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Understanding Alternative Licensing Models

Updated: Dec 17, 2019

A. Shrink-wrap Licenses

Shrink-wrap licenses derive their name from the practice of containing them on (or currently in) a shrink-wrap package that also contains the software and documentation. The license is visible through the cellophane packaging, and it usually provides that the purchaser is bound by the terms of the license upon opening the shrink-wrap. If the licensee does not agree with and therefore does not wish to be bound by the terms of the license, it should return the unopened package to the licensor for a full refund. There is no opportunity to negotiate the terms of the license.


Initially, courts were hesitant to enforce shrink-wrap licenses. Courts upholding shrink-wrap licenses also use the Uniform Commercial Code (UCC) as well as other laws. See generally Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991) (shrink-wrap license not enforceable under Section 2-207 of UCC as license terms mutually altered the contract between the parties); Arizona Retail Systems v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993) (shrink-wrap license not binding under UCC Sections 2-207 and 2-209). See also Vault Corporation v. Quaid Software, Ltd., 847 F.2d 255 (5th Cir. 1988) (provisions of shrink-wrap license unenforceable to the extent their validity is based on Louisiana Software License Enforcement Act that is preempted by federal copyright law).

In ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), the Seventh Circuit held that “shrink-wrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general” (i.e., unconscionable). The court rejected the applicability of UCC § 2-207 stating that a battle of the forms could not exist if only one form existed. Thus, there was initially a stark dichotomy of opinion as to the enforceability of shrink-wrap licenses. See also Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997), cert. denied, 522 U.S. 808 (1997) (contract terms in computer box enforceable, including arbitration clause); M.A. Mortenson Co., Inc. v. Timberline Software Corp., 970 P.2d 803 (Wash. 1999), aff’d 998 P.2d 305 (Wash. 2000), aff’d, No. 67796-4, 2000 Wash. LEXIS 287 (Wash. Sup. Ct. July 11, 2000); Bowers v. Baystate Technologies, Inc., 320 F.3d 1317 (Fed. Cir. 2003) (Copyright Act does not preempt or narrow contractual prohibition on reverse engineering contained in shrink-wrap license).


Since ProCD, many federal and state courts have upheld licenses given to the customer after payment of the license fee, provided the licensee has the right to cancel the transaction once it receives the license terms and is unwilling to accept them. See Meridian Project Systems, Inc. v. Hardin Const. Co., 42 F. Supp.2d 1101 (E.D. Cal. 2006) (shrink-wrap EULA not unconscionable because buyer did not see license prior to purchasing software; EULA not preempted by Copyright Act.). See also Hill v. Gateway 2000, Inc., 105 F.3d 1147, 1149–50 (7th Cir. 1997), cert. denied 522 U.S. 808 (1997); O’Quin v. Verizon Wireless, 256 F. Supp.2d 512 (M.D. La. 2003); Lozano v. AT&T Wireless, 216 F. Supp.2d 1071, 1073 (C.D. Cal. 2002); i.Lan Systems, Inc. v. NetScout Service Level Corp., 183 F. Supp.2d 328, 337–38 (D. Mass. 2002); Moore v. Microsoft Corp., 741 N.Y.S.2d 91 (2002); Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (1998); M.A. Mortenson Co. v. Timberline Software Corp., 970 P.2d 803, 809 (Wash. 1999).


Given that most shrink-wrapped software is utilized in the consumer market, it is possible that it is subject to the Magnuson-Moss Act. The contrary is also possible. Consequently, to avoid coverage under the Magnuson-Moss Act, and the accompanying limitations, a licensor must be very careful as to the warranties it makes.


Section 209 of the Uniform Computer Information Transactions Act (UCITA) recognizes the validity of shrink-wrap licenses with certain limitations.


For a more detailed discussion, see Connors, Dissecting Electronic Arts’ Spore: An Analysis of the Illicit Transfer of Copyright Ownership of User-Generated Content in Computer Software, 4 Liberty U. L. Rev. 405 (2010); Lemley, Intellectual Property and Shrink-wrap Licenses, 68 S. Cal. L. Rev. 1239 (1995); Moore and Hadden, On-Line Software Distribution: New Life for “Shrink-wrap” Licenses?, 13 Computer Law. 1 (April 1996); Recent Legal Developments in Shrink Wrap License Agreements, 12 Computer L. Strategist 1 (April 1996).

For a general discussion, see Kim, Clicking and Cringing, 86 Or. L.R. 797 (2007); Rowles, Shrink-Wrap and Click-Wrap Agreements Under the Uniform Computer Information Transactions Act, 17 E-Commerce Advisor 3 (May 2001); Rowles, Enforceability of Shrink-Wrap and Click-Wrap Licenses—Revisited, 18 E-Commerce Advisor 1 (June 2002).


B. Click-wrap Licenses


Click-wrap licenses are similar to shrink-wrap licenses except that they are viewed online and the user must click on an icon to accept the terms of the license. Requiring the user to manifest its assent provides a licensor with a stronger argument for enforcing a license than otherwise may be made in the case of a shrink-wrap license.


