Over the course of the past three decades we are experiencing a new reality of flourishing and ever-growing electronic commerce. This new form of trade brought with itself a new medium for contracting – electronic contracts. The result is that nowadays, with one click of a mouse a user in one part of the world can instantly purchase goods or services to be delivered from another distant part of the world. As we can see, the traditional notions of time, place and matter are transformed by electronic contracting. Due to the speed of internet communications, the entirely paperless form of exchanges and the blurring of the notion of distance, we are faced with a new reality of contracting that creates many challenges for century-old traditional legal principles.
In the same way as paper contracts, online contracts need to comply with the requirements for consent established by statutory law – having a binding offer and valid acceptance. Clearly what differs when it comes to electronic contracting is the way the offer and acceptance are manifested and communicated. Nowadays, there are two main types of online contracts in view of the form for expressing assent – click-wrap and browse-wrap agreements. But before them, there was the era of shrink-wrap agreements.
Back in the 1980s it was common practice for software vendors to issue end user license agreements (EULAs) in the form of shrink-wrap licenses. The term “shrinkwrap” referred to the plastic film that was used for the packaging of the software. Normally, the paperwork of the EULA was shipped inside the plastic film together with the medium for the software (usually a CD). The package was then sealed with a sticker so that it was not really possible for the buyer to review the license terms before tearing the seal and opening the package. At the same time, in many cases the sticker informed the buyer that the act of opening the package and breaking the seal meant accepting the EULA terms.
The shrink-wrap license presents the end user with a list of terms and conditions that have to be accepted on a take-it-or-leave-it basis. As mentioned, one way of imposing the terms on the end user was by merely opening the package with the software. In other shrink-wrap licenses, the mechanism was related with the actual installation and use of the software – by using the software the user became bound with the attached license agreement. However, there were some cases where shrink-wrap licenses allowed for a short time frame in which the end user was given the opportunity to return the software and decline being bound by the agreement. Thus, in case the end user did not agree with the terms of the EULA, his only recourse was to return all copies of the software, the discs and the user manuals to the place where they were obtained.
In the early 1990s shrink-wrap licenses were often invalidated by courts. However, there was a landmark US decision in 1996 that turned the tide – Pro CD Inc. vs Zeidenberg 86 F.3d 1447 (7th Cir. 1996), a case before the US Court of Appeals for the Seventh Circuit. In that case the court postulated that shrink-wrap agreements are in general valid and enforceable contracts, as long as their terms do not violate rules of positive law. In the case at hand, the buyer, Mr. Zeidenberg, was offered a shrink-wrap contract when he purchased a CD with a non-commercial version of a telephone directory database. The software also had a commercial version that allowed for more extensive use. Mr. Zeidenberg installed the software on his computer and later started a website where he charged visitors a fee for information that was initially on the purchased CD. However, such use was clearly prohibited under the EULA of the non-commercial version of the software that he obtained. This prohibition was explicitly listed in the paper version of the EULA that was in the package and was also displayed on his computer screen when he was installing the software. The court concluded that Mr. Zeidenberg had many opportunities to familiarize himself with the text of the license, both in the paper version and also when it was displayed on his screen during the installation process and subsequently in each instance when the software was used. The vendor – Pro CD, addressed an offer to Mr. Zeidenberg that he formally accepted by installing and using the software, as this was the requirement for acceptance established in the EULA. Therefore, the court postulated that both offer and acceptance were in place and a valid contract had been formed that was later breached by the prohibited use performed by Mr. Zeidenberg. Furthermore, the court concluded that if the buyer wanted to reject the license terms, he could have simply returned the software to the seller instead of using it.
In the years following the Pro CD vs Reidenberg decision, shrink-wrap licenses were generally considered enforceable contracts. This was faced with opposition from many legal scholars who viewed shrink-wrap as a tool for stripping end users of their bargaining power and subjecting them to onerous take-it-or-leave-it terms.
Soon after the judicial acceptance of shrink-wrap, courts were faced with the question of validity and enforceability of click-wrap agreements. In general, click-wrap contracts require the end user to expressly manifest his or her will to be bound by a contract after being presented with the contractual terms. The assent could be materialized by clicking a button or typing text or by ticking a box in order to express agreement to the terms. Unlike a shrink-wrap, here the terms and conditions are presented to the end user before the goods or services are actually delivered. The moment when acceptance occurs is the moment the consumer clicks the respective acceptance button. Thus, in order for the consumer to download a music file or an ebook or to install a piece of software, he should first express assent to the offered terms and conditions. However, these terms and conditions are once again non-negotiable. There is no option for the end user to try and suggest modifications to the terms.
If we have to compare a click-wrap agreement to a shrink-wrap one, the act of assenting to the terms and conditions by clicking the “Accept” button is similar to the act of opening the shrink-wrap package. However, a big difference between the two is that in click-wrap agreements the end user is able to familiarize herself with the terms of the agreement before the contract is actually formed. Additionally, a second difference between the two is that while shrink-wrap agreements were used entirely in physical context (purchase of software on a physical medium such as a CD), click-wrap agreements are widely used in a non-tangible context – they facilitate the delivery of a wide array of online services and digital content over the internet.
From a commercial perspective, click-wrap agreements have a clear practical rationale. It is a lot more efficient for a vendor to use such standardized take-it-or-leave-it agreements delivered digitally instead of individually negotiating and contracting with each potential customer. Contract formation takes place without any physical contact with the customer and thus both transaction costs and ultimately the purchase price of the product are reduced.
