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JILT 1998 (2) - Struan J A Robertson

The Validity of Shrink-Wrap Licences in Scots Law

Beta Computers (Europe) Ltd v. Adobe Systems (Europe) Ltd

Struan J A Robertson [1]
struan.robertson@virgin.net

Contents
Abstract
1. Introduction
2. The Facts of the Case
3. The Arguments
4. The Result
5. Analysis of the Decision
6. Shrink-Wrap Licenses-English and US Law
7. Conclusion
  Bibliography

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Abstract

Software companies often enclose a licence of terms with their software, known as a shrink-wrap licence. In December 1995 the case of Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd provided the UK with its first judicial opportunity to consider the validity of shrink-wrap licences. Prior to this case, such licences were thought to be unenforceable. However, the Scottish Court of Session ruled otherwise. It also held that the contract for supply was concluded only when the shrink-wrap terms had been seen and accepted by the purchaser. This article considers the case in detail and suggests flaws in the judicial reasoning. The positions under English and US law are observed. Alternative means of protection for the software company are also considered.

Keywords: Shrink-wrap licences; Copyright; Software; Intellectual Property; Jus quaesitum tertio; English Law; United States Law.


This is a Case Note published on 30 June 1998.

Citation: Robertson S J A, 'The Validity of Shrink-Wrap Licences in Scots Law Beta Computers (Europe) Ltd v. Adobe Systems (Europe) Ltd', Case Note, 1998 (2) The Journal of Information, Law and Technology (JILT). <http://elj.warwick.ac.uk/jilt/cases/98_2rob/>. New citation as at 1/1/04: <http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/1998_2/robertson/>.


1. Introduction

Computer software can be sold in different ways. Bespoke (tailor made) software is expensive and usually involves a direct and detailed contract between the author and the end user. An increasingly popular means of sale is for the purchaser to download the software from the Internet and pay for it on-line. However, mass-produced, 'off the shelf' software is most commonly sold by mail order. The average purchaser, eager to try his or her new program, invariably tears off the cellophane to get inside the box containing the disks or CD-ROM, without a second thought for the piece of paper between the box and the cellophane. This piece of paper is the shrink-wrap licence. This article explores the legal significance of that missing second thought.

Shrink-wrap licences are licence agreements which state that acceptance on the part of the user of the terms of the agreement is indicated by opening the shrink-wrap packaging or other packaging of the software, by use of the software, or by some other specified procedure. There is no signature by the licensee. The purposes of shrink-wrap licences include restricting the use of the software, declaring the governing jurisdiction, disclaiming legal warranties and limiting the availability of monetary damages. In fact, they are the most common means by which software companies attempt to limit their potential liability. It follows that the validity or otherwise of the licences is of great significance to both the software companies and the users.

There are different types of shrink-wrap licence. A 'box-top' licence is visible beneath the wrapping on the box. An 'envelope licence' is printed on the outside of a sealed envelope containing the licence. A 'referral licence' has a sticker over the disk or CD-ROM box that states, 'Do not open this before reading the licence attached.' The vast majority of shrink-wrap licences are not available for inspection prior to purchase. The validity of such licences is the subject of this article.

A computer program is protected by copyright because it constitutes a literary work under the Copyright Designs and Patents Act 1988.[2] From a purchaser's point of view, unless there is some agreement with the owner of the intellectual property in the program, it is almost impossible to use software without infringing the copyright. This is because, in order to load and run a program, the program has to be copied from its permanent storage medium, into the computer. Legitimate use of software therefore depends on having the permission of the owner of the copyright. The shrink-wrap licence purports to preserve the owner's rights whilst enabling the software to be used.

Until recently, the legal significance of such licences was considered precarious at best (Stone, 1996 et al), although the practice was widespread among software companies. The reason for doubting the validity or enforceability is that the supply generally occurs before the purchaser has the opportunity to consider the terms of the licence. Depending on the type of licence, it may or may not be possible to view the licence terms before the box is opened. The focus of this article is a case which did not investigate this distinction. What will be considered are two broader concepts. First, whether it is legally justifiable to hold the purchaser to licence terms which only come to his or her attention after the apparent point of sale; and second, whether the software company can rely on its licence in a contract between two other parties.

