Legal Studies Research Paper Series

Research Paper 16-6

March 3, 2016

Global Internet Law

Michael L. Rustad
Thomas F. Lambert Jr. Professor of Law, Suffolk University Law School

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GLOBAL INTERNET
LAW
Second Edition

Michael L. Rustad
Thomas F. Lambert Jr. Professor of Law &
Co-Director Intellectual Property Law Concentration
Suffolk University Law School

HORNBOOK SERIES®

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The publisher is not engaged in rendering legal or other professional advice, and this publication is not a substitute for the
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 Dedicated to

Janice Marilyn Knowles, R.N. (1924–2013)

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 Acknowledgments
—————

The term, “global” in my title has a lot to do with teaching so many graduate and
law students from radically different legal cultures over the years. I currently teach the
SJD Research and Writing Colloqium to foreign graduate students at Suffolk University
Law School. For the past five years, I’ve taught the required proseminar for all LL.M.
and foreign visiting students at Suffolk. I also gained global perspective by teaching in
Suffolk’s summer program at the University of Lund in Sweden five summers. I taught
students from more than thirty different countries in Suffolk’s LL.M. program in
International Business LL.M. program in Budapest, Hungary over five summers. Great
thanks are due to Suffolk University Law School’s reference librarians Diane D’Angelo
and Rick Buckingham. Diane D’Angelo co-authored the section on global Internet
research methods in Chapter 2. Vit Svejkovsky, a 2010 Magistr graduate of Prague’s
Charles University Faculty of Law and a LL.M. graduate of Suffolk University Law
School, co-authored the section comparing U.S. to European consumer law. I greatly
appreciate the editorial and research of Suffolk University Law School research
assistants Eunice D. Aikins-Afful, John H. Brainard, Matt Carey, Samantha Lynne
Cannon, Krista Fales, Jeremy Kennelly, Darcy Kohls, Emily Lacy, Nicole A. Maruzzi,
Patrick Nichols, Keyur Parikh, Harel Talasazan, Gamze Yalcin, and Elmira Cancan
Zenger. Rick Buckingham and Diane D’Angelo provided me with expert reference
librarian support on both editions. Finally, as always, I appreciate the editorial work
and good company of my wife, Chryss J. Knowles.

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 Acknowledgments from
First Edition
________

Many people contributed to this book including Suffolk University law students,
legal academics and business lawyers from around the world. My research assistants
included J.D. and LL.M. students who are lawyers in their own country as well as U.S.
law students. Camila Rocio Valenzuela Araya, Marty Cachapero, Andrew Clark, Nicola
Condella, Salvatore Cultrano, Kristina Foreman, Ibrahim Kaylan, Wenzhuo Liu, and
Manuel Ignacia Miranda all served with distinction. Wenzhuo Liu, who has experience
as a Chinese lawyer working with Johnson and Johnson, conducted research and edited
every chapter. I appreciated her technical expertise as well as her considerable analytical
abilities. Manuel Miranda, who is a LL.M. graduate and lawyer from Venezuela, edited
and researched Internet law developments in Latin America. Vit Svejkovsky, a business
and intellectual property lawyer, from the Czech Republic, provided extensive editorial
suggestions and examples from Eurozone. Hyeonieong Woo, Suffolk Law Student, and
Yina Kim, a South Korean lawyer and graduate of Suffolk University Law School,
accomplished superb research as well as giving helpful editorial comments. Thanks to
Kara Ryan my administrative assistant at Suffolk for her assistance on drafts. I also
appreciate the assistance of Shannon Edgar at Stetson University College of Law for
administrative support during the summer of 2013.
Diane D’Angelo and Rick Buckingham, Suffolk University Law School reference
librarians, provided me with useful suggestions. I learned about the importance of global
Internet Law from teaching international business lawyers from around the world in
Suffolk’s LL.M. program. I gained an understanding about European licensing law from
Professors Patrik Lindskoug and Ulf Maunschbach, who taught with me five summers
at the University of Lund.
My family has been supportive and encouraging. My daughter the attorney, Erica
Rustad Ferreira, and my son the doctor, James Knowles Rustad, contributed a great deal
by researching, editing, and offering suggestions along the way. Finally, my wife, Chryss
J. Knowles, deserves special thanks for her editorial assistance.
I would like to acknowledge the recent loss of my beloved mother-in-law, Janice
Marilyn Knowles, R.N., of St. Johnsbury, Vermont, a very distinguished member of the
“greatest generation.” This book is dedicated to Janice’s life so full of joy and loving
contributions to society and her family.

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 Summary of Contents
—————

Page
ACKNOWLEDGMENTS .............................................................................................................. V
ACKNOWLEDGMENTS FROM FIRST EDITION ........................................................................ VII

CHAPTER 1. OVERVIEW OF THE GLOBAL INTERNET ........................................ 1

CHAPTER 2. PERSPECTIVES ON GLOBAL INTERNET LAW ............................65

CHAPTER 3. CIVIL PROCEDURE IN CYBERSPACE ......................................... 163

CHAPTER 4. INTERNET-RELATED CONTRACT LAW....................................... 203

CHAPTER 5. CONSUMER REGULATION IN CYBERSPACE ............................ 347

CHAPTER 6. GLOBAL INTERNET TORTS ............................................................ 423

CHAPTER 7. INTERNET-RELATED PRIVACY ..................................................... 551

CHAPTER 8. PROSECUTING CYBERCRIMES ..................................................... 647

CHAPTER 9. CONTENT REGULATION ON THE INTERNET ........................... 705

CHAPTER 10. COPYRIGHTED WORKS IN CYBERSPACE ................................ 725

CHAPTER 11. TRADEMARKS ON THE GLOBAL INTERNET .......................... 805

CHAPTER 12. TRADE SECRETS IN CYBERSPACE ............................................ 901

CHAPTER 13. PATENT LAW AND THE INTERNET ............................................ 925

TABLE OF CASES ................................................................................................................. 959
TABLE OF STATUTES ........................................................................................................... 971
INDEX .................................................................................................................................. 977

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 Table of Contents
—————

Page
ACKNOWLEDGMENTS ..............................................................................................................V
ACKNOWLEDGMENTS FROM FIRST EDITION ........................................................................ VII

CHAPTER 1. OVERVIEW OF THE GLOBAL INTERNET ........................................1

§ 1.1 What Is Global Internet Law? .............................................................................. 1
§ 1.2 A Brief History of the Internet ...........................................................................14
(A.) DARPA & ARPANET ..................................................................................19
(B.) Internet Pioneers .........................................................................................22
(1.) Vint Cerf & Bob Kahn .........................................................................23
(2.) Tim Berners-Lee ..................................................................................24
(3.) Jon Postel .............................................................................................25
(4.) Marc Andreessen..................................................................................25
(C.) National Science Foundation’s NSFNET ...................................................26
(D.) The Internet’s Unfathomable Dimensions .................................................29
§ 1.3 Defining the Internet and the World Wide Web................................................33
(A.) Hubs or IXPs ................................................................................................34
(B.) Bridges ..........................................................................................................36
(C.) Gateways ......................................................................................................37
(D.) Routers .........................................................................................................37
(E.) Repeaters ......................................................................................................38
(F.) Cable Modems ..............................................................................................39
(G.) Bandwidth ....................................................................................................39
(H.) DSL ...............................................................................................................40
(I.) Mobile Devices .............................................................................................40
(J.) Mobile Applications .....................................................................................41
(K.) Jailbreaking .................................................................................................42
§ 1.4 Software Protocols That Power the Internet .....................................................43
(A.) TCP/IP ..........................................................................................................43
(B.) FTP & HTTP ................................................................................................44
(1.) FTP .......................................................................................................44
(2.) HTTP ....................................................................................................44
(3.) SFTP .....................................................................................................44
(C.) Microformats & XML ...................................................................................45
(D.) MPEG & MP3 ..............................................................................................45
(E.) XML’s Metalanguage ...................................................................................45
(F.) Application Program Interfaces ..................................................................46
(G.) Web 1.0 & 2.0 ...............................................................................................48
(1.) Web 1.0: The Asynchronous Internet .................................................48
(2.) Web 2.0: The Synchronous Internet ...................................................48
(H.) Web 3.0’s Ontology Language .....................................................................49

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§ 1.5 World Wide Web Applications ............................................................................50

(A.) Search Engines ............................................................................................50
(1.) Google’s Global Search Engine ...........................................................51
(2.) Browser Wars .......................................................................................51
(B.) Voice over Internet Protocol ........................................................................52
(C.) Web Portals ..................................................................................................53
(D.) E-Mail ...........................................................................................................54
§ 1.6 Social Networks ...................................................................................................54
(A.) YouTube: Broadcast Yourself ......................................................................57
(B.) Second Life & Virtual Worlds .....................................................................58
(C.) Twitter ..........................................................................................................60
§ 1.7 Conclusion: The Future of the Internet .............................................................62

CHAPTER 2. PERSPECTIVES ON GLOBAL INTERNET LAW ........................... 65

§ 2.1 Overview of Global Internet Law .......................................................................65
(A.) Cyberspace as Place .....................................................................................65
(B.) How the Global Internet Changes the Law ...............................................66
(1.) Foreign Enforcement of U.S. E-Businesses........................................66
(2.) Legal Lag ..............................................................................................67
(C.) The Internet and Social Change .................................................................68
(D.) The Internet’s Legal Lag .............................................................................69
(E.) Cybersociology & Internet Law ..................................................................75
(F.) Cyberlaw as the Law of the Horse ..............................................................81
(G.) Ways the Internet Has Shaped the Law ....................................................82
(H.) Law as Code .................................................................................................85
§ 2.2 Voluntary Organizations Setting Standards .....................................................88
(A.) Open Systems Initiative ..............................................................................90
(B.) World Wide Web Consortium ......................................................................90
(C.) Internet Engineering Task Force ...............................................................90
(D.) The Internet Society (ISOC) .......................................................................91
(E.) International Telecommunication Union ...................................................92
§ 2.3 Models of Global Internet Governance ...............................................................93
§ 2.4 Self-Governing or Libertarian Governance........................................................95
(A.) Libertarian Manifesto .................................................................................95
(B.) Decentralized Internet Governance ...........................................................99
§ 2.5 Global Transnational Governance ....................................................................101
(A.) Co-Regulation of the Internet ...................................................................102
(B.) UN-Anchored WGIG Models .....................................................................105
(1.) Global Internet Council .....................................................................105
(2.) No Specific Oversight ........................................................................106
(3.) International Internet Council..........................................................106
(4.) Mixed Model .......................................................................................107
(5.) International Communication Union (ITU) .....................................107
(C.) Council of Europe’s Internet Governance ................................................108
§ 2.6 Internet Law & Code; Markets & Norms ........................................................109
(A.) Statutes and Cases as Internet Law ........................................................110
(B.) Code as Internet Law ................................................................................111

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(C.) Norms as Internet Law .............................................................................114

(1.) International Mores for Cyberspace .................................................115
(2.) Norms by Non-State Actors...............................................................116
(D.) Markets as Internet Law...........................................................................118
(E.) Generative Internet Architecture .............................................................119
§ 2.7 Why Territory Matters in Global Internet Governance ..................................121
(A.) Local Governance of the Global Internet .................................................121
(B.) EU Regulations of the Net ........................................................................124
§ 2.8 The Wealth of Networks ...................................................................................128
(A.) Benkler’s Economics-Based Governance ..................................................128
(B.) Open Source & Democratic Production ....................................................130
(C.) Copyright Commons ..................................................................................131
§ 2.9 Civil Society & Net Neutrality ..........................................................................131
§ 2.10 The Problem of Legal Lag .................................................................................133
(A.) Legal Lag & Evolving Internet Technologies...........................................133
(B.) Legal Lag in Substantive Internet Law ...................................................134
(C.) Legal Lag & Telecomms ............................................................................135
(D.) Legal Lag & Tax Law ................................................................................135
(1.) Nexus in Cyberspace..........................................................................136
(2.) Patchwork of Diverse Tax Rules .......................................................136
(3.) Cross-Border Internet Tax Issues .....................................................137
(E.) Legal Lag in Stages of Litigation ..............................................................138
(1.) Digital Smoking Guns .......................................................................138
(2.) Social Media & Evidence ...................................................................139
(3.) Social Media Postings as Evidence ...................................................141
§ 2.11 International Perspectives on the Internet .....................................................142
(A.) European Internet Law Developments ....................................................142
(B.) Chinese Internet Law ................................................................................144
§ 2.12 Research Methods for Global Internet Lawyers ..............................................149
(A.) Need for Global Internet Lawyers ............................................................149
(B.) Electronic Internet Law Resources ..........................................................151
(C.) Blogosphere & Twitter as Sources of Internet Law ................................152
(D.) Researching Global Internet Law .............................................................153
(E.) Fee-Based Resources .................................................................................155
(1.) BNA’s Electronic Commerce & Law Report .....................................155
(2.) Westlaw ..............................................................................................155
(3.) Lexis ....................................................................................................156
(4.) Foreign Law Guide ............................................................................156
(5.) Bloomberg/BNA Internet Law Resource Center ..............................156
(6.) Index to Foreign Legal Periodicals (IFLP) .......................................156
(F.) Free Resources ...........................................................................................156
(1.) Curia ..................................................................................................157
(2.) FLARE—Foreign Law Research ......................................................157
(3.) GlobaLex ............................................................................................157
(4.) The Global Legal Information Network (GLIN) .............................157
(5.) World LII ...........................................................................................158
(6.) LegiFrance .........................................................................................158
(7.) German Law Archive ........................................................................158
(8.) Legal Information Institute of India (INDLII) ................................158

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(9.) The Incorporated Council of Law Reporting (ICLP) .......................158

(10.) EUR-Lex ............................................................................................158
(11.) Social Science Research Network (SSRN) .......................................159
(12.) Research Guides ................................................................................159
(13.) WorldCat.org .....................................................................................159
(G.) Global Internet Law Websites ..................................................................160
(1.) World Intellectual Property Organization .......................................160
(2.) Council of Europe, Cybercrime .........................................................160
(3.) Computer Crime Research Center ....................................................160
(4.) Summaries of European Union Legislation .....................................160
(5.) Annual International Conference on Cyberlaw ...............................160
(6.) The Global Cyber Law Database (GCLD) ........................................161
(7.) ABA Cyberlaw Committee ................................................................161
(8.) IP Mall, University of New Hampshire/Franklin Pierce.................161

CHAPTER 3. CIVIL PROCEDURE IN CYBERSPACE ......................................... 163

§ 3.1 Introduction .......................................................................................................163
§ 3.2 U.S. Centric Cyberjurisdiction..........................................................................165
(A.) U.S. Civil Procedure Generally .................................................................165
(B.) U.S. Subject Matter Jurisdiction ..............................................................165
(C.) Venue in Cyberspace .................................................................................167
(D.) U.S. Personal Jurisdiction.........................................................................168
(E.) Res Judicata ...............................................................................................171
§ 3.3 International Shoe in Cyberspace: An Overview .............................................171
(A.) Initiating & Responding to Complaints ...................................................171
(B.) Defendant’s Motion to Dismiss .................................................................172
(C.) Specific and General Jurisdiction .............................................................172
(1.) Long-Arm Statutes ............................................................................173
(2.) General Personal Jurisdiction...........................................................174
(3.) Specific Jurisdiction ...........................................................................177
(D.) Personal Jurisdiction for Online Activities ..............................................178
(1.) Zippo.com Sliding Scale .....................................................................179
(2.) Passive Jurisdiction ...........................................................................180
(3.) The Gray Zone: Maybe Interactivity ................................................183
(4.) Zippo.com’s Interactivity Test...........................................................183
(E.) The Effects Test for Cybertorts .................................................................184
(F.) Purposeful Availment for Internet Contracts ..........................................187
(G.) “Something More” Test ..............................................................................189
(1.) GTE New Media Services ..................................................................189
(2.) ALS Scan ............................................................................................189
(3.) Euromarket Designs ...........................................................................191
(4.) Dudnikov ............................................................................................192
(5.) be2 LLC ...............................................................................................192
(6.) Mavrix Photo ......................................................................................194
(H.) Posting of Defamatory Comments ............................................................194
(I.) Situs of the Cyberspace Injury ..................................................................195
(J.) In Rem & Quasi In Rem Jurisdiction .......................................................195
(K.) Choice of Law & Forum .............................................................................196

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§ 3.4 Global Internet Jurisdiction .............................................................................197

(A.) Foreign Litigation ......................................................................................197
(B.) European Jurisdictional Rules .................................................................200
(C.) UNIDROIT/ALI Principles & Rules of Transnational Civil
Procedure....................................................................................................201

CHAPTER 4. INTERNET-RELATED CONTRACT LAW ...................................... 203

§ 4.1 Overview of Online Contracts ...........................................................................203
§ 4.2 Licensing as the Chief Contracting Form ........................................................205
(A.) The Concepts & Methods of Licensing Information ................................206
(1.) Definition of Licensing .......................................................................206
(2.) Granting Clause .................................................................................209
(3.) Definitions in Licensing Agreements ...............................................210
(4.) First Sale Doctrine & Licensing ........................................................211
(B.) Licensing Litigation ...................................................................................213
(C.) Standard Form License Agreements ........................................................215
(D.) Types of Wrap Contracts ...........................................................................220
(1.) Shrinkwrap Agreements ...................................................................220
(2.) Clickwrap Agreements ......................................................................222
(3.) Browsewrap ........................................................................................226
(4.) Scrollwrap & Sign-in-Wrap ...............................................................233
§ 4.3 Contract Formation Issues in Cyberspace .......................................................238
(A.) Formation Issues .......................................................................................238
(B.) “Rolling Contracts” ....................................................................................240
(1.) ProCD, Inc. v. Zeidenberg: A Game-Changer ...................................241
(2.) Hill v. Gateway 2000, Inc. .................................................................243
(C.) Policing Cyberspace Contracts..................................................................245
(1.) Unconscionability ...............................................................................246
(2.) Public Policy Limitations ..................................................................248
(3.) Copyright Misuse ...............................................................................249
(4.) State Unfair and Deceptive Trade Practices Act .............................251
(D.) Preemption of Licensing ............................................................................251
§ 4.4 Uniform Electronic Transactions Act ...............................................................252
(A.) Provisions of UETA ...................................................................................252
(B.) UETA’s Scope .............................................................................................254
(C.) UETA Requires Parties’ Agreement .........................................................254
(D.) UETA’s Risk Allocation for Errors ...........................................................255
§ 4.5 The Electronic Signatures in Global and National Commerce Act ................255
§ 4.6 Revised U.C.C. Article 1 ....................................................................................257
§ 4.7 Uniform Computer Information Transactions Act ..........................................258
(A.) History of U.C.C. Article 2B ......................................................................258
(B.) UCITA: A Licensing Law for the Internet ...............................................258
(C.) UCITA’s Statutory Purposes .....................................................................263
(D.) A UCITA Roadmap ....................................................................................263
(E.) UCITA’s Sphere of Application .................................................................264
(F.) Initial Provisions........................................................................................266

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(G.) Formation of Standard Form Licenses .....................................................269

(1.) Opportunity to Review Terms ...........................................................271
(2.) Manifestation of Assent .....................................................................271
(3.) Attributable to Licensee ....................................................................272
(H.) Formation of Online Contracts .................................................................272
(1.) Express Warranties ...........................................................................273
(2.) Implied Warranty of Merchantability ..............................................275
(3.) Fitness-Type Warranties ...................................................................275
(4.) Systems Integration Warranties .......................................................277
(5.) Information Content Warranties ......................................................277
(6.) Warranty Disclaimers & Limitations ...............................................279
(7.) Non-Infringement Warranty .............................................................281
(I.) Performance of a License Agreement .......................................................282
(J.) Remedies for Licensors and Licensees .....................................................286
§ 4.8 Principles of the Law of Software Contracts ...................................................289
(A.) Sphere of Application ................................................................................292
(1.) Software Contracts for Consideration ..............................................292
(2.) Exclusions from the Principles’ Sphere of Application ....................293
(a.) Digital Content & Databases ....................................................293
(b.) Embedded Software ...................................................................293
(c.) Open Source Software Contracts Without Consideration .......294
(d.) Physical Tangible Medium ........................................................294
(3.) Mixed Transactions ...........................................................................295
(4.) Application by Analogy ......................................................................295
(B.) Preliminary Concerns ................................................................................296
(1.) Anti-Reverse Engineering Clauses ...................................................297
(2.) Public Policy Reasons Not to Enforce Licenses ................................297
(3.) Unconscionability ...............................................................................298
(4.) Mixed Transactions ...........................................................................300
(C.) Forum Selection Clauses ...........................................................................301
(D.) Formation of Software Contracts .............................................................302
(1.) Liberal Formation Rules ...................................................................302
(2.) Battle of the Forms Provision ...........................................................303
(2.) Formation Safe Harbor Provisions ...................................................304
(3.) Parol Evidence Rule ...........................................................................304
(4.) Liberal Contract Formation ..............................................................305
(5.) Standard Form Software Contracts ..................................................306
(6.) Modification of a Software Contract .................................................306
(7.) Supplemental Terms..........................................................................306
(E.) Software Contracting Warranties.............................................................307
(1.) Express Warranties ...........................................................................307
(2.) Implied Warranty of Merchantability ..............................................308
(3.) Systems Integration & Fitness Warranties .....................................308
(4.) Non-Infringement Warranties ..........................................................312
(5.) Disclaiming Warranties.....................................................................312
(6.) Nondisclaimable Warranty for Hidden Defects ...............................313

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(F.) Software Performance Standards .............................................................314

(1.) Breach and Material Breach .............................................................314
(2.) Material Breach .................................................................................315
(3.) Right to Cure ......................................................................................315
(G.) Remedies for Breach of Software Contracts ............................................316
(1.) UCITA-Like Remedies .......................................................................316
(2.) Use of Automated Disablement to Impair Use ................................316
(3.) Liquidated Damages ..........................................................................317
(4.) Cancellation & Expectancy Damages ...............................................317
(5.) Specific Performance .........................................................................317
§ 4.9 Cloud Computing Service Level Agreements ..................................................317
(A.) NIST Definition of Cloud Computing .......................................................320
(B.) Qualities of Cloud Computing ...................................................................321
(C.) Software as a Service Paradigm ...............................................................322
(D.) Service Level Agreements for Cloud Computing .....................................323
§ 4.10 Commercial Law of Internet Intangibles .........................................................328
§ 4.11 Cross-Border Electronic Commerce..................................................................333
(A.) EU Consumer Protection...........................................................................335
(B.) Electronic Commerce Directive.................................................................335
(1.) Intermediary Liability .......................................................................336
(2.) Spam E-Mail.......................................................................................337
(3.) Electronic Contracts ..........................................................................337
(4.) Duty to Respond to Report Illegal Activities ....................................338
(5.) Liability of Service Providers ............................................................338
(C.) The Convention for the International Sale of Goods ...............................338
(1.) Sphere of Application .........................................................................338
(2.) Exclusions & Overview of Scope .......................................................339
(3.) CISG’s Application to Computer Software .......................................340
(4.) CISG Formation Rules ......................................................................341
(5.) CISG’s Warranty-Like Provisions.....................................................341
(6.) CISG’s Fundamental Breach and Avoidance ...................................341
(7.) Breach and Remedies ........................................................................342
(D.) Europe’s Doctrine of Exhaustion ..............................................................342
(E.) Cross-Border Licensing .............................................................................343
(F.) Cross-Border Payments .............................................................................344

CHAPTER 5. CONSUMER REGULATION IN CYBERSPACE ............................ 347

§ 5.1 Overview of Internet-Related Consumer Protection .......................................347
§ 5.2 FTC as Cyberspace Constable ..........................................................................349
(A.) Unfair & Deceptive Trade Practices .........................................................352
(B.) Online Fraudulent Schemes .....................................................................353
(C.) Online Advertising & Marketing ..............................................................353
(1.) Online Disclosures .............................................................................354
(2.) FTC Guidance on Online Endorsements ..........................................355
(3.) FTC Mandatory Website Disclosures ...............................................357
(D.) Unfair or Deceptive Online Practices .......................................................360
(1.) Deceptive Pornographers ..................................................................362
(2.) Nigerian 419 E-Mail Swindles ..........................................................362
(3.) Dot.Cons .............................................................................................363

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(4.) Mousetrappers ...................................................................................363

(5.) The Cybersex Wonderland ................................................................364
(6.) Social Media Unfair Practices ...........................................................366
(E.) The War Against Spam .............................................................................367
(F.) Magnuson-Moss Consumer Warranty Act & Software ...........................375
(1.) The Magnuson-Moss Act and Software ............................................376
(2.) The Path of the Magnuson-Moss Warranty Act ..............................376
(3.) Disclaimability of Implied Warranties .............................................377
(4.) Labeling of Consumer Warranties ....................................................378
(5.) Limited Warranty ..............................................................................379
(G.) Little FTC Acts at the State Level ...........................................................380
§ 5.3 Consumer Financial Protection Bureau...........................................................381
(A.) Online Phony Pay Day Lenders ................................................................381
(B.) Mandatory Arbitration in Consumer Financial Markets .......................383
§ 5.4 Federal Communications Commission .............................................................384
(A.) The Communications Act of 1934 .............................................................385
(B.) Net Neutrality ............................................................................................385
§ 5.5 Securities & Exchange Rules for the Internet .................................................387
§ 5.6 Internet Taxation ..............................................................................................389
(A.) Federal Tax Law ........................................................................................389
(B.) State Internet Taxes ..................................................................................389
§ 5.7 State Consumer Protection ...............................................................................393
§ 5.8 Commerce Clause Challenges...........................................................................394
(A.) American Libraries Assoc. v. Pataki .........................................................395
(B.) Internet Sales of Alcohol ...........................................................................396
(C.) Usurious Loans ..........................................................................................397
(D.) State Regulation for Online Gambling .....................................................397
§ 5.9 Internet Payments Systems ..............................................................................398
§ 5.10 Predispute Mandatory Arbitration ...................................................................400
§ 5.11 Global Consumer Issues ....................................................................................406
(A.) Unfair Online Advertising ........................................................................407
(B.) Unfair Consumer Contracts Directive......................................................408
(C.) Distance Selling Directive .........................................................................409
(D.) “Rolling Contracts” in the Eurozone .........................................................412
(E.) Mandatory Terms in Consumer Contracts ..............................................414
(F.) Chinese Consumer Law & Social Media Contracts .................................419
(G.) Foreign Taxation of Online Services ........................................................422

CHAPTER 6. GLOBAL INTERNET TORTS ............................................................ 423

§ 6.1 Overview of Cybertorts .....................................................................................423
(A.) What Cybertorts Are .................................................................................423
(B.) The Unique Qualities of Virtual Torts .....................................................425
(C.) Cyber Liability Insurance .........................................................................427
§ 6.2 Intentional Cybertorts Against the Person ......................................................430
(A.) Assault and Battery ...................................................................................430
(B.) Intentional Infliction of Emotional Distress ............................................431
(C.) Malicious Prosecution ................................................................................435
(D.) Abuse of Process.........................................................................................435

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(E.) Trespass to Virtual Chattels .....................................................................436

(1.) Spam E-Mail.......................................................................................438
(2.) Bots as Trespassers ...........................................................................440
(3.) Spyware as Trespass to Chattels ......................................................442
(4.) Trespass to Digital Data ....................................................................443
(F.) Conversion in Cyberspace .........................................................................443
(1.) Cyberconversion of Domain Names ..................................................444
(2.) Conversion of Websites ......................................................................445
§ 6.3 Intentional Business Torts in Cyberspace .......................................................446
(A.) Trade Secret Misappropriation .................................................................446
(B.) Unfair Competition ....................................................................................447
(C.) Misappropriation of Intangible Data ........................................................448
(D.) Interference with Business Contracts ......................................................449
(E.) Negligent Interference with Contract ......................................................451
(F.) Trade Libel .................................................................................................451
§ 6.4 Intentional Information-Based Torts ...............................................................452
(A.) Cyberfraud .................................................................................................452
(B.) Online Defamation.....................................................................................453
(1.) Defamation for Individuals & Businesses ........................................453
(2.) Publishers, Conduits & Distributors ................................................456
(3.) Internet Posting Is Libel ...................................................................457
(4.) Libel Per Se ........................................................................................459
(5.) Special Damages & Libel ...................................................................459
(6.) State Action ........................................................................................460
(7.) Publishers, Distributors, and Conduits ............................................460
(8.) Anonymous Speech and Subpoena Duces Tecum ............................461
(C.) Defenses in Defamation ............................................................................463
(1.) Public Official .....................................................................................463
(2.) Public Figures, Limited Public Figures ............................................464
(a.) General Purpose Public Figure .................................................464
(b.) Limited Purpose Public Figure .................................................464
(3.) Standard for Private Persons ............................................................466
(4.) Truth as a Complete Defense ............................................................466
(5.) First Amendment Defenses ...............................................................466
(6.) Privileges and Qualified Privileges...................................................468
(7.) Anti-SLAPP Suit Statutes .................................................................468
(8.) Retraction Statutes ............................................................................469
(9.) Single Publication Rule .....................................................................469
(D.) Privacy Based Cybertorts ..........................................................................470
(1.) Intrusion upon Seclusion ...................................................................471
(2.) Appropriation & Right of Publicity ...................................................472
(3.) Public Disclosure of Private Fact ......................................................475
(4.) False Light .........................................................................................476
§ 6.5 Negligence Based Actions .................................................................................478
(A.) Internet Related Negligence .....................................................................478
(1.) Establishing a Duty of Care & Legal Causation ..............................478
(2.) Setting the Standard of Care in Negligent Security Cases .............481
(3.) Difficulty of Establishing Present Injury .........................................484

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(B.) Negligent Enablement of Cybercrime ......................................................484

(C.) Negligence Per Se ......................................................................................488
(D.) Premises Liability in Cyberspace .............................................................490
(E.) Professional Negligence .............................................................................492
(F.) Negligent Data Brokering .........................................................................493
(G.) Negligent Misrepresentation ....................................................................494
(H.) Negligent Entrustment .............................................................................496
(I.) Private and Public Nuisance .....................................................................496
(J.) Negligent Failure to Warn ........................................................................497
§ 6.6 Strict Liability in Cyberspace ...........................................................................499
(A.) Information as Defective Products ...........................................................500
(1.) 3-D Product Manufacturing ..............................................................500
(2.) Cybercrime & FDA Regulated Medical Products ............................501
(3.) Video Games as Products ..................................................................503
(4.) Defective Navigational Charts ..........................................................504
(B.) Internet-Related Products Liability .........................................................505
(1.) Definition of Products Liability .........................................................505
(2.) Three Types of Product Defects ........................................................506
(C.) Economic Loss Rule ...................................................................................507
(D.) Negligent Information Liability ................................................................508
(E.) Innominate Torts in Cyberspace...............................................................509
§ 6.7 Secondary Tort Liability ...................................................................................509
§ 6.8 Cybertort Punitive Damages ............................................................................510
§ 6.9 Cybertort Defenses ............................................................................................512
(A.) Traditional Tort Defenses .........................................................................512
(1.) Contributory Negligence ...................................................................512
(2.) Ameliorating the Harsh Effects of Contributory Negligence ..........513
(3.) Comparative Negligence ....................................................................513
(B.) Section 230 of the CDA ..............................................................................514
(1.) Distributor Liability ..........................................................................520
(2.) Service Providers Have No Takedown Duty ....................................522
(3.) Immunity Even When Websites Exercise Editorial Control...........525
(4.) Immunity Extends to Injunctive Relief ............................................526
(5.) Causes of Action Immunized by Section 230 ...................................527
(a.) Defamation .................................................................................527
(b.) Right of Privacy ..........................................................................528
(c.) Negligence Claims Based upon Inadequate Safeguards .........529
(d.) Intentional Interference with Contract ....................................529
(e.) Trafficking Victims Protection Reauthorization Act
(TVPRA) ......................................................................................530
(f.) Civil RICO ..................................................................................531
(6.) Exceptions to Section 230 Immunity ................................................532
(a.) Service Provider Is Itself a Content Provider ..........................532
(b.) Intellectual Property Carveouts ................................................534
(c.) Carveouts for ECPA Action .......................................................536
(d.) Action Does Not Arise Out of Website Actions ........................536
(7.) The Case For & Against Section 230 ................................................537
(8.) Shielding Against Website Negligence .............................................538
(C.) Government Immunities ...........................................................................539

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§ 6.10 Transborder Torts..............................................................................................539

(A.) Privacy-Based Litigation ...........................................................................539
(B.) Cross-Border Internet Libel Law ..............................................................540
(1.) Reforming UK Internet Defamation Law ........................................540
(2.) Global Internet Libel Law Cases ......................................................542
(3.) Jurisdiction and Discovery ................................................................545
(4.) EU Service Provider Liability ...........................................................546
(5.) Negligence ..........................................................................................547
(C.) Products Liability Directive ......................................................................547

CHAPTER 7. INTERNET-RELATED PRIVACY ..................................................... 551

§ 7.1 Overview of Online Privacy ..............................................................................551
(A.) FTC’s Role as Privacy Constable ..............................................................554
(1.) FTC Privacy Disclosures ...................................................................554
(2.) FTC Privacy Enforcement .................................................................555
(B.) Google’s Privacy Policy Litigation ............................................................557
(C.) Google G-Mail Litigation ...........................................................................559
(D.) Google Wallet .............................................................................................560
§ 7.2 Overview of the Lack of Online Privacy ...........................................................561
(A.) No Privacy in Internet Searches ...............................................................561
(B.) No Privacy Rights Against Data Dredgers ..............................................562
(C.) No Privacy in Social Networks .................................................................562
§ 7.3 Employment & the Internet as Front Stage ....................................................565
(A.) Employment-Related Online Privacy .......................................................565
(B.) E-Mail & Internet Usage Monitoring .......................................................567
§ 7.4 Workplace Privacy Issues .................................................................................571
(A.) National Labor Relations Act ...................................................................571
(B.) Concerted Activities ...................................................................................572
(C.) NLRA Section 8(a)(1) .................................................................................573
(D.) Harassment by Co-Employees ..................................................................576
(E.) Social Media Employer Snooping .............................................................577
(F.) Public Employee’s First Amendment Interests .......................................577
§ 7.5 Fourth Amendment & Internet Technologies..................................................578
(A.) Internet-Related Search & Seizures .........................................................583
(1.) Smyth v. Pillsbury..............................................................................584
(2.) Garrity v. John Hancock....................................................................584
(B.) Search and Seizure of Text Messages ......................................................585
(1.) The Ubiquity of Text Messaging and Electronic Messaging ..........585
(2.) The Fourth Amendment and the Katz Balancing Test ..................586
(3.) Fourth Amendment Stretched to Text Messaging ..........................587
(4.) Warrantless Searches for Text Messages ........................................588
(5.) Cellular Phones as Containers .........................................................589
(6.) The Third-Party Doctrine and Text Messaging ..............................590
(7.) Imperfect Analogies for Text Messaging .........................................591
(8.) Relevance of State v. Patino .............................................................592
(9.) The Rhode Island Supreme Court’s Opinion ...................................592
(10.) Riley v. California .............................................................................593
(C.) Global Positioning System (GPS) Surveillance .......................................594

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§ 7.6 Federal Statutes Governing Internet Privacy .................................................596

(A.) Privacy Act of 1974 ....................................................................................596
(B.) Children’s Online Privacy Protection Act of 1998 ...................................596
(C.) HIPAA’s Online Privacy Rules .................................................................604
(D.) Gramm-Leach-Bliley Act ...........................................................................604
§ 7.7 State Regulation of Online Privacy ..................................................................605
§ 7.8 Third Party Disclosure of Private Information ...............................................606
§ 7.9 Consumer Privacy Bill of Rights ......................................................................606
§ 7.10 Global Privacy Issues ........................................................................................608
(A.) European Data Protection .........................................................................608
(1.) The Treaty of Lisbon and Privacy .....................................................608
(2.) OECD Privacy Principles ..................................................................609
(3.) The Charter of Fundamental Rights of the EU ...............................609
(B.) Data Protection Directive ..........................................................................613
(C.) U.S. Data Protection Directive Safe Harbor ............................................621
(D.) Proposed General Data Protection Regulation ........................................625
(1.) Chapter 1: General Provisions .........................................................626
(2.) Chapter 2: Principles ........................................................................627
(3.) Chapter 3: Rights of the Data Subject .............................................628
(4.) Article 17: Right to Be Forgotten .....................................................628
(5.) Exceptions to the Right to Be Forgotten .........................................630
(6.) Data Transfer and Portability ..........................................................631
(7.) Data Subject’s Right to Object .........................................................631
(8.) Measures Based on Profiling ............................................................631
(9.) Data Security.....................................................................................632
(10.) Notification of Data Breaches ..........................................................632
(11.) Data Protection Impact Assessment and Authorization ................632
(12.) Data Protection Officer, Position & Ethics ......................................632
(13.) Transfer to Third Countries .............................................................633
(14.) Independent Status of Supervisory Authorities .............................634
(15.) Duties and Powers of Supervisory Authorities ...............................634
(16.) European Data Protection Board .....................................................635
(17.) Remedies, Liabilities and Sanctions ................................................635
(18.) Specific Data Processing Situations ................................................636
(E.) Directive on Privacy and Electronic Communications ............................636
(F.) Global Internet Security ............................................................................638
(G.) Workplace Privacy .....................................................................................639
(H.) Do Not Track Specifications ......................................................................640
(I.) Foreign Litigation ......................................................................................644
(J.) Chinese Real Name Regulations ..............................................................645

CHAPTER 8. PROSECUTING CYBERCRIMES ..................................................... 647

§ 8.1 Overview of Cybercrimes ..................................................................................647
(A.) Cybercrime as a Global Problem ..............................................................647
(B.) Defining Cybercrime ..................................................................................648
(C.) Auditing Cybercrime .................................................................................650
(1.) What Computer Crime Includes? .....................................................652
(2.) The Nature of Computer Crime ........................................................652
(3.) Types of Cybercrimes Reported ........................................................656

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§ 8.2 Computer Fraud and Abuse Act .......................................................................658

(A.) Criminal Law Provisions ...........................................................................658
(1.) Obtaining National Security Information ........................................663
(2.) Accessing Computer Without Authorization....................................663
(3.) Trespassing in a Government Computer .........................................664
(4.) Accessing to Defraud .........................................................................664
(5.) Damaging Computers or Data ..........................................................664
(6.) Trafficking in Passwords ...................................................................665
(7.) Threatening to Harm a Computer ....................................................665
(B.) CFFA’s Civil Liability ................................................................................666
(1.) United States v. Morris ......................................................................667
(2.) United States v. Ivanov ......................................................................668
(3.) United States v. Drew ........................................................................668
(4.) Courts Holding Violation of Terms of Use Violates CFAA ..............669
(5.) Courts Holding Violation of Terms of Use Does Not Violate
CFAA ..................................................................................................670
(a.) LVRC Holdings Inc. v. Brekka ..................................................670
(b.) United States v. Nosal................................................................671
(c.) WEC Carolina Energy Solution LLC v. Miller .........................672
(d.) Weingand v. Harland Financial Solutions ...............................673
(6.) CFAA Recent Litigation ....................................................................674
§ 8.3 Electronic Communications Privacy Act (ECPA) ............................................675
(A.) Overview of the ECPA ...............................................................................675
(B.) ECPA Defenses ..........................................................................................678
(1.) Ordinary Course of Business Exception ...........................................678
(2.) Business Exception ............................................................................679
(3.) Consent of Users ................................................................................679
(4.) The Patriot Act Exceptions ...............................................................680
(5.) ECPA Case Law .................................................................................680
§ 8.4 Stored Communications Act .............................................................................681
(A.) SCA Prima Facie Case ..............................................................................681
(B.) SCA Defenses .............................................................................................683
§ 8.5 ECPA & SCA Case Law ....................................................................................684
(A.) Electronic Communications Privacy Act Litigation ................................684
(1.) Bohach v. City of Reno .......................................................................684
(2.) In re Pharmatrak ...............................................................................685
(3.) McVeigh v. Cohen ...............................................................................686
(B.) Stored Communication Act Litigation ......................................................686
(1.) Konop v. Hawaiian Airlines ..............................................................686
(2.) United States v. Lang ........................................................................688
(3.) SCA and Cell Tower Records ............................................................689
(C.) Social Media & the ECPA .........................................................................689
(D.) Child Pornography Crimes ........................................................................690
§ 8.6 Other Internet-Related Criminal Statutes ......................................................694
(A.) Identity Theft .............................................................................................694
(B.) Access Device Fraud ..................................................................................694
(C.) Civil RICO in Cyberspace .........................................................................695
(D.) Anti-Stalking ..............................................................................................697

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§ 8.7 International Cybercrime Enforcement ...........................................................697

(A.) Personal Jurisdiction in Cross-Border Cases ..........................................698
(B.) Cybercrime Convention .............................................................................698
(C.) Economic Espionage Act............................................................................702
(D.) Who the Cybercriminals Are .....................................................................703

CHAPTER 9. CONTENT REGULATION ON THE INTERNET ........................... 705

§ 9.1 Overview of Internet Regulations ....................................................................705
§ 9.2 Indecent Speech & Censorship on the Internet ...............................................707
(A.) Communications Decency Act of 1996 ......................................................708
(B.) Child Online Protection Act ......................................................................710
(C.) Children’s Internet Protection Act (CIPA) ...............................................712
(D.) The Child Pornography Prevention Act of 1996 ......................................712
(E.) The Protect Act of 2003 .............................................................................713
(F.) School Censorship of Internet Content ....................................................714
§ 9.3 Applying the First Amendment in Cyberspace ...............................................715
(A.) Dormant Commerce Clause ......................................................................715
(B.) Content-Specific Regulations ....................................................................716
(C.) Content-Neutral Regulations ....................................................................717
(D.) Facial Attacks on Internet Speech ...........................................................717
(1.) Vagueness ...........................................................................................717
(2.) Overbreadth .......................................................................................718
(E.) Categories of Unprotected Speech ............................................................718
§ 9.4 Cyberbullying .....................................................................................................719
(A.) Federal Legislative Proposals ...................................................................719
(B.) State Anti-Bullying Legislation ................................................................719
§ 9.5 Countering Hate on the Net .............................................................................720
§ 9.6 Adult Entertainment & Pornography ..............................................................721
§ 9.7 Cross-Border Content Regulation ....................................................................722
(A.) EU Data Retention ....................................................................................722
(B.) Foreign Filtering of Content .....................................................................723

CHAPTER 10. COPYRIGHTED WORKS IN CYBERSPACE ................................ 725

§ 10.1 Overview of Copyright Law ..............................................................................727
(A.) The Scope of Copyright Law Protection ...................................................727
(B.) Exclusive Rights of Copyright Owners .....................................................728
(C.) Copyright Term Extension Act (CTEA)....................................................729
§ 10.2 Elements of Copyright Law ..............................................................................730
(A.) Originality ..................................................................................................730
(B.) Fixation ......................................................................................................731
(C.) Exclusions from Copyright ........................................................................732
(D.) Derivative Works .......................................................................................732
(E.) Automatic Creation & Notice ....................................................................733
(F.) Work Made for Hire ...................................................................................734
(G.) Software Copyrights ..................................................................................736
§ 10.3 Overview of Internet-Related Copyright Infringement ..................................737
(A.) Direct Infringement ...................................................................................740
(1.) Prima Facie Case ...............................................................................740
(2.) Copyright Damages ...........................................................................743

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(B.) Three Types of Secondary Copyright Infringement ................................745

(1.) Contributory Infringement ................................................................746
(2.) Vicarious Infringement ......................................................................747
(3.) Inducement or Encouraging Infringement .......................................747
§ 10.4 Peer-to-Peer File Sharing .................................................................................750
(A.) Napster .......................................................................................................751
(B.) Grokster ......................................................................................................752
(C.) Cyberlocker Services..................................................................................753
§ 10.5 Links, Framing, Bookmarks, & Thumbnails ...................................................753
(A.) Hyperlinks ..................................................................................................753
(B.) Framing ......................................................................................................755
(C.) Bookmarks .................................................................................................755
(D.) Thumbnails of Copyrighted Images .........................................................756
§ 10.6 Database Protection ..........................................................................................757
§ 10.7 Limitations on Exclusive Rights .......................................................................758
(A.) First Sale Doctrine .....................................................................................758
(B.) Public Domain Information .......................................................................759
(C.) Defense of Fair Use....................................................................................760
(D.) Reverse Engineering..................................................................................761
(E.) Transformative Use ...................................................................................762
(F.) Independent Creation ................................................................................762
§ 10.8 Digital Millennium Copyright Act ....................................................................762
(A.) Overview of the DMCA ..............................................................................762
(B.) Title I’s Provisions .....................................................................................765
(1.) Anti-Circumvention Provisions .........................................................765
(2.) Anti-Trafficking Provisions ...............................................................766
(C.) DMCA’s Safe Harbors................................................................................766
(1.) Transitory Digital Network Communications .................................770
(2.) System Caching ..................................................................................770
(3.) Storage Exemption.............................................................................771
(4.) OSP’s Registered Agent .....................................................................772
(5.) Takedown & Put-Back Rules ............................................................772
(6.) Information Location Tools ...............................................................776
(D.) DMCA Anti-Circumvention Rules ............................................................776
(E.) Exemptions & First Amendment Challenges ..........................................777
(1.) Reverse Engineering ..........................................................................777
(2.) DMCA & Fair Use ..............................................................................778
(F.) Chilling Effects of the DMCA ...................................................................781
(G.) DMCA Subpoenas to Identify Infringers .................................................782
§ 10.9 Criminal Copyright Law ...................................................................................784
§ 10.10 Copyright Issues in the Clouds .........................................................................786
§ 10.11 Copyright Issues in Social Networks ................................................................787
§ 10.12 International Issues ..........................................................................................790
(A.) Moral Rights...............................................................................................791
(B.) Copyright Protection for Dress Design .....................................................793
(C.) Extraterritoriality ......................................................................................794
(D.) National Treatment ...................................................................................794
(E.) Global Copyright Treaties .........................................................................795

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(F.) SOPA and ACTA ........................................................................................795

(1.) SOPA...................................................................................................795
(2.) ACTA ..................................................................................................796
(G.) European Union Internet-Related Issues ................................................797
(1.) ISP Liability .......................................................................................797
(2.) Framing ..............................................................................................797
(3.) Peer-to-Peer Sharing and ISPs .........................................................798
(4.) Copyrightability of Metatags ............................................................799
(H.) Website Blocking & In Rem Injunctions ..................................................799
(I.) Ancillary Copyright ...................................................................................800
(J.) DMCA Takedown & Extraterritoriality ...................................................801
(K.) Linking .......................................................................................................802
(L.) International Copyright Protection ..........................................................802
(M.) Online Copyright Infringement ................................................................803

CHAPTER 11. TRADEMARKS ON THE GLOBAL INTERNET .......................... 805

§ 11.1 Overview of Internet-Related Trademark Law ...............................................806
(A.) Path of Trademark Law ............................................................................807
(B.) Federal Trademark Registration ..............................................................809
(C.) State Trademark Law ...............................................................................811
(D.) Trademark Applications ............................................................................811
(1.) Territorial Extent of Trademarks .....................................................811
(2.) Actual & Intent to Use Applications .................................................812
(E.) The Distinctiveness Spectrum ..................................................................813
(1.) Generic Trademarks ..........................................................................814
(2.) Descriptive Trademarks ....................................................................816
(3.) Suggestive Trademarks .....................................................................817
(4.) Arbitrary Trademarks .......................................................................817
(5.) Fanciful Trademarks .........................................................................818
(6.) Summary of Trademark Continuum ................................................818
(7.) Incontestability ..................................................................................819
(F.) Trade Name ................................................................................................819
(G.) Service Marks ............................................................................................819
(H.) Functional Limits of Trademarks .............................................................820
(I.) What a Domain Name Is ...........................................................................820
§ 11.2 Website Trade Dress .........................................................................................821
§ 11.3 Road Map of Internet-Related Trademark Claims .........................................822
§ 11.4 Likelihood of Confusion and Related Causes of Action ...................................825
(A.) Direct Infringement ...................................................................................825
(B.) Likelihood of Confusion .............................................................................826
(C.) False Advertising .......................................................................................828
(D.) Reverse Confusion .....................................................................................829
(E.) Secondary Trademark Infringement ........................................................830
(1.) Contributory Trademark Infringement ............................................830
(2.) Vicarious Trademark Infringement ..................................................831
§ 11.5 Trademark Dilution Revision Act of 2006 .......................................................832
(A.) Federal Dilution Claim ..............................................................................834
(B.) The Nuts & Bolts of the TDRA .................................................................836

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(C.) TDRA Federal Remedy for Famous Mark Blurring ................................838

(D.) Defenses to Federal Dilution Actions .......................................................840
§ 11.6 State Anti-Dilution Actions ..............................................................................841
(A.) State Anti-Dilution: Blurring ....................................................................842
(B.) State Anti-Dilution: Tarnishment ............................................................842
§ 11.7 False Designation of Origin ..............................................................................842
§ 11.8 False Endorsement ............................................................................................844
§ 11.9 Anticybersquatting Act of 1999 ........................................................................845
(A.) ACPA Overview .........................................................................................847
(B.) Elements of ACPA Claims ........................................................................848
(C.) ACPA Safe Harbor for Domain Name Registrants .................................849
(D.) ACPA Remedies .........................................................................................850
(1.) Actual or Statutory Damages ............................................................850
(2.) Injunctive Relief .................................................................................850
(3.) Transfer of Domain Names ...............................................................851
(4.) In Rem Actions Against Domain Names ..........................................851
(E.) ACPA Case Law .........................................................................................853
§ 11.10 Keyword Trademark Litigation ........................................................................853
(A.) Use in Commerce & the Net .....................................................................855
(B.) Commercial Use in Keywords ...................................................................855
(1.) LBF Travel, Inc. v. Fareportal, Inc. ..................................................856
(2.) 1-800 Contacts, Inc. v. WhenU.Com, Inc. .........................................857
(3.) Rescuecom Corp. v. Google ................................................................858
§ 11.11 Sponsored Banners & Pop-Ups ........................................................................859
§ 11.12 Metatags ............................................................................................................859
(A.) Invisible Trademark Violations ................................................................859
(B.) Initial Interest Confusion ..........................................................................862
§ 11.13 Defenses to Trademark Infringement Actions ................................................863
(A.) Trademark Fair Use ..................................................................................863
(1.) Traditional Fair Use ..........................................................................863
(2.) Descriptive & Nominative Fair Use .................................................864
(B.) First Amendment in Cyberspace ..............................................................866
(C.) Trademark Parodies ..................................................................................866
(D.) Trademark Laches .....................................................................................868
(E.) Disclaimers .................................................................................................868
§ 11.14 False Advertising ..............................................................................................868
§ 11.15 Trademark Issues in Social Media ...................................................................869
§ 11.16 Typosquatters, Hijackers, & Reverse Hijackers..............................................869
(A.) Typosquatters ............................................................................................869
(B.) Domain Name Hijackers, Reverse Hijackers, & Tasters ........................870
(C.) Reverse Domain Name Hijacking .............................................................871
(D.) Domain Name Tasting ..............................................................................871
§ 11.17 Lanham Act Statutory or Actual Damages .....................................................872
§ 11.18 ICANN’s Governance ........................................................................................873
(A.) Overview of ICANN ...................................................................................873
(B.) Internet Assigned Numbers Authority.....................................................876
§ 11.19 Uniform Domain Name Resolution Policy .......................................................877
§ 11.20 Uniform Dispute Resolution Service Providers ...............................................878
(A.) Hypothetical Case: Lady Gidget ...............................................................880

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(B.) Madonna v. Parisi .....................................................................................881

(1.) Madonna’s Argument ........................................................................881
(2.) Parisi’s Defense ..................................................................................881
(3.) WIPO Panel’s Decision ......................................................................882
(C.) The Nuts & Bolts of the Uniform Dispute Resolution Policy .................884
(1.) Domain Name Registration ...............................................................884
(2.) Liability of the Domain Name Registrars ........................................885
§ 11.21 Types of UDRP Cases........................................................................................887
(A.) Incorporating Another’s Trademark.........................................................888
(B.) Common Law TM Rights of Celebrities ...................................................888
(C.) Appending Descriptive or Generic Words ................................................889
(D.) Anti-Corporate Websites ...........................................................................890
(E.) UDRP Typosquatting ................................................................................891
(F.) Comparative Advantages: UDRP vs. Court Actions ...............................891
§ 11.22 ICANN’S New TLDs and gTLDs ......................................................................892
§ 11.23 Global Trademark Issues ..................................................................................893
(A.) Global E-Business Concerns .....................................................................893
(B.) European Community Trademarks ..........................................................894
(C.) Madrid Protocol for International Registration of Marks .......................896
(D.) Internet-Related Foreign Trademark Litigation .....................................897
(1.) Keyword Advertising in France ........................................................897
(2.) Metatags .............................................................................................898

CHAPTER 12. TRADE SECRETS IN CYBERSPACE ............................................ 901

§ 12.1 What Is a Trade Secret? ....................................................................................902
§ 12.2 Trade Secrets Governed by State Law .............................................................903
(A.) Restatement (First) of Torts, §§ 757, 758 (1939) .....................................903
(B.) Uniform Trade Secrets Act........................................................................903
(C.) UTSA’s Definition of Trade Secrets ..........................................................904
(D.) UTSA Misappropriation Action ................................................................905
(E.) Reasonable Means to Protect Secrets .......................................................906
(1.) Nondisclosure Agreements ................................................................907
(2.) Idea Submission Policies ...................................................................909
(3.) Inevitable Disclosure .........................................................................909
(F.) Uniform Trade Secret Act Remedies ........................................................910
(G.) Defenses in UTSA Litigation ....................................................................911
(1.) Reverse Engineering ..........................................................................911
(2.) First Amendment Defenses ...............................................................911
§ 12.3 Restatement (First) of Torts .............................................................................912
(A.) Internet-Related Software Cases ..............................................................913
(B.) Internet-Related Trade Secret Litigation ................................................913
(C.) Computer Fraud and Abuse Act ...............................................................915
§ 12.4 Trade Secrets in a Global Internet ...................................................................916
§ 12.5 Economic Espionage Act ...................................................................................917
(A.) Overview of the Economic Espionage Act ................................................917
(B.) International Trade Secret Protection .....................................................919
(C.) Trade Secret Misappropriation & Foreign Defendants ...........................921
(D.) State-Sponsored Chinese Espionage ........................................................923

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 TABLE OF CONTENTS xxix

CHAPTER 13. PATENT LAW AND THE INTERNET ............................................ 925

§ 13.1 Overview of Internet-Related Patent Law .......................................................925
(A.) Internet-Related Patent Wars ..................................................................925
(B.) Constitutional and Statutory Basis ..........................................................926
§ 13.2 U.S. Patent Act ..................................................................................................927
§ 13.3 Patent Types ......................................................................................................928
(A.) Utility Patents ...........................................................................................928
(B.) Design Patents ...........................................................................................930
(C.) Plant Patents .............................................................................................932
§ 13.4 Patent Law Terms .............................................................................................932
§ 13.5 Section 101 Patentable Subject Matter ............................................................932
(A.) Subject Matter ...........................................................................................933
(B.) Judicial Exceptions to Patentability.........................................................934
§ 13.6 Elements of Patentability .................................................................................936
(A.) Novelty........................................................................................................936
(1.) Anticipation ........................................................................................936
(2.) Statutory Bar .....................................................................................937
(B.) Patentability: Non-Obviousness ...............................................................937
(C.) Patentability: Utility .................................................................................938
§ 13.7 USPTO Applications..........................................................................................938
(A.) Overview of Patent Application Process ..................................................938
(B.) Anatomy of a Patent Application ..............................................................939
(C.) Examination of Patent Application ..........................................................939
(D.) Specifications .............................................................................................940
(E.) Patent Claiming .........................................................................................941
(F.) Enablement ................................................................................................941
(G.) Patent Invalidity ........................................................................................941
(H.) Patent Terms..............................................................................................942
(I.) Assignment and Sale of Patents ...............................................................943
§ 13.8 Internet-Related Patents ..................................................................................943
(A.) Software Patents ........................................................................................944
(B.) E-Business Methods ..................................................................................947
(C.) Post-State Street Developments ................................................................948
(D.) Limits on Business Methods .....................................................................950
(E.) Blocking Patents ........................................................................................950
§ 13.9 Internet-Related Patent Litigation ..................................................................950
(A.) Direct Infringement ...................................................................................950
(B.) Contributory Infringement .......................................................................951
(C.) Inducement ................................................................................................951
(D.) Emblematic Lawsuits ................................................................................952
(E.) E-Business Patent Trolls...........................................................................953
(F.) The Supreme Court’s Patent Jurisprudence ............................................954
(1.) Importance of Injunctive Relief to Protect Internet Patents ..........954
(2.) Bilski v. Kappos..................................................................................955
(3.) Mayo Collaborative Services ..............................................................957
(G.) Cross-Border Patent Issues .......................................................................957
Conclusion..........................................................................................................................958

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xxx TABLE OF CONTENTS

TABLE OF CASES .................................................................................................................959

TABLE OF STATUTES ...........................................................................................................971
INDEX ..................................................................................................................................977

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GLOBAL INTERNET
LAW
Second Edition

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 Chapter 4

INTERNET-RELATED CONTRACT LAW

Analysis

§ 4.1 Overview of Online Contracts

§ 4.2 Licensing as the Chief Contracting Form
§ 4.3 Contract Formation Issues in Cyberspace
§ 4.4 Uniform Electronic Transactions Act
§ 4.5 The Electronic Signatures in Global and National Commerce Act
§ 4.6 Revised U.C.C. Article 1
§ 4.7 Uniform Computer Information Transactions Act
§ 4.8 Principles of the Law of Software Contracts
§ 4.9 Cloud Computing Service Level Agreements
§ 4.10 Commercial Law of Internet Intangibles
§ 4.11 Cross-Border Electronic Commerce
—————

§ 4.1 Overview of Online Contracts

During the past two decades, the Internet evolved as a business tool. Specialized
Internet-related contracts emerged at a time of tremendous changes in the way business
was conducted because of 24/7 e-commerce possibilities. Today social media websites are
reshaping business and advertising. 1 Internet contract law is also rapidly evolving as
industry groups, governments, and international organizations formulate new
standards, usages of trade, regulatory initiatives, statutes, and court decisions. The
rapid evolution of the Internet has created an endemic problem of “legal lag.” The law of
contracts is lagging behind the development of software law and the Internet. The
timeworn doctrines of contract law are continually being eroded, fractured, and
shattered by the Internet’s rapid evolution. While Internet contracts take the form of
contracts, they are really “unilaterally imposed rules to protect new business models.”2
Licensing software permits software publishers to commodify their intellectual
property assets, while retaining control of its uses. 3 This chapter introduces the global
contracting law covering topics such as licensing, shrinkwrap, clickwrap, terms of service

1 “Social media has changed the way businesses communicate, enabling brands to directly engage with
consumers. Companies are turning increasingly to social media platforms to structure innovative and edgy
marketing and promotions that often include a mix of user-generated content, text messaging, Twitter
messaging, Facebook applications, blogging, viral marketing, and other social elements.” Alan L. Friel, Akash
Sachdeva, Jesse Brody, and Jatinder Bahra, Safeguarding Brand Reputation in Social Media, CORPORATE
COUNSEL (June 13, 2013).
2 NANCY S. KIM, WRAP CONTRACTS: FOUNDATIONS AND RAMIFICATIONS 211 (New York: Oxford
University Press, 2013).
3 Adobe Sys., Inc. v. One Stop Micro, Inc., 84 F. Supp. 2d 1086, 1092 (N.D. Cal. 2000) (“[A] common
method of distribution is through licensing agreements, which permit the copyright holder to place restrictions
upon the distribution of its products.”); Storm Impact, Inc. v. Software of Month Club, 13 F. Supp. 2d 782, 791
(N.D. Ill. 1998) (reservation of right to distribute software made available to be downloaded over the Internet
was valid and enforceable).
203

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204 INTERNET-RELATED CONTRACT LAW Ch. 4

agreements and service level agreements in wide currency. Unlike toasters, rental cars,
or other tangible personal property, software can be reproduced at the click of a download
button at almost no cost, which results in contracting practices being based primarily upon
the licensing of information. Many Internet-related contracts are mass-market
agreements such as terms of service agreements or software license agreements. As
software companies go global, online contracts become subject to radically different legal
traditions. U.S. style terms of use, which are widely enforced in the United States, are
unenforceable in the European Union. A new legal paradigm is necessary to facilitate E-
Commerce, which may soon eclipse brick-and-mortar commerce. Paper-based signatures
are rapidly giving way to digital signatures in E-Commerce. Electronic agents with or
without human review are increasingly forming contracts.4 Trading partner agreements
form rules in advance for protocols regarding the ordering of goods and payment through
electronic messages. The Uniform Computer Information Transaction Act (UCITA)
validates electronic data interchange (EDI) trading agreements, whereby the parties
agree in advance to order goods by computer-to-computer interactions, without the need
for traditional human review.
Since the 1980s, software publishers, as well as database and website developers have
created a number of groundbreaking contracting forms that both deviate markedly from
the customary contract law “formation trilogy” of offer, acceptance, and consideration.
Licenses are a specialized contractual form that protect intellectual property rights and
enable vendors to realize their investments in developing code. The licensing of software,
like leases, validates the legal concept of the right to use property without the passage
of title. While the consumer’s title to the tangible copy of the software (the purchased
CD-ROM, for example) may be absolute, the purchase does not confer property rights
upon the intangible code that makes up the software.
The legal invention of licensing enables the software publishers to prohibit
assignments or transfers of the product, thus allowing them to retain control over the
product after the licensee pays royalties. Licensing enables the licensor to control the use
of their digital products after delivery.5 The licensor’s retention of title enables them to
slice and dice price (arbitrage) based upon a complex array of variables, such as business-
to-business, business-to-consumer, or market segments within a given foreign country. A
typical licensing provision specifies the following conditions of use:
Licensee may not install, electronically transfer, or otherwise execute the
FourGen Enterprise Software on any Computer other than the Designated
Computer. Only one Computer can be specified as the Designated Computer in
a network unless additional licenses are purchased.

