Why Libertarians Should Oppose “Shrinkwrap” Contracts

by on October 28, 2008 · 45 comments

Presumably, everyone reading this post has purchased software at some point in the past 15 years. If you have, you may have agreed to a contract unwittingly. Breaking the seal of the shrinkwrap around the box might bind you to the terms and conditions contained inside. This is but one of many new ways you can be determined to agree to contractual terms you may have never seen.

In the last decade, Gateway came under fire for its means of doing business with consumers. A customer would order her computer over the phone, but when it would come, it would contain a list of terms including things like a mandatory abritration clause – and always stating that the customer was deemed to have accepted the terms by not returning the computer (at her expense) by some period of time. A number of court cases raised the question whether this practice really created a binding contract. 

As libertarians, we are generally in favor of contracts. But a contract is a mutually consensual agreement. The critical question for shrinkwrap contracts and the like is whether both parties have really assented. In the Gateway cases, there are three main interpretations of what is going on:

  1. The phone conversation ordering the computer (or, analogously, buying the software from the store) was just preliminary negotiations. When Gateway shipped the computer, it offered it to the customer with the terms that came with it. And since under traditional contract law “the offeror is the master of his offer,” Gateway could specify that keeping the computer without returning it would be deemed to be acceptance of the offer. So, the customer has accepted the terms and is bound by them. This was Gateway’s interpretation, and the one a New York appellate court adopted in Brower v. Gateway 2000.
  2. The phone order was the customer’s offer to buy a computer from Gateway. Gateway’s shipping the computer accepted it, but its acceptance provided deviating terms. Under the Uniform Commercial Code (UCC), which governs the transaction, the deviating terms must be expressly assented to by the customer. Keeping the computer did not accept the deviating terms, so the contract has only the terms agreed to by both parties and the default terms provided by the UCC. This was the result a Kansas court came to in Klocek v. Gateway.
  3. The phone conversation (or, analogously, the sale of the software) was actually a complete contract itself, which agreed on the item to be purchased and the price the customer would pay. The terms that came with the computer were Gateway’s proposal to modify the agreement. But since the customer didn’t agree to the terms explicitly, but rather just accepted the computer, the new terms were never accepted.

Libertarians might legitimately disagree about which of these interpretations is most plausible, but I think that #3 is the winner. We should be in favor of contract rules that allow people to form contracts in a number of ways, including telephone sales calls, but we should make sure that both parties really agree to the contract. This doesn’t mean that we have to look at whether the parties had “equal bargaining power” or thoroughly read the contracts before signing.

But what Gateway was doing in those cases, and what software companies do all the time, seem an awful lot like the homeless guy washing your car window and then demanding payment. This is not a contract. As the great libertarian philosopher Robert Nozick said, “You may not decide to give me something, for example a book, and then grab money from me to pay for it, even if I have nothing better to spend the money on” (Anarchy, State, and Utopia, p. 95.). Though the offeror must be allowed to require the offeree to do a lot to accept the contract (e.g. providing a car dealer with your credit history), the offeror cannot bind the offeree even though she hasn’t done anything. I should not be required to ship back a product, at my expense, to refuse assent.

But perhaps shrinkwrap contracts will become less of a problem as more sales – and even content acquisition – occurs online. Before I buy a song on iTunes, I have to agree to the terms Apple gives me. If I don’t like the terms, I can refuse to buy from iTunes and instead use Amazon Music Downloads or go buy a CD. And few people buy things over the phone any more. When you buy a physical product online, the seller can require you to agree to its terms before it accepts your order, charges you, and ships. These cases are explicit agreements, and libertarians should support protecting these. But, as Tim Lee has pointed out here, we should be careful before finding contracts where none really exist.

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    Great post.

  • MikeRT

    I second that.

    I've raised this point for several years now, but this is the first time I've seen a major IP blog really discuss it.

    One of the problems with this approach is that it makes a mockery of contract law. Furthermore, there is also a cultural angle to the issue in that most people find it absolutely absurd to be bound to a contract, especially one they were never given a chance to negotiate, in order to buy a commodity product. If, say, a car company did these things, it would prompt incredible outrage.

