Frictionless Contracting In A COVID-19 Economy: Part 1

By Reece Clark
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Law360 (July 17, 2020, 12:05 PM EDT) --
Reece Clark
Reece Clark
Before the COVID-19 pandemic, "frictionless contracting" was trending in customer acquisition, particularly in technology-based services. Foundationally, frictionless contracting involves electronic contracts, often stylized as terms of service agreements, combined with clear digital workflows and e-signatures. In practice, frictionless contracting involves a much broader constellation of digital tools and strategies designed to reduce overhead spend per customer and expedite customer onboarding.

Through frictionless contracting, a company can quickly scale its customer acquisition efforts and simultaneously streamline its contracting processes. This leads to increased revenue, reduced customer abandonment, lower overhead spend and fewer legal risks.

As the global economy slowly reopens following the COVID-19 lockdowns, many early-stage companies will experience renewed urgency to institute frictionless contracting strategies to support market growth and regain lost customers. Likewise, consumers of all ages will have grown accustomed to easily accessing digital products while practicing social distancing measures.

In the process, these consumers will have sharpened their expectations of effortless contracting, and will carry these expectations forward as they begin expanding their consumption of subscription-based products and services. Because of these evolving preferences, and because of the challenges companies — especially early-stage companies — will face in resource allocation in the COVID-19 economy, this article sets out a clear value proposition for a company to institute (or expand) frictionless contracting strategies.

Part one of this two-part article begins by offering context and legal support for terms of service agreements in relation to customer acquisition. In particular, part one establishes the legal foundation for terms of service agreements as the animating feature of the frictionless contracting experience.

Part two will examine the foundations of transaction cost and the corresponding business imperative to reduce overhead spend in the customer acquisition process (now more than ever in a COVID-19 economy), and is designed to succinctly address cost and value as a function of legal spend in order to give companies a road map of where to invest precious resources. Part two will conclude by examining the evolution of frictionless contracting, and then highlight technologies and thinking designed to further reduce contracting friction.

The Evolution of Terms of Service Agreements

Terms of service agreements emerged as end-user license agreements, or EULAs, in the 1980s.[1] Foundationally, EULAs were designed to protect the proprietor of on-premises software from end-user acts and omissions (often through extensive use restrictions).[2] EULAs also recite reservations of rights held by the author (as a licensor) to the intellectual property embedded within the software product.

EULAs quickly evolved to include additional provisions designed to protect and limit the liability of the licensor.[3] Courts have extensively weighed in on key issues underpinning the EULA, including whether EULAs are valid as a contract, whether their clauses are enforceable, and whether they are unconscionable or unacceptable pursuant to the Uniform Commercial Code.[4]

Generally speaking, since ProCD Inc. v. Zeidenberg was decided in 1996 by the U.S. Court of Appeals for the Seventh Circuit, courts have routinely sided with licensors regarding EULA terms and enforceability.[5] This has led to an environment favoring the rights of licensors using the EULA as a contractual vehicle.[6]

As software moved to a cloud-based environment, the EULA model also migrated online.[7] EULAs evolved into the now-ubiquitous "terms of service" or "terms of use" agreement, which companies large and small routinely employ.[8]

When companies decide to publish their terms of service agreements passively on their website, this is considered a "browsewrap" agreement. Browsewrap agreements do not require a user to manifest affirmative consent to the terms and conditions of use. Because of this lack of notice, browsewrap agreements are disfavored and have been heavily litigated.

Arguably, the most famous browswrap case is the 2002 decision in Specht v. Netscape Communications Corp. by the U.S. Court of Appeals for the Second Circuit.[9] In Specht, then-Circuit Judge Sonia Sotomayor found that without affirmative consent to the terms of service, "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 the free software, and that defendants therefore did not provide reasonable notice of the license terms."[10]

Nevertheless, browsewrap agreements have remained in use and as recently as 2019, were the subject of admonitions by the U.S. Court of Appeals for the Ninth Circuit regarding a website operator's use of a defective browsewrap agreement:

[Defendant's] agreement is unambiguously a browsewrap agreement. [Plaintiff] was not required to assent to [Defendant's] Terms before downloading or using the app — or at any point at all. ... In the absence of actual knowledge, a reasonably prudent user must be on constructive notice of the terms of the contract for a browsewrap agreement to be valid. ... When downloading the app, the Terms are not just submerged — they are buried twenty thousand leagues under the sea. Nowhere in the opening profile page is there a reference to the Terms. To find a reference, a user would need to click on an ambiguous button to see the app's full profile page and scroll through multiple screen-lengths of similar-looking paragraphs. Once the user unearths the paragraph referencing the Terms, the page does not even inform the user that he will be bound by those terms. There is no box for the user to click to assent to the Terms. ... A reasonably prudent user cannot be expected to scrutinize the app's profile page with a fine-tooth comb for the Terms.[11]

