Shrink Wrap License Agreements

Unravelling some of the confusing legal issues

By Paul Goodman, New York, New York

About the author

Paul Goodman is a partner in the New York City law firm of Elias, Goodman & Shank, where he specializes in computer law and in representing software developers. He is also the publisher of the recently released Software Company Legal Guide. He has earned a Masters Degree in Computer Science and is the author of four books on Macintosh programming. He welcomes your comments on this article (AppleLink: Law. Goodman). This article is provided for general informational purposes only. If specific legal advice is required, the services of a knowledgeable attorney should be sought.

It’s finally finished. For the last two years, your small company has been working on its newest software product. Countless days, evenings and weekends went into its design, programming, testing and debugging. All of the details are almost complete. The documentation is finished, the disks are at the duplicator and the design firm has just delivered a magnificent logo and packaging. But, hold everything. You realize that there is something you forgot. The software license agreement. No problem you say as you grab for the packaging from that utility you bought yesterday. All you have to do is copy what they have and you’ll be just fine.

This scenario might be slightly exaggerated but in most cases it is not far from what might actually happen. The license agreement that will be included with a software product is often not given much of a thought. This is unfortunate since the importance of the license should not be underestimated. This article will attempt to unravel some of the confusing legal issues surrounding license agreements and provide some guidance for the befuddled software publisher.

Why Do I Need One?

Often referred to as a “shrink-wrap license”, the software license agreement seeks to establish a contractual relationship between the publisher and the user that is separate and distinct from the contract of sale formed between the retailer and the purchaser. This contractual relationship (what law professors call “privity of contract”) is needed in order to protect the software developer from possible legal consequences arising out of a myriad of situations. Although published software is protected by the Copyright Act (presuming that you haven’t inadvertently placed it into the public domain), this protection is limited. The Copyright Act was designed to protect an author’s rights by preventing the unauthorized copying of their work but that protection is only a part of what a publisher needs.

Relying solely on the Copyright Act, the publisher would have no way to attempt to limit the reverse engineering of the software, to limit the warranties associated with the software or to limit the potential damages which might be awarded in a law suit against the publisher. Yet, despite its importance, many publishers sell their software with either a poorly constructed license or no license whatsoever.

Are They Valid?

Despite their widespread use, there still remain serious legal questions regarding the validity of the shrink-wrap license. Generally, in order to be bound by the terms of a contract, a party must agree to its terms and sign it. However, it would be virtually impossible to have the buyer of a software package execute a written agreement prior to purchasing it since, in the microcomputer industry, software is almost never sold directly by the publisher to the end user. Thus, in order to be effective, there needs to be some mechanism whereby the purchaser agrees to the terms of the license without actually signing on the dotted line. Enter the shrink-wrap license. As originally implemented, visible through the clear plastic shrink wrap covering the software’s packaging is the license agreement printed on the back of the box. Clearly stated on the license is an indication that the act of breaking the wrapping to access the software will be construed as an act of acceptance of the license agreement. Since today, this type of packaging is seen by many companies as unacceptable from a marketing point of view, most companies have now moved the license inside of the box and have sealed the program disks inside of an envelope, but the concept remains the same.

But, does this work? Can the mere reading of an agreement followed by the opening of a package bind the purchaser to the license agreement? You would think that by now there would be a simple answer to this question. But unfortunately, the answer is still unclear since a major legal test of the shrink-wrap license has yet to take place. There does exist legal precedent which suggests that a signed agreement is not necessary to bind a party to an agreement, such as with the typical purchase orders and sales orders used in commercial transactions. But, there is also significant precedent which tends to suggest that courts might not uphold shrink wrap licenses, including a long standing policy to disapprove of so-called “adhesion contracts” where one party has no ability to bargain with the other. However, we feel that at least some aspects of the typical license will be upheld in future court tests, especially the limitations on warranties and liability. Therefore, it is wise that every software package be shipped with a suitable shrink wrap agreement combined with a well constructed mechanism by which the purchaser signifies their acceptance.

Improving the Chances

To improve the chances of being enforced by the courts, the shrink wrap “mechanism” must allow the purchaser at least a minimum chance to analyze their purchase (it is clear that the original shrink wrap concept is the poorest choice in this respect). The mechanism should allow the user access to the documentation to evaluate the program’s functionality and require some significant overt act by the user to signify acceptance of the agreement. As mentioned, one currently popular method is to package the program disks sealed inside of an envelope. The license agreement is either positioned prominently inside the manual, on a separate license sheet or on the envelope containing the program disks. The disk envelope is sealed with a label which reads something like this: “By Opening This Envelope You Are Accepting the Terms of the License.” In addition, some publishers display a screen the first time a package is launched instructing the user to read the license. This scheme is clearly an improvement over the original shrink wrap concept since it allows the user a chance to review the program’s documentation before accepting the license agreement.