  • http://srynas.blogspot.com/ Steve R.

    I'll third it. Also bad with many EULAs and website Terms of Service (TOS) is that the so-called contract terms can be changed by the vendor at-will and/or post-sale. To follow up on MikeRT this makes a mockery of contract law.

    Rhetorically, why should anyone respect the vendors rights if they don't respect the consumers rights. If the vendor is not bound by the contract, logic dictates that the consumer would then have a “right” to do whatever also. Anarchy anyone?

  • http://zgp.org/~dmarti/ Don Marti

    OK, legal experts…I never clicked through, broke the shrinkwrap, or otherwise accepted this EULA:

    http://zgp.org/~dmarti/freedom/for-sale-cheap/

    So I can sell the unopened software, right?

  • http://srynas.blogspot.com/ Steve R.

    The Gripeline had many posts on the absurdity of EULAs posted in the EULA Library. Unfortunately many of the links are now dead and the site is href=”http://www.gripe2ed.com/scoop/story/2008/7/28/165924/644″>no longer active. This link is still valid: href=”http://www.gripe2ed.com/scoop/story/2008/6/20/022/00732″>Teleblend's terrible terms

    Ed Foster wrote on one of Teleblend's provisions: “In other words, even if you got what looked like a real contract when you signed up for the service, those terms are voided by whatever they choose to post on a webpage you (as was the case with the reader) may not even know exists. And this they call an “opt-in” customer agreement?

  • http://felter.org/wesley/ Wes Felter

    So shinkwrap contracts are bad, but clickwrap contracts (virtually the same thing) are good? It's good that commerce is moving online, because then the only way to avoid these one-sided contracts is to not use the Internet?

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    I would contend that clickwrap contracts are not the same as shrinkwrap contracts. In the shrinkwrap context, I have never actually assented to the terms. I already dickered for the product and received it, but now the seller wants to impose some terms ex post factor. When I buy the new Augustana album on iTunes, however, I agree to Apple's terms before I pay for the files. If I decide that I don't actually want to buy the music, I can simply not form the contract and thereby not bind myself to pay or to Apple's terms (but, of course, I also won't get the product).

    The clickwrap case sounds exactly the same to me as a standard form contract. The only difference is that one is online and one is on paper. In either case, my actual agreement to the terms is required – and it is, of course, perfectly within the seller's right to refuse to give me its files or products unless I agree to provisions that it sets forth.

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    Do you read the entire agreement before you click “I agree” boxes?

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    No. It takes a lot of time to read through those agreements. And it's not worth searching through them for the remote possibility that I will find a term that matters to me to such an extent that I would refuse to go forward with the contract if I discovered it.

  • Wilson

    Surely the seller of software or hardware should be able to impose terms of use on the user. I don't think that returning the product is an excessive burden (maybe you have an argument that Gateway should pick up the cost of returning the product). A court can overturn unconscionable terms. I'm not exactly sure what the alternative is. If you disallow these type of contracts certain types of products are of course going to be more expensive or utterly unavailable to consumers. Gateway is not going to read you the terms over the telephone, and that wouldn't create any greater understanding than the present terms.

    I think a non-paternalist has to recognize that people are going to agree to terms all the time that they don't read or don't understand. As long as those terms aren't unconscionable, and they can be rejected by the prudent consumer, I see no reason to deny firms the capability to impose terms on their products.

  • Wilson

    Surely the seller of software or hardware should be able to impose terms of use on the user. I don't think that returning the product is an excessive burden (maybe you have an argument that Gateway should pick up the cost of returning the product). A court can overturn unconscionable terms. I'm not exactly sure what the alternative is. If you disallow these type of contracts certain types of products are of course going to be more expensive or utterly unavailable to consumers. Gateway is not going to read you the terms over the telephone, and that wouldn't create any greater understanding than the present terms.

    I think a non-paternalist has to recognize that people are going to agree to terms all the time that they don't read or don't understand. As long as those terms aren't unconscionable, and they can be rejected by the prudent consumer, I see no reason to deny firms the capability to impose terms on their products.

