Internet: Enforceability of Click-wrap Licenses

December 1, 1998 Advisory

As electronic commerce proliferates, the Internet community has sought reliable techniques for forming legally enforceable, on-line contracts. While several methods are currently in wide-spread use, click-wrap licenses, sometimes called web-wrap agreements, have emerged as the dominant model. Click-wrap licenses are based on the familiar shrink-wrap license, where a mass-marketed software product contains a license on the outside of its package and the customer is deemed to have assented to the license terms by using the software and failing to return it within a specified period. Click-wrap agreements also require the user to signal assent by his or her conduct, usually by clicking on a button labeled "I agree." Despite their ubiquitous use, U.S. courts have addressed the legal enforceability of shrink-wrap or web-wrap agreements only a few times.

In one such case, the Seventh Circuit held that standard, shrink-wrap licenses are enforceable, unless they violate some general rule of contract law (e.g., if they are unconscionable). ProCD Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). The court primarily based this conclusion on three factors: that the software package indicated to consumers that the software was subject to an enclosed license; that the purchaser had ample opportunity to read the license; and that the purchaser could reject the license by returning the software for a refund. According to the court, a software vendor, as master of its offer, is free to invite acceptance by specific consumer conduct. The Seventh Circuit then extended the scope of this holding in Hill v. Gateway 2000, 105 F.3d 1147 (7th Cir. 1997), applying the same reasoning to enforce a similarly structured, phone-based, computer sales contract.

Earlier this year, a California court provided strong support for the enforceability of web-wrap agreements, recognizing the validity of terms of service posted on a web-site. Hotmail Corp. v. Van Money Pie Inc., C98-20064 (N.D.Cal., April 20, 1998). The plaintiff, Hotmail, offered free Internet e-mail services provided the user consented to Hotmail's terms of service through execution of a standard click-wrap agreement. The defendants allegedly sent SPAM (unsolicited e-mail) advertising pornographic materials using Hotmail addresses, in violation of the terms of service. Hotmail sued the defendants for, among other things, violating the click-wrap agreement, trademark dilution, and unfair competition. Ruling on Hotmail's motion for preliminary injunction, the court determined that the evidence supported a finding that the plaintiff would likely prevail on its breach of contract claim.

While these cases alone do not resolve the enforcement issue, they provide strong evidence that courts will increasingly recognize the validity of on-line contracts. Proposed UCC Article 2B, a new section of the Uniform Commercial Code specifically addressing software licensing and electronic commerce, expressly recognizes the enforceability of shrink-wrap and click-wrap agreements and, if adopted, will put to rest much of the confusion currently surrounding the issue. But for now, companies should adhere to the following guidelines to maximize the chance that a click-wrap license will be enforced:

  1. Provide clear and conspicuous notice (at the time of purchase) that the sale is subject to an on-line agreement (you should disclose the entire agreement upon purchase or first use);

  2. Include in the notice a clear description of the conduct constituting acceptance (e.g., clicking "Yes" or "I agree");

  3. Highlight any unusual terms or conditions at the outset of the transaction;

  4. Require an affirmative action to signal assent (e.g., clicking a button) and condition acceptance on use; and

  5. Offer a refund if the buyer rejects the agreement, and provide an easy method of cancellation and/or return of any purchased products.

Enforcement is not the only important legal issue implicated by on-line agreements. Electronic contracts, like other contracts, are subject to a variety of statutory rules. In most jurisdictions, contracts for the sale of goods are governed by Article 2 of the UCC, and these statutory requirements do not disappear simply because the contract is executed electronically rather than by conventional means. Moreover, the Magnuson-Moss Act governs the enforceability of warranty disclaimers and limitations of liability in certain consumer transactions, and as Internet commerce expands, electronic transactions will not long evade the requirements of the statute. The legal rules governing electronic contracts will undoubtedly undergo a tumultuous evolution during the next few years, but companies should remember that the new legal regime, developed to address the peculiar legal problems created by Internet commerce, will emerge out of familiar, long-standing legal principles.