Shrink Wrap Contracts: Insights Into Their Vital Elements And Legal Nuances

Shrink Wrap Contract Defined

Shrink wrap contracts are agreements in which the product or software is packaged with terms of use displayed on the protective packaging. The basic premise is that by opening or removing the packaging, the consumer or purchaser agrees to the terms. For example, in a typical case, a customer buying software at a store would find a package with a CD inside, and the CD’s case would also contain the terms of use. The customer then opens the case and installs the software , thus showing acceptance.
Shrink wrap agreements are almost always presented to consumers post-sale. In this way, shrink wrap contracts differ from click-through licenses, which appear prior to the sale. Shrink wrap contracts are most commonly used in the software industry, but such licensing is also used in other sectors, such as publishing and financial service.

Legality and Enforceability

In the realm of contract law, shrink wrap agreements have had a rather checkered history. Over the years, numerous cases both for and against their enforceability have shaped the legal landscape. However, United States courts have remained generally unwavering in their stance. Where there is an exchange of information and an agreement on the terms between the buyer and the seller, along with consideration provided by the purchaser in the form of payment although not yet exchanged, and the buyer is given adequate opportunity to read the license before acceptance, to reject the license by non-purchase or non-use and is returning what it has purchased and is entitled to a refund, there exists a valid contract enforceable against both parties. The first known precedent regarding click-through licenses was Cantor v. Borell, 5 Mass. L. Rptr. 220 (Mass. Land Ct. 1994), a case involving only physical software and the validity of the user license that was contained in a booklet which accompanied the software. In Borrel the Court held that the user license – although not visible to the user until the software was unwrapped from its protective plastic – was binding upon the purchaser because the purchaser had the opportunity to read the software license, and was bound by all of the provisions contained in the license. In the case of Step-Saver Microwave Corp. v. Lybron Corp., 912 F.2d 1041 (3d. Cir. 1990), a computer manufacturer licensed software from a software developer. Lybron’s license was a "shrink-wrapped" agreement. The corporat0ion involved in Step-Saver v. Lybron involved shrink-wrapped software which was installed before the users received it. The Third Circuit Court of Appeals rejected a contract claim against Lybron "because the customer who purchased the Lybron software had no opportunity to review the terms of the license before using the software." This decision greatly influenced other jurisdictions in their holding of this type of contract invalid. Consensus among the courts ultimately led to the enactment of the Uniform Computer Information Transaction Act ("UCITA") in Maryland and Virginia in 2000. UCITA essentially codifies the law with respect to shrink-wrap/click wrap licenses. Relying on the age-old contract principle of mutual assent, UCITA section 110(a) provides that "[u]nless otherwise agreed, a party gives unequivocal acceptance of an offer by an act or conduct that reasonably indicates acceptance in the circumstances." UCITA section 112(a)(3) further provides that "[i]n the absence of an agreement concerning the manner of acceptance of a contract offer, a reasonable manner of acceptance is manifest by the circumstances, including the prior practices of the parties, if any." Through these and other sections, UCITA essentially allows for the enforceability of such contracts in the usual way. In 1977, the Uniform Law Commissioners created the Drafting Committee of UCITA to evaluate commercial practices and judicial rulings on transactions involving information by software developers. The purpose was to create a single body of statutory law in respect to computer information transactions forthwith. UCITA was designed to be a comprehensive code of statutory law governing computer information transactions, detailed for each transaction from beginning to end. The first draft was prepared in 1996; in 1999 it was introduced in the Virginia General Assembly; and eventually approved in both Virginia and Maryland in 2000.

Advantages and Disadvantages of Shrink Wrap Contracts

When it comes to transaction ease, shrink wrap agreements have major advantages. Consumers can purchase software or apps from major retailers or download them directly off an online marketplace. If the product is in stores, there’s no need for a contract review before a purchase is made. The transaction is quick and convenient. And if the solution is downloaded, nothing even needs to be ordered and delivered. A simple purchase also makes shrink wrap contracts more appealing to vendors. They don’t have to write out custom agreements for every consumer. Instead, they can write a single agreement with limited license specifications and market broadly. All that’s needed is to add disclosures right on the packaging, which is generally regarded as the agreement being presented to the consumer.
The biggest con? Often, there is little room for legal challenges. While ostensibly there is something in writing in the form of the packaging and license agreements included with the product or service. However, the details can be vague. A councilman in Hawaii ran into this issue when he ordered an app to interact with his electric meter. The app updated unexpectedly, but he was told that he was required to pay for the update, a fact he said was buried deep in the documentation. He decided to take the program to the state’s Office of Consumer Protection.
More clearly, shrink wrap contracts often contain disclaimers and cancellation policies. If the software or solution is sent through the mail, it usually comes with instruction for return. In fact, shrink wrap contracts for physical products usually come with agreement contract stickers that are affixed to the package. When buying online, a consumer has to check a box confirming that the terms of service have been read and understood. In either case, the process assumes that the consumer had adequate time to review the agreement. But the situation may not always be so clear. For example, if there’s any doubt on how fully a consumer accepts the terms of an agreement, vendors could see fewer opportunities for damages.