Another scheme implemented by some publishers involves a “key” used to activate the software, a password which is sealed inside of a separate envelope from the program disks (the key is also a useful form of copy protection). The program is modified to allow only limited use prior to the entering of the key. When the user reaches the software’s transaction limit they are prompted to enter the password. The envelope and the software indicate that the entering of the key (or just the opening of its envelope) constitutes acceptance of the terms of the license. This mechanism would seem to present a much fairer chance for the user to evaluate the software before deciding whether or not to accept the license agreement, thus, increasing the chances that a court will interpret it as an equitable arrangement. However, this arrangement might leave the publisher exposed to possible liability, since the user can actually load and use the software before they accept the agreement. Should a problem occur, the publisher might not be able to protect itself by asserting the limitations of liability and warranties contained in the license since by the publisher’s own admissions, it would not yet be in effect.

In light of this analysis, how should the prudent publisher structure their license agreements? Although there are no hard and fast answers, what does seem clear is that the user should have an opportunity to review the software’s documentation prior to accepting the license agreement, but should not be able to run the software without accepting the license. The purchaser must also be given the option of returning the software for a full refund should they decide not to accept the license. The availability of this option makes it clear that the acceptance of the license is a voluntary act and not one of adhesion. Returning the software should not be a difficult task for the purchaser, and your dealers should be instructed to accept, for full refund, any software without explanation (or hassle) as long as the seal on the software’s envelope is not broken.

One last consideration would be to insist that the user sign the registration card to signify their acceptance of the license. Registration cards provide an opportunity to have the purchaser actually sign a document which indicates their acceptance of the license agreement. However, it is obvious that this system cannot be primarily relied upon since many users never return registration cards. Therefore, registration cards should be viewed as a back-up to a shrink-wrap license. Since it’s in your interest to have your users sign and return those cards, they should be given some inducement to return them - such as a free update to the software, a t-shirt or some other incentive.

License Contents

Now that we have covered both the need for and the enforceability of a license, we can turn our attention to the actual contents of the license. While there may be variations from product to product, every software license, at a minimum, should cover the areas described below (the actual license language shown is based upon widely used industry standards). In reading the sample provisions, keep in mind that they are presented as examples and are necessarily general in nature and may not reflect the particular needs of your transactions.

Introduction

The license introduction should address the reasons for the agreement, how the user accepts it (by opening the envelope, loading the software, etc.) and what the user should do if they do not wish to be bound by the terms of the agreement (such as return the software for a full refund). For instance:

This is a legal agreement between you and Publisher.  The terms of this Agreement 
govern your use of this software.  Please read this agreement carefully before you open 
this package.   By opening this package you are agreeing to be bound by this Agreement. 
 If you do not agree to the terms of this Agreement please return the entire package intact, 
in the original wrapping, to your dealer for a full refund.

License Grant

Here you set forth the rights granted to the user, the right to use a single copy on a single CPU:

In consideration of payment of the license fee, which is part of the price you paid for 
this software package (referred to in this Agreement as the “Software”), Publisher, as 
Licensor, grants to you, as Licensee, a non-exclusive right to use and display this copy 
of the Software on a single computer (i.e., a single CPU) at one location at any time.

Permitted Use of The Software

In this section you would inform the user that they may not make copies of the software except as a back-up, that they must own a separate copy for each simultaneous user, that they must not give, rent or sell copies to anyone, and that the software should not be decompiled or reverse engineered in any fashion.

The Software and the accompanying written materials are protected by U.S. Copyright 
laws.  Unauthorized copying of the Software, is expressly forbidden.  You may be held legally 
responsible for any copyright infringement that is caused or encouraged by your failure 
to abide by the terms of this Agreement.  Subject to these restrictions, you may make one 
(1) copy of the Software solely for back-up purposes provided such back-up copy contains 
the same proprietary notices as appears in this Software.

As the Licensee, you may physically transfer the Software from one computer to another 
provided that the Software is used on only one computer at a time.  You may not distribute 
copies of the Software or the accompanying written materials to others.  You may not modify, 
adapt, translate, reverse engineer, decompile, disassemble, or create derivative works 
based on the Software.  You may not modify, adapt, translate or create derivative works 
based on the written materials without the prior written consent of Publisher.

This Software is licensed to only you, the Licensee, and may not be transferred to 
anyone else without the prior written consent of Publisher.  In no event may you transfer, 
assign, rent, lease, sell or otherwise dispose of the Software on a temporary or permanent 
basis except as expressly provided herein. 

Warranties and Warranty Disclaimer

The warranty disclaimer specifically excludes the implied and express warranties set forth in the Uniform Commercial Code (“UCC”). These are both the warranties you expressly give to the purchaser and the warranties implied by the law (the warranties of merchantability and fitness for a particular purpose). It is here that you must make some distinction regarding what warranties are being excluded. A software package really contains two products, the software itself and the media on which the software is contained. The publisher’s main concern is to disclaim any express or implied warranty with relation to the performance of the actual software while providing a warranty on media itself.

A standard software warranty exclusion might read as follows:

THE SOFTWARE AND ACCOMPANYING WRITTEN MATERIALS ARE PROVIDED “AS IS” 
WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED OF ANY KIND, AND PUBLISHER 
SPECIFICALLY DISCLAIMS THE WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE 
AND MERCHANTABILITY.

