• 1. Introduction
• 2. European Consumer Protection
  • a. Unfair Contract Terms Directive
  • b. The Distance Selling Directive
• 3. IP Protection for Software in Japan
• 4. Reverse Engineering Clauses
  • a. Unites States
  • b. Europe
  • c. Japan
• 5. Quickwrap
  • a. Shrinkwrap
    • United States
    • Europe
    • Japan
  • b. Clickwrap
    
    • Unites States
    • Europe
• 6. Practice Pointers
  • a. Checklist
  • b. Recommendations
• 7. Conclusion

1.      Introduction

Software licensing is the third largest industry in the United States.[1] Most leading software companies are incorporated in the United States, Japan, and European countries.[2] However, since 65% of practicing U.S. attorneys do not address the UNIDROIT Principles of International Commercial Contracts,[3] or other international norms, it may surprise many U.S. counsel that a standard U.S. software licensing contract will often violate European consumer law, generate bad publicity and result in fines. AOL France learned the hard way in 2004, when a French court invalidated nearly every clause in its standard subscriber contract,[4] even though AOL had localized and revised the agreement to suit the local market in response to requests from a consumer protection agency. The court awarded ?30,000 in damages, levied a fine of ?1,000 for each day the invalidated clauses remained on AOL?s website, and ordered substantive parts of the court?s decision be published on the AOL?s website and three national daily newspapers. The reviewing court affirmed on all counts.[5]

The experience of AOL in France demonstrates a large discrepancy between the U.S. and EU online consumer agreements. U.S. courts have routinely enforced many agreements similar to AOL France?s, even with terms less favorable to consumers.[6] As the software industry increasingly goes global, corporate counsel must not only stay on top of foreign regulatory developments but be comfortable working in a wide variety of legal traditions as well.

Software licensors need to determine whether they can realize their investment and protect their source code in high piracy countries, especially those with a high rate of technological literacy.[7] While developing countries currently play a relatively minor role in the global software industry, China, Russia, and Brazil are showing rapid progress.[8] Due to rapidly growing software markets of China, Russia, and India, the worldwide software theft losses exceeded the $50 billion mark. Leading software makers estimate the 2009 rate of global software piracy at 43%, with Georgia and Zimbabwe topping the charts with a piracy rate exceeding 90%, and the United States showing the lowest worldwide rate of 20%.[9] Approximately 50% to 90% of software available on auction websites such as eBay is pirated.[10]

U.S. counsel needs to gain familiarity with various foreign intellectual property protection regimes because software licensing laws are generally not extraterritorial.[11] Nevertheless, a number of high piracy countries agree to enforce U.S. intellectual property rights as a condition of joining into trade alliances. For example, a signatory country of the Berne Convention must grant the same protection to intellectual property rights of citizens of other signatory states as it grants to its own nationals. Prior to the Berne Convention, nationals of their respective countries had no formal copyright protection abroad. The Berne Convention signatories went on to create the World Intellectual Property Organization (WIPO), which currently consists of 184 Member States and is now an agency of the United Nations devoted to developing an international intellectual property system.[12] Under the Trade-Related Aspects of Intellectual Property Rights (TRIPS), developing countries must accept minimum intellectual property rights in exchange for access to lucrative markets.

A typical U.S.-style contract, based on principles of free market economy, will be viewed as one-sided and unconscionable in Europe and Japan, where lawmakers place more emphasis on providing consumers with a social safety net.[13] A software licensor cannot freely require licensees in those major markets to arbitrate away from home, waive basic consumer rights, reverse engineering rights, choice of law, or cooling off periods for distance contracts. This paper analyses some of the most significant points of tension in software licensing law between the U.S. and the next two biggest software markets - EU and Japan. Practice pointers at the end will help U.S. counsel to avoid costly mistakes and bad publicity by effectively localizing contract terms and business strategies to account for differences in law and culture.

2.      European Consumer Protection

The considerable differences in contract law in the U.S. and EU reflect different perceptions about the role of government in regulating markets. The U.S. has traditionally been skeptical about government regulation while placing more emphasis on market-driven institutional arrangements.[14] Digital consumer legislation has not had great success in the U.S.[15] The most famous pro-consumer legislation proposed in the recent time, the Digital Media Consumers' Rights Act (DMCRA), [16] has been introduced into Congress three times without success. [17]

On the contrary, as evidenced by the number of recent major consumer protection laws and initiatives in Europe, EU legislators have not been so eager to let the market forces play a greater role in business-consumer relations. [18] A gap in attitudes about the risks of free enterprise leads EU legislators to believe that consumers will tend to avoid weakly regulated markets. Therefore, high minimum levels of consumer protection are necessary to create new distribution channels.[19] U.S. counsel must be aware that, while EU Directives mandate the minimum levels of protection, Member States can grant higher levels to its consumers.