Over the years, the usual position of courts has been that click-wrap agreements are legally binding and enforceable. Clicking the “I Agree” button is viewed as pretty much analogous to signing a paper agreement and thus the end user is bound by the underlying terms and conditions, irrespective of the fact whether the end user has actually read them. This position can be clearly seen in the court decision in a US case from 2010 – Scherillo v. Dun & Bradstreet, Inc. 684 F Supp. 2d 313 (E.D.N.Y. 2010). This case was about a clause for forum selection that was included in the terms and conditions of a website. The terms and conditions were listed in a text box that was scrollable and there was an additional clickable box below with the wording “I have read and agree to the terms and conditions”. The position of the court was that such a presentation of the terms and conditions in a scrollable box offered sufficient opportunity for the end user to familiarize with the terms and conditions, including the litigated provision for forum selection. In particular, the court stated that “a person who checks the box agreeing to the terms and conditions of a purchase on an internet site without scrolling down to read all of the terms and conditions is in the same position as a person who turns to the last page of a paper contract and signs it without reading the terms – namely, the clause is still valid.”
Browse-wrap contracts differ from click-wrap contracts in that they do not require the end user to explicitly express his or her consent through an affirmative action. In browse-wrap agreements the terms are often inconspicuous. They are usually provided through hyperlinks that direct to a separate page. At the same time, there is no requirement for the end user to actually click on the hyperlink before the contract is formed. Instead of clicking an “I Agree” button, here the assent of the end user is materialized by the mere act of browsing, i.e. continuing to use and navigate through the website or by the act of purchasing goods or services found on the website. Browse-wrap agreements can be used for both the terms and conditions of use of a website and also the terms and conditions of sale related to a website. Obviously, such a way of presenting the contractual terms creates a clear danger that the user may not notice what she is actually agreeing to. This raises the question to what extent browse-wrap agreements are enforceable.
One of the seminal cases on enforceability of browse-wrap contracts was Specht vs Netscape Communications Corp (306 F.3d 17, 23-24 (2d Cir. 2002). That case revolves around the enforceability of an arbitration clause that was part of an end user license agreement. The plaintiffs downloaded a software plug-in named Smart Download. For that purpose, they had to click a download button on the product webpage that was not accompanied with any additional information about the applicable license terms. Therefore, the end users were not required to explicitly assent to any terms and conditions prior to clicking the download button. The only reference to the license terms of Smart Download on the webpage was located in a section that could have become visible to the end users only in case they had scrolled past the download button into a separate screen and then clicked on a hyperlink to access the terms. Therefore, the EULA terms and the contested arbitration clause were not presented to the end users in a clearly visible manner that attracts attention.
Not surprisingly, the conclusion of the court was that the mere clicking of the download button was not an expression of assent and the actual download of the software plug-in did not constitute acceptance of the EULA terms. Importantly, the court highlighted that first, having a reasonably conspicuous notice of the existence of the EULA terms and second, unambiguous manifestation of assent to those terms is essential to guarantee the integrity and credibility of electronic contracts. This position of the court fully corresponds with the basic legal principle that all applicable terms and conditions should be brought to the attention of the end user before acceptance of the offer. Anything communicated to the user after acceptance should not be deemed to form part of the contract.
A different outcome for browse-wrap enforceability can be seen in a later case involving business to business contracting – Register.com Inc v Verio Inc., 356 F.3d 393, 428 (2d Cir. 2004). Register.com (Register) was selling internet domain names and as an internet domain name registrar they were required to provide a freely accessible online database with the names and contact details of their customers. The browse-wrap terms governing the use of that database prohibited the use of the results from querying the database for commercial solicitation. At the same time, these browse-wrap terms were displayed for the end user only after a query had already been performed.
Verio Inc. (Verio) was a company that developed and designed web sites. According to Register, Verio allegedly started soliciting its services to customers of Register after it used an automated software for querying the database of Register every day and obtaining the contact details of those customers. In an attempt to stop this solicitation, Register filed a lawsuit for an injunction that would prevent Verio from doing any more queries to the database as a result of the alleged repeated breaches of the browse-wrap terms. The District Court for the Southern District of New York granted the preliminary injunction and noted that the terms of use for the database were clearly presented on the website of Register and even though they were shown to the end user after a query has been made, by continuing to make further queries the user was clearly expressing assent to those already familiar terms. Therefore, a valid contract was formed on the basis of the browse-wrap terms and it was subsequently breached by the repeated acts of commercial solicitation.
This decision was later upheld by the US Court of Appeals for the Second Circuit. In its argumentation the court used a fascinating analogy to support its reasoning. The analogy was between the actions of Verio and those of a person that visits a fruit stand, takes a bite of an apple and as he turns to leave sees a sign, only visible when someone turns to exit, that says “Apples – 50 cents”. The person leaves without paying, as he believes that this notice should have been presented to his attention before biting the apple. Thereafter, that same person returns to the same fruit stand every day, several times a day, continues to take an apple, eats it and never pays for it.
As can be seen from the Register v Verio case, the enforceability of browse-wrap terms raises a lot more questions and uncertainty than click-wrap terms and requires a comprehensive assessment on a case by case basis. Going forward, it may not be uncommon for courts to part away with their initial reluctance to enforce browse-wrap agreements as long as the terms are clearly presented to the end user in a manner that attracts attention. Inevitably, the evolution of electronic contracts will continue to pose difficult legal questions and law itself will need to evolve and adapt in order to meet these challenges.