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Source:
http://www.utexas.edu/law/journals/tiplj/volumes/vol5iss2/mcdaniel.html#_ftnref212

This is not the entire article. We have reproduced this section only with footnotes.

VI. Preemption

In ProCD Inc. v. Zeidenberg,[186] the Seventh Circuit held that conduct-based license agreements (commonly referred to as “shrinkwrap” agreements) are enforceable.[187] This was the first decision by a federal appeals court validating shrinkwrap license agreements. The decision may extend beyond consumer software transactions and could validate many types of agreements formed on-line and accepted by conduct.[188]

ProCD produced a computer database, SelectPhone, which contained more than 95 million residential and commercial telephone listings from more than 3,000 telephone directories.[189] The database was distributed on CD-ROM and was also available through America Online™ (for a fee).[190] ProCD had spent more than $10 million developing and maintaining the product.[191] They offered two versions: (1) a consumer version (at a price of $150) that permitted only personal use of the product; and (2) a more expensive commercial version that permitted users to create customized searches and to develop marketing and direct mailing lists in accordance with the terms in the shrinkwrap license agreement.[192] The outside of the SelectPhone box contained a notice that use of the software was restricted by a license agreement.[193] The specific terms of the license were detailed in a manual contained in the box and also appeared on the user’s screen each time the user ran the software program.[194] The consumer could not see the terms of the license agreement until after they purchased the product and opened the box.[195]

The defendant, Zeidenberg, purchased the consumer version of the SelectPhone software product, copied data from its database, and distributed the data over the Internet through Silken Mountain Web Services Inc., a corporation founded and controlled by the defendant.[196] Zeidenberg purchased two updates to the database (subject to identical shrinkwrap license restrictions) and distributed them in a similar manner, violating the terms of the shrinkwrap license agreement contained in the consumer version of the product.[197]

The district court held that the shrinkwrap license was not a binding contract because: (1) the license terms were not visible to the consumer at the time of purchase;[198] and (2) federal copyright law preempted enforcement of the license.[199] On the issue of contract formation, the district court held that the contract was formed at the time of purchase and, therefore, the purchaser could not be bound by terms that were unknown at that time.[200] The Seventh Circuit, however, reasoned that by opening and using the software, the defendant agreed to be bound by the terms of the license.[201] It is important to reiterate, however, that only a reference to the license agreement was printed on the outside of the box—the defendant was unable to read the actual license agreement until after the software was purchased.[202]

The district court analyzed the license terms that were unknown to Zeidenberg at the time of purchase under sections 2-207 and 2-209 of the Uniform Commercial Code (UCC).[203] Section 2-207 treats additional written terms sent after acceptance as “proposals for addition to the contract.”[204] Section 2-209 controls proposed modifications to an already formed contract.[205] Under either clause, the new terms of the license agreement would not become a binding part of the agreement unless Zeidenberg expressly agreed to them. Since acceptance by conduct fails to satisfy the requirement of express consent, the district court concluded that the shrinkwrap license was unenforceable.[206]

In contrast, the Seventh Circuit relied upon an analysis of section 2-204 of the UCC, which allows a contract to be “made in any manner” including conduct.[207] According to the Seventh Circuit, ProCD was entitled to define how its offer could be accepted.[208] The court also relied upon section 2-606 of the UCC, which provides that a buyer has accepted goods if, having had an opportunity to inspect the goods, the buyer fails to reject them.[209] Under the license agreement, ProCD offered Zeidenberg a full refund if he rejected the terms of the shrinkwrap license and returned the SelectPhone product.[210] Zeidenberg did not take this option. The Seventh Circuit held that he thereby accepted the license terms.[211] This reasoning suggests that the terms of a shrinkwrap license are an element of the goods, rather than a separate agreement relating to the goods.

On the issue of preemption,[212] the district court held that section 301 of the 1976 Copyright Act prevents enforcement of shrinkwrap licenses.[213] This section preempts any legal or equitable rights under state law that are equivalent to any of the exclusive rights contained in section 106 of the 1976 Copyright Act, and that are within the subject matter of copyright, as defined by sections 102 and 103 of the Act.[214] The Seventh Circuit found that “courts usually read preemption clauses to leave private contracts unaffected.”[215] The court added that regardless of how restrictive a license agreement is, “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.”[216]

The Seventh Circuit further noted the economic benefit derived from ProCD’s engagement in “price discrimination.” By charging different prices to different groups of users, software vendors were allowed to expand the overall market. The enforceability of the shrinkwrap license agreements is key to separating customers into “consumer” and “commercial” groups. The Court concluded that consumers benefit from the enforceability of the shrinkwrap license terms by getting the product at a reduced cost.[217]

[186] 86 F.3d 1447, 39 U.S.P.Q.2d (BNA) 1161 (7th Cir. 1996) (Easterbrook, J.) (hereinafter ProCD II).

[187] Id. at 1449, 39 U.S.P.Q.2d at 1161.

