January, 1999
87 Calif. L. Rev. 79
LENGTH: 17628 words
SYMPOSIUM: Contract and Copyright
Are Not at War:
A Reply to "The Metamorphosis of
Contract into Expand"
Joel Rothstein Wolfson**
Copyright © 1999 California
Law Review, Inc.
* Joel Rothstein Wolfson is an Associate
General Counsel for The Nasdaq Stock Market, Inc. in Washington,
D.C. He graduated with distinction
in Mathematics from the University of Wisconsin, Madison and holds a J.D.
from Cornell Law School.
SUMMARY:
... This Comment replies to David
Nimmer, Elliot Brown, and Gary N. Frischling's Article that proposes state
legislation declaring contracts
unenforceable if they are "non-negotiable," to the extent they: 1) license
uncopyrightable information; or
2) "abrogate or restrict" fair use. ... Had the Nimmer proposal been the
law and
the shrink-wrap license in ProCD
not been upheld, it is hard to imagine ProCD or any other commercial entity
ever compiling another directory.
... Nasdaq does permit numerous entities to freely redisseminate its data,
but
it does so under a different contractual
structure - a vendor agreement. ... Section (b) of the Nimmer proposal
would declare unenforceable any
clause that "abrogates or restricts" any fair use of the data, as that
concept
is defined under the Copyright Act.
... Since fair use under the Copyright Act does not explicitly regulate
who
can receive data, the D&B clause
would likewise be declared unenforceable under the Nimmer proposal. ...
Moreover, what the Nimmer proposal
explicitly invites is state law interpretations of what is copyrightable
and
what is fair use under federal copyright
law. ... That is, the authors argue that if ProCD is present law and
Article 2B incorporates ProCD into
a statutory enactment, and any contract is thus free of any preemption
from the Copyright Act, then state
contract law must have a provision, namely, the Nimmer proposal, that
provides the same result under state
law that section 301 would have provided. ...
TEXT:
[*79]
This Comment replies to David Nimmer,
Elliot Brown, and Gary N. Frischling's Article that proposes state
legislation declaring contracts
unenforceable if they are "non-negotiable," to the extent they: 1) license
uncopyrightable information; or
2) "abrogate or restrict" fair use. Both prongs create unintended consequences
that far outweigh benefits because:
1) uncopyrightable information is a fast growing and socially important
industry; and 2) contractual restrictions
on fair use serve important purposes (such as protecting privacy or
guarding against piracy). This Comment
observes that a test of "non-negotiability" would prove unsustainable
in practice, and that what the authors
propose would not produce good law. This Comment suggests instead
that we let courts use their existing
powers to police oppressive terms or take the matter to Congress.
Introduction
In their Article The Metamorphosis
of Contract into Expand, n1 David Nimmer, Elliot Brown, and Gary N.
Frischling take issue with Article
2B of the Uniform Commercial Code (U.C.C.). Specifically, the authors argue
that Article 2B subverts federal
copyright policy by allowing information vendors to protect uncopyrightable
material and to circumvent the fair
use doctrine. As a remedy, they suggest amending Article 2B to prevent
"non-negotiable" contracts from
imposing conditions that would achieve these results.
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n1. David Nimmer et al., The Metamorphosis
of Contract into Expand, 87 Calif. L. Rev. 17 (1999).
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[*80] This proposal (the
Nimmer proposal) is essentially a repackaging of the McManis motion, a
proposal
that the bodies drafting Article
2B have already rejected. n2 Despite the superficial appeal of the McManis
motion - and now of the Nimmer proposal
- this rejection is justified, because both proposals would create
numerous harmful, if unintended,
consequences.
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n2. The first half of the Article
presents a thoughtful and interesting argument that the formalities of
contract
formation may not be necessary in
simple mass-market software transactions. Unfortunately, that argument
does not get the authors where they
want to go - namely, the conclusion that "non-negotiable" contracts
cannot protect uncopyrightable works
or limit "fair use." So the authors shift their discussion to the Boucher
Bill, which the authors champion,
pulling the Article towards a justification of that bill, despite the authors'
own
arguments earlier in the piece.
This Comment focuses on the second half of the Article, in which the authors
advance their proposals to limit
Article 2B's reach. For further discussion of the first half of the Article,
see
infra note 46. The Nimmer proposal,
though closely modeled on the McManis motion and the Boucher Bill, was
not officially presented for adoption;
rather, it is shorthand for the authors' position.
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This Comment has three Parts. Part
I provides a brief legislative history of the McManis motion, which, like
the
Nimmer proposal, sought unsuccessfully
to limit the scope of Article 2B, and then gives a brief overview of the
Nimmer proposal. Part II addresses
the practical difficulties that the Nimmer proposal would create for the
information industries. Finally,
Part III demonstrates how the authors' flawed proposal relies on an erroneous
legal analysis of existing case
law on contract and copyright and therefore is an unnecessary solution
to a
nonexistent problem.
I The Nimmer Proposal and the Rejected
McManis Motion
Article 2B is a proposed addition
to the U.C.C. that would govern licenses of information and software
transactions. There are two co-sponsors
of the Article 2B effort, the American Law Institute (ALI) and the
National Conference of Commissioners
on Uniform State Laws (NCCUSL). The McManis motion is named for
Professor Charles McManis of the
Washington University School of Law, who introduced the following proposal
at the 1997 Annual ALI Meeting:
I move that Section 2B-308 n3 of
the Discussion Draft of Uniform Commercial Code Article 2B (dated April
14,
1997) be amended by adding the following
section (h):
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n3. At the time, 2B-308 was the section
of Article 2B that dealt with "mass-market transactions" - the
concept analogous to the Nimmer
proposal's "non-negotiable license." In the April 1997 Draft of Article
2B, a
"mass-market transaction" was defined
in 2B-102(26), in part, as:
[A] transaction in a retail market
for information involving information directed to the general public as
a whole
under substantially the same terms
for the same information, and involving an end user licensee that acquired
the information in a transaction
under terms and in a quantity consistent with an ordinary transaction in
the
general retail distribution.
Id. [All versions of Article 2B
are available on the Internet. See National Conference of Commissioners
on
Uniform State Laws, Drafts of Uniform
and Model Acts of Official Site (last modified Sept. 2, 1998)
<http://www.law.upenn.edu/library/ulc/ulc.htm>.
The Official Site offers the Article 2B drafts in several file
formats, among which the pagination
is inconsistent. In this Comment and throughout this issue of the
California Law Review, page references
are to the pages as they are numbered in the Acrobat PDF file format.
Only the prefaces to the drafts
are cited by page number; all other material is cited by section number.
The
draft of August 1, 1998, has no
page numbers in its on-line version, and therefore the preface of that
draft is
cited without page references. Ed.]
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[*81] (h) A term that
is inconsistent with 17 U.S.C. Section 102(b) or with the limitations on
exclusive rights
contained in 17 U.S.C. Sections
107-112 and 117 cannot become part of a contract under this section. n4
The discussion of the McManis motion
at the 1997 Annual ALI meeting was relatively short, and it passed by a
razor-thin margin of 86-84. Thereafter,
both the information industries and the federal agencies that oversee
them mobilized to inform the other
co-sponsor of the Article 2B, NCCUSL, of the effects of the motion. n5
At
its 1997 Annual Meeting, NCCUSL
adopted the following motion:
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n4. The motion and Professor McManis'
supporting memorandum can be found at
<http://www.ali.org/ALI/McManis.htm>
(visited Oct. 30, 1998).
n5. Letters were submitted by the
United States Securities and Exchange Commission, the United States
Commodity Futures Trading Commission,
the Information Industry Association (representing over 550
information providers), the Consolidated
Tape Administration (representing a number of securities markets
including the New York Stock Exchange,
The Nasdaq Stock Market, Inc., and the American Stock Exchange), a
separate letter from the Chair of
The Nasdaq Stock Market, Inc., the New York Mercantile Exchange, the
Options Price Reporting Authority,
and the Chicago Mercantile Exchange along with the Chicago Board of
Trade. Copies of some of these submissions
can be found at
<http://www.softwareindustry.org/issues/guide/nccusl.html>
(visited Sept. 24, 1998).
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In light of the significant concerns
expressed by federal regulatory agencies, the major stock, commodity and
mercantile exchanges and the software,
publishing, entertainment and information industries, the Committee of
the Whole believes that Article
2B should not address in its text the subject matter of the so-called McManis
Motion, but should adopt a position
of neutrality on the issues which are being actively debated at federal
and
international levels. This position
of neutrality should be stated in the Official Comments. In light of the
concerns articulated and this view,
the Committee of the Whole respectfully suggests that ALI revisit the
position expressed in a narrow vote
at its 1997 Annual Meeting. n6
Thus, NCCUSL not only rejected the
McManis motion, but also took the unusual step of asking the ALI to
reconsider its adoption of the McManis
motion. The NCCUSL motion passed by a voice vote. Of the almost 400
delegates in the room, fewer than
ten appeared to vote against the NCCUSL motion. Next, the Article 2B
Drafting Committee [*82]
took up the McManis motion. After an hours-long debate, it is fair to say
that the
Committee had little interest in
the McManis motion. In fact, no one on the Drafting Committee moved to
adopt the McManis motion, or anything
like it.
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n6. The text of this motion can be
found in a report about the meeting, at
<http://www.softwareindustry.org/issues/guide/nmtgrpt.html>
(visited Sept. 24, 1998).
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Finally, the McManis motion was broadened
and reintroduced at the 1998 ALI Annual Meeting. It provided:
The current draft of proposed UCC
Article 2B has not reached an acceptable balance in its provisions
concerning mass-market licenses
(2B-208) and the relationship between Article 2B and federal law (2B-105).
