For further reading (optional):
The owner of a copyright has the exclusive rights, under 17 U.S.C. § 106, to reproduce, distribute, create derivative works, publicly perform, publicly display, and publicly digitally perform. Once an author has obtained copyright (by fixing an original work), he or she can exploit that copyright directly, transfer the copyright to another party, or license out some or all of the copyright rights.
Note that "[o]wnership of a copyright … is distinct from ownership of any material object in which the work is embodied. Transfer of ownership of any material object, including the copy or phonorecord in which the work is first fixed, does not of itself convey any rights in the copyrighted work embodied in the object." 17 U.S.C. § 202. That means when you buy a book, you own the physical object, and the right to re-sell that object, but not the copyright or the right to reproduce the book's text. Most books come with language like "All rights reserved."
Much software claims to be licensed, not sold, with the terms of an End User License Agreement ("EULA") dictating what you can and can't do with the product. One can hardly venture online without encountering (claimed) contracts. ISPs condition connection to
the Internet on acceptance of terms of service; websites offer up terms of
use; digital purchases carry shrink-wrap or click-wrap licenses. Contractual private ordering allows parties
to customize the legal rules of their interactions when the defaults dont suit.
Yet this private ordering raises intertwined substantive and procedural questions. Substantively, should we
permit parties to opt out of legal rules with a signature or the
click of a mouse? Why do the courts in Vault v. Quaid and
ProCD v. Zeidenberg reach different conclusions about the preemption of state contract law
and the enforceability of contract? Think about the limits of these arguments: Would
Judge Reavley (Vault) invalidate a negotiated agreement that granted access to software conditioned
on a corporate users agreement not to reverse engineer it? Would Judge Easterbrook
(ProCD) permit software publishers to eliminate any possibility of reverse engineering even where
it is fair use under copyright law by including prohibitory terms in click-wraps
for all future software packages? How do efficiency and fairness choices factor in
At the procedural level, even before we get to the terms of a
contract, we must ask whether a contract was validly formed. Compare the ProCD
and Specht contracts: Was there offer and acceptance? meeting of the minds?
REAVLEY, Circuit Judge:
Vault brought this copyright infringement action against Quaid seeking damages and preliminary and permanent injunctions. The district court denied Vault's motion for a preliminary injunction, holding that Vault did not have a reasonable probability of success on the merits. Vault Corp. v. Quaid Software Ltd., 655 F.Supp. 750 (E.D.La.1987). By stipulation of the parties, this ruling was made final and judgment was entered accordingly. We affirm.
Vault produces computer diskettes under the registered trademark "PROLOK" which are designed to
prevent the unauthorized duplication of programs placed on them by software computer companies,
. Each version of PROLOK has been copyrighted and Vault includes a
license agreement with every PROLOK package that specifically prohibits the copying, modification, translation,
decompilation or disassembly of Vault's program. Beginning with version 2.0 in September 1985,
Vault's license agreement contained a choice of law clause adopting Louisiana law.
Quaid's product, a diskette called "CopyWrite," contains a feature called "RAMKEY" which unlocks
the PROLOK protective device and facilitates the creation of a fully functional copy
of a program placed on a PROLOK diskette.
Quaid first developed RAMKEY in September 1983 in response to PROLOK version 1.0.
In order to develop this version of RAMKEY, Quaid copied Vault's program into
the memory of its computer and analyzed the manner in which the program
operated. When Vault developed version 1.07, Quaid adapted RAMKEY in 1984 to defeat
this new version.
Vault brought this action against Quaid seeking preliminary and permanent injunctions to prevent Quaid from advertising and selling RAMKEY, an order impounding all of Quaid's copies of CopyWrite which contain the RAMKEY feature, and monetary damages in the amount of $100,000,000. Vault asserted three copyright infringement claims cognizable under federal law, 17 U.S.C. § 101 et seq. (1977 & Supp.1988) (the "Copyright Act"), which included: (1) that Quaid violated 17 U.S.C. §§ 501(a) & 106(1) by copying Vault's program into its computer's memory for the purpose of developing a program (RAMKEY) designed to defeat the function of Vault's program; (2) that Quaid, through RAMKEY, contributes to the infringement of Vault's copyright and the copyrights of its customers in violation of the Copyright Act as interpreted by the Supreme Court in Sony Corp. of Am. v. Universal City Studios, 464 U.S. 417, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984); and (3) that the second version of RAMKEY, which contained approximately thirty characters from PROLOK version 1.07, and the latest version of RAMKEY, constitute "derivative works" of Vault's program in violation of 17 U.S.C. §§ 501(a) & 106(2). Vault also asserted two claims based on Louisiana law, contending that Quaid breached its license agreement by decompiling or disassembling Vault's program in violation of the Louisiana Software License Enforcement Act, La.Rev.Stat.Ann. § 51:1961 et seq. (West 1987), and that Quaid misappropriated Vault's program in violation of the Louisiana Uniform Trade Secrets Act, La.Rev.Stat.Ann. § 51:1431 et seq. (West 1987).
C. Contributory Infringement
Vault contends that, because purchasers of programs placed on PROLOK diskettes use the RAMKEY feature of CopyWrite to make unauthorized copies, Quaid's advertisement and sale of CopyWrite diskettes with the RAMKEY feature violate the Copyright Act by contributing to the infringement of Vault's copyright and the copyrights owned by Vault's customers. Vault asserts that it lost customers and substantial revenue as a result of Quaid's contributory infringement because software companies which previously relied on PROLOK diskettes to protect their programs from unauthorized copying have discontinued their use.
While a purchaser of a program on a PROLOK diskette violates sections 106(1)
and 501(a) by making and distributing unauthorized copies of the program, the Copyright
Act "does not expressly render anyone liable for the infringement committed by another."
Sony, 464 U.S. at 434, 104 S.Ct. at 785. The Supreme Court in
Sony, after examining the express provision in the Patent Act which imposes liability
on an individual who "actively induces infringement of a patent," 35 U.S.C. § 271(b)
& (c), and noting the similarity between the Patent and Copyright Acts, recognized
the availability, under the Copyright Act, of vicarious liability against one who sells
a product that is used to make unauthorized copies of copyrighted material. Id.
at 434-42, 104 S.Ct. at 785-89. The Court held that liability based on
contributory infringement could be imposed only where the seller had constructive knowledge of
the fact that its product was used to make unauthorized copies of copyrighted
material, id. at 339, 104 S.Ct. at 787, and that the sale of
a product "does not constitute contributory infringement if the product is widely used
for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing
uses." Id. at 442, 104 S.Ct. at 789.
While Quaid concedes that it has actual knowledge that its product is used
to make unauthorized copies of copyrighted material, it contends that the RAMKEY portion
of its CopyWrite diskettes serves a substantial noninfringing use by allowing purchasers of
programs on PROLOK diskettes to make archival copies as permitted under 17 U.S.C.
§ 117(2), and thus that it is not liable for contributory infringement
. [W]e find
that RAMKEY is capable of substantial noninfringing uses and thus reject Vault's contention
that the advertisement and sale of CopyWrite diskettes with RAMKEY constitute contributory infringement.
The focus of Vault's allegation of contributory infringement in its amended complaint is
that CopyWrite, through RAMKEY, enables purchasers of PROLOK protected programs to infringe the
copyrights of Vault's customers and that, as a result, Vault has suffered damages
due to its loss of customers. While Vault does not own the copyrights
to its customer's programs, it does own the copyright to the program it
places on each PROLOK diskette. This program operates in conjunction with the "fingerprint"
to prevent the duplication of Vault's customer's programs. Uncontroverted testimony established that both
Vault's protective program and its customer's program are copied onto a CopyWrite diskette
when an individual executes a computer's "copy" function in order to duplicate the
customer's program from a PROLOK diskette onto a CopyWrite diskette, and that RAMKEY
then interacts with Vault's program to defeat its protective function and to make
the computer operate as if the original PROLOK diskette was in one of
its disk drives. Therefore, CopyWrite diskettes, through RAMKEY, facilitate not only the copying
of Vault's customer's software programs but also the copying of Vault's protective program,
and, in addition, RAMKEY interacts with Vault's program to destroy its purpose.
2. Substantial Noninfringing Uses of RAMKEY
Vault's allegation of contributory infringement focuses on the RAMKEY feature of CopyWrite diskettes, not on the non-RAMKEY portions of these diskettes. Vault has no objection to the advertising and marketing of CopyWrite diskettes without the RAMKEY feature, and this feature is separable from the underlying diskette upon which it is placed. Therefore, in determining whether Quaid engaged in contributory infringement, we do not focus on the substantial noninfringing uses of CopyWrite, as opposed to the RAMKEY feature itself. The issue properly presented is whether the RAMKEY feature has substantial noninfringing uses.