Most cases adhere to Specht, expressing the gold standard for website consent in a terms of service agreement as an explicit action involving active user manifestation of agreement to abide by the website's terms.[12] Now common, website users today are routinely presented with a box or workflow that requires the user to affirmatively assent to the license terms of a website by clicking "Yes" or "I Agree" in order to access the website features and services. These are referred to as "clickwrap" agreements.[13]

In i.Lan Systems Inc. v. Netscout Service Level Corp., for example, the U.S. District Court for the District of Massachusetts stated that it would enforce a clickwrap agreement on the following theory:

If ProCD was correct to enforce a shrinkwrap license agreement, where any assent is implicit, then it must also be correct to enforce a clickwrap license agreement, where the assent is explicit. ... The only issue before the Court is whether clickwrap license agreements are an appropriate way to form contracts, and the Court holds they are.[14]

Anecdotally, terms of service agreements are rarely reviewed by customers.[15] Empirical evidence bears this out as well.[16]

In one study, only two of every 1,000 retail software shoppers accessed the EULA, and of those that did, most read only a small portion.[17] This study found that "a higher fraction of customers read EULAs when expected benefits are likely to be higher or reading costs are likely to be lower, which suggests that the fraction of informed customers is limited by the high search and reading costs of standard-form contracts."[18]

This conclusion tracks with literature on customer interactions with standard form contracts. The reasons vary for why customers fail to read standard form contracts, but often they are difficult to understand or may seem unimportant[19] or an annoying waste of time.

An important insight can be extracted from this study: A company may see a return on investment faster by investing in a well-drafted terms of service agreement than a traditional form contract for purposes of customer contracting. That return may be further magnified where the price point of the licensed product is relatively low (such as for an app).[20]

Studies show, for example, that for off-the-shelf software products, the quality of the customer protections within the EULA is a relatively small factor in the customer's decision to purchase the product.[21] This means that companies may not need to extend more favorable terms in the terms of service to their customers.

Taken as a whole, part one of this article lends support for the terms of service agreement as a primary customer-facing contractual vehicle. Terms of service agreements are legally supported by a long history of case law, are effective under federal law when deployed as a clickwrap,[22] and have become so commonplace that customers expect (and quietly accept) terms of service agreements in the digital products and services they consume.

In a COVID-19 economy, these benefits provide a strategic advantage for a company set on scaling up new services and products, or simply reacquainting past customers with existing products and services. Notwithstanding these advantages, a company should also understand the value proposition of investing in a terms of service agreement as a function of cost. The next installment of this two-part article sets forth a framework for a company to better assess such costs relative to legal spend and customer acquisition overhead generally.

Reece Clark is an associate at Polsinelli PC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] See W. S. Humphrey, Software unbundling: a personal perspective, in IEEE Annals of the History of Computing, vol. 24, no. 1, pp. 59-63, Jan.-March 2002; see also Jason Koebler, Corporations Use End User License Agreements to Create a Parallel Legal System Vice, (Mar 29 2017, 8:30 a.m.), (last visited April 20, 2020).

[2] A closely related, complementary concept is "digital rights management," or "DRM," which is a range of technical means implemented by device makers and copyright holders to restrict the types of use employed by an end user. See Perzanowski & Schultz, The End of Ownership: Personal Property in the Digital Economy, 121 – 125, MIT Press, 2016. DRM found a home in an amendment to the Digital Millennium Copyright Act. See 17 U.S.C. 1201.

[3] See Nazaruk v. eBay Inc. , No. 2:06CV242DAK, 2006 WL 2666429, at *4 (D. Utah Sept. 14, 2006) aff'd, 223 F. App'x 815 (10th Cir. 2007) (a forum selection clause contained in a clickwrap agreement is "mandatory" and "should be enforced"); Bar-Ayal v. Time Warner Cable Inc. , No. 03 CV 9905 KMW, 2006 WL 2990032, at *16 (S.D.N.Y. Oct. 16, 2006) (upholding an arbitration provision promulgated in a clickwrap agreement and finding it to not be "unconscionable"); Motise v. Am. Online Inc. , 346 F. Supp. 2d 563, 566 (S.D.N.Y. 2004) (enforcing a forum selection clause contained within a clickwrap agreement); Moore v. Microsoft Corp. , 293 A.D.2d 587, 587, (2002) (finding that "the plaintiff's claims are barred by the clear disclaimers, waivers of liability, and limitations of remedies contained in the EULA") citing ProCD Inc. v. Zeidenberg , 86 F.3d 1447; Specht v. Netscape Communications Corp. , 150 F Supp2d 585; M.A. Mortenson Co. v. Timberline Software Corp. , 998 P.2d 305, 314 (2000 en banc) (Upholding a terms of service agreement, including an exclusion of consequential damages, finding that "its terms are enforceable unless 'objectionable on grounds applicable to contracts in general....'").