Section 2B-208 reflects a persistent
licensor bias that permeates the entire draft, substantially alters
established principles of contract
law, and creates a serious risk of conflict with, and eventual preemption
in
whole or in part by, federal copyright
and/or patent law. Section 2B-105, while paying lip-service to the
supremacy of federal law, does nothing
to eliminate or reduce that risk of conflict, nor does it provide
contracting parties or the courts
with any meaningful guidance about how to avoid such conflicts. A
fundamental change in approach is
therefore needed to avoid the potential for conflict, not only between
2B-208 and federal law, but also
between U.S. law and various bodies of international and foreign law. n7
As the motion's supporting memorandum
makes clear, the 1998 version of the McManis motion not only sought
to reintroduce the wording of the
original 1997 version, but also offered four other alternatives to accomplish
the same end. Professor McManis
attributed two of these alternatives to papers presented at the April 1998
Berkeley conference that gave rise
to this Symposium. n8 After lengthy discussion, a voice vote was taken
on
the 1998 McManis motion. The vote
was overwhelming in its rejection, so much so that the Chair did not even
ask for a raising of hands to confirm
the outcome (as the Chair did for some other motions made at the same
session).
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n7. The motion and Professor McManis'
supporting memorandum can be found at
<http://www.ali.org/ALI/McManis2.htm>
(last modified May 5, 1998) [hereinafter 1998 McManis Motion].
Detailed counter memoranda by Holly
Towle, <http://www.ali.org/ALI/towle2.htm> (last modified May 8,
1998), and this Comment's author,
<http://www.ali.org/ALI/wolfson.htm>" (last modified May 13, 1998),
can
also be found.
n8. See 1998 McManis Motion, supra
note 7, at 5-7.
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Now Nimmer and his co-authors have
proposed their own amendment to Article 2B. The Nimmer proposal
reads:
When a work is distributed to the
public subject to non-negotiable license terms, such terms shall not be
enforceable [ ] to the extent that
they - (1) limit the reproduction, adaptation, distribution, performance,
or
display, by means of transmission
or otherwise, of material that is uncopyrightable under section 102(b)
[of
the Copyright Act] or otherwise;
or (2) abrogate or [*83] restrict the limitations on exclusive
rights specified
in sections 107 through 114 and
sections 117 and 118 of [the Copyright Act]. n9
The Nimmer proposal thus follows
in the footsteps of the McManis motion, while broadening its scope and
altering some of its details. The
McManis motion was cast as an amendment to section 308 of Article 2B and
thus limited itself to "mass-market
transactions," that is, licenses of products found in a retail market with
quantities consistent with typical
purchases in that marketplace. The Nimmer proposal extends to a far
broader category of licenses, which
could well include large procurements between sophisticated parties where
the recipient of the standard form
has reviewed the form, but because it appears acceptable, chooses not to
negotiate the terms. Likewise, the
McManis motion limited itself to a "term that is inconsistent with 17 U.S.C.
Section 102(b)," n10 whereas the
Nimmer proposal covers any limitation on "reproduction, adaptation,
distribution, performance, or display,
by means of transmission or otherwise," not just that which is
inconsistent. The Nimmer proposal
also extends its prohibitions to "material that is uncopyrightable under
Section 102(b) or otherwise." n11
Finally, the McManis motion declares unenforceable limitations inconsistent
with "17 U.S.C. Sections 107-112
and 117," whereas the Nimmer proposal extends to "sections 107 through
114 and sections 117 and 118."
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n9. Nimmer et al., supra note 1, at 72.
n10. 17 U.S.C. 102(b) provides:
In no case does copyright protection
for an original work of authorship extend to any idea, procedure,
process, system, method of operation,
concept, principle, or discovery, regardless of the form in which it is
described, explained, illustrated,
or embodied in such work.
n11. Id. Nimmer et al., supra note
1, at 72 (emphasis added).
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The Nimmer proposal raises several
interesting points. First, it declares unenforceable terms that purport
to
deal with "reproduction, adaptation,
distribution, performance, or display, by means of transmission or
otherwise" that the authors contend
are (and I will refer to as) the "exclusive rights" of a copyright owner
under section 102 of the Copyright
Act when the license deals with "material that is uncopyrightable under
section 102(b) [of the Copyright
Act] or otherwise." Second, it declares unenforceable terms that purport
to
deal with exclusive rights where
the terms "abrogate or restrict the limitations on exclusive rights specified
in
sections 107 through 114 and sections
117 and 118 of [the Copyright Act]." Third, it declares the above types
of terms unenforceable only when
they are "non-negotiable license terms."
[*84]
II The Harmful Unintended Consequences
of the Nimmer Proposal
The Nimmer proposal would have several
harmful unintended consequences for the information industries.
Before turning to the flaws in the
authors' legal analysis, then, I shall address four key areas where adoption
of the Nimmer proposal would create
undesirable outcomes: (1) denying protection to socially valuable but
uncopyrightable information; (2)
guaranteeing abuse of the "fair use" doctrine; (3) raising the ire of the
United
States' trading partners; and (4)
creating an unworkable rule for "non-negotiable" contracts. Even if the
current state of the law were as
troublesome as the authors claim it is, that would still not justify legislation
that would produce so many harmful
results in the real world.
A. The Growing Importance of Uncopyrightable
Information
An increasing proportion of the
value of the United States economy depends on the creation and compilation
of information "that is uncopyrightable
under section 102(b) [of the Copyright Act] or otherwise," n12 for
which contract is the chief, and
sometimes the only, means of protection. Yet the authors would apparently
deny such information any contractual
protection from unauthorized copying.
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n12. Id.
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A recent study highlights the importance
of the information industries to the United States economy. Just in
the last year, the American Electronics
Association published Cybernation, a study of the importance of
high-technology industries to the
economy. n13 The study contained statistics about the growth of the
"information retrieval services"
sector of the high-technology industry. While the category includes purveyors
of both copyrighted and non-copyrighted
information, there is no reason to believe that the uncopyrighted
portion of the sector is growing
any slower than the information sector as a whole. In tabular form, the
study
reported the following growth pattern:
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n13. See American Electronics Association,
Cybernation (1998). In the interest of full disclosure, I note that
this study was partially funded
by The Nasdaq Stock Market, Inc.
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[SEE TABLE IN ORIGINAL] [*85]
These conclusions are similar to those published in the 1998 U.S. Industry
and Trade Outlook. Discussing a
segment of the information industry termed "electronic information services,"
that report stated:
This subsector grew at close to
9 percent on average between 1994 and 1996. Export revenues from this
subsector were $ 1.3 million in
1995, an increase of almost 15 percent. Exports increased at an average
of 28
percent a year between 1992 and
1995, and strong export growth is expected to continue....Estimates,
though sketchy, indicate that consumer
on-line services had on the order of 9 to 11 million subscribers in
1995, a 70 to 100 percent increase
over 1994. Growth of this magnitude will probably continue through 2000.
n14
Similarly, a 1998 study by Laura
D'Andrea Tyson and Edward F. Sherry summarizes various statistics on what
they term the "database industry":
n15
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n14. Dep't of Commerce, U.S. Industry & Trade Outlook "98 26-28 (1998).
n15. Laura D'Andrea Tyson & Edward
F. Sherry, Statutory Protection for Databases: Economic and Public
Policy Issues 9 (1998) <http://www.house.gov/judiciary/41118.htm>
(visited Sept. 24, 1998). Reprinted with
permission.
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[SEE TABLE IN ORIGINAL] [*86]
In addition to these studies, recent
cases illustrate the principle that important information products are
often
not protected - or are only weakly
protected - by copyright. A good start is ProCD v. Zeidenberg. n16 There,
ProCD had produced a CD-ROM of 95,000,000
residential and commercial telephone listings compiled from
approximately 3,000 publicly available
telephone books. n17 As the Court of Appeals noted, ProCD spent over $
10,000,000 to compile the information
from the directories onto its CD-ROM. n18 Unquestionably, a CD-ROM of
telephone directories is a socially
useful product that costs millions of dollars to produce, verify, market,
support, and update. Yet, copyright
protection was completely unavailable to protect ProCD from a graduate
student, Matthew Zeidenberg, who
took the entire CD-ROM and posted it on the Internet in competition with
ProCD. Needless to say, Zeidenberg
incurred none of the costs of producing the CD, but used it to attract
20,000 hits per day on his World
Wide Web site. n19
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n16. 908 F. Supp. 640 (W.D. Wis.), rev'd, 86 F.3d 1447 (7th Cir. 1996).
n17. See 908 F. Supp. at 644.
n18. See 86 F.3d at 1449.
n19. See 908 F. Supp. at 646.
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Were it not for the ability of ProCD
to protect its product contractually, ProCD would have had no cause of
action against Zeidenberg, who would
have been free to reap what he had not sown. Had the Nimmer proposal
been the law and the shrink-wrap
license in ProCD not been upheld, it is hard to imagine ProCD or any other
commercial entity ever compiling
another directory. Intentional or not, one consequence of the Nimmer
proposal would be the loss of many
such economically useful, but non-copyrightable, databases.
A similar situation was presented
in Warren Publishing Co. v. Microdos Data Corp. n20 There, Warren, the
publisher of the Television &
Cable Factbook, sued Microdos, which had scanned the entire book and then
sold
a CD-ROM of the same information
in competition with Warren's paper publication. The Factbook has been
published every year since 1948.
The portion of the Factbook involved in the litigation contained approximately
1,340 pages of data on 8,413 cable
systems and their owners. A directory section provided addresses and
telephone numbers for these systems,
as well as viewership and programming [*87] information. n21
Warren
is a small family-owned business.
It employs a staff that each year re-surveys and re-verifies the information
in the Factbook. While the Factbook
is a valuable source of information (I have consulted it in my own
practice), this information is collected
by survey, much the way census data is collected. As the Supreme
Court noted in Feist Publications,
Inc. v. Rural Telephone Service Co., n22 this type of survey data does
not
enjoy copyright protection:
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n20. 115 F.3d 1509 (11th Cir. 1997).
n21. See id. at 1511-12.
n22. 499 U.S. 340 (1991).
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One who discovers a fact is not
its "maker" or "originator." The discoverer merely finds and records.
Census-takers, for example, do not
"create" the population figures that emerge from their efforts; in a sense,
they copy these figures from the
world around them. Census data therefore do not trigger copyright because
these data are not "original" in
the constitutional sense. The same is true of all facts - scientific, historical,
biographical, and news of the day.
