This article has been written by Tanisha Das, pursuing the Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.This article has been edited by Anahita Arya ( Senior Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
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When the computer software industry first emerged in the 1980s, software was provided to customers in order to induce them to buy computers. When the market required this software in abundance, software developers started to distribute software in a covered package in what later came to be known as ‘shrink-wrap’ licenses. The primary purpose of a shrink-wrap license was to protect the copyright enjoyed by the developers of computer programs. Simply put, these agreements are an authorization given by the copyright owner to the licensee to perform certain acts, without which it would constitute copyright infringement.
A shrink-wrap agreement is a printed form that is placed or printed on top of the package in which the computer program is marketed. This agreement derives its name from the fact that these are included on the packages that are generally covered with plastic or cellophane “shrink-wrap.” The shrink-wrap agreement purports to create a license agreement between the buyer and the developer. One enters a shrink-wrap agreement by breaking the seal of the package through which the terms of the agreement is clearly visible. The typical notice also states that if the user is unwilling to agree to the terms and conditions of the agreement, he/she may return the unopened package to the seller for a full refund.
Shrinkwrap agreements are recognised under Section 206 of the UCITA (Uniform Computer Information Transaction Act) which establishes that a contract can be formed by the interaction of two electronic agents or an individual acting on its own behalf. Subsection (b) of the same Act, states unequivocally that – “A contract is formed if the individual takes actions that the individual is free to refuse to take or makes a statement that the individual has reason to know will indicate acceptance.”
Enforceability of shrink-wrap agreement
There have been a lot of contentions with the enforceability of shrink-wrap agreements. Although there is no coherent legislation that directly upholds its assent, it can be decided along the line of general principles of contract. The main component of an agreement is offer and acceptance. The foundation of any contract is consensus id idem, which is the meeting of minds. A typical shrink-wrap agreement contains a clause that says:
‘By breaking the seal you agree to be bound by all the terms and conditions of this license agreement. If you do not agree to these terms you may, within 15 days, return this package unused and unopened to the person from whom you bought it for a full refund.’
The above clause contains an offer and also prescribes the method of acceptance in the form of tearing the package. Hence, this is a binding contract, because the acceptance is manifested by an unequivocal act from which the inference of acceptance can be logically drawn. It is now understood that a shrink-wrap agreement is valid because the requirement of a valid offer and acceptance is met. But, a question still persists, that there has been no meeting of minds.
To answer this question a shrink-wrap agreement ought to be compared with a contract of adhesion. In this form of contract, the parties do not negotiate the terms of their contract. Instead, the person to whom the offer is made has only one choice – whether to accept the terms that are offered in the contract. It is irrelevant whether the terms of the contract were understood by the user. The material fact here is; reasonable due diligence is undertaken by the licensor to draw the attention of any person who buys it. The buyer of shrink-wrapped software, therefore, is bound by the contract since it is valid and enforceable.
Essential clauses of shrink-wrap license agreement
Grant of license
This clause gives assertion to the use of license unequivocally. The grant of license clause must specify the type of shrink-wrap software license that is being granted to use. shrink-wrap software licenses can be of 2 types namely, open-source and proprietary software. Open-source software is generally developed by multiple developers and is provided without a license fee. The user is at a free will to modify the software. In contrast, proprietary software is software that a single vendor develops in return for a license fee. Unlike open-source software, the licensee has no access to the actual source code or simply the actual programming for the software. A grant of license clause can be drafted in the following way: A grant of license clause may contain the below mentioned clauses. Example:
- AB grants the licensee an object code-only, non-exclusive, non-transferable license to use the object code version of the proprietary software identified on the package.
- The software shall be solely used for the licensee’s personal/business purpose and is subjected to the terms of this license agreement.
- The software does not include licenses to any third-party software, and licensees will be responsible for obtaining third-party software necessary to use the software.