The EU differs from the U.S. not just in substantive law but in methods of enforcement. U.S. software licensors frequently include arbitration or choice of forum clauses in order to avoid litigation in remote forums. It may be difficult, however, to limit European consumer?s right of redress locally because license terms limiting that right are invalidated as unfair. [20] In the UK, for example, an arbitration clause relating to amount of GBP�5,000 or less is automatically unfair as a matter of law.[21] Nevertheless, regulatory agencies play a significantly greater role than courts in enforcing consumer protection laws in Europe.[22] Counsel to a U.S. software licensor must keep this strong pro-consumer stance in mind when drafting a license agreement for European markets.

a.      Unfair Contract Terms Directive

The Directive on Unfair Terms in Consumer Contracts[23] exhibits some of the most significant differences between EU and U.S. consumer contract law. The Directive applies to non-negotiated contracts between a business and a consumer. Software contract terms classified as unfair under the Directive are not binding on consumers. A non-negotiated contractual term is regarded unfair if, ?contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer.?[24]

An Annex to the Directive contains a non-exclusive list of presumptively unfair terms. The list presumptively invalidates many terms typically present in U.S. software contracts: mandatory arbitration clauses, disclaimers of warranties, limitation of licensor?s liability, contract assignment, limitation of consumer?s remedies, automatic contract extension, binding the consumer to terms without providing a real opportunity of becoming acquainted with the terms, unilateral modifications of contract or any characteristics of the product or service.[25]

U.S. counsel must not only avoid incorporating terms from the Annex list of suspect terms into licensing agreement but keep in mind that even if a particular term is not on the list, European interpretation of contractual fairness is likely to favor a consumer to a significantly greater degree than it would in U.S. courts. When a contested term is not on the list of suspect terms, the Directive mandates courts to apply a more broad fairness test. Any contractual term causing a ?significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer? is deemed unfair under the Directive.[26] Ambiguities will be interpreted in light ?most favourable to the consumer.?[27]

b.      The Distance Selling Directive

The Distance Selling Directive[28] gives European consumers that purchased goods through distance communication the same rights as if they had purchased those goods in person. Most notably, the Directive grants consumers a nonwaivable seven day minimum ?cooling off? period in which to withdraw from the contract without penalty and without giving any reason. Member States can enact legislation that provides for longer cooling off periods. The only charge that may be made to the consumer because of the exercise of this right of withdrawal is the direct cost of returning the goods.[29] This provision does not apply to software ?unsealed by the consumer,?[30] which means that the withdrawal provision doesn?t apply to clickwrap agreements, where the consumer downloads software from the Internet. Even though auction sales are specifically exempt from the Directive,[31] a German court applied the Directive to an eBay auction, ruling that consumers had 14 days to return the merchandise under German law.[32] U.S. counsel must be cognizant that, while all European consumers have a seven-day minimum cooling off period, this period may be extended by the operation of national law of a Member State.

3.      IP Protection for Software in Japan

Japan is a civil law country and its courts are not bound by stare decisis.[33] Due to a firmly rooted sense of wa, civil harmony, Japan has about one-twentieth per capita amount of litigation than U.S.[34] The centrally controlled court system allows the Supreme Court to impose its legal positions upon lower courts.[35] Therefore, the judiciary might not always be the most effective way to resolve disputes on established matters of law, and arbitration can have advantages in those cases.

The IP protection of software became an important issue in the 1970s, when mass produced software was introduced for the market of personal computers.[36]

In 1972, the Ministry of International Trade and Industry (MITI) Study Committee on Legal Protection of Software issued a report on the state of protection of computer software and proposed certain legislative amendments. Most notably, the study concluded that software products were entitled to copyright protection, and such protection was inadequate at the time.[37]  The report proposed to amend the then existing legislature to address failure to prohibit unauthorized use, failure to discourage duplicative development, and long-term protection under copyright.[38] Recommendation to use arbitration to resolve disputes was made.[39]

IP protection problems in software were further examined by a subcommittee within the Copyright Council that recommended to grant the copyright owner distribution rights and to develop a registration process to help distribution of work and avoid duplication of effort.[40] In a 1982 decision by the Tokyo district court, for the first time in Japan the court extended a copyright protection to a computer object program.[41] 