"They may not be copyrighted and are part of the public domain available
to every person." n23
Relying on Feist and its own opinion
in BellSouth Advertising & Publishing Corp. v. Donnelley Information
Publishing, Inc., n24 the Eleventh
Circuit denied any copyright protection to the Factbook. In other words,
Microdos was free under the Copyright
Act to copy and sell all the information from the Warren Factbook
without expending any of its own
effort or cost. Needless to say, unless Warren can protect its underlying
data through "non-negotiable" licenses,
it has little ability to protect its tremendous yearly investment in
producing the Factbook. This would
be a harsh, and, one would hope, unintended consequence of the Nimmer
proposal. n25
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n23. Id. at 347-48 (alteration in original) (emphases added) (citations omitted).
n24. 999 F.2d 1436 (11th Cir. 1993).
n25. Some have argued that trademark
would have been a substitute cause of action for Warren. For more on
the weakness of this argument, see
infra note 32.
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Thus, the Nimmer proposal would threaten
contractual protection for socially valuable products like those
discussed in the cases above. And,
as is clear from those cases, copyright does not currently protect these
information services. Contract would
seem to be the most flexible, narrowly tailored way to preserve economic
incentives for providing information
products, but that is precisely what would be foreclosed by the Nimmer
proposal.
It might be suggested that special
federal statutory protections for certain kinds of uncopyrightable
information sources might be the
answer to this dilemma. Draft legislation is already pending in Congress
[*88] to protect databases.
n26 But such sui generis protection schemes cannot obviate the need for
contractual protections for two
reasons. First, the scope of such legislative proposals is narrow. The
database
protection bill, for instance, is
limited to the protection of only certain databases. The universe of
uncopyrightable materials presently
protected by contract is much broader, however. Examples include
publishing and distribution agreements
for written and film works that are uncopyrightable because the period
of protection has passed or because
they were improperly marked under United States law prior to 1978, and
agreements protecting trade secrets
and know-how. Even databases would not receive full protection,
because the statutory database scheme
would not eliminate the need to license those databases outside the
United States. Second, as the authors
themselves note, contracts normally work with, rather than in place of,
federal statutory protections. Only
the simplest transactions can be dealt with by statutory protection alone.
Complex, interdependent licensing
requires both contract and federal statutory protection.
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n26. See infra note 86 and accompanying
text.
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B. The Importance of Licenses That
Limit "Fair Use"
The Nimmer proposal also seeks to
invalidate "non-negotiated" licenses that "abrogate or restrict the
limitations on exclusive rights
specified in sections 107 through 114 and sections 117 and 118 of [the
Copyright Act]." But it is easy
to demonstrate that there are many forms of "fair use" that need to be
restricted by contract to ensure
the continuing availability of the information being copied.
I begin with one of my employer's
databases. The Nasdaq Stock Market, Inc., is the second largest stock
market in the United States, and
among the fastest growing markets in the world. Its reported daily share
volume exceeds that of the New York
Stock Exchange. The Nasdaq Stock Market lists about 5,983 companies'
securities. n27 Nasdaq also offers
a forum, the OTC Bulletin Board, where broker-dealers can enter bids to
buy
or sell the tens of thousands of
publicly traded securities that fail to meet Nasdaq's listing requirements.
All in
all, up-to-date quotations of brokers,
dealers, and customer limit orders, as well as information on actual
trades of thousands of companies'
securities - all of which amount to millions of bytes of information each
day
- are packaged by Nasdaq into a
broadcast data feed called the Level 1/Last Sale feed. n28
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n27. These statistics are drawn from <http://www.nasd.com/mr3a.html> (visited Sept. 17, 1998).
n28. More detailed descriptions of
Nasdaq, its markets, and data feeds can be found at
<http://www.nasdaq.com> (visited
Sept. 17, 1998).
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[*89] Not only does Nasdaq
compile this data, it decides which companies will be listed on its market,
and
therefore included in the Nasdaq
Stock Market portion of the Level 1/Last Sale feed. Nasdaq offers an
extensive hearing process to issuers
who do not agree with Nasdaq's decision. An affiliate of Nasdaq, NASD
Regulation, Inc. (NASDR), spends
millions of dollars each year educating, testing, and disciplining the
brokers
and dealers and their thousands
of associated persons who are allowed to enter the quotes and trades
reflected in the Level 1/Last Sale
feed. Moreover, Nasdaq has an extensive MarketWatch system that, in real
time, based on a complex series
of variables, triggers alerts to a roomful of human analysts about unusual
activity in the price movement or
trading of securities that might indicate an attempt to insider trade or
otherwise illegally manipulate the
price of a security. These analysts can call the issuer or broker to
investigate whether a trading halt
in the security needs to be declared by the Nasdaq Stock Market. The
MarketWatch department can also
refer the oddity to a huge off-line Market Surveillance department, which
disciplines any broker or dealer
found to have violated the securities laws, SEC regulations, or NASDR/Nasdaq
rules and regulations.
These services come at a cost. To
offer this data involves creating the market, compiling the data, verifying
the data, monitoring the market,
and testing, certifying, and disciplining market participants. A large
portion of
these expenses are currently paid
for by the revenue derived from the Level 1/Last Sale feed. Nasdaq provides
its Level 1/Last Sale data to over
338,000 terminals in fifty-nine countries. n29 With such a large customer
base, Nasdaq can afford to charge
a relatively low fee to each user for its data. Market professionals (like
brokers or dealers) pay $ 20.00
per month for unlimited access to real-time (less than fifteen-minute delayed)
data. Non-professionals are charged
just $ 4.00 per month for the same information. Professional and
non-professional users who can wait
fifteen minutes or more for the information receive it free of charge.
n30
Needless to say, Nasdaq must be
able to carefully guard and restrict the use of its data in order to ensure
that it can collect the millions
of dollars required to fund its data collection efforts within those first
fifteen
minutes. Thus, the Nasdaq Subscriber
Agreement generally prohibits re-transmission of the real-time data. n31
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n29. See The Nasdaq Stock Market,
Inc., The Nasdaq Stock Market Fact Book & Company Directory 32
(1997).
n30. See National Association of Securities Dealers, Inc., NASD Manual Rule 7010 (1998).
n31. Of course, the Nasdaq agreement
affirmatively grants subscribers the right "on a non-continuous basis,
[to] furnish limited amounts of
the Information to customers: in written advertisements, correspondence,
or
other literature; or during voice
telephonic conversations not entailing computerized voice, automated
information inquiry systems, or
similar technologies." The Nasdaq Stock Market, Inc., Consolidated Subscriber
Agreement at 1.
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[*90] In the Internet
age, such close control of real-time data is essential. Imagine that, out
of data on, say
10,000 companies, a subscriber were
able, despite the restriction in the Nasdaq agreement, to retransmit on
their web site the quotes and last
sales of fifty companies, claiming fair use. Imagine that 200 such sites
existed, each with a different set
of fifty companies. In such a scenario, a vendor could simply continuously
visit these 200 sites and thereby
gather, in real time, the quotes and trades on all of Nasdaq's stocks,
and
thereafter redisseminate a complete
feed without compensation to Nasdaq. Were that to happen, Nasdaq
would not have the revenue feed
to continue to collect, process, verify, police, and disseminate the data.
n32
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n32. Some have argued that there
are trademark causes of action that would prevent such an occurrence.
They argue that a competing vendor
would, in order to attract users, indicate that its data came from the
compiler, such as Nasdaq. The use
of the Nasdaq trademark would leave the pirating vendor open to a
trademark or anti-dilution suit
from the compiler. This reasoning is flawed. In the case of Nasdaq, as
in the
case of many databases, the competing
vendor would never have to use any of Nasdaq's trademarks in order
to vend its product because it would
be obvious to the users where the data must have came from and that
its reliability can be trusted.
It should be noted that there is
a tort available to Nasdaq called "misappropriation of hot news." This
cause of
action was first recognized by the
Supreme Court in International News Service v. Associated Press, 248 U.S.
215 (1918). The legislative history
of the 1976 Copyright Act specifically noted that 301 was not intended
to
preempt this cause of action. See
H.R. Rep. No. 94-1476, reprinted in 1976 U.S.C.C.A.N. 5659, 5748. Courts
have recognized the continuing validity
of the hot news tort. See National Basketball Ass'n v. Motorola, Inc.,
105 F.3d 841 (2d Cir. 1997); see
also Nash v. CBS, Inc., 704 F. Supp. 823, 833-35 (N.D. Ill. 1989); Mayer
v.
Josiah Wedgwood & Sons, Ltd.,
601 F. Supp. 1523, 1531-35 (S.D.N.Y. 1985); P.I.T.S. Films v. Laconis,
588 F.
Supp. 1383, 1385-86 (E.D. Mich.
1984) (each holding all misappropriation causes of action preempted, save
for
International News Service). This
cause of action, however, does not exist overseas and is limited to
protecting the information only
while it is "hot news." This protection, therefore, does not adequately
protect
most non-copyrightable databases.
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Nasdaq does permit numerous entities
to freely redisseminate its data, but it does so under a different
contractual structure - a vendor
agreement. n33 Under this agreement, a vendor is given the authority to
redisseminate data, as long as it
agrees to obtain the Subscriber Agreement from its customers, and report
and bill the number of customers
it services to Nasdaq. In this way, Nasdaq is able to facilitate broad
dissemination of its real-time data
worldwide while guarding its vital revenue stream.
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- -Footnotes- - - - - - - - - - - - - - - - - -
n33. See The Nasdaq Stock Market,
Inc., Vendor Agreement for Level 1[su'sm'] Service and Last Sale[su'sm']
Service (on file with author).
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Despite the legitimate need to prohibit
the redissemination of real-time data by unauthorized vendors of
Nasdaq, the contractual scheme used
by Nasdaq would be illegal under the Nimmer proposal. Section (b) of
the Nimmer proposal would declare
unenforceable any clause that "abrogates or restricts" any fair use of
the
data, as that concept is defined
under the Copyright Act. Thus, Nasdaq could not legally [*91]
prevent the
Internet recollation scheme outlined
above with "non-negotiable" contracts, despite the commercially
legitimate and socially desirable
need to do so.
The Nimmer proposal would permit
Nasdaq to impose the restrictions on use in its current license only if
the
terms were "negotiable." It is not
exactly clear what is meant by "negotiable" since Nimmer, Brown, and
Frischling do not discuss the concept.
