Shrinkwrap Licenses in the United States

Shrinkwrap Licenses to Protect Copyrighted Software

by MICHAEL L. RUSTAD and DIANE D’ANGELO

The greatest story never told about Internet-related copyright developments is how information age companies use license agreements to protect intangible assets such as software and website content. The software industry invented the shrinkwrap license agreement, the earliest form of mass-market license, in the 1970s, and vendors began using this contracting form by the early 1980s. (1) The name shrinkwrap “evolved from the early practice of displaying the terms of the license through the plastic wrapping (shrinkwrap),” (2) and reflected a widespread practice of delivering software on a CDROM or physical media. (3) Software makers printed box-top licenses on the outside of the software CD packaging underneath cellophane shrinkwrap. Shrinkwrap refers to the preprinted standard-form license agreement that is contained in the package with the software. (4)

Software makers used shrinkwrap licenses in the early 1980s prior to the development of the World Wide Web. In the 1980s and early 1990s, there was a swirl of uncertainty over the enforceability of shrinkwrap license agreements. The first paragraph of a shrinkwrap agreement typically states that the opening of the package indicates acceptance of the license terms. (5) Contractual formation was predicated upon the user cracking open the shrinkwrap plastic
and using the software. (6) It is unclear what company first invented the shrinkwrap license agreement, and that “fact is lost in the arcane mists of computer history.” (7)

Scholars agree that end user license agreements (EULAs) were common in software industry practice by the early 1980s, and the software license agreement morphed into diverse forms over the past three decades. (8) In the early 1990s, software licensors did not know whether courts would enforce mass-market licenses such as the shrinkwrap agreement. (9)

In the new millennium, the EULA is the primary tool the copyright industry usesfor transferring information-based intellectual property that includes software, databases, and content. In the first case in which a shrinkwrap EULA was enforced, ProCD v. Zeidenberg, (10) the Seventh Circuit confirmed the validity of a shrinkwrap agreement. In ProCD, Matthew Zeidenberg purchased a copy of ProCD’s Select Phone software consisting of more than 3,000 telephone directories. (11) Zeidenberg sold access to ProCD’s software on the Internet. (12) The district court refused to enforce ProCD’s license agreement because the license agreement was not printed on the outside of the box, but inside the package. (13) The lower court also ruled the license was preempted by the U.S. Copyright Act. (14)

Judge Frank Easterbrook, writing for the Seventh Circuit, ruled ProCD’s license agreement was enforceable. (15) The court reasoned that Zeidenberg accepted the terms of the license agreement “after having an opportunity to read the license at leisure.” (16)

Moreover, the court drew upon UCC Article 2’s liberal formation rules and held that contracts could be formed in “any manner sufficient to show agreement.” (17) This bellwether decision reflected a paradigm shift in favor of judicial enforcement of mass-market EULAs. Since ProCD, software makers have largely been successful in convincing U.S. courts to treat EULAs as enforceable contracts.

Mark Lemley describes the “sea change” in the courts created by this influential case:

“Electronic contracting has experienced a sea change in the last decade. Ten years ago, courts required affirmative evidence of agreement to form a contract. No court had enforced a “shrinkwrap” license, much less treated a unilateral statement of preferences as a binding agreement. Today, by contrast, more and more courts and commentators seem willing to accept the idea that if a business writes a document and calls it a contract, courts will enforce it as a contract even if no one agrees to it. Every court to consider the issue has found “clickwrap” licenses, in which an online user clicks “I agree” to standard-form terms, enforceable. A majority of courts in the last ten years have enforced shrinkwrap licenses, on the theory that people agree to the terms by using the software they have already purchased.” (18)

A year after ProCD, Judge Easterbrook coined the term “rolling contract,” extending the “pay now, terms later” EULA paradigm he formulated in Hill v. Gateway 2000, Inc. (19) Rich and Enza Hill responded to Gateway’s advertisement in PC World Magazine by telephone, ordering a personal computer through Gateway’s representative and paying for it by credit card. The computer arrived with a software license agreement packed in the box. Gateway included a “Standard Terms and Conditions Agreement,” which stated that it would govern unless the computer was returned within thirty days. (20) One of the one-sided terms and conditions of the standard form contract was a mandatory pre-dispute arbitration clause. The Hills kept the Gateway computer for longer than thirty days and therefore accepted the terms of the standard form. (21) The Seventh Circuit held that the Hills were bound by the shrinkwrap agreement, noting the “terms inside Gateway’s box stand or fall together.” (22) After these Easterbrook opinions, courts have generally validated Internet-related license agreements to protect copyrighted software.

Resources

Notes

1. Mark A. Lemley, Intellectual Property and Shrinkwrap Licenses, 68 S. CAL. L. REV. 1239, 1241 n.5 (1995).
2. MICHAEL D. SCOTT, INTERNET AND TECHNOLOGY LAW DESK REFERENCE 888 (9th ed. 2009) (citing Peerless Wall & Window Coverings Inc. v. Synchronics, Inc., 85 F. Supp. 2d 519, 524 (W.D. Pa. 2000)).
3. See Michael L. Rustad, Commercial Law Infrastructure For The Age of Information, 16 J. MARSHALL J. COMPUTER & INFO. L. 255, 300 (1997) (noting that mass market licenses such as shrinkwrap are delivered to the user on a “take it or leave it” basis).
4. See Synchronics, 85 F. Supp. 2d at 524.
5. This example is drawn from Morgan Labs., Inc. v. Micro Data Base Sys. Inc., No. C96-3998 THE, 1997 WL 258886 (N.D. Cal. Jan. 22, 1997).
6. Lemley, supra note 1, at 1241–42.
7. Id. at 1241 n.5 (describing shrinkwrap licenses as reverse unilateral contracts).
8. See Michael J. Madison, Reconstructing the Software License, 35 LOY. U. CHI. L.J. 275, 316 (2003) (“As custom, therefore, software licensing has a historical pedigree that stretches to a maximum of thirty years. The structure and purpose of software ‘licenses’ that developed at that time . . . in fairness cannot be compared to contemporary licensing practice, which developers rely on to limit competition.”).
9. Rustad & Onufrio, supra note 82.
10. 86 F.3d 1447 (7th Cir. 1996).
11. Id. at 1449.
12. Id.
13. Id.
14. Id.
15. Id. at 1451.
16. Id. at 1452.
17. Id.
18. Mark A. Lemley, Terms of Use, 91 MINN. L. REV. 459, 459–60 (2006).
19. 105 F.3d 1147 (7th Cir. 1997).
20. Id. at 1148.
21. Id.
22. Id.