INTELLECTUAL PROPERTY AND SHRINKWRAP LICENSES - LEMLEY
Shrinkwrap licenses have been a fixture in computer software transactions for some time. [FN5] Shrinkwrap licenses take many forms. The prototypical example is a single piece of paper containing license terms which has been wrapped in transparent plastic along with one or more computer disks. [FN6] In theory, purchasers of a computer program will read the license terms before tearing open the plastic wrap and using the computer disks. Other examples of the genre include licenses printed on the outside of boxes containing software, licenses simply included somewhere within the box, or licenses shrinkwrapped with the owner's manual accompanying the software.
Wherever they are located, shrinkwrap licenses commonly include language along the following lines:
[Vendor] is providing the enclosed materials to you on the express condition that you assent to this software license. By using any of the enclosed diskette(s), you agree to the following provisions. If you do not agree with these license provisions, return these materials to your dealer, in original packaging within three days from receipt, for a refund. [FN7]
The point of such language is simple -- the software vendor is attempting to create what some have referred to as a "reverse unilateral contract." [FN8] This language is the sine qua non of shrinkwrap licenses, because without such a provision there is no license at all. [FN9] Vendors intend that, by opening the plastic wrap and actually using the software, customers will bind themselves to the terms of the shrinkwrap license.
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Because of the nature of the shrinkwrap license, and because of its potential to rewrite the rules of tort and intellectual property law, courts have viewed such licenses with a skeptical eye. Courts have considered three different legal issues with respect to shrinkwrap licenses: (1) whether the shrinkwrap license is valid at all as a matter of contract law; (2) whether the particular terms discussed in the last section are enforceable, even if the license is considered valid; and (3) whether, even if state contract law would enforce terms that modify intellectual property law, federal intellectual property law preempts such modifications. I will briefly review the law on each of these issues in turn.
Shrinkwrap licenses do not follow the normal model of contracts. Black letter contract law sets out three predicates to the formation of a contract: offer, acceptance, and consideration. [FN35] Behind these requirements is the overarching notion of a bargain between the parties. [FN36] In the prototypical contract, where the parties meet face to face and discuss the terms before coming to an agreement, the bargain is obvious. But where is the bargain in a standard form shrinkwrap license that is not even signed by the party against whom it will be enforced? [FN37]
The few courts that have considered this issue have relied on U.C.C. sections 2-207 and 2-209 in concluding that shrinkwrap license terms are not generally enforceable. [FN38] The most detailed discussion of this issue to date is the Third Circuit's decision in Step-Saver Data Systems, Inc. v. Wyse Technology. [FN39] The case involved a breach of warranty claim brought by Step-Saver Data Systems, Inc., the purchaser of a shrinkwrapped computer program, against the vendor, The Software Link, Inc. ("TSL"). [FN40] The shrinkwrap license disclaimed all express and implied warranties on the software, including certain prior warranties allegedly given by TSL to Step-Saver. The district court directed a verdict for TSL on the warranty claims, holding that the shrinkwrap license terms constituted the complete and exclusive agreement between the parties. [FN41]
The Third Circuit reversed. The court applied the provisions of U.C.C. sections 2-207 to the contract at issue. [FN42] It reasoned that a contract was formed when Step-Saver, responding to magazine advertisements by TSL, placed telephone orders for copies of TSL's software, and TSL shipped the software. At this point, the contract was formed by agreement and performance because both parties had acted as if a contract existed. [FN43] The court concluded that the issue therefore concerned the nature of the terms of the contract.
Because the contract was formed before Step-Saver ever received the shrinkwrap license, the court treated the license provisions as a written confirmation and as an attempt to modify the terms of the contract (under U.C.C. sections 2-202 and 2-209, respectively). [FN44] Because those provisions require that both parties intend to adopt the additional terms, the court held that the shrinkwrap license did not bind Step-Saver. This conclusion was confirmed by the court's application of U.C.C. section 2-207:
UCC s 2-207 establishes a legal rule that proceeding with a contract after receiving a writing that purports to define the terms of the parties's [sic] contract is not sufficient to establish the party's consent to the terms of the writing . . . . In the absence of a party's express assent to the additional or different terms of the writing, section 2-207 provides a default rule that the parties intended, as the terms of their agreement, those terms to which both parties have agreed, along with any terms implied by the provisions of the UCC. In other words, because the parties agreed to a contract at the point of telephone order and product shipment, only those terms on which the parties agreed at that point became part of the contract. Other terms could be implied, if necessary, from the U.C.C.'s default rules. But the shrinkwrap license was ineffective to modify the contract terms unless Step- Saver expressly agreed to such a modification. [FN46]
The Step-Saver decision has potentially broad applicability to shrinkwrap license cases. While the decision is premised on the formation of a contract through telephone orders before the shrinkwrap license is ever delivered, many commercial sales of software occur in analogous contexts. Often the software is ordered by letter or by telephone. Even if it is purchased over the counter, the purchase transaction is completed -- and an agreement between retailer and customer is reached -- at the point of sale. A shrinkwrap license contained inside a box cannot be discovered and read until after the customer has returned home, opened the box, and begun the process of installing the software. [FN47]
The few other cases considering the issue directly have generally lined up with Step-Saver in refusing to enforce shrinkwrap licenses. Two courts reached this result on the grounds that the licenses are "unenforceable contracts of adhesion." [FN48] This rationale is broader than Step-Saver, because a court would then not enforce any shrinkwrap license terms, whether or not the customer was aware of the license at the time the agreement was made. Rather, the "contract of adhesion" rationale focuses on the weaker bargaining position of the consumer, and the consumer's lack of meaningful choice as to the terms offered.
