August 2001
FEDERAL COURT R EFUSES TO ENFORCE
PASSIVE “BROWSE-WRAP” ARBITRATION CLAUSE IN
LICENSE AGREEMENT FOR SOFTWARE DOWNLOAD
EXECUTIVE S UMMARY
This memorandum reviews a recent ruling of the United States District Court for the
Southern District of New York, refusing to enforce an arbitration clause in a so-called
“browse-wrap”, or passive, license agreement intended to govern use of a software program
downloaded for free from a website. The case is one of only a handful on the subject, and is
relevant to all businesses that utilize online contracts or online user terms and conditions. It
demonstrates that, although courts may be willing in some circumstances to enforce terms not
approved in advance by a customer, there may be a limit in at least some courts’ minds about
enforcing certain terms, particularly unconventional ones, that consumers need not see before
completing a transaction.
The case, Specht v. Netscape Communications Corp.1, in particular presents a further
warning sign regarding possible judicial reaction to passively entered online contracts, often
termed “browse-wrap” licenses. Such licenses are available for passive viewing on a website,
but do not require viewing or permit active assent to the terms of the license, and thus do not
involve clicking an “I agree” button or tab on the computer screen or similar user activity.
Specht should be of direct concern for companies that rely on “browse wrap” agreements to
impose contractual obligations on users of content that they deliver from their website via
download. Specht should also be noted by website operators that seek to rely on passive
posting of their terms of use to restrict user activities on their website. The decision of the
Specht court, as well as dicta from other recent cases, suggest that companies using browsewrap licenses or terms on their websites run some risk that their contractual terms will be held
unenforceable. Such companies should consider whether — particularly for websites
containing sensitive information or involving significant transactions — they may be better
served with “click-wrap” agreements requiring active assent to their terms.
1
No. 00 Civ. 4871 (AKH), 2001 WL 755396 (S.D.N.Y. July 3, 2001).
I.
THE SPECHT R ULING
The Specht decision governs a group of related putative class actions brought by
Netscape customers who downloaded and used a software product called “Smart Download,”
which enables users efficiently to continue and complete downloads and installation of other
software or content despite intermittent Internet connections. The plaintiffs alleged that Smart
Download transmitted to Netscape information about the users’ file transfer activity on the
Internet, and thus constituted an electronic surveillance of the users’ activity in violation of
two federal criminal statutes, the Electronic Communications Privacy Act and the Computer
Fraud and Abuse Act.
Netscape moved to compel arbitration (presumably anticipating that the claims could
not be sustained as a class action in arbitration) based on the arbitration provisions of the
browse-wrap software license agreement for Smart Download posted on Netscape’s website.
In the Specht decision, Judge Alvin K. Hellerstein of the U.S. District Court Southern District
of New York denied Netscape’s motion on the ground that users who downloaded Smart
Download never consented to any of the terms of the license agreement, and thus a valid
agreement to arbitrate was never formed.
Central to the court’s reasoning were the details of Netscape’s passive method of
making the license agreement available to prospective users of Smart Download. Specifically,
persons wishing to obtain the software from Netscape’s website viewed a tinted box labeled
“download.” The only step required to initiate the download was to click on the tinted box.
The sole reference to a license agreement could be located only if the user scrolled down
below the fold of the web page — in other words, to a portion of the page that ordinarily
would not be visible in connection with downloading the software — where Netscape invited
the user to review the terms of the license agreement. The license itself could be viewed only
by clicking through a hyperlink to another page. Users were not required to review the license
agreement before commencing the download, nor were they required to review or accept the
license in connection with either installation or operation of the software. The reference to the
license agreement or the associated hyperlink probably would have been unseen by and
effectively invisible to most users.
