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Court Strikes Down Shrink-Wrap License Agreement

By Eric S. Freibrun, Esq.

Most computer users are quite familiar with the so-called "shrink-wrap" license agreement that comes with most software programs for the consumer market. Well, at least most users have seen them, if not actually strained their eyes to read their small-print terms and conditions. The shrink-wrap license agreement purports to create a binding legal agreement (so it says) between the software vendor and the user. The agreement is usually found inside the box containing the software, printed on the envelope containing the CD-ROM or disks, or stated in the user manual. At the beginning appears the usual statement warning the user not to open the software envelope or use the software if he or she does not agree with the terms and conditions of the agreement.

Use of this type of agreement has become the legal licensing paradigm of the software industry for consumer mass-market software. The term "shrink-wrap" derives from the fact that such agreements used to be included on the outside of the software packaging, visible through the clear plastic shrink-wrap with which the package was sealed.

But are such "shrink-wrap" agreements enforceable against the user who breaches their terms? Notwithstanding the software’s industry’s reliance on this method of licensing and protection of software intellectual property rights, there are few cases on the subject. Recently, however, a federal district court in Wisconsin provided clear guidance on the circumstances under which a shrink-wrap agreement will be held invalid and unenforceable.

ProCD, Inc. v. Zeidenberg, 908 F.Supp. 640 (W.D. Wis. 1996), involved the CD-ROM product sold under the trademark "Select Phone." It’s a listing of over 95 million telephone numbers, bundled with the software that enables a user to access those numbers on his or her computer, and cost ProCD millions of dollars to develop. The defendant, a computer science Ph.D. student living in Madison, Wisconsin, purchased copies of Select Phone. He then copied the telephone listings from the CD-ROM onto his computer, created a software search engine, and uploaded the whole thing onto a World Wide Web site that soon generated over 20,000 hits a day. Naturally, ProCD sued, alleging copyright infringement, breach of the express terms of the shrink-wrap license agreement, violation of Wisconsin’s Computer Crimes Act, misappropriation and unfair competition. Wouldn’t you?

Did Zeidenberg infringe ProCD’s claimed copyright in the telephone listings? The court said no. Relying on a U.S. Supreme Court decisions only a few years old, Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 U.S. 340, the court stated that mere facts or raw data such as telephone listings not arranged in an original manner are not entitled to copyright protection. Because the telephone listings in ProCD’s product were not arranged in an original manner and lacked the minimal degree of creativity necessary to constitute a copyrightable compilation of facts, they were not protectable under copyright law. Therefore, Zeidenberg could copy the telephone listings and further distribute them from his Web site.

Did Zeidenberg violate the terms of the shrink-wrap license agreement, which expressly stated that copying of the software and the data (the telephone listings) may be done only for individual or personal use and that distribution, sublicense or lease of the software or the data was prohibited? The court again said no. Copying of the data was clearly prohibited by the license agreement. But the court refused to enforce the agreement. The court stated that the terms of the Select Phone license agreement were not presented to Zeidenberg or any other purchaser at the time of sale. The only reference to the agreement was a statement in small print at the bottom of the package that said users were subject to the terms and conditions of the enclosed license agreement. Zeidenberg did not have the opportunity to inspect or consider the terms of the license. The court did not think that mere reference to the terms at the time of the initial contract formation -- forking over payment at the check-out counter -- presented Zeidenberg with an adequate opportunity to decide whether the license terms were acceptable or not. Zeidenberg had to have been given the opportunity to read and consider the terms in their entirety at the time of initial contract formation, which the court said was the time the retail transaction was consummated. Under Section 2-209 of the Uniform Commercial Code, the court held that the license agreement terms contained inside the Select Phone package constituted additional terms to which Zeidenberg did not agree, nor have the opportunity to agree to, upon the initial agreement -- payment at the check-out counter in exchange for the copy of the software. Further, the court held, even if the agreement were enforceable, copyright law would pre-empt the provision of the agreement prohibiting copying of the uncopyrightable telephone listings.

This case is currently on appeal before the U.S. Court of Appeals for the Seventh Circuit. The Software Publishers Association, the principal trade association for the personal computer software industry, has filed an amicus curiae brief in favor of ProCD arguing that the district court’s decision should be reversed.

While the enforceability of shrink-wrap software license agreements, as currently used by the software industry, may be dubious, users should not by any means assume that software is freely copyable. The ProCD case involved uncopyrightable data -- the telephone listings. Zeidenberg did not copy and distribute ProCD’s original copyrighted software search engine; he created his own. Had he copied ProCD’s software and distributed it from his Web site, he would likely have been found liable for copyright infringement, notwithstanding the unenforceability of the shrink-wrap agreement.

Software vendors can take away from this decision some useful tips. Vendors may want to consider giving users the opportunity to review their license terms and conditions by printing them on the outside of their software packaging or otherwise making them available at retail outlets where their products are sold. For phone orders, vendors may consider providing purchasers copies of the license agreement in advance of consummating a transaction, or at least informing purchasers at the time of purchase that the transaction is subject to the terms of the license agreement.

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This article is provided for general informational purposes only and does not constitute legal advice. Each factual situation is different and requires specific analysis.

Attorney Eric Freibrun specializes in Computer law and Intellectual Property protection, providing legal services to information technology vendors and users. Tel.: 847-562-0099; Fax: 847-562-0033; E-mail: eric@freibrun.com.

Copyright Eric S. Freibrun, Esq., Law Offices of Eric S. Freibrun, Ltd. All rights reserved.