Only one court has enforced the terms of a shrinkwrap license, and then only in a very limited way. In Arizona Retail Systems, Inc. v. Software Link, Inc., [FN49] the district court enforced the shrinkwrap terms sent along with an "evaluative" copy of the software. The court's decision was based on Arizona Retail Systems, Inc.'s ("ARS") admission that it did not decide to keep the copy until having opened and read the shrinkwrap license and used the software for several hours. [FN50] Thus, unlike Step-Saver, ARS was aware of the terms of the shrinkwrap license at the time the agreement was formed. However, the court refused to enforce the same license when it accompanied software subsequently purchased by phone and shipped to ARS. The court's reasoning for refusing to enforce the license against telephone orders follows Step-Saver. [FN51] In addition, the court relied on a number of policy arguments against enforcing shrinkwrap licenses. [FN52] Because of its schizophrenic result, Arizona Retail is at best limited authority for enforcing shrinkwrap licenses.
The general refusal of the United States courts to enforce shrinkwrap licenses is echoed outside the United States. A number of countries either refuse to enforce shrinkwrap licenses at all, or place restrictive conditions on the form and contents of such licenses. [FN53] Comparatively fewer countries freely enforce shrinkwraplicenses. [FN54]
Even if courts were to conclude that shrinkwrap licenses are themselves enforceable, there remains the possibility that particular terms contained in those licenses will not be enforceable. Contract law offers three circumstances in which license provisions in an otherwise valid contract will not be enforced.
First, the contract term may be "unconscionable." Unconscionability is governed by U.C.C. section 2-302. [FN55] Under this provision, unconscionability has two components: the absence of meaningful choice or bargaining power on the part of one party (procedural unconscionability) and contract terms which are unreasonably favorable to the other party (substantive unconscionability). [FN56] The procedural element is satisfied if the contract was not negotiated, and the party claiming unconscionability lacked meaningful choice in entering into the contract. [FN57] The substantive element is satisfied by proof of "harsh" or "one-sided" results that unreasonably place contract risks on the party lacking bargaining power. [FN58] While unconscionability generally arises in form contracts that unfairly bind individual consumers, it has sometimes been applied to protect small businesses as well. [FN59]
Particular shrinkwrap license terms may be vulnerable to unconscionability claims if they place unfair burdens on licensees. The nature of the shrinkwrap license seems to satisfy the requirement of procedural unconscionability. [FN60] As a result, substantively unreasonable terms may not be enforced even if the shrinkwrap license is otherwise valid. Terms which purport to alter existing law in significant ways are particularly likely to be invalidated under this rule. [FN61]
A second legal principle that threatens the enforceability of specific provisions of some shrinkwrap licenses is based on section 211(3) of the Restatement (Second) of Contracts. [FN62] That section limits the enforceability of standardized contract terms that are not negotiated, even if the contract itself is signed by both parties and some of the terms are bargained over. Such standardized contract terms will not be considered part of the agreement if there is "reason to believe that the party manifesting . . . assent [to the form contract] would not do so if he knew that the writing contained a particular term . . . ." [FN63] Courts have applied Restatement section 211(3) to invalidate standardized contract terms modifying existing law in software transactions. [FN64] However, application of this rule to shrinkwrap licenses is limited in practice by its requirement that the contract term be unknown and beyond the range of reasonable expectation. An unreasonable rule that was well-known and universally used in shrinkwrap licenses would apparently pass muster under the Restatement test.
Finally, a few courts have been willing to rely on public policy to invalidate license terms. In Angus Medical Co. v. Digital Equipment Corp., the court cited public policy in favor of access to the courts as one reason for finding unenforceable a contract term which shortened the applicable statute of limitations. It concluded that a term which violates public policy may be "beyond reasonable expectation" even if it is not "unusual or unexpected." [FN65]
Shrinkwrap license terms that purport to alter the rights granted to purchasers and licensees under patent or copyright law may also be vulnerable to the charge that they are preempted by federal intellectual property law. [FN66] Several courts have held or strongly suggested that federal statutes preempt state contract law rules to the extent that those rules permit the parties to "opt out" of some parts of the federal statutory scheme. Other courts have found a continuing role for contract law, even where it conflicts with federal law.
