The Independent Counsel

Software Licensing

Shrink-wrap Licenses - Shrinking Protection


Ever since commercial software was first marketed, it has been licensed, not sold. Licensing software has enabled commercial software developers to protect the intellectual property in their products that gives them a competitive edge, limit their liability from damages arising from products expected to have unknown defects, and restrict use to enhance revenue opportunities.

Copyright laws provide limited protection against copying the products, but do not address the other areas of concern to commercial developers. Software licenses have traditionally been written agreements, signed by both the users and the licensors, where both parties had the opportunity to bargain over the terms.

However, with the advent of mass marketed software, where a single software product may be distributed to thousands, or even millions, of users through multiple direct and indirect channels, it has not been practical for the software developers to secure an individual software license agreement from each user.

The Shrink Wrap License “Agreement”

To facilitate commercial transactions in the mass market environment, the software industry adopted the concept of the “shrink-wrap license”. Under this concept, a license “agreement” setting forth the terms under which the developer was “selling” a right to use the software product is typically printed on the packaging containing the media on which the software code is loaded.

The shrink wrap “agreement” typically includes restrictions on use and limitations on the scope of the developer's warranty and liability. The “agreement” is intended to take effect upon the opening of the media packaging. This practice has found use for more than 15 years, and has been very controversial from its inception, especially as to its enforceability in the area of consumer use. However, there have been few cases where enforcement has been tested.

A Successful Challenge to Shrink Wrap

In January, 1996, a federal district court in Wisconsin granted summary judgment in favor of an alleged violator of such an agreement based on the view that most shrink-wrap licenses are not enforceable, even in transactions between businesses. ProCD Inc. v. Zeidenberg. In ProCD, The defendant, a competitor of the developer of a telephone directory software package, purchased several versions of the plaintiff’s software package loaded on CD-ROM.

The software package was the product of millions of dollars spent by the developer to create both the directory and the access software found on the CD-ROM. The defendant had copied the directory from the developer’s commercially available CD-ROM and offered it to third parties over the Internet utilizing its own proprietary access software.

The court decided that the data in the directory, consisting merely of telephone listings, lacked the requisite originality to afford it copyright protection. The defendant therefore was not foreclosed from copying the data and using it without restriction under the United States Copyright Act.

However, the developer claimed that even if the data was unprotected by the Copyright Act, it was still entitled to protection under the terms of the shrink-wrap license agreement stated on the CD-ROM packaging. These terms included, among other things, restrictions on the use and distribution of the data within.

The court also refused to enforce the shrink-wrap license terms based on the principle that no purchaser of any product can be bound by terms that he has no opportunity to review before purchase. In this case, the developer’s outside packaging referred to additional terms to be found within the box, which the defendant could not see without first purchasing and opening the box. In applying the Uniform Commercial Code to these facts, the court concluded that the unseen terms within the box were merely proposals that any purchaser could reject.

The fact that the defendant purchased several versions of the software, each containing the same shrink-wrap license, was considered by the court and dismissed as irrelevant. The court found that, since the terms in each box were unilaterally determined by the developer and could be changed at will, no purchaser could be bound by knowledge of terms found in other packages because there was no assurance that other packages would contain those same terms.

Comment: The ProCD decision makes it crucial for mass market software developers to display key licensing terms prominently on the outside packaging of their software in order to reserve greater rights and protections than are available under copyright law.

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1996; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.