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White Paper—Mass-Market License Agreements

I.     Introduction.

This paper reviews legal developments in the enforceability of mass-market software licenses.  By mass-market license, we mean generally standard form license agreements that are accepted by conduct (as opposed to signature), whether or not the licensee is a consumer.

The term mass-market license is also used in the Uniform Computer Information Transactions Act (UCITA), although UCITA defines the term more narrowly than the preceding paragraph.[1]   UCITA provides special protections to licensees in what it defines as mass-market transactions.  While UCITA has yet to be widely adopted,[2] we will consider its treatment of mass-market licenses in this paper.

II.     Formation of Legally-Binding Mass-Market Licenses.

A.     Overview.

Mutual assent is the fundamental basis of contract.  In a mass-market license, end-users manifest assent through conduct indicating acceptance of the license, such as opening the package, or clicking an icon, or by typing in words of acceptance into a computer, after having an opportunity to review the agreement and with knowledge that the conduct will effect assent.

A variety of mass-market license agreements, each employing a different type of acceptance, have been upheld in litigation, including:

Shrink-wrap licenses, where an agreement is visible on the outside of diskette envelopes or other packaging containing a software product and the end-user accepts the agreement by opening the packaging.[3]

In-the-box licenses which accompany packaged products and that the end-user accepts by retaining the product.[4]

Boot-screen licenses where a license or notice of license displayed when the program is installed and user is required to click an icon indicating assent to the license before proceeding.[5]

Click-wrap licenses where a license or notice of license be displayed when an end-user accesses or downloads information from the Internet and user is required to click an icon indicating assent to the license before proceeding.[6]

In each case, acceptance-by-conduct was not a substitute for assent, but rather it is a merely non-verbal mechanism for manifesting assent.  It takes the place of a signature as the vehicle for evidencing the user’s assent to the agreement.

If there is no connection in the mind of the user between the conduct and assent, then the conduct may not be effective to create a binding contract.   For example, in Specht v. Netscape Communications Corp.,[7]a vendor made its software available for download at a Web site, which included an inconspicuous legend requesting users to “Please review and agree to the terms of the [license] before downloading and using the software.”   The legend, which was visible only if users scrolled down to the bottom of the Web page, included a hypertext link to the license itself.  This license format is sometimes referred to as a browse-wrap license.

The court held that downloading software in this case was not effective as an indication of contractual assent because the “primary purpose of downloading is to obtain a product, not to assent to an agreement.”[8]   In contrast, the court observed, clicking on an icon stating “I assent” has no meaning or purpose other than to indicate such assent.  The court also observed that, unlike a click-wrap or shrink-wrap licensee, the individual obtaining the software was not made aware that he is entering into a contract because the vendor had not provided adequate notice.

In sum, mass-market licensing is based on the end-user assenting to the vendor’s proposed agreement by engaging in specified conduct after having notice of and an opportunity to review the proposed license agreement.

B.     Pay Now – Terms Later.

Ideally, a vendor would procure an end-user’s assent to the vendor’s mass-market license before the user’s payment for or receipt of the software.  Under these circumstances, there would be a high probability that the mass-market license would be an enforceable contract.

This type of pre-purchase acceptance is easy to implement using a click-wrap type of agreement when software is downloaded over the Internet.  In many other distribution channels, however, license terms are presented after the user has paid for or taken delivery of software.  These so-called “pay now, terms later” transactions may occur with software that is physically delivered in a package that contains the license agreement, such as cases when a user:

• purchases packaged software in a store;
• orders software over the telephone or from an online store and the software is physically shipped to the user; or
• submits a purchase order to a vendor, who ships software to the user in response to the purchase order.

The courts are divided on whether licenses are enforceable in these types of pay now, terms later cases.  In ProCD v. Zeidenberg,[9]  the court found that this pay now/terms later license was enforceable.   In that case, Plaintiff ProCD sued defendant, one of its customers, for violating a use restriction under the license agreement. 

The defendant customer had purchased the product at a retail store, with the license agreement contained within the product.  The district court held that the customer was not bound by the license because he could not have accepted the licensor’s hidden terms prior to the consummation of the transaction at the cash register.  Once the sale was consummated, the court reasoned, the plaintiff’s license could not be imposed on the defendant.

