Specht v. Netscape Communications Corp. case brief

Specht v. Netscape Communications Corp.
306 F.3d 17
Case Synopsis:
Defendants, a provider of computer software programs and its corporate parent, appealed the judgment of the United States District Court for the Southern District of New York which denied their motion to compel arbitration of plaintiff internet users’ class action alleging that defendants invaded their privacy and violated the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act.

Facts:
-The internet users downloaded two free software programs from defendants’ websites to enable internet browsing.
-One program, a “plug-in” that enhanced the other program’s browsing capabilities, allegedly transmitted private information about the internet users’ online activities to defendants without the internet users’ knowledge.
-Defendants sought to compel arbitration of the action pursuant to the arbitration clause contained in the software licensing agreements.

Holding:
-On appeal of the district court’s denial of the motion, the court determined that a reasonably prudent internet user would not have known or learned of the existence of the license terms before responding to defendants’ invitation to download free software, and therefore defendants did not provide reasonable notice of the license terms.
-The license agreements were located on a submerged screen that the user would have needed to scroll through in order to read the full agreement and arbitration clause. As a consequence, the internet users’ act of downloading the software did not unambiguously manifest assent to the arbitration provision in the license terms.

Rule:
-If a party wishes to bind in writing another to an agreement to arbitrate future disputes, such purpose should be accomplished in a way that each party to the arrangement will fully and clearly comprehend that the agreement to arbitrate exists and binds the parties thereto.

Analysis:

• The Federal Arbitration Act provides that a written provision in any contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract. 9 U.S.C.S. § 2. It is well settled that a court may not compel arbitration until it has resolved the question of the very existence of the contract embodying the arbitration clause. Arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit. Unless the parties clearly provide otherwise, the question of arbitrability — whether an agreement creates a duty for the parties to arbitrate the particular grievance — is undeniably an issue for judicial determination.

• In deciding whether parties agreed to arbitrate a certain matter, a court should generally apply state-law principles to the issue of contract formation.

• Whether governed by the common law or by Article 2 of the Uniform Commercial Code, a transaction, in order to be a contract, requires a manifestation of agreement between the parties. Mutual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract. California’s common law is clear that an offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he is unaware, contained in a document whose contractual nature is not obvious.

• Arbitration agreements are no exception to the requirement of manifestation of assent. This principle of knowing consent applies with particular force to provisions for arbitration. Clarity and conspicuousness of arbitration terms are important in securing informed assent. If a party wishes to bind in writing another to an agreement to arbitrate future disputes, such purpose should be accomplished in a way that each party to the arrangement will fully and clearly comprehend that the agreement to arbitrate exists and binds the parties thereto. Thus, California contract law measures assent by an objective standard that takes into account both what the offeree said, wrote, or did and the transactional context in which the offeree verbalized or acted.

• It is true that a party cannot avoid the terms of a contract on the ground that he or she failed to read it before signing. But courts are quick to add that an exception to this general rule exists when the writing does not appear to be a contract and the terms are not called to the attention of the recipient. In such a case, no contract is formed with respect to the undisclosed term.

• “Inquiry notice” is actual notice of circumstances sufficient to put a prudent man upon inquiry.

• Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact. Cal. Civ. Code § 19. These principles apply equally to the emergent world of online product delivery, pop-up screens, hyperlinked pages, clickwrap licensing, scrollable documents, and urgent admonitions to “Download Now!”

• 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.

• When products are “free” and users are invited to download them in the absence of reasonably conspicuous notice that they are about to bind themselves to contract terms, the transactional circumstances cannot be fully analogized to those in the paper world of arm’s-length bargaining.

Outcome:
-The judgment denying defendants’ motion to compel arbitration of the internet users’ class action lawsuit alleging that their privacy was violated by defendants was affirmed.