Sep 6 2005

Shrink-wraps are enforceable contracts

The vast majority of courts enforce shrinkwrap and "clickwrap" licenses even though the individual terms are not negotiated and even if the licensee did not read them. Since that is true, and has been true for a number of years in a number of settings, it is interesting still to see statements like "shrinkwrap contracts are unenforceable." The statement and others like it are simply wrong as a matter of law and of practice. There are few exceptions to enforceability in the cases and they most often can be explained by flaws in how terms were presented.

Why one still sometimes hears non-lawyers and, indeed, some lawyers saying that shrinkwraps and clickwrap contracts are unenforceable, when there is an avalanche of contrary law is not clear. Beginning in the 1990's, though, with cases such as ProCD v. Zeidenberg where Judge Easterbrook pointed out how common it was to contract using standard forms made available for review after an initial agreement was reached, and continuing as recently as this month, with cases such as Davidson & Assoc. v. Internet Gateway holding such contracts enforceable and effective to set out obligations different from alleged fair use privileges under copyright law, this form of contracting has been common and routinely enforced. In Davidson, contract terms were used to differentiate between an online and a non-online version of a computer game and a contract term prohibited reverse engineering the game. The court had no difficulty in enforcing the contract and the "no reverse engineering" term.

Indeed, standard form contracts are used in all industries, and shrinkwrap and online contracts are now used in many industries in addition to the software industry in the mass market and commercial deals.

In this type of contracting, assent to the contract often comes by doing something the licensee has reason to know will be viewed by the other party as assent, such as by clicking "I agree" or by using the product after being informed that you should return it if the contract terms are unacceptable. Bad terms in these as in any contract that over-reach can be thrown out by a court under doctrines such as unconscionability, even though that seldom happens because it is seldom necessary.

Why are these contracts enforced? One reason is that they are important to the modern marketplace. One party (e.g., the publisher) markets a product under terms it believes appropriate in light of the price it is charging; the other party enters the market and acquires, or refuses to acquire, the product under those terms. That choice marks the assent. The transaction is a simple one of a type that contract law has long enforced in the absence of fraud or the like. To render this type of contracting unenforceable would be a costly and ineffective disruption of an important market practice. The practice allows publishers and others to gauge the price to fit the product and, as in Davidson, to distinguish different products based on terms of use.

Part of the problem that some have with shrinkwrap or clickwrap contracts is that they are standard forms that a licensee cannot negotiate. But standard forms are ubiquitous, not only in mass markets, but also in many high price commercial contracts. Their use is not a case of cowed masses being forced to accept a format by a few big businesses, but a case of markets reflecting what costs and effort parties wish to put into contracting. If there is a market demand to tailor each contract to each transaction (and paying the resulting higher cost to do so), then the market would reflect that result. But even in the automobile industry where there is a tradition of separately negotiated purchase prices for new cars, some dealers and some manufacturers are having an impact by offering standardized, rather than tailored prices. Virtually no dealer or manufacturer separately negotiates other contract terms.

The idea that parties ordinarily sit down and fully negotiate each term of a contract (or even that they want to do so) and that only this process can create a contract, has never been true and even if it ever were, is hopelessly obsolete and falsely romantic. That detailed bargaining seldom happens because it is too time-consuming, too expensive, and too unrelated to the parties primary concern - completing the deal itself. The reality in a mass market is that if the terms are not acceptable, there will be a market-driven change. For example, some cell phone and Internet Service Providers advertise that their services are offered with "no contract" to differentiate themselves from other companies. What they mean, of course, is not that there is no contract, but that they do not price or market on the basis of a multi-year, standard contracts. Whether or not that approach attracts a sizeable market share remains to be seen. If it does, other providers are likely to consider adopting it.

But terms do not become part of the contract by just being there, there must be assent. Assent must be voluntary, but that does not mean, here or in any other setting, that the assenting person's options must include obtaining the product lawfully without the terms. It means there must be an option and an opportunity to decline the entire deal. The cases suggest that assent requires at least four things:

*The person must know or have reason to know that contract terms are being proposed for the transaction. Where the terms are not proposed until after an initial agreement (e.g., placing the order), there must be reason to know at that time that more terms will be proposed later.
*There must be reason to know what act will be treated by the other party as assent to the contract. An "I agree" button is an obvious act, but is not required.
*The person must have an opportunity to review the terms before it assents. The person does not have to read them however.
*The person must have a chance to say no and walk away from the deal, with a refund of what the person might have already paid.

Interestingly, these four things, which generally summarize or require more than the cases, are set out and required in UCITA, the governing law in Virginia and Maryland.