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Products Purchased under Shrink-Wrap Agreements—Common Elements

While there are no bright-line rules as to the specific types of products that are made available under shrink-wrap agreements, the following are common elements:

■ The product typically has a relatively low cost per unit (e.g., less than $20,000). While the cost per unit for a given product may be low, or even trivial (e.g., less than $100), the total cost to the organization should not be overlooked (e.g., 1,000 units at $100 per unit results in aggregate fees of $100,000). An easy example would be a copy of Microsoft Word or Adobe Acrobat. Essentially all open-source software is licensed under shrink-wrap terms.

■ The product is provided “off-the-shelf,” meaning that it is not customized for the purchaser. Each purchaser purchases the exact same version of the product as every other purchaser, without modification.

■ The product requires very little implementation effort. The purchaser generally assumes all of the installation effort without obtaining professional services from the vendor or a third party.

■ The product is generally not mission-critical.

■ The product is typically well understood and established in the marketplace. Frequently, the product is available for trial and evaluation before a license is required.

The listed points are, of course, only generalities. It is important to note that there are many instances in which shrink-wrap agreements are used for the purchase of products that cost hundreds of thousands of dollars, require extensive customization and a significant implementation effort, and are mission-critical to the organization. As discussed in the next section, the risk of the products purchased under a shrink-wrap model can increase dramatically when the proposed application varies from the foregoing common elements.

Methods of Purchasing Shrink-Wrap Products

There are essentially two means of purchasing shrink-wrap products. First, the product can be directly purchased from the vendor that created it (e.g., downloading a copy of Adobe Acrobat Reader from Adobe’s website or purchasing a copy of Word directly from Microsoft). Second, the product can be purchased through a reseller or similar entity that is authorized by the vendor to distribute the product.

One benefit of using a reseller is the potential to license and purchase products, particularly large orders, at a substantial discount. Another advantage is the possibility of negotiating an enterprise or master contract with favorable legal and business terms for all licenses and purchases made through the reseller. In many instances, however, the use of resellers results in the licensee or purchaser obtaining substantially less favorable terms than if the licensee or purchaser directly negotiated with the vendor and eliminated the use of the reseller. Resellers generally insist on highly protective agreements that absolve them of liability for the products they distribute. Any protections relating to the products are provided in the form of non-negotiable shrink-wrap agreements from the manufacturers or, worse yet, provided through websites that may change at any time. In either case, the product terms are (i) nonnegotiable, and (ii) almost always very minimal, offering little in the way of substantive warranties and indemnities. A growing number of manufacturers are turning to reseller arrangements for the express purpose of avoiding having to extend appropriate, market-based contractual protections to their customers.

Reseller arrangements should generally only be considered when the product satisfies the common elements described above (e.g., low fees, noncritical use, off-shelf, well established, potentially trialed) and the cost—benefit of proceeding with transaction is justified. This usually means the reseller will be used for the purchase of a narrow range of preapproved products for the organization, like purchases of standard office productivity applications (e.g., Microsoft Word and Adobe products).

Typical Shrink-Wrap Terms and Conditions

While the type of terms and conditions found in shrink-wrap agreements varies greatly from vendor to vendor, there are a number of common themes. In general, shrink-wrap agreements include the following potentially problematic terms:

■ Little or no warranty protection. In most instances, all warranties are expressly disclaimed—meaning the software is provided entirely “as-is.”

■ There is generally no protection in the event the purchaser is sued for intellectual property infringement arising out of its licensed use of the products. For example, a purchaser could be sued for patent infringement arising out of use of a software product and—even though the vendor is the cause of the infringement because of the way it developed the software—find itself with no protection under its software license agreement with the vendor. These types of claims have become more and more prevalent. In fact, entire businesses have been founded based on developing large patent portfolios and then, as their revenue source, suing the licensees of software for damages. Most negotiated agreements include an indemnification from infringement claims.

■ A limitation of liability that absolves the vendor of all or substantially all liability for all damages of every kind and type. If an indemnity for intellectual property infringement is provided, the indemnity is generally subject to the overarching limitation of liability, significantly diminishing the vendor’s obligation to indemnify.

■ In contrast, the purchaser will have unlimited liability for all forms of damages. The purchaser may also be required to give the vendor a broad and frequently poorly defined indemnity for a wide range of claims, some of which may arise from the vendor’s own conduct.

■ Little or no protection for confidentiality of the purchaser’s information. The lack of this protection is a critical risk if the vendor has the right to access the purchaser’s facilities and systems to conduct audits. Shrink-wrap and clickwrap agreements frequently contain specific language permitting the vendor to have broad rights to conduct onsite audits of its customers’ facilities and computer systems, frequently with little or no notice. Those audits can expose highly sensitive information of the purchaser.

■ The location (venue) at which a potential litigation or arbitration must be conducted may be inconvenient for the purchaser. For example, a purchaser in California may be required to arbitrate a dispute under the agreement in Florida. If the value of license is only, say, $10,000, having to engage an attorney and attend meetings in Florida would be cost-prohibitive.

These are general observations only. The specific language of a given shrink-wrap agreement may present additional risks. In particular, as discussed in the next section, a growing number of shrink-wrap agreements may present substantial risks to the purchaser’s own intellectual property or, if the purchaser is in a regulated industry (e.g., financial services or healthcare), to the purchaser’s data.

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