Future Looks Bright for Shrink-Wrap Licenses

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Future Looks Bright for Shrink-Wrap Licenses

By David M. Nadler and Lauren A. Degnan

Contributing Writers

Anyone who has ever purchased a box of software is familiar with the lengthy document that purports to establish a contract with the buyer, usually a license governing the purchaser's use of the software. Until recently, courts have refused to enforce these types of shrink-wrap licenses and out-of-the-box contracts except under limited circumstances. The courts generally held that shrink-wrap licenses were not enforceable because the parties did not mutually agree to the terms of the agreement.

The U.S. Court of Appeals for the Seventh Circuit has reversed this trend and upheld a shrink-wrap license in the 1996 case ProCD Inc. v. Zeidenberg. The court explained that shrink-wrap licenses are not inherently suspect as long as the terms of the license are not unconscionable or objectionable on other grounds. The court further suggested that these agreements are more likely to be upheld if the licenser gives the buyer (1) notice that there are additional terms to the agreement not listed on the software package, and (2) an opportunity to return the product if these terms are not acceptable.

Following this decision, the Seventh Circuit ruled in Hill v. Gateway 2000 Inc. on Jan. 6 that the ProCD holding is not limited to the software license portion of a shrink-wrap contract and applies to all of the terms of a contract. Specifically, the court found that an arbitration clause in the contract included with the software package was enforceable because the buyer had notice of the contract and failed to reject the contract by returning the product.

These cases show that the courts are shaping the law to fit the standard practices of the software industry. The Uniform Commercial Code is also adapting to the industry and has proposed the addition of Article 2B to specifically address software licenses. Under the proposed article, shrink-wrap licenses whose terms are not otherwise objectionable are legally binding if the users (1) have an opportunity to reject the contract, and (2) manifest assent after this opportunity. This includes, for example, engaging in certain affirmative conduct that the contract conspicuously states will constitute acceptance. Consistent with the customary practice in the software industry, the notes to the article specify that opening a package may qualify as assent.

Opponents of shrink-wrap licenses argue that these agreements are unfair because consumers are generally unable to negotiate the terms. Article 2B attempts to address this concern by protecting consumers from unusual or surprising terms. The article provides that terms inconsistent with customary practices or that conflict with previously negotiated terms may become part of the agreement only with conspicuous language and manifest assent. This would exclude merely retaining the software without objection. A final version of Article 2B is scheduled to be adopted this summer.

Taken in combination, Article 2B and recent case law give shrink-wrap licensers guidance in drafting these contracts to maximize their enforceability. First, the software package should state conspicuously that license terms are included in the box or package. Second, the exact terms of the license should be available before the consumer begins to use the software, or shortly thereafter. For example, a written copy of the contract should be in the box, and during installation the software should display the terms of the license and require the user to press enter if he agrees to the license. Third, the licenser should offer a full refund if the user decides not to accept the terms of the license.

David M. Nadler is a partner in the Washington law firm of Dickstein Shapiro Morin & Oshinsky LLP. He can be reached at NadlerD@dsmo.com. Lauren Degnan is an associate with the firm.