Ownership and limitation on use
In a shrink-wrap agreement, the ownership completely is on the licensor. These rights also include patent, trade secret, or any other intellectual property rights. This clause can also include certain restrictions on the usage of the software by the user. Since the ownership rights lay with the licensor, the licensee shall not sell, sublicense or transfer any copies of the software. Any such action shall be deemed an infringement. We can refer to the sample clause below to understand better.
Ownership and limitation clauses can be very peculiar to each organisation and are solely based on the requirement of parties. A sample clause can be drafted in the following manner.
- Licensee shall be the sole owner of all rights, title, and interests upon the software including but not limited to copyright, trade secret, or other intellectual property, and that the licensee receives no rights or title or interest in the software except as expressly set forth herein.
- Licensee shall not sell, rent, lease, transfer or distribute any copies of the software to any third party.
- Licensee shall not create any derivative works based upon the software.
- Licensee shall not try to alter or destroy any label embedded within the software.
Fees and payment
In a typical shrink-wrap agreement payment is made in the form of a one-time payment which includes annual royalties and other fees as well. Since this software grant end-users the right to use generally and commercially available off-the-shelf software, it is viable for it to be a fully paid-up license. Fees and payment clauses can be drafted in the following way:
a. This agreement grant end-users the right to use generally and commercially available off-the-shelf software for a cost of XX including annual royalties and other fees.
Warranty and disclaimer
A warranty clause is a very important aspect of a shrink-wrap agreement. This clause will provide a protective shield to the licensee in case the licensor does not meet the expectations set forth in the usage of the software. It shall also answer a pertinent question here that is, what if there is a material breach of the warranties by the licensor. A warranty clause can be drafted as:
The licensor warrants that:
- The software will function substantially as described in the package.
- The licensor owns or otherwise has the right to license the software under this agreement.
- The software shall be delivered free of physical defects.
In the event of a breach of the above-stated warranties, the licensee shall be liable for providing all necessary remedies. If the software does not function substantially, the licensor, at its option:
- Modify or alter the software as per mentioned as the feature of the software.
- Provide a reasonable work around solution that will meet the requirement of the licensee.
- Replace the media which is physically defected with a replacement copy with no additional charges.
The remedies shall not be applicable to situations wherein the software has been modified by the licensee or any third party to a version not similar to the current release.
Limitation of liability/indemnification
A limitation of liability clause in a shrink-wrap agreement saves both the parties from any damage of any kind of indirect, consequential, punitive, and/or special damages that occurred due to breach of contract. An indemnification clause is different from a limitation of liability clause in terms of the monetary thresholds. An indemnity clause is all about which party will have to bear the cost of defending a legal claim. For example, if the software does not work and a company suffers damages thereto, this clause shall restrict the company’s ability to recoup its loss. Various forms of limitation of liability clause drafted, favour the licensor. A limitation of liability clause can be drafted as below cited. Example:
- Licensor shall not be liable to the licensee or any other third party for any indirect, punitive or consequential damages including but not limited to damage for loss of goodwill, loss or damage of data, computer failure or any other similar damage.
- The licensee shall be solely responsible for all the information or data provided by him in pursuant of the use and results of the software.
- The licensor shall indemnify, defend and hold licensee harmless from any damages awarded against licensee arising out of third party legal actions.
- The licensee shall not be obliged to indemnify the licensor with regard to legal actions arising out of third party transactions, any repair, alteration or modification to the existing software.
- The licensee shall not be liable in the event of any breach by the licensee of its obligations under this agreement.
The most prominent point of contention with the use of Shrink-wrap agreements is the fact that a person would not be able to clearly read the terms and conditions of software until and unless one takes off the shrink wrap, which then inevitably means it will constitute an acceptance of the terms of the contract. In that case, the end-user of software in the case of shrink-wrap software does not have any access to source code. He has only the right to use the software for his personal or business use. Therefore, in the event of any claim, the first job of a lawyer would be to find out what are the remedies available against breach of rights.
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