Tabberone is pronounced tab ber won |
|
The Tabberone™ Archives These articles concern what we consider major trademark and copyright issues. They are usually reproduced with the original source referenced. Bear in mind, these articles are copyrighted and commercial use without permission of the authors may be considered infringement. The intended use here is educational, commentary and non-commercial. The reason they are reproduced in the Tabberone™ Archives, as opposed to just providing a link, is because links disappear and pages are removed. That presents a messy confirmation process that is annoying to the browser (you) but also presents a credibility issue. We do not claim any rights in these pieces. Do not regard the absence of a copyright statement or © to mean the article is not copyrighted. Some sites do not have a copyright statement. When an article or a comment is posted on the internet by the copyright owner, the owner is seeking a world-wide, 24/7 audience; sometimes for a limited amount of time, sometimes indefinitely. In essence, an internet posting intentionally relinquishes one's copyright for exclusivity because the owner has posted it on the internet to been seen by everyone, everywhere. The Tabberone™ Archives non-commercial duplication of the posting is simply a continuance of the original wishes of the copyright owner. We post these articles for reference, for commentary and for confirmarion of our position. |
Source: http://www.nesl.edu/lawrev/VOL32/2/MORRILL.HTM August 25, 2008 - content has not been altered. |
Contract Formation and the Shrink Wrap License: Introduction When a consumer walks into a retail store and buys a mass marketed item of software, what rights to the software do they acquire, and what legal control over it does the vendor retain? Are their respective rights determined by federal copyright law, in addition to any expressly negotiated terms? Or, can the vendor dictate the rights of the parties by asserting that the sale is conditioned on a shrink-wrap license, the presence of which the consumer is most likely not aware until he gets the product home? In their limited legal history, shrink-wrap licenses have not fared well. Courts typically have either found them unenforceable or modified them.(1) In a break from prior jurisprudence on this issue, the Seventh Circuit Court of Appeals, in ProCD, Inc. v. Zeidenberg,(2) held the terms of a shrink-wrap license fully enforceable.(3) ProCD is distinguishable from prior shrink-wrap cases in that it deals with a pure retail/over-the-counter transaction.(4) Retail stores sell an enormous amount of software each year.(5) It is the average consumer, making such an over-the-counter purchase, who requires the greatest protection from sales terms hidden in shrink-wrap licenses.(6) The Seventh Circuit holding in ProCD represents a substantial shift in power to software vendors, if seen as strong precedent. Herein lies the importance of this case. This Comment examines ProCD's departure from prior jurisprudence on shrink-wrap licenses.(7) It explores the court's logic to determine whether the holding is an anomaly, based on the unusual facts of the case, or a signal of where the law is heading on this issue.(8) There are many legal issues in play when the enforceability of a shrink-wrap license is challenged.(9) Contract formation and interpretation questions, copyright issues, and federal preemption are commonly involved.(10) Whether the license is enforceable turns, in large part, on how one views the sales contract for the particular copy of software involved.(11) When the consumer properly accepted the vendor's offer to sell then becomes the pivotal question.(12) The decision of the Seventh Circuit hinged on this point.(13) This timing question is the primary focus of this Comment.(14) Part II of the Comment discusses shrink-wrap licenses in general and explains why vendors of software so commonly utilize them.(15) Part III of the Comment examines how prior courts have handled shrink-wrap licenses, including the significance of treating shrink-wrap licenses as terms of the sales contract versus actual licenses.(16) Part IV.A-B examines the ProCD case, specifically, the facts of the case and the district court's holding.(17) The Seventh Circuit Court of Appeals' reversal of the district court is then reviewed in Part IV.C.(18) Part V analyzes the reasoning of the appeals court.(19) This Comment concludes that, while justice was done in this particular case, the reasoning employed by the Seventh Circuit in reaching its decision was flawed.(20) It argues that this case should not be looked to as precedent for the common consumer transaction.(21) The Comment takes the position that the Seventh Circuit overlooked some fundamentals of contract formation, which lead to a contrary conclusion in the retail setting.(22) Finally, Part VI proposes some simple steps to avoid the problems posed by point of sale presentment of shrink-wrap licenses.(23) Background
A. What is a Shrink-Wrap License Anyway? Much of what consumers buy comes encased in plastic shrink-wrapping.(24) Books, food products, cigarettes, and over-the-counter drugs are commonly sold with the package covered with shrink-wrap.(25) Shrink-wrap is typically used to preserve the product and ensure that no one tampers with the contents.(26) Legal innovation being what it is, shrink-wrap has been given an added function when used on packages of computer software.(27) Vendors of computer software use the plastic shrink-wrap as a mechanism of attaching the terms under which they purport to make their product available.(28) Software vendors have followed this practice throughout their history.(29) In the mass market/consumer context, the shrink-wrap license provides an efficient way for the software vendor to dictate the terms of each sale.(30) When a business purchases a specialized software program, it typically negotiates, with the vendor, its rights of use in the software.(31) In the mass market setting, however, the negotiation of terms for each sale is clearly impractical.(32) In response to this problem, software vendors adopted the practice of attaching licensing language to the packaging of each copy of their software sold.(33) These licenses are known commonly as "box top licenses," "shrink-wrap licenses" and "tear me open licenses."(34) Vendors of software often call them "end user licenses."(35) While the language informing the purchaser of the presence of the license is often imprinted on the shrink-wrap that encases the product, hence the common nickname, this is not always the case.(36) Notice of the terms is often printed on the box in which the software is sold.(37) Typically, the complete licensing agreement is found inside of the package, in the software itself, or both.