Specht v. Netscape Communications Corp.

Citations: 306 F.3d 17; 2002 WL 31166784Docket: Docket Nos. 01-7870, 01-7872, 01-7860

Court: Court of Appeals for the Second Circuit; October 1, 2002; Federal Appellate Court

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An appeal was made regarding a judgment from the Southern District of New York, which denied a motion by defendants Netscape Communications Corporation and America Online, Inc. to compel arbitration and stay court proceedings. The central issue was whether plaintiffs, by downloading free software from the defendants' webpage, agreed to the software's license terms, including an arbitration clause. The court found that a reasonably prudent internet user would not have been aware of the license terms, as they were located below the download button and required scrolling to access. Consequently, the mere act of downloading the software did not indicate clear assent to the arbitration provision.

The court also held that the claims related to the SmartDownload program, which enhances the Netscape Communicator browser, were not subject to arbitration under the license terms for Communicator. Furthermore, the defendants' argument that Christopher Specht, a website owner not party to the license agreement, should be compelled to arbitrate his claims based on a purported benefit from SmartDownload was rejected as overly speculative. The court affirmed the district court’s denial of the motion to compel arbitration and stay proceedings.

In the background of the case, plaintiffs alleged that their use of SmartDownload unlawfully transmitted private information about their online activities, violating the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act. They claimed that the Communicator software created a "cookie" to identify users and that SmartDownload, once installed, generated a "Key" for further identification, which facilitated the transmission of data to Netscape each time files were downloaded.

Plaintiffs allege that Netscape engaged in unlawful eavesdropping on users of its software products, particularly during the download of SmartDownload. During the relevant period, Netscape provided various software, including Communicator and SmartDownload, for free on its website. Five of the six named plaintiffs—Fagan, Gibson, Gruber, Kelly, and Weindorf—downloaded Communicator and had to agree to its license terms by clicking a "Yes" button before installation could proceed. The license agreement did not mention SmartDownload or its terms and included a clause requiring arbitration for disputes in Santa Clara County, California.

Although Communicator could be downloaded independently, all plaintiffs, except Fagan, downloaded it alongside SmartDownload. They accessed a webpage promoting SmartDownload with a "Download" button, which they clicked to initiate the download. After downloading SmartDownload, they proceeded to download Communicator, which included the clickwrap agreement. Notably, the download of SmartDownload did not present any clickwrap agreement, and only a reference to SmartDownload's license terms was visible if users scrolled down the webpage. Plaintiffs Gibson, Gruber, Kelly, and Weindorf claimed they did not see the license terms before downloading, and while they acknowledged the possibility of not recalling details during depositions, they did not affirmatively state they had seen the terms when clicking the download button.

Plaintiffs Gibson, Gruber, Kelly, and Weindorf contend that the process for obtaining SmartDownload was significantly different from that of Communicator. They assert that, unlike with Communicator, they were not required to explicitly agree to SmartDownload’s license agreement or even to view its terms prior to downloading the free plug-in. During the download and subsequent use of SmartDownload, no mention of the license terms was made. For users who might have scrolled down past the download button, the license terms were not immediately visible as they were with Communicator’s clickwrap agreement. Instead, accessing the terms required clicking an underlined invitation that led to a separate webpage titled "License and Support Agreements," which stated that users must read and agree to the license terms before acquiring the product.

The webpage included a list of license agreements, with the first being for the Netscape software family, including SmartDownload. The agreement granted a nonexclusive license for use, stipulating that by accepting the terms or installing the software, users were consenting to be bound by the agreement. A key provision mandated that most disputes related to the agreement be resolved through arbitration in Santa Clara County, California, with the losing party responsible for arbitration costs.

In contrast to the four plaintiffs who downloaded SmartDownload from Netscape's website, the fifth plaintiff, Michael Fagan, claims to have downloaded the program from an unrelated shareware website operated by ZDNet.

Shareware sites are platforms hosting free software, with significant differences in user experience when downloading SmartDownload from ZDNet compared to Netscape. Users on ZDNet encountered a hypertext link for further information rather than direct access to the license agreement, potentially allowing downloads without awareness of the terms. Christopher Specht, a website operator for WhyWeb, claims that defendants intercepted data from users who previously installed SmartDownload. Defendants argue that Specht benefitted from the Netscape license by facilitating downloads, thus necessitating arbitration under its terms. However, Specht asserts he did not receive commissions from these downloads. In district court, defendants sought to compel arbitration based on the license agreement, but the court found that users were not adequately notified of the SmartDownload terms, ruling that plaintiffs had not accepted the license. The separate Communicator license was deemed unrelated to SmartDownload, and Specht was not bound by the arbitration agreement due to lack of relationship or direct benefit. The court's decision was appealed by defendants, and proceedings were stayed pending this appeal. The appellate court has jurisdiction under the FAA.

