If You Use A Shrinkwrap License It May Not Be Enforceable: Mass Market Software & The Shrinkwrap License
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| Ever since mass market computer software has been developed computer software companies have relied upon the shrinkwrap license
for protection of their intellectual property rights. A shrinkwrap license is an unsigned agreement between the purchaser
of a mass market computer software program and the computer software company that developed the software. This license purports
to define the terms of the transaction as well as placing contractural conditions on the purchaser's use of the software.
Computer software companies rely heavily upon the shrinkwrap license agreement to protect their perceived interests in the
mass market distribution of their software by retaining title to the copy of the software - the software is licensed and not
sold to the purchaser. By retaining title to the software the computer software company theoretically attempts to impose conditions
upon the licensee, the purchaser, that are not otherwise permissible under federal copyright law. The principal terms of the
shrinkwrap license are (1) prohibits making unauthorized copies of the software, (2) prohibits rental of the software, (3)
prohibits reverse engineering and modifications to the software, (4) limits use of the software to one central processing
unit, (5) disclaims warranties, and (6) limits liability. Since the purchaser of the software normally does not deal directly with the computer software company, but instead purchases the software through mass market distribution channels - retail and wholesale stores, direct mail - the sale is usually accompanied by a document known as a shrinkwrap license. The license is normally connected to the software in such a manner that the purchaser should notice and read the license prior to using the software. Acceptance of the license terms and conditions is acknowledged by the purchaser when the purchaser opens the software shrinkwrap or other packaging, or by using the software. The enforceability of the shrinkwrap license has been the subject of much discussion and debate. Commentators and the courts have analyzed the enforceability issue from the following perspectives: (1) The Nature of the Transaction: Is the computer software a "good"?, Is the transaction a sale or a lease?, Is the transaction governed by the Uniform Commercial Code (UCC)?; (2) Contract Creation: Is the shrinkwrap license included in the contract entered into by the purchaser and computer software company?; (3) Enforceability: Is the shrinkwrap license a contract of adhesion?, and (4) Preemption: Is the shrinkwrap license preempted by federal copyright law? State Validating Statutes State legislatures in two states, Louisiana and Illinois, attempted to improve the computer software company's position as a licensor by reinforcing by statute the validity of the shrinkwrap license. These statutes have not proven to be effective as the Illinois statute was repealed and the Louisiana statute was determined by the court to be unenforceable. The Nature of the Transaction The prevailing view treats mass market prepackaged software as goods, since the software is analogous to any other general market product that is covered under the UCC, even though intellectual property rights are regarded as intangibles. Although the UCC does not govern aspects of a transaction that deal with the disclosure of information, the rights to use the technology, the rights to reproduce copies of the software, and the transaction involves goods that contain intangible intellectual property rights, does not absolve the computer software company from delivering to the purchaser a product that meets UCC standards. To determine whether an agreement is a license or a sale the courts have generally looked to the terms of the license; does the licensee make periodic payments in addition to the purchase price, does the licensor retain title as a security interest, does the license expire at a specific time. Since the shrinkwrap license does not meet these criteria - the software is purchased at a fixed price with no additional payment required, title is not retained for securing payment of the purchase price as the total payment is made at the time of purchase, the license is not for a specified period of time - the prevailing view is that the transaction is a sale of goods and not a true license agreement. Contract Creation The principle issue is whether the license document is part of an enforceable contract. One perspective holds that if the transaction is viewed as having induced the purchaser to have agreed to the terms of the shrinkwrap license that the terms of the agreement should be enforced by the traditional doctrine of contract law which upholds the written terms of a contract. A difficulty with this viewpoint is with the manner in which the transaction takes place; the sale occurs, the purchaser pays for the software, and the license is included with the materials the purchaser acquires. In most transactions the purchaser does not become aware of the terms of the license until after the sale is consummated, even though most software purchasers are aware of the existence of a shrinkwrap license. Since the purchaser fails to sign the shrinkwrap license agreement, or otherwise expressly agree to the terms of the shrinkwrap license, acceptance of the agreement by the purchaser is inferred by opening the package or using the software even without the license terms being read. A recent decision, Step-Saver Data Systems, Inc. v. Wyse Technology, focused on the issue of contract creation and whether a shrinkwrap license governed the transaction at all. Although the Step-Saver decision involved a transaction between a computer software company and a reseller which attempted to impose significant contractural limitations on the rights and remedies of the purchaser the analysis of UCC rules and their applicability to this transaction have much broader significance for mass market transactions involving shrinkwrap licenses. In summary the Third Circuit held that the shrinkwrap license did not become part of the contract and therefore was not a valid modification to a previously existing contractural relationship for the sale of prepackaged computer software. The court concluded that UCC $ 2-207 controlled the transaction and that a contract existed between the parties prior to the opening of the package. Furthermore, the license terms were an offer of new terms by the computer software company, that materially altered the contract, and were not expressly accepted by the purchaser. Although Step-Saver did not deal with a typical mass market transaction of software the use of UCC $ 2-207 and the subsequent invalidation of the shrinkwrap license should apply equally well for a mass market transaction where the sale is made based upon agreement of price and quantity. This sale and the contractural relationship between the parties cannot subsequently be materially altered by a license document that was not part of the original transaction. Enforceability & Preemption The Vault Corp. v. Quaid Software Ltd., decision specifically addressed the issues of shrinkwrap license enforceability and preemption raised by federal copyright law. The district court stated that the shrinkwrap license was a contract of adhesion that was only enforceable if the Louisiana statute, explicitly validating the shrinkwrap license, was valid and not preempted by federal copyright law. The court then concluded that the Louisiana statute was not valid at least to the extent that its provisions were contrary to federal copyright policy, i.e. prohibition on copying for any purpose, prohibition on reverse engineering, et.al. The Fifth Circuit affirmed the district court's holding that the Louisiana shrinkwrap license statute was unenforceable for attempting to expand federal intellectual property rights and therefore was preempted, at least in part, by federal law considerations including copyright and patent law. Conclusion Recent court decisions have concluded that mass market computer software transactions will be treated as the sale of goods under the UCC. Furthermore, the shrinkwrap license will not be enforceable because it is not a part of the contract creation between the parties. Finally, state laws that expand upon federal intellectual property rights are preempted by federal law. This article is not legal advice. You should consult an attorney if you have legal questions that relate to specific publishing issues and projects. |
© 1994 The Law Office of Lloyd L. Rich
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