Author:	Richard G Kunkel JD Associate Professor, University of St Thomas, St Paul, Minnesota
Subjects:	Computer software law and legislation United States (Other articles) Copyright - Computer programs Intellectual property (Other articles)
Issue:	Volume 9, Number 3 (September 2002)
Category:	Refereed Articles

Paper presented at the Australasian Law Teachers' Association annual conference hosted by Murdoch University School of Law, Perth, Western Australia September 29 - October 2 2002

Contents

• Introduction
• Shrinkwrap License Cases
• Step-Saver and ProCD
• The Gateway Cases: Hill, Brower and Klocek
• Other Shrinkwrap Cases
• Clickwrap Cases
• Browsewrap Cases
• Conclusion
• Notes

Dilbert to Dogbert: "I didn't read all of the shrinkwrap license on my new software until after I opened it. Apparently I agreed to spend the rest of my life as a towel boy in Bill Gates' new mansion."[1]

Introduction

1. The Internet has become an important force in global commerce. Electronic commerce revenues in 2000 amounted to about $ 490 billion in United States online purchases. By 2004 the United States will transact online sales reaching an estimated $ 3.2 trillion.[2] Potential for its future growth is immense as well. Industry consulting groups predict a doubling of e-commerce trade every 12 to 18 months, with one projection topping out at $4.6 trillion. [3]

2. The shift toward global e-commerce is forcing the legal infrastructure of commerce to change in order to keep up with technology. Around the world nations are building the legal infrastructure to succeed in the global digital economy. Worldwide, revisions in laws regarding online privacy, electronic contracting, digital signatures, and consumer protection have been enacted in order to provide the essential "e-confidence" needed for electronic commerce to prosper.[4]

3. The explosive growth in e-commerce has been enabled by contracts that license the use of software applications and electronic information which are distributed online, and by license contracts that create the terms of use for online services. Paradoxically, this most essential building block for electronic commerce, the software license, remains in a state of limbo in the United States. More than 10 years ago the U.S. courts first considered whether a shrinkwrap software license should be enforced, relying on a analysis of the transaction as a sale of goods under Uniform Commercial Code Article Two[5] Amazingly the law regarding shrinkwrap, clickwrap and browsewrap licenses remains, in many respects, as unclear today as it was in 1991. The current, and uncertain, state of affairs in the United States was summarized by the court in i.Lan Systems, Inc. v. Netscout Service Level Corp., 183 F. Supp. 2d 328 (D. Mass. 2002):

   In Massachusetts and across most of the nation, software licenses exist in a legislative void. Legal scholars, among them the Uniform Commissioners on State Laws, have tried to fill that void, but their efforts have not kept pace with the world of business. Lawmakers began to draft a new Article 2B (licenses) for the UCC, which would have been the logical complement to Article 2 (sales) and Article 2A (leases), but after a few years of drafting, those lawmakers decided instead to draft an independent body of law for software licenses, which is now known as the Uniform Computer Information Transactions Act ("UCITA"). So far only Maryland and Virginia have adopted UCITA; Massachusetts has not. Accordingly, the Court will not spend its time considering UCITA. At the same time, the Court will not overlook Article 2 simply because its provisions are imperfect in today's world. Software licenses are entered into every day, and businesspersons reasonably expect that some law will govern them. For the time being, Article 2's familiar provisions -- which are the inspiration for UCITA -- better fulfill those expectations than would the common law. Article 2 technically does not, and certainly will not in the future, govern software licenses, but for the time being, the Court will assume it does. [6]

4. The strong legislative solution needed to clarify the distinctions between software sales and software licenses has not been forthcoming. Further, the legislation needed to more clearly define the rights, obligations, and remedies of online vendors and purchasers in e-commerce remains elusive after a decade of effort. This failure has led to great uncertainty and unpredictable results. This, in turn, has eroded confidence in electronic contracting which depends on enforceable licenses and terms of use. The result, as one might expect, is a crazy quilt of seemingly irreconcilable cases. [7]

5. This paper will argue that a common thread can be discerned among the cases. In this legal vacuum, where no clearly controlling legislation or definitive precedent exists, the courts are relatively unfettered . Each may exercise a wide degree of discretion in choosing the law to apply and the rationale necessary to reach a just and equitable result as the court sees it. For example, the law most commonly applied to software licenses, Uniform Commercial Code Article 2, has a liberal, flexible approach to contract formation that is malleable in the hands of a court seeking a just result. Further, a court may draw upon principles of unconscionability, contracts of adhesion and consumer protection statutes to reach an equitable result. In a given case courts may apply these theories together with common law contract and copyright pre-emption principles as necessary to reach a just and equitable result. While this path has not produced legal certainty, this paper argues that, in the main, the outcomes have been just on the equities, if not entirely consistent on legal theory.

