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Federal Appeals Court Holds Shrink Wrap License Unenforceable

January 1992

Over the last five years we have reported two cases in which software vendors unsuccessfully attempted to enforce shrink wrap licenses. To the best of our knowledge, no court to date has found such an agreement to be enforceable.

The U.S. Court of Appeals in Philadelphia has recently issued an important decision on the legality of shrink-wrap licenses, holding that they are unenforceable when the software is shipped to a value added reseller, or “VAR.”

In this case a VAR, Step-Saver Data Systems, Inc., purchased software from The Software Link (TSL). After experiencing problems with the software and being sued by several customers, Step-Saver sued TSL for breach of express and implied warranties. TSL claimed in defense that its shrink wrap license, which appeared on the outside of each package of software, disclaimed any warranties. Based on this argument, the trial court dismissed the claims against TSL.

Step-Saver appealed, and the Court of Appeals reversed. The court held that the dispute was governed by the Uniform Commercial Code (the “UCC”), which, with minor variations, is the body of law governing the sale of goods in most U.S. states.

Step-Saver and TSL did business in the following manner: Step-Saver would call and order software packages from TSL, usually in lots of 20 copies at a time. TSL would accept the order, and promise to ship. Step-Saver would send a P.O and TSL would ship the product, together with an invoice. The invoice and the P.O. both would recite price, quantity and payment terms, but make no mention of warranties. The software would, however, contain what the court called a “box-top license,” disclaiming all warranties. The box-top license also stated that opening the package constituted acceptance of the license, and gave the recipient the right to return the package unopened and receive a full refund.

The court found that under these circumstances the shrink-wrap license could not be enforced. The court held that whether the license was part of the contract must be determined under Section 2-207 of the UCC, a particularly thorny (but frequently applied) provision of the UCC, which is used to determine the terms of a contract where the parties send each other conflicting forms with different provisions.

Under Section 2-207, where there is a contract but one of the parties sends a writing proposing new significant terms, the new terms do not become part of the agreement. The court held that the box-top license’s disclaimer of warranties was a new term that materially altered the contract; therefore, it did not become a part of the contract.

TLB Comment : The court’s ruling does not apply to situations where a consumer purchases a software package at a retail location and the package has a conspicuous warranty disclaimer on the outside. The court noted that in this situation the purchaser is made aware of the disclaimer before the contract of sale is formed, not afterwards. The retail sale purchase may, however, be the only situation in which a shrink-wrap warranty disclaimer is effective. The Step-Saver decision makes clear that when software is ordered by mail or telephone, a box-top license will not be effective to disclaim warranties.

For companies who distribute software through VARs, OEMs, distributors or retailers, the lesson also is clear: if the vendor wishes to eliminate the risk that it will be caught up in a breach of warranty suit, it cannot rely on shrink-wrap licenses. The vendor must require a purchaser to sign a written offer containing the warranty disclaimer, and the offer must expressly limit acceptance to the terms contained in the offer.