Opinion ID: 564982
Heading Depth: 1
Heading Rank: 2

Heading: the effect of the box-top license

Text: 11 The relationship between Step-Saver and TSL began in the fall of 1984 when Step-Saver asked TSL for information on an early version of the Multilink program. TSL provided Step-Saver with a copy of the early program, known simply as Multilink, without charge to permit Step-Saver to test the program to see what it could accomplish. Step-Saver performed some tests with the early program, but did not market a system based on it. 12 In the summer of 1985, Step-Saver noticed some advertisements in Byte magazine for a more powerful version of the Multilink program, known as Multilink Advanced. Step-Saver requested information from TSL concerning this new version of the program, and allegedly was assured by sales representatives that the new version was compatible with ninety percent of the programs available off-the-shelf for computers using MS-DOS. The sales representatives allegedly made a number of additional specific representations of fact concerning the capabilities of the Multilink Advanced program. 13 Based on these representations, Step-Saver obtained several copies of the Multilink Advanced program in the spring of 1986, and conducted tests with the program. After these tests, Step-Saver decided to market a multi-user system which used the Multilink Advanced program. From August of 1986 through March of 1987, Step-Saver purchased and resold 142 copies of the Multilink Advanced program. Step-Saver would typically purchase copies of the program in the following manner. First, Step-Saver would telephone TSL and place an order. (Step-Saver would typically order twenty copies of the program at a time.) TSL would accept the order and promise, while on the telephone, to ship the goods promptly. After the telephone order, Step-Saver would send a purchase order, detailing the items to be purchased, their price, and shipping and payment terms. TSL would ship the order promptly, along with an invoice. The invoice would contain terms essentially identical with those on Step-Saver's purchase order: price, quantity, and shipping and payment terms. No reference was made during the telephone calls, or on either the purchase orders or the invoices with regard to a disclaimer of any warranties. 14 Printed on the package of each copy of the program, however, would be a copy of the box-top license. The box-top license contains five terms relevant to this action: 15 (1) The box-top license provides that the customer has not purchased the software itself, but has merely obtained a personal, non-transferable license to use the program. 7 16 (2) The box-top license, in detail and at some length, disclaims all express and implied warranties except for a warranty that the disks contained in the box are free from defects. 17 (3) The box-top license provides that the sole remedy available to a purchaser of the program is to return a defective disk for replacement; the license excludes any liability for damages, direct or consequential, caused by the use of the program. 18 (4) The box-top license contains an integration clause, which provides that the box-top license is the final and complete expression of the terms of the parties's agreement. 19 (5) The box-top license states: Opening this package indicates your acceptance of these terms and conditions. If you do not agree with them, you should promptly return the package unopened to the person from whom you purchased it within fifteen days from date of purchase and your money will be refunded to you by that person. 20 The district court, without much discussion, held, as a matter of law, that the box-top license was the final and complete expression of the terms of the parties's agreement. Because the district court decided the questions of contract formation and interpretation as issues of law, we review the district court's resolution of these questions de novo. 8 21 Step-Saver contends that the contract for each copy of the program was formed when TSL agreed, on the telephone, to ship the copy at the agreed price. 9 The box-top license, argues Step-Saver, was a material alteration to the parties's contract which did not become a part of the contract under UCC Sec. 2-207. 10 Alternatively, Step-Saver argues that the undisputed evidence establishes that the parties did not intend the box-top license as a final and complete expression of the terms of their agreement, and, therefore, the parol evidence rule of UCC Sec. 2-202 would not apply. 11 22 TSL argues that the contract between TSL and Step-Saver did not come into existence until Step-Saver received the program, saw the terms of the license, and opened the program packaging. TSL contends that too many material terms were omitted from the telephone discussion for that discussion to establish a contract for the software. Second, TSL contends that its acceptance of Step-Saver's telephone offer was conditioned on Step-Saver's acceptance of the terms of the box-top license. Therefore, TSL argues, it did not accept Step-Saver's telephone offer, but made a counteroffer represented by the terms of the box-top license, which was accepted when Step-Saver opened each package. Third, TSL argues that, however the contract was formed, Step-Saver was aware of the warranty disclaimer, and that Step-Saver, by continuing to order and accept the product with knowledge of the disclaimer, assented to the disclaimer. 23 In analyzing these competing arguments, we first consider whether the license should be treated as an integrated writing under UCC Sec. 2-202, as a proposed modification under UCC Sec. 2-209, or as a written confirmation under UCC Sec. 2-207. Finding that UCC Sec. 2-207 best governs our resolution of the effect of the box-top license, we then consider whether, under UCC Sec. 2-207, the terms of the box-top license were incorporated into the parties's agreement. 24
