What’s a Shrinkwrap Agreement?
Shrinkwrap agreements, a term that invokes an image of a product shrink-wrapped and sealed in a box for shipment, have much more of a legal history than one might think. The concept, which predates the software industry, stems from a 1975 case that involved software on a license disk. The case concerned software that would be activated and usable once the user indicated agreement with the terms by (in this case) opening the box (and removing the product from the disk). The Shrinkwrap Agreement was born.
Shrinkwrap agreements are similar to "clickwrap" agreements, where you click on an "I accept" button, except that they omit the part where you click "I agree" after reading the terms. Computers can’t read the fine print in CDs either, so the user technically agrees to the license by simply using the product in question.
The difference between the agreements is that clickwrap agreements are usually found on software interface terms online, while shrinkwrap agreements are found on packaging as seen in the image above.
What does the law say about "shrinkwrap contracts?" Do you have any remedies if you open the box and don’t like the terms. The answer is of course that it depends. However , "as long as a consumer could have examined the terms of an agreement, whether by examining the box or the materials it contained, prior to making the decision to accept them by use, then the terms are enforceable."
Courts generally find that shrinkwrap licenses are enforceable, as long as the terms are not "clearly unconscionable." Courts look to the standards for enforceability of physical contracts: general formation principles, consideration, the K is not unconscionable, failure to perform is not excused, and the terms must have been communicated to the party. In all of these areas, courts find that a valid contract may form from a shrinkwrap agreement.
In general courts find that "shrinkwrap licenses are enforceable under the standard contract principles, whether the terms are provided on the packaging or upon first use of the product." Likewise, the court found that "clickwrap agreements are enforceable under the standard contract principles, as long as users have reasonable notice of terms and agreement to terms, a user is bound by usage."
The Lawfulness of Shrinkwrap Agreements
The legal framework for shrinkwrap agreements, while not without controversy, has been generally established through several influential cases. A cornerstone case of the enforceability of software licenses, including shrinkwrap agreements, is ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. April 18, 1996). In affirming the District Court’s ruling that a shrinkwrap license must be enforced, the 7th Circuit reviewed the requirements for an enforceable contract and noted that the acceptance of a contract can be implied by action. The 7th Circuit also distinguished the questions surrounding the enforceability of shrinkwrap licenses based upon the nature of the contract and noted that it had previously recognized "practice such as shrinkwrap licenses" in Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1149 (7th Cir. 1997).
However, the applicability of ProCD to shrinkwrap agreements outside the context of software licenses and particularly to any type of consumer transaction has varied greatly among jurisdictions. For example, the 2d Circuit held in Step-Saver Data Sys., Inc. v. Wyse Tech. (Delaware), Inc., 912 F.2d 643 (3d Cir. 1990), that an end user license agreement (EULA) for software that was required to use a computer system to which it was bundled was unenforceable. However, in an almost exact reversal of the 2d Circuit’s holding, the 3d Circuit in Step-Saver, held an EULA enforceable when the end user’s only choice was to accept or reject the bundled package.
Upsher-Smith Labs, Inc. v. Remington Prods., Inc., 961 F. Supp. 667 (E.D. Pa. 1997), while at the hands of the 3d Circuit, applied Delaware contract law (Supreme Court of Delaware) to conclude that the "take it or leave it" nature of the sale of the product required that the consumer abide by the terms of the EULA. In Upsher, the court also relied on some earlier Supreme Court of Pennsylvania Decisions relating to adhesion contracts and found that there was no valid basis to prevent the clickwrap license from being governed by contrary terms listed on a product label.
The Southern District of New York in Specht v. Netscape Communications Corp, 150 F. Supp. 2d 403 (S.D.N.Y.), went so far as to declare a software shrinkwrap license invalid and unenforceable. In Specht, the court ruled that Netscape could not rely upon its EULA because no assent could be found since the download screen specifically stated that the user needed to read the terms of agreement and that assent to the terms was limited to the acceptance of the software after the "complete and specific notice." With respect to a shrinkwrap license, "the question is not whether this contracting party had adequate notice of the terms, but whether these electronic contracting procedures were sufficient to make assent to a license binding when the consumer effectively is left with no choice." Id. at 416. However, the Southern District of Ohio has found a shrinkwrap agreement to be binding where the software was shipped to the consumer together with the shrinkwrap agreement and the consumer had not read the shrinkwrap license but reasonably could have done so. Cf., Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997).
Typical Provisions in Shrinkwrap Agreements
Although there are unique terms and conditions that are particular to each shrinkwrap license agreement, there are many standard terms and conditions that are commonly included.
Such terms and conditions may include, among other things:
Restrictions on Licensing the Software
The terms and conditions of a typical software license agreement limit licensee from licensing its own individual, separate sub-licenses. This effectively prohibits licensee from selling its copy of the software, under its own name, to another person.
Confidentiality/Use of Marks
Most license agreements will include language concerning confidential information concerning the software. This is important to protect product specifications, code and other trade secrets from discovery, or use by licensee or its affiliates. Also, most software licenses will have terms and conditions concerning custody and control of product trademarks, as well as restrictions upon the use of such marks.
Indemnification
A typical license agreement will require the customer to indemnify the licensor against claims by third parties arising from licensee’s acts or omissions.
Does the License Agreement Bind Third Parties?