The most celebrated decision on intellectual property preemption is Vault Corp. v. Quaid Software Ltd. [FN67] That case involved Vault's copy protection program called Prolok, which was designed to prevent unlawful duplication of other software by "locking" it. Vault sold Prolok with a shrinkwrap license, which provided in relevant part that the purchaser could not copy or reverse engineer any part of the software. Quaid purchased a copy of Prolok and reverse engineered it in order to find a way to defeat the copy protection program. Quaid incorporated its knowledge in an "unlocking" product it sold, called Ramkey. The final version of Ramkey did not contain any material copied from Prolok. [FN68]
Vault sued Quaid, alleging copyright infringement and violation of the shrinkwrap license provision. The Fifth Circuit found that Quaid had not infringed Vault's copyright by reverse engineering Prolok or producing Ramkey. [FN69] It then turned to Vault's claims based on the shrinkwrap license. The district court had held that the shrinkwrap license was unenforceable as a contract of adhesion unless it was saved by the Louisiana Software License Enforcement Act. The Louisiana statute, enacted at Vault's urging, specifically authorized contractual terms prohibiting reverse engineering. [FN70]
The Fifth Circuit found that the Louisiana statute directly conflicted with the rights of purchasers of copyrighted works set out in section 117 of the Copyright Act, [FN71] and was therefore preempted by copyright law. The court relied on a venerable line of Supreme Court cases for the proposition that "[w]hen state law touches upon the area of [patent or copyright statutes], it is 'familiar doctrine' that the federal policy 'may not be set at naught, or its benefits denied' by the state law." [FN72]
Vault 's conclusion that state law could not expand the rights granted to authors under the copyright law has been endorsed by other courts. [FN73] Further, several courts have applied Vault 's preemption analysis to the interpretation of bargained software license agreements. For example, the court in SQL Solutions, Inc. v. Oracle Corp. [FN74] limited the effect of a choice of law provision, holding that "federalism principles dictate that state rules of contractual construction cannot interfere with federal law or policy. In particular, state law must be applied in a manner that does not conflict with federal copyright law and policy." [FN75]
It does not follow from this, however, that all contract law provisions relating to the subject matter of copyright are preempted. In National Car Rental Sys. v. Computer Assocs., [FN76] the court considered whether copyright law preempted a bargained software license that limited the licensee to using the software for internal purposes. The court held that contract law was not preempted because it did not grant rights "equivalent to" those offered by copyright. [FN77] Contract law was saved from general preemption by the presence of an "extra element" not required by copyright -- an agreement between the parties. [FN78] The court held that the license agreement governed the question of which of the exclusive rights listed in section 106 Computer Associates had granted to National Car Rental Systems. It did not, however, decide whether the license agreement would be preempted if the agreement directly contradicted rights granted to the user under copyright law.
On this point, the Supreme Court's decision in Goldstein v. California [FN79] is particularly relevant. In that case, the Court upheld a California criminal statute penalizing the unauthorized commercial duplication of sound recordings, which at that time were not protected by federal copyright law. The Court identified three classes of cases: those instances in whichthe federal government intended to provide protection; those instances in which the federal government intended to permit copying; and those instances in which it intended neither. Only in the third instance, the Court held, was state copyright protection permissible:
[A] conflict would develop if a State attempted to protect that which Congress intended to be free from restraint or to free that which Congress had protected. However, where Congress determines that neither federal protection nor freedom from restraint is required by the national interest, it is at liberty to stay its hand entirely. Since state protection would not then conflict with federal action, total relinquishment of the State's power to grant copyright protection cannot be inferred. [FN80] Where Congress expressed no intention, the Court held that states are free to legislate. However, Goldstein suggests that this freedom does not permit states to give intellectual property owners rights that the federal government intended to withhold.
A similar set of cases (outside the computer software context) exists in patent law. On the one hand, the Supreme Court has held that patent law does not generally preempt contract law. As a result, it has permitted inventors to charge a royalty for unpatented inventions. [FN81] On the other hand, it has steadfastly refused to let licensees bargain away the right to challenge the validity of patents, [FN82] or to extend the patent term by contract. [FN83]
In short, courts have been skeptical of shrinkwrap licenses for a variety of reasons. Some courts hold that shrinkwrap licenses are entirely unenforceable under contract law. Particular terms of shrinkwrap licenses may also be vulnerable to judicial attack, especially if they are unexpected, unconscionable, or violative of public policy. [FN84] Finally, some courts have concluded that shrinkwrap licenses are preempted by intellectual property law to the extent that they attempt to change the balance of rights struck by federal policy. [FN85] But virtually no reported decisions have actually enforced shrinkwrap license provisions as written, especially where those provisions modify federal law.
North American Systemshops Ltd. v. King
Alberta Judgments: [1989] A.J. No. 512
No. 8703 15084
Alberta Court of Queen's Bench
This action deals with the rights of a copyright owner of computer software sold over the counter.
On April 3, 1986, an authorized dealer of the plaintiff sold to the defendant, King & Company, a floppy disk copy of "With Interest", a computer program developed by the plaintiff, in which the plaintiff claims a copyright. Shortly after the sale, having been informed by its agent that the software purchaser reported a problem in printing the program, the president of the plaintiff attended at the premises of the corporate defendant and corrected the problem, which originated in the defendant's printer and not in the program. While at the defendant's premises, the plaintiff learned that "With Interest" had been installed on the hard drives of other micro- computers owned by the defendants, although only one copy of the program had been purchased. On April 30, 1987, or approximately one year after the discovery of the copies of the program, the plaintiff notified the defendant company by letter that the latter was in breach of the plaintiff's copyright. The defendant immediately responded; it notified the plaintiff that the program "With Interest" had been removed from the hard drives of its micro-computers; that the defendant retained only the floppy disk; that, for the purposes of the demand letter, it did not contest the plaintiff's assessment of its rights; and that it undertook not to use the floppy disk except in the manner outlined by the plaintiff.
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Next I turn to the assessment of the legal result of the sale of the floppy disk to the defendants. In its Statement of Claim the plaintiff posits:
The program . . is sold under a licence statement which entitles the purchaser to make copies of the licensed program for backup purposes only. . . . The plaintiff further says that the defendants have breached the licensing agreement by making more than backup copies and by having multiple users. .
At the trial the plaintiff argues that the use of the word "agreement" in the Statement of Claim was unintended and that the plaintiff does not
anchor its claim in contract. Rather it alleges that the claim is limited to copyright. It relies on ss. 27(1) and 3(1) of the Act.
