Victory for Shrinkwrap License Agreements

1/1/2004

"Shrinkwrap" software license agreements have been controversial, and their enforceability has been in doubt. Courts have split on this issue, several well-publicized decisions having held them to be invalid. The problem is that the customer usually reads the license agreement after the sale has already taken place; that is, after the contract between the buyer and seller has been formed under traditional contract formation analysis. Typically, the customer opens the package and reads the license agreement contained on or with the disk or reads it in connection with powering up the software itself. The customer usually is offered the opportunity to get its money back if it does not agree with the license agreement terms and conditions, but is told that continued use of the software constitutes acceptance of the license.

The Washington Supreme Court, in an en banc decision issued May 4, 2000, has now come down on the side of enforceability of shrinkwrap software license agreements. In M.A. Mortenson Co. v. Timberline Software Corp., No. 67796-4, 2000 WL 550845 (Wash May 4, 2000), Mortenson, a general construction contractor, purchased Timberline software and used it to prepare a construction bid. Due to an alleged defect in the software, Mortenson overbid a project by almost $2 million. It sued Timberline for breach of warranties. Timberline relied upon a provision in its shrinkwrap license agreement that excluded all consequential damages and limited Mortenson to recovery of the purchase price.

The Washington Supreme Court, in a lengthy analysis of the various legal issues raised by shrinkwrap license agreements, affirmed summary judgment for Timberline and found that the terms of the software license agreement were not unconscionable and that they were enforceable against Mortenson. The court referred to this sort of contract formation, when terms are added after the initial offer and acceptance, as a "layered contract."

Click here for the opinion in Mortensen.

Comment: This is an important decision in the software licensing field. The court's detailed analysis of shrinkwrap license issues likely will be cited by other courts. It also seems to reflect a trend in the direction of upholding such agreements. Note that the uncertainties associated with shrinkwrap license agreements can usually be avoided through use of "click-on" agreements, in which the purchaser affirmatively agrees, via an on-line consent form, to the terms of the license agreement.

Jere M. Webb
503.294.9460
jmwebb@stoel.com