In 1983, MITI proclaimed that software was an economic asset which is fundamentally different from other copyrighted works such as literary texts, music, or drawings.[42] MITI proposed important principles for the legal protection of software: recognition of the special characteristics of software (need to maintain confidentiality of the code and the ease of its copying), promotion of industrial use of software, balancing rights of new and old software, protection of economic rights of users and developers, flexibility to adapt to rapid changes, and recognition of the international nature of the legal protection of computer software.[43] MITI adopted a sui generis approach to the protection of computer software and proposed enacting the Program Rights Law (Puroguramukenho) which would protect software for fifteen years, include right of use and compulsory licensing but there were no moral rights protections for the creators under the Berne Convention.[44] 

In response, the Copyright Council recommended that Japan follow the worldwide trend of using copyright law as the primary vehicle for the protection of computer software. Even though MITI was more powerful than the Copyright Council, the Council?s recommendations were followed due to the pressure from the European Economic Community (EEC) and the U.S.[45] As a result, the Japanese Copyright Law was amended in 1985 to define a computer program (puroguramu) as ?an expression of combined instructions given to a computer so as to make it function and obtain a certain result,? and add program works to the list of works of authorship, allow authorship to be extended to either the natural person or the legal person with the natural person receiving extended protection of life plus fifty years. The Law established a registration system for computer programs but since Japan is a signatory to the Berne Convention, registration is not required to enjoy the protection of copyright.[46]

Overall, commentators note that generally intellectual property protection of software is weaker in Japan than in the U.S. and that copyright in Japan mostly protects just the literal expression of software code but not so much the broader features of software design as in the U.S.[47]  A great deal of uncertainty comes from the lack of case law and trends to implement provisions similar to the European Directive,[48] such as a provision to specifically allow reverse engineering for the purposes of achieving interoperability.

4.      Reverse Engineering Clauses

It is common to see clauses in U.S. software licenses that bar the licensee from reverse engineering, disassembling, or decompiling the software. Such clauses may be problematic under the European and Japanese law. Reverse engineering is a process of deducing the inner workings of software by analyzing its structure and operation. At one extreme, this can be done by taking the program apart with a tool such as a disassembler that translates machine language of 1?s and 0?s into human-readable programming language. At the other extreme is the "black box" method of feeding data to the program and observing its behavior.[49]

Legitimate reasons for reverse engineering include software customization, debugging, personal education, ensuring compatibility with other software, determining whether another company had stolen and reused the source code, determining whether a program is capable of performing as advertized.[50] Illicit reverse engineering occurs when the reverser copies the competitor?s code into own product.

a.      Unites States

In the United States, limited reverse engineering for legitimate purposes is permitted in the context of the fair use doctrine, even if reversing is done to discover trade secrets.[51] In reality, however, reverse engineering of software in the U.S. is generally illegal because most software license agreements prohibit it, and courts have found such prohibitions, whether in a clickwrap or shrinkwrap form, to override the Copyright Act which allows reversing for limited purposes.[52] Users are considered to have waived their limited reverse engineering rights by acceding to the end-user license agreement with an anti-reverse engineering clause.[53] No court has concluded that a software license restricting reverse engineering is preempted by federal law, although some preeminent copyright law scholars have criticized this judicial reluctance.[54]

When ruling on the federal preemption issue, the courts have addressed (1) the preemption of state laws under the Copyright Act, and (2) preemption of private contract provisions. These decisions concluded that, while federal preemption exists, it does not apply to private contractual relationships. In other words, even though the Copyright Act trumps state laws, the parties are free to waive their federal rights if they so choose.

In Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th Cir. 1988), the Fifth Circuit addressed the issue of state law preemption by the Copyright Act. Louisiana License Act permitted software producers to prohibit the decompilation or disassembly of its licensed software. However, �117 of the Copyright Act allows the owner of a particular copy of a copyrighted computer program to make copies or adaptations of the program for reasons such as essential steps in utilization of the program, backup copies, etc. The License Act authorized a perpetual bar on copying, whereas the Copyright Act granted protections for the life of the author plus fifty years. The License Act placed no restrictions on programs which may be protected, yet under the Copyright Act, only ?original works of authorship? can be protected. Therefore, since the Congress had spoken directly on point, the Louisiana Act was preempted by the Copyright Act and portions of the license agreement which contradicted it were held to be unenforceable.

