Designer Skin LLC v. S & L Vitamins, Inc., et al.
Click-wrap Agreement Held Enforceable
Click-wrap agreements are contracts formed entirely over the Internet. A party posts terms on its website pursuant to which it offers to sell goods or services. To buy these goods, the purchaser is required to indicate his assent to be bound by the terms of the offer by his conduct -- typically the act of clicking on a button stating "I agree." Once the purchaser indicates his assent to be bound, the contract is formed on the posted terms, and the sale is consummated. No paper record is created nor is the signature of the purchaser required.
Click-wrap agreements derive their name from shrink-wrap agreements, by which most software is sold today. The software vendor offers to sell or license the use of her software according to terms accompanying the software. The purchaser or licensee agrees by his conduct to be bound by such terms. Such conduct typically takes the form of the retention or use of the software after being provided an opportunity to review the contract's terms and return the software for a full refund if they are unacceptable.
Lawyers have long opined that click-wrap agreements are enforceable contractual arrangements. In what appears to be the first judicial pronouncement on this subject, Hotmail Corporation v. Van Money Pie Inc., et al., C98-20064 (N.D. Ca., April 20, 1998), the United States District Court for the Northern District of California has agreed. In Hotmail, the court held that defendants were bound by Terms of Service posted on a website as a result of their act of clicking on a button "I agree."
Plaintiff Hotmail provides free e-mail services to over 10 million customers under its trade name and service mark "hotmail." To utilize Hotmail's services, one must agree to Hotmail's Terms of Service, which expressly prohibit use of Hotmail e-mail accounts to facilitate the transmission of unsolicited commercial e-mail, otherwise known as spam. Users agree to these Terms of Service via a click-wrap agreement, in which the customer, after being given the opportunity to view the Terms of Service on his computer, clicks a box indicating assent to be bound thereby.
Defendants sent spam which advertised allegedly pornographic materials. Defendants altered the return addresses of this e-mail to falsely indicate that it was sent from a Hotmail account, rather than its true source. This was accomplished by using plaintiff's mark in the e-mail's reply address. Numerous recipients of defendants' spam responded with complaints, which were sent to accounts defendants had set up at Hotmail for the receipt of e-mail.
Plaintiff moved to enjoin defendants both from sending "spam" which falsely stated it came from plaintiff's service, and from using Hotmail accounts as mail boxes for "spam" reply.
Plaintiff argued that defendants' conduct breached the Terms of Service, which constituted a contract governing defendants' use of plaintiff's services. Plaintiff also alleged that defendants' conduct infringed and diluted plaintiff's service mark, violated the Computer Fraud and Abuse Act and constituted unfair competition. The court agreed and issued a preliminary injunction, enjoining defendants from continuing this course of conduct.
The court held that "the evidence supports a finding that plaintiff will likely prevail on its breach of contract claim." As stated above, this contract was contained in plaintiff's Terms of Service which was breached by defendants' use of Hotmail accounts and the Hotmail mark in their transmission of spam. To reach this conclusion, the Court first had to hold that the plaintiff and defendants were parties to an enforceable agreement. By so doing, the Court indicated its willingness to uphold the validity of a click-wrap agreement, as defendants agreed to be bound by plaintiff's Terms of Service solely by clicking "I agree" after being presented with an opportunity to view the Terms of Service.
The court also held that plaintiff was likely to prevail on its claims of false designation of origin and unfair competition. Defendants used plaintiff's "Hotmail" mark in the reply address of spam defendants sent. The court found that this was likely to confuse members of the public by causing them to think that plaintiff was involved in sending them unwanted spam when, in fact, it was not.
Finally, the court found that defendants' conduct was likely to violate the Computer Fraud and Abuse Act, and constituted a trespass on chattel. The former act, 18 U.S.C. §1030, prohibits persons from knowingly causing the transmission of information that intentionally causes damage to protected computers. Defendants committed the requisite injury to plaintiff's computers by causing spam e-mail to bounce back to plaintiff's computers by use of a false return address. This conduct also caused a prohibited trespass on plaintiff's chattels, namely its computers.
The Court's decision in Hotmailaccords with two decisions of the Seventh Circuit Court of Appeals, each of which upheld the enforceability of shrink-wrap agreements.
In ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) the court held that "shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable)."
Defendant purchased CD-Roms which contained compilations of various telephone directories. These CD-Roms were packaged along with a user's manual in a box. Printed on the outside of this package was a notice that use of the CD-Roms was restricted by the terms of an enclosed license. This license, contained both in the user's manual found inside the product's packaging, as well as encoded on the CD-Rom disks themselves, restricted use to non-commercial purposes. In violation of this license, defendant sold the information contained on the CD-Roms to third parties.
