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Shrink wrap and click wrap licences.

With the introduction of personal computers, software manufacturers began mass marketing computer programs to consumers. The variety and number of software programs available in stores is nothing short of amazing. Today, purchases of computer programs are a common occurrence, one that is repeated countless times, day in and day out, throughout the country.

Most software is sold through a distributor on behalf of the software manufacturer. A contract is entered into between yourself and the distributor, for example, your local computer store. You pick out the software you wish to buy, pay the agreed upon purchase price, and receive your copy of the program. On the surface, the purchase of computer software is no different than the purchase of any other consumer item. These transactions are, however, not what they appear to be.

Despite what appears to be a sale of the computer program, software developers do not intend to sell you their computer program. All they want to do is sell you a "non-exclusive, non-transferable right to use" their program on certain terms and conditions, one of which is that the transaction was a licence, not a sale. The intended consequence of this condition was that the ownership of the program remains in the hands of the developer.

Originally, the terms of software licence agreements were written on or could be read beneath the plastic wrapping that encased the packaging in which the software was sold. In theory, you would read the licence agreement before purchasing and opening the packaging. The licence was worded in such a way that by purchasing and opening the packaging you would automatically be bound by the terms of the licence agreement. These agreements came to be referred to as shrink wrap licences.

After a period of time, software licences were no longer visible on the outside of the packaging. The next trend was that software developers placed their licence agreements inside the software packaging along with the software and user manuals. It was common to have the disks enclosed in a sealed envelope that referred to the licence agreement and warned that opening the envelope constituted acceptance of all of the terms and conditions. Although the software licences no longer appeared on or beneath the plastic wrapping the term shrink wrap licence continued to describe these types of licensing agreements.

More recently, software developers have begun including the licence agreement as part of the installation of the program. When you go to install the program, the licence agreement appears on your screen and you are asked to accept the terms and conditions before you are allowed to proceed with the installation of the program. Some programs permit you to print a copy of the licence agreement; others do not. Because you have to click on the accept button to proceed with the installation, these types of licence agreements have become known as click wrap licences.

Shrink wrap and click wrap licences are dramatically different from other types of agreements. First, shrink wrap and click wrap licence terms cannot be examined prior to the purchase of the software. Second, if the terms of the licence agreement are read, it is only after the transaction is complete. Third, the licence agreement is presented to you on a take-it-or-leave-it basis. Fourth, the software is sold on the condition that you agree to the terms of the licence agreement and that by opening the package, installing the software or using the program you are deemed to have accepted the terms of the licence agreement. Fifth, if you do not agree with the terms of the licence, you are instructed to return the software for a refund.

Because of these differences, there are numerous issues with respect to the enforceability of shrink wrap and click wrap licence agreements. There are two main reasons these issues arise. First, the licence agreements purport to create a contractual relationship between the software developer and the end user and second, the terms of the licence agreement are brought to the user's attention after the transaction is complete.

It is a basic principle of contract law that a party is only bound by those terms and conditions that were known to him at the at the time the contract was formed. An even more basic principle of contract law is that a contract is formed at the time there has been both an offer and an acceptance. In a typical software transaction, the contract is formed when you pay for the software, regardless of when you receive your copy of the program. In these transactions, the terms and conditions of the licence agreements would not have been discussed. Unless you had purchased and installed software in the past, you would not even know that the product was licenced and not sold.

Based on the fundamentals of contract law, the key to the enforceability of both shrink wrap and click wrap license agreements would be the timing of the formation of the contract between the parties -- as it is this timing that determines whether or not the terms of the licence agreement are binding on the parties.

There is very little case law on the enforceability of shrink wrap and click wrap licence agreements and, apart from one old Alberta decision, all of the available case law comes from the United States. The first case was decided in 1986 with the leading US case being decided a decade later in 1996.

There has been a dramatic shift in the case law dealing with software licence agreements between 1986 and 1996. The courts have gone from not discussing contract formation, to finding that the contract is formed at the time of the sale and then to artificially postponing contract formation until after the purchaser had an opportunity to review the terms of the shrink wrap licence.

The leading case on the enforceability of shrink wrap licences is a decision of the Seventh Circuit in ProCD v. Zeidenberg (1996). In this case ProCD sold its software/database with a shrink wrap licence agreement. There was notice, in small print, on the packaging declaring that the software came with restrictions stated on an enclosed licence. No details of the licence were on the package. The licence was encoded on the CD ROM disks, was printed in the user manual and appeared on the computer screen each time the software was used. The Defendant Zeidenberg bought a consumer version of this program from a retailer. Zeidenberg created his own search engine, downloaded all the data from ProCD's disks and made his version of the program available to third parties over the internet at a reduced price.

The court was of the opinion that one of the terms to which Zeidenberg agreed by purchasing the software was that the transaction was subject to a licence. The court noted that a "notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable ... may be a means of doing business valuable to buyers and sellers alike."

The decision of the Seventh Circuit in ProCD v. Zeidenberg generated a significant amount of commentary. The commentators supporting the findings of the Seventh Circuit echoed the court's pro-market argument and did not discuss the reasoning behind the decision. On the other hand, the commentators who questioned the correctness of the decision of the Seventh Circuit did so on some fairly substantive legal grounds, most being related to the court's total disregard of basic principles of contract law.

The concern many commentaries expressed with respect to the correctness of the court's decision in ProCD v. Zeidenberg do not appear to be shared by the American judiciary. This decision has been cited without criticism at least four times and followed in three decisions, the latest being reported in 1999.

Under well known principles of contract law, shrink wrap licences should not be enforceable as between the software developer and the end user -- such was the state of the law up until 1995. However, since that time, courts in the United States and the United Kingdom have held that shrink wrap licences are valid and enforceable contracts. The trend in the case law towards the enforceability of shrink wrap and click wrap licences is impossible to reconcile with established principles of contract law.

This shift in the law is not based on a sound legal analysis but rather on a willingness on the part of the courts to give legal effect to the manner in which business is conducted in the computer and software industry. As noted by one commentator:

"... industry practice can sometimes operate rather like adverse possession in land law; once a particular practice has become widely accepted, the courts will, quite rightly, become increasingly reluctant to overturn that practice but will rather seek to interpret the law in a way which is consistent with that practice ..." (Gardener, Paul, "Shrink-Wrap Licenses: Beta v. Adobe (Scotland)" Computers and Law, 1996).

In any analysis of this issue, lawyers and judges will look to existing case law. Their attention will naturally turn to other jurisdictions, primarily the United States, for guidance in their decision making. The American courts have taken an extremely practical approach to the enforceability of shrink wrap and click wrap licence agreements. Although there may be substantial grounds to dispute the legal correctness of the decision, most people would likely agree with the outcome. This, in part, may account for the limited amount of case law in the United States and the general absence of case law on the subject from other jurisdictions.

The software developers appear to have won the battle over the general enforceability of shrink wrap and click wrap licence agreements. What has not been decided is the enforceability of particular terms and conditions contained in those licence agreements, many of which seek to alter fundamental principles of both contract law and intellectual property law. This is where the more important battle will take place, and it is yet to come.
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Author:Waller, Adrienne
Date:Dec 1, 2000
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