Prior to 1996 the software company was thought to be unable to rely on contract law to enforce the conditions of the licence. However, the case of Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd[3] has apparently changed this position for Scotland. This case, in the Outer House of the Court of Session, was the UK's first judicial consideration of shrink-wrap licences. What follows is a detailed study of the case. The arguments put forward by each party will be described and the deciding judgement by Lord Penrose will be considered.

It will be argued that, notwithstanding the desirability or otherwise of shrink-wrap licences, the relevant law did not exist to justify the findings of the Court. The position in Scotland will be summarily contrasted with the positions in English and United States law.

2. The Facts of the Case

Adobe placed a telephone order with Beta Computers for the supply of Informix software to upgrade their existing software. Informix produce information management software. The software was a standard 'off the shelf' upgrade identified by both parties when the order was placed. Beta obtained the software package and delivered it to Adobe. The terms and conditions of sale were not discussed. When the software was delivered it was packaged in such a way as to show that the software was subject to a strict end user licence and that the package contained 'End User Licence Conditions' under the name of Informix. The packaging was shrink-wrapped. Visible beneath the wrapping were the words 'Opening the Informix S.I. software package indicates your acceptance of these terms and conditions.'

Adobe never opened the packaging and decided to return the software after delivery without payment. The reasons for rejection were not investigated in the case. There may have been unfavourable conditions in the licence, or Adobe may simply have had a change of mind. Beta refused to take back the software and sued for the price.

3. The Arguments

Beta contended that there was an unconditional and unqualified order for identified software. This order was made on the telephone and Adobe purchased it 'blind' so far as any terms and conditions of contract were concerned. Beta met the order and claimed that Adobe should pay the contract price. Beta was of the view that the shrink-wrap conditions, produced by Informix, were irrelevant because the contract had been made prior to Adobe seeing them. Beta had no concern with the interests of Informix, the software company and owner of the intellectual property in the software.

Adobe said the contract was less simple. While Beta was content to treat it as a sale of goods, Adobe considered it a sale of software, which should be treated differently. The software was supplied on disks. The disks themselves had little value; it was the program contained on them which mattered. Adobe pointed out that the program could not be used without the permission of the copyright owner, since the use would be an infringement of the copyright. The reason for this was the need to 'copy' the program, inherent in the use of software, as explained above. The use would therefore need to be licensed by the owner of the copyright, making the licence an essential ingredient in the transaction. Both parties agreed that it was standard practice in transactions for packaged software for the owner of the copyright, invariably the software company, to fulfil this by including end user conditions. The purchase was of the software and the licence to use the software. Adobe argued that the conditions of use stipulated that opening the package bound the purchaser to the conditions. The conditions advertised the right of the purchaser to reject the software if not prepared to accept them. If one rejected the package, there was no concluded agreement. Accordingly, Adobe submitted that 'acceptance of the licence conditions was a condition suspensive of agreement.'[4]

Adobe accepted that the licence conditions were created by Informix but averred that, if Beta imposed them on Adobe, they would become Beta's conditions for the purposes of the contract. If Beta was held to be supplying only the physical medium without seeking to impose the conditions, the transaction would result in Adobe having unrestricted use of the software. This might cause some concern in the industry. Accordingly, implication of a condition suspensive of agreement was necessary to give the contract business efficacy. However, if no condition was implied and the contract had been entered into unconditionally, then delivery of the product with previously undisclosed conditions was not a proper performance of the contract. Again, Adobe must be allowed to reject the software.

4. The Result

Lord Penrose was of the opinion that both parties had analysed the transaction incorrectly. He said that the first step should be to identify what the customer sought to have supplied by the dealer. He found that the subject of the contract was a complex product comprising the medium and the manifestation within it or on it of the intellectual property of Informix, the author of the software. Lord Penrose decided that there was only one contract and that it was not simply a sale of goods contract. He saw the product as one which absorbed the intellectual property of the author or software company. He also recognised a conferred right of access to that material which, generally and in the absence of a consent derived from the owner, is owned by the author or software company to the exclusion of all third parties.

