Wednesday, September 22, 2010

Vernor v. Autodesk Three-Pronged Ownership Test Is Fatally Flawed

On appeal in Vernor v. Autodesk, the court defined a new three-pronged test for determining whether a user of software is an "owner" or merely a "licensee" within the meaning of sections 109 and 117 of the Copyright Act. It is my opinion that this new three-pronged test is fatally flawed.

First, let's introduce the three-pronged test:

a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.

Now let's apply this new test to some hypothetical cases. In doing so we'll demonstrate how the test fails to correctly determine whether or not the user is the owner of the copy. I've chosen these particular hypothetical cases because it is otherwise quite clear from the facts of the cases whether the user is or is not the owner of the copy. The first hypothetical case shows that application of the three-pronged test can lead to the incorrect conclusion that a user is an owner of a particular copy:

Alice asks Bob if she can use a copy of a program Bob wrote. Bob copies the program to his own USB flash drive and loans it to Alice. A week later, Bob asks to have the flash drive back, but Alice says she sold the USB drive to Charlie. Bob sues Alice for infringing his exclusive right to distribute copies of his program. Alice asserts she had a right to sell the copy under the first-sale doctrine.

The court must now decide whether or not Alice was an "owner of a copy" in order to determine if she can claim protection under the first-sale doctrine. Applying the three-pronged test:

  1. Bob did not grant a license to Alice;

  2. Bob did not specifically restrict Alice's ability to transfer the program; and

  3. Bob did not impose any use restrictions.

It is clear from the facts that Alice is not an "owner of a copy". The USB drive, which is Bob's property, is the copy. Bob merely loaned the USB drive to Alice; he never transferred ownership of it to her. However, according to the three-pronged test, Alice clearly was an "owner of a copy" and therefore had a right, under the first-sale doctrine, to sell the copy to Charlie. The test fails to recognize that Bob was always the owner of the USB drive. And since the USB drive is the copy, Bob was always the owner of the copy. The fact that Bob didn't extend any license to any of Bob's copyrights simply has no bearing on who owns the USB drive and, hence, who owns the copy. If we stick to the three-pronged test, we must somehow explain how ownership of the USB drive was implicitly transferred to Alice (even though Bob's and Alice's original agreement was that the USB drive was merely loaned to Alice).

In the next hypothetical case, we demonstrate that the opposite outcome is also possible. That is, application of the three-pronged test may lead to the incorrect conclusion that a user is not the owner of a particular copy. The facts in this case are similar to the first, but this time the program is copied to Alice's USB drive and Bob additionally grants Alice a limited license:

Alice asks Bob if she can use a copy of a program Bob wrote. Bob copies the program to Alice's USB flash drive. Bob tells Alice he grants her permission to make more copies of the program, provided she doesn't give any copies to anyone else and provided she promises to only use the program for working on a specific school project. Alice never makes any other copies of the program. Later, she sells her USB drive to Charlie. Bob finds out about the sale and sues Alice for contributory copyright infringement. Alice again claims she is protected by the first-sale doctrine.

Once again, the court must determine whether or not Alice was an "owner of a copy" in order to determine if she can claim protection under the first-sale doctrine. Applying the three-pronged test:

  1. Bob granted Alice a license;

  2. Bob's license restricts Alice's ability to transfer the software; and

  3. Bob's license imposes significant use restrictions.

It is clear from the facts that Alice is the owner of the copy -- the USB drive belongs to her. However, according to the test, Alice was merely a "licensee" and not an "owner of a copy". The test fails to recognize that Alice was always the owner of the USB drive. And, again, since the USB drive is the copy, Alice was always the owner of the copy. It also fails to recognize that Alice was both an owner and a licensee. If we stick to the three-pronged test, we must somehow explain how ownership of the USB drive automatically transferred to Bob once his program was copied to it.

The reason the test fails is three-fold:

  1. The test relies on a logical fallacy known as "begging the question": the premise of the test, that the terms in the license are valid and binding upon the user (i.e. "the user is merely a licensee"), depends on the truth of the very matter in question (i.e. "is the user merely a licensee?").

  2. There is an implicit and incorrect assumption within the test that a user can be either an "owner" or a "licensee", but not both (if you are a "licensee", then you are not an "owner of a copy").

  3. The test assumes that ownership of a material object can be determined solely by looking to the terms of a license of intangible rights which may be completely unrelated to the transaction in which the user obtained possession, and possibly ownership, of the material object.

Because ownership of a copy of software is inseparably tied to ownership of the material object in which the software is fixed (i.e. the media it is recorded on), the question of ownership of the copy must look at how the user came into possession of the material object and whether or not the transfer of possession also transferred ownership. Any licenses of copyrights are entirely orthogonal to the question of ownership of the material object. In our second hypothetical case, Alice clearly owns her USB drive; the terms of Bob's license agreement allowing her to make additional copies is simply irrelevant -- yet the Vernor court's test would have us rely solely on the content of Bob's irrelevant license agreement.