Understanding Consumer Rights and Protections

Consumer rights and protections apply to shrink wrap contracts just as they do for any other kind of contract. There are certain obligations that manufacturers and sellers must follow. If they fail to follow the rules, consumers have recourse against them under appropriate consumer protection laws. Consumer protection laws vary from state to state. In some cases, they are also found at the federal level. In any event, some states do impose stricter rules on businesses than other states do. Among the more common issues that arise in these situations is the concept of unconscionability. Unconscionability can occur when the contract is a take it or leave it deal . That is, consumers must either accept the terms being presented to them or forego the object of their desire. Cases have arisen when a manufacturer forced a consumer to forgo the object of their desire. For example, in a computer program case, the manufacturer sold the object of desire – the computer program – that a consumer wanted but specifically refused to sell to them. Often to have the software, a consumer had to agree to install it from the package. The end user license agreements here were often one sided in favor of the seller. And for those who wanted to keep a step ahead of computer viruses, they were given no choice but to accept the difficult license agreements, regardless of whether they were deemed unconscionable.

Best Practices for Businesses with Shrink Wrap Contracts

When it comes to shrink wrap contracts, you should generally keep the following tips in mind:

Ensure all documentation, including software manuals, website terms and conditions, and any other materials, are clear, unambiguous, and readily available to customers or users before a purchase or download is made. Keeping all terms in a visible location, along with a simple explanation of each term, can make sure that the user understands the contract terms and conditions.
Register copyright or trademark protections for all proprietary content covered by a shrink wrap contract where possible or practical. While you cannot keep another party from obtaining a trademark registration, for example, if you have the same or similar mark(s) already registered, having additional registrations for the same mark can help establish priority over an infringer.
Ensure that the terms of the shrink wrap contract are not in obvious conflict with applicable laws or regulations. While it is often legal to limit the use of a product to certain locations or areas, some jurisdictions may have laws that prohibit that type of limitation. Use of arbitration clauses and other similar provisions might not be enforceable in certain cases, so business owners should be sure that any important provisions are not in direct conflict with local, state, or federal laws.
Consider using an "I accept" button that must be clicked before the user can complete the purchase or download. This clause should not be able to be checked from an automatic location in the interface, but should require a manual action. This goes back to users having the ability to opt out of accepting the terms. Users are often presented with terms and conditions they are required to accept to complete a transaction, but aren’t required to actually read those terms themselves. However, if the terms are only identified in a digital location, they can be considered an accepted part of the terms of the contract. Adding a checkbox that requires users to click "I accept", even after they have been given links to review the terms, can make sure that they have actively opted in to the contract.

Toward The Future With Contracting

As digital continues to transform the way we do business, contracting renegotiations will likely become more and more frequent. In an age of big data, adaptive technologies and continuous development, terms and conditions, which were once static agreements, will require a nimbleness to respond to the changing environment. However, these more adaptive terms may need to go hand-in-hand with more active and upfront dispute resolution mechanisms.
For example, while disputes are generally first determined by the courts, consumer disputes with large businesses are more likely to be arbitrated. The American Arbitration Association Business Review found that 8 out of every 10 consumer claims and 3 out of every 5 employment claims were arbitrated rather than litigated in court in 2017. With a range of mobile-ready arbitration services ranging from basic online dispute resolution (ODR) to blockchain-based smart contract settlements , it is now more important than ever to consider how potential disputes will be handled. If a contract includes a dispute resolution clause, it should be woven into the overall deal structure and may even be included as a prerequisite to the execution of the contract. The natural flow of the project should consider how and when disputes will be resolved.
For example, while often considered as the end of the line, litigation may be appropriate for high value, high risk disputes or agreements while lower value, lower risk disputes might benefit from ODR with an informal, low-cost system. With the consumer purchase journey moving from in-store to online, contracting practices must keep pace. Digital solutions that can resolve disputes quickly at a lower cost to all parties have become increasingly important in more traditional and less traditional industries alike.