25 As a basic principle, we agree with Step-Saver that UCC Sec. 2-207 governs our analysis. We see no need to parse the parties's various actions to decide exactly when the parties formed a contract. TSL has shipped the product, and Step-Saver has accepted and paid for each copy of the program. The parties's performance demonstrates the existence of a contract. The dispute is, therefore, not over the existence of a contract, but the nature of its terms. 12 When the parties's conduct establishes a contract, but the parties have failed to adopt expressly a particular writing as the terms of their agreement, and the writings exchanged by the parties do not agree, UCC Sec. 2-207 determines the terms of the contract. 26 As stated by the official comment to Sec. 2-207: 27 1. This section is intended to deal with two typical situations. The one is the written confirmation, where an agreement has been reached either orally or by informal correspondence between the parties and is followed by one or more of the parties sending formal memoranda embodying the terms so far as agreed upon and adding terms not discussed.... 28 2. Under this Article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore, any additional matter contained in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term unless the acceptance is made conditional on the acceptance of the additional or different terms. 29 Although UCC Sec. 2-202 permits the parties to reduce an oral agreement to writing, and UCC Sec. 2-209 permits the parties to modify an existing contract without additional consideration, a writing will be a final expression of, or a binding modification to, an earlier agreement only if the parties so intend. 13 It is undisputed that Step-Saver never expressly agreed to the terms of the box-top license, either as a final expression of, or a modification to, the parties's agreement. In fact, Barry Greebel, the President of Step-Saver, testified without dispute that he objected to the terms of the box-top license as applied to Step-Saver. In the absence of evidence demonstrating an express intent to adopt a writing as a final expression of, or a modification to, an earlier agreement, we find UCC Sec. 2-207 to provide the appropriate legal rules for determining whether such an intent can be inferred from continuing with the contract after receiving a writing containing additional or different terms. 14 30 To understand why the terms of the license should be considered under Sec. 2-207 in this case, we review briefly the reasons behind Sec. 2-207. Under the common law of sales, and to some extent still for contracts outside the UCC, 15 an acceptance that varied any term of the offer operated as a rejection of the offer, and simultaneously made a counteroffer. 16 This common law formality was known as the mirror image rule, because the terms of the acceptance had to mirror the terms of the offer to be effective. 17 If the offeror proceeded with the contract despite the differing terms of the supposed acceptance, he would, by his performance, constructively accept the terms of the counteroffer, and be bound by its terms. As a result of these rules, the terms of the party who sent the last form, typically the seller, would become the terms of the parties's contract. This result was known as the last shot rule. 31 The UCC, in Sec. 2-207, rejected this approach. Instead, it recognized that, while a party may desire the terms detailed in its form if a dispute, in fact, arises, most parties do not expect a dispute to arise when they first enter into a contract. As a result, most parties will proceed with the transaction even if they know that the terms of their form would not be enforced. 18 The insight behind the rejection of the last shot rule is that it would be unfair to bind the buyer of goods to the standard terms of the seller, when neither party cared sufficiently to establish expressly the terms of their agreement, simply because the seller sent the last form. Thus, UCC Sec. 2-207 establishes a legal rule that proceeding with a contract after receiving a writing that purports to define the terms of the parties's contract is not sufficient to establish the party's consent to the terms of the writing to the extent that the terms of the writing either add to, or differ from, the terms detailed in the parties's earlier writings or discussions. 19 In the absence of a party's express assent to the additional or different terms of the writing, section 2-207 provides a default rule that the parties intended, as the terms of their agreement, those terms to which both parties have agreed, 20 along with any terms implied by the provisions of the UCC. 32 The reasons that led to the rejection of the last shot rule, and the adoption of section 2-207, apply fully in this case. TSL never mentioned during the parties's negotiations leading to the purchase of the programs, nor did it, at any time, obtain Step-Saver's express assent to, the terms of the box-top license. Instead, TSL contented itself with attaching the terms to the packaging of the software, even though those terms differed substantially from those previously discussed by the parties. Thus, the box-top license, in this case, is best seen as one more form in a battle of forms, and the question of whether Step-Saver has agreed to be bound by the terms of the box-top license is best resolved by applying the legal principles detailed in section 2-207.