In summary, application of the Vernor v. Autodesk three-pronged ownership test can be shown to reach the wrong result. The test fails because:

  • it is based on a logical fallacy;

  • it doesn't recognize that licensees can simultaneously be owners of copies; and

  • it confuses the act of licensing intangible rights with the transfer of ownership of material objects.

Tuesday, July 27, 2010

The Third Chamber of Congress

No too long ago, the Software & Information Industry Association (SIIA) wrote an amicus brief in support of Blizzard in the infamous MDY v. Blizzard case. Within that brief, the SIIA wrote:

Today, licenses govern most mass market software transactions, and the software industry has grown to over $500 billion in annual revenues.

Here the SIIA points out that the $500 billion software industry almost exclusively uses so-called "licenses" to distribute their products. The appeals court will hopefully carefully take note of this fact, because it is an indicator of what will happen to our country's copyright laws if the district court's MDY v. Blizzard decision is upheld.

The thing is that section 117 of the Copyright Act only has meaning if users of software own the copies of software that they use. If the copyright owners own all of the copies, then there is nobody who is affected by section 117. Section 117 would basically become a dead law. A ghost-town within the law books, complete with chirping crickets and tumbleweeds. It might as well just be dropped from the books.

In other words, by allowing the SIIA and the companies it represents to unilaterally claim that all software is licensed, not sold, the courts would effectively be promoting the software industry to the position of the Third Chamber of Congress. It would give the software industry the ability to write their own "laws" about what actions (or inactions!) would constitute copyright infringement anywhere software is involved. This is because, without section 117, EULAs would be the only voice that would determine what is and what is not copyright infringement. Imagine that a company would get to decide what rules consumers will need to follow, lest they be hammered by the full force of copyright law complete with its exorbitant statutory damages and even criminal penalties. This is a pretty scary prospect, and is a prospect that the appeals court should not take lightly when considering MDY v. Blizzard.

Thoughts on MDY v. Blizzard

A commenter recently asked what I thought about the MDY v. Blizzard case. For the most part, I think the court makes the same mistakes that we've seen in other cases. The court surmises that simply because the EULA states that the software is licensed, then it must be true. Ergo, they say, the user is a licensee, not an owner of the software and section 117 does not apply.

According to the court, the only thing that makes the transfer of a copy of WoW a license instead of a sale, is the EULA itself:

The EULA thus makes clear that Blizzard is granting to its users a license, not ownership, of the copies of the game client software.
The court ignores the fact that by all other accounts, the transaction would perfectly fit the definition of a sale. And what if the buyer rejects the EULA? Then who owns the copy? The EULA doesn't apply if it's rejected, so any requirement within it to return the software is inoperable. It seems to me that the end user would own the copy of WoW in such a case -- then what?

The bottom line in this case is the same as it is everywhere else. The question of ownership turns entirely on who owns the media on which the software resides. In their amicus brief in support of Autodesk in a separate, but similar case, the SIIA refers to the media as, "a worthless plastic CD." This is very telling of the software industry's indifference to who owns the media. And the reason for their visible indifference is because they know they can't demonstrate ownership of the media. After all, what owner in their right mind would allow the property they own to be distributed all around the country, not knowing who possesses it or where it's located? Yet, this is exactly what software companies do.

But why is ownership of the media so key? It's because the media is the copy. The Copyright Act specifically defines it as such. Whoever owns the media, owns the copy. It's really as simple as that. Bought software online? The copy resides on your hard drive? You own the hard drive, you also own the copy. Same goes for the owner of a CD-ROM or floppy disk.

In the case of WoW, it's pretty clear that the users own the media. Again, Blizzard has no idea who possesses the media or where the media is located. It would be quite a stretch for them to claim they own the media. It's even possible to buy WoW as a direct download: there is no media for Blizzard to own, only the user's hard drive. Any claim that Blizzard owns the media (especially if the media is your own hard drive!) is plain nuts, and patently false.

I also find this sentence from the court's opening statements somewhat amusing (emphasis added):

A user can obtain the game client software by purchasing a copy at a retail store or downloading a copy from the WoW website.

Apparently, even the court is still confused as to whether users are licensing or purchasing the copies. I find it telling that they would make such a mistake. I believe the reason for the mistake is because it feels natural to characterize these transactions as purchases/sales, because they seem like it in virtually every way. Even the court can't shake the feeling.

In my opinion, the court was mistaken when it ruled that MDY committed contributory copyright infringement. However, there's more to the MDY case than copyright infringement. There are also questions related to the WoW terms of use (TOU). The TOU of the online services are governed by a completely different set of rules. It seems likely that MDY did cause end users to violate the TOU, and MDY does admit as much.

Wednesday, January 16, 2008

ProCD In Depth

I've been thinking about the ProCD case again lately and would like to do a more detailed review of it. The key point that the court made in the ProCD case was that the clickwrap agreement was part of the contract for sale. In other words, the sale was not complete until Zeidenberg accepted the clickwrap agreement. Zeidenberg had the option of voiding the sale (and returning the software for a refund) if he objected to the clickwrap terms. So is this right? Can a software license agreement be inserted into a contract for sale in this way? I believe the court erred in saying that it can.

