Special Types of Contracts in Cyberspace
People encounter special types of online contracts every day. When you download software over the internet, you likely enter into a contract with the software developer regarding your use of that software. If you create a new online social networking profile, you enter into a contract with the social networking platform provider. It is fair to say that most people do not read the “terms of use” or “terms of service” documents before clicking on “I agree” in order to access an online product or service.
Such a contract is called a contract of adhesion. An offeror drafts these types of contracts for its own benefit. The offeree has little opportunity to negotiate the terms of the contract. In order to use the underlying product or service, the offeree must accept all the terms of the contract. It is a “take it or leave it” contract. In this type of contract, the offeror has all of the bargaining power. The underlying question in these types of contracts is whether there is agreement between the parties over the contract terms. Do the parties truly have a meeting of the minds?
FYI
Take a moment to look at the terms of service documents for common online services. You can read the Google Terms of Services document at http://www.google.com/policies/terms/. The Facebook terms of service document, called “Statement of Rights and Responsibilities,” is available at https://www.facebook.com/legal/terms.
Contracts of adhesion sound bad, but they are sometimes necessary. This is especially true for e-commerce transactions. E-commerce could be substantially slowed if merchants had to negotiate the terms of every sale with a consumer. Thus, they create form contracts for multiple uses to expedite commerce.
Contracts of adhesion also are called “form” contracts or “boilerplate” contracts because they are presented as standard forms. They contain standard terms that are used regardless of where the transaction takes place. These terms typically favor the offeror. For instance, they might have terms that limit a person’s rights if the offeror breaches the contract. They also may require any lawsuits about the contract to be filed in the offeror’s home state.
In the online environment, end user license agreements are the most encountered contracts of adhesion. An end user license agreement (EULA) is a contract between the manufacturer or distributor of a piece of software or a service and the end user of the application. It states how the software or service can be used.
NOTE
In the law, boilerplate language is any standard language that a person or entity can reuse in multiple contracts with few edits.
EULAs are particularly important in the software context. This is because they help protect the software owner’s copyright in his or her product. Computer software can be protected by copyright laws. Software owners traditionally license their products rather than selling them. This helps them protect their copy and distribution rights. In many instances, it even gives them more control over their products than copyright law allows because the EULA specifies how consumers use software and places limitations on that use.
NOTE
A license is a grant of permission to use a product or service in certain situations. It is not a sale of the underlying software.
Depending on the nature of the underlying transaction, a EULA also might be called a “terms of use” or a “terms of service” agreement. A EULA is traditionally used for products such as software that a user purchases or downloads. “Terms of service” is used for online services, such as search engine or social networking services. The phrase “terms of use” might be used for both products and services.
At the end of the day it really does not matter what these types of documents call themselves. It is important to understand that all of these documents try to create a contract between the software or service owner and the person who uses the software or service. This chapter uses the terms EULA and “terms of service agreement” somewhat interchangeably. However, there are several different specific terms for these types of contracts. They include:
- Shrinkwrap contracts
- Clickwrap contracts
- Browsewrap contracts
Shrinkwrap Contracts
The term shrinkwrap contract almost exclusively refers to software license agreements, specifically those that are included within a box of physical-media software. This term does not refer to software that consumers purchase and download online. With the proliferation of online software download services, you may not see actual physical media with a shrinkwrap contract that often anymore.
These types of EULAs are called shrinkwrap contracts because software manufacturers put them in a software box, underneath the shrinkwrap cellophane and packaging. Consumers do not actually see the terms of the EULA until after they buy the software. They then become bound to the terms of the agreement when they break the shrinkwrap and open the packaging. The agreement usually creates a software license between the consumer and the software developer.
At first courts viewed these types of contracts with suspicion. They tended to interpret the terms of the contract against the software manufacturer. Courts did not rule on whether these contracts were valid; instead, they looked at the terms in the contract. They would hold that some provisions of the contracts were unenforceable.
NOTE
Shrinkwrap licenses grew in popularity in the 1980s. Software developers used them to protect their exclusive rights granted under copyright law. They also used them to state their software warranties and to limit their liability for software failures. This helped them avoid some UCC warranty provisions.
Today courts generally hold that shrinkwrap contracts are valid. There is an offer and acceptance, which is shown by the manufacturer offering the software for sale, and the purchaser buying and installing it. These contracts also are supported by consideration. The consideration is the exchange of a product for money, and a consumer’s affirmative act of installing the software.
Courts tend to favor shrinkwrap contracts where the consumer receives the terms of the contract in multiple ways. A shrinkwrap contract is more likely to be enforceable when the agreement is printed on paper in the box and presented again to the consumer on the computer screen when the software is being installed. A shrinkwrap contract that allows a consumer to return the software without using it if he or she rejects its terms also is more likely to be enforceable. Meeting of the minds is shown through the actions of the consumer with respect to either installing the software or returning it.
Clickwrap Contracts
A clickwrap contract is a variation of the shrinkwrap contract. A clickwrap contract is usually presented to a user when purchasing software via the internet. These agreements are not used just for software purchases. Vendors use them for any type of product or service purchase that is conducted over the internet or online.
NOTE
A distinction between shrinkwrap and clickwrap contracts is that a user has an opportunity to read a clickwrap contract before purchasing a product or using a service. A user also must affirmatively agree to the contract before getting access to a product or service.
These types of contracts usually appear on a user’s computer or mobile device screen before installation of a product, application (mobile apps), or use of a service. They may be displayed in a separate pop-up dialogue box or on the main browser screen. A user has to click on an “I agree” or “I accept” button located on the same screen as the contract (or in the same pop-up window) before downloading and installing a product or using a service.
