M.A.  Mortenson Co. v. Timberline Software Corp., et al. Dissenting Opinion

IN THE SUPREME COURT OF THE STATE OF WASHINGTON

M.A. MORTENSON COMPANY,  INC.,
Petitioner,

 

v.

TIMBERLINE SOFTWARE CORPORATION and

SOFTWORKS DATA SYSTEMS, INC., 
Respondents.

    

Docket Number:  67796-4; En Banc
File Date:  05/04/2000
Oral Argument Date: 10/26/1999

SOURCE OF APPEAL
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Appeal from Superior Court, King County;
95-2-31991-2
Honorable Phillip Hubbard, Judge.

JUSTICES
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Authored by Charles W. Johnson

Concurring:

Richard P. Guy
Charles Z. Smith

Barbara A. Madsen
Philip A. Talmadge
Faith E Ireland
Visiting Judge

 

Dissenting:

Richard B. Sanders
Gerry L. Alexander

COUNSEL OF RECORD
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Counsel for Petitioner(s)
            Bradley L. Powell
            Oles Morrison Rinker & Baker Llp
            33rd Fl. Columbia Center
            701 5th Ave.
            Seattle, WA  98104

            Catherine C. Clark
            Williams & Williams Psc
            6161 NE 175th Ste 200
            Kenmore, WA   98028-4800

            Theodore Russell
            Sheppad Mullin Richter & Hampton Llp
            Four Embarcadero Ctr.
            Suite 1700
            San Francisco, CA   94111

Counsel for Respondent(s)
            Charles E. Peery
            Peery Hiscock Pierson & Ryder
            505 Madison St.
            Ste 300
            Seattle, WA   98104-1138

            Michael E. Ricketts
            Peery Hiscock Pierson Kingman & Peabody
            505 Madison St., #300
            Seattle, WA  98104

            Laura P. Knechtel
            PO Box 26682
            PO Box 26682
            Federal Way, WA   98093-3682

            Michael P. Grace
            Groff & Murphy Pllc
            1191 2nd Ave Ste 1900
            Seattle, WA  98101

Amicus Curiae on behalf of Business Software alliance
            Robert B. Mitchell Jr.
            Preston Gates & Ellis
            5000 Columbia Center
            701 5th Ave.
            Seattle, WA   98104-7078

            Mark Wittow
            Preston Gates & Ellis
            701 5th Ave Ste 5000
            Seattle, WA   98104-7078

Amicus Curiae on behalf of Washington Softwarealliance
            Robert B. Mitchell Jr.
            Preston Gates & Ellis
            5000 Columbia Center
            701 5th Ave.
            Seattle, WA   98104-7078

            Mark Wittow
            Preston Gates & Ellis
            701 5th Ave Ste 5000
            Seattle, WA   98104-7078

Majority by Johnson, J.
Dissent by Sanders, J.

No. 67796-4

SANDERS, J. (dissenting)--Although the majority states 'this is a case about contract formation, not contract alteration,' Majority at 17, the majority abandons traditional contract principles governing offer and acceptance and relies on distinguishable cases with blind deference to software manufacturers' preferred method of conducting business.  Instead of creating a new standard of contract formation--the majority's nebulous theory of 'layered contracting'--I would look to the accepted principles of the Uniform Commercial Code (U.C.C.) and the common law to determine whether Timberline's licensing agreement is enforceable against Mortenson. Because the parties entered a binding and enforceable contract prior to the delivery of the software, I would treat Timberline's license agreement as a proposal to modify the contract requiring either express assent or conduct manifesting assent to those terms.  Because this is a review of a summary judgment and we must view all facts and inferences in the light most favorable to Mortenson, I would remand to the trial court to determine whether Mortenson manifested assent to the terms of Timberline's license agreement.

I.   Offeror is Master of the Offer

It is well established that the offeror is the master of his offer under traditional contract law principles.

{E}ven under the liberal rules of contract formation as contained in the U.C.C., the Code drafters still recognized and gave approval to an ancient and cardinal rule of the law of contracts.  The offeror is the master of his offer.  An offeror may prescribe as many conditions, terms or the like as he may wish, including but not limited to, the time, place and method of acceptance.  Kroeze v. Chloride Group Ltd., 572 F.2d 1099, 1105 (5th Cir. 1978) (citations omitted); see also RCW 62A.2-206(1)(a) ('Unless otherwise unambiguously indicated by the language or circumstances, an offer to make a contract shall be construed as inviting acceptance in any manner and by any medium reasonable in the circumstances.').  Thus, under both the common law of contracts and the U.C.C., the offeror has the power to structure the terms of its offer as well as the mode of its acceptance. In recognition of this basic tenet of contract law, every court that has considered the enforceability of a 'shrinkwrap' license agreement1 has begun its analysis with an examination of the method of offer and acceptance utilized by the parties.  The first of such cases, Step-Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91 (3d Cir. 1991), involved a claim by a value added retailer, Step-Saver, for breach of warranties against the software vendor, The Software Link (TSL).  The court explained Step-Saver's purchase of the software as follows:

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.

