Facts

In March 2000, plaintiffs Peter Specht, John Gibson, Michael Fagan, Mark Gruber, Sean Kelly, and Sherry Weindorf downloaded a free software program called SmartDownload from defendants Netscape Communications Corporation and America Online, Inc.'s website to enhance the functionality of the Netscape Communicator browser.¹ Christopher Specht operated a separate website from which users could download files.²

The plaintiffs subsequently filed suit in the United States District Court for the Southern District of New York, alleging that SmartDownload transmitted cookies and identification keys that collected information about their online activities without their knowledge or consent, in violation of the Electronic Communications Privacy Act, 18 U.S.C. §§ 2510 et seq., the Computer Fraud and Abuse Act, 18 U.S.C. § 1030, and state laws for invasion of privacy, trespass, and unfair competition.³

The SmartDownload webpage displayed a Download button with a notice in small print at the bottom.⁴ The notice stated Please review and agree to the terms of the Netscape SmartDownload software license agreement before downloading and using the software.⁵ This notice linked via hyperlink to the full license agreement containing an arbitration provision requiring disputes to be submitted in Santa Clara County, California.⁶ Users could click the Download button and complete the download without viewing the license terms or clicking any I agree button.⁷ The full agreement did not appear unless the hyperlink was affirmatively clicked.⁸

In contrast, downloading the related Communicator browser program automatically displayed its license terms in a scrollable window. Installation could not proceed until the user clicked Yes to accept those terms. They expressly agreed to Communicator's license terms, which made no mention of SmartDownload and contained their own arbitration clause.

Five of the user plaintiffs downloaded Communicator in connection with SmartDownload.⁹ Plaintiff Fagan obtained SmartDownload from an unrelated ZDNet shareware website that provided only a hypertext link to more information rather than any direct notice of license terms.¹⁰

Plaintiff Christopher Specht never downloaded or used SmartDownload but hosted files that users employing the plug-in could access from his site.¹¹

Defendants moved in the district court to compel arbitration and stay proceedings pursuant to the arbitration clause in the SmartDownload license agreement.¹² The district court denied the motion on the ground that plaintiffs had not agreed to arbitrate.¹³ Defendants appealed to the United States Court of Appeals for the Second Circuit, which had jurisdiction under 9 U.S.C. § 16(a)(1)(B).¹⁴

Analysis

Issue #1

Issue

Whether the plaintiffs agreed to be bound by the SmartDownload software license agreement containing an arbitration clause by clicking the Download button on defendants' webpage?¹⁵

Legal Rule

The Federal Arbitration Act requires federal courts to enforce arbitration agreements within its scope.¹⁶ Under New York law the touchstone of contract formation is the manifestation of mutual assent.¹⁷ A party cannot be bound by terms it has not had an opportunity to read.¹⁸

Rule Analysis

No. The ESTABLISHED FACTS establish that five user plaintiffs clicked the Download button on the SmartDownload webpage and completed the download without viewing the license terms or clicking any I agree button.¹⁹ The full license agreement containing the arbitration clause appeared only if the user affirmatively clicked the hyperlink.²⁰ The notice itself was printed in small type at the bottom of the screen below the button.²¹ By contrast the Communicator download automatically displayed scrollable license terms that could not be bypassed without clicking Yes.

Because the SmartDownload transaction supplied no reasonably conspicuous notice and no unambiguous manifestation of assent the license agreement never became part of the contract between the parties.²²

Conclusion

The plaintiffs did not agree to be bound by the SmartDownload software license agreement containing an arbitration clause.²³

Issue #2

Issue

Whether the notice of the license agreement on the SmartDownload webpage was reasonably conspicuous to users?²⁴

Legal Rule

A party cannot be said to have assented to a contract term of which it had no notice.²⁵ A contract cannot be formed by an offer that is not sufficiently definite to allow the offeree to accept it.²⁶

Rule Analysis

No. The ESTABLISHED FACTS show that the only reference to license terms on the SmartDownload webpage was a sentence in small print at the bottom of the screen that became visible only if the user scrolled past the Download button.²⁷ The sentence merely invited the user to review the terms via hyperlink and did not state that downloading would constitute acceptance.²⁸ A reasonably prudent user would not have scrolled to locate the notice or understood it as creating contractual obligations.²⁹

Conclusion

The notice of the license agreement on the SmartDownload webpage was not reasonably conspicuous to users.³⁰

Issue #3

Issue

Whether the plaintiffs' act of downloading the software unambiguously manifested assent to the license agreement?³¹

Legal Rule

A party's conduct manifests assent only when a reasonable person would understand that the conduct signifies agreement to the terms.³² The offeror is the master of the offer.³³

Rule Analysis

No. The ESTABLISHED FACTS establish that the button was labeled Download not I agree or I accept and that the license terms never appeared on screen unless the hyperlink was clicked.³⁴ Plaintiffs Gibson Gruber Kelly and Weindorf clicked the button and completed the download without ever seeing the license terms.³⁵ Their conduct therefore could not unambiguously manifest assent to terms they had no reason to know existed.³⁶

Conclusion

The plaintiffs' act of downloading the software did not unambiguously manifest assent to the license agreement.³⁷

Issue #4

Issue

Whether the arbitration clause in the separate Communicator license agreement encompasses claims relating to SmartDownload?³⁸

Legal Rule

When an arbitration clause is broad any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.³⁹ Claims that present no question involving construction of the contract and no questions in respect of the parties rights and obligations under it are beyond the scope of the agreement.⁴⁰

Rule Analysis

No. The ESTABLISHED FACTS show that the Communicator license agreement expressly applied only to Netscape Communicator and Netscape Navigator and contained a merger clause stating that the agreement constituted the entire agreement between the parties.⁴¹ The SmartDownload license agreement separately applied to SmartDownload.⁴² The complaints consistently alleged that SmartDownload alone performed the eavesdropping.⁴³ The underlying dispute therefore concerns matters clearly collateral to the Communicator license agreement.⁴⁴

Conclusion

The arbitration clause in the separate Communicator license agreement does not encompass claims relating to SmartDownload.⁴⁵

Issue #5

Issue

Whether plaintiff Christopher Specht can be compelled to arbitrate his claims as a nonparty beneficiary of the Netscape license agreement?⁴⁶

Legal Rule

A nonsignatory may be estopped from denying an obligation to arbitrate when the nonsignatory receives a direct benefit from a contract containing an arbitration clause.⁴⁷ The benefit must be tangible and definite rather than tenuous or speculative.⁴⁸

Rule Analysis

No. The ESTABLISHED FACTS establish that Christopher Specht never downloaded or used SmartDownload.⁴⁹ Defendants' theory of benefit rests on an attenuated chain of events in which unknown users would download files from his site using SmartDownload and later subscribe to WhyWeb triggering a commission.⁵⁰ No direct benefit was conferred on Specht under any Netscape license agreement.⁵¹ The hypothesized benefit is too speculative to require arbitration.⁵²

Conclusion

Plaintiff Christopher Specht cannot be compelled to arbitrate his claims as a nonparty beneficiary of the Netscape license agreement.⁵³