The dangers of online licensing

by Breon Gravatt

Terms and conditions for the use of websites, software and other internet or e-commerce related products are commonly provided under one of three forms of licence arrangement:

  • click-wrap licences;

  • shrink-wrap licences;

  • browse-wrap licences.

  • US decisions support two of these, but call into question the effectiveness of the third. This BSW Aware considers the efficacy of such licences in New Zealand and Australia

    Click-wrap licences

    A click-wrap licence presents licence terms and conditions on-screen, for instance before a product is purchased, or before software can be installed.

    Users cannot proceed without indicating their acceptance of the terms and conditions in some manner, for instance by clicking on an "I accept" button or typing the words "I accept" in an on-screen text window.

    Shrink-wrap licences

    A shrink-wrap licence consists of licence terms and conditions contained within and usually viewable through a sealed wrapper. A notice advises that by breaking the seal on the wrapper, or by opening the wrapper, the user agrees to the terms and conditions.

    Shrink-wrap licences are commonly used for software purchased from retail outlets.

    Browse-wrap licences

    A browse-wrap licence is terms and conditions that are simply displayed on a website. They usually relate to the use of the website, use of software products that can be downloaded from it, or to services provided via the website.

    Browse-wrap licences are often contained in a separate page on the website which can be accessed from other pages via hyperlinks, often entitled “Terms and conditions”, “Legal notices”, or similar.

    Consideration of such licences by the courts

    Courts in the United States have issued decisions on all three types of licences. While these are not binding on the New Zealand or Australian courts, in the absence of New Zealand or Australian case law, the courts in both countries would be guided by those decisions. They are therefore useful in indicating what courts here might decide.

    In general, the US courts have upheld click-wrap and shrink-wrap licences, providing:

  • the licence terms are presented before any contract is formed; and

  • users are required to perform some positive action indicating their assent to the terms (such as opening the wrapping of a shrink-wrap licence, or typing "I agree" in a click-wrap licence).

  • However, two US cases call the effectiveness of browse-wrap licences into question.

    Pollstar v Gigmania Limited (California, 17 October 2000)

    Pollstar’s website offered allegedly proprietary information, along with notice of a licence agreement. Clicking on the notice took the user to a separate web page containing the full text of the licence agreement. This governed use of the information contained on the site.

    The defendant copied some of the allegedly proprietary information from the website and was sued by the plaintiff for breach of the licence agreement.

    The court did not declare the licence agreement invalid and unenforceable. However, it pointed out that the information could be accessed and used without assenting to the licence agreement, or even viewing its terms. Accordingly, many visitors to the site might not be aware of the licence agreement.

    Specht v Netscape Communications Corp (New York District Court, 5 July 2001, Federal Court of Appeal 1 October 2002)

    Netscape offered certain software products free of charge on its website. The download page included a button labelled "Download". Clicking on this initiated the software download. A sentence at the bottom of the page said:

    "Please review and agree to the terms of the Netscape SmartDownload Software Licence Agreement before downloading and using the software".

    The underlined portion of text was a hypertext link to a separate web page entitled "Licence and Support Agreements", one paragraph of which said:

    "For products available for download, you must read and agree to the licence agreement terms BEFORE you install the software."

    Below that paragraph was a list of hyperlinks. Clicking on one of these took the user to the licence agreement for the SmartDownload product, the first clause of which said:

    "[B]y ... installing or using ... Netscape SmartDownload, the individual or entity licensing the product is consenting to be bound by and is becoming a party to this agreement".

    The licence agreement included an arbitration clause stating that any dispute arising out of use of the software must be referred to arbitration rather than court proceedings.

    Several users of the software brought a court proceeding against Netscape, which asked the court instead to compel the parties to arbitrate as required by the licence agreement.

    In deciding whether the licence agreement was binding the District Court asked two questions:

  • Did the website give sufficient notice of the existence of the licence agreement and its terms?

  • Did the act of downloading the software sufficiently demonstrate the plaintiff's assent to be bound by the licence agreement?

  • On the first issue, the hyperlink on the download page to the licence agreements would not be visible on many user’s computers, unless the user scrolled down the page. Accordingly, users could easily download the software without knowing that the licence existed, let alone knowing its terms.

    On the second issue, the primary purpose of downloading was to obtain a product, not to assent to an agreement, so users had not done anything showing assent to any licence.

    The US Court of Appeals upheld both of these findings.

    Further, Netscape's website did not make it clear that a binding contract was being formed, as the text on the download page said:

    "Please review [the terms of the licence]".

    This did not indicate that a user must agree to the licence terms before downloading and using the software. The District Court considered this request to be a mere invitation, not a condition of downloading the software. The Court of Appeals did not consider this point.

    The Court of Appeals also considered whether internet users could be deemed to have agreed to the licence terms. Californian law states that if a prudent person has actual notice of circumstances sufficient to put them on enquiry, they have constructive knowledge of what they could have ascertained by such enquiry. In other words, if the possibility of a licence agreement was raised by Netscape, the users had an obligation to investigate it further. They would be deemed to have accepted the licence terms if they could reasonably have found them.

    The Court of Appeals stated that what the plaintiffs saw was an invitation to download a free plug-in on a page praising the product and providing a “Download” button. Because there was no immediately visible notice of the existence of any licence terms, a reasonably prudent internet user would not have known of the existence of such terms, and could not be deemed to have accepted them.

    Both the District Court and the Court of Appeals held that no contract had been formed between Netscape and the users that incorporated the licence terms. They accordingly refused to compel arbitration.


    While Specht is not binding on the New Zealand or Australian courts, the principles of contract law on which the decision is based are similar in the United States. If the issue arose in either country, our courts would probably be guided by Specht.

    Website operators should not rely on terms and conditions contained on a website if:

  • they are not adequately brought to the attention of users; or

  • users do not have to view the terms and conditions before using the website.

  • Merely providing a hyperlink to terms and conditions governing the use of a website, the information it contains, or software that can be downloaded from the website will probably not form part of any contract with users.

    In the words of the Appeal Court in Specht, “Reasonably conspicuous notice of the existence of contract terms and an unambiguous manifestation of assent to those terms by consumers are essential if electronic bargaining is to have integrity and credibility.”

    The industry practice of providing links to legal notices, such as terms of use, copyright notices and privacy policies, at the bottom of webpages may not be effective. Websites should be reviewed to determine whether they are ‘at risk’ and, if necessary:

  • taking further steps to bring the terms and conditions to users’ attention;

  • not allowing users to proceed without viewing the terms and conditions; or

  • requiring users to specifically agree to the terms and conditions.

  • This will be especially important if any of the terms are unusual or particularly onerous, as there is a greater obligation to bring such terms to the attention of users before relying on them.


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