Applying California contract law, and treating the transaction as a sale of goods subject
to Article 2 of the Uniform Commercial Code, the court found that persons downloading
Smart Download were given no notice and had no reason to believe that they were entering
into a contract.2 The court also concluded that, even if customers were aware that they were
entering into a contract, they were not afforded the opportunity to consent expressly to the
terms of that contract. In these circumstances, the court was unwilling to hold customers to
2
Judicial treatment of software transactions as sales of goods under U.C.C. Article 2 is frequently
criticized by software publishers. The body of law preferred by much of the software industry is
the Uniform Computer Information Transactions Act (UCITA). UCITA could not have been
applied in Specht because California is not one of the two states that have adopted UCITA to date.
It is doubtful, however, that the application of UCITA would have changed the outcome in Specht.
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the terms of a license agreement that it suspected most had never even read. The court
observed that in California, as in most states, “an offeree, regardless of apparent manifestation
of his consent, is not bound by inconspicuous contractual provisions of which he was unaware,
contained in a document whose contractual nature is not obvious.”
In sum, the court compared Netscape’s distribution of Smart Download to “a free
neighborhood newspaper, readily obtained from a sidewalk box or supermarket counter
without any exchange with a seller or vender.” Although the publisher of such a free
newspaper could still rely on its copyright protections, few would expect purely contractual
obligations, obscurely displayed, to be enforceable against the taker of the newspaper.
In reaching its decision, the court contrasted Smart Download’s passive “browse-wrap”
license procedure with other online contracts recently upheld by the courts. Thus, for
example, in cases such as In re Real Networks Inc. Privacy Litigation and Hotmail Corp. v.
Van$ Money Pie, Inc., active “click-wrap” license agreements were found to be valid and
enforceable.3 The principal difference between the enforced click-wrap agreements and the
unenforced browse-wrap agreement in Specht is that the click-wrap agreements require users
to view the contractual terms on their computer monitor, and then actively assent to the terms
displayed, such as by clicking an “I agree” button. The possibility that a user may not actually
read the click-wrap agreement, but instead simply click “I Agree,” generally will not render
the agreement unenforceable because the user has been afforded a clear opportunity to review
the terms and has expressly assented to such terms; as with pen-and-ink contracts, a party will
generally not be excused from a contract on the ground that he or she did not read it.
Another useful comparison is the difference between the hidden license in Specht and
the visible license in the enforceable passive “browse wrap” procedures at issue in
Register.com, Inc. v. Verio, Inc.4 In Register.com, a U.S. District Court applying New York
law found that a systematic user of Register.com’s “whois” database information was aware
of, and thus bound by, data use limitations that were stated in every display of whois search
results.5 According to Register.com’s stated terms, the user’s assent was manifested by of
submission of whois inquiries, an approach that the court found effective.
3
No. 00C1366, 2000 WL 631341 (N.D. Ill. May 8, 2000); No. C 98-20064, 1998 WL 388389
(N.D. Cal. April 16 1998).
4
126 F.Supp. 2d 238 (S.D.N.Y. 2000).
5
The Specht court distinguished Register.com as having been decided under New York law, rather
than California law, but the court may simply have been unaware of the prominence of
Register.com’s terms and conditions, which was not fully described in the Register.com opinion.
In any case, as suggested above, the two decisions do not appear to put California and New York
law at loggerheads, but instead appear to have facts that fall on different sides of a mutuallyrecognized line of manifest assent.
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II.
P RACTICAL IMPLICATIONS
A.
Implications for Online Vendors
The Specht ruling serves as an important reminder that vendors wishing to rely on
online contracts, in the form of license agreements or otherwise, need to give careful
consideration to the balance between customer ease of use and legal certainty. Marketing
personnel are often understandably reluctant to burden online transactions with too many time
consuming screens or legal fine print that may well “kill the mood” and drive down
transaction numbers. But the tradeoff may be that the company finds itself unable to enforce
restrictions on the user’s recourse against the company necessary to make the business model
viable. Vendors that consider this balance and conclude that enforceability of certain terms is
critical to the company from a business and financial perspective may want to consider
requiring their customers to assent actively, in some fashion, to the terms of the contract
before the delivery of a product, software, or information. If they do so in order to decrease
their risk of unenforceability, they will also want to maintain records of their customers’
assent (either on a user-by-user basis, or sufficient to prove that no user could avoid assent) so
that it can be clearly demonstrated, in the event of a dispute, that any given customer was
provided with and assented to the contractual terms.6
Of course, it is important to note that simply because a contract has been formed, it will
not necessarily be rendered enforceable by the courts. Customers may still seek to avoid
enforcement of contracts using the full panoply of traditional defenses, such as the defense of
unconscionability. For instance, a domestic court may hesitate to enforce a license agreement
that requires disputes to be arbitrated outside of the United States. Accordingly, online
vendors also should take care to ensure that their agreements are likely to be deemed
“substantively and procedurally fair” by a court.