He found this consistent with the legislative policy of the Copyright, Designs and Patents Act 1988. He reviewed the various sections of the Act which he regarded as relevant to computer programs. Lord Penrose was of the opinion that the scheme of the Act made impossible the legitimate supply of the medium with the facility to access the program material recorded on it independently of the authority of the owner of the copyright, however obtained, for the use of the program material. Such consent must be by licence conferred from the acquisition of the software. That must be derived from the owner of the intellectual property or someone authorised by the owner to confer rights of use on third party purchasers. He believed that in the present dispute, it was an essential feature of an effective transaction that the supplier undertakes to make available to the purchaser both the medium and the right of access and use.

The circumstances were such that the supply was intended to be made in pursuance of an order without discussion of any terms and conditions of supply, but with both parties being aware of the practice of software companies of seeking to impose end user conditions qualifying the purchaser's right of exploitation of the software. Both parties accepted that it was standard practice for software companies to include end user conditions in packaged software. Seeing the transaction as a supply contract, Lord Penrose recognised a choice of two possible solutions.

First, to deny any contractual role to the conditions when they appeared on delivery on the packaged software. Lord Penrose stated,

'In my opinion it is not possible to hold that there is a new contract between author and end user which comes into existence at the point of delivery with acceptance occurring on unwrapping the product.'

He reasoned that, if there was such a contract, the supplier's contractual obligations with the purchaser would be left untouched by the new contract and the supplier would have already performed his contractual obligations and become entitled to the price independently of any new arrangements involving the software company and the end user. Thus Lord Penrose specifically rejected the existence of a contract between the purchaser and Informix. He believed that if the conditions were ignored, the position of the owner of the intellectual property could be undermined in the assertion of control over the extent of permitted use of that property if the attempt at imposing the conditions were ineffective.

The second choice would be to hold that the conditions form part of the contract between the supplier and the end user. This risks exposing the supplier to rejection of the supply upon the end user deciding, on seeing that there were conditions, that he was not prepared to be bound by them. However, on this alternative the supplier is likely to have infringed the author's copyright by making an unconditional supply. Lord Penrose considered this risk for the supplier as insignificant. He believed that the industry as a whole, in the efficient and sensible management of transactions, required that effect should be given to the conditions.

Thus Lord Penrose rejected the existence of a separate contract between the purchaser and Informix. He said that this case was concerned with 'the arranging of that essential aspect of the parties' contractual relationship which is intended to define the conditions for use of the intellectual property reflected in the program material.' He went on to say:

'It appears to me to be consonant with a proper view of parties' commercial relationships that there should not be consensus in idem until there are produced and accepted by parties to the contract those conditions stipulated by the owner of the software for its use. That point could not come earlier in this case than the stage at which the supplier, deriving the material from the owner, tendered to the purchaser an expression of those conditions which the purchaser might accept or reject before becoming bound to the contract. On this ground alone, it is my opinion that the pursuers' case is irrelevant and falls to be dismissed.'[5]

Lord Penrose said that such a contract would be consistent with Scots law. The software company's conditions would apply to the end user by way of the doctrine of jus quaesitum tertio. By the operation of this doctrine, Scots law allows two parties to confer an enforceable right upon a third party who is not a party to the contract. In the present case, the supplier and purchaser were parties contracting for the supply of something which was owned by and was in the control of a third party. The agreement that the supply should be subject to the protection of the third party's interests on such terms as he may stipulate seemed acceptable to Lord Penrose. If Adobe had accepted the licence terms, Informix would be entitled to enforce the conditions in its favour directly against Adobe.

In summary, the Court held that consensus in idem did not exist until the licence terms had been offered to and accepted by the purchaser. If the purchaser had accepted the licence terms these terms could have been enforced by Informix by a jus quaesitum tertio. Adobe rejected the software without opening the wrapping. The Court did not enforce the shrink-wrap conditions against Adobe because the wrapping had not been removed. If the wrapping were opened and the software used then, on Lord Penrose's reasoning, the terms of the licence would have been incorporated into the contract between the supplier and the end user.