   Shrinkwrap License Cases

6. Shrinkwrap licenses get their name from the clear plastic wrapping that encloses many software packages. They contain a notice that by tearing open the shrinkwrap, the user assents to the software terms enclosed within. As applied to software applications, the typical software license includes a conspicuous notice of agreement, title retention in the seller, restrictions on transfer and modification, prohibition of reverse engineering and limited copying provisions.[8] Applied generally to a broad range of contracts in e-commerce, common features of the shrinkwrap license may include an arbitration clause, a forum selection clause, and disclaimer of warranties and limitation of remedies. Despite any individual variances, the shrinkwrap license uniformly is used to dictate the sellers' terms to the purchaser.

   Step-Saver and ProCD

7. The seminal case regarding enforceability of shrinkwrap licenses was Step-Saver Data Sys., Inc. v. Wyse Tech.[9] Step-Saver purchased a software program called MultiLink from TSL for resale. Step-Saver would place telephone orders for 20 copies of MultiLink at a time. TSL took the order on the phone and promised to ship the goods. Each MultiLink software package contained a shrinkwrap license that disclaimed all express and implied warranties and limited remedies to replacement of the MultiLink program. MultiLink caused serious problems for the end users to whom Step-Saver had resold the software. These customers brought suit against Step-Saver, which, in turn, sued TSL over the software defects. TSL raised the disclaimer and limitation of remedies contained in the shrinkwrap license as its defense.[10]

8. The U.S. Court of Appeals for the 3rd Circuit treated the contract as a sale of goods and applied UCC Article 2. The court accepted Step-Saver's argument that the contract had been formed during the telephone conversation in which Step-Saver made an offer to purchase and TSL agreed to ship the software at the agreed price. Under UCC Section 2-207, the additional terms of TSL's shrinkwrap license that encased the software disks were construed as proposals for addition to the contract. However, because the license terms materially altered the contract, they were not automatically added to the contract under Section 2-207 (2). The court held that the terms of the shrinkwrap license were not enforceable because Step-Saver had not assented to them. Applying Section 2-207 (3), the court found the contract was sufficiently definite without reference to the shrinkwrap license and supplied additional terms from copyright law and UCC gap-fillers[11]

9. Arizona Retail Sys. v. Software Link, Inc.[12] is nearly identical to Step-Saver and follows a similar analysis. Coincidentally, the case even involved the same defendant, TSL. As in Step-Saver, Arizona Retail Store (ARS) was an offeror that placed orders by phone, and the offeree, TSL, promised shipment of the goods. The court followed the Step-Saver rationale that the parties had formed a contract before TSL insisted on the terms of the shrinkwrap license. In this case, TSL argued that the shrinkwrap license was a proposal for a modification to the contract under UCC Section 2-209, and that ARS had assented to the license terms by opening the package. The court, however, required that the ARS's assent must be expressed and could not be inferred from ARS's conduct in reselling the software.[13]

10. Evaluating the decision on the equities alone, the Step-Saver and ARS cases appeared to reach a fair result: the decisions placed the loss for the defective software on its manufacturer, rather than shifting it to a mere reseller of the product by enforcing the disclaimers and limitations of remedies in the shrinkwrap license.

11. The law governing shrinkwrap licenses took a dramatic turn in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).[14] The plaintiff, ProCD had compiled data from 3000 telephone directories into a searchable computer database. ProCD had spent over $10 million to compile the database, develop its search functionality and to keep it current. ProCD sold both commercial licenses and consumer licenses to the data that was encoded on CD-ROM disks. The outside of the box stated that the software was restricted according to the terms of the enclosed license. In addition, the user's manual contained the license and the license appeared on the user's screen every time the program was run.[15]

12. Zeidenberg was a graduate student seeking a Ph.D. in Computer Science. He purchased a consumer package of the database off the shelf at a retail store. The consumer version of the software was restricted under the terms of the shrinkwrap license to non-commercial uses. Zeidenberg was aware of the license restrictions and chose to ignore them. He began making the data from the ProCD database available over the Internet at prices below those offered by ProCD. The District Court reviewed the Step-Saver and ARS cases and applied a similar analysis under the UCC. Zeidenberg was the offeror, the retail store was the offeree, and the contract was formed in the store before Zeidenberg discovered or assented to the license terms contained in the box. The court concluded that, despite the references to the license on the box, the license restrictions in the shrinkwrap license were not part of the contract between ProCD and Zeidenberg.