B.
Implications for Website Operators
Many websites use passive browse-wrap “terms of use” to establish the conditions
under which visitors may use the information and services available on their site. Insofar as
such terms of use constitute an affirmative license under the website owner’s intellectual
property rights, it is relatively clear that no express assent by the user should be necessary.
Thus, for example, it is well-established that website operators may block a customer’s access
to a website for violating a browse-wrap license, or limit the copying and redistribution of
copyrightable content provided on the site. But where a website owner seeks to rely on its
terms of use to impose purely contractual conditions going beyond the basic exercise of its
6
This same analysis is likely to apply if the transaction is governed by UCITA. Although UCITA
thus far has been adopted only by Virginia and Maryland, it is worth bearing in mind that, under
UCITA, a person must have actual knowledge of the terms of the agreement or have an
opportunity to review the terms before they are able to demonstrate assent; otherwise, the
agreement may be unenforceable. Click-through agreements that fully disclose terms generally
should satisfy UCITA’s requirements.
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intellectual property rights, the reasoning of the court in Specht regarding notice and assent
becomes more relevant and cautionary. While not directly on point, one can easily anticipate
that Specht will now be cited by parties seeking to challenge whether a website operator can
enforce choice of law, choice of forum, or arbitration clauses contained in its terms of use.
Accordingly, if website operators want the highest level of legal certainty that they will
be able to enforce contractual aspects of their terms of use or other website license agreements
with their users, they may wish to institute an active click-through scheme like the one
described above, requiring the user to assent expressly to the terms of the license agreement
before accessing data from the site. (Of course, in connection with a user registration scheme,
assent need only be obtained once, at registration, if subsequent use is permitted only after a
secure log-in.) While this more active click-wrap procedure may be considered burdensome
by the operator, the user, or both, the burden nevertheless may be considered worthwhile in
light of the potential added likelihood of enforcing the agreement.
_________________________________________________
If you would like further information regarding these new developments, please feel free to
contact any one of our lawyers experienced in electronic commerce identified below.
Covington & Burling plays a leading role in the fields of e-commerce and information technology
law, both in the United States and throughout the world. Our e-commerce and information technology
practices reflect the firm’s overall strength in the areas of government regulation, litigation, transactional
matters and technology. With offices in Washington, New York, London, Brussels and San Francisco,
Covington & Burling has broad experience in dealing with every facet of e-commerce and information
technology matters.
Covington & Burling Lawyers to Contact for Further Information
Jason Albert (Brussels)
32.(0)2.549.52.60
ealbert@cov.com
Evan Cox (San Francisco)
415.591.7072
ecox@cov.com
Erin Egan (Washington)
202.662.5145
eegan@cov.com
Mark Kightlinger (Washington)
202.662.6110
mkightlinger@cov.com
Mark Plotkin (Washington)
202.662.5656
mplotkin@cov.com
Hilary Prescott (London)
44.(0)20.7290.3110
hprescott@cov.com
Stuart Stock (Washington)
202.662.5384
sstock@cov.com
Bert Wells (New York)
212.841.1074
bwells@cov.com
Kurt Wimmer (London)
44.(0)20.7290.3105
kwimmer@cov.com
This memorandum provides general information, not legal advice as to any specific matter, and
should not be used as a substitute for appropriate legal advice.
www.cov.com
© 2001 Covington & Burling
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