But whatever it is intended to mean, this much must be clear: the
Nimmer proposal contemplates that
an attorney or another person with enough education to explain and
understand the contract, as well
as with enough authority to bind Nasdaq to any changes in the agreement,
would be present or at least available
to negotiate the terms with each customer. For customers who are now
charged $ 4.00 per month, or nothing
if they take delayed data, Nasdaq would not have enough revenue
incentive to offer this expensive
and labor-intensive negotiation service to these low-end customers.
Moreover, if Nasdaq is required
to affirmatively "negotiate" every contract with every user, it would have
to
create a system for administering
custom - and likely contradictory - contractual obligations among its
licensees. As a result, it seems
likely that dissemination of Nasdaq real-time and delayed data would have
to
be restricted to the largest revenue-producing
entities, for their use only. The hundreds of web sites that now
disseminate Nasdaq data would dry
up. The non-professional and delayed services would likely disappear.
The irony is that although the Nimmer
proposal is supposed to benefit small users and consumers, it will likely
have just the opposite effect. The
rule championed by the authors would force information vendors to license
data only to the largest customers,
for whom the cost of negotiation and administration of custom negotiated
licenses could be justified by the
revenue flow. Alternatively, information providers will have to raise the
price
of their data to the small user.
This will, in turn, hurt small users, who are likely the most cost-sensitive.
Nasdaq would not be a unique case.
Dun and Bradstreet (D&B) (and the other credit reporting agencies around
the world) produces and distributes
credit information on millions of entities. Needless to say, private and
sensitive information about a person's
financial situation legitimately needs to be guarded and prevented from
redissemination. Like other information
providers, D&B uses "non-negotiable" licenses with small users to keep
setup and administration costs and
burdens low. Imagine that the D&B database contains 100,000 credit
records. Under traditional fair
use doctrine, if D&B provided five credit reports to a small user,
a
redissemination of those five credit
reports would likely be a "fair use" of the database. Nonetheless, I would
be aghast and angry if my credit
report were one of the five reports that the user chose to [*92]
post on
the Internet. Today, D&B prohibits
redissemination of its reports. D&B is able to protect the privacy
of the
subjects of its reports by strict
contractual prohibitions that undoubtedly "abrogate or restrict" fair use
rights.
The Nimmer proposal would declare,
as a matter of law, that D&B has no ability to protect privacy of credit
reports where small users who obtain
the information through "non-negotiable" licenses are involved. n34
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n34. To be sure, the Fair Credit
Reporting Act, 15 U.S.C. 1681-1681(e), provides some statutory protection
for certain kinds of "consumer reports"
and "investigative consumer reports" (as defined by 15 U.S.C. 1681(a).
However, like other forms of federal
protection, it does not form an independent, freestanding scheme in the
absence of contract. For example,
most restrictions and regulations under the Fair Credit Reporting Act relate
to "consumer reporting agencies,"
not to users or recipients of the information. See 15 U.S.C. 1681(b),
1681(m) (1984). Thus, users of information
who obtain the information legally under the Fair Credit Reporting
Act, but then use the information
for other purposes, may not be violating federal law. Moreover, the statute
does not regulate credit reports
of persons other than consumers. The Fair Credit Reporting Act also does
not
give the reporting agency a cause
of action against users to prevent their unauthorized or illegal use of
the
data. And, as with other federal
protection schemes, the Fair Credit Reporting Act does not cover
unauthorized uses made outside the
United States. Finally, some credit report providers (and others) fear
that
the Nimmer proposal, particularly
as embodied in the Boucher Bill, see infra text accompanying note 86, could
be read to override or conflict
with even the limited protections currently provided by the Act.
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Similarly, D&B is able to manage
its defamation risk via contractual use restrictions. In many states, there
is a
qualified privilege against defamation
where the information is exchanged in good faith between creditors.
However, that privilege is unavailable
where the data is shared with non-creditors. The D&B license restricts
not only use and redissemination
of the data, but also to whom the data may be shared. Since fair use under
the Copyright Act does not explicitly
regulate who can receive data, the D&B clause would likewise be
declared unenforceable under the
Nimmer proposal. The Nimmer proposal would destroy D&B and its
creditor-clients' qualified privilege.
It seems safe to say that the cost of D&B services, when fully subject
to
invasion of privacy and defamation
claims, would be far higher than it is today. n35
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n35. See generally Letter from James
R. Maxeiner, Vice President and Associate General Counsel, Dun and
Bradstreet, Inc., to ALI (May 19,
1997) (discussing the McManis Motion). A copy of the letter can be found
at
<http://www.softwareindustry.org/issues/guide/docs/jm.html>
(visited Sept. 24, 1998).
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One more example should suffice.
Most of the readers of this Comment are familiar with the WESTLAW or
Lexis/Nexis limited-use services
provided to law school students. WESTLAW and Lexis/Nexis are high-priced
services, far beyond the means of
most law students and law school libraries. Nonetheless, these (and similar
information vendors) offer a "non-negotiable"
educational license to students. The license permits them access
to large areas of the databases,
provided that the students do not make professional or commercial use of
the
discounted WESTLAW or Lexis/Nexis
services. While the trade-off of [*93] restricted use for low
price seems
socially beneficial, the Nimmer
proposal would declare the trade-off unenforceable since the students are
making the same "fair use" of the
few cases they read from the vast WESTLAW or Lexis/Nexis databases that
is made by professional users, and
thus leave these vendors with little choice but to withdraw the law student
program. Similarly, the ProCD case
involved a vendor who offered the same information to individual users
at a
far lower price than it offered
the same information to professional users. n36
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- -Footnotes- - - - - - - - - - - - - - - - - -
n36. See ProCD, Inc. v. Zeidenberg,
86 F.3d 1447, 1449 (7th Cir. 1996).
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The cases of harm from the Nimmer
proposal for information services do not end here. Many trade secrets
involve uncopyrightable information.
Would the Nimmer proposal declare terms restricting use and
redissemination of such trade secrets
unenforceable since the information is "material that is uncopyrightable
under section 102(b) [of the Copyright
Act] or otherwise"? If so, how would one protect trade secrets? A
license that relates to restrictions
on use of a patent literally violates the Nimmer proposal since the license
terms restrict some or all of the
exclusive rights of "performance," "adaptation," or "display" of an invention,
and certainly patent terms prohibit
what would otherwise be "fair use" under the Copyright Act. Know-how
licenses would likewise have their
terms routinely declared unenforceable since they too often involve
uncopyrightable material. n37
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n37. Even after a lengthy discussion
of the importance of trade secrets and the non-preemption of trade
secret protection by 301 of the
Copyright Act, neither the McManis motion nor the Nimmer proposal is worded
to permit protection of non-copyrightable
trade secrets, nor validate restrictions on use of trade secrets that
would appear to "abrogate or limit"
fair use of that information. This is more than a mere oversight; any
proposal that validates trade secrets
would have to validate reverse engineering restrictions. One of the
authors' main hopes for their proposal
is the voiding of all reverse engineering clauses. See infra Section II.D.
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C. The Unintended International Consequences
of the Nimmer Proposal
One must also look at the effect
of the Nimmer proposal on international transactions. The Nimmer proposal
incorporates uniquely American notions
of fair use and copyrightability into the commercial law of the United
States. In international transactions
involving a United States buyer, the United States could well be the
contractual or default choice of
law. n38 Although the subject matter of the license is [*94]
copyrightable
under the law of the producer, it
may not be copyrightable under United States law (for example if the work
predated the United States adoption
of the Berne Treaty and was not properly marked). n39 The producer
today can impose contractual restrictions
on the work in the United States that mirror those of the Copyright
Act and do not unfairly restrict
fair use of the work. However, under the Nimmer proposal, the restrictions,
perfectly legal in every country
but the Unites States, are declared unenforceable ab initio in the United
States, unless each individual license
is negotiated. If the work is a mass-market work like a digital version
of
a sound recording or movie, the
producer simply cannot afford to distribute the work in the United States
since each license would have to
be individually "negotiated." America is too often accused of trying to
export
its peculiar notions of copyright
and fair use. To do so through the guise of a commercial law statute could
well provoke criticism, and even
retaliation, from the international community.
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n38. 2B-107 provides for contractual
and default choices of law:
(a) The parties in their agreement
may choose the applicable law. However, in a consumer transaction, the
choice is not enforceable to the
extent it varies a rule that cannot be varied by agreement under the law
of
the jurisdiction whose law would
apply in the absence of the agreement.
(b) Except as otherwise provided by an enforceable choice-of-law term, the following rules apply:
(1) An access contract or a contract
providing for electronic delivery of a copy is governed by the law of the
jurisdiction in which the licenser
is located when the agreement is entered into between the parties.
(2) A consumer transaction that requires
delivery of a copy on a physical medium to the consumer is governed
by the law of the jurisdiction in
which the copy is delivered or, in the event of nondelivery, the jurisdiction
in
which delivery was to have occurred.
(3) In all other cases, the contract
is governed by the law of the jurisdiction with the most significant
relationship to the contract.
(c) If the jurisdiction whose law
governs under subsection (b) is outside the United States, the laws of
that
jurisdiction govern only if they
provide substantially similar protections and rights to a party not located
in that
jurisdiction as are provided under
this article. Otherwise, the law of the jurisdiction in the United States
which
has the most significant relationship
to the transaction governs.
(d) A party is located at its place
of business if it has one place of business, at its chief executive office
if it
has more than one place of business,
or at its place of incorporation or primary registration if it does not
have
a physical place of business. Otherwise,
a party is located at its primary residence.
n39. Pursuant to 17 U.S.C. 405(a),
works created before the effective date of the Berne Convention
Implementation Act of 1988 would
fall into the public domain if not properly marked with the statutorily
prescribed copyright notice.
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D. The Unmanageable "Non-Negotiable"
Standard
A key feature of the Nimmer proposal
is that it applies only to "non-negotiable" terms. The problem is that
the
authors do not discuss what this
term means. It either means almost nothing, or it can swallow up the
universe of contracting practices.
n40
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- -Footnotes- - - - - - - - - - - - - - - - - -
n40. Perhaps the reason for the authors'
silence on the issue of "non-negotiable" licenses is that none of the
case law discussed in the Article
supports the distinction sought to be made - a distinction that must be
drawn in order to support the Boucher
Bill and the McManis motion, both of which make that distinction.