(38) Whatever their precise form, the general idea is the same. By opening the product, or by continuing to use the product after viewing the license terms, the user is said to have manifested assent to be bound by the license.(39) The problem is that the average consumer is highly unlikely to be aware of the license before they pay for the software and take it home.(40) Indeed, by their very nature, the acts called for as acceptance of the license, opening the product and using it, would not take place in the store--the point where the reasonable consumer would see the sales contract as having been consumated. B. The General Goals of Shrink-Wrap Licenses Vendors of computer software routinely assert that they do not sell copies of their program; rather they license the right to use particular copies.(41) This practice is in large part designed to "preserve [the] proprietary rights" of the owner of the software copyright.(42) Computer software is highly susceptible to abuses that infringe the proprietary rights of the copyright holder.(43) Licenses commonly seek to prevent resale of the software, renting of the software, use of the software in multiple machines by the original purchaser, and reverse engineering of the software to obtain its object code for use in designing a competing software package.(44) In addition, such licenses typically purport to disclaim any implied warranties and limit the vendor's liability.(45) C. The Benefits to the Vendor of Calling It a License Instead of a Sale The characterization of the transfer as granting a license, as opposed to making a sale, has tremendous legal consequences for consumers and vendors alike.(46) The main benefit to the vendor, of such a characterization, is that they retain a greater degree of control over the copy, and thus greater protection of their interests, than they would have if the copy was actually sold.(47) In the past, such licenses provided the only protection available to software vendors.(48) Today, software vendors are afforded protection under federal law.(49) When shrink-wrap licenses first came into use, software was not afforded extensive legal protection.(50) In the 1970s and early 1980s whether copyright and/or patent law even applied to computer software was a matter for debate.(51) Eventually, the law began to address the unique problems facing software, and greater protection was extended to software producers.(52) In an interesting development, software makers who, acting defensively, once sought protection where the law afforded them little, now attempt to take away consumer rights held under federal law--a shift to the offense.(53) Indeed, the very attempt to characterize the transaction as licensing as opposed to a sale is, in large part, designed to block consumer rights held under the first sale doctrine of federal copyright law.(54) The first sale doctrine grants the purchaser of a copy of a copyrighted item, including software, the right to resell that particular copy.(55) As software is easily copied and downloaded onto hard-drives, this doctrine poses a special threat to software vendors. The Copyright Act was amended to address this problem.(56) Nonetheless, the threat of software being shared by multiple parties or resold remains under the first sale doctrine.(57) If a software vendor can assert that a particular copy of its program has not actually been sold, the first sale doctrine does not apply.(58) Additionally, certain elements of computer software are ineligible for copyright protection. For example, in the case at hand, ProCD's alphebetical phone lists are ineligible for copyright protection under the Feist doctrine.(59) In such circumstances, the shrink-wrap provides an efficient way to gain the desired level of protection.(60) D. Application of the Uniform Commercial Code to Shrink-Wrap Licenses Software vendors prefer to state that they grant to consumers only a license to use their program.(61) Most courts agree, however, that a consumer purchase of software is a sale of goods.(62) A sale "consists in the passing of title from the seller to the buyer for a price."(63) Generally speaking, a license is a temporary right of use.(64) The typical elements of a license agreement are: (1) the licensee makes periodic payments; (2) the licensor retains the title to the goods; and (3) the license expires at a definite time.(65) In the typical software sales transaction, none of these indicia are present.(66) Accordingly, "[b]ecause the shrink-wrap license does not meet these criteria, the prevailing view is that the transaction is a sale of goods and not a true license agreement."(67) The consequence of this determination is that Article 2 of the Uniform Commercial Code (U.C.C.), in addition to the common law of contracts, determines the rights and liabilities of the parties to the transaction.(68) Pre-ProCD Jurisprudence on Shrink-Wrap Licenses
A. Prior Federal Court Rulings As the appeals court in ProCD accurately points out, the volume of literature on shrink-wrap licenses exceeds, by a substantial margin, the actual number of cases dealing with them.(69) The three major cases on point, prior to ProCD, are discussed below.(70) None of these cases touch on the over-the-counter/retail transaction involved in the case at hand. 1. Vault Corp. v. Quaid Software Ltd. In 1988, the Fifth Circuit Court of Appeals held a shrink-wrap license, which prohibited decompilation and disassembly of a software program, unenforceable.(71) Vault Corp. (Vault), produced a program called PROLOK, which was designed to prevent the copying of computer software programs.(72) Each copy of PROLOK sold came with a licensing agreement which stipulated that use of PROLOK constituted acceptance of the license.(73) Among other things, the license purported to prohibit the decompilation and disassembly of PROLOK and contained a warranty disclaimer.(74) A later version of this agreement included a "choice of law clause adopting Louisiana law."(75) At that time, Louisiana had a licensing act that gave greater protection than the federal copyright act.(76) Quaid Software Ltd. (Quaid) developed a product, RAMKEY, designed specifically to defeat PROLOK.(77) Vault brought an action against Quaid for copyright infringement and violation of the licensing agreement.(78) The majority of the Vault decision dealt with the federal copyright claims.(79) The Fifth Circuit Court of Appeals upheld the district court's dismissal of Vault's copyright claims.(80) The appeals court then turned to the state law challenge grounded on the alleged breach of the license agreement.(81) Vault asserted that, in decompiling PROLOK to design RAMKEY, Quaid had violated the license's prohibition against such activity.(82) The court found that section 117 of the Copyright Act was in conflict with Louisiana's License Act as to its prohibition of decompilation or disassembly, and, thus, the state statute was preempted.(83) Due to the preemption, the prohibition in the license was unenforceable.