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Shrink-Wrap License Does Not Modify Negotiated CM Software Contract, Kansas Supreme Court Holds
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July 30, 2007
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By Bill Hale
Thelen LLP
The Kansas Supreme Court has held that a shrink-wrap license agreement included with an accounting and project management software package was not part of the contract between a Kansas construction management company and a Washington software provider. Wachter Management Co. v. Dexter & Chaney, Inc., 282 Kan. 365, 144 P.3d 747 (2006).
In 2003, the software company and the CM negotiated the purchase of accounting and project management software. The negotiations culminated in the software company sending a written proposal to the CM for purchase of the software and installation, maintenance, training and consulting services. The proposal did not contain an integration clause, did not state it was a final and complete agreement, but also did not provide for including additional terms. The CM signed and returned the proposal, and the software company subsequently shipped the software to the CM and assisted in its installation.
The software included a shrink-wrap license on the outside of the sealed software package. This license said that by opening the sealed software package, the CM consented to all the terms of the shrink-wrap license. If the CM did not consent, it was to return the unopened package to the software company. The shrink-wrap license stated that it was the exclusive agreement between the parties and superseded all prior agreements. A key provision of the shrink-wrap license required the CM to bring any suits against the software company in Washington State court under Washington law.
In 2005, after having problems with the software, the CM sued the software company in Kansas state court for breach of contract, breach of warranty and fraudulent inducement, alleging more than $350,000 in damages. The software company moved to dismiss the case on grounds of improper venue, arguing that the agreement expressly required the CM to sue it only in Washington State court. The CM argued that it was not bound by the terms of the shrink-wrap license because the agreement was not part of the contract between the parties. The District Court agreed and refused to dismiss on grounds that the shrink-wrap license contained additional terms that the CM had not bargained for. On an interlocutory appeal taken directly by the Kansas Supreme Court, the court affirmed.
The software company argued that the CM agreed to the terms of the shrink-wrap license when it used the software and that, unless the shrink-wrap license was enforced, the CM could use the software unfettered by any license terms. The CM argued that the shrink-wrap license was an attempt to unilaterally modify the contract created when the CM accepted the software company's proposal and that the Uniform Commercial Code precludes unilateral modification of contract terms.
The Supreme Court noted that the case was similar to a case in which the Washington Supreme Court examined Washington law and the Uniform Commercial Code and upheld the validity of a shrink-wrap license. Click here for a summary of that case.
However, the Kansas Supreme Court disagreed with the reasoning of the majority in the Washington case and held that under Kansas law the shrink-wrap license was not part of the contract between the software company and the CM.
The court noted that in this case, detailed negotiations between the parties had led to the software company's proposal to the CM. This proposal constituted an offer, which the CM accepted by signing and returning it, thereby forming a written contract. If the software company had wanted the terms of the license to be part of the contract, it could have done so by including them in its proposal or incorporating them by reference. In this way, the court distinguished the common situation in which a consumer simply buys software off the shelf without any prior negotiations with the provider.
Because a contract already existed when the CM received the shrink-wrap license, the court treated the license as a proposal by the software company to modify the contract. The court examined the UCC and Kansas law and determined that a proposal to modify a contract only becomes part of the contract if both parties expressly consent to it.
The court also held that because use of the software was well within the contemplation of the original contract, the CM's use of the software was not enough to constitute consent to the proposed modifications. Because the CM did not expressly consent to the terms of the shrink-wrap license, it never became part of the contract between the parties. Therefore, the license provision prohibiting the CM from suing the provider outside Washington State was not enforceable.
The dissent asserted that because the software company's proposal made reference to "licenses," the shrink-wrap license was part of the deal and that the CM should have returned the software as non-conforming if it disagreed. The dissent also asserted, as did the majority in the Washington case, that a "layered" contract was formed because there was no integration clause and, therefore, the shrink-wrap license became part of the contract when the CM went ahead and used the software.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-369-7229 or at pwberning@thelen.com or contact your Thelen attorney. For more information about Thelen's Construction and Government Contracts Department, click here.
©2007 Thelen LLP
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