[4] For a couple examples of early court cases finding EULAs unenforceable, see Step-Saver Data Sys. Inc. v. Wyse Tech. , 939 F.2d 91 (3d Cir. 1991); Vault Corp. v. Quaid Software Ltd. , 847 F.2d 255 (5th Cir. 1988). Most courts, however, have determined that EULAs are valid and enforceable. See ProCD Inc. v. Zeidenberg , 86 F.3d 1447 (7th Cir. 1996); Microsoft Corp. v. Harmony Computers & Elecs. Inc. , 846 F. Supp. 208 (E.D.N.Y. 1994); Novell Inc. v. Network Trade Ctr. Inc. , 25 F. Supp. 2d 1233 (D. Utah 1998).

[5] In the seminal case of ProCD, the license was ruled enforceable because it was necessary for the customer to assent to the terms of the agreement in order to install the software. See ProCD Inc. v. Zeidenberg , 86 F.3d 1447, 1449 (7th Cir. 1996) ("Shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable).").

[6] See Rebecca K. Lively, Microsoft Windows Vista: The Beginning or the End of End-User License Agreements As We Know Them? 39 St. Mary's L.J. 339, 350–51 (2007). Lively also correctly identifies the "yawning" nature of the EULA to an end-user. See id. at 340; infra notes 16 – 18 and accompanying text.

[7] See Bradshaw et. al. Contracts for Clouds: Comparison and Analysis of the Terms and Conditions of Cloud Computing Services, Q. Mary Univ. of London, Sch. of Law Studs. Res. Paper No. 63/2010 (Sept. 2010).

[8] For some examples, TOSBack keeps track of some of the largest companies' terms of service and their updates over time. See TOSBack, (last visited April 4, 2020).

[9] Specht v. Netscape Commc'ns Corp. , 306 F.3d 17 (2d Cir. 2002).

[10] Id. at 20. The court rejected Netscape's argument that a scrollbar on the side of the page was enough to put users on inquiry notice to review the terms of service at the bottom of the page. Because users were not required to explicitly agree to the terms of service and it was not obvious that a terms of service existed without further investigation, the court found that a reasonably prudent user would not have understood himself or herself to be assenting to Netscape's terms of service, and therefore no contract had been formed. See generally id.

[11] Wilson v. Huuuge Inc. , No. 18-36017, 13 - 17 (9th Cir. 2019).

[12] See generally id. See also Kwan v. Clearwire Corp. , No. C09-1392JLR, 2012 WL 32380, at *7 (W.D. Wash. Jan. 3, 2012) ("In addition to clickwrap agreements, "browsewrap" agreements have arisen as another means of contracting on the internet. ... In a browsewrap agreement, the terms and conditions of use for a website or other downloadable product are posted on the website typically as a hyperlink at the bottom of the screen. Unlike a clickwrap agreement, where the user must manifest assent to the terms and conditions by clicking on an "I agree" box, a browsewrap agreement does not require this type of express manifestation of assent. Rather, a party instead gives his or her assent by simply using the product — such as by entering the website or downloading software. In ruling upon the validity of browsewrap agreements, courts primarily consider whether a website user has actual or constructive notice of the terms and conditions prior to using the website or other product."), citing Specht, 306 F.3d at 20 (finding insufficient notice).

[13] The term "clickwrap" is a play on words on the term "browsewrap," which itself is a play on words on the term "shrinkwrap." In the early days, shrinkwrap license agreements involved a manifestation of assent to the license terms when the user simply removed the shrinkwrap from the CD or diskette.

[14] See i.Lan Sys. Inc. v. Netscout Serv. Level Corp. , 183 F. Supp. 2d 328, 338 (D. Mass. 2002) ("In short, i.LAN explicitly accepted the clickwrap license agreement when it clicked on the box stating "I agree.").

[15] Audie Cornish, Why Do We Blindly Sign Terms Of Service Agreements? NPR, (September 1, 2014 4:07 p.m. ET) (last visited April 20, 2020); See also David Berreby, Click to agree with what? No one reads terms of service, studies confirm, Guardian, (March 3, 2017, 8:38 ET) (last visited April 20, 2020) ("By 'clicking Join,' they read, 'you agree to abide by our terms of service.' Hundreds of college students tapped the big green 'Join' button to become members of NameDrop, a new social network. But according to paragraph 2.3.1 of the terms of service, they'd agreed to give NameDrop their future first-born children.").

[16] See Bakos et. al., Does Anyone Read the Fine Print? Consumer Attention to Standard-Form Contracts, 43 J. Legal Stud. 1, 22 (2014) ("The time spent on the EULAs relative to their length indicates that readers rarely read terms in their entirety, especially as they are generally written in complex legalese. Since consumers are unlikely to be aware of the default rules, even if EULAs do spell out some terms in clear language, they may still be misunderstood.").

[17] Id. at 1.

[18] Id. at 4. For a solution to the high cost of reading that a company may employ in order to engender user trust, see infra Note 57 and accompanying text.

[19] Id.

[20] Id. at 29.

[21] Florencia Marotta-Wurgler, What's in a Standard Form Contract? An Empirical Analysis of Software License Agreements, J. Emp. Legal Studs. 4:677-713, 2007.

[22] See infra note 42 discussing Electronic Signatures in Global and National Commerce Act.

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