In evaluating whether private parties can waive their federal rights to reverse engineer software, the courts balance freedom of contract with federal policies. Contractual waivers of an individual's state and federal statutory rights are enforced if the waiver is ?clear and umistakable? and ?it waives a statutory right designed to protect the interests of individual parties rather than the public.?[55] When the courts specifically addressed the validity of waiver of federal right to reverse engineer software under the Copyright Act they held such waivers valid even within the terms of a shrinkwrap license.[56]

For example, the Federal Circuit in Bowers v. Baystate Technologies, Inc., 320 F.3d 1317 (Fed.Cir. 2003), plaintiff Bowers sold his software program with a shrinkwrap license containing an express prohibition on reverse engineering. Nevertheless, defendant Baystate reverse engineered the software. In a breach of contract action, Baystate argued that the Copyright Act preempted the prohibition of reverse engineering embodied in the shrink-wrap license agreements. The court held that the Copyright Act did not preempt Plaintiff's contract claims and drew a distinction between preemption as applied to state laws versus private contracts: ?while the Fifth Circuit has held a state law prohibiting all copying of a computer program is preempted by the federal Copyright Act, no evidence suggests the First Circuit would extend this concept to include private contractual agreements supported by mutual assent and consideration.?[57]

In sum, while the courts do not allow states to enact laws that violate the Copyright Act, private contracting parties are free to waive their federal right to reverse engineer software even in a non-negotiated context of a shrinkwrap license. Since the majority of software licenses in the U.S. prohibit reverse engineering, it is de facto illegal in most cases.

b.      Europe

The E.U. Directive on Legal Protection of Computer Programs[58] allows reverse engineering for the purposes of and to the extent necessary to achieve interoperability of the licensor's software with other systems. The Directive prohibits it for the purposes of creating a competing product, and also prohibits the public release of information obtained though reverse engineering of software.[59]

In contrast to the U.S., European consumers cannot be required to contractually waive their reverse engineering rights. A common strategy to deal with this risk of reverse engineering is to get licensees to agree and acknowledge that they have sufficient information to create any interfaces to interoperate with the licensed software, i.e., that the licensee has sufficient interoperability information. However, it is possible that interoperability problems may arise after such waiver, since only the United States, Burma, and Liberia do not follow international system of units.[60] Furthermore, U.S. counsel, while drafting a reverse engineering clause for European markets, must keep in mind that in the European Union, the right of interoperability explicitly outweighs the freedom of contract, and courts and consumer protection agencies have been very proactive in protecting European consumers.[61] U.S. licensor must also be careful not to give away any technical information that may violate U.S. export laws, whether it?s an actual export to a physical foreign location or ?deemed? export where a foreign licensee accesses the information from own computer abroad.[62]

c.       Japan

Even though the 1985 amendments to the Japanese Copyright Law do not address reverse engineering, it is not prohibited. Generally speaking, reverse engineering to achieve interoperability in Japan falls within the fair use doctrine. In the mid-1990s, Japan considered a change to the Copyright Law that would allow reverse engineering but the proposal was defeated due to the pressures from the U.S.[63] Currently, the Japanese Copyright Law does not contain a general fair use provision nor does it directly address reverse engineering. However, the Law provides for the balancing of the authors' rights with the benefit of the public and technology development. Specifically, the Law states that its purpose is ?to aim at protecting the rights of authors, etc., while considering fair utilization of these cultural products, and thereby to contribute to the development of culture.?[64]

The protections of the Copyright Law extend only to expressions, whereas underlying ideas must be available for public use unless they meet higher requirements for protection under the Patent Law (such as novelty and nonobviousness). In 1993, the Guidelines of the Agency of Patents clarified that protection of ideas in software depends upon patents.

Since non patented ideas must be available to public, and it is practically impossible to study a computer program by reading its object code of millions of 1s and 0s, a version closer to source code is necessary. At the same time, allowing all reverse engineering might chill the developers and slow down technological development which would violate art. 1 of the Japanese Copyright Law. Disassembly and decompilation, thus, are practical compromise to make underlying software ideas available to public without impeding technological development.[65]

Encouraging inter-operability does not always harm software developers, and may in some cases increase the program?s market share. For example, one company?s spell-checker that can be used with another company?s word processor could make the word processor more popular and increase its producer?s market share.[66]

Program developers may try to license interoperability but this may be problematic because it would require significant expenditures and those that disagree with license terms may still get away with reverse engineering software for interoperability. For example, when Accolade wanted to develop video games compatible with Sega?s console, it gave up on pursuing a license, copied Sega?s copyright protected object code and reverse engineered several Sega?s video games. The court held that this copying constituted fair use.[67]