5. Analysis of the Decision

Lord Penrose reasoned that the licence terms had to be given effect in order for the contract to work. The present writer agrees with Smith (1996) et al in arguing that this is incorrect. The Court believed that in a software contract, the purchaser had to have the right to use the software. However, Lord Penrose went on to suggest that an unconditional contract would not give the purchaser any such rights. As Smith observes, the flaw in this argument is that, 'when an object, in which intellectual property resides, is sold it is quite clear that the sale of the object does not affect the intellectual property in it.' The peculiarity of software is that the program contained on a disk cannot be used without infringing the copyright in the program. This fact seems to have persuaded Lord Penrose that the author's licence conditions must form part of the contract, otherwise the purchaser could not use the software. Lord Penrose implies that when a copyrighted article is sold the contract is incomplete until licence terms are agreed. However, a contract is complete when it is made and there are no express licence terms unless these are incorporated when drafting the contract.

Section 50C of the Copyright, Designs and Patents Act 1988, inserted by the Copyright (Computer Programs) Regulations 1992, implements in the UK the provisions of Article 5(1) of the European Directive on Computer Programs 1991. The directive is effectively a right to use a program. It states that, in the absence of contractual provisions, a lawful acquirer of a computer program has the right to copy or adapt it when such reproduction is necessary for the use of the program in accordance with its intended purpose. It is both surprising and unfortunate that Article 5(1) and Section 50C were omitted from the court's consideration.

Relying on Section 50C, it would not have been necessary to conclude that the conditions of Informix were incorporated in the contract between supplier and purchaser in order for the purchaser to use the software. There is a statutory right of use for the purchaser. The contract was concluded on the telephone. If Informix had wished to impose its licence terms on Adobe it should have instructed Beta to refer to those conditions when making the telephone call.

The doctrine of jus quaesitum tertio was used to hold that any terms in the licence which were intended to benefit Informix could have been enforced by Informix against Adobe if the licence terms had been accepted. Acceptance would be demonstrated by opening the wrapping. The type of licence in this case appears to have been the box-top type by which the licence terms are visible without the need to open the wrapping. It is submitted that enforceability is contingent on the finding that such a licence forms part of the contract. This article considers that in the circumstances of this case, the licence did not form part of the contract. If the licence were not part of the contract the doctrine could not apply. The licence would be merely an unenforceable set of guidelines.

If the contract between Beta and Adobe had referred to and specifically included the licence terms, they would indeed be enforceable by Informix by operation of the jus quaesitum tertio. The Scottish Courts have shown a reluctance to recognise a right in favour of a third party unless that is the clear intention of the contracting parties.[6] On the authority of Morton's Trustees v The Aged Christian Friend Society of Scotland,[7] the parties to the contract must expressly state that the third party is to benefit. It is insufficient to show merely that the third party did incidentally benefit.[8] It is piquant to recall that Beta regarded the interests of Informix as irrelevant.

The concern exhibited by Lord Penrose for the software industry in general is probably misplaced. Much computer software is sold without added licence. The result of the decision was that Beta, having performed its contractual obligation of supply, lost the sale and had to take back the software. Lord Penrose believed that no contract existed until acceptance of the licence conditions. If this were correct, there would be no reason to distinguish it from other types of transaction involving the attachment of conditions. No contract would exist until the conditions were agreed. This raises the question of what constitutes a condition. Lord Penrose did not qualify his statement and applied it in circumstances where the present writer considers the 'conditions' to carry the legal weight of mere guidelines. It is conceivable that a product warning is a condition. Accordingly, if a label on an electric drill warns the purchaser to 'keep out of reach of children,' could the product be returned to the retailer because the purchaser is unhappy with the 'condition'?

The licence is arguably unnecessary because the law of copyright would protect the position of software companies such as Informix. Infringement of copyright would include inter alia piracy by making multiple copies, the publication of variations of the original and making arrangements by translation between programming languages.[9] The remedies for infringement include interdict/injunction, delivery up, damages and account of profits. The attempts at the limitation of liability would perhaps be negated by statute in any event. The Unfair Contract Terms Act 1977 was so applied in the recent English case of St Albans City and District Council v International Computers Ltd. [10]

One further criticism of Lord Penrose's approach is in his treatment of the supply of software for a price as a contract sui generis. He correctly observed that the rights of the parties should not depend upon the medium of supply. However he distinguished the software transaction from one for a book or record on the basis that a computer program could be obtained 'over the telephone system for a price' and therefore all supplies of software must be treated as sui generis. The present writer agrees with Adams (1997) that this reasoning is flawed. It overlooks the fact that any copyright work can be delivered either on a physical medium or on-line. On this rationale, all sales of books, paintings, music etc. must be treated as sui generis.