4 “This term refers to an automated means for making or performing contracts. The agent must act
independently in a manner relevant to creating or performing a contract. Mere use of a telephone or e-mail
system is not use of an electronic agent. The automated system must have been selected, programmed or
otherwise intentionally used for that purpose by the person that is bound by its operations. The legal
relationship between the person and the electronic agent is not equivalent to common law agency since the
“agent” is not a human. However, parties that use electronic agents are ordinarily bound by the results of their
operations.” UCITA, Id. at § 102(a)(23) (defining electronic agent).
5 “Transferors use a licensing structure in part to restrict usage of the software. Enforcement of the
restriction should not depend on whether the software transferor labels the transfer a license or a sale. Instead,
enforcement should depend on (i) whether federal law renders the restriction unenforceable because it upsets
the intellectual property balance between exclusionary rights and creating a rich public domain; (ii) whether
the transferee had sufficient notice and opportunity to read the term restricting rights; and (iii) whether the
restriction runs afoul of public policy or unconscionability norms.” American Law Institute, Principles of the
Law of Software Contracts § 1.06 (2010).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 205

Increasingly, Internet contracts are being entered into in a cross-border legal

environment, filled with pitfalls for the unwary. “The preparation of Internet contracts is
difficult, since courts may apply laws and jurisdictional rules that are unknown to the
drafters of the agreement.”6 So, how do people contract over the Internet? In the early
1990s, contracts were chiefly entered into by email and there was uncertainty as to
whether the digital signature was valid. “While new commerce on the Internet has
exposed courts to many new situations, it has not fundamentally changed the principles
of contract.”7 Nevertheless, the Internet has spawned new information-age contracting
rules, which are the subject of this chapter.
§ 4.2 Licensing as the Chief Contracting Form
A license is a contract where the licensor grants the licensee the right to use
software or other information. A license is first a contract, generally between two
parties—the licensor and the licensee—although licenses may also be assigned or
sublicensed. The licensor is the party that agrees to transfer software or to grant access
to other computer information. The licensee’s duty is to pay the licensing fee to the
licensor in order to obtain access to or use of information under the terms and conditions
specified in the agreement. Like a lease for personal property, a license agreement gives
the licensee the right to use the intangible property under stated guidelines. Internet
licenses may include computer software, website content, databases or other digital
information. Licensing is the principal contracting form used in E-Commerce and in the
online world.8 The licensing of software validates the licensee’s rights to use intellectual
property intangibles just as a lease of goods gives lessees the right to use durable goods
such as equipment. A lessor leases equipment to a lessee for the term of the lease
agreement. Similarly, a software license is a contractual arrangement where the licensor
conveys the right to use software for the term of the agreement.
Licensors have an action for breach of contract if the licensee fails to pay royalties
or exceeds the scope of the granting clause. The elements of a breach of a license
agreement are: (1.) the existence of a valid contract; (2.) performance or tendered
performance by the plaintiff; (3.) breach of the contract by the defendant; and (4.)
resulting damages to the plaintiff. A software license is, in effect, a waiver of the
copyright owner’s right to sue for copyright or patent infringement. Nevertheless, a
software license is not just a waiver to sue for infringement, but often involves
conditions, covenants, and affirmative duties that sometimes survive beyond the term of
the agreement. Licenses that address issues such as maintenance, data transmission, and
use of data are ubiquitous in the Internet-based economy. Apple’s iPhone User Agreement,
for example, provides that:
By using any location-based services on your IOS Device,9 you agree and
consent to Apple’s and its partners’, licensees’ and third party developers’
transmission, collection, maintenance and use of your location data and queries
to provide such products and services.10

6 F. LAWRENCE STREET & MARK P. GRANT, THE LAW OF THE INTERNET (New York: Lexis Law
Publishers, 1999) at 8.
7 Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004).
8 Michael L. Rustad, Making UCITA More Consumer-Friendly, 18 J. MARSHALL J. COMPUTER & INFO.
L. 547, 551–52 (1999) (arguing the software licensing law is less developed than the law for durable goods).
9 The IOS is the operating system for Apple’s iPhone and iPod family of mobile devices.
10 In re Smartphone Geolocation Data Application, 977 F. Supp.2d 129 (E.D. N.Y. May 1, 2013) at 14.

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206 INTERNET-RELATED CONTRACT LAW Ch. 4

(A.) The Concepts & Methods of Licensing Information

(1.) Definition of Licensing

A license is primarily an advanced contract, generally between two parties, the

licensor and the licensee. Licenses as advanced contracts have evolved into many flavors,
such as customized or mass-market licenses.11 A license agreement gives the licensee
the right to access or use software or other computer licensor agrees to transfer software
or to grant access to other computer information. The licensee pays the licensing fee to
the licensor in order to obtain access to or use of information. The classic definition of a
license is “a mere waiver of the right to sue” for infringement. 12 The concept of a license
is explained as thus:
A license is an agreement the terms of which entail a limited or conditional
transfer of information or a grant of limited or restricted contractual rights or
permissions to use information. A contract “right” is an affirmative
commitment that a licensee may engage in a specific use, while contract
“permission” means simply that the licensor will not object to the use. Either
can be the basis of a license. No specific formality of language is required. For
purposes of this Act, the term includes consignments of copies of information
but does not otherwise alter the legal nature of a consignment.13
The licensing of software and other intellectual property to transfer value is the
emblematic feature of the information-based economy.14 In the information-based
economy, software publishers market their products on the Internet or as a subscription
service in the case of cloud computing. The makers of software games distribute their
games on CD-ROMs, which are subject to End User License Agreements (EULA). In a
standard-form EULA, the end user agrees to the EULA terms prior to downloading the
software.15 For example, the game developer typically displays the EULA to the user
during the initial installation of the game. If the user does not agree to the EULA by
clicking on an “Agree” button, the game will not install on the user’s computer.16 In
contrast to a sale or lease, a license grants the licensee contract rights that authorize
“access to, or use, distribution, performance, modification, or reproduction of information
or informational rights.”17 The greatest story never told about Internet-related contract
11 See Raymond T. Nimmer et al., License Contracts Under Article 2 of the Uniform Commercial Code:
A Proposal, 19 RUTGERS COMP. & TECH L.J. 281, 294 (1993) (defining a “software contract” as “an agreement
that transfers or promises to transfer one or more rights in specific computer software, including the right to
access, the right to use or to have used, the right to modify, the right to copy or the right to otherwise employ
the computer software.”).
12 De Forest Radio Telephone Co. v. United States, 273 U.S. 236, 242 (1927).
13 UCITA § 102(a)(37).
14 James Boyle, a visionary thinker, argues that the new economy includes a broad definition of
information. “Consciously and unconsciously, we are already developing the language of entitlement for a
world in which information—genetic, electronic, and proprietary—is one of the main sources and forms of
wealth.” JAMES BOYLE, SHAMANS, SOFTWARE AND SPLEENS: LAW AND CONSTRUCTION OF THE INFORMATION
SOCIETY (Cambridge, Massachusetts: Harvard University Press, 1996) at x.
15 Michael L. Rustad & Diane D’Angelo, The Path of Internet Law: An Annotated Guide, 2011 DUKE L.
& TECH. REV. 12, 24 (“Courts generally will enforce EULAs so long as the “terms are clear and acceptance is
unambiguous, regardless of whether [the user] actually reads them.’ ”).
16 Robert W. Gomulkiewicz, Getting Serious About User-Friendly Mass Market Licensing for Software,
12 GEO. MASON L. REV. 687, 687–88 (2004) (concluding that end user licenses (“EULAs”) are here to stay for
the foreseeable future despite hundreds of articles criticizing this form of contracting).
17 UCITA § 102(a)(41) (1999).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 207

law is how license agreements protect intangible assets such as software, data, and other
intangibles. In the 1970s, the software industry invented the shrinkwrap license
agreement, the earliest form of mass-market license. Vendors began using this
contracting form by the early 1980s. Licensing is beginning to displace sales and leases
as the chief means of transferring value in the information-based society. It’s already
“ranked as the third largest segment of the U.S. economy, behind only the automotive
industry and electronic manufacturing” and grew “five times faster than the economy as
a whole between 1996 and 2006.”18 Mass-market software publishers employ licensing
on a widespread scale accounting for over $500 billion in annual revenues. 19 Two of the
world’s largest companies, mass-market software producers Microsoft and Apple, with
market caps of $390.6 billion and $128.7 billion respectively, rely heavily on revenues
generated by software licensing. Apple, whose revenues are driven in large part by its
mobile phones, is the eighth largest company with a capitalization of $188.6 billion. 20
With a license, the licensor gives the licensee the right to use software or other digital
data for the term of the agreement.
Software can be reproduced at the click of a download button for almost no cost to
the licensor. As opposed to durable goods like plasma televisions, iPods, or dishwashers,
there is an endless supply of intangible software. The inimitable feature of licensed
content is that the number of users can be increased without whittling away or
diminishing the product.21 Licensing gives the licensee the right to use software or other
digital code for a designated period, in a bounded geographic area, for specified purposes.
In contrast, a licensing agreement gives the licensor the ability to control both the
users and uses. A clause in a license agreement may also limit use of software to a single
Central Processing Unit (CPU) on a computer workstation or server. A CPU license is
the right to use software on a specific CPU or CPUs designated by make and serial
number. Intersoft Solutions has devised a “multi-pack” license where the licensee may
use a copy of the software “identified in the multi-pack on the number of computers
associated with the multi-pack.”22 For example, a four-user multi-pack will give the
licensee the right to use the software on four computers concurrently.23 A software
license is accurately described as an instrument in the borderland between the law of
contracts and intellectual property law. Thus, the view that a license is merely a
covenant not to sue is a myopic view of licensing.

18 Steve Lohr, Study Ranks Software as No. 3 Industry, N.Y. TIMES (June 3, 1997) at D2; Jon M. Garon,
Media & Monopoly in the Information Age: Slowing the Convergence at the Marketplace of Ideas, 17 CARDOZO
ARTS & ENT. L.J. 491, 574 (1999) (stating that by 1996 computer software was ranked as the “third largest
segment of the U.S. economy, behind only the automotive industry and electronic manufacturing”) (citing
Ronald Rosenberg, Software Fastest Growing Industry, BOSTON GLOBE, June 5, 1997, at D2). The software
industry has been “projected to grow five times faster than the economy as a whole between 1996 and 2006
. . .” One Million New Positions Seen by 2006—Software Sets Pace for Future Job Growth, ELEC. ENG’G TIMES,
Jan. 5, 1998, at 1–2.
19 Software & Information Industry Association, Software and Information: Driving the Knowledge
Economy (January 24, 2008) at 7–8.
20 Id.
21 “Dilution is grounded on the idea that a trademark can lose its ability to clearly and unmistakably
distinguish one source through unauthorized use. It is a gradual whittling away of a distinctive trademark or
name. In order to establish a dilution claim, two elements must be shown: (1) ownership of a distinctive mark,
and (2) a likelihood of dilution. A likelihood of dilution can be established by a showing either of blurring or of
tarnishment.” Hormel Foods Corp. v. Jim Henson Prods., 73 F.3d 497, 506 (2d Cir. 2006).
22 Clientui License Agreement, http://www.intersoftpt.com/clientui/Licensing (2011).
23 Id.

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208 INTERNET-RELATED CONTRACT LAW Ch. 4

Software publishers and content creators use licensing as the chief method of
transferring value for mass-market software products. Comparable to the creation of the
corporation or the limited liability company, the invention of the software license
agreement is equally significant. Licensing allows the software developer to prohibit
assignments or transfers of their product so the initial purchaser may not resell or
reproduce the copy. The legal invention of licensing makes it possible for a software
publisher to retain title to its information-based product and impose significant transfer
restrictions. This enables the software publisher to slice and dice pricing based upon a
complex array of variables. Software publishers have different fee schedules for
databases depending upon whether the user is a large corporation, a community library,
a small business, or a noncommercial user. Copyright publishers use copyright licenses
to commodify their information-based assets:
Although the copyright model may, at first glance, seem to provide adequate
protection for software, software providers frequently attempt to alter the
relationship created by that model by contracting with parties who receive
copies of the software, denominating such parties as copyright licensees rather
than purchasers. This approach is in stark contrast to the general approach of
publishers of hard copy materials. Such publishers usually simply place a
copyright notice on works of authorship, using the U.S. Copyright Act’s set of
enumerated rights and limitations as, essentially, a boilerplate contract. The
rationale behind these different approaches helps to illuminate the
shortcomings of the copyright regime in dealing with software. 24
A company’s licensing fees reflect not only the product chosen and the identity of
the user, but also the number of users for the chosen products. Software publishers and
content creators can charge different prices for licenses while retaining exclusive
reproduction and other rights under copyright law. For enterprises, royalties are
typically based upon such variables as the number of employees or the revenues of the
licensee. A license gives the licensee permission to use software, information, or other
content subject to conditions, permissions, and restrictions. Location and use restrictions
are necessary tools for software developers to realize their investment in developing
intangible information assets.25 Licenses have long been used to protect intellectual
property, including patents, copyrights, trademarks, and trade secrets. While protecting
the rights of the owner, licensing permits others to use the protected intellectual
property subject to the terms of the license agreement. In addition, the granting of a
license flows from the licensor to the licensee. In a license agreement, the licensor retains
the title and the intellectual property rights. Just as with leases, there is no transfer of
title or interest, only the right to use information.
In practice, software licensing typically includes affirmative obligations, conditions,
and covenants in addition to the licensor waiving its right to file a copyright infringement
lawsuit.26 Software makers use license agreements to engage in wholesale price
discrimination. This does not raise antitrust issues, but it does enable licensors to charge

24 Maureen O’Rourke, Drawing the Boundary Between Copyright and Contract: Copyright Preemption
of Software License Terms, 45 DUKE L. J. 479, 486 (1995).
25 A contract for the sale of goods is one in which a seller agrees to transfer goods that conform to the
contract in exchange for valuable consideration. U.C.C. § 2–301 (2011).
26 RAYMOND T. NIMMER & JEFF DODD, MODERN LICENSING LAW § 1:5 (Chapter One: Introduction and
Overview (Westlaw: 2008).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 209

more for company-wide licenses. For example, a software publisher will charge
Caterpillar or General Motors more for an enterprise-wide license than for the price for
a consumer license. Licenses may charge more for software used in North America than
in Southeast Asia. They also enable the licensor to charge a university more for its
product than for a consumer transaction. Licensing is the one advanced contracting form
that makes arbitrage function well. EULAs give customers the right to use Microsoft
software.27 In a typical standard-form EULA license agreement, the end user agrees to
the EULA terms prior to downloading the software. A Single User License Agreement
(SULA) gives the licensee the right to use software on a single personal computer and to
make a backup. Software publishers, such as Oracle, Adobe, and Microsoft, make it clear
in their license agreement that they are not selling the software, but only giving a right
to use it. Symantec, a leading provider of anti-virus software, parcels out different
bundles of rights with respect to its software; depending on whether it is licensing to a
consumer or an enterprise. These rights bundled together as a “license,” are the only
“products” that Symantec conveys. Symantec retains the title and all rights to its
software. except for those rights that Microsoft expressly conveys through one of these
licenses. When an end-user downloads an Adobe product, they are given legal notice that
the software is licensed not sold and that they are subject to the licensing agreement.
(2.) Granting Clause

The granting clause determines what rights the licensor conveys to the licensee. A
license will recite all rights granted to the licensee in the licensing agreement. The
granting clause also specifies whether a license is exclusive or non-exclusive to the
licensee. An example of a broad granting clause in a license agreement is: “of all possible
rights and media including all rights then existing or created by the law in the future.”28
Use restrictions determine what is not included in the software transfer. “Many non-
exclusive licenses may be non-transferable without the licensor’s consent. In some
commercial licenses, the subject matter includes confidential information that is
protected by enforceable contractual use restrictions.”29 Granting clauses will typically
address the question of whether the licensee has a right to sub-license software or other
information to a third party. Licensing agreements are either “Perpetual” or “Non-
Perpetual.” “Perpetual” license agreements last forever and maintain their validity as
long as the “software is being used in accordance with the license-agreement
requirements.”30 Conversely, “non-perpetual” license agreements specify “the right to
use a particular licensed product until the end of the license-agreement term.”31
A software licensor may place geographic restrictions on use and may charge a
different price for a license in a different country. Additionally, a software license
agreement may grant a “non-exclusive and non-transferrable license” without specifying
that the license is “personal” to the licensee. Software licenses define the scope and

27 Microsoft.com, What Does the End User License Agreement (EULA) Say? http://www.microsoft.com/
resources/documentation/windows/xp/all/proddocs/en-us/lic_what_eula_say.mspx?mfr=true (2012).
28 U.C.C. § 2B–307(1) (2011).
29 UCITA § 503, cmt. 3(B).
30 Microsoft.com, Proof of License for Microsoft Software, Download Series, https://www.google.com/
?gws_rd=ssl#q=%E2%80%9D+%E2%80%9CPerpetual%E2%80%9D+license+agreements+last+forever+and+
maintain+their+validity+as+long+as+the+%E2%80%9Csoftware+is+being+used+in+accordance+with+the+li
cense-agreement+requirements.%E2%80%9D+30.
31 Id.

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210 INTERNET-RELATED CONTRACT LAW Ch. 4

nature of the licensee’s authorized use. They may limit the customer’s use to internal
operations at a designated location or further restrict their use to a designated Central
Processing Unit. Typically software licenses will state that the customers will not “lend,
sell, give, lease, or otherwise disclose” the software systems without the licensor’s
approval. A licensor may also specify an event of default in a license agreement when
the licensee merges or is reorganized.32
The granting clause is the action section of the license agreement, which determines
how the licensed product may be used. It also determines what rights the licensor and
licensees have in the right to use the intellectual property and under what terms and
conditions. Software publishers typically classify their licensing transaction as exclusive,
semi-exclusive, or nonexclusive. An exclusive software license, like a non-exclusive one,
does not convey ownership, but does signify exclusive use of a product for the term of the
agreement. Exclusive licenses are frequent in software development agreements where
a company tailors a product to the specific needs of a single customer. With an exclusive
license agreement, the royalties must pay not only the entire development costs of the
software, but also projected profits as well. For example, CliniCon entered into a 2001
exclusive license agreement with a division of Bristol-Myers so that the pharmaceutical
giant had the sole right to use software that determines clinically driven skin and wound
care protocols.
Typically, the license grant will explain limitations on the number of users. The
granting clause first determines who can use information. Software license agreements
come in a mélange of affiliations, ranging from the simple bipartite relationship between
the licensor to licensee, to complex development contracts. 33 Software licensing permits
far greater control than either the sales or leases of goods. Arbitrage, the practice of
pricing licenses to software and other information based on the customer or its usage, is
easily accomplished through licensing agreements because it entails the practice of
calibrating the pricing of software to such factors as the nature of the customer or user. 34
For example, a software licensor may control the location, number of users, and even the
permitted uses of the software.
(3.) Definitions in Licensing Agreements

License agreements present key definitions in alphabetical order and define terms
used more than once in the agreement. Courts will review the definitions section as the
best evidence of the parties’ intent for the meaning of core provisions. Nevertheless,
courts may interpret key terms in unintended ways if the parties do not define them
precisely. Learned Hand famously stated, “Definitions are chameleons, which reflect the
color of their environment.”35 Therefore, the parties to license agreements should define
key terms with an eye to the possibility that a court will not understand either the
commercial setting or the technology. As a result, the parties must consistently define

32 Cincom Systems, Inc. v. Novelis Corp., 581 F.3d 431 (6th Cir. 2009) (software transaction was a
license with a non-transfer provision, so subsequent acquiring entity infringed when it used the software).
33 Id. at 316 (“As custom, therefore, software licensing has a historical pedigree that stretches to a
maximum of thirty years. The structure and purpose of software “licenses” that developed at that time . . . in
fairness cannot be compared to contemporary licensing practice, which developers rely on to limit
competition.”).
34 CARL SHAPIRO AND HAL R. VARIAN, INFORMATION RULES: A STRATEGIC GUIDE TO THE NETWORK
ECONOMY (Boston, Massachusetts: Harvard University Business School, 1998).
35 Commissioner v. National Carbide Co., 167 F.2d 304, 306 (1948).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 211

and use key terms throughout the license agreement which best reflect the operational
environment where the software is being used.
(4.) First Sale Doctrine & Licensing

Generally, if the software publisher grants only a license to the copy of software and
imposes significant restrictions on the purchaser’s ability to redistribute or transfer that
copy, the purchaser is considered a licensee, not an owner, of the software. Software
publishers are far more likely to license their products than they are to sell or lease
them.36 The first sale doctrine applies in all fields of intellectual property law. 37 Under
the first sale doctrine, the patent owner cedes the right to file suit for patent
infringement for the patented article that they have sold. 38 Similarly, the first sale
doctrine of trademark law permits the purchaser of trademarked goods to resell the
trademarked goods without infringing the owner’s marks. Essentially, an intellectual
property owner cannot place conditions on goods once they are sold, which is an
undesirable result from the perspective of the intellectual property owner.
The U.S. Copyright Act confers several exclusive rights on copyright owners,
including the exclusive rights to reproduce their works and to distribute their works by
sale or rental.39 The exclusive distribution right is limited by the first sale doctrine, an
affirmative defense to copyright infringement that allows owners of copies of copyrighted
works to resell those copies. This means that “once a copyright owner sells a copy of the
copyrighted work, the owner has no continuing right to control either the use or
distribution of a particular copy of a copyrighted work.”40 Under the U.S. Copyright Act,
the first sale doctrine gives the purchaser of a copyrighted works the right to “sell or
otherwise dispose of the possession of that copy” without interference by the copyright
owner.41 The 1976 Act conceptualizes the public performance right to include the right

36 As the Ninth Circuit stated, “the first sale doctrine rarely applies in the software world because
software is rarely ‘sold.’ ” Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 769, 786 n.9 (9th Cir.
2006).
37 In patent law, the functional equivalent is the doctrine of exhaustion. Under 35 U.S.C. § 271, a
defendant can only be liable for infringement if the allegedly infringing acts are carried out “without authority.”
35 U.S.C. §§ 271(a), (f), (g). “The longstanding doctrine of patent exhaustion provides that the initial authorized
sale of a patented item terminates all patent rights to that item.” Quanta Computer, Inc. v. LG Elecs., Inc.,
553 U.S. 617, 625 (2008). “The exhaustion doctrine prohibits patent holders from selling a patented article and
then ‘invoking patent law to control post-sale use of the article.’ ” Excelstor Tech., Inc. v. Papst Licensing
GmbH & Co. KG, 541 F.3d 1373, 1376 (Fed. Cir. 2008). The rationale underlying the doctrine rests upon the
theory that an unconditional sale of a patented device exhausts the patentee’s right to control the purchaser’s
use of that item thereafter because the patentee has bargained for and received the full value of the goods.
Princo Corp. v. ITC, 616 F.3d 1318, 1328 (Fed. Cir. 2010) (en banc). Trademark exhaustion principles provide
trademark owners with certain rights to control the sale of a branded authentic product until it has been placed
on the market and there is a first sale.
38 The doctrine of patent exhaustion provides that the authorized sale of “an article that substantially
embodies a patent” exhausts the patent holder’s rights and prevents them from controlling post sale use of the
article through the use of patent law. Quanta Computer, Inc. v. LG Elec., Inc., 553 U.S. 617 (2008); See also,
Jazz Photo Corp. v. Int’l Trade Comm’n, 264 F.3d 1094, 1105 (Fed. Cir. 2001) (“When a patented device has
been lawfully sold in the United States, subsequent purchasers inherit the same immunity [as the seller
possessed] under the doctrine of Patent exhaustion.”).
39 Vernor v. Autodesk, Inc., 621 F.3d 1102, 1107 n. 1 (10th Cir. 2010).
40 MARK A. LEMLEY, ET AL., SOFTWARE AND INTERNET LAW 254–55 (New York, New York: Aspen
Casebook, 4th ed. 2011) (explaining how licensing enables the software publisher to control price
discrimination enabling arbitrage or selling the product at different prices in different markets (i.e. business-
to-consumer vs. business-to-business pricing)).
41 Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350–351 (1908) (recognizing first sale doctrine where
copyright owner sold its book with a printed notice announcing that any retailer who sold the book for less

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212 INTERNET-RELATED CONTRACT LAW Ch. 4

“to transmit or otherwise communicate a performance . . . of the work . . . to the public,

. . . whether the members of the public capable of receiving the performance . . . receive
it in the same place or in separate places and at the same time or at different times.”42
The U.S. Supreme Court stretched the first sale doctrine to “copies of a copyrighted
work lawfully made abroad.”43 In Kirtsaeng v. John Wiley & Sons, Inc.,44 the U.S.
Supreme Court considered a case of ongoing grey market infringement. Supap
Kirtsaeng, a citizen of Thailand, asked his friends and family to buy copies of foreign
edition English-language textbooks at Thai bookshops, where they were sold at low
prices, and mail them to him in the United States. Kirtsaeng would then sell them,
reimburse his family and friends, and keep the profit. The U.S. Supreme Court held the
“first sale” doctrine—which permits lawfully acquired copies of copyrighted works to be
resold by their owners—also applies to works such as the books manufactured in
Thailand.
In Vernor v. Autodesk, Inc.,45 a first sale dispute arose out of Timothy Vernor’s
purchase of Autodesk software at a garage sale. Architects, engineers, and
manufacturers used this high-priced software to design blueprints and to model data.
The issue for the court was to determine whether Vernor was the “owner of a particular
copy”46 and “owner of a copy”47 for purposes of the “first sale” and “essential step”
defenses created by those sections of the U.S. Copyright Act. In Vernor, Autodesk offered
its software to customers subject to a license agreement that customers were required to
accept before installing the software. The licensing agreement for the Autodesk software
provided that Autodesk retained title to all copies and that the customer had a
nonexclusive and non-transferable license to use it.48
EBay suspended Vernor’s account when it received Digital Millennium Copyright
Act takedown notices from Autodesk, protesting Vernor’s eBay sales of the used
Autodesk software. In response to eBay’s suspension of his account, Vernor filed suit
against Autodesk, seeking a declaratory judgment to establish that he was a lawful
owner of the software. 49 The Ninth Circuit ruled that Autodesk’s customer, from whom
Vernor acquired the used copies, was a licensee not an owner of the copies. 50

than one dollar was responsible for copyright infringement; court held that the distribution right did not permit
the plaintiff to dictate subsequent sales of the book.).
42 17 U.S.C. § 101.
43 Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351, 1355–56 (2013).
44 133 S. Ct. 1351 (2013).
45 621 F.3d 1102 (9th Cir. 2010) (holding that Vernor infringed Autodesk’s copyright when he resold
software products on eBay).
46 17 U.S.C. § 109(a).
47 17 U.S.C. § 117(a).
48 Id. at 1104.
49 To enforce its license agreement, Autodesk filed a number of DMCA takedown notices with eBay
arising out of listings of the software. Id. at 1105–06. Eventually, eBay suspended Vernor’s account. Id. at
1106. Chapter 10 explains the DMCA takedown procedures in detail.
50 The court found that Autodesk reserved title to its software copies and imposed significant transfer
and use restrictions. The court held that Autodesk’s customer from whom Vernor acquired the used copies was
a licensee not an owner of the copies. Id. at 1111–1112. The court thus concluded that neither Autodesk’s
original customer nor Timothy Vernor could sell or resell copies of the software under the first sale doctrine.
Id. at 1116.

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 213

The court reasoned that neither Autodesk’s original customer nor Vernor could sell
or resell copies of Autodesk’s software under the first sale doctrine. 51 “The first sale
doctrine does not apply to a person who possesses a copy of the copyrighted work without
owning it, such as a licensee.”52 The court developed a three-part test to determine
whether a software user was a licensee or owner of a copy where the copyright owner (1.)
specifies that the user is granted a license, (2.) significantly restricts the user’s ability to
transfer the software, and (3.) imposes notable use restrictions. 53 The court found that
Autodesk was licensing its product and therefore the first sale doctrine was
inapplicable.54
(B.) Licensing Litigation
In New-Crop LLC v. QED Clinical,55 a company failed to pay for an electronic
prescribing system it contracted to use, and continued to use the system’s data after the
license agreement ended. In NewCrop, the licensor delivered an electronic medication
prescribing system for CINA, the physicians and health care provider licensees. The
software licensed to the health care defendants “allegedly allowed physicians to send
prescriptions directly to pharmacies electronically via the Internet.”56 The defendant
licensees gained access through NewCrop’s website or through a software interface.57
“NewCrop said it discussed entering into a formal licensing agreement with CINA during
November 2007, but claimed it allowed CINA and its clients to access the system prior
to execution of the contract.”58 Under the license agreement, the defendants agreed, “to
pay monthly fees for the use of NewCrop’s electronic prescribing system.”59 Because of
CINA’s clients’ enrollment, CINA reportedly was obligated to submit a monthly report-
detailing enrollment by its clients and the fees payable to NewCrop.
In its license agreement with NewCrop, INA agreed to discontinue or disable its
links to NewCrop’s websites, and destroy any copies of data from NewCrop’s system upon
termination of the license agreement. CINA failed to make licensing payments and the
balance due was $44,117.60 After declaring the license agreement to be in breach, the
licensor “apparently blocked CINA from accessing its website, but CINA “continued to
use NewCrop’s data offline. NewCrop claimed it suffered damages totaling at least
$37,351.80 for CINA’s use of the data.”61 NewCrop filed a lawsuit against CINA,
asserting claims of quantum meruit, promissory estoppel, fraud and fraudulent
inducement, money had and received unjust enrichment, and a violation of the Texas

51 Id. at 1116.
52 Id. at 1107–1108.
53 Id. at 1111.
54 Id. (holding that a software user is a licensee rather than an owner of a copy where the copyright
owner specifies that the user is a licensee and noting that this arrangement significantly restricts the user’s
ability to transfer the software and imposes use restrictions).
55 2013 WL 1819926 (Tex. Dist., March 20, 2013).
56 Id.
57 Id.
58 Id.
59 Id.
60 Id.
61 Id.

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214 INTERNET-RELATED CONTRACT LAW Ch. 4

Theft Liability Act.62 The parties settled for $118,000 plus costs and attorneys’ fees and
an injunction prohibiting CINA from further using NewCrop’s software and data.63
In most software license litigation where the licensee files suit against the
developer, it is because the delivered software does not conform to its specifications. In
Silicon Knights v. Epic Games,64 the video game developer licensed another company’s
videogame engine software. Silicon Knights entered into a license agreement with Epic
Games to license Unreal Engine 3 (UE3). The plaintiff contended that it was licensing
UE3 to use it in the development of videogames it was building for Xbox 360 and
PlayStation 3. They also contended that Epic misrepresented UE3’s capabilities and filed
to deliver updates or new releases in a timely manner and that UE3 did not work
properly and developed its own game engine. The lawsuit asserted claims of breach of
warranty, breach of contract, unfair competition, and fraud. Epic filed a counterclaim
that Silicon Knights breached their license agreement, misappropriated their trade
secrets and infringed their copyright. A jury agreed with Epic, finding that Silicon
Knight breached the license agreement and awarded Epic $2,650,000 in damages. The
jury also found Silicon Knights infringed Epic’s trade secrets and awarded another
$1,800,000. This case illustrates the high stakes nature of many software development
agreements. In many instances, there will be claims, counterclaims, and judgments for
many millions of dollars.
In most software licensing litigation where the developer is the plaintiff, the dispute
is over the duty of the licensee to pay royalties. In Educ. Logistics v. Laidlaw Transit65
a software developer was awarded $28.4 million after a licensee breached the licensing
agreement by failing to remit royalty payments when due and by failing to use its ‘best
efforts’ to promote the software to other users. Educational Logistics (Edulog), the
software developer, licensed a proprietary computer software system that uses digitized
maps and student databases to create bus routes for transporting students to and from
school. Edulog claimed its software would help school districts save money by
diminishing the number of school buses deployed for transportation services. Edulog
formed Logistics Management to license their software to school systems. Logistics
entered into a license agreement with Laidlaw Transit, one of the largest student
transportation services in North America. They entered into a five-year exclusive license
agreement, but retained the right to directly market to other customers. At the end of
the five-year exclusivity agreement, Laidlaw elected not to renew. Laidlaw though
retained a non-exclusive right to continue using the transportation software.
Edulog and Logistics contended Laidlaw breached the perpetual, non-exclusive
portion of their agreement by failing to use “best efforts” to promote the software. The
plaintiffs also contended that Laidlaw failed to pay royalties and failed to promote the
system. Laidlaw’s defense was that it no longer had a duty of “best efforts” once the five-
year exclusive agreement expired. Laidlaw also contended that Logistics (and Edulog)
materially breached their side of the agreement. The jury awarded the plaintiffs
$28,409,515, which included compensation for lost license fees, lost annual license
maintenance fees, lost perpetual license fees, lost royalties and breach. The court

62 Id.
63 Id.
64 2012 WL 6919153 (E.D.N.C., May 30, 2012).
65 2012 WL 8017634 (D. Mont., Nov. 15, 2012).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 215

remitted the judgment to $18,899,756. Each of these development or customized

software licenses were negotiated agreements and by their very nature, relational
contracts. The lesson of these development software cases is the importance of drafting
license or development agreements that limit liability. Contracts to develop Internet-
related software will typically be business-to-business and will be negotiated.
(C.) Standard Form License Agreements
When most law students think about software licensing, they think about standard
form Terms of Use (TOU). They “come in a variety of forms with a variety of colorful
names such as “shrink wrap,” “boot screen,” “click wrap,” or “browse wrap” (or less
charitably as “sneak wrap” or “autistic”) licenses.”66 Ordinary consumers may not be
aware that they are entering into contracts when they register for Facebook, Twitter, or
other websites.67 Standard form contracts are ubiquitous in twenty-first century contract
law.68 By the 1970s, more than ninety-percent of all contracts were classified as
“standard form” contracts.69 Four decades before the rise of the World Wide Web, David
Slawson contended that standard form contracts are not really contracts at all: “The
conclusion to which all this leads is that practically no standard forms, at least as they
are customarily used in consumer transactions, are contracts.”70
In the 1980s, there was a swirl of uncertainty over the enforceability of shrinkwrap
licenses as courts routinely struck them down on diverse contractual grounds.71 Mass-
market licenses are standard form contracts marketed to consumers with identical terms
and no likelihood of individual negotiation. Typically, mass-market licenses are one-sided
contracts that eliminate warranties and remedies.72 They are presented to the customer
66 The term “sneak wrap” refers to online TOU agreements. See Ed Foster, “Sneak Wrap” May Be a
Good Way of Defining the Maze of Online Policies, INFOWORLD, July 26, 1999, at 73 (describing sneak wrap as
“where the vendor reserves the right to change the terms of a deal at any time, and sneak notice of the change
right past you if they possibly can”); See also, ROBERT W. GOMULKIEWICZ, XUAN-THAO NGUYEN & DANIELLE
CONWAY-JONES, LICENSING INTELLECTUAL PROPERTY LAW AND APPLICATION 311 (New York: Wolters, Kluwer,
2nd ed. 2012).
67 NANCY S. KIM, WRAP CONTRACTS: FOUNDATIONS AND RAMIFICATIONS (New York: Oxford University
Press, 2013) at 1 (“When I ask my law or business school students whether they have entered into any contracts
in the past week, few raise their hands [although they] have checked their online banking account, or
downloaded software or music, or posted to their Facebook or Twitter accounts. . . .”).
68 The conventional explanation is that these mass market license agreements were invented to bypass
the first sale but one commentator contends that it was invented as a competition law or antitrust reason.
Steven A. Heath, Contracts, Copyright, and Confusion: Revisiting the Enforceability of “Shrinkwrap’ Licenses,
5 CHI-KENT INTELL. PROP. 12, 13 (2005) (arguing that software licensing was invented to avoid “governmental
scrutiny over anti-competitive practices at large in the computing industry.”).
69 W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84
HARV. L. REV. 529, 544 (1971).
70 Mass market licenses are a classic example of adhesion contracts in which the weaker party adheres
to the terms of the stronger party and there is no possibility of negotiations. Edwin Patterson, The Delivery of
A Life-Insurance Policy, 33 HARV. L. REV. 198, 222 (1919) (coining term in study of adhesionary contract in the
life insurance industry).
71 See e.g., Arizona Retail Sys., Inc. v. The Software Link, Inc., 831 F. Supp. 759, 766 (D. Ariz. 1993)
(refusing to enforce terms of a shrinkwrap license because “whether the terms of the license agreement are
treated as proposals for additional terms under U.C.C. § 2–207, or proposals for modification under U.C.C.
§ 2–209, the terms of the license agreement are not a part of the agreement between the parties.”). See Step-
Saver Data Sys. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991).
72 Celeste M. Hammond, A Real Estate Focus: The (Pre) Assumed “Consent” of Commercial Binding
Arbitration Contracts: An Empirical Study of Attitudes and Expectations of Transactional Lawyers, 36 J.
MARSHALL L. REV. 589, 598–99 (2003). (“Most consumers and employees do not realize that they have waived
these rights until they become necessary. Some of the rights most often waived in pre-employment or adhesion
contracts are the aforementioned rights—trial, appeal, class action, and choice of the arbitrator.”). See F. PAUL

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216 INTERNET-RELATED CONTRACT LAW Ch. 4

on a “take-it or leave it” basis with identical, non-negotiable terms for all licensees. They
are generally single-user licenses but may be bundled in multi-pack license, which
delineates the number of users. For example, Symantec, a leading anti-virus licensor
parcels out different bundles of rights depending on whether the user is a business or a
consumer entity. When an end-user of software downloads a digital product, they are
given a legal notice that the software is licensed, not sold, and that they are subject to
the terms of the licensing agreement, which is presented in the login screen. As
mentioned above, a typical EULA requires the licensee to click “I agree” to the terms of
service or other license agreement before they are permitted to download and use the
software.73
Each mass-market form is an adhesive contract where the licensee adheres to the
terms of the licensor and where there is no semblance of balanced terms. The typical
mass market license is characterized by (1.) a vendor-oriented choice of law provision,
(2.) a warning that the intellectual property rights are not transferred to the consumer,
(3.) a restricted scope to a single user, (4.) the consumer must de-install or destroy copies
of the software if he terminates the license, (5.) the vendor disclaims the implied
warranty of merchantability and fitness for a particular purpose, (6.) the licensor offers
the consumer a limited rather than full warranty, (7.) the consumer is not entitled to
updates for free, and (8.) the consumer submits in advance to jurisdiction in the vendor’s
home court.74
To paraphrase Woody Allen’s character, Alvy Singer in Annie Hall, U.S.-style TOU
agreements fall somewhere on the continuum between the horrible and the miserable. 75
TOU agreements, which are presented on a take it or leave it basis, are spreading faster
than the 2011 New York City bed bug epidemic. Just as bed bugs hide in cracks and
crevices of mattresses and box springs, sneakwrap documents, masquerading in the
clothing of contracts, purport to bind consumers to oppressive and unfair terms. The vast
majority of Internet contracts are standard form licenses defined in UCITA as transactions
targeting a broad market.76 Nancy Kim coined the term “wrap contract” to describe

BLAND JR. ET. AL., CONSUMER ARBITRATION AGREEMENTS: ENFORCEABILITY AND OTHER TOPICS 6–12 (2007)
(surveying the reasons why predispute mandatory arbitration diminishes rights of consumers).
73 “Sometimes forgotten in the Internet Age—where contracts of adhesion are often the rule for online
consumers—is the essential element of contract formation: mutual manifestation of assent.” (citing Mark A.
Lemley, Terms of Use, 91 MINN. L.REV. 459, 459–60 (2006) (noting how courts are moving away from the
principle that affirmative evidence of agreement is necessary to find a contract binding). Berkson v. Gogo LLC,
2015 WL 1699755 (E.D. N.Y. Apr. 9, 2015).
74 The term “mass market license” is new and the definition must be applied in light of its intended and
limited function. That function is to describe small dollar value, routine transactions involving information
that is directed to the general public when the transaction occurs in a retail market available to and used by
the general public. The term includes all consumer contracts and also some transactions between businesses
if they are in a retail market.
75 “I feel that life is divided into the horrible and the miserable. That’s the two categories. The horrible
are like, I don’t know, terminal cases, you know, and blind people, crippled. I don’t know how they get through
life. It’s amazing to me. And the miserable is everyone else. So you should be thankful that you’re miserable,
because that’s very lucky, to be miserable.” Annie Hall (Rollins-Joffe Productions 1977) (quoting the character
Woody Allen); See also, MICHAEL L. RUSTAD, SOFTWARE LICENSING: PRINCIPLES AND PRACTICAL STRATEGIES
292 (New York: Oxford University Press, 2010). (comparing this characterization of life by Woody Allen’s
character to quickwrap license agreements).
76 “When most people think about software licensing, they think about standard form mass-market
EULAs. These come in a variety of forms with a variety of colorful names such as “shrink wrap,” “boot screen,”
“click-wrap,” or “browse wrap” (or, less charitably, as “sneak wrap” or “autistic” licenses).” ROBERT W.
GOMULKIEWICZ, XUAN-THAO NGUYEN, & DANIELLE CONWAY-JONES, LICENSING INTELLECTUAL PROPERTY: LAW
AND APPLICATION 311 (New York: Aspen Publishers, 2008); UCITA § 102(a)(44).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 217

Internet-related contracting forms such as terms of use, browsewrap, clickwrap, or

shrinkwrap. She uses the term “wrap contract” to mean “a blanket term to refer to a
unilaterally imposed set of terms which the drafter purports to be legally binding and
which are presented to the non-drafting party in a nontraditional form.”77 “Wrap
contracts” take the form of a traditional contract but constitute a “coercive contracting
environment.”78 The problem with “wrap contracts” is often “their aggressive terms.”79
Raymond T. Nimmer, Reporter for the Uniform Computer Information Transactions
Act, is a defender of webwraps. UCITA validates webwrap contracts and provides a legal
infrastructure of their enforcement. “The legal effect of online agreements may be an
emerging area of the law, but courts still apply traditional principles of contract law and
focus on whether the plaintiff had reasonable notice of and manifested assent to the
online agreement.”80 A click wrap agreement typically requires users to click the “I
agree” box after being presented with the terms of agreement.81 By contrast, a
“browsewrap” agreement is one “where website terms and conditions of use are posted
on the website typically as a hyperlink at the bottom of the screen.”82 Clickwrap evolved
out of shrinkwrap agreements “which are generally license agreements placed inside the
cellophane ‘shrinkwrap’ of computer software boxes that, by their terms, become
effective once the ‘shrinkwrap’ is opened.”83 Clickwrap agreements are increasingly
common and “have routinely been upheld.”84 Virginia State Code provides: “ ‘Standard
form’ means a record or a group of related records, containing terms prepared for
repeated use in transactions and so used in a transaction where there is no negotiated
change of terms by individuals, except to set the price, quantity, method of payment,
selection among standard options, or time or method of delivery.”85 Wrap licenses are
standard form contracts marketed to consumers with identical terms and no likelihood of
individual negotiation. Typically, wrap licenses eliminate warranties and all meaningful
remedies in order to reallocate the costs of software failure to consumers and other
licensees.86

77 NANCY S. KIM, WRAP CONTRACTS: FOUNDATIONS AND RAMIFICATIONS 2. (New York: Oxford
University Press, 2013).
78 Id. at 1–3.
79 Id. at 4.
80 Burcham v. Expedia, Inc., 2009 WL 586513, at *2 (E.D.Mo. March 6, 2009).
81 Fteja v. Facebook, Inc., 841 F. Supp. 2d 829, 837–38 (S.D.N.Y.2012).
82 Id. at 836.
83 Stomp Inc. v. Neato, 61 F. Supp. 2d 1074, 1080 n. 11 (C.D. Cal. 1999) (A “clickwrap agreement” allows
the consumer to manifest its assent to the terms of a contract by “clicking” on an acceptance button on the
website. If the consumer does not agree to the contract terms, the website will not accept the consumer’s order.
Such agreements are common on websites that sell or distribute software programs that the consumer
downloads from the website. The term “clickwrap agreement” is borrowed from the idea of “shrinkwrap
agreements,” which are generally license agreements placed inside the cellophane “shrinkwrap” of computer
software boxes that, by their terms, become effective once the “shrinkwrap” is opened.”).
84 See e.g., Zaltz v. JDATE, 2013 WL 3369073 *8 (E.D. N.Y. July 8, 2013) (upholding dating websites’
clickstream agreement); Doe v. Project Fair Bid Inc., No. C11–809 MJP, 2011 WL 3516073, *4 (W.D. Wash.
Aug. 11, 2011) (upholding clickwrap on Internet website.); TracFone Wireless, Inc. v. Anadisk LLC, 685 F.
Supp. 2d 1304, 1315 (S.D. Fla. 2010) (upholding clickstream agreement); A.V. v. iParadigms, LLC, 544 F. Supp.
2d 473, 480 (E.D. Va. 2008) (upholding clickwrap agreement where a student had to register for a term paper
service by creating a profile on defendant’s website and clicking “I Agree” to the terms of the user agreement,
which was displayed directly above the “I Agree” link that the student had to click).
85 Va. Code Ann. § 59.1–501.2(61).
86 Michael L. Rustad, Commercial Law Infrastructure For The Age of Information, 16 J. MARSHALL J.
COMPUTER & INFO L. 255, 300 (1997).

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Increasingly, these agreements specify limited remedies and require the user to
waive the right to jury or a court resolution in favor of predispute, mandatory
arbitration. Mandatory arbitration is sometimes coupled with its running partner, anti-
class action waivers.87 Consumer licensees must agree to both forego the right to file
actions in court or join class actions as a condition of using data or software. The chart
below depicts the major form of mass license agreements in wide currency on the
Internet.88 In the 1980s, mass-market licensors began to use shrinkwrap license
agreements to govern terms and conditions for their software products. 89 While the
consumer’s title to the tangible copy of the software (a purchased CD-ROM, for example)
may be absolute, that does not confer property rights upon the intangible code that
makes up the software.
Licensing enables the useful practice of arbitrage, which is the common practice of
strategically calibrating software prices according to such factors as the amount of
competition, the value added, and the user’s ability to pay.90 During the formative period
of mass-market licenses in the 1980s, licensors used the term “shrinkwrap” or box top
license. In the new millennium, clickstream or clickwrap is the most popular type of
contract. Software vendors include clickstream agreements in so-called installwrap
agreements, where the customer agrees to the terms as a condition of downloading the
software. The installwrap is an agreement, which “pops up on the screen when the
software is actually being installed on the user’s computer, requiring the user to click an
“accept” button before the installation will conclude . . . if you decline to accept, the
installation will abort.”91 VeriSign’s installwrap for its Symbian export utility software
license states:
By clicking “I Accept” below, installing, or using this software, you are
consenting to be bound by and are becoming a party to this agreement. If you
do not agree to all of the terms of this agreement and any such third party

87 These provisions will not be enforced in European consumer transactions. Companies including such
provisions in terms of service, shrinkwrap, browsewrap, or clickwrap also face European enforcement actions
by entities that enforce consumer rights. See Council Directive 93/13/EEC of April 1993 on Unfair Terms in
Consumer Contracts, Annex, 1993 O.J. (L 95) 29, at letter (q) (excluding or hindering the consumer’s right to
take legal action or exercise any other legal remedy, particularly by requiring the consumer to take disputes
exclusively to arbitration not covered by legal provisions, unduly restricting the evidence available to him or
imposing on him a burden of proof which, according to the applicable law, should lie with another party to the
contract).
88 Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77
N.Y.U.L. REV. 429, 464 (2002) (“Consumers enter into electronic contracts in two distinct ways: “browsewrap”
and “clickwrap’ contracts.”).
89 UCITA defines the Mass-Market license as “a standard form that is prepared and used in a Mass-
market transaction. UCITA, Id. at § 102(a)(45). A Mass-market transaction, in turn, means “(A) A consumer
transaction; or (B) any other transaction with an end user licensee if: (i) the transaction is for information or
informational rights directed to the general public as a whole including consumers, under substantially the
same terms for the same information; (ii) the licensee acquires the information or rights in a retail transaction
under terms and in quantity consistent with an ordinary transaction in a retail market.” § 102(a)(46).
90 CARL SHAPIRO AND HAL R. VARIAN, INFORMATION RULES: A STRATEGIC GUIDE TO THE NETWORK
ECONOMY (Boston: Harvard University Business School, 1998); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1449
(7th Cir. 1996) (noting that licensing enables software to be sold for a higher price for commercial users, while
the same product may be priced lower if use restrictions are enforceable and the license is restricted to non-
commercial use).
91 Christain H. Nasdan, Open Source Licensing: Virus or Virtue? 10 TEX. INTELL. PROP. L.J. 349, 377
(2002).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 219

license agreements, which are applicable, do not install or use the software, or
click “I Do Not Accept,” and, if applicable, return this product to VeriSign. 92
The economic reality is that quickwrap licenses are an efficient form of contracting. They
are seldom read before being entered into by millions of online consumers around the
world. Nevertheless, consumers have a love/hate relationship with these mass-market
license agreements, as Amy Schmitz characterizes it:
On the one hand, consumers admit that they have no interest in reading form
contracts, enjoy the convenience and efficiency of form contracting, and
routinely accept forms “dressed up” as deals without stopping to read or
question their content. On the other hand, consumers are often frustrated with
the effectively nonnegotiable nature of these contracts and complain that they
lack the requisite time or understanding to read or negotiate companies’
impenetrable purchase terms.93
Types of Wrap Agreements

Mass-Market Forms Formation Principle Controversial Aspects

(1) Shrinkwrap License Licensee manifests Consumers may not be

assent when he or she able to review or even
tears open wrapping on learn of one-sided terms
software box. before being bound.

(2) Clickwrap By clicking on an icon or Links to clickwrap

radio button, the user agreements are
manifests assent to be sometimes below the fold
bound by terms.94 of a web page, or
presented
inconspicuously.95

92 VeriSign, Symbian Key Export Software License Agreement, http://www.verisgn.com.

93 Amy J. Schmitz, Pizza-Box Contracts: True Tales of Consumer Contracting Culture, 45 WAKE FOREST
L. REV. 863, 864–65 (2010) (arguing that consumers bear some responsibility for acquiescing to the stronger
party “run[ning] roughshod over their rights”).
94 Specht v. Netscape Communications Corp., 150 F. Supp.2d 585, 593–94 (S.D. N.Y. 2001) (“A click-
wrap license presents the user with a message on his or her computer screen, requiring that the user manifest
his or her assent to the terms of the license agreement by clicking on an icon.”) (citation omitted).
95 “Whether a term is ‘conspicuous’ or not is a decision for the court and includes the following: (i) for a
person: (A) a heading in capitals equal to or greater in size than the surrounding text, or in contrasting type,
font, or color to the surrounding text of the same or lesser size; and (B) language in the body of a record or
display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text
of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention
to the language; and (ii) for a person or an electronic agent, a term that is so placed in a record or display that
the person or electronic agent may not proceed without taking action with respect to the particular term.”
U.C.C. § 2–103(1)(b) (2003).

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220 INTERNET-RELATED CONTRACT LAW Ch. 4

(3) Browsewrap96 Binds consumers who Consumers may be

merely browse or access bound even though they
a website without any neither read the terms of
act-manifesting assent. use nor affirmatively
“Your use of the ___ manifested assent to its
Website and/or the provisions.
Services constitutes your
agreement to be legally
bound by these Terms of
Use.”97

(4) Scrollwrap or Sign- “Scrollwrap requires “There is a crucial

in-Wrap98 users to physically scroll distinction between
through an Internet online agreements that a
agreement and click on a user must view because
separate “I agree” button of the nature of the
in order to assent to the website’s construction
terms and conditions of and design—i.e.,
the host website. Sign- scrollwraps—and those
in-wrap couples assent that merely require a
to the terms of a website user to click an “I agree”
with signing up for use box that appears next to
of the site’s services; it is a hyperlink containing
the form used by Gogo in “terms of use”—i.e.,
the instant case.”99 clickwraps.”100

(D.) Types of Wrap Contracts

(1.) Shrinkwrap Agreements

Box-top licenses were developed so that the license agreement or document would
be placed under the plastic wrapping of the box containing the CD-ROM. Think of
licensing as an advanced form of contract law with a multiplicity of different conditions,
covenants, and terms. Because licensors can retain control over the licensee’s use of the
intangible information after delivery, licensing is far more flexible than either sales or
leases. In contrast, the seller of a snowmobile generally cannot specify that it may only

96 A number of courts have enforced browsewrap even though they do not require the user to click a
specific box. Sw. Airlines Co. v. BoardFirst, L.L.C., 2007 WL 4823761, at 5 (N.D. Tex. Sept. 12, 2007); Molnar
v. 1-800-Flowers.com, Inc., 2008 WL 4772125, at 7 (C.D. Cal. 2008) (“Courts have held that a party’s use of a
website may be sufficient to give rise to an inference of assent to the terms of use.”). But see, Hines, 668 F.
Supp. 2d at 368 (holding that a forum-selection clause contained in browsewrap terms of use available through
a link at the bottom of a website was not enforceable because it was not “reasonably communicated” to
customer).
97 Roller v. TV Guide Holdings, LLC, 2013 WL 3322348 (Ark. Sup. Ct., June 27, 2013) (refusing to
enforcing browsewrap agreement absent evidence that the agreement was communicated to the user).
98 The federal district court recognized these wrap contracts in Berkson v. Gogo LLC, 2015 WL 1600755
(E.D. N.Y. Apr. 8, 2015).
99 Id. at *25.
100 Id. at *29.

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 221

be driven in state parks or farmland or within a given state’s boundaries. With the sale
of goods, the buyer receives ownership and title and can do whatever they want with the
product. With software and other information assets, the licensor retains control over
the customer’s uses. The license agreement determines who, what, where, when, why,
and how software may be used. The unique aspect of licensing versus sales or leases is
that it “enables a split of ownership and user rights in the information, but unlike hard
goods, information can be both transferred and retained.”101 Licensing software permits
software publishers to commodify their intellectual property assets. Unlike with sales or
leases, it is possible to have an infinite supply of licensed software.
Software makers used shrinkwrap licenses in the early 1980s, prior to the
development of the World Wide Web. Adobe, Inc., a leading software development and
publishing company, claimed that all of its software products were subject to a
shrinkwrap EULA that prohibited copying or commercial redistribution. Shrinkwrap
contracts are license agreements or other terms and conditions of a putatively
contractual nature, which can only be read and accepted by the consumer after they
break open the plastic wrapping surrounding the boxed software. The first paragraph of
a shrinkwrap license usually provides that the opening of the package signifies
acceptance of the license’s terms because a licensor needs to reference the fact that the
software is licensed.102 In general, it is advisable that the licensor include the terms of
the license agreement in every copy of the software and manuals, and note that the
software was licensed on the introductory screen display each time the software was
used. The license conditions access to and use of its service on the subscriber’s acceptance
of its terms and conditions. Shrinkwrap license agreements were developed to side-step
the U.S. Copyright Act’s first sale doctrine.”103
Shrinkwrap is cynically referred as “sneakwrap” as captured in a well-known
Dilbert cartoon.104 The cartoon begins with Dilbert stating: “I didn’t read all of the
shrinkwrap license agreement on my new software until after I opened it,”—and
concludes with Dilbert lamenting: “Apparently, I agreed to spend the rest of my life as a
towel boy in Bill Gates’ new mansion.”105 Standard form agreements are adhesion
contracts in which the licensee adheres to the terms of the stronger party. 106 The typical
Internet related shrinkwrap or other mass-market license agreement does not provide

101 Id. at 4.
102 This example is drawn from Morgan Laboratories, Inc. v. Micro Data Base Systems, Inc., 1997 WL
258886 (N.D. Cal. 1997).
103 The first sale doctrine of copyright law gives the owner of a lawfully made copy the power to “sell or

otherwise dispose of the possession of that copy” without the copyright holder’s consent.” Step-Saver Data Sys.
v. Wyse Tech., 939 F.2d 91, 96 n.7 (3d Cir. 1991) (quoting Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 350 (1908)
(holding that a copyright owner’s exclusive distribution right is exhausted after the owner’s first sale of a
particular copy of the copyrighted work)). The first sale doctrine is now codified as Section 109 of the U.S.
Copyright Act. Section 109 of The U.S. Copyright Act states in relevant part: “the owner of a particular copy
. . . lawfully made under this title . . . is entitled, without the authority of the copyright owner, to sell or
otherwise dispose of the possession of that copy. . . .” U.S. Copyright Act, 17 U.S.C. § 109(a).
104 The term “sneak wrap” refers to online TOU agreements. See Ed Foster, ‘Sneak Wrap’ May Be a Good

Way of Defining the Maze of Online Policies, INFOWORLD, July 26, 1999, at 73 (describing sneak wrap as “where
the vendor reserves the right to change the terms of a deal at any time, and sneak notice of the change right
past you if they possibly can”).
105 Michael L. Rustad & Thomas H. Koenig, The Tort of Negligent Enablement of Cybercrime, 20 BERKELEY

L. J. 1553, 1563 (2005).

106 Southwest Airlines Co. v. BoardFirst L.L.C., No. 3:06–CV–00891–B, 2007 WL 4823761, at *5 (N.D.

Tex. Sept. 12, 2007).

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222 INTERNET-RELATED CONTRACT LAW Ch. 4

warranties of any kind and foreclose any realistic remedy by requiring the consumer to
litigate in a forum of the vendor’s choice—often in a distant forum. Many shrinkwrap
license agreements generally begin with a legal notice followed by a disclaimer, or terms
of use, stating that breaking the shrinkwrap confirms the user’s acceptance of the license
terms.
(2.) Clickwrap Agreements

A clickwrap agreement is an “agreement [that] collects all of the terms of the

agreement in a single dialog box and then requires the user to affirmatively accept the
agreement before proceeding, makes every term equally visible.”107 “On the Internet, the
primary means of forming a contract are the so-called ‘clickwrap’ (or ‘click-through’)
agreements, in which website users typically click an ‘I agree ‘box after being presented
with a list of terms and conditions of use, and the ‘browsewrap’ agreements, where
website terms and conditions of use are posted on the website typically as a hyperlink at
the bottom of the screen.”108
In Nicosia v. Amazon.com, Inc.,109 the court upheld a clickwrap agreement where
the Amazon.com user clicked a box acknowledging terms at the initial signup to the
website. The agreements were presented with a hyperlink at top of webpage to “terms of
use” multiple times after completing purchases. The New York federal court also upheld
Amazon’s arbitration clause and anti-class action waiver predicated upon an inquiry
notice theory. In Nicosia, the plaintiff filed a putative class action against Amazon.com,
Inc. “contending that Amazon has sold and continues to sell weight loss supplements
containing sibutramine, a “controlled substance . . . [that has] never been permitted for
sale without a prescription from a licensed physician . . . [and that is] associated with a
serious risk of cardiovascular events and strokes,” in violation of various federal and
state consumer protection laws and in breach of various implied warranties.”110
The Nicosia court granted Amazon’s motion to dismiss because all claims were
governed by a mandatory arbitration clause and class action waiver. The court described
Amazon’s 2012 Conditions of Use agreement as a hybrid between a clickwrap and a
browsewrap agreement. “While the Conditions of Use are only available by navigating
through a hyperlink, like a browsewrap agreement, a purchaser using Amazon’s website
could only place his or her order after viewing a conspicuous hyperlink to the current
Conditions of Use and agreeing to make his purchase subject to those conditions.”111 The
court stated:
Additionally, a purchaser cannot make purchases on Amazon.com without first
signing-up for an account, and in that process, expressly assenting to be bound

107 Liberty Syndicates at Lloyd’s v. Walnut Advisory Corp., Slip Copy, No. 09–1343, 2011 WL 5825777

(D. N.J. Nov. 16, 2011).

108 Hines v. Overstock, Inc., 668 F. Supp.2d 362, 366 (E.D. N.Y. 2009); Hubbert v. Dell Corp., 359

Ill.App.Ct. 976, 984, 359 Ill.App.3d 976, 296 Ill.Dec. 258, 835 N.E.2d 113 (2005) (holding that within the
“browsewrap” context a computer seller’s use of a blue hyperlink to incorporate “Terms and Conditions of Sale”
was conspicuous and provided notice to the buyer because the link was included on numerous pages which
acted like a “multipage written paper contract”).
109 No. 14–CV–4513, 2015 WL 500180, at *7 (E.D.N.Y. Feb. 4, 2015).