The starting point for our analysis is with Sony. The plaintiffs in Sony,
owners of copyrighted television programs, sought to enjoin the manufacture and marketing of
Betamax video tape recorders ("VTR's"), contending that VTR's contributed to the infringement of
their copyrights by permitting the unauthorized copying of their programs. 464 U.S. at
419-20, 104 S.Ct. at 777. After noting that plaintiffs' market share of television
programming was less than 10%, and that copyright holders of a significant quantity
of television broadcasting authorized the copying of their programs, the Court held that
VTR's serve the legitimate and substantially noninfringing purpose of recording these programs, as
well as plaintiffs' programs, for future viewing (authorized and unauthorized time-shifting respectively), and
therefore rejected plaintiffs' contributory infringement claim. Id. at 442-55, 104 S.Ct. at 789-95.
Quaid asserts that RAMKEY serves the legitimate purpose of permitting purchasers of programs
recorded on PROLOK diskettes to make archival copies under § 117(2) and that this
purpose constitutes a substantial noninfringing use. At trial, witnesses for Quaid testified that
software programs placed on floppy diskettes are subject to damage by physical and
human mishap and that RAMKEY protects a purchaser's investment by providing a fully
functional archival copy that can be used if the original program on the
PROLOK protected diskette, or the diskette itself, is destroyed. Quaid contends that an
archival copy of a PROLOK protected program, made without RAMKEY, does not serve
to protect against these forms of damage because a computer will not read
the program into its memory from the copy unless the PROLOK diskette containing
the original undamaged program is also in one of its disk drives, which
is impossible if the PROLOK diskette, or the program placed thereon, has been
destroyed due to physical or human mishap. ...
A copy of a PROLOK protected program made with RAMKEY protects an owner
from all types of damage to the original program, while a copy made
without RAMKEY only serves the limited function of protecting against damage to the
original program by mechanical and electrical failure. Because § 117(2) permits the making of
fully functional archival copies, it follows that RAMKEY is capable of substantial noninfringing
uses. Quaid's advertisement and sale of CopyWrite diskettes with the RAMKEY feature does
not constitute contributory infringement.
IV. Vault's Louisiana Claims
Seeking preliminary and permanent injunctions and damages, Vault's original complaint alleged that Quaid breached its license agreement by decompiling or disassembling Vault's program in violation of the Louisiana Software License Enforcement Act (the "License Act"), La.Rev.Stat.Ann. § 51:1961 et seq. (West 1987), and that Quaid misappropriated Vault's program in violation of the Louisiana Uniform Trade Secrets Act, La.Rev.Stat.Ann. § 51:1431 et seq. (West 1987). On appeal, Vault seeks an injunction to prevent Quaid from decompiling or disassembling PROLOK version 2.0.
Louisiana's License Act permits a software producer to impose a number of contractual
terms upon software purchasers provided that the terms are set forth in a
license agreement which comports with La.Rev.Stat.Ann. §§ 51:1963 & 1965, and that this license
agreement accompanies the producer's software. Enforceable terms include the prohibition of: (1) any
copying of the program for any purpose; and (2) modifying and/or adapting the
program in any way, including adaptation by reverse engineering, decompilation or disassembly. La.Rev.Stat.Ann.
§ 51:1964. The terms "reverse engineering, decompiling or disassembling" are defined as "any process
by which computer software is converted from one form to another form which
is more readily understandable to human beings, including without limitation any decoding or
decrypting of any computer program which has been encoded or encrypted in any
manner." La.Rev.Stat.Ann. § 51:1962(3).
Vault's license agreement, which accompanies PROLOK version 2.0 and comports with the requirements
of La.Rev.Stat.Ann. §§ 51:1963 & 1965, provides that "[y]ou may not ... copy, modify,
translate, convert to another programming language, decompile or disassemble" Vault's program. Vault asserts that
these prohibitions are enforceable under Louisiana's License Act, and specifically seeks an injunction
to prevent Quaid from decompiling or disassembling Vault's program.
The district court held that Vault's license agreement was "a contract of adhesion
which could only be enforceable if the [Louisiana License Act] is a valid
and enforceable statute." The court noted numerous conflicts between Louisiana's License Act and
the Copyright Act, including: (1) while the License Act authorizes a total prohibition
on copying, the Copyright Act allows archival copies and copies made as an
essential step in the utilization of a computer program, 17 U.S.C. § 117; (2)
while the License Act authorizes a perpetual bar against copying, the Copyright Act
grants protection against unauthorized copying only for the life of the author plus
fifty years, 17 U.S.C. § 302(a); and (3) while the License Act places no
restrictions on programs which may be protected, under the Copyright Act, only "original
works of authorship" can be protected, 17 U.S.C. § 102. The court concluded that,
because Louisiana's License Act "touched upon the area" of federal copyright law, its
provisions were preempted and Vault's license agreement was unenforceable.
In Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 84 S.Ct.
784, 11 L.Ed.2d 661 (1964), the Supreme Court held that "[w]hen state law
touches upon the area of [patent or copyright statutes], it is 'familiar doctrine'
that the federal policy 'may not be set at naught, or its benefits
denied' by the state law." Id. at 229, 84 S.Ct. at 787 (quoting
Sola Elec. Co. v. Jefferson Elec. Co., 317 U.S. 173, 176, 63 S.Ct.
172, 173, 87 L.Ed. 165 (1942)). See Compco Corp. v. Day-Brite Lighting, Inc.,
376 U.S. 234, 84 S.Ct. 779, 11 L.Ed.2d 669 (1964)
. Section 117 of
the Copyright Act permits an owner of a computer program to make an
adaptation of that program provided that the adaptation is either "created as an
essential step in the utilization of the computer program in conjunction with a
machine," § 117(1), or "is for archival purpose only," § 117(2). The provision in Louisiana's
License Act, which permits a software producer to prohibit the adaptation of its
licensed computer program by decompilation or disassembly, conflicts with the rights of computer
program owners under § 117 and clearly "touches upon an area" of federal copyright
law. For this reason, and the reasons set forth by the district court,
we hold that at least this provision of Louisiana's License Act is preempted
by federal law, and thus that the restriction in Vault's license agreement against
decompilation or disassembly is unenforceable.
We hold that: (1) Quaid did not infringe Vault's exclusive right to reproduce its program in copies under § 106(1); (2) Quaid's advertisement and sale of RAMKEY does not constitute contributory infringement; (3) RAMKEY does not constitute a derivative work of Vault's program under § 106(2); and (4) the provision in Vault's license agreement, which prohibits the decompilation or disassembly of its program, is unenforceable.
The judgment of the district court is AFFIRMED.
Must buyers of computer software obey the terms of shrinkwrap licenses? The district court held not, for two reasons: first, they are not contracts because the licenses are inside the box rather than printed on the outside; second, federal law forbids enforcement even if the licenses are contracts. [W]e disagree with the district judge's conclusion on each. Shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable).
ProCD, the plaintiff, has compiled information from more than 3,000 telephone directories into a computer database. We may assume that this database cannot be copyrighted, although it is more complex, contains more information (nine-digit zip codes and census industrial codes), is organized differently, and therefore is more original than the single alphabetical directory at issue in Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340 (1991). ProCD sells a version of the database, called SelectPhone, on CD-ROM discs. (CD-ROM means "compact disc-read only memory." The "shrinkwrap license" gets its name from the fact that retail software packages are covered in plastic or cellophane "shrinkwrap," and some vendors, though not ProCD, have written licenses that become effective as soon as the customer tears the wrapping from the package. Vendors prefer "end user license," but we use the more common term.)
The database in SelectPhone cost more than $10 million to compile and is expensive to keep current. It is much more valuable to some users than to others. The combination of names, addresses, and SIC codes enables manufacturers to compile lists of potential customers. Manufacturers and retailers pay high prices to specialized information intermediaries for such mailing lists; ProCD offers a potentially cheaper alternative. People with nothing to sell could use the database as a substitute for calling long distance information, or as a way to look up old friends who have moved to unknown towns, or just as a electronic substitute for the local phone book. ProCD decided to engage in price discrimination, selling its database to the general public for personal use at a low price (approximately $150 for the set of five discs) while selling information to the trade for a higher price. It has adopted some intermediate strategies too: access to the SelectPhone database is available via the America On-line service for the price America Online charges to its clients (approximately $3 per hour), but this service has been tailored to be useful only to the general public.
If ProCD had to recover all of its costs and make a profit by charging a single price--that is, if it could not charge more to commercial users than to the general public--it would have to raise the price substantially over $150. The ensuing reduction in sales would harm consumers who value the information at, say, $200. They get consumer surplus of $50 under the current arrangement but would cease to buy if the price rose substantially. If because of high elasticity of demand in the consumer segment of the market the only way to make a profit turned out to be a price attractive to commercial users alone, then all consumers would lose out--and so would the commercial clients, who would have to pay more for the listings because ProCD could not obtain any contribution toward costs from the consumer market.