In this case, the parties agreed that the making of a copy of a computer program constituted the making of a "contrivance by means of which the work may be mechanically performed or delivered"; absent such agreement, one might have concluded that the forces at work in the performance of a computer software program were electromagnetic rather than mechanical.
The plaintiff alleges that the statutory framework has this result: so long as the copyright symbol is displayed on the software, when a copyright owner of a computer software program sells that program over-the-counter the onus shifts to the purchaser to ensure that the owner is willing to permit the purchaser to make the use of the program which the purchaser intends. In other words, the display of the copyright forces the purchaser to seek out, and abide by, a licence statement, or permission, or conditions of use from the copyright owner.
(a) How was the sale made?
In this case, the precise circumstances of the sale are not clear. The plaintiff's witness Syrja states that the floppy disk was inserted into the center of the booklet "With Interest" and those contents were covered in cellophane which was then shrink-wrapped, or tightly reduced around the contents. Despite a discovery request by the defendant for an unopened, shrink-wrapped, package, and an undertaking to provide one, no pristine package of "With Interest" has been introduced into evidence.
The witness Wallace, an employee of the authorized agent, was questioned about the sale.
Q. So how would you obtain copies of this?
A. We purchased them from North American Systemshops and then re-sell them.
Q. Do you recall the package that you sold to the defendants if I can call them King and Company?
A. Oh, yes. Mike came over and sat down and I gave them a package and he -- we -- I showed my copy running on my micro and went through the initial part of it and he left and took it away with him. -
Q. So to your knowledge does North American Systemshops put different registration numbers on their copies?
A. I would assume so.
Q. And do you recall the number of the defendant's micros?
A. No. Well, it was 10 but the one that I sold them I didn't know what the number was because, of course, it's packaged.
Q. Okay, now if we can just step back a minute here. When you ordered these from North American Systemshops, are you advised of the serial number of the diskette inside?
A. No.
Q. When it's shrink wrapped can you see the number of diskette inside?
A. No, because the diskette is inside -- well, basically in the middle of manual where the page folds, where the book folds.
On the evidence, I conclude that: the program was sold to the defendants shrink-wrapped; that no copyright symbol was visible to the purchaser, (since the copyright symbol on the booklet is on the inside front cover of the booklet and not on the outside cover and the copyright symbol on the floppy disk is in the same general location on the disk as the registration number and the evidence of the witness Wallace is that the registration number was not visible through the shrink-wrap); and that no licence statement was visible (the licence statement being on the inside back cover of the booklet and not being on the floppy disk). In addition, the evidence establishes that the copyright symbol comes up on the first screen when the program is used, but no licence statement comes up on the screen. Finally, I am satisfied that the user of the program would not have to refer to the booklet for general use of the program as the program was designed to be, and was in fact, "user-useful" in Mr. Syrja's phrase.
(b) Do all copyright restrictions apply on the sale or only those restrictions brought to the attention of the purchaser?
Since the copyright symbol is found on the first screen of the program, the plaintiff argues that the defendant must search out the plaintiff's permission to use this program in any way.
The defendant argues that the sale itself carries with it an implied right to make use of the copy of the program in any way the purchaser may devise. The defendant adopts the positions, including references to existing jurisprudence, taken by Sookman, Computer Law, in particular, at pp. 2-48 and
If copies of software are sold and not licensed, without restrictions binding on the purchasers, the purchasers of the copies sold are entitled to resell them, give them away, hire them, or destroy them, without infringing the copyright of the owner of the software. No term will usually be implied in such sales that the buyers can only re-sell the software but not let them out. These rights can substantially affect the revenues that a software publisher can earn and impinge on its ability to maintain the confidentiality of the software. For these reasons, software is frequently licensed rather than sold to end users.
Shrink wrap licenses commonly contain restrictions in the rights of use of the software, including restrictions relating to copying, modifying, renting, and re-selling the software. Such licenses often also exclude the conditions of merchantability and fitness for purpose implied under sale of goods legislation, contain limited repair and replace remedies, and limitation of damage provisions. The enforceability of shrink wrap licences has not yet been tested in the courts in Canada. It is submitted that they will not be enforceable against an ordinary vendee, unless there is some clear communication of the shrink wrap terms at the time of purchase to the party to whom the software is sold. The reason is that an ordinary vendee without knowledge of any restrictions affecting the use of goods is not bound to honour any restrictions concerning the goods since restrictive conditions do not run with them.
If the vendor sells, imposing no restriction or condition upon his purchaser at the time of sale, he cannot impose a condition subsequently by a delivery of the goods with a condition endorsed upon them or on the package in which they are contained. Unless the purchaser knows of the condition at the time of sale, he has the benefit of the implied licence to use the article free from conditions. Furthermore, the buyer will only be restricted to the limitations expressly brought home to his attention, and has no obligations to make inquiries of the owner of the rights in the article to ascertain if there are other restrictions that have not been brought to his attention.
In view of this law, which would likely be applied to restrictions imposed pursuant to shrink wrap licences, licensors of mass-marketed software should make every effort to ensure that prospective licensees are made aware of the terms to be imposed on them before the transaction is completed.