33 TSL advances several reasons why the terms of the box-top license should be incorporated into the parties's agreement under a Sec. 2-207 analysis. First, TSL argues that the parties's contract was not formed until Step-Saver received the package, saw the terms of the box-top license, and opened the package, thereby consenting to the terms of the license. TSL argues that a contract defined without reference to the specific terms provided by the box-top license would necessarily fail for indefiniteness. Second, TSL argues that the box-top license was a conditional acceptance and counter-offer under Sec. 2-207(1). Third, TSL argues that Step-Saver, by continuing to order and use the product with notice of the terms of the box-top license, consented to the terms of the box-top license. 34
35 TSL argues that the parties intended to license the copies of the program, and that several critical terms could only be determined by referring to the box-top license. Pressing the point, TSL argues that it is impossible to tell, without referring to the box-top license, whether the parties intended a sale of a copy of the program or a license to use a copy. TSL cites Bethlehem Steel Corp. v. Litton Industries in support of its position that any contract defined without reference to the terms of the box-top license would fail for indefiniteness. 21 36 From the evidence, it appears that the following terms, at the least, were discussed and agreed to, apart from the box-top license: (1) the specific goods involved; (2) the quantity; and (3) the price. TSL argues that the following terms were only defined in the box-top license: (1) the nature of the transaction, sale or license; and (2) the warranties, if any, available. TSL argues that these two terms are essential to creating a sufficiently definite contract. We disagree. Section 2-204(3) of the UCC provides: 37 Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. 38 Unlike the terms omitted by the parties in Bethlehem Steel Corp., the two terms cited by TSL are not gaping holes in a multi-million dollar contract that no one but the parties themselves could fill. 22 First, the rights of the respective parties under the federal copyright law if the transaction is characterized as a sale of a copy of the program are nearly identical to the parties's respective rights under the terms of the box-top license. 23 Second, the UCC provides for express and implied warranties if the seller fails to disclaim expressly those warranties. 24 Thus, even though warranties are an important term left blank by the parties, the default rules of the UCC fill in that blank. 39 We hold that contract was sufficiently definite without the terms provided by the box-top license. 25 40
41 TSL advances two reasons why its box-top license should be considered a conditional acceptance under UCC Sec. 2-207(1). First, TSL argues that the express language of the box-top license, including the integration clause and the phrase opening this product indicates your acceptance of these terms, made TSL's acceptance expressly conditional on assent to the additional or different terms. 26 Second, TSL argues that the box-top license, by permitting return of the product within fifteen days if the purchaser 27 does not agree to the terms stated in the license (the refund offer), establishes that TSL's acceptance was conditioned on Step-Saver's assent to the terms of the box-top license, citing Monsanto Agricultural Products Co. v. Edenfield. 28 While we are not certain that a conditional acceptance analysis applies when a contract is established by performance, 29 we assume that it does and consider TSL's arguments. 42 To determine whether a writing constitutes a conditional acceptance, courts have established three tests. Because neither Georgia nor Pennsylvania has expressly adopted a test to determine when a written confirmation constitutes a conditional acceptance, we consider these three tests to determine which test the state courts would most likely apply. 30 43 Under the first test, an offeree's response is a conditional acceptance to the extent it states a term materially altering the contractual obligations solely to the disadvantage of the offeror. 31 Pennsylvania, at least, has implicitly rejected this test. In Herzog Oil Field Service, Inc., 32 a Pennsylvania Superior Court analyzed a term in a written confirmation under UCC Sec. 2-207(2), rather than as a conditional acceptance even though the term materially altered the terms of the agreement to the sole disadvantage of the offeror. 33 44 Furthermore, we note that adopting this test would conflict with the express provision of UCC Sec. 2-207(2)(b). Under Sec. 2-207(2)(b), additional terms in a written confirmation that materially alter [the contract] are construed as proposals for addition to the contract, not as conditional acceptances. 45 A second approach considers an acceptance conditional when certain key words or phrases are used, such as a written confirmation stating that the terms of the confirmation are the only ones upon which we will accept orders. 34 The third approach requires the offeree to demonstrate an unwillingness to proceed with the transaction unless the additional or different terms are included in the contract. 