110 Id. at *2–3.

111 Id. at *7.

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 223

(in a clickwrap agreement) to the terms of Conditions of Use, which are subject
to change.112
The court enforced Amazon’s TOU reasoning that: “Where the link to a website’s
terms of use is buried at the bottom of the page or tucked away in obscure corners of the
website where users are unlikely to see it, courts have refused to enforce the browsewrap
agreement,” however “where the website contains an explicit textual notice that
continued use will act as a manifestation of the user’s intent to be bound, courts have
been more amenable to enforcing browsewrap agreements.”113 In short, the
conspicuousness and placement of the ‘Terms of Use’ hyperlink . . . and the website’s
general design all contribute to whether a reasonably prudent user would have inquiry
notice of a browsewrap agreement.”114 The court reasoned:
In reaching this conclusion, the federal district court reviewed Amazon’s initial
sign-up page and final checkout page finding that the plaintiff had, at a
minimum, inquiry notice of the current terms of the Conditions of Use when
making his purchases. First, he expressly agreed, when he signed up for an
account with Amazon.com, to be bound by the terms of the Conditions of Use,
and indicated that, inter alia, he understood that the terms of the Conditions
of Use were subject to change.
Second, he was put on inquiry notice of the current terms each time he made a
purchase, as a conspicuous hyperlink to the current Conditions of Use each
time he made a purchase. Given (1.) the conspicuous placement of the
hyperlink to the current Conditions of Use on the checkout page, (2.) the
express warning at checkout that his purchases were subject to the terms of
the current Conditions of Use, and (3.) the fact that he expressly agreed, when
signing-up for an Amazon.com account, to be bound by the terms of the
Conditions of Use (including a provision notifying him that the conditions are
subject to change), this Court concludes that Plaintiff assented, each time he
made a purchase on Amazon.com, to be bound to the terms of the then-current
Conditions of Use.115
The making of contracts over the internet “has not fundamentally changed the
principles of contract.”116 In Ajemian v. Yahoo!, Inc.,117 the court discusses the
enforceability of a forum selection clause in a clickwrap agreement. Although forum
selection clauses have almost uniformly been enforced in clickwrap agreements, the
court discusses that there have been no such case where such a clause has been enforced
in a browsewrap agreement. Here, the record does not establish that the TOS was a
clickwrap agreement, or that terms of the TOS were displayed (in whole or part), or that
the terms were accepted by clicking “I accept” or by taking some similar action. As a
result, the record does not reflect that the terms of any agreement were reasonably
communicated or that they were accepted. To form such an agreement, users typically
click an “I agree” box after being presented with a list of terms and conditions of use.

112 Id.
113 Id.
114 Id.
115 Id.
116 Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004).
117 83 Mass.App.Ct. 565, 987 N.E.2d 604 (Mass. Ct. App. May 7, 2013).

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224 INTERNET-RELATED CONTRACT LAW Ch. 4

In State ex rel. U-Haul Co. of West Virginia v. Zakaib,118 the court held that an
oblique reference to an addendum in truck and trailer rental company’s pre-printed
rental contracts and electronic clickwrap contracts was insufficient to incorporate the
addendum and its terms, including its inclusion of an arbitration agreement, into the
contracts by reference. The references to the addendum were quite general, with no
detail provided to ensure that customers were aware of the addendum and its terms,
which was compounded by the fact that the addendum itself was designed to look more
like a document folder advertising products, services, and drop-off procedures, rather
than a legally binding contractual agreement. 119 A “click-wrap” agreement usually
appears on an Internet webpage and requires that a user consent to any terms or
conditions by clicking on a dialogue box on the screen in order to proceed with the
internet transaction.120
Clickwrap evolved out of shrinkwrap agreements that are “generally license
agreements placed inside the cellophane “shrinkwrap” of computer software boxes that,
by their terms, become effective once the “shrinkwrap” is opened.”121 The typical “click
through” website agreement requires end users to click on an “I agree” button that creates
a contract where the user agrees to submit to all of the terms and conditions set forth by
the licensor.122 Generally, the user must indicate acceptance of the clickwrap agreement

118 232 W.Va. 432, 752 S.E.2d 586 (W.Va. 2013).

119 Id. at 593.
120 Id.

121 See Stomp, Inc. v. NeatO, LLC, 61 F. Supp. 2d 1074, 1080 n.11 (C.D. Cal.1999) (upholding choice of

venue clause).
122 See e.g., Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 429 (2d Cir. 2004) (“Essentially, under a

clickwrap arrangement, potential licensees are presented with the proposed license terms and forced to
expressly and unambiguously manifest either assent or rejection prior to being given access to the product.”).
See e.g., Appistry, Inc. v. Amazon.com, Inc., 2015 WL 881507 (W.D. Wash. 2015) (enforcing clickwrap
agreement where website user had reasonable notice of the terms and manifested assent to the agreement by
clicking agreement to Amazon’s customer agreement); Nicosia v. Amazon, 2015 U.S. Dist. LEXIS 13560
(E.D.N.Y. Feb. 4, 2015) (finding that plaintiff assented to [c]onditions of [u]se posted on Amazon.com each time
he completed a purchase, “[g]iven (1) the conspicuous placement of the hyperlink to the current [c]onditions of
[u]se on the checkout page, (2) the express warning at checkout that his purchases were subject to the terms
of the current [c]onditions of [u]se, and (3) the fact that he expressly agreed, when signing-up for an
Amazon.com account, to be bound by the terms of the [c]onditions of [u]se (including a provision notifying him
that the conditions are subject to change)”); Newell Rubbermaid Inc. v. Storm, No. CV 9398–VCN, 2014 WL
1266827 (Del. Ch. Mar. 27, 2014) (upholding a clickwrap “a checkbox underneath the hyperlink read, “I have
read and agree to the terms of the Grant Agreement.”); Bassett v. Elec. Arts, Inc., 2015 WL 1298644 (E.D. N.Y.
Feb. 9, 2015) (upholding clickwrap were user had opportunity to review terms and manifested assent by
clicking agreement); Hines v. Overstock.com, Inc., 380 F. App’x 22, 25 (2d Cir. 2010) (“New York courts find
that binding contracts are made when the user takes some action demonstrating that they have at least
constructive knowledge of the terms of the agreement, from which knowledge a court can infer acceptance.”);
Centrifugal Force, Inc. v. Softnet Commc’n, Inc., No. 08–CV–5463, 2011 WL 744732, at *6–8 (S.D.N.Y. Mar. 1,
2011) (finding binding clickwrap software license agreement); Burcham v. Expedia, Inc., No. 4:07CV1963 CDP,
2009 WL 586513, at *1, 3 (E.D. Mo. Mar. 6, 2009) (upholding clickwrap agreements (i) a “Continue” button led
to a page where it stated, “By continuing on you agree to the following terms and conditions,” and provided the
entire terms of agreement in full text, and (ii) a box stated, “I agree to the terms and conditions,” while the
phrase, “terms and conditions,” was a hyperlink to a user agreement). Feldman v. Google, Inc., 513 F. Supp.
2d 229, 233 (E.D. Pa. 2007) (upholding forum selection clause binding where online contract between internet
advertising service and would-be advertiser read in bold at top “Carefully read the following terms and
conditions,” adding, “If you agree with these terms, indicate your assent below’ and user could only progress
by clicking on box marked ‘accept’ ” and “terms of use” were presented to user in scrollable window); Recursion
Software, Inc. v. Interactive Intelligence, Inc., 425 F. Supp. 2d 756 (N.D. Tex. 2006) (concluding that “clickwrap
licenses . . . , are valid and enforceable contracts” and enforcing arbitration clause when the user was required
to accept before installing software).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 225

to proceed with the installation. 123 Like shrinkwrap, the clickwrap spells out permitted
and restricted uses by licensees. U.S. courts will enforce clickwrap agreements so long
as the user has an opportunity to review the terms and manifest assent, even though
most users fail to read the terms before clicking the “I agree” button.
Clickwrap agreements allow users to manifest assent to contractual terms
presented to the user before installation of computer software programs. The clickwrap
spells out permitted and restricted uses by visitors. In a clickstream agreement, the
licensor conditions a licensee’s use of a website on the user agreeing to the site’s terms
and conditions. The Tenth Circuit U.S. Court of Appeals observed:
Clickwrap agreements are increasingly common and have routinely been
upheld. Federal and state courts typically evaluate clickwrap agreements by
applying state law contract principles. Courts evaluate whether a clickwrap
agreement’s terms were clearly presented to the consumer, the consumer had
an opportunity to read the agreement, and the consumer manifested an
unambiguous acceptance of the terms. 124
A large number of courts have validated clickwrap agreements if they find users
have an opportunity to review the terms and manifest assent. 125 In Newell Rubbermaid
Inc. v. Storm,126 the Delaware Chancery Court found that a valid clickwrap agreement
was formed when the licensor included a (i) box titled “Grant Terms and Agreement”
that stated: ‘[y]ou must read your Grant Agreement and review the terms to continue,”
(ii) an agreement was provided in a hyperlink, and (iii) a checkbox underneath the
hyperlink read, “I have read and agree to the terms of the Grant Agreement.”127 Newell
Rubbermaid gave Storm one of its more valued employees the equivalent of a stock
option. However, to qualify for the stock option, the user had to click “the “accept” button.
In 2013, Storm again clicked the “Accept” but she claimed that she did not know that
she was manifesting assent to the nondisclosure and nonsolicitation terms in the
clickwrap.
Storm argued that she had not read the agreement nor was she given consideration
for the nondisclosure, nonsolicitation agreements. However, the box included the
statement that she had read the agreement and the court enforced the clickwrap and the
nondisclosure and nonsolicitation agreements. The court concluded that “while Newell’s
method of seeking Storm’s agreement to the post-employment restrictive covenants,
although certainly not the model of transparency and openness with its employee, it was
not an improper form of contracting.”128 The court noted that Storm was directed to a
screen, which in several places referenced the 2013 Agreements. In addition she
admitted that she clicked the checkbox next to which were the words “I have read and

123 Realpage, Inc. v. EPS, Inc., 560 F. Supp.2d 539 (2007) (quoting Specht v. Netscape Commc’ns. Corp.,

306 F.3d 17, 22 n.4 (2d Cir. 2002)).

124 Hancock v. AT&T Co., 701 F.3d 1248, 1256 (10th Cir. 2012).

125 See e.g., Zaltz v. JDATE, 2013 WL 3369073 *8 (E.D. N.Y. July 8, 2013) (upholding dating websites’

clickstream); Serrano v. Cablevision Sys. Corp., 863 F. Supp. 2d 157, 164 (E.D.N.Y. 2012) (“ ‘[C]lick-wrap’
contracts are enforced under New York law as long as the consumer is given a sufficient opportunity to read
the end-user license agreement, and assents thereto after being provided with an unambiguous method of
accepting or declining the offer.”); Jallali v. Nat’l Bd. of Osteopathic Med. Examiners, Inc., 908 N.E.2d 1168,
1173 (Ind. Ct. App. 2009) (upholding clickwrap agreement under general contract principles).
126 No. CV 9398 VCN, 2014 WL 1266827, at *2 (Del. Ch. Mar. 27, 2014).

127 Id. at *2.

128 Id. at *7.

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226 INTERNET-RELATED CONTRACT LAW Ch. 4

agree to the terms of the Grant Agreement.” Courts will not enforce clickwraps where
the hyperlink is inconspicuous or a reasonable user would not notice them or be aware
that they were entering a contract.129 In Ngyuen v. Barnes & Noble,130 the court noted
that:
Contracts formed on the Internet come primarily in two flavors: ‘clickwrap’ (or
‘click-through’) agreements, in which website users are required to click on an
‘I agree’ box after being presented with a list of terms and conditions of use;
and ‘browsewrap’ agreements, where a website’s terms and conditions of use
are generally posted on the website via a hyperlink at the bottom of the
screen.’131
(3.) Browsewrap

Most courts upholding the enforceability of browsewrap agreements have done so

. . . where [a party’s actual knowledge of them] was firmly established in the factual
record.”132 Courts determine whether a user has notice depending upon “the design and
content of the website and the browsewrap agreement’s webpage.”133 Browsewrap
agreements are distinguishable from clickwrap agreements, where a “webpage user
manifests assent to the terms of a contract by clicking an ‘accept’ button in order to
proceed.”134 In addition, “the hyperlinks which point to the browsewrap agreement are
explicit about both the binding nature of the agreement and the fact that continued use
129 See, e.g., Sgouros v. TransUnion Corp., 2015 WL 507584 (N.D. Ill, Feb. 5, 2015) (applying Illinois

law and finding clickwrap agreement not binding where website did not make explicitly clear that button
marked “I Accept” indicated assent to “terms of use” presented in scrollable window at top of webpage, in
between which was other text requesting separate authorization); Savetsky v. Pre-Paid Legal Servs., 2015 WL
604767 (N.D. Ca. Feb. 12, 2015) (ruling that LegalShield user did not consent to arbitrate disputes at any point
when entering into a hybrid agreement with some features of clickwrap); Berkson v. Gogo LLC, 2015 WL
1600755 (E.D. N.Y. Apr. 9, 2015) (refusing to enforce venue and arbitration clause in provider’s sign-up wrap
noting that “[c]lickwrap refers to the assent process by which a user must click “I agree,” but not necessarily
view the contract to which she is assenting.”; observing that clickwrap agreements necessitate an active role
by the user of a website and that courts generally find them enforceable; “Click agreements require a user to
affirmatively click a box on the website acknowledging awareness of and agreement to the terms of service
before he or she is allowed to proceed with further utilization of the website. By requiring a physical
manifestation of assent, a user is said to be put on inquiry notice of the terms assented to.”); See generally,
Juliet M. Moringiello and William L. Reynolds, From Lord Coke to Internet Privacy: The Past, Present, and
Future of the Law of Electronic Contracting, 72 MD. L. REV. 452, 466 (2013) (“In the world of electronic
contracts, clickwrap is a meaningless term. Click-to-agree transactions come in many flavors. Sometimes the
click is at the end of the terms so that a reader must at least scroll through to reach the ‘I agree’ icon, while
[at] other times the click is next to a hyperlink that leads to the terms, either in one click or in several. Whether
the terms are classified as clickwrap says little about whether the offeree had notice of them.”).
130 763 F.3d 1173 (9th Cir. 2014).

131 Id. at 1175–1176.

132 Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 401–04 (2d Cir.2004) (finding likelihood of success on

the merits in a breach of browsewrap claim where the defendant “admitted that . . . it was fully aware of the
terms” of the offer); Sw. Airlines Co. v. BoardFirst, L.L.C., 06–CV–0891,2007 WL 4823761 at *4–6 (N.D.Tex.
Sept. 12, 2007) (finding proper formation of a contract where defendant continued its breach after being
notified of the terms in a cease and desist letter); Ticketmaster Corp. v. Tickets.Com, Inc., No. CV–997654,
2003 WL 21406289 (C.D.Cal. Mar. 7, 2003) (denying defendants’ summary judgment motion on browsewrap
contract claim where defendant continued breaching the contract after receiving letter quoting the browsewrap
contract terms); Fteja v. Facebook, Inc., 841 F. Supp. 2d 829, 835, 838–40 (S.D.N.Y.2012) (enforcing forum
selection clause in terms of service linked to webpage that provided “By clicking Sign Up” you indicate
acceptance of the terms); Cairo, 2005 WL 756610 (enforcing browsewrap forum selection clause where plaintiff
“admit[ted] to actual knowledge” of the agreement). Be In, Inc. v. Google Inc., No. 12–CV–03373–LHK, 2013
WL 5568706, at *7 (N.D. Cal. Oct. 9, 2013).
133 Id.

134 Van Tassell v. United Mktg. Grp., LLC, 795 F. Supp. 2d 770, 790 (N.D. Ill. 2011).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 227

of the website will act as a manifestation of the user’s intent to be bound.”135 Browsewrap
agreements purport to bind the users of websites to which the agreements are
hyperlinked as the Be In Inc. v. Google Inc.136 court states: Browsewrap agreements are
those that purport to bind the users of websites to which the agreements are
hyperlinked. Generally, the text of the agreement is found on a separate webpage
hyperlinked to the website the user is accessing.
Browsewrap agreements are generally entitled “Terms of Use” or “Terms of
Service.” The defining feature of browsewrap agreements is that the user can continue
to use the website or its services without visiting the page hosting the browsewrap
agreement or even knowing that such a webpage exists. How much notice the user has
of the existence of the agreement varies in large part based on the design and content of
the website and the browsewrap agreement’s webpage. Often, the hyperlinks, which
point to the browsewrap agreement, are explicit about both the binding nature of the
agreement and the fact that continued use of the website will act as a manifestation of
the user’s intent to be bound.137 “The defining feature of browsewrap agreements is that
the user can continue to use the website or its services without visiting the page hosting
the agreement or even knowing that such a webpage exists.”138 Browsewraps are
inherently riskier than clickwraps because courts require providers to prove that the
user has actual or constructive notice of the terms of use. 139 A browsewrap agreement
discloses terms on a website that offers a product or service to the user, and the user
assents by visiting the website to purchase the product or enroll in the service.”140 The

Id.
135

2013 WL 5568706 (N.D. Cal. Oct. 9, 2013).

136

137 Id. at *6.

138 Be In Inc. v. YouTube, LLC, 2013 WL 5568706 (N.D. Oct. 9, 2013).

139 See e.g. Van Tassell v. United Mktg. Grp., LLC, 795 F. Supp. 2d 770, 792–93 (N.D.Ill.2011) (refusing

to enforce browsewrap arbitration clause in website terms of use which was only noticeable after a “multi-step
process” of clicking through nonobvious links); Jerez v. JD Closeouts, 36 Misc. 2d (Mar. 20, 2012) (finding
browsewrap forum selection clause unenforceable when it was “buried” and “could only be found by clicking on
an inconspicuous link on the company’s ‘About Us’ page”); Hines v. Overstock.com, Inc., 380 Fed.Appx. 22, 25
(2d Cir.2010). See generally, Mark A. Lemley, Terms of Use, 91 MINN. L.REV. 459, 477 (2006) (“Courts may be
willing to overlook the utter absence of assent only when there are reasons to believe that the [website user]
is aware of the [website owner’s] terms.”).
140 Schnabel v. Trilegiant Corp., 697 F.3d 110, 129 n. 18 (2d Cir.2012); Ticketmaster Corp. v.

Tickets.com, Inc., No. 99–CV–7654, 2003 WL 21406289, , at *2 (C.D. Cal. March 7, 2003) (applying California
law in finding binding contract where defendant company was put on reasonable notice of “terms of use” of
competitor’s website, plaintiff having “placed in a prominent place on the home page the warning that
proceeding further binds the user to the conditions of use” and defendant accessed the site repeatedly). “An
examination of the cases that have considered browsewraps in the last five years demonstrates that the courts
have been willing to enforce terms of use against corporations, but have not been willing to do so against
individuals.”); Kwan v. Clearwire Corp., 2012 WL 32380 (W.D. Wash. Dec. 28, 2011) (“In a browsewrap
agreement, the terms and conditions of use for a website or other downloadable product are posted on the
website typically as a hyperlink at the bottom of the screen. Unlike a click-wrap agreement, where the user
must manifest assent to the terms and conditions by clicking on an “I agree” box, browse-wrap agreement does
not require this type of express manifestation of assent. Rather, a party instead gives his or her assent by
simply using the product, such as by entering the website or downloading software. In ruling upon the validity
of browse-wrap agreements, courts primarily consider whether a website user has actual or constructive notice
of the terms and conditions prior to using the website or other product.”); Pollstar v. Gigmania Ltd., 170 F.
Supp. 2d 974, 2000 WL 33266437 (E.D. Cal. 2000) (“[A] browsewrap license is part of the web site[, e.g., license
terms are posted on a site’s home page or are accessible by a prominently displayed hyperlink,] and the user
assents to the contract when the user visits the web site. No reported cases have ruled on the enforceability of
a browsewrap license.”); Be In, Inc. v. Google Inc., No. 12–CV–03373, 2013 WL 5568706 at *6 (N.D Cal. Oct. 9,
2013) (observing that proximity and website layout are the most important variables for enforceability; to be
binding, consumers must have reasonable notice of a company’s “terms of use” and exhibit ‘unambiguous
assent’ to those terms.”); Hancock v. Am. Tel. & Tel. Co., 701 F.3d 1248, 1257–58 (10th Cir. 2012) (validating

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228 INTERNET-RELATED CONTRACT LAW Ch. 4

term “browsewrap” signifies a form of contracting that purports to bind website visitors
even if they do no perform affirmative acts such as clicking “yes” to agree.141 A defining
feature of a browsewrap license is that it does not require the user to manifest assent to
the terms and conditions expressly—the user need not sign a document or click on an
“accept” or “I agree” button to be bound by the agreement. Assent is even more
attenuated in browsewrap agreements than in the clickwrap or shrinkwrap contexts
because “user[s] can continue to use the website or its services without visiting the page
hosting the browsewrap agreement or even knowing that such a webpage exists.”142
Courts usually uphold browsewrap if the user “has actual or constructive knowledge of
a site’s terms and conditions prior to using the site.”143
The contract formation of a “browse-wrap agreement” is that an agreement is
formed simply by a website visitor’s use of the website or browsing the website, without
requiring the visitor to click on anything or indicate any other explicit manifestation of
assent. ‘Some U.S. courts are reluctant to enforce browsewrap because of the difficulty
of proving that the terms of use were actually communicated to the user. 144 In Hines v.
Overstock.com, Inc.,145 the federal court denied the defendant’s motion to dismiss
because consumer had no notice of the “terms and conditions” on the retailer’s website
and therefore the browsewrap was unenforceable. The court noted that the website did
not give the user a prompt to review the terms and the link was inconspicuously
displayed. Similarly, in In re Zappos.com, Inc., Customer Data Breach Sec. Litig.,146 the
court applying Nevada law found a browsewrap agreement unenforceable where the
hyperlink to “ ‘terms of use’ is ‘inconspicuous, buried in the middle to bottom of every

Internet agreement that gave customer an opportunity to review and a manifestation of assent because
customer had to click an ‘I Agree’ button to continue with registration process and activation of internet
service.”). Southwest Airlines Co. v. BoardFirst, L.L.C., 2007 WL 4823761 (N.D. Tex. Sept. 12, 2007). (“The
validity of a browsewrap license turns on whether a website user has actual or constructive knowledge of a
site’s terms and conditions prior to using the site. Where a website fails to provide adequate notice of the terms,
and there is no showing of actual or constructive knowledge, browsewraps have been found unenforceable.”);
Small Justice LLC v. Xcentric Ventures LLC, 2015 WL 1431071 (D. Mass. Mar. 27, 2015) (concluding that the
blogger transferred copyright ownership to Xcentric by means of an enforceable browsewrap agreement and
that Xcentric was thus entitled to summary judgment as to Count I (declaratory judgment as to copyright
ownership)). Cf. Berkson v. Gogo LLC, 2015 WL 1600755 (E.D.N.Y. Apr. 8, 2015) (refusing to enforce scrollwrap
and observing that “Browsewraps can take various forms but basically the website will contain a notice that—
by merely using the services of, obtaining information from, or initiating applications within the website—the
user is agreeing to and is bound by the site’s terms of service. Because of the passive nature of acceptance in
browsewrap agreements, courts closely examine the factual circumstances surrounding a consumer’s use.
141 Facebook, by far the largest social network site, structures its terms of use as a browsewrap with the

following introductory clause: “By using or accessing Facebook, you agree to this Statement.” Statement of
Rights and Responsibilities, Facebook, http://www.facebook.com/terms.php?ref=pf; See Fteja v. Facebook, Inc.,
841 F. Supp.2d 829, 835, 838–40 (S.D.N.Y.2012) (enforcing forum selection clause in terms of service linked to
webpage that provided “By clicking Sign Up, you are indicating that you have read and agree to the Terms of
Service” against user who clicked “Sign Up”).
142 Be In, Inc. v. Google Inc., No. 12–cv–03373–LHK, 2013 WL 5568706, at *6 (N.D. Cal. Oct. 9, 2013).

143 See Southwest Airlines Co. v. BoardFirst, LLC, 2007 WL 4823761, at *5 (N.D.Tex. Sept.12, 2007).

144 Roller v. TV Guide Holdings, LLC, 2013 WL 3322348 *8 (Ark. Sup. Ct., June 27, 2013) (stating: “In

this case, TV Guide has not demonstrated that the terms of the agreement were communicated to appellants.
TV Guide’s assertions that appellants had notice of the agreement stem from appellants’ mention of the
agreement in their complaint. However, this is insufficient as the dispositive issue in determining if an
enforceable agreement existed is whether appellants had constructive or actual knowledge of the terms of the
agreement and therefore agreed by their use of TV Guide’s website to be bound by those terms.”).
145 668 F. Supp.2d 362, 365 (E.D. N.Y. 2009).

146 893 F. Supp.2d 1058 (D. Nev. 2012).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 229

[defendant] webpage among many other links, and the website never directs a user to
the Terms of Use.”147

Case Name and Factors Key to Non-Enforceability

Citation of Browsewrap

Sgouros v. TransUnion Browsewrap not binding where website did not

Corp., 2015 WL 507584 make explicitly clear that button marked “I Accept”
(N.D. Ill, Feb. 5, 2015) indicated assent to “terms of use” presented in
scrollable window at top of webpage, in between
which was other text requesting separate
authorization.

Savetsky v. Pre-Paid Here, there is no evidence Savetsky had actual

Legal Servs., 2015 WL notice of the sample member contract on
604767 (N.D. Ca. Feb. LegalShield’s website, or acknowledged the
12, 2015) existence of such a contract prior to purchasing his
membership. In fact, by simply checking the
desired services and clicking the “BUY NOW”
button, a consumer can order a LegalShield plan
without even being aware a member contract
exists. Not to mention that a consumer would only
receive actual notice if he clicked through two
optional links and read to page seven where, under
the inconspicuous heading “Settlement of
Disputes,” the arbitration provision appears.

Van Tassell v. United Refusing to enforce arbitration clause in

Mktg. Grp., LLC, 795 browsewrap agreement that was only noticeable
F.Supp.2d 770, 792–93 after a “multi-step process” of clicking through
(N.D. Ill. 2011) non-obvious links).

Jerez v. JD Closeouts, 36 Finding browsewrap forum selection clause

Misc.3d 161 (Mar. 20, unenforceable when it was “buried” and “could only
2012) be found by clicking on an inconspicuous link on
the company’s ‘About Us’ page”).

Pollstar v. Gigmania, Refusing to enforce browsewrap agreement where

Ltd., 170 F. Supp.2d 974, textual notice appeared in small gray print against
981 (E. D. Cal. 2000) a gray background. In short, the conspicuousness
and placement of the “Terms of Use” hyperlink,
other notices given to users of the terms of use, and
the website’s general design all contribute to
whether a reasonably prudent user would have
inquiry notice of a browsewrap agreement.

147 Id. at 1065–66.

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230 INTERNET-RELATED CONTRACT LAW Ch. 4

Hines v. Overstock.com, Consumer had no actual or constructive notice of

Inc., 668 F.Supp.2d 362 terms and conditions of use of online retailer’s
(E.D.N.Y. 2009) website, and thus arbitration clause of
“browsewrap” agreement was not binding on
consumer for purposes of her putative class action
alleging that retailer’s imposition of “restocking
fee” for returned goods amounted to breach of
contract, fraud, and violation of New York statutes
prohibiting deceptive business practices and false
advertising; consumer was never advised of terms
and conditions and could not even see link to them
without scrolling down to bottom of screen, which
was an action that was not required to effectuate
her purchase, and notice that “Entering this Site
will constitute your acceptance of these Terms and
Conditions,” was only available within terms and
conditions.

In Savetsky v. Pre-paid Legal Services,148 the court refused to compel arbitration

Savetsky received no indication whatsoever that legal consequences (like assent to the
arbitration provision) would flow from his failure to cancel a legal services contract. The
court held that there was no “outward manifestation of assent so a reasonable person
would believe that they consented to arbitration. The court noted when a prospective
customer logs on to LegalShield’s website, he is presented with the option to “Buy Now”
or “Learn More.” If he chooses to “Buy Now,” the customer is prompted to select his state
and given an overview of the pre-paid legal service plans available in that state.
Alongside those options is a link to “More Plan Details.” A customer need not review
those additional details to purchase the plan. The words “member contract” are a link
that takes the prospective customer to a sample version of LegalShield’s member
contract. The member contract in effect when Savetsky purchased his membership
contained the following clause:
Settlement of Disputes: All disputes or claims relating to the Company, this
Contract, any Company products or services or any claims or causes of action
between you and the Company, and any of the Company’s officers, directors,
employees or affiliates, whether in tort or contract, shall be settled totally and
finally by arbitration according to the Commercial Arbitration Rules of the
American Arbitration Association. . . . If you file a claim or counterclaim
against the Company . . . in any such arbitration, you may do so only on an
individual basis and not with any other member or as part of a class action.
“The court found no manifestation of assent as “a reasonable person in Savetsky’s
position understands that by not cancelling his LegalShield membership after receiving
a copy of the membership contract he was assenting to the arbitration provision.” Here,
the court found that Savetsky was not bound nor did he have a duty to act. The typical
browsewrap provides that Internet users may not use a website absent proof of the user’s

148 2015 U.S. Dist. LEXIS 17591 (N.D. Cal. Feb 12, 2015).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 231

manifestation of assent to the site’s terms of service.149 “So, for example, the term in its
purest form includes an interface that presents a link at the bottom of the page to the
terms and conditions. It also includes more ambiguous situations, such as where there
is a statement that the purchase is governed by terms that are linked to the page,” but
requires no clicking of “a radio button acknowledging the terms.”150
In Southwest Airlines Co. v. BoardFirst, L.L.C.,151 the Texas court stated that the
enforceability of browsewrap “turns on whether a website user has actual or constructive
knowledge of a site’s terms and conditions prior to using the site. Where a website fails
to provide adequate notice of the terms, and there is no showing of actual or constructive
knowledge, browsewraps have been found unenforceable.”152 Assent is even more
attenuated in browsewrap agreements than in the clickwrap or shrinkwrap contexts
because “user[s] can continue to use the website or its services without visiting the page
hosting the browsewrap agreement or even knowing that such a webpage exists.”153 In
AvePoint, Inc. v. Power Tools, Inc.,154 the court held that the software developer’s
competitor was in violation of the website’s terms and conditions listed in the
browsewrap agreement when they used the developer’s computer network under false
pretenses to download a trial copy of developer’s trademarked “AvePoint” software for
competitive, rather than personal purposes, without authority to do so. Browsewrap
agreements are those that purport to bind the users of websites to which the agreements
are hyperlinked.155 A defining feature of an internet browsewrap agreement is that it
does not require a user to manifest assent to the terms and conditions expressly, since
the user does not click an “I accept” button but rather gives assent by using the website
itself.156 The validity of a browsewrap agreement generally turns on whether a website
user has actual or constructive knowledge of a site’s terms and conditions prior to using
the site.157
The agreement in Major v. McAllister158 illustrated a typical example of
browsewrap. In Major, the court found mutual assent when a website user of the
ServiceMagic site assented to a forum selection clause contained in an Internet website
browsewrap agreement, even though her assent did not require a “click.”159 In that
browsewrap case, the website placed immediately visible notice of the existence of license
terms on the site. The website stated: “By submitting you agree to the Terms of Use” and
placing a blue hyperlink next to the button that user pushed, second link to those terms
was visible on the same page without scrolling, and similar links were on every other
website page.”160 U.S. courts enforce forum selections in favor of the stronger party so

149 “Most courts which have considered the issue, however, have held that in order to state a plausible

claim for relief based upon a browsewrap agreement, the website user must have had actual or constructive
knowledge of the site’s terms and conditions, and have manifested assent to them[,]” Cvent, Inc. v. Eventbrite,
Inc., 739 F. Supp.2d 927, 937 (E.D. Va. 2010).
150 Ronald J. Mann & Travis Siebeneicher, Just One Click: The Reality of Internet Retail Contracting, 108

COLUM. L. REV. 984, 990 (2008).

151 2007 WL 4823761 (N.D. Tex. Sept. 12, 2007).

152 Id.

153 Be In, Inc. v. Google Inc., No. 12–cv–03373–LHK, 2013 WL 5568706 at *6 (N.D. Cal. Oct. 9, 2013).

154 981 F.Supp.2d 496 (W.D. Va. 2013).

155 Id. at 510.

156 Id. at 510.

157 Id. at 511.

158 302 S.W.3d 227 (Mo. App. 2009).

159 Id. at 227.

160 Id. at 228.

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232 INTERNET-RELATED CONTRACT LAW Ch. 4

long as they are not unreasonable. “A forum selection clause is unreasonable if: (1.) its
incorporation into the agreement was the result of fraud or overreaching; (2.) the
complaining party will be deprived of his day in court due to the grave inconvenience or
unfairness of the selected forum; (3.) the fundamental unfairness of the chosen law may
deprive the plaintiff of a remedy; or (4.) the clause contravenes a strong public policy of
the forum state.”161
Browsewrap binds the user when a user merely browses the website or social media
site.162 Facebook, for example, structures its terms of use as a browsewrap with the
following introductory clause: “By using or accessing Facebook, you agree to this
Statement.” Browsewrap agreements dictate that additional browsing past the homepage
constitutes the mutual assent.163 Unlike shrinkwrap or clickwrap, browsewrap raises an
issue of whether the user has manifested assent. Courts will strike down browsewrap
where it is not clear whether users have notice. Browsewrap may take various forms but
typically, they involve notice on a website that conditions use of the site upon compliance
with certain terms or conditions. These terms may be included on the same page as the
notice or accessible via a hyperlink. “A hyperlink electronically provides direct access
from one internet location/file to another, typically by clicking a highlighted word or icon.
An online reference work, for example, may hyperlink words or terms in its text to their
respective definitions.”164
In Register.com, Inc. v. Verio, Inc.,165 the domain name database’s terms of service
(TOS) were structured as a browsewrap. The TOS stated that the user was agreeing to
the terms and conditions by merely submitting a query to the database. The court stated:
[w]hile new commerce on the Internet has exposed courts to many new
situations; it has not fundamentally changed the principles of contract, and
holding that contract terms on website were enforceable when offeree who
should have been aware of terms accepted services from offeror. 166
The TOS provided that by submitting a query, they were bound by the terms and
conditions.167 The website visitor contended that it did not click agreement to
Register.com’s TOS and was thus not bound by its provisions. Nevertheless, the Second
Circuit upheld the browsewrap finding that the defendant’s submission of the WHOIS
query manifested its consent to Register.com’s TOS.168 The court enjoined Verio from

161 Zaltz v. JDATE, 2013 WL 3369073 *8 (E.D. N.Y. July 8, 2013).

162 Badoo, a U.K. based social network site popular in Europe and Latin America instructs users that
their “Terms apply whenever you visit Badoo, whether or not you have chosen to register with us, so please
read them carefully. By accessing, using, registering for or receiving services offered on Badoo (the “Services”)
you are accepting and agreeing to be bound by the Terms.” Badoo, Terms and Conditions of Use, Badoo,
http://www.badoo.com/terms (emphasis omitted).
163 Woodrow Hartzog, Website Design as Contract, 60 AM. U. L. REV. 1635, 1642 (2011).

164 Major v. McCallister, 302 S.W.3d 227, 228 (Mo App. 2009).

165 356 F.3d 393 (2d Cir. 2004).

166 Id. at 403.

167 Id.

168 ICANN is considering a radical reform of its WHOIS system as noted in a recent report:

As the Expert Working Group on gTLD Directory Services (EWG), we have proposed a
paradigm shift—a new system in which gTLD registration data is collected, validated and disclosed
for permissible purposes only, with some data elements being accessible only to authenticated
requestors that are then held accountable for appropriate use. Our objective is to reexamine and
define the purpose of collecting and maintaining gTLD directory data, consider how to safeguard
the data, and propose a next generation solution that will better serve the needs of the global
Internet community.

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 233

using a search robot to extract information from Register.com’s WHOIS database of

domain names. Register.com was entitled to injunctive relief because it demonstrated
likelihood to succeed on the merits based upon a trespass to chattels claim as well as
violation of the Computer Fraud Abuse Act and federal trademark claims.
In Sours v. TransUnion,169 the Illinois district court denied TransUnion’s motion to
compel arbitration on the grounds of defective contract formation. The court found that
the design of the website and scroll bar was insufficient to place users on notice that they
were entering into an agreement by their clickstream. The users, the court reasoned,
were not aware of a possibility of being bound by the terms in the Window and thus the
form contract was not a valid browsewrap. The court reasoned that the users did not
have sufficient constructive notice that they were bound by the terms in the Window by
using the website.
(4.) Scrollwrap & Sign-in-Wrap

“Scrollwrap requires users to physically scroll through an Internet agreement and

click on a separate “I agree” button in order to assent to the terms and conditions of the
host website.170 Judge Jack Weinstein’s opinion in Berkson v. Gogo LLC,171 identified a
crucial distinction between online agreements that a user must view because of the
nature of the website’s construction and design, which are “scrollwraps,” and those that
merely require a user to click an “I agree” box that appears next to a hyperlink containing
terms of use, which are “clickwraps.”172 The scrollwrap or sign-in-wrap requires users to
assent to the terms of a use and may take the form of clickwrap, browsewrap, or a
combination of these contracting forms. 173 Judge Weinstein summarized the leading
“scrollwrap” cases:
Some court decisions that use the term “clickwrap” are in fact dealing with
“scrollwrap” agreements where an internet consumer had a realistic
opportunity to review and scroll through the electronic agreement. 174

Internet Corporation for Assigned Names and Numbers (ICANN), Explore the Draft Next Generation gTLD
Directory Services Model (June 24, 2013), http://www.icann.org/en/news/announcements/announcement-3-24
jun13-en.htm.
169 14 C1850 (N.D. Ill., Feb. 5, 2015) (finding scroll bar to be insufficient to inform users that they were

manifesting assent by clicks).

170 Shari Claire Lewis, ‘Sign-in-Wraps’ Face the Judicial Microscope in New York, N. Y. L. J. (Apr. 21,

2015).
171 2015 WL 1600755 (E.D. N.Y. Apr. 9, 2015).

172 Id. at *29.

173 For example, CafeMom’s terms of service apply to all users of the site, and the provider reserves the

right to change terms by simply posting them to the site. Terms of Service, CAFEMOM, http://www.cafemom.
com/about/tos.php (“CafeMom reserves the right to update or change these TOS at any time by posting the
most current version of the TOS on the Site. Your continued use of the Site after we post any changes to the
TOS signifies your agreement to any such changes.”); See also, Terms and Conditions, AUDIMATED, http://
www.audimated.com/legal.php), Terms of Service, SECONDLIFE, http://secondlife.com/corporate/tos.php. and
Terms of Service, STUMBLEUPON, http://www.stumbleupon.com/terms.
174 Id. at *29 (See, e.g., Feldman, 13 F. Supp. 2d at 236–38 (holding that the plaintiff had the duty to

read terms that were presented in a scroll box and required a click to agree and, therefore, the fact that the
entire contract was not visible in the scroll box was irrelevant); Bar-Ayal v. Time Warner Cable Inc., No. 03–
CV–9905, 2006 WL 2990032, at *9–10 (S.D.N.Y. Oct. 16, 2006) (finding acceptance where scrolling though
thirty-eight screens of text was required—essentially the entire agreement); Moore v. Microsoft Corp., 293
A.D.2d 587, 741 N.Y.S.2d 91, 92 (2d Dep’t 2002) (contract formed when “[t]he terms of the [agreement] were
prominently displayed on the program user’s computer screen before the software could be installed,” and “the
program’s user was required to indicate assent to the [agreement] by clicking on the ‘I agree’ icon before

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234 INTERNET-RELATED CONTRACT LAW Ch. 4

Terms of service must also be reasonably presented or risk that a court will not
enforce them.175 Common terms address user submissions, prohibited content
(pornography, IP rights, rights of publicity, commercial content or endorsements,
promotions, sweepstakes, software viruses, and other malicious or illegal content),
community norms, responsibility for submissions posted on the service, ownership of the
site, refusal to post or removal of postings, termination of accounts, ownership of content
choice of law, choice of forum, privacy policies, warranty disclaimers, limitations of
liability, intellectual property infringement, notice and takedown provisions, licenses to
use submissions, third party websites and services (no endorsements), provisions for
modifying the agreement, integration or merger clauses and provisions for the
termination and modification of the agreement.176 TOU establish the terms and
conditions for online purchases; it may limit the site’s liability for damage that its
content and services cause to users.
A website may, through its TOU, obtain the rights to use and reproduce content
users post to a website, such as comments to a blog. In addition, TOUs may condition or
restrict the subsequent uses a website visitor may make of content that he or she
previously accessed on the website. TOU are often structured as clickwrap, browsewrap,
or a hybrid contracting form, which like scrollwrap or sign-in-wrap.177 Courts
considering browsewrap terms of service have held that “the validity of a browsewrap
license turns on whether a website user has actual or constructive knowledge of a site’s
terms and conditions prior to using the site.”178 The lesson from a decade of terms of
service is that the terms of service must be presented to the plaintiff, rather than merely
posted inconspicuously on a website. 179 Facebook, for example, calls its terms of use

proceeding with the download”); In re RealNetworks, Inc., No. 00–CV–1366, 2000 WL 631341, at *6 (N.D.Ill.
May 8, 2000) (approving license agreement placed in pop-up window with scroll bar); cf. Serrano v. Cablevision
Sys. Corp., 863 F. Supp. 2d 157, 164–65 (E.D.N.Y.2012) (approving agreement where plaintiff noted that upon
initiation of internet service, she was “provided with an electronic copy of Cablevision’s Terms of Service” and
was required “to indicate that [she] reviewed and agreed to the Terms of Service by clicking on a link marked
‘Agree.’).
175 See e.g. Kwan v. Clearwire, No. 09–1392, 2012 WL 32380 at *9 (W.D. Wash., Jan. 24, 2012) (“this

court finds that the breadcrumbs left by Clearwire to lead Ms. Brown to its [Terms of Service] did not constitute
sufficient or reasonably conspicuous notice of the [Terms of Service].”).
176 See e.g., Caringbridge, Terms of Use, (Sept. 3, 2014), http://www.caringbridge.org/terms-of-use

(specifying the conditions in which user-generated content may be used).

177 “Sites condition access to their content on visitors’ acceptance of these TOU, which generally assume

an agreement between the website and user that is enforceable by state contract law. TOU may be deployed
to all sorts of purposes. They may set the terms and conditions for online purchases; they may limit the site’s
liability for damage that its content and services cause to users. A site may, through its TOU, obtain the rights
to use and reproduce content users post to a website, for example, comments to a blog. And TOU may condition
or restrict the subsequent uses a site visitor may make of content that he or she accesses on the website.”
Bradley E. Abruzzi, Copyright, Free Expression, and the Enforceability of “Personal Use-Only” and Other Use-
Restrictive Online Terms of Use, 26 SANTA CLARA COMPUTER & HIGH TECH. L. J. 85, 86 (2010). Some sites are
a hybrid between a browsewrap and a clickwrap because they predicate the manifestation of assent upon either
browsing a site or clicking agreement to the terms in a registration process. See e.g., LinkedIn, User Agreement,
http://www.linkedin.com/static?key=user_agreement (providing an example of a hybrid user agreement).
178 Southwest Airlines Co. v. BoardFirst, L.L.C., 2007 WL 4823761, at *5 (N.D. Tex. Sept. 12, 2007).

Molnar v. 1-800-Flowers.com, 2008 WL 4772125, at *7 (C.D. Cal. 2008); See also, Motise v. America Online,
Inc., 346 F. Supp. 2d 563, 564–65 (S.D.N.Y.2004) (finding the consumer had no notice where terms of use were
available on website, but never presented).
179 Most TOUs require the user to manifest assent to the TOU by clicking on the “I agree” icon or a

hyperlink before they can proceed to download the software. See e.g., Moore v. Microsoft Corp., 741 N.Y.S.2d
91, 92–93 (N.Y. App. Div. 2002) (upholding TOU).

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 235

agreement, “Statement of Rights and Responsibilities.”180 In the Facebook agreement,

users agree to a choice of law in Facebook’s home court, Santa Clara County. Moreover,
they agree to indemnify Facebook if the social media website is sued because of postings
that infringe a third party’s content or result in other lawsuits.181
Additionally, the U.S.-based social network website AsianAve requires users at
signup to agree to the site’s terms of service and privacy policy.182 In Kwan v. Clearwire
Corp.,183 a U.S. federal court refused to enforce an Internet service provider’s arbitral
clause, finding it to be inconspicuous. The Kwan court found that a website user did not
assent to be bound to the defendant’s terms of use, which included a mandatory
arbitration clause because the terms of use were buried two or three clicks into the
defendant’s website.184 The Kwan court applied the test set out in Specht,185 which asks,
“[i]n ruling upon the validity of browsewrap agreements, . . . whether a website user has
actual or constructive notice of the terms and conditions prior to using the website or
other product.”186
The court ruled that mere access to a term of service agreement was insufficient to
meet the conspicuousness test. The court ordered discovery to determine whether
Clearwire’s customers agreed to the TOS and to class action waivers. The lesson of
Specht and Kwan case is that location and conspicuousness matter. Federal and state
courts evaluate mass-market agreements by applying state law contract principles. 187
The court in Berkson v. Gogo LLC,188 recognized two new hybrid wrap contracts: the
scrollwrap and sign-in-wrap contract in addition to browsewrap and clickwrap, the first
Internet-related wrap contracts to evolve. In Berkson v. Gogo LLC,189 plaintiffs filed a
class action arising out of inflight wireless service. 190 Adam Berkson and Kerry Welsh
filed suit against Gogo alleging that they “improperly increased their sales and profits

Facebook, http://www.facebook.com/terms.php?ref=pf.
180

Id.
181

182 AsianAveJobs, Terms of Service, AsianAve, http://www.asianave.com/jobs/tac.html.

183 2011 U.S. Dist. LEXIS 150145, 2012 WL 3280 (W.D. Wash. Jan. 3, 2012).

184 Id. at *7–*9. (citing Specht v. Netscape Communs. Corp., 306 F.3d 17 (2d Cir. 2002) (Sotomayor, J.)).

185 In Specht v. Netscape Communs. Corp., 306 F.3d 17 (2d Cir. 2002) (Sotomayor, J.)), the Second

Circuit first addressed “issues of contract formation in cyberspace.” 306 F.3d at 20. Although cyberspace
transactions typically lacked “a physical document containing contract terms,” the parties to such a transaction
could be deemed to have been put on “inquiry notice” of license terms that a reasonably prudent person would
have seen on the website. 306 F.3d at 31. Conversely, if an offer on a website “did not carry an immediately
visible notice of the existence of licensing terms or require unambiguous manifestation of assent to those
terms”, the mere “existence of license terms on a submerged screen is not sufficient to place consumers on
inquiry or constructive notice of those terms.” 306 F.3d at 31–32. The Specht court was the first appellate
decision to explain that the design and placement of the website matters most in determining whether a user
has constructive notice of the terms. The Court in Specht went on to find that the placement of license terms
on an “unexplored portion of [defendants’] webpage” below the “download button” was not sufficient to bind
customers to those terms. 306 F.3d at 31–32. In so holding, the Court distinguished other “online transaction”
cases where “there was much clearer notice than in the present case that a user’s act would manifest assent
to contract terms.” 306 F.3d at 33.
186 2011 U.S. Dist. LEXIS 150145 at *7.

187 Cf. Nicosia v. Amazon, Inc., 2015 U.S. Dist, LEXIS 13560 (E.D. N.Y. Feb. 4, 2015) (enforcing

Amazon’s TOU because it was clear that clicking the order button constitute assent to the terms of the TOU)
with Savetsky v. Pre-Paid Legal Services, 2015 U.S. Dist. LEXIS 175911 (N.D. Cal. Feb. 12, 2015) (refusing to
compel mandatory arbitration where information was insufficient and arbitration clause was buried).
188 2015 WL 1600755 (E.D. N.Y. Apr. 8, 2015).

189 Id. at *1.

190 Id.

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236 INTERNET-RELATED CONTRACT LAW Ch. 4

by misleading customers into purchasing a service that charged a customer’s credit card,
on an automatically-renewing continuing monthly basis, without adequate notice or
consent.”191 The court recounted the facts as follows:
The graphics and text on defendants’ website, it is argued, led internet
consumers during the proposed class period—between February 2008 and
December 2012—to believe that they were only buying a one-month
subscription when they signed up for in-flight Wi-Fi through Gogo.192
Gogo’s position is that the terms plaintiffs consented to not only clearly provided for
automatic renewal, but that they included mandatory arbitration and waiver of venue
protection. The court found no inquiry notice to these scrollwrap agreements. The court
also ruled that sign-in wraps used in the inflight service were unenforceable and refused
to compel arbitration. The court’s description of these new wrap contracts was as a
hybrid version of browsewrap and clickwrap. The court ruled that the average Internet
user would not be aware that he/she was entering into a binding contract to a sign-in-
wrap. The court found that there was no contract formation as either a clickwrap or
browsewrap for these scrollwrap or sign-in-wrap arrangements.193
The federal court in Berkson stated that these hybrid wraps had some features of
browsewrap and some elements of clickwrap stating:
Browsewrap exists where the online host dictates that assent is given merely
by using the site. Clickwrap refers to the assent process by which a user must
click “I agree,” but not necessarily view the contract to which she is assenting.
Scrollwrap requires users to physically scroll through an internet agreement
and click on a separate “I agree” button in order to assent to the terms and
conditions of the host website. Sign-in-wrap couples assent to the terms of a
website with signing up for use of the site’s services; it is the form used by Gogo
in the instant case.194
Next, the court described sign-in-wraps that “do not require the user to click on a
box showing acceptance of the ‘terms of use’ in order to continue. Rather, the website is
designed so that a user is notified of the existence and applicability of the site’s ‘terms of
use’ when proceeding through the website’s sign-in or login process. The Berkson court
noted that U.S. federal appeals courts have yet to weigh in on the enforceability and
validity of sign-in-wraps. The court summarized recent federal district court opinions
addressing sign-in type wrap contracts:
First, where the hyperlinked “terms and conditions” is next to the only button
that will allow the user to continue use of the website. See, e.g., Crawford v.
Beachbody, LLC, No. 14–CV–1583, 2014 WL 6606563, at *3 (S.D.Cal. Nov. 5,
2014) (forum selection clause binding where consumer clicked on button
marked “Place Order” and above button was statement informing user that by
clicking the button user was subject to the website’s “terms and conditions,”
which were available in the same screen via hyperlink); Starke v. Gilt Groupe,
Inc., No. 13–CV–5497, 2014 WL 1652225, at *2–3 (S.D.N.Y. Apr. 24, 2014)

191 Id.
192 Id.
193 Id. at *44–*45.
194 Id. at *25.

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§ 4.2 LICENSING AS THE CHIEF CONTRACTING FORM 237

(arbitration clause in “terms of use” binding where consumer clicked “Shop

Now” button next to statement that informed user that “the consumer will
become a Gilt member and agrees to be bound by the “Terms of Membership,”
which were available next to the button as a hyperlink”); Swift v. Zynga Game
Network, Inc., 805 F.Supp.2d 904, 908, 912 (N.D.Cal.2011) (arbitration clause
enforceable where user clicked on button marked “accept,” below which was
statement in small grey font indicating that clicking on the button meant
accepting the hyperlinked “terms of service”).
Second, where the user “signed up” to the website with a clickwrap agreement
and was presented with hyperlinks to the “terms of use” on subsequent visits.
See, e.g., Nicosia v. Amazon.com, Inc., No. 14–CV–4513, ___ F.Supp.3d ___, ___,
2015 WL 500180, at *7 (E.D.N.Y. Feb. 4, 2015) (arbitration clause enforceable
where user clicked box acknowledging terms at initial signup to website and
was presented with hyperlink at top of webpage to “terms of use” multiple times
after completing purchases), appeal filed, No. 15–CV–0423 (2d Cir. Feb. 13,
2015); Zaltz v. JDATE, 952 F.Supp.2d 439, 454 (E.D.N.Y.2013) (forum selection
clause binding where user had to assent to clickwrap agreement and clicked
button marked “accept,” next to which was hyperlink to “terms of use,” to sign
up to website and to renew her membership).
Third, where notice of the hyperlinked “terms and conditions” is present on
multiple successive webpages of the site. See, e.g., Major v. McCallister, 302
S.W.3d 227, 230–31 (Mo.Ct.App.S.Dist.2009) (forum selection clause
enforceable where hyperlink to “terms and conditions” was presented on
multiple successive webpages and the final step in the website’s signup process
was to click a button next to which was the phrase: “By submitting you agree
to the Terms of Use”).195
In Hancock v. Am. Tel. & Tel. Co.,196 the Tenth Circuit upheld a scrollwrap under
Florida and Oklahoma law where process gave customer opportunity to review Internet
terms in scrolling text box. In Hancock, the customer had to click an “I Agree” button to
manifest assent to internet terms in order to continue with registration process and
activation of internet service. In Newell Rubbermaid Inc. v. Storm, 197 the court found a
valid clickwrap agreement found when (i) a box titled “Grant Terms and Agreement”
stated, “[y]ou must read your Grant Agreement and review the terms to continue,” (ii)
an agreement was provided in a hyperlink, and (iii) a checkbox underneath the hyperlink
read, “I have read and agree to the terms of the Grant Agreement.”). This website design
is functionally equivalent to a scrollwrap.
Courts typically evaluate whether a mass-market agreement’s terms were clearly
presented to the consumer, the consumer had opportunity to read the agreement, and
the consumer manifested an unambiguous acceptance of the terms. 198 Social Network

Id. at *31–*32.
195

701 F.3d 1248, 1257–58 (10th Cir. 2012).

196

197 No. CV 9398–VCN, 2014 WL 1266827, at *2 (Del. Ch. Mar. 27, 2014),

198 See e.g., Specht v. Netscape Commc’ns Corp., 306 F.3d 17, 28–32 (2d Cir. 2002) (applying California

law); Serrano v. Cablevision Sys. Corp., 863 F. Supp. 2d 157, 164 (E.D.N.Y. 2012) (“ ‘[C]lick-wrap’ contracts
are enforced under New York law as long as the consumer is given a sufficient opportunity to read the end-
user license agreement, and assents thereto after being provided with an unambiguous method of accepting or
declining the offer.”); Jallali v. Nat’l Bd. of Osteopathic Med. Examiners, Inc., 908 N.E.2d 1168, 1173 (Ind. Ct.

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238 INTERNET-RELATED CONTRACT LAW Ch. 4

Websites (SNSs) generally require users to enter into two kinds of contractual
relationships, terms of service agreements and privacy policies, as a condition for
accessing their websites. An SNS, website, or other brick-and-mortar company can
reduce transaction costs by using a predispute mandatory arbitration clause because it
need not defend lawsuits in state or federal court but in a forum where it can choose the
arbitral provider and rules to govern the dispute. 199
§ 4.3 Contract Formation Issues in Cyberspace
(A.) Formation Issues
Beginning in the 1990s, the law of contracts evolved to address the unique issues
posed by e-commerce and the Internet.200 In Specht v. Netscape Communications Corp.,201
the Second Circuit refused to enforce a mass-market license agreement because it was
unclear whether a consumer would have an opportunity to review the terms of the
license agreement prior to manifesting assent. The consumer-plaintiff filed suit under
the Computer Fraud & Abuse Act and ECPA charging Netscape with allegedly
monitoring his activities over the Internet. Netscape moved to compel arbitration and to
stay court proceedings, arguing that the plaintiffs agreed to submit to arbitration when
it clicked agreement to a mass-market license agreement located on a submerged screen
that the user would have needed to scroll through to read the full agreement. The court
concluded that, “Where consumers are urged to download free software at the immediate
click of a button, a reference to the existence of license terms on a submerged screen is
not sufficient to place consumers on inquiry or constructive notice of those terms.”202
At issue in Specht was the enforceability of an arbitration clause contained in
license terms on a website.203 Netscape contended that the mass-market agreement was
accepted when plaintiffs downloaded a plug-in (i.e., software that supplements or
enhances the capabilities of an existing program) from the site. 204 Netscape used a
highlighted box that included a statement that read: “Please review and agree to the
terms of the Netscape SmartDownload software license agreement before downloading

App. 2009) (upholding clickwrap agreement under general contract principles); Sgouros v. TransUnion, 14
C1850 (N.D. Ill. Feb. 5, 2015) (refusing to compel arbitration as it was unclear whether checking box
constituted user’s manifestation of assent).
199 See generally, Michael L. Rustad, Richard Buckingham, Diane D’Angelo, & Kate Durlacher, An

Empirical Study of Predispute Mandatory Arbitration Clauses in Social Media Terms of Service, 34 U. ARK.
LITTLE ROCK L. REV. 643 (2012).
200 “In the 1990s, however, things began to change. The rise in computer use by individuals coupled with

the advent of the World Wide Web gave rise to two parallel developments, both of which challenged the law of
contract formation. Increased computer use created a demand for software programs designed for the consumer
market, and those programs were commonly transferred to users by way of standard-form licenses that were
packaged with the software and thus unavailable before the consumer paid for the software. Also, parties in
large numbers began to use electronic means—the computer—to enter into bargained-for relationships. The
turn of the millennium brought two electronic contracting statutes, the Electronic Signatures in Global and
National Commerce Act (“E-Sign”) and the Uniform Electronic Transactions Act (“UETA”), which removed any
doubts that contracts entered into electronically could satisfy the Statute of Frauds.” Juliet M. Moringiello &
William L. Reynolds, From Lord Coke to Internet Privacy: The Past, Present, and Future of the Law of Electronic
Contracting, 72 MD. L. REV. 452, 454 (2013).
201 306 F.3d 17 (2d Cir. 2002) (Where the user was unaware that the license agreement appeared only

on a submerged screen when downloading free software.).

202 Id. at 32.

203 Id. at 20.

204 Id. at 23.

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§ 4.3 CONTRACT FORMATION ISSUES IN CYBERSPACE 239

and using the software.”205 While this statement was in the same typeface and size as
most of the type on the page, it was specially emphasized by the use of a shaded box, and
it was further highlighted by the use of a colored hyperlink.206 Nevertheless, the court
found that Netscape had not done enough to bring the terms of use to the attention of
consumers and refused to enforce the arbitration clause. In addition, Netscape had not
asked the consumer to click agreement to the DownLoad license, only for Netscape’s
Communicator.
When plaintiffs downloaded free software from the Netscape site by the click of a
button, they could not initially see a reference to license terms. 207 Plaintiffs could have
seen the sole reference to terms only if they had scrolled down to the bottom of the screen
before commencing a download.208 Netscape moved to compel arbitration and stay court
proceedings. The motion to compel arbitration and stay court proceedings was denied by
the district court.209 The Second Circuit affirmed the lower court finding that plaintiffs
were not put on sufficient notice of terms.210 The court observed, “There is no reason to
assume that viewers will scroll down to subsequent screens simply because screens are
there.”211 The Second Circuit determined that downloading the software did not
constitute acceptance of Netscape’s terms that included mandatory arbitration.212 The
court held “that a reasonably prudent offeree in plaintiffs’ position would not have known
or learned, prior to acting on the invitation to download, of the reference to [the
software’s] license terms hidden below the “Download” button on the next screen.”213
The Second Circuit refused to enforce Netscape’s “Smart Download” software license
agreement compelling arbitration, finding that Christopher Specht, the plaintiff, did not
have reasonable notice of the license terms nor did he (and other users) manifest assent
before downloading this plug-in program. Because Netscape’s browsewrap “did not carry
an immediately visible notice of the existence of license terms,” the court refused to
enforce them.214 The key fact in screen was that link to the agreement was located on “a
screen located below the download button.”215 The text of the license agreement “would
have become visible to plaintiffs only if they had scrolled down to the next screen.”216
The court emphasized that an “unexplored portion” of text “remained below the
download button.217 The Specht court applied legal realism to cyberspace contracts by
striking down Netscape’s agreement as “stealthware.”218 The Second Circuit held that a
consumer’s clicking on a download button did not manifest assent to license terms if
those terms were not conspicuous and it was not clear that clicking meant agreement
with the terms of a license agreement containing a predispute mandatory arbitration
205 Id.
206 Id. at 23.
207 Id.
208 Id.
209 Id. at 25.
210 Id. at 32.
211 Id.
212 Id. at 35.
213 Id. at 35.
214 Id. at 31.
215 Id. at 20.
216 Id. at 23.
217 Id. at 32
218 Id.

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240 INTERNET-RELATED CONTRACT LAW Ch. 4

clause. The consumer had no real opportunity to learn of the existence of an arbitration
clause because it could not be seen prior to scrolling down the page to a screen located
below the download button. The Second Circuit’s ruling that location matters and that a
reasonable Internet user should have an opportunity to review terms prior to being
bound is a rare pro-consumer ruling.
Most U.S. courts are predisposed to enforce Internet license agreements, even when
the consumer might not know of the existence of its one-sided terms.219 In Scherillo v.
Dun & Bradstreet, Inc.,220 the federal court upheld a click-wrap forum selection clause
finding it to be reasonably communicated to the plaintiff even though the user had to
scroll down the page. The court gave no credence to the plaintiff’s argument that he
“checked” the terms and conditions box inadvertently and therefore had not consented
to the agreement. The software licensor can create a “safe harbor” for proving
manifestation of assent by using a “double assent procedure” that requires the user to
reaffirm assent.221 A licensor must give the licensee a right to a refund if the licensee
has not had an opportunity to review the terms and manifest assent prior to payment. 222
Courts will generally validate contractual formation if it follows the Uniform Computer
Information Transactions Act’s (UCITA) mandate of giving the user an opportunity to
review the terms and a means to manifest assent. Manifestation of assent by the offeree
is some decision based upon awareness of the terms of the license. 223
(B.) “Rolling Contracts”
Rolling contracts are a standard form contract where the buyer or licensee orders
goods or downloads information but pays for them prior to seeing many of the terms. 224
Instagram users filed a class action in 2013 contending that the social media’s rolling
contract and unilateral changes to its terms of use regarding the ownership of copyrights
of user-generated content (UGC) was unenforceable.225 Instagram’s prior terms of use
disclaimed ownership of UGC but the new terms claimed a royalty free license. 226
Travelocity’s User Agreement is a rolling contract because it states, “Travelocity may at

219 The limited empirical studies demonstrate beyond my examples that EULAs are tilted in favor of

the seller. See Florencia Marotta-Wurgler, What’s in a Standard Form Contract? An Empirical Analysis of
Software License Agreements, 4 J. EMPIRICAL LEGAL STUD. 677, 703 (2007) (finding that end user license
agreements were more pro-seller than the default rules of the UCC); See e.g., Cvent, Inc. v. Eventbrite, Inc.,
739 F. Supp.2d 927, 937 (E.D. Va. 2010) (enforcing mass-market license and stating the UCITA was not useful
for the plaintiffs); Burcham v. Expedia, Inc., 2009 WL 586512 (E.D. Mo. March 6, 2009) (rejecting plaintiff’s
argument that he was not bound to website’s click-wrap agreement because others had access to his computer
and could have created an account on his behalf without him seeing the terms.); See RESTATEMENT (SECOND)
OF CONTRACTS § 208, cmt. d. (“gross inequality of bargaining power, together with terms unreasonably
favorable to the stronger party, may confirm that the weaker party did not in fact assent or appear to assent
to the unfair terms”).
220 684 F. Supp. 2d 313 (E.D.N.Y. 2010).