13. On appeal, the Court of Appeals for the 7th Circuit reversed. The court noted that it would be impossible to print the entire license terms on the exterior of the box to be viewed before sale. The court found " notice on the outside, terms on the inside, and a right to return the software for refund if the terms are unacceptable . . . may be a means of doing business valuable to buyers and sellers alike"[16] The court noted the importance of these licenses to mass marketing and distribution in the software industry and likened the transaction to concert tickets, airline tickets, and tickets to sporting events where the purchaser pays money up front and later receives the tickets with the terms included. If the terms are objectionable the purchaser will return the tickets for refund. Under the 7th Circuit's analysis, Zeidenberg was the offeree, not the offeror. ProCD, through the retail store, was the offeror, and had proposed a contract that the buyer would accept by using the software after having an opportunity to read the license. When Zeidenberg used the software he accepted, creating a contract including the terms of the shrinkwrap license.[17]

14. Despite the radical departure from the approach of the Step-Saver and ARS, the ProCD court appears to have reached the right decision when judged on the equities. A sophisticated computer user, Zeidenberg, misrepresented his status as a consumer user not a commercial user, misappropriated valuable data, and with knowledge that it violated the terms of the license agreement, then broadly disseminated the data to the detriment of ProCD. In order to prevent this injustice, the court held the shrinkwrap license enforceable. Unfortunately, departing from Step-Saver was unnecessary to reach the equitable result. With Zeidenberg's extensive computer science background, the court could have held that the notice on the exterior of the box was adequate notice to Zeidenberg, someone likely to know the general parameters of the license inside. Upon continuing to use the software, with the license in front of him at each use, this would have been sufficient assent under the UCC.

15. Sadly, hard facts make for bad law. The ProCD decision was sharply criticized by commentators,[18] but at least the decision can be defended on the ground of reaching the just result.

    The Gateway Cases: Hill, Brower and Klocek

16. Seven months later the 7th Circuit applied the ProCD analysis in Hill v Gateway 2000, Inc.[19] The Hills ordered a computer from Gateway over the telephone. Gateway sent the computer along with its Standard Terms And Conditions Agreement. Under these terms the Hills were permitted 30 days to return the computer at their expense. The terms also required the Hills to submit any disputes with Gateway to arbitration. The Hills say the arbitration clause did not stand out from other terms, but conceded they did not read the terms closely enough to discover the arbitration clause. The Hills kept the computer beyond 30 days before complaining about defects in the computer. Eventually the Hills brought a class-action suit against Gateway. Gateway defended by asking the court to enforce the arbitration clause. [20]

17. The court emphasized the similarities between ProCD and the Gateway case. Gateway shipped the computers to the Hills with an "accept or return offer". While the arbitration clause was not discussed in the telephone conversation, neither was the inclusion of application programs or Gateway's warranty, upon which the Hills replied. The court found that these valuable promises bound Gateway just as the arbitration clause found the Hills. The court found that consumers could protect themselves by requesting a copy of the terms before purchase, consulting public sources such as computer magazines and Web sites and inspecting the documents and returning the computer if they found the terms unacceptable.[21]

18. In this case, the equities that supported the decision in ProCD were reversed and now lay with the consumer purchaser, not the seller. The Hills were ordinary consumers, unlike Zeidenberg, a computer scientist. In ProCD, the packaging alerted Zeidenberg to the terms inside, and when he used the software it displayed a license agreement each time it was used. In contrast the Hills were never notified that the Gateway box would contain additional terms nor were they alerted to the fact that using the computer beyond 30 days would find them to additional terms they did not notice. Of course, Gateway and other vendors are free to structure their transactions as "money first, terms later" transactions. They need only communicate that fact unequivocally in their dealings with consumers in their marketing and at the outset of their contacts with consumers during the telephone or online ordering process.

19. The 7th Circuit's willingness to promote the mass marketing needs of the computer industry and software industry at the expense of consumer protection has been roundly criticized for numerous reasons. Commentators argue that Hill misapplies Sections 2-204 and 2-206 of the UCC,[22] its analysis of Section 2-207 is directly contrary to the official comments regarding that section,[23] it unfairly shifts to consumers the burden of discovering an arbitration clause or other onerous terms and the return cost of shipping to avoid them[24] The 7th Circuit's failure to follow the equities in the case has led to a chorus of condemnation. [25]

20. The Hill case did not end litigation against Gateway. In Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (App. Div. 1998)[26] the plantiffs brought a class action suit challenging the identical arbitration clause in Gateway's Standard Terms And Conditions. The clause required arbitration before the International Chamber of Commerce in Chicago. The ICC required advance fees of $4,000, $2000 of which was not refundable. The ICC also rules also followed the " loser pays" rule exposing consumers to potential liability for Gateway's legal fees. These costs were substantially higher than the cost for most of Gateway's products. The plaintiffs contended the arbitration clause was unenforceable under Section 2-207. They also argued that it was a contract of adhesion and was unconscionable under Section 2-302.[27]