To make price discrimination work, however, the seller must be able to control arbitrage. An air carrier sells tickets for less to vacationers than to business travelers, using advance purchase and Saturday--night-stay requirements to distinguish the categories. A producer of movies segments the market by time, releasing first to theaters, then to pay-per-view services, next to the videotape and laserdisc market, and finally to cable and commercial tv. Vendors of computer software have a harder task. Anyone can walk into a retail store and buy a box. Customers do not wear tags saying "commercial user" or "consumer user." Anyway, even a commercial-user-detector at the door would not work, because a consumer could buy the software and resell to a commercial user. That arbitrage would break down the price discrimination and drive up the minimum price at which ProCD would sell to anyone.
Instead of tinkering with the product and letting users sort themselves--for example, furnishing current data at a high price that would be attractive only to commercial customers, and two-year-old data at a low price--ProCD turned to the institution of contract. Every box containing its consumer product declares that the software comes with restrictions stated in an enclosed license. This license, which is encoded on the CD-ROM disks as well as printed in the manual, and which appears on a user's screen every time the software runs, limits use of the application program and listings to non-commercial purposes.
Matthew Zeidenberg bought a consumer package of SelectPhone in 1994 from a retail outlet in Madison, Wisconsin, but decided to ignore the license. He formed Silken Mountain Web Services, Inc., to resell the information in the SelectPhone database. The corporation makes the database available on the Internet to anyone willing to pay its price--which, needless to say, is less than ProCD charges its commercial customers.
Following the district court, we treat the licenses as ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts and the Uniform Commercial Code. Whether there are legal differences between "contracts" and "licenses" (which may matter under the copyright doctrine of first sale) is a subject for another day. Zeidenberg [argues], and the district court held, that placing the package of software on the shelf is an "offer," which the customer "accepts" by paying the asking price and leaving the store with the goods. In Wisconsin, as elsewhere, a contract includes only the terms on which the parties have agreed. One cannot agree to hidden terms, the judge concluded. So far, so good--but one of the terms to which Zeidenberg agreed by purchasing the software is that the transaction was subject to a license. Zeidenberg's position therefore must be that the printed terms on the outside of a box are the parties' contract--except for printed terms that refer to or incorporate other terms. But why would Wisconsin fetter the parties' choice in this way? Vendors can put the entire terms of a contract on the outside of a box only by using microscopic type, removing other information that buyers might find more useful (such as what the software does, and on which computers it works), or both. The "Read Me" file included with most software, describing system requirements and potential incompatibilities, may be equivalent to ten pages of type; warranties and license restrictions take still more space. Notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike. Doubtless a state could forbid the use of standard contracts in the software business, but we do not think that Wisconsin has done so.
Transactions in which the exchange of money precedes the communication of detailed terms are common. Consider the purchase of insurance. The buyer goes to an agent, who explains the essentials (amount of coverage, number of years) and remits the premium to the home office, which sends back a policy. On the district judge's understanding, the terms of the policy are irrelevant because the insured paid before receiving them. Yet the device of payment, often with a "binder" (so that the insurance takes effect immediately even though the home office reserves the right to withdraw coverage later), in advance of the policy, serves buyers' interests by accelerating effectiveness and reducing transactions costs. Or consider the purchase of an airline ticket. The traveler calls the carrier or an agent, is quoted a price, reserves a seat, pays, and gets a ticket, in that order. The ticket contains elaborate terms, which the traveler can reject by canceling the reservation. To use the ticket is to accept the terms, even terms that in retrospect are disadvantageous. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991); see also Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, 115 S. Ct. 2322 (1995) (bills of lading). Just so with a ticket to a concert. The back of the ticket states that the patron promises not to record the concert; to attend is to agree. A theater that detects a violation will confiscate the tape and escort the violator to the exit. One could arrange things so that every concertgoer signs this promise before forking over the money, but that cumbersome way of doing things not only would lengthen queues and raise prices but also would scotch the sale of tickets by phone or electronic data service.
Consumer goods work the same way. Someone who wants to buy a radio set visits a store, pays, and walks out with a box. Inside the box is a leaflet containing some terms, the most important of which usually is the warranty, read for the first time in the comfort of home. By Zeidenberg's lights, the warranty in the box is irrelevant; every consumer gets the standard warranty implied by the UCC in the event the contract is silent; yet so far as we are aware no state disregards warranties furnished with consumer products. Drugs come with a list of ingredients on the outside and an elaborate package insert on the inside. The package insert describes drug interactions, contraindications, and other vital information--but, if Zeidenberg is right, the purchaser need not read the package insert, because it is not part of the contract. Next consider the software industry itself. Only a minority of sales take place over the counter, where there are boxes to peruse. A customer pay place an order by phone in response to a line item in a catalog or a review in a magazine. Much software is ordered over the Internet by purchasers who have never seen a box. Increasingly software arrives by wire. There is no box; there is only a stream of electrons, a collection of information that includes data, an application program, instructions, many limitations ("MegaPixel 3.14159 cannot be used with BytePusher 2.718"), and the terms of sale. The user purchases a serial number, which activates the software's features. On Zeidenberg's arguments, these unboxed sales are unfettered by terms--so the seller has made a broad warranty and must pay consequential damages for any shortfalls in performance, two "promises" that if taken seriously would drive prices through the ceiling or return transactions to the horse-and-buggy age.
According to the district court, the UCC does not countenance the sequence of money now, terms later. One of the court's reasons--that by proposing as part of the draft Article 2B a new UCC sec. 2-2203 that would explicitly validate standard-form user licenses, the American Law Institute and the National Conference of Commissioners on Uniform Laws have conceded the invalidity of shrinkwrap licenses under current law, see 908 F. Supp. at 65566--depends on a faulty inference. To propose a change in a law's text is not necessarily to propose a change in the law's effect. New words may be designed to fortify the current rule with a more precise text that curtails uncertainty. To judge by the flux of law review articles discussing shrinkwrap licenses, uncertainty is much in need of reduction--although businesses seem to feel less uncertainty than do scholars, for only three cases (other than ours) touch on the subject, and none directly addresses it. See Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991); Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 268-70 (5th Cir. 1988); Arizona Retail Systems, Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993). As their titles suggest, these are not consumer transactions. Step-Saver is a battle-of the-forms case, in which the parties exchange incompatible forms and a court must decide which prevails. See Northrop Corp. v. Litronic Industries, 29 F.3d 1173 (7th Cir. 1994) (Illinois law); Douglas G. Baird & Robert Weisberg, Rules, Standards, and the Battle of the Forms: A Reassessment of sec. 2-207, 68 Va. L. Rev. 1217, 1227-31 (1982). Our case has only one form; UCC sec. 2-207 is irrelevant. Vault holds that Louisiana's special shrinkwrap-license statute is preempted by federal law, a question to which we return. And Arizona Retail Systems did not reach the question, because the court found that the buyer knew the terms of the license before purchasing the software.
What then does the current version of the UCC have to say? We think that the place to start is sec. 2-204(1): "A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." 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. This Zeidenberg did. He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance. So although the district judge was right to say that a contract can be, and often is, formed simply by paying the price and walking out of the store, the UCC permits contracts to be formed in other ways. ProCD proposed such a different way, and without protest Zeidenberg agreed. Ours is not a case in which a consumer opens a package to find an insert saying "you owe us an extra $10,000" and the seller files suit to collect. Any buyer finding such a demand can prevent formation of the contract by returning the package, as can any consumer who concludes that the terms of the license make the software worth less than the purchase price. Nothing in the UCC requires a seller to maximize the buyer's net gains.
Section 2-606, which defines "acceptance of goods", reinforces this understanding. A buyer accepts goods under sec. 2-606(1)(b) when, after an opportunity to inspect, he fails to make an effective rejection under sec. 2-602(1). ProCD extended an opportunity to reject if a buyer should find the license terms unsatisfactory; Zeidenberg inspected the package, tried out the software, learned of the license, and did not reject the goods. We refer to sec. 2-606 only to show that the opportunity to return goods can be important; acceptance of an offer differs from acceptance of goods after delivery, see Gillen v. Atalanta Systems, Inc., 997 F.2d 280, 284 n.1 (7th Cir. 1993); but the UCC consistently permits the parties to structure their relations so that the buyer has a chance to make a final decision after a detailed review.
The district court held that, even if Wisconsin treats shrinkwrap licenses as contracts, sec. 301(a) of the Copyright Act, 17 U.S.C. sec. 301(a), prevents their enforcement. The relevant part of sec. 301(a) preempts any "legal or equitable rights [under state law] that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103". ProCD's software and data are "fixed in a tangible medium of expression", and the district judge held that they are "within the subject matter of copyright". The latter conclusion is plainly right for the copyrighted application program, and the judge thought that the data likewise are "within the subject matter of copyright" even if, after Feist, they are not sufficiently original to be copyrighted. One function of sec. 301(a) is to prevent states from giving special protection to works of authorship that Congress has decided should be in the public domain, which it can accomplish only if "subject matter of copyright" includes all works of a type covered by sections 102 and 103, even if federal law does not afford protection to them. Cf. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989) (same principle under patent laws).
