Online Contracts

Nearly 2 years have passed since the decision by the U.S. Court of Appeals for the Second Circuit in Specht v. Netscape Comm. Corp., 306 F.3d 17 (2002), threw what some thought was a large monkey wrench into online contract formation.

The practical effect of the decision, however, has not been as significant as had been feared, and businesses operating in cyberspace continue to successfully reach online agreements with end users and customers.

As a close reading of the Specht ruling and other decisions make clear, “clickwrap” and other online agreements that meet certain basic requirements for contract formation are, indeed, enforceable.

'Specht' Case

The Specht plaintiffs alleged that, unknown to them, their use of a “plug-in” program entitled SmartDownload that they had downloaded from the Netscape Communications Corporation's Web site transmitted to Netscape private information about plaintiffs' downloading of files from the Internet, thereby allegedly effecting an electronic surveillance of their online activities in violation of federal law.

The plaintiffs acknowledged that when they installed Netscape's Internet browser (Netscape Communicator), they were automatically shown a scrollable text of that program's license agreement and were not permitted to complete the installation until they had clicked on a “Yes” button to indicate that they accepted all the license terms.

But the Communicator license agreement made no mention of SmartDownload or other plug-in programs, and stated that “these terms apply to Netscape Communicator and Netscape Navigator.”

Importantly, no clickwrap presentation preceded the download of the separate albeit related SmartDownload plug-in, and the sole reference to SmartDownload's license terms on the “SmartDownload Communicator” Web page was located below the icon that commenced the SmartDownload download and in text that would have become visible to plaintiffs only if they had scrolled down to the next screen. That text included a provision requiring virtually all disputes relating to the agreement to be submitted to arbitration.

Relying on that provision, Netscape moved to compel arbitration. Finding that Netscape's Web page neither adequately alerted users to the existence of SmartDownload's license terms nor required users unambiguously to manifest assent to those terms as a condition of downloading the product, the district court held that the plaintiffs had not entered into the SmartDownload license agreement.

The district court also ruled that the license agreement governing the use of Communicator, a distinct program, even though the plaintiffs had assented to its terms, and in several instances obtained both programs simultaneously, nevertheless involved an independent transaction that made no mention of SmartDownload and so did not bind plaintiffs to arbitrate their claims relating to SmartDownload.

In its decision, the Second Circuit pointed out that whether governed by the common law or by Article 2 of the Uniform Commercial Code, a transaction, in order to be a contract, requires a manifestation of agreement between the parties. It continued by declaring that a consumer's clicking on a download button does not communicate assent to contractual terms if the offer did not make clear to the consumer that clicking on the download button would signify assent to those terms.

The court also rejected Netscape's argument that the plaintiffs had to be held to a standard of reasonable prudence and that, because notice of the existence of SmartDownload license terms was on the next scrollable screen, plaintiffs were on “inquiry notice” of those terms.

“We disagree with the proposition that a reasonably prudent offeree in plaintiffs' position would necessarily have known or learned of the existence of the SmartDownload license agreement prior to acting, so that plaintiffs may be held to have assented to that agreement with constructive notice of its terms,” the circuit ruled.

As the appellate court observed, plaintiffs were responding to an offer that did not carry an immediately visible notice of the existence of license terms or require unambiguous manifestation of assent to those terms.

The circuit also found that the fact that, given the position of the scroll bar on their computer screens, plaintiffs may have been aware that an unexplored portion of the Netscape Web page remained below the download button did not mean that they reasonably should have concluded that this portion contained a notice of license terms.

The Second Circuit then ruled that where consumers are urged to download free software at the immediate click of a button, a reference to the existence of license terms on a submerged screen “is not sufficient to place consumers on inquiry or constructive notice of those terms.”

