Not So Fast! Appeals Court Reverses, Upholds Shrink-Wrap Agreement

In May’s Visual Basic Tips & Tricks (SeeCourt 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 ™,” 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.

September 1st, 1996|