Reverse engineering for purposes other than to achieve interoperability may be impermissible in Japan. In Microsoft Corp. v. Shuuwa System Trading KK,[68] the defendant disassembled Microsoft?s object code and published it in a book form with the defendant?s comments and labels for easier understanding. Microsoft obtained an injunction. The court ruled that intermediate copying for the purposes of reverse engineering was an unauthorized reproduction in violation of the Copyright Law. There is some dispute whether the case can be interpreted to prohibit reverse engineering for all purposes but, most likely, it does not go that far. The case was decided before the amendments to the Copyright Law and, furthermore, the defendant engaged in publication and massive reproduction of the plaintiff?s code. The current Copyright Law allows making copies of computer software ?to the extent deemed necessary for the purpose of exploiting that work in a computer.?[69] 

Therefore, it might be difficult for a U.S. licensor to enforce a typical U.S.-style clause that prohibits reverse engineering for interoperability purposes in Japan.

5.      Quickwrap

A quickwrap software license refers to a standard of ?take it or leave it? non-negotiated agreements where the licensee manifests assent by such means as opening a plastic shrinkwrap, or clicking on a hyperlink or ?I Agree? button.[70] Software licensors draft quickwrap agreements to limit their liability and protect their intellectual property rights.[71]

U.S. courts are inclined to enforce various forms of quickwrap agreements if the user had reasonable notice and manifested assent to the online terms.[72] Due to the well known reverence for the free market in the U.S., it is not surprising that such agreements are only held invalid when found unconscionable.[73] Unconscionablity is a difficult standard to meet, and the doctrine is invoked in rare instances because it requires that terms be shockingly oppressive, not merely unreasonable, before they will be considered unenforceable.[74] This paper focuses on two most litigated forms of quickwrap in Europe: shrinkwrap and clickwrap.

a.      Shrinkwrap

Shrinkwrap is the earliest form of quickwrap, developed by the software industry in the 1970?s.[75] The name ?shrinkwrap? evolved from ?the early practice of displaying the terms of the license through the plastic wrapping.?[76] The practice of stating that breaking open the plastic packaging or loading the software onto a computer constituted an acceptance of the stated license terms spread through the software industry despite substantial doubts about the enforceability of these licenses, both as a matter of contract law and as a matter of intellectual property policy.[77]

United States

In order to settle this nebulous area of law, the National Conference of Commissioners in Uniform State Laws ("NCCUSL") promulgated the Uniform Computer Information Transactions Act (?UCITA?), which explicitly and controversially accepted Shrink-wrap licenses as enforceable contracts.[78] However, in the face of mounting opposition, NCCUSL ceased efforts to get the UCITA enacted in all states of the U.S. Thus, UCITA has only been enacted in Maryland and Virginia.[79] For a long time, U.S. courts refused to enforce shrinkwrap licenses.[80]

Nevertheless, in 1996, shrinkwrap licenses received a significant boost from the Seventh Circuit in ProCD, Inc. v. Zeidenberg, [81] a landmark case that soon defined the law on shrinkwrap licenses. The defendant purchased CD-ROMs. Printed on the box was a notice that the conditions of use of the CD-ROMs were defined by the terms in the user's manual inside the box. The court held that the contract had been formed, pursuant to the general principles of contract formation of the UCC and common law, when the buyer ?accepted? the terms by electing to keep the software. Since ProCD, the U.S. courts have widely enforced shrink-wrap licenses.[82]

In order to be enforceable, a shrinkwrap license generally must give notice that a program is offered subject to terms. The most common ways of doing this are to provide a conspicuous notice on the program box, on a sales receipt, or otherwise prior to purchase). For example, in I-A Equip. Co., Inc. v. ICode, Inc., the Massachusetts District Court held a shrinkwrap license enforceable where the sales order gave notice of additional terms inside the software box, the terms of the license were printed on the outside of an envelope containing the software, and the program required the purchaser to explicitly accept the terms of the agreement in order to complete installation of the software. 43 U.C.C. Rep. Serv. 2d 807 (D. Mass. 2002).

Some courts have even upheld the license where the terms were not made available prior to a consumer's receipt of the program but the user was allowed an opportunity to return the program if he or she disagrees with the license terms. The court in Adobe Systems, Inc. v. Stargate Software Inc., determined that the agreement was enforceable against the defendant software distributor because the user had the opportunity to return the software if it did not agree with the terms of the shrinkwrap agreement inside the box, and the terms of the shrinkwrap agreement clearly indicated that the transaction was a license, not a sale. 216 F. Supp. 2d 1051 (N.D. Cal. 2002).