  • Ryan Radia

    The key is that the seller impose any terms at the point of sale. Once you buy a product and agree to any accompanying terms, the product is yours to do with it as you please. Gateway simply needs to present the contract to the consumer by placing it on the front of the box.

  • bubba

    The obvious solution is for Gateway to offer free return shipping if the customer declines the terms and conditions. No one would actually do this, but Gateway would regain the legal high ground.

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    If you disallow these type of contracts certain types of products are of course going to be more expensive or utterly unavailable to consumers.

    So if the courts hold that shrinkwrap contracts are unenforceable, Gateway is going to stop selling computers?

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    I'm not convinced this would be enough. If I'm right and #3 (contract already formed by phone conversation) is the correct interpretation, then the computer is already the customer's, on the terms agreed to over the phone.

    The solution is, as I suggested, for any sellers that will refuse to sell their products under the default UCC terms to make sure that customers agree to those terms before they pay for and receive the product. This can be done with “clickwrap” or it can be done in store by signing the agreement at the cash register.

  • http://srynas.blogspot.com/ Steve R.

    Alex, the consumer is only allowed to sign? You wrote: “This can be done with “clickwrap” or it can be done in store by signing the agreement at the cash register.”. Contracts should be open to the negotiation of terms in order to be considered valid. In my opinion contracts by adhesion should be prohibited.

    If the vendor offers a “boiler plate” contract at the cash register then the purchaser should have a right to strike out any terms that they don't agree with and the vendor should be obligated to live with that. (fair is fair) If a vendor is not willing to negotiate the terms of contract, then (in my opinion) a valid contract doesnot exist.

  • http://www.openmarket.org/author/alex-harris/ AlexHarris

    Yes. I definitely agree that a customer should be able to try to negotiate with the seller. But if the seller refuses to sell under the customer's terms (as is frankly likely – I doubt that the cash register clerk has the power to approve a contract with changed terms), then there's no deal.

  • WilsonF

    That's not what I meant to say anyway, simply that the costs would be increased. Gateway's clause at issue in Klocek was an arbitration clause–certainly Gateway believes that arbitration reduces their costs and presumably they pass that benefit on to consumers.

    Yet, certainly some products would stop being available to consumers (at reasonable cost) altogether. The famous case ProCD dealt with a database program that the company sold to consumers at a lower price than they would for commercial uses. Without the shrinkwrap license, that is, without these terms, how can ProCD effectively price discriminate?

    It seems clear to me that these licenses are perceived by the vendor as adding value to their products or they would not have them. In a free market, presumably a portion of that value is passed on to the consumer. Moreover, presumably the free market protects people from obviously unfair terms, beyond the unconscionably requirement.

    As for putting the terms on the outside of the box, I don't see how this rectifies any of the problems. People still aren't going to read it, there is still not going to be any explicit acceptance, for software products it's going to be in tiny type, an absurd addition, and the Gateway computer at issue was ordered over the phone. In this case, the point of sale requirement would force a recital of the terms over the phone. How is that effective?

    I think requiring explicit acceptance and full understanding by all consumers is paternalistic, and overly skeptical of a functioning marketplace. In that way I don't see this as a very libertarian argument (not a good or bad thing, just saying).

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    I think requiring explicit acceptance and full understanding by all consumers is paternalistic.

    This doesn't make any sense to me. if I didn't accept a contract, how is it “paternalistic” to say that I'm not bound by it?

  • WilsonF

    We seem to be assuming that consumers can't or won't read these terms, because if they did read and understand the terms, they would be fully capable of rejecting them in the manner specified. I mean, maybe I'm not understanding, but I thought the argument was that the reason that shrinkwrap licenses are bad is because people are not reading them; implicit acceptance lets people enter into contracts the terms of which they are not aware of.

    While this is true that in reality people don't usually read the licenses, contract law should not be built upon the idea that people aren't going to read what appears to be significant legal terms included with their purchase. That is the idea I think is paternalistic. If it is binding, we shouldn't assume that people are going to unilaterally ignore it. Again though, maybe I'm wrong about this. I still think the market is the right solution here.