221 UCITA § 112, cmt. 5 (1999).

222 Id. at § 209(b).

223 Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir. 2004)(“It is standard contract doctrine

that when a benefit is offered subject to stated conditions, and the offeree makes a decision to take the benefit
with knowledge of the terms of the offer, the taking constitutes an acceptance of the terms, which accordingly
become binding on the offeree.”).
224 Robert A. Hillman, Rolling Contracts, 71 FORDHAM L. REV. 743, 744 (2002) (defining rolling

contracts).
225 (Rodriguez v. Instagram LLC, Cal. Super. Ct., No. CGC–13–532875 (Super. Ct. S.F. Cty., July 16,

2013) (stating that plaintiffs sought injunctive relief for unilateral changes in terms of use).
226 Id.

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§ 4.3 CONTRACT FORMATION ISSUES IN CYBERSPACE 241

any time modify this User Agreement and your continued use of this site or Travelocity’s
services will be conditioned upon the terms and conditions in force at the time of your
use.”227 Courts have recognized a “layered” or “rolling” system of electronic contract
formation, which is derived from the layered contract formation 228 that exists in the
physical world for sophisticated products such as computer systems. 229 With a layered
contract, agreement to a contract may not occur at a single point in time. Under webwrap
contracts, a party will manifest assent to different terms at different points in time.
Terms of service agreements, for example, reserve the right to later modify or add to the
terms of use or service. The licensor or buyer requires payment first and provides terms
later. The recent trend in judicial decisions is that courts enforce “cash now, terms later”
licenses so long as the licensor gives reasonable notice to the user and an opportunity to
decline the terms.
UCITA validates “rolling contracts” if the person had reason to know that terms
would come later, had a right to refund if he declined the terms, and manifested assent
after an opportunity to review them.230 Online merchants typically offer consumers take
it or leave it agreements. UCITA gives consumers a right to a refund if they have not had
an opportunity to review the terms. 231 The predominant trend is for U.S. courts to
legitimize software industry consumer licensing practices that disclaim warranties. 232
One commentator suggested the term ‘sneak wrap’ for online mass-market
agreements.233
(1.) ProCD, Inc. v. Zeidenberg: A Game-Changer

ProCD, Inc. v. Zeidenberg 234 nicely illustrates the trend in the law to enforce mass-
market licenses even though they have an avant-garde form departing from classical
contract law. In ProCD, the Seventh Circuit upheld a shrinkwrap agreement in which the
licensee, a computer science graduate student, paid first and was given the software
licensing agreement only after he paid for the CD-ROM. ProCD compiled a computer
database called “Select Phone” that consisted of more than 3,000 telephone directories and
sought to protect its investment in the database by requiring licensees to enter into a
licensing agreement limiting use and containing restrictions. Matthew Zeidenberg
purchased a copy of ProCD’s Select Phone in Madison, Wisconsin, but chose to ignore the
terms of the agreement prohibiting transfers or assignments of rights. Zeidenberg then
formed a company to resell the information provided in ProCD’s database. He charged
customers for access to the information in Select Phone and made the information
available over the World Wide Web. ProCD filed a copyright infringement lawsuit seeking

In re Online Travel Co., 2013 WL 2948086 *4 (N.D. Tex. June 14, 2013).
227

CLAYTON P. GILLETTE & STEVEN D. WALT, SALES LAW: DOMESTIC & INTERNATIONAL 89 (New York,
228

New York: Foundation Press, rev. ed. 2002) (describing rolling contracts as layered).
229 BRIAN W. SMITH, E-COMMERCE PRODUCTS & SERVICES 2.16 (2001); See also, Robert A. Hillman,

Rolling Contracts, 71 FORDHAM L. REV. 743, 744 (2002).

230 Raymond T. Nimmer, Licensing of Information Assets, 2 INFO. LAW § 11:147 (June 2009).

231 Id. (explaining conditions of consumers’ right to a refund).

232 See Robert W. Gomulkiewicz, The Implied Warranty of Merchantability in Software Contracts: A

Warranty No One Dares to Give and How to Change That, 16 J. MARSHALL J. COMPUTER & INFO. L. 393, 393
(1998) (describing trend in American courts).
233 The term “sneak wrap” refers to online TOU agreements. See Ed Foster, ‘Sneak Wrap’ May Be a Good

Way of Defining the Maze of Online Products, INFOWORLD (July 26, 1999).
234 86 F.3d 1447 (7th Cir. 1996).

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242 INTERNET-RELATED CONTRACT LAW Ch. 4

an injunction against Zeidenberg.235 Peter Alces describes the factual setting for this
“instant” classic of avant-garde contract formation:
The transactional context is familiar: Zeidenberg went into a store that sold
packaged computer software and purchased ProCD’s product, essentially an
electronic phone directory. Terms disclosed within the box and terms disclosed,
when Zeidenberg launched the software limited his rights to disseminate the
information contained on the software. Zeidenberg ignored the term limiting
his right of dissemination and ProCD brought an action to enjoin his (mis)use
of the product. Zeidenberg responded that his contract with ProCD was formed
when he paid for the software and left the store with it. Not anything proposed
or imposed by ProCD in the box or on the computer screen thereafter could be
part of the parties’ ‘agreement.’236
The injunction prevented Zeidenberg from further disseminating ProCD’s software
since such distribution exceeded the scope of the rights granted in his license. The federal
district court held ProCD’s license agreements were unenforceable since the terms did not
appear on the outside of the package and a customer could not be “bound by terms that
were secret at the time of purchase.”237 The Seventh Circuit disagreed, ruling that ProCD’s
license agreements were enforceable. The Seventh Circuit applied U.C.C. Article 2 to the
license agreement, noting contract formation may be manifested in any manner sufficient
to show agreement.238 The court rejected the argument that license agreement was
preempted: “Contracts . . . generally affect only their parties; strangers may do as they
please, so contracts do not create ‘exclusive rights.’ ”239
The ProCD court decided that Zeidenberg accepted the software “after having an
opportunity to read the license at leisure.”240 The court held that 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. The court reasoned that ProCD “extended
an opportunity to reject if a buyer should find the license terms unsatisfactory.”241 The
court rejected Zeidenberg’s assertion he had no choice but to adhere to ProCD’s terms once
he opened the package. The court also gave short shrift to Zeidenberg’s argument that
shrinkwrap license agreements must be conspicuous to be enforced. Finally, the court
rejected the argument that the U.S. Copyright Act preempts software licenses because the
rights created by ProCD’s license agreement were not found to be the functional equivalent
of any of the exclusive rights of the U.S. Copyright Act.242 “Notice on the outside, terms
on the inside, and a right to return the software for a refund if the terms are unacceptable
(a right that the license expressly extends), may be a means of doing business valuable
to buyers and sellers alike.”243

235 A plaintiff seeking a preliminary injunction must establish; (1) that he is likely to succeed on the

merits; (2) that he is likely to suffer irreparable harm in the absence of preliminary relief; (3) that the balance
of equities tips in his favor; and (4) that an injunction is in the public interest.
236 Peter A. Alces, The Moral Impossibility of Contract, 48 WM. & MARY L. REV. 1647, 1653–54 (2007).

237 86 F.3d at 1450.

238 Id. (citing U.C.C. § 2–204).

239 Id. at 1454.

240 86 F.3d 1447 at 1452.

241 Id.

242 Id. at 1454–55.

243 Id. at 1453.

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§ 4.3 CONTRACT FORMATION ISSUES IN CYBERSPACE 243

The ProCD decision is emblematic in that it validated contracts taking the form of
“payment now, terms later.” The Seventh Circuit adopted a law and economics perspective
in validating “rolling contracts” because the court regarded this method as an efficient
form of private ordering. The court observed that “notice on the outside, terms on the
inside, and a right to return” was a useful business practice. 244 Nevertheless, this
decision raises the question of how far the classical doctrine of master of an offer can be
stretched. James J. White, co-author of a leading treatise on Commercial law, gives this
hypothetical:
“Suppose that your form asserts that my intentional tying my shoelaces
tomorrow will be assent to all of your terms. Since I cannot tie my shoelaces
unintentionally and since I have no valet, I’m stuck, not so?” How would you
respond?245
Professor White notes that the path of Internet contract law is already legitimating
functionally equivalent contracts. He notes how UCITA rules “that one has “manifested
assent,” (agreed to something) if he “intentionally engages in conduct . . . with reason to
know that the other party . . . may infer from the conduct that the person assents to the
. . . term.”246 One way to interpret ProCD is as an efficient evolution of the concept that
a software licensor is the master of its offer.
(2.) Hill v. Gateway 2000, Inc.

In the past two decades, the tide turned in U.S. courts in favor of the enforceability
of mass-market licenses beginning with Judge Frank Easterbrook’s decisions in ProCD,
Inc. v. Zeidenberg247 and Hill v. Gateway 2000.248 In Hill, Judge Easterbrook cited his
own opinion in ProCD validating the practice of pay now, terms later.249 In Hill, a
consumer picked up the telephone, spoke with a Gateway customer representative,
ordered a Gateway personal computer, and gave his credit card number. The box arrived,
containing the computer and a list of terms, said to govern unless the customer returns
the computer within thirty 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? This was the fact pattern in Hill v. Gateway 2000, Inc.,250
where Rich and Enzo Hill challenged an arbitration clause in Gateway’s software license
agreement included in a standard form contract shipped with their home computer.
Gateway’s standard business practice was to mail the computer system—with a software
license agreement included inside the box. Included in the software license agreement

Id. at 1451.
244

James J. White, Contracting Under Amended 2–207, 2004 WIS. L. REV. 723, 736; See Roger C. Bern,
245

‘Terms Later’ Contracting: Bad Economics, Bad Morals, and a Bad Idea for a Uniform Law, Judge Easterbrook
Notwithstanding, 12 J.L. & Pol’y 641, 643 (2004) (“Judge Easterbrook’s imposition of the ‘terms later’
contracting rule in ProCD and Hill was itself devoid of legal, economic, and moral sanction. Thus his opinions
in those cases provide no legitimate support for other court decisions or for any uniform law that would validate
‘terms later’ contracting.”).
246 Id.

247 86 F.3d 1447 (7th Cir. 1996).

248 105 F.3d 1147 (7th Cir. 1997).

249 Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1149 (7th Cir. 1997) (applying ProCD to the sale of a boxed

computer and noting that “[p]laintiffs ask us to limit ProCD to software, but where’s the sense in that? ProCD
is about the law of contract, not the law of software.”).
250 Id.

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244 INTERNET-RELATED CONTRACT LAW Ch. 4

was a predispute mandatory arbitration clause. Under a predominant purpose test, the
sale of a personal computer system with software installed falls under U.C.C. Article 2.
Nevertheless, in this case, the court enforced the license agreement ruling against
the consumers. Under classical contract law, silence or inaction by a party generally does
not constitute assent, “where circumstances or the previous course of dealing between
the parties places the offeree under a duty to act or be bound, his silence or inactivity
will constitute his assent.”251 The court upheld the entire agreement, including the
arbitration clause, finding that the inaction of Hill constituted a manifestation of assent.
Writing for the Seventh Circuit, Judge Easterbrook validated delayed contract formation;
the consumer pays for the product and receives the terms in the packaging of the product
when the shipper sends it at a later point.252
The court found Hill to be the offeree and Gateway the offeror who had the power to
dictate the manner of acceptance. The court enforced a shrinkwrap agreement even
though it was included in a sealed software box giving the licensees no opportunity to
review the terms prior to payment. 253 The Seventh Circuit said that the “terms inside
Gateway’s box stand or fall together.”254 The U.S. Court of Appeals held that Gateway’s
license agreement was enforceable because of the consumer’s decision to keep the Gateway
system beyond the 30-day period specified in the agreement. The Hill court determined
there was acceptance by silence and the entire mass-market agreement was binding
including the arbitration clause.255
Judge Easterbrook reasoned that U.C.C. § 2–207, the battle of the forms, was
inapplicable, since there was not an exchange of forms at all, but rather a single form
drafted by the licensor.256 His contention that a battle of the forms requires two forms
(buyer and seller) conflicts with Official Comment #1 to U.C.C. § 2–207, which makes
clear that the battle of the forms also applies to a written confirmation of an earlier oral
agreement and therefore does not require two forms. A battle of the forms may involve
only the seller’s form and a confirmation. U.C.C. § 2–207 would apply because Gateway’s
form could be construed as a written confirmation where the agreement had been
reached by Mr. and Mrs. Hill and the Gateway representative on the telephone.257 U.C.C.

251 See Circuit City Stores, Inc. v. Najd, 294 F.3d 1104, 1109 (9th Cir. 2002); See also, Quevedo v. Macy’s,

Inc., 798 F. Supp. 2d 1122, 1133–35 (C.D. Cal. 2011) (holding that when a Macy’s employee admitted receiving
the SIS handbook and signing the Acknowledgment Form, his failure to opt out constituted assent to the
arbitration agreement.).
252 Id.

253 “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?” Id. at 1148.
254 Id.

255 See Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1149 (7th Cir. 1998) (upholding rolling contract

requiring consumers to submit to arbitration because they had entered into an enforceable contract only after
retaining the personal computer beyond the thirty-day period specified in the agreement.).
256 The court found that the UCC’s battle of the forms provision was not relevant to a single form sent

by the licensor. ProCD v. Zeidenberg, 86 F.3d at 1452.

257 Peter Alces also criticized Judge Easterbrook’s application of U.C.C. Article 2 in the ProCD case:

“Judge Easterbrook’s analysis misunderstood the meaning and application of three Uniform Commercial Code
sections. And it is not clear that the U.C.C. was in the least pertinent to the issue presented. His analysis of
the apposite Contract doctrine, though, is revealing, and demonstrates well the significance of doctrine to
theory. You cannot explain (or even posit) the theoretical basis of Contract until you first determine what

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§ 4.3 CONTRACT FORMATION ISSUES IN CYBERSPACE 245

§ 2–207(2) would construe the additional or different terms would be construed as

“proposals for addition to the contract” since the transaction was not between
merchants.258 In other words, the Hills would need to agree to the arbitration term in
order for it to be part of the contract.
Since Hill, many courts find these “pay now, terms later” agreements to be broadly
enforceable. “Payment preceding the revelation of full terms is common for air
transportation, insurance, and many other endeavors.”259 The Gateway style license
agreement is now referred to as the “rolling contract” because the consumer pays now
and the terms are conveyed later. “In a layered or ‘rolling contract’ setting, the
opportunity to review can come after the initiation of the process of contracting and any
preliminary agreement.”260 Consumer advocates charge that rolling contracts are
comparable the bait and switch practices prohibited by the Federal Trade
Commission.261 Rolling contracts, once considered unenforceable, are commonplace in all
standard form contracts, not just in terms of use or software licensing agreements.
(C.) Policing Cyberspace Contracts
Internet content providers have created what is, in effect, a “liability-free” zone to
insulate themselves from paying consequential damages or other significant remedies in
the event for any cause of action.262 By agreeing to pre-dispute mandatory arbitration,
class action waivers,263 and waivers of all meaningful remedies, Internet users very often
waive the right to discovery,264 a jury trial, and an appeal in a court of law. 265 The

Contract is, and what Contract is what Contract doctrine determines it to be.” Peter A. Alces, The Moral
Impossibility of Contract, 48 WM. & MARY L. REV. 1647, 1653 (2007).
258 U.C.C. § 2–207(2) (2011).

259 Hill v. Gateway, Id. at 1149.

260 Frederick H. Miller, Uniform Computer Information Transactions Act, 10 HAWKLAND U.C.C. SERIES

UCITA § 113:1.
261 Jean Braucher, Delayed Disclosure in Consumer E-Commerce as an Unfair and Deceptive Practice,

46 WAYNE L. REV. 1805, 1852–53 (2000) (stating that “[h]olding back terms can be seen either as involving a
deceptive representation or a deceptive omission” and that the FTC policy presumes that this practice will
mislead consumers.).
262 “A social media company can dodge jury verdicts, punitive damages, class actions, consequential

damages, and any other meaningful remedy by requiring their users to submit to arbitration. One-sided terms
of use that, in effect, divest consumers of fundamental rights raise serious concerns of procedural and
substantive unfairness. ‘Users of ADR are entitled to a process that is fundamentally fair.’ Social networking
sites have designed arbitration agreements that operate as poison pills that eliminate minimum adequate
rights and remedies for consumers, while preserving the full array of remedies for these virtual businesses.”
Michael L. Rustad, Richard Buckingham, Diane D’Angelo, & Kate Durlacher, An Empirical Study of
Predispute Mandatory Arbitration Clauses in Social Media Terms of Service, 34 U. ARK. LITTLE ROCK L. REV.
643, 645 (2012).
263 Absent a class action waiver, individuals with functionally equivalent complaints against a company

may join in a class suit or representative action where a federal court consolidates the complaints into a single
proceeding. Arbitration clauses did not typically address the distinction between class actions filed in federal
and state courts and class action arbitrations. Class actions in court have radically different procedural and
substantive rights than so-called class action arbitrations. For a discussion of the differences between court
and arbitration class actions, see AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1757 (2011) (citing
empirical research that revealed that class arbitrations did not result in final award on the merits).
264 Arbitral providers will sometimes permit general discovery but this requires an application to an

arbitrator and is subject to the discretion of the arbitrator. See Paul Bennett Marrow, When Discovery Seems
Unavailable, It’s Probably Available, 80 N.Y. ST. B. ASS’N. J. 44, 44–46 (October 2008), http://www.marrow
law.com/articles/pdf/Journal-oct08-marrow.pdf. JAMS, for example, permits depositions and discovery at the
arbitrator’s discretion, which is similar to the rule for the AAA. Id.
265 “Over the past few years, a quiet revolution has begun as many social networking sites (SNSs) impose

predispute mandatory arbitration on consumers. Senator Patrick Leahy (D. Vt.) stated, ‘Mandatory arbitration

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246 INTERNET-RELATED CONTRACT LAW Ch. 4

supporters of these mass-market license agreements contend that they are efficient and
beneficial to consumers.
(1.) Unconscionability

The public policy underlying the doctrine of unconscionability is protection of the

weaker contracting party. “To characterize a contract term as ‘unconscionable’ requires
a showing that the contract was both procedurally and substantively unconscionable
when made by, for example, some showing of an absence of meaningful choice on the
part of one of the parties together with contract terms which are unreasonably favorable
to the other party.”266 However, courts are seldom willing to strike down an Internet-
related U.C.C. § 2–302 builds upon the theory of the late Arthur Neff by addressing the
issue of unconscionable contracts. 267 Many courts adopted the requirement that
plaintiffs must prove both procedural and substantive unconscionability in order for a
court to strike down a contract or clause.268 The use of hidden terms is procedural
unconscionability, whereas an exorbitant price constitutes substantive
unconscionability. In order to strike down a one-sided license agreement or a clause in
an agreement, the court must find both an unfair bargaining process (procedural
unconscionability), as well as unfair terms (substantive unconscionability).269
A court will not typically find an Internet-related contract or clause to be
unconscionable unless it finds procedural and substantive unconscionability. In Brower
v. Gateway 2000, Inc., a New York state court modified an order that would have
required a New York consumer to arbitrate a consumer claim in Chicago, Illinois.270 In
Brower, a consumer purchased a Gateway computer through the telephone or mail. The
computer was shipped in a box, together with its “Standard Terms and Conditions
Agreement,” which provided, “By keeping your Gateway 2000 computer system beyond

makes a farce of the right to a jury trial and the due process guaranteed to all Americans.’ [Social Network
Sites] SNSs generally require users to enter into two kinds of contractual relationships, terms of service
agreements and privacy policies, as a condition for accessing their websites. Hundreds of millions of consumers
enter into mandatory arbitration clauses with SNSs through browsewrap, clickwrap, or registration forms.
After a consumer has registered or accessed a site, SNSs reserve the right to modify substantive terms,
sometimes without notifying users. An SNS, website, or other brick-and-mortar company can reduce
transaction costs by using a predispute mandatory arbitration clause because it need not defend lawsuits in
state or federal court but in a forum where it can choose the arbitral provider and rules to govern the dispute.
Michael L. Rustad, Richard Buckingham, Diane D’Angelo, & Kate Durlacher, An Empirical Study of
Predispute Mandatory Arbitration Clauses in Social Media Terms of Service, 34 U. ARK. LITTLE ROCK L. REV.
643, 644 (2012).
266 Berkson v. Gogo LLC, 2015 WL 1600755 (E.D. N.Y. Apr. 9, 2015).

267 See Arthur Neff, Unconscionability and the Code—The Emperor’s New Clause, 115 U. PA. L. REV.

485, 487 (1967).

268 Most courts require a finding of procedural unconscionability and substantive unconscionability.

Procedural unconscionability concerns the formalities of making the contract, while substantive
unconscionability concerns the terms of the contract itself. State ex rel. Vincent v. Schneider, 194 S.W.3d 853,
858 (Mo. en banc, 2006).
269 See, e.g., Riensche v. Cingular Wireless, L.L.C., No. C06–1325Z, 2006 WL 3827477, at *9 (W.D.

Wash. Dec. 27, 2006) (holding that the forum selection clause was substantively unconscionable); Comb v.
PayPal, Inc., 218 F. Supp. 2d 1165, 1173, 1176 (N.D. Cal. 2002) (refusing to enforce pre-dispute mandatory
arbitration clause in user agreement ruling that the forum selection clause was substantively and procedurally
unconscionable). Additionally, the doctrine of unconscionability has been applied in a wide array of contexts.
See, e.g., Scott v. Cingular Wireless, 161 P.3d 1000, 1006 (Wash. 2007) (holding a class action waiver
unconscionable); Gatton v. T-Mobile USA, 61 Cal. Rptr. 3d 344, 358 (Cal. Ct. App. 2007) (holding a class action
waiver unconscionable and unenforceable); Aral v. EarthLink, Inc., 36 Cal. Rptr. 3d 229, 238 (Cal. 2005)
(holding a class action waiver unconscionable).
270 676 N.Y.S.2d 569 (N.Y.A.D. 1st Dept. 1998).

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§ 4.3 CONTRACT FORMATION ISSUES IN CYBERSPACE 247

30 days after the date of delivery, you accept these Terms and Conditions.” The
Agreement provided that any disputes would be exclusively settled by binding
arbitration in Chicago, according to the rules of the International Chamber of Commerce.
Gateway’s arbitral provider charged an upfront $4,000 non-refundable registration fee
to arbitrate personal computer claims generally valued at less than $1,000. Gateway’s
predispute mandatory arbitration clause reads as follows:
Any dispute or controversy arising out of or relating to this Agreement or its
interpretation shall be settled exclusively and finally by arbitration. The
arbitration shall be conducted in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce. The arbitration shall
be conducted in Chicago, Illinois, U.S.A. before a sole arbitrator. Any award
rendered in any such arbitration proceeding shall be final and binding on each
of the parties, and judgment may be entered thereon in a court of competent
jurisdiction.271
Brower was the lead plaintiff in a class action alleging that Gateway’s licensing
practices constituted unfair and deceptive practices. Brower argued that it was
unconscionable to be required to arbitrate in distant forum under rules promulgated by
the International Chamber of Commerce (ICC) and that the ICC’s Rules of Conciliation
and Arbitration imposed prohibitively expensive costs in relation to the size of their
claim. “For example, a claim of less than $50,000 required advance fees of $4,000 (more
than the cost of most Gateway products), of which the $2,000 registration fee was
nonrefundable even if the consumer prevailed at the arbitration.”272 The ICC fees did
not include the consumer’s travel expenses that would be “$1,000 per customer in this
action, as well as bear the cost of Gateway’s legal fees if the consumer did not prevail at
the arbitration” because the ICC adopted a loser pays rule.273
The Brower court upheld the license agreement reasoning that the consumer had
the option of making an alternative purchase and was therefore not in a position of take
it or leave it and could have returned the personal computer for a refund. 274 The court
also found “a valid agreement to arbitrate between the parties,” but ruled that the
agreement “should be modified, on the law and the facts, to the extent of vacating that
portion of the arbitration agreement as requires arbitration before the International
Chamber of Commerce.”275 The court replaced the ICC with the American Arbitration
Association (AAA), but could not determine on the record whether their charges were “so
egregiously oppressive that they, too, would be unconscionable.”276 The United States
Supreme Court acknowledges that high arbitration costs can in and of themselves
preclude a litigant from asserting her rights.277
The problem with unconscionability is that judges are reluctant to strike down
substantive provisions because they adopt the legal fiction that a bargain was reached
in a webwrap license. Courts are reticent to strike down one-sided and aggressive terms

271 Id.
272 Id. at 571.
273 Id.
274 Id. at 574.
275 Id. at 575.
276 Id.
277 Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 90 (2000).

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248 INTERNET-RELATED CONTRACT LAW Ch. 4

in webwrap.278 One reform proposal for making fairer webwrap would be to presume
that these standard forms are unconscionable except if validated by legislative decree or
if there were meaningful alternatives in the marketplace. 279 Reconceptualizing
unconscionability will lead to more balanced terms, less one-sided terms in webwrap.280
(2.) Public Policy Limitations

The Uniform Computer Information Transactions Act (UCITA) disfavors gag

clauses that attempt to gag negative reviews or other critical comments about software
or other digital content.281 Courts will police Internet contracts violating “fundamental
public policies.”282 UCITA § 105(c) forbids licensing terms that prohibit the discussion of
the quality of performance of computer information. Courts will not invalidate choice of
forum clauses except on strong public policy grounds that “enforcement of the clause
deprives the plaintiff of his day in court.”283 UCITA seemingly gives the courts discretion
to “avoid a result contrary to public policy, in each case to the extent that the interest in
enforcement is clearly outweighed by a public policy against enforcement of the term”
though there is no case law interpreting this provision. 284
Courts have rarely invalidated terms of service on public policy grounds. In People
v. Network Ass’n,285 New York Attorney General Elliot Spitzer challenged a “no public
comment” rule in a license agreement. In that case, a New York trial court found a term
in a license agreement that restrained reviews of the software in publications to be an
invalid contractual restriction.286 In Network Ass’n, Network Solutions, the maker of
McAfee anti-virus software, licensed its products over the Internet including a clickwrap
agreement with the anti-publication term. The license agreement stated that the
customer “shall not disclose the results of any benchmark test to any third party without
Network Associates’ prior written approval.”287
Network Associates prohibited its customers from publishing reviews of the
software without their prior consent. The litigation stemmed from Network Associates’
refusal to enjoin the publication of a negative review of their Gauntlet firewall program
in comparison to six other software security programs. Network Associates protested the
publication of the review quoting language from restrictive clauses of Gauntlet’s
clickwrap agreement. A U.S. court may theoretically strike the term or limit its
application “so as to avoid a result contrary to public policy.”288 The software license
agreement challenged by the state attorney general contained the following terms:

278 NANCY S. KIM, WRAP CONTRACTS: FOUNDATIONS AND RAMIFICATIONS 208 (New York: Oxford

University Press, 2013).

279 Id.

280 Id.

281 UCITA, Id. at § 105, cmt. 4.

282 UCITA § 105(c).

283 Misui & Co. (USA) v. Mira M/V, 111 F.3d 33, 35 (5th Cir. 1997).

284 UCITA § 105(b).

285 People v. Network Ass’n, 758 N.Y.S.2d 466 (2003).

286 Id.

287 Id. at 467.

288 UCITA § 105(b).

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§ 4.3 CONTRACT FORMATION ISSUES IN CYBERSPACE 249

Installing this software constitutes acceptance of the terms and conditions of

the license agreement in the box. Please read the license agreement before
installation. Other rules and regulations of installing the software are:
(A.) The product cannot be rented, loaned, or leased—you are the sole
owner of this product.
(B.) The customer shall not disclose the result of any benchmark test to
any third party without Network Associates’ prior written approval.
(C.) The customer will not publish reviews of this product without prior
consent from Network Associates, Inc.289
The New York trial court enjoined the enforcement of “language restricting the right
to publish the results of testing and review.”290 In the past four decades since the advent
of software licensing, few courts have addressed the enforceability of gag clauses. While
there is no case law on point, it is likely that no court in the Eurozone would enforce
these clauses. However, prohibitions against public comment clauses would likely be an
unfair practice under the EU Directive on Unfair Contract Terms.
(3.) Copyright Misuse

The doctrine of misuse addresses a licensor’s attempt to inflate its intellectual

property rights. The Fourth Circuit recognized the doctrine of misuse, which originated
in patent law.291 “Decisions recognizing the misuse defense, though increasing in
number, offer little guidance as to the types of conduct that would be considered a misuse
of copyright privileges.”292 George Carr gives this advice for software licensors:
[1] Most often, the defense applies where the rights holder has included terms
in its typical license agreement that are unreasonably anticompetitive, such as
prohibiting the use of competing products, [2] or prohibiting the licensee from
independent creation of a noninfringing product that would compete with the
copyrighted product or would contribute to the public good. [3] The defense also
applies when a rights holder attempts to mislead or defraud an infringer by
unfairly threatening infringement penalties that exaggerate or misstate the
law, [4] or by claiming copyright in a work that is at least partly in the public
domain.[5]293
The intersection between copyright law and contract law is the province of licensing.
Critics charged that UCITA created an imbalance by allowing software licensors to use
contract law as the backdoor achieving purposes unwarranted by U.S. copyright law. 294

Id. at 467.
289

Id. at 470.
290

291 Lasercomb Am. v. Reynolds, 911 F.2d 970 (4th Cir. 1990).

292 Ramsey Hanna, Misusing Antitrust: The Search for Functional Copyright Misuse Standards, 46

STAN. L. REV. 401, 401 (1994).

293 George Carr, Copyright Misuse: An Overview, ABA LITIGATION (2010).

294 “Traditionally, contract and copyright co-existed peaceably, with contract law providing the legal

framework for transactions in copyrighted works. UCITA threatens that relationship by empowering providers
to impose unilaterally license terms that contravene foundational copyright policies and current user
expectations. The act’s overall framework and specific default rules support enforcement of mass-market
adhesion contracts that restrict uses of information protected by current copyright law. In response to the
threat of contractual foreclosure of user rights, some commentators have observed that copyright law may, in
the future, serve as a “consumer protection” law, limiting the scope of restrictive contractual provisions through

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250 INTERNET-RELATED CONTRACT LAW Ch. 4

The Reporters of the Principles of Software Contracts describe copyright misuse as an

equitable doctrine assertable as a defense to infringement. When a court holds particular
conduct misuse, the rightholder cannot enforce its licensing rights until it purges itself
of the misuse. A copyright misuse is frequently a defense interposed in a breach of
licensing agreement case.
“In subsection (c), the Principles take the position that, as a matter of intellectual
property policy, when a claim in breach of contract is brought, courts should refuse to
enforce any provision in the agreement that would have been considered misuse had the
action been one for infringement.”295 The Reporters give the following illustration of
copyright misuse in license agreements:
A’s copyright on a spreadsheet program expires in 2090. A’s standard form
provides that its transferees agree not to implement the ideas contained in the
program and/or develop a competing program independently for a period of 99
years from the date of the agreement. In 2009, A transfers its software to B
using the standard form. The provision constitutes copyright misuse and is
unenforceable. It would likely also be unenforceable under a preemption
analysis.296
The federal preemption doctrine has its roots in the Supremacy Clause of the
Constitution, which provides that the Constitution and the laws of the United States
“shall be the supreme Law of the Land.”297 In software licensing cases, the argument is
that the federal copyright law preempts software licensing, which is state contract law.
Licensees in Internet-related licensing disputes may assert copyright misuse as an
equitable defense when sued for copyright infringement. 298 Copyright misuse is a
doctrine that licensees can sometimes deploy to challenge anticompetitive terms in
software licenses that expand rights beyond the scope of the U.S. Copyright Act. 299 The
first case to recognize the defense of copyright misuse was Lasercomb Am., Inc. v.
Reynolds,300 in which the Fourth Circuit imported the doctrine of patent misuse
established in Morton Salt Co. v. G.S. Suppinger.301 In Lasercomb, the Fourth Circuit
stated, “Since copyright and patent law serve parallel interests, a ‘misuse’ defense should
apply to infringement actions brought to vindicate either right.”302 Legal transplants can
originate in other branches of law or in other legal cultures. 303

judicial application of doctrines such as preemption or copyright misuse.” Deborah Tussey, UCITA, Copyright,
and Capture, 21 CARDOZO ARTS & ENT. L. J. 319, 321 (2003).
295 Principles of the Law of Software Contracts, Id. at § 1.09, cmt. d (2010).

296 Principles of the Law of Software Contracts, Id. at § 1.09, illust. 8 (2010).

297 Fid. Fed. Savings & Loan Ass’n v. de la Cuesta, 458 U.S. 141, 152 (1982) (interpreting U.S. Const.,

art. VI, cl. 2).

298 Mark A. Lemley, Intellectual Property and Shrinkwrap Licenses, 68 S. CAL. L. REV. 1239 (1995)

(“Software vendors are attempting en masse to “opt out” of intellectual property law by drafting license
provisions that compel their customers to adhere to more restrictive provisions than copyright law would
require.”).
299 Mark A. Lemley, Beyond Preemption: The Law and Policy of Intellectual Property Licensing, 87 CAL.

L. REV. 111, 151–58 (1999).

300 911 F.2d 970, 977 (4th Cir. 1992).

301 314 U.S. 488 (1942).

302 Lasercomb, 911 F.2d at 976.

303 Julie Mertus, From Legal Transplants to Transformative Justice: Human Rights and the Promise of

Transnational Civil Society, 14 AM U. INT’L L. REV. 1335, 1349 (1999).

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§ 4.3 CONTRACT FORMATION ISSUES IN CYBERSPACE 251

Patent law represents a “carefully crafted bargain for encouraging the creation and
disclosure of new, useful, and non-obvious advances in technology.”304 The Lasercomb
court stretched the patent misuse doctrine to copyright law for the first time.
Specifically, the misuse of copyright defense precludes a copyright holder from
recovering for copyright infringement “where the holder has attempt[ed] to suppress any
attempt by the licensee to independently implement the idea which [the copyrighted
material] expresses.”305 There is little case law on what kinds of software contracting
terms would trigger the misuse doctrine or otherwise violate a fundamental public
policy. Attorney Carr makes these suggestions:
Copyright holders should take care in licensing their property to avoid arguably
anticompetitive license terms. They should also retain counsel to review any
enforcement efforts—threat letters, cease-and-desist demands, takedown
notices, and the like—before they are sent to minimize the chance of any
misleading statements about infringement penalties or the scope of the claimed
copyright. Any such questionable conduct could form the basis of a misuse
defense.306
The Third Circuit in Video Pipeline v. Buena Vista Home Ent., Inc.307 extended the
patent misuse doctrine to copyright, and recognizes that it might operate beyond its
traditional anti-competition context, but found it inapplicable to Disney’s license
agreement.
(4.) State Unfair and Deceptive Trade Practices Act

License agreements and terms of use are also challengeable under state consumer
law. Every state has enacted an unfair and deceptive trade practices act, which is the
Swiss Army Knife for many state attorney generals and private attorneys general.
Massachusetts’ Chapter 93A, for example, allows private litigants as well as the attorney
general to pursue actions. Chapter 93A permits plaintiffs to recover for up to three but
not less than two times actual damages for willful or knowing violations of the act.
Double or treble damages are awarded for “willful or knowing” violations of section 2 of
Chapter 93A.308 To date, few plaintiffs have challenged license agreements, where the
rights and remedies are tilted in favor of the dominant party.
(D.) Preemption of Licensing
In order to be preempted, a claim must involve a work “within the subject matter of
copyright.”309 The Principles of the Law of Software Contracts makes it clear that federal
intellectual property rights preempt licensing. 310 Plaintiffs have not been successful in

Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 146 (1989).
304

Id. at 371.
305

306 George Carr, Copyright Misuse: An Overview, ABA LITIGATION (2010).

307 342 F.3d 191 (3rd Cir. 1991).

308 M.G.L.A. ch. 93A, § 11.

309 17 U.S.C. § 301(a).

310 Preemption may be either statutorily or constitutionally based and either express or implied. In its

§ 301, the U.S. Copyright Act contains an express preemption provision, stating that “all legal or equitable
rights that are equivalent to any of the exclusive rights within the general scope of copyright . . . and come
within the subject matter of copyright . . . are governed exclusively by this title.” 17 U.S.C. § 301(a). Courts
interpret this language to mean that a cause of action is preempted if the subject matter at issue is within the
scope of the Act and the rights a party seeks to enforce or protect are not qualitatively different from rights

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252 INTERNET-RELATED CONTRACT LAW Ch. 4

persuading courts that the U.S. Copyright Act preempts licensing provisions. A large
number of courts have ruled that licensing claims involving the subject matter of
copyright do not constitute equivalent rights under the Federal Copyright Act.311
“Intellectual property law usually does not preempt breach-of-contract actions or the
enforcement of terms of private agreements because restrictive by operating against the
world, compete directly with the federal system.”312 “Of course, preemption cannot be
avoided simply by labeling a claim “breach of contract.”313 A plaintiff must actually allege
the elements of an enforceable contract (whether express or implied-in-fact), including
offer, acceptance, and consideration, in addition to adequately alleging the defendant’s
breach of the contract.”314
§ 4.4 Uniform Electronic Transactions Act
(A.) Provisions of UETA
The Uniform Electronic Transactions Act (UETA) is a model state law act proposed
by the National Conference of Commissioners on Uniform State Laws (NCCUSL) to
create more uniformity in state law for electronic transactions. UETA was enacted to
respond to the “widespread use of the Internet for sale of goods and to provide
uniformity.”315 UETA is solely concerned with the validity of records and digital
signatures and is therefore not a statute concerned with substantive online contract law.
The purpose of UETA is to remove barriers to E-Commerce, implement reasonable
practices, and harmonize contracting procedural rules by enabling the electronic retention
and transmission of digital information. UETA is strictly a procedural statute that
modifies the meaning of writings and signatures. UETA substitutes the “record” for a
paper-based writing and treats signatures in electronic form as signatures made by pen.
The UETA is law in forty-seven of the fifty states and the District of Columbia, as
well as by the territories of Puerto Rico and the Virgin Islands. What this means is that

under the Act. The Patent Act, in contrast, contains no such express language. The ultimate source of authority
for implied preemption is the Supremacy Clause of the U.S. Constitution, which states, “Th[e] Constitution,
and the Laws of the United States which shall be made in Pursuance thereof . . . shall be the supreme Law of
the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any
State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. Whether the Intellectual Property Clause
itself is an independent source of implied preemption is an open question. The Intellectual Property Clause
states, “The Congress shall have Power . . . To promote the Progress of Science and useful Arts, by securing for
limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Id.
, art. I, § 8, cl. 8. Because the intellectual property statutes are enacted pursuant to this power, the extent of
Supremacy Clause preemption is necessarily related to the interpretation of the Intellectual Property Clause.”
Principles of the Law of Software Contracts, Id. at § 1.09 (2010), cmt.
311 Utopia Provider Sys., Inc. v. Pro-Med Clinical Sys., L.L.C., 596 F.3d 1313, 1326–27 (11th Cir. 2010)

(express contract); Bowers v. Baystate Techs., Inc., 320 F.3d 1317, 1324–26 (Fed. Cir. 2003) (applying First
Circuit law to an express contract in a software license); Wrench, 256 F.3d at 456 (implied-in-fact contract);
ProCD, 86 F.3d at 1454–55 (express contract in a software license); Nat’l Car Rental Sys., Inc. v. Computer
Assocs. Int’l, Inc., 991 F.2d 426, 431 (8th Cir. 1993) (express licensing agreement); Taquino v. Teledyne
Monarch Rubber, 893 F.2d 1488, 1490, 1501 (5th Cir. 1990) (express contract); Acorn Structures, Inc. v.
Swantz, 846 F.2d 923, 926 (4th Cir. 1988) (per curiam) (express contract).
312 Principles of the Law of Software Contracts, Id. at § 1.09 (2010), cmt.

313 “A breach of contract claim requires proof of actual damages. In order to recover for a breach of

contract plaintiffs must prove by a preponderance of the evidence that the breaches are the cause of actual
damages to the plaintiff.” Pilar Servs. v. NCI Info. Sys., 569 F. Supp. 2d 563, 568 (E.D. Va. 2008).
314 Forest Park Pictures v. Universal TV Network, Inc., 683 F.3d 424, 432 (2d Cir. 2012).

315 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE, § 1–3 at 5 (New York: West

Publishing Co. 6th ed. 2010).

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§ 4.4 UNIFORM ELECTRONIC TRANSACTIONS ACT 253

an e-signature or e-record has the same validity as a paper and pen signature or writing.
The UETA adopts a non-regulatory approach to electronic signatures and writings and
validates electronic signatures and records in order to remove barriers to electronic
commerce. A document bearing an electronic signature may be contested on the ground
that an alleged signatory did not execute, adopt, or authorize the electronic signature. A
digital signature is an electronic identifier created by computer with the same legal
validity as a handwritten signature. The UETA “applies to any electronic record or
electronic signature created, generated, sent, communicated, received, or stored on or after
the effective date of the statute.”316
For example, when a person orders goods or services through a vendor’s
website, the person will be required to provide information as part of a process,
which will result in receipt of the goods or services. When the customer
ultimately gets to the last step and clicks “I agree,” the person has adopted the
process and has done so with the intent to associate the person with the record
of that process. The actual effect of the electronic signature will be determined
from all the surrounding circumstances, however, the person adopted a process
which the circumstances indicate s/he intended to have the effect of getting the
goods/services and being bound to pay for them. The adoption of the process
carried the intent to do a legally significant act, the hallmark of a signature. 317
If there is a conflict between U.C.C. Article 2 governing sales, and the UETA, U.C.C.
Article 2 holds the trump card. The UETA defines the “electronic signature” as an
“electronic sound, symbol, or process attached to or logically associated with a record, and
executed or adopted by a person with the intent to sign the record.”318 Section 5(a) of the
UETA does not mandate that a consumer or other party use electronic signatures or
records. However, if the parties agree to use electronic signatures or records, the courts
will validate them.319 UETA Section 5(b) applies “only to transactions between parties,
each of which has agreed to conduct transactions by electronic means.”320
Section 6 states that UETA’s purpose is “to facilitate and promote commerce and
governmental transactions by validating and authorizing the use of electronic records
and electronic signatures.”321 Section 7 of the UETA provides “a record or signature may
not be denied legal effect or enforceability solely because it is in electronic form.”322 Section
7(b) of the UETA legitimizes the concept of electronic contract, providing “a contract may
not be denied legal effect or enforceability solely because an electronic record was used in
its formation.”323 UETA is neither a general contracting statute nor a digital signatures
statute. As of September 15, 2012, eighty U.S. courts weighed in on UETA-related issues
in court decisions. UETA is the most influential state statute validating a wide range of
e-contracts and e-transactions.

316 Section 4 states that the Act “. . . applies to any electronic record or electronic signature created,

generated, sent, communicated, received, or stored.” UETA, Id. at § 4.

317 UETA, Id. at § 2, cmt. 7.

318 Id. at § 2(8).

319 Id. at § 5(a).

320 Id.

321 Id. at § 6.

322 Id. at § 7.

323 Id. at § 7(b).

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254 INTERNET-RELATED CONTRACT LAW Ch. 4

(B.) UETA’s Scope

UETA applies to electronic records and electronic signatures relating to a
transaction.324 The scope of UETA is “inherently limited by the fact that it only applies
to transactions related to business, commercial (including consumer) and governmental
matters.”325 Section 8(a) of UETA provides the ground rules for what constitutes an
electronic record.326 Electronic records must minimally be “capable of retention.”327 An
online communication that prevents the recipient from either printing or storing the record
does not qualify as a retained record.
For electronic contracts to be viable there must be some mechanism of attribution,328
so the parties know each other’s identity and authority to contract. For example,
passwords are a well-established attribution method; a Westlaw user supplies a password
authenticating the user’s identity for each login. The attribution of messages between
sender and receiver is a key feature of the infrastructure of online contracting. Attribution
procedures also verify whether a message contains errors or alterations using algorithms
or other codes, identifying words or numbers.
(C.) UETA Requires Parties’ Agreement
The parties must agree to contract electronically in order for digital signatures to
be binding. Section 5 of UETA notes that the model act “does not require a record or
signature to be created, generated, sent, communicated, received, stored, or otherwise
processed or used by electronic means or in electronic form.”329 UETA only applies where
the parties agree to enter into contracts electronically. Whether the parties agree to
conduct a transaction by electronic means is determined from the context and
surrounding circumstances, including the parties’ conduct.330 Section 5 makes it clear
that UETA “is intended to facilitate the use of electronic means, but does not require the
use of electronic records and signatures.”331 Comment 5 to Section 5 states:
If Automaker, Inc. were to issue a recall of automobiles via its Internet website,
it would not be able to rely on this Act to validate that notice in the case of a
person who never logged on to the website, or indeed, had no ability to do so,

324 Id. at § 3.
325 Id. at § 3, cmt. 1.
326 Id. at § 8(a).

327 Id. at § 8.

328 An “attribution procedure” is a procedure used to identify the person who sent an electronic message

or to verify the integrity of its content. In general, an attribution procedure has substantive effect only if it was
agreed to or adopted by the parties or established by applicable law. Agreement to or adoption of a procedure
may occur directly between the two parties or through a third party. For example, the operator of a system
that includes information provided by third parties may arrange with database providers and customers for
use of a particular attribution procedure. Those arrangements establish an attribution procedure between the
customers and the database providers. An attribution procedure may also be established by two parties in the
expectation that a third party may rely on it. For example, a digital signature may be issued to an individual
pursuant to an agreement between the issuer and the individual, but then accepted or relied on by another
party in a separate transaction. Use of the signature is an attribution procedure in that transaction. Similarly,
a group of member companies may establish attribution procedures intended to bind members in dealing with
one another. Such arrangements are attribution procedures under this Act.” UCITA, Id. at § 102(a)(3).
329 Id. at § 5(a).

330 Id. at § 5(b).

331 Id. at § 5, cmt. 1.

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 THE ELECTRONIC SIGNATURES IN GLOBAL AND
§ 4.5 NATIONAL COMMERCE ACT 255

notwithstanding a clause in a paper purchase contract by which the buyer

agreed to receive such notices in such a manner. 332
UETA states, “A record or signature may not be denied legal effect or enforceability
solely because it is in electronic form.”333 Section 8 of UETA requires that electronic
record be capable of retention or enforcement will be denied. “If a sender inhibits the
ability of a recipient to store or print an electronic record,” it is not enforceable against
the recipient.334
(D.) UETA’s Risk Allocation for Errors
UETA’s method for allocating the risk of errors in electronic records places the risk of
loss of a transmission error on the party failing to employ an agreed upon security
procedure. Thus, if both parties fail to use an agreed upon security procedure, the rule does
not apply. The party following reasonable security procedures will avoid the effect of the
changed or erroneous electronic record only if the other party deviates upon the agreed
upon procedure. Persons entering into electronic contracts must be able to prevent and
correct errors.
§ 4.5 The Electronic Signatures in Global and
National Commerce Act
The Electronic Signatures in Global and National Commerce Act (E-Sign Act),
signed into law on June 30, 2000, provides a general rule of validity for electronic records
and signatures for transactions in or affecting interstate or foreign commerce. 335 The
federal E-Sign Act establishes that electronic signatures and records are functionally
and legally equivalent to signatures or writings on paper.336 Given that the vast majority
of states had enacted UETA by 2000, the federal statute duplicated what was already
well established in the states. Together, UETA and E-Sign make it clear that courts
recognize technologies for e-signatures that presently take the following forms:
Password or personal identification number (PIN)—a set of characters,
numbers, or combination thereof, created by the system user and encrypted
when transmitted over an open network;
Smart Card—a plastic card (like an ATM or credit card) containing a
microprocessor or “chip” that can generate, store, and process data and that
has programming capacity for activation when the user enters another
identifier such as a PIN;
Biometrics—technological method that measures and analyzes unique human
characteristics, such as fingerprints, eye retinas and irises, voice and facial
patterns, and hand measurements. The devices consist of a reader or sensor,
and software that convert the received information into a digital form, and a
database that stores the individual’s known biometric data;

Id. at § 5, cmt. 5.
332

Id. at § 7.
333

334 Id. at § 8.

335 15 U.S.C. §§ 7000 et seq.

336 E-Sign provides that no contract, signature, or record shall be denied legal effect solely because it is

in electronic form. Nor may a contract relating to a transaction be denied legal effect solely because an
electronic signature or record was used in its formation. E-Sign, Id. at § 101(a).

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256 INTERNET-RELATED CONTRACT LAW Ch. 4

Digitized Signature—a type of biometric, consisting of a graphical image of a

handwritten signature, entered using a special digitized pen and pad input
device that is automatically compared with a stored copy of the digitized
signature of the user and authenticated if the two signatures meet
specifications for similarity; and
Digital Signature—a unique signature produced on a message that uses a key
(a large, binary number) known only by the signer, and a signature algorithm
(mathematical formula) that is publicly known. 337
The federal statute treats electronic signatures the same as pen-and-ink signatures
and records the same as legally required writings. The E-Sign Act allows the use of
electronic records to satisfy any statute, regulation, or rule of law requiring that such
information be provided in writing, if the consumer has affirmatively consented to such
use and has not withdrawn such consent. The sphere E-Sign’s application is less than
what one would expect for a federal statute, because Congress included a provision
explicitly stating that its provisions are superseded or modified by the UCC, which is a
state statute.338 Congress incorporated a saving clause, which defers to UETA where
there is a conflict with E-SIGN.339
The vast majority of states already enacted UETA by the time Congress passed E-
Sign in June of 2000. White and Summers describe the relationship between E-Sign and
UETA: “E-Sign covers the same territory as UETA . . . Congress feared that UETA would
not create uniformity in electronic contracting law because some states might not adopt
it” and others threatened to adopt non-uniform amendments.340 Section 102 of E-Sign
provides an exemption to the federal statute’s general preemption of state law:
This section allows states to adopt statutes, regulations, and other rules of law
to modify, limit, or supersede the provisions of section 101 with respect to state
law. The state’s law must be consistent with E-Sign and meet one of two
conditions. The law must: (1.) constitute an enactment or adoption of the
Uniform Electronic Transactions Act (UETA) as approved by the National
Conference of Commissioners on Uniform State Laws (NCCUSL) in 1999; or
(2.) specify alternative procedures or requirements for the use or acceptance of
electronic records or electronic signatures, if the alternative requirements are
technology neutral and do not accord greater legal status or significance to a
specific technology.341

337 Kathy D. Smith, Chief Counsel & Milton Brown, Deputy General Counsel, Electronic Signatures: A

Review of the Exceptions to the Electronic Signatures in Global and National Commerce Act (June 2003) at 6.
338 Id. (“Apparently the drafters of revised Article 1 and Amended Article 2 feared that the revision

might not get the protection of the 103 exemption [of E-Sign] because of the “in effect” language.”).
339 “At the date this report, 49 states, the District of Columbia, and the Virgin Islands, have adopted a

version of an electronic transactions law. Although some state electronic transactions are modeled closely after
E-Sign or UETA, others are incorporated into state commercial and business codes and contain language
unique to the state and that refer to the underlying substantive law governing the transactions. Where a state
has an electronic transactions law that complies with section 102 of E-Sign, the state law controls whether
electronic signatures and documents relating to the nine E-Sign exceptions are to be given the same legal
validity and effect as paper documents.” Id. at 9.
340 James J. White & Robert S. Summers, Uniform Commercial Code, § 1–3 at 5 (New York: West

Publishing Co., 6th ed. 2010).

341 KATHY SMITH & MILTON BROWN, ELECTRONIC SIGNATURES (June 2003), Id. at 8.

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§ 4.6 REVISED U.C.C. ARTICLE 1 257

E-Sign carves out nine statutory exceptions outside its sphere: (1.) wills, codicils,
and testamentary trusts; (2.) laws governing domestic law matters; (3.) state Uniform
Commercial Code, except section 1–107 and 1–206, Articles 2 and 2A; (4.) court orders
or notices; (5.) utility cancellation notices; (6.) default, foreclosure, or eviction notices;
(7.) health or life insurance benefit cancellation notices; (8.) product recall notices; and
(9.) hazardous, toxic, or dangerous materials notices. 342 Section 102(a)(2) gives the States
the power to exempt certain further documents from E-Sign. Each of these exceptions
reflects well-established law and the consumer expectation that a paper-based document
memorialize the transaction. Transfers of land or dissolutions of marriage should not be
executed by e-mail. Congress considered these carve-outs as documents where the
consumer should receive a hard copy not just an electronic document.
E-Sign insures that courts may not deny the legal effect or the enforceability of
contracts solely because the parties formed the contract through electronic signatures or
electronic records. Internet-related contracts might take the form of sales, leases or the
licensing of intellectual property. E-Sign validates electronic signatures to authenticate
the identity of the sender of a message or the signer of a document, and ultimately to
ensure the original content of the sent message or document is unchanged. Digital
signatures can be automatically time stamped and are more transportable than physical
signatures. E-Sign § 101(c) is a rule of consent requiring that consumers affirmatively
consent before receiving electronic communications in lieu of a writing.343 Consumers must
specifically opt-in to receive electronic communications.
The consent rule also gives consumers a prescribed method for withdrawing consent.
Consumer disclosures are required if an electronic record is substituted for a paper based
record. Consumers may not be compelled to use electronic contracting and must consent
to this method of entering into contracts. Section 101(c)(1)(C)(ii) states that a consumer’s
consent to receive electronic records is valid only if the consumer consents electronically
or confirms his or her consent electronically. The consumer’s consent must demonstrate
that the consumer can access the information that is the subject of the consent. Section
101(c) gives consumers the right to demand that sellers or services providers make a record
available on paper or in another electronic form.
§ 4.6 Revised U.C.C. Article 1
Article 1 of the Uniform Commercial Code (U.C.C.) sets forth basic definitions and
concepts that are utilized throughout the other articles of the U.C.C. In December 2001,
the joint sponsors of the UCC, the National Conference of Commissioners on Uniform
State Laws and the American Law Institute, revised Article 1. Section 1–108 is entitled,
“Relation to Electronic Signatures in Global and National Commerce Act.” This section
makes it clear that U.C.C. Article 1:
modifies, limits, and supersedes the federal Electronic Signatures in Global
and National Commerce Act, 15 U.S.C. Section 7001 et seq., except that
nothing in this article modifies, limits, or supersedes Section 7001(c) of that

E-Sign, Id. at § 103.

342

Section 101(c)(1)(C)(ii) of E-Sign requires businesses to obtain from consumers electronic consent or
343

confirmation to receive information electronically that a law requires to be in writing.

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258 INTERNET-RELATED CONTRACT LAW Ch. 4

Act or authorizes electronic delivery of any of the notices described in Section

7003(b) of that Act.344
E-Sign “provides that the ‘provisions of Section 7001 of this title shall not apply to
a contract or other record to the extent it is governed by . . . the Uniform Commercial
Code, as in effect in any State, other than sections 1–107 and 1–206 and Articles 2 and
2A.”345
§ 4.7 Uniform Computer Information Transactions Act
(A.) History of U.C.C. Article 2B
In the early 1990s, lawyers representing the software industry began to press for a
specialized law addressing software licensing. The empirical reality is that the licensing
of downloadable software shares little common ground with the traditional attributes of
a sale of goods. With the sale of goods, title passes when the buyer accepts and pays in
accordance with the contract, and it is marked by physical delivery of tangible goods. No
title passes with the licensing of software. A licensee is typically not permitted to resell
licensed software. Software, unlike goods, may be delivered computer-to-computer
without human intervention. The licensor retains title to software or other information
and imposes restriction on use. No mass-market software developer could stay in
business if all rights were transferred to the software with the first sale. Licensing is a
useful and necessary legal invention to permit software developers to realize their
investment.
Industry, consumer and bar association groups hotly debated the innumerable
drafts of Article 2B, which preceded UCITA. In March of 1995, the National Conference
of Uniform State Laws (NCCUSL) approved a “hub and spoke” model that treated Article
2B as a separate spoke sharing hub provisions with Articles 2 and 2A. The hub and spoke
model sought to harmonize Articles 2, 2A and 2B by forging general principles common
to each article. The drafters of U.C.C. Article 2B envisioned a common hub and separate
spokes for Articles 2, 2A and 2B (corresponding to sales, leases, and licenses). A wide
variety of stakeholders such as The Software Publishers Association (SPA) opposed the
hub and spoke model. The SPA was critical of the model for being too anti-industry and
too pro-consumer. A corporate counsel for a Fortune 500 company complained that the
drafting committee included too many law professors with a pro-consumer bias. Other
critics argued just the opposite, that Article 2B was a statute by and for the software
industry against consumers. Consumer representatives argued that Article 2B was anti-
consumer and that they were inadequately represented in the drafting process.
(B.) UCITA: A Licensing Law for the Internet
In the late 1980s, the American Bar Association’s Business Law Section considered
revising commercial law to encompass software contracts. The impetus to create
specialized legal infrastructure for software licensing gained speed in the early 1990s
when NCCUSL346 and the American Law Institute (ALI) joined forces to develop a

344U.C.C. § 1–108.
345KATHY SMITH & MILTON BROWN, ELECTRONIC SIGNATURES (June 2003), Id. at 24.
346 The National Conference of Commissioners on Uniform State Law (NCCUSL is now the Uniform

Law Commission.

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 259

separate article of the Uniform Commercial Code called Article 2B.347 The avowed
purpose of U.C.C. Article 2B was to revise U.C.C. Article 2 concepts for the commercial
realities of software licenses. The ABA’s Business Law Section created a software
licensing committee that explored the creation of separate software contracting law. The
U.C.C. sponsoring organizations, ALI and NCCUSL, envisioned a common hub and
separate spokes for Articles 2, 2A, and 2B that correspond to sales, leases, and licenses,
respectively. The death knell for the hub and spoke model sounded in late July 1995,
when NCCUSL abandoned the entire hub and spoke architecture in favor of making
Article 2B a separate U.C.C. article.348
NCCUSL eliminated the hub and spoke model but retained Professor Raymond
Nimmer as the Article 2B Reporter. During the early to mid-1990s, NCCUSL and the
American Law Institute developed a model software code to be included as U.C.C. Article
2B of the Uniform Commercial Code. UCITA customizes U.C.C. Article 2 concepts for the
commercial realities of software licenses. In addition to Professor Nimmer, the key
players for the Article 2B project were the American Bar Association, NCCUSL, and the
ALI. The ALI withdrew from the Article 2B Drafting Project after the ALI Council
surveyed its membership and determined that it would not approve the proposed
software article. ALI’s scuttling of the joint statutory project with NCCUSL to create a
specialized U.C.C.
Article 2B preceded the Uniform Computer Information Transactions Act (UCITA)
as a stand-alone statute. “The UCITA differs from U.C.C. Article 2 by recognizing that
most transactions dealing with software and electronic data . . . As such, the UCITA
attempts to tailor remedies and warranties to the transfer of information rather than
the sale of goods.”349 NCCUSL approved UCITA as the comprehensive statute codifying
software contracts.350 In July of 1999, NCCUSL approved UCITA, which is the first
statute to govern licensing:
UCITA is the first uniform contract law designed to deal specifically with the
new information economy. Transactions in computer information involve
different expectations, different industry practices, and different policies from
transactions in goods. For example, in a sale of goods, the buyer owns what it
buys and has exclusive rights in that subject matter (e.g., the toaster that has
been purchased). In contrast, someone that acquires a copy of computer
information may or may not own that copy, but in any case rarely obtains all
rights associated with the information.351
Raymond T. Nimmer stated: “The purpose of UCITA . . . is to develop contract law
sensitive to computer information as subject matter. . . . Sales of goods are different from
transactions in computer information. A sale of a chair or toaster (the grist of Article 2)

347 Professor Rustad served on the ABA Business Law’s Subcommittee on Software Licensing for a

decade. He served as the task force leader for the scope of U.C.C. Article 2B and also worked on the sections
on transfer and assignment of software.
348 See Thom Weidlich, Commission Plans New U.C.C. Article, NAT’L L. J. (Aug. 28, 1995), at B1 (noting

that NCCUSL appointed Houston law professor Raymond T. Nimmer as Technology Reporter for the new
U.C.C. Article 2B).
349 2 GEORGE B. DELTA & JEFFREY H. MATSUURA, LAW OF THE INTERNET (New York, New York: Wolters,

Kluwer Law and Business, 2008) at 13112.

