CASE STUDIES

Case-ProCD Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996)

Brief Fact Summary
Defendant bought a CD-ROM database with a license restriction, limiting the
consumer-purchaser to non-commercial use. The existence of a license restriction was
declared by shrinkwrap packaging but the terms were inside the packaging and not on
the outside. Defendant ignored the license and resold the information on the CD
database.
Synopsis of Rule of Law
If a buyer is presented with additional terms and offered the opportunity to reject and
return the goods and subsequently does not reject the goods, then the buyer will have
accepted those terms.
Facts
Plaintiff compiled telephone directory information from more than 3000 directories
into a database, available on CD-ROM. The court found that the database was costly
to compile and was expensive to keep current. Plaintiff planned to charge one price
for limited use to consumers and a higher price to commercial users which ordinarily
would pay intermediaries expensive fees for such information. The Shrinkwrap
license to consumer product, sold at a lower cost than the commercial version, stated
that use was limited to non-commercial purposes. Every box declared that the
software comes with restrictions stated in an enclosed license, which is available on
the disk and also which appears on the screen every time the software runs.
Issue
Does the buyer have to comply with the terms of a shrinkwrap license because they
have become part of the contract?
Held
The buyer must comply with the license terms. The UCC permits parties to structure
their relations so that the buyer has a chance to make final decision after a detailed
review. The customer inspected the package, tried out the software, learned of the
license and did not reject the goods, which the customer could if the license was
unsatisfactory. A buyer accepts, under 2-206 when after an opportunity to inspect the
goods, he fails to make an effective rejection. Thus, the buyer had accepted and was
bound to abide by the license.

Analysis
In ProCD, the Seventh Circuit addressed the issue of whether a shrinkwrap
license that was included with computer software was an enforceable contract. The
lower court had held that because the shrinkwrap license was inside the box, rather
than printed on the outside, it was not enforceable because the contract was formed
when the buyer purchased the goods, and could therefore not contain "hidden terms"
that were not even disclosed until the box was later opened. The appellate court
rejected this analysis under traditional contract principles and Article 2 of the UCC,
holding that "shrinkwrap licenses are enforceable unless their terms are objectionable
on grounds applicable to contracts in general (for example, if they violate a rule of
positive law, or if they are unconscionable.)"
In so holding, the court concluded that no contract was formed by the parties
until the buyer "accepted" the seller's terms by either returning the software after
reading the license agreement or electing to keep the goods. In support of its
conclusion that the contract was not formed until after the license terms were
reviewed, the court observed that "transactions in which the exchange of money
precedes the communication of detailed terms are common" not only within the
software industry but in the purchase of a wide variety of services such as insurance,
airline tickets and theater concert tickets. The court also focused on the practical
difficulty of informing every customer of all of the terms contained in an information
license before money changed hands and concluded that a purchaser could prevent
formation of the contract simply by returning the goods.

Case- Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997)
Facts
Hill (P) ordered a computer from Gateway (D) by phone. The customer service
representative did not read the terms and conditions of the sale. Hill received a box
containing the computer and the terms that would govern the transaction unless Hill
returned the computer within thirty days, including an arbitration clause.
Hill was dissatisfied with the purchase and filed suit in federal court. The district
court refused Gateways request that it honor the arbitration clause, holding that the
record did not support a finding of a valid arbitration agreement, or that Hill had
adequate notice of the arbitration clause. Gateway took an immediate appeal.
Issue
1) In order for an arbitration clause to be valid, must the purchaser receive notice of
the clause apart from the terms and conditions of sale included in a box, or must the
clause be otherwise prominent or stand out?
2) Does an allegation that an arbitration clause is part of a scheme to defraud render
that clause unenforceable?
Holding and Rule
1) No. In order for an arbitration clause to be valid, the purchaser need not receive
notice of the clause apart from the terms and conditions of sale included in a box, and
the clause need not be otherwise prominent or stand out.
2) No. An allegation that an arbitration clause is part of a scheme to defraud does not
render that clause unenforceable.
The court held that the enforceability of an arbitration clause is determined on the
same basis as any other contract clause. A contract need not be read to be effective.
The terms included in the box stand or fall together if the terms constitute the
contract between the parties then all must be enforced.
The court held that UCC 2-207(2) only applies where there is a battle of the forms,
and that it did not apply in this case because there was only one form.

Analysis
In Hill, the court adopted the analysis of ProCD in an action by purchasers of a
computer against the computer manufacturer. At issue was the enforceability of an
arbitration agreement between the parties where the arbitration clause was included in
a set of terms sent to the buyer in the box in which computer was shipped which also
stated that the buyer agreed to accept the terms unless the customer returned the
computer within 30 days. The plaintiffs contended that they had not read the
statement of terms closely enough to discover the agreement to arbitrate before the 30
days expired but the court rejected this, noting that "a contract need not be read to be
effective." As in ProCD, the court approved the enforceability of the "approve or
return" device for setting terms, again relying on the fact that there are "many
commercial transactions in which people pay for products with terms to follow." The
customers should have anticipated that additional significant terms would be included
with the product and, by keeping the product more than 30 days, accepted the
manufacturer's offer and terms.