(84) 2. Step-Saver Data Systems v. Wyse Technology In 1991, the Third Circuit Court of Appeals refused to enforce a shrink-wrap license using a "battle of the forms" analysis.(85) Step-Saver Data Systems (Step-Saver) marketed computer systems, software, and hardware together.(86) Step-Saver selected an operating system from The Software Link (TSL) and terminals from Wyse Technology (Wyse).(87) As soon as the systems were put in place, Step-Saver began receiving complaints from their customers.(88) Step-Saver asked Wyse and TSL to look into the problems.(89) When the three were not able to reach a resolution, Step-Saver filed suit against both for breach of warranty, and against TSL for intentional misrepresentation.(90) The district court dismissed TSL from the action based on warranty disclaimers that were contained in the box-top license that accompanied their product.(91) The court began by noting that in the contract negotiation process, Step-Saver and TSL did not discuss the terms of the box-top license.(92) The court stated that the dispute was not whether a sales contract existed, but rather what its terms were.(93) The court viewed the box-top license as "a written confirmation containing additional terms," namely, the license.(94) The court held that because the license would materially alter the parties' agreement, it was not part of the agreement.(95) 3. Arizona Retail Systems v. Software Link, Inc. In 1993, in a case involving multiple transactions between a vendor and purchaser, the United States District Court for the District of Arizona held one license enforceable and subsequent ones unenforceable.(96) The specific matter at issue in this case was the enforceability of warranty disclaimers and liability limitations included in the shrink-wrap license.(97) The Software Link (TSL) "designs and sells software."(98) Arizona Retail Systems (Arizona Retail) "is a . . . retailer that, among other things . . . markets . . . multi-user computer systems."(99) Arizona Retail ordered a copy of one of TSL's software packages.(100) Arizona Retail received two copies of the system, a live copy and a test copy.(101) The discs containing the software came encased in plastic shrink-wrap that included a "Limited Use License Agreement."(102) Arizona Retail evaluated the system, read the license, and elected to keep the product.(103) For the next year, Arizona Retail made numerous purchases, over the phone, of additional copies of the product.(104) Problems then developed with the product, and Arizona Retail sued for breach of warranty.(105) The court held that the software license, which was included with the original live disc sent to Arizona Retail, was enforceable.(106) The court based its decision on the fact that Arizona Retail was fully aware of the terms of the license from use of the test disc and had received notice on the outside of the live disc package that the same terms applied.(107) The court further reasoned that Arizona Retail accepted TSL's offer to sell by opening the envelope containing the live copy, and that acceptance included the terms of the license.(108) As to the subsequent sales, the court held that the license did not apply.(109) The distinction between the latter sales and the original one was that the negotiation for the latter sales were completed over the phone, and the warranty and liability terms were never discussed.(110) The licenses, however, were attached to each copy of the program sent.(111) TSL argued that the license agreement was enforceable either as: (1) a valid contract modification under U.C.C. § 2-209; (2) "a conditional acceptance of ARS's offer to purchase;" or (3) non-material terms that, under § 2-207, became part of their contract.(112) TSL asserted that the license agreement was a valid part of their contract under either of the three options.(113) The court rejected all three arguments.(114) It also noted that to allow this to be termed a conditional acceptance would violate the goal of U.C.C. § 2-207 to end "the battle of the forms."(115) The court further opined that the realities of the marketplace make it easier for the seller to make clear the terms they purport to sell their goods under, than to impose a duty of inspection and rejection upon the buyer.(116) The Case: ProCD, Inc. v. Zeidenberg
A. The Facts of the Case ProCD, Inc. (ProCD) is a Delaware corporation, with its principal place of business in Danvers, Massachusetts.(117) The corporation compiled a vast phone directory and then placed it on CD-ROM discs.(118) The product is marketed under the name "Select Phone."(119) Select Phone holds over 95 million residential and commercial listings.(120) ProCD sells commercial and non-commercial versions of Select Phone.(121) While the two versions contain essentially the same data, the commercial version is more expensive.(122) This price discrimination is practiced because it is believed that the average consumer will not buy Select Phone at the higher commercial price.(123) In order to enlarge their market, therefore, ProCD sells Select Phone to non-commercial users at a lower rate.(124) Since it is impossible for ProCD to know who takes Select Phone off the store shelf, one of the terms of ProCD's license restricts the non-commercial version to non-commercial uses only.(125) Select Phone is sold "in boxes containing a set of [CD-ROM] discs and a user guide."(126) The Select Phone directory includes the "full names, street addresses, telephone numbers, zip codes and industry or `SIC' codes" of the parties in it.(127) ProCD spent approximately $10 million collecting this information from more than 3000 publicly available telephone directories.(128) In addition to the raw data, Select Phone includes application software that is "used to access, retrieve and download the data."(129) The software enables a search of the database by use of several different search commands.(130) ProCD purports to sell copies of Select Phone subject to a "`Single User License Agreement.'"(131) The agreement is mentioned on the outside of the box, "in one place in small print."(132) Inside the box is a users guide in which the text of the license is contained.(133) The beginning of the licensing agreement states: Please read this license carefully before using the software or accessing the listings contained on the discs. By using the discs and the listings licensed to you, you agree to be bound by the terms of this License. If you do not agree to the terms of this License, promptly return all copies of the software, listings that may have been exported, the discs and the User Guide to the place where you obtained it.(134) In addition, the software is designed so that when used, a reminder flashes across the screen stating that the product is subject to the licensing agreement.