It concluded that the claims of the plaintiffs were beyond the scope of the arbitration clause contained in the separate Communicator license agreement, and that because those claims were not arbitrable under that agreement or under the SmartDownload license agreement, “to which plaintiffs never assented,” the district court's holding that the plaintiffs could not be compelled to arbitrate their claims had to be affirmed.

Other Rulings

Implicit in the Second Circuit's decision in Specht is that the clickwrap agreement for Netscape Communicator was effective and enforceable ' and that disputes between the parties over that software would have been subject to its terms, including its arbitration provision.

This part of the ruling is not necessarily surprising. Just as breaking the shrinkwrap seal and using the enclosed computer program after encountering notice of the existence of governing license terms has been deemed by some courts to constitute assent to those terms in the context of tangible software (see, eg, ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1451 (7th Cir. 1996), so clicking on a Web page's clickwrap button after receiving notice of the existence of license terms has been held by other courts to manifest an Internet user's assent to terms governing the use of downloadable intangible software. See, eg, Hotmail Corp. v. Van Money Pie Inc., 1998 U.S. Dist. Lexis 10729 (N.D. Cal. 1998).

In fact, a variety of courts have enforced contracts arising from Internet use, at least where there was clear notice that a user's acts manifested assent to contract terms. See, eg, DeJohn v. TV Corp. Int'l, 245 F. Supp. 2d 913, (E.D. Ill, 2003 (E.D. Ill 2003), (upholding, inter alia, forum selection provision in online contract despite plaintiff's claim that he did not read it before clicking his assent); America Online, Inc. v. Booker, 781 So. 2d 423 (Fla. Dist. Ct. App. 2001) (upholding forum selection clause in “freely negotiated agreement” contained in online terms of service); Barnett v. Network Solutions, Inc., 38 S.W.3d 200, 203-04 (Tex. App. 2001) (upholding forum selection clause in online contract for registering Internet domain names that required users to scroll through terms before accepting or rejecting them); Caspi v. Microsoft Network, 732 A.2d 528 (N.J. Super. Ct. App. Div. 1999) (upholding forum selection clause where subscribers to online software were required to review license terms in scrollable window and to click “I Agree” or “I Don't Agree”); cf. Pollstar v. Gigmania, Ltd., 170 F. Supp. 2d 974, 981-82 (E.D. Cal. 2000) (expressing concern that notice of license terms had appeared in small, gray text on a gray background on a linked Web page, but concluding that it was too early in the case to order dismissal).

'Register' Ruling

Significantly, the Second Circuit's recent decision in Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2004), distinguishes Specht and further helps explain the standards that online contracts must meet to be enforceable. [Editor's Note: We covered the Register.com case in the February issue.]

This case involved Verio, Inc., a company engaged in the business of selling a variety of Web site design, development and operation services. In the sale of such services, Verio obtained daily updates as to contact information for new domain name registrants through automated, multiple inquiries made to the WHOIS database maintained by Register.Com., a domain name registrar that also marketed similar Internet services. Every registrar in certain top level domains is required by its accreditation agreement with the Internet Corporation for Assigned Names and Numbers (ICANN) to make publicly available a database which sets forth the identity and contact information for registrants registering domain names with that registrant ' in essence, the registrar's customer list.

Verio used the information “mined” from the database to market its services directly to those new domain name registrants as potential prospects for Web services.

Register ultimately brought suit against Verio, arguing that certain of Verio's actions were inconsistent with the terms of the restrictive legend Register had attached to its responses to Verio's queries.

Verio asserted that it had never become contractually bound to the conditions imposed by Register's restrictive legend because, in the case of each query Verio made, the legend did not appear until after Verio had submitted the query and received the WHOIS data.

Accordingly, Verio contended that in no instance did it receive legally enforceable notice of the conditions Register intended to impose. Verio therefore argued it should not be deemed to have taken WHOIS data from Register's systems subject to Register's conditions. It relied on Specht, but the Second Circuit was not persuaded.