A district court's denial of a motion to compel arbitration is reviewed de novo, as established in case law. The determination of whether parties have agreed to arbitrate involves interpreting state law and is also subject to de novo review. The key legal question is whether a binding contract exists, which is a legal question reviewed de novo, while the factual findings underlying this conclusion are only overturned if clearly erroneous. If arbitration is found to have been agreed upon, the court next evaluates whether the dispute falls within the arbitration agreement's scope, which is also reviewed de novo. 

Further, the issue of whether a party can be compelled to arbitrate based on direct benefits received from a contract entered into by others is reviewed de novo. Determining if an entity is a party to the arbitration agreement relates to whether the parties agreed to arbitrate in general. The Federal Arbitration Act (FAA) states that written provisions in contracts involving commerce to settle disputes via arbitration are valid and enforceable, unless valid grounds exist for revocation. Courts cannot compel arbitration without first resolving the existence of the contract containing the arbitration clause.

Arbitration is contractual, meaning parties cannot be forced to arbitrate disputes they did not agree to submit. The question of arbitrability is typically for judicial determination unless stated otherwise by the parties. The district court appropriately applied state-law principles to assess contract formation in determining if the parties agreed to arbitrate. In this case, California law governs contract formation, and this determination has not been appealed.

Defendants contend that the district court improperly ruled on contract formation as a matter of law, specifically questioning whether user plaintiffs viewed SmartDownload’s license terms during their download of the plug-in program. While plaintiffs asserted they did not see the terms, defendants highlighted that some plaintiffs could not definitively recall if the license link was visible due to varying computer configurations. They argue that a trial is necessary to address these factual disputes, claiming the district court erred by denying their motion for summary judgment.

However, two primary reasons prevent a remand for a full trial. First, during oral arguments, defendants’ counsel indicated that the district court could resolve the issue based on uncontroverted facts, suggesting no need for a factual trial. Consequently, the district court addressed the matter of reasonable notice and assent as a legal issue rather than a factual one. An appellate court generally does not entertain issues raised for the first time on appeal, and since defendants did not present this argument in the district court, they cannot do so now.

Second, the district court had a comprehensive record from extensive discovery, including affidavits, depositions, and visual evidence regarding users' experiences on the Netscape webpage, which significantly exceeded the limited records that typically warrant a remand for trial under the Federal Arbitration Act. The court concluded that the evidence presented constituted a sufficient hearing, negating the need for further trial on the contract formation issue.

Defendants failed to demonstrate that user plaintiffs entered into an agreement under their license terms, as a reasonable fact-finder could not conclude otherwise based on the assembled record. The district court correctly ruled on the issues of reasonable notice and objective manifestation of assent, denying the defendants' request for a full trial on these matters. Under both common law and Article 2 of the Uniform Commercial Code (UCC), a valid contract necessitates mutual agreement and manifestation of consent. Acceptance of arbitration provisions is crucial for establishing an agreement to arbitrate. A contract for the sale of goods can be formed through any method that indicates agreement, including conduct that acknowledges the contract's existence. Mutual assent can be demonstrated through words or actions, but a party's conduct only signifies assent if they intend the conduct and know that the other party may infer their agreement. While user plaintiffs clicked a "Download" button, this action does not imply assent to the contractual terms unless it was clearly communicated that such action would signify agreement. In California, intent to contract is assessed objectively, and inconspicuous contractual provisions are unenforceable if the offeree is unaware of them. This principle also applies to arbitration agreements, which require clear and conspicuous terms for informed consent. Clarity in the arbitration agreement is essential to ensure that all parties understand that they are bound by it, which is evaluated through an objective standard reflecting the offeree's statements and the context of their actions.

Plaintiffs are not necessarily bound by the SmartDownload license agreement simply because the license terms were located on the next scrollable screen. The court rejects the defendants' argument that a reasonably prudent offeree would have been aware of these terms prior to downloading the software. According to California Civil Code § 1589, acceptance of a transaction's benefits implies consent to its obligations, provided the individual knows or should know the facts. However, an exception exists when the document does not clearly appear to be a contract, or if the terms are not highlighted to the recipient, thus preventing the formation of a contract regarding undisclosed terms. 