But are rights created by contract "equivalent to any of the exclusive rights within the general scope of copyright"? Three courts of appeals have answered "no." National Car Rental Systems, Inc. v. Computer Associates International, Inc., 991 F.2d 426, 433 (8th Cir. 1993); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488, 1501 (5th Cir. 1990); Acorn Structures, Inc. v. Swantz, 846 F.2d 923, 926 (4th Cir. 1988). The district court disagreed with these decisions, but we think them sound. Rights "equivalent to any of the exclusive rights within the general scope of copyright" are rights established by law--rights that restrict the options of persons who are strangers to the author. Copyright law forbids duplication, public performance, and so on, unless the person wishing to copy or perform the work gets permission; silence means a ban on copying. A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create "exclusive rights." Someone who found a copy of SelectPhone on the street would not be affected by the shrinkwrap license--though the federal copyright laws of their own force would limit the finder's ability to copy or transmit the application program.
Think for a moment about trade secrets. One common trade secret is a customer list. After Feist, a simple alphabetical list of a firm's customers, with address and telephone numbers, could not be protected by copyright. Yet Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974), holds that contracts about trade secrets may be enforced--precisely because they do not affect strangers' ability to discover and use the information independently. If the amendment of sec. 301(a) in 1976 overruled Kewanee and abolished consensual protection of those trade secrets that cannot be copyrighted, no one has noticed--though abolition is a logical consequence of the district court's approach. Think, too, about everyday transactions in intellectual property. A customer visits a video store and rents a copy of Night of the Lepus. The customer's contract with the store limits use of the tape to home viewing and requires its return in two days. May the customer keep the tape, on the ground that sec. 301(a) makes the promise unenforceable? . [S]ome applications of the law of contract could interfere with the attainment of national objectives and therefore come within the domain of sec. 301(a). But general enforcement of shrinkwrap licenses of the kind before us does not create such interference.
Everyone remains free to copy and disseminate all 3,000 telephone books that have been incorporated into ProCD's database. Anyone can add sic codes and zip codes. ProCD's rivals have done so. Enforcement of the shrinkwrap license may even make information more readily available, by reducing the price ProCD charges to consumer buyers. To the extent licenses facilitate distribution of object code while concealing the source code (the point of a clause forbidding disassembly), they serve the same procompetitive functions as does the law of trade secrets. Rockwell Graphic Systems, Inc. v. DEV Industries, Inc., 925 F.2d 174, 180 (7th Cir. 1991). Licenses may have other benefits for consumers: many licenses permit users to make extra copies, to use the software on multiple computers, even to incorporate the software into the user's products. But whether a particular license is generous or restrictive, a simple two-party contract is not "equivalent to any of the exclusive rights within the general scope of copyright" and therefore may be enforced.
REVERSED AND REMANDED
SOTOMAYOR, Circuit Judge:
This is an appeal from a judgment of the Southern District of New York denying a motion by defendants-appellants Netscape Communications Corporation and its corporate parent, America Online, Inc. (collectively, "defendants" or "Netscape"), to compel arbitration and to stay court proceedings. In order to resolve the central question of arbitrability presented here, we must address issues of contract formation in cyberspace. Principally, we are asked to determine whether plaintiffs-appellees ("plaintiffs"), by acting upon defendants' invitation to download free software made available on defendants' webpage, agreed to be bound by the software's license terms (which included the arbitration clause at issue), even though plaintiffs could not have learned of the existence of those terms unless, prior to executing the download, they had scrolled down the webpage to a screen located below the download button. We agree with the district court that a reasonably prudent Internet user in circumstances such as these would not have known or learned of the existence of the license terms before responding to defendants' invitation to download the free software, and that defendants therefore did not provide reasonable notice of the license terms. In consequence, plaintiffs' bare act of downloading the software did not unambiguously manifest assent to the arbitration provision contained in the license terms .
We therefore affirm the district court's denial of defendants' motion to compel arbitration and to stay court proceedings.
In three related putative class actions,1 plaintiffs alleged that, unknown to them, their use of SmartDownload transmitted to defendants private information about plaintiffs' downloading of files from the Internet, thereby effecting an electronic surveillance of their online activities in violation of two federal statutes, the Electronic Communications Privacy Act, 18 U.S.C. §§ 2510 et seq., and the Computer Fraud and Abuse Act, 18 U.S.C. § 1030.
In the time period relevant to this litigation, Netscape offered on its website various software programs, including Communicator and SmartDownload, which visitors to the site were invited to obtain free of charge. It is undisputed that five of the six named plaintiffs downloaded Communicator from the Netscape website . no clickwrap presentation accompanied the [download of SmartDownload]. Instead, once plaintiffs had clicked on the "Download" button located at or near the bottom of their screen, and the downloading of SmartDownload was complete, these plaintiffs encountered no further information about the plug-in program or the existence of license terms governing its use.9 The sole reference to SmartDownload's license terms on the "SmartDownload Communicator" webpage was located in text that would have become visible to plaintiffs only if they had scrolled down to the next screen.
Had plaintiffs scrolled down instead of acting on defendants' invitation to click on the "Download" button, they would have encountered the following invitation: "Please review and agree to the terms of the Netscape SmartDownload software license agreement before downloading and using the software." Plaintiffs Gibson, Gruber, Kelly, and Weindorf averred in their affidavits that they never saw this reference to the SmartDownload license agreement when they clicked on the "Download" button. They also testified during depositions that they saw no reference to license terms when they clicked to download SmartDownload, although under questioning by defendants' counsel, some plaintiffs added that they could not "remember" or be "sure" whether the screen shots of the SmartDownload page attached to their affidavits reflected precisely what they had seen on their computer screens when they downloaded SmartDownload.10
In sum, plaintiffs Gibson, Gruber, Kelly, and Weindorf allege that the process of obtaining SmartDownload contrasted sharply with that of obtaining Communicator. Having selected SmartDownload, they were required neither to express unambiguous assent to that program's license agreement nor even to view the license terms or become aware of their existence before proceeding with the invited download of the free plug-in program. Moreover, once these plaintiffs had initiated the download, the existence of SmartDownload's license terms was not mentioned while the software was running or at any later point in plaintiffs' experience of the product.
Even for a user who, unlike plaintiffs, did happen to scroll down past the download button, SmartDownload's license terms would not have been immediately displayed in the manner of Communicator's clickwrapped terms. Instead, if such a user had seen the notice of SmartDownload's terms and then clicked on the underlined invitation to review and agree to the terms, a hypertext link would have taken the user to a separate webpage entitled "License & Support Agreements." The first paragraph on this page read, in pertinent part:
The use of each Netscape software product is governed by a license agreement. You must read and agree to the license agreement terms BEFORE acquiring a product. Please click on the appropriate link below to review the current license agreement for the product of interest to you before acquisition. For products available for download, you must read and agree to the license agreement terms BEFORE you install the software. If you do not agree to the license terms, do not download, install or use the software.
Below this paragraph appeared a list of license agreements, the first of which was "License Agreement for Netscape Navigator and Netscape Communicator Product Family (Netscape Navigator, Netscape Communicator and Netscape SmartDownload)." If the user clicked on that link, he or she would be taken to yet another webpage that contained the full text of a license agreement that was identical in every respect to the Communicator license agreement except that it stated that its "terms apply to Netscape Communicator, Netscape Navigator, and Netscape SmartDownload." The license agreement granted the user a nonexclusive license to use and reproduce the software, subject to certain terms:
BY CLICKING THE ACCEPTANCE BUTTON OR INSTALLING OR USING NETSCAPE COMMUNICATOR, NETSCAPE NAVIGATOR, OR NETSCAPE SMARTDOWNLOAD SOFTWARE (THE "PRODUCT"), THE INDIVIDUAL OR ENTITY LICENSING THE PRODUCT ("LICENSEE") IS CONSENTING TO BE BOUND BY AND IS BECOMING A PARTY TO THIS AGREEMENT. IF LICENSEE DOES NOT AGREE TO ALL OF THE TERMS OF THIS AGREEMENT, THE BUTTON INDICATING NON-ACCEPTANCE MUST BE SELECTED, AND LICENSEE MUST NOT INSTALL OR USE THE SOFTWARE.
Among the license terms was a provision requiring virtually all disputes relating to the agreement to be submitted to arbitration:
Unless otherwise agreed in writing, all disputes relating to this Agreement (excepting any dispute relating to intellectual property rights) shall be subject to final and binding arbitration in Santa Clara County, California, under the auspices of JAMS/EndDispute, with the losing party paying all costs of arbitration.DISCUSSION
It is well settled that a court may not compel arbitration until it has resolved "the question of the very existence" of the contract embodying the arbitration clause. Interocean Shipping Co. v. Nat'l Shipping & Trading Corp., 462 F.2d 673, 676 (2d Cir. 1972). "[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648 (1986) (quotation marks omitted). Unless the parties clearly provide otherwise, "the question of arbitrability-whether a[n] . . . agreement creates a duty for the parties to arbitrate the particular grievance-is undeniably an issue for judicial determination." Id. at 649.
