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Shrink Wrap Agreements

Shrink wrap agreements, the agreements on the plastic covering you tear off your new video game or accounting software, have long been limited to preventing copying, redistribution and modification of software. Well, not any longer. On October 6, 2005, the 9th Circuit Court of Appeals upheld a lower court ruling that as long as the items are patented, it is okay for companies to shrink-wrap items other than software. The case involved refilling Lexmark printer cartridges under Lexmark’s ‘prebate’ program. The prebate program gives consumers a discount off the retail price of the cartridges if they agree not to refill the cartridge through anyone other than a licensed Lexmark refiller. Although at first blush that may sound like a fair deal, looking down the road a little reveals the potential downside for consumers.

Say you buy a patented ‘prebate’ hybrid car with a replaceable fuel cell. Third party fuel cell dealers sell a replacement $500 less than the original. You figure replacement costs are a little more, but if you get a $1000 discount on the price of the car if you agree not to use an aftermarket fuel cell, you might take the discount. The problem is that once all the after market suppliers are out of the market, the price of the manufacturer’s fuel cell might triple in price. You are stuck.

This poses huge problems for technophiles. What can you modify? If part of your hardware goes bad, will it cost close to the price of a new machine to replace a single part? What if you are working on a customer’s hardware? Is it shrink-wrapped or not? Do you always have to use the manufacturer’s replacement parts just to be safe? Are you liable if you violate the shrink-wrap agreement?

Right now this decision is limited to those states governed by the 9th Circuit. If additional courts adopt this line of thinking however, hardware shrink-wraps could quickly become the law of the land. If this happens, consumers will have to decide whether they are going to accept these types of agreements. If they do, will they inevitably be fostering the use of more such agreements for more kinds of products? What does a manufacturer of a patented product do? Jump on the bandwagon and start shrink-wrapping everything? Hardware shrink-wrap strategy is still in its infancy. This ruling gives us a mere glimpse of what is to come. Unless this new ruling is overturned, or at least limited to the 9th Circuit, the fallout over the next decade will be devastating.

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