In upholding this shrink-wrap agreement, the court determined that ProCD had made an offer to license its product which could only be accepted by conduct -- use of the software -- after being afforded an opportunity to read the terms of the license. By so using the software, defendant Zeidenberg was bound by the terms of the license.
Of like effect is the Court's decision in Hill v. Gateway 2000, Inc., 105 F. 3d 1147 (7th Cir. 1997), where the Seventh Circuit held that plaintiff's purchase of a computer was governed by contract terms shipped to her along with the computer. Plaintiff had received notice that the terms would govern the parties' relationship unless the computer was returned within 30 days. Plaintiff had failed to return the computer within the allotted time.
The court succinctly set forth the pertinent facts of the case. "A customer picks up the phone, orders a computer, and gives a credit card number. Presently a box arrives, containing the computer and a list of terms, said to govern unless the customer returns the computer within 30 days. Are these terms effective as the parties' contract, or is the contract term-free because the order-taker did not read any terms over the phone and elicit the customer's assent?"
The Seventh Circuit held that the terms do indeed govern the parties' relationship, validating Gateway 2000's "approve or return" device. The court held that Gateway's offer required acceptance by retaining the computer after receipt of the terms. As such, the parties' contract was not formed until the customer retained the computer for a period of 30 days, and the terms provided with the computer bound the parties.
These decisions are well grounded in existing law. Under Uniform Commercial Code ("UCC") §2-204, a "contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of a contract." Similarly, Section 19 of the Restatement (Second) of Contracts provides that "[t]he manifestation of assent may be made wholly or partly by written or spoken words or by other action or by failure to act." These provisions provide ample support for the conclusion that a binding contract can be created over the Internet by the act of clicking on an "I agree" button indicating assent to be bound by the offeror's proposed contract terms. Indeed, this rationale was utilized by the Seventh Circuit in support of its decision in ProCD.
The enforceability of click-wrap licenses will be firmly established should proposed UCC Article 2B be enacted. Under proposed Section 2B-207, "a party adopts the terms of a record, including a standard form, if the party agrees, by manifesting assent or otherwise, to the record: (1) before or in connection with the initial performance or use of or access to the information ...". Under proposed Section 2B-208 "a party adopts the terms of a mass-market license ... only if the party agrees to the license, by manifesting assent or otherwise, before or in connection with the initial performance or use of or access to the information...". Under both sections, a party must manifest assent to be bound by the offeror's contract terms. Under section 2B-111, a party manifests assent if she engages in affirmative conduct the seller clearly indicates will result in acceptance of the proposed agreement. To be binding, the party must be afforded an opportunity both to review the contract's terms, and to decline or accept the offer. Moreover, mere retention of information without more is insufficient to create an online contract.
These sections are intended to permit the creation of enforceable click-wrap agreements. This is made clear by the current comments to proposed section 2B-111, which provides that assent sufficient to form a contract is given in the hypothetical outlined below:
The fact that click-wrap agreements can be enforced does not mean that any particular agreement is in fact enforceable. Contracting parties must still turn to ordinary contract law principles to determine the enforceability of particular agreements. While beyond the scope of this article, contracts of adhesion are no more enforceable when consummated over the Internet than if consummated in a retail store. "Contracts of adhesion arise when a standardized form of agreement, usually drafted by the party having superior bargaining power, is presented to a party, whose choice is either to accept or reject the contract without the opportunity to negotiate its terms. Such a contract will not be enforced against the weaker party when it is (1) not within that party's reasonable expectations; or (2) is unduly oppressive, unconscionable or against public policy." AEB & Associates Design Group, Inc. v. Tonka Corp., 853 F. Supp. 724, 732 (S.D.N.Y. 1994) (citations omitted). Similarly, various UCC provisions are likely to be applicable to online contractual arrangements. These include UCC §2-316, which requires that for certain warranty disclaimers to be enforceable, they must appear conspicuously in the parties' contract.
In spite of Hotmail, ProCD and Hill, there will be continued uncertainty about the enforceability of click-wrap agreements until their validity is widely accepted by the courts. Taking the following precautions will enhance the likelihood that online contracts will be enforceable:
Since I wrote this article, a number of other courts have addressed the issue of how to enter into a binding agreement online. You can find some of these decisions by visiting the Click-Wrap Agreements and Contracts sections of my Internet Library.
Reprinted with permission from the June 30, 1998 issue of the New York Law Journal. Copyright 1998, NLP IP Company. All rights reserved.