It is submitted that, in the circumstances, Adobe should have been held to its bargain with Beta, and able to use the software free of Informix's licence conditions. Informix would not have a jus quaesitum tertio but would still enjoy the protection established by having the copyright in the software. If a software company expects an end user to be bound by licence conditions, it should take further steps. Such steps will be considered at the end of this article.

6. Shrink-Wrap Licenses under English and US Law

Although Lord Penrose found that there was no consensus in idem between Beta and Adobe, he recognised the validity of shrink-wrap licences per se, on the basis of jus quaesitum tertio. The concept is alien to English law. The doctrine of privity in English law provides that contracts are binding only on those party to them. This means that where there is a software company, supplier and end-user, the software company must seek to create a contract with the ultimate customer. In circumstances similar to Beta v Adobe, it could be argued that the shrink-wrap licence would be unenforceable by English law because there is no consideration from the purchaser to the software company. The licence then becomes an unenforceable set of guidelines. However, any 'promise' by the purchaser might be interpreted to be a form of consideration. A contract could then exist between the software company and purchaser. If so, the outstanding question concerns the fact that the licence terms only come to the attention of the purchaser after the apparent point of sale. The issues are the same as those considered above. To date, no English court has addressed the question of the validity of shrink-wrap licences. If the issue should arise, Beta v. Adobe may hold some persuasive authority.

Shrink-wrap licences originated in the United States. It is also the biggest source of software publication. Like English law, federal law demands privity of contract, although this is diluted to some extent by the US doctrine of warranty. The validity of shrink-wrap licences was unresolved[11] until the case of ProCD, Inc. v. Zeidenberg.[12] In this case the Court of Appeals held that shrink-wrap licences are enforceable as a matter of contract unless their terms are objectionable on grounds applicable to contracts in general. The case is not of itself binding precedent for the validity of the licences. However, it is the most recent and most extensive consideration of the matter.

This case can be distinguished from that of Beta v. Adobe. The US Uniform Commercial Code governs the sale of goods. Section 2-206(1)(b) thereof states that, 'a buyer accepts goods when, after an opportunity to inspect, he fails to make an effective rejection.' Accordingly, if the sale of software constitutes the sale of goods, the implied acceptance is at a later stage to its UK equivalent. The licence in ProCD was a so-called 'click-wrap,' by which positive action is required on-line to indicate acceptance of conditions. As Judge Easterbrook observed:

'the software splashed the licence on the screen and would not let [the purchaser] proceed without indicating acceptance. (…) ProCD extended an opportunity to reject if a buyer should find the licence terms unsatisfactory. Zeidenberg inspected the package, tried out the software, learned of the licence and did not reject the goods.'

The case is important to US practice because it recognises the potential validity of the licence. However, in ProCD there was no intermediary (the Beta equivalent) and therefore the question of enforceability by a third party did not arise. The case, and those before it, explicitly rejected the argument that a provision stating that 'opening this package indicates your acceptance of these terms' were of themselves sufficient to demonstrate a conditional acceptance.

7. Conclusion

Shrink-wrap licences have been supported by industry practice for some years. Individual companies will be reluctant to stand out against such an established practice and will continue to supply such licences with software. The Scottish legal system has now endorsed the practice. The present writer is of the view that the validity of these licences has been introduced by dubious reasoning.

