Stories by Craig Horrocks and Chihaya Natusch

Splitting hairs: Should Microsoft be broken up?

What will happen if Microsoft is broken into separate business units, following a US court’s findings that it abused its dominant position in the market? Two teams of our regular TechLaw columnists take opposing views on the implications of such action and what each will mean for IT users.
AGAINST

Legal holes may exist in click-wrap trap

It happens so often. You purchase a software program and insert the CD-ROM into your computer drive or you order some software over the Internet and download it directly into your computer. Then the software terms and conditions of use appear on the screen. You scroll down a page or two of small text and are then asked to consent to the terms and conditions by clicking on an on-screen button. These are known as click-wrap or Web-wrap licence agreements.
As click-wrap licence agreements are formed very differently from contracts that are created offline, click-wrap licences are raising new and difficult legal issues. This article looks at some of the requirements for a valid click-wrap licence.
One issue that is yet to be determined by the courts is whether the simple act of clicking on an on-screen button is sufficient acceptance of the licence. Traditionally a contract became enforceable when two parties signed an agreement. However, in the case of click-wrap licences, the end-user consents by clicking a mouse rather than by a written signature.
Going back to basic principles of contract law, one could argue that where the mode of communication of acceptance is stipulated by the offeror and acceptance is sent by the specified mode of communication, it will be sufficient to complete the contract.
The act of clicking could be treated as an affirmative action which has been expressly stipulated by the software house as sufficient to notify acceptance. If the software house clearly indicates on the relevant Web site that clicking on an on-screen button is the proper form of accepting the terms and conditions of the click-wrap licence, the courts may respect the software houses’ chosen mode of communication.
Whether clicking on a mouse is sufficient to indicate acceptance is yet to be answered by the courts. There is no established case law on this issue in New Zealand, although there are a few US cases. The Hotmail versus Van Money Pie case was the first case involving click-wrap licences. While the court did not directly address the issue of whether click-wrap licences were enforceable, it did indirectly suggest that contracts formed online could be enforceable.
The second issue is determining when acceptance is communicated in a click-wrap licence. Under the "postal rule", acceptance would be effective when the mouse is clicked on the "accept" button. However, some legal experts have argued that the postal rule is not applicable to electronic acceptances, as it is a form of instantaneous communication. The postal rule was created specifically for mail and telegraph.
The third issue, and probably the issue of most concern for software houses looking to protect their intellectual property, is whether the click-wrap terms are contractually effective.
Often click-wrap licences are presented to the end-user after the sale of software has occurred. The Step-Saver Data Systems versus Wyse Technology and Arizona Retail Systems versus Software Link cases considered the enforceability of shrink-wrap licences (the precursor to click-wrap licences) and held that terms or conditions could not be introduced after the sale of software, because those terms came too late.
However, a recent US case called ProCD versus Zeidenburg held that it was legally possible to incorporate additional terms into a contract even after its formation. Taking a pragmatic approach, the court noted a number of situations where money is paid before all the terms of the contract are made fully known to the customer such as insurance, purchasing a music concert ticket or a plane ticket.
It is debatable which line of reasoning the New Zealand courts would follow if faced with a similar issue. Overwhelmed by the impracticalities of following the strict approach as upheld by Step Saver and Arizona, perhaps judges might take a pragmatic approach and create an exception to the traditional rule.
The introduction of click-wrap licences challenges the traditional rules of contract formation. The instantaneous and convenient nature of click-wrap license agreements is its greatest appeal to software vendors and yet at the same time, it raises issues as to whether it meets the basic elements of contract.
Until the courts specifically address the enforceability of click-wrap licences, software houses should be aware of they might not be able to enforce their licence agreements against end users 100% of the time.
What is clear is that when designing the click-wrap contracting process great care needs to be taken to ensure the best possible process is adopted. That best practice should involve certainty in collecting evidence on the contracting process.
Craig Horrocks is the Managing Partner and Chihaya Natusch is a solicitor in Clendon Feeney’s technology law team. This article, together with further background comments and links to other Web sited can be downloaded from www.clendons.co.nz. Send email to techlaw@clendons.co.nz.

[]