(135) This notice states: "The listings contained within this product are subject to a License Agreement. Please refer to the Help menu or to the Users Guide."(136) Other screens flash additional warnings.(137) Matthew Zeidenberg, the defendant, was a Wisconsin resident pursuing a Ph.D. in computer science.(138) In 1994, Zeidenberg purchased a copy of Select Phone.(139) He decided that he could "download data from Select Phone and make it available to third parties over the Internet for commercial purposes."(140) Though he was aware of ProCD's assertions that his use of the product was contingent on a licensing agreement, Zeidenberg disregarded it, believing that it was not binding.(141) Zeidenberg asserted that he was not, and could not have been, aware of the license at the time of purchase.(142) In April of 1995, after purchasing an updated version of Select Phone, Zeidenberg opened a business, Silken Mountain Web Services, Inc. (Silken Mountain).(143) Zeidenberg created the corporation to "[make] a database of telephone listings available over the Internet."(144) Silken Mountain compiled their own database, in part, by downloading data that had been loaded into Zeidenberg's personal computer from Select Phone and adding it to its own database.(145) While Zeidenberg used Select Phone's raw data (i.e. the phone lists), he wrote his own software program to access this data.(146) His software allowed for a more limited search than could be done on the Select Phone software.(147) Subsequently, Zeidenberg/Silken Mountain entered into a contract with Branch Information Systems (Branch), under which Branch gave Zeidenberg access to the Internet to make his product available.(148) ProCD learned of this activity and "demanded that [Zeidenberg/Silken Mountain] discontinue their activity immediately."(149) Zeidenberg refused.(150) In response to ProCD's complaint, Branch stopped doing business with Zeidenberg.(151) Zeidenberg then entered into a contract with another Internet access provider, Ivory Tower Information Services (Ivory Tower).(152) Anticipating a renewed challenge from ProCD, this contract required Ivory Tower to continue making the product available until "ordered by a court to stop."(153) B. The District Court's Ruling
1. Procedural Developments In September of 1995, ProCD brought an action against Zeidenberg seeking injunctive relief and monetary damages for alleged violations of their license agreement.(154) ProCD asserted that Zeidenberg had violated the license agreement by transmitting the product to a third party and by using it for commercial purposes.(155) The action was brought under the Federal Copyright Act,(156) the Wisconsin Computer Crimes Act,(157) and Wisconsin contract and tort law.(158) After a hearing on September 22, 1995, ProCD's motion for preliminary injunction was granted.(159) ProCD and Zeidenberg filed cross motions for summary judgment.(160) The district court allowed Zeidenberg's motion, denied ProCD's, and dissolved the preliminary injunction.(161) In addition to the shrink-wrap license, the court had to contend with several other issues.(162) 2. The Copyright Issues First, the court addressed and rejected ProCD's contention that what Zeidenberg had done amounted to an infringement of its copyright.(163) The court examined the raw data and the software used to access the data separately.(164) Citing to a recent United States Supreme Court decision, which held the contents of the white pages of a phone book ineligible for federal copyright protection,(165) the court rejected ProCD's claim that their phone lists were entitled to copyright protection.(166) The court then addressed the copyrightability of the software used to search the phone lists.(167) The court held that the software is entitled to copyright protection as the product of "original expression and creativity."(168) However, the district court concluded that, as Zeidenberg had not copied the software, he had not infringed on ProCD's copyright.(169) 3. The License Agreement The court next addressed the software license agreement.(170) The court stated that it would treat Zeidenberg's purchase as a sale of goods under the U.C.C., as opposed to a license.(171) The court's analysis focused on the timing question--when was the contract for sale of the software formed?(172) The court also considered whether the license, if not part of the original agreement, could be integrated into the contract by some other means.(173) The court noted that U.C.C. § 2-206 sets out the basic framework for contract formation, offer and acceptance.(174) By placing its product on the shelf of a retail store, ProCD made an offer under § 2-206.(175) By taking the product off the shelf, taking it to the counter, and exchanging money for it, Zeidenberg accepted ProCD's offer in a manner reasonable under the circumstances, as called for under § 2-206(1)(a).(176) The exchange of money for goods was seen as "conduct sufficient to create a contract under section 2-204."(177) The district court rejected ProCD's contention that action beyond payment of the sale price was required to form the sales contract.(178) The court next addressed ProCD's argument that Zeidenberg was vested with a right of inspection, and his acceptance was "subject to [his] right of inspection and revocation that [he] did not exercise."(179) In ProCD's view, Zeidenberg's failure to return Select Phone, after having an opportunity to inspect the software and the license, constituted acceptance of its offer to sell.(180) The court found inspection and revocation rights inoperative in this context.(181) "Plaintiff argues that defendant's acceptance of the software was contingent upon their rights of inspection, rejection or revocation, but sections 2-204 and 2-206 do not mention any such rights. Sections 2-602 and 2-608 . . . offer such rights, yet these sections do not apply in this context."(182) The court noted that § 2-602 refers to the right to inspect goods prior to acceptance to protect the buyer from being stuck with "damaged or . . . otherwise unsatisfactory" goods.(183) As to § 2-608, the court noted that it applies to situations where the goods do not conform to what was contracted for.(184) The court observed that the dispute between ProCD and Zeidenberg did not involve any allegation of defect or non-conformity.(185) Rather, the dispute was how the sales contract would limit Zeidenberg's use of the product.(186) Ultimately, the court saw § 2-207(187) and § 2-209(188) as the controlling Code sections.(189) The court reviewed Step-Saver Data Systems, Inc. v. Wyse Technology(190) and Arizona Retail Systems v. Software Link.(191) It interpreted these cases as supporting two possible ways to view ProCD's license.(192) Either "the terms of the user agreement were incorporated into plaintiff's sales offer by the reference on the outside of the Select Phone package"(193) or "the user agreement was not included in plaintiff's sales offer and represents either a proposed modification to the sales agreement under U.C.C. § 2-209 or a written confirmation of a previously established contract under U.C.C. § 2-207."