Academic

Warner on Internet Contracting

By Lawrence Solum

Richard Warner (Chicago-Kent College of Law) has posted Turned on its Head?: Norms, Freedom, and Acceptable Terms in Internet Contracting on SSRN.  Here is the abstract:

Is the Internet turning contract law on its head? Many commentators contend it is. Precisely this issue arises in current controversies over end user license agreements (EULAs) and Terms of Use agreements (TOUs, the agreements governing our use of web sites). Commentators complain that, in both cases, the formation process unduly restricts buyers' freedom; and, that sellers and web site owners exploit the process to impose terms that deprive consumers of important intellectual property and privacy rights. The courts ignore the criticisms and routinely enforce EULAs and TOUs. There is truth on both sides of this court/commentator divide. EULAs and TOUs are standard form contracts, and a standard contract formation process can guarantee acceptable terms and enhance freedom; however, in the case of EULAs and TOUs, the process is currently defective in ways that result in unfair terms that reduce freedom. The cornerstone of the analysis is the claim that, when certain ideal conditions are fulfilled, standard form contracting is a freedom-enhancing process yielding acceptable terms. To characterize the ideal formation process, the analysis combines ideas from both the relational theory of contracts and law and economics. Relational theory provides the picture of contracting as a norm-governed activity while an adaptation of a well-known law and economics argument to argue yields the conclusion that, in an ideal formation process, the profit-maximizing strategy for sellers and web site owners is to offer consumers norm-consistent contractual terms. I contend that norm-consistent terms are acceptable and freedom-enhancing. The theory applies equally to Internet and non-Internet contracting, and this shows that the Internet is not turning contract law on its head; however, the theory also reveals that Internet contracting poses serious, unmet challenges to contract law. The problem is that EULAs and TOUs contain terms not currently governed by appropriate norms. As a result, the EULA and TOU formation process departs from the ideal formation process in ways that result in unacceptable, freedom-reducing terms. In the case of EULAs the offending terms involve prohibitions on reverse engineering and transfers of software to third parties. It is likely that relevant norms will evolve relatively soon to govern such terms. In the case of TOUs, the offending terms concern the collection of information by businesses and web sites and implicate privacy concerns. It is unlikely that relevant norms will evolve in relatively soon in this case. How are appropriate norms to be identified or, where necessary, created? The analysis raises but does not answer this question.

Very interesting line of analysis--I am very attracted to the distinction between contract terms that are norm-consistent and those that are not as a salient distinction.  Recommended.

Full post as published by Legal Theory Blog on September 02, 2008 (boomark / email).