Some courts have found that notice to a purchaser that additional terms will be required is sufficient to enforce a shrinkwrap agreement. In Microstar v. Formgen, Inc., 942 F. Supp. 1312 (S.D. Cal. 1996), new ?levels? of a software game were sold separately from the disk containing the original game and license agreement as a separate file, the terms of which permitted users to create new levels of the game for personal use, but forbade commercial redistribution of new levels. Licensees were not required to read or accept the license terms prior to installing the game software. The court held that the software reseller was aware of the terms of a license agreement, and thus, although the manufacturer could have done a better job of making users aware of the license, the manufacturer's restrictions on re?use of its program were applicable to the reseller.

Due to the general American pro-business inclination, the courts tend invalidate shrinkwrap licenses only in exceptional circumstances, such as unconscionable terms or violations of a rule of a positive law. In Softman Products Co., LLC v. Adobe Systems, Inc., 171 F. Supp. 2d 1075 (C.D. Cal. 2001), the court held a shrinkwrap license unenforceable because the user never installed the software and thus never had the opportunity to view or accept the terms of the license, which were not contained in the packaging, but presented only when a user installed the software. The court held that reading a notice on the outside of the software box that indicated that the transaction was subject to a clickwrap license contained in the media was not sufficient to show assent to such terms.

Europe

European courts have taken a more cautious approach. In the European Union, the issue of shrinkwraps is decided at the Member State level. The first European shrinkwrap case was decided in 1995 by the District Court of Amsterdam in Coss Holland B.V. v T.M. Data Nederland B.V.[83] TM Data is an accredited Dutch retailer of Raima, a U.S. software company. TM Data provided Coss with a defective software program that resulted in serious losses to Coss. Coss then filed a liability claim against TM Data. TM Data denied liability by relying on their position as a retailer: they could only deliver something that was provided to them without any opportunity of quality control. Furthermore, TM Data argued that their full performance under the contract had been provided and complete from the moment the software package had been unwrapped. They contended that the shrinkwrap agreement was between Coss and Raima, and TM Data was not a party to the contract.

The Court rejected this argument, and held that the sale led to the conclusion of the contract between Raima and Coss. The Court stated that Dutch contract law requires a clear notice of the contents of the license agreement, yet ?the simple opening of a wrap does not, from this fact, form a contract of license between the producer of the software and the user.?[84] As a result, the retailer was held liable for the damages resulting from the defective software.

Nonetheless, shrinkwrap agreements are frequently used in the Netherlands, although the U.S. Department of Commerce explicitly warns that ?[m]ost shrink-wrap packaging as used in the United States does not comply [with local law].?[85] Under the Dutch law, the customer must have received the terms and conditions in hand before or at the time of the sale, not after opening the package.[86]

In the EU countries where the issue of shrinkwrap licenses has not yet been specifically addressed by the legislature or courts (e.g. Germany,[87] Sweden[88], Finland[89]), general contract formation principles apply. The controlling factor is usually whether the licensee has had a meaningful opportunity to familiarize himself or herself with the license prior to purchase. In order to draft enforceable licenses, U.S. counsel must seek clarification at various local governmental agencies and departments of commerce on the requirements.

Japan

In Japan, shwinkwrap agreements are not enforceable unless the consumer was aware of the license terms prior to purchasing the software.[90] The prevailing practice is for software publishers to print the license on the box. The courts, however, will not enforce the license terms that are deemed one-sided or unreasonably unfavorable to the consumer.[91] Furthermore, Japan has enacted legislation similar to the European Unfair Contract Terms Directive, and the unfair terms are invalidated even if the consumer had the opportunity to read and accede to them.[92]

The Japanese consumer contract law contains an indicative and non-exclusive list of unfair terms.[93] The list contains terms that are similar to the ones in the European Directive on unfair contract terms. Any license terms inconsistent with the mandatory provisions of the copyright law are unenforceable even if they were individually negotiated.[94] Since Japan does not have a federal system, thorny issues of federal preemption do not arise as they sometimes do in the U.S. Nevertheless, Japan has a system of mandatory rules and default rules. A license may not violate mandatory rules that are based on public policy. However, article 91 of the Civil Code of Japan provides contracting parties may declare an intention that differs from laws and ordinances that are not concerned with public policy. If shrinkwrap agreements violate mandatory provisions of the copyright law which is based on public policy, such agreements will be unenforceable.  