(194) In Arizona Retail, a set of shrink-wrap terms were held enforceable where the license was known to the party seeking to challenge the license at the time of contract formation.(195) The court in ProCD found that, unlike the party in Arizona Retail, Zeidenberg did not know of the license terms at the time the sales contract was formed.(196) As a result, the terms were not part of the initial contract.(197) The court also struck down ProCD's assertion that the terms should be binding as to the subsequent purchases by Zeidenberg because he was clearly aware of the license at the time of the subsequent sales from his prior use of Select Phone.(198) The court also rejected ProCD's classification of the terms as valid modifications of the contract, to which Zeidenberg assented by using the product after becoming aware of them.(199) The district court held that § 2-209 requires express assent to proposed contract modifications; the assent cannot be implied.(200) The court also refused to hold the terms of the license binding under either § 2-209 or § 2-207.(201) Section 2-209 was found invalid because assent is required for contract modification and none was present here.(202) Regarding § 2-207, the court opined that "[b]ecause [it] is concerned primarily with contract wars between merchants, it is preferable to analyze the Select Phone user agreement under 2-209."(203) The court held however that § 2-207 would still strike the user agreement because there was no showing that Zeidenberg assented to the terms.(204) The remainder of the court's decision focused on issues relating to preemption of the state law causes of action.(205) The court held that even if the terms are in the contract, federal copyright law would preempt any state based contract rights.(206) C. The Seventh Circuit Court of Appeals Reverses
1. Contract Formation Issues ProCD appealed the district court's holding to the Seventh Circuit Court of Appeals.(207) On June 20, 1996, the appeals court overturned the district court, holding the shrink-wrap license enforceable.(208) The appeals court followed the same analytical road as the district court, treating the license as terms of a contract, in a sale of goods, governed by the U.C.C.(209) If the shrink-wrap license terms are viewed as contract terms, then whether or not they are part of the contract depends on when the contract was formed.(210) The only terms that a court will enforce are those known to the parties, at the time of contract formation, and to which the parties agree.(211) The district court held that the contract was formed at the counter of the retail store, at which time the consumer did not know the terms of the license, and thus had not agreed to them.(212) The appeals court, however, rolled the moment of contract formation ahead to a time when Zeidenberg either knew of the license terms or had a reasonable opportunity to know of them, resulting in their becoming part of the contract.(213) As a result, the appeals court found that the shrink-wrap license would be enforceable "unless [the] terms are objectionable on grounds applicable to contracts in general."(214) The appeals court held that ProCD's offer was not properly accepted by simply exchanging money for the product and leaving the store.(215) As the "master of the offer" the seller can specify what constitutes acceptance.(216) The court stated that a seller is not limited to a money for goods exchange as the only means of acceptance they can require.(217) In the court's view, ProCD required something more.(218) The additional conduct called for by ProCD was for Zeidenberg to take Select Phone home, have the opportunity to view the license terms, and then elect to keep it.(219) All terms known to Zeidenberg, according to ProCD, when he accepted in this manner, became part of the contract.(220) The appeals court held that Zeidenberg performed the acts called for by ProCD, and, therefore, the contract included the license.(221) 2. Money Now, Terms Later As Routine Commercial Practice The appeals court found that post payment presentment of terms is a routine commercial practice.(222) It noted that "[t]ransactions in which the exchange of money precedes the communication of detailed terms are common." (223) To support this conclusion, the court provided examples of other consumer transactions where this occurs, such as the purchase of: insurance, airline tickets, concert tickets, radios, and prescription drugs.(224) The court also noted that a growing percentage of software sales take place on-line where there is no tangible object transferred. (225) It opined that, in on-line transactions, because there is no box, there is no opportunity to present the license terms prior to the transfer of the product. (226) The court seemed to believe that requiring the terms to be presented prior to the sale would result in on-line transactions being free of any restrictive licensing terms. This reasoning, however, is directly challenged by other commentators. (227) 3. Power To Return The Software The appeals court held that vesting Zeidenberg with power to return the software, after reviewing it, is consistent with Article 2 of the U.C.C. and demonstrates that the U.C.C. recognized that, in certain transactions, the purchaser can receive the goods, and still not be finally bound to keep them.(228) The court pointed to § 2-606(b) to "reinforce"(229) the position that it is acceptable under the U.C.C. for the maker of the offer to allow an inspection of the goods prior to the buyer being bound to keep them.(230) Under § 2-606(1)(b), "acceptance of the goods occurs when the buyer (b) fails to make an effective rejection . . . [after] the buyer has had a reasonable opportunity to inspect [the goods]."(231) Recognizing that this did not pertain to the formation of the contract, the court presented § 2-206(1)(b) to support the assertion that the U.C.C. allows "the parties to structure their relationship so that the buyer has a chance to make a final decision after a detailed review."(232) However, the court does appear to intermingle the concept of acceptance of goods with acceptance of an offer.(233) 4. Placement And Prominence Of The Shrink-Wrap Terms Having found that the contract was formed after Zeidenberg took the software home and used it, the appeals court next turned to the placement of the notice of the licensing terms.(234) The appeals court took the position that the U.C.C. does not require notice of the shrink-wrap terms to be given with any "special prominence."(235) The appeals court further stated that none of the prior cases dealing with shrink-wrap licenses provide any guidance on the issue of the shrink-wrap license at hand.