ProCD v. Zeidenberg. 86 F.3d 1447 (UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT, 1996)
EASTERBROOK, Circuit Judge. Must buyers of computer software obey the terms of shrinkwrap licenses? The district court held not, for two reasons: first, they are not contracts because the licenses are inside the box rather than printed on the outside; second, federal law forbids enforcement even if the licenses are contracts. 908 F. Supp.640 (W.D. Wis. 1996). The parties and numerous amici curiae have briefed many other issues, but these are the only two that matter--and we disagree with the district judge's conclusion on each. Shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable). Because no one argues that the terms of the license at issue here are troublesome, we remand with instructions to enter judgment for the plaintiff.
ProCD, the plaintiff, has compiled information from more than 3,000 telephone directories into a computer database. We may assume that this database cannot be copyrighted, although it is more complex, contains more information (nine-digit zip codes and census industrial codes), is organized differently, and therefore is more original than the single alphabetical directory at issue in Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 113 L. Ed. 2d 358, 111 S. Ct. 1282 (1991). See Paul J. Heald, The Vices of Originality, 1991 Sup. Ct. Rev. 143, 160-68. ProCD sells a version of the database, called SelectPhone (trademark), on CD-ROM discs. (CD-ROM means "compact disc--read only memory." The "shrinkwrap license" gets its name from the fact that retail software packages are covered in plastic or cellophane "shrinkwrap," and some vendors, though not ProCD, have written licenses that become effective as soon as the customer tears the wrapping from the package. Vendors prefer "end user license," but we use the more common term.) A proprietary method of compressing the data serves as effective encryption too. Customers decrypt and use the data with the aid of an application program that ProCD has written. This program, which is copyrighted, searches the database in response to users' criteria (such as [**4] "find all people named Tatum in Tennessee, plus all firms with 'Door Systems' in the corporate name"). The resulting lists (or, as ProCD prefers, "listings") can be read and manipulated by other software, such as word processing programs.
The database in SelectPhone (trademark) cost more than $ 10 million to compile and is expensive to keep current. It is much more valuable to some users than to others. The combination of names, addresses, and sic codes enables manufacturers to compile lists of potential customers. Manufacturers and retailers pay high prices to specialized information
intermediaries for such mailing lists; ProCD offers a potentially cheaper alternative. People with nothing to sell could use the database as a substitute for calling long distance information, or as a way to look up old friends who have moved to unknown towns, or just as a electronic substitute for the local phone book. ProCD decided to engage in price discrimination, selling its database to the general public for personal use at a low price (approximately $ 150 for the set of five discs) while selling information to the trade for a higher price. It has adopted some intermediate strategies too: access to the SelectPhone (trademark) database is available via the America On-line service for the price America Online charges to its clients (approximately $ 3 per hour), but this service has been tailored to be useful only to the general public.
If ProCD had to recover all of its costs and make a profit by charging a single price--that is, if it could not charge more to commercial users than to the general public--it would have to raise the price substantially over $ 150. The ensuing reduction in sales would harm consumers who value the information at, say, $ 200. They get consumer surplus of $ 50 under the current arrangement but would cease to buy if the price rose substantially. If because of high elasticity of demand in the consumer segment of the market the only way to make a profit turned out to be a price attractive to commercial users alone, then all consumers would lose out--and so would the commercial clients, who would have to pay more for the listings because ProCD could not obtain any contribution toward costs from the consumer market.
To make price discrimination work, however, the seller must be able to control arbitrage. An air carrier sells tickets for less to vacationers than to business travelers, using advance purchase and Saturday-night-stay requirements to distinguish the categories. A producer of movies segments the market by time, releasing first to theaters, then to pay-per-view services, next to the videotape and laserdisc market, and finally to cable and commercial tv. Vendors of computer software have a harder task. Anyone can walk into a retail store and buy a box. Customers do not wear tags saying "commercial user" or "consumer user." Anyway, even a commercial-user-detector at the door would not work, because a consumer could buy the software and resell to a commercial user. That arbitrage would break down the price discrimination and drive up the minimum price at which ProCD would sell to anyone.
Instead of tinkering with the product and letting users sort themselves--for example, furnishing current data at a high price that would be attractive only to commercial customers, and two-year-old data at a low price--ProCD turned to the institution
of contract. Every box containing its consumer product declares that the software comes with restrictions stated in an enclosed license. This license, which is encoded on the CD-ROM disks as well as printed in the manual, and which appears on a user's screen every time the software runs, limits use of the application program and listings to non-commercial purposes.
Matthew Zeidenberg bought a consumer package of SelectPhone (trademark) in 1994 from a retail outlet in Madison, Wisconsin, but decided to ignore the license. He formed Silken Mountain Web Services, Inc., to resell the information in the SelectPhone (trademark) database. The corporation makes the database available on the Internet to anyone willing to pay its price--which, needless to say, is less than ProCD charges its commercial customers. Zeidenberg has purchased two additional SelectPhone (trademark) packages, each with an updated version of the database, and made the latest information available over the World Wide Web, for a price, through his corporation. ProCD filed this suit seeking an injunction against further dissemination that exceeds the rights specified in the licenses (identical in each of the three packages Zeidenberg purchased). The district court held the licenses ineffectual because their terms do not appear on the outside of the packages. The court added that the second and third licenses stand no different from the first, even though they are identical, because they might have been different, and a purchaser does not agree to--and cannot be bound by--terms that were secret at the time of purchase. 908 F. Supp. at 654.
