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 useCommerical

Excluding Commercial UsersSoftware = information

Yes No

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

Developer Consumers

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

Developer Windows users

Reverse engineer

Information

License agreement

And . . .

Microsoft DeveloperLicense agreement

Agrees not to make the application for Apple, so . . .

Developer Mac 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 (9th 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 YALE L. J. 1575, 1661 (2002).

Julie E. Cohen & Mark A. Lemley, Patent Scope and Innovation in the Software Industry, 89 CALIFORNIA L. REV. 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 ConsumerLicense agreement

Agrees to restrictions on transfer, so . . .

Consumer 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 BOSTON COLLEGE L. REV 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