge or understanding of individual term in the record. Some ones thought that UCITA favors sellers of software. The section 59.1-502.8 is a significant example. It will encourage the seller to use obscure language in their licenses. How can we require a normal user hold the same professional knowledge as a seller?
A case brought by Netscape against Specht, who downloaded a free “plug-in” program from Netscape’s website reached a different result. There was a license agreement on the web page of Netscape’s website, but the reference of this license was far from the “Download” button and could only be found by scrolling down. Applying California law, the judge Hellerstein said, “Netscape’s failure to require users of SmartDownload to indicate assent to its license as precondition to downloading and using its software is fatal to its argument that a contract is formed.” There was no true assent, there was no agreement reached. Also there is a notice in the web page, which said “ Please review and agree to the terms of the Netscape SmartDownload software license agreement before downloading and using the software”, it was just “mere invitation” and there was no obligation or requirement for a user to agree to or even review the license before downloading and using the software. Judge Sotomayor of court of appeal said, “Reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assents to those terms by consumers is essential if electronic bargaining is to have integrity and credibility.” See Specht v. Netscape.
b) Clickwrap License as a Contract for Adhesion or Mass-Market License. Generally speaking, contracts for adhesion are legally enforceable. There is nothing wrong with a contract of adhesion. Most of the transactions of daily life involve such contracts that are drafted by one party and presented on a take it or leave it basis. See Section 1.4, Corbin on Contract, 2nd edition. Although there is duty-to-read concept in traditional contract law, many case laws have refused the enforceability of a contract of adhesion based several grounds, which include: (1) there was not true assents to a particular term; (2) even if there was a assent, the term is to be exercised from the contract because it contravenes public policy; (3) the term is unconscionable and should be stricken. See Section 29.10, Corbin on Contract, 2nd edition.
In Weaver v. American Oil Com., the court stated that duty-to-read rule had no application because “the clause was in fine print and contained no title heading.” The court felt enforcement of such an agreement will be contrary to public policy. The stronger party in the bargaining used its advantage. “The party seeking to enforce such a contract has the burden of showing that the provisions were explained to the other party and came to his knowledge and there was in fact a real and voluntary meeting of the minds and not merely an objective meeting.” The theory is that since such clauses impose a great hardship or risk on the weaker party, who is at the mercy of the stronger, an informed and voluntary consent should be required. See, e.g., Vitex Mfg. Corp. v. Caribtex Corp., 337 F.2d 795. In Williams v. Walker-Thomas Furniture, the court used the same approach. The court stated “When a party of little bargaining power, and little real choice, ……, it is hardly likely that his consent, …… was ever given to all the terms. …… and the court should consider whether the contract are so unfair that enforcement should be withheld.”
It is common that a manufacturer or a vendor hold a more powerful position than the consumer. In some circumstances, the consumers have no choice but to accept the unfair terms and conditions of the vendor. It is hard to say the consumer and the vendor have made a valid contract even if the consumer clicked “I accept” button.
c) Exculpation, Disclaimer and Indemnity Clauses.
Although there may be offer and acceptance in the formation of a clickwrap license, it is not enough at some time. Additional requirements in the formation of a contract may be imposed by the UCC. For example, a disclaimer of the implied warranty of merchantability must be “conspicuous”. See UCC section 2-205, section 2-209(2). According to UCC section 2-205 and section 2-209(2), promises to make firm offers, or to negate oral modifications, must be “separately signed”. Regarding the enforceability of exculpation or indemnify clause, there is no a harmonious answer in case laws. In Weaver, the court held the indemnify clause invalid. But other cases, such as Levine v. Shell Oil, reached contrary decisions based on similar facts. “It can hardly be said that there is a general rule that promises to indemnify are objectionable.” See Corbin on Contract, 2nd edition.
2 How to Construct a Clickwrap License?
a) Federal Law or State Law? The district court in ProCD case held that, even if Wisconsin treats shrinkwrap licenses as contract, section 301(a) of the Copyright Act, 17 U.S.C. section 301(a), prevents their enforcement. The court for appeals overruled this holding. Enforcement of shrinkwrap license included with computer software under state law did not create rights equivalent to exclusive rights within general scope of copyright, and was thus not preempted by Copyright Act. 17 U.S.C.A. section 301(a). The court for appeals held that provision of Copyright Act preempting any right under state law that are equivalent to any of exclusive rights within general scope of copyright does not interfere with private transactions in intellectual property, and does not prevent states from respecting those transactions.
According to UCITA section 59.1-501.5, if a provision of UCITA is preempted by federal law such a provision is unenforceable. A term of a mass-market contract must not violate a fundamental public policy. If so, the court may refuse to enforce the contract. When there is a conflict between chapter 43 of UCITA or a contract under that chapter and the consumer protection act, administrative rule or regulations, the consumer protection act, administrative rule or regulation governs.
b) Contract for Goods Sale or Copyright License? In ProCD case, the court pointed out, “we treat the licenses as ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts and the Uniform Commercial Code.” But, is a clickwrap license really similar with a sale contract for goods? The difference between physical property and intellectual property is obvious. The copyright owner just wants the buyer to get a permission to use this software in a limited manner. The buyer of a desk can dispose such a good in any way after he buys it from a vendor. It is not the same to an information product. The buyer, who is the licensee at the same time, can only use the software complying with the licensing scope. It was the right reason why NCCUSL made the UCITA.
c) Parol or Extrinsic Evidence. According to UCITA section 59.1-503.1, evidence of any previous agreement or of a contemporaneous oral agreement cannot contradict a final expression of the parties’ agreement with respect to terms included therein. But, course of performance, course of dealing, or usage of trade, as well as evidence of consistent additional terms may explain or supplement the agreement, unless the court finds the record to have been intended as a complete and exclusive statement of the terms of the agreement.
3 What can We Do to Help Our Clients?
Copyright law is an equity law. What we need to do is to find a balance between the public interest and the interest of copyright owners. This is a basic and the most important principle we should keep when we work for our clients. As a clickwrap license, it will be invalid if you violate the public interest, though seemingly you are doing your best to protect the interest of your client. The following hints or tips may be helpful:
l Make sure that the buyers have opportunity to review your license;
l If the buyers do not satisfy the terms and conditions of license, they may reject the license and get a return;
l Make sure your license is reasonable conspicuous. With regard to special terms, such as exculpation clause, disclaimer clause, indemnity clauses or arbitration clause, if the law requires separate assent, require the buyers to express separate assent;
l Using arbitration as your dispute solving method rather than litigation;
l If it is available, choose the UCITA as your governing law.