Shrink-Wrap Licences: A Licence Or A Sale?

Software is often distributed together with short, often one-page, end-user licence agreements. Such agreements serve several purposes, including providing for a limited scope of use by users, setting out express protection for confidential information, limiting the responsibility of the vendor, limiting the remedies available to the customer and limiting dealings with the product by the customer.

The customer is often surprised to find that even though they paid full price for the product, they can often not assign or transfer it on the sale of the business, or their ability to deal with the product is otherwise very restricted.

This leads to the basic question of whether or not the transaction is in fact a licence or a sale. If it is a sale, then many of the restrictions may be unenforceable. This issue has been considered by a number of U.S. cases, most recently in Softman Products Company, LLC v. Adobe Systems Inc., Case No. CV 00-04161 DDP (Cal. Central District Court). Softman was distributing software through its Web site, www.buycheapsoftware.com, including individual pieces of Adobe software that Adobe distributes in a value-priced bundle called Collections. The software is distributed by Adobe through licensing agreements with distributors and subject to end-user licence agreements (EULA) that contain many restrictions, including that the individual software cannot be separately distributed.

Adobe sued Softman, alleging that sale of the individual software was copyright infringement on the theory that once the conduct was outside the scope of the licence it was without the authority of the copyright holder. Distribution of copyright materials is one of the rights of the copyright holder under 17 U.S.C. § 107.

In this case, it is important to note that Softman was merely reselling the Adobe bundled software, which it had lawfully acquired. Softman was neither distributing counterfeit products nor modifying the Adobe products. The court analyzed the relationship in light of the first sale doctrine under 17 U.S.C. § 109(a), which provides that the exclusive right of the copyright holder to sell or dispose of a copy is limited to the first legitimate sale, and found that that doctrine was applicable. Adobe argued that the transaction was a licence, not a sale, and hence exempt from this doctrine.

The court reviewed the history of software licensing and found that the test of whether the transaction is a sale or a licence is dependent on the economic realities of the exchange and not what the document is called. In this case a one-time up-front fee is paid, and essentially perpetual possession of the software is provided. In light of these circumstances the court concluded that a "shrink-wrap licence" transaction is a sale of goods rather than a licence. The court held that a single payment for a perpetual transfer of possession is, in reality, a sale of personal property and therefore transfers the ownership in that copy of the software.

Adobe argued that the EULA required the construction of the transaction as a licence. The court held that Softman was not bound by the EULA because it had never agreed to these terms.

A hard copy of the EULA is not included with the Adobe software products. Rather, the user is asked to agree to its terms as part of the installation process. The court noted that the formation of a contract required the user to assent and that such assent could be manifested in words or conduct. In this case the court found Softman never installed the software product and so there was clearly no assent to the terms of the EULA. The court found that a notice on the box indicating that the product was offered subject to a licence agreement was insufficient to constitute the assent necessary to bind Softman.

As a result, Softman was the owner of the copies of the Adobe software products and was not bound by the restrictions in the EULA. The first sale doctrine permitted the further and separate distribution of the software.

The court expressly did not follow several cases that showed more deference to the licensing restrictions in software licence agreements. The court went on to criticize shrink-wrap licences generally, noting that many courts have found them to be invalid either as contracts of adhesion, unconscionable or as unacceptable under the U.S. Uniform Commercial Code. While these comments may be an obiter dicta in this case, the court is signalling the software vendor community that increasingly unreasonable terms cannot be foisted on users without attracting judicial attention. The court, in looking at the elements required for injunctive relief, found that the restrictions in the EULA were inconsistent with the balance of rights between users and creators found in intellectual property law. Consequently, public policy did not favour removal of the limited rights of users under copyright, particularly in a contract of adhesion.

In order to avoid later enforceability problems, software vendors should reconsider their refusal to negotiate reasonable changes to licence terms in many software transactions. Software vendors should also review how to make sure that there is real, meaningful, knowledgeable and effective assent in their licensing practices. Software vendors should consider how they can take some effective responsibility for their products, yet reasonably limit their liability exposure, and avoid excessively unreasonable terms or practices.


Martin P.J. Kratz is the head of the technology practice group at Bennett Jones LLP and is the author or co-author of Internet Law, Canadian Intellectual Property Law, Protection of Copyright and Industrial Design, Obtaining Patents, Information System Security, The Computer Virus Crisis and Control and Security of Computer Information Systems. This column is intended to convey brief, timely but only general information and does not constitute legal advice.