This writer is of the view that shrink-wrap licences are a reasonable concept. However, the prudent software company would be well advised to incorporate them in a different manner to that adopted by Informix. The customer should be offered the opportunity to receive a copy of the licence before placing an order. The purchaser should be required to view the entire licence agreement before the order process can be completed. The software company should obligate the supplier by written agreement to instruct every customer that the order is being accepted conditioned upon the shrink-wrap licence and that it will be supplied with the product. The supplier should accept returns from and refund any customer unwilling to accept the licence terms. The supplier should enjoy a reciprocal arrangement with the software company. The click-wrap licence used in ProCD is increasingly popular and offers a better means of ensuring that the conditions come to the user's attention. The problem is that the packaging will be open and accordingly it will be necessary to rely on a procedure for return. Notwithstanding any such licence protection, the software company should bear in mind that the law of copyright will protect its basic rights.

Software companies should find safer ways of validating the conditions in their shrink-wrap licences than relying on the Beta v Adobe case. It would be tempting to advocate the continued disregard of the piece of paper between the cellophane and the box, if only to bring the issue before the courts again. It is hoped that a judicial second thought on the question of validity will relieve the burden from the purchaser.

Bibliography

Cornish, W. R. (1996) Intellectual Property (London, Sweet & Maxwell)

Edwards, L. and Waelde, C. (1997) Law & the Internet – Regulating Cyberspace (Oxford, Hart)

Klinger, P. and Burnett, R. (1994) Drafting and Negotiating Computer Contracts (London, Butterworths)

Reed, C. (ed. 1996) Computer Law (3rd ed., London, Blackstone Press)

Walker, D. M. (1985) The Law of Contracts and Related Obligations in Scotland (2nd ed., London, Butterworths).

Woolman, S. (1987) An Introduction to the Scots Law of Contract (Edinburgh, W Green & Son Ltd.)

Journal Articles

Adams, J. N. (1997) 'The Snark Was a Boojum, You See', Edinburgh Law Review Volume 1, page 386.

Bainbridge, D. I. (1997) 'Software Licencing Fundamentals', Computers and Law, Volume 8, Issue 2, page 4.

Covington, T. A. (1997) 'The Future of Shrink-Wrap Licences', Fenwick & West LLP, California – Web site publication: <http://www.fenwick.com/pub/future.html>

Gringas, C. (1996) 'The Validity of Shrink-Wrap Licences', International Journal of Law and Information Technology, Volume 4, Number 2, page 77.

Hayes, D L (1997) The Enforceability of Shrink-Wrap Licences On-Line and Off-Line, Fenwick & West LLP, California – Web site publication: <http://www.fenwick.com/pub/shrnkwrp.html>

Marsland, V. (1997) 'Online Services – Copyright in the Online World' (London, Hawksmere) - Seminar Paper.

Silverleaf, M. (1996) 'Beta v Adobe', Commercial Lawyer, February, page 7.

Smith, G. P. (1996) 'Shrink-Wrap Licensing in the Scottish Courts', International Journal of Law and Information Technology, Volume 4, Number 2, page 131.

Stone, S. (1996) 'Shrink-Wrap Licences – Are They Enforceable?' Commercial Lawyer, February, page 7.

Turner, M. J. (1997) 'Anatomy of a Computer Contract Dispute', Computers and Law, Volume 8, Issue 3, page 12.

Footnotes

[1] Trainee Solicitor, Bishop and Robertson Chalmers, Glasgow. The author invites comments on this article. Email: struan.robertson@virgin.net

[2] Section 3(1)(b).

[3]1996 SLT 604; 1996 SCLR 587.

[4] At page 606.

[5] At page 611.

[6] Woolman (1987), page 142.

[7] (1899) 2 F. 82.

[8] Finnie v Glasgow & South-Western Railway Co. (1857) 3 Macq. 75.

[9] Copyright, Designs and Patents Act 1988 section 21, as amended following the European Directive on Computer Programs 1991, Article 5(5).

[10] [1996] 4 All ER 481.

[11] See: Step-Saver Data Systems Inc. v Wyse Technology and The Software Link, 939 F 2d 91 (3rd Cir 1991); Arizona Retail Systems Inc. v The Software Link Inc., 831 F Supp 759 (D Ariz 1993); Vault Corporation v Quaid Software Ltd, 847 F 2d 255 (5th Cir 1988); For consideration of these cases, see David Hayes (1997).

[12] 86 F. 3d 1447 (7th Circuit 1996).

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