Enforceability of Shrinkwrap Contracts: ProCD Inc. v. Zeidenberg
The most famous case involving shrinkwrap contracts is ProCD Inc. v. Zeidenberg (1996).25 This was the first time that a federal court of appeal looked at a shrinkwrap case. The Seventh Circuit Court of Appeals, which covers Illinois, Indiana, and Wisconsin, decided this case.
ProCD sold a software product that was a searchable telephone directory database. It distributed its program and database on CD-ROM. ProCD spent more than $10 million to develop its product and to keep the database of telephone directory information current.
ProCD had both commercial-use and noncommercial-use versions of the product. The commercial-use product was more expensive than the noncommercial-use, or consumer, product. Businesses that bought the commercial version could use it to create mailing lists of potential customers and for other marketing purposes, although ProCD did not allow this in the consumer version of the product.
ProCD had to keep businesses from buying the consumer product and using it for commercial purposes. However, it did not do this through technological solutions. Instead, ProCD turned to contract law. People who bought the consumer version of the software were prohibited from using it for commercial purposes because of the license agreement that was included with the product.
The defendant, Matthew Zeidenberg, purchased the consumer version of the product. He then formed his own company and reposted the information on the internet, offering the information for sale at a price that was lower than ProCD’s price for either its consumer or commercial product.
ProCD sued Zeidenberg, arguing that Zeidenberg breached the terms of the license agreement that was included in the ProCD software box. Zeidenberg argued that only the text written on the outside of the package containing the ProCD product was part of his contract with ProCD. He claimed that the license agreement that was inside the box was additional contract terms. He argued that they were not enforceable under various provisions of the UCC.
The district court agreed with Zeidenberg, and ProCD appealed the decision of the district court to the Seventh Circuit Court of Appeals.
The Seventh Circuit held that the license agreement inside the box was an enforceable contract. In reviewing the case, the court noted that ProCD offered a full refund to a purchaser who did not agree with the terms of the shrinkwrap contract and returned the product without using it.
One fact that also helped the court reach the decision that the shrinkwrap contract was enforceable was that Zeidenberg had multiple opportunities to read it before he installed the software. It was printed on paper inside the box, and it was displayed on the computer screen during the software installation process. Zeidenberg could not install the software without specifically clicking on an acceptance box that contained the terms of the contract. The court found that all these opportunities to read the contract put Zeidenberg on notice of it. Through his actions, he showed that he agreed with those terms. This included the term forbidding commercial use of the product.
The court’s reasoning in ProCD v. Zeidenberg is used as the basis for validating other types of EULAs such as clickwrap agreements.
You can read the court’s opinion at https://law.justia.com/cases/federal/district-courts/FSupp/908/640/1457490/.
Courts have generally held that clickwrap contracts are enforceable. These cases are highly dependent on how the clickwrap contract is presented to the consumer. In many cases, these types of contracts are enforceable if the actual agreement is prominently displayed. A consumer must have a reasonable opportunity to read and review the terms of the agreement. A consumer also must affirmatively agree to the contract before receiving a product or service. Clicking on the “I agree” or “I accept” buttons is evidence of the consumer’s agreement.
Browsewrap Contracts
Browsewrap contracts describe the situation where terms of use or service documents are listed on a web page. In these situations, a user does not have to make an affirmative action to accept the terms of the contract, such as clicking on a button. A browsewrap agreement assumes that a contract is entered into when a user merely visits a web page or downloads a product.
NOTE
A browsewrap contract is similar to a clickwrap agreement without the “click” requirement.
Terms of use and terms of service documents are browsewrap contracts when they do not require a user to affirmatively agree to the terms contained in the document. They are clickwrap contracts if a user must click on a button to show his or her agreement with the terms.
Many popular web pages use browsewrap contracts to display their terms of use or service provisions. For example, the CNN web page at www.cnn.com has a “terms of use” link listed in small type at the bottom of their home page. Users navigate to CNN’s terms of use when they click on that link. That agreement sets forth the terms and conditions for use of the CNN web page. The agreement states that users who do not agree to the terms of service should not access or use CNN.com.
Courts often are slow to find that browsewrap contracts are enforceable. One reason for this is that consumers may not know about these contracts. Terms of use or service links on web pages are typically in very small type and located at the bottom of web pages. Consumers are not conditioned to look for these agreements or read them. If consumers do not know about the contract and have not read it, how can they agree to its terms?
Courts review the facts of browsewrap cases very closely. For instance, in Specht v. Netscape Communications Corporation (2002), the Second Circuit Court of Appeals did not enforce a browsewrap contract. In this case, the consumer downloaded software but did not have to click on any buttons to show agreement with a license before downloading the software. However, the consumer had to click on several embedded links to read the terms of the agreement. They were not eye-catching links. The website did not display the license agreement in a separate window and it did not “pop up” at the consumer. The court held there was not enough notice to the consumer about the terms of the contract; therefore, it held that the contract was not enforceable against the consumer.
NOTE
Websites that use browsewrap agreements will want to make sure that the embedded links to those agreements are noticeable to a consumer.
It is possible that courts will start enforcing browsewrap contracts as e-commerce and internet use continue to grow. This is particularly true if web pages do more to make a user aware of the browsewrap contract. For instance, a court might be more inclined to enforce a browsewrap agreement when its terms are specifically referenced during the course of a transaction.
A Missouri court upheld a browsewrap agreement requiring a user to click on a “Submit” button that had the following language written next to it: “By submitting you agree to the Terms of Use.”26 The text included a link to the terms of use language. The court held that the user was on notice that the terms of use governed the transaction. It also found that the user had the opportunity to read those terms.