The inadequacy of shrink-wrap agreements

As regards the cyber environment, the e-world, giga space, or however else you want to call the high-tech world we live in right now, a lot of legal practitioners will agree with me that this environment has created unique legal challenges, as companies and customers move at “Internet speed.”

Mark Twain once said: “Methuselah lived to be 969 years old … you boys and girls will see more in the next hundred years than Methuselah saw in his whole lifetime.” He may have lived for more than nine centuries, but he was not able to witness this phenomenon we call the Internet.

Not too long ago, when a company wanted to enter into a contract with a customer for the sale of goods or the provision of services, each contractual party signed a hard-copy document to indicate agreement with the terms and conditions of the contract. Today, even though high technology has created quite a number of what used to be merely “mythical” paperless offices, though not as plentiful as they should be, many transactions are conducted online between parties who don’t even know each other.

Instead they have been replaced by high-tech contracts with unusually curious names, which, by the way, have been accepted in online business: shrink-wrap agreements, click-wrap agreements, and browse-wrap agreements. These contracts have many advantages in the present e-world over their traditional counterparts — particularly speed and efficiency. But they also pose new risks as the courts struggle with how and whether to enforce them.

These agreements are either printed on the back of or included inside a box containing computer software. They contain a number of legal terms that relate to how the software may be used. The name “shrink-wrap” arose because the agreements are often inside the shrink-wrapped plastic or cellophane that seals the box containing the software. By breaking the shrink wrap, the purchaser agrees to abide by the terms of the contract — or so the software companies would like it to be.

Should you pull out a manual or box from any software product you have bought, you’ll find some interesting terms in the license agreements such as: a) it is illegal to make or distribute copies of this software except to make a backup copy for archive purposes only; b) the software company warrants that the program will perform only as described in the “user documents” and hence no other advertising, description, or representation shall be binding; c) the software company shall not be liable for any damages arising out of the use of or inability to use this product even if the said software company has been advised of the possibility of such damages; d) the documentation that accompanies the software may, of course, not be copied. I think the above is pretty exhaustive. (Should any reader have any additions to the above, I will appreciate their suggestions.)

Shrink-wrap agreements became controversial because there were those who believed that consumers should not be obligated to abide by the terms of an agreement they might never read, particularly if the agreement is inside the box and therefore not even visible until after the purchase is made and the box is opened.

Because the law on obligations and contacts all over the civilized world requires that every binding contract have an “offer” and an “acceptance,” some people argue that shrink-wrap agreements are not enforceable because consumers never accept them. However, as far as my case studies are concerned, there is a celebrated US case that was adjudicated on as early as 1996, more than 12 years ago: the ProCD v. Ziedenberg case.

This case involved a dispute between a software company (ProCD) and a consumer (Zeidenberg). The latter used the software in a manner forbidden by the shrink-wrap agreement. Matthew Zeidenberg purchased a copy of ProCD’s SelectPhone CD software — a database of telephone directories that cost more than US$10 million to compile — from a retail store in 1994.

To protect the investment, ProCD included a shrink-wrap agreement in its SelectPhone software stating that it could be used only for non-commercial purposes. The agreement was contained in the printed manual that came with the CDs, and outside the box was a notice that advised purchasers that the software carried restrictions provided for in an enclosed license.

Despite the restrictions, Zeidenberg used the data from the CDs to create a website that offered phone listings for a fee that clearly showed commercial use, which the license forbade.

ProCD thus sued Zeidenberg, whose main defense was that the shrink-wrap agreement was not enforceable. Although the trial court agreed with him, the appellate court did not. It ruled: “Notice on the outside of the box, 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.”

The court emphasized that although the software license was not available to the defendant until after he purchased the CDs, transactions in which the exchange of money precedes the communication of detailed terms are common, such as in buying insurance where the purchaser does not see the insurance contract until after he has paid for it; airline tickets that are not delivered until after a reservation is made, which usually contain elaborate terms about travel, or concert tickets that have licenses printed on the back limiting what the ticket-holder can do at the concert, such as forbidding audiotaping or videotaping.

The appeals court was quite specific when it noted that shrink-wrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general, or the traditional fundamental laws on contracts. If, for instance, therefore, the shrink-wrap agreement inside a software package informs the buyer that he owes an additional US$10,000 or that he must show proof that he participated in a sex orgy, or that he must give up his firstborn son, then, of course, those terms would not be legally binding.

Proceeding under this rationale, the shrink-wrap agreement applicable to the SelectPhone software was ruled upon as enforceable and ProCD could pursue its claims against Matthew Zeidenberg for breach of contract.

There has been wide acceptance of the Zeidenberg case ruling, but it is not universally accepted up to now. There is still hesitation to accept the enforceability of shrink-wrap agreements even though more than a decade has elapsed since its adjudication. And this is where the inadequacy lies.

We must take note of the fact, which the court in the ProCD v. Zeidenberg case noted, that not all software purchases are made at retail stores where the product is contained in a box. Even as the court wrote its opinion as early as 1996, the Internet as a medium of conducting business, meaning e-commerce, has grown exponentially.

Because of this, companies that offer products and services online have employed a mechanism similar to the shrink-wrap agreement when they want their customers to agree to certain terms.

I am certain that if you have signed up for or purchased anything online, you have come across this variation. It’s called the “click-wrap” agreement, which is generally an online variation of the shrink-wrap agreement. This click-wrap license typically displays an agreement to a Web user who has to click on a link or button to indicate his willingness to be bound by the terms of the agreement before he can begin downloading the software, using the free e-mail service, buying books, etc.

There is a third type of high-tech contract that has appeared since the introduction of the World Wide Web, something that courts have come to label as the “browse-wrap” agreement.

The latter two agreements can be discussed in future articles of mine due to space limitations. As can be gleaned from the above discussion on shrink-wrap agreements, its inadequacy and lack of general acceptance by the different jurisdictions of the world have to be addressed. I said “inadequacy” because of the indefinite and non-categorical dicta of various adjudications and opinions.

Should fundamental theories and dogmas of judicial systems of the civilized world on crime and punishment change because the cyber world is an altogether different planet … because it is “giga space”?

Certainly not. US Chief Justice Earl Warren said years ago that “the crime problem is in part an overdue debt that the country must pay for ignoring for decades the conditions that breed lawlessness.”

The governments of the world will certainly have to be attuned to the legal complexities and problems of the e-world. They must not violate international law or domestic law, for that matter. Another world-renowned jurist, Justice Louis Brandeis, said: “Crime is contagious. If the government becomes a lawbreaker, it breeds contempt for the law.”

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