There have been cases where a software license agreement between a licensor and a licensee also binds third parties; e.g., subcontractors who do work for the licensee. There have also been cases where it does not. With respect to computer software, however, a license agreement ordinarily may be enforced against a third party if the third party received a copy of the software and/or a copy of the license agreement, and uses the software in any way. See, e.g., Compton v. 4KIDS Entm’t.
In practical terms, many of the terms and conditions common to a software license agreement are beneficial to the licensor. The terms and conditions of a shrinkwrap software license agreement that benefit the licensee will include simple, easy to read terms and conditions that are clear and unambiguous.
Consumer Rights Regarding Shrinkwrap Agreements
The burgeoning use of shrinkwrap agreements has drawn and continues to draw the attention of consumer advocacy groups, state attorneys general, and other public watchdogs. Assertions are made that many shrinkwrap agreements are unclear and one-sided and that some shrinkwrap agreements may deny rights afforded consumers under other laws. Much of the concern focuses on provisions that waive or otherwise diminish rights that consumers would otherwise have in product returns and refunds, warranties, product care, safety, health and hazardous substances, and privacy. More recently, there have been challenges to shrinkwrap agreements that purport to preclude class-action suits.
Some courts have expressed concern that parties may be unjustifiably bound by shrinkwrap agreements they have no realistic ability to review. Other courts have expressed concern that the use of shrinkwrap agreements has the potential to disenfranchise consumers from protections afforded them under other state and federal laws. Such concerns, however, have not resulted in a lack of enforceability for shrinkwrap agreements. In the case of shrinkwrap agreements with online purchases, the Federal Trade Commission has stated that "online sellers must clearly and conspicuously disclose all material terms of the sale, including any restrictions on return and exchange policies." Similar guidelines apply to transactions through the mail and by telephone. Moreover, Section 1-201(10) of the U.C.C. requires that consumer contracts must be "conspicuous" while the consumer contracts themselves should "call attention to" contract terms considered to disadvantage the consumer.
Accordingly, given available resources to detect and challenge certain terms of shrinkwrap contracts and such scrutiny, it is sometimes difficult to understand why continued challenges to shrinkwrap agreements are made. Some challenges appear to have more to do with commercial speech issues than other issues least of all consumer issues.
Issues and Controversies with Shrinkwrap Agreements
One of the major controversies surrounding the use of shrinkwrap agreements is the issue of consent. Are customers really consenting to the terms of the agreement when they click "I Agree" before even having a chance to review the terms? Or do they effectively have no choice but to accept them if they want to use the product? The balance between allowing businesses to protect their interests and preserving the rights of consumers is also a point of contention . Some argue that because of this digital age and the relative ease in which products and licenses can be downloaded, there is an increased likelihood that the terms set forth in these agreements will be violated. As such, there is a greater need for the protection they provide. Critics, however, express concern that businesses and manufacturers might take advantage of this opportunity to push unfavorable terms onto the customers. The courts continue to evaluate the enforceability of shrinkwrap agreements in light of protecting customer rights and interests against the interests of manufacturers and retailers.
Examples of Shrinkwrap Agreements
Several landmark cases help illustrate the enforceability and applicability of shrinkwrap agreements in the commercial and legal landscape.
ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) is one of the seminal cases on this issue. The Court of Appeals for the Seventh Circuit found that "the failure to read a contract before signing it does not justify non-performance and will not excuse liability for breach." In this case, ProCD was a computer software manufacturer that developed a computer program containing valuable information such as the names and addresses of hundreds of thousands of businesses and individuals. The individuals and businesses derived their information from more than sixty-five publicly available data sources. ProCD intended to sell this information to businesses; however, selling the information to individual customers was prohibited by the terms and conditions of the license. Zeidenberg was an individual who obtained a copy of the ProCD software at an electronics store for $199.95, removed the product from its box, and proceeded to install the software in opposition to the terms and conditions of the license. Upon discovering this, ProCD sued Zeidenberg for breach of contract. The Court determined that the software was licensed, not sold, so the terms and conditions of the license were applicable to Zeidenberg. Ultimately, the Court afforded the license the same protection afforded to tangible property.
Another prominent case involving shrinkwrap agreements comes from the federal court for the Eastern District of Pennsylvania. In Oracle v. Realmax, Inc., 886 F. Supp. 300 (E.D. Pa. 1995), the court determined whether downloading an electronic copy of an Oracle license agreement onto a computer constituted sufficient notice of a clickwrap agreement. The Oracle license agreement stated that individuals downloading the software would receive "an electronic copy of the license agreement after downloading the Software." In its decision, the Court found that "[i]ndividuals cannot be considered bona fide users of the Software, or bound by the terms contained in the Software License Agreement unless they have actually received the Agreement." Absent actual receipt of the terms and conditions, the Court determined that sufficient notice had not been given to the individuals.
The Future of Shrinkwrap Agreements
The future of shrinkwrap agreements is one of simplification. As digital distribution expands to more products and services, consumers will see fewer restrictions on their use of products. For example, gaming companies are already moving away from ownership-based models. Electronic Arts’ Origin "access" explains the new mindset: With Origin you no longer own games; you only buy access to them. You can play the game as long as the game is in the Origin public library, or until you lose your license. Rather than purchase a status of ownership , consumers must pay for access to content. Digital distribution of products and services is set to continue to expand. As virtual reality products come to market, consumers will be given access to the system’s products rather than owning them. To promote and protect their brands in a digital world, companies will increasingly trend away from their restricted, onerous customer agreements because, as you know, consumers dislike them. It could be that the most enforceable, restrictive customer terms will be saved for products and services that are not digitally distributed.