350 NCCUSL’s commissioners, primarily appointed by state governors, serve for specific terms.

351 Raymond T. Nimmer, Prefatory Note, UCITA Refs & Annos.

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260 INTERNET-RELATED CONTRACT LAW Ch. 4

is different from a license of a computer database or software (the focus of UCITA).”352

UCITA harmonizes legal infrastructure for Web-site linking agreements, affiliate
agreements, legal notices, license agreements, access contracts, clickwrap agreements,
end-user agreements, online shopping, auction bidding agreements, terms of services
agreements, and online licenses of all kinds. An “access contract” “means a contract to
obtain by electronic means access to, or information from, an information processing
system of another person, or the equivalent of such access.”353 The concepts and methods
for attribution procedures, authentication, computer information, electronic agents,
electronic events, electronic messages, and accommodating contracting law for advances
created by the Internet. UCITA legitimates the widespread industry practice of licensing
as a means of bypassing the first sale doctrine of the U.S. Copyright Act. Licensing is a
useful legal invention, which permits the industry to realize value.
The final approved version of UCITA reflects the Reporter’s compromise with
various consumer and industry stakeholders. Nevertheless, the problem for the UCITA
Drafting Committee was that each time a compromise was reached with one aggrieved
stakeholder, another interest group stepped forward arguing that they were
unrepresented in the drafting process. Wave after wave of UCITA critics have come
forward in the ten-year war over its enactment. Critics claimed that UCITA legitimated
oppressive choice of law and forum clauses in shrinkwrap, webwrap, or clickwrap
agreements that effectively stripped consumers of any meaningful remedy. UCITA
validated rolling contracts where a vendor provides new terms after the license is executed.
Google, for example, claims the right to make unilateral modifications to its software
license for developers in the following clause:
Google may make changes to the License Agreement as it distributes new
versions of the (Android Software Development Kit). When these changes are
made, Google will make a new version of the License Agreement available on
the website where the [Android] is made available.354
UCITA’s endorsement of rolling contracts where the consumer pays now and gets
its terms later was another issue of contention. UCITA “embraces the theory of ‘layered
contracting,’ which acknowledges while ‘some contracts are formed and their terms fully
defined at a single point in time, many transactions involve a rolling or layered process.
An agreement exists, but terms are clarified or created over time.’ ”355 The business
community other than large software vendors were generally opposed to the following
UCITA provisions:
Unconditional validation of “shrinkwrapped” or “clickthrough” licenses
combined with onerous default provisions
Restriction on number of permitted users as default provision
Limitation on duration of license as default provision
Limitation warranty of non-infringement

352 Raymond T. Nimmer, UCITA: A Commercial Contract Code, COMPUTER L. (May 2000) at
353 UCITA § 102(a)(1).
354 Android.com Id., Software License Agreement, http://developer.android.com/sdk/terms.html.
355 UCITA § 208, cmt. 3.

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 261

Permitted disclaimer of implied warranty regarding defects—even those

known to the software publisher at time of license
Restriction on transferability—while prohibited under the recent proposed
amendment to UCITA in the case of mergers or sales of business—are still
allowed in other cases
Permitted use of automatic or passive restraint—for a reason as vague as the
“prevention of use inconsistent with the agreement”
Waiver of remedy for breach of contract
Deletion of the requirement to deliver a product conforming to the contract and
the abandonment of perfect tender rule
Electronic repossession or self-help356
NCCUSL initially approved UCITA in 1999, but the drafters amended the statute
again in 2002 to respond to various drafting glitches. The American Bar Association
(ABA) Working Group on UCITA stated in a 2002 report that UCITA “is a very complex
statute that is daunting for even knowledgeable lawyers to understand.”357 The ABA
Working Group was critical of UCITA’s complexity, its scope, and its complicated
structure:
The text, which consists of black letter rules (or sections), together with the
extended comments, is lengthy and filled with terminology that is largely
unfamiliar to the average reader, necessitating lengthy definitions of those
terms. These initial hurdles are then exacerbated by the general organizational
structure of the statute and the manner of presentation. For example, in far
too many instances it is impossible to understand a rule simply by reading the
section that supposedly sets forth that rule. Instead, the reader must wend his
or her way not only through some intricate prose, but also through a number
of other sections that are cross-referenced in the rule. In addition, the text
frequently suggests that there are other sections that may affect a particular
rule (and which therefore should be considered), but which are not specifically
referenced (e.g., pursuant to the applicable sections of this [Act], including
Section 209, 211, and 102(a) (57)). Consequently, many of the black letter rules
come across as convoluted and, at times, inscrutable.358
NCCUSL amended UCITA in 2002 after the model statute was stalled in state
legislatures. The 2002 Amendments to UCITA implemented some of the ABA Report
suggestions, but did not satisfy consumer groups and other critics. The 2002 Amendments
prohibited “electronic self-help” but did not adopt a rule of pretransaction disclosures of
terms or require licensors to disclose material defects or serious bugs.359 UCITA’s 2002
Amendments did not result in new states enacting the model software licensing statute.
NCCUSL discharged its standby committee in August of 2003, stating that it was not
expending further resources to engineer a consensus about UCITA’s provisions.

356 Letter of April 2001 to Oklahoma Attorney General Drew Edmundson, http://www.ucita.com/pdf/AG_

letter.pdf+Stephen+Chow+Fair+Use+UCITA&cd=2&hl=en&ct=clnk&gl=us&ie=UTF-8.
357 ABA Working Group on UCITA (Jan. 30, 2002).

358 Id. at 9.

359 Summary of AFFECT Response to 2002 UCITA Revisions.

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262 INTERNET-RELATED CONTRACT LAW Ch. 4

Critics charged that UCITA would enable software publishers to shut down their
customer’s computer system without prior court approval. The Americans for Fair
Electronic Commerce spearheaded an attack on self-help provisions in UCITA. They
charged that remote repossession would give software publishers too much power “in a
dispute over license rights, to remotely shut down an organization’s mission-critical
software.”360 UCITA opponents—large technology users and consumer rights groups who
are strange bedfellows—contended UCITA would give software companies a virtual
stranglehold on technology contracts. 361 The licensee community, too, joined the chorus
against UCITA’s self-help provisions.
Ultimately, UCITA’s drafters limited electronic repossession, which did little to
smother the firestorm. “UCITA Section 816 substantially limits licensor repossession of
information, while Articles 2, 2A and 9 impose no limitations beyond trespass and breach
of peace. Yet this section of UCITA has been quite controversial.” 362 The procedural
rights and obligations for electronic repossession are not disclaimable and may not be
waived by agreement. Just as with Article 9, no repossession can take place where a
breach of the peace would result. UCITA does not want to grant licensors the unbridled
right to use electronic self- help or disabling devices that will cause harm to computer
systems. UCITA § 816 does not permit electronic repossession for consumer licenses.
Nevertheless, critics contended that UCITA’s electronic repossession provisions were
imbalanced favoring large software licensors such as Microsoft and failing to protect
licensee’s rights.363
Critics of UCITA charge that it validated abusive practices such as requiring
consumers to litigate in distant forums, depriving them of a meaningful remedy.
Nevertheless, an empirical study of website licenses found that licensors did not abuse
their market power by imposing harsh terms and conditions in standard-form license
agreements.364
The firestorm over a few UCITA provisions deflects attention away from the
empirical reality that many of its rules reflect best practices in the software industry
developed over the past three decades. The United States was the first post-industrial
society to develop a specialized civil code covering the licensing of software. UCITA applies
360 Americans for Fair Electronic Commerce Transactions, What is UCITA? http://www.ucita.com/

what_problems.html.
361 “One of the reasons that the UCITA project did not succeed is that, although UCITA attempted to

mask its real focus on mass market transactions with a purported paradigm of a negotiated transaction, it in
fact explicitly addressed non-negotiated deals in a way that was inconsistent with U.C.C. Art. 2, which
disfavors delayed disclosure of material terms. . . . UCITA seems to protect delayed disclosure of even
significant terms in non-negotiated deals, thus revealing its real concern with validating an approach dubious
under both commercial and consumer law. Most state attorneys-general in the United States—who enforce
state consumer protection laws—and the Federal Trade Commission reacted negatively and pressed for
changes.” Jean Braucher, U.S. Influence with a Twist: Lesson About Unfair Contract Terms from U.S. Software
Customers, 2007 COMPET. & CONSUMER L. J. 5, 12 (2007).
362 Carlyle Ring and Raymond T. Nimmer, NCCUSL, Series of Papers on UCITA Issues, http://www.

uniformlaws.org/Shared/uniformact_qanda/uniformacts-q-ucita.aspx#selfhelp (“Under Section 802,

cancellation only occurs on a material breach of contract or a breach that the agreement makes sufficient to
cancel the license. An Article 9 secured party, an Article 2 seller realizing on a retained security interest, and
an Article 2A lessor, all are free to use their self-help rights upon any default, material or not.”).
363 See e.g., Americans for Fair Electronic Commerce Transactions, What is UCITA?

364 Florencia Marotta-Wurgler, Competition and the Quality of Standard-Form Contracts: An Empirical

Analysis of Software Licenses (Aug. 22, 2005), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=799274

(summarizing results of a content analysis of 647 software license agreements, examining how competitive
forces shape standard terms).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 263

to computer information transactions; encompassing the vast majority of Internet-

related terms of service or terms of use as well as software licensing.
(C.) UCITA’s Statutory Purposes
UCITA is a model state law that was approved by NCCUSL in 1999. Maryland and
Virginia enacted UCITA and a number of states enacted “bomb shelter provisions” that
prohibited the use of UCITA in parties’ choice of law clauses.365 UCITA “bomb shelter”
statutes void choice of law clauses where UCITA is the choice of law. These “bomb
shelter” statues shield users from the effect of UCITA in their choice of law clauses. Iowa,
North Carolina, and West Virginia enacted “bomb shelter” statutes that prevent UCITA
from being the operative law. Nevertheless, in Virginia and Maryland UCITA applies
unless the parties’ choice of law clause opts out of the model statute. UCITA gives the
parties to a software license the right to opt out or alter the provisions of the statute.
It is also possible for software makers in other states to choose UCITA as the
applicable law so long as that state has not adopted a measure prohibiting UCITA in
choice of law agreements. UCITA § 104 allows for parties to a transaction not within the
scope of UCITA to elect that their transaction be governed by UCITA, except for
provisions that cannot be varied by contract under the law otherwise governing the
transaction. The parties may elect that the UCITA contract formation rules apply in lieu
of the common-law or U.C.C. Article 2, which would otherwise govern the transaction.
Lawyers representing the software industry use UCITA provisions as default standard
terms for their software licensing contracts.
(D.) A UCITA Roadmap
The 2002 Version of UCITA: An Overview

Section
Title of Parts & Subparts Numbers

Part I: General Provisions: Short Title & Definitions,

General Scope and Terms §§ 101–118

Part II: Formation & Terms, Formation of Contract,

Terms of Records & Electronic Contracts, Idea and
Information Submissions §§ 201–215

Part III: Construction: General Interpretation §§ 301–308

Part IV: Warranties §§ 401–410

365 “One of the reasons that the UCITA project did not succeed is that, although UCITA attempted to

mask its real focus on mass-market transactions with a purported paradigm of a negotiated transaction, it in
fact explicitly addressed non-negotiated deals in a way that was inconsistent with U.C.C. Art 2, which disfavors
delayed disclosure of material terms. . . . UCITA seems to protect delayed disclosure of even significant terms
in non-negotiated deals, thus revealing its real concern with validating an approach dubious under both
commercial and consumer law. Most state attorneys-general in the United States—who enforce state consumer
protection laws—and the Federal Trade Commission reacted negatively and pressed for changes.” Jean
Braucher, U.S. Influence with a Twist: Lesson About Unfair Contract Terms from U.S. Software Customers,
2007 COMPET. & CONSUMER L. J. 5, 12 (2007).

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264 INTERNET-RELATED CONTRACT LAW Ch. 4

Part V: Transfer of Interests and Rights: Ownership

and Transfers, Financing Arrangements §§ 501–511

Part VI: Performance: General Performance in Delivery

of Products §§ 601–618

Part VII: Breach of Contract: General, Defective

Copies; Repudiation and Assurances §§ 701–710

Part VIII: Remedies: General §§ 801–816

Part IX: Miscellaneous Provisions §§ 901–904

As the chart above depicts, UCITA is divided into nine parts: (1.) General
Provisions, (2.) Formation and Terms, (3.) Construction, (4.) Warranties, (5.) Transfer of
Interests and Rights, (6.) Performance, (7.) Breach of Contract, (8.) Remedies and (9.)
Miscellaneous Provisions. Lawyers frequently import UCITA provisions into their mass-
market license agreement because of their flexibility. Even though UCITA has not been
widely adopted, it is nevertheless a useful template for a wide array of software licensing
transactions. Two leading scholars assert, “that UCITA maintains the contextual,
balanced approach to standard terms that can be found in the paper world.”366 Douglas
E. Phillips, vice president and general counsel of Promontory Interfinancial Systems,
contends that counsel representing software licensors or licensees must master UCITA’s
provisions. For example, Phillips recommends that attorneys learn UCITA’s provisions
in deciding whether to opt in or out of the statute:
[L]awyers who assist clients in computer information transactions must place
their bets . . . In negotiating software licenses and other computer information
transactions, lawyers are being confronted with proposed contractual choice-of-
law clauses that invoke UCITA.367
(E.) UCITA’s Sphere of Application
UCITA applies to “computer transactions”368 which encompasses “contracts to
create, modify, transfer or license computer information or informational rights in
computer information.”369 A computer information transaction is defined as an
agreement or the performance of it to create, modify, transfer, or license computer
information or informational rights in computer information. The licensing of
intangibles, like leases, validates the legal concept of the right to use property. The
question of who has title to tangible copies of intangibles is not dispositive or even
relevant to licensing rights. With software licensing, the medium is not the message,
only the right to exploit information. The ease of copying software has made the
invention of licensing the only efficient method of realizing value. UCITA’s scope is
transactions in information, which is a broader concept than software licensing. A

366 See Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77

N.Y.U. L. Rev. 429, 491 (2002).

367 Douglas E. Phillips, Consequential Damages Exclusions Under UCITA, 19 J. MARSHALL J. OF COMP.

& INFO. LAW 295, 295 (2001).

368 UCITA, Id. at § 103(a).

369 UCITA, Id. at § 102(11).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 265

computer information transaction is defined as an agreement or the performance of it to

create, modify, transfer, or license computer information or informational rights in
computer information.370
UCITA defines “computer information” as electronically based or capable of being
processed by a computer. UCITA follows the NCCUSL text in defining information
broadly to include data, text, images, sounds, mask works, or computer programs:
This term covers information that is in electronic form and that is obtained
from, accessible with, or usable by, a computer; it includes the information, the
copy of it (e.g., a diskette containing the information), and its documentation
(including non-electronic documentation). As defined, “electronic” includes
digital information or information in another form having similar capabilities.
This covers analog and future computational technologies, eliminating the
possibility that the Act might be limited to current technology. The term does
not include information merely because it could be scanned or entered into a
computer; it is limited to electronic information in a form capable of being
directly processed in a computer. ‘Computer information’ does not generally
include printed information or information in other non-electronic formats.371
UCITA covers all transfers of computer information including licensing,
assignments, or sales of copies of computer programs. UCITA also covers “multimedia
products, software and multimedia development contracts, access contracts, and
contracts to obtain information for use in a program, access contract, or multimedia
product.”372 Nevertheless, the mere fact that parties agree to communicate in digital
form does not bring a transaction within this definition. UCITA applies to transfers of
computer information and informational rights in Maryland and Virginia. UCITA
governs software licenses and other information-based transactions in Virginia or
Maryland law unless the parties otherwise agree. A computer program is a set of
statements or instructions to be used directly or indirectly in a computer to bring about
a certain result. The statutory purposes of UCITA are: (1.) to facilitate computer or
information transactions in cyberspace; (2.) to clarify the law governing computer
information transactions; (3.) to enable expanding commercial practice in computer
information transactions by commercial usage and agreement of the parties; and (4.) to
make the law uniform among the various jurisdictions.
UCITA provides a legal infrastructure widely adopted for Web-site linking
agreements, affiliate agreements, legal notices, license agreements, access contracts,
clickwrap agreements, end-user agreements, online shopping, auction bidding
agreements, terms of services agreements, and online licenses of all kinds. UCITA’s

370 See e.g., VA. CODE ANN. § 59.1–501.2(a)(11).

371 UCITA § 102(a)(10), cmt. 8.
372 UCITA § 102(a)(10), cmt. 9.

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266 INTERNET-RELATED CONTRACT LAW Ch. 4

concepts for attribution procedures,373 authentication,374 computer information,375

electronic agents,376 electronic messages,377 and other legal infrastructure adaptable for
diverse information age contracts. UCITA’s statutory framework is flexible because
parties may select which provisions to incorporate in their license agreements. UCITA
customizes concepts imported from U.C.C. Article 2 such as the parol evidence rule, the
statute of frauds, warranties, risk of loss rules, and remedies.
Similarly, UCITA continues to be a template useful in terms of use or service
agreements. Lawyers charged with drafting a software licensing agreement incorporate
many UCITA provisions in their contracts, and many of its provisions are not
objectionable since they reflect the best practices of the software industry. UCITA has a
continuing vitality in its daily impact on countless licensing agreements. The Reporters
of the American Law Institute’s “Principles of the Law of Software Contracts”
acknowledge importing many UCITA concepts into its software contracting templates.
UCITA’s scope covers computer information transactions.378 “Like Article 2, UCITA
covers a variety of transactions, many of which take place solely between merchants.
Article 2 governs sales of jet planes as well as toasters, not to mention the large-scale
acquisition of jet and toaster parts.”379
(F.) Initial Provisions
UCITA § 102 defines key terms such as access contracts, attribution procedures,
authentication, computer information, electronic agents, electronic events, electronic
messages, mass-market licenses, receipt, and record. This section also defines electronic
agents to mean “a computer program, or electronic or other automated means, used
independently to initiate an action, or to respond to electronic messages or performances,
on the person’s behalf without review or action by an individual at the time of the action

373 “ ‘Attribution procedure’ means a procedure to verify that an electronic authentication, display,

message, record, or performance is that of a particular person or to detect changes or errors in information.
The term includes a procedure that requires the use of algorithms or other codes, identifying words or numbers,
encryption, or callback or other acknowledgment.” UCITA § 102(a)(5).
374 UCITA defines authenticate to mean:

(A) to sign; or (B) with the intent to sign a record, otherwise to execute or adopt an electronic
symbol, sound, message, or process referring to, attached to, included in, or logically associated or
linked with, that record. UCITA § 102(a)(6).
375 “ ‘Computer information’ means information in electronic form which is obtained from or through the

use of a computer or which is in a form capable of being processed by a computer. The term includes a copy of
the information and any documentation or packaging associated with the copy.” UCITA § 102(a)(10).
376 “ ‘Electronic agent; means a computer program, or electronic or other automated means, used

independently to initiate an action, or to respond to electronic messages or performances, on the person’s behalf
without review or action by an individual at the time of the action or response to the message or performance.”
UCITA § 102(a)(27).
377 “ ‘Electronic message’ means a record or display that is stored, generated, or transmitted by

electronic means for the purpose of communication to another person or electronic agent.” UCITA § 102(a)(28).
378 “This term helps to define the scope of this Act. Section 103 requires an agreement involving

computer information. The term includes transfers (e.g., licenses, assignments, or sales of copies) of computer
programs or multimedia products, software and multimedia development contracts, access contracts, and
contracts to obtain information for use in a program, access contract, or multimedia product. However, the
mere fact that parties agree to communicate in digital form does not bring a transaction within this definition,
nor does a decision by one party to use computer information when the contract does not require this.” UCITA
§ 102(a)(9).
379 BRIAN W. SMITH, E-COMMERCE FINANCIAL PRODUCTS & SUCCESS, F-5 (New York, New York:

Lexis/Nexis, 2001) (edited by Andrew J. Morris and Brian W. Smith).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 267

or response to the message or performance.”380 UCITA provides a legal infrastructure for

standard form licenses, including access contracts, terms of service agreements, clickwrap
agreements, shrinkwrap agreements, and website user agreements. UCITA gives
licensees a statutory right to return mass-market products where they have had no
opportunity to review terms. 381 If the licensee returns mass-market software, the
licensor bears the shipping and related costs. 382
UCITA adopts Article 2’s concept of unconscionability, which give courts the power
to strike down unconscionable contracts or terms, and this doctrine applies to all UCITA
license agreements. Section 111 of UCITA gives courts the power to police contracts or
any term.383 A court may refuse to enforce the entire software license or the remainder
of the contract without the unconscionable term. The court has broad equitable powers
to limit the application of any unconscionable term to avoid any unconscionable result.
The issue of unconscionability is always a matter of law and one for the trial judge rather
than the jury. The basic test is whether the license agreement or term should be
invalidated because it is “so one-sided as to be unconscionable under the circumstances
existing at the time of the making of the contract.”384 Unconscionability is an amorphous
doctrine designed to prevent “oppression and unfair surprise.”385
Courts generally require procedural unconscionability, where there is a lack of a
meaningful choice due to unfair bargaining and substantive unconscionability, which is
the resultant unfair term. Procedural unconscionability means that the contract
negotiation or bargaining was unfair and focuses on two factors, oppression and
surprise.386 Substantive unconscionability exists when the terms of the resultant
contract are unfair or abusive. A substantively unconscionable bargain is “one that “no
man in his senses and not under delusion would make on the one hand, and no honest

UCITA § 102(a)(27).
380

Section 209(c) provides: “In a mass-market transaction, if the licensor does not have an opportunity
381

to review a record containing proposed terms from the licensee before the licensor delivers or becomes obligated
to deliver the information, and if the licensor does not agree, such as by manifesting assent, to those terms
after having that opportunity, the licensor is entitled to a return.” UCITA, Id. at § 209(c).
382 UCITA §§ 112(e), 209(b).

383 Courts have refused to enforce clauses in a few Internet-related license agreements. See e.g.,

Riensche v. Cingular Wireless, L.L.C., No. C06–1325Z, 2006 WL 3827477, at 9 (W.D. Wash. Dec. 27, 2006)
(holding that the forum selection clause was substantively unconscionable); Comb v. PayPal, Inc., 218 F. Supp.
2d 1165, 1173, 1176 (N.D. Cal. 2002) (refusing to enforce pre-dispute mandatory arbitration clause in user
agreement ruling that the forum selection clause was substantively and procedurally unconscionable).
Additionally, the doctrine of unconscionability has been applied in a wide array of contexts. See e.g., Scott v.
Cingular Wireless, 161 P.3d 1000, 1006 (Wash. 2007) (holding a class action waiver unconscionable); Gatton
v. T-Mobile USA, 61 Cal. Rptr. 3d 344, 358 (Cal. Ct. App. 2007) (holding a class action waiver unconscionable
and unenforceable); Aral v. EarthLink, Inc., 36 Cal. Rptr. 3d 229, 238 (Cal. 2005) (holding a class action waiver
unconscionable). See Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569, 575 (N.Y. App. Div. 1998) (explaining
that New York requires “a showing that a contract is “both procedurally and substantively unconscionable
when made’ ”) (quoting Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1, 10 (1988)). California’s test for
substantive unconscionability is whether the clause or contract “shocks the conscience.” Am. Software, Inc. v.
Ali, 54 Cal. Rptr. 2d 477, 480 (Cal. Ct. App. 1996). The test for procedural unconscionability is whether “the
manner in which the contract was negotiated” was unfair. Id. at 479.
384 U.C.C. § 2–302, cmt. 1 states this guidepost for unconscionability.

385 This test was imported from U.C.C. § 2–302.

386 Procedural unconscionability “concerns the manner in which the contract was negotiated and the

circumstances of the parties at that time.” Kinney v. United Healthcare Servs., Inc., 70 Cal.App.4th 1322, 83
Cal.Rptr.2d 348, 352–53 (Ct.App.1999). A determination of whether a contract is procedurally unconscionable
focuses on two factors: oppression and surprise. See also, Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519, 60
Cal.Rptr.2d 138, 145 (Ct.App.1997) (discussing test for procedural unconscionability as being oppression from
the inequality of bargaining power and surprise as hidden terms).

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268 INTERNET-RELATED CONTRACT LAW Ch. 4

and fair man would accept on the other.”387 In contrast, procedural unconscionability is
often found when one of the parties has no reasonable opportunity to know what he is
signing. A door-to-door sales representative, in a classic illustration, intentionally spills
coffee on a prospective customer to divert his attention and then switches a promissory
note for the sweepstakes entry form the consumer thought he was signing.
This creates a problem of procedural unconscionability. The use of hidden terms in
software licenses will qualify as procedural unconscionability, whereas an exorbitant fee
for arbitration could constitute substantive unconscionability. In order to strike down a
license agreement or a clause in a license agreement, a court must find both an unfair
bargaining process, which is procedural unconscionability, as well as unfair terms, which
is substantive unconscionability. It takes a grossly unfair term such as a forum selection
clause for a U.S. citizen in Oslo, Norway to constitute substantive unconscionability.
Section 111(b) of UCITA follows U.C.C. § 2–302’s methodology in requiring a court to
hear evidence of the commercial setting and other circumstances before invalidating a
license agreement on the grounds of unconscionability.
Unconscionability, however, has proved to be a toothless tiger when it comes to
terms of service agreements.388 There are few terms of service agreements where a court
has struck down either a clause or an entire webwrap license agreement as
unconscionable. A court will refuse to enforce a software contract or a single provision
on unconscionability or public policy grounds. Courts will not strike down a contractual
provision unless they believe it is so one-sided in favor of the dominant party to “shock
the conscience.” Courts will typically look at the contract’s purpose and circumstances in
play when the contract was executed in making a determination about
unconscionability. A California court struck down EarthLink’s arbitration agreement in
a case where consumers filed suit for “improperly charging fees for a digital subscriber
line, or DSL, prior to providing customers with the equipment necessary to utilize the
service.”389 Typically, a court must find unfair bargaining (procedural unconscionability)
as well as an unfair bargain in fact (substantive unconscionability). In EarthLink, the
court found the provider’s arbitration provision to be procedurally unconscionable
because it was presented during installation or when the package was mailed with no
right to opt out.390 Hundreds of millions of consumers have entered into terms of service
agreements with social networking sites. To date, however, a court has invalidated a
terms of use or terms of service agreement on unconscionability grounds in only a single
case.391

387 Farrell v. Convergent Communications, Inc., No. C98–2613 MJJ, 1998 WL 774626, at *4 (N.D. Cal.

Oct. 29, 1998).

388 See Davidson & Associates, Inc. v. Internet Gateway, Inc., 334 F. Supp. 2d 1164 (E.D. Mo. 2004)

(holding game maker’s terms of service and end user license agreement to be enforceable and rejecting
competing game maker’s argument that these agreements was unconscionable even though these mass-market
licenses prohibited reverse engineering, disassembling, and making derivative works).
389 Mike McKee, Earthlink Chastised Over DSL Dispute, 129 THE RECORDER 1 (Nov. 30, 2005).

390 Id.

391 Bragg v. Linden Research, Inc., 487 F. Supp. 2d 593 (E.D.P.A. May 30, 2007) (finding arbitration

clause in Terms of Service for Second Life both procedurally and substantively unconscionable in case filed by
attorney Second Life plaintiff).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 269

(G.) Formation of Standard Form Licenses

UCITA’s concept of a “record” enables the parties of an e-contract to satisfy the
moth-eaten Statute of Frauds’ requirement for a writing. Out of the hundreds of global
nations conducting Internet commerce, the U.S. is the only country to require a Statute
of Frauds for the sale of goods or the licensing of information. U.C.C. Article 2 continues
to require a signed writing by the party against whom enforcement is sought unless there
is an exception. UCITA updates the Statute of Frauds for online contracts by treating a
“record” as a functional equivalent of “pen and paper” signatures. UCITA defines
“records” to mean information inscribed on a tangible medium. Records may also be
stored in an electronic library or other medium, permitting it to be retrievable in
perceivable form.
Part 3 of UCITA covers topics such as the parol evidence rule, modification, changes
in terms, and the interpretation of information-based contracts. UCITA’s parol evidence
rule substitutes the term “record” for a writing but is otherwise parallel to U.C.C. § 2–
202. Like Article 2, UCITA permits integrated writings to be supplemented by course of
performance and by course of dealing and usage of trade. UCITA § 301 permits a party
to introduce evidence of consistent additional terms unless the record states that it is a
“complete and exclusive” statement of the terms of the license. UCITA validates mass-
market or standard form agreements “only if the party agrees to the license, such as by
manifesting assent, before or during the party’s initial performance or use of or access
to the information.”392 Critics point to the hegemony of freedom of contract, but this
principle was embodied in the U.C.C. as well:
The general basis for UCITA’s opposition is its application of freedom of
contract to both traditional contracts issues, especially those involving product
qualities, and to those associated with a licensor’s desire to retain intellectual
property rights in its software. UCITA’s default rules, like those in the UCC,
apply only if the parties have not otherwise agreed on a subject. If the law
supports standard contracts based loosely on a freedom of contract principle,
then the terms of that contract will tend to favor the drafter over the other side,
unless a court adjudges the contract or provision unconscionable. Once again,
UCITA is ostensibly doing what has previously been done and often
endorsed.393
UCITA broadly enforces mass-market licenses.394 UCITA also states, “A party
adopts the terms of a record, including a standard form, as the terms of the contract if
the party agrees to the record, such as by manifesting assent.”395 Mass-market contracts
392UCITA § 209(a).
393Nim Razook, The Politics and Promise of UCITA, 36 CREIGHTON L. REV. 643, 646 (2003).
394 Professor Amy Schmitz describes the way in which American consumers have:

[a] love/hate relationship with form terms. On the one hand, consumers admit that they have no
interest in reading form contracts, enjoy the convenience and efficiency of form contracting, and
routinely accept forms “dressed up” as deals without stopping to read or question their content. On
the other hand, consumers are often frustrated with the effectively nonnegotiable nature of these
contracts and complain that they lack the requisite time or understanding to read or negotiate
companies’ impenetrable purchase terms.
Amy J. Schmitz, Pizza-Box Contracts: True Tales of Consumer Contracting Culture, 45 WAKE FOREST L. REV.
863, 864–65 (2010) (arguing that consumers bear some responsibility for acquiescing to the stronger party
“running roughshod over their rights”).
395 Id. at § 208(1).

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270 INTERNET-RELATED CONTRACT LAW Ch. 4

are enforced if three conditions are met: (1.) the user has an opportunity to review the
terms of the license, (2.) the user manifests assent after having an opportunity to review
the terms, and (3.) the actions are “attributable in law” to the user. UCITA rejects the
doctrine of acceptance by silence for standard form licenses, which is a criticism of
browsewrap. Assent is not conditioned on whether the party has read or understood the
terms of the agreement.396 The concept of manifesting assent is based upon an objective
standard rather than a subjective “meeting of the minds.” A minimally adequate
objective manifestation of assent is an opportunity to review the record coupled with an
affirmative act that indicates assent.
However, one of the difficult policy issues to determine is to decide what affirmative
conduct constitutes assent. In a paper-based contract, a signature establishes the
manifestation of assent. UCITA permits the manifestation of assent to be fulfilled by an
affirmative act, such as clicking a display button reading: “I accept the terms of this
agreement.” A licensor must give the licensee a right to a refund if the licensee has not
had an opportunity to review the terms and manifest assent prior to payment. 397 UCITA
§ 114 requires that the licensor of the terms of service give the potential customer an
opportunity to review the terms of a standard-form license. UCITA § 114 is fulfilled so
long as the licensor gives the customer an opportunity to review the terms of the license
before the software maker delivers the software and the customer is bound to pay. Under
Section 209(b), a licensor must give the licensee a right to a refund if the licensee has
not had an opportunity to review the terms and manifests assent prior to payment.
As a result, mass-market licenses are a useful legal invention. The alternative to
mass-market licensing would be retaining an attorney to negotiate the terms of each
license, which would not be cost-efficient. One possible effect of increasing overall costs
on the business may be that there would be fewer resources available for the
development of new and improved products. In addition, negotiating mass-market
agreements would limit the availability of the licensed products overall or sharply
increase the price of licensed products in the market. For example, UCITA § 112 binds a
licensee to the terms of a shrinkwrap, or clickwrap agreement as long as the party
manifests assent to the terms of the agreement.
UCITA also validates “rolling contracts,” permitting a content provider or software
publisher to add, delete, or change terms after the licensee has paid royalties for access.
The trend in recent judicial decisions is that courts enforce “cash now, terms later”
software agreements so long as the licensor gives reasonable notice to the user and
provides an opportunity to decline the terms. UCITA allows rolling contract terms to be
adopted after performance if the licensee “had reason to know that their agreement
would be represented by terms in a record that there would be no opportunity to review
before performance or use began.”398 UCITA validates “rolling contracts” if the person
had reason to know that terms would come later, had a right to a refund if he declined
the terms, and manifests assent after an opportunity to review them. 399

396 Id. at § 208, cmt. 7.

397 Id. at § 209(b).
398 John E. Murray, Jr., The Definitive ‘Battle of the Forms’: Chaos Revisited, J. OF LAW & COMMERCE 1,

39 (2000).
399 Raymond T. Nimmer, Licensing of Information Assets, 2 INFO. LAW § 11:147 (June 2009).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 271

(1.) Opportunity to Review Terms

As introduced above, mass-market or wrap contracts are enforced if three conditions

are met: (1.) the user has an opportunity to review the terms of the license, (2.) the user
manifests assent after having an opportunity to review the terms, and (3.) the actions
are “attributable in law” to the user. UCITA’s mass-market licensing provisions are
consistent with current judicial trends. Courts are inclined to validate mass-market
license agreements so long as the licensee has an opportunity to review terms and a
means of manifesting assent. UCITA § 114 requires that the licensor of the terms of
service give the potential customer an opportunity to review the terms of a standard-
form license.400 This section is satisfied so long as the licensor gives the customer an
opportunity to review the terms of the license before the software maker delivers the
software and the customer is bound to pay. 401 Under Section 209(b), a licensor must give
the licensee a right to a refund if the licensee has not had an opportunity to review the
terms and manifest assent prior to payment. If the licensee returns mass-market
software, the licensor bears the shipping and related costs. UCITA’s drafters are
cognizant of the importance of proximity because the statute requires the terms must be
either close to the description of the computer or available by clicking on a hyperlink to
another site.
(2.) Manifestation of Assent

Section 209(a) of UCITA validates mass-market or standard form agreements “only

if the party agrees to the license, such as by manifesting assent, before or during the
party’s initial performance or use of or access to the information.”402 UCITA § 208(1) also
states, “A party adopts the terms of a record, including a standard form, as the terms of
the contract if the party agrees to the record, such as by manifesting assent.”403 Assent
is not conditioned on whether a consumer read or understood the terms of the agreement.
The concept of manifesting assent is based solely upon an objective standard rather than
a subjective “meeting of the minds.” Simply clicking an “I accept” text or an icon evidences
a user’s manifestation of assent. A manifestation of assent to a record or term is not
effective unless the licensee has an opportunity to review the record or term. 404 UCITA
provides that individuals be deemed to have had an opportunity to review a term if the
term is available in a manner that ought to call it to the attention of a reasonable person.
Section 112 binds a party to the terms of a shrink-wrap or click-wrap agreement if
the party had reason to know his acts would be treated as assent to the terms. The
manifestation of assent and opportunity to review the terms are mandatory terms and
may not be varied by contract. UCITA critics point out that mass-market licenses are
adhesive contracts that offer no possibility of negotiation. The contract formation process
for mass-market licenses is flawed; the take it or leave it nature of the process is unfair;
the “pay first, terms come later” sequence of events is flawed and unfair; it is too easy to
hide terms; the method of contracting improperly extends intellectual property
protection. Free market individualism is premised on the assumption that human beings

400 UCITA § 114.

401 Id. at § 114(1)(A)–(B).
402 UCITA § 209(a).
403 Id. at § 208(1).
404 Id. at § 113, cmt. 2.

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272 INTERNET-RELATED CONTRACT LAW Ch. 4

are motivated primarily by economic self-interest and have a right to pursue self-interest
“without interference from others or the imposition of alternative conceptions of the good
by others.”405 It is in the self-interest of the software industry to disclaim all warranties
and consequential damages, which may leave consumers without a minimum adequate
remedy.
(3.) Attributable to Licensee

UCITA spells out substantive rules needed for online transactions that provide
safeguards and safe harbors against a user’s inadvertent assent or attribution. Section
212(a) states that electronic events are attributable to either the person or their
electronic agent. Under UCITA § 102(a)(5), for example, attribution procedure is defined
as any electronic authentication or performance of a particular person that enables
tracking of changes or the identification of errors in e-communications. Algorithms and
other codes incorporating encryption, callback, or other acknowledgements are used to
verify authenticity of messages. UCITA validates the use of electronic agents, automated
means of initiating action, and responding to electronic records without review by human
beings. Under UCITA § 206, the parties may closely track both E-Sign and UETA’s
concept of attribution. Under UCITA § 206, the parties may use electronic agents to enter
into contracts (offer and acceptance) without the benefit of human review.406 UCITA
updates the concept of writing with a “record,” which is the functional equivalent of a
paper-based writing.
Section 107 of UCITA provides that “a record or authentication may not be denied
legal effect or enforceability solely because it is in electronic form.”407 UCITA spells out
substantive rules needed for online transactions that provide safeguards and safe
harbors against a user’s inadvertent assent or attribution. Section 212(a) states that
electronic events are attributable to either the person or their electronic agent. Trading
partner agreements often specify the protocols used in computer-to-computer
transactions.
(H.) Formation of Online Contracts
UCITA follows the U.C.C. definition of a contract that includes express terms plus
supplemental terms. “An ‘agreement’ is the bargain of the parties in fact as found in
their language or other circumstances, including course of performance, course of
dealing, or usage of trade.”408 UCITA updates contract law substituting the concept of a
record for a writing.409 Mark Lemley criticizes UCITA’s overly liberal formation rules:
[S]ince [UCITA] makes it so easy to write and enforce the terms of a contract,
a software vendor with a good lawyer can quite easily enforce virtually
whatever terms it likes simply by putting them ‘conspicuously’ in a multi-page

405 MICHAEL J. TREBILCOCK, THE LIMITS OF FREEDOM OF CONTRACT 8 (Cambridge, Massachusetts,

Harvard University Press, 1993).

406 UCITA, Id. at § 206.

407 Id. at § 107.

408 U.C.C. § 1–201(b)(3).

409 “A ‘record’ is information that is inscribed on a tangible medium or that is stored in an electronic or

other medium and is retrievable in perceivable form. UCITA § 102(a)(55).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 273

document that the user cannot even see (much less agree to) until after buying,
installing, and beginning to run the software.410
UCITA’s broad enforceability of standard-form EULAs is aligned with software
industry developments.411 The second part of UCITA “supplies modified contract
formation rules adapted to permit and to facilitate electronic contracting, and rules to
determine the terms of contracts formed, including protections against “imposed” terms,
unauthorized communications, and electronic error, and incentives for pre-transaction
disclosure of all terms to be a part of the contract.”412
UCITA provides Internet-related legal infrastructure that is an advance over
U.C.C. Article 2. The concept of a “record” enables the parties of an e-contract to satisfy
the moth-eaten Statute of Frauds that still is the law in every U.S. jurisdiction. England
abolished its Statute of Fraud in sales in the early 1950s. UCITA allows computer-to-
computer transactions by substituting the concept of an electronic record as the functional
equivalent of writing. UCITA provides essential legal infrastructure for many different
forms of electronic contracts. UCITA § 201 requires a writing for license agreements which
are $5,000 or greater.
UCITA recognizes several exceptions to the Statute of Fraud’s writing requirement.
For example, a license agreement is enforceable after a completed performance, a court
admission, or a merchant licensor’s failure to answer a confirming record. “Part 3 of
UCITA provides rules governing parol evidence, modification, changes in terms and for
interpretation in the absence of explicit treatment by the parties.”413 UCITA’s parol
evidence rule substitutes the term “record” for a writing but is otherwise parallel to
U.C.C. § 2–202.414 Like Article 2, UCITA permits integrated writings to be supplemented
by course of performance and by course of dealing and usage of trade. Courts may receive
evidence of consistent additional terms unless the record states that it is “a complete and
exclusive statement of the terms of the agreement.”415
(1.) Express Warranties

UCITA’s express warranty provisions include both affirmation of act and promises
that the software publisher or other licensor makes to its customer relating to the
software, which is the “basis of the bargain” test. An express warranty is breached when
claims are not supported or product fails to live to affirmative statements about its
performance. UCITA’s express warranty provisions for computer information transactions
borrows extensively from U.C.C. § 2–313. Express warranties are not disclaimable because

410 Mark A. Lemley, Beyond Preemption: The Law and Policy of Intellectual Property Licensing, 87 CAL.

L. REV. 111, 122 (1999).

411 See e.g., Robert W. Gomulkiewicz, Getting Serious About User-Friendly Mass Market Licensing for

Software, 12 GEO. MASON L. REV. 687, 687–88 (2004) (concluding that end user licenses (EULAs) are here to
stay for the foreseeable future despite hundreds of articles criticizing this form of contracting).
412 William Denny, The Joint Task Force of the Delaware State Bar Association Sections of Commercial

Law, Computer Law, Intellectual Property, and Real and Personal Property Overview of the Uniform Computer
Transactions Act (Jan. 5, 2000) at 11.
413 Id.

414 The parol evidence rule prohibits the introduction of extrinsic evidence in prior or contemporaneous

agreements to alter the terms of an integrated and complete written contract. Where two contracts contain all
the essential terms of the respective agreements, and neither contract is facially ambiguous, they must be
viewed as integrated documents that are subject to the parol evidence rule. Under these circumstances, the
terms of these contracts may not be varied by parol evidence unless they are somehow ambiguous.
415 UCITA § 301.

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274 INTERNET-RELATED CONTRACT LAW Ch. 4

it would be fraud to make a statement about a digital product’s performance and then later
disclaim it.
Internet merchants create express warranties whenever they make definite
statements about the software’s performance in product packaging, banner
advertisements, pop-up advertisements, and sales representations or demonstrations,
whether on or off line. Website promotional materials, product descriptions, samples, or
advertisements will also create express warranties. A breach of warranty claim has four
elements: (1.) a contract between the parties; (2.) a breach of that contract; (3.) damages
flowing the breach; and (4.) that the party stating the claim performed its own
contractual obligations. UCITA divides warranties into two broad categories: warranties
of non-infringement and warranties of quality. Common software licensing warranties
include those of non-infringement, express warranties, the implied warranty of
merchantability of a computer program, information content, fitness for licensee’s
purpose, and the warranty of system integration. 416 When applied to software, the
concept of merchantability requires the software to perform at a level that is at least
fair, average, and not objectionable in the software industry. Merchantability always
references the specific industry. Software must have the minimal quality of similar code
in the industry (which tolerates a certain amount of bugs) without objection. The mere
fact there are problems in the software does not mean it is unmerchantable. 417
UCITA’s express warranty provisions include “not only affirmations of fact, but also
promises made by the licensor to its licensee which relate to the software and become
part of the basis of the bargain.”418 Affirmations of fact about software or other digital
information creates express warranties to the extent that they form the “basis of the
bargain.”419 A licensor makes an express warranty “if the licensor affirms a fact or makes
a promise to the licensee.”420 Internet merchants create express warranties when they
make definite statements about the software product packaging; banner advertisements;
sales literature; and demonstrations—notwithstanding representations made by sales
personnel to customers.
Website promotional materials, product descriptions, samples, or advertisements will
also create express warranties. A statement that goes to the “basis of the bargain” creates
an express warranty. Express warranties in the online world are created through sales
literature, seller’s talk, website advertisements, and live demonstrations on the Internet.
The question of whether an express warranty is breached is determined by whether the

416 Id. at §§ 401, 403–405.

417 Id. (stating that “[t]he mere fact that some systemic performance failures occur does not prove breach
of merchantability. The issue should be whether those failures are extraordinary as juxtaposed to ordinary
users and performance of similarly complex programs”).
418 Baney Corp. v. Agilysys NV, LLC, 773 F. Supp. 2d 593, 603 (D. Md. 2011) (holding “that a provision

in a license agreement for a multi-property management system computer program requiring defendant to
correct program errors was a warranty under Maryland’s Uniform Computer Information Transactions Act,
but a disclaimer that correction of errors was not guaranteed was construed as requiring only a good faith
effort to correct program errors.”).
419 Courts have held that an advertisement or packaging may create an express warranty. See e.g.,

Cipollone v. Liggett Group, Inc., 893 F.2d 541, 575–76 (3d Cir. 1990) rev’d in part on other grounds 505 U.S.
504(1992) (concluding that cigarette advertisements representing that the cigarettes were safe could constitute
an express warranty); Elias v. Ungar’s Food Products, 252 F.R.D. 233, 252 (D.N.J. 2008) (packaging statements
regarding fat and caloric content created express warranty).
420 JANE K. WINN & BENJAMIN WRIGHT, THE LAW OF ELECTRONIC COMMERCE (New York, New York:

Aspen Law & Business, 2001) at 13–30.

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 275

claims made by products are supportable. UCITA’s express warranty provisions for
computer information transactions are substantially similar to U.C.C. § 2–313.
(2.) Implied Warranty of Merchantability

As with U.C.C. Article 2, merchantability in software contracts are contextual and

defined in large part by quality standards in the industry. The implied warranty of
merchantability means that the software quality standards must be fit for its ordinary
purpose. Software must be non-objectionable in the trade, be at least fair average, and
be adequately packaged. Software vendors typically disclaim this warranty because of
uncertainty as to the meaning of merchantability for software or digital products.
Software is rarely, if ever, bug-free, so vendors do not want to be held accountable for
minor errors. Information, software, or data, must have the minimal quality of similar
code in the industry, which tolerates a certain amount of bugs without objection. Bug
free software is not yet the industry standard and insubstantial defects in software may
not defeat its merchantability.421 Software or data need not be the best quality, but
cannot be the worst either, in order to satisfy the merchantability standard.
(3.) Fitness-Type Warranties

Courts subdivide implied warranties of quality into the implied warranty of

merchantability and the systems integration warranty or fitness-type warranty. The
concept of merchantability applies to the ordinary purposes of software, data, or
information, whereas fitness or systems integration warranties signify interoperability
standards or whether a given software application works on a specific computer system.
The fitness for a particular purpose warranty has its genesis in U.C.C. § 2–315. Section
405 of UCITA recognizes two fitness-type warranties: (a) the fitness for particular
purpose (Section 405(a)) and (c) the systems integration warranty (Section 405(c)).
UCITA’s fitness for a particular purpose warranty, Section 405(a), requires proof that
the licensor knew or had reason to know of a particular purpose for which the
information is required.
The licensee must demonstrate that it was relying upon the licensor, and that the
computer software or other information was fit for a particular purpose. The fitness
warranty is disclaimable and modifiable, arising whenever a licensee relies upon a
“licensor’s skill or judgment to select, develop, or furnish” software or other information.
This implied warranty is that the software delivered is fit for the licensee’s purpose.
Subsection 405(a)(2) applies a reasonable effort standard for service-like obligations. The
software fitness warranty is less rigorous than that for the sale of goods. UCC Article 2’s
fitness warranty is the equivalent of strict liability whereas UCITA’s fitness imposes a
“reasonable effort” test, which is easier for the licensor to satisfy. This implied warranty
is that software is fit for the licensee’s purpose.
If an agreement requires a licensor to provide or select a system consisting of
computer programs and goods, and the licensor has reason to know that the
licensee is relying on the skill or judgment of the licensor to select the

421 Id. (stating that “[t]he mere fact that some systemic performance failures occur does not prove breach

of merchantability. The issue should be whether those failures are extraordinary as juxtaposed to ordinary
users and performance of similarly complex programs.”).

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276 INTERNET-RELATED CONTRACT LAW Ch. 4

components of the system, there is an implied warranty that the components

provided or selected will function together as a system.422
This fitness warranty is contextualized, which means that software may pass the
merchantability hurdle, but may not be suitable for a licensee’s needs.423 In an
illustrative case, a computer vendor delivered a computed topographer scan machine (CT
Scan) that was merchantable but still not suitable for the customer’s particular purpose.
The CT scanner met the standard of fair average quality but failed to pass the contextual
fitness test, as it was not suitable for the radiologists’ practice, which used x-rays to
create pictures of cross-sections of the entire body.
The fitness warranty issue arose because the radiologists had informed the vendor
that they needed software for full body scans, not just head scans, therefore the fitness
warranty was breached because the CT Scan software delivered could only accommodate
head scans. In this illustrative case, the CAT scan machine satisfied the merchantability
test but failed the fitness test, as it was not suitable for the customer’s particular
purpose. The CAT scanner was of fair or average quality but did not meet the contextual
needs of the radiologists. The group of radiologists let their vendor know that they
intended to use the product for body scanning, not just head scanning as the CAT Scan
software was only fit for head scans and could not read full-body scans. In another
software fitness case, a doctor charged that a computer vendor’s billing system software
was not fit for its particular purposes. The court found that the doctor’s office failed to
give its vendor notice of the problems and found the problem to be training staff on how
to use the software rather than a defect in the software.
Section 405(a) is the fitness warranty that applies “when a licensor has reason to
know of the licensee’s particular purpose in the transaction and that the licensee is
relying on the licensor’s expertise in selecting or developing information suitable for that
purpose.”424 Section 405(a)(2) cuts back on the fitness for a particular purpose where the
licensor is rendering services in a computer contract. Subsection 405(a)(2) “applies a
reasonable effort standard for cases where the relationship appears to concern services-
like obligations. Under prior law, the decision was based on whether a court viewed the
transaction as a sale (result) or services (effort) contract.”425 Software must not only be
merchantable and fit for a particular purpose but also be interoperable with a given
computer system or it is of no use to the licensee. “Section 405(c) creates a new implied
warranty regarding system performance in cases of systems integration contracts. The
warranty is that the selected components will function as a system.”426 “This does not
mean that the system, other than as stated in subsection (a) will meet the licensee’s
purposes, that it is an optimal system, or that it will not infringe third party rights. The
warranty is merely that the system will functionally operate as a system.”427

UCITA § 405(c)(2).
422

1 BARKLEY CLARK & CHRISTOPHER SMITH, THE LAW OF PRODUCT WARRANTIES § 6.2 (Boston,
423

Massachusetts, Warren, Gorham and Lamont, Nov. 2009).

424 UCITA, Id. at § 405(a).

425 UCITA, Id. at § 405, cmt. 4.

426 UCITA § 405, cmt. 6.

427 Id.

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 277

(4.) Systems Integration Warranties

Systems integration warranties are more important in the business-to-business cases

than the business-to-consumer context. UCITA § 405(c) creates an implied warranty of
system integration for software that performs as part of a complex computer system. The
systems integration warranty is a representation that a given component will
interoperate with other components of a system. In a development contract, the
commissioning party should require the licensor to give a compatibility warranty:
Compatibility warranty—The software should be warranted to operate with
any hardware or third party software the licensor recommends. This is
especially important if the software will be used as a basis on which the licensee
plans to build a particular function. Also, the warranty should specify that all
upgrades and enhancements provided will operate with the licensed software
without errors or malfunctions.428
The systems integration warranty often arises when a customer relies upon the
expertise of the vendor who represents that a given component or program will work on a
given system. For example, an online company could be making a systems integration
warranty if it told a customer its software would perform on a Windows 8 platform.
(5.) Information Content Warranties

UCITA recognizes an implied warranty for informational content that is unlike

those found in either Article 2 or 2A of the UCC. Section 404, the information content
warranty, is given only by merchant/licensors with a special relationship of reliance with
the licensee that “collects, compiles, processes, provides or transmits informational
content.”429 According to § 404(a), the merchant-licensor’s duty as to information content
is limited to inaccuracies “caused by the merchant’s failure to perform with reasonable
care.”430 UCITA § 404(b)(1) does not extend this warranty to encompass published
content nor is it applicable to the subjective qualities of information. The information
content warranty is inapplicable to published conduits or where licensor is simply a
conduit, which does not provide editorial services.
UCITA’s information content warranty is negligence-based, not predicated upon
strict liability like the other warranties. Section 404, cmt. 2 states, “Reasonable efforts,
not perfect results, provide the appropriate standard in the absence of express terms to
the contrary.”431 Section 404(b) does not warrant the accuracy of published information.
Licensors frequently limit any warranty representation to what they contributed to a
database, software or other digital information to avoid being held legally responsible
for the shortcomings of the entire system.
This warranty is more appropriate to database access agreements than to software
licensing. “An ‘access agreement’ is an agreement that authorizes the user of software to
access the provider’s software via a data-transmission system, such as the Internet, or
via a private network or another intermediary now known or hereafter developed.”432

428 Marie Flores, Don’t Settle For Just a Warranty, 19 NO. 10 E-COMMERCE L. & STRATEGY 1 (Feb. 2003).
429 UCITA § 404.
430 UCITA § 404(b)(1).
431 UCITA § 404(b).
432 Principles of the Law of Software Contracts, Id. at § 101(a).

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278 INTERNET-RELATED CONTRACT LAW Ch. 4

Section 404(a) limits the warranty to merchant/licensors that have a special relationship
of reliance with the licensee. This information-content warranty is limited to the
statement that the content was not inaccurate due to anything that the licensor did in
its processing. It is the information content creator, not the licensor, who would create
inaccuracies in informational content. Therefore, this warranty gives little protection to
the licensee against inaccuracies.
The merchant-licensor’s duty as to information content is limited to inaccuracies
“caused by the merchant’s failure to perform with reasonable care.”433 UCITA devises an
implied warranty for informational content that is unlike those found in either Article 2
or 2A of the UCC.434 Virginia, one of only two states to enact UCITA, adopted the
information content warranty:
Unless the warranty is disclaimed or modified, a merchant that, in a special
relationship of reliance with a licensee, collects, compiles, processes, provides,
or transmits informational content warrants to that licensee that there is no
inaccuracy in the informational content caused by the merchant’s failure to
perform with reasonable care.
(b.) A warranty does not arise under subsection (A) with respect to:
(1.) subjective characteristics of the informational content, such as the
aesthetics, appeal, and suitability to taste;
(2.) published informational content; or
(3.) a person that acts as a conduit or provides no more than editorial
services in collecting, compiling, distributing, processing, providing,
or transmitting informational content that under the circumstances
can be identified as that of a third person.
(c.) The warranty under this section is not subject to the preclusion . . . (b)(1)
on disclaiming obligations of diligence, reasonableness, or care. 435
UCITA’s information content warranty is negligence-based not predicated upon
strict liability like the other warranties. The information warranty is not what it is
cracked up to be because it is not applicable to published content. “One who hires an
expert cannot expect infallibility unless the express terms clearly so require. Reasonable
efforts, not perfect results, provide the appropriate standard in the absence of express
terms to the contrary.”436 Moreover, this warranty is more significant for what it does
not do. Section 404(b) states, “merchant licensors give no warranty for the accuracy of
published information content.”437 A lawyer representing a licensor in a contract where
the customer delivers data should limit any warranty protection to the licensor’s
contribution to the inaccuracy. This warranty is more appropriate to database
agreements than for software licensing.

433 UCITA § 404(a).

434 Id. at § 404.
435 Va. Code § 59.1–504.4. (Implied warranty; informational content).
436 UCITA § 404, cmt. 2.
437 UCITA § 404(b).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 279

The information content warranty focusing on accuracy of data has a limited sphere
of application. First, only a merchant/licensor can give this warranty. 438 Second, the
merchant/licensor must have a special relationship of reliance with the licensee. 439
Third, the warranty is limited to the statement that the content was not inaccurate due
to the licensor’s processing.440 It is the information content creator, not the licensor, who
would create inaccuracies in informational content. Therefore, this warranty gives little
protection to the licensee against inaccuracies. This special warranty applies to
merchant/licensors who deal in information transactions; it requires that the
information transferred is accurate within the practice of reasonable care. 441
The warranty for informational content does not arise for subjective aspects of the
informational content, published content or when the licensor is merely acting as an
information transfer conduit without providing editorial services. 442 This warranty may
be disclaimed despite UCITA’s general prohibition against disclaiming reasonableness
and care.443 The information content warranty does not extend to aesthetics, subjective
quality, or marketability. No court has construed the meaning of the implied warranty
for information content but presumably, the general standard for services applies.444
(6.) Warranty Disclaimers & Limitations

UCITA allows the parties to disclaim or modify all implied warranties by words or
conduct. The parties to a software license agreement must use specific language to
disclaim warranties, although it may sometimes be disclaimed by circumstances. An
express warranty once created is as “tenacious as a bulldog, and the only way to get rid
of it is to see that it never takes hold.”445 Google Analytics’ warranty disclaimer clause
entitled, “Our Warranties and Disclaimers” states:
We provide our Services using a commercially reasonable level of skill and care
and we hope that you will enjoy using them. But there are certain things that
we don’t promise about our Services.
OTHER THAN AS EXPRESSLY SET OUT IN THESE TERMS OR
ADDITIONAL TERMS, NEITHER GOOGLE NOR ITS SUPPLIERS OR
DISTRIBUTORS MAKE ANY SPECIFIC PROMISES ABOUT THE
SERVICES. FOR EXAMPLE, WE DON’T MAKE ANY COMMITMENTS
ABOUT THE CONTENT WITHIN THE SERVICES, THE SPECIFIC
FUNCTIONS OF THE SERVICES, OR THEIR RELIABILITY,
AVAILABILITY, OR ABILITY TO MEET YOUR NEEDS. WE PROVIDE THE
SERVICES “AS IS”.
SOME JURISDICTIONS PROVIDE FOR CERTAIN WARRANTIES, LIKE
THE IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A

UCITA § 404(a).
438

Id.
439

440 Id.

441 Id.

442 Id. at § 404(b).

443 Id. at § 404(c).

444 UCITA § 404, cmt. 1.

445 THOMAS M. QUINN, UNIFORM COMMERCIAL CODE COMMENTARY AND LAW DIGEST SECOND ¶ 2–313[A]

2–136 (New York: Thomson Reuters updated 2015).

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280 INTERNET-RELATED CONTRACT LAW Ch. 4

PARTICULAR PURPOSE AND NON-INFRINGEMENT. TO THE EXTENT

PERMITTED BY LAW, WE EXCLUDE ALL WARRANTIES. 446
The seller’s warranties are found in the 2–300s section of U.C.C. Article 2: U.C.C.
§ 2–312 to § 2–318. Over the past twenty years, countless courts have extended U.C.C.
warranties for the sale of goods to the licensing of intangibles. Google’s terms of service
follows a U.C.C. Article 2 methodology set forth in U.C.C. § 2–316 for the performance
warranties and U.C.C. § 2–312 for the warranty of infringement. The composite term “as
is” excludes all implied warranties of performance, which includes U.C.C. § 2–314, the
implied warranty of merchantability and U.C.C. § 2–315, the fitness for a particular
purpose. A warranty of non-infringement is excluded or modified by specific language.
Google’s warranty disclaimer does not attempt to disclaim express warranties.
However, many terms of use and software license agreements attempt to disclaim
express warranties. The only way to avoid liability for express warranties is not to make
them. As with U.C.C. Article 2, the implied warranty of merchantability is sufficient to
disclaim the implied warranty of informational content. The vast majority of software
license agreements disclaim the implied warranty of merchantability following the
methodology of U.C.C. Article 2 found in U.C.C. § 2–316. A former Microsoft lawyer
attributes this software industry contracting practice of disclaiming merchantability to
the uncertain meaning of software merchantability. Why should software publishers
take on a liability with ‘unknown repercussions?’447
Just as in Article 2 of the U.C.C., UCITA allows the parties to disclaim or modify all
implied warranties by words or conduct. “Any disclaimer of the implied warranty of non-
infringement and quiet enjoyment must be by specific language or by circumstances . . .
of the implied warranty of merchantability is also sufficient to disclaim the implied
warranty of informational content.”448 In addition, the use of “as is” or like expressions
may disclaim remedies with the “exception of the warranties of quiet enjoyment and non-
infringement under UCITA § 401 or UCITA § 404,”449 Warranties of noninfringement
are only disclaimable by specific language. Similarly specific language is required to
disclaim the warranty of accuracy in UCITA § 404.450 Amazon, the Internet’s largest
bookstore, is typical of Internet vendors in disclaiming all warranties, express, or
implied, including, but not limited to, implied warranties of merchantability and fitness
for a particular purpose. Amazon also does not make any warranty as to its information,
content, materials, products (including software), or services. Amazon also disclaims
responsibility for viruses originating on its site using specific language.
UCITA’s legal infrastructure legitimates the software industry practice of eliminating
the implied warranty; licensors often follow Amazon.com’s practice of offering its services
on an “as-is” basis. In order to exclude the implied warranty of merchantability, the
exclusionary language must mention the word “merchantability;” must be in writing;

446Google, Terms of Service, http://www.google.com/intl/en/policies/terms/.

447Robert W. Gomulkiewicz, The Implied Warranty of Merchantability in Software Contracts: A
Warranty No One Dares to Give and How to Change That, 16 J. MARSHALL J. OF COMP. & INFO. L. 393, 393
(1998).
448 2 GEORGE B. DELTA & JEFFREY H. MATSURRA, LAW OF THE INTERNET (New York, New York: Wolters,

Kluwer Law and Business,2008) at 13-118.