Printed on the package of each copy of the program, however, would be a copy of the box-top license. Id. at 95-96.  Although TSL argued that the contract between it 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, the court rejected this argument.  Finding that TSL's shipment of the order and Step-Saver's payment and acceptance demonstrated the existence of the contract, the court held the dispute involved the terms of the contract.  Id. at 98. The court resorted to U.C.C. sec. 2-207(3) to resolve this question:

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. Step-Saver, 939 F.2d at 98.  Viewing the shrinkwrap license agreement as 'a written confirmation containing additional terms,' the court held the license was not part of the agreement because it would materially alter the parties' agreement.  Id. at 105-06.

Step-Saver demonstrates that time of contract formation is crucial.  The court there implicitly held that the contract was formed when TSL accepted Step-Saver's telephone offer with its promise to ship the software. Accordingly, the contract included terms relating to price, shipment, and payment because those were the terms agreed to in both the invoice and purchase order.  But because the warranty disclaimers were not delivered until 'after the contract {was} formed,' id. at 105, they were not binding. Arizona Retail Sys., Inc.  v. Software Link, Inc., 831 F. Supp. 759 (D. Arizona 1993), a case not even mentioned by the majority, clearly illustrates considerations of offer and acceptance can be determinative with regard to the enforceability of a shrinkwrap license agreement. Arizona Retail Systems involved multiple transactions between a software vendor, TSL, and a value-added retailer, Arizona Retail Systems (ARS). After noting 'the first contract entered into by the parties involves facts and circumstances materially different than the subsequent contracts,' id. at 763, the court described the initial contract formation as follows:

TSL made the offer by including the live copy of PC-MOS with the evaluation diskette.  The live copy appears to have been sealed in an envelope, the outside of which stated that by opening the envelope the user acknowledges 'acceptance of this product, and {consents} to all the provisions {of} the Limited Use License Agreement.'  ARS, therefore, accepted TSL's offer on TSL's terms when the envelope was opened.  Id. at 764 (alterations in original) (citation omitted) (emphasis added). Since TSL as the seller-offeror in the initial purchase set the terms of the offer, the court held that the offer contained the shrinkwrap license included by TSL.  '{T}he contract was not formed when TSL shipped the goods but rather only after ARS opened the shrink wrap . . . which ARS had notice would result in a contract being formed.'2  Id. at 763.

With respect to the subsequent purchases, however, the court held the license agreement did not apply.  The court first noted the circumstances surrounding the subsequent purchases were nearly identical to the circumstances in Step-Saver--i.e., ARS telephoned TSL to order software; TSL accepted the offer by promising to ship; the software arrived with the license agreement affixed.  Thus, the court held '{b}y agreeing to ship the goods to ARS, or, at the latest, by shipping the goods, TSL entered into a contract with ARS.'  Id. at 765.  The court then explained why the license agreement was not enforceable:

After entering into the contract, TSL was not free to treat the license agreement as a conditional acceptance, which is essentially a counter- offer.  The license agreement thus is best seen as a proposal to modify the contract between the parties, which . . . was not effective because ARS never specifically assented to the proposed terms.  Id. (footnotes and citations omitted).  Because ARS was the offeror in these purchases, it was in control of the offer.  The court injected a bit of commercial reality into its discussion with the following observation:

 

'Requiring the seller to discuss terms it considers essential before the seller ships the goods is not unfair; the seller can protect itself by not shipping until it obtains assent to those terms it considers essential.' Id. at 766.

Despite numerous similarities between the transaction at issue here and that in Step-Saver, the majority found Step-Saver to be 'inapplicable' and refused to follow its logic.  Majority at 17.  The majority distinguished Step-Saver from the instant case on three grounds:  (1) Step-Saver was a value added retailer, not an end user (the party to which a license agreement typically applies); (2) Step-Saver twice refused to sign an agreement comparable to the license agreement, but the seller continued to provide the software; and (3) the contract in Step-Saver was 'between merchants.'  See Majority at 16-17.  While I agree these are notable factual distinctions, the majority does not explain why these distinctions warrant the outright dismissal of Step-Saver's logic given the strong similarities between the contract formation there and in the instant case.