II
Following the district court, we treat the licenses as ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts and the Uniform Commercial Code. Whether there are legal differences between "contracts" and "licenses" (which may matter under the copyright doctrine of first sale) is a subject for another day. See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (E.D. N.Y. 1994). Zeidenberg does not argue that Silken Mountain Web Services is free of any restrictions that apply to Zeidenberg himself, because any effort to treat the two parties as distinct would put Silken Mountain behind the eight ball on ProCD's argument that copying the application program onto its hard disk violates the copyright laws. Zeidenberg does argue, and the district court held, that placing the package of software on the shelf is an "offer," which the customer "accepts" by paying the asking price and leaving the store with the goods. Peeters v. State, 154 Wis. 111, 142 N.W. 181 (1913). In Wisconsin, as elsewhere, a contract includes only the terms on which the parties have agreed. One cannot agree to hidden terms, the judge concluded. So far, so good--but one of the terms to which Zeidenberg agreed by purchasing the software is that the transaction was subject to a license. Zeidenberg's position therefore must be that the printed terms on the outside of a box are the parties' contract--except for printed terms that refer to or incorporate other terms. But why would Wisconsin fetter the parties' choice
in this way? Vendors can put the entire terms of a contract on the outside of a box only by using microscopic type, removing other information that buyers might find more useful (such as what the software does, and on which computers it works), or both. The "Read Me" file included with most software, describing system requirements and potential incompatibilities, may be equivalent to ten pages of type; warranties and license restrictions take still more space. Notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike. See E. Allan Farnsworth, 1 Farnsworth on Contracts § 4.26 (1990); Restatement (2d) of Contracts § 211 comment a (1981) ("Standardization of agreements serves many of the same functions as standardization of goods and services; both are essential to a system of mass production and distribution. Scarce and costly time and skill can be devoted to a class of transactions rather than the details of individual transactions."). Doubtless a state could forbid the use of standard contracts in the software business, but we do not think that Wisconsin has done so.
Transactions in which the exchange of money precedes the communication of detailed terms are common. Consider the purchase of insurance. The buyer goes to an agent, who explains the essentials (amount of coverage, number of years) and remits the premium to the home office, which sends back a policy. On the district judge's understanding, the terms of the policy are irrelevant because the insured paid before receiving them. Yet the device of payment, often with a "binder" (so that the insurance takes effect immediately even though the home office reserves the right to withdraw coverage later), in advance of the policy, serves buyers' interests by accelerating effectiveness and reducing transactions costs. Or consider the purchase of an airline ticket. The traveler calls the carrier or an agent, is quoted a price, reserves a seat, pays, and gets a ticket, in that order. The ticket contains elaborate terms, which the traveler can reject by canceling the reservation. To use the ticket is to accept the terms, even terms that in retrospect are disadvantageous. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 113 L. Ed. 2d 622, 111 S. Ct. 1522 (1991); see also Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 132 L. Ed. 2d 462, 115 S. Ct. 2322 (1995) (bills of lading). Just so with a ticket to a concert. The back of the ticket states that the patron promises not to record the concert; to attend is to agree. A theater that detects a violation will confiscate the tape and escort the violator to the exit. One could arrange things so that every concertgoer signs this promise before forking over the money, but that cumbersome way of doing things not only would lengthen queues and raise prices but also would scotch the sale of tickets by phone or electronic data service.
Consumer goods work the same way. Someone who wants to buy a radio set visits a store, pays, and walks out with a box. Inside the box is a leaflet containing some terms, the most important of which usually is the warranty, read for the first time in the comfort of home. By Zeidenberg's lights, the warranty in the box is irrelevant; every consumer gets the standard warranty implied by the UCC in the event the contract is silent; yet so far as we are aware no state disregards warranties furnished with consumer products. Drugs come with a list of ingredients on the outside and an elaborate package insert on the inside. The package insert describes drug interactions, contraindications, and other vital information--but, if Zeidenberg is right, the purchaser need not read the package insert, because it is not part of the contract.
Next consider the software industry itself. Only a minority of sales take place over the counter, where there are boxes to peruse. A customer pay place an order by phone in response to a line item in a catalog or a review in a magazine. Much software is ordered over the Internet by purchasers who have never seen a box. Increasingly software arrives by wire. There is no box; there is only a stream of electrons, a collection of information that includes data, an application program, instructions, many limitations ("MegaPixel 3.14159 cannot be used with Byte-Pusher 2.718"), and the terms of sale. The user purchases a serial number, which activates the software's features. On Zeidenberg's arguments, these unboxed sales are unfettered by terms--so the seller has made a broad warranty and must pay consequential damages for any shortfalls in performance, two "promises" that if taken seriously would drive prices through the ceiling or return transactions to the horse-and-buggy age.
According to the district court, the UCC does not countenance the sequence of money now, terms later. (Wisconsin's version of the UCC does not differ from the Official Version in any material respect, so we use the regular numbering system. Wis. Stat. § 402.201 corresponds to UCC § 2-201, and other citations are easy to derive.) One of the court's reasons--that by proposing as part of the draft Article 2B a new UCC § 2-2203 that would explicitly validate standard-form user licenses, the American Law Institute and the National Conference of Commissioners on Uniform Laws have conceded the invalidity of shrinkwrap licenses under current law, see 908 F. Supp. at 655-66--depends on a faulty inference. To propose a change in a law's text is not necessarily to propose a change in the law's effect. New words may be designed to fortify the current rule with a more precise text that curtails uncertainty. To judge by the flux of law review articles discussing shrinkwrap licenses, uncertainty is much in need of reduction--although businesses seem to feel less uncertainty than do scholars, for only three cases (other than ours) touch on the subject, and none directly addresses it. See Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991); Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 268-70 (5th Cir. 1988); Arizona Retail Systems, Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993). As their titles suggest, these are not consumer transactions. Step-Saver is a battle-of-the-forms case, in which the parties exchange incompatible forms and a court must decide which prevails. See Northrop Corp. v. Litronic Industries, 29 F.3d 1173 (7th Cir. 1994) [**15] (Illinois law); Douglas G. Baird & Robert Weisberg, Rules, Standards, and the Battle of the Forms: A Reassessment of § 2-207, 68 Va. L. Rev. 1217, 1227-31 (1982). Our case has only one form; UCC § 2-207 is irrelevant. Vault holds that Louisiana's special shrinkwrap-license statute is preempted by federal law, a question to which we return. And Arizona Retail Systems did not reach the question, because the court found that the buyer knew the terms of the license before purchasing the software.