21. Although the court was not bound by the ProCD and Hill decisions, it agreed with their rationale that no contract or agreement occurred when the order was placed over the phone or even upon receipt of the goods. The court stated: "by the terms of the agreement at issue, it is only after the consumer has affirmatively retained the merchandise for more than 30 days -- within which the consumer has presumably been examined and even used the products and read the agreement -- that the contract has been effectuated."[28] This analysis is circular and disingenuous: an agreement was formed on these terms because the document says it was formed on these terms. The court also relied on the erroneous approach in Hill that Section 2-207 did not apply because it was because only one form was used.[29]

22. With respect to the contract of adhesion argument, the Brower court noted that the parties clearly did not possess equal bargaining power in the transaction. However the court ruled that the agreement was not a contract of adhesion because the purchasers were not in a " take-it-or-leave-it" position. They could reject the agreement altogether by returning the computer to Gateway or they could select from many other computer sellers in the marketplace. The court noted that this required affirmative action and expense for the purchaser, but ruled that the purchaser was permitted to make this tradeoff in exchange for the convenience and savings of shopping over the phone.[30]

23. The Brower court next turned to the unconscionability argument. The court did not find any high-pressure sales tactics or that the arbitration clause was hidden in fine print. However, they ruled the excessive cost of the ICC arbitration process was unreasonable and effectively barred consumers from resolving disputes in the ICC. This left them with no forum at all in which to resolve a dispute. Gateway offered to substitute the American Arbitration Association for the ICC in order to avoid unconscionability concerns and also argued that it had substituted a new arbitration agreement by mailing to its customers a quarterly magazine containing the new terms.

24. Although following the Hill case, the Brower court took an important step toward recognizing the equities of the situation by striking a clearly onerous ICC dispute resolution process as unconscionable. The court remanded the case to the trial court for a determination whether the AAA arbitration process was "egregiously oppressive so that it too would be ruled unconscionable."[31]

25. Still the litigation against Gateway continued. William Klocek, a pro se plaintiff, brought individual and class action claims against Gateway alleging false promises of technical support that resulted in breach of contract and breach of warranty.[32] Gateway had promised that its computers would be compatible with standard peripherals and Internet services. The Gateway 2000 Standard Terms and Conditions shipped with Klocek's computer had now shrunk to a five day time period within which to return the computer or be bound. The terms included arbitration before the ICC which the Brower court had ruled unconscionable.

26. The Klocek court noted that Gateway had the burden of proving the existence of a contract that required Klocek to arbitrate his claims. Gateway urged the court to follow the precedent of Hill. The court noted extensive criticism of the Hill and ProCD cases. The court rejected the idea that Section 2-207 could not apply because only one form was used, noting that the language of the statute does not preclude one form and the official comments expressly permit its application to agreement previously reached orally. The court determined that Section 2-207 applied to the case.[33]

27. The Klocek court also rejected the statement in ProCD that " the vendor is the master of the offer" and noted that in typical consumer transactions the purchaser is the offeror and the vendor is the offeree. The court found that Gateway provided no factual evidence to establish that it was the offeror rather than Klocek. The court held that under Section 2-207 Gateway was free to make its acceptance of Klocek's offer expressly conditional on Klocek's agreement to Gateway's standard terms. However the mere shipment of terms in the box was not sufficient to communicate such an unwillingness to proceed under the terms of Klocek's offer. Because Klocek was a non-merchant purchaser, Gateway was required to prove that Klocek expressly agreed to the additional terms. Gateway argued that retaining the computer beyond five days satisfied this requirement but the court rejected the argument, ruling that express assent cannot be presumed by silence or a mere failure to object. The court said it would apply the same analysis under UCC Section 2-209.[34]

28. The Klocek court weighed the practical considerations in the computer industry for conducting business over the phone and shipping its full terms of the agreement with the software and hardware package. The court noted that under its decision Gateway remained free to do so, but it merely had to effectively communicate that intention to its customers either on the phone or after the sale under Section 2-207. In Klocek the court recognized the needs to return to the equities of the situation which favored individual consumers rather than large manufacturers, perhaps in part because the plaintiff represented himself.

    Other Shrinkwrap Cases

29. Nevertheless, courts continue to follow ProCD and Hill[35] In M.A. Mortenson Co. v. Timberline Software Corp., [36] Mortenson, a large construction firm purchased software from Timberline to use in preparing construction bids. Mortenson had used earlier versions of Timberline software for three years. Timberline produced an updated version of the software, called Precision, and through its authorized dealer, furnished a price quote to Mortenson. Mortenson issued a purchase order to the dealer for eight copies of the software containing terms for price, setup fees, delivery charges and tax. The purchase order did not include an integration clause.