    If you are arguing that companies should not be able to require terms of use with their products, because you have a product in hand and you ought to be able to use it as you please, I think that this is troublesome for reasons I already mentioned.

  • Ryan Radia

    It doesn't matter if most people don't read the terms as long as they have the have the ability to discover the terms of a purchase before they actually fork over the cash and receive the product. People who don't care about the terms in the first place will be unaffected by the change.

  • Ryan Radia

    Shrinkwrap contracts are bad because consumers who want to read the terms, can't do so until they've already paid the money and taken possession of the product. I don't always read the ToS of every product I buy, but sometimes I do, in which case I should have the chance to do so at the point of sale.
    I don't think anybody is saying that it's wrong for companies to attach terms of use with their products. The question is when those terms should be presented to prospective buyers.

  • WilsonF

    This really seems to me to be solved by the idea that customers know that there ARE likely to be terms and they can return the product to reject the terms once they are aware of what they are.

    Are you saying that if we spotted people a couple of bucks to send the product back that this whole issue would be solved? If not, what am I missing?

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    The question is what constitutes consent to a contract. My position is that a valid contract does not exist unless both parties have taken some affirmative step to indicate assent to the contract. Failing to send a computer back is not an affirmative step. I mean, how about this: instead of shipping the computer back to Gateway, how about if I simply mail back the contract with a note saying that I don't accept it? Is it still a valid contract then? If so, why does Gateway get to dictate to me what I have to do to avoid being party to a contact I never asked to be a party to in the first place?

  • Ryan Radia

    I think objections to shrinkwrap contracts would be muted greatly if returns were a simple process with no cost involved. I'm still not sure if I think that'd completely vindicate shrinkwrap contracts, though.

  • WilsonF

    Well I think this is a good point and a defensible hard line to take that affirmative action is required to consent to a contract, but I think if the courts held that way the world would different in a bad way in terms of the availability and prices of goods and services. I admit I am no expert here though and perhaps this isn't true at all. I think markets protect consumers from bad adhesion contracts and good adhesion contracts are important to sellers, since explicit acceptance is very practically difficult, as mentioned above.

    Yet, I don't think adhesion contracts are defenseless on a consent theory. Gateway is not dictating to you a contract you never asked to be a part of; presumably you knew there would be terms included along with the item you actively purchased when you purchased it, and when you cracked the box the terms made it clear what it takes to reject. In addition, I would imagine you can solicit Gateway for the terms of the purchase before delivery and receive them.

  • http://www.tc.umn.edu/~leex1008 Tim Lee

    presumably you knew there would be terms included along with the item you actively purchased when you purchased it

    Really? That's a serious question. I mean yes, I know this because I used to write about this sort of thing for a living, but I don't think it's at all obvious that the average Gateway customer knows that computers will come with a licensing agreement.

    And I still don't understand why Gateway is entitled to dictate what I must do to avoid being a party to a contract. Sending a computer back isn't costless, even if Gateway is paying for shipping. I might have to drive to the post office. I might have to wait around my house for the UPS guy to pick up the package. Or maybe I needed the computer right away for some important consulting job and can't afford to send it back. Why does Gateway get to say that I have to either accept its terms or bear those costs?

  • http://srynas.blogspot.com/ Steve R.

    Here is a Ubersoft Cartoon that humorously summarizes the absurdity of EULAs and TOSs. (There are several panels.)

  • WilsonF

    I suppose my last comment on this is that I suppose you are right, that if the customer did not know that there were terms before the purchase, there is a good case for voiding the contract. Note, Gateway could fix this by saying over the phone “this purchase is subject to terms and conditions.” I still think that practical concerns outweigh this, but I suppose I could be convinced otherwise.

    If you do know, however, that there are likely to be some terms with the purchase of a computer, I don't think Gateway is 'imposing' upon you by requiring this form of acceptance. It's simply a part of an ongoing transaction, one which you subjectively may find bothersome, but not one that is out of out of order–especially given my argument above that the terms are not likely to be particularly burdensome in light of the marketplace.

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