Numerous cases cited by the authors
discuss when a law or contract is preempted, but none makes
preemption dependent on whether
the contract is a standard form or was "negotiable." This flaw undermines
the Article's entire analysis.
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[*95] As corporate counsel
for a large corporation, I can tell you that very few terms in a contract
are truly
"non-negotiable." If you represent
a buyer with enough economic power, with almost no exceptions, the
vendor will "negotiate" the clause
with you. The vendor may demand that in order to change the clause, the
buyer will have to pay a far greater
price, agree to other restrictions that may be difficult for the buyer
to
accept as a quid pro quo, or the
vendor may be willing to trade concessions on this clause for concessions
on
another clause that the buyer desires.
The fact that the buyer chooses not to accept the vendor's price for
the changes requested by the buyer
does not make the clause "non-negotiable." Similarly, the vendor may not
agree to the changes requested by
the buyer, but might be willing to offer different changes in the term
or
changes in related terms. In either
case, the term is not "non-negotiable."
Even if you are a small user, few
vendors declare terms truly "non-negotiable." That is, out of a duty of
customer service, the vendor will
diligently forward the user's request to its counsel for review. Again,
most
often the vendor will respond with
a letter proposing some increased price, other quid pro quo, or other
restriction in order to balance
the added risks to the vendor of the proposed changes. Few customers are
ever
willing to accept such offers, but
the term is nonetheless open to negotiation.
If the term "non-negotiable" means
"not typically negotiated," on the other hand, then the authors are asking
that vendors (or buyers) who typically
propose the terms keep an accurate track of who has asked for what
changes, what the response was in
each case, and what the outcome of the response was in order to show
what terms are "typically negotiated."
For a corporation like Microsoft or Nasdaq, a legal requirement of that
kind would impose a huge paperwork
burden. Moreover, I suspect, most buyers do not care to negotiate the
kind of terms that concern the authors.
For example, they appear to be most worried about software reverse
engineering clauses, and clauses
that limit the right of professors (and librarians) to use significant
portions of
copyrighted material in classroom,
distance learning, and interlibrary loan situations. While this may not
be the
entire universe of clauses that
are the real concern of the Nimmer proposal and the McManis motion, accept
for a moment that these are among
the concerns. Will the Nimmer proposal solve the problem? No. While
Microsoft may sell tens of millions
of copies of Windows 95, all but a handful of users would object to the
anti-reverse engineering clause
in the operating system's license. That is, the Microsoft database would
likely
show that there were few, perhaps
twenty at most, requests in a given year to change the reverse
engineering clause. Of that, Microsoft
would likely show that most [*96] were from users who requested
reverse engineering for their internal
business purposes only and were licensed the source code (under strict
confidentiality), became OEMs, n41
or were sold a modified object code version of the program; maybe two
more were offered the right to reverse
engineer in return for cross-licensing of the requester's major software
patents, which the requesters declined;
and two were perhaps from its major competitors who were offered
the right to reverse engineer for
$ 1 million per year. Was the clause therefore "non-negotiable"? Presumably,
even this term was "typically negotiated,"
in which case the Nimmer proposal did not accomplish the result the
authors intended - making reverse
engineering clauses and clauses that restrict fair use illegal per se.
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- -Footnotes- - - - - - - - - - - - - - - - - -
n41. As defined by the Webopaedia
web site, OEM
stands for original equipment manufacturer,
which is a misleading term for a company that has a special
relationship with computer producers.
OEMs buy computers in bulk and customize them for a particular
application. They then sell the
customized computer under their own name. The term is really a misnomer
because OEMs are not the original
manufacturers - they are the customizers. Another term for OEM is VAR
(value-added reseller).
PC Webopaedia Definition and Links
(visited November 24, 1998)
<http://webopedia.internet.com/TERM/O/OEM.html>.
Parenthetically, I should note that
much of the authors' confusion stems from the incorrect paradigm
suggested at the beginning of the
Article. The authors suggest that an Article 2 transaction "typically
involves...a negotiated contract
between buyer and seller....The typical software transaction, by contrast,
does not involve a direct sale between
the software proprietor and the end-user; rather it involves a
non-negotiated license (otherwise
known as a "shrinkwrap" contract) ...." n42 In fact, as anyone who buys
goods from a retail outlet is well
aware, indirect sales involving non-negotiated contracts are very typical
in
Article 2 goods transactions. Similarly,
as the Society of Information Managers demonstrated at a recent
Article 2B Drafting Committee meeting,
more than 50% of the software market involves customized software
transactions with huge dollar values
and extensive negotiations directly with the software provider or a
developer. n43
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- -Footnotes- - - - - - - - - - - - - - - - - -
n42. Nimmer et al, supra note 1, at 21.
n43. White Paper from the Society
of Information Managers addressed to Carlyle C. Ring, Jr., Chair, Article
2B
Drafting Committee (March 23, 1998).
Page 1 of the White Paper notes:
Typically, roughly half of the software
purchased by large businesses is shrinkwrap, and it is usually acquired
by simply issuing a purchase order
to a reseller rather than by negotiating a license agreement with the
licensor.
Equally significant is the market
for mainframe and midrange system software, which is used by business,
government and institutions and
is characterized by niche products at high prices (typically $ 100,000
to many
millions per transaction), few transactions,
direct negotiation with the licensor, little or no competition, and
more often than not, a mission critical
application such corporate payroll, tax accounting, claims payment, or
safety, health and environmental
systems.
Id. (Emphasis added).
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[*97] It is not clear
why the law for information and software transactions should uniquely burden
the use of
standard forms when the law for
goods or services does not. The problems of standard non-negotiable forms
and of oppressive terms contained
in them are equally present in the case of home mortgages, car sales
agreements, car rental agreements,
telephone service contracts, cable television contracts, airline tickets,
parking lot signs that disclaim
liability, and insurance policies. To clearly disadvantage one set of industries,
namely, the Article 2B industries,
against their competitors in neighboring businesses by imposing legal
restrictions on standard forms is
not just.
Moreover, what the Nimmer proposal
explicitly invites is state law interpretations of what is copyrightable
and
what is fair use under federal copyright
law. This would be a disaster. Imagine a state court judge being asked
whether a clause is unenforceable
as a matter of state contract law, not because it violates some important
public policy of his or her state,
but because it merely "restricts" some federal policy articulated in a
vague set
of four factors, n44 the application
of which even the Circuits disagree, under a statute whose interpretation
is otherwise exclusively delegated
to the jurisdiction of federal courts. n45 It is one thing to have the
current
situation where state courts unavoidably
must decide questions like, "Is this cause of action for violation of
the license one of contract (that
can be litigated before me) or one of copyright law (that can only be
brought in a federal court)?" It
is another to advocate, as the authors do, a situation where a state statute
propels state courts into the deepest,
most controversial, aspects of federal copyright policy. Do the authors
really want fifty jurisdictions
(plus the District of Columbia and the U.S. Territories) determining what
"abrogates or restricts" fair use
and what is copyrightable? Or to put the question even more pointedly,
do the
authors want the Washington State
Supreme Court deciding what is permissible reverse engineering and fair
use of Microsoft's products?
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n44. Fair use is defined in 17 U.S.C.
107 by a set of factors:
In determining whether the use made
of a work in any particular case is a fair use the factors to be considered
shall include -
(1) the purpose and character of
the use, including whether such use is of a commercial nature or is for
nonprofit educational purposes;
(2) the nature of the copyrighted work;
(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
(4) the effect of the use upon the potential market for or value of the copyrighted work.
The fact that a work is unpublished
shall not itself bar a finding of fair use if such finding is made upon
consideration of all the above factors.
17 U.S.C. 107 (1992).
n45. See 28 U.S.C. 1338 (1984) (granting
exclusive jurisdiction over copyright matters to the federal courts).
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-End Footnotes- - - - - - - - - - - - - - - - -
[*98]
III Overreading ProCD: The Flawed
Legal Analysis Underlying the Nimmer Proposal
Not only does the authors' Article
end up with a proposal that has many unintended consequences, but it
relies on a flawed legal analysis
to reach that result. In particular, the authors overstate the importance
of the
Seventh Circuit's opinion in ProCD
v. Zeidenberg, authored by Judge Frank Easterbrook, and then use that
case as an argument for a major
restructuring of Article 2B and state contract law. But if one rejects
the
authors' reading of ProCD - as I
do - there is no need for their solution. n46
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n46. As I stated in note 2 supra,
the first half of the Article is vastly different from the second, result-oriented
half. I wish to make only a couple
brief comments on the first half of the Article. First, the authors spend
considerable time arguing that
at least for the modes of software
distribution used today, copyright law provides all the teeth a publisher
needs to control use and dissemination
of her work. No ersatz shark via contractual promise is necessary to
enforce these rights....
...
[The discussion above] demonstrates
that state contract law is not needed to protect the copyright interests
of copyright proprietors. Those
interests are safeguarded by the Copyright Act itself.
Nimmer et al, supra note 1, at 33,
40. In other words, the authors argue that contracts are never needed to
restrict the exclusive rights in
software transactions. This may be true for the very simple examples the
authors have chosen to use, but
there are clear examples where complex use restrictions need to be spelled
out in a contract, particularly
where they involve bilateral and mutual obligations.
For example, I was involved in such
a transaction with a large software producer. The Nasdaq Stock Market
needed a new feature added to an
existing product. The producer was not in a position to develop the feature
but was willing to allow Nasdaq
royalty-free access to the source code and was willing to provide some
of its
development personnel and resources
to help Nasdaq develop the feature, provided that Nasdaq gave the
developer a perpetual royalty-free
license to the Nasdaq-developed code and the right to incorporate a
version of the code into its normal
product in return for a couple of years of free maintenance. Nasdaq agreed
not to sell its code to any third
party. Clearly such complex interrelated and co-developed cross-licensing
projects involve bilateral and mutually
dependent rights, performances, and obligations. The Copyright Act
simply cannot, independent of contract,
adequately cover such situations, nor can unilateral notice of use
restrictions fill the bill. Contracts,
even in software transactions, are necessary.