What then does the current version of the UCC have to say? We think that the place to start is § 2-204(1): "A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance. And that is what happened. ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure. This Zeidenberg did. He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance. So although the district judge was right to say that a contract can be, and often is, formed simply by paying the price and walking out of the store, the UCC permits contracts to be formed in other ways. ProCD proposed such a different way, and without protest Zeidenberg agreed. Ours is not a case in which a consumer opens a package to find an insert saying "you owe us an extra $ 10,000" and the seller files suit to collect. Any buyer finding such a demand can prevent formation of the contract by returning the package, as can any consumer who concludes that the terms of the license make the software worth less than the purchase price. Nothing in the UCC requires a seller to maximize the buyer's net gains.
Section 2-606, which defines "acceptance of goods", reinforces this understanding. A buyer accepts goods under §2-606(1)(b) when, after an opportunity to inspect, he fails to make an effective rejection under § 2-602(1). ProCD extended an opportunity to reject if a buyer should find the license terms [*1453] unsatisfactory; Zeidenberg inspected the package, tried out the software, learned of the license, and did not reject the goods. We refer to § 2-606 only to show that the opportunity to return goods can be important; acceptance of an offer differs from acceptance of goods after delivery, see Gillen v. Atalanta Systems, Inc., 997 F.2d 280, 284 n.1 (7th Cir. 1993); but the UCC consistently permits the parties to structure their relations so that the buyer has a chance to make a final decision after a detailed review.
Some portions of the UCC impose additional requirements on the way parties agree on terms. A disclaimer of the implied warranty of merchantability must be "conspicuous." UCC § 2-316(2), incorporating UCC § 1-201(10). Promises to make firm offers, or to negate oral modifications, must be "separately signed." UCC §§ 2-205, 2-209(2). These special provisos reinforce the impression that, so far as the UCC is concerned, other terms may be as inconspicuous as the forum-selection clause on the back of the cruise ship ticket in Carnival Lines. Zeidenberg has not located any Wisconsin case--for that matter, any case in any state--holding that under the UCC the ordinary terms found in shrinkwrap licenses require any special prominence, or otherwise are to be undercut rather than enforced. In the end, the terms of the license are conceptually identical to the contents of the package. Just as no court would dream of saying that SelectPhone (trademark) must contain 3,100 phone books rather than 3,000, or must have data no more than 30 days old, or must sell for $ 100 rather than $ 150--although any of these changes would be welcomed by the customer, if all other things were held constant--so, we believe, Wisconsin would not let the buyer pick and choose among terms. Terms of use are no less a part of "the product" than are the size of the database and the speed with which the software compiles listings. Competition among vendors, not judicial revision of a package's contents, is how consumers are protected in a market economy. Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756 (7th Cir. 1996). ProCD has rivals, which may elect to compete by offering superior software, monthly updates, improved terms of use, lower price, or a better compromise among these elements. As we stressed above, adjusting terms in buyers' favor might help Matthew Zeidenberg today (he already has the software) but would lead to a response, such as a higher price, that might make consumers as a whole worse off.
HOTMAIL CORPORATION v. VAN$ MONEY PIE INC United States District Court, N.D. California.
1. Plaintiff Hotmail is a Silicon Valley company that provides free electronic mail ("e-mail") on the World Wide Web. Hotmail's online services allow its over ten million registered subscribers to exchange e-mail messages over the Internet with any other e-mail user who has an Internet e-mail address throughout the world. Every e-mail sent by a Hotmail subscriber automatically displays a header depicting Hotmail's domain name "hotmail.com" and a footer depicting Hotmail's "signature" at the bottom of the e-mail which reads "Get Your Private, Free Email at http://www.hotmail.com." Every e-mail received by a Hotmail subscriber also automatically displays a header depicting Hotmail's domain name. Thus, plaintiff's HOTMAIL mark--contained within its domain name and signature--appears on millions of e-mails transmitted worldwide daily.
2. In or about 1996, Hotmail developed the mark HOTMAIL and obtained the Internet domain name "hotmail.com" which incorporates its mark. Hotmail is the sole and exclusive holder of that domain name.
3. In or about 1996, Hotmail began using its HOTMAIL mark in various forms and styles, continuously in commerce in association with its online services as a means of identifying and distinguishing Hotmail's online services from those of others. Thus Hotmail's mark has appeared in the headers and footers of e-mail sent from and received by Hotmail subscribers, on Hotmail's homepage and on nearly every page of its Website, on letterhead and envelopes, on business cards, in promotional materials and in press releases.
4. Hotmail has spent approximately $10 million marketing, promoting, and distributing its services in association with its HOTMAIL mark. Hotmail does not authorize any other e-mail service provider to use its HOTMAIL mark, or Hotmail's domain name or signature.