35 46 Although we are not certain that these last two approaches would generate differing answers, 36 we adopt the third approach for our analysis because it best reflects the understanding of commercial transactions developed in the UCC. Section 2-207 attempts to distinguish between: (1) those standard terms in a form confirmation, which the party would like a court to incorporate into the contract in the event of a dispute; and (2) the actual terms the parties understand to govern their agreement. The third test properly places the burden on the party asking a court to enforce its form to demonstrate that a particular term is a part of the parties's commercial bargain. 37 47 Using this test, it is apparent that the integration clause and the consent by opening language is not sufficient to render TSL's acceptance conditional. As other courts have recognized, 38 this type of language provides no real indication that the party is willing to forego the transaction if the additional language is not included in the contract. 48 The second provision provides a more substantial indication that TSL was willing to forego the contract if the terms of the box-top license were not accepted by Step-Saver. On its face, the box-top license states that TSL will refund the purchase price if the purchaser does not agree to the terms of the license. 39 Even with such a refund term, however, the offeree/counterofferor may be relying on the purchaser's investment in time and energy in reaching this point in the transaction to prevent the purchaser from returning the item. Because a purchaser has made a decision to buy a particular product and has actually obtained the product, the purchaser may use it despite the refund offer, regardless of the additional terms specified after the contract formed. But we need not decide whether such a refund offer could ever amount to a conditional acceptance; the undisputed evidence in this case demonstrates that the terms of the license were not sufficiently important that TSL would forego its sales to Step-Saver if TSL could not obtain Step-Saver's consent to those terms. 49 As discussed, Mr. Greebel testified that TSL assured him that the box-top license did not apply to Step-Saver, as Step-Saver was not the end user of the Multilink Advanced program. Supporting this testimony, TSL on two occasions asked Step-Saver to sign agreements that would put in formal terms the relationship between Step-Saver and TSL. Both proposed agreements contained warranty disclaimer and limitation of remedy terms similar to those contained in the box-top license. Step-Saver refused to sign the agreements; nevertheless, TSL continued to sell copies of Multilink Advanced to Step-Saver. 50 Additionally, TSL asks us to infer, based on the refund offer, that it was willing to forego its sales to Step-Saver unless Step-Saver agreed to the terms of the box-top license. Such an inference is inconsistent with the fact that both parties agree that the terms of the box-top license did not represent the parties's agreement with respect to Step-Saver's right to transfer the copies of the Multilink Advanced program. Although the box-top license prohibits the transfer, by Step-Saver, of its copies of the program, both parties agree that Step-Saver was entitled to transfer its copies to the purchasers of the Step-Saver multi-user system. Thus, TSL was willing to proceed with the transaction despite the fact that one of the terms of the box-top license was not included in the contract between TSL and Step-Saver. We see no basis in the terms of the box-top license for inferring that a reasonable offeror would understand from the refund offer that certain terms of the box-top license, such as the warranty disclaimers, were essential to TSL, while others such as the non-transferability provision were not. 51 Based on these facts, we conclude that TSL did not clearly express its unwillingness to proceed with the transactions unless its additional terms were incorporated into the parties's agreement. The box-top license did not, therefore, constitute a conditional acceptance under UCC Sec. 2-207(1). 52
53 parties had excluded any express or implied 54 warranties associated with the software program? 55 TSL argues that because Step-Saver placed its orders for copies of the Multilink Advanced program with notice of the terms of the box-top license, Step-Saver is bound by the terms of the box-top license. Essentially, TSL is arguing that, even if the terms of the box-top license would not become part of the contract if the case involved only a single transaction, the repeated expression of those terms by TSL eventually incorporates them within the contract. 56 Ordinarily, a course of dealing or course of performance analysis focuses on the actions of the parties with respect to a particular issue. 40 If, for example, a supplier of asphaltic paving material on two occasions gives a paving contractor price protection, a jury may infer that the parties have incorporated such a term in their agreement by their course of performance. 41 Because this is the parties's first serious dispute, the parties have not previously taken any action with respect to the matters addressed by the warranty disclaimer and limitation of liability terms of the box-top license. Nevertheless, TSL seeks to extend the course of dealing analysis to this case where the only action has been the repeated sending of a particular form by TSL. While one court has concluded that terms repeated in a number of written confirmations eventually become part of the contract even though neither party ever takes any action with respect to the issue addressed by those terms, 42 most courts have rejected such reasoning. 