My second comment goes to the authors'
discussion of Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908) and
RCA Manufacturing Co. v. Whiteman,
114 F.2d 86 (2d Cir. 1940). Nimmer et al, supra note 1, at 44-45. The
authors use these cases to conclude
that long before ProCD "earlier actors throughout the twentieth century
had similarly attempted to magnify
their rights through use of contract," and that such contractual
restrictions, when they violate
the "delicate balance" of copyright law, are invalid. See id. at 45. Bobbs-Merrill
and Whiteman are not contract cases
like ProCD, since both involve mere notices (Whiteman involved a notice
to a subsequent buyer). As the court
in Bobbs-Merrill explicitly noted, "This is purely a question of statutory
construction. There is no claim
in this case of contract limitation, nor license agreement controlling
the
subsequent sales of the book." 210
U.S. at 350. Moreover, at least the Bobbs-Merrill Court was being asked
to
follow a series of patent cases,
which at the time, permitted use restrictions on subsequent purchasers
of
patented goods by mere notice and
without contract. The Court refused to follow the patent cases, and so
refused to permit notices alone
to control use, because patent law is too different from copyright law.
See id.
at 346 ("There are such wide differences
between the right of multiplying and vending copies of a production
protected by the copyright statute
and the rights secured to an inventor under the patent statutes, that the
cases which relate to the one subject
are not altogether controlling as to the other.") Yet the authors then
turn around and argue that patent
cases like Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141
(1989), control the interpretation
of the scope of 301 and the right of authors to charge for uncopyrightable
works and for copyrighted products
after the expiration of the copyright term.
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-End Footnotes- - - - - - - - - - - - - - - - -
[*99] The Nimmer Article
starts out with a very agreeable proposition:
Both at gestation and throughout
its life, a copyright is owned according to a complex scheme deriving in
large
part from state law....
But it is not solely the question
of ownership over which state law governs. Copyright exploitation, too,
can
often turn on distinctions that
equally derive from state laws....
In sum, federal copyright doctrine
leaves to state law the vast bulk of issues concerning contracts affecting
copyright. It follows that state
contract law, and cognate doctrines arising under state law, determines
to a
great extent the destiny of a copyrighted
work and the physical object in which it is embodied. n47
The authors then turn to the ProCD
decision and a lengthy discussion of its preemption analysis. Needless
to
say, commentators have divided sharply
on the reasoning in ProCD. n48 Nimmer, Brown, and Frischling are
certainly welcome to add their slant
to those who disagree with the court's reasoning. However, criticizing
Judge Easterbrook's reading of some
of the cases on which he relies does not get the authors where they
want to be. They want to find a
way to outlaw certain kinds of clauses in "non-negotiable" settings. In
order
to set the stage for this, the authors
are forced to claim that:
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n47. Nimmer et al, supra note 1, at 26.
n48. In addition to the articles
listed in the Nimmer Article, Nimmer et al, supra note 1, see, for example,
M.A.
O'Rourke, Copyright Preemption After
the ProCD Case: A Market-Based Approach, 12 Berkeley Tech. L.J. 53
(1997) and Stephen P. Tarolli, Comment,
The Future of Information Commerce Under Contemporary Contract
and Copyright Principles, 46 Am.
U. L. Rev. 1639 (1997). See also Note, Contract Formation and Shrink Wrap
License: A Case Comment on ProCD,
Inc. v. Zeidenberg, 32 New Eng. L. Rev. 513 (1998); Note, ProCD, Inc. v.
Zeidenberg and Article 2B: Finally,
the Validation of Shrink-Wrap Licenses, 16 J. Marshall J. Computer &
Info. L.
439 (1998); Note, Contracting Beyond
Copyright:ProCD, Inc. v. Zeidenberg, 10 Harv. J.L. & Tech. 353 (1997);
cf. Robert W. Gomulkiewicz &
Mary L. Williamson, A Brief Defense of Mass Market Software License
Agreements, 19 Rutgers Computer
& Tech. L.J. 335 (1996).
- - - - - - - - - - - - - - - -
-End Footnotes- - - - - - - - - - - - - - - - -
The contract at issue in ProCD,
Inc. v. Zeidenberg differs from the foregoing examples in the one respect
relevant to nonstatutory preemption:
it contravenes one of the core policies of the Copyright Act by
extending quasi-copyright protection
to works that do not qualify as "original." It further fails the test of
encouraging the dissemination of
copyrightable works in an orderly fashion in that it seeks to bar the
dissemination of uncopyrightable
materials. It is, in short, nothing other than an [*100] attempt
in effect to
overrule by contract binding Supreme
Court precedent.
...
[The authors' example] proves that
absolute freedom of contract under state law relating to copyrightable
works is insupportable. n49
But this is to overread ProCD. The
authors must accuse Judge Easterbrook of advocating a position that every
contract is free of any preemption
under section 301 of the Copyright Act n50 in order to proceed to what
is
the heart of their Article - a justification
for radically altering state law in order to construct a state law
analogue to section 301 of the Copyright
Act. That is, the authors argue that if ProCD is present law and
Article 2B incorporates ProCD into
a statutory enactment, and any contract is thus free of any preemption
from the Copyright Act, then state
contract law must have a provision, namely, the Nimmer proposal, that
provides the same result under state
law that section 301 would have provided.
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n49. Nimmer et al, supra note 1, at 52-53, 54 (emphases added).
n50. See, e.g., id. at 55 ("In Sony,
the Supreme Court stated that "[copyright] protection has never accorded
the copyright owner complete control
over all possible uses of his work.' Yet, in a world governed by Judge
Easterbrook's radical freedom to
impose terms by shrinkwrap "contract,' there is no reason that such a
conclusion should pertain. Instead,
the imagination of shrinkwrap drafters can come close indeed to achieving
the type of complete control that
Sony expressly denied them."); id. at 49 ("Judge Easterbrook's reversal
of
the district court's holding in
ProCD cites National Car Rental for the sweeping proposition that "rights
created
by contract' are not "equivalent
to any of the exclusive rights within the general scope of copyright.'
Although
that latter case did hold that the
specific contract there at issue was not preempted, it did not extend its
holding to contracts in general.");
id. at 52 ("It does not demonstrate the far greater proposition at which
it
[ProCD] hints: No contract relating
to copyrightable goods is preempted under section 301(a).") (emphasis
added).
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-End Footnotes- - - - - - - - - - - - - - - - -
This is the fundamental error in
the authors' analysis. Nowhere does Judge Easterbrook claim that contract
always preempts copyright. In fact,
I suspect he believes just the opposite. Take the authors' examples. If
the Copyright Act requires that
transfers of copyright ownership be executed in writing or that a federal
definition of "children" be used,
the logic of ProCD would not lead to enforcing contractual provisions
contradicting those requirements.
ProCD simply stands for the proposition that contractual clauses are not
automatically preempted by the Copyright
Act. It does not stand for the negative pregnant of that
proposition, which would be that
contractual clauses can never be preempted by provisions of the Copyright
Act.
At the end of the ProCD opinion,
Judge Easterbrook specifically addresses the issue of preemption of
contractual terms by the Copyright
Act. To all appearances, he states that contractual clauses can be
subject to preemption by section
301 on a case-by-case basis. He begins with a lead-in discussion about
whether Congress could preempt any
[*101] contractual provision that differs from the rights and obligations
created by federal statute. He concludes
that if Congress explicitly chooses to do so, it has that power.
However, courts do not normally
imply that Congress intended to prohibit private contractual clauses:
Although Congress possesses power
to preempt even the enforcement of contracts about intellectual
property...courts usually read preemption
clauses to leave private contracts unaffected. American Airlines,
Inc. v. Wolens provides a nice illustration.
A federal statute preempts any state "law, rule, regulation,
standard, or other provision...relating
to rates, routes, or services of any air carrier." 49 U.S.C.A. 1305(a)(1).
Does such a law preempt the law
of contracts - so that, for example, an air carrier need not honor a quoted
price (or a contract to reduce the
price by the value of frequent flyer miles)? The Court allowed that it
is
possible to read the statute that
broadly but thought such an interpretation would make little sense. Terms
and conditions offered by contract
reflect private ordering, essential to the efficient functioning of markets.
Although some principles that carry
the name of contract law are designed to defeat rather than implement
consensual transactions, the rules
that respect private choice are not preempted by a clause such as
1305(a)(1). n51
Thus, Judge Easterbrook notes that
Congress can intend to preempt any contract that performs an "end run"
around its statutory scheme of rights
and obligations of a buyer and seller. But, Judge Easterbrook implicitly
asks whether Congress intended the
preemption clause of the Copyright Act n52 to preempt all contractual
terms that differed from the Copyright
Act's set of rights and obligations. Judge Easterbrook finds that
Congress did not intend that result:
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- -Footnotes- - - - - - - - - - - - - - - - - -
n51. 86 F.3d 1447, 1454-55 (7th Cir.
1996) (citing American Airlines, Inc. v. Wolens, 513 U.S. 219 (1995))
(emphases added) (citations omitted).
n52. 17 U.S.C. 301(1) provides:
(a) On and after January 1, 1978,
all legal or equitable rights that are equivalent to any of the exclusive
rights
within the general scope of copyright
as specified by section 106 [17 U.S.C. 106] in works of authorship that
are fixed in a tangible medium of
expression and come within the subject matter of copyright as specified
by
sections 102 and 103 [17 U.S.C.
102 and 103], whether created before or after that date and whether
published or unpublished, are governed
exclusively by this title [17 U.S.C. 101-1101]. Thereafter, no person is
entitled to any such right or equivalent
right in any such work under the common law or statutes of any State.
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-End Footnotes- - - - - - - - - - - - - - - - -
Section 301(a) plays a role similar
to 1301(a)(1): it prevents states from substituting their own regulatory
systems for those of the national
government. Just as 301(a) does not itself interfere with private
transactions in intellectual property,
so it does not prevent states from respecting those transactions. n53
[*102] Finally, Judge
Easterbrook makes clear that he does not intend to make the reverse finding
- that no
contractual term is ever subject
to preemption by 301(a) of the Copyright Act:
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n53. 86 F.3d at 1455 (emphasis added).