On appeal, the Seventh Circuit reversed, holding that the license was an enforceable even though the license was not presented until after the sale.  In reaching this result, the court first observed that “[t]ransactions in which the exchange of money precedes the communication of detailed terms are common,” citing as examples insurance, air travel and concert tickets.[10]   The court then explained that the final acceptance of a contract can be made after the buyer has taken delivery of the goods and had an opportunity to review the license agreement that accompanies those goods.  The court wrote:

A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance.  A buyer may accept by performing the acts the vendor proposes to treat as acceptance.  And that is what happened.  ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure.  This Zeidenberg did.[11]

The court relied on the fact that the software’s packaging had an externally-visible legend advising prospective buyers that the software was subject to a license and that the defendant had the right to return the software if he objected to those license terms.  The court also said that public policy favored enforcement of mass-market license agreements because they promoted efficient pricing of software products.

Other courts have followed and expanded upon ProCD’s holding.  In Hill v. Gateway 2000, Inc., the Seventh Circuit held that terms of sale accompanying a computer were enforceable against the purchasers.[12]   In this case, the plaintiff purchaser had ordered the computer by telephone.  The manufacturer shipped the computer with accompanying standard terms purporting to govern the sale unless the purchaser returned the computer within 30 days.

Once again stressing a public policy of promoting economic efficiency, the Seventh Circuit applied its reasoning in ProCD to conclude that the plaintiffs in Hill were bound by the manufacturer’s standard terms when they failed to return the computer within the allotted time.

The plaintiffs in Hill tried to distinguish ProCD on the basis that the box containing ProCD’s software displayed a notice that additional terms were to be found within the box and, presumably, no such notice was available to the plaintiffs in Hill (because they ordered by telephone).  The Seventh Circuit brushed aside this distinction by surmising that the plaintiffs must have known before they ordered the computer that “the carton would contain some important terms, and they did not seek to discover these in advance.”[13]

Hill seems to extend ProCD by saying, as a practical matter, that buyers of computer software and hardware are automatically on notice that those products will be accompanied by mass-market terms, and so long as buyers have the opportunity to return the product upon inspection of those terms, they will be bound by those terms.

In a more recent case, i.LAN Systems, Inc. v. Netscout Service Level Corp., a federal district court in Massachusetts followed ProCD to hold that a click-wrap license agreement was enforceable, noting that pay now, terms later is “a practical way to form contracts, especially with purchasers of software.”[14]   The court observed that “If ProCD was correct to enforce a shrink-wrap license agreement, where any assent is implicit, then it must also be correct to enforce a click-wrap license agreement, where the assent is explicit.”[15]

Other courts, notably Step-Saver Data Systems, Inc. v. Wyse Technology and Arizona Retail Systems, Inc. v. Software Link, Inc.,[16] have decided, generally, that mass-market license terms that are initially presented to buyers only after a sale (e.g. found in the packaging) are at best proposals to modify the contract already struck by the parties.  As such, these terms are not enforceable against end-users unless expressly accepted.

Step-Saver and Arizona Retail Systems both pre-date ProCD and, as fate would have it, involved claims lodged against the same defendant, a vendor of the ill-fated PC-MOS software program.  That program was sold with a traditional shrink-wrap license (i.e., literally wrapped in shrink-wrap plastic).

In Arizona Retail Systems, the plaintiff was a value-added reseller who had purchased the software once in an initial transaction and then again in a series of follow-on transactions.  In the initial transaction, the software had been provided on an evaluation basis and the plaintiff did not decide to purchase the software until after its employee had read the license and broken its shrink-wrap seal.

In the follow-on transactions, the plaintiff purchased many copies of the software by placing telephone orders.  During these order calls, the parties would agree on price and quantity but did not discuss other license terms.  At the conclusion of each call, the defendant vendor would ship the ordered software products.

The court held that the shrink-wrap license did apply to the initial transaction, where the plaintiff had taken delivery of the product on an evaluation basis.  The court reasoned that, because the software was initially provided on an evaluation basis, the contract had not been formed at delivery but rather after the plaintiff had reviewed and accepted (by conduct) the vendor’s mass-market license.

