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The sale of software in stores, by mail, and over the Internet has resulted in several specialized forms of licensing agreements. For example, software sold in stores is commonly packaged in a box or other container, and then wrapped in clear plastic wrap. Through the clear plastic wrap on the box, the purchaser can see the warning that states the use of the software is subject to the terms of a license agreement contained inside, an agreement that cannot be read prior to purchase of the software. The license agreement generally explains that if the purchaser does not wish to enter into a contract by purchasing the software, he/she must return the product prior to opening the sealed package containing the CD on which the software resides. If the software is returned with the sealed package unopened, a refund will be forthcoming. Opening the sealed package containing the CD signifies acceptance of the terms of the license and will usually prevent the purchaser from obtaining a refund. These licenses have come to be referred to as “shrink wrap licenses.”

Shrink-wrap licenses have been the subject of considerable litigation since the time they first appeared. For example, in 1996, in ProCD, Inc. v. Zeidenberg, the Seventh Circuit Court of Appeals considered a software license agreement that was encoded on the CD-ROM disks, printed in the manual, and that appeared on a user’s screen every time the software ran. The court ruled that the absence of contract terms on the outside of the box containing the software was irrelevant because every software box also contained a warning, notice or some other indication that the software comes with restrictions stated in an enclosed license. The Seventh Circuit accepted that placing all of the contract terms on the outside of the box would have been impractical, and that the transaction was valid even though the exchange of money preceded the communication of detailed terms, in part because the software could not be used unless and until the purchaser was shown the license and agreed to those terms.

In 1997, in Hill v. Gateway 2000, Inc., the Seventh Circuit expanded the decision reached in ProCD, by holding that when a customer ordered a computer by telephone, the computer arrived with a license enclosed in the box along with the computer. The license included an arbitration clause "to govern unless the customer returned the computer within 30 days." The customer was not specifically required to view or agree to these terms before using the computer. The Seventh Circuit held that the manufacturer was inviting acceptance of the terms in the license, and that by keeping the computer past the 30-day period the purchaser had accepted the manufacturer’s offer, including the terms of the arbitration clause.

Not all courts that have confronted the issue of whether shrink-wrap licenses are valid have agreed with the Seventh Circuit analysis represented in ProCD and Hill. For example, in 2000, in Klocek v. Gateway, Inc., the United States Federal District Court for the District of Kansas found that a standard shrink-wrap license agreement included in the box containing a computer constituted additional terms (i.e., terms not previously agreed upon by the parties). The district court went on to explain that under the Uniform Commercial Code, when a seller includes additional terms and does not specifically require assent to the additional terms as a condition for acceptance, the additional terms do not constitute a part of the original agreement and that the purchaser can both keep the product and not be bound by the additional terms. Therefore, because the seller did not specifically accept the additional terms and because the purchaser did not willingly accept the additional terms, the purchaser was deemed to have accepted the first offer to sell, which did not constitute the additional terms. In other words, the purchaser did not purchase subject to the shrink-wrap license.

While there does continue to be debate regarding the validity of shrink-wrap agreements, when utilized properly they are quite effective and likely to be determined to be valid by most, if not all, courts. The key to using a shrink-wrap license properly is to do it in a way that allows the purchaser to know in advance the sale is conditioned upon terms of a license found within the packaging of the product.

With the advent of the purchase, sale and in some instances delivery of products over the Internet, shrink-wrap licenses are becoming less of a legal issue. This is true in no small part due to the rise of click-on agreements.

For more information:
  • Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. 2001)
  • Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332 (D. Kan. 2000)
  • Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997)
  • ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1450 (7th Cir. 1996)