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-End Footnotes- - - - - - - - - - - - - - - - -
Like the Supreme Court in Wolens,
we think it prudent to refrain from adopting a rule that anything with
the
label "contract" is necessarily
outside the preemption clause: the variations and possibilities are too
numerous
to foresee. National Car Rental
likewise recognizes the possibility that some applications of the law of
contract
could interfere with the attainment
of national objectives and therefore come within the domain of 301(a).
But
general enforcement of shrinkwrap
licenses of the kind before us does not create such interference. n54
Yet the authors accuse Judge Easterbrook
of making just the opposite finding. They assert that he believes in
"absolute freedom of contract under
state law relating to copyrightable works," n55 that in "Judge
Easterbrook's radical freedom to
impose terms by shrinkwrap "contract,'" n56 "the copyright owner [gains]
complete control over all possible
uses of his work," n57 and that Judge Easterbrook makes "the sweeping
proposition that "rights created
by contract' are not "equivalent to any of the exclusive rights within
the
general scope of copyright.'" n58
The fundamental assumption of the Article is that ProCD stands for freedom
of contract unfettered by any strong
public policies embodied in the Copyright Act. The authors then argue
that Article 2B has adopted this
same radical approach, n59 and that therefore some provision needs to be
added to Article 2B to provide that
contractual terms can be preempted by strong federal policy.
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n54. Id. (citing American Airlines,
Inc. v. Wolens, 513 U.S. 219 (1995), National Car Rental Sys., Inc. v.
Computer Assoc. Int'l, Inc., 991
F.2d 426 (8th Cir. 1993)) (emphasis added).
n55. Nimmer et al, supra note 1, at 54.
n56. Id. at 55.
n57. Id.
n58. Id. at 49.
n59. See, e.g., id. at 23 (Article
2B makes "provisions of software licenses presumptively enforceable while
providing no limitations on overreaching
contract terms that proprietors may unilaterally decide to impose.");
id. at 71 ("By taking no position
on preemption other than that "it preempts,' the draft ratifies the status
quo
and makes every imaginable shrinkwrap
encroachment on users' rights presumptively enforceable.").
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-End Footnotes- - - - - - - - - - - - - - - - -
The reason why Judge Easterbrook
and Article 2B do not hold radical views of contract preemption, and why
Article 2B does not need the Nimmer
proposal (particularly given its many unintended consequences), is that
courts have never needed explicit
statutory permission to void contractual terms that violate public policy.
Courts constantly read complementary
and even conflicting pronouncements from federal and state
legislatures, and from other courts
and, in light of the particularized facts before them, attempt to divine
what
public policy requires.
[*103] Consider an analogy.
Article 2 of the U.C.C. governs and permits contracts of all sorts. In
fact,
nothing in Article 2 declares unenforceable
a contract for the sale of gambling equipment, the sale of federally
prohibited drugs, or the production
of a nuclear device. Article 2 does not do so and does not have to. If
a
contract seeks to cause a party
to agree to violate federal law or a strongly held federal policy, courts
have
no trouble declaring that part of
the contract unenforceable. No explicit statutory pronouncement, beyond
the
Supremacy Clause of the Constitution,
which already exists and is well understood by courts, is needed.
Courts are constantly reconciling
and harmonizing the policies behind various laws, both state and federal.
In
other words, statutes are not written
as if they had merger clauses. One is not expected to look only to the
four corners of a particular statutory
scheme for resolution of all issues related to that scheme. The beauty
of
the common law system is that judges
are free to look at the entire body of law and find solutions and
balances - within the confines of
precedence and specific legislative pronouncements - to fit the facts of
the
particular case before them. Judges
are free to create judicial glosses and exceptions to statutory strictures.
After all, the doctrine that the
authors are so wedded to - fair use - is an example of a judicially created
exception to the explicit, seemingly
contrary, pronouncements of the Copyright Act. Eventually, in 1976,
Congress saw the wisdom of the exception
and decided to incorporate it permanently into the statutory
scheme itself. Technology and business
practices develop more quickly than the law. We should not argue
that courts and parties must be
hamstrung by what will quickly become aging law. We should certainly not
declare, as the Nimmer proposal
does, that certain contracts are completely illegal no matter what their
social
value or purpose; rather, we should
permit judges to interpret and apply law as they always have.
Often commentators see their job
as criticizing a court decision and then proposing a hard and fast statutory
rule to overcome what they see as
a bad decision. Obviously, I do not see the ProCD decision as a bad result.
Uncopyrightable materials, in my
view, should not be stripped of all legal protection simply because they
are
not protected by the Copyright Act.
The authors read the Feist decision as saying that if material is not
protectable by copyright or other
federal law or a recognized exception to federal law (such as trade secrets
or "hot news misappropriation" n60),
then it cannot be protected at all. n61 The authors forget [*104]
their
own opening hypothesis, that contract
and copyright are meant to work together to define the limits of
protection. The authors and I disagree
on whether protection of uncopyrightable materials by a contract is
violative of a strongly held federal
public policy. I do not believe it is; the authors do believe it is. As
I will
argue below, the authors' real remedy
is to get the federal government to clarify who is right. The answer is
not to change state law in order
to resolve a debate about the proper interpretation of federal copyright
law.
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n60. See supra text accompanying note 32.
n61. In fact, the authors are forced
to overread Feist in much the same way they are forced to overread
ProCD. The authors conclude that
Feist stands for the proposition that not only does copyright law not
protect unoriginal compilations
of facts but also that, as a result, contract cannot protect unoriginal
compilations of facts, since to
permit contracts to protect such compilations would "constitute an
impermissible end-run around Feist."
Nimmer et al, supra note 1, at 43; see also, e.g., id. at 46 ("As already
noted, the district court concluded
that a ruling in favor of [the plaintiff] would subvert Feist; indeed,
there
can be little doubt that plaintiff
crafted its shrinkwrap with the precise goal in mind."); id. at 51 ("The
shrinkwrap license at issue in ProCD
undid the right of the public that Feist conferred - the ability to copy
telephone listings without liability.").
However, a fair reading of Feist
can only lead to the conclusion that the Supreme Court was holding that
unoriginal factual databases are
unprotected by copyright. Nowhere does the Court imply that contractual
protections over these uncopyrightable
databases are illegitimate.
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-End Footnotes- - - - - - - - - - - - - - - - -
The authors posit a number of hypotheticals
that they claim are truly unconscionable and yet permitted under
their reading of ProCD, ignoring
a series of escape valves built into the U.C.C. and common law that permit
courts to adequately police flawed
terms. Such escape valves include unconscionability, n62 duress and
economic duress, n63 the First Amendment,
antitrust law (in particular, the essential facilities doctrine), n64
and unfair competition. n65 Most
importantly, there is the Supremacy Clause of the Constitution, which
resolves any conflict between federal
and state law in favor of federal law. n66 I suspect that any "bizarre
and oppressive" clause will violate
one or more of these doctrines. Moreover, in many circumstances one can
sue on an independent claim of tortious
conduct, regardless of whether one is in contractual privity with the
tortfeasor. n67 These doctrines
impose a tremendous restraint on "bizarre and oppressive" business practices.
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n62. Section 2B-110 addresses unconscionability. It is drawn from U.C.C. 2-302.
n63. A finding that a contract was
formed by illegal means such as duress or fraud gives the aggrieved party
an option to ratify or disaffirm
the contract. See 1A Arthur L. Corbin, Corbin on Contracts 538-39 (1963
&
Supp. 1994). For particular focus
in the area on restraints of trade, see 6A Arthur L. Corbin, Corbin on
Contracts 1405 (1962 & Supp.
1994).
n64. There are a host of illegal
activities undertaken by those with market power or among persons who agree
with others to unfairly restrain
trade. See generally 2 Earl W. Kintner, Federal Antitrust Law 10.19-10.38
(1980) (analyzing various theories
that prohibit refusals to deal under 1 and 2 of the Sherman Act).
n65. See generally 3 Joseph D. Zamore, Business Torts 1.03 (1998).
n66. See Ronald D. Rotunda & John E. Nowak, Treatise on Constitutional Law 62-63 (2d ed. 1992).
n67. See generally Zamore, supra
note 65, at 23.03.
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-End Footnotes- - - - - - - - - - - - - - - - -
Let us focus this approach on some
of the hypotheticals raised in the Article. The hypotheticals can be divided
into two classes: (1) those that
violate strongly held public policies; and (2) those where small factual
differences distinguish situations
where the same restriction should be upheld or declared unenforceable.
I
start with the [*105]
hypotheticals violative of fundamental public policy. The preamble to the
Nimmer,
Brown, and Frischling Article begins
with a contract by a sole source monopolist, where access can only be
granted to vital information through
the monopolist. Moreover, the contract apparently attempts to authorize
the licenser to impose criminal
sanctions without resort to a judicial forum and to conduct unannounced
searches and seizures of private
homes, and it prohibits printouts of the licensed texts. n68 It is hard
to see
how a court would not strike down
these provisions under any number of doctrines. First, any consent by
users to acts illegal under state
law would quickly be declared ineffective. The effect of consent to a criminal
act, such as trespass, unlawful
entry, burglary, or assault is a complex subject. However, it is clear
that since
crimes are a public wrong, consent
from a private party obtained by duress or mistake, or where against public
policy, is routinely declared ineffective.
n69 Second, the "essential facilities doctrine" of antitrust law would
likely invalidate unreasonable access
limitations. n70 Further, the clauses in the authors' example appear to
be
unconscionable, forced under duress,
and contrary to the First Amendment (and analogous state policies
favoring free speech).
- - - - - - - - - - - - - - - -
- -Footnotes- - - - - - - - - - - - - - - - - -
n68. Nimmer et al, supra note 1, at 20-21.
n69. See generally P.H. Robinson,
Criminal Law Defenses 66, 101(b) (1984 & Supp. 1996) (discussing when
consent is effective and ineffective
in property offenses); Model Penal Code 2.11(3) (1985) (discussing
"Ineffective Consent").
n70. See generally Kintner, supra
note 64, at 10.25 (analyzing various theories that prohibit unilateral
refusals
to deal by a monopolist, including
Sherman Act section 2 violations); Thomas V. Vakerics, Antitrust Basics
5.06[5] (1997). But cf. Phillip
Areeda & Donald F. Turner, Antitrust Law 736e(6) (1978 & Supp.