The defendants' reliance on cases from traditional paper contracting, which emphasize a duty to read terms when presented with a physical document, is not applicable in this context of online transactions. The court notes that in the case of SmartDownload, users were primarily presented with promotional content and a download button, rather than explicit notice of the license terms. Therefore, it concludes that a reasonably prudent offeree in this scenario would not have been aware of the license terms, countering the claim of inquiry notice advanced by the defendants.

Plaintiffs responded to an offer lacking clear notice of license terms and did not adequately indicate their acceptance of those terms. The contractual nature of the terms was not evident, as demonstrated by plaintiffs' testimony that they only used the scroll bar when necessary and perceived the visible portion of the webpage as containing standard links rather than important contract information. Plaintiffs were unaware that license terms were associated with the SmartDownload use, and the webpage design obscured the fact that downloading the software implied acceptance of Netscape's rules. The court concluded that merely having terms accessible on a hidden portion of the screen does not fulfill the requirement for constructive notice in the context of free software downloads. The document transitions to discussing relevant case law on computer sales and software licensing, indicating that such laws generally support the plaintiffs' position that they did not consent to the license terms. Defendants referenced cases like Hill v. Gateway 2000 and ProCD, Inc. v. Zeidenberg, where users were deemed bound by license terms due to sufficient notice and opportunity to review, contrasting these with the plaintiffs' situation in the current case.

In Brower v. Gateway 2000, Inc., the court determined that a buyer agreed to an arbitration clause found inside a computer box by retaining the items beyond the specified license terms. Similarly, in M.A. Mortenson Co. v. Timberline Software Corp., the buyer's installation and use of software indicated assent to the license terms, which were clearly presented on various materials included with the product. However, these cases do not support the defendants’ position, as they highlight that purchasers are bound to terms when they are given clear notice and an opportunity to object, which distinguishes them from the current case. 

In contrast, the downloading situation at hand lacks such conspicuous notice, undermining the defendants' argument that downloading without clear terms binds the users. Previous online transaction cases, such as Hotmail Corp. v. Van$ Money Pie Inc. and America Online, Inc. v. Booker, involved explicit notifications and agreements that affirmed users' assent to terms, unlike the present scenario where the license terms were not adequately highlighted. 

The court concluded that the plaintiffs' downloading of Smart-Download did not signify acceptance of the defendants' license terms due to insufficient notice and unclear assent. A reasonably prudent offeree would not have recognized the hidden license terms prior to downloading. Therefore, the court upheld the finding that the user plaintiffs, including Fagan, are not bound by the disputed arbitration clause.

Plaintiffs have agreed to the license terms for Netscape’s Communicator, but there is a dispute over whether the arbitration clause of that agreement applies to their claims related to SmartDownload. Defendants assert that the arbitration clause is broad enough to include these claims, despite plaintiffs not explicitly agreeing to SmartDownload's license terms and the Communicator license not mentioning SmartDownload. The scope of arbitration agreements is reviewed de novo, with any doubts favoring arbitration. However, arbitration is only mandated if there is a clear agreement to do so. The Communicator license requires arbitration for "all disputes relating to this Agreement," which is classified as broad, creating a presumption of arbitrability. Yet, if the dispute relates to issues outside the contract, it may not fall under the arbitration clause.

The court assesses whether the claims involve contract construction or the parties' rights under the contract, focusing on the factual allegations in the complaint. The key issue is whether the claims regarding violations of the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act relate to the Communicator license agreement. The court finds these claims are collateral to the Communicator agreement, which specifically pertains to Netscape’s browser programs and does not cover plug-ins like SmartDownload. Additionally, both agreements contain merger clauses that limit the scope of the contracts by excluding prior evidence, further indicating that the dispute over SmartDownload is outside the Communicator license agreement's purview.

The Communicator license agreement has several key provisions: it grants a non-exclusive license to reproduce the software for personal and internal business use but restricts modification, de-compilation, redistribution, and alteration of intellectual property. It includes termination rights for the licensor, a complete warranty disclaimer, a limitation of liability for consequential damages, and specific clauses regarding encryption and export. Additionally, it features a miscellaneous section addressing merger, choice-of-law, arbitration, severability, non-waiver, non-assignment, force majeure, and reimbursement for the prevailing party in disputes.