In the subsequent transactions, however, the court held that the shrink-wrap license did not apply.  In those deals, the court reasoned, the contract between the parties was formed either on the telephone or at the latest when the defendant shipped the software.  Once the contract was formed, the shrink-wrap license was a mere proposal under U.C.C. § 2-207(2) to add additional terms or a proposal under U.C.C. § 2-209 to modify the agreement.  In either case, the court said, such a proposal requires express assent, which cannot be inferred merely from a party’s conduct in continuing with the agreement.

In a more recent case, Klocek v. Gateway, Inc,[17] the court followed the approach in Step-Saver and Arizona to conclude that the purchaser of a computer was not bound by an in-the-box contract where seller did not mention the contract at the time of the sale.  Expressly rejecting ProCD, the court in Klocek held that the in-the-box license was a proposal for additional terms under U.C.C. § 2-207 that did not become part of the contract until expressly accepted by the customer.

Although Klocek criticizes and rejects ProCD, the decisions are not necessarily at odds.  The underpinning of ProCD was that at the time of the sale, the customer was on notice that additional terms would be proposed later and that the entire transaction was conditioned upon the customer’s acceptance of those terms.  Yet in Klocek, there was no evidence presented that the parties, at the time of the sale, contemplated additional terms.  The court suggests in dicta that, had this been the case, a different result might have followed:

The Court is mindful of the practical considerations which are involved in commercial transactions, but it is not unreasonable for a vendor to clearly communicate to a buyer – at the time of sale – either the complete terms of the sale or the fact that the vendor will propose additional terms as a condition of sale, if that be the case.[18]

             In sum, there is an apparent split in authority among the courts as to whether license terms are enforceable in pay now, terms later transactions.  In any case, vendors can increase the probability that license terms will be enforced by putting customers on notice of the license before orders or payment is accepted or products are shipped and by offering end-users the right to return products if they do not agree with the license terms.

C.     License vs. Sale.

One reason vendors distribute software under mass-market licenses is to avoid transferring ownership of copies of their software.  When a copy of software is sold, as opposed to merely licensed, the end-user, as owner of the copy, has certain rights that may undermine the vendor’s business model.

In particular under §109 of the Copyright Act, the owner of a copy of software entitled to sell or otherwise dispose of possession of that a copy without the authority of the copyright owner.  Vendors in many cases may not want end users to transfer the software to other end users.

Additionally, under §117, the owner of a copy computer program has a statutory privilege to install and use that copy on a machine.  This broad statutory right may not be consistent with a licensing model that only allows and end user to install and execute software on a certain type of machine or for a certain purpose.

The license vs. sale distinction maintained by vendors has been challenged by a recent decision in the Central District of California in the case of SoftMan Products Company LLC v. Adobe Systems Inc.[19]That case involved a reseller who acquired bundled packages of Adobe software on the open market, broke the packages apart and then resold the components in violation of the Adobe’s license agreement.   When Adobe sued, the defendant argued that this conduct was protected by the first sale doctrine of §109, since the defendant had acquired title to the copies in a sale.

The court agreed with the defendant, holding that Adobe had sold copies of its software, notwithstanding that fact that Adobe had included a mass-market license agreement with the software.   Going well beyond the case before it, the court in essence announced that, notwithstanding the words and intentions of the contracting parties, a transaction will be deemed a sale, not a license, if certain attributes are present.

These attributes include:  (i) upfront, lump sum payments; (ii) a perpetual term (or a term that runs indefinitely without provisions for renewal); (iii) the software is priced per copy distributed; (iv) the licensee/buyer accepts the risk that the software will be damaged, lost, or unsold; (v) subsequent transfer of the license is neither prohibited nor conditioned on the licensor’s prior approval; and (vi) restrictions on use whose principal purpose is to protect intangible copyrightable subject matter, not to preserve property interests in individual program copies.[20]   The court most heavily weighed the first two factors, stating, “a single payment for a perpetual transfer of possession is, in reality, a sale of personal property and therefore transfers ownership of that property, the copy of the software.”[21]

It is important to note in this case that the defendant, as a reseller and not an end-user, had never accepted Adobe’s license because it had not opened and installed the packaged software or otherwise undertaken the conduct that would have constitute acceptance of those agreements.   Thus, the formation of the mass-market contract was not at issue.