1996)
(proposing a variety of theories
that could impose liability on a monopolist for a refusal to deal, but
cautioning
that, "all in all, we conclude that
relief for arbitrary refusals to deal should be left to common law remedies
or
to new legislation.... State and
Federal legislatures have been demonstrably able and willing to pass regulatory
statutes in situations deemed important
and at times to create administrative machinery to carry them out.")
(citations omitted) (emphasis added).
Is there any doubt that Congress would create a Federal Agency that
would oversee and regulate the terms
and conditions of an industry as monopolistic and overreaching as the
one posited by the authors?
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-End Footnotes- - - - - - - - - - - - - - - - -
Similarly, the authors posit a "state
law that validates all oral contracts solemnly adjured before a panel of
three clergymen," including a transfer
of ownership in a copyright. n71 Is there any doubt that, under section
301(a) of the Copyright Act, where
a state law or a contractual clause violates a clearly articulated exclusive
contractual limitation in the Copyright
Act itself, the law or clause would be struck down? (Even the [*106]
authors' discussion of the hypothetical
does not appear to raise a question that courts would make quick work
of such clauses or laws.) Or take
the case of a contractual clause that awards treble damages of attorney's
fees. n72 It is settled contractual
policy that a contractual remedy that amounts to a penalty or punitive
damage award will not be enforced.
n73 Article 2B does not need to restate that well-settled rule of contract
law for the same conclusion to result.
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n71. Nimmer et al, supra note 1,
at 54. As the authors admit, this particular application of the hypothetical
state law would be preempted by
the Federal Copyright Act 903(b). See id. ("The owner of the exclusive
rights in a mask work may transfer
all of those rights, or license all or less than all of those rights, by
any
written instrument signed by such
owner or a duly authorized agent of the owner."). There would be no
reason, however, to completely invalidate
the state law since it has a rational application in cases of
non-exclusive licenses, and in cases
that do not involve copyright contracts.
n72. See Nimmer et al, supra note 1, at 56.
n73. See, e.g., Restatement (Second)
of Contracts 356 cmt. a. (1981) ("The parties to a contract are not
free to provide a penalty for its
breach."); 3 E.A. Farnsworth, Contracts 282 (1990) ("The most important
restriction is the one denying them
the power to stipulate in their contract a sum of money payable as
damages that is so large as to be
characterized as a "penalty'.").
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The authors even pose the situation
where a book requires "the reader not to skip chapters, not to read any
paragraphs more than three times,
not to reveal the surprise plot twists to family or acquaintances, and
certainly not to quote in a book
review the few paragraphs that the fair use doctrine would otherwise permit."
n74 In general, a contractual term
that unreasonably prohibits disclosure, criticism, or a review of a book
would be struck down either as violative
of the First Amendment or unconscionable under a strong state-law
policy of freedom of expression.
Do the authors doubt that courts will not allow themselves to be used as
instruments of clauses that are
so repugnant to a clearly articulated federal or state policy? Judge
Easterbrook's analysis, discussed
at length above, suggests that he has no such doubt, and Article 2B by
its
silence has no such doubts. Judges
do not need the Nimmer proposal to know how to do their job in such
situations.
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n74. Nimmer et al, supra note 1,
at 56 (citations omitted). Forbidding the quotation of a few paragraphs
in a
public review can serve a legitimate
need where the book is a listing of vital trade secrets.
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Thus, I move to the hypotheticals
where small differences in the facts should make a difference in outcome.
If
a small change in the facts should
cause the same clause to be declared legitimate in one case and illegitimate
in another, one is encountering
a situation tailor-made for a court determination of legality rather than
a
statutory "one-size-fits-all" solution.
I argue that the authors' examples fall in the best-left-to-a-court
category.
I start with the authors' examples
of a shrink-wrap license on a video that states "may be viewed by no more
than three people at one sitting,"
n75 or a clause that prohibits "private home taping" of a television program.
n76 While these clauses may appear
absurd in the situations [*107] posed by the authors, the same
restrictions would appear quite
reasonable: (1) where the licensed video was a presentation of top secret
or
trade secret information where the
licensee agreed that only three named persons could view the video and
no taping of the material would
be permitted; (2) where the license was for a paid theater presentation
of a
pay-per-view prize fight and the
theater owner only paid for one viewing by no more than three persons;
(3)
where the video was a free evaluation
copy sent to a movie theater owner for its review prior to contract; or
(4) where the contract was between
a publisher and a team of three editors or article referees hired to review
manuscripts for a publisher where
the material is intended for eventual future publication and where the
restriction is limited in time to
pre-publication only (in which case, the publisher is seeking to protect
itself
against scooping of its-and its
authors'-future publication by its own editors or referees).
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n75. Id. at 54.
n76. Id. at 55. Similarly, it might
well be legitimate where the television program involved a video presentation
incorporating trade secrets, where
the information was "top secret," or did not involve a video, but a data
stream for a database that one paid
little for, but was for one-time access only.
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Similarly, one could take the clause
prohibiting reimportation of software in a "non-negotiable" form contract.
If
that form contract were between
the manufacturer and its multiple distributors where exclusive geographic
territories are granted to each
distributor, then the clause seems quite reasonable to protect the reasonable
expectations of the distributors.
The difference that a fact or two
can make in analyzing the reasonableness of clauses is quite evident in
reacting to the hypotheticals in
series (i)-(v). Series (i), n77 the authors claim, are all examples of
clauses
valid under the Copyright Act, and
so I need not address them.
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n77. Id. at 64.
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Series (ii) n78 involves three situations
that the authors claim are clear cases of copyright misuse or antitrust
violations, but the situations may
not be so clear. The first hypothetical involves an agreement by C to pay
G
a six percent royalty to permit
C to engage in distribution of videotapes for 100 years (the same rate
during
and after the copyright has expired).
If one imagines that the six percent royalty agreement relates solely to
compensation for G's contractually
mandated multi-million dollar advertising campaign of the videotapes for
the
entire 100-year period, the clause
would seem reasonable. In the second hypothetical, H requires a theater
owner to show and pay a single royalty
rate for Gone With the Wind and Night of the Lepus. In the third
hypothetical, there is an agreement
by viewers to pay "$ 5 for each 37-minute segment" n79 of Gone With the
Wind and every other motion picture.
This situation might be an illegal tying or might amount to copyright
abuse, but would seem permissible
if the royalty for the films involved a substantial volume rate discount
over
the royalty for Gone with the Wind
[*108] plus the royalty for Night of the Lepus and the other films
when
licensed alone, if there is a market
at those higher rates for the individual films, and if G (or the viewers)
has
the free choice to license the films
one at a time or in the package.
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n78. Id.
n79. Id.
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Imagine similar slight changes in
the facts of series (iii). n80 In the first situation, the theoretical
agreement is
for royalties related to home copying
of public-domain films. The authors assert that as "such devices would
render the "limited times' provision
of the Constitution a nullity, they cannot stand." n81 That conclusion
would
not be so obvious where the purveyor
seeks only a minimal flat amount for home taping of any work (with the
rate blending the rates for copyrighted
and other works) at a rate that merely compensates it for the cost of
transmission and overhead. Would
such an arrangement seem so outrageous? Would it be better if the law,
under the Nimmer proposal, effectively
prohibited any compensation from viewers for films when the copyright
had expired?
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n80. Id. at 64-65.
n81. Id. at 66.
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The second hypothetical in series
(iii) involves a license for a computer program menu structure and a
"surcharge" if the menu structure
is incorporated into other products. Although the authors think the law
on
the legality of this situation is
clear, they note that when the issue came before the Supreme Court, the
case
below was affirmed by an equally
divided court. Moreover, if the license and surcharge involved a reciprocal
agreement by the licenser to consult
with the licensees on proposed changes to the interface, and for support
services to facilitate the interaction
of these other programs and the licenser's programs, the licensing
arrangement would not appear oppressive
or unconstitutional.
Series (iv) n82 has similarly fact-specific
outcomes. The first two hypotheticals involve licenses for a still
frame of a picture for an obituary
and for ten seconds of a film for use in a film class. Rather than this
exact
factual situation, imagine that
it is not a single frame of a movie, but a copyrighted and famous photograph
of
the actor that is under license
and that the seminar is one being broadcast over network television. Such
licenses are common and quite legal.
Finally, the authors pose a third situation where 5000 copies of a video
forbid "any and all uses in Nevada,
even if such qualify as "fair uses.'" n83 Imagine that this film is a
videotaped advertisement for a product
that a court has already declared illegal in Nevada, and that the
licensee offers a separate, no-cost
license for the use of parts of the advertisement by news and other
public-interest organizations, but
forbids any use that the court would [*109] declare to be in
contempt of
its injunction against use of the
film. In all these cases, are not photographers permitted to charge for
use of
their photographs; studios, for
commercial exploitation of their works; providers, for the prevention of
illegal
use of their materials?
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n82. Id. at 65.
n83. Id.
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In sum, we must trust that courts
will restrain absurd results. To legislate against a whole class of vital
contracts and to police against
the possibility that one court will someday enforce one absurd contract
is
folly. The Nimmer proposal may well
declare illegal the absurd contracts, but it also outlaws thousands of
reasonable business practices.
Perhaps the best answer to the authors'
fears are the words of Professor Corbin, who once stated:
Theoretically, at least, people
are free to contract as they choose, limiting their rights and duties in
ways that
are unusual or absurd or unprofitable.
Their language is subject to judicial interpretation; and in this process
of
interpretation the tendency away
from the absurd and the unreasonable is so strong as to amount to a
practical limitation upon our freedom
of contract. n84
The real answer for the authors,
as I have noted above, is to get a clarification of, or a change in, federal
law. Reading between the lines,
I suspect that three issues primarily drive the Nimmer proposal. First,
it
bothers the authors that one can
"contract around Feist." The second issue is that big software producers
contractually prohibit reverse engineering
of their software, which the authors believe harms the growth of
competition in the software industry.
Finally, the authors