However, Publisher warrants to the original Licensee that the disk(s) on which the Software is recorded is free from defects in materials and workmanship under normal use and service for a period of ninety (90) days from the date of delivery as evidenced by a copy of the receipt of purchase. Further, Publisher hereby limits the duration of any implied warranty(ies) on the disk to the period stated above. Some jurisdictions may not allow limitations on duration of an implied warranty, so the above limitation may not apply to you.

THE ABOVE ARE THE ONLY WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, 
THAT ARE MADE BY PUBLISHER ON THE SOFTWARE.  NO ORAL OR WRITTEN INFORMATION 
OR ADVICE GIVEN BY PUBLISHER, ITS DEALERS, DISTRIBUTORS, AGENTS OR EMPLOYEES 
SHALL CREATE A WARRANTY OR IN ANY WAY INCREASE THE SCOPE OF THIS WARRANTY, 
AND YOU MAY NOT RELY UPON SUCH INFORMATION OR ADVISE.  THIS WARRANTY GIVES 
YOU SPECIFIC LEGAL RIGHTS.  YOU MAY HAVE OTHER RIGHTS, WHICH VARY ACCORDING 
TO JURISDICTION.

Limitation of Liability

Along with a limitation of warranties, a complete license agreement also needs a separate limitation of liability. Although many people tend to lump these two together, they are actually two different concepts and need to be addressed separately. A disclaimer of warranty is a device used to control the publisher’s liability by reducing the number of situations under which they may be sued. A limitation of liability, on the other hand, restricts the legal remedies available to the buyer once a breach is established.

Limiting your liability is not quite the same thing as eliminating your liability altogether. Comments to the UCC clearly state that “it is of the very essence of a sales contract that at least minimum adequate remedies be available.” This is taken to mean that a total disavowing of all liability is not permissible. This is of particular danger to the publisher since the UCC also provides that if a limited remedy should fail of its “essential purpose”, the buyer will have available all the powerful remedies usually afforded to a buyer under the UCC.

This provision contains two separate exclusive remedies depending upon the situation. Should a disk prove defective, the remedy is either replacement of the disk or return of the purchase price. Should there by any other problem, the sole, exclusive remedy would be return of the purchase price.

A typical limitation of liability is as follows:

NEITHER PUBLISHER NOR ANYONE ELSE WHO HAS BEEN INVOLVED IN THE CREATION, 
PRODUCTION OR DELIVERY OF THE SOFTWARE SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, 
CONSEQUENTIAL, OR INCIDENTAL DAMAGE (INCLUDING DAMAGE FOR LOSS OF BUSINESS 
PROFIT, BUSINESS INTERRUPTION, LOSS OF DATA, AND THE LIKE) ARISING OUT OF THE 
USE OF OR INABILITY TO USE THE SOFTWARE EVEN IF PUBLISHER HAS BEEN ADVISED OF 
THE POSSIBILITY OF SUCH DAMAGE.  SOME JURISDICTIONS MAY NOT ALLOW THE EXCLUSION 
OR LIMITATION OF LIABILITY FOR CONSEQUENTIAL OR INCIDENTAL DAMAGE.

Publisher’s entire liability and your exclusive remedy as to the disk(s) shall be, at Publisher’s option, either (a) return of the purchase price or (b) replacement of the defective disk. If failure of any disk has resulted from accident, abuse or misapplication, Publisher shall have responsibility to replace the disk or refund the purchase price. Any replacement disk will be warranted for the remainder of the original warranty period or thirty (30) days, whichever is longer. In no event shall Publisher’s liability arising under any cause of action exceed the purchase price of the Software paid by Licensee.

Miscellaneous

Like any agreement, the shrink-wrap license should have its own set of boilerplate provisions. However, an attempt should be made to limit the “legalese” to as little as possible. This provision covers two standard contract provisions, severability and governing law. The severability provision will attempt to preserve the remainder of the agreement should one or more provisions be found by a court to be unenforceable. The governing law provision contained in the first sentence of the provision will have an effect on both where (the locale) any potential law suit should be heard and which set of laws will be used to determine that suit. In general, a publisher should pick the governing law of their home state. In specific:

This Agreement shall be governed by the laws of the State of <state>.  If for any reason 
a court of competent jurisdiction finds any provision of this Agreement, or portion thereof, 
to be unenforceable, that provision of the Agreement shall be enforced to the maximum 
extent permissible so as to effect the intent of the parties, and the remainder of this Agreement 
shall continue in full force and effect.

Some Last Thoughts

Are software license agreements like these fair to the user? In many senses the answer to this question is yes. The dynamic and growing microcomputer software industry provides computer users with an unprecedented variety of software all at a moderate price (especially when compared to mini and mainframe computer software). If software publishers had to assume the risk of the possible consequences that an end user might face, publishers would be forced to charge far greater amounts of money for their software in order to make the assumption of that risk financially prudent. After all, a publisher does not know how a package will be used and when or if a user makes back-ups of valuable data. As most developers know, in the hands of an inexperienced user, even the “safest” software package could cause damage. Thus, while the software license agreement shifts the risk of using the software from the publisher to the user, it is also what affords the public access to varied and inexpensive software.