Court: Court of Appeals for the Seventh Circuit; June 20, 1996; Federal Appellate Court
The case involves ProCD, Inc. as the plaintiff and Matthew Zeidenberg and Silken Mountain Web Services, Inc. as defendants, with the United States Court of Appeals for the Seventh Circuit addressing the enforceability of shrinkwrap licenses. The district court previously ruled against enforcement, citing two main reasons: the licenses were not considered contracts due to their placement inside the packaging, and federal law prohibited enforcement even if they were contracts. The appellate court disagreed, asserting that shrinkwrap licenses are enforceable unless their terms violate general contract law principles, such as being unconscionable or illegal. Since no objections to the license terms were raised, the court remanded the case with instructions for judgment in favor of ProCD.
ProCD has developed a database compiling information from over 3,000 telephone directories, which is believed to be non-copyrightable, despite its complexity and originality when compared to a single alphabetical directory referenced in Feist Publications, Inc. v. Rural Telephone Service Co. ProCD markets this database under the trademark SelectPhone on CD-ROM. The shrinkwrap license applies to software packaging that is sealed in plastic, with some vendors activating licenses upon opening the package. ProCD employs a proprietary method for data encryption and provides an application program that enables users to query and manipulate the database through common software tools.
The SelectPhone database, valued at over $10 million to compile and maintain, offers significant utility to various users, particularly manufacturers seeking customer lists. ProCD provides this database at a low price of approximately $150 for personal use, while charging commercial users more to cover costs and generate profit. This pricing strategy is crucial; if ProCD were restricted to a single price, it would need to increase costs significantly, leading to reduced sales and consumer losses. The company employs price discrimination effectively but faces challenges controlling arbitrage, as consumers could resell the software to commercial users. To mitigate this risk, ProCD has implemented a licensing agreement that restricts use to non-commercial purposes, clearly stated on the product packaging and within the software itself.
Matthew Zeidenberg acquired a consumer package of SelectPhone in 1994 and subsequently ignored the accompanying license. He established Silken Mountain Web Services, Inc. to resell the SelectPhone database online at reduced prices compared to ProCD's charges. After purchasing two additional packages with updated databases, he continued to disseminate this information via the internet. ProCD filed a lawsuit seeking an injunction against Zeidenberg for exceeding the rights outlined in the licenses, which were identical across all three packages. The district court deemed the licenses ineffective since their terms were not displayed externally on the packages, ruling that a purchaser cannot be bound by undisclosed terms.
The court treated the licenses as standard contracts governed by common law and the Uniform Commercial Code. Zeidenberg did not contest that his corporation was subject to the same restrictions as himself, acknowledging the potential copyright violation of copying the software. He argued that purchasing the software constituted acceptance of an offer, as per Wisconsin law, which requires that contracts only include agreed-upon terms. The judge asserted that hidden terms cannot be agreed upon, but acknowledged that the license was a term of the transaction. Zeidenberg suggested that the visible terms on the packaging constituted the entire contract, excluding those referring to other terms. The court noted the impracticality of placing all contract terms on packaging without sacrificing critical product information. It argued that the practice of including terms in a "Read Me" file and allowing returns if terms are unacceptable provides a beneficial business model for both consumers and sellers. The court concluded that standardization of agreements is vital for efficient mass production and distribution, indicating that Wisconsin has not prohibited such practices in the software industry.
Transactions where payment precedes the communication of detailed terms are prevalent in various industries. In insurance, buyers pay premiums before receiving policy details, which are often irrelevant to the insured's obligations due to this sequence. The use of "binders" allows for immediate coverage, benefiting buyers by reducing transaction costs. Similarly, airline ticket purchases involve payment before receiving the ticket, which contains detailed terms that the traveler accepts by using the ticket, even if those terms later prove disadvantageous. This principle also applies to concert tickets, where attendance implies acceptance of terms stated on the ticket's back.
Consumer goods typically involve immediate payment followed by receipt of terms within the product packaging, such as warranties, which are generally recognized despite arguments against their relevance. Medications include crucial information in package inserts that, under certain interpretations, may be deemed non-binding if not read prior to purchase.
In the software industry, most transactions occur remotely, with users often not interacting with physical products. Software is frequently delivered electronically without prior visibility to terms, leading to questions about contractual obligations. If these interpretations were upheld, it could result in sellers being liable for extensive warranties and damages, significantly increasing costs and complicating sales processes.
