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.

and

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.