To answer this question correctly, I think the proper place to start is an inconspicuous section of the Uniform Commercial Code: section 2-313A. The relevant part of this section is part (3):
  1. If in a record packaged with or accompanying the goods the seller makes an affirmation of fact or promise that relates to the goods, provides a description that relates to the goods, or makes a remedial promise, and the seller reasonably expects the record to be, and the record is, furnished to the remote purchaser, the seller has an obligation to the remote purchaser that:

    1. the goods will conform to the affirmation of fact, promise, or description unless a reasonable person in the position of the remote purchaser would not believe that the affirmation of fact, promise, or description created an obligation; and

    2. the seller will perform the remedial promise.
I'll clarify what this statute means by "remote purchaser". In a chain of distribution, the manufacturer is a seller. Anyone who purchases directly from the manufacturer is an "immediate buyer". The "immediate buyer" may be (and often is) a distributor. Any other buyers in the chain of distribution, for instance retailers or consumers, are "remote purchasers". A retailer might be an immediate buyer if the retailer purchases direct from the manufacturer. Indeed, a consumer might be an immediate buyer if the consumer buys direct from the manufacturer. But in a typical retail transaction, as we have in ProCD, the consumer is a remote purchaser. So when interpreting this section, in typical retail transactions, "seller" can be thought of as "manufacturer" and "remote purchaser" can be thought of as "consumer".

The important thing about this section of the UCC is that it tells us what role the manufacturer plays in subsequent sales further down the chain of distribution. It says that the manufacturer can be obligated to make good on any promises they make to the consumer in statements that are packaged with or accompanying the product. Primarily, this is intended to provide a measure of enforceability to warranty claims, or any other claims in or on the packaging. But this also implies some very important and pertinent things about the intent of the UCC:
  1. A manufacturer is not a party to a contract for sale in a typical retail setting. The purpose of section 2-313A is to establish that a manufacturer has obligations to consumers. If the UCC intended that a manufacturer was considered a party to a retail contract for sale, then this would already be established. Obviously, as a party to the contract, the manufacturer would have obligations to the consumer. There would be no reason for Section 2-313A to spell this out. Furthermore, 2-313A would not need to make the distinction between "remote purchasers" and just regular buyers, since a consumer would not be a "remote purchaser" if the manufacturer was directly involved in the contract.

  2. Notices, from the manufacturer, in or on the product packaging cannot obligate the buyer. If they could, why would Section 2-313A expressly state that such notices obligate only the manufacturer? If they could create an obligation in either direction, wouldn't it be simpler to just say that including notices in the packaging is a valid way of adding terms to the contract?

  3. Notices included in or on the product packaging are not part of the contract for sale. If they were, then as part of the contract, the manufacturer would obviously have an obligation to perform according to those terms and, again, there would be no need for Section 2-313A to spell that out.
In short, section 2-313A exists for the express purpose of creating an obligation that would otherwise not have existed. That is to say, without section 2-313A, manufacturers would have zero obligation to consumers. This implies that, with the exception of the specific terms outlined in section 2-313A, the manufacturer has no part in "remote" contracts for sale. And this is certainly reasonable, since otherwise the manufacturer would have absolutely no control about how many contracts it enters into or with whom it enters into those contracts, as well as not being privy to any additional terms of those contracts.

Applied to the ProCD case, this means that ProCD is not the seller as far as the UCC is concerned. The seller was a retailer (Best Buy by Mr. Zeidenberg's recollection). As the seller, Best Buy had the ability to determine what the terms of the contract were. ProCD's ability to enter into the equation is strictly limited to the role that Section 2-313A gives them. The clickwrap agreement was obviously added by ProCD, not Best Buy. I think this fact alone pretty well puts the key question to rest. The correct answer is "no", clickwrap contracts cannot be construed as being part of the contract for sale. A manufacturer is not a party to retail contracts for sale which they are not directly involved in. Therefore, the manufacturer has no ability to add terms to the contract for sale.

In the interest of thoroughness, we won't stop with that. There are still plenty of points that the court raised in ProCD which, for a detailed review, must be addressed. Let's continue by taking a look at how the court reasoned that the clickwrap license was part of the contract for sale. They start with this:
But one of the terms to which Zeidenberg agreed by purchasing the software is that the transaction was subject to a license.
If this was indeed a term of the contract for sale, that his use of the software was subject to a license, then that term in the contract is without question unconscionable. The reason is that a sale necessarily involves the transfer of ownership -- UCC 2-401(2) tells us this. Saying that his use of the software is subject to a license is equivalent to saying that he does not obtain ownership of the copy of software. Indeed, this is the raison d'ĂȘtre for the infamous phrase "licensed, not sold". Since the fundamental purpose in a contract for sale is to obtain ownership in the product being purchased, there can be no term more unconscionable than one that says "ownership in the product being sold does not transfer to the buyer". Better yet, "this sale is not a really a sale". But telling Zeidenberg that the sale is subject to a license is effectively saying both of these things. Nevertheless, the court insists that Zeidenberg did agree to such a term. Conversely, if Zeidenberg truly obtained ownership in his copy of software, as he must since the court agreed that this was a sale governed by the UCC, then Section 117 of the Copyright Act expressly gives Zeidenberg the right to use his copy of software. ProCD's statement that he must first obtain ProCD's permission before he may use the software is simply false.

