INFORMATION & TECHNOLOGY LAW

Just Click Here - Shrinkwrap & Clickwrap Licensing Gain New Court Attention

By Jon M. Garon*
As published in Interface Tech News, November, 2002

Courts from California to the District of Columbia are struggling to understand the power of two little words — "I agree." Most modern consumers are familiar with the "I agree" buttons and understand that they require us to accept the contract terms for the product, as dictated by the seller. Virtually every software company utilizes some form of the dialogue box as the first step in software installation or access to secure website content. They may even start appearing on the operational menu of movie DVDs.

Software companies first introduced the terms and conditions for end-user licenses as package inserts. Courts, however, were reluctant to bind consumers to informational flyers stuffed into the bottom of boxes. Eventually, however, the software companies recognized that by placing a prominent notice on the outside of the package, the consumer could be put on notice of the terms both on and inside the box. The contract was simple —"by opening this sealed package, you [the consumer] agree to all the contract terms on [or inside] the box." The proof for acceptance of the contract was the consumer's act of opening the shrinkwrap on the package. Thus the 'shrinkwrap' license agreement was born.

Shrinkwrap agreements still suffer from mechanical infirmities. Some courts do not like additional terms to be introduced after the contract is signed, or in this case, formed by opening the package. This thinking reflects a certain legal formalism which requires advance notice of terms as a precondition to any agreement. So what? Since none of these contracts can be renegotiated and most consumers pay little attention to the terms unless something goes terribly wrong, advance notice really does not matter.

Realistically, these formal decisions are clever methods for courts to duck the hard policy choices regarding the broader implications of shrinkwrap agreements.

To overcome the difficulties of shrinkwrap packaging, companies turned to clickwrap agreements. The clickwrap is the term for a window which opens to reveal the text of the contract accompanied by a dialogue box with the button label "I agree." Some companies even require that the consumer scroll through the text before the button becomes accessible. Of course, nothing requires that these terms actually be read or understood, only that the button be pushed. Similarly, nothing confirms that the person installing the software has corporate authority to enter into binding contracts on behalf of her company. Nothing even requires that the person installing the software be legally old enough to enter into a binding contract.

Clickwrap agreements, however, are much more efficient than shrinkwrap agreements. The terms of the contract are built into the software or website so no person can attain access without pushing the "I agree" button or illegally hacking the software. As a result, they avoid many of the evidentiary pitfalls and formalistic failings of the shrinkwrap agreements.

In 1996, the court in ProCD, Inc. v. Zeidenberg upheld a clickwrap agreement on a CD of telephone directory information. The contract was binding even though the content on the CD was otherwise not protected by copyright. Since then, the majority of courts have agreed that such contracts are binding and enforceable. Most recently, a D.C. Circuit Court in Bowers v. Baystate Techs., has held that such contracts are always binding. The D.C. Circuit stressed the importance of the right to contract.

Other courts, however, have taken a more varied approach. While some courts have upheld clickwrap agreements to enforce the basic terms of the fees and the choice regarding the location of any litigation, other courts have taken a more limited view. For example, applying California law, the Second Circuit court in New York relied on the formalistic requirements necessary to uphold clickwrap agreements. In Specht v. Netscape Communs. Corp., the court disallowed a clickwrap agreement used by Netscape because the terms were linked to the "I agree" button rather than prominently displayed in an accompanying window. Hyperlinked text does not actually display the contract terms, so the court adopted a formalistic basis for invalidating the terms.

Perhaps more importantly, a California district court in Comb v. Paypal, Inc., treated the arbitration provisions separately from other aspects of the contract. Recognizing that an individual's right to seek legal recourse is a fundamental right, the court was much less willing to enforce the arbitration provision of an otherwise valid clickwrap agreement. Because of its onerous nature and the requirement users waive a significant legal right, the use of the clickwrap agreement was limited.

The California approach would not be bad for most software companies. Clickwrap agreements typically prohibit reverse engineering, fair use copying, and copying of data and trade secrets that are not generally protected by copyright. These contractual limitations make it much more difficult for companies to develop compatible software or to create competitive products. Were these uses to be considered the same type of fundamental rights as was the right to sue, then the software industry would benefit as a whole. (Of course Microsoft and other segment leaders would prefer the opposite result, hiding behind clickwrap contracts to protect their market leads.)

Ironically, waiving the right to sue lowers production costs and consumer costs while enforcement of the other terms of the clickwrap agreements tends to increase cost and slow development. Clickwrap agreements have become a central part of software sales and licensing, but the time may have come to reassess which fundamental rights we wish to treat as outside the right to contract by clickwrap. Elimination of lawsuits may be reasonable; elimination of reverse engineering may not be. For mass market, consumer transactions, states should begin to recognize the value of reverse engineering, public domain access and fair use so that the legitimacy of clickwrap agreements would be more reasonable.

To accept these terms, just click here.

*Jon M. Garon is admitted in New Hampshire and California.

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