[188] This case is more of a contract case than a copyright infringement case. The parties focused on the enforceability of the underlying shrinkwrap agreement rather than issue of copyright infringement because the defendant copied only the plaintiff’s uncopyrightable data rather than the plaintiff's copyrighted software. See generally Feist Publications v. Rural Tel. Co., 499 U.S. 340, 18 U.S.P.Q.2d (BNA) 1275 (1991). In Feist, the Supreme Court held that certain lists of information (such as directory listings in phone books) are not protected by copyright law. Id. at 360, 18 U.S.P.Q.2d at 1284. Although ProCD II also involved phone book information, the difference in outcome was due to the presence of a supplemental license agreement in ProCD II, 86 F.3d at 1449, 39 U.S.P.Q.2d at 1162. Whether the phone books in Feist could be subject to a binding shrinkwrap license agreement printed on the cover of the phone books is a question that remains unanswered. The Seventh Circuit pointed out that the effort and expense the plaintiff incurred in making the product in ProCD II distinguished it from the product in Feist. Id. at 1450-51, 39 U.S.P.Q.2d at 1162-63. However, it should be noted that under Feist, “sweat of the brow” does not make an otherwise non-copyrightable work copyrightable. Feist, 499 U.S. at 359-60, 18 U.S.P.Q.2d at 1283. The Seventh Circuit also differentiate ProCD II from Feist by pointing out the extra information in the ProCD product—such as SIC codes and addresses—are not available in normal phone books. ProCD II, 86 F.3d at 1450-51, 39 U.S.P.Q.2d at 1162-63. However, Feist did not limit itself to the basic information in phone books, but rather to the non-original, selection, coordination and arrangement of data. Feist, 499 U.S. at 356-61, 18 U.S.P.Q.2d at 1282-84. Such compilations often take little creativity, but lots of work, to arrange.

[189] Pro CD, Inc. v. Zeidenberg, 908 F. Supp. 640, 644, 38 U.S.P.Q.2d (BNA) 1513, 1515 (W.D. Wis. 1996) (reversed ProCD II, 86 F.3d 1447, 39 U.S.P.Q.2d 1161 (7th Cir. 1996)) (hereinafter ProCD I).

[190] ProCD II, 86 F.3d at 1449, 39 U.S.P.Q.2d at 1162.

[191] Id.

[192] Id.

[193] Id. at 1450, 39 U.S.P.Q.2d at 1162.

[194] Id. at 1450-51, 39 U.S.P.Q.2d 1162-63.

[195] Id.

[196] Id. at 1450, 39 U.S.P.Q.2d at 1163.

[197] Id.

[198] ProCD I, 908 F. Supp. at 654-55, 38 U.S.P.Q.2d at 1524.

[199] Id. at 659, 38 U.S.P.Q.2d at 1528.

[200] Id. at 651, 38 U.S.P.Q.2d at 1521.

[201] ProCD II, 86 F.3d at 1450, 39 U.S.P.Q.2d at 1163. However, the court determined that the contract was only binding upon the person who purchased the software from the retailer. “Someone who found a copy … on the street would not be affected by the shrinkwrap license….” Id. at 1454, 39 U.S.P.Q.2d at 1166. Copyright law would of course still protect the application program involved, but the defendant in this case copied the uncopyrightable data, not the program.

[202] Id. at 1451, 39 U.S.P.Q.2d at 1163-64. The Seventh Circuit noted that standardization of contracts has become an important and common practice. Id. (quoting Restatement (2d) of Contracts § 211 cmt. a) Examples used by the court included airplane tickets, concert tickets, insurance policies, and consumer goods. ProCD II at 1451, 39 U.S.P.Q.2d at 1163.

[203] U.C.C. §§ 2-207 & 2-209 (1996).

[204] ProCD I, 908 F. Supp. at 655, 38 U.S.P.Q.2d at 1524.

[205] Id. at 651, 38 U.S.P.Q.2d at 1521.

[206] Id. at 655, 38 U.S.P.Q.2d at 1524.

[207] ProCD II, 86 F.3d at 1452, 39 U.S.P.Q.2d at 1164-65.

[208] Id., 39 U.S.P.Q.2d at 1165.

[209] Id.

[210] Id. at 1452-53, 39 U.S.P.Q.2d at 1165.

[211] Id.

[212] Generally, preemption means that states cannot afford greater protection than federal copyright and patent laws provide. See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 9 U.S.P.Q.2d (BNA) 1847 (1989). In Bonito Boats, Florida tried to make it illegal to copy boat hull designs, and the Supreme Court held that the Florida law was preempted by the patent laws because the hull was functional. Id. at 144, 9 U.S.P.Q.2d at 1849. Here, the Seventh Circuit tried to distance itself from Bonito Boats on two main grounds: (1) ProCD was a private action under common law, not a particular state law; and (2) other simple lists, like customer lists, are often protected by trade secret law. ProCD II, 86 F.3d at 1454, 38 U.S.P.Q.2d at 1166. Obviously, the copier in Bonito Boats needed an original boat hull to copy. Under the court’s reasoning, the manufacturer could have arguably prevented copying by placing a shrinkwrap license agreement on the hull of the boat that stated: “By taking possession of this boat, you agree not to copy the hull design.”

[213] ProCD II, 86 F.3d at 1453, 39 U.S.P.Q.2d at 1165.

[214] Id.

[215] Id. at 1454, 39 U.S.P.Q.2d at 1166.

[216] Id. at 1455, 39 U.S.P.Q.2d at 1167.

[217] Id. at 1454-55, 39 U.S.P.Q.2d at 1166-67.

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