Immediately following the above statement, the court continues:
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.
Actually, Zeidenberg's position could also have been that none of the terms on the outside of the box are the parties' contract. After all, the terms on the box were added by ProCD, not by Best Buy. Even if we ignore section 2-313A, or if we assert that Best Buy implicitly added ProCD's terms to the contract, any term stating that the sale was subject to a license would be excluded not because it refers to terms inside the box, but because it is an unconscionable term. Also, if we assume that Best Buy did implicitly add ProCD's terms to the contract, then the contract was still between Best Buy and Zeidenberg, and ProCD had no standing to bring suit.

Next the court sympathizes with ProCD's inability to include the entire license agreement on the outside of the packaging:
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.
Let's be very clear about this: the verbose license terms existed only because ProCD wanted them to, not because the UCC required them. Just because ProCD wishes to complicate an otherwise simple transaction, this by no means provides them with an excuse as to why they may attempt to exempt themselves from the rules imposed by the UCC (that there can be no hidden terms). How can ProCD complain that the terms won't fit on the outside of the box, when it is ProCD themselves who insist that these terms be included in the first place? This is no excuse and the court's use of this rationale is somewhat of a red herring.

Along similar lines, the court continues:
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.
First, the "Read Me" file is not a "term on the inside". Surely the court doesn't suggest that the contents of the "Read Me" file are part of the contract for sale? Of course that is not the case. The "Read Me" file is simply part of the product. That would more accurately be described as "product on the inside", which I'm sure is great for the consumer. As for the warranty, it is expressly covered by the now familiar section 2-313A. Again, this doesn't constitute "terms [of the contract] on the inside", since 2-313A makes a special case for this type of notice on or in the packaging.

Next, the court attempts to justify "money now, terms later" by using other types of familiar transactions. Examples used include: insurance, airline travel, and concert admissions. First, none of these are sales of goods, they're all contracts for services. It's doubtful if the UCC even applies to these transactions. You might be able to argue that tickets (to an airline or a concert) are a "good", but the contract for sale would then only cover the ticket itself, not the services provided later. Any contract covering the services would be separate from the contract for sale (indeed, the Carnival Lines case cited by the court supports this position).

Following on the heels of the above examples of contracts for services, the court attempts to cite a couple of examples where "money now, terms later" is commonplace for actual consumer goods:
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.
Here the court has repeated their earlier warranty mistake. Again, section 2-313A expressly states that a warranty of this type can be established by including a notice inside the box.

The other example they give of "money now, terms later" in the context of an actual consumer good goes:
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.
"Take two tablets every six hours, not to exceed six tablets in a 24-hour period." The court expects us to believe that a statement such as this is somehow part of the contract for sale? Surely that's not the case. The package insert is no more a part of the contract for sale than are instructions for assembly included with cheap furniture.

The court then embarks on a verbose argument about sales of software (portions omitted for brevity's sake):
Only a minority of sales take place over the counter, where there are boxes to peruse. ... 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 ... On Zeidenberg's arguments, these unboxed (sic) 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.
Suddenly, including terms in a contract apparently requires a box. I guess there isn't any technically feasible way for a seller to display a contract before transmitting this stream of electrons. And apparently that contract couldn't say anything like "sold AS IS" to disclaim the implied warranties of merchantability or fitness for a particular purpose. Honestly, I don't understand the fixation with boxes here. Why does the court impart such importance on the existence of boxes? It's as though they believe boxes are the only way to record a contract in a sale of goods, which is ironic because the court seems so intent on driving home the notion that these contracts can be formed in many varied and flexible ways.

The District Court, which ruled in favor of Zeidenberg the first time around (before the case was appealed), felt that the proposed addition of Article 2B to the UCC indicated that drafters of the UCC conceded that shrinkwrap licenses were invalid under the current law. This court disagreed with that stating:
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.
Changing a law to clarify it is one thing. But the plan with Article 2B (which eventually became UCITA) was to add a whole new class of transactions called "licenses". That's not exactly clarifying the law. That's creating a new law. If they felt that licenses should be valid under Article 2, they could very easily have added a single section to Article 2 clarifying that license agreements could be included on or in the packaging of goods, and that such licensing agreements are part of the contract for sale (just as the court is attempting to argue here). But instead, they felt they needed to add an entirely new Article, with dozens upon dozens of new sections to accommodate software licenses. This is incongruous with the court's inference that Article 2B was intended to be mere clarification of existing law. The District Court's argument seems to be rooted in the stronger inference.