449 Id.

450 JOHN EDWARD MURRAY & HARRY M. FLECTNER, SALES, LEASES, AND ELECTRONIC COMMERCE:

PROBLEMS AND MATERIALS ON NATIONAL AND INTERNATIONAL TRANSACTIONS 146 (2003).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 281

and must be conspicuous. Warranty limitations must not be unconscionable nor violate
fundamental public policies. The Reporter for the Principles of the Law of Contracts
provided by the American law Institute completed an empirical study concluding that
fifty-three out of fifty-four Internet websites eliminated all warranty protection. 451 From
the beginning of the software industry, vendors universally disclaimed implied warranties
of merchantability and the fitness for a particular purpose. In the absence of a disclaimer,
computer programs must be fit for their ordinary purpose.
Consumer software is subject to state law limitations. Some software publishers will
place a legend on their warranty disclaimer that: “Certain state laws do not allow
limitations on implied warranties or the exclusion or limitation of certain damages.” The
proviso might additionally state, “If these laws apply to you, some or all of the above
disclaimers, exclusions, or limitations may not apply to you, and you might have
additional rights to avoid undue scrutiny from the Federal Trade Commission or state
attorneys general consumer protection divisions.” Massachusetts’ Chapter 106, 2–316A
prohibits sellers as well as lessors to disclaim the implied warranty of merchantability
and fitness for a particular purpose. Massachusetts’ law makes it clear that attempted
disclaimers of the implied warranties of fitness and merchantability in consumer
transactions are unenforceable.
(7.) Non-Infringement Warranty

The non-infringement warranty is a representation that the licensor warrants that

it does not infringe a third party’s patents, copyrights, trademarks, or trade secrets. The
essence of this warranty is that the licensor represents that it has the intellectual
property rights necessary to license the software or digital data. Most licensors are not
willing to provide this broad non-infringement warranty and instead give a warranty
that they have no knowledge of infringement.452 Under this provision, a licensor that
knowingly delivers infringing software or interferes with its customer’s right to use
software will be required to indemnify its customer. Any disclaimer of the implied
warranty of non-infringement and quiet enjoyment must be done with specific language.
UCITA adapts the warranty of quiet possession of information transfers from the law of
real property.
The essence of the quiet enjoyment warranty is the right of a licensee to use
information for the duration of the license without interference by a licensor or a third
party. The quiet enjoyment warranty applies only to the acts or omissions of the licensor,
not to third parties. A licensee receives “peace of mind” that it is not purchasing an
intellectual property lawsuit along with the software code. The licensor is accountable if
the software or other information product infringes title or intellectual property rights
of others. UCITA’s non-infringement warranty states:
A licensor of information that is a merchant regularly dealing in information
of the kind warrants that the information will be delivered free of the rightful
claim of any third person by way of infringement or misappropriation, but a
licensee that furnishes detailed specifications to the licensor and the method
required for meeting the specifications holds the licensor harmless against any
451 Robert A. Hillman & Ibrahim Barakat, Warranties and Disclaimers in the Electronic Age, 11 YALE

J. L. & TECH. 1, 3 (2009).

452 H. WARD CLASSEN, A PRACTICAL GUIDE TO SOFTWARE LICENSING FOR LICENSEES AND LICENSORS 511

(Chicago, Illinois: American Bar Association Business Law Section, 2d ed. 2007).

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282 INTERNET-RELATED CONTRACT LAW Ch. 4

such claim that arises out of compliance with either the required specification
or the required method except for a claim that results from the failure of the
licensor to adopt, or notify the licensee of, a non-infringing alternative of which
the licensor had reason to know.453
A licensor that delivers infringing software or interferes with its customer’s right to
use software will be required to indemnify its customer if its software infringes the
intellectual property of third parties. Any disclaimer of the implied warranty of non-
infringement and quiet enjoyment must be done with specific language. UCITA adapts
the warranty of quiet possession of information transfers. This concept originated in real
property transactions and later was applied to sales and leases of goods in the UCC.
UCITA imposes a strict liability standard, making the licensor accountable if the
software or other information product infringes title or intellectual property rights of
others. The software warranties for non-interference and non-infringement protect the
licensee should the licensed software infringe the intellectual property rights of third
parties. In states adopting UCITA, the licensor will have a duty to indemnify its
customer if delivered software violates a third party’s intellectual property rights. 454
Nevertheless, the licensor will seek to limit its indemnification duties to claims
recognized under U.S. intellectual property rights existing at the time that the licensor
delivers the software.455 In addition to non-infringement, licensors also give a warranty
of non-interference to their customers:
for the duration of the license, that no person holds a rightful claim to, or
interest in, the information which arose from an act or omission of the licensor,
other than a claim by way of infringement or misappropriation, which will
interfere with the licensee’s enjoyment of its interest; and
(2.) as to rights granted exclusively to the licensee, that within the scope of the
license:
(A.) to the knowledge of the licensor, any licensed patent rights are valid
and exclusive to the extent exclusivity and validity are recognized by
the law under which the patent rights were created; and
(B.) in all other cases, the licensed informational rights are valid and
exclusive for the information as a whole to the extent exclusivity and
validity are recognized by the law applicable to the licensed rights in
a jurisdiction to which the license applies. 456
(I.) Performance of a License Agreement
Delivery in a software contract occurs when the software maker gives its customer
electronic access to the licensed software. In a typical software license agreement, the
licensor’s delivery obligation may be to give its customer an activation key to enable
access to the licensed software. In an Internet transmission, delivery frequently comes
in the form of a download from a website. In a cloud-computing environment, a customer
will access computing applications and data from a datacenter that provides services as

453 UCITA § 401(a).

454 UCITA § 401.
455 H. WARD CLASSEN, A PRACTICAL GUIDE TO SOFTWARE LICENSING, Id. at 57.
456 UCITA § 401(b) (stating non-interference warranty).

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 283

opposed to tangible goods. Part 6 of UCITA extends commercial law concepts and
methods to information performance standards. Section 605 applies a “material breach”
standard in business-to-business transactions rather than the perfect tender rule, which
is reserved for business-to-consumer transactions.457 Licensors will generally prefer a
fundamental or material breach standard for performance.
A material breach of a software license agreement “occurs when there is a breach of
an essential and inducing feature of the contract.”458 The First Circuit U.S. Court of
Appeals defined material breach to occur: “when there is a breach of an essential and
inducing feature of the contract.”459 A material breach by one party excuses the other
party from further performance under the contract, and once relieved from performance,
the injured party is not liable for further damages incurred by the party in material
breach. The legal significance of a material breach by either the licensor or licensee
“excuses the other party from further performance under the contract.”460 Software
failure is “the occurrence of either deficient functionality, where the program fails to
perform a required function, or deficient performance, where the program performs a
required function too slow or in an insufficient manner”461 UCITA’s § 701 gives an
aggrieved party the right to refuse a performance that is a material breach.462 Under
this section, a material breach is first determined by examining the agreement.
Examples of breach would be repudiation of a contract, failure to perform a contractual
obligation in a timely way, exceeding the scope of use, or failing to comply with other
conditions expressed in the contract.
As with U.C.C. Article 2, it is a breach to repudiate a contract before the date of
performance (anticipatory repudiation). UCITA’s performance rules are functionally
equivalent to U.C.C. Article 2 except for its articulation of a material breach standard
for non-mass-market transactions. Section 703 imports U.C.C. § 2–508’s concept of a
cure. A federal appeals court affirmed damages for a software developer’s failure to cure
software defects in a 2006 case. The court found that a licensor failed to make any efforts
to correct material failure and did not perform substantially in accordance with the
software’s documentation.463 Section 704 adopts the material breach standard for
defective tender of software. Section 707 imports the concept of revocation of acceptance
from Article 2. Section 708 gives parties a right to an adequate assurance of performance,
while Section 709 adopts the concept of anticipatory repudiation with similar provisions
to U.C.C. Article 2, whereas retraction of anticipatory repudiation is found in Section
710.464
Defects in software may be difficult to detect unless engineers build in an extensive
period of alpha testing. Newly developed software will often have latent design defects
only detectable in certain applications. Software problems may not surface until the
product interacts with a third party’s software. The licensor will want to reallocate the

UCITA § 605.
457

Teragram Corp. v. Marketwatch.com, Inc., 444 F.3d 1, 26 (1st Cir. 2006).

458

459 Id.

460 Id. at 27.

461 See Daniel T. Perlman, Note, Who Pays the Price of Computer Software Failure?, 24 RUTGERS

COMPUTER & TECH. L.J. 383, 387 (1998).

462 UCITA § 701.

463 Teragram Corp. v. Marketwatch.com, Inc., 444 F.3d 1, 29 (1st Cir. 2006).

464 UCITA §§ 709, 710.

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284 INTERNET-RELATED CONTRACT LAW Ch. 4

risk if its product will not work with third party software. U.C.C. Article 2’s perfect
tender rule does not mesh well with developmental or customized software where bugs
are worked out over a period of acceptance testing. A licensor will be concerned that a
court will mechanically apply the “perfect tender” standard to software, so it is preferred
that the parties agree to a material breach or fundamental breach standard to replace
the perfect tender rule. Saba Software disclosed in a 10Q S.E.C. filing that they, like
many other companies, are challenged by the problem of identifying design defects or
errors in their software prior to release:
Products as complex as ours often contain unknown and undetected errors or
performance problems. Although our products are subject to rigorous testing
and quality control processes, serious defects are frequently found during the
period immediately following introduction and initial shipment of new products
or enhancements to existing products. Although we attempt to resolve all
errors that we believe would be considered serious by our customers before
shipment to them, our products are not error-free. These errors or performance
problems could result in lost revenues, reduced service levels, delays in
customer acceptance on professional services products and would be
detrimental to our business and reputation. As is typical in the software
industry, with each release we have discovered errors in our products after
introduction. We will not be able to detect and correct all errors before releasing
our products commercially and these undetected errors could be significant. We
cannot assure you that there are no undetected errors or performance
problems.465
A software maker will find it difficult to comply with the “perfect tender rule.” The
parties must spell out the meaning of impaired functionality if they choose that test
rather than “perfect tender.” U.C.C. § 601, the perfect tender rule, permits a buyer to
obtain substitute goods if the goods fail “in any respect to conform to the contract.”466
UCITA’s material breach standard is functionally equivalent to Article 25 of the
Convention for the International Sale of Goods (CISG). UCITA imports a large number
of performance-related concepts such as tender, acceptance, rejection, revocation, cure
repudiation, and retraction from U.C.C. Article 2, with minor adaptations. UCITA’s
concept of tender is that a licensor transmits a copy of software or otherwise enables use
or access to software, databases, or other information. In a mass-market license
agreement, the acceptance process will typically include downloading and using the
software. As with the sale of goods, acceptance occurs if the customer fails to return
software after using it. The customer may expressly communicate acceptance to the
software publisher or failing to reject the software. The parties need to specify
acceptance criteria for the customer’s acceptance testing in its operational environment.
The acceptance-testing period is a software industry practice where the software
developer gives its customer a fixed period to evaluate the software and either accept or
reject it.
UCITA adopts a material breach standard for performance in Section 701 that gives
an aggrieved party the right to refuse a performance that is a material breach. Section
701 states a material breach is first determined by examining the agreement. “A breach

465 Saba Software Inc., 10-Q Filing to Securities & Exchange Commission (October 7, 2009).
466 U.C.C. § 2–601.

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 285

occurs if a party without legal excuse fails to perform an obligation in a timely manner,
repudiates a contract, or exceeds a contractual use term, or otherwise is not in
compliance with an obligation placed on it by this [Act] or the agreement.”467 UCITA
§ 601(b)(1) excludes the material breach standard for copies of software or other
information in a mass-market transaction. UCITA adopts the perfect tender rule for
mass-market transactions but this rule does not extend to business-to-business or
custom licenses.468 UCITA defines a “mass-market” license to include “consumer
contracts” but also any other license where the end-user licensee receives software on
the same terms. Mass-market end-user licenses are offered by the licensor on the same
terms for the same rights without individual negotiation. Part 6 of UCITA also sets forth
the procedure for terminating a license agreement.
UCITA § 617 requires that the terminating party to give the other party a
“reasonable notice of termination.”469 Termination is the legally operative stage that
discharges obligations on the part of the licensor and the licensee. Nevertheless, in
software license agreements, a licensee may have continuing obligations that survive
termination unlike sales or leases of goods. The Joint Task Force of the Delaware State
Bar Association Sections of Commercial Law, Computer Law, Intellectual Property, and
Real and Personal Property summarizes UCITA Part Six as follows:
Part 6 of UCITA adapts traditional rules as to what is acceptable performance
to the context of computer information transactions, including providing rules
for the protection of the parties concerning the electronic regulation of
performance (Section 605), to clarify that the appropriate general rule is one of
material breach with respect to cancellation (rather than so called “perfect
tender”) (see Section 601; see also Sections 701, 704, and 802), and to carry over
the familiar rules of Article 2 when appropriate in the context of the tangible
medium on which the information is fixed and for impracticability. Part 6 also
supplies guidance in the case of certain specialized types of contracts for
termination.470
UCITA adopts a substantial performance or material breach standard versus
Article 2’s parochial and unrealistic perfect tender rule for contract performance, which
is adopted in no other country connected to the Internet. In contrast, the U.C.C. Article
2 perfect tender rule permits a buyer to obtain substitute goods if the goods fail “in any
respect to conform to the contract.”471 Perfect tender is not a realistic performance
standard for the sale of goods, and courts find ways to bypass this harsh doctrine. Perfect
tender is a disaster for the software industry where software may be composed of
millions of lines of code. A licensee should not be able to cancel a software contract
because of a minor bug or errant line of code. The material breach standard parallels the
fundamental breach of Article 25 of CISG.472 The vast majority of material breach cases
will be ones in which the software fails to substantially conform to its documentation.

UCITA § 701.
467

UCITA § 601(b)(1).
468

469 UCITA § 617.

470 William Denny, The Joint Task Force of the Delaware State Bar Association Sections of Commercial

Law, Computer Law, Intellectual Property, and Real and Personal Property Overview of the Uniform
Computer Transactions Act (Jan. 5, 2000).
471 U.C.C. § 2–601.

472 CISG art. 25.

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286 INTERNET-RELATED CONTRACT LAW Ch. 4

UCITA imports a large number of performance concepts from U.C.C. Article 2, with
minor adaptations. UCITA adapts U.C.C. Article 2 concepts such as tender, acceptance,
rejection, revocation of acceptance, cure, anticipatory repudiation, and retraction of
anticipatory repudiation from Article 2 of the UCC. UCITA’s concept of tender is that a
licensor transmits a copy of software or otherwise enables use or access to software,
databases, or other information.473 A licensor’s right to cure is a major countervailing
power to the licensee’s right to reject software products. In Sun Microsystems technology
development and distribution license, Microsoft had a thirty-day period for error
correction if it failed to meet the compatibility requirements for Java programming
language.474 If Microsoft could not cure the problems in this period, Sun Microsystems
had the right of termination.
Under U.C.C. Article 2, a buyer’s refusal to permit the seller to cure the non-
conforming tender was grounds for breach of the sales contract. In customized or
development software agreements, the acceptance period is the functional equivalent of
a cure. During the acceptance-testing period, the customer will have an opportunity to
fix bugs, reconfigure interfaces, and make adjustments to improve compatibility. UCITA
adapts U.C.C. Article 2’s perfect tender rule to mass-market software licensing
transactions.475 UCITA § 601(b)(1) excludes the material breach standard for copies of
software or other information in a mass-market transaction. “This “conforming tender”
rule (sometimes described as the “perfect tender” rule) applies to cases involving delivery
of a copy in mass-market transactions.”476
UCITA defines a “mass-market” license to include “consumer contracts” but also
any other license where the end-user licensee receives software on the same terms. Mass-
market end-user licenses are offered by the licensor on the same terms for the “same
information or informational rights in a retail transaction under terms and in a quantity
consistent with an ordinary transaction in a retail market.”477 Part 6 of UCITA sets forth
the procedure for terminating a license agreement. UCITA § 617 requires that the
terminating party to give the other party a “reasonable notice of termination.”478
Termination is the legally operative stage that discharges obligations on the part of the
licensor and the licensee. In software license agreements, a licensee may have continuing
obligations that survive termination.
(J.) Remedies for Licensors and Licensees
Part 7 of UCITA establishes the basic rules that govern breach of computer
information transaction agreements. Even if a licensor tenders software with a
substantial defect, it will have an opportunity to cure—a concept UCITA imports from
U.C.C. § 2–508. A customer’s failure to notify the vendor that it is rejecting software
serves as a waiver of all remedies. Part 8 of UCITA imports many U.C.C. Article 2’s
remedies by adapting provisions to licensing. UCITA defines “ ‘direct damages’ as
compensation for losses associated with the value of the contracted for performance itself

473 U.C.C. §§ 2–601, 2–602.

474 Sun Microsystems v. Microsoft Corp., 81 F. Supp.2d 1026, 1032 (N.D. Cal. 2000).
475 UCITA § 601, cmt. 4.
476 Id.
477 U.C.C. § 1–201(44).
478 UCITA § 617.

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§ 4.7 UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT 287

as contrasted to loss of a benefit expected from use of the performance or its results.”479
The key UCITA sections measuring direct damages are Section 808 and 809 that are
capped by the contracted-for price or market value for the performance as appropriate.
Section 816 of UCITA limits licensor’s ability to electronically repossess information or
disable software.
UCITA gives the aggrieved party the right to seek a remedy for nonmaterial
breaches as well as for material breaches. However, rescinding a software license
agreement does not preclude the aggrieved party from pursuing other remedies. An
aggrieved party may cancel a license agreement if there is an uncured material breach,
but the breaching party has a right to notice before the non-breaching party cancels a
software contract. UCITA tailored buyer and seller remedies to software transactions.
UCITA § 804 is a carbon copy of U.C.C. § 2–718, the doctrine of liquidated damages,
which defers to the parties’ compensation clauses.
Parties may specify liquidated damages, sometimes called compensation clauses, in
advance so long as they do not amount to a penalty clause. A compensation clause in a
license agreement may set both a floor and a ceiling for recovery by the non-breaching
party (minimum and maximum recovery). The licensee can only change limited remedies
on the narrow grounds of unconscionability, fundamental public policy, or the issue of
mutuality of obligation. None of these tools are promising for addressing consumer
protection problems such as one-sided choice of law, predispute mandatory arbitration,
and limited but exclusive remedies.480
Section 803(b) adopts the doctrine of “sole and exclusive” remedy from U.C.C. Article
2. Xerox offers two remedies for its breach of warranty; (1.) replace the non-conforming
software or (2.) give its customer a refund. In order to bypass the standard remedies, a
licensor must include the specific language “sole and exclusive” to the limited remedy
provision in the license agreement. If this language is used, the “replacement and
refund” remedy displaces all UCITA remedies. This methodology is drawn from U.C.C.
Article 2.
If a licensee can prove that “performance of an exclusive or limited remedy causes
the remedy to fail of its essential purpose,” it may pursue all licensee remedies under
UCITA. UCITA’s doctrine of the failure of essential purpose is the functional equivalent
of U.C.C. § 2–719(2). Courts frequently employ the doctrine of the failure of essential
purpose to strike down unreasonable limitations of damages in software licenses, as was
the case in RRX Industries. v. Lab-Con, Inc.481 In RRX Industries, the court invalidated
a clause in a software license agreement that limited the licensee’s recovery to actual
fees paid under the license agreement. In RRX, the computer seller began installing the
software system in January 1981 and completed it in June 1981. Bugs appeared in them
soon after installation. The seller attempted to repair the bugs by telephone patching.
The licensor upgraded the system to make it compatible with hardware that was
more sophisticated. However, the software maker was unable to iron out the bugs and
the software did not perform according to the specifications. The court found that the
computer maker failed to install an operational software system and to train the buyer’s

479 UCITA § 102(22).

480 See generally, Jean R. Sternlight, Creeping Mandatory Arbitration: Is It Just?, 57 STAN. L. REV. 1631
(2005).
481 772 F.2d 543 (9th Cir. 1985).

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288 INTERNET-RELATED CONTRACT LAW Ch. 4

employees how to use it. The court upheld the district court’s finding that the default of
the computer seller was “so total and fundamental that its consequential damages
limitation was expunged from the contract.”482
UCITA § 803 permits an aggrieved licensee to have all UCITA remedies if the
vendor’s sole and exclusive remedy “fails of its essential purpose.” Courts have struck
down limited remedy clauses in license agreements where the licensee does not receive
the benefit of the bargain.483 As with most UCITA provisions, the parties to a license
agreement have the freedom of contract to forge their own contract remedies. UCITA
gives the aggrieved party the right to seek a remedy for nonmaterial breaches as well as
for material breaches. However, rescinding a software license agreement does not
preclude the aggrieved party from pursuing other remedies. An aggrieved party may
cancel a license agreement if there is an uncured material breach, but the breaching
party has a right to notice before the non-breaching party cancels a software contract.
UCITA has essentially imported the buyer’s and seller’s remedies of Article 2 of the
U.C.C. to software transactions.
Non-performance of the remedy leaves the licensee without what it bargained for
under the contract, a functioning product.484 For example, UCITA reasons that an agreed
limited remedy provision is enforceable even if it does not afford a consumer (or other
licensee) a “minimum adequate remedy.”485 The consumer’s only tools for challenging
TOUs will be on the narrow grounds of unconscionability, fundamental public policy,
and the issue of mutuality of obligation. 486 None of these tools is promising in resolving
problems such as one-sided choice of law and forum clauses.
If a licensee can prove that “performance of an exclusive or limited remedy causes
the remedy to fail of its essential purpose,” the licensee may pursue any other UCITA
remedy.487 Maryland’s UCITA allows parties to choose the remedies for breach of
contract “even to the point of eliminating judicial remedies and creating an “exclusive
. . . sole remedy.”488 UCITA’s doctrine of the failure of essential purpose is the functional
equivalent of U.C.C. § 2–719(2) which provides: “Where circumstances cause an
exclusive or limited remedy to fail of its essential purpose, remedy may be had as
provided in this Act.”489 UCITA § 803 permits an aggrieved licensee to have all UCITA
remedies if the vendor’s sole and exclusive remedy “fails of its essential purpose.”490 This
provision gives the licensee all of the remedies of UCITA if a limited, exclusive remedy
fails.

482 Id. at 547.

483 RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543, 41 U.C.C. Rep. Serv. 1561 (9th Cir. 1985)
(striking down a clause in a software license where the licensor agreed to correct programming “bugs” but
limited the licensor’s liability to an amount not in excess of the actual amounts paid to the licensor as license
fees).
484 UCITA § 803 cmt. 5(a).

485 UCITA § 803, cmt. 6.

486 Id.

487 Id. at § 803(b).

488 Baney Corp. v. Agilysys NV, LLC, 773 F. Supp. 2d 593, 605 (D. Md. 2011).

489 U.C.C. § 2–719(2).

490 Id.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 289

§ 4.8 Principles of the Law of Software Contracts

The American Law Institute (ALI) initiated the Principles of the Law of Software
Contracts (Principles) to fill a gap left by the demise of UCITA and to bridge a gap in
software contracting law.491 The ALI approved the Principles in 2009 as “soft law” as
opposed to UCITA, which was hard law as a state statute to be enacted by legislatures.
The Principles are a Restatement-like template to guide courts, contractors, and
policymakers. “Further, the near demise of the Uniform Computer Information
Transactions Act (UCITA) and the vague scope provision of amended Article 2 of the
Uniform Commercial Code (U.C.C.) (also unlikely to be widely adopted) exacerbate the
confusion, calling attention to the current legal vacuum.”492 The purpose of the Principles
is to harmonize and unify software contracting law whether denominated by a sale, a
lease, license or other assignment. “Perhaps no other commercial subject matter is in
greater need of harmonization and clarification” than software contracts.”493 The
Principles bridge a gap in software law:
These Principles seek to clarify and unify the law of software transactions. In
light of the many percolating legal issues that pertain to the formation and
enforcement of software agreements, an attempt to “restate” this law would be
premature. Reinforcing this view, software technology continues to develop,
which influences methods of doing business and changes or creates new legal
issues. Instead of restating the law, a “Principles” project accounts for the case
law and recommends best practices, without unduly hindering the law’s
adaptability to future developments. For example, the “Principles” drafter can
formulate the “black letter” rather broadly, with substantial elaboration in
Comments. Further, although these Principles often employ prescriptive
language, a “Principles” project is not the law unless and until a court adopts
it. Courts can apply the Principles as definitive rules, as a “gloss” on the
common law, U.C.C. Article 2, or other statutes, or not at all, as they see fit.494
The Principles aim at clear formulations of the law as it presently stands or might
plausibly be stated by a court. In the absence of a software contracting law, courts stretch
U.C.C. Article 2 and other bricks and mortar principles to digital information. The
American Law Institute Reporters identified four issues that need to be resolved in a
mature software contracting law:
Software contracts create a wide array of new issues on the substantive side.
One central issue is whether contracting parties are free to broaden or narrow
the protections afforded by federal and state intellectual property law.
Resolution of this issue requires not only attention to contract law, but also
sensitivity to the balance of rights created by intellectual property law. Another
issue involves the limits of freedom of contract. What terms should be stricken

491 “Issues arising from the process of formation in the software environment share common themes

with other kinds of contracts. One major set of questions involves whether to enforce contract terms that
become available only after payment, or that are presented in a take-it-or-leave-it standard form, or both.
Neither Article 2 of the U.C.C. nor the common law has satisfactorily resolved these issues, as evidenced by
the amount of litigation, conflicting decisions, and ink spilled in the law reviews.” Principles of the Law of
Software Contracts, Introduction.
492 Principles of the Law of Software Contracts Intro. (2010).

493 Id.

494 Id.

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290 INTERNET-RELATED CONTRACT LAW Ch. 4

on unconscionability, public policy, or related grounds? A third important issue

involves the appropriate level of quality protection for users of software in light
of the engineering challenges and diverse methods of producing it, on the one
hand, and defective software’s potential to cause calamitous harm, on the
other. A fourth issue involves the permissible range of software remedies
providers may employ, including self-help mechanisms and remedy
limitations.495
To date, only a single court has cited the Principles of the Law of Software Contracts
in a judicial opinion and no court has adopted any of its substantive provisions. 496
Nevertheless, the Principles provide a useful template for software contracts of all kinds:
sales, leases, and licenses.497 UCITA, in contrast, was a statute designed for software
licensors. Some critics of the ALI law reform project characterize it as provisions as being
too pro-licensee, such as the nondisclaimable duty to warn users of hidden material
defects.498 This was the opposite criticism of UCITA, which was perceived as pro-licensor.
Because of its burgeoning importance, perhaps no other commercial subject
matter is in greater need of harmonization and clarification. Although the
software industry is relatively young, it constitutes an increasingly important
share of our economy. Further, the law governing the transfer of hard goods is
inadequate to govern software transactions because, unlike hard goods,
software is characterized by novel speed, copying, and storage capabilities, and
new inspection, monitoring, and quality challenges. In short, parties to
software transactions would greatly benefit from the clarification and
improvement of this area of the law.
These Principles seek to clarify and unify the law of software transactions. In
light of the many percolating legal issues that pertain to the formation and
enforcement of software agreements, an attempt to “restate” this law would be
premature. Reinforcing this view, software technology continues to develop,
which influences methods of doing business and changes or creates new legal
issues. Instead of restating the law, a “Principles” project accounts for the case

495 Principles of the Law of Software Contracts Intro. (2010).

496 Conwell v. Gray Loon Outdoor Mktg. Group, 906 N.E.2d 805, 811 (Ind. Sup. Ct. 2009) (refusing to
apply U.C.C. Article 2 but noting that American Law Institute launched Principles of the Law of Software
Contracts in affirming judgment in favor of Internet website designer who sued client, seeking payment for
making website modifications and hosting client’s website).
497 “The Principles should apply to all software agreements supported by a consideration, including

licenses, sales, and access contracts. To some extent, this approach eliminates heretofore contentious debates
over the characterization of a transaction, and the resulting implications. For example, the application and
reach of these Principles should not depend on whether a transferor labels a transaction a sale or a license. In
this regard, the goal of the Principles is to make sure that the legal rights that flow from an agreement do not
depend solely on the label a party places on the agreement. Instead, legal rights are based on the legitimacy
of the process of contracting and the meaning and appropriateness of the substantive terms in light of federal
intellectual property law, public policy, and unconscionability concerns.” Principles of the Law of Software
Contracts 1, 2 Overview (2010).
498 H. Ward Classen, who represents large-scale licensors, stated in his software licensing treatise, that

the “Principles are perceived as licensee oriented and as incorporating consumer protections into commercial
transactions. Many argue the Principles limit the freedom of contract, increasing vendor cost and uncertainty,
leading to an increase in litigation . . . From the licensor’s perspective, the most controversial provision
addresses a non-disclaimable warranty of ‘no hidden material defects.’ This warranty may not be disclaimed.
The warranty extends “ to any party in the normal chain of distribution.” H. WARD CLASSEN, A PRACTICAL
GUIDE TO SOFTWARE LICENSING FOR LICENSEES AND LICENSORS (Chicago, Illinois: American Bar Association,
Business Law Section, 4th ed. 2011) at 273.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 291

law and recommends best practices, without unduly hindering the law’s
adaptability to future developments. . . . The ALI has employed the “Principles”
approach before in projects such as “Principles of Corporate Governance:
Analysis and Recommendations” and “Principles of the Law of Family
Dissolution: Analysis and Recommendations.”499
Judges have little recourse but to stretch U.C.C. Article 2 to software but sales law
“is inadequate to govern software transactions because, unlike hard goods, software is
characterized by novel speed, copying, and storage capabilities, and new inspection,
monitoring, and quality challenges.”500 The problem with extending U.C.C. Article 2 to
software is that it does not fit this durable goods paradigm. 501 Title never passes with
licensing unlike sales. Similarly, U.C.C. Article 2’s warranty of title is inapplicable to
software transactions. Software requires its own specialized legal infrastructure to
reflect its emblematic qualities in the borderline between intellectual property and the
law of contracts.
With soft law, courts have the discretion to apply the Principles as definitive rules,
to supplement the common law or Article 2 of the UCC, or not use this template. 502 In
the past, the ALI distilled the common law by developing Restatements of the Law such
as the Restatement of Contracts and the Restatement of Torts. In contrast to UCITA or
Article 2 of the UCC, the Principles of Software are not self-executing and do not apply
unless a court adopts them. The Principles offer courts as well as attorneys representing
clients a limited number of rules applicable to most software contracts. 503 Courts may
also apply the Principles by analogy even though a given transaction is outside the
sphere of application. The following is a roadmap of the topics covered by the Principles
of the law of Software Contracts:

Principles of the Law of Software Contracts, Reporters’ Introduction (2010).

499

Id. at 1–2.
500

501 The courts’ strained efforts of applying the law of sales to the licensing of intangibles is like the

television commercial in which two mechanics are trying to fit an oversized automobile battery into a car too
small to accommodate it. The car owner looks on with horror as the mechanics hit the battery with mallets,
trying to drive it into place. The owner objects and the mechanics say, “we’ll make it fit!” The owner says, “I’m
not comfortable with make it fit.” Michael L. Rustad, Commercial Law Infrastructure for the Age of
Information, 16 J. MARSHALL J. COMPUTER & INFO. L. 255, 274 (1997).
502 Maureen O’Rourke, Software Contracting, SM088 ALI–ABA 27, American Law Institute American Bar

Association, CLE (June 7–8, 2008) (presenting discussion draft).

503 American Law Institute Reporters, Memorandum to Principles of Software Contracts (May 2010) at

xix.

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292 INTERNET-RELATED CONTRACT LAW Ch. 4

Chapters
of Principles Key Selections
Chapter 1: § 1.01 Definitions
Definitions, § 1.06 Scope in General
Scope and § 1.07 Scope of Embedded Software
General Terms
§ 1.08 Scope: Mixed Transfers
(Sections 1.01–1.14)
§ 1.09 Enforcement of Terms under Federal Intellectual
Property Law
§ 1.10 Public Policy
§ 1.11 Unconscionability
§ 1.12 Relation to Outside Law
§ 1.14 Choice of Law in Standard Form Transfers, Forum-
Selection Clauses
Chapter 2: § 2.01 Formation Generally
Formation § 2.02 Enforcement of the Standard Form
and Enforcement § 2.03 Contract Modification
(Sections 2.01–2.04)

Chapter 3: § 3.01 Implied Indemnification vs. Infringement

Performance § 3.02 Express Quality Warranties,
(Sections 3.01–3.12) § 3.03 Implied Warranty of Merchantability
§ 3.04 Implied Warranty of Fitness for a Particular Purpose
§ 3.05 Other Implied Quality Warranties
§ 3.06 Disclaimer of Express & Implied Quality Warranties
§ 3.07 Third-Party Beneficiaries of Warranty
Chapter 4: § 4.01 Contractual Modification or Limitation of Remedy
Remedies § 4.02 Liquidation and Limitation of Damages
(Sections 4.01–4.06) § 4.03 Use of Automated Disablements
§ 4.04 Cancellation
§ 4.05 Expectation Damages
§ 4.06 Specific Performance

(A.) Sphere of Application

(1.) Software Contracts for Consideration

The Principles apply to any transfer of any software, including sales, leases, and
licenses, as long as the transfer of software is supported by consideration, which
encompasses sales, leases, and licenses. 504 The ALI Reporters describe the sphere of

504 “These Principles address several sets of issues. The first issue involves the scope of the project. For

a discussion of this difficult issue, see the Summary Overview to Chapter 1, Topic 2, that follows. We conclude
that the appropriate scope of the project is agreements for the transfer of software or access to software for a
consideration, i.e., software contracts. The project does not include the exchange of digital art or digital
databases for reasons discussed in the Summary Overview to Topic 2 of this Chapter.” American Law Institute
Reporters, Introduction to Principles of Software Contracts (May 2010).

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 293

application as any form of software contract, thus avoiding the problem of determining
whether a given software transaction was a sale, lease, or license. As the Reporters state:
Focusing on software contracts, regardless of the type, avoids issues arising
from the label the parties place on a transaction. Regardless of whether the
parties call their transaction a license, sale, lease, or something else, the
Principles would apply and courts would avoid the question of whether the
UCC’s Article 2, common law, UCITA, or some other law governs the
transaction.505
Apache License Version 2.0 grants the licensee a “perpetual, worldwide, non-
exclusive, no-charge, royalty-free, irrevocable copyright license to reproduce, prepare
Derivative Works of, publicly display, publicly perform, sublicense, and distribute the
Work and such Derivative Works in Source or Object form.”506 The Principles’ sphere of
application excludes all open source software contracts that are royalty-free or without
consideration.
The Principles of the Law of Software Contracts is a project aimed at all software
contracts entered into for consideration, whether structured as licenses, transfers,
assignments, or sales. The Restatement-like Principles address legal issues for
transferring software for consideration, whether by lease, license or sale.
(2.) Exclusions from the Principles’ Sphere of Application

(a.) Digital Content & Databases

“Section 1.01(j) defines software to exclude digital content (digital art and digital
databases) and §§ 1.06 through 1.08 delineate the types of software transfers targeted
by the Principles.”507
(b.) Embedded Software

The Principles exclude embedded software from its sphere of application. 508 The
Principles are inapplicable to physical media on which software is stored or transferred
such as a CD-ROM or firmware.509 UCITA Article 2 is the applicable law for CD-ROMs
and firmware, a result similar to UCITA’s sphere of application.

505 Robert A. Hillman & Maureen O’Rourke, Principles of the Law of Software Contracts: Some

Highlights, 84 TULANE L. REV. 1520, 1522 (2010).

506 Open Source Initiative, Open Source Initiative OSI—Apache License, Version 2.0:Licensing, Apache

License Version 2.–0, http://www.opensource.org/licenses/apache2.0.php.

507 Id.

508 “Software embedded in goods should less frequently raise issues concerning copying, transfer,

support, maintenance, upgrade, inspection, monitoring, licensing restrictions, or remedial limitations (in any
way distinct from the goods themselves). For example, embedded software typically is difficult to copy and
special-purpose in nature so that the owner of one kind of goods with embedded software cannot easily copy
the software and transfer it for use in another brand or kind of goods. In addition, “[w]hen software is embedded
and marketed as an integral part of goods, many, if not most, people would consider the software to be part of
the goods.” Principles of the Law of Software Contracts 1, 2 Overview (2010).
509 “Like UCITA, these Principles do not apply to transactions that involve telecommunication services,

such as the distribution of audio and visual content either on cable or over the Internet, and do not apply to
most transactions involving the motion picture and music industries. However, these Principles effectuate
these exclusions, not by creating industry-specific carve-outs, but by limiting the scope to transfers of software
as defined in § 1.01(j) and (m) and by utilizing the predominant-purpose test of § 1.08 for mixed transactions.
Principles of the Law of Software Contracts 1, 2 Overview (2010). “Section 1.01(j), which defines software, and
§§ 1.06 through 1.08, on scope, accomplish the goals set forth in this discussion. Section 1.01(j) defines software

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294 INTERNET-RELATED CONTRACT LAW Ch. 4

(c.) Open Source Software Contracts Without Consideration

Open source licenses510 without licensing fees or other consideration, are outside
the scope of the Principles of the Law of Software Contracts.511 This limitation does not
take many open source software outside of the Principles’ sphere of application. The
Reporters note that as long as there is consideration, the Principles apply. 512
Consideration may include licensing fees, but there may be other forms of consideration
such as the obligation of the licensee to supply the licensor with the source code for
improvements.513 The Principles would also apply if the licensee agreed to pay
maintenance fees or a fee for ancillary services. Consideration is broadly construed and
would thus apply the Principles to many, if not most, open source license agreements. 514
As the Reporters note:
Open source licenses also often include terms such as requiring the licensee to
distribute derivative software under the same terms as the initial transfer
(same terms provision) or requiring the licensee to keep the source code open if
it transfers the software (copyleft provision).’ Such terms also should constitute
consideration under contract law because the terms ‘go beyond simply defining
the boundaries of the license[s]” by creating affirmative obligations if the
transferee itself distributes the software.’ Further, licensors have multiple
motives for ‘bargaining for’ these provisions. For example, many licensors of
open source software seek to further their philosophy of openness by creating
a software commons to increase the uses of software for the benefit of society.
Courts have found that such altruistic motives constitute evidence of
bargained-for consideration. Licensors may benefit more directly by entering
lucrative service contracts or by enhancing their reputations, which may lead
to successful entrepreneurial activities. 515
(d.) Physical Tangible Medium

As with UCITA, Section 1.06(b)(1) of the Principles “does not apply to any disk, CD-
ROM, or other tangible medium that stores the software. If a disk is defective so that the
software is inaccessible, for example, Article 2 of the Uniform Commercial Code applies

to exclude digital content (digital art and digital databases) and §§ 1.06 through 1.08 delineate the types of
software transfers targeted by the Principles. The rules and Comments on scope that follow surely do not
clearly place every transaction on one side or the other of the scope line. No scope provisions could achieve that
goal. Instead, these Principles set forth a limited number of coherent rules on scope that courts can apply to
most transactions and that identify the types of transfers these Principles target.” Id.
510 Red Hat, Inc. for example is a leading provider of open source software and related services to

enterprise customers. Red Hat’s open source software, used by Wall Street investment firms, hundreds of
Fortune 500 companies, and the United States government, is outside the sphere of application of the
Principles of the Law of Software Contracts.
511 Jacobsen v. Katzer, 535 F.3d 1373, 1378 (Fed. Cir. 2008) (“Open source software licenses, or ‘public

licenses,’ are used by artists, authors, educators, software developers, and scientists who wish to create
collaborative projects and to dedicate certain works to the public.”).
512 Robert A. Hillman & Maureen O’Rourke, Principles of the Law of Software Contracts: Some

Highlights, 84 TULANE L. REV. 1520, 1523 (2010).

513 Id. at 1523–24.

514 Id.

515 Id. at 1524.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 295

to determine the transferee’s warranty and remedial rights.”516 The Reporters explain
why a defective physical disk is outside the Principles’ sphere of application:
“A” transfers a word-processing program to “B” on a CD-ROM. The CD-ROM is
defective. These Principles apply to the transfer of the word-processing program but not
to the defective CD-ROM. The warranty rules of Article 2 of the U.C.C. comfortably
govern the quality of the CD-ROM, whereas these Principles directly address quality
concerns relating to the software program.517
(3.) Mixed Transactions

The Reporters acknowledge this “gravamen of the action” is anomalous in that

U.C.C. Article 2 could apply to part of a transaction and the Principles of the Law of
Software Contracts to the same transaction. 518 The Reporters focus on the special
problems presented by the software component of mixed transactions. The Principles
apply a “predominant purpose” test; or what the Convention for the International Sale
of Goods conceptualizes as the “preponderant part” test. If a manufacturer embeds
software in goods or software is part of a mixed transaction, courts ask whether the goods
or software predominates. The Reporters state:
Software embedded in goods should less frequently raise issues concerning copying,
transfer, support, maintenance, upgrade, inspection, monitoring, licensing restrictions,
or remedial limitations (in any way distinct from the goods themselves). For example,
embedded software typically is difficult to copy and special-purpose in nature so that the
owner of one kind of goods with embedded software cannot easily copy the software and
transfer it for use in another brand or kind of goods. In addition, “[w]hen software is
embedded and marketed as an integral part of goods, many, if not most, people would
consider the software to be part of the goods.” For these reasons, these Principles exclude
transfers of embedded software, except when the “predominant purpose” of the
transaction is the transfer of the software, in which case the above issues are more likely
to arise. Software issues may also arise when a party transfers non-embedded software
along with any combination of goods, digital content, and services. These Principles
apply to the software portion of these transactions unless any digital content or services
predominate.519
(4.) Application by Analogy

These Restatement-like Principles address legal issues for transferring software for
consideration, whether by lease, license or sale. The Reporters suggest that courts may
extend the sphere of the Principles’ application by analogy: Courts facing difficult legal

516Principles of the Law of Software Contracts § 1.06 (2010), cmt.

517Principles of the Law of Software Contracts § 1.06 (2010), illust. 1.
518 “Under subsection (b)(1) of this Section, these Principles do not apply to any disk, CD-ROM, or other

tangible medium that stores the software. If a disk is defective so that the software is inaccessible, for example,
Article 2 of the Uniform Commercial Code applies to determine the transferee’s warranty and remedial rights.
Although this approach creates the anomaly that two sets of rules may apply to the same transaction, such a
result is appropriate and inevitable in a project that focuses on the special problems presented by the software
component of mixed transactions. Further, such a treatment is not unique to software contracts.” Principles of
the Law of Software Contracts § 1.06, cmt. a (2010).
519 Principles of the Law of Software Contracts 1, 2 Overview (2010).

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296 INTERNET-RELATED CONTRACT LAW Ch. 4

issues “involving digital-database and digital-art transactions can look to these

Principles by analogy if appropriate.”520
The Principles of the Law of Software Contracts

What’s In What’s Outside

Its Sphere of Application Its Sphere of Application

 Sales, leases, and licenses of  Open source and other

software software
 Contracts entered into  Contracts where there is
with consideration no consideration
 Digital art, digital databases521
 Embedded software

(B.) Preliminary Concerns

The prefatory Principles (Chapter 1) provide a legal infrastructure including
definitions, scope, and general terms, digital content, record, software, choice of forum,
choice of law and unconscionability.522 The Principles of the Law of Software Contracts
makes it clear that the parties’ choice of law must give way to federal intellectual
property rules to the contrary. A software contract is unenforceable if it “(A.) conflicts
with a mandatory rule of federal intellectual property law, or (B.) conflicts impermissibly
with the purposes and policies of federal intellectual property law, or (C.) would
constitute federal intellectual property misuse in an infringement proceeding.”523 There
is almost no case law on what kinds of software contracting terms would violate a
fundamental public policy.
The Principles guide courts in policing unfair or unconscionable license agreements.
Section 1.09, illus. #8 for example, would invalidate a provision in a license agreement
where a transferee of a spreadsheet software program is asked to agree not to implement
ideas or develop a competing program for 99 years. A few software licensors prohibit
licensees from publicly criticizing software, a practice that is also challengeable under
Section 109. The Principles make it clear software contracts are governed by state law and
trumped by federal intellectual property law under the Supremacy Clause of the U.S.
Constitution.524

520 Principles of the Law of Software Contracts § 1.06, cmt. (f) (2010).
521 “It [The Principles] does not include digital art or a digital database (digital content), as defined in
§ 1.01(f). However, courts can look to these Principles by analogy to resolve issues involving digital content if
appropriate.” Principles of the Law of Software Contracts § 1.06 cmt. a (2010)
522 “A “standard form” is a record regularly used to embody terms of agreements of the same type.”

Principles of the Law of Software Contracts, § 1.01.

523 Principles of the Law of Software Contracts § 1.09.

524 The Supremacy Clause provides that federal law shall be the supreme law of the land; and the judges

in every state shall be bound thereby, anything in the Constitution or laws of any state to the contrary
notwithstanding. U.S. Const. art. VI, cl. 2. Under this principle, Congress has the power to preempt state law.
However, in considering whether a state statute is preempted, courts should assume that the historic police
powers of the states are not superseded unless that was the clear and manifest purpose of Congress. U.S.
CONST. art. VI, cl. 2.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 297

(1.) Anti-Reverse Engineering Clauses

Reverse engineering is a process by which a computer or software engineer works

backward to determine how the software works. The Supreme Court defined reverse
engineering broadly as “starting with the known product and working backwards to
divine the process which aided in its development or manufacture.”525 Anti-reverse
engineering clauses prohibit licensees from decompiling or reverse engineering licensed
software such as games. Reverse engineering allows software developers to make better
products. “Without this capacity, there is no guarantee that new programs will work
together.”526 European courts would likely find that a licensor’s strict prohibition against
reverse engineering violates a public policy in favor of interoperability of computer
systems.527 Software developers will need to comply with European Union restrictions
on interoperability. A Paris court ruled that Nintendo had no right to prevent flash
cartridges from other software companies to work on their game systems. 528 The reverse
engineering of software is a social good because it enables programmers to develop code
that is interoperable with established platforms.
Section 118 of UCITA entitled Terms on reverse engineering, renders contractual
prohibitions against reverse engineering as unenforceable. 529 UCITA’s Reporter states
that reverse engineering clauses in license agreements may be unenforceable if they
prohibit tests for interoperability.530 Reverse engineering is a process by which a
computer or software engineer works backward to determine how the software works.
The Supreme Court defined reverse engineering broadly as “starting with the known
product and working backwards to divine the process which aided in its development or
manufacture.”531 Anti-reverse engineering clauses prohibit licensees from decompiling
or reverse engineering licensed software such as games.
(2.) Public Policy Reasons Not to Enforce Licenses

The Principles guide courts to refuse to enforce license agreements if enforcement

would violate important public policies.532 As seen in the example above, a court will find
525 Kewanee Oil Co. v. Bicron Corp, 470 U.S. 470, 476 (1974) (“A trade secret law, however, does not

offer protection against discovery by so-called reverse engineering, that is by starting with the known product
and working backward to divine the process which aided in its development or manufacture.”).
526 RICHARD S. ROSENBERG, THE SOCIAL IMPACT OF COMPUTERS 511 (New York: Academic Press 2004).

527 Reverse engineering is necessary to attain interoperability of computer systems. The European

Community recognizes a right to reverse engineering to prevent unfair competition or what we refer to as
antitrust.
528 Nintendo Loses Suit Against DS Flash Cards, ESCAPIST MAGAZINE (Dec. 4, 2009).

529 UCITA § 118 (Amendments to Uniform Computer Transactions Act) (stating licensee “may identify,

analyze, and use those elements of the program necessary to achieve interoperability of an independently
created computer program with other programs including adapting or modifying the licensee’s computer
program.”).
530 The Reporter notes to Section 105(b) suggest that anti-reveres engineering clauses prohibiting tests

for interoperability may violate a “fundamental public policy.” ANDREA MATWYSHYN, HARBORING DATA:
INFORMATION SECURITY, LAW AND THE CORPORATION 170 (2009).
531 Kewanee Oil Co. v. Bicron Corp, 470 U.S. 470, 476 (1974) (“A trade secret law, however, does not

offer protection against discovery by so-called reverse engineering, that is by starting with the known product
and working backward to divine the process which aided in its development or manufacture.”).
532 “The American Law Institute’s project on Principles of the Law of Software Contracts suggests there

are currently three possible ways to police unreasonable transfer and use restrictions. First, they might be pre-
empted by federal law. Second and third, they also might be against public policy or unconscionable under
state law. A fourth possibility is that state public policy judgments could be made by state statutes, making
certain types of terms unenforceable in general, or unenforceable in mass-market transactions; state statutes

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298 INTERNET-RELATED CONTRACT LAW Ch. 4

a provision in a license agreement violative of public policy where a transferee of a

spreadsheet software program is asked to agree not to implement ideas or develop a
competing program for 99 years.533 A court may refuse to enforce an online contract that
violates fundamental public policies. 534 There is little case law on what kinds of contract
terms a court may find to be contrary to a fundamental public policy. A court may likely
find that the sale of hardcore pornography or human embryos on a website is a violation
of public policy. A few software licensors prohibit licensees from publicly criticizing
software. Clauses enjoining the criticism of software products have a chilling effect on
free expression and may be prohibited by public policy considerations. 535
It is unclear whether courts will use the “fundamental public policy” doctrine to
invalidate unfair, oppressive, or surprising terms in mass-market agreements. UCITA
seems to give the courts wide discretion to “avoid a result contrary to public policy, in
each case to the extent that the interest in enforcement is clearly outweighed by a public
policy against enforcement of the term,” although the case law has yet to evolve.536
(3.) Unconscionability

The Reporters have adopted U.C.C. Article 2’s principle of unconscionability, which
enables courts to police licensors that overreach in software licenses and other contracts.
Courts require licensees to demonstrate both procedural unconscionability in contract
formation and unfair or surprising terms (substantive unconscionability). A comment to
§ 1.1 states: “With some exceptions, courts usually require a showing of both procedural
(defects in the contract-formation process) and substantive (the agreement or term
unfairly surprises or oppresses one party)” before they will strike down a clause or
license agreement.537 “[G]ross inequality of bargaining power, together with terms
unreasonably favorable to the stronger party, may confirm indications that the
transaction involved elements of deception or compulsion, or may show that the weaker
party had no meaningful choice.”538 The Reporters cite “[e]xamples of procedural
unconscionability include conduct approaching misrepresentation or duress, as well as
hidden, incomprehensible, or obscure terms. The Reporters cited examples of
substantively unconscionable terms include a cross-collateral clause and a clause
unreasonably limiting the time within which a buyer must notify the seller about claims
involving latent defects.”539

also could provide minimum transfer and use rights and provide contract remedies, such as rejection or
damages for failure to provide them.” Jean Braucher, Contracting Out of the Uniform Commercial Code,
Contracting Out of Article 2 Using a ‘License’ Label, A Strategy That Should Not Work for Software Products,
40 LOY. L.A. REV. 261, 274 (2006).
533 Id. at § 1.09, illus. #8.

534 UCITA § 105.

535 “In the First Amendment context, litigants are permitted to challenge a statute not because their

own rights of free expression are violated, but because of a judicial prediction or assumption that the statute’s
very existence may cause others not before the court to refrain from constitutionally protected speech or
expression.” Backpage.com, LLC v. McKenna, 881 F. Supp. 2d 1262, 1270 (W. D. Wash. 2012).
536 Id. at § 105(b).

537 Principles of the Law of Software Contracts § 1.11 cmt. b (2010).

538 RESTATEMENT (SECOND) CONTRACTS § 208, cmt.

539 Id. at § 1.11, cmt. c.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 299

The Principles imported U.C.C. § 2–302’s concept of unconscionability in § 1.11:

(a) If the court as a matter of law finds the agreement or any term of the
agreement to have been unconscionable at the time it was made, the court
may refuse to enforce the agreement, or it may enforce the remainder of
the agreement without the unconscionable term, or it may so limit the
application of any unconscionable term to avoid any unconscionable result.
(b) When it is claimed or appears to the court that the agreement or any term
thereof may be unconscionable, the parties shall be afforded a reasonable
opportunity to present evidence as to its commercial setting, purpose, and
effect to aid the court in making the determination. 540
The lesson from five decades of U.C.C. § 2–302 is that unconscionability applies to
business-to-consumer transactions, but is rarely an issue in business-to-business
transactions.541 The Reporters’ comment is that “[t]raditional unconscionability law
should apply in the context of software agreements, and will likely be most relevant in
retail-like standard-form transfers.”542 The comments to Section 1.11 demonstrate that
unconscionability is a doctrine targeting consumer transactions:
(1.) B, a consumer, buys a computer with pre-loaded software from A, a direct
marketer, by telephone. A includes its standard form with the software, and
displays the form on its website. The form includes 26 paragraphs. Paragraph
25 provides for arbitration in Chicago under the rules of the International
Chamber of Commerce. Even assuming the transaction complies with § 2.02 of
these Principles, a court might nonetheless hold the arbitration provision
unconscionable if the arbitration clause is hidden in small print and arbitration
in Chicago is unduly burdensome because, for example, Chicago is a distant
forum and arbitration there or with the selected arbitrator is unduly expensive.
(2.) Company A markets software for preparing construction bids. In a
negotiated exchange, Company A and Company B enter into an otherwise
enforceable agreement in which B acquires the software and uses it to submit
a bid. B loses a business opportunity because the software is defective and
causes an inaccurate bid. The standard-form agreement limits consequential
damages to the price of the software. The agreement is likely enforceable
between the two commercial parties. See also § 4.01(c) of these Principles.543
The Reporters acknowledge that terms of service and other license agreements may
be unconscionable, even if validly formed under Chapter 2 of the Principles. 544 Even if a

Id. at § 1.11.
540

Nevertheless, Aral v. EarthLink, Inc., 36 Cal.Rptr.3d 229, 238 (Ct. App. 2005) (“[T]erms . . . were
541

presented on a ‘take it or leave it’ basis either through installation of the software or through materials
included in the package mailed with the software with no opportunity to opt out. This is quintessential
procedural unconscionability. With respect to substantive unconscionability, Aral alleged . . . that EarthLink
began charging customers for DSL service as soon as they ordered [it] although the company knew or should
have known that the service would not be available until after the modem was delivered, some weeks later. . . .
[T]he gravamen of the complaint is that numerous consumers were cheated out of small sums of money through
deliberate behavior. Accepting these allegations as true . . . the class action waiver must be deemed
unconscionable under California law”).
542 Id. at § 1.11, cmt. c.

543 Id. at § 1.11, illus. 1.

544 Id. at § 1.11, cmt. 1.

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300 INTERNET-RELATED CONTRACT LAW Ch. 4

standard form contract complies with the Principles formation requirements, “it should
not be sheltered from an unconscionability challenge.”545 The Principles Reporters
suggest, “[r]equiring a lesser degree of procedural unconscionability when terms are
particularly onerous may help to counteract the market reality that transferees
generally do not read terms, often do not understand them when they are aware of them,
and underestimate the probability of a defective product.”546
“Additionally, in the clickwrap context, consumers often do not consider the click as
signifying the same assent as a signature. Thus, when a term is particularly onerous,
the court should require a lesser showing of procedural unconscionability.”547 The
Reporters compare substantive unconscionability to the European mandatory rule that
courts will not enforce terms creating a significant imbalance in the bargain to the
consumer’s detriment. The European Commission’s 1993 Directive on Unfair Contract
Terms compiled “a nonexclusive list of terms that may be considered unfair when not
individually negotiated.”548 The Principles of the Law of Software Contracts did not
compile a list of unfair terms, but noted that the Directive’s list may be a useful reference
point for U.S. courts determining unconscionability. 549
Nevertheless, these Principles opt to rely on traditional unconscionability doctrine
rather than defining which terms are enforceable and which are not. A court may,
however, find the European Union’s Unfair Contract Terms Directive’s (UCTD) list
useful in evaluating unconscionability claims. The annex to the Directive gives examples
of terms that the EU considers unfair, deceptive, and unenforceable. Generally, terms
that authorize the transferor to add spyware to a transferee’s computer, allow the
transferor to modify the contract without notice or an opportunity to object or consent,
extend obligations automatically and without notice, allow the transferor to change the
nature of the software unilaterally, or authorize cancellation without notice are suspect
under these Principles.550 Unlike the UCTD, the Reporters rejected the mandatory terms
approach favored by the European Commission:
So long as the formation process is reasonable, an important philosophy of
these Principles is freedom of contract. The view that transferors understand
their products and the risks of contracting better than lawmakers underscores
this philosophy. In addition, regulators may misidentify the class of terms that
are the product of market failures. These Principles therefore reject, in large
part, adopting substantive mandatory rules for software agreements.
Exceptions, in limited circumstances, include certain terms that apply to
contract breakdown, such as choice of law, forum selection, the warranty of no
material hidden defects, liquidated damages, and automated disablement. 551
(4.) Mixed Transactions

Software contracts frequently involve sales as well as services. In addition, services

are often included in the licensing of software. The Reporters adopted a predominant
545 Id.
546 Id.
547 Id.
548 Id.
549 Principles of the Law of Software Contracts, Id. at § 1.11, cmt. c (2010).
550 Id.
551 Principles of the Law of Software Contracts 2, 2 Overview (2010).

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 301

purpose test for mixed transactions. Therefore, “the Principles exclude transfers of
embedded software, except when the ‘predominant purpose’ of the transaction is the
transfer of the software, in which case the above issues are more likely to arise.”552
Software issues may also arise when a party transfers non-embedded software along
with any combination of goods, digital content, and services. These Principles apply to
the software portion of these transactions unless any digital content or services
predominate.
(C.) Forum Selection Clauses
During the past four decades, U.S. courts have been predisposed to enforce the
parties’ choice of forum and law clauses. In Caspi v. Microsoft Network, LLC, 553 a New
Jersey appellate court upheld a forum selection clause “where subscribers to online
software were required to review license terms in scrollable window and to click ‘I agree’
or ‘I don’t agree.’ ”554 The Principles also presume that U.S. style choice of forum clauses
are broadly enforceable.555 Sections 114 of the Principles allow the parties to submit to
jurisdiction and agree to an exclusive forum so long as it is not unfair or unreasonable.
Section 114 states:
The parties may by agreement choose an exclusive forum unless the choice
is unfair or unreasonable. A forum choice may be unfair or unreasonable if:
(a.) the forum is unreasonably inconvenient for a party;
(b.) the agreement as to the forum was obtained by misrepresentation,
duress, the abuse of economic power, or other unconscionable means;
(c.) the forum does not have power under its domestic law to entertain
the action or to award remedies otherwise available; or
(d.) enforcement of the forum-selection clause would be repugnant to
public policy as expressed in the law of the forum in which suit is
brought.556
These provisions do not address the problem arising when the cost appearing in a forum
exceeds what is stake. In these cases, the forum selection clause operates de facto as a
liability shield because the plaintiff cannot exercise her rights. In Cairo, Inc. v.
Crossmedia Servs., Inc.,557 the court enforced a forum selection clause in a website’s
terms of use where every page on the website had a textual notice that read: “By

Principles of the Law of Software Contracts 1, 2 Overview (2010).

552

323 N.J.Super. 118, 732 A.2d 528 (1999).

553

554 Id.

555 See e.g., Guadagno v. ETrade Bank, 592 F. Supp. 2d 1263, 1271–72 (C.D. Cal. 2008) (upholding a

forum selection clause requiring users to waive their right to joining class action and submitting to pre-dispute
mandatory arbitration); Eslworldwide.com, Inc. v. Interland, Inc., No. 06 CV 2503, 2006 WL 1716881, at 2
(S.D.N.Y. June 21, 2006) (upholding forum selection clause including in clickwrap agreement); Siebert v.
Amateur Athletic Union of U.S., Inc., 422 F. Supp. 2d 1033, 1039 (D. Minn. 2006) (upholding forum selection
clause for pre-dispute mandatory arbitration); Adsit Co., Inc. v. Gustin, 874 N.E.2d 1018, 1024 (Ind. Ct. App.
2007) (upholding Adsit’s Terms of Use agreement containing a forum selection clause and choice of law clause
where user was required to click on a button reading “I Accept” that was placed strategically at the bottom of
the webpage containing the policy; clickwrap agreement also was displayed on an internet webpage).
556 Principles of the Law of Software Contracts, § 1.1.

557 No. 04–04825, 2005 WL 756610, at *2, *4–5 (N.D. Cal. Apr. 1, 2005).

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302 INTERNET-RELATED CONTRACT LAW Ch. 4

continuing past this page and/or using this site, you agree to abide by the Terms of Use
for this site, which prohibit commercial use of any information on this site.”
In Feldman v. Google, Inc.,558 a federal court found a forum selection clause binding
where the online contract between Internet advertising service and a would-be
advertiser read in bold at top “Carefully read the following terms and conditions,”
adding, “If you agree with these terms, indicate your assent below’ and user could only
progress by clicking on box marked ‘accept’ ” and “terms of use” were presented to user
in scrollable window.” In Crawford v. Beachbody, LLC,559 the court found a forum
selection clause binding where the consumer clicked on a button marked “Place Order
and above button was a statement informing the user that by clicking the button was
subject to the website’s ‘terms and condition,’ which were available in the same screen
via hyperlink.”560
(D.) Formation of Software Contracts
(1.) Liberal Formation Rules

Section 2.01 of the Principles “sets forth the general approach to formation issues.
It is based on portions of both the original and amended U.C.C. §§ 2–204, 2–206, and 2–
207, and the Restatement Second of Contracts §§ 18–34, 50–70.”561 Section 2.01 applies
to negotiated software agreements and standard-form agreements, but the Section is
subject to the separate rules of § 2.02 that govern standard-form transfers of generally
available software. Section 2.01 therefore applies if the software transferor uses a
standard form but the transfer is of a large number of copies of software, the right to
access software is to a large number of end users, or the software is not generally
available to the public under the same standard terms.
The U.C.C. Article 2 inspired formation rules apply to both negotiated software
contracts and standard-form agreements. Section 2.01 states:
(a.) Subject to § 2.02, a contract may be formed in any manner sufficient to
show an agreement, including by offer and acceptance and by conduct.
(b.) A contract may be formed under subsection (a) even though
(1.) one or more terms are left open, if there is a reasonably certain basis
for granting an appropriate remedy in the event of a breach; or
(2.) the parties’ records are different. In such a case, the terms of the
contract are
(A.) terms, whether in a record or not, to which both parties agree;
(B.) terms that appear in the records of both parties; and
(C.) terms supplied by these Principles or other law.562

558 513 F. Supp. 2d 229, 233 (E.D. Pa. 2007).