In some sense, then, the SoftMan case is not a restraint or rejection on the ability of commercial actors to enter into mass-market contracts; it is a more dramatic restraint and rejection on the ability of a commercial actors to enter into license relationships when software is licensed for a perpetual term in consideration of one up-front payment.

III.     UCITA’s Treatment of Mass-Market Contracts.

UCITA has been adopted in only two states (Virginia and Maryland), but has a number of provisions sanctioning – and regulating – mass-market licensing.

A.     Manifestation of Assent under UCITA.

Under UCITA Section 208, “[a] party adopts the terms of a record, including a standard form, as the terms of the contract if the party agrees to the record, such as by manifesting assent.”

Under UCITA Section 112, the term “manifesting assent” means that the person, acting with knowledge of, or having an opportunity to review, the record or term or a copy of it:  (1) authenticates the record or term with intent to adopt or accept it; or (2) intentionally engages in conduct or makes statements with reason to know that the other party or its electronic agent may infer from the conduct or statement that the person assents to the record or term.[22]

If assent is manifested by conduct, UCITA affords vendors an evidentiary benefit if they provide a double assent procedure to confirm assent.[23]

B.     Online Assent.

UCITA Section 211 provides specific guidance for click-wrap licenses used when a vendor makes software or other information available to a licensee via the Internet site.  In such a case, the vendor has provided an adequate “opportunity to review” the terms of the license if the vendor:

(1)  makes the standard terms of the license readily available for review by the licensee before the information is delivered or the licensee becomes obligated to pay, whichever occurs first, by:

• (A)displaying prominently and in close proximity to a description of the computer information, or to instructions or steps for acquiring it, the standard terms or a reference to an electronic location from which they can be readily obtained; or
• (B)disclosing the availability of the standard terms in a prominent place on the site from which the computer information is offered and promptly furnishing a copy of the standard terms on request before the transfer of the computer information; and

(2)  does not take affirmative acts to prevent printing or storage of the standard terms for archival or review purposes by the licensee.

UCITA Section 214 also specifies that consumers are not bound by certain errors in messages they create unless a “reasonable method” to detect and correct or avoid the error was provided (i.e., a confirmation screen).

C.     Pay Now, Terms Later.

UCITA’s treatment of pay now, terms later transactions is consistent with the Seventh Circuit’s reasoning in ProCD.  Under UCITA Section 208, the terms of a license may be adopted after beginning performance or use if the parties had reason to know that there would be a follow-on agreement.  If the parties fail to agree on the follow-on terms, the subject matter of the transaction is to be returned to the vendor.

In mass-market transactions, UCITA Section 209 provides a more elaborate (and more licensee-favorable) rule.  Under Section 209, if a mass-market license is not available in a manner permitting an opportunity for review by the licensee before the licensee becomes obligated to pay, and the licensee does not agree to the license after having an opportunity to review, then the licensee is entitled to return the software and to receive:  (1) reimbursement of reasonable expenses in returning the software; and (2) compensation for any reasonable and foreseeable costs of restoring licensee’s system to reverse changes in the system caused by the installation.

IV.     Conclusion

Under prevailing law, mass-market license agreements should be enforceable if the end-user: (1) has notice of the agreement and has an opportunity to review it before entering the transaction, (2) knowingly engages in affirmative conduct that constitutes acceptance of the agreement, and (3) has an opportunity, in lieu of acceptance, to decline the agreement and forego the licensing transaction.

Although judicial trend seems to be toward acceptance of mass market licensing along the lines of ProCD, Vendors who sell packaged software should consider structuring licensing programs to survive judicial scrutiny under Step-Saver or Klocek by ensuring that notice of license terms is provided prior to acceptance of orders or payment or shipment of software.  This means providing notice of the license terms early and often on packaging, in collateral, and in other pre-sales communications.  Prospective users should have easy opportunity to access and review the license agreement before manifesting assent.  Notice should be especially conspicuous in connection with describing for the end-user the conduct that is to constitute acceptance.