Next we get to the issue of the formation of the 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.
Again ProCD, the manufacturer, is being treated as though they are a party to the contract for sale, which simply isn't the case. Best Buy was the vendor. Therefore it was Best Buy that made the offer which Zeidenberg accepted. Best Buy essentially said, "We'll sell you a copy of SelectPhone if you give us $70". Zeidenberg accepted by forking over the money. This is the contract for sale within the meaning of the UCC. But the court would have us believe that the contract was ProCD saying, "We'll let you use our software if you promise to not do this, that or the other with it." That's not a contract for sale at all. There's no mention of anything in there that has anything to do with a sale. To the contrary, there was probably a line in there somewhere that said, "This software is licensed, not sold" which is quite the opposite of what would constitute a contract for sale.

Moving on, the court provides an apt description of the way Zeidenberg accepted ProCD's supposed offer to sell:
He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance.
"He had no choice." That is quite telling of the position that Zeidenberg was in. He was the owner of this copy of software, as UCC 2-401(2) tells us that he must be. Yet he has "no choice" but to accept the license. In other words, he is not free to exercise his Section 117 right to use his copy of software. He is forced to accept in order to exercise his right. That sounds very much like coercion to me. However, it is possible that Zeidenberg happily entered into the license agreement fully voluntarily, not feeling at all coerced. Without testimony from Zeidenberg as to how he felt about accepting the license agreement at the time he assented to it, it's not possible for us to know.

Next the court attempts to find justification within the UCC for putting terms of the contract inside the box, claiming:
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.
Except that inspection of goods, and acceptance of the offer are two different things under the UCC. And the court recognizes this fact:
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
First off, it's not an "opportunity" to return. The seller has an obligation to allow the buyer to return. But I digress. The terms of use are not part of the product, and therefore are not covered by the inspection clause. The court even admits so much, recognizing that there is a difference between accepting the offer and accepting the product. This is no minor detail, since acceptance of the offer is what triggers the formation of the contract. At the end of the day, Section 2-606 is irrelevant to their argument and provides no reinforcement whatsoever.

The court's next point is that the UCC implies that terms of the contract may be so inconspicuous as to be hidden from view, inside the box:
Some portions of the UCC impose additional requirements on the way parties agree on terms. A disclaimer of the implied warranty of merchantability must be "conspicuous." UCC sec. 2-316(2), incorporating UCC sec. 1-201(10). Promises to make firm offers, or to negate oral modifications, must be "separately signed." UCC secs. 2-205, 2-209(2). These special provisos reinforce the impression that, so far as the UCC is concerned, other terms may be as inconspicuous as the forum-selection clause on the back of the cruise ship ticket in Carnival Lines.
First, Carnival Lines is irrelevant as that was a contract to provide services and not governed by the UCC. There is no mention whatsoever of the UCC in the Carnival Lines decision. As for the conspicuousness requirement for disclaimers of warranties, it is clear that the intent of the UCC is that such disclaimers must be in writing and the buyer must be duly notified. This requirement is simply because the implied warranties are of much importance. After all, no one wants to unknowingly buy useless junk. It implies nothing that would indicate that a manufacturer, who is not present, may insert terms into a remote contract for sale.

As a final argument, the court tries to equates the license agreement to a "feature" of the product:
In the end, the terms of the license are conceptually identical to the contents of the package. Just as no court would dream of saying that SelectPhone (trademark) must contain 3,100 phone books rather than 3,000, or must have data no more than 30 days old, or must sell for $100 rather than $150 ... so, we believe, Wisconsin would not let the buyer pick and choose among terms. Terms of use are no less a part of "the product" than are the size of the database and the speed with which the software compiles listings.
As we already discussed, and the court admitted, acceptance of the offer and acceptance of the product are not the same thing. The court has already argued that the license agreement is part of the offer. It cannot also be part of the product. The court can't have it both ways. This is not a matter of a consumer picking among terms of a contract. It's a matter of a consumer ignoring false claims made by a manufacturer.

And that pretty much is the conclusion of their theory as to how the license became part of the contract for sale. I think it is pretty clear that there are a number of weaknesses in this theory that contradict that finding.
  • Section 2-313A shows that ProCD's role in the transaction is limited to the ability to make promises, guarantees, or warranties. ProCD was not a party to the contract. The contract was between Best Buy and Zeidenberg. ProCD had no standing to bring suit for breach of contract.

  • Any term that purports to subject a sale to a license is unconscionable on the grounds that it effectively turns the sale into a non-sale.

  • The court failed to demonstrate that "money now, terms later" is a normal course of dealing within the sale of consumer goods.

  • Acceptance of an offer and acceptance of a good are two different things. The license agreement is clearly not part of the product, therefore rejection of the license agreement is not equivalent to rejection of the product, nor is acceptance of the product acceptance of the license agreement.

One final thought: none of the above precludes a clickwrap license from becoming enforceable if the end-user genuinely voluntarily enters into it. The only thing we've established here is that the license agreement is not part of the contract for sale. But the license agreement could still stand on its own as an independent contract. And this might give some credit to the court's finding. If Zeidenberg entered into the license agreement contract purely voluntarily, then he could still be bound to it. However, this raises the question of whether ProCD failed to offer any consideration. After all, Zeidenberg already owned and could legally use the software, so what is ProCD offering in return? Whether, in this situation, the license is rendered invalid for lack of consideration is a topic for another day.

