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Internet users cannot be bound by a license agreement mandating arbitration when the agreement was buried on the second page of a free software download program, the 2nd U.S. Circuit Court of Appeals has ruled. Upholding a lower court decision of first impression, the 2nd Circuit rejected an attempt by Netscape Communications Corp. and its parent company, America Online Inc., to compel arbitration by users who claimed their privacy rights were being violated when they used a software “plug-in” program. “[W]here 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,” 2nd Circuit Judge Sonia Sotomayor said in Specht v. Netscape Communications Corp., 01-7860. The plaintiffs in Specht had protested that when they used the plug-in program, personal information was transmitted to the software provider, including a record of other downloads they made from the Internet. In three putative class actions, the users claimed the transmission of the personal information amounted to electronic surveillance in violation of the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act. Netscape argued the dispute must go to arbitration because the plaintiffs had used the plug-in knowing there was a license agreement, and at a minimum they had an obligation to inquire further. But the plaintiffs who had used the plug-in, called SmartDownload Communicator, claimed they were not required to assent to the license agreement or even view its terms before downloading the free program. Southern District of New York Judge Alvin K. Hellerstein had rejected Netscape’s motion to compel arbitration and stay court proceedings in the case. Applying California law, Hellerstein said, “Netscape’s failure to require users of SmartDownload to indicate assent to its license as precondition to downloading and using its software is fatal to its argument that a contract is formed.” The judge also found that another plaintiff, who obtained the plug-in program from another Web site, had even less notice than those who downloaded the program from the Netscape Web site. RULING UPHELD On appeal, Judge Sotomayor upheld Hellerstein’s ruling, saying, “Clarity and conspicuousness of arbitration terms are important in securing informed consent.” And the circuit court was unpersuaded by Netscape’s argument that the mere notice of the existence of the license terms on the next scrollable screen obligated the plaintiffs to read the agreement. “We disagree with the proposition that a reasonably prudent offeree in plaintiffs’ position would necessarily have known or learned of the existence of the SmartDownload license agreement prior to acting, so plaintiffs may be held to have assented to that agreement with constructive notice of its terms,” Sotomayor said. While a party normally cannot avoid a contract on the grounds it failed to read the contract before signing, Judge Sotomayor said, there is an exception where the terms are not called to the attention of the recipient. “There is no reason to assume that viewers will scroll down to subsequent screens simply because screens are there,” the judge said. And any analogy to “the paper world of arm’s-length bargaining” must fail where the product is advertised as “free,” and there is a lack of conspicuous notice that users are about to bind themselves to contract terms, she said. “Reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to those terms by consumers is essential if electronic bargaining is to have integrity and credibility,” she said. Senior Judges Joseph M. McLaughlin and Pierre N. Leval joined in the opinion. Roger W. Yoerges, Patrick J. Carome, Joseph R. Profaizer and Darrin Hostetler of Wilmer Cutler & Pickering in Washington, D.C., represented Netscape. America Online was represented by in-house counsel David C. Goldberg. Representing the plaintiffs were Joshua N. Rubin, Jill Abram, Courtney E. Lynch and Richard B. Margolies of New York’s Abbey Gardy; James V. Bashian; and George G. Mahfood of Leesfield Leighton Rubio Mahfood & Boyers in Miami.

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