(236) 5. Shrink-Wrap Terms As Part of The Product The court also observed that the workings of the marketplace offer protection to the consumer from undesirable shrink-wrap license/contract terms.(237) It opined that the license is part and parcel of the product, and it would be unfair to software vendors to allow consumers to "pick and choose" what parts of the product they want.(238) The court asserted that if a consumer doesn't like the makeup of a particular product--including the license--they should simply buy another product.(239) It stated that it would be an improper exercise of judicial power, and bad for consumers as a whole, to allow Zeidenberg to take what he likes and disregard what he does not like.(240) In the court's view, a consumer, empowered with the right of rejection under the U.C.C., who finds a software licensing agreement unpalatable can return the product and seek out one with less restrictive terms.(241) Analysis On the unusual facts of this case, the appeals court reached the correct result, but for the wrong reasons.(242) In reaching its conclusion, the court ignored some basic principles of contract law and warped others.(243) The holding of the appeals court is likely attributable to its attempt to reach justice in this one case and molding the law to achieve that goal. Zeidenberg was, in all likelihood, fully aware of the license when he purchased Select Phone, yet chose to ignore it.(244) ProCD was represented by a large and powerful law firm; Zeidenberg was not.(245) The combination of this David versus Goliath contest and the unsympathetic position of Zeidenberg was likely the driving, yet unspoken, reason for this decision. The danger with such judicial wand-waving, however, is that it establishes faulty precedent.(246) A. The Seventh Circuit Court of Appeals' Logic Was Flawed The appeals court stated that it would decide the case following the U.C.C. and the common law of contracts.(247) Under the U.C.C. and common law, however, the contract was formed when the consumer paid for the good and walked out of the store.(248) This is the fatal flaw in the court's logic. 1. The Court's Reliance on U.C.C. § 2-204 The heart of the appeals court's logic is that ProCD called for acceptance of its offer by conduct beyond simple tender of payment and walking out of the store with the software.(249) The court stated, "ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure."(250) As the consumer was aware of the license at that time, the court reasoned, the license was enforceable.(251) In reaching this conclusion the court relied on U.C.C. § 2-204(1).(252) Both the district court and the appeals court walk their analyses through the basic notions of offer and acceptance.(253) Section 2-204 lays out some basic principals of contract formation.(254) It makes formation an easier and less rigid process than it was under the common law.(255) The U.C.C. is basically silent on what constitutes an offer.(256) Under § 1-103, when the U.C.C. is silent on an issue, common law principals govern.(257) The Second Restatement of Contracts defines an offer as "the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it."(258) U.C.C. § 2-206 lays out the specific rules for acceptance.(259) 2. Retail Sales Contracts Normally Complete at Store As noted by the district court, in Wisconsin, a "sales contract results when [the] customer pays [the] purchase price and departs with [an] item."(260) Numerous courts have similarly held that in a retail context, the sales contract is completed by the time the consumer departs from the store.(261) It is presumed by both the district court and the appeals court that the presence of the good on the shelf constituted an offer.(262) There is also a substantial body of law which holds that advertisement of goods, or their placement in a store, is a mere solicitation of offers.(263) Under either view, however, the outcome is the same in that the contract is formed by the time the buyer departs from the store. 3. ProCD Failed to Clearly Convey Their Desired Mode of Acceptance ProCD sought something beyond this ordinary means of acceptance.(264) In addition to paying the purchase price and taking physical possession of the good, ProCD purported to require reading, or having the chance to read, the license and then electing to keep the good.(265) U.C.C. § 2-206 states, "[u]nless otherwise unambiguously indicated by the language or circumstances: (a) An offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances."(266) Point one of the official comment to §2-206 notes, "[a]ny reasonable manner of acceptance is intended to be regarded as available unless the offeror has made quite clear that it will not be acceptable."(267) The offeror is free to require anything as acceptance, however bizarre,(268) but "[i]f the mode of acceptance is unclear . . . the ambiguity is resolved against the offeror."(269) In such a circumstance, § 2-206(a) allows any means of acceptance reasonable under the circumstances.(270) The Second Restatement of Contracts also notes that, "[u]nless otherwise indicated by the language or the circumstances, an offer invites acceptance in any manner and by any medium reasonable in the circumstances."(271) The only notice provided, at stores where Select Phone is sold, to suggest that something more than the usual means of acceptance was sought by ProCD, was presented in fine print on the bottom of the box.(272) A reasonable person would not find such stealthy notice "quite clear" or "unambiguous."(273) Webster's New World Dictionary defines ambiguous, in part, as "not clear."(274) The official comment to § 2-206 states that to be unambiguous for purposes of § 2-206, the offeror must be "quite clear."(275) It is axiomatic that something can only be clear to you if you are consciously aware of it.(276) The notice on the box failed to "clearly" convey its message due to its hidden placement.(277) Where ProCD failed to make their special requirement clear, the Code tells us the fallback position is any means of acceptance "reasonable in the circumstances."(278) As discussed above, tender of payment and taking possession of the item is universally seen, in the consumer context, as reasonable.(279) ProCD's failure to make a proper § 2-206 "special" offer gave Zeidenberg the ability to accept and consummate the sales contract by paying the price and taking possession of Select Phone.(280) 4. The "License" Was Not Part of the Contract to which the Consumer Agreed The Seventh Circuit Court of Appeals stated that the license would be treated as a provision of the contract.(281) Both the district court and the appeals court agreed that the only contract terms a court will enforce are those to which the parties have agreed.(282) A consumer who is not aware of, and could not reasonably be aware of, a term cannot be said to have agreed to it.