Want to learn more about drafting, negotiating, and understanding intellectual property and technology contracts and have 10 minutes to spare? Grab your morning coffee or afternoon tea and dig into our Tech Contract Quick Bytes – small servings of technical contract insights expertly prepared by our seasoned attorneys. This month, we're dishing up best practices for online contracts.
Because these online contracts lack the traditional ink signature and paper, establishing notice of the terms and conditions as well as end user assent is critical for companies in ensuring contract enforceability. Below, we introduce the legal basis for online contracts, assess digital signature issues that arise in common forms of electronic terms, and briefly conclude with general best practices to consider.
Legal Basis for Online Contracts
The Uniform Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce Act (E-SIGN) have made electronic contracts and digital signatures legally valid. But basic state contract law principles still apply; there must be an offer, acceptance, and consideration.
Among these principles, acceptance of an electronic contract (i.e., conduct that indicates the offeree's manifestation of assent to the offeror's terms) is vulnerable to legal challenge, depending on how the terms and conditions are displayed and what (if any) end user action is required to assent to such terms and conditions. This legal vulnerability is especially prevalent for online or mobile application operators, like website and app owners.
Digital Assent Issues: Browsewrap and Clickwrap Agreements
Online contract owners typically seek enforcement of their electronic terms through either a browsewrap or clickwrap agreement approach. Browsewrap agreements provide electronic terms and conditions through a static hyperlink. Users are not required to affirmatively accept the terms and conditions. Rather, such agreements assume users are bound to the terms simply by use of the accompanying site, app, or service.
Clickwrap agreements generally require users to manifest their intent to accept online terms through specific conduct, such as by clicking a dialog box. Courts have been more willing to find clickwrap agreements enforceable because they require more express user action.
Not all end user action, however, leads to assent. Certain state jurisdictions have invalidated legal terms for failure to establish a contractual arrangement, with dispute resolution clauses being the most frequently challenged. In particular, the Ninth Circuit has previously rejected the application of online legal terms, either as a browsewrap or clickwrap agreement, when the terms or the manner in which they were presented failed to:
- Provide notice of the terms
- Show affirmatively a manifestation of assent by the user
On notice, the Ninth Circuit has emphasized as problematic the smaller font size of the terms and conditions users encountered and the contract owner's failure to provide a hyperlink in the common style and color. The court has also cited as a failure absence of explicit notification of the legal significance of the end user action that would conclude the agreement.
With these rulings in mind, the Ninth Circuit has upheld an online contract, including an arbitration provision, that the court classified as falling somewhere between a browsewrap and a clickwrap agreement. The Ninth Circuit has specifically held that because the contract owner displayed a hyperlink to its terms in bright blue font, placed it directly above the respective action button, and presented it to the customer in three independent stages, the user was given notice of the contract terms. And because the contract owner explicitly notified the user that by clicking the action button in each stage that they agreed to the terms, the customer manifested their assent.
To avoid enforceability problems with electronic terms and conditions, digital platform companies should highlight important terms, display all terms in plain view and in the same font size as other displayed text, require user action to accept such terms, and note the legal significance of acceptance, i.e., acceptance of the referenced terms.
While courts continue to assess digital assent in other contexts as new services emerge, they will likely do so by applying the traditional contract principles and existing legal precedent for online website terms.
If you're interested in discussing online contract formation, please contact A.J. Zottola or Ben Myers. Click here to learn more about Venable's IP Tech Transactions services, and subscribe to Tech Contract Quick Bytes.