30. The software was shipped with a shrinkwrap license on the outside of each software packet and in the instruction manual. The license terms are referenced each time the software loads. The license contained a disclaimer excluding liability for any damages and limiting remedies to return of the license fees paid. The license stated: "Your use of the program acknowledges that you have read this license, understand it, and agree to be bound by its terms and conditions." It also instructed the user that if they did not agree with the terms, they were to return the software disks and manuals to the dealer for a refund.

31. Mortenson used the Precision software to prepare its bid for a hospital project. The software malfunctioned several times while preparing the bid. Mortenson submitted the bid generated by the program and won the bid for the project. It later learned that the bid submitted was $1.95 million lower than it had intended. Subsequently, the software was confirmed to have several "bugs" and Mortenson sued. Timberline defended based on the disclaimer contained in the software license. The trial court awarded summary judgment, which was upheld by both the Washington Court of Appeals and the Washington Supreme Court.

32. Mortenson contended that its purchase order was sufficient under the UCC to constitute an integrated contract that excluded the license and its disclaimer. Timberline argued that the purchase order was not intended to be the final expression of the parties' terms, because it mentioned, but omitted details, regarding software support and possible upgrades. The court ruled that the purchase order was not the entire agreement of the parties.[37]

33. Mortenson then argued that the license was a contract modification under Section 2-207 and asked the court to follow the Step-Saver analysis. But the court distinguished Step-Saver by noting that Mortenson was an end user covered by a "standard" license agreement, not a reseller as the plaintiff in Step-Saver. Further, Mortenson had previously used other bid preparation software made by Timberline, with similar license provisions. On these facts, the court refused to follow Step-Saver's contract modification analysis under Section 2-207.

34. Instead, it followed ProCD and held the license terms were part of the agreement between Mortenson and Timberline in the first place, and not an attempted modification. It applied Section 2-204 to assert that the parties may form a contract in "any manner sufficient to show agreement even if the moment of its making is undetermined". The Mortenson court referred to the draft version of UCITA, which allowed a layered contracting approach.[38] Of course the difficult issue occurs when one party inserts a "layer" of contract terms that the other is not fully aware of and to which the party has not manifested assent. The case is remarkable because of its procedural posture on appeal from summary judgment, meaning there were no genuine issues of material fact.

35. On the equities, it seems just to hold the clause enforceable against Mortenson, but only after a trial to determine the facts, rather than by summary judgment. Several factors would support this result. Mortenson and Timberline both were sophisticated commercial parties. Mortenson had been an end user of Timberline's software for many years and would have been aware of the terms that accompanied all Timberline products it had used, and it had the right to return the software if it did not wish to accept the license terms. The court noted that the license terms were explicitly set forth or referenced in numerous locations. The court could have reached its equitable result by applying a Section 2-204 and including the license terms based on the parties' prior course of dealing.

    Clickwrap Cases

36. Clickwrap agreements came into use when software vendors began distributing software by means other than disks, such as when the software is pre-installed on a computer for the user, or when the software is downloaded over the Internet. Upon downloading, installation or first use of the application, a window containing the terms of the license opens for the user to read. The user is asked to click either "I agree" or "I do not agree". If the user does not agree, the process is terminated. The clickwrap agreements often remove many factual questions whether the user had adequate notice of the license terms and manifested assent to them. With respect to software downloads, the clickwrap terms often are displayed at the very start of the contract formation process, although often the terms are contained in a scrollable window that requires the user to scroll down to read all of the terms. This positioning often eliminates U.C.C. Section 2-207 issues regarding agreement to additional or different terms.

37. In i.Lan Systems, Inc. v. Netscout Service Level Corp.[39] the court was asked to enforce a clickwrap agreement that conflicted with an earlier purchase order. i.Lan was the purchaser of network monitoring software sold by NextPoint. In 1998, i.Lan signed a Value Added Reseller (VAR) agreement with NextPoint. This agreement had extensive warranty disclaimers and limitations of remedies. In 1999, i.Lan issued a purchase order for new software, which NextPoint agreed to install. The software contained a clickwrap agreement containing essentially the same terms as the 1998 VAR agreement.