The Japanese Ministry of Economy, Trade and Industry, publishes ?Interpretative Guidelines on Electronic Commerce?[95] with authoritative interpretation of the Japanese intellectual property law in plain English. According to the Guidelines, the general contract formation principles under the Civil Code of Japan are satisfied, and a valid shrinkwrap agreement is formed ?[i]f the user is aware of the contents of a license agreement before breaking the seal.?[96]

b.      Clickwrap

Clickwraps are online equivalents of shrinkwraps. A clickwrap (aka clickstream) agreement allows website visitor to manifest assent to contractual terms by clicking ?I Agree? box after having an opportunity to review the terms of use. The website will not accept orders or provide access otherwise.[97] Commentators state that, despite the prevalence of these types of agreements, many people do not read the terms prior to clicking ?I Agree.?[98] According to a recent study, only one or two in a thousand actually read online contracts, and their average reading time is 29 seconds per 2277-word average contract.[99]

Unites States

In 1998, the first two cases upheld enforceability of clickwraps without much discussion, perhaps in part due to relatively unsympathetic parties ? an Internet pornography spammer[100] and an experienced lawyer who did not read the contract.[101] Ever since then, U.S. courts overwhelmingly find that clicking is a valid way to manifest assent.[102] The courts maintain that ?[a]bsent a showing of fraud, failure to read an enforceable clickwrap agreement, as with any binding contract, will not excuse compliance with its terms.?[103] However, the courts have also considered doctrines of unconscionability,[104] violations of public policy,[105] fairness of forum selection clauses,[106] and federal copyright preemption.[107] Licensees have a difficult burden to meet under these doctrines in order to successfully challenge a clickwrap agreement. The few successful challenges did not turn on the issue of whether a click was sufficient to manifest assent. Rather, these cases turned on general contract doctrines or because of insufficient evidence of clicking.[108]

Specht v. Netscape Communications Corp., 306 F.3d 17, (2d Cir. 2002) in an example of a high burden the U.S. plaintiff would have to meet in order to successfully challenge the clickwrap agreement. In that case, the Second Circuit held that the license was not enforceable because the end user of the software program was not required to view or accept the terms of a license agreement prior to downloading the software program from the software provider's web site, and the notice of the license agreement was situated below the bottom of the screen on the download page.

Therefore, despite their controversial nature and criticisms, clickwrap agreements continue to enjoy strong support of the U.S. courts as long as licensee had reasonable notice of the terms.

Europe

European courts have adopted different approaches that reflect a continued commitment to strong regulatory oversight of Internet consumer markets. Even if the licensee had reasonable notice and acceded to the terms of a clickwrap agreement, European courts are more likely to invalidate clauses considered abusive and suspect under the Unfair Contract Terms Directive and European consumer law.[109]

An illustrative case arose in a small town in Southern Italy. The plaintiff company purchased a computer over the Internet by clicking acknowledgment to a clickwrap agreement that turned out to contain an inconvenient for the plaintiff choice of forum clause. Italian Civil Code requires a buyer to double sign a contract with abusive clauses. An Internet user fulfills this requirement by a digital signature or a double click ? the first click to approve contractual regulation, and the second click to assent to abusive terms.[110] Some commentators maintain that double click is insufficient for a software licensor to demonstrate compliance with the double signature provision for potentially abusive terms. As a result, Italian companies lack confidence in online contracting, and local software industry practice is to confirm double click with a follow-up hard copy of the agreement sent to the licensee.[111] Italy?s double signature requirement also invalidates shrinkwrap licenses since the licensee is not able to double sign a shrinkwrap agreement. To circumvent this, Italian software licensors require buyers to double sign and mail a request for warranties.[112]

While not all European countries are as strict as Italy when it comes to clickwrap agreements, such agreements still require a higher level of affirmative action on the part of consumer in other EU countries as well. Even then, if the license agreement includes terms unfavorable to consumers, judges invalidate the agreement entirely or partially, pursuant to the Unfair Contract Terms Directive.