43 57 For two reasons, we hold that the repeated sending of a writing which contains certain standard terms, without any action with respect to the issues addressed by those terms, cannot constitute a course of dealing which would incorporate a term of the writing otherwise excluded under Sec. 2-207. First, the repeated exchange of forms by the parties only tells Step-Saver that TSL desires certain terms. Given TSL's failure to obtain Step-Saver's express assent to these terms before it will ship the program, Step-Saver can reasonably believe that, while TSL desires certain terms, it has agreed to do business on other terms--those terms expressly agreed upon by the parties. Thus, even though Step-Saver would not be surprised 44 to learn that TSL desires the terms of the box-top license, Step-Saver might well be surprised to learn that the terms of the box-top license have been incorporated into the parties's agreement. 58 Second, the seller in these multiple transaction cases will typically have the opportunity to negotiate the precise terms of the parties's agreement, as TSL sought to do in this case. The seller's unwillingness or inability to obtain a negotiated agreement reflecting its terms strongly suggests that, while the seller would like a court to incorporate its terms if a dispute were to arise, those terms are not a part of the parties's commercial bargain. For these reasons, we are not convinced that TSL's unilateral act of repeatedly sending copies of the box-top license with its product can establish a course of dealing between TSL and Step-Saver that resulted in the adoption of the terms of the box-top license. 59 With regard to more specific evidence as to the parties's course of dealing or performance, it appears that the parties have not incorporated the warranty disclaimer into their agreement. First, there is the evidence that TSL tried to obtain Step-Saver's express consent to the disclaimer and limitation of damages provision of the box-top license. Step-Saver refused to sign the proposed agreements. Second, when first notified of the problems with the program, TSL spent considerable time and energy attempting to solve the problems identified by Step-Saver. 60 Course of conduct is ordinarily a factual issue. But we hold that the actions of TSL in repeatedly sending a writing, whose terms would otherwise be excluded under UCC Sec. 2-207, cannot establish a course of conduct between TSL and Step-Saver that adopted the terms of the writing. 61
62 TSL has raised a number of public policy arguments focusing on the effect on the software industry of an adverse holding concerning the enforceability of the box-top license. We are not persuaded that requiring software companies to stand behind representations concerning their products will inevitably destroy the software industry. We emphasize, however, that we are following the well-established distinction between conspicuous disclaimers made available before the contract is formed and disclaimers made available only after the contract is formed. 45 When a disclaimer is not expressed until after the contract is formed, UCC Sec. 2-207 governs the interpretation of the contract, and, between merchants, such disclaimers, to the extent they materially alter the parties's agreement, are not incorporated into the parties's agreement. 63 If TSL wants relief for its business operations from this well-established rule, their arguments are better addressed to a legislature than a court. Indeed, we note that at least two states have enacted statutes that modify the applicable contract rules in this area, 46 but both Georgia and Pennsylvania have retained the contract rules provided by the UCC.
64 Under section 2-207, an additional term detailed in the box-top license will not be incorporated into the parties's contract if the term's addition to the contract would materially alter the parties's agreement. 47 Step-Saver alleges that several representations made by TSL constitute express warranties, and that valid implied warranties were also a part of the parties's agreement. Because the district court considered the box-top license to exclude all of these warranties, the district court did not consider whether other factors may act to exclude these warranties. The existence and nature of the warranties is primarily a factual question that we leave for the district court, 48 but assuming that these warranties were included within the parties's original agreement, we must conclude that adding the disclaimer of warranty and limitation of remedies provisions from the box-top license would, as a matter of law, substantially alter the distribution of risk between Step-Saver and TSL. 49 Therefore, under UCC Sec. 2-207(2)(b), the disclaimer of warranty and limitation of remedies terms of the box-top license did not become a part of the parties's agreement. 50 65 Based on these considerations, we reverse the trial court's holding that the parties intended the box-top license to be a final and complete expression of the terms of their agreement. Despite the presence of an integration clause in the box-top license, the box-top license should have been treated as a written confirmation containing additional terms. 51 Because the warranty disclaimer and limitation of remedies terms would materially alter the parties's agreement, these terms did not become a part of the parties's agreement. We remand for further consideration the express and implied warranty claims against TSL. 66