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By Jason M. Scally
A company that purchased computer software may be bound by a licensing agreement entered into by clicking on an "I agree" button during the on-screen installation process, a U.S. District Court judge has found.
The buyer claimed that the software seller was required to provide it with unlimited upgrades and technical support under the terms of a prior agreement and sought specific performance.
But the seller disputed this claim and maintained that the subsequent "clickwrap" agreement prohibited specific performance as a remedy.
U.S District Court Chief Judge William G. Young agreed with the seller and found the clickwrap agreement enforceable.
"The only issue before the [c]ourt is whether clickwrap agreements are an appropriate way to form contracts," he explained, "and the [c]ourt holds that they are."
Young added: "[E]ven if the clickwrap agreement permits specific performance, and even if the Court were to enter judgment in favor of [the plaintiff], [the defendant's] software is not unique or irreplaceable as a practical matter, so the Court would not award specific performance."
The 24-page decision is I.LAN Systems, Inc. v. Netscout Service Level Corporation, Lawyers Weekly No. 02-006-02.
Manufacturers Take Comfort
Scott A. Roberts of Boston, who represented the defendant, said this was a significant decision because although other jurisdictions have enforced clickwrap agreements, "it was a case of first impression in this circuit."
The defense attorney was pleased with the decision because it held that clicking the "I agree" button on clickwrap contracts was an "explicit manifestation" of assent to the contract, and also that his client would not be liable for specific performance.
Roberts remarked: "Software manufacturers can take comfort in the fact that, in appropriate circumstances, their click license agreements will be enforced."
Gary W. Smith of Boston, an IP lawyer who has followed these kinds of cases, agreed that it was an important decision, because "there is very little caselaw in this area and it addressed an issue that will become more and more common."
He added: "What this case points out is that there is a gap in the existing law that needs to be addressed to cover these types of licensing issues for software."
When asked whether this decision will impact personal software agreements as well as commercial agreements, Smith said, "The question may be somewhat more difficult in the consumer context, but the same analysis would generally apply and clickwrap licenses would be generally enforceable in the consumer context [as well]."
The plaintiff's attorney, Erik P. Belt of Boston, could not be reached prior to deadline.
'I Agree'
The defendant, Netscout Service Level Corp., formerly known as NextPoint Networks, Inc., was a seller of computer software.
The plaintiff, i.LAN Systems, Inc., was a company that helps other companies monitor computer networks, and in 1998 signed an agreement with the defendant.
The agreement provided that the plaintiff would resell the defendant's software to customers, and in 1999 the two parties entered into a purchase order for the software.
The purchase price for the software was over $85,000.
The software itself contained a clickwrap license agreement that required the user to click on a button on the computer screen that said, "I agree," in order to signify that it assented to the terms of the agreement before being allowed to install the software.
The plaintiff claimed that the agreements they entered into with the defendants gave them the right to "effectively rent, rather than sell" the software to customers, and that they would have unlimited rights to the software with continual upgrades and support.
The defendant and the plaintiff each had a different interpretation of their agreement, and after a few months the plaintiff filed suit in the U.S District Court alleging breach of contract and a violation of G.L.c. 93A.
Soon after, the plaintiff then filed a motion for summary judgment arguing that it was entitled to specific performance of the contract including "perpetual upgrades [and] unlimited support."
After arguments were heard on that motion, the defendants filed a cross-motion for summary judgment arguing that even if the plaintiff's allegations were true, the clickwrap license agreement limited liability to the purchase price of the software.
Explicit Agreement
The judge observed that an initial question in determining the clickwrap agreement's enforceability would be whether the agreement was a contract under UCC Sect. 2-204, or merely "adding terms to an existing contract under UCC section 2-207."
Young analyzed two cases from other circuits that dealt with similar issues but applied the different sections of the Uniform Commercial Code.
One case from the 3rd U.S. Circuit Court of Appeals, applying Section 2-207 of the UCC, dealt with similar facts although the agreement in dispute was a shrinkwrap license agreement — a licensing agreement usually found on or in the software box or literally shrink-wrapped to the package.
The 3rd Circuit decision found that the shrinkwrap licensing agreement which limited liability "was not enforceable because it was merely a proposed agreement under UCC section 2-207 to which the reseller never agreed."
Young noted that "the court refused to imply assent because the limitation of liability was material and UCC section 2-207(2)(b) does not allow material terms to be added by implication."
Another case from the 7th Circuit, however, came to a different conclusion on the issue of enforceability of shrinkwrap licensing agreements and found that UCC Sect. 2-204 applied and that "UCC Sect. 2-207 is irrelevant."
Young noted that "[t]he holding ... is best described as ... 'terms inside a box of software bind consumers who use the software after an opportunity to read the terms and to reject them by returning the product.'"
Young stated that the "analytical difference between [the two cases] is whether 'money now, terms later' forms a contract (i) at the time of the purchase order or (ii) when the purchaser receives the box of software, sees the licensing agreement, and does not return the software."
In applying the law to the present case, Young agreed with the 7th Circuit's theory because, "'money now, terms later' is a practical way to form contracts, especially with purchasers of software."
He said that if shrinkwrap agreements were enforceable "where any assent is implicit, then it must also be correct to enforce a clickwrap license agreement, where the assent is explicit."
The judge found that "i.LAN explicitly accepted the clickwrap license agreement when they clicked on the box stating 'I agree.'"
However, Young added that even if he agreed with the plaintiff that UCC Sect. 2-207 should apply, "the [c]ourt would hold that i.LAN implicitly accepted the clickwrap license agreement because its additional terms were not material ... there can be no unreasonable surprise or hardship to i.LAN from enforcing the limitation of liability."
Even though the 1999 purchase order did not contain any limitation of liability, Young found that "the clickwrap license agreement specifically was intended to fill any gaps left by the 1999 purchase order."
Specific Performance Rejected
Although the defendant argued that its clickwrap agreement prohibited specific performance as a remedy, the judge found that even if it did not explicitly prohibit the specific performance, "the law does not permit specific performance simply because a contract does not prohibit it."
He found: "[E]ven if the [c]ourt were to enter judgment in favor of i.LAN, NextPoint's software is not unique or irreplaceable as a practical matter so the [c]ourt would not award specific performance."
Citing UCC Sect. 2-716, Young noted that specific performance "may be decreed where the goods are unique or in other proper circumstances."
The plaintiff argued that the software was "unique" because:
* it was copyrighted and took years to design;
* the plaintiff tailored its business specifically to the software; and
* the number of software licenses the plaintiff will need in the future is unknown, so money damages would not be adequate.
But Young rejected the defendant's reasoning because the software was "mass-produced [and] one of several competing software packages in the market."
He said, "Although these software packages may be copyrighted and the product of intense labor, they are interchangeable as a practical matter and thus none is unique."
The judge also explained that "[m]uch as i.LAN may not want to, it certainly could purchase comparable software on the open market and reconfigure its systems to run that software."
Young also rejected the plaintiff's third argument, because "This argument is not that NextPoint's goods are unique, but that i.LAN had struck what it thought to be a unique contract ... The UCC, however, looks to the uniqueness of the goods, not the contract."
The U.S. District Court judge allowed the defendant's cross-motion for partial summary judgment denying the plaintiff the right to specific performance, and he stated that if the plaintiff prevails on any other claim, "it would be entitled to no more than the amount it paid for the software license at issue."
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© 2002 Lawyers Weekly Inc., All Rights Reserved.
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January 14, 2002