(283) So the question presented is this: when a consumer walks out of a retail store, with a copy of Select Phone, what sales contract terms has the consumer agreed to? While one may have agreed to other terms, it is clear that the consumer has not agreed to the license, as it has not yet been presented.(284) The result is that the license fails to become part of the contract.(285) B. Notice of the License Should Have Been More Prominent ProCD's license/contract purports to alter the nature of what is transferred.(286) ProCD provides little to no notice to the consumer, prior to the sale, that such license terms apply.(287) The Seventh Circuit Court of Appeals justifies this tactic by holding that, unless the U.C.C. explicitly requires a contract term to be presented with special prominence, the term can be as inconspicuous as its proponent desires to make it.(288) From this premise, the court concluded that notice of shrink-wrap license terms requires no special prominence.(289) Specifically, the appeals court stated: A disclaimer of the implied warranty of merchantability must be `conspicuous.' Promises to make firm offers . . . must be `separately signed.' These special provisos reinforce the impression that, so far as the U.C.C. is concerned, other terms may be as inconspicuous as the forum selection clause on the back of the cruise ship ticket in Carnival Lines.(290) A review of other U.C.C. provisions, however, shows this to be a false premise.(291) 1. U.C.C. § 2-316 and Prominent Placement of Language Section 2-316 of the U.C.C. covers "Exclusion or Modification of Warranties."(292) Section 2-316(2), quoted by the district court, requires a conspicuous writing to disclaim the implied warranty of merchantability.(293) The appeals court stated that, because the Code explicitly uses the word "conspicuous" in this setting, anytime a contractual provision needs special prominence, the Code will say so.(294) In the absence of such mention, according to the court, special prominence is not required.(295) One need look no further than § 2-316(3)(a), and some of the case law interpreting it, to see that this is a faulty assertion.(296) Section 2-316(3)(a) also speaks to the exclusion of implied warranties.(297) It states that if words like "as is," which are commonly seen as disclaiming warranties, are used then the warranties are effectively disclaimed.(298) Nowhere in this section of the U.C.C., nor in any point of the official comment, is there a requirement that the words "as is" be conspicuous. Following the logic of the appeals court, one would conclude that such language requires no special prominence to be effective.(299) Other courts have come to a contrary conclusion. In 1970, the Superior Court of New Jersey decided Gindy Manufacturing Corp. v. Cardinale Trucking Corp.,(300) in which the maker of semi-trailers sought to recover a sales price from a buyer.(301) As a defense, the buyer asserted that the trailers were faulty when delivered.(302) The maker of the trailers claimed that the sales contract contained the language "as is" and, consequently, any warranties as to quality were effectively disclaimed.(303) The maker, in a motion for summary judgment, asserted that the warranty was the only defense and, because "as is" was used in the contract, there was no warranty.(304) The court denied the summary judgment motion on a number of unrelated grounds.(305) As to the presence of the term "as is," the New Jersey Superior Court noted that "[m]y preference . . . is to find that there is a requirement of conspicuousness when terms like `as is' are used to exclude an implied warranty of merchantability or fitness."(306) The court noted that, although the U.C.C. does not explicitly state that the "as is" term must be conspicuous in order to create a valid waiver of warranties, such a requirement "harmonizes with the basic purpose of the Code to protect the buyer from surprise."(307) In 1987, the Court of Appeals for Idaho also held that such an "as is" term must have prominent placement.(308) Western Rail Road Builders purchased used railroad maintenance equipment from Fernandez.(309) After the machinery was found to be defective Western stopped payment on its check.(310) Fernandez brought an action for payment of the sale price.(311) Western asserted that, due to the problem with the machines, it could rescind the sale.(312) In response, Fernandez pointed to the words "as is" on the sales ticket to support his position that the goods did not have to conform to a merchantability standard, nor conform to a "particular description."(313) The trial court granted Western's motion for a recission of the sales contract and Fernandez appealed.(314) The court of appeals vacated the trial court's ruling and remanded the case.(315) In part, the court noted that "[a]lthough the U.C.C. does not explicitly require the term `as is' to be conspicuous, an inconspicuously inserted term may fail to `[make] plain that there is no implied warranty.'"(316) 2. U.C.C. § 2-719 and Prominent Placement of Language Other terms have been held to require "special prominence," even though the U.C.C. does not explicitly require it.(317) Section 2-719 deals with "Contractual Modification or Limitation of Remedy."(318) As the name states, this section addresses the parties' rights to, by contract, limit the remedies available in the case of a dispute.(319) "Under this section parties are left free to shape their remedies to their particular requirements and reasonable agreements limiting or modifying remedies are to be given effect."(320) A review of § 2-719 reveals no requirement that such a limitation be "conspicuous."(321) Here too, other courts have required, in the absence of a direct statutory command, that a term be given special prominence in order to achieve the goals of the Code. For example, the Appellate Court of Illinois has held, "[t]o be a part of the bargain, a provision limiting . . . liability must, unless incorporated into the contract through prior course of dealings or trade usage, have been bargained for, brought to the purchasers attention or be conspicuous."(322) Likewise, the Court of Appeals of Nebraska agreed that a limitation of liability needs special prominence.(323) Adams v. American Cyanamid Co. dealt with a farmer's suit against an herbicide manufacturer for, among other things, breach of warranty.(324) The warranty disclaimer in issue contained a limitation on consequential damages.(325) The Nebraska court noted that "[t]he Code does not require that a limitation of remedy be conspicuous."(326) The court, however, concluded that "in order for a limitation of remedy to be effective, it must also be conspicuous and a buyer must be afforded a reasonable opportunity to read it."(327) These cases, interpreting other sections of the U.C.C. directly contradict the Seventh Circuit Court of Appeals' presumption that, if the U.C.C. does not explicitly require that a contract term be conspicuous, it can be as inconspicuous as a party decides to make it.