38. The issues presented were much like those in ProCD and its progeny. Was the purchase order an offer accepted by NextPoint when it agreed to ship the software (following Step-Saver)? Or was it a "money now, terms later" transaction that created a contract when i.Lan clicked "I accept" on the clickwrap license (following ProCD)? The i.Lan court expressed its preference for the ProCD analysis over that of Step-Saver on the basis of the UCC's liberal approach to contracting. The court held that NextPoint had made a counter-offer in shipping the software with the clickwrap license terms, and the contract was created when i.Lan made its clickwrap acceptance and not when it agreed to ship pursuant to the purchase order. Additionally, the court held that even if a Section 2-207 analysis was applied, NextPoint's clickwrap terms were not material because they were essentially identical to the 1998 VAR agreement. The i.Lan court ruled that the 1998 VAR agreement, the 1999 purchase order and the clickwrap agreement had to be read together in context. The court stated it would be absurd to treat the silence of the 1999 purchase order as negating i.Lan's express agreement to the 1998 VAR and clickwrap terms. Like the Mortenson case, in which the parties also had extensive prior dealings on similar license terms, the decision appears to be consistent with the equities involved.

39. Much of the litigation regarding clickwrap licenses concerns forum selection clauses and arbitration clauses. In most cases, the courts have found the clickwrap terms to be enforceable.[40] The courts and commentators alike have embraced the policy reasons behind forum selection clauses expressed by the U.S. Supreme Court in Carnival Cruise Lines v. Shute.[41]

40. A typical case is Caspi v. Microsoft Network,[42] in which the plaintiff entered into a clickwrap agreement with Microsoft as an online subscriber to Microsoft's MSN network. MSN's membership agreement appeared in a scrollable window containing the terms. The subscriber was prompted to click either "I agree" or "I Don't Agree", which aborts the registration process. Caspi alleged that Microsoft engaged in "unilateral negative option billing" by rolling subscribers onto more expensive plans without their consent. The case was a class action purporting to represent 1.5 million subscribers. The membership agreement contained a forum selection clause requiring jurisdiction and venue in Microsoft's backyard, King County Washington.

41. The Caspi court enforced the forum selection clause. The court ruled that 1) there was no fraud or overweening bargaining power, 2) the clause did not violate public policy, and 3) it did not seriously inconvenience trial[43] Further, the court ruled that the MSN members had adequate notice of the clause because they were free to scroll through the computer screens displaying the terms for any amount of time before agreeing.[44]

42. The most recent case in this area is Forrest v. Verizon Communications[45] which involved a forum selection clause contained in an agreement to provide DSL Internet service. Verizon customers experienced difficulties with frequent and lengthy disruptions in service and slower service speeds than promised. The plaintiff became so frustrated after three months of waiting for service that he filed suit for class action on claims of breach of contract, negligent misrepresentation, and consumer protection violations.

43. Verizon's customers had signed up for the DSL service online. The forum selection clause was contained in a clickwrap license that appeared in a small computer window in which only a portion of the agreement was visible. along with a scroll bar allowing the customer to scroll through the agreement. Below the scroll box was an "accept" button, which the customer clicked to assent to the agreement. The forum selection clause provided as follows:

    4.7 You and VIS agree that this Agreement shall be interpreted in accordance with the substantive laws of the Commonwealth of Virginia, without reference to its principles of conflicts of laws. You and VIS consent to the exclusive personal jurisdiction of and venue in a court of competent jurisdiction located in Fairfax County, Virginia.

    6. Any cause of action or claim you may have with respect to the Service must be commenced within one (1) year after the claim or cause of action arises or such claim or cause of action is barred.

    The choice of Virginia as of the forum state was significant because Virginia is one of only two states that do not provide a class action procedure. Thus, if the selection clause were enforced, a class action remedy was not available.

44. The Forrest court first considered whether the clause was reasonably communicated to the plaintiff. The plaintiff argued that only a portion of the agreement was visible at any one time, that a forum selection clause was contained in a section entitled "General Provisions" rather than in another section entitled "Limitations of Liability and Remedies", and that the clause should have been in capital letters. The court rejected all three arguments and held that the use of the scroll box did reasonably communicate the terms to the plaintiff.

45. The Forrest court also considered whether the forum selection clause was unenforceable because by designating Virginia as a forum state and choosing its substantive law, it effectively deprived the plaintiffs of the opportunity to bring a class action. The court acknowledged a split in the authorities on the issue. However, the court noted that there was nothing sinister in Verizon's choice of Virginia as the forum state because Verizon's principal place of business was in Virginia.

46. Forrest also argued that the agreement was unenforceable because he was obligated to incur financial expense for modems and Ethernet cards to use the service before entering into the agreement. The court held that a forum selection clause may be enforced even when they are entered into after a cause of action concerning the contract had already risen.

47. Lastly, Forrest argued that only his contract claims were affected by the forum selection clause and that his court and consumer protection claims need not be brought in Virginia. The court noted that the forum selection clause that was broad enough to encompass all claims related to the service and would not allow the plaintiff to circumvent the operation of the clause through "artful pleading".