Click-wrap licenses are generally held to be enforceable when the license terms are viewed prior to the software’s purchase or installation. See, e.g., i.LAN Systems, Inc. v. NetScout Service Level Corp., 183 F. Supp.2d 328 (D. Mass. 2002); Davidson & Assocs. v. Jung, 422 F.3d 630 (8th Cir. 2005). See generally Caspi v. Microsoft Corp., 743 A.2d 851 (N.J. App. Div. 1999) (forum selection clause in click wrap agreement was enforceable); A.V. v. iParadigms, LLC, 544 F. Supp.2d 473 (E.D. Va. 2008) (minors bound by terms set forth in click-wrap agreement). A click-wrap agreement will generally be enforced if the user is given the opportunity to read the digital license agreement prior to delivery of the software. Moore v. Microsoft Corp., 293 A.D.2d 587 (N.Y.A.D. 2002). For a general discussion, see Rowles, Shrink-Wrap and Click-Wrap Agreements Under the Uniform Computer Information Transactions Act, 17 E-Commerce Advisor 3 (May 2001); Rowles, Enforceability of Shrink-Wrap and Click-Wrap Licenses—Revisited, 18 E-Com. Advisor 1 (June 2002).


However, licensors must be careful in structuring the click-through process. Licensees should be required to scroll through the license terms prior to being able to assent to the terms. Licensors should not use hyperlinks or scroll boxes allowing the licensee to avoid navigating through the license terms. Prudent licensors should present two options: the option to click “I Agree” and the option to click “I Do Not Agree.” The licensor should not use amorphous terms such as “Continue,” “Next Page,” or “Process My Order” to indicate assent. At least one court refused to enforce the provisions of a click-wrap agreement when the user had to scroll down below the “download” button to see the license terms and where the “download” button did not indicate unambiguous assent to the terms. See Specht v. Netscape, 306 F.3d 17, 35 (2d Cir. 2002). Rather than use language such as “please review and agree to the terms” on the button, the licensor should require the licensee to indicate its assent, by clicking, “I agree to the terms” after the license terms have been displayed.


The licensor should retain all records documenting the licensee’s assent, including the terms the licensee agreed to and the date of the licensee’s assent. Further, the licensor should ensure there are no existing agreements between the parties that may cause a conflict among the different written agreements, such as a requirement that any modification of the initial agreement must be in writing signed by authorized representatives of both parties. One court has upheld the right of a licensor to unilaterally modify the license terms as a result of the licensor including a provision in the license permitting the licensor to “modify the agreement at any time by notifying [the licensee] or by posting a new agreement.” Margae, Inc. v. Clear Link Technologies, LLC, 2008 WL 2465450 (D. Utah June 16, 2008). Like other breach claims involving traditional software licenses, state law claims involving breach of click-wrap copyright licenses are preempted by federal copyright law. Microstrategy, Inc. v. Netsolve, Inc., 368 F. Supp.2d 533 (E.D. Va. 2005).


For a general overview of the enforceability of click-wrap and shrink-wrap licenses, see Boykin, Survey of E-Contracting Cases: Browsewrap, Clickwrap, and Modified Clickwrap Agreements, 68 Bus. Law. 257 (Nov. 2012); Cunningham & Witkow, Click with Caution: Liability for Breach of Click-Wrap and Browse-Wrap Agreements, 23 Computer & Internet Law. 1 (June 2006); Rowles, Shrink-Wrap and Click-Wrap Agreements Under the Uniform Computer Information Transactions Act, 17 E-Commerce Advisor 3 (May 2001); Rowles, Enforceability of Shrink-Wrap and Click-Wrap Licenses—Revisited, 18 E-Commerce Advisor 1 (June 2002); Grierson, Enforceability of “Click-wrap” or “Shrink-wrap” Agreements Common in Computer Software, Hardware, and Internet Transactions, 106 A.L.R. 5th 309 (2003); Dessent, Browse-wraps, Click-Wraps and Cyberlaw: Our Shrinking (Wrap) World, 25 T. Jefferson L. Rev. 1 (2002); Kunz et al., Browse-Wrap Agreements: Validity of Implied Assent in Electronic Form Agreements, 59 Bus. Law. 279 (2003); and Kunz et al., Click-Through Agreements: Strategies for Avoiding Disputes on Validity of Assent, 57 Bus. Law. 401 (2001).


C. Browse-wrap Licenses


Browse-wrap licenses are licenses posted on website that are usually accessed through a hyperlink and that do not require a user to affirmatively indicate his/her acceptance of the license terms. See Pollstar v. Gigmania, Ltd., 170 F. Supp.2d 974, 981 (E.D. Cal. 2000) (“[A] browse wrap license is part of the website and the user assents to the contract when the user visits the website.”). Browse-wrap licenses are generally enforceable even if the user did not read the license terms, provided that the terms were available to the user prior to acceptance. Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004); Druyan v. Jagger, 508 F. Supp. 228 (S.D.N.Y. 2007). “The validity of a browse-wrap license turns on whether a website user has actual or constructive knowledge of a site’s terms and conditions prior to using the site.” Southwest Airlines Co. v. BoardFirst, L.L.C., 2007 WL 4823761 *5 (N.D. Tex. Sept. 12, 2007).


For a general overview, see Boykin, Survey of E-Contracting Cases: Browsewrap, Clickwrap, and Modified Clickwrap Agreements, 68 Bus. Law. 257 (Nov. 2012); Rambarran & Hunt, Are Browse-Wrap Agreements All They Are Wrapped Up to Be?, 9 Tul. J. Tech. & Intell. Prop. 173 (Spring 2007); Lemley, Terms of Use, 91 Minn. L. Rev. 459, 472-76 (2006) (summarizing circumstances under which browse-wrap agreements are valid); Tracy, Legal Update: Browsewrap Agreements: Register.com v. Verio Inc., 11 B.U. J. Sci. & Tech. L. 164 (2005); Kunz et al., Browse-Wrap Agreements: Validity of Implied Assent in Electronic Form Agreements, 59 Bus. Law. 279 (Nov. 2003).

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