As the circuit noted, the users in Specht visited Netscape's site one time to download its software, and Netscape's posting of its terms did “not compel the conclusion that its downloaders took the software subject to those terms because there was no way to determine that any downloader had seen the terms of the offer.”

The crucial difference here, the Second Circuit held, was that Verio visited Register's computers daily to access WHOIS data and each day saw the terms of Register's offer.

Moreover, Verio admitted that, in entering Register's computers to get the data, it was fully aware of the terms on which Register offered the access. Thus, Verio could not disregard those terms with impunity and continue to exploit the information obtained from Register in violation of those terms.

Conclusion

There are a number of things companies can do in an effort to reach an enforceable online agreement with a user or customer.

It appears the courts are exercising their traditional caution by requiring the greatest level of explicit acceptance in contracts with unsophisticated consumers, while lessening the circumstances required to indicate assent by sophisticated commercial entities.

In most circumstances, it will be essential for an offeree to click on an “I agree” icon. Nevertheless, such a requirement is consistent with fundamental principles of contract formation, which still require that when a benefit is offered subject to stated conditions, and the offeree makes a decision to take the benefit with knowledge of the terms of the offer, the taking constitutes an acceptance of the terms, which accordingly become binding on the offeree.

Thus, consistent with this principle, Verio had the choice either to accept the offer of contract, taking the information subject to Register's terms, or, if the terms were not acceptable, to decline to take the benefits.

In any situation, it is important for the terms and conditions to be clearly visible – typically, before the offeree is able to download the program or information, receive services or otherwise make use of the business's Web site.

If possible, the “I accept” button should follow the contractual language or provide a direct link to the contract language. In some cases, the “I accept” button may not even be visible until the terms have been at least scrolled through by the offeree and the offeree will be prevented from proceeding until clicking on “I accept.”

Courts have enforced these kinds of agreements in the past, and businesses operating online can learn much from these decisions (and general contract provisions) to assist them in reaching their desired goals.

Nearly 2 years have passed since the decision by the U.S. Court of Appeals for the Second Circuit in Specht v. Netscape Comm. Corp. , 306 F.3d 17 (2002), threw what some thought was a large monkey wrench into online contract formation.

The practical effect of the decision, however, has not been as significant as had been feared, and businesses operating in cyberspace continue to successfully reach online agreements with end users and customers.

As a close reading of the Specht ruling and other decisions make clear, “clickwrap” and other online agreements that meet certain basic requirements for contract formation are, indeed, enforceable.

'Specht' Case

The Specht plaintiffs alleged that, unknown to them, their use of a “plug-in” program entitled SmartDownload that they had downloaded from the Netscape Communications Corporation's Web site transmitted to Netscape private information about plaintiffs' downloading of files from the Internet, thereby allegedly effecting an electronic surveillance of their online activities in violation of federal law.

The plaintiffs acknowledged that when they installed Netscape's Internet browser (Netscape Communicator), they were automatically shown a scrollable text of that program's license agreement and were not permitted to complete the installation until they had clicked on a “Yes” button to indicate that they accepted all the license terms.

But the Communicator license agreement made no mention of SmartDownload or other plug-in programs, and stated that “these terms apply to Netscape Communicator and Netscape Navigator.”

Importantly, no clickwrap presentation preceded the download of the separate albeit related SmartDownload plug-in, and the sole reference to SmartDownload's license terms on the “SmartDownload Communicator” Web page was located below the icon that commenced the SmartDownload download and in text that would have become visible to plaintiffs only if they had scrolled down to the next screen. That text included a provision requiring virtually all disputes relating to the agreement to be submitted to arbitration.

Relying on that provision, Netscape moved to compel arbitration. Finding that Netscape's Web page neither adequately alerted users to the existence of SmartDownload's license terms nor required users unambiguously to manifest assent to those terms as a condition of downloading the product, the district court held that the plaintiffs had not entered into the SmartDownload license agreement.