5. "Spam" is unsolicited commercial bulk e-mail akin to "junk mail" sent through the postal mail. The transmission of spam is a practice widely condemned in the Internet Community and is of significant concern to Hotmail.
6. Hotmail has invested substantial time and money in efforts to disassociate itself from spam and to protect e-mail users worldwide from receiving spam associated in any way with Hotmail.
7. To become a Hotmail subscriber, one must agree to abide by a Service Agreement ("Terms of Service") which specifically prohibits subscribers from using Hotmail's services to send unsolicited commercial bulk e-mail or "spam," or to send obscene or pornographic messages. Hotmail can terminate the account of any Hotmail subscriber who violates the Terms of Service.
8. In or about the Fall of 1997, Hotmail learned that defendants were sending "spam" e-mails to thousands of Internet e-mail users, which were intentionally falsified in that they contained return addresses bearing Hotmail account return addresses including Hotmail's domain name and thus its mark, when in fact such messages did not originate from Hotmail or a Hotmail account. Such spam messages advertised pornography, bulk e-mailing software, and "get-rich- quick" schemes, among other things.
9. In addition, Hotmail learned that defendants had created a number of Hotmail accounts for the specific purpose of facilitating their spamming operations. Such accounts were used to collect responses to defendants' e-mails and "bounced back" messages in what amounted to a "drop box" whose contents were never opened, read or responded to. It was these Hotmail accounts that were used as return addresses by defendants in lieu of defendants' actual return addresses when defendants sent their spam e-mail.
10. As a result of the falsified return addresses described above, Hotmail was inundated with hundreds of thousands of misdirected responses to defendants' spam, including complaints from Hotmail subscribers regarding the spam and "bounced back" e-mails which had been sent by defendants to nonexistent or incorrect e-mail addresses. This overwhelming number of e-mails took up a substantial amount of Hotmail's finite computer space, threatened to delay and otherwise adversely affect Hotmail's subscribers in sending and receiving e- mail, resulted in significant costs to Hotmail in terms of increased personnel necessary to sort and respond to the misdirected complaints, and damaged Hotmail's reputation and goodwill.
11. In particular, Hotmail discovered a spam e-mail message advertising pornographic material that was sent by ALS. While this spam originated from ALS and was transmitted through an E-mail Provider other than Hotmail, ALS falsely designated a real Hotmail e-mail address as the point of origin. The e-mail address chosen for this purpose was "geri748@hotmail.com."
12. Hotmail also discovered a number of spam e-mail messages advertising pornographic material that were sent by LCGM. While these spam e-mails originated from LCGM and were transmitted through an E-mail Provider other than Hotmail, LCGM falsely designated a number of real Hotmail e-mail address as the points of origin. The e-mail addresses chosen for this purpose were "becky167 @hotmail.com;" "deena54@hotmail.com;" "marisa104@hotmail.com;" "shelly345 @hotmail.com;" sonnie67@hotmail.com; "ashley_113@hotmail.com;" "grace44 @hotmail.com;" "jess_59@hotmail.com;" "kristina17@hotmail.com;" "nellie24 @hotmail.com;" and, "tyrona56@hotmail.com."
13. Hotmail also discovered a spam e-mail message advertising pornographic material that was sent by Moss. While this spam originated from Moss and was transmitted through an E-mail Provider other than Hotmail, Moss falsely designated a real Hotmail e-mail address as the point of origin. The e- mail address chosen for this purpose was "rebecca_h19@hotmail.com."
14. Hotmail also discovered a spam e-mail message advertising a cable descrambler kit that was sent by Palmer. While this spam originated from Palmer and was transmitted through an E-mail Provider other than Hotmail, Palmer falsely designated two real Hotmail e-mail addresses as the points of origin. The e-mail addresses chosen for this purpose were "kelCA@hotmail.com" and "angiCA@hotmail.com."
15. Hotmail also discovered a spam e-mail message advertising a service that matches people seeking cash grants that was sent by Financial. While this spam originated from Financial and was transmitted through an E-mail Provider other than Hotmail, Financial falsely designated a real Hotmail e-mail address as the point of origin. The e-mail address chosen for this purpose was "order_desk66 @hotmail.com."
16. Hotmail also discovered a number of spam e-mail messages advertising pornography that were sent by Snow. While this spam originated from Snow and was transmitted through an E-mail Provider other than Hotmail, Snow falsely designated several real Hotmail e-mail address as the point of origin. The e-mail addresses chosen for this purpose were bettyharris123@hotmail.com; "annharris123@hotmail.com;" "cindyharris123@hotmail.com;" "wilmasimpson @hotmail.com;" rw3570@hotmail.com; "rw3560@hotmail.com;" and, "jw2244 @hotmail.com."
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Breach Of Contract
35. The evidence supports a finding that plaintiff will likely prevail on its breach of contract claim and that there are at least serious questions going to the merits of this claim in that plaintiff has presented evidence of the following: that defendants obtained a number of Hotmail mailboxes and access to Hotmail's services; that in so doing defendants agreed to abide by Hotmail's Terms of Service which prohibit using a Hotmail account for purposes of sending spam and/or pornography; that defendants breached their contract with Hotmail by using Hotmail's services to facilitate sending spam and/or pornography; that Hotmail complied with the conditions of the contract except those from which its performance was excused; and that if defendants are not enjoined they will continue to create such accounts in violation of the Terms of Service.