SEVENTH CIRCUIT HOLDS "SHRINKWRAP" LICENSE AGREEMENTS
ENFORCEABLE & NOT PREEMPTED BY COPYRIGHT ACT -
ProCD, Inc. v. Zeidenberg


Copyright (c) 1996 Christopher R. Costa

In ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1996 WL 339807, 1996 U.S. App. LEXIS 14951 (7th Cir. June 20, 1996), the U.S. Court of Appeals held that shrinkwrap license agreements are enforceable and not preempted by the Copyright Act. (The term "shrinkwrap"refers to the cellophane or plastic wrapping around the software package).

This landmark decision upholds the computer industry's practice of including license terms on or inside packaging or on envelopes containing software and furthers the industry's commercial interests in protecting intellectual property rights while facilitating distribution.

The Seventh Circuit ruled that shrinkwrap license agreements will be judged as any other contact and enforced, unless their terms are "objectionable on grounds applicable to contracts in general (for example, it they violate a rule of positive law or if they are unconscionable)." 86 F.3d at 1449. The Circuit Court reversed and remanded the case to the District Court.

Facts.
ProCD compiled information from more than 3,000 telephone directories into its database. ProCD marketed and licensed a version of the database, in CD-ROM form, known as SelectPhone (TM). The SelectPhone product contained a new method of compressing data in addition to a proprietary software application. Zeidenberg, a student, bought a consumer package of SelectPhone which contained a shrinkwrap license (rather than an executed end user license) from a retail outlet in Wisconsin. Zeidenberg also purchased two additional SelectPhone packages containing updated versions of ProCD's database and shrinkwrap licenses.

Each box containing a consumer version of SelectPhone stated that the ProCD software comes with restrictions stated in an enclosed license (i.e., ProCD's "Single User License Agreement"). The shrinkwrap license (which is encoded on the CD-ROM disks, printed in the manual, and appears on a user's screen every time the software runs), limits use of the SelectPhone application program and listings to non-commercial purposes. The ProCD software" splashed the license on the screen and would not let him (Zeidenberg) proceed without indicating acceptance." 86 F.3d at 1452.

Zeidenberg decided to ignore the license and formed Silken Mountain Web Services, Inc. to resell the phone listings from ProCD's SelectPhone database by making them available on the Internet at a price considerably less than the price which ProCD charged to its commercial customers. ProCD filed suit alleging violations of the Copyright Act, breach of contract, misappropriation of trade secrets, and violation of Wisconsin's Computer Crimes Act, and sought an injunction.

The District Court's Ruling.
The Western District of Wisconsin rejected all of ProCD's claims, holding that:

(1) Copyright protection was not available to the two main elements of SelectPhone - the phone book data or phone listings were "a collection of facts arranged in a commonplace, non-original fashion" and not copyrightable under Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340 (1991), and Zeidenberg's copying of the SelectPhone software was permitted under 17 U.S.C. sec. 117 as an "essential step in the utilization of the computer program," ProCD, Inc. v. Zeidenberg, 908 F. Supp. 640, 647 (W.D. Wis. 1996);

(2) The agreement between the parties was a contract for the sale of goods under the Uniform Commercial Code ("UCC") and was not subject to any shrinkwrap license terms, as ProCD's mere reference to proposed shrinkwrap license terms on the outside of the box did not present Zeidenberg with an adequate opportunity to review and consider such terms, 908 F. Supp. at 654; and

(3) ProCD's state law claims were preempted by the Copyright Act, since although the phone listings were copyrightable, they still were within the "subject matter" of the Copyright Act and ProCD's claims did not include any extra element beyond the Copyright Act infringement claims, 908 F. Supp. at 656-7.

Shrinkwrap Licenses.
Although the District Court held the shrinkwrap licenses were "ineffective because their terms do not appear on the outside of the SelectPhone packages" and were not disclosed to the purchaser prior to purchasing, the Seventh Circuit deemed Zeidenberg's lack of access to the license terms at the time of purchase to be irrelevant. The Circuit Court stated that "[a]lthough the district judge was right to say that a contract can be, and often is, formed simply by paying the price and walking out of the store, the UCC permits contracts to be formed in other ways." 86 F.3d at 1452.

The Circuit Court, treating the licenses as ordinary contracts accompanying the sale of goods, noted several common situations where "transactions in which the exchange of money precedes the communication of detailed terms." 86 F.3d at 1451.

The Seventh Circuit quoted UCC sec. 2-204(1) [UCC sec. 2-204(1) states "A contract for the sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract."] and stated that:

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 . . . 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. He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance.

86 F.3d at 1452. The Court noted that Zeidenberg could have simply returned the software to ProCD for a refund, if he did not want to accept ProCD's offer.

Noting that the "UCC consistently permits parties to structure their relations so that they buyer has a change to make a final decision after a detailed review," 86 F.3d at 1453, the Seventh Circuit noted the similarity between Zeidenberg's failure to reject ProCD's offer and Zeidenberg's failure to reject ProCD's goods. The Court reasoned that Zeidenberg accepted the goods under UCC sec. 2-606(1)(b), as he failed to make an effective rejection under UCC sec. 2-602(1) after an opportunity to inspect the goods. ProCD extended an opportunity to reject, if a buyer should find the license terms unsatisfactory. According to the conclusion reached by the Seventh Circuit, "Zeidenberg inspected the package, tried out the software, learned of the license, and did not reject the goods." 86 F.3d at 1453.

Under the Seventh Circuit's analysis, "clickwrap" license agreements (agreements presented via electronic transmission permitting review and acceptance by clicking on an "accept" icon or other electronic signature) would similarly pose no bar to enforceability.

Copyright Preemption.
The District Court held that, even if Wisconsin treats shrinkwrap licenses as contracts, the shrinkwrap license was preempted by Section 301(a) of the Copyright Act. Title 17 U.S.C. sec. 301(a), in pertinent part, preempts any "legal or equitable rights [under state law] that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103."

Following Fourth, Fifth, and Eighth Circuit precedent, the Seventh Circuit held that the rights granted under the shrinkwrap license were not "equivalent to that of the exclusive rights within the general scope of copyright," since the licenses only affected the right of the parties to the license and could not create "exclusive rights." The Court stated:

But are rights created by contract "equivalent to any of the exclusive rights within the general scope of copyright?". . . Rights "equivalent to any of the exclusive rights within the general scope of copyright" are rights established by law - rights that restrict the options of persons who are strangers to the author . . . A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create "exclusive rights."

86 F.3d at 1454.

ProCD, Inc. v. Zeidenberg is a significant decision concerning shrinkwrap licenses, expected to be used to support electronic commerce contracting, and well worth your review.

--- The Daily Record, November 9, 1996, at 28A;
Fall 1996 Newsletter, Computer & Telecommunications Law Section, D.C. Bar, at 4-6;
Spring Quarter 1997, IPLS Newsline, Virginia State Bar, Intellectual Property Law Section Newsletter, at 17-20.