The district court also ruled that the license agreement governing the use of Communicator, a distinct program, even though the plaintiffs had assented to its terms, and in several instances obtained both programs simultaneously, nevertheless involved an independent transaction that made no mention of SmartDownload and so did not bind plaintiffs to arbitrate their claims relating to SmartDownload.

In its decision, the Second Circuit pointed out that whether governed by the common law or by Article 2 of the Uniform Commercial Code, a transaction, in order to be a contract, requires a manifestation of agreement between the parties. It continued by declaring that a consumer's clicking on a download button does not communicate assent to contractual terms if the offer did not make clear to the consumer that clicking on the download button would signify assent to those terms.

The court also rejected Netscape's argument that the plaintiffs had to be held to a standard of reasonable prudence and that, because notice of the existence of SmartDownload license terms was on the next scrollable screen, plaintiffs were on “inquiry notice” of those terms.

“We disagree with the proposition that a reasonably prudent offeree in plaintiffs' position would necessarily have known or learned of the existence of the SmartDownload license agreement prior to acting, so that plaintiffs may be held to have assented to that agreement with constructive notice of its terms,” the circuit ruled.

As the appellate court observed, plaintiffs were responding to an offer that did not carry an immediately visible notice of the existence of license terms or require unambiguous manifestation of assent to those terms.

The circuit also found that the fact that, given the position of the scroll bar on their computer screens, plaintiffs may have been aware that an unexplored portion of the Netscape Web page remained below the download button did not mean that they reasonably should have concluded that this portion contained a notice of license terms.

The Second Circuit then ruled that where consumers are urged to download free software at the immediate click of a button, a reference to the existence of license terms on a submerged screen “is not sufficient to place consumers on inquiry or constructive notice of those terms.”

It concluded that the claims of the plaintiffs were beyond the scope of the arbitration clause contained in the separate Communicator license agreement, and that because those claims were not arbitrable under that agreement or under the SmartDownload license agreement, “to which plaintiffs never assented,” the district court's holding that the plaintiffs could not be compelled to arbitrate their claims had to be affirmed.

Other Rulings

Implicit in the Second Circuit's decision in Specht is that the clickwrap agreement for Netscape Communicator was effective and enforceable ' and that disputes between the parties over that software would have been subject to its terms, including its arbitration provision.

This part of the ruling is not necessarily surprising. Just as breaking the shrinkwrap seal and using the enclosed computer program after encountering notice of the existence of governing license terms has been deemed by some courts to constitute assent to those terms in the context of tangible software ( see , eg , ProCD, Inc. v. Zeidenberg , 86 F.3d 1447, 1451 (7th Cir. 1996), so clicking on a Web page's clickwrap button after receiving notice of the existence of license terms has been held by other courts to manifest an Internet user's assent to terms governing the use of downloadable intangible software. See, eg, Hotmail Corp. v. Van Money Pie Inc., 1998 U.S. Dist. Lexis 10729 (N.D. Cal. 1998).

In fact, a variety of courts have enforced contracts arising from Internet use, at least where there was clear notice that a user's acts manifested assent to contract terms. See , eg , DeJohn v. TV Corp. Int'l , 245 F. Supp. 2d 913, (E.D. Ill, 2003 (E.D. Ill 2003), (upholding, inter alia, forum selection provision in online contract despite plaintiff's claim that he did not read it before clicking his assent); America Online, Inc. v. Booker , 781 So. 2d 423 (Fla. Dist. Ct. App. 2001) (upholding forum selection clause in “freely negotiated agreement” contained in online terms of service); Barnett v. Network Solutions, Inc ., 38 S.W.3d 200, 203-04 (Tex. App. 2001) (upholding forum selection clause in online contract for registering Internet domain names that required users to scroll through terms before accepting or rejecting them); Caspi v. Microsoft Network , 732 A.2d 528 (N.J. Super. Ct. App. Div. 1999) (upholding forum selection clause where subscribers to online software were required to review license terms in scrollable window and to click “I Agree” or “I Don't Agree”); cf. Pollstar v. Gigmania, Ltd ., 170 F. Supp. 2d 974, 981-82 (E.D. Cal. 2000) (expressing concern that notice of license terms had appeared in small, gray text on a gray background on a linked Web page, but concluding that it was too early in the case to order dismissal).