The district court properly concluded that in deciding whether parties agreed to arbitrate a certain matter, a court should generally apply state- law principles to the issue of contract formation
III. Whether the User Plaintiffs Had Reasonable Notice of and Manifested Assent to the SmartDownload License Agreement
Whether governed by the common law or by Article 2 of the Uniform Commercial Code ("UCC"), a transaction, in order to be a contract, requires a manifestation of agreement between the parties. See Windsor Mills, Inc. v. Collins & Aikman Corp., 101 Cal. Rptr. 347, 350 (Cal. Ct. App. 1972) ("[C]onsent to, or acceptance of, the arbitration provision [is] necessary to create an agreement to arbitrate."); see also Cal. Com. Code § 2204(1) ("A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.").13 Mutual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract. Binder v. Aetna Life Ins. Co., 89 Cal. Rptr. 2d 540, 551 (Cal. Ct. App. 1999); cf. Restatement (Second) of Contracts § 19(2) (1981) ("The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents."). Although an onlooker observing the disputed transactions in this case would have seen each of the user plaintiffs click on the SmartDownload "Download" button, see Cedars Sinai Med. Ctr. v. Mid-West Nat'l Life Ins. Co., 118 F. Supp. 2d 1002, 1008 (C.D. Cal. 2000) ("In California, a party's intent to contract is judged objectively, by the party's outward manifestation of consent."), a consumer's clicking on a download button does not communicate assent to contractual terms if the offer did not make clear to the consumer that clicking on the download button would signify assent to those terms, see Windsor Mills, 101 Cal. Rptr. at 351 ("[W]hen the offeree does not know that a proposal has been made to him this objective standard does not apply."). California's common law is clear that "an offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he is unaware, contained in a document whose contractual nature is not obvious." Id.; see also Marin Storage & Trucking, Inc. v. Benco Contracting & Eng'g, Inc., 107 Cal. Rptr. 2d 645, 651 (Cal. Ct. App. 2001) (same).
Arbitration agreements are no exception to the requirement of manifestation of assent. "This principle of knowing consent applies with particular force to provisions for arbitration." Windsor Mills, 101 Cal. Rptr. at 351. Clarity and conspicuousness of arbitration terms are important in securing informed assent. "If a party wishes to bind in writing another to an agreement to arbitrate future disputes, such purpose should be accomplished in a way that each party to the arrangement will fully and clearly comprehend that the agreement to arbitrate exists and binds the parties thereto." Commercial Factors Corp. v. Kurtzman Bros., 280 P.2d 146, 147-48 (Cal. Dist. Ct. App. 1955) (internal quotation marks omitted). Thus, California contract law measures assent by an objective standard that takes into account both what the offeree said, wrote, or did and the transactional context in which the offeree verbalized or acted.
A.The Reasonably Prudent Offeree of Downloadable Software
Defendants argue that plaintiffs must be held to a standard of reasonable prudence and that, because notice of the existence of SmartDownload license terms was on the next scrollable screen, plaintiffs were on "inquiry notice" of those terms.14 We disagree with the proposition that a reasonably prudent offeree in plaintiffs' position would necessarily have known or learned of the existence of the SmartDownload license agreement prior to acting, so that plaintiffs may be held to have assented to that agreement with constructive notice of its terms. See Cal. Civ. Code § 1589 ("A voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting."). It is true that "[a] party cannot avoid the terms of a contract on the ground that he or she failed to read it before signing." Marin Storage & Trucking, 107 Cal. Rptr. 2d at 651. But courts are quick to add: "An exception to this general rule exists when the writing does not appear to be a contract and the terms are not called to the attention of the recipient. In such a case, no contract is formed with respect to the undisclosed term." Id.; cf. Cory v. Golden State Bank, 157 Cal. Rptr. 538, 541 (Cal. Ct. App. 1979) ("[T]he provision in question is effectively hidden from the view of money order purchasers until after the transactions are completed. . . . Under these circumstances, it must be concluded that the Bank's money order purchasers are not chargeable with either actual or constructive notice of the service charge provision, and therefore cannot be deemed to have consented to the provision as part of their transaction with the Bank.").
[R]eceipt of a physical document containing contract terms or notice thereof is frequently deemed, in the world of paper transactions, a sufficient circumstance to place the offeree on inquiry notice of those terms. "Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact." Cal. Civ. Code § 19. These principles apply equally to the emergent world of online product delivery, pop-up screens, hyperlinked pages, clickwrap licensing, scrollable documents, and urgent admonitions to "Download Now!". What plaintiffs saw when they were being invited by defendants to download this fast, free plug-in called SmartDownload was a screen containing praise for the product and, at the very bottom of the screen, a "Download" button. Defendants argue that under the principles set forth in the cases cited above, a "fair and prudent person using ordinary care" would have been on inquiry notice of SmartDownload's license terms. Shacket, 651 F. Supp. at 690.
We are not persuaded that a reasonably prudent offeree in these circumstances would have known of the existence of license terms. Plaintiffs were responding to an offer that did not carry an immediately visible notice of the existence of license terms or require unambiguous manifestation of assent to those terms. Thus, plaintiffs' "apparent manifestation of . . . consent" was to terms "contained in a document whose contractual nature [was] not obvious." Windsor Mills, 101 Cal. Rptr. at 351. Moreover, the fact that, given the position of the scroll bar on their computer screens, plaintiffs may have been aware that an unexplored portion of the Netscape webpage remained below the download button does not mean that they reasonably should have concluded that this portion contained a notice of license terms. In their deposition testimony, plaintiffs variously stated that they used the scroll bar "[o]nly if there is something that I feel I need to see that is on-that is off the page," or that the elevated position of the scroll bar suggested the presence of "mere formalities, standard lower banner links" or "that the page is bigger than what I can see." Plaintiffs testified, and defendants did not refute, that plaintiffs were in fact unaware that defendants intended to attach license terms to the use of SmartDownload.
We conclude that in circumstances such as these, where consumers are urged to download free software at the immediate click of a button, a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms.15 The SmartDownload webpage screen was "printed in such a manner that it tended to conceal the fact that it was an express acceptance of [Netscape's] rules and regulations." Larrus, 266 P.2d at 147. Internet users may have, as defendants put it, "as much time as they need" to scroll through multiple screens on a webpage, but there is no reason to assume that viewers will scroll down to subsequent screens simply because screens are there. When products are "free" and users are invited to download them in the absence of reasonably conspicuous notice that they are about to bind themselves to contract terms, the transactional circumstances cannot be fully analogized to those in the paper world of arm's-length bargaining. In the next two sections, we discuss case law and other legal authorities that have addressed the circumstances of computer sales, software licensing, and online transacting. Those authorities tend strongly to support our conclusion that plaintiffs did not manifest assent to SmartDownload's license terms.
For the foregoing reasons, we affirm the district court's denial of defendants' motion to compel arbitration and to stay court proceedings.
RADER, Circuit Judge.1
Following trial in the United States District Court for the District of Massachusetts, the jury returned a verdict for Harold L. Bowers on his patent infringement, copyright infringement, and breach of contract claims, while rejecting Baystate Technologies, Inc.'s claim for patent invalidity. The jury awarded Mr. Bowers separate damages on each of his claims. The district court, however, omitted the copyright damages as duplicative of the contract damages. Because substantial evidence supports the jury's verdict that Baystate breached the contract, this court affirms that verdict. This court holds also that the district court did not abuse its discretion in modifying the damages award. Nevertheless, because no reasonable jury could find that Baystate infringes claim 1 as properly construed, this court reverses the patent infringement verdict.
Harold L. Bowers (Bowers) created a template to improve computer aided design (CAD) software, such as the CADKEY tool of Cadkey, Inc. Mr. Bowers filed a patent application for his template on February 27, 1989. On June 12, 1990, United States Patent No. 4,933,514 ('514 patent) issued from that application.
Generally, a CAD software program has many commands that the software presents to the user in nested menus many layers deep. The layering often makes it difficult for a user to find quickly a desired command. [...]
Since the early 1980s, CAD programs have assisted engineers to draft and design on a computer screen. George W. Ford, III, a development engineer and supervisor of quality control at Heinemann Electric, envisioned a way to improve Mr. Bowers' template and CAD software. Specifically, Mr. Ford designed Geodraft, a DOS-based add-on program to operate with CAD. Geodraft allows an engineer to insert technical tolerances for features of the computer-generated design. These tolerances comply with the geometric dimensioning and tolerancing (GD & T) requirements in ANSI Y14.5M, a standard promulgated by the American National Standards Institute (ANSI). Geodraft works in conjunction with the CAD system to ensure that the design complies with ANSI Y14.5M-a task previously error-prone due to the standard's complexity. Geodraft automatically includes symbols specifying the correct GD & T parameters. Mr. Ford obtained a registered copyright, TX 2-939-672, covering Geodraft.