The dispute regarding alleged electronic eavesdropping via a separate plug-in program does not clearly fall under the Communicator license terms, indicating it is collateral to the agreement. The determination of arbitrability hinges on whether the plaintiffs’ allegations relate to contract construction or the parties' rights under the license. Although defendants claim the plaintiffs’ allegations suggest a connection between Communicator and SmartDownload in eavesdropping, the plaintiffs maintain a distinction between the two, asserting that SmartDownload is solely responsible for the alleged eavesdropping. They describe how SmartDownload operates independently, facilitating file transfers and automatically connecting to Netscape’s servers to download Communicator. The plaintiffs clarify that SmartDownload collects information during file downloads, including details from cookies created by Communicator, but maintain that SmartDownload’s actions are separate from Communicator’s functionalities.

Plaintiffs differentiate between SmartDownload and Communicator, asserting that SmartDownload was responsible for the alleged unlawful eavesdropping, utilizing both its own identifiers and a Communicator cookie to transmit personal information to Netscape. The complaints emphasize that the abuses occurred through SmartDownload, not Communicator, thereby rendering claims unrelated to the Communicator license agreement. As a result, the claims of the five user plaintiffs fall outside the arbitration clause of that agreement, and they cannot be compelled to arbitrate. 

Regarding Plaintiff Specht, he alleges that defendants spied on his website when users downloaded files linked to a service called WhyWeb via SmartDownload. Defendants argue that Specht received a "direct benefit" from the Netscape license agreement because users obtaining files from his site could lead to a commission for him from WhyWeb. However, Specht denies receiving any commissions. The court clarifies that defendants cannot claim Specht benefited from license agreements that the user plaintiffs did not assent to. The legal premise for third-party benefits hinges on an existing contract, and in this case, no such agreement exists for the user plaintiffs regarding SmartDownload. Consequently, the court rejects the defendants' argument regarding Specht's status as a nonparty beneficiary.

A third-party beneficiary can enforce a contract made for its benefit but must prove that the contracting parties intended to confer such benefits. In the case referenced, Netscape and the visitors to Specht's website did not intend to confer any contractual benefits to Specht or other website operators, which leads the defendants to argue that Specht received a direct benefit from a Netscape license agreement, regardless of intent. They cite American Bureau of Shipping v. Tencara Shipyard S.P.A. to support this claim; however, the benefits in that case were more direct, including lower insurance rates and the ability to register a yacht.

The court outlined that a nonsignatory could be compelled to arbitrate if they receive a direct benefit from a contract with an arbitration clause. In contrast, Specht's potential earnings from SmartDownload were deemed too abstract and indirect to qualify as a direct benefit. Consequently, the court concluded that Specht was not a direct beneficiary under any Netscape agreement, affirming the district court’s decision to deny the defendants' motion to compel arbitration and stay proceedings. The district court's ruling applied to multiple cases, and the appeals were subsequently consolidated. Additionally, Netscape's website describes 'plug-ins' as software that enhances the browser’s capabilities.

SmartDownload was designed to facilitate file downloads for users of browser programs like Communicator, allowing them to pause downloads without losing progress, even if their Internet connection was interrupted. There is a distinction between downloading and installing software; downloading stores the program on a user's hard drive, but it remains inoperable until installed by executing the file. Online software license agreements, known as "clickwrap," require users to click an icon to signify acceptance of the terms before they can use the software. This model parallels the "shrinkwrap" agreements for tangible software. Courts have recognized that both breaking a shrinkwrap seal and clicking a clickwrap button demonstrate user assent to the governing license terms. The term "user plaintiffs" refers to those suing for damages as computer users, distinguishing them from plaintiff Specht, who claims harm as a website owner.

Communicator was a software suite that included the standalone browser Navigator. All five named user plaintiffs indicated they had upgraded versions of Communicator. Fagan, who is uncertain about whether he obtained Communicator or Navigator, is not relevant to the appeal since both shared the same license agreement. Unlike the other plaintiffs, Fagan downloaded Netscape’s browser program without using SmartDownload. He reportedly acquired SmartDownload from an unrelated shareware site. The term "webpage" refers to a document on an Internet site that users view by scrolling. Plaintiff Kelly, an experienced Internet user, believed he was not downloading software but rather a tool for downloading files when he clicked to obtain SmartDownload.

