Disney Case Teaches Importance of Clear Contract-Forming Language to Create Contractual Restrictions

Many companies that market products or content protected by intellectual property rights rely on “shrink-wrap” or “box top” licenses to impose licensing restrictions on their customers. But that strategy only works if the customer is indeed bound by the terms – meaning that he or she will be deemed to have accepted the terms as a matter of contract formation. A recent decision of a California federal court highlights the need to use language in such licenses that clearly inform the user that they are agreeing to contractual terms when using the product (by opening a box or entering a website).

Disney Enterprises, Inc. v. Redbox Automated Retail LLC (C.D.Cal. 2018) denied Disney’s motion for a preliminary injunction based on contract and copyright claims. A key part of the decision was the court’s finding that no contract had been created between the parties when the defendant opened a Disney “combo pack” that included codes used to download Disney movies. The box top language was not sufficiently clear that the user opening the box was agreeing to contractual terms and restrictions.

Unlike prior cases involving “box top” licenses, Disney’s combo pack did not make clear that by opening the box, the user was entering into a contract by which it accepted restrictions on use and resale of the contents. The combo pack merely stated that “[c]odes are not for sale and transfer” in medium print. In very small print, they stated “Terms and Conditions apply.” That was not enough to alert the user that he or she was agreeing to contractual terms.

The lesson: if you want contractual terms to be binding, you must make clear that the user is entering into a contract

Disney owns copyrights to many movies it produces, which it distributes in several different formats. It sells what it calls “combo packs” which contain a Blue-ray disk, a DVD disk, and a paper containing a code allowing the user to download a digital file from Disney websites. The box, in medium print, states that “[c]odes are not for sale and transfer.” In very small print, they state “Terms and Conditions apply.”

Redbox sells Blue-ray and DVD disks and provides download services for movies. It is not an authorized Disney distributor, so it purchases combo packs, opens them and removes the codes, and then uses them to sell to its customers to allow them to download Disney movies.

A key issue was whether a contract was formed when Redbox employees opened the combo packs to remove the paper with the code. The district court held not – the outside of the box did not clearly state that by opening it, the user was agreeing to the terms contained in it. It distinguished a prior Ninth Circuit case, Arizona Cartridge Remanufacturers Association, Inc. v. Lexmark International, Inc., 421 F.3d 981 (9th Cir. 2005), where a printing cartridge manufacturer included the following legend on its box-top license:

Please read before opening. Opening of this package or using the patented cartridge inside confirms your acceptance of the following license agreement. The patented cartridge is sold at a special price subject to a restriction that it may be used only once. Following this initial use, you agree to return the empty cartridge only to Lexmark for remanufacturing and recycling. If you don't accept these terms, return the unopened package to your point of purchase. A regular price cartridge without these terms is available.

Unlike the statement in Arizona Cartridge, the Disney box top made “no suggestion that opening the box constituted the acceptance of any further license restrictions.” The court also rejected that argument that because Redbox had opened many combo packs, it was aware of the terms inside the box and had agreed to them after the first one it opened. Repetitive use of form agreements without showing a meeting of the minds is simply not persuasive in finding contract formation.

Many businesses use “box top” or “shrink wrap” licenses – the user must do something (open a package, click on a website tab) to form a contract and agree to license restrictions. The Disney decision instructs that it is crucial that the user be warned at that time that he or she is agreeing to some terms – otherwise, there will be no binding contract.