'Register' Ruling

Significantly, the Second Circuit's recent decision in Register.com, Inc. v. Verio, Inc. , 356 F.3d 393 (2004), distinguishes Specht and further helps explain the standards that online contracts must meet to be enforceable. [Editor's Note: We covered the Register.com case in the February issue.]

This case involved Verio, Inc., a company engaged in the business of selling a variety of Web site design, development and operation services. In the sale of such services, Verio obtained daily updates as to contact information for new domain name registrants through automated, multiple inquiries made to the WHOIS database maintained by Register.Com., a domain name registrar that also marketed similar Internet services. Every registrar in certain top level domains is required by its accreditation agreement with the Internet Corporation for Assigned Names and Numbers (ICANN) to make publicly available a database which sets forth the identity and contact information for registrants registering domain names with that registrant ' in essence, the registrar's customer list.

Verio used the information “mined” from the database to market its services directly to those new domain name registrants as potential prospects for Web services.

Register ultimately brought suit against Verio, arguing that certain of Verio's actions were inconsistent with the terms of the restrictive legend Register had attached to its responses to Verio's queries.

Verio asserted that it had never become contractually bound to the conditions imposed by Register's restrictive legend because, in the case of each query Verio made, the legend did not appear until after Verio had submitted the query and received the WHOIS data.

Accordingly, Verio contended that in no instance did it receive legally enforceable notice of the conditions Register intended to impose. Verio therefore argued it should not be deemed to have taken WHOIS data from Register's systems subject to Register's conditions. It relied on Specht, but the Second Circuit was not persuaded.

As the circuit noted, the users in Specht visited Netscape's site one time to download its software, and Netscape's posting of its terms did “not compel the conclusion that its downloaders took the software subject to those terms because there was no way to determine that any downloader had seen the terms of the offer.”

The crucial difference here, the Second Circuit held, was that Verio visited Register's computers daily to access WHOIS data and each day saw the terms of Register's offer.

Moreover, Verio admitted that, in entering Register's computers to get the data, it was fully aware of the terms on which Register offered the access. Thus, Verio could not disregard those terms with impunity and continue to exploit the information obtained from Register in violation of those terms.

Conclusion

There are a number of things companies can do in an effort to reach an enforceable online agreement with a user or customer.

It appears the courts are exercising their traditional caution by requiring the greatest level of explicit acceptance in contracts with unsophisticated consumers, while lessening the circumstances required to indicate assent by sophisticated commercial entities.

In most circumstances, it will be essential for an offeree to click on an “I agree” icon. Nevertheless, such a requirement is consistent with fundamental principles of contract formation, which still require that when a benefit is offered subject to stated conditions, and the offeree makes a decision to take the benefit with knowledge of the terms of the offer, the taking constitutes an acceptance of the terms, which accordingly become binding on the offeree.

Thus, consistent with this principle, Verio had the choice either to accept the offer of contract, taking the information subject to Register's terms, or, if the terms were not acceptable, to decline to take the benefits.

In any situation, it is important for the terms and conditions to be clearly visible – typically, before the offeree is able to download the program or information, receive services or otherwise make use of the business's Web site.

If possible, the “I accept” button should follow the contractual language or provide a direct link to the contract language. In some cases, the “I accept” button may not even be visible until the terms have been at least scrolled through by the offeree and the offeree will be prevented from proceeding until clicking on “I accept.”

Courts have enforced these kinds of agreements in the past, and businesses operating online can learn much from these decisions (and general contract provisions) to assist them in reaching their desired goals.