Shrinkwrap Contracts Richard Warner

ProCD v. Zeidenberg ProCD sold a CD that contained every phone number and address in every telephone directory in the United States. It sold it to businesses for $5,000. It also wished to sell it to consumers for personal use. Of course, consumers would not pay thousands of dollars for this. The solution: price discrimination by contract.

Contractual Price Discrimination The use of a CD ProCD sold to consumers was governed by a license in which the purchaser agreed not to use the CD for commercial purposes. The license indicated that you were to call an 800 number if you were interested in a commercial use. The consumer price was around $150. This is price discrimination: one price for businesses and another for consumers.  It is a common and perfectly legal practice.

Excluding Commercial Users Software = property Personal use Commerical

Excluding Commercial Users Software = information YesNo Personal Commercial

Facts of ProCD v. Zeidenberg Zeidenberg bought the consumer package and ignored the license. He made the information available on the Internet; the price was less than the price ProCD charged its commercial customers. Zeidenberg claimed he never agreed to the license in the box. He claimed that the terms on the outside of the box are the terms of the agreement.

Presentation of the License “Every box containing its consumer product declares that the software comes with restrictions stated in an enclosed license.”  The license is inside the box since it would be too long to print on the outside. Isn’t this like my note on the door?

Another Analogy You entered into a contractual relationship in taking this course. I have some more terms that were not disclosed to you. You agree to pay Richard Warner $100 on demand.

An Argument for Zeidenberg An offer is a manifestation of a willingness to enter a bargain so made as to justify the offeree in thinking his assent will conclude the bargain. What was the manifestation in this case? The terms on the outside of the box. How can the inaccessible terms on the inside be a manifestation?

A Typical Practice There are many situations in which the buyer has no notice of the terms until after purchase.  This is typical in insurance and consumer goods.

Why the Issue Matters Contracts are voluntarily undertaken obligations. No adult can unilaterally impose obligations on another adult. The state can do so. Aren’t these contracts private legislation?

Two Exclusions Reverse engineering. Resale, lending, and giving.

Contracts and Control To write an interoperable application, the application developer usually needs to know facts about the platform maintained as trade secrets (the API’s = application program interfaces). The developer typically has two ways to obtain the requisite knowledge: reverse engineer the software, or enter into a license agreement with the platform sellers.

Reverse Engineering Information Flow Microsoft Copy of Windows Access Information DeveloperConsumers Reverse engineer Information License agreement

Contractual Prohibition Software licenses typically prohibit reverse engineering.  In the US, not enforceable in the EU. Copy of Windows Access Information Developer Reverse engineer Purchase governed by a contract

So... Microsoft Copy of Windows Access Information DeveloperWindows users Reverse engineer Information License agreement

And... Microsoft Developer License agreement Agrees not to make the application for Apple, so... DeveloperMac users

Reverse Engineering As Fair Use Reverse engineering software consists in examining its programming in order to learn how the software works. Under federal copyright law, reverse engineering is permissible as a fair use provided...

Sega Enters. Ltd. v. Accolade, Inc. it is done for a legitimate purpose  such as to gain access to functional specifications necessary to make a compatible program, and  It provides the only means of access to those elements of the software that are not protected by intellectual property rights. Sega Enters. Ltd. v. Accolade, Inc. 977 F 2d 1510, 1523 – 24 (9 th Cir. 1993).

Should the Prohibitions Be Enforced? Those who have carefully considered the question conclude—tentatively or unequivocally—that sellers should not have unlimited discretion to prohibit reverse engineering. The fundamental reason is that allowing reverse engineering is an important factor in promoting innovation and competition, and in ensuring compatibility between products.

Useful Articles Pamela Samuelson & Suzanne Scotchmer, The Law and Economics of Reverse Engineering, 111 Y ALE L. J. 1575, 1661 (2002). Julie E. Cohen & Mark A. Lemley, Patent Scope and Innovation in the Software Industry, 89 C ALIFORNIA L. R EV. 1, 21 (2001).

The First Sale Doctrine In the typical EULA, the seller retains title to the software, licensing certain uses, but prohibiting or limiting the transfer of the software to third parties. Otherwise, buyers could resell the software under the Copyright Act’s “first sale” doctrine, which provides “the owner of a particular copy... is entitled... to sell or otherwise dispose of the possession of that copy.”  17 U.S.C. §109(a)).

A Similar Pattern Microsoft Consumer License agreement Agrees to restrictions on transfer, so... Consumer

No Secondary Market Digital copies do not degrade in the way non- digital copies do, and sellers fear that the widespread availability of “good as new” used software will have a serious impact on the market for new software. The used software would be considerably less expensive (or available for free from libraries), yet might nonetheless meet the needs of many buyers.

Conflict of Values We value communication and the dissemination of knowledge It is inconsistent with this value to allow sellers to prohibit  the commercial transfer of software in a secondary, used-software market, and  the non-commercial transfer of software by public and private archives and libraries.

How Should We Resolve the Conflict? “The first sale doctrine has been a major bulwark in providing public access by facilitating the existence of used book and record stores, video rental stores, and, perhaps most significantly, public libraries.” “Technology has begun to change dramatically the environment in which the first sale doctrine operates”  R. Anthony Reese, The First Sale Doctrine in the Era of Digital Networks, 44 B OSTON C OLLEGE L. R EV 577, 614 (2003)

Too Soon? Given the technological and economic complexity of the situation, it is too soon to tell what sort of restrictions on the first sale doctrine, if any, are appropriate.

The Courts The courts have addressed this issue by invoking the distinction between a sale and a license Adobe v. One Stop UMG v. Augustino  between a covenant and a condition MDY v. Blizzard