48. There are several factors that weakened the equities in the plaintiffs' case in Forrest. First, the plaintiff was a licensed attorney for the Department of Justice, likely to be fully aware of the importance of the forum selection clause. Second, the forum chosen was the principal place of business of the defendant and was not an inconvenient forum for the plaintiff who lived in the area. Third, the agreement gave the plaintiff 30 days after registration to cancel the service and receive a full refund.

49. One notable exception with regard to a clickwrap forum selection clause is Williams v. America Online, Inc.[46] Williams involved a class action against America Online for damages caused to the plaintiff's computer during installation AOL Version 5.0. Upon installation, the AOL software changed configurations on the plaintiff's computer to prevent access to non-AOL service providers, to disable non-AOL e-mail programs and to override other personal information files. The AOL subscribers all entered into AOL's clickwrap Terms of Service (TOS) which included a forum selection clause requiring all claims to be heard in Virginia under Virginia law, which, as noted in the Forrest case above, does not permit class actions.

50. The plaintiffs provided evidence that the re-configuration of their computers occurred before the clickwrap agreement was displayed on their screens. Thus their damages had already occurred before any reasonable notice of the TOS terms or opportunity to review them. AOL set the default clickwrap setting to "I Agree", and the user had to click "Read Now" twice before the TOS was displayed. The court refused to enforce the clickwrap agreement, which is consistent with the equities of the case.

    Browsewrap Cases

51. Browsewrap agreements do not appear on the screen and the user is not compelled to accept or reject the terms as a condition of proceeding with further computer operations. Instead, a browsewrap agreement appears only as a hyperlink that is accessed by clicking on the link. It is optional, not required. This makes browsewrap agreements much more susceptible to challenge on the grounds of lack of reasonable notice and bona fide assent to the browsewrap terms.[47] One commentator described the differences between clickwrap and browsewrap agreements as follows:

52. There are three important differences between clickwrap and browsewrap agreements. First, in the case of clickwrap agreements, users have constructive notice of the terms of the agreements because they are presented with all the terms of the agreements prior to entering into the agreement. However, with browsewrap agreements the terms of the agreement are displayed to users only if they click on the hyperlink that brings up the "terms and conditions" page. Second, in order to carry out their primary purpose (e.g., downloading software or purchasing tickets online), users must acknowledge the presence of both the clickwrap agreement and the displayed terms by clicking on a button. With a browsewrap agreement, users can carry out their primary purpose without ever clicking on the hyperlink that links to the "terms and conditions" and without ever seeing the agreement or its terms. Finally, with a browsewrap agreement users may not even realize that a contract is being formed. It is precisely because of these differences that courts have treated enforcement of these agreements differently. [48]

53. The leading case in this area is Specht v. Netscape Communications Corp.[49] Specht received a free download of Netscape's "Smart Download" software that enhances the downloading files from the Internet. In a class action, the plaintiffs charged that Netscape had used the software to obtain web usage information from Smart Download users in violation of their privacy. The browsewrap terms included an arbitration clause.

54. The software was available on Netscape's web site as well as from other free download sites. On Netscape's site, the link to the browsewrap terms was not visible in the first window view, but only visible if the user scrolled down the screen further. On non-Netscape sites, the Smart Download software could be obtained with any links to the browsewrap contract terms whatsoever. Netscape's site did not require users to click the browsewrap link. It merely stated, "Please review and agree to the terms of the Netscape Smart Download software license agreement before downloading and using the software."[50]

55. The Specht court ruled that "please review" was an invitation and not a condition, and thus could not constitute the assent necessary to make the arbitration enforceable.[51] The browsewrap agreement, if noticed, remains optional to the user, and there is scant little evidence that proves the user knew they were entering into an agreement at all by simply using the software, much less assent to the specific terms. Here, the equities lie with protecting unwitting users from forfeiting their rights to trial. Providers of online services and software have the more reliable option of a clickwrap agreement, and if they fail to use it, they do so at their peril.[52]

56. A very recent case, Comb v. PayPal, Inc.[53] also rejected the validity of the terms in a browseware agreement. PayPal was an on-line payment service that expanded from 10,000 customers on January 1, 2001 to 10.6 million accounts by September 30, 2001. Despite a sevenfold increase in revenue and 13-fold increase in users, PayPal merely doubled its number of customer service representatives.[54] It allegedly did not provide toll-free customer service numbers, required reporting of complaints by e-mail without providing an e-mail address for such complaints, and engaged in such poor customer service that the result was a backlog of 100,000 unanswered customer complaints. In many cases, PayPal froze disbursements from accounts, but allowed deposits into accounts.[55]

57. PayPal sought to compel arbitration and prevent consolidation of the plaintiffs' claims. PayPal relied on the terms of its browsewrap user agreement, which provided as follows:

    This User Agreement ("Agreement" or "User Agreement") is a contract between you and PayPal, Inc. and applies to your use of the PayPal TM payment service and any related products and services (collectively the "Service"). This Agreement affects your rights and you should read it carefully. We encourage you to print the Agreement or copy it to your computer's hard drive for your reference.