Thursday, December 13, 2007

The Basics: Start Here

Did you know that you don't own the software that you buy? Any software you've paid for and have in your possession is actually the property of the software company. Yes, that's right. The CDs and DVDs containing the software that you've bought belong to the software companies. They are just letting you use them. Virtually any copy of software you've ever bought is not really yours. They all belong to the software companies. At least this is what the software companies want you to believe.

The software companies call this whole scheme "licensing". Instead of selling you a copy of software, they grant you a license. A license is basically permission to do something that you otherwise would not be allowed to do. Because the copy belongs to the software company, you are not allowed to use it without their permission. So, before you can begin using that copy, you must first get their permission. You get this permission by accepting the license that the software company offers you. Part of that offer includes the "license agreement", sometimes referred to as an EULA (End-User License Agreement). The only way for you to accept the license is to agree to the terms laid out in the license agreement. If you do not agree to all of the terms in the agreement, you will not be granted the license and will not be allowed to use the software. At least, this is how the software companies see it. Not everyone agrees with this view.

The problem with this notion of "software licensing" is that, claims from the software companies aside, there are many indicators that show that you are the true owner of the software. One of the hallmarks of ownership is the exclusive right to possess property for an indefinite amount of time. When you buy software at the store, it is yours to keep until you decide you don't want it anymore. In other words, you have an exclusive, indefinite right to possession of the software. Already, that is starting to sound like ownership. If you live in a state that charges sales tax, then you probably pay sales tax on software that you buy at the store. If the software companies aren't actually selling the software to you, merely licensing it, then you shouldn't have to pay sales tax. But if you do pay sales tax, then this is another indicator that the software is actually being sold to you, not licensed to you. Because you never have to return the software to the software publisher, the transaction in which you obtained the software does not fit the definition of a lease, loan, or rental. The only other reasonably fitting type of transaction that's left is a sale. Under the law, ownership of the goods being sold transfers to the buyer once the transaction is complete. In fact, the law describes the kinds of transactions that constitute sales, and buying software at a store fits the law's description of a sale perfectly.

It doesn't end there. Even before you buy your copy of the software, there are indicators that the software company has already sold the software. In their accounting practices, software companies recognize revenue from retail software as soon as the software is shipped. If the software was truly licensed, then nobody has purchased the license yet and the software companies should be barred, by generally accepted accounting principles, from recognizing revenue until the license has actually been paid for. These revenue recognition practices indicate that the software companies sell the software to their distributors. If a distributor resells a copy of software, they don't need to notify the software company of the transfer. This shows that the software companies are not at all interested in their purported ownership rights over that copy. They are only interested in shipping software and getting money for it. Both of these examples show that the software companies themselves treat the transaction like a sale.

It would appear that the courts are in disagreement as to whether (retail) software is generally sold or licensed. There have been a number of cases that have gone both ways. One camp has opined that the economic and physical realities of the transaction should determine whether it is a license or a sale. The other camp says that if the software companies say it's a license, then it's a license. In my opinion the former are correct and have the stronger argument.

What should this mean then, if software is sold and not licensed? This should mean that buyers of software do not need a license to use the software they buy. If you are the owner of a particular copy of software, you have the legal right to use that software on a computer. There are, however, some things you cannot do with your copy. You can't make copies of it, unless the copies you make are for archival purposes, or if those copies are absolutely necessary in order for you to use the software with a computer. You also can't make any software that is a derivative of the copy you bought. You can't do these things because the software company holds the copyright to the software. The right to make copies and derivative works are exclusive rights given to the copyright holder. When the software company sells you a copy of software, they sell you that particular copy only, they don't sell you the copyright. Nevertheless, as the owner of the copy, you are granted by law the right to use the software with a computer.

So where do "software license agreements" or EULAs fit in to the picture? You have the legal right to use the software. You don't need permission from the software company. You don't need a license from the software company. You don't need to agree to the "license agreement". Herein lies the rub: the software companies continue to insist that you need to agree to the license agreement before you may use the software. In my view, this is illegal interference with your ownership rights. No law, not even copyright law, gives them the right to prevent you from using a copy of software that you own.

I believe that software companies continue to use license agreements because they know that consumers will generally just accept the license agreement, most of the time without even reading it. If you voluntarily accept the agreement without objection, it could very well become a legally binding contract upon you. There is a line of court cases where this has been decided. Nevertheless, if you reject the license agreement, then as the owner of the copy, you should still be allowed to use the software. The problem is that you can't. The software companies force you to accept the license agreement, or you will be unable to install or use the software. Added to this, the "license agreement" usually instructs you to return the software if you don't agree to it. I believe that most people don't understand their rights in this area. Due to this lack of understanding, when faced with this "accept our terms or lose your right to use the software" ultimatum, most people simply agree to the terms because they feel they have no choice. If they reject the terms, they believe they must return the software, and they suspect that they will find substantially similar terms on just about any other competing product.