Further, the majority does not even mention Arizona Retail Sys., 831 F. Supp. 759.  Arizona Retail Systems, like Step-Saver, also involved the applicability of a license agreement to a value added retailer (as opposed to an end user) and was 'between merchants.'  But these details were apparently insignificant, as they did not change the court's determination that the license agreement applied to the parties' first transaction.  The court did not focus on the parties, but rather looked to how the contract was formed in each instance to determine the enforceability of the license agreement.

 

In addition to Step-Saver and Arizona Retail Systems, there are three other cases that have analyzed shrinkwrap license agreements and found them to be enforceable.   See Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (1998); Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.), cert denied, 522 U.S. 808 (1997); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996).  Although the majority here found 'the approach of the ProCD, Hill, and Brower courts persuasive' and adopted it as a means of enforcing the license agreement, Majority at 20, these cases are unquestionably distinguishable.

In ProCD, 86 F.3d 1447, the Seventh Circuit considered whether a consumer who purchased off-the-shelf software in a retail setting was bound by the shrinkwrap license agreement.  The court first distinguished Step-Saver and Arizona Retail Systems on the grounds that 'these are not consumer transactions.'  ProCD, 86 F.3d at 1452.  The court further distinguished the decision in Step-Saver as a battle-of-the-forms case which had no application because '{o}ur case has only one form.'  Id.  The court then explained why the license agreement was binding:

A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance.  A buyer may accept by performing the acts the vendor proposes to treat as acceptance.  And that is what happened.  ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure. . . .  {T}he UCC permits contracts to be formed in other ways.  ProCD proposed such a different way, and without protest Zeidenberg agreed.  Id.  Under the traditional rules of contract formation, ProCD controlled the terms of the transaction and thus could dictate the mode of acceptance. See Corbin on Contracts sec. 88, at 136  (1952) ('The offeror creates the power of acceptance; and he has full control over the character and extent of the power that he creates.').

In Hill, 105 F.3d 1147, the Seventh Circuit extended the applicability of the ProCD decision from software to the computer itself.  The court summarized the issue presented as follows:

A customer picks up the phone, orders a computer, and gives a credit card number.  Presently a box arrives, containing the computer and a list of terms, said to govern unless the customer returns the computer within 30 days.  Are these terms effective as the parties' contract, or is the contract term-free because the order-taker did not read any terms over the phone and elicit the customer's assent? Hill, 105 F.3d at 1148.  After noting with approval the 'vendor as master of the offer' language contained in ProCD, the court stated:

The question in ProCD was not whether terms were added to a contract after its formation, but how and when the contract was formed--in particular, whether a vendor may propose that a contract of sale be formed, not in the store (or over the phone) with the payment of money or a general 'send me the product,' but after the customer has had a chance to inspect both the item and the terms.  ProCD answers 'yes,' for merchants and consumers alike. Hill, 105 F.3d at 1150 (emphasis added).3  Gateway--like the vendor in ProCD--was the offeror and controlled the terms of the transaction. Because Gateway specified that acceptance of its offer would occur only after the buyer retained the computer for more than 30 days, the court enforced the terms and conditions that accompanied the computer. In Brower the court upheld the same licensing agreement at issue in Hill against a challenge brought by a class of retail consumers.  Focusing on the formation of the contract, the court explained:

{T}here is no agreement or contract upon the placement of the order or even upon the receipt of the goods.  By the terms of the agreement at issue, it is only after the consumer has affirmatively retained the merchandise for more than 30 days--within which the consumer has presumably examined and even used the product(s) and read the agreement--that the contract has been effectuated. Brower, 246 A.D.2d at 251.  As the offeror, Gateway controlled the manner in which its offer was accepted.  Because the consumers accepted Gateway's offer by retaining the computer for more than 30 days, the court held the disputed terms to be 'simply one provision of the sole contract 'proposed' between the parties.'  Id.

