Executive Intellectual Property Bulletin
A Shrinkwrap License is an Enforceable Contract in the Seventh Circuit
The United States Court of Appeals for the Seventh Circuit (which includes Illinois, Indiana, and Wisconsin) recently ruled that a shrinkwrap license is enforceable as an ordinary contract. (ProCD Inc. v. Zeidenberg, CA 7, No. 96-1139, 6/20/96).
ProCD developed an extensive database of telephone listings and a set of programs to use the data in different ways. They package and sell this product in a sealed box. A shrinkwrap license is included inside the box with the set of CD-ROM disks holding the telephone listings and programs. A statement on the outside of the box informs prospective purchasers that buying the software subjects them to the terms and conditions of the enclosed agreement. In addition, the first time the software is activated it displays a screen containing the essential elements of the license.
ProCD's license agreement states in part that the software and data can only be copied for personal use and that distribution or sublicensing of the data and software is expressly prohibited. Matthew Zeidenberg purchased a copy of the ProCD software which included the shrinkwrap license. Zeidenberg ran the software, downloaded the telephone listing data, and incorporated the data into his own database of telephone listings. Zeidenberg then sold access to his database over the Internet. ProCD subsequently sued Zeidenberg for copyright infringement and for violation of the shrinkwrap agreement.
At trial the Wisconsin district court held that the telephone listings were uncopyrightable and that the shrinkwrap license was ineffective against Zeidenberg because he did not consent to the terms of the agreement at the time of purchase. On appeal, the Seventh Circuit focused on the contract issues raised by ProCD's claim that Zeidenberg violated the terms of the agreement, holding shrinkwrap licenses to be enforceable contracts. The court stated that even though the purchaser is not able to review the specific terms of the agreement prior to purchase, a statement on the outside of the package is sufficient to put the purchaser on notice that certain limitations apply to their use of the product. The court paralleled Zeidenberg's purchase with other commercial transactions where the purchaser pays for the product before receiving the detailed terms of the purchase, such as purchasing an airline ticket or a radio. As a result the court held that the terms of a shrinkwrap agreement, like those of other forms of contracts, are enforceable unless they are unconscionable or violate a specific rule of law.
The appellate court did not address ProCD's copyright claim. The court stated that contract rights are private rights and do not fall within the rights established by the Copyright Act. By the court's analysis, copyright law is a right against the world, preventing certain uses unless permission obtained from the copyright owner. A copyright provides protection for software against those having no permission to use the software. Once a user is given permission to use the software in some way, however, it becomes a private issue of determining the terms of the agreement. An agreement between the two parties documents the permission the purchaser has obtained from the copyright owner and makes scope of permissible use a contract issue instead of a copyright issue.
Although there are few court cases directly on point, historically shrinkwrap licenses have been generally found unenforceable. The ProCD case will stimulate new discussion and continued efforts to better define the efficacy of such licenses. Recent decisions and trends in legislative actions are moving toward expanding the enforceability of shrinkwrap agreements. As a result, it is a good idea to include a shrinkwrap license with packaged software products, so long as purchasers have prior notice of the existence of the license. The still-unsettled status of shrinkwrap licenses does, however, warrant considering alternative positions. Particular circumstances may speak toward pursuing protection through other avenues such as patent or copyright. Each software developer must consider what aspects of their product they wish to protect and how to best protect those aspects.
For more information on this topic and how these decisions may affect U.S. industry and trade, please contact Steven W. Lundberg or any one of the other attorneys at Schwegman, Lundberg & Woessner, P.A. at 612-339-0331 or by facsimile at 612-339-3061, or via the Internet at Web site (http://www.slwk.com).