In 1989, Mr. Ford offered Mr. Bowers an exclusive license to his Geodraft software. Mr. Bowers accepted that offer and bundled Geodraft and Cadjet together as the Designer's Toolkit. Mr. Bowers sold the Designer's Toolkit with a shrink-wrap license that, inter alia, prohibited any reverse engineering.
In 1989, Baystate also developed and marketed other tools for CADKEY. One of those tools, Draft-Pak version 1 and 2, featured a template and GD & T software. In 1988 and 1989, Mr. Bowers offered to establish a formal relationship with Baystate, including bundling his template with Draft-Pak. Baystate rejected that offer, however, telling Mr. Bowers that it believed it had "the in-house capability to develop the type of products you have proposed."
In 1990, Mr. Bowers released Designer's Toolkit. By January 1991, Baystate had obtained copies of that product. Three months later, Baystate introduced the substantially revised Draft-Pak version 3, incorporating many of the features of Designer's Toolkit. Although Draft-Pak version 3 operated in the DOS environment, Baystate later upgraded it to operate with Microsoft Windows ®.
Baystate's introduction of Draft-Pak version 3 induced intense price competition between Mr. Bowers and Baystate. To gain market share over Baystate, Mr. Bowers negotiated with Cadkey, Inc., to provide the Designer's Toolkit free with CADKEY. Mr. Bowers planned to recoup his profits by selling software upgrades to the users that he hoped to lure to his products. Following pressure from Baystate, however, Cadkey, Inc., repudiated its distribution agreement with Mr. Bowers. Eventually, Baystate purchased Cadkey, Inc., and eliminated Mr. Bowers from the CADKEY network — effectively preventing him from developing and marketing the Designer's Toolkit for that program.
On May 16, 1991, Baystate sued Mr. Bowers for declaratory judgment that 1) Baystate's products do not infringe the '514 patent, 2) the '514 patent is invalid, and 3) the '514 patent is unenforceable. Mr. Bowers filed counterclaims for copyright infringement, patent infringement, and breach of contract.
Following trial, the jury found for Mr. Bowers and awarded $1,948,869 for copyright infringement, $3,831,025 for breach of contract, and $232,977 for patent infringement. The district court, however, set aside the copyright damages as duplicative of the contract damages and entered judgment for $5,270,142 (including prejudgment interest). Baystate filed timely motions for judgment as a matter of law (JMOL), or for a new trial, on all of Mr. Bowers' claims. Baystate appeals the district court's denial of its motions for JMOL or a new trial, while Mr. Bowers appeals the district court's denial of copyright damages. This court has jurisdiction under 28 U.S.C. § 1295(a)(1) (2000).
Baystate contends that the Copyright Act preempts the prohibition of reverse engineering embodied in Mr. Bowers' shrink-wrap license agreements. Swayed by this argument, the district court considered Mr. Bowers' contract and copyright claims coextensive. The district court instructed the jury that "reverse engineering violates the license agreement only if Baystate's product that resulted from reverse engineering infringes Bowers' copyright because it copies protectable expression." Mr. Bowers lodged a timely objection to this instruction. This court holds that, under First Circuit law, the Copyright Act does not preempt or narrow the scope of Mr. Bowers' contract claim.
Courts respect freedom of contract and do not lightly set aside freely-entered agreements. Beacon Hill Civic Ass'n v. Ristorante Toscano, 422 Mass. 318, 662 N.E.2d 1015, 1017 (1996). Nevertheless, at times, federal regulation may preempt private contract. Cf. Nebbia v. New York, 291 U.S. 502, 523, 54 S.Ct. 505, 78 L.Ed. 940 (1934) ("Equally fundamental with the private right is [the right] of the public to regulate [the private right] in the common interest."). The Copyright Act provides that "all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright... are governed exclusively by this title." 17 U.S.C. § 301(a) (2000). The First Circuit does not interpret this language to require preemption as long as "a state cause of action requires an extra element, beyond mere copying, preparation of derivative works, performance, distribution or display." Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1164, 32 USPQ2d 1385, 1397 (1st Cir.1994) (quoting Gates Rubber Co. v. Bando Chem. Indus., 9 F.3d 823, 847, 28 USPQ2d 1503, 1520 (10th Cir.1993)); see also Computer Assoc. Int'l, Inc. v. Altai, Inc., 982 F.2d 693, 716 (2d Cir.1992) ("But if an `extra element' is `required instead of or in addition to the acts of reproduction, performance, distribution or display, in order to constitute a state-created cause of action, then the right does not lie "within the general scope of copyright," and there is no preemption.'") (quoting 1 Nimmer on Copyright § 1.01[B] at 1-15). Nevertheless, "[n]ot every `extra element' of a state law claim will establish a qualitative variance between the rights protected by federal copyright law and those protected by state law." Id.
In Data General, Data General alleged that Grumman misappropriated its trade secret software. 36 F.3d at 1155. Grumman obtained that software from Data General's customers and former employees who were bound by confidentiality agreements to refrain from disclosing the software. Id. at 1154-55. In defense, Grumman argued that the Copyright Act preempted Data General's trade secret claim. Id. at 1158, 1165. The First Circuit held that the Copyright Act did not preempt the state law trade secret claim. Id. at 1165. Beyond mere copying, that state law claim required proof of a trade secret and breach of a duty of confidentiality. Id. These additional elements of proof, according to the First Circuit, made the trade secret claim qualitatively different from a copyright claim. Id. In contrast, the First Circuit noted that claims might be preempted whose extra elements are illusory, being "mere label[s] attached to the same odious business conduct." Id. at 1165 (quoting Mayer v. Josiah Wedgwood & Sons, Ltd., 601 F.Supp. 1523, 1535, 225 USPQ 776, 784 (S.D.N.Y.1985)). For example, the First Circuit observed that "a state law misappropriation claim will not escape preemption ... simply because a plaintiff must prove that copying was not only unauthorized but also commercially immoral." Id.
The First Circuit has not addressed expressly whether the Copyright Act preempts a state law contract claim that restrains copying. This court perceives, however, that Data General's rationale would lead to a judgment that the Copyright Act does not preempt the state contract action in this case. Indeed, most courts to examine this issue have found that the Copyright Act does not preempt contractual constraints on copyrighted articles. See, e.g., ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 39 USPQ2d 1161 (7th Cir.1996) (holding that a shrink-wrap license was not preempted by federal copyright law); Wrench LLC v. Taco Bell Corp., 256 F.3d 446, 457, 59 USPQ2d 1434, 1441-42 (6th Cir.2001) (holding a state law contract claim not preempted by federal copyright law); Nat'l Car Rental Sys., Inc. v. Computer Assocs. Int'l, Inc., 991 F.2d 426, 433, 26 USPQ2d 1370, 1376 (8th Cir. 1993); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488, 1501 (5th Cir.1990); Acorn Structures v. Swantz, 846 F.2d 923, 926, 6 USPQ2d 1810, 1812 (4th Cir.1988); but see Lipscher v. LRP Publs., Inc., 266 F.3d 1305, 1312, 60 USPQ2d 1468, 1473 (11th Cir.2001).
In ProCD, for example, the court found that the mutual assent and consideration required by a contract claim render that claim qualitatively different from copyright infringement. 86 F.3d at 1454. Consistent with Data General's reliance on a contract element, the court in ProCD reasoned: "A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create `exclusive rights.'" Id. Indeed, the Supreme Court recently noted "[i]t goes without saying that a contract cannot bind a nonparty." EEOC v. Waffle House, Inc., 534 U.S. 279, 122 S.Ct. 754, 764, 151 L.Ed.2d 755 (2002). This court believes that the First Circuit would follow the reasoning of ProCD and the majority of other courts to consider this issue. This court, therefore, holds that the Copyright Act does not preempt Mr. Bowers' contract claims.
In making this determination, this court has left untouched the conclusions reached in Atari Games v. Nintendo regarding reverse engineering as a statutory fair use exception to copyright infringement. Atari Games Corp. v. Nintendo of America, Inc., 975 F.2d 832, 24 USPQ2d 1015 (Fed.Cir.1992). In Atari, this court stated that, with respect to 17 U.S.C. § 107 (fair use section of the Copyright Act), "[t]he legislative history of section 107 suggests that courts should adapt the fair use exception to accommodate new technological innovations." Atari, 975 F.2d at 843. This court noted "[a] prohibition on all copying whatsoever would stifle the free flow of ideas without serving any legitimate interest of the copyright holder." Id. Therefore, this court held "reverse engineering object code to discern the unprotectable ideas in a computer program is a fair use." Id. Application of the First Circuit's view distinguishing a state law contract claim having additional elements of proof from a copyright claim does not alter the findings of Atari. Likewise, this claim distinction does not conflict with the expressly defined circumstances in which reverse engineering is not copyright infringement under 17 U.S.C. § 1201(f) (section of the Digital Millennium Copyright Act) and 17 U.S.C. § 906 (section directed to mask works).