Whether, as a matter of law, you have a right to use software that you buy, if you are presented with a "license agreement" is still an open question. Copyright law quite clearly states that the owner of a copy of computer software has the right to use that software. What isn't so clear is whether or not, if you reject the terms of a "license agreement", you may still use the software or whether you are obligated to return the software instead. I would argue that you become the owner of the software the instant it is given to you and you part with your money. This argument is backed by the Uniform Commercial Code which plainly states when and how ownership is transferred in a sale. As soon as you become the owner, you can exercise any of your ownership rights even if you never so much as read the "license agreement". There have been court cases where the right to exercise ownership rights over software, in the absence of reading the "license agreement", has been upheld. It seems clear that ownership of the software can't be contingent upon agreeing with the "license agreement". It follows then, that ownership of the software remains even if you reject the "license agreement". Finally, since you own it you should be able to use it despite the fact that you've rejected the "license agreement".

Finally, I would argue that, if it is established that software is sold, not licensed, the mere fact that these agreements are called "license agreements" makes them, at the very least, meaningless. Or maybe even misleading to the point of being fraudulent.

To sum it all up, when you buy software, you own the copy you purchased. As a result, you should be allowed to use that copy even if you reject the "license agreement" or any other contract that comes with the software. However, the legal system hasn't yet made it clear whether this is true, and that really bothers me. A wise old lawyer once told me:
Under the rule of law we are supposed to know what we can and can't do, not have to guess at what will happen after someone sues us and we spend a couple of hundred thousand dollars or more to find out.

-- Ray Beckerman
I, for one, think it's long overdue that we find out just exactly what we can and can't do with the software we buy.

(And Ray, if you ever read this, please forgive me for calling you "old" :)

Friday, November 30, 2007

Installing Click-Wrap Software Is Copyright Infringement

If we subscribe to the view that software is licensed, not sold, then an interesting paradox arises surrounding "click-wrap" software. The end-user gets caught in a Catch-22 in which he or she must accept the EULA before using the software, but cannot do so without first committing an act of copyright infringement.

The problem is that click-wrap EULAs require the user to run the installation program in order to display and accept (or reject) the EULA. Pursuant to section 117 of the Copyright Act, only the owner of the copy of software is authorized under copyright law to use the software with a computer (using the software with a computer necessarily makes copies). This applies just as equally to the installer program.

Under this theory the end-user does not own the copy of the installer program, and is therefore not allowed to even run the installer. Doing so would be a clear act of copyright infringement. How then can the user accept the EULA and begin lawfully using the software?

The only way to avoid this Catch-22 would be to allow the end-user to read and accept or reject the EULA without having to first run any licensed software. This could be done in a couple of ways:
  1. The installer program could be sold outright to the user, so that the user is the owner of the copy of the installer and may therefore legally use the installer.
  2. The end-user could be required to accept the EULA before the software is even handed over to them.
The first option would require the installer program to reside on its own media, because the legal definition of a "copy" means the physical media on which the copy is recorded. The end-user can't own the installer and not own the other software if both the installer and other software are on the same disk. If they are on the same disk, then either the end-user owns both or the end-user owns neither.

The second option would make licensing software more like entering into normal, enforceable, contracts. For instance, the end-user would be presented with the license at the point of sale and would be required to accept it before taking possession of the software. The seller would be required to make acceptance of the software publisher's EULA a condition of the contract for sale. If the buyer refuses to accept the EULA, then the seller refuses to sell the license to the buyer.

Practically no retail software is ever sold in either of the above two ways. Accordingly, if the courts want to decide that software is licensed, not sold, then they must also come to the conclusion that virtually every person who has ever installed "click-wrap" software is a copyright infringer.

The other more sensible option, of course, is to come to the conclusion that the software is sold outright.

Monday, November 12, 2007

ProCD v. Zeidenberg

One of the more important decisions regarding software "license agreements" has been a 1996 Seventh Circuit Court of Appeals case known as ProCD v. Zeidenberg. It has become one of the most cited cases whenever the legitimacy of EULAs is questioned. On appeal, the court ruled that software EULAs are valid contracts, upholding the enforceability of their terms. It's an interesting case particularly because the court upheld the EULA even though the operating assumption was that the software was sold outright, not licensed.
The good news is, however, that there are easily identifiable problems with the court's opinion in this case. These problems should leave enough room for future cases to come to a different conclusion than ProCD.

First, a bit of background about the ProCD case. ProCD sold software at retail outlets. Matthew Zeidenberg was a customer who purchased a copy of ProCD's software from a retailer. Note that Zeidenberg did not purchase the software directly from ProCD. Later, Mr. Zeidenberg engaged in activity that was contrary to the terms of the "license agreement" and ProCD successfully sued Zeidenberg for his breach of the "license agreement".

