Not So Fast! Appeals Court Reverses,
Upholds Shrink-Wrap Agreement
By Eric S. Freibrun, Esq.
In May’s Visual Basic Tips &
Tricks (See "Court Strikes Down Shrink-Wrap License
Agreement"), I had written about how a Wisconsin Federal District Court had sent
shock waves throughout the software industry by refusing to uphold a software
vendor’s typical "shrink-wrap" end user license agreement. This decision in
ProCD, Inc., v. Matthew Zeidenberg and Silken Mountain Web Services, Inc., 908
F.Supp. 640 (W.D. Wis. 1996), was staggering, casting serious doubt on the validity of the
software industry’s standard method for establishing license agreements with users of
mass-marketed computer software. In June, the U.S. Court of Appeals for the Seventh
Circuit reversed the District Court in favor of the vendor, ProCD (See http://www.law.emory.edu/7circuit/june96/96-1139.html).
This case involved the CD-ROM product
"Select Phone (tm)," a listing of over 95 million telephone numbers, addresses
and SIC codes bundled with search and retrieval software. It cost ProCD more than $10
million to compile and is expensive to keep current. The defendant, a computer science
Ph.D. student living in Madison, Wisconsin, purchased copies of Select Phone but decided
to ignore the license. He formed Silken Mountain Web Services, Inc. to resell the
information in the SelectPhone database. He copied the telephone listings from the CD-ROM
onto his computer, created a software search engine, and uploaded the data onto Silken
Mountain’s World Wide Web site that soon generated over 20,000 hits a day. 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.
The District Court held that because the
terms of the license agreement were inside the box instead of printed on the outside,
Zeidenberg had no opportunity to disagree with or negotiate them at the time of purchase,
which was when he paid for the product at the retail check-out counter. In Wisconsin and
in every other state, the terms of a contract include only those on which the parties have
agreed.
The Appeals Court noted, though, that the
SelectPhone box contained a clear statement that use of the product was subject to the
license terms contained inside. The Court refused to require ProCD to print the entire
license agreement in microscopic type on the outside of the box in order for it to be
enforceable. In what appears to be a judicial endorsement of the software industry’s
widely used method for establishing license agreements with users of mass-marketed
software, the Court stated, "Notice on the outside, terms on the inside, and a right
to return the software for a refund if the terms are unacceptable (a right that the
license expressly extends), may be a means of doing business valuable to buyers and
sellers alike."
The Court analogized to numerous other
types of transactions in which the exchange of money precedes the communication of
detailed terms in order to facilitate efficient commerce. For example, when an airline
ticket is purchased, the Court noted, the traveler calls the carrier or an agent, is
quoted a price, reserves a seat, pays, and gets a ticket, in that order. The ticket
contains elaborate terms, which the traveler can reject by canceling the reservation. To
use the ticket is to accept the terms, even terms that in retrospect are disadvantageous.
Similarly, the Court explained, when one buys a concert ticket, the back of the ticket
states that recording the show is prohibited. To attend the concert is to agree to that
restriction. If every patron had to sign an agreement with specific terms before paying
for the ticket, this cumbersome way of doing business would result not only in long lines
but would nix the sale of tickets by phone or electronic data service.
In describing the software industry, the
Appeals Court noted that only a minority of sales take place over the counter, where there
are boxes to peruse. Much software is ordered by phone, or by Internet users who download
the software electronically. According to the Court, if it were to accept
Zeidenberg’s arguments that these "unboxed sales" contain no terms and
conditions because the user had no package with a license agreement on it to read before
deciding to buy, then under the Uniform Commercial Code (UCC) the vendor’s typical
warranty and damages disclaimers don’t apply. The result would be that the vendor has
made a broad warranty and must pay consequential damages for any shortfalls in
performance. These two "promises," the Court noted, if taken seriously, would
drive prices through the ceiling or return transactions to the horse-and-buggy age.
The Court concluded addressing the issue
of "shrink-wrap" license enforceability by citing chapter and verse of the UCC,
in particular, Sec. 2-204(1): "A contract for sale of goods may be made in any manner
sufficient to show agreement, including conduct by both parties which recognizes the
existence of such a contract." The Court noted that the vendor, ProCD, as maker of
the offer to sell, may invite acceptance by conduct, and may propose limitations on the
kind of conduct that constitutes acceptance. A buyer may accept that offer by performing
the acts the vendor proposes to treat as acceptance. And that, concluded the Court, is
what happened. ProCD proposed a contract that a buyer would accept by using the software
after having an opportunity to read the license at leisure, the Court said. This
Zeidenberg did. He had no choice, because the software splashed the license on the screen
and would not let him proceed without indicating acceptance. Zeidenberg also had the
opportunity to reject the contract if he found the terms unacceptable by returning the
software. He instead chose to use it. Accordingly, he was bound by its terms.
The Appeals Court reversed the District
Court’s ruling against ProCD and remanded the case back to the District Court to
determine damages and other legal relief, most likely an injunction against
Zeidenberg’s further breach of contract and copyright infringement. The message of
this case appears to be twofold: (i) the prevailing mass-market software industry end-user
licensing method works; and (ii) end-users seeking to profit by ignoring vendors’
product license agreements do so at their peril.
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.