As all these cases make clear, the determinative inquiry in the instant case is which party--as offeror--dictated the mode of acceptance and the terms of the transaction?  The record here is clear--Mortenson issued a purchase order which identified the parties, product, quantity, price, and a variety of other terms.  Clerk's Papers (CP) at 206.  Timberline's representative, Reich, accepted Mortenson's offer by signing the purchase order and promising to order the software.  As the offeror, Mortenson controlled the terms of the transaction, to which Timberline unequivocally agreed when it accepted Mortenson's offer.  Accordingly, the parties created a binding and enforceable contract before Mortenson received the software and purportedly discovered Timberline's license agreement. As Timberline entered an enforceable agreement by agreeing to the terms of Mortenson's offer, Timberline's subsequent delivery of the license agreement constitutes a proposal to modify the contract pursuant to RCW 62A.2-209.4  In Arizona Retail Systems, the court held:

Section 2-209 requires assent to proposed modifications and this court, like the court in Step-Saver, concludes that the assent must be express and cannot be inferred merely from a party's conduct in continuing with the agreement.  ARS, like Step-Saver, did not expressly assent to the modification and the Step-Saver court made clear that merely continuing with a contract does not constitute assent.  Arizona Retail Sys., 831 F. Supp. at 764; see also Restatement (Second) of Contracts sec. 19(1) (1981) (a party may manifest assent by written or spoken words, by other acts, or by failure to act).  Mortenson asserts that Timberline's representative opened the boxes containing the software, opened the software packaging, and installed the program onto Mortenson's computers.  As a result, Mortenson claims it never saw the licensing agreement purportedly attached to the software.  Further, although the majority claims the parties had a course of dealing based on Mortenson's prior purchases from Timberline, majority at 22, it is not clear Mortenson ever previously consented to the terms contained in Timberline's license agreement.  See Step-Saver, 939 F.2d at 104 ('{T}he 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 . . . .').

The majority acknowledges we must accept 'Mortenson's contention it never saw the terms of the license, as we must do on summary judgment. . . .' Majority at 21.  But because Mortenson did not expressly assent to the terms of Timberline's license agreement after a binding contract was made, I would reverse the trial court's summary judgement order and remand for a determination of whether Mortenson's conduct constituted assent.  If Mortenson did not assent to Timberline's license agreement, the trial court should allow Mortenson to proceed to a trial on the merits.

Conclusion

Although the majority recognizes the purchase order is a 'contract,' Majority at 12-14, the majority ultimately disregards this binding and enforceable agreement and allows Timberline to unilaterally inject its own terms--without finding Mortenson even saw these terms--after the conclusion of the contract formation process.  If Timberline's license was essential to its assent to the contract, Timberline should have countered Mortenson's offer and included the terms of its license agreement. 'Requiring the seller to discuss terms it considers essential before the seller ships the goods is not unfair; the seller can protect itself by not shipping until it obtains assent to those terms it considers essential.'  Arizona Retail Sys., 831 F. Supp. at 766.  What is unfair here, however, is the majority's rewriting of Mortenson's contract with Timberline.

I dissent.

1 Vendors of computer software use plastic shrink-wrapping as a mechanism of attaching terms under which they purport to make their product available.  In the mass market/consumer context, the shrink-wrap license provides an efficient way for the software vendor to dictate the terms of each sale. When a business purchases a specialized software program, it typically negotiates, with the vendor, its rights of use in the software.  In the mass market setting, however, the negotiation of terms for each sale is clearly impractical. Robert J. Morrill, Contract Formation and the Shrink Wrap License:   A Case Comment on ProCD, Inc. v. Zeidenberg, 32 New Eng. L. Rev. 513, 516 (1998) (footnotes omitted).

2 The court was careful to note this decision was consistent with Step-Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91 (3d Cir. 1991). The Step-Saver court addressed the situation in which a contract had been formed by the conduct of the parties--i.e., through the ordering and shipping of the agreed-upon goods--but the goods arrived with the license agreement affixed.  In such cases, the contract is formed before the purchaser becomes aware of the seller's insistence on certain terms. Arizona Retail Sys., Inc. v. The Software Link, Inc., 831 F. Supp. 759, 763 (D. Arizona 1993) (emphasis added).

3 It should be noted that the court in Hill misconstrued ProCD's holding by stating that 'ProCD answers 'yes,' for merchants and consumers alike.' Hill, 105 F.3d at 1150.  As noted above, ProCD distinguished both Step-Saver and Arizona Retail Systems primarily because they involved merchants and were not consumer transactions.

4 RCW 62A.2-209 provides:

(1) An agreement modifying a contract within this Article needs no consideration to be binding.

(2) A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.

(3) The requirements of the statute of frauds section of this Article (RCW 62A.2-201) must be satisfied if the contract as modified is within its provisions.

(4) Although an attempt at modification or rescission does not satisfy the requirements of subsection (2) or (3) it can operate as a waiver.

(5) A party who has made a waiver affecting an executory portion of the contract may retract the waiver by reasonable notification received by the  other party that strict performance will be required of any term waived, unless the retraction would be unjust in view of a material change of position in reliance on the waiver.