It's important, when analyzing the court's opinion, to understand that the court treated the transaction like a normal sale of goods:
... 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.
This is an important distinction because this means that Article 2 of the Uniform Commercial Code (UCC) applied to the transaction in which Mr. Zeidenberg purchased his copy of the ProCD software. Indeed, the court relies heavily upon Article 2 of the UCC in formulating its opinion. The text of the opinion makes numerous references to various subsections of UCC Article 2, too many for me to quote all of them here. The question the court decided it needed to address, was whether or not the EULA in ProCD's software constituted a valid contract for sale between ProCD and Mr. Zeidenberg. The court found that it did, based on its interpretation of the UCC.

But this is a case where the legal definition of certain key terms was completely overlooked. It's similar to Apple's licensing blunder, where they've overlooked what the legal definition of what a "copy" is. In the ProCD case, the court overlooked the definition of "contract for sale", which is defined in Sec. 2-106(1):
(1) In this Article unless the context otherwise requires "contract" and "agreement" are limited to those relating to the present or future sale of goods. "Contract for sale" includes both a present sale of goods and a contract to sell goods at a future time. A "sale" consists in the passing of title from the seller to the buyer for a price (Section 2-401). A "present sale" means a sale which is accomplished by the making of the contract.
The key definition in this subsection is that of "sale", the passing of title from the seller to the buyer. This definition tells us that the "contract for sale" covers interaction between the buyer and seller and that the parties to the contract are the buyer and seller. The court in ProCD v. Zeidenberg never answered the question of who, exactly, were the parties to the contract for sale. Since ProCD was not involved in the actual sale, but instead a retailer was, the parties to the contract were in fact the retailer and Mr. Zeidenberg. However, the court repeatedly implied that ProCD was a party to the contract for purposes of interpreting applicable sections of the UCC. This is was an oversight that invalidates much of the court's opinion since they erroneously presumed ProCD into the contract for sale, and based much of their reasoning on this one assumption. All of the court's reasoning that involved the UCC was pretty much misapplied. Here is one such example:
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 soft- ware 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. [emphasis added]
Here the court infers ProCD into the position of the seller, when in fact the seller was the retailer. It was the retailer that made the offer to sell, not ProCD.

A proper analysis of the ProCD case, if you're going to assume that it was an outright sale as the court had done, requires us to view the contract for sale and the EULA as two separate contracts: one between the retailer and Mr. Zeidenberg, and the other between ProCD and Mr. Zeidenberg. The EULA does not automatically become part of the contract for sale just because there is a label on the box indicating that there is an EULA inside. The language was not added by the retailer and was not a term that was agreed upon as part of the sale.

Interestingly, the court does partly agree that the EULA is separate from the contract. Contradicting it's earlier argument that the EULA became part of the contract for sale, the court begins to treat the EULA as part of the product itself, not as part of the contract:
In the end, the terms of the license are con- ceptually identical to the contents of the package.
Terms of use are no less a part of "the product" than are the size of the database and the speed with which the software compiles listings.
The court uses this argument, that the EULA is actually a part of the product, as grounds to argue that Mr. Zeidenberg had the opportunity to inspect and reject the EULA pursuant to UCC Sec. 2-602(1), which gives the buyer the right to inspect and reject the goods. Arguing this, that the EULA is part of the product, puts Mr. Zeidenberg in a highly unusual position. This is because EULAs universally assert that ownership of the software remains with the software publisher. An essential result of the court's argument is that Mr. Zeidenberg was buying these goods only so that he could waive his ownership. This whole notion, that by purchasing goods a consumer is simultaneously waiving their ownership rights is absurd. No reasonable consumer would ever agree to such nonsense. I can hardly dream up a more unconscionable term in a contract for sale. After all, the purpose of purchasing goods is to obtain ownership in them.

Nevertheless, this situation where, by purchasing a product, the consumer must give up his ownership in the product, is an inescapable consequence of the court's reasoning. This is exactly why normally software publishers insist that their software is licensed, not sold. By selling permission to use software, publishers avoid this situation where the consumer is purchasing something meaningless and absurd. Instead of buying an EULA for something already owned, software publishers say, consumers are buying permission to use something they never owned in the first place.

In summary, the court made at least two errors which, if corrected, would completely alter the course of their reasoning:
  1. ProCD was not a party to the contract for sale, the retailer and Mr. Zeidenberg were the parties to the contract. As such, the EULA must be treated as a separate contract.
  2. The EULA is clearly not a part of the goods which must either be accepted or rejected. It would be unconscionable for a consumer to buy something for which they must give up all their ownership rights in order to use.
Addressing these two problems, we quickly find that Mr. Zeidenberg fulfilled all his obligations under the contract for sale and was the rightful owner of the software the moment money changed hands. The software publisher's attempt to force Mr. Zeidenberg to agree to the EULA before being able to use a product that he owns, is an illegal power-grab. The right to regulate use of a copyrighted work is not one of the exclusive rights granted to copyright holders. ProCD had absolutely no right to dictate how Mr. Zeidenberg used the software that he was lawfully entitled to use.