Fagan became aware of the SmartDownload software on his hard drive while attempting to download files from the Internet. A screenshot of the SmartDownload webpage shows partially visible license terms, whereas other affidavits do not display these terms at all. It is undisputed that the software license agreement meets the criteria of "involving commerce" as defined by 9 U.S.C. § 2, and it qualifies as a "written provision" under the Electronic Signatures in Global and National Commerce Act (E-Sign Act) despite being in electronic form. Judge Hellerstein questioned whether there was a factual dispute regarding Fagan's download source, with defense counsel asserting that no genuine issue existed concerning reasonable notice of the license terms. This stance aligns with the standard for determining the necessity of a trial over an arbitration agreement as established in relevant Circuit case law. The district court determined that transactions involving SmartDownload should follow California law regarding the sale of goods, including the Uniform Commercial Code (UCC). However, the applicability of UCC Article 2 to downloadable software licensing remains contentious, as the UCC does not explicitly address software, leading to a trend in case law favoring intellectual property principles over UCC provisions in software-related commercial disputes.

A sale of tangible goods over the Internet is governed by Article 2 of the UCC, as established in Butler v. Beer Across America. Courts have also applied Article 2 to off-the-shelf software sold in tangible formats, albeit with reservations. Database licenses are treated as ordinary contracts under common law and the UCC, though the legal distinction between contracts and licenses remains contentious, especially under copyright law. The case of I.Lan Systems Inc. v. Nextpoint Networks Inc. highlighted that while Article 2 may not govern software licenses in the future, it is assumed to apply currently. Downloadable software, lacking tangibility and easily transferable, has led to significant interest in licensing. To address the inadequacies of existing law for software transactions, the UCITA was developed, resembling UCC Article 2 but tailored for computer information, and has been adopted in Maryland and Virginia. The current analysis indicates no substantial difference exists between UCC Article 2 and common law for present purposes. "Inquiry notice" is defined as actual notice that prompts further investigation. The district court's alternative finding regarding the mild language of license terms is not addressed. Defendants emphasize Register.com, Inc. v. Verio, Inc. to argue user assent to terms, but this case differs significantly as the defendant was fully aware of the terms and used the information contrary to them, making it less relevant to the current context.

California's consumer fraud statute, Cal. Bus. Prof.Code § 17538, governs online transactions, mandating that vendors prominently display return and refund policies and other essential consumer information on specific screens during the purchasing process. These screens include the initial access screen, the screen where goods are offered, the order placement screen, and the payment information screen. The intent is to ensure consumers are informed before committing to a transaction. Although the statute primarily protects California residents and consumer fraud is not claimed in the current case, it aligns with California's common law principle of conspicuous notice regarding contract terms.

Additionally, the Uniform Computer Information Transactions Act (UCITA) emphasizes the necessity of clear notice and unambiguous agreement in online transactions. It stipulates that users must have the opportunity to review contract terms in a manner that should catch a reasonable person's attention. Assent to terms is manifested through knowledge of the terms and intentional conduct suggesting agreement. For mass-market licenses, assent occurs before or during initial use. UCITA also outlines guidelines for internet transactions, requiring licensors to make standard terms accessible prior to payment or delivery, either through prominent display or hyperlinks, ensuring that terms are readily available and noticeable to users.

UCITA, enacted only in Maryland and Virginia, does not apply to the current case, yet its provisions provide context regarding the defendants' claim that plaintiffs were on inquiry notice of SmartDownload's license terms. UCITA has faced criticism for its extensive definitions, particularly concerning consent, but its notice and assent provisions align with established contract principles. The court found that the Netscape webpage did not provide adequate notice of the license terms, rendering irrelevant whether plaintiff Fagan downloaded SmartDownload from that page or another source. Consequently, Fagan could not be bound by the license agreement. 

Additionally, the court determined that California common law adequately addresses the issues of notice and assent, thus bypassing discussions related to California's Commercial Code. Since the agreement was not established, the court did not consider the plaintiffs' arguments regarding unconscionability. 

The potential involvement of intellectual property rights was noted, but it was stated that Netscape's IP rights were unlikely to be affected. The plaintiffs' personal information, as stored in cookies, lacks copyright protection, which does not extend to factual data. As a result, plaintiffs’ claims are not shielded from arbitration based on intellectual property rights, although this issue was not resolved in the current decision. The plaintiffs also contended that their claims should not be arbitrated due to the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act, but this argument was not addressed given the case's outcome.