Moreover, while the Fifth Circuit has held a state law prohibiting all copying of a computer program is preempted by the federal Copyright Act, Vault Corp. v. Quaid Software, Ltd., 847 F.2d 255 (5th Cir.1988), no evidence suggests the First Circuit would extend this concept to include private contractual agreements supported by mutual assent and consideration. The First Circuit recognizes contractual waiver of affirmative defenses and statutory rights. See United States v. Spector, 55 F.3d 22, 24-5 (1st Cir.1995) (holding that a contractual waiver of the statute of limitations defense constitutes an "effective waiver of defendant's rights under the statute of limitations" if the agreement were properly executed, and the "waiver is made knowingly and voluntarily."); Tompkins v. United Healthcare of New England, 203 F.3d 90, 97 (1st Cir.2000) (stating that "in some circumstances contractual waiver of statutory rights is permissible," citing Canal Elec. Co. v. Westinghouse Elec. Corp., 406 Mass. 369, 548 N.E.2d 182, 187 (Mass. 1990) ("a contractual waiver of statutory rights is permissible when the statute's purpose is the `protection of the property rights of individual parties ... rather than ... the protection of the general public.'")). Thus, case law indicates the First Circuit would find that private parties are free to contractually forego the limited ability to reverse engineer a software product under the exemptions of the Copyright Act. Of course, a party bound by such a contract may elect to efficiently breach the agreement in order to ascertain ideas in a computer program unprotected by copyright law. Under such circumstances, the breaching party must weigh the benefits of breach against the arguably de minimus damages arising from merely discerning non-protected code.
This court now considers the scope of Mr. Bowers' contract protection. Without objection to the choice of law, the district court applied Massachusetts contract law. Accordingly, contract terms receive "the sense and meaning of the words which the parties have used; and if clear and free from ambiguity the words are to be taken and understood in their natural, usual and ordinary sense." Farber v. Mutual Life Ins. Co., 250 Mass. 250, 253, 145 N.E. 535 (Mass.1924); see also Kelly v. Marx, 428 Mass. 877, 881, 705 N.E.2d 1114 (Mass.1999) ("The proper course is to enforce contracts according to their plain meaning and not to undertake to be wiser than the parties.") (quoting Guerin v. Stacy, 175 Mass. 595, 597, 56 N.E. 892 (1900) (Holmes, C.J.)).
In this case, the contract unambiguously prohibits "reverse engineering." That term means ordinarily "to study or analyze (a device, as a microchip for computers) in order to learn details of design, construction, and operation, perhaps to produce a copy or an improved version." Random House Unabridged Dictionary (1993); see also The Free On-Line Dictionary of Computing (2001), at http://wombat.doc. ic.ac.uk/foldoc/foldoc.cgi?reverse + engineering (last visited Jul. 17, 2002). Thus, the contract in this case broadly prohibits any "reverse engineering" of the subject matter covered by the shrink-wrap agreement.
The record amply supports the jury's finding of a breach of that agreement. As discussed above, the district court erred in instructing the jury that copyright law limited the scope of Mr. Bowers' contract protection. Notwithstanding that error, this court may affirm the jury's breach of contract verdict if substantial record evidence would permit a reasonable jury to find in favor of Mr. Bowers based on a correct understanding of the law. Larch v. Mansfield Mun. Elec. Dept., 272 F.3d 63, 69 (1st Cir.2001). The shrink-wrap agreements in this case are far broader than the protection afforded by copyright law. Even setting aside copyright violations, the record supports a finding of breach of the agreement between the parties. In view of the breadth of Mr. Bowers' contracts, this court perceives that substantial evidence supports the jury's breach of contract verdict relating to both the DOS and Windows versions of Draft-Pak.
The record indicates, for example, that Baystate scheduled two weeks in Draft-Pak's development schedule to analyze the Designer's Toolkit. Indeed, Robert Bean, Baystate's president and CEO, testified that Baystate generally analyzed competitor's products to duplicate their functionality.
The record also contains evidence of extensive and unusual similarities between Geodraft and the accused Draft-Pak — further evidence of reverse engineering. James Spencer, head of mechanical engineering and integration at the Space and Naval Warfare Systems Center, testified that he examined the relevant software programs to determine "the overall structure of the operating program" such as "how the operating programs actually executed the task of walking a user through creating a [GD&T] symbol." Mr. Spencer concluded: "In the process of taking the [ANSI Y14.5M] standard and breaking it down into its component parts to actually create a step-by-step process for a user using the software, both Geodraft and Draft-Pak [for DOS] use almost the identical process of breaking down that task into its individual pieces, and it's organized essentially identically." This evidence supports the jury's verdict of a contract breach based on reverse engineering.
Mr. Ford also testified that he had compared Geodraft and Draft-Pak. When asked to describe the Draft-Pak interface, Mr. Ford responded: "It looked like I was looking at my own program [i.e., Geodraft]." Both Mr. Spencer and Mr. Ford explained in detail similarities between Geodraft and the accused Draft-Pak. Those similarities included the interrelationships between program screens, the manner in which parameter selection causes program branching, and the manner in which the GD&T symbols are drawn.
Both witnesses also testified that those similarities extended beyond structure and design to include many idiosyncratic design choices and inadvertent design flaws. For example, both Geodraft and Draft-Pak offer "straightness tolerance" menu choices of "flat" and "cylindric," unusual in view of the use by ANSI Y14.5M of the terms "linear" and "circular," respectively. As another example, neither program requires the user to provide "angularity tolerance" secondary datum to create a feature control frame — a technical oversight that causes creation of an incomplete symbol. In sum, Mr. Spencer testified: "Based on my summary analysis of how the programs function, their errors from the standard and their similar nomenclatures reflecting nonstandard items, I would say that the Draft-Pak [for DOS] is a derivative copy of a Geodraft product."
Mr. Ford and others also demonstrated to the jury the operation of Geodraft and both the DOS and Windows versions of the accused Draft-Pak. Those software demonstrations undoubtedly conveyed information to the jury that the paper record on appeal cannot easily replicate. This court, therefore, is especially reluctant to substitute its judgment for that of the jury on the sufficiency and interpretation of that evidence. In any event, the record fully supports the jury's verdict that Baystate breached its contract with Mr. Bowers.
Baystate does not contest the contract damages amount on appeal. Thus, this court sustains the district court's award of contract damages. Mr. Bowers, however, argues that the district court abused its discretion by dropping copyright damages from the combined damage award. To the contrary, this court perceives no abuse of discretion.
The shrink-wrap license agreement prohibited, inter alia, all reverse engineering of Mr. Bowers' software, protection encompassing but more extensive than copyright protection, which prohibits only certain copying. Mr. Bowers' copyright and contract claims both rest on Baystate's copying of Mr. Bowers' software. Following the district court's instructions, the jury considered and awarded damages on each separately. This was entirely appropriate. The law is clear that the jury may award separate damages for each claim, "leaving it to the judge to make appropriate adjustments to avoid double recovery." Britton v. Maloney, 196 F.3d 24, 32 (1st Cir.1999) (citing Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 451 n. 3, 113 S.Ct. 884, 122 L.Ed.2d 247 (1993)); see also Data Gen. Corp. v. Grumman Sys. Support Corp., 825 F.Supp. 340, 346 (D.Mass.1993) ("So long as a plaintiff is not twice compensated for a single injury, a judgment may be comprised of elements drawn from separate ... remedies."), aff'd in relevant part, 36 F.3d 1147 (1st Cir. 1994). In this case, the breach of contract damages arose from the same copying and included the same lost sales that form the basis for the copyright damages. The district court, therefore, did not abuse its discretion by omitting from the final damage award the duplicative copyright damages. Because this court affirms the district court's omission of the copyright damages, this court need not reach the merits of Mr. Bowers' copyright infringement claim.
Because substantial evidence supports the jury's verdict that Baystate breached its contract with Mr. Bowers, this court affirms that verdict. This court holds also that the district court did not abuse its discretion in omitting as duplicative copyright damages from the damage award. Because no reasonable jury could find that Baystate infringes properly construed claim 1, this court reverses the verdict of patent infringement.
DYK, Circuit Judge, concurring in part and dissenting in part.
I join the majority opinion except insofar as it holds that the contract claim is not preempted by federal law.1 Based on the petition for rehearing and the opposition, I have concluded that our original decision on the preemption issue, reaffirmed in today's revision of the majority opinion, was not correct. By holding that shrinkwrap licenses that override the fair use defense are not preempted by the Copyright Act, 17 U.S.C. §§ 101 et seq., the majority has rendered a decision in conflict with the only other federal court of appeals decision that has addressed the issue — the Fifth Circuit decision in Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th Cir.1988). The majority's approach permits state law to eviscerate an important federal copyright policy reflected in the fair use defense, and the majority's logic threatens other federal copyright policies as well. I respectfully dissent.
