A week after the America Online v. Superior Court decision, which was the centerpiece of last month's column, comes another bombshell in the "terms and conditions" category. The America Online case, you will recall, invalidated the choice-of-law and choice-of-forum provisions found in AOL's terms of service. This new case invalidates the arbitration clause in the terms associated with Netscape's SmartDownload feature. The bottom line is that if you do not require your customers to click an "I accept" button (and perhaps do even more) to express acceptance of your terms and conditions, they may not be enforceable.
To understand the significance of this new decision, it is important to have some knowledge of arbitration law (which may be new to you), of contract law (which is very basic), and of the conventions of software licensing (with which you may be very familiar). This is important stuff.
As of a century or so ago, courts were reluctant to allow parties to resolve disputes privately. However, court actions are expensive and cumbersome, so much so that the specter of litigation could frustrate a business deal that otherwise would be mutually beneficial - to the parties in particular and to the economy in general. In response, Congress enacted the Federal Arbitration Act, Title 9, US Code, Section 1-14, rendering most arbitration agreements enforceable.
Arbitration, in very general terms, is a process whereby the parties go to a private "rent-a-judge" - usually an attorney and often a retired judge - whom they retain to resolve their dispute. This person is called an "arbitrator."
If you are a baseball fan or involved in activities of unionized labor, you probably are at least generally acquainted with arbitration, because union contracts typically include arbitration provisions. Disputes between a union member and the employer thereby must be resolved by arbitration, rather than in court. It is quicker, more certain, and less expensive.
When a business contract calls for arbitration and a dispute arises, the complaining party normally demands arbitration. However, if one party to the contract sues the other in court, the defendant files a motion or petition to compel arbitration. Either way, the parties will be relegated to arbitration.
Normally, the parties hire the arbitrator. Arbitration rules require that the parties share the cost of arbitration. Arbitrators charge for their services, unlike public judges. The reason, by the way, why parties to business contracts regularly are willing to resolve their disputes before a pricey arbitrator rather than a public judge (costing only a minimal filing fee) is because of the other costs and delays associated with litigation. Court litigation brings with it staggering costs of attorneys, depositions, court appearances, and others, as well as delays associated with seemingly endless motions and appeals. Moreover, litigants in court are stuck with the court's schedule; whereas parties to arbitration hire the judge, so the judge is working for them.
An arbitration hearing takes place in a conference room, not a courtroom. The arbitrator hears evidence and makes a decision, called an "award." The arbitrator's award is enforceable in court, just like a judge's decision. But unlike a judge's decision, there ordinarily can be no appeal from an arbitration award.
Because it facilitates a cheap, quick, and final decision, parties to business contracts embrace arbitration. Large companies are particularly fond of arbitration provisions in consumer contracts, both because of the factors generally favoring arbitration and because there is no jury. Juries tend to side with consumers against companies because all jurors are consumers, and so few of them are in business that any businessmen who show up for jury duty can usually be excluded by competent plaintiff's counsel. Thus, "runaway juries" render huge verdicts in favor of consumers against big corporations.
Netscape has an arbitration provision in its license agreement, as do many software providers in such agreements or in their "terms and conditions." However, a supplier of a product or service cannot simply dictate those conditions. Rather, they are enforceable only to the extent that the consumer agrees to them. Like any contract, there must be a "meeting of the minds."
The contract-law requirement of a "meeting of the minds" does not mean that the seller and the buyer must enter into a point-by-point agreement on terms of service. If a seller offers a product subject to specified conditions, the potential buyer has two choices: Accept the package deal as offered, or not. Theoretically, the consumer could go to the manufacturer and negotiate a different set of conditions, but that will not happen in reality. Importantly, if the consumer agrees to the contractual terms, they are binding even though the consumer did not read them; if the consumer agrees to accept the offered package of terms, she generally is stuck with all of the terms, although she may have chosen to not review them before acceptance.
The requirement that the terms of a contract go only as far as there is a meeting of the minds is key here. If the supplier of a product includes "terms" in the box, but the customer does not see them until after receiving the product, the "terms" are not enforceable.
Software licensing has given birth to a whole new set of issues relating to the enforceability of agreements. When you purchase computer software, you purchase a license, not a product. In the days of mainframes, the customer signed a contract with the software company that included the extensive terms of the license. However, early on in the personal-computer era - when the general public began purchasing mass-marketed computer software (licenses) in boxes at the store - software companies had to figure out a way to create enforceable licensing agreements with their customers. What they came up with is the now-familiar "shrink-wrap" license.
The terms of a shrink-wrap license generally are enforceable. On the outside of the box is a reasonably conspicuous notice that the license is subject to the limitations explained inside. When you open the box, the discs are shrink-wrapped with a notice that if you open the shrink-wrapped package you are agreeing to the terms of the license found in the box; if you don't agree, you can return the package - with the package of discs unopened - for a full refund.
When the capability to download software arose, more ingenuity was required. What arose were so-called "click-wrap" and "browse-wrap" licensing agreements. The former displays the terms on the screen and then requires a click of an "I accept" button, or something of that nature (with an alternative, "I do not accept" button). The latter merely gives notice that there exist terms and conditions, with perhaps a hyperlink to them.
Applying the principles of contract law explained above to the click-wrap and browse-wrap licenses, you probably have figured out that click-wrap is the better approach, and you would be right. Actually, the best solution is a click-wrap with a scrolling requirement. That arrangement requires that the customer cannot click the "I accept" button until he has scrolled through the terms. A customer who later claims he never approved the terms would be confronted with the fact that he could not have downloaded the software unless he first scrolled through the terms and, after that, clicked the "I accept" button as opposed to the "I do not accept" button. The law will not take pity on the consumer who scrolled through a list of terms but decided to not read them; they were there to read and the consumer simply chose to not read them. Customers do that at their own peril unless the conditions are unconscionable.
In this new Netscape case, the court found that the SmartDownload procedure was too similar to an unenforceable "browse-wrap" agreement. The download screen said "Please review and agree to the terms of the Netscape SmartDownload software license agreement before downloading and using the software."
That polite request that the customer review the terms before downloading, the court found, was something short of making the use of the software subject to the license agreement. Specht v. Netscape Communications Corp., ___ F.Supp.2d ___, 2001 WL 755396 (S.D.N.Y., July 5, 2001).
A click-wrap agreement, however, is not the end of the arbitration issue. For example, requiring a customer to pay half the cost of arbitration, rather than a $100 small-claims-court filing fee, as a barrier to recovering $150 from a billing error, could be considered unconscionable and subject to being thrown out by the courts. It thereby could be claimed to be an unfair business practice by the FTC or (see last month) a competitor or private plaintiff. Accordingly, care must be taken in drafting arbitration terms, like all terms.
As you can see, this is a rapidly changing area of the law. Your terms and conditions need to be updated regularly, perhaps more frequently than your software.
Clyde DeWitt is a partner in the Los Angeles, California law firm of Weston, Garrou & DeWitt. He can be reached through AVN Online's offices, at his office at 12121 Wilshire Boulevard, Suite 900 Los Angeles, CA 90025 or over the Internet at [email protected]. Readers are considered a valuable source of court decisions, legal gossip, and information from around the country, all of which is received with interest. Books, pro and con, are encouraged to be submitted for review, but they will not be returned. This column does not constitute legal advice but, rather, serves to inform readers of legal news, developments in cases, and editorial comment about legal developments and trends. Readers who believe anything reported in this column might impact them should contact their personal attorneys.