559 No. 14–CV–1583, 2014 WL 6606563 at *3 (S.D. Cal. Nov. 5, 2014).
560 See also, Starke v. Gilt Groupe, Inc., No. 13–CV–54907, 2014 WL 1652225 at *2–3 (S.C. N.Y. April.

2, 2014) (upholding arbitration clause in ‘terms of use’ where the consumer clicked a ‘Shop Now button next to
a statement informed users they were entering in a contract).
561 Principles of the Law of Software Contracts § 2.01, cmt. (a) (2010).

562 Principles of the Law of Software Contracts § 2.01 (2010).

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 303

(2.) Battle of the Forms Provision

U.C.C. § 2–207 governing the battle of the forms under Article 2 is one of the most
complicated provisions of U.C.C. Article 2. That section is divided into three sections,
each of which covers a different problem. U.C.C. § 2–207(1) recognizes that contracts
may be formed despite having conflicting or additional terms. U.C.C. § 2–207(2)’s
framework deals with what to do with conflicting or additional terms. U.C.C. § 2–207(3)
presents a solution when there is no contract on the form but rather on the parties
conduct. The Principles of the Law of Software Contracts have adopted a clear and easy
to understand alternative to U.C.C. § 2–207 with § 2.01(b)(2)(A)–(C).563 Under
§ 2.01(b)(2) of these Principles, the terms consist of terms common to both records, other
terms the parties agreed to, and supplemental terms supplied by these Principles and
outside law. Thus, if the parties’ records differ insubstantially, courts can enforce the
common terms under § 2.01(b)(2)(B). The contract first consists of the terms where both
records agree and terms that appear in both records combined with supplemental
principles.564 Conflicting and additional terms falls out and are not part of the software
contract. The Reporters illustrate the simple approach to battle of the forms with the
following illustration:
B, a computer manufacturer, sends A, a software transferor, an order for 500
copies of a graphic-design software package. B’s order provides that A warrants
the software to be free from defects. A ships 500 copies of the software to B
accompanied by a standard form disclaiming all express and implied
warranties. B accepts delivery of the software. Under § 2.01(b), the parties’
conduct shows that they formed a contract even though the records alone do
not establish a contract. Section 2.01(b)(2)(A) and (B) do not apply to the issue
of implied warranties because the disclaimer of implied warranties is not in
both records and the parties did not agree on the treatment of implied
warranties. Subsection (b)(2)(C) does apply, however, which looks to these
Principles or outside law to supply terms. Under Sections 3.03 through 3.05 of
the Principles, the agreement includes implied warranties. Further, under
§ 2.01(b)(2)(A), the contract also includes express warranties to the extent that
A has made any promises, descriptions, and affirmations. B has agreed to such
warranties by implication because B has accepted the software and the
warranties benefit B. The “free from defects” term in B’s record drops out,
however, because it is not in both records. Subsection (b)(2) also applies if one
or both records include a provision such as “only our terms govern” and the
parties perform the agreement.565
Section 2.02 addresses standard form transfers of generally available software. The
contract rules for electronic and prepackaged software adopt an objective theory of contract

In such a case, the terms of the contract are:

563

(A) terms, whether in a record or not, to which both parties agree;

(B) terms that appear in the records of both parties; and
(C) terms supplied by these Principles or other law.
Principles of the Law of Software Contracts § 2.01(2)(A)–(C) (2010).
564 Id.

565 Principles of the Law of Software Contracts § 2.01, illus. 6.b (2010).

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304 INTERNET-RELATED CONTRACT LAW Ch. 4

formation566 in Section 2.01(b) where a transferee is deemed to have adopted a standard

form where a reasonable transferor would believe that the other party intends to be bound.
Section 2.02 addresses standard form transfers of generally available software. Section
2.02 addresses standard form transfers of generally available software. The contract rules
for electronic and prepackaged software adopt an objective theory of contract formation 567
in Section 2.01(b) where a transferee is deemed to have adopted a standard form where a
reasonable transferor would believe that the other party intends to be bound.
(2.) Formation Safe Harbor Provisions

The Principles validate mass-market license agreements such as clickwrap and

shrinkwrap, but do not validate browsewrap because it does not give the licensee
reasonable accessibility to terms prior to the transfer.568 The Principles adopt the
“opportunity to review” test in UCITA, which gives the licensee reasonable accessibility to
terms prior to the transfer. Clickwrap, for example, should be structured so that the “I
accept” radio button appears either at the end of, or adjacent to, the license to pass the
“opportunity to review” test. Under § 2.02(d), a transferor of software must give the
transferee the capacity to store and reproduce the license or other standard form.
The key to the Principles’ formation safe harbor is whether “the standard form is
reasonably accessible electronically prior to initiation of the transfer at issue.”569 “The
safe harbor also requires a ‘clickwrap’ acceptance of terms, which means that the ‘I
accept’ icon must appear at the end of, or adjacent to, the standard form.”570 For
electronic contracts, the Principles’ safe harbor requires that the “transferee can store
and reproduce the standard form.”571 Contract formation is subject to limitations based
upon public policy, unconscionability, and other invalidating defenses. 572 These terms
are broadly admissible to “supplement a record.”573 The opportunity to review and
manifestation of assent are also predicates for formation of mass-market licenses under
UCITA.
(3.) Parol Evidence Rule

It is the court’s role to determine whether a given software contract is integrated.

Under Section 3.08(f) of the Principles states, “unambiguous terms set forth in a fully
integrated record may not be contradicted by evidence of any prior agreement or of a
contemporaneous oral agreement.” The Principles import a liberal rule from U.C.C.

566 “Whether a meeting of the minds exists, however, is determined objectively by looking at the intent

of the parties as expressed by their actual words or acts. A meeting of the minds cannot be determined on the
undisclosed assumption or secret surmise of either party.” Int’l Casings Group, Inc. v. Premium Std. Farms,
Inc., 358 F. Supp. 2d 863, 869 (W.D. Mo. 2005).
567 “Whether a meeting of the minds exists, however, is determined objectively by looking at the intent

of the parties as expressed by their actual words or acts. A meeting of the minds cannot be determined on the
undisclosed assumption or secret surmise of either party.” Int’l Casings Group, Inc. v. Premium Std. Farms,
Inc., 358 F. Supp. 2d 863, 869 (W.D. Mo. 2005).
568 Id.

569 Id. at § 2.02(c)(1).

570 Robert A. Hillman & Maureen O’Rourke, Defending Disclosure in Software Licensing, 78 U. CHI. L.

REV. 95, 104 n. 53 (2011).

571 Principles of the Law of Software Contracts, § 2.02(d)

572 Id. § 2.02(d) (noting that the Principles is subject to “invalidating defenses supplied by these

Principles or outside law, a standard term is enforceable if reasonably comprehensible.”).

573 Id. at § 3.08(g)(2).

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 305

Article 2 that calls for the broad admissibility of evidence as to course of performance,
course of dealing, and usage of trade. This broad admissibility of supplemental terms also
applies to fully integrated agreements. Section 2.02 applies special rules for standard or
mass-market transfers of generally available software. Section 3.08’s parol evidence rule
distinguishes between fully integrated and partially integrated records, drinking deeply
from the wells of the Restatement (Second) of Contracts and U.C.C. § 2–202.574 Fully
integrated software contracts are “intended by the parties as a complete and exclusive
statement of the terms of an agreement.”575 In contrast, a partially integrated record or
records are a “complete and exclusive statement of one or more terms of an agreement.”576
As with U.C.C. Article 2, even fully integrated terms or agreements “may be explained by
evidence of course of performance, course of dealing, usage of trade, and consistent
additional terms.”577
(4.) Liberal Contract Formation

Section 201(a) provides that a software “contract may be formed in any manner
sufficient to show an agreement, including by offer and acceptance and by conduct.”578
As with U.C.C. Article 2, a “software contract may be formed under subsection (a) even
though (1.) one or more terms are left open, if there is a reasonably certain basis for
granting an appropriate remedy in the event of a breach; or (2.) the parties’ records are
different.”579 Subsection (a) follows common-law and U.C.C. Article 2 formation
principles. The Reporters comment notes, “The policy is to enforce agreements no matter
how formed. A principal challenge in negotiated agreements is to distinguish pre-
contract negotiations and preliminary drafts, on the one hand, from the formation of an
enforceable agreement on the other.”580 The Principles adopt the objective test for
contract formation also followed by the Restatement (Second) of Contracts. Thus, in a
software license or other contract, the court bases contract formation “on what the
circumstances show, not on what they subjectively believe.”581 The Reporters provide the
following illustrations of how contract formation works in the non-retail setting:
(1.) A, a software transferor, enters a multiuser licensing agreement with B, an
automobile manufacturer, which authorizes 4000 of B’s employees to use the
software. The agreement includes a three-year maintenance agreement. The
software is generally available to the public. Section 2.01 applies, not § 2.02,
because the magnitude of the transfer is inconsistent with a retail sale and
because the terms of the multiuser agreement differ from those in a typical
retail sale.
(2.) A, a software publisher, transfers one copy of accounting software to B, an
automobile manufacturer. The transfer is by standard form, but does not

574 The Reporters state that they are seeking “a middle ground between rigid enforcement of the parol-

evidence rule and its abrogation. . . . Based on these sources, these Principles bar evidence only if (1) the parties
intended a full integration or (2) the parties intended a partial integration and the evidence is of conflicting
terms.” Principles of the Law of Software Contracts § 3.08, cmt. (a) (2010). Id. at § 3.08, cmt. a.
575 Id. at § 3.08(a).

576 Id.

577 Id.

578 Principles of the Law of Software Contracts § 2.01(a) (2010).

579 Principles of the Law of Software Contracts § 2.01(b)(1) (2010).

580 Principles of the Law of Software Contracts § 2.01, cmt. b (2010).

581 Id.

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306 INTERNET-RELATED CONTRACT LAW Ch. 4

include multiuser authorization. The software is generally available to the

public under the same standard terms. Section 2.02 applies, not § 2.01, because
the transfer is of only one copy and is therefore consistent with a retail sale,
and the software is available to the public under the same terms. 582
(5.) Standard Form Software Contracts

“Section 2.01(a) encompasses both contract-formation routes. Not only can parties
form a software contract by virtue of a traditional offer and acceptance, but they can also
form one if their conduct shows their intention to contract, such as by delivering and
accepting software despite the absence of an enforceable record.”583 Section 2.01 applies
to negotiated software agreements as well as mass-market or standard-form
agreements, “but the Section is subject to the separate rules of § 2.02 that govern
standard-form transfers of generally available software.”584 Section 2.01 therefore
applies if the software transferor uses a standard form but the transfer is of a large
number of copies of software, the right to access software is to a large number of end
users, or the software is not generally available to the public under the same standard
terms.
(6.) Modification of a Software Contract

Under the Principles, as with UCITA, a modification of a software contract requires

no consideration to be binding. Section 2.03 validates no-oral-modifications clauses unless
waived.585 Section 2.03 also provides that contractual modifications require no particular
form; they “may be formed in any manner sufficient to show an agreement.”586 For
electronic transfers of software, e-notices of modification are enforcement provided the
transferee receives a reasonable electronic notice of the modification and the transferee
signifies agreement to the modifications electronically.587
(7.) Supplemental Terms

The Principles recognize a hierarchy of contract terms, which begins with the
language of the entire agreement but also considers the parties course of performance,
course of dealing and usage of trade in that order.588 If there is a disagreement over
meaning of a term in a record, courts are to apply the standard of reasonable integration.589
Section 3.10 articulates two exceptions to 3.09(a)’s objective interpretation rule.590 The
first exception is that if the parties to a software contract disagree over the meaning of
words or conduct, “the meaning intended by one of them should be enforced if at the time
the parties made the agreement that party did not know or have reason to know of any
different meaning intended by the other party.”591 The second exception is that parties do
not have an agreement where “the parties disagree over the meaning of a fundamental

582 Principles of the Law of Software Contracts § 2.01, illust. 1–2 (2010).
583 Principles of the Law of Software Contracts § 2.01, illus. 3(b) (2010).
584 Principles of the Law of Software Contracts § 2.01 cmt. (a) (2010).
585 Id. at Topic 3, Contract Modification, Summary Overview, § 2.03.
586 Id. at § 2.03(a).
587 Id. at § 2.03(b).
588 Id. at § 3.09.
589 Id. at § 3.09(a).
590 Id. at § 3.10(a)–(b).
591 Id. at § 3.10(a).

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 307

term or terms” but that applies only if the words or conduct are susceptible to more than
one meaning.592
(E.) Software Contracting Warranties
Section 3.01 is the functional equivalent of U.C.C. § 2–312 but gives licensees and
other transferees a lesser infringement warranty than what buyers receive under Article
2. Section 3.01 gives licensees and other transferees a lesser infringement warranty. A
licensor is not liable for transferring software infringing the patents of others absent
knowledge of the infringing content. Licensors typically do not give the non-infringement
warranty when the licensee uses the software in a way contrary to the agreement. A
licensor may disclaim or limit implied warranties. Sections 3.02 through 3.07 in the
Principles import warranties concepts from U.C.C. Article 2 and UCITA with some
differences. Section 3.02 creates an express warranty if the licensor delivers software
that fails to conform to the description in advertising or packaging. As with U.C.C.
Article 2, courts are to distinguish between puffery or seller’s talk and statements more
definite or specific to constitute an enforceable express warranty.
(1.) Express Warranties

The quality warranties outlined in Chapter 3 of the Principles closely track U.C.C.
Article 2, while accommodating them to software commercial realities. Section 3.02 of
the Principles makes the transferor liable for express warranties to any transferee in the
distribution chain, including all intermediate parties and end users.593 The creation of
an express warranty is not dependent upon whether a transferor uses formal words such
as “warrant” or “guarantee” or that it has a specific intention to make a warranty. A
licensor’s affirmation of the value of software is mere puffery and does not constitute an
express warranty.
The Principles recognize express warranties but decline to adopt a “basis of the
bargain” test for enforceability.594 Instead, the Principles replace the “basis of the bargain”
test with an objective test focusing on whether the representations made by the licensor
about software are sufficiently definite so a licensee or other transferee can reasonably
rely upon them. If the transferor makes a statement constituting an affirmation of fact,
promise, or description, the statement constitutes an express warranty, so long as a
licensee or assignee reasonably relies on the statement. As with U.C.C. Article 2, Express
warranties survive unexpected disclaimers and the only way to disclaim them is not to
make them. Reliance is not a formal requirement of Article 2 or UCITA but it is difficult
for the plaintiff to prove an express warranty without a showing of reliance.
The Reporters borrow Section 3.02 of the Principles from both UCITA and Article 2
of the UCC. This section creates a cause of action for the licensee if the delivered software
fails to conform to the description in advertising or packaging. If an employee of the
software licensor demonstrates the software to a licensee, the software must conform to
the demonstration. A licensor is potentially liable for express warranties to any transferee
in the distributional chain, including intermediaries and end users.

592 Id. at § 3.10(b)(1).

593 Principles of the Law of Software Contracts § 3.02, cmt. a. (2009).
594 Id. at § 3.02.

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308 INTERNET-RELATED CONTRACT LAW Ch. 4

(2.) Implied Warranty of Merchantability

The Principles downsize U.C.C. Article 2’s six-part test for merchantability to three
quality standards in Section 3.01(b) for merchant transferors.595 Merchantable software,
at a minimum, must “(1.) pass without objection in the trade under the contract
description; (2.) be fit for the ordinary purposes for which such software is used; and (3.)
be adequately packaged and labeled.”596 The Principles draw upon industry standards
in setting minimal standards of merchantability. The implied warranty of
merchantability is a flexible set of standards and can be calibrated for many different
kinds of software. The Principles do not extend the implied warranty of merchantability
to open source software because “developers have little control over quality.”597
Software warranties determine the merchantability of software by referencing
current software best practices. For example, a maker of Automated Teller Machine
(ATM) software must ensure that its product meets minimum industry standards for
security. The leading ATM provider incorporates a Triple DES standard to encrypt
customers’ financial and personal data. Triple-DES is an encryption standard designed
to make ATM transactions more secure. Software makers that fulfill this standard are
similar to a seller of goods meeting a merchantability standard that goods “pass without
objection in the trade under the contract.” The level of computer security is an example
of an industry standard or usage of trade.
Software is merchantable if it complies with best practices like incorporating
reasonable security. The software industry claims bug-free software is impossible to
produce. Software makers may deliver software with minor defects and still satisfy the
implied warranty of merchantability so long as the software would pass without
objection in the trade and be fit for its ordinary purposes. Software consisting of millions
of lines of code will violate merchantability if it does not perform its functionality. In
development software projects, the licensee is given a period of acceptance testing to
identify bugs, allowing the software maker an opportunity to correct them.
(3.) Systems Integration & Fitness Warranties

The Principles, too, adopts a systems integration or fitness warranty. Section 3.04
of the Principles requires the licensor to know, or have a reason to know, of the particular
purpose of the licensee to make a fitness type warranty. If a software developer warrants
its software will function with a given computer system, the company will be liable for
the warranty of fitness for a particular purpose under § 3.04. Section 3.04 requires the
customer to prove that licensor or other vendor knew or had reason to know of the
licensee’s particular purposes for the software.
The concept of systems integration is a software engineering term meaning an
engineer’s ability to combine “software components into an integrated whole.”598 Systems
integration and fitness for a particular purpose are closely related doctrines often used
in custom software contracts. The Reporters imported Section 3.04 of the Principles from
U.C.C. § 2–312 and UCITA § 405. Section 3.04 of the Principles requires the licensor

595 Id. at § 3.01(b).

596 Id.
597 Id. at § 3.01, cmt. a.

598 Carnegie Mellon, A Framework for Software Product Line Practice, Version 5.0, Software System

Integration, http://www.sei.cmu.edu/productlines/frame_report/softwareSI.htm.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 309

know, or have a reason to know, of the particular purpose of the licensee to make a fitness
type warranty. If a software developer warrants its software will function with a given
computer system, the company will be liable for the warranty of fitness for a particular
purpose under § 3.04. A licensor violates a fitness warranty when it selects software for
the particular purpose of the licensee.
Fitness warranties may be created in part by product advertising or sales
representations. Companies claiming that they are systems integration specialists may
create fitness warranties. Vendors frequently must address system integration tasks to
make hardware and software compatible. For example, systems integration is required
to link a given firewall system with other security systems such as surveillance products.
Systems integration is a software engineering term meaning an engineer’s ability to
combine software components so they work as an integrated whole, which is also known
as interoperability.
Like the fitness warranty, systems integration depends upon a showing of reliance
of the customer on the licensor’s representation that software will work or is integrated
with a given computer system. For example, if a software developer warrants that their
software will function with Microsoft’s Word 8 the license will be liable under the systems
integration warranty. Systems integration is a common issue in software contracts
because engineers will often need interfaces to make products interoperable. Customers
would typically license software from diverse vendors employing a ‘best of breed’
strategy, purchasing different applications from several vendors. The customer is often
in a position that they need computer consultants to help them achieve ‘systems
integration.’599 In many instances, software engineers will need to write custom code for
interfaces that would allow components from different vendors to run together. 600
It is sometimes difficult to predict whether systems integration can be achieved
easily because programmers cannot always rely upon the same assumptions about how
components work together.601 Carnegie-Mellon’s best practices for achieving integration
states:
In a product line, the effort involved in software system integration lies along
a spectrum. At one end, the effort is almost zero. If you know all the products’
potential variations in advance, you can produce an integrated parameterized
template of a generic system with formal parameters. You can then generate
final products by supplying the actual parameters specific to the individual
product requirements and launching the construction tool (along the lines of
the UNIX Make utility). In this case, each product consists entirely of core
components; no product-specific code exists. This is the “system generation”
end of the integration spectrum. At the other end of the spectrum, considerable
coding may be involved to bring the right core components together into a
cohesive whole. Perhaps the components need to be wrapped, or perhaps new
components need to be designed and implemented especially for the product.

599 Companies will enter into “systems integrations” contracts with consultants who must compile

engineering and process specifications and documentation to make systems work together. See e.g., Uop v.
Consulting, 1997 WL 219820 (Conn. Super. Ct., April 24, 1997) (striking complaint for negligence in the
performance of a systems integration consulting contract because of the economic loss doctrine).
600 In re Oracle Corp. Sec. Litig., No. C01-00988SI, 2009 WL 1709050, at *1 (N.D. Cal. June 19, 2009).

601 Id.

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310 INTERNET-RELATED CONTRACT LAW Ch. 4

In these situations, the integration more closely resembles that of a single-

system project.602
Most software product lines occupy a middle point on the spectrum. Obviously, the
closer to the generation side of the spectrum you can align your production approach,
the easier integration will be and the more products you will be able to turn out in a
short period.603 A warranty of systems integration arises when a software developer
represents that its product will work on a customer’s computer system or when they
attest that the software will work on certain platforms. Oracle’s CEO likely made
systems integration warranties in a famous press conference, assuming potential
customers can prove reliance on his systems integration representations:
The right model for enterprise software is “Here are all the pieces. They’ve all
been engineered to work together. No systems integration required. You can
install it in a matter of months in the largest and most complex operations. All
the pieces are there: marketing, sales, web store, service, internet procurement,
auctioning, supply chain automation, manufacturing, human resources,
everything. And all the pieces fit together.”
So in the early stages—the very early stages of this release 11i, we’re saying,
‘We’re right. The rest of the world is wrong’; where there’s all this controversy
where we can’t show lots and lots of companies up and running—big companies
up and running—they’re just beginning to come live now, already we’re getting
tremendous traction in the market. And it will be far and away the biggest
success in the history of our company, much bigger than the database. 604
In the Oracle Corporation Securities Litigation, the plaintiffs contended that Oracle
released Suite 11i prematurely and that it did not work in different computing
environments. Oracle’s CEO, Larry Ellison, touted its applications as seamless at an
“AppWorld” Conference: “In fact, we recommend that you start with, you try a component
of the suite and then you add it in. Now the nice thing is it’s like Lego blocks. Once you
have one piece in, the other pieces just snap together. There’s no systems integration
required. . . . You just basically turn it on or snap it together. It is absolutely all the
pieces within the suite are literally plug and play.”605 Oracle’s Application Suite 11i is a
program that integrates business processes planning such as accounting, human
resources, and manufacturing.
Systems integration issues arise where customer require that specific software
applications be compatible with specific software and hardware. Video drivers, for
example, must work with a Windows7 platform. 606 A computer must also have the
compatible hardware and systems requirement to run with the Windows 10 operating
system or Apple’s Mac OS X operating system. 607 The licensor or software vendor will
either disclaim the systems warranty or limit software installation of the system, not its

602 Carnegie-Mellon, Software System Integration, Id.

603 Id.
604 In re Oracle Corp. Secs. Litig., Id. at *13.

605 Id. at *12.

606 MICHAEL ALDRIDGE, MCTS MICROSOFT WINDOWS VISTA CLIENT CONFIGURATION EXAM 70–620

(2007) at 10.
607 Id.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 311

integration to the older system. In Foundation Software v. Digital Equipment Corp.,608

the court held the vendor liable for promising that the software would run on the Micro
Vax system when it was, in fact, incompatible. A U.S. software publisher, for example,
would be making a systems integration warranty if it told a customer that its software
would work on Microsoft’s Windows Server 2003 platform.
Sales representative often claim that a licensor’s software is compatible with other
vendor’s applications, which creates an enforceable systems integration warranty.
Companies often claim that their software is compatible with other vendor’s
applications, which makes a systems integration warranty. In development contracts,
systems integration is a quantifiable and nonquantifiable discriminator as to the
difficulty of completing a software development or custom contract. The developed
software might conform to its technical specifications during alpha testing, but fail a
beta test in the customer’s environment of use. In many software development projects,
the difficulty is that software will not plug in and execute. Many projects fail because
customized modules are incompatible with third party products. In a government
contract, the contract will typically call for the vendor to install and integrate system
elements. Systems integration includes making systems subsystems, components,
support equipment, and software/data work together.
The vendor is frequently responsible for ensuring “that the total system will meet
all requirements.”609 If a software developer warrants its software will function with a
given computer system, the company will be liable for the warranty of “fitness for a
particular purpose” under § 3.04.610 Section 3.04 requires the customer to prove that
licensor or other vendor knew or had reason to know of the licensee’s particular purposes
for the software. The free and open source licensing paradigm requires licensors to give
downstream users an opportunity to look under the hood so they “can easily understand
and change those instructions.”611
A counterhegemonic paradigm that distributes software in source code enables a
community of collaborators to share improvements. Stephen Weber’s 2004 book, The
Success of Open Source, describes how the open source movement has changed the
meaning of property in the information-based economy: “Property in open source is
configured fundamentally around the right to distribute, not the right to exclude.”612
Open source programmers have developed a long list of products that includes Apache,
the Linux operating system, “the scripting language PERL, and the popular email server
Sendmail.”613 Section 3.04 of the Principles is a functional equivalent of U.C.C. § 2–312
and UCITA § 405.

608807 F. Supp. 1195 (D. Md. 1992).

609Fairchild Indus. v. United States, 71 F.3d 868, 871 (Fed. Cir. 1995).
610 The Principles of the Law of Software Contracts, § 3.04.

611 Brief of Amicus Curiae Electronic Freedom Foundation, KSR Int’l Co. v. Teleflex Inc., 2004 U.S.

Briefs 1350 Aug. 22 (2006).

612 STEPHEN WEBER, THE SUCCESS OF SOURCE CODE 1 (Cambridge, Massachusetts: Harvard University

Press, 2004).
613 Jay P. Kesan & Rajiv C. Shah, Deconstructing Code, 6 YALE J. L. & TECH. 277, 350 (2003–2004)

(retelling the story of the open source software movement and its accomplishments).

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312 INTERNET-RELATED CONTRACT LAW Ch. 4

(4.) Non-Infringement Warranties

The Principles generally follow the contours of warranties set forth in Article 2 of
the U.C.C.—except for the non-infringement warranty. Article 2 of the U.C.C. imposes a
strict liability for transferring goods infringing the patents or other intellectual property
rights of third parties while the Principles adopt a negligence standard. Section 3.01 of
the Principles gives licensees and other transferees a lesser infringement warranty than
U.C.C. Article 2’s does § 2–312. The Principles also permits software vendors to disclaim
their implied indemnification obligations consistent with U.C.C. § 2–312. A former
Microsoft lawyer explains this software industry contracting practice results because
software makers believe that taking on this liability will lead to unknown
repercussions.614 Section 3.01 permits software transferors to exclude or modify the
implied indemnification against infringement.615 The UCC’s non-infringement warranty
does not depend upon the seller’s knowledge because it is a strict liability-like obligation
while the Principles adopt a negligence standard
Licensors routinely disclaim non-infringement warranties because of the
uncertainties in the enforcement of software patents, which is a topic discussed in
Chapter 13. Section 3.01(a) states that unless the parties otherwise agree, a transferor
that deals in software of the kind and receives payment, agrees to “indemnify and hold
the transferee harmless against any claim of a third party based on infringement of an
intellectual property or like right.”616 A licensor is not liable for transferring software
infringing the patents of others absent knowledge of the infringing content.617
Transferors do not give the non-infringement warranty when the transferee uses the
software in a way contrary to the agreement.
(5.) Disclaiming Warranties

The Principles of the Law of Software Contracts draws upon industry standards in
setting the standard of merchantability. Although the implied warranty of
merchantability is a flexible set of standards, it varies within the software industry. The
Principles do not extend the implied warranty of merchantability to open source software
because “developers have little control over quality.”618 Furthermore, most software
makers will disclaim the implied warranty of merchantability. A Texas court upheld the
following disclaimer in a license agreement between sophisticated businesses:
EXCEPT FOR [LICENSOR’S] OBLIGATIONS UNDER SECTION 1.1 BELOW
(NON-INFRINGEMENT) AND SECTION 12 BELOW (CONFIDENTIALITY),
[LICENSOR] MAKES NO REPRESENTATIONS, WARRANTIES OR
GUARANTEES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR ANY USE OR ANY PARTICULAR
PURPOSE WITH REGARD TO THE SOFTWARE AND DOCUMENTATION.
[LICENSOR DOES NOT WARRANTY THAT THE OPERATION OF THE
SOFTWARE WILL BE UNINTERRUPTED OR ERROR-FREE . . . THE
614 Robert W. Gomulkiewicz, The Implied Warranty of Merchantability in Software Contracts: A

Warranty No One Dares to Give and How to Change That, 16 JOHN MARSHALL J. OF COMP. & INFO. l. 393, 393
(1998).
615 Id. (citing Section 3.01).

616 Principles, § 3.01.

617 U.C.C. § 2–312.

618 Principles of the Law of Software Contracts § 3.01, cmt. a.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 313

SOFTWARE AND DOCUMENTATION IS LICENSED TO [LICENSEE] ON

AN ‘AS IS’ BASIS.619
A former Microsoft lawyer contends that vendors disclaim these warranties because
the “repercussions are unknown.”620 Software makers disclaim performance warranties
such as merchantability and fitness for a particular purpose because of uncertainty as
to what these warranties mean as to software:
First, the doctrine of implied warranty of merchantability requires that goods
must “pass without objection in the trade”; however, all programs are subject
to criticism in the computer trade press. Second, the court would have to
determine the standard to which the software would be compared. However,
the dynamic nature of the software industry makes such a comparison difficult.
Furthermore, such comparison would be difficult because computer software is
generally perceived as a collection of unique ideas. 621
(6.) Nondisclaimable Warranty for Hidden Defects

Section 3.05(a) creates a nondisclaimable warranty that a licensor’s software does

not have hidden defects of which it is aware at the time of transfer; “The ALI Principles
include three kinds of disclosure: disclosure of facts (concerning the quality of software),
disclosure of terms (of standard forms), and disclosure of post-contract intentions (to
pursue remote disablement of software).”622 Section 3.05(b) provides that a party that
transfers software by sale, license, or otherwise, and receives money or a monetary
obligation warrants “that the software contains no material hidden defects of which the
transferor was aware at the time of the transfer.”623 A software licensor makes a
nondisclaimable warranty if its software does not have hidden defects of which it is
aware at the time of transfer.624
The Reporters are extending a products liability theory in requiring licensors to
warn licensees of known dangers. This provision is well established in products liability:
“The majority of states, either by case law or by statute, follow the principle that ‘the
seller is required to give warning against a danger, if he has knowledge, or by the
application of reasonable, developed human skill and foresight should have knowledge
of the danger.’ ”625 The software industry’s response to this provision has been
overwhelmingly hostile. The chief concern is that the provision is vague and will lead to
disputes as to whether software bugs create a duty to inform customers. ALI Reporters
Robert Hillman and Maureen O’Rourke contend that Section 3.05 does no more than
incorporate existing contract law’s duty to disclose and tort’s fraudulent concealment
law.626 The anachronistic practice of the software industry is to disclaim all warranties
619 I2 Technologies, Inc. v. DARC Corp., 2003 WL 22205091 (N.D. Tex., Sept. 23, 2003) (quoting DARC’s

anti-disabling device warranty).

620 Robert W. Gomulkiewicz, The Implied Warranty of Merchantability in Software Contracts: A

Warranty No One Dares to Give and How to Change That, 16 JOHN MARSHALL J. OF COMP. & INFO. L. 393, 393
(1998).
621 Id. at 234.

622 Robert A. Hillman & Maureen O’Rourke, Defending Disclosure in Software Licensing, 78 U. CHI. L.

REV. 95, 95 (2011).

623 Principles of the Law of Software Contracts § 3.05(b).

624 Id. at § 305(b).

625 Id.

626 Hillman and O’Rourke, Defending Disclosure, Id. at 95.

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314 INTERNET-RELATED CONTRACT LAW Ch. 4

including the implied warranty of merchantability and offer the purchaser, a limited and
often inadequate remedy. The nondisclaimable warranty is the first modest step to
mandatory minimum adequate remedies. Some proprietary software publishers who
contend that this provision creates uncertainty as to the meaning of “material defect”
oppose section 3.05.627 Linux and other open source stakeholders oppose this warranty
for free and open software (FOSS).628 Another critic of the non-disclaimable warranty of
no defect provision recommends opting out of the Principles as in the clause below:
This Agreement and all related disputes shall be governed by the laws of
_______, without regard to the United Nations Convention on Contracts for the
International Sale of Goods or the American Law Institute’s Principles of the
Law of Software Contracts (Principles). The parties agree that (i) the Principles
shall have no application whatsoever to the interpretation or enforcement of
this Agreement, and (ii) neither party shall invoke the Principles in whole or
in part in any judicial or arbitral proceeding relating to this Agreement. 629
(F.) Software Performance Standards
(1.) Breach and Material Breach

The Principles defines a breach as failure to perform without a legal excuse. 630 The
material breach standard is more licensor oriented than U.C.C. Article 2’s perfect tender
rule. Customized software code will rarely be bug-free, and therefore the licensor will
violate Article 2’s perfect tender rule most of the time. Material breach reflects the
industry standard that developed software is almost never free of bugs. Software
licensors should use the “material breach” standard so their customer will not
pretextually reject software because of minor bugs that do not impair functionality or
performance. The Reporters do not replicate other law on breach but instead focus “on
what constitutes breach so as to entitle an aggrieved party to a remedy.”631
The Principles did not include specialized rules for tender, acceptance, rejection,
repudiation, “anticipatory repudiation, adequate assurance of performance, or other
performance-related topics such as inspection.”632 These concepts are imported from well-
travelled provisions of Article 2 of the U.C.C. and the common law without substantial
reworking. Instead, the drafters developed rules not found in the common law and tailored
them to the specific problems of software contracting. Courts consider the behaviour of the
party as well as the covenant of good faith and fair dealing.

627 “A few software providers also worry about the meaning of “material defect.” The comments to section

3.05(b) point out that the section simply captures the principle of material breach: Does the defect mean that
the transferee will not get substantially what it bargained for and reasonably expected under the contract?
The criticism that “materiality” is too vague, if accurate, would mean that contract law would have to abolish
its material breach doctrine too.” Robert Hillman, American Law Institute Approves Principles of the Law of
Software Contracts, Concurring Opinions Blog (June 2, 2009) http://www. concurringopinions.com/archives/
2009/06/american-law-institute-approves-the-principles-of-the-law-of-software-contracts.html.
628 Id. (response to Hillman’s post by Ken Arromdee, June 2, 2009).

629 Id. (response to Hillman’s post by Sean Hogle, June 6, 2009).

630 Principles of the Law of Software Contracts § 3.11(a).

631 Topic 3, Breach, Summary Overview, Id. at 138.

632 Id.

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§ 4.8 PRINCIPLES OF THE LAW OF SOFTWARE CONTRACTS 315

(2.) Material Breach

The Principles draw in large part from the Restatement (Second) of Contracts § 241
and UCITA § 701 in determining what constitutes a material breach. Section 3.11 defines
a material breach as an electronic agent that allows the non-breaching party to declare
the end of the contract. A material breach occurs where transferors breach the warranty
of § 3.05(B) (duty to disclose material hidden defects), a limited remedy fails of its
essential purpose (§ 4.01), or the transferor breaches the contract by failing to comply
with § 4.03, which is the provision for electronic repossession or automatic disablement
by planting malicious or disabling code.
UCITA was the contracting statute to displace the perfect tender rule with the
material breach standard. Under Section 3.11, a material breach signifies the end of the
contract whereas a non-breaching party may recover for non-material breach and the
contract is still in force. UCITA adopted a substantial performance or material breach
standard for development software contracts versus Article 2’s parochial and unrealistic
perfect tender rule. The most significant factors include: the terms of the agreement; (1.)
usage of trade, course of dealing, and (2.) course of performance; (3.) the extent which
the aggrieved party will be deprived of the benefit reasonably expected; (4.) the extent
to which the aggrieved party can be adequately compensated for the part of the benefit
deprived; (5.) the degree of harm or likely harm to the aggrieved party; and (6.) the extent
to which the behavior of the party failing to perform or to offer to perform departs from
standards of good faith and fair dealing.633 The Reporters note also that a material
breach occurs where transferors breach the warranty of § 3.05(b) (duty to disclose
material hidden defects), a limited remedy fails of its essential purpose (§ 4.01); or the
transferor breaches the contract by failing to comply with § 4.03, which is the provision
for automatic disablement.634
(3.) Right to Cure

Breaching parties have the right to cure at their own expense where the time for
performance has not yet expired or there are reasonable grounds to believe the
nonconforming software would be acceptable to the licensee. Software licensors also
often give licensees a period of acceptance testing in addition to the cure. The Principles
of the Law of Software Contracts imported the concept of cure of breach from UCITA,
which gives software licensors a second chance to get things right, if the software does
not work as intended.635 As with U.C.C. Article 2, breaching parties have the right to
cure at their own expense where the time for performance has not yet expired or there
are “reasonable grounds to believe the nonconforming performance would be
acceptable.”636 Software licensors often give licensees a period of acceptance testing
during which time the licensor may cure defects. The cure gives the breaching party a
“further reasonable time after performance was due” to get things right.637

633 Id. at § 3.11(c)(1)–(6).

634 Id. at § 3.11(d).
635 Id. at § 3.12.
636 Id.
637 Id. at § 3.12(a)(2).

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316 INTERNET-RELATED CONTRACT LAW Ch. 4

(G.) Remedies for Breach of Software Contracts

(1.) UCITA-Like Remedies

The Principles of Software Contracts validate the parties’ agreements as to what

the remedies should be much like UCITA and U.C.C. Article 2. The Reporters assume
parties to software contracts will adapt well-established principles from sales such
resale, market price, specific performance, and liquidated damages to software contracts.
Software licensors should provide their customers with a minimally adequate remedy.
In the absence of agreement, the drafters adopted the expectation theory of damages. 638
The non-breaching party is entitled to remedies for breach. The breach of a software
contract may constitute copyright infringement as well as breach of contract. Copyright
infringement is a cause of action arising out of interfering with an author’s exclusive
rights. Infringement is the reproduction, distribution, performance, public display, or
creation of a derivative work without permission of the copyright owner.
(2.) Use of Automated Disablement to Impair Use

The Principles of the Law of Software Contracts limit the ability of a software
licensor to remotely remove or disable software. Electronic self-help is always a
controversial provision because of the unbridled power it gives licensors over essential
software to the customer’s business. A disabling device is computer code that prevents
users from accessing software.639 The use of disabling devices is a very controversial
practice in the software industry. A software licensor should not use disabling devices
unless the licensee agrees to this remedy prior to entering into the license agreement. 640
Furthermore, a licensor should not disable software without providing notice to the
licensee. For example, the electronic repossession of a business’s billing software might
deprive business of the ability to collect accounts. The principal concern of the licensee
about disablement is that a licensor may repossess mission-critical software where there
is a bona fide dispute over a term in a software contract. Section 4.03 provides, “A
transferor may not use automated disablement of the process results in the loss of rights
granted in the agreement or the loss of use of other software or digital content.”641
Section 4.03 balances the interests of licensors and licensees by permitting
automated disablement under certain limited circumstances, but strictly prohibiting
disablement as a self-help remedy. Electronic self-help is always a controversial
provision because of the power it gives licensors over integral software in enterprises.
Electronic disablement is strictly prohibited in standard form transfers of generally
available software and all consumer transactions.642 Licensors using electronic
disablement contrary to the Principles are subject to liability for direct, incidental, and
consequential damages.643 In business-to-business transfers, disablement is permitted

638 Reporter’s Memorandum at xxii.

639 “Often inserted by a vendor to allow the vendor to prevent the end user from using the software after
the license has expired. It may also refer to a virus, spider, worm, etc., that disables the software. Disabling
code is often referred to as malicious code.” H. WARD CLASSEN, A PRACTICAL GUIDE TO SOFTWARE LICENSING
FOR LICENSEES AND LICENSORS (Chicago, Illinois: American Bar Association Business Law Section, 4th ed.
2011) at 396.
640 UCITA § 605.

641 Id. at § 4.03.

642 Id. at § 4.03(c).

643 Id. at § 4.03(e).

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§ 4.9 CLOUD COMPUTING SERVICE LEVEL AGREEMENTS 317

but subject to limitations such as “the term authorizing automated disablement is

conspicuous; [and] the transferor provides timely notice of the breach” and gives the other
party a reasonable right to a cure.644 The Reporters also note how parties frequently tailor
their own remedies with consequential damages exclusions, as limited remedies will fail
of their essential purpose making consequential damages limitations unenforceable
because they are unconscionable.
(3.) Liquidated Damages

Section 4.02 provides for liquidated damages but these clauses may not be penal
provisions i.e. “the amount must be reasonable in light of the anticipated harm or actual
harm caused by the breach.”645 The guideposts in U.C.C. § 2–718 were imported to the
Principles. If the court strikes down compensation or liquated damages clauses, the
remedies are available had the clause not been included.646 The Reporters decline to
develop precise formulas for measuring damages in software contracts, but direct courts
to U.C.C. Article 2 for guidance.647
(4.) Cancellation & Expectancy Damages

Cancellation of the software contract is appropriate by the non-breaching party who

provides that the other party committed a material breach.648 As with U.C.C. Article 2,
there is no right to cancel absent notice to the breaching party, which triggers their right
to cure. Section 4.05 draws upon the common law of contract in recognizing that the non-
breaching party has the right to “expectation damages.”649 Damages for loss expectancy
include incidental and consequential damages less expenses saved that stem from the
breach.650
(5.) Specific Performance

Section 4.06 recognizes the equitable remedy of specific performance where software
“is unique or in other proper circumstances.”651 Specific performance is not available for
personal services such as support by a particular programmer.652 Specific performance, as
with the sales of goods, is appropriate where the software is unique or in proper
circumstances. This remedy, based upon equity, is discretionary and unavailable absent a
showing of exceptional circumstances.
§ 4.9 Cloud Computing Service Level Agreements
The term, cloud computing, is a metaphor that describes public as well as private
providers of software access or storage. Cloud computing is “used to describe a software-
as-a-service (SAAS) platform for the online delivery of products and services.”653 Despite

644 Id. at § 4.03(d)(1)–(3).

645 Id. at § 4.02(a).
646 Id. at § 4.02(b); see also, § 4.01, cmt. a, illus. 2.
647 Id. at § 4.05, cmt. a.
648 Id. at § 4.04.
649 Id. at § 4.05.
650 Id.
651 Id. at § 4.06(a).
652 Id. at § 4.06(a), cmt. a.
653 Rearden LLC v. Rearden Commerce, 597 F. Supp. 2d 1006, 1021 (N.D. Cal. 2009).

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318 INTERNET-RELATED CONTRACT LAW Ch. 4

the metaphor that services and software are stored in the clouds, cloud computing
always has a physical location. “Cloud computing is a model for enabling convenient, on-
demand network access to a shared pool of configurable computing resources (e.g.,
networks, servers, storage, applications, and services) that can be rapidly provisioned
and released with minimal management effort or service provider interaction.”654
“Amazon, Google, Rackspace, and Microsoft are leading companies in the business of
renting cloud computing and storage.655 Cloud computing is in perpetual motion and the
buzz is that it will displace traditional software licensing. Nevertheless, Richard
Stallman, a founding father of the open source movement describes it as a trap for the
unwary. He writes about how cloud computing raises the specter of unilateral control by
proprietary companies: “It’s stupidity. It’s worse than stupidity: it’s a marketing hype
campaign. Somebody is saying this is inevitable—and whenever you hear somebody
saying that, it’s very likely to be a set of businesses.”656 A litigator examines how cloud
computing impacts discovery and jurisdiction:
We have reached the point where some of us do not know where in the “cloud”
our computer backup files reside. There are drive-through windows at fast food
restaurants in the Midwest where orders are taken by call centers in the
Southeast. We fly from Boston to Chicago, for the day, and stop along the way
to eat dinner at the airport in Philadelphia. In short, nothing stops at a state
border anymore.657
Companies as well as individuals are storing their data and using software in the
clouds and therefore “no longer have direct physical access to the devices storing their
data.”658 A University of California-Berkeley Distributed Systems Laboratory research
report describes the variegated service paradigm of cloud computing:
Cloud Computing refers to both the applications delivered as services over the
Internet and the hardware and systems software in the datacenters that
provide those services. The services themselves have long been referred to as
Software as a Service (SaaS). The datacenter hardware and software is what
we will call a Cloud. When a Cloud is made available in a pay-as-you-go manner
to the public, we call it a Public Cloud; the service being sold is Utility
Computing. We use the term Private Cloud to refer to internal datacenters of
a business or other organization, not made available to the public. Thus, Cloud
Computing is the sum of SaaS and Utility Computing, but does not include
Private Clouds. People can be users or providers of SaaS, or users or providers
of Utility Computing. We focus on SaaS Providers (Cloud Users) and Cloud

654 NATIONAL INSTITUTE OF STANDARDS & TECHNOLOGY, NIST CLOUD COMPUTING PROGRAM, http://

www.nist.gov/itl/cloud/index.cfm.
655 Scott DeCarlo & Tomio Geron, America’s Fastest Growing Tech Companies, FORBES (June 24, 2013).

656 MICHAEL ARMBRUST, ARMANDO FOX, REAN GRIFFITH, ANTHONY D. JOSEPH, RANDY KATZ, ANDY

KONWINSKI, GUNHO LEE, DAVID PATTERSON, ARIEL RABKIN, ION STOICA, AND MATEI ZAHARIA., ABOVE THE
CLOUDS: A BERKELEY VIEW OF CLOUD COMPUTING (Feb. 10, 2009) at 1 (Executive Summary) (quoting Free
Software pioneer Richard Stallman).
657 ANDREW SCHULMAN, A PRACTICAL GUIDE TO ORGANIZING A BUSINESS IN RHODE ISLAND (MCLE) § II–

16.1(2013).
658 JEFFREY FOLLETT, ET. AL., MCLE MASSACHUSETTS DISCOVERY PRACTICE § 20.1 (2012 ed.) (discussing

electronic discovery).

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§ 4.9 CLOUD COMPUTING SERVICE LEVEL AGREEMENTS 319

Providers, which have received less attention than SaaS Users. From a
hardware point of view, three aspects are new in Cloud Computing.659
The service agreement by application service providers (ASPs) emerged in the late
1990s as a model of distribution that did not involve installation at the customer’s
facility. For instance, Microsoft devised a method of distributed service that includes
linking popular programs in a services package. Distributed service agreements reflect
a new licensing model, which encompasses software as well as services. As with other
licenses, the service provider makes it clear that it is retaining all proprietary rights and
that the customer does not own the software or the media on which it is inscribed.
Subscription based licenses frequently encompass services as well as the licensing of
software such as 24/7 telephone support, installation, or maintenance. The leading
cloud-based storage products are DropBox, SugarSync, and Pogoplug/Cloudstor. The
U/Cal Berkeley Report identified hardware savings from cloud computing. The chief
finding was that the appeal of cloud computing was the “the construction and operation
of extremely large-scale, commodity-computer datacenters at low cost locations.”660 The
chief savings for companies are the “cost of electricity, network bandwidth, operations,
software, and hardware available at these very large economies.”661 The researchers
identified three hardware-related aspects of cloud computing accounting for its appeal:
(1) The illusion of infinite computing resources available on demand, thereby
eliminating the need for Cloud Computing users to plan far ahead for
provisioning.
(2) The elimination of an up-front commitment by Cloud users, thereby
allowing companies to start small and increase hardware resources only
when there is an increase in their needs.
(3) The ability to pay for use of computing resources on a short-term basis as
needed (e.g., processors by the hour and storage by the day) and release
them as needed, thereby rewarding conservation by letting machines and
storage go when they are no longer useful and storage by the day) 662
(4) The illusion of infinite computing resources available on demand, thereby
eliminating the need for Cloud Computing users to plan far ahead for
provisioning.
(5) The elimination of an up-front commitment by Cloud users, thereby
allowing companies to start small and increase hardware resources only
when there is an increase in their needs.
(6) The ability to pay for use of computing resources on a short-term basis as
needed (e.g., processors by the hour and storage by the day) and release
them as needed, thereby rewarding conservation by letting machines and
storage go when they are no longer useful and storage by the day) and

659 MICHAEL ARMBRUST, ARMANDO FOX, REAN GRIFFITH, ANTHONY D. JOSEPH, RANDY KATZ, ANDY

KONWINSKI, GUNHO LEE, DAVID PATTERSON, ARIEL RABKIN, ION STOICA, AND MATEI ZAHARIA, ABOVE THE
CLOUDS: A BERKELEY VIEW OF CLOUD COMPUTING (Feb. 10, 2009) at 1 (Executive Summary).
660 Id.

661 Id.

662 Id.

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320 INTERNET-RELATED CONTRACT LAW Ch. 4

release them as needed, thereby rewarding conservation by letting

machines and storage go when they are no longer useful.
Cloud computing is a disruptive technology for traditional legal rules built upon a
foundation of territorial sovereignty. “With the ubiquity of cloud computing, the
government’s reach into private data becomes even more problematic.”663 Cloud
computing creates new legal dilemmas such as what constitutes electronic storage, an
issue key to the Electronic Communications Privacy Act. How should the Stored
Communications Act be tweaked to recognize that since the Act was enacted, e-mail and
other messages are stored and accessed remotely by Internet users? 664 What should
constitute electronic storage in an era of the synchronization of copies across countless
servers that may also be cross-border or cross-national. Cloud-based services have
become standard for personal use, business use, educational use, and even governmental
use.
The cloud-computing infrastructure is undergoing the same revolution as commuter
vehicles did in the 1960s, and telephone communications underwent before that. He
describes the “computer utility” companies of the 1960s, which operated the first
networks for scientific research, which foreshadowed the growth of cloud computing
which, with more powerful and cheaper computers, has grown exponentially in use. The
FCC has yet to treat cloud computing as a utility subject to its regulations. 665 In general,
federal agencies do not regard Internet commercial institutions such as Google as
utilities.
(A.) NIST Definition of Cloud Computing
Cloud computing is a model for enabling convenient, on-demand network access to
a shared pool of configurable computing resources (e.g., networks, servers, storage,
applications, and services) that can be rapidly provisioned and released with minimal
management effort or service provider interaction.”666 The National Institute of
Standards and Technology (NIST) defines cloud computing as having the following
qualities:
Cloud computing is a model for enabling convenient, on-demand network
access to a shared pool of configurable computing resources (e.g., networks,
servers, storage, applications, and services) that can be rapidly provisioned and
released with minimal management effort or service provider interaction. This
cloud model promotes availability and is composed of five essential
characteristics (On-demand self-service, Broad network access, Resource
pooling, Rapid elasticity, Measured Service); three service models (Cloud
Software as a Service (SaaS), Cloud Platform as a Service (PaaS), Cloud
Infrastructure as a Service (IaaS); and, four deployment models (Private cloud,
Community cloud, Public cloud, Hybrid cloud). Key enabling technologies
663 See United States v. Cotterman, 709 F.3d 952, 965 (9th Cir. 2013) (en banc).
664 Nearly thirty years ago, the Stored Communications Privacy Act was enacted to fill a gap in the then
relatively new ECPA. See Russell S. Burnside, The Electronic Communications Privacy Act of 1986: The
Challenge of Applying Ambiguous Statutory Language to Intricate Telecommunication Technologies, 13
RUTGERS COMPUTER & TECH. L.J. 451, 516–17 (1987) (lamenting “the 1986 Act’s circumscription of legal
protections for electronic communications, E-Mail, and remote computer services.).
665 Kevin Werbach, The Network Utility, 60 DUKE L.J. 1761 (2011).

666 PETER MELL & TIMOTHY GRANCE, NAT’L INST. OF STANDARDS & TECH., U.S. DEP’T OF COMMERCE,

SPECIAL PUBLICATION 800–145: NIST DEFINITION OF CLOUD COMPUTING (Draft), at 2 (2011).

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§ 4.9 CLOUD COMPUTING SERVICE LEVEL AGREEMENTS 321

include: (1.) fast wide-area networks, (2.) powerful, inexpensive server computers,
and (3.) high-performance virtualization for commodity hardware.667
(B.) Qualities of Cloud Computing
Cloud computing “enabling technologies include: (1.) fast wide-area networks, (2.)
powerful, inexpensive server computers, and (3.) high-performance virtualization for
commodity hardware.”668 ReDigi describes cloud computing as “the process involves
“migrating” a user’s file, packet by packet—“analogous to a train”—from the user’s
computer to the Cloud Locker so that data does not exist in two places at any one time. ”669
Cloud computing is rapidly evolving encompassing both software and hardware. The
cloud infrastructure can be viewed as containing both a physical layer and an abstraction
layer. The physical layer consists of the hardware resources that are necessary to
support the cloud services being provided, and typically includes server, storage and
network components. The abstraction layer consists of the software deployed across the
physical layer, which “manifests the essential cloud characteristics. Conceptually the
abstraction layer sits above the physical layer.”670 NIST’s definition of cloud computing
explains its essential qualities:
On-demand self-service. A consumer can unilaterally provision computing
capabilities, such as server time and network storage, as needed automatically
without requiring human interaction with each service provider.
Broad network access. Capabilities are available over the network and accessed
through standard mechanisms that promote use by heterogeneous thin or thick
client platforms (e.g., mobile phones, tablets, laptops, and workstations).
Resource pooling. The provider’s computing resources are pooled to serve
multiple consumers using a multi-tenant model, with different physical and
virtual resources dynamically assigned and reassigned according to consumer
demand. There is a sense of location independence in that the customer
generally has no control or knowledge over the exact location of the provided
resources but may be able to specify location at a higher level of abstraction
(e.g., country, state, or datacenter). Examples of resources include storage,
processing, memory, and network bandwidth.
Rapid elasticity. Capabilities can be elastically provisioned and released, in
some cases automatically, to scale rapidly outward and inward commensurate
with demand. To the consumer, the capabilities available for provisioning often
appear to be unlimited and can be appropriated in any quantity at any time.
Measured service. Cloud systems automatically control and optimize resource
use by leveraging a metering capability at some level of abstraction appropriate
to the type of service (e.g., storage, processing, bandwidth, and active user
accounts). Resource usage can be monitored, controlled, and reported,

667 Id.
668 Id.
669 Capitol Records, LLC v. ReDigi Inc., 106 U.S.P.Q.2D (BNA) 1449, 1449 (S.D. N.Y. 2013).
670 Id. at 2, n.2.

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322 INTERNET-RELATED CONTRACT LAW Ch. 4

providing transparency for both the provider and consumer of the utilized
service.671
(C.) Software as a Service Paradigm
Service bureaus lease or sell data processing, computer time, online services, and
access to software in return for subscription fees. Service bureaus are businesses that
provide data processing, online services, and access to software through a direct
connection over the Internet or WAN services for a fee.672 A licensor will want a clause
that addresses service bureaus. Service bureaus offer diversified software packages or
target specific industries. Vendors have developed payroll interface software products
that bridge between their software and payroll service bureaus. Service bureaus also
offer credit-reporting software to customers. Service bureaus charge their customers pay
access and storage charges. Credit or collection agencies depend upon the service bureau
to have properly functioning software with the latest updates. Similarly, human
relations or payroll departments will access software through service bureaus. Service
bureaus increasingly support GNU/Linux and Free/Open Source Software. Cloud
computing has evolved as the latest stage in software as a service.
Richard Raysman and Peter Brown, in their computer law treatise, explain that the
service bureau will warrant that it will deliver a software system that meets its
customer’s needs and this includes documentation, training, and the right of the
customer to have a programmer at the services bureau.673 In addition, the service bureau
will warrant that its staff will have the “appropriate technical and application skills to
enable them to perform their duties” under the service bureau agreement. Many service
bureaus will agree to make modifications or enhancements available to their customers
for no additional fee.674
Cloud providers have developed the next generation of IT services, storing data and
running applications and permitting users access data and collaborate on any device,
from any location 24/7. Ideally, data or software can be accessed, edited, and shared
securely from any location on any device. To date, cloud computing providers have
adopted a services paradigm. A typical provision, for example, makes a term of service
automatically renewable in perpetuity, subject only to written cancellation by the
customer. The fees are generally in the form of monthly service fees with upgrades.
Providers issue service credits to customer accounts to offset future billable services.
Service credits are not typically transferable to other account holders.

671 PETER MELL & TIMOTHY GRANCE, THE NIST DEFINITION OF CLOUD COMPUTING: RECOMMENDATIONS

OF THE NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY, SPECIAL PUBLICATION, 800–145 (Sept. 2011) at
1.
PCMAG.com, Encyclopedia, Id.
672

2 RICHARD RAYSMAN & PETER BROWN, COMPUTER LAW: DRAFTING AND NEGOTIATING FORMS AND
673

AGREEMENTS § 10.15A at 10–81 (New York, New York: New York Law Press, 2009).
674 Id. at 10–76.

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§ 4.9 CLOUD COMPUTING SERVICE LEVEL AGREEMENTS 323

(D.) Service Level Agreements for Cloud Computing

I’ve looked at clouds from both sides now
From up and down, and still somehow
It’s cloud illusion I recall
I really don’t know clouds at all.
—Joni Mitchell, Both Sides Now
This section presents the chief issues in negotiating, drafting, and litigating cloud
computing service level agreements. The development of cloud computing creates new
contracting issues such as whether reasonable security is an implied norm for off-site
storage. Cloud computing, like out-sourcing data, exists in a legislative vacuum. Some
of the same issues applicable to software licensing apply equally well to cloud computing.
Lawyers representing providers and clients need to consider issues such as choice of law,
choice of forum, jurisdiction, performance standards, security, and warranties such as
systems integration and fitness for a particular purpose. In addition “some new issues
come about because of the multi-tenant nature (information from multiple companies
may reside on the same physical hardware) of cloud computing, the merger of
applications and data, and the fact that a company’s workloads might reside outside of
their physical on-premise datacenter.”675
Some issues include data or software accuracy, quality, completeness, timeliness,
responsiveness resource efficiency, metrics for measuring usage, auditing, privacy,
security, interoperability, and what happens in the event of service interruption.
Amazon’s EC2 service and Google’s Google App Engine are two of the best-known
examples of cloud computing, which Gartner Inc., a technology research company,
defines as a type of computing in which “massively scalable IT-enabled capabilities are
delivered ‘as a service’ to external customers using Internet technologies.”676 Google set
the stage for revolutionary technological concepts such as Cloud computing, which
enables clients to access software and data stored in remote sites.
Cloud computing service level agreements (SLAs) address issues such as data
protection, data security, and storage services. For a provider, the goal of the SLA is to
reallocate the risk of service interruptions and limit liability and exposure to
consequential damages. Many providers offer “service credits” for interruptions to
displace other remedies. From a customer’s perspective, the SLA must provide “peace of
mind” that it will have meaningful remedies in the event of loss of data or service
interruptions. SLAs need to address backup audits and assessments as well as backups
in the event of service interruptions.
Neither Congress nor state legislatures have enacted new contracting law
addressing cloud computing or service bureaus. This is another example of legal lag
where the information technologies are evolving faster than the law. Cloud computing is
a new paradigm of providing information technology services with diverse ideal types
that include on-site private clouds, off-site private clouds, public clouds, or hybrids such

675 Open Cloud Manifesto, Dedicated to the Principle That the Cloud Should Remain Open, http://www.

opencloudmanifesto.org/.
676 Jon Brodkin, Seven Cloud-Computing Risks, NETWORK WORLD (July 2, 2008) (reviewing Gartner

Report on risks of cloud computing).

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324 INTERNET-RELATED CONTRACT LAW Ch. 4

as when a business places its website on a public cloud but retains a private cloud for its
internal operations.677 A 2011 survey of 3,000 CIO executives confirmed the importance
of cloud computing in U.S. companies.678 “The companies are attempting to build a highly
resilient network by using high tier, redundant connections, failover sites, and
intelligent re-routing; this will help them meet their service level commitments.”679
In many respects, cloud-computing works like a utility such as water or electricity
in that is measured, scaled out, and provides on demand services. NIST develops a
paradigm of three service models:
Cloud Software as a Service (SaaS): The capability provided to the consumer
to use the provider’s applications running on a cloud infrastructure. The
applications are accessible from various client devices through a thin client
interface such as a Web browser (e.g., Web based email). The consumer does
not manage or control the underlying cloud infrastructure including network,
servers, operating systems, storage, or even individual application capabilities,
with the possible exception of limited user specific application configuration
settings.
Cloud Platform as a Service (PaaS): The capability provided to the consumer is
to deploy onto the cloud infrastructure consumer created or acquired
applications created using programming languages and tools supported by the
provider. The consumer does not manage or control the underlying cloud
infrastructure including network, servers, operating systems, or storage, but
has control over the deployed applications and possibly application hosting
environment configurations.
Cloud Infrastructure as a Service (IaaS): The capability provided to the
consumer is to provision processing, storage, networks, and other fundamental
computing resources where the consumer is able to deploy and run arbitrary
software, which can include operating systems and applications. The consumer
does not manage or control the underlying cloud infrastructure but has control
over the operating systems, storage, deployed applications, and possibly
limited control of select networking components (e.g., host firewalls).680
In addition to the private sector, approximately 25% of the federal government’s eighty
billion in IT spending is a potential target for cloud computing solutions. 681
Lawyers representing cloud-computing customers will need to focus on the meaning
of key terms in their contracts such as “availability, “access,” and “outage.” The first
generation of service level agreement (SLA) is the chief instrumentality for cloud
computing contract law. Service providers use SLAs to reallocating risks, disclaiming

677 Nathan Marke, Clearing the Clouds: What’s Right For Your Business, CBR ROLLING BLOG (June 17,

2011), http://www.cbronline.com/blogs/cbr-rolling-blog/clearing-the-clouds-whats-right-for-your-business-210
611.
678 Glenn Gruber, Six Questions Hoteliers Should Ask Providers of Cloud-Based Systems, TALKING

TRAVEL TECH BLOG (June 16, 2011), http://www.tnooz.com/2011/06/21/news/six-questions-hoteliers-should-

ask-providers-of-cloud-based-systems/.
679 Id.