* Congress has made the Copyright Act the exclusive means for protecting copyright. The Act provides that "all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright ... are governed exclusively by this title." 17 U.S.C. § 301(a) (2000). All other laws, including the common law, are preempted. "[N]o person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State." Id.
The test for preemption by copyright law, like the test for patent law preemption, should be whether the state law "substantially impedes the public use of the otherwise unprotected" material. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 157, 167, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989) (state law at issue was preempted because it "substantially restrict[ed] the public's ability to exploit ideas that the patent system mandates shall be free for all to use."); Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 231-32, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964). See also Eldred v. Ashcroft, ___ U.S. ___, 123 S.Ct. 769, 154 L.Ed.2d 683 (2003) (applying patent precedent in copyright case). In the copyright area, the First Circuit has adopted an "equivalent in substance" test to determine whether a state law is preempted by the Copyright Act. Data Gen. Corp. v. Grumman Sys. Support Corp. 36 F.3d 1147, 1164-65 (1st Cir.1994). That test seeks to determine whether the state cause of action contains an additional element not present in the copyright right, such as scienter. If the state cause of action contains such an extra element, it is not preempted by the Copyright Act. Id. However, "such an action is equivalent in substance to a copyright infringement claim [and thus preempted by the Copyright Act] where the additional element merely concerns the extent to which authors and their licensees can prohibit unauthorized copying by third parties." Id. at 1165 (emphasis in original).
The fair use defense is an important limitation on copyright. Indeed, the Supreme Court has said that "[f]rom the infancy of copyright protection, some opportunity for fair use of copyrighted materials has been thought necessary to fulfill copyright's very purpose, `[t]o promote the Progress of Science and useful Arts....' U.S. Const., Art. I, § 8, cl.8." Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 575, 114 S.Ct. 1164, 127 L.Ed.2d 500 (1994). The protective nature of the fair use defense was recently emphasized by the Court in the Eldred case, in which the Court noted that "copyright law contains built-in accommodations," including "the `fair use' defense [which] allows the public to use not only facts an ideas contained in the copyrighted work, but also expression itself in certain circumstances." Id. at ___, 123 S.Ct. 769.
We correctly held in Atari Games Corp. v. Nintendo of America, Inc., 975 F.2d 832, 843 (Fed.Cir.1992), that reverse engineering constitutes a fair use under the Copyright Act.2 The Ninth and Eleventh Circuits have also ruled that reverse engineering constitutes fair use. Bateman v. Mnemonics, Inc., 79 F.3d 1532, 1539 n. 18 (11th Cir.1996); Sega Enters. Ltd. v. Accolade, Inc., 977 F.2d 1510, 1527-28 (9th Cir.1992). No other federal court of appeals has disagreed.
We emphasized in Atari that an author cannot achieve protection for an idea simply by embodying it in a computer program. "An author cannot acquire patent-like protection by putting an idea, process, or method of operation in an unintelligible format and asserting copyright infringement against those who try to understand that idea, process, or method of operation." 975 F.2d at 842. Thus, the fair use defense for reverse engineering is necessary so that copyright protection does not "extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work," as proscribed by the Copyright Act. 17 U.S.C. § 102(b) (2000).
A state is not free to eliminate the fair use defense. Enforcement of a total ban on reverse engineering would conflict with the Copyright Act itself by protecting otherwise unprotectable material. If state law provided that a copyright holder could bar fair use of the copyrighted material by placing a black dot on each copy of the work offered for sale, there would be no question but that the state law would be preempted. A state law that allowed a copyright holder to simply label its products so as to eliminate a fair use defense would "substantially impede" the public's right to fair use and allow the copyright holder, through state law, to protect material that the Congress has determined must be free to all under the Copyright Act. See Bonito Boats, 489 U.S. at 157, 109 S.Ct. 971.
I nonetheless agree with the majority opinion that a state can permit parties to contract away a fair use defense or to agree not to engage in uses of copyrighted material that are permitted by the copyright law, if the contract is freely negotiated. See, e.g., Nat'l Car Rental Sys., Inc. v. Computer Assocs. Int'l, Inc., 991 F.2d 426 (8th Cir.1993); Acorn Structures v. Swantz, 846 F.2d 923, 926 (4th Cir.1988). See also Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488 (5th Cir.1990). But see Wrench LLC v. Taco Bell Corp., 256 F.3d 446, 457 (6th Cir.2001) ("If the promise amounts only to a promise to refrain from reproducing, performing, distributing or displaying the work, then the contract claim is preempted."). A freely negotiated agreement represents the "extra element" that prevents preemption of a state law claim that would otherwise be identical to the infringement claim barred by the fair use defense of reverse engineering. See Data Gen., 36 F.3d at 1164-65.
However, state law giving effect to shrinkwrap licenses is no different in substance from a hypothetical black dot law. Like any other contract of adhesion, the only choice offered to the purchaser is to avoid making the purchase in the first place. See Fuentes v. Shevin, 407 U.S. 67, 95, 92 S.Ct. 1983, 32 L.Ed.2d 556 (1972). State law thus gives the copyright holder the ability to eliminate the fair use defense in each and every instance at its option. In doing so, as the majority concedes, it authorizes "shrinkwrap agreements ... [that] are far broader than the protection afforded by copyright law." Ante at 1326.
There is, moreover, no logical stopping point to the majority's reasoning. The amici rightly question whether under our original opinion the first sale doctrine and a host of other limitations on copyright protection might be eliminated by shrinkwrap licenses in just this fashion. See Brief for Electric Frontier Foundation et al. as Amici Curiae 10. If by printing a few words on the outside of its product a party can eliminate the fair use defense, then it can also, by the same means, restrict a purchaser from asserting the "first sale" defense, embodied in 17 U.S.C. § 109(a), or any other of the protections Congress has afforded the public in the Copyright Act. That means that, under the majority's reasoning, state law could extensively undermine the protections of the Copyright Act.
The Fifth Circuit's decision in Vault directly supports preemption of the shrinkwrap limitation. The majority states that Vault held that "a state law prohibiting all copying of a computer program is preempted by the federal Copyright Act" and then states that "no evidence suggests the First Circuit would extend this concept to include private contractual agreements supported by mutual assent and consideration." Ante at 1325. But, in fact, the Fifth Circuit held that the specific provision of state law that authorized contracts prohibiting reverse engineering, decompilation, or disassembly of computer programs was preempted by federal law because it conflicted with a portion of the Copyright Act and because it "`touche[d] upon an area' of federal copyright law." 847 F.2d at 269-70 (quoting Sears, Roebuck, 376 U.S. at 229, 84 S.Ct. 784). From a preemption standpoint, there is no distinction between a state law that explicitly validates a contract that restricts reverse engineering (Vault) and general common law that permits such a restriction (as here). On the contrary, the preemption clause of the Copyright Act makes clear that it covers "any such right or equivalent right in any such work under the common law or statutes of any State." 17 U.S.C. § 301(a) (2000) (emphasis added).
I do not read ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996), the only other court of appeals shrinkwrap case, as being to the contrary, even though it contains broad language stating that "a simple two-party contract is not `equivalent to any of the exclusive rights within the general scope of copyright.'" Id. at 1455. In ProCD, the Seventh Circuit validated a shrinkwrap license that restricted the use of a CD-ROM to non-commercial purposes, which the defendant had violated by charging users a fee to access the CD-ROM over the Internet. The court held that the restriction to non-commercial use of the program was not equivalent to any rights protected by the Copyright Act. Rather, the "contract reflect[ed] private ordering, essential to efficient functioning of markets." Id. at 1455. The court saw the licensor as legitimately seeking to distinguish between personal and commercial use. "ProCD offers software and data for two prices: one for personal use, a higher prices for commercial use," the court said. The defendant "wants to use the data without paying the seller's price." Id. at 1454. The court also emphasized that the license "would not withdraw any information from the public domain" because all of the information on the CD-ROM was publicly available. Id. at 1455.
The case before us is different from ProCD. The Copyright Act does not confer a right to pay the same amount for commercial and personal use. It does, however, confer a right to fair use, 17 U.S.C. § 107, which we have held encompasses reverse engineering.
ProCD and the other contract cases are also careful not to create a blanket rule that all contracts will escape preemption. The court in that case emphasized that "we think it prudent to refrain from adopting a rule that anything with the label `contract' is necessarily outside the preemption clause." 86 F.3d at 1455. It also noted with approval another court's "recogni[tion of] the possibility that some applications of the law of contract could interfere with the attainment of national objectives and therefore come within the domain" of the Copyright Act. Id. The Eighth Circuit too cautioned in National Car Rental that a contractual restriction could impermissibly "protect rights equivalent to the exclusive copyright rights." 991 F.2d at 432.
I conclude that Vault states the correct rule; that state law authorizing shrinkwrap licenses that prohibit reverse engineering is preempted; and that the First Circuit would so hold because the extra element here "merely concerns the extent to which authors and their licensees can prohibit unauthorized copying by third parties." Data Gen., 36 F.3d at 1165 (emphasis in original). I respectfully dissent.