Shrinkwrap Contracts
Richard Warner
ProCD v. Zeidenberg
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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
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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.
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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.
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It is a common and perfectly legal practice.
Excluding Commercial Users
Commerical
Software =
property
Personal use
Excluding Commercial Users
Software = information
Commercial
Personal
Yes
No
Facts of ProCD v. Zeidenberg
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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
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“Every box containing its consumer
product declares that the software comes
with restrictions stated in an enclosed
license.”
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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
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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
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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
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There are many situations in which the buyer
has no notice of the terms until after
purchase.
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This is typical in insurance and consumer goods.
Why the Issue Matters
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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
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Reverse engineering.
Resale, lending, and giving.
Contracts and Control
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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
License agreement
Microsoft
Information
Developer
Access
Copy of
Windows
Information
Reverse engineer
Consumers
Contractual Prohibition
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Software licenses typically prohibit reverse
engineering.
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In the US, not enforceable in the EU.
Developer
Purchase governed
by a contract
Access
Copy of
Windows
Information
Reverse engineer
So . . .
License agreement
Microsoft
Information
Developer
Access
Copy of
Windows
Information
Reverse engineer
Windows
users
And . . .
License agreement
Microsoft
Developer
Agrees not to make the application for Apple,
so . . .
Developer
Mac users
Reverse Engineering As Fair Use
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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.
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it is done for a legitimate purpose
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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.
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Sega Enters. Ltd. v. Accolade, Inc. 977 F 2d 1510, 1523
– 24 (9th Cir. 1993).
Should the Prohibitions Be Enforced?
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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
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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
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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.”
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17 U.S.C. §109(a)).
A Similar Pattern
License agreement
Microsoft
Consumer
Agrees to restrictions on transfer, so . . .
Consumer
Consumer
No Secondary Market
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Digital copies do not degrade in the way nondigital 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
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We value communication and the
dissemination of knowledge
It is inconsistent with this value to allow
sellers to prohibit
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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?
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“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”
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R. Anthony Reese, The First Sale Doctrine in the Era of Digital
Networks, 44 BOSTON COLLEGE L. REV 577, 614 (2003)
Too Soon?
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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
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The courts have addressed this issue by
invoking
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the distinction between a sale and a license
Adobe v. One Stop
UMG v. Augustino
between a covenant and a condition
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MDY v. Blizzard