If contemplating on-line distribution, it is essential to have an enforceable on-line agreement with the end user to protect valuable intellectual property rights and minimize any potential risk and liability. The Electronic Signatures in Global and National Commerce Act (E-Sign) is a step forward for ensuring the enforceability of these agreements. The Act encourages businesses and consumers to contract and communicate electronically with electronic signatures, contracts, and other electronic records. Enacted October 1, 2000, E-Sign gives electronic transactions the same validity as their paper-based counterparts.
E-Sign Electronic Signatures
With E-Sign, an electronic signature is defined as “an electronic sound, symbol, or process attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” Therefore, clicking “YES” or “I AGREE”, placing a name in a form box on a web site, or signing an e-mail can legally bind the individual performing the action. Because of the near instantaneous actions of electronic transactions, however, E-Sign also provides consumer protections that businesses should acknowledge. Business guidelines to remain in step with these protections are discussed in the Security On-line and Digital Signatures section of this Guide.
Online Licensing Agreements
In addition to E-Sign, courts have upheld the validity of online licensing agreements. In Compuserve Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996), the Court found an electronic agreement enforceable when a Texas lawyer entered into an on-line agreement for distribution of the lawyer‘s software products. The Court concluded that typing the word “AGREE” in response to prompts generated by a “point-and-click contract” on-line, the individual “manifested assent” to the terms of the license agreement. This case supports the enforceability of on-line licenses, especially if they are designed to require the other party to acknowledge acceptance through some affirmative act, such as clicking on a mouse to indicate acceptance of the terms and conditions of the license. In ProCD Inc. v. Zeidenberg 86 F.3d 1447 (7th Cir. 1996), the Court found a “shrink-wrap” license enforceable. In ProCD the license was encoded on the CD-Rom disks, printed in the manual, and appeared on the users screen every time the program was run. In a breach of warranty case involving a software license similar to that in ProCD the Supreme Court of Washington deemed it enforcible, M.A. Mortenson Co. Inc. v. Timberline Software Corp. 998 P2d 305 (Wash. 2000). A fourth case, Hotmail Corp. v. Van $ Money Pie, Inc., 47 U.S.P.Q. 2d 1020 (N.D.Cal. 1998) appears to confirm the enforceability of “point-and-click” contracts on the Internet. The Hotmail Terms of Services Agreement is available at http://www.hotmail.com.
Insufficient to Create a Binding Agreement
Businesses that use on-line licensing should be aware, however, that the mere placement of licensing terms on a web site may be insufficient to create a binding agreement. In Specht v. Netscape Communications Corp., 306 F.3d 17 (2nd Cir. 2002), the Court found that licensing terms found below the download area on a web page were not binding on visitors who downloaded software. Visitors could download the software without examining the terms if they did not scroll down the browser. The Court considered the terms a “browse-wrap” agreement and found that they did not constitute binding assent. Businesses should require consumers to affirmatively accept licensing terms before they are given access to downloading software. Not all courts have enforced shrinkwrap or so-called “click on” licenses. In Klocek v. Gateway, Inc. 104 F. Supp. 2d 1332 (D.Kan. 2000) the Court did not follow ProCD and held that the plaintiff computer purchaser did not agree to the license terms.
The Court determined that the buyer was the offeror and the vendor accepted buyer’s offer when it shipped the computer in response to the offer. Even if the license enclosed in the box stated additional or different terms, unless acceptance of those terms was a condition of buyer‘s acceptance and vendor provided no unwillingness to proceed, the license terms were not enforceable against the buyer.
In Bowers v. Baystate Technologies, 64 USPQ2d 1065 (Fed. Cir. 2002) a prohibition against reverse engineering contained in a shrinkwrap software license was enforced against the defendant purchaser. Citing ProCD and Massachusetts contract law, the Court rejected the defendant’s arguments that the United States Copyright Act preempted the reverse engineering prohibition and that the license itself was not enforceable.
Forcing the end user to go through a sequence of steps before being permitted to access or download software allows the merchant the ability to put together a “click on” license that contains appropriate warranty disclaimers, limitations of liability, and other necessary licensing provisions as well as registration information. It would be difficult for end users to argue that they did not review or acknowledge acceptance of the license terms if they are required to go through such process prior to downloading the software. Obviously, it is important to have end users click on a “buy” or “download” button only after the license terms and conditions have been accepted by the end user. This process can avoid the lack of notice problems encountered in the typical shrink-wrap transactions. The click-on license agreement can be short and simple or more comprehensive depending upon the specific objectives of the merchant.