(328) One of the policy considerations underlying the U.C.C. is protection of parties from surprise.(329) Section 2-316, "Exclusion or Modification of Warranties," states in point one of the official comment that it seeks to "protect the buyer from surprise."(330) Most consumers purchasing a software package that is sold in a glossy box, with bright graphics announcing its wonderful capabilities, would be extremely surprised to later find that on the bottom of the box, in small print, the vendor had attached restrictive contract language.(331) It is a clear contravention of an underlying policy of the Code to allow such an important statement to be given effect where its proponent chose to hide it from the purchaser. In addition, it is common practice to include a limitation of liability in shrink-wrap licenses.(332) Other courts have held that such limitations of liability require special prominence.(333) The inclusion of such language in a shrink-wrap license would bring it within the class of terms requiring such prominence. C. The Court's Ruling Was Correct on These Facts As explained above, the logic of the Seventh Circuit Court of Appeals was flawed.(334) However, as to this particular transaction involving Zeidenberg, the court's conclusion was just.(335) In fact, the result would be sound under either the view of the transaction taken by the district court or that taken by the appeals court.(336) The reason is that Zeidenberg, as a graduate student in computer science, would have a greater level of understanding, than the average consumer, of how software is typically sold.(337) As a result of this understanding he would clearly know that software vendors assert that they do not sell, but license. 1. Usage of Trade and Zeidenberg The practice of selling software with a license attached is almost universal.(338) U.C.C. § 1-205(2) states, "[a] usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question."(339) Section 1-205(3) further states that "[a] course of dealing between parties and any usage of trade in the vocation or trade in which they are engaged or of which they are or should be aware of give particular meaning to and supplement or qualify terms of an agreement."(340) As it is an almost universal practice to sell software contingent on a license, this should qualify as a usage of trade under § 1-205.(341) It is reasonable to conclude that one who has reached the level of graduate student in computer science is aware of this custom. Under § 1-205(3), Zeidenberg's knowledge, from being in the software vocation and seeking to get into the trade of selling a software program of his own, should "give particular meaning to and supplement or qualify"(342) the terms of his contract with ProCD.(343) In addition, under § 1-205(2), the fact that Zeidenberg was in the vocation, and arguably trade, of software would lead to "justify an expectation that it [the license] be observed with respect to the transaction in question."(344) 2. Zeidenberg Could Have Examined the Terms Prior to the Sale As noted above, Zeidenberg, unlike the average consumer, was most likely aware the license was present prior to buying the product.(345) Had Zeidenberg tried, he could have examined the software license prior to paying for Select Phone.(346) Zeidenberg's assertion that he "did not know, and could not have known the terms of this license prior to sale of the product because the terms were only printed in the User Guide which was inside the product box and were unavailable for inspection prior to sale" is simply wrong.(347) Regardless of which time the court selects as the moment the sales contract was formed, at the counter or later, Zeidenberg would have every reason to have known of the terms, and if he so chose, to have examined them.(348) The district court stated that the terms of the license agreement "were not presented to defendants at the time of sale."(349) It looked to Arizona Retail(350) for the proposition that if the terms are visible, or if the party had an "opportunity to read" them prior to the sale being completed then they are enforceable.(351) Zeidenberg, unlike the average consumer who lacks his expertise, clearly had an opportunity to read the terms prior to the sale taking place. All he had to do was examine the box, see the notice of the terms, and then open the box and read them.(352) He should be estopped from asserting, as a defense to the enforcement of the terms, his own failure to do so. Conclusion ProCD was the first major case to deal with a shrink-wrap license in a purely consumer context. By rolling the moment of contract formation ahead, the Seventh Circuit Court of Appeals found the "license" enforceable.(353) This was the just result on these facts. The holding, however, creates bad precedent and should be restricted to situations in which it can be demonstrated that the consumer had reason to know of the license terms at the point of purchase. This was a consumer transaction.(354) The average consumer lacks the special knowledge that Zeidenberg possessed.(355) As a result they would have no reason to expect such terms to attach to the sale. Given that, it would be an inequitable shift in power to allow a software vendor to effectively convert a sale to a license via contract terms which are only mentioned, prior to the sale, in fine print and hidden away. If it is important enough to software vendors to have the license be part of the contract, there are some simple steps they can take. If the vendors simply place notice of the license in a more prominent position, with larger type, or even have a tear-off sheet on each box, that must be signed prior to the sale, stating that the purchaser assents to the license, then there would be no dispute that each purchaser was made fully aware of the license, and agreed to it. While it is understandable that for marketing reasons vendors wish to use the visible package space for glossy enticements, the minor space lost will be well spent in the pursuit of giving reasonable notice of the presence of the license. Until such steps are taken, these problems will persist. As the court in Arizona Retail so aptly put it, "[r]equiring the seller to discuss terms it considers essential before the seller ships the goods is not unfair; the seller can protect itself by not shipping until it obtains assent to those terms it considers essential."(356) How true it is. Robert J. Morrill* |
General Articles | Cease and Desist Letters | Federal Court Cases | FAQs & Whines | Glossary | Hall Of Shame | Contributions
Corporate Lawyers |
Definitions |
Federal Court Cases Alphabetically | by Federal Circuit | by Subject | by Court Quotations |
Federal Statutes Copyright Act 17 U.S.C. 5 | Digital Millenium Copyright Act 17 U.S.C. 12 | Lanham Act 15 U.S.C. 22
|