    You agree to the terms and conditions of this Agreement, the PayPal Privacy Policy, and any documents incorporated by reference. You further agree that this User Agreement forms a legally binding contract between you and PayPal, and that this Agreement constitutes "a writing signed by You" under any applicable law or regulation.

    Arbitration. Any controversy or claim arising out of or relating to this Agreement or the provision of Services shall be settled by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. Any such controversy or claim shall be arbitrated on an individual basis, and shall not be consolidated in any arbitration with any claim or controversy of any other party. The arbitration shall be conducted in Santa Clara County, California, and judgment on the arbitration award may be entered in any court having jurisdiction thereof. Either you or PayPal may seek any interim or preliminary relief from a court of competent jurisdiction in Santa Clara County, California necessary to protect the rights or property of you or PayPal, Inc. (or its agents, suppliers, and subcontractors) pending the completion of arbitration.[56]

    A link to the text of the user agreement was provided but the link did not need to be opened for the application to be processed. The agreement filled 25 printed pages.

58. The PayPal user agreement contained several overreaching and onerous provisions that, on the equities of the case, cried out for a remedy. The agreement contained a clause allowing PayPal to change the agreement at any time without notice. Although the amount of the average transaction handled by PayPal was $55 and involved consumers, the arbitration clause required use of the more expensive commercial arbitration rules of the American Arbitration Association.

59. The court first considered whether the customer had entered into an agreement to arbitrate by use of the clickwrap agreement. The court found that PayPal had made only a weak showing of actual agreement by the plaintiffs. Because it wanted to reach the unconscionability of the agreement, the court assumed without deciding that there was sufficient circumstantial evidence to demonstrate that the plaintiffs had agreed.[57]

60. The court considered both the procedural and substantive unconscionability of the agreements. In California law, an agreement is procedurally unconscionable if it is a contract of adhesion, which the court defined as a standardized contract that is imposed and drafted by the party of superior bargaining strength and that relegates the subscribing party only the opportunity to adhere to the contract or reject it.[58]

61. PayPal argued that because alternate sources of its service were available, the grant was not unconscionable. However, the court held that "available alternate substitute goods" was not the relevant test for unconscionability in disputes between consumers with small claims and a large institution[59] In discussing substantive unconscionability, the court considered four factors: mutuality, a prohibition against consolidation of claims, the costs of arbitration, and venue. With regard to mutuality, the court cited several overreaching provisions in the PayPal agreement. PayPal had the sole discretion to restrict accounts, withhold funds, close accounts, and procure ownership of all funds in the dispute until later determination of the claim. The user agreement was subject to change by PayPal without prior notice merely by posting the revised agreement on the PayPal web site. PayPal also froze customer accounts and retained funds without notice to its customers. PayPal could not show business realities that were necessary to justify such one-sided practices.

62. With regard to the prohibition on consolidation of claims, the court found that the prohibition on consolidation of claims created the potential for millions of customers with small claims to be without an effective method of redress.

63. The plaintiffs argued that the cost of conducting arbitration under AAA commercial rules as the agreement required, and not AAA consumer rules, would be $5,000. PayPal contended it would be only a filing fee of $125. The average claim against PayPal was $55 and the largest among the named plaintiffs was $310. The user agreement also required all arbitrations to take place in Santa Clara County, California. The court noted that forum selection clauses are generally presumed a prima facie valid, but it found the clause unconscionable when taken together with the small average claim. The court stated: "limiting venue to PayPal's backyard appears to be yet one more means by which the arbitration clause serves to shield PayPal from liability instead of providing a neutral forum in which to arbitrate disputes".[60] Of course, the court's decision to strike the browsewrap agreement as unconscionable is entire consistent with the equities in the case.

    Conclusion

64. The foregoing review of case law regarding shrinkwrap, clickwrap and browsewrap licenses demonstrates that judicial unpredictability will reign until a more certain legislative framework can be developed for dealing with the many variations involving these agreements. While objectively assessing the relative equities of the parties is not a fool-proof predictor of judicial decision-making, parties in litigation regarding these agreements would be wise to consider the relative equities in their favor as closely as the legal precedents involved.