The district court ruled that the UCC does not support a "money now, terms later" approach. Wisconsin's UCC aligns with the Official UCC, specifically referencing Wis. Stat. 402.201 as equivalent to UCC 2-201. The court criticized the inference that the American Law Institute's proposal for a new UCC 2-2203, which would validate standard-form user licenses, acknowledges the current invalidity of shrinkwrap licenses. Proposing a textual change does not imply a change in legal effect; it may instead clarify existing rules. Despite extensive academic discussion on shrinkwrap licenses, few cases have addressed the issue, and none involve consumer transactions.
The current UCC allows contracts to be formed through various means, including conduct that demonstrates agreement. In this case, ProCD's contract stipulated that acceptance occurred when the buyer used the software after reading the license. The buyer, Zeidenberg, accepted this condition by using the software, which required license acceptance to proceed. The court acknowledged that while contracts can be formed through simple transactions, the UCC permits alternative methods of agreement. The circumstance is distinguishable from a scenario where unexpected charges are presented after purchase, as consumers can reject such terms and return the product. The UCC does not mandate that sellers enhance buyers' economic benefits.
UCC Section 2-606(1)(b) establishes that a buyer accepts goods if they inspect them and fail to reject them effectively under UCC 2-602(1). In this case, ProCD provided an opportunity for rejection, which Zeidenberg did not utilize after inspecting the software and reviewing the license terms. The UCC highlights the importance of offering a chance for buyers to make informed decisions post-inspection. Certain UCC provisions require specific conditions for disclaimers of warranties or modifications to be valid, emphasizing the need for clarity in contractual terms. However, no Wisconsin or other state cases have mandated special prominence for terms in shrinkwrap licenses, indicating that these terms are integral to the product itself. The court compared the terms of use to the product's physical attributes, asserting that judicial intervention to alter terms would disrupt market dynamics, ultimately harming consumers. The district court ruled that even if shrinkwrap licenses are considered contracts under Wisconsin law, 17 U.S.C. § 301(a) preempts their enforcement, as ProCD's software and data fall within the scope of copyright. The court affirmed that while the software is clearly copyrightable, the data may not meet the originality requirement established in Feist. This conclusion is reinforced by supportive case law and legal commentary.
Section 301(a) of the Copyright Act aims to prevent states from providing special protections to works that are in the public domain, necessitating that "subject matter of copyright" encompasses all works covered under sections 102 and 103, regardless of federal protection. Courts have determined that rights created by contract are not "equivalent to any of the exclusive rights within the general scope of copyright," as established by three appellate court decisions. Unlike copyright, which limits third parties' use of a work, contracts generally bind only the parties involved, allowing outsiders to use the work freely. For instance, a person finding a copy of a software program would not be bound by a shrinkwrap license, although copyright law would restrict copying without permission.
Additionally, trade secrets, such as customer lists, cannot be protected by copyright post-Feist but can be enforced through contract, as established in Kewanee Oil Co. v. Bicron Corp. There is uncertainty whether the 1976 amendment to 301(a) negated Kewanee’s holding, though no evidence of such a change is apparent. Everyday examples illustrate the tension between contract rights and copyright limitations, such as rental agreements for movies or use of databases under educational contracts. In the case at hand, ProCD offers different pricing structures for personal versus commercial use of its software and data, and Zeidenberg's desire to utilize the data without paying the commercial price is challenged by established legal principles that enforce payment for intellectual property, as supported by cases like Aronson v. Quick Point Pencil Co.
Congress has the authority to preempt the enforcement of contracts related to intellectual property; however, courts typically interpret preemption clauses as not affecting private contracts. In American Airlines, Inc. v. Wolens, the Supreme Court examined whether a federal statute that preempts state laws regarding air carrier rates, routes, and services also preempts contract law, concluding that such a broad interpretation would undermine market efficiency by disregarding private ordering. While some contract law principles may hinder consensual transactions, rules that honor private agreements remain unaffected by preemption clauses like 49 U.S.C.App. 1305(a)(1). Similarly, Section 301(a) prevents states from imposing their regulatory frameworks on national objectives but does not impede the enforcement of private transactions in intellectual property. The Court in Wolens advised against a blanket rule that all contracts fall outside preemption due to the unpredictable nature of contract variations. The case of National Car Rental acknowledges that certain contract applications could conflict with national goals, yet general enforcement of shrinkwrap licenses does not present such a conflict. The contract between Aronson and Quick Point Pencil Company, as well as between ProCD and Zeidenberg, does not restrict public access to information, allowing for the continued copying and dissemination of data. Enforcement of licenses may even enhance information accessibility and provide additional consumer benefits, such as extra copying rights or usage flexibility. Ultimately, a simple two-party contract is not equivalent to exclusive copyright rights and can be enforced. The decision was reversed and remanded.
