I. IntroductionComputer software companies widely rely on the use of “shrinkwrap”license agreements in the mass market distribution of software.“Shrinkwrap” agreements are unsigned license agreements whichstate that acceptance on the part of the user of the terms of theagreement is indicated by opening the shrinkwrap packaging or otherpackaging of the software, by use of the software, or by some otherspecified mechanism. Computer companies have generally elected to license copies ofcomputer programs to end users, rather than to sell those copies, forthe following principal reasons: ■ To negate the “doctrine of first sale,” which holds that once acopy of a copyrighted work has been sold, the copyright holder’s rights in that particular copy are exhausted, and the copy may be freely resold, leased, lent or otherwise disposedof. The casting of the transaction as a license is an attempt toavoid this doctrine so that the user may not freely transfer the software to others, causing lost revenue to the software vendor, or lend the software to others who may illegally duplicate it.2■ To place the user on notice of the terms of the warranty, if any, made by the vendor with respect to the software, and to disclaim other warranties in accordance with the provisions of the Uniform Commercial Code (UCC).■ To impose upon the transaction other terms and conditions via the license agreement, such as limitations on the permissible use of the software, limitations of liability, choiceof governing law, and other contractual provisions.Because the license agreement affords the primary mechanism bywhich software vendors limit the risks and liability arising from thedistribution of their products, the enforceability of shrinkwrapagreements is of great significance. The enforceability of theseagreements has long been the subject of serious doubt. Before 1996,only three cases had touched on the subject of the enforceability ofshrinkwrap license agreements. One of these cases assumed withoutexplanation that the shrinkwrap license at issue in that case was acontract of adhesion which could be enforceable only if the provisionsof a state statute—which explicitly made such license agreementsenforceable—were a valid statute that was not preempted by federallaw. The other two cases focused on the rules of contract formation underthe UCC and their implication for deciding whether a shrinkwraplicense agreement governs a transaction at all—quite apart from rulesconcerning contracts of adhesion—and, if so, which of the termscontained therein are governing. In both cases, the court held that acontractual relationship was formed between the software vendor andpurchaser upon acceptance of orders for the software issued viatelephone, and the shrinkwrap license agreement which the purchasersaw for the first time after the contract had been formed wasineffective under the UCC to modify the terms of the previously formedcontract. Both of these cases involved transactions between a software vendorand a reseller of the software, rather than an end user, in the contextof some unique facts. Thus, none of these cases addressed the issueof the enforceability of a shrinkwrap license against an end user whopurchases a copy of a mass-marketed computer program in anessentially “over the counter” transaction. In early 1996, however, inthe case of ProCD, Inc. v. Zeidenberg3, a federal district court squarelyaddressed this issue, and ruled that a shrinkwrap license wasunenforceable against the end user under the relevant contractfenwick & west 1The Enforceability of Shrinkwrap Licebse Agreements On-Line and Off-LineTThhee EEnnffoorrcceeaabbiilliittyy ooff SShhrriinnkkwwrraapp LLiicceennssee AAggrreeeemmeennttss OOnn--LLiinneeaanndd OOffff--LLiinneeBy David L. Hayes,ESq.1March 1997fenwick & west llp© 2003, 1997 Fenwick & West LLP. All Rights Reserved. 1 Chairman of the Intellectual Property Practice Group, Fenwick & West LLP, Mountain View, California. BSEE (summa cum laude), Rice University 1978; MSEE, Stanford University1980; J.D. (cum laude), Harvard Law School 1984. 2 The doctrine of first sale was codified by Congress in section 109 of the 1976 Copyright Act (Title 17 of the United States Code). Recognizing the problem of unscrupulous softwarerental companies that were renting software to users who then made illegal copies of such software, Congress amended the first sale doctrine as it applies to computer programs. SeeComputer Software Rental Amendments Act of 1990, Pub. L. No. 101-650, 104 Stat. 5134 (codified at 17 U.S.C. § 109(b)). As amended, the first sale doctrine permits only non-profit librariesand educational institutions to lend or lease copies of software although a purchaser of a copy of a copyrighted computer program may still sell that copy to another without the consent ofthe copyright holder. 3 908 F. Supp. 640 (W.D. Wis. 1996).formation provisions of the UCC, because the end user did not see theterms of the shrinkwrap license until after the purchase wasconsummated. The court held that the entire terms of the licenseagreement had to be visible on the packaging of the software beforethe purchase was consummated in order for the terms of the license toform part of the bargain between the parties. The district court’s decision was reversed on appeal by the SeventhCircuit, which held that shrinkwrap licenses are enforceable unlesstheir terms are objectionable on grounds applicable to contracts ingeneral. The Seventh Circuit’s opinion adopted a very differentapproach to the analysis of the rules of contract formation under theUCC than did the other two cases which focused on those rules.Although the Seventh Circuit’s ruling represents the first judicialdecision to uphold the enforceability of a shrinkwrap licenseagreement, its reasoning is inconsistent with the analysis of itspredecessor decisions, and therefore sets up a split in authority as tothe proper UCC analysis to be applied to shrinkwrap licenses. Further judicial development will be required to discern whether othercourts will adopt the Seventh Circuit’s UCC analysis, or the analysis ofthe predecessor decisions, which the district court in ProCD foundpersuasive and chose to follow. If other courts adopt the logic of thedistrict court in ProCD and its predecessor opinions, then companieswishing to continue to rely on shrinkwrap licenses may be required tomake the terms of the license agreement visible
View Full Document
Unlocking...