680 Id. at 17.

681 Jill Tumler Singer, Is Cloud Computing For Real? Summary of Session By CIO of the National

Reconnaissance Office at Cloud Expo New York, SYS-CON MEDIA, http://www.sys-con.com/node/1878613.

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§ 4.9 CLOUD COMPUTING SERVICE LEVEL AGREEMENTS 325

warranties, and limiting remedies to service credits. 682 In a service paradigm, the
provider gives only a “best efforts” promise as opposed to strict liability-like express
warranties that run with sales of goods or the Principles of the Law of Software
Contracts. An exception to this tendency is the warranty-like protections given by AMS,
a public peer exchange.683
Access and outage terms are two of the most important provisions in any SLA
agreement.684 Access is the sine qua non of cloud computing and therefore the agreement
must carefully define how outage is to be measured. 685 Epocrates’ SLA spells out what
access means under the contract: “ ‘Availability’ is defined as the time when the
infrastructure is available for users to access the BMJWebDxPremium Product.
Availability is measured on a 24/7/365 basis and means when the BMJWebDxPremium
Product is functioning correctly when accessed via the internet from outside the
Epocrates network and includes being able to access the BMJWebDxPremium
Product.”686 Epocrates’ SLA also explains the operational structure for its cloud in its
SLA:
The Epocrates production facility has been architected as a highly available
and highly scalable infrastructure. The site is monitored on a 24 7 365 basis for
fault and performance characteristics. Every effort is made to minimize the
frequency and effects of planned and/or unplanned outages of the
infrastructure. The Service Level Agreement (SLA) for the production
infrastructure is as set out below:
The SLA sets out the time when the BMJWebDxPremium Product will be
available for external user access. This includes access to the
BMJWebDxPremium Product and NewDx Content included in that product
and any other agreed content to the extent that Epocrates and its contractors
host it. Epocrates agrees and undertakes to provide the Service Levels to the
site in accordance with this Schedule. Epocrates further agrees that it shall
monitor and measure the performance of the service and of the Service Levels
and shall report the same to the BMJ as set out below.687

682 CIOs key questions for cloud providers concerned access, outages, and recovery of data. “Do you have

SLAs on RTO (Recovery Time Object) / RPO (Recovery Point Objective)?” Other questions include whether
cloud providers had data backups. If so, how far back in time may data be recovered? How quickly can data be
recovered? Executives are also interested in availability terms, system integration, and the portability of data.
Glenn, Gruber, Six Questions Hoteliers Should Ask Providers, Id.
683 “AMS is a public peering hub—connects cloud providers together. Is now offering SLA guaranteed

100gbE connections, not just ‘best effort’ SLAs that most in industry currently use.” David Sims, Amsterdam
Peering Exchange Intros SLA for Guaranteed Bandwidth, TMCNET.COM, http://www.tmcnet.com/channels/
voice-peering/articles/186546-amsterdam-peering-exchange-intros-sla-guaranteed-bandwidth.htm.
684 “Outages damage perception of reliability of the cloud.” Robert Plant, Don’t Get Stuck in the Cloud:

Even if Your Data is Secure, One Glitch with a Cloud Provider Could Scare off your Customers, HARV. BUS.
REV., http://www.businessweek.com/managing/content/jun2011/ca20110621_098805.htm.
685 “Access to cloud resources requires . . . access to the cloud.” Id.

686 Epocrates Material Contract in SEC Filing, Exhibit 10, July 16, 2010 (Data processing and

preparation DATED 20th February 2007 (1) The BMJ Publishing Group- and -(2) Epocrates, Inc. Click for
Enhanced Coverage Linking Searches Agreement for the Newdx Project).
687 Id.

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326 INTERNET-RELATED CONTRACT LAW Ch. 4

Cloud providers have developed software that measures usage, which is the basis
for charging its customers688 For example; a new software product by “Uptime Software”
monitors cloud services and provides estimates on costs, uptime, and other benchmarks.
This software signals a new era in contract enforcement as software monitors resources,
determines cloud costs, and helps enforce SLAs. 689 Nevertheless, it is important for
providers and clients to spell out how service level credits are computed and provide for
auditing by both parties.690 A FDIC official notes that SLA cloud computing is still in the
process of evolution. He notes the difficulty of locking down the meaning of a cloud
computing contract.691 This FDIC specialist highlights the following key negotiating
points:
How do you monitor that relationship? Who does the monitoring? What do you
monitor? For example, are you looking at the business health of the service
provider, the compliance with regulations and compliance with the bank’s own
internal policies? How is their security posture? Essentially, it’s everything
we’d want to see in the service level agreements.
For example, ensuring availability of your data, how do you know whether or
not the cloud is really capable of providing you 100 percent up time? Is it a
guarantee or is it a commitment? And we’ve seen some recent examples where
cloud outages do occur, even though they may provide commitments 100
percent up time. The same goes for security. There have been a few instances
where we’ve seen some cloud providers for data storage asserting that there is
security, only to find out later that there really isn’t security that they
committed to.692
The SLA agreement must also provide for prompt hardware service in the event of
outages in private clouds. The Society for Worldwide Interbank Financial
Telecommunication (SWIFT) provides a network that enables financial institutions
worldwide to send and receive information about financial transactions in a secure,
standardized and reliable environment. For the past forty years, SWIFT has averaged
99.999 uptime.693 Security is the watchword for lawyers representing cloud computing
clients:
[B]e specific in the security protocols they require, keeping in mind that they
must be reasonable and within the cloud provider’s ability to implement.
Schultz said organizations should insist on data loss prevention, but be
prepared to pay more for it.

688 Jessica Davis, MSPs, SaaS Providers Get a Handle on Cloud Computing Costs With Uptime Software,

CHANNELINSIDER.COM, http://www.channelinsider.com/c/a/Cloud-Computing/MSPs-SaaS-Providers-Get-a-
Handle-on-Cloud-Computing-Costs-With-Uptime-Software-112268/.
689 Id.

690 Nathan Marke, Clearing the Clouds: What’s Right For Your Business, CBR ROLLING BLOG,(June 17,

2011) http://www.cbronline.com/blogs/cbr-rolling-blog/clearing-the-clouds-whats-right-for-your-business-210611.
691 Tracy Kitten, Cloud & Mobile: Vendor Weak Points: FDIC’s Saxinger on Management and Contracts

with Third Parties, BANKINFOSECURITY.COM (June 22, 2011) http://www.bankinfosecurity.com/articles.php?

art_id=3770.
692 Id.

693 Karl Flinders, Bank App Store Part of Community Cloud Developments, COMPUTERWEEKLY.COM,

(June 21, 2011) http://www.computerweekly.com/Articles/2011/06/21/247043/Bank-app-store-part-of-community-

cloud-developments.htm.

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§ 4.9 CLOUD COMPUTING SERVICE LEVEL AGREEMENTS 327

Consider including penalty clauses for data security breaches in their cloud
SLAs. Getting that requires a cloud provider serious enough about data
security . . . It’s nice to get money back if you have a breach. It won’t cover your
costs but you’re getting someone who invests skin in the game.’
The cloud provider must be obligated to return or destroy data as directed by
the customer, and the contract should have a timeframe for accomplishing
that.694
To properly represent their clients, attorneys must spell out rights in the event
software or data is unavailable because of natural disasters or other interruptions. In
addition, the parties to cloud computing SLAs must spell out: (1.) Rights and Duties of
provider and client; (2.) Metrics/measurements to be used in measuring level of service,
disruption, or maintenance; (3.) Description and list of services provider is to deliver that
will conform to terms (Clients should consider how measurement is reported); (4.) Issues
with SLA’s where cloud provider outsources to another cloud provider; upstream SLA
needs to give complimentary representations about level of service and other
obligations.695
The SLA is a very different paradigm than standard software contracts with new
risks. IBM charges more for SLAs with meaningful warranties and remedies. 696 IBM’s
White Paper states that SLAs need to fulfill four objectives:
 The list of services the provider will deliver and a complete definition of
each service.
 Metrics to determine whether the provider is delivering the service as
promised and an auditing mechanism to monitor the service.
 Responsibilities of the provider and the consumer and remedies available
to both if the terms of the SLA are not met.
 A description of how the SLA will change over time.697
Another survey of cloud computing customers revealed dissatisfaction with the
terms of cloud computing service agreements:
One critical element of cloud strategy revealed by the survey involves service
levels: ‘Survey respondents hold very low opinions of the service-level
agreements they are getting from vendors,’ . . .” That’s why we believe that the
first essential-but-unknown success factor in cloud implementations is a strong
focus on SLAs.”698
A study of cloud computing clients concluded that SLA agreements were an entirely
new paradigm with unique negotiating points: “About one-third of service consumer
respondents rate the effectiveness of their SLAs 3 on a scale of 1 (“very ineffective”) to 5

694 Marcia Savage, Cloud Computing Contracts and Security’s Role, TECHTARGET.COM (June 22, 2011)

http://searchcloudsecurity.techtarget.com/news/2240037158/Cloud-computing-contracts-and-securitys-role.
695 Id.

696 The Importance of Service Level Agreements, PERSPECTIVES ON CLOUD COMPUTING, http://cloudblog

group.tumblr.com/post/7045628090/the-importance-of-service-level-agreements.
697 IBM.com, Review and Summary of Cloud Service Level Agreements, Id. at 1.

698 Eileen Feretic, There’s No Escaping the Cloud, BASELINEMAG.COM (2011), http://www.baselinemag.

com/c/a/IT-Management/Theres-No-Escaping-the-Cloud-595183/.

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328 INTERNET-RELATED CONTRACT LAW Ch. 4

(“generally very effective”).699 Only 16% of the respondents gave their SLAs the highest
ratings though “49% say their providers deliver 95% to 100% compliance.”700 A cloud
computing contracting survey also concluded that:
57% of service consumers rely on internal IT to monitor provider SLAs.
46% agree it’s difficult to monitor service-level targets with public cloud service
providers.
Most (79%) of SLA terms are negotiated.
The vast majority (96%) of SLAs did not fully meet the required service-level
targets over the past year.
Most (57%) service consumers assess financial penalties on service providers
when terms aren’t met, yet only 10% say they receive full reimbursement. 701
In the cloud computing legal environment, there is frequently a mismatch in service
level agreements (SLAs) between existing systems (tomorrow’s legacy) and what is being
offered for cloud-based services.702 “Despite supplier promises around availability,
standard SLA targets still fall well short of current performance in more traditional
delivery models.”703 Security and privacy issues abound with cloud computing though
Internet law has not yet evolved to address these issues. Security priorities for cloud
computing include: (1.) Governance, Risk & Compliance, (2.) Identity Management
Infrastructure Security (3.) Confidentiality of Data and (4.) Data Protection.704 As a U.S.-
based company, Microsoft has to comply with the Patriot Act—that means that the U.S.
government may access EU-Based cloud data potentially violating the EU Data
Protection Directive.705 Outsourcing data including personally identifiable information
about European consumers may create unanticipated negative consequences as to the
portability of data.706
§ 4.10 Commercial Law of Internet Intangibles
The lesson of the past two decades is the protean qualities of U.C.C. Article 9. The
law of secured transactions accommodates well to changing information technologies.
Courts have had little difficulty in accommodating principles of secured transactions to
cyberspace or to the transfer of intangible assets. In an information-based economy,

699 Id.
700 Id.
701 Press Release, InformationWeek Analytics New Research Finds Only 4% of SLAs Met All Service-

Level Targets Over the Past 12 Months, PRNEWSWIRE.COM (June 24, 2011) http://www.prnewswire.com/news-
releases/informationweek-analytics-new-research-finds-only-4-of-slas-met-all-service-level-targets-over-the-
past-12-months-124485048.html.
702 Id.

703 Andy Gallagher, An Evolutionary Approach to Cloud Computing, COMPUTERWEEKLY.COM (June 17,

2011), http://www.computerweekly.com/Articles/2011/06/17/247021/An-evolutionary-approach-to-cloud-computing.
htm.
704 Jan De Clercq, Stay Safe in the Cloud, Id.

705 Zack Whittaker, Microsoft Admits Patriot Act Can Access EU-Based Cloud Data, ZDNET, http://www.

zdnet.com/blog/igeneration/microsoft-admits-patriot-act-can-access-eu-based-cloud-data/11225.
706 Stuart Wilson, Steve Bailey, CommVault, CHANNELEMEA.COM (June 24, 2011, http://www.

channelemea.com/spip.php?article4301. (“What is less publicized . . . is the additional risk of outsourcing email

for faculty and students who are European residents. The European Union (EU) has much stricter privacy
laws than the US, which could require seeking permission from the parties prior to engaging a third-party to
handle their email.”).

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§ 4.10 COMMERCIAL LAW OF INTERNET INTANGIBLES 329

software and intellectual property are a company’s crown jewels. A leading law school
casebook on the licensing of intellectual property notes that companies seeking financing
will need to prove “the valuation of the company’s intellectual property” before lenders
will loan them money.707 Bankruptcy trustees are disbursing internet assets such as
domain names or IP addresses routinely:
Bankruptcy trustees, debtors-in-possession, and receivers are seeing an
increase in efforts to sell Internet Protocol (IP) addresses, also referred to “IP
Numbers.” IP Numbers are the unique numeric identifiers associated with
computers connected to the Internet. While sales of IP Numbers can deliver
value to the estate, IP Numbers are unusual in that their value, use and
transfer are enhanced by applicable contract and policy. Ignoring the contracts
and policies can delay the sale process and reduce or negate the value of IP
Numbers. This article seeks to provide an overview of issues associated with IP
Number sales, as well as suggesting an approach for permissible and
straightforward sales to obtain the highest value.708
A federal bankruptcy judge ordered that its founders purchase Bebo.com, once the
third largest social media website.709 Increasingly, trustees or debtors-in-possession view
domain names as significant assets for secured lending and sales of assets. 710 To
understand how to collateralize software and underlying intellectual property, it is
necessary to briefly cover the basics of secured transactions. U.C.C. Article 9 is part of
the Uniform Commercial Code, a state law, that covers financial obligations secured by
interest in personal property and fixtures but not real property, which is covered by the
state law of mortgages. Security agreements are contracts that create a security interest
in collateral denominated by the debtor. Intellectual property rights are defined as
general intangibles, a U.C.C. Article 9 category of collateral. Software is protectable by
both patents and copyrights and the underlying intellectual property, which are general
intangibles, can serve as collateral. For patents, which are general intangibles,
perfection is accomplished by filing a UCC-1 or financing statement in the state where
the debtor’s headquarters are located. In contrast, copyrights are perfected by
registration in the U.S. Copyright Office.
Security interests are consensual, as opposed to judicial or mechanical liens, which
are created by law. U.C.C. Article 9 provides the legal infrastructure for assets-based
financing where the assets are personal property. The idea is for a creditor to back up
their right to payment (such as a promissory note) with the right to repossess and sell
the debtor’s collateral. UCC’s sphere of application is spelled out in § 9–109(a)(1).

707 ROBERT W. GOMULKIEWICZ, XUAN-THAO NGUYEN, AND DANIELLE CONWAY-JONES, LICENSING

INTELLECTUAL PROPERTY: LAW AND APPLICATION 529 (New York, New York: Aspen Law and Business, 2008).
708 Stephen M. Ryan, Matthew Martel, and Ben Edelman, Internet Protocol Numbers Internet Protocol

Numbers and the American Registry for Internet Numbers: Suggested Guidance for Bankruptcy Trustees,
Debtors-in-Possession and Receivers, BLOOMBERG BNA: BANKRUPTCY RESOURCE CENTER (Jan. 4, 2012).
709 In re Bebo.com Inc., No. 2:13–bik–22205 (Bankr. Ct., C.D. Cal., July 13, 2013).

710 Domain names are property that can be a valuable asset in secured lending. “Like their brick-and-

mortar counterparts, “e-tailers” must have an attractive address online known as a “domain name.” To
establish their website’s presence on the Internet, domain name holders contract with an Internet Service
Provider, which provides the services necessary for registering a domain name. ‘Domain names are unique;
[they] are assigned on a first come, first serve basis.” As a result, “there are no two identical names on the
Internet.’ In addition, domain names enable Internet users to locate a website using that name.” Rachel
Ehrlich Albanese and Avi Fox, Chapter 11.com: New Life for the Failed Retailer, BLOOMBERG BNA: ELECT.
COMM. & LAW REPORT. (Aug. 23, 2010).

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330 INTERNET-RELATED CONTRACT LAW Ch. 4

Article 9 applies to “a transaction, regardless of its form, that creates a security interest
in personal property or fixture.”711 U.C.C. Article 9’s unified concept of the security
interest and methods of perfection that turn on the type of collateral applies equally well
to Internet-related commercial and consumer financing of personal property. The chart
below is a roadmap to the seven parts of U.C.C. Article 9. Creditors will need to consider
how U.C.C. Article 9 priority rules apply to software.

Parts to Article 9
of the U.C.C. Key Topics Covered

Part 1: § 9–100s: Definitions of General Concepts

General Provisions

Part 2: § 9–200s: General Effectiveness of Security Agreement, Attachment

Effectiveness and Attachment and Enforcement of Security Interest, After-Acquired
Property Clauses; Future Advances

Part 3: § 9–300s: Law Governing the Perfection and Priority of Security

Perfection and Priority Interests, Conflict of Law Rules, Types of Collateral and How
They Determine Method of Perfection, Location of Debtor,
Security Interests That Are Perfected Upon Attachment,
Perfection by Possession, Perfection by Control, Priority
Rules, Lien Creditors vs. Secured Creditors, Buyers of Goods,
Licensees of Intangibles; Priorities Among Conflicting
Security Interests, Future Advances, Priority of Purchase-
Money-Security Interests, Priority of Security Interests in
Transferred Collateral, Accessions, Commingled Goods,
Rights of Banks and Relationship Between Bank and Secured
Party when Deposit Accounts are Controlled

Part 4: § 9–400s: Alienability of Debtor’s Rights, Security Agreements Cannot

Rights of Third Parties Prevent Transfers of the Debtor’s Rights, Assignment & Anti-
Assignment of Security Interests

Part 5: § 9–500s: Contents of the Financing Statement, Name of Debtor and

Filing Secured Party, Filing and Compliance with Other Laws,
Effects of Errors & Omissions, Effect of Certain Events on
Effectiveness of Financing Statement, Changes in Debtor’s
Name, Changes in Location of Collateral, New Debtors,
Effectiveness of Filed Records, Amending Finance
Statements, Termination Statements, What Constitutes
Filing, Grounds for Refusing to Accept Financing Statements,
Duties and Operation of Filing Office, Acceptance and Refusal
to Accept Record, Uniform Forms of Financing Statements &
Amendments, Fees, Filing Office Rules

711 U.C.C. § 9–109(a)(1).

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§ 4.10 COMMERCIAL LAW OF INTERNET INTANGIBLES 331

Part 6: § 9–600s: Rights After Default, Rights and Duties of Secured Party in
Default and Enforcement of Possession and Control, Waiver and Variance of Rights and
Security Interests Duties, Secured Party’s Right to Take Possession After
Default, Disposition (sale, lease or licensing) of Collateral
After Default, Notification Before Disposition of Collateral,
Notification Forms, Contents and Form of Notification Before
Disposition of Collateral: Consumer Goods Transaction;
Application of Proceeds, Surplus & Deficiency, Rights of
Transferees of Collateral, Rights & Duties of Certain
Secondary Obligors; Full and Partial Satisfaction of
Obligation, Notification of Proposal to Accept Collateral,
Right of Redemption, Remedies for Secured Party’s Failure to
Comply with Article, Impact on Deficiency or Surplus,
Determination of Whether Conduct was Commercially
Reasonable

Part 7: 9–700s: Effective Date, Savings Clause, Security Interest Perfected

Transition (and Unperfected) Before Effective Date, Continuation
Statements

U.C.C. Article 9 provides the ground rules for how to create, perfect, and gain
priority for security interests in Internet-related software and other intangible assets.
U.C.C. Article 9 determines the rules for perfecting security interests in software,
intellectual property and other information-based assets in every U.S. jurisdiction.
Counsel securing Internet-related assets outside the U.S. will need to comply with
foreign law. U.C.C. Article 9’s rules of perfection are not followed outside the United
States but many countries are beginning to adopt U.S. style central registries. The
Reporters of the Principles of the Law of Software Contracts exclude the “transfer of a
security interest in software” from its sphere of application.712
If the parties create a security interest in software, U.C.C. Article 9 applies, not the
Principles. Article 9’s major innovation was to create the legal invention of a “security
interest” in personal property. A security interest is an interest in personal property that
backs up the debtor’s promise to pay or other payment obligation. Collateral means “any
tangible or intangible asset belonging to the debtor in which the debtor grants a security
interest to its secured party.”713 Secured parties are those who are the beneficiaries of
the security interest. The granting clause gives the secured party a security interest in
designated collateral generally indicated by specific listing or collateral types such as
software as a general intangible.714
Section 109 defines the scope of U.C.C. Article 9. Article 9 applies to any
“transaction, regardless of its form, that creates a security interest in personal property
or fixtures.”715 A security interest, in turn, is “an interest in personal property or fixtures

712 American Law Institute, Principles of the Law of Software Contracts (Proposed Final Draft, March

6, 2009) at § 1.06(b)(2).
713 JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE (St. Paul: West Publishing Co.

6th ed. 2010) at 1151.

714 See U.C.C. § 9–102(a)(72)(A); § 9–102(a)(73)(A).

715 U.C.C. § 9–109(d)(9).

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332 INTERNET-RELATED CONTRACT LAW Ch. 4

which secures payment for performance of an obligation.”716 Obligations based upon

realty other than fixtures are outside of U.C.C. Article 9’s scope. The parties to a secured
transaction create all of these security interests by contract. The security agreement is
an advanced form of contracting which often has numerous conditions and covenants.
The typical security agreement has a granting clause giving the secured party rights
in property owned by the debtor. In the clause below, the secured party grants a security
interest in their copyright: “Big Software Company hereby grants to First National Bank
(Secured Party) a security interest in their copyrighted software and agrees that Secured
Party has and shall continue to have a security interest in the following property,
including, without limitation, the copyrighted software described in the Exhibits
attached.” The debtor’s property denominated under the security agreement is
“collateral.” The secured party gains numerous advantages over general creditors by
obtaining a security agreement interests. The security agreement between the secured
party (generally a bank) and the debtor (generally a borrower) creates a consensual
security interest in software collateral. The debtor is generally a borrower in a credit
transaction, while the secured party is the beneficiary of the security interest. The entire
idea of a secured transaction is that the secured party has a security interest in
designated collateral of the debtor that can be repossessed or realized in the event of a
default. One of the common events of default is the failure of the debtor to pay a
promissory note installment.
The security agreement between the secured party and debtor is a relational
contract. The security agreement will typically be 50 to 100 pages long with extensive
covenants, conditions, and restrictions tailored to the type of collateral and transactions.
At a minimum, a security agreement includes the names of the parties, a granting
clause, a reasonable description of the collateral, promises by the debtor and creditor,
warranties, events of default, acceleration, remedies, and the signatures of the parties.
In addition to the security agreement, a secured party will require the debtor’s principals
to sign a promissory note as accommodation parties. This means that if the debtor does
not pay, the accommodation parties must pay stepping into the shoes of the
accommodated party. If debtor is a start-up company, the secured party or bank will
typically ask the debtor’s principals to sign in their personal capacity guaranties or sureties.
The security agreement is the ultimate source as to whether software or other
intangibles are included.
A licensor of software or other information may create an account classified as
Article 9 collateral.717 The account or the stream of payments can be collateral that the
secured party will want to be part of the collateral covered by its security agreement
with the debtor. In the example above, Article 9 covers consensual security interests
created by the secured party and the licensor/debtor as a matter of contract law. In
contrast, judicial liens or non-consensual liens are created as a matter of law. If a sheriff
levied on a licensor’s equipment such as its computers and office equipment because the
company failed to pay taxes or a general creditor, this would be a right accorded by
statute, not agreement. Lawyers representing Internet companies will need to determine
what special steps need to be taken to perfect security interests in collateral. “If some of
the secured party’s collateral consists of rights to payment arising from copyrights, in

716 U.C.C. § 1–201(b)(35).

717 U.C.C. § 9–102(a)(2).

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§ 4.11 CROSS-BORDER ELECTRONIC COMMERCE 333

whole or in material part, the secured party should” be sure that the security agreement
and the financing statement perfect its security interest in the right of payment.”718
Increasingly, the federal law of bankruptcy will be determining the rights and liabilities
of e-commerce companies seeking Chapter 7 or 11 protections. Internet assets such as
websites will increasingly be collateralized as the economy emphasizes intangible assets.
§ 4.11 Cross-Border Electronic Commerce
The Internet, by its very nature, is international, yet there is no uniform legal
infrastructure for commercial transactions harmonized for the global marketplace. 719
However, an international commercial law is beginning to evolve:
The way of the future in the increasingly global economy is to create greater
uniformity in commercial standards of doing business across nations. Where
differences in laws and languages create barriers to trade in the process of
negotiating and translating complex written documents, short cuts provided by
new systems will be needed to keep pace with international commerce and
trade. Many recent uniform systems are evolving, based on mercantile law and
industry practices, such as the INCOTERMS, the international (and generally
accepted) system of commercial delivery terms. 720
In the absence of international conventions, domestic law applies to license
agreements and terms of service. There is great uncertainty as to whose law will govern
online commerce, which knows no international borders. Uniform rules for safeguarding
commercial information transfers would be a desirable international development.
Contract law in cyberspace must take into account radically different social, economic,
and legal systems. A growing number of companies are engaged in cross-border
electronic commerce. The movement to devise uniform rules to be used in private
international law has evolved rapidly over the past century. The United Nations
Commission for International Trade (UNCITRAL); the International Institute for the
Unification of Private Law (UNIDROIT); the Council on Europe (Council); and the
International Chamber of Commerce (ICC) have all spearheaded past efforts to create
international commercial law.
The European Commission contends that E-Commerce will increase only if
consumers are convinced they have a minimal adequate remedy when entering into
cross-border sales and services.721 UNCITRAL’s Model Law on Electronic Commerce is

718 Edwin Smith, MCLE, Taking and Enforcing Security Interests in Personal Property § 2.4.
719 Robert A. Hillman of the Cornell Law School is the Reporter of the Principles of the Law of Software
Contracts, while Maureen O’Rourke, the Dean of the Boston University Law School, the Associate Reporter,
are distinguished legal academics who understand the globalized nature of software transaction. The
Reporters also demonstrate their sophisticated understanding of software consumer issues when they
acknowledge the different approach taken in the Principles from Europe’s “pro-regulatory stance to consumer
protection and contract terms specifically.” Principles of the Law of Software Contracts, 2009 A.L.I., § 1.11,
cmt. c. The Reporters acknowledge that they have considered the European approach to consumer transactions
rejecting it in favor of the U.S.-based unconscionability doctrine. Id. The Reporters note that the annex to the
Unfair Contract Terms Directive may be useful to courts “in evaluating unconscionability claims.” Id. Finally,
the Reporters acknowledge that it may be expensive for software makers to localize their contracts for the
European consumer market. Id. This section demonstrates that Internet contracting practices must be
localized because countries connected to the Internet have radically different legal cultures.
720 MCLE DRAFTING AND ENFORCING MASSACHUSETTS CONTRACTS § 3.11 (2013).

721 “The [Directive on Consumer Rights] Proposal ensures a high level of consumer protection and aims

at establishing the real retail internal market, making it easier and less costly for traders to sell cross border

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334 INTERNET-RELATED CONTRACT LAW Ch. 4

consistent with UCITA’s E-Commerce infrastructure in addressing business-to-business

but not business-to-consumer rules. UNCITRAL’s Model Law, like UCITA, validates the
digital signature as the functional equivalent of the “pen and paper” signature. Article 7
of the UNCITRAL’s model law on Electronic Commerce defines a signature as follows:
“The only significant difference between a domestic contract and an international
contract is that in the former all the relevant elements of the contract in question are
connected with one country only.”722 The parties subject to an international contract law
will need to consider jurisdictional choice of law and conflicts of law issues that arise
when radically different legal cultures converge.723
Software licensing is increasingly a global enterprise, which creates new
complications for an E-Commerce company.724 Lawyers representing E-Commerce
companies must tailor cross-border licensing to consider different consumer protection
and contracting rules, as well as linguistic and cultural differences. 725 Internet
companies targeting European consumers must comply with the Unfair Contracts Term
Directive (UCTD); European courts will not enforce contractual provisions determined
to be unfair under the Directive.726 The Annex to the UCTD classifies many terms in
standard-form TOUs as unfair and this includes disclaimers of warranties, limitations
of licensor’s liability, unilateral modifications to contract terms, and the acceptance of
the license agreement by performance. If a given term in a license agreement is not
addressed in the Annex of Suspect Terms, a European court may refuse to enforce it
under a more general test of unfairness. Article 8 of the UCTD provides that Member
States have the discretion to adopt provisions that are more stringent.
Europe is unique because the twenty-eight countries of the European Union enacted
a de facto cross-border regime governing electronic commerce. The European Commission
(EC) has powers of initiative, implementation, management, and control, which allows it
to formulate harmonized regulations. The differences between the EU and the U.S.
approaches to TOUs reflect different assumptions about the role of government in
regulating markets.727 Consumers throughout the EU have mandatory rights and
remedies that are non-waivable, regardless of whether or not the consumer reads these
terms. In Europe, the EU Commission has launched a quiet revolution giving European
consumers rights across the Continent. During the past decade, the EC has approved
Internet regulations such as the E-Commerce Directive; E-Signatures Directive; Distance

and providing consumers with a larger choice and competitive price.” Europa, Proposal for a Directive on
Consumer Rights, http://ec.europa.eu/consumers/rights/cons_acquis_en.htm.
722 UNILEX, UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL L AW PRINCIPLES.

723 A recent example of cultural clash is the French case against Twitter for enabling the transmission

of anti-Jewish tweets. This action is going forward in a French court but would be dismissed at an early stage
in the United States because of the First Amendment and Section 230 of the Communications Decency Act.
See Eleanor Beardsley, French Twitter Lawsuit Pits Free Speech Against Hate Groups, NATIONAL PUBLIC
RADIO (Jan. 22, 2013).
724 There is relatively little case law on shrinkwrap, but a Scottish court upheld a shrinkwrap license in

a business-to-business setting. Beta Computers (Europe) Limited v. Adobe Systems (Europe) Limited. FSR
(1996) 367.
725 MARK LEMLEY ET AL., SOFTWARE AND INTERNET LAW 459 (2006) (noting the need for legal protection

of software and computer technology in an environment “complicated in part because of differences among
national legal rules, traditions, procedures, and institutional frameworks.”).
726 See generally, Michael L. Rustad & Vittoria Maria Onufrio, The Exportability of the Principles of

Software: Lost in Translation?, 2 HASTINGS SCI. & TECH. L.J. 25, 51–52 (2010).
727 Jane K. Winn & Brian H. Bix, Diverging Perspectives on Electronic Contracting in the U.S. and EU,

54 CLEV. ST. L. REV. 175, 183 (2006).

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§ 4.11 CROSS-BORDER ELECTRONIC COMMERCE 335

Selling Directive; Data Protection Directive; Database Protection Directive; and the
Copyright Directive. The right to protection of personal data is established by Article 8 of
the Charter, and in Article 8 of the European Convention of Human Rights. The EU
recognizes E-Commerce does not flourish without mandatory consumer protection across
national borders. Reverse engineering is a right guaranteed to European licensees under
the Software Directive for purposes of interoperability. Many of the U.S. style terms of
service are invalid or questionable under mandatory European consumer protection
rules.728
(A.) EU Consumer Protection
Online businesses, including U.S. companies, must give European consumers
accurate pre-contractual disclosures.729 Online sellers are required to give consumers
confirmatory disclosures before the delivery of computer software or other E-Commerce
contracts. The seller’s confirmation disclosure must explain the period in which a
consumer can cancel the contract. Specifically, websites must give the consumer a right to
cancel a distance contract. Further, a website seller must give European consumers a right
of withdrawal period not shorter than seven working days. If an e-Business accepts orders
via its website or other instrumentality, it will have only 30 days to fill the order. An E-
Commerce seller must give European consumers precontractual disclosures including that
they have the right to a refund payable within 30 days.
Sellers may not require European consumers to waive consumer rights under the
Distance Selling Directive or Unfair Contract Terms Directive or any other mandatory
rule. The European Union’s Unfair Contract Directive gives, in effect, all European
consumers a fundamental right to read, review, and understand standard terms before
concluding a contract.730 Simply put, mass-market license agreements where the
consumer cannot view the terms prior to payment are invalid in all twenty-eight Member
States of the EU under the Unfair Contract Terms Directive.731
(B.) Electronic Commerce Directive
Member States are required to develop national legislation implementing the
Electronic Commerce Directive (E-Commerce Directive).732 The E-Commerce Directive,
which took effect on January 6, 2002, creates a legal framework for online service
providers, commercial communications, electronic contracts, and limitations of liability of
intermediary service providers. Article 1 states that the E-Commerce Directive seeks to
728 Michael L. Rustad and Maria Vittoria Onufrio. Reconceptualizing Consumer Terms of Use for a

Globalized Knowledge Economy, 14 U. PA. J. BUS. L. REV. 1085–1190 (2012).

729 See e.g. Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts(5) and

Directive 97/7/EC of the European Parliament and of the Council of 20 May 1997 on the protection of consumers
in respect of distance contracts; Council Directive 84/450/EEC of 10 September 1984 concerning misleading
and comparative advertising, Council Directive 85/374/EEC of 25 July 1985 on the approximation of the laws,
regulations and administrative provisions concerning liability for defective products.
730 European Commission, Unfair Contract Terms, http://ec.europa.eu/consumers/consumer_rights/

rights-contracts/unfair-contract/index_en.htm
731 Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts at art. 4(1):

Without prejudice to Article 7, the unfairness of a contractual term shall be assessed, taking
into account the nature of the goods or services for which the contract was concluded and by
referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion
of the contract and to all the other terms of the contract or of another contract on which it is
dependent.
732 The European Parliament and the European Council adopted the Directive on June 8, 2000.

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336 INTERNET-RELATED CONTRACT LAW Ch. 4

contribute to the proper functioning of the internal market by ensuring the free
movement of information society services between the Member States. 733 The E-
Commerce Directive establishes rules such as the transparency and information
requirements for online service providers, commercial communications, electronic
contracts, and limitations of liability of intermediary service providers. 734 The E-
Commerce Directive requires providers to list designated information on their website
to qualify for immunities. Barclay’s Bank for example, complies with the Directive
disclosures in the following chart:

Company name Barclays Bank PLC.

Registered office 1 Churchill Place, London E14 5HP

(1.) Intermediary Liability

The E-Commerce Directive applies only to service providers established within the
twenty-eight Member States of the EU. The E-Commerce Directive exempts service
providers from liability for intermediaries “where they play a passive role as a “mere
conduit” of information from third parties and limits service providers’ liability for other
“intermediary” activities such as the storage of information.”735 Article 12 provides for
immunity from liability for providers serving as a mere conduit, Articles 13 and 14
immunize providers for ministerial activities such as caching and hosting. Article 14,
entitled “Hosting,” states:
1. Where an information society service is provided that consists of the
storage of information provided by a recipient of the service, Member States
shall ensure that the service provider is not liable for the information stored at
the request of a recipient of the service, on condition that:
(a.) the provider does not have actual knowledge of illegal activity or
information and, as regards claims for damages, is not aware of facts or
circumstances from which the illegal activity or information is apparent;
or

733 Id. at art. 1(1).

734 Articles 10 through 21 of the E-Commerce Directive ‘set forth the liability limitations for
intermediary service providers and applicable take-down and put-back regimes for illegal material distributed
through their facilities.’ European ISPs are immunized for caching, hosting, and perfunctory tasks related to
efficient transmission of digital data. The E-Commerce Directive does not impose liability on the ISP if it does
not modify information transmitted by third parties, unless the ISP acquires actual or constructive notice of
illegal content and fails to take prompt remedial steps. Article 15(1) makes it clear that Member States may
not impose a duty on providers to investigate questionable e-mails or website posters. Article 15(2), however,
permits Member States to enact legislation requiring providers to notify law enforcement when they discover
illegal activities on their services. One of the complexities of the E-Commerce Directive’s constructive notice
provision is its insufficient guidance as to what circumstances and requirements place ISPs on notice. Michael
L. Rustad & Thomas H. Koenig, Rebooting Cybertort Law, 80 WASH. L. REV. 335, 393 (2005). Article 17 of the
Brussels Regulations provides that a consumer cannot waive her right to sue a supplier in her local court. A
supplier, which includes U.S. software companies, directing their activities to the consumer’s home state is
automatically subject to jurisdiction because he has directed activities to that state as defined in Article 15.
Finally, a consumer may enforce a judgment in any Member State upon completion of the formalities set forth
in Article 53. Id. at arts. 15, 17, 53.
735 Europa, Electronic Commerce: Commission Welcomes Final Adoption of Legal Framework Directive,

Summary (2012).

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§ 4.11 CROSS-BORDER ELECTRONIC COMMERCE 337

(b.) the provider, upon obtaining such knowledge or awareness, acts

expeditiously to remove or to disable access to the information.
2. Paragraph 1 shall not apply when the recipient of the service is acting
under the authority or the control of the provider.
3. This Article shall not affect the possibility for a court or administrative
authority, in accordance with Member States’ legal systems, of requiring the
service provider to terminate or prevent an infringement, nor does it affect the
possibility for Member States of establishing procedures governing the removal
or disabling of access to information.736
Article 14 establishes a procedure for taking down infringing or illegal content with
delineated notice and takedown procedures. Internet services providers are not
responsible for the content they host as long as (1.) the acts in question are neutral
intermediary acts of a mere technical, automatic and passive capacity; (2.) they are not
informed of its illegal character, and (3.) they act promptly to remove or disable access
to the material when informed of it.737 In addition, Article 15 prevents EU Member
States from requiring service providers to monitor content for potentially illegal
activities.738 These E-Commerce service provider rules are functionally equivalent to the
safe harbors of the Digital Millennium Copyright Act discussed in Chapter 10.
(2.) Spam E-Mail

Article 7 of the E-Commerce Directive requires service providers to “ensure that

service providers undertaking unsolicited commercial communications by electronic
mail consult regularly and respect the opt-out registers in which natural persons not
wishing to receive such commercial communications can register themselves.”739 Article
7 requires Internet service providers to ensure that any unsolicited commercial
communication sent by electronic mail is clearly and unambiguously identifiable as such
as soon as the consumer receives it. Article 7(2) requires providers to comply with the EU
opt-in rules for commercial e-mail.740
(3.) Electronic Contracts

Article 9 of the E-Commerce Directive requires providers to recognize the validation

of electronic or digital signatures. 741 Article 9(2)’s list of exceptions for electronic
contracts is similar to the U.S. approach in UETA and E-SIGN. As in the United States,
Internet service providers have no affirmative duty to monitor illegal or infringing
content in the European Union.742 Article 9 provides: “Member States shall ensure that
their legal system allows contracts to be concluded by electronic means. Member States
736 Id. at art 14.
737 Id.
738 Id. at art. 15.

739 Id. at art. 7(1)(describing unsolicited commercial communications opt-out procedure).

740 “Without prejudice to Directive 97/7/EC and Directive 97/66/EC, Member States shall take measures

to ensure that service providers undertaking unsolicited commercial communications by electronic mail
consult regularly and respect the opt-out registers in which natural persons not wishing to receive such
commercial communications can register themselves.” Id. at art. 7(2).
741 Id. at art. 9.

742 Id. at art. 15(1) (“Member States shall not impose a general obligation on providers, when providing

the services covered by Articles 12, 13 and 14, to monitor the information which they transmit or store, nor a
general obligation actively to seek facts or circumstances indicating illegal activity.”).

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338 INTERNET-RELATED CONTRACT LAW Ch. 4

shall in particular ensure that the legal requirements applicable to the contractual
process neither create obstacles for the use of electronic contracts nor result in such
contracts being deprived of legal effectiveness and validity on account of their having
been made by electronic means.”743
Article 9 contains functionally equivalent provisions to EUTA and the E-Sign Act.
Like these U.S. statutes, the European E-Commerce Directive provides that certain
categories of contracts may not be concluded electronically: (a.) real estate contracts
except rental agreements, (b.) contracts required to be in writing by courts or statutes,
(c.) contracts of suretyship or security agreements, and (d.) contracts for family law or
trusts/estates.744
(4.) Duty to Respond to Report Illegal Activities

Article 15(2) gives Member States the option of establishing a duty of service
providers to “inform the competent public authorities of alleged illegal activities
undertaken or information provided by recipients of their service or obligations to
communicate to the competent authorities, at their request.”745 This role is similar to the
one of U.S. service providers who have a duty to report illegal activities, such as the
distribution of child pornography and respond to subpoenas of courts of competent
jurisdiction. The Directive requires seller to give consumers disclosures before electronic
contracting on how to conclude online contracts, as well as the means of correcting errors.
Article 10 gives consumers the right to store and retrieve contracts or they are
unenforceable. Article 12 essentially immunizes ISPs for conduit activities much like the
U.S. Digital Millennium Copyright Act’s Section 512 discussed in Chapter 10. There are a
number of requirements that must be met for a service provider to receive 17 U.S.C.
§ 512(c) safe harbor protection.
(5.) Liability of Service Providers

The liability limitation for European service providers applies only if the service
provider does not initiate or modify the transmission. Articles 13 and 14 of the Directive
immunize a service provider’s caching and hosting activities. Article 16 imposes no duty of
providers to monitor their websites for illegal activities like the DMCA. Member States
must develop legislation to inform the authorities of illegal activities. Member States are
to develop legislation to encourage out of court settlements of disputes under Article 17.
(C.) The Convention for the International Sale of Goods
(1.) Sphere of Application

The Convention for the International Sale of Goods (CISG) applies to business-to-
business transactions where the buyer and seller are in different signatory states.746 The
purpose of the UNCITRAL was to modernize and harmonize the international law of
sales. By January 1, 1988, when the United States became a signatory, the CISG was
the applicable law for international sales contracts in more than sixty countries. As of
743 Id. at art. 9(1).
744 Id. at art. 9(2).
745 Id. at art. 15(2).

746 Final Act of the U.N. Conference on Contracts for the International Sale of Goods, Official Records,

Annex I at 230 (April 10, 1980), U.N. Doc. A/ Conf.9 7/18, reprinted in 19 INT’L LEGAL MATERIALS 668 (1980),
art. 3(2) [hereinafter CISG].

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§ 4.11 CROSS-BORDER ELECTRONIC COMMERCE 339

May 2, 2012, 74 countries became CISG signatories, accounting for an even larger
proportion of U.S. trading partners. CISG consists of four parts made up of three
substantive parts and a fourth part containing final provisions. The CISG drafters
divided the international sales statute into articles, which are subdivided into chapters in
each part of the statute. Part I, entitled the “Sphere of Application and General
Provisions,” establishes CISG’s sphere of application. Article 1 of CISG sets forth the
basic rules on applicability of the international law to contracting states. Nationality is
important in determining scope; the CISG’s scope section uses “place of business” of a
party and not “nationality, place of incorporation, or place of head office.”747
(2.) Exclusions & Overview of Scope

Nevertheless, the CISG excludes the following from the scope of its application:
auction sales, the sale of securities, negotiable instruments, ships, aircraft, and the sale of
electricity. CISG’s Reporters excluded consumer transactions as well as all tort actions
including causes of action for products liability. Because Europe has adopted the Products
Liability Directive there is no need for CISG to cover those causes of action. The justification
for CISG exclusions is that it would subject sellers to conflicting national laws or extant
law. CISG Part I, Chapter 2, General Provisions, applies to both buyers and sellers in
Articles 7 through 13. CISG Part II, spans Articles 14 through 24, and sets forth rules
for the formation of the international sales contract.
CISG Part III, Articles 25 through 88, covers topics such as breach, avoidance, party
obligations, and remedies relevant in software licensing where the CISG is the governing
law. CISG Part IV consists of final provisions, including reservations and legal
provisions for becoming a signatory state. CISG differs from U.C.C. Article 2 in
recognizing the concept of fundamental breach when either party may avoid a contract.
U.C.C. Article 2 employs the “Perfect Tender Rule,” which permits a buyer to reject a
contract if it fails to conform in any respect to the contract. 748 The CISG, however, makes
it more difficult to cancel an international sales agreement because of its Article 25
fundamental breach standard.
The CISG’s exclusive jurisdiction bases itself upon the seller and buyer’s places of
business, as opposed to the nationality of the buyer and seller. The CISG applies unless
the parties agree to opt out of the Convention under CISG Article 6. The CISG is also
inapplicable if one of the parties is unaware that the other’s place of business is a foreign
CISG signatory state.749 Article 10 of CISG applies if one of the parties has multiple
places of business. Courts will likely exclude service-like transactions as well as
contracts where sales are only incidental transactions. CISG leaves less room for creative
judicial reforms, though some commentators believe that this statute should be stretched
to software transactions, even though it is an intangible. CISG rules for international
sales contracts apply in two circumstances: (1.) when contracts for the sale of goods are
between parties whose places of business are in different CISG Contracting States; or

747 CISG art. 1.

748 CISG art. 25. Under CISG, “breach of contract” covers all failures of a party to perform any of his
obligations. However, a fundamental breach is more serious and may warrant cancellation:
A breach of contract committed by one of the parties is fundamental if it results in such
detriment to the other party as substantially to deprive him of what he is entitled to expect under
the contract, unless the party in breach did not foresee and a reasonable person of the same kind
in the same circumstances would not have foreseen such a result.
749 CISG art. 1(2).

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340 INTERNET-RELATED CONTRACT LAW Ch. 4

(2.) “when the rules of private international law lead to the application of the law of a
Contracting State.”750
This provision applies when one party has a place of business in a CISG signatory
state and the other party’s place of business is located in a non-CISG state. A court
deciding an international sales law dispute could make a decision that private
international law leads to applying the law of the CISG or some other body of law. In
this provision, the CISG is deferring to the court’s application of its private international
law principles, often referred to as conflict of law principles by U.S. courts. 751 Article
1(1)(b) is not applicable to U.S. contracting parties because the U.S. entered a
reservation derogating from this principle. The U.S. representatives to the Convention
found this article to create uncertainty.
(3.) CISG’s Application to Computer Software

The CISG does not address the question of whether the Convention applies to the
licensing of software. U.S. courts classify most software license transactions as falling
under Article 2 of the U.C.C., governing the sale of goods,—even though these
transactions involve the transfer of information or digital data. 752 However, the
exclusion of specific intangibles like electricity or shares of stock does not signal the
“conclusion that the subject matter of a CISG sale must always be a tangible thing.”753
CISG applies to diverse forms of software licensing but goods, like software, frequently
involve a mix of sales and services:
Though we cannot see or touch it, a computer program is not really all that
different from a tractor or a microwave oven, in that a program—designed and
built to process words, bill customers or play games—is also a kind of
“machine.” In other words, a computer program is a real and very functional
thing; it is neither “virtual reality” nor simply a bundle of (copyrighted)
“information.” Once we recognize the functional nature of a program, we begin
to see that the CISG rules (on contract formation, obligations, remedies for
breach etc.) are well-suited to regulate international sales of these particular
things.754
Academic commentators contend that custom software, Internet downloads, and
standard mass-market licenses are all within CISG’s sphere.755 Under CISG, “the goods
referred to are conceived as movable assets; and the common-law tradition sets great
store by noting that they have to be corporeal as well.”756 CISG “seems well-suited to the
750 CISG art. 1.
751 Rod N. Andreason, MCC-Marble Ceramic Center: The Parol Evidence Rule and Other Domestic Law
Under the Convention on Contracts for the International Sale of Goods, 1999 B.Y.U. LAW REV. 351, 376 (1999)
(arguing that private international law must also be consulted to resolve substantive issues of cross-border
sales law).
752 Robert B. Doe & Jen C. Salyers, Chapter 18 on Software Licenses in KATHERYN A. ANDRESEN, LAW

& BUSINESS OF COMPUTER SOFTWARE 18–5 to 18.6 (2008).

753 Joseph Lookofsky, In Dubio Pro Conventione? Some Thoughts about Opt-Outs, Computer Software

and Preëmption Under the CISG, 13 DUKE J. INT. & COMP. L. 258 (2003).
754 Id. at 756.

755 Id. at 278.

756 FRITZ ENDERLEIN & DIETRICH MASKOW, INTERNATIONAL SALES LAW: UNITED NATIONS CONVENTION

ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS, CONVENTION ON THE LIMITATION PERIOD IN THE
INTERNATIONAL SALE OF GOODS (New York: Oceana Publications, 1992) http://www.cisg.law.pace.edu/cisg/
biblio/enderlein-art01.html.

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§ 4.11 CROSS-BORDER ELECTRONIC COMMERCE 341

regulation of contracts for the sale of computer software.”757 Counsel representing

parties in international licensing agreements need to consider whether they will opt out
of CISG in the event a court extends CISG to international licensing agreements.
(4.) CISG Formation Rules

Assuming that the CISG applies to the software contract, there are many
differences in formation rules from U.C.C. Article 2. The CISG does not require a writing
to be enforceable and thus CISG recognizes neither Statute of Fraud nor Parol Evidence
Rule. Anglo-American contract theory follows an objective theory of contract. In contrast,
Article 8 of the CISG interprets an international sales contract according to the party’s
intent. Unlike the parol evidence rule, a court may consider subjective intent as well as
objective circumstances prior to or contemporaneous with any final writing, whether
integrated or not. Article 8 also permits courts and tribunals to consider subjective intent
as well as the reasonable interpretation of the parties’ statements and conduct.758
(5.) CISG’s Warranty-Like Provisions

The CISG does not use the word “warranty,” although all of the warranties found
in U.C.C. § 2–313 to § 2–315 are found in Article 35. CISG Article 35 requires that the
seller deliver goods of the quantity, quality, and description required by the contract. 759
Unlike the UCC, the CISG does not adhere to any formal requirements to disclaim
warranties, such as a “conspicuous” disclaimer of the implied warranty of
merchantability that expressly mentions the term merchantability.
(6.) CISG’s Fundamental Breach and Avoidance

Article 2 of the U.C.C. permits a buyer to reject a contract if it fails to conform in

any respect to the contract, which is the milestone concept known as the “Perfect Tender
Rule.”760 The CISG makes it more difficult to cancel an international sales agreement
because of its Article 25 fundamental breach standard. Fundamental breach, in contrast,
is the predicate for avoiding a CISG contract under Articles 49(1)(A) and 64(1)(A). Article
49(1)(A) gives the buyer a right to “avoid” the contract if the failure of the seller amounts
to a fundamental breach. If there is a fundamental breach of contract by the seller, a
buyer may require the seller to deliver substitute goods, which is a remedy found in
Article 46(2). Article 25 gives some guidance as to the nature of a fundamental breach.
A breach is fundamental if it causes such “detriment to the other party” to
“substantially deprive him of what he is entitled to expect under the contract.”761
Assuming there is an Article 25 fundamental breach, the buyer will have remedies even
though the risk of loss has already passed from the seller. In contrast, if there is a mere
non-fundamental breach, the buyer will be able to claim either monetary damages for
the difference between the value of what was promised and delivered as provided for in
Article 74. As with U.C.C. § 2–714, a buyer may accept goods notwithstanding their

757 JOSEPH M. LOOKOFSKY, UNDERSTANDING THE CISG IN THE USA 61 (1995).

758 MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova d’Agostino, S.P.A., 144 F.3d 1384 (11th Cir.
1998).
759 CISG art. 35.
760 U.C.C. § 2–601.
761 CISG art. 25.

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342 INTERNET-RELATED CONTRACT LAW Ch. 4

nonconformity and claim a price reduction.762 In a software license, the CISG’s

fundamental breach is more pro-licensor than U.C.C. § 2–601’s perfect tender rule and
better suited for the “buggy nature” of software.
(7.) Breach and Remedies

A buyer may require the seller to deliver substitute goods under CISG Article 46(2)
if the seller fundamentally breaches the contract. U.C.C. Article 2’s standard is one of
perfect tender, U.C.C. § 2–601. CISG, unlike U.C.C. Article 2, does not require a Statute
of Fraud nor does it adopt the parol evidence rule. Article 8 of CISG allows either party
to introduce evidence of prior or contemporaneous agreements to interpret a contract.
Assuming there is a fundamental breach under Article 25, the buyer will have remedies
even though the risk of loss has already passed from the seller. Nevertheless, a buyer
may seek monetary remedy for non-fundamental breaches. The difference between the
value of what was promised and delivered, Article 74, is a buyer’s fundamental remedy
for accepted goods. The CISG enables a buyer to accept goods even though they do not
conform to contract and claim a price reduction as an offset.763
(D.) Europe’s Doctrine of Exhaustion
In July of 2012, the European Court of Justice (ECJ)764 ruled against Oracle that
only the right to distribute software is subject to the European Union’s exhaustion
doctrine, which is the equivalent of the first sale doctrine followed by U.S. courts. 765
Exhaustion is a synonym for first sale for all practical purposes. Oracle filed suit against
UsedSoft in the Landgericht München I (Regional Court, Munich I) “seeking an order
that UsedSoft cease the practices” of relicensing Oracle software. According to the
Bundesgerichtshof, the actions of UsedSoft and its customers infringe Oracle’s exclusive
right of permanent or temporary reproduction of computer programs within the meaning
of Article 4(1)(A) of Directive 2009/24. The German court reasoned:
Oracle filed suit against UsedSoft after it promoted an “Oracle Special Offer” in
which it offered for sale “already used” licenses for Oracle software. UsedSoft
represented that all licenses were current because the maintenance agreement
concluded between the original license holder and Oracle was still in force. Oracle’s
principal method of distribution was to have its customers download software from the
Internet. The original Oracle licenses were multi-user and exceeded the number of
licenses needed by the first acquirer. UsedSoft would then purchase these licenses from
organizations that had valid licenses but had stopped using the software. UsedSoft
contended that its business model was authorized by Europe’s exhaustion doctrine.766
Oracle contended, “Exhaustion did not apply to downloading a computer program from

762 See CISG art. 50.

763 For a full discussion of CISG and how it compares to U.C.C. Article 2, see MICHAEL L. RUSTAD, THE
CONCEPTS AND METHODS OF SALES, LEASES AND LICENSES IN A GLOBAL PERSPECTIVE (2007).
764 EU Member States will refer issues to the ECJ and often cases are referred back to the national court

for a final decision consistent with the ECJ ruling.

765 In Case C–128/11, Bierbach, Administrator of UsedSoft GmbH v. Oracle International Corp., July 3,

2012, Judgment of the Court (Grand Chamber), Reference for a preliminary ruling under Article 267 TFEU
from the Bundesgerichtshof (Germany), made by decision of 3 February 2011, received at the Court on 14
March 2011, in the proceedings.
766 Directive 2009/24/EC of the European Parliament and of the Council of 23 April 2009 on the legal

protection of computer programs.

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§ 4.11 CROSS-BORDER ELECTRONIC COMMERCE 343

the Internet, because there was no sale of a tangible object” only a license.767 The ECJ
opinion ruled that EU Directive permitted licensees to dispose of copies downloaded from
the Internet so long as they do not retain a copy for themselves. The European Court of
Justice decided that the Directive:
must be interpreted as meaning that, in the event of the resale of a user license
entailing the resale of a copy of a computer program downloaded from the
copyright holder’s website, that license having originally been granted by that
right holder to the first acquirer for an unlimited period in return for payment
of a fee intended to enable the right holder to obtain a remuneration
corresponding to the economic value of that copy of his work, the second
acquirer of the license, as well as any subsequent acquirer of it, will be able to
rely on the exhaustion of the distribution right under Article 4(2) of that
directive, and hence be regarded as lawful acquirers of a copy of a computer
program within the meaning of Article 5(1) of that directive and benefit from
the right of reproduction provided for in that provision. 768
The court’s decision was that the first sale or exhaustion doctrine applies equally well to
downloading software from the Internet.
(E.) Cross-Border Licensing
U.S. companies need to localize their licensing agreements tailored for diverse legal
cultures as illustrated by Micro Data Base Systems, Inc. v. State Bank of India. 769 The
key issue in Micro Data Systems turned on the territorial limits of the license’s granting
clause. In Micro Data Base Systems, the State Bank of Mumbai, India entered into an
end-user agreement with the Indiana-based MDBS, the developer of the Database
Management System. The license agreement did not contain geographic limitations on
where the software could be used. MDBS’s Runtime Distribution License Agreement
permitted the India-based bank to copy and distributes MDBS modules so long as each
copy incorporated tokens to track authorized users. The State Bank of India agreed to
purchase tokens for each licensed copy of the software used by MDBS. The licensor
charged royalties based upon the sale of tokens used in the shipment of each module.
State Bank of India installed the MDBS in 130 branches around the world. State
Bank did not purchase tokens for all of the MDBS modules it used and distributed. In
the early 1990s, State Bank used the MDBS software to drive a third-party banking
program known as IBSnet. Morgan Laboratories created IBSnet and sold it to State
Bank. MDBS filed suit against State Bank of India claiming copyright infringement and
breach of the software license agreement. Since MDBS had imposed no territorial
limitations, the court held the software license agreement covered locations both inside
and outside of India. However, the Micro Data Base Systems court ruled that State Bank
of India was liable for every software module they distributed without copy control
tokens. The court computed damages by multiplying the number of unauthorized copies
times the cost for 447 tokens, which totaled $447,000 plus interest. The court ruled that
MDBS could not recover damages for copyright infringement since U.S. copyright law
has no extraterritorial effect on infringing conduct occurring in India. The tracking

767 Id.
768 Id. at clause 88.
769 177 F. Supp.2d 881 (N.D. Ind. 2001).

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344 INTERNET-RELATED CONTRACT LAW Ch. 4

system described in Micro Data Base Systems, Inc. enabled the licensor to monitor and
control the copying, distribution, and use of its software.
(F.) Cross-Border Payments
EBay initiated a payments system in Germany and Austria in which it
“intermediated payments, receiving funds directly from buyers for items purchased from
newly registered sellers on the localized eBay websites in those countries.”770 EBay
reported that the German Bundesanstalt fur Finanzdienstleistungsaufsicht (BaFin) and
the Austrian Finanzmarktaufsicht (FMA) required it to obtain a license as a condition of
introducing this system. EBay’s payment processing unit is based in Luxembourg, which
does not require a license.771 EBay faces regulations and licensure in other countries
where it operates:
In Australia, PayPal serves its customers through PayPal Australia Pty. Ltd.,
which is licensed by the Australian Prudential Regulatory Authority as a
purchased payment facility provider, which is a type of authorized depository
institution. Accordingly, PayPal Australia is subject to significant fines or other
enforcement action if it violates the disclosure, reporting, anti-money
laundering, capitalization, corporate governance or other requirements
imposed on Australian depository institutions. In China, PayPal is affiliated
with Shanghai Wangfuyi Information Technology Ltd., which is licensed as an
Internet Content Provider and operates a payments service only for Chinese
customers and only for transactions denominated in Chinese currency. The
People’s Bank of China (PBOC) has enacted regulations to establish a new type
of license, called a Payment Clearing Organization (PCO) license, which will be
required for non-bank payment services.772
The Internet poses new legal dilemmas for payments systems. One of the greatest
risks for businesses is when a cybercriminal operating in a distant forum steal
credentials from a commercial bank transfer or wire transfer. For consumers, the
greatest risk is the interception of credit card information. By the time the Internet
evolved, credit cards were well-established as a payment system. Consumers continue to
use credit cards for most retail Internet purchases, though there is a recent shift to debit
cards and ACH (automated clearinghouse) transfers.773 ACH transfers for Internet
purchases are growing exponentially since 2001. 774 Credit card providers and processers
are stepping up their security for credit card processing. 775 The National Automated
Clearing House Association (NACHA) rules now address “Internet-Initiated Entries.”776
Foreign and cross-border payments and mobile payments over a cell phone or other
device, which are far more common in foreign countries such as Japan than in the U.S.,
are at the cutting edge of payments law.777 However, the law governing Internet

EBay SEC 10-Q Filing (July 19, 2013).

770

Id.
771

772 Id.

773 LYNN M. LOPUCKI, ELIZABETH WARREN, DANIEL KEATING, AND RONALD J. MANN, COMMERCIAL

TRANSACTIONS: A SYSTEMS APPROACH 600 (5th ed. 2013)

774 Id. at 607.

775 Id.

776 Id.

777 Id.

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§ 4.11 CROSS-BORDER ELECTRONIC COMMERCE 345

payments is lagging behind the staggering increasing in new mobile phone applications
enabling payment.

Electronic copy available at: https://ssrn.com/abstract=2743390