On-Line Distribution May Improve Software Licensing

Under the current law, shrink-wrap software licenses are of dubious value because they are rarely enforced by courts. Creating an enforceable software license for mass-distributed software, the "shrink-wrap license," is a primary goal of a new article of the Uniform Commercial Code that was reviewed by a national conference of uniform state law commissioners in San Antonio July 16.

The national conference approved the draft licensing article for distribution to elicit more public comment. A draft must be approved by two annual conferences before it is distributed to the states for enactment into law by their respective legislatures. Even before the new law takes effect, however, there is reason to believe that, unlike their cellophane-covered cousins, licenses for software distributed on-line are enforceable.

Shrink-wrap licenses are nearly always included in mass-market software. By including the software in a "read me first" envelope, the manufacturer hopes to strengthen his claim that the software is merely being licensed, not sold, to the purchaser and that the manufacturer retains some control over its use.

The distinction between a sale and a license of the software is critical in copyright law because under federal copyright law the "owner" of a copy of a computer program has the right to copy it and adapt it to other uses. A licensee does not have such rights unless authorized by the licensor.

Courts have declined to enforce shrink-wrap licenses because the license was not an effective agreement between the buyer and seller of the software or because the terms of the license were pre-empted by federal law. Printed terms on an envelope inside the shrink-wrap or a screen message in the operating software are unknown to the buyer until after the sale. Therefore, those terms are considered merely a proposed modification of the terms of the sale of the software and are not incorporated in the mutual bargain between the buyer and seller. The buyer is free to reject the manufacturer's proposal by ignoring the terms of the proposed license.

In addition to the failure of a shrink-wrap license to be included in the terms of sale as a matter of contract law, some courts have also held that a shrink-wrap license may be pre-empted by federal law if it attempts to limit the purchaser from actions that are permitted under federal copyright law.

Both of these problems may be overcome when software is distributed on-line. First, most of the federal pre-emption problems arise because federal copyright law gives the "owner" of a copy of software certain privileges that may be inconsistent with the manufacturer's interests. It is difficult to argue that the purchaser of a shrink-wrapped box of mass-market software merely acquires a license because the transaction has so may attributes of a sale. The purchaser goes into a retail outlet and walks out with the goods. For copyright purposes, the buyer has obtained a "material object" to which all the rights of an "owner of a copy" attach.

On-line distribution is different because no material object changes hands. Without a "good" changing hands, one of the cornerstones of traditional UCC sales analysis is absent. And in the absence of a "material object," it is more difficult for the buyer to establish that he is the "owner" of a "copy" of the software. On-line distribution also eliminates the largest obstacle to enforcement of license terms as a matter of contract law.

In on-line distribution, the licensee may be shown and be required to accept the terms of the license before the software is downloaded. Hitting the "accept" button to activate the downloading sequence demonstrates the licensee's agreement to the terms of the manufacturer's license. Even if the basic economic terms of the transaction had been agreed in a prior written or oral communication, such as to arrange for payment for the software, requiring the recipient to accept the license terms before receiving the download constitutes acceptance of modified terms proposed by the seller.

The new UCC article 2B, which is being considered this month, will propose some changes. Under the proposal, the purchaser of mass-market software would have accepted the terms of the mass-market license if he demonstrates his acceptance within a reasonable time after he begins using the software. Thus, a license screen that requires customer acceptance of license terms before the installation program runs would meet the requirements of the proposed law.

As a consumer protection measure, the proposal also requires that unusual license provisions or provisions different than terms specifically negotiated between the parties be pointed out to the customer before his assent to such terms is effective.

Jonathan Cain is a partner in the high-technology practice of Shaw, Pittman, Potts & Trowbridge in McLean, Va. He can be reached via e-mail at

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