The EU approach to clickwraps and other issued discussed reflects a continued commitment to strong regulatory oversight of Internet consumer markets. U.S. software licensor that wishes to stay on the safe side is advised to follow Italian approach, if practicable. An ounce of prevention may very well be worth a pound of cure. This is why, in the aftermath of the AOL France case, Dell decided to voluntarily change its terms to make them more favorable to licensees. Dell changed the terms that limited liability for negligence to the price of the product; terms that excluded liability for consequential loss arising out of breach of contract; and terms that excluded liability for oral representations not confirmed in writing.[113]

6.      Practice Pointers

In order to remain competitive in a global software market, simply translating a license agreement into a foreign language and currency might not be enough. U.S. software licensors must comply with local law, or risk costly and embarrassing consequences.

a.      Checklist:

This list provides the list of terms and clauses that have been routinely upheld by the American courts but might present significant risk in the European and Japanese markets:

-          Ensure that the license agreement does not include presumptively unfair terms from the Annex to the Unfair Contract Terms Directive.

-          Remove clauses that limit licensee?s seven day minimum ?cooling off? period of the Distance Selling Directive.

-          Does the agreement require consumer to arbitrate or limit court remedies?

-          Does the license to Europe violate the consumers? right to litigate in their local court?

-          Is reverse engineering to achieve interoperability prohibited?

-          Ensure that the agreement does not contain any of the following potentially illegal clauses from the AOL France case:

o   Contract acceptance by performance (use of Web site)

o   Cross-border transfer of personal data without consumer consent

o   Connection fees

o   Per-minute billing

o   Disclaimers of liability for negligence, service interruptions, or service performance

o   Company rights of termination

o   Company right to modify contract terms after the contract formation

o   Unilateral changes to late payment rules

o   License of  customer?s content to the company

-          Are the terms of the shrinkwrap agreement printed conspicuously on the box?

-          Does the shrinkwrap disclose that the software is being licensed, not sold?

-          Does the licensee have the opportunity to review the full terms of the shrinkwrap license prior to purchasing, by visiting a website, a vendor or otherwise?

-          Does the clickwrap license instruct the user to read the terms carefully prior to acceding?

-          Does the clickwrap give notice to the licensee that she may return the software for a refund if she declines to download or to click ?I accept? button?

b.      Recommendations:

In view of the issues discussed, some possible recommendations for software companies localizing license agreements in Europe are:

1. Always keep in mind the general European pro-consumer inclination and avoid clauses where the dominant party gets the upper hand or requires licensee to waive basic consumer rights.
2. Keep in mind that the EU Unfair Contract Terms Directive applies to the vast majority of business-to-consumer licenses to Europe and ambiguities will most likely be interpreted in favor of the consumer.
3. Pay particular attention to arbitration clauses, disclaimers of warranties, limitation of licensor?s liability or consumer?s remedies, and unilateral modifications of contract or service. Those are the riskiest terms under the European and Japanese laws.
4. Ensure that the licensee?s Member State legislation does not provide for a cooling off period that is longer than seven days.
5. Modify the reverse engineering clause to exclude liability for reverse engineering for the purposes of achieving interoperability.
6. To ensure compliance with export laws, consider stating that ?Licensee shall be responsible for compliance with any applicable laws and regulations related to access of the Software outside of the United States.?
7. Ensure that the shrinkwrap license is displayed prominently through the wrapping, and licensee has an opportunity to review the terms prior to payment. If not possible to display the whole agreement in this manner, display the most important terms and include a coherent web address of where the full license agreement can be found. If practicable, make printed copies of license available at the point of sale.
8. Ensure that the licensee has the opportunity to review the clickwrap terms before paying and proceeding with the download, installation, or access. If practicable, make it effectively impossible to proceed with the download without double clicking on an ?I agree? button.
9. Ensure that the clickwrap is structured in a way that allows for a refund if the user declines to download the product.

7.      Conclusion 

Simply translating a U.S. license agreement into a foreign language might not be enough to avoid costly litigation and negative publicity in Europe and Japan, where a typical U.S.-style contract will be viewed as one-sided and unconscionable. A software producer cannot deprive licensees in those major markets of their rights to resolve disputes close to home, to reverse engineer software for interoperability purposes, and to enjoy a cooling off period.  A properly localized licensing agreement must account for differences in law, culture, and attitudes towards the business-consumer relationships.

European countries place more emphasis on providing their citizens with a social safety net, which results in the high minimum levels of consumer protection. In Japan, the software is primarily protected through the copyright principles, in addition to patent system and other methods of protection. A U.S. licensor must be aware of the Japanese aversion to litigation and high reverence for civil harmony. Individual solutions must be tailored to account for each country?s cultural and legal differences.

Endnotes:

This article by San Diego Business Attorney Sergei Tokmakov is for general educational purposes only. It does not constitute legal advice because your specific case may be different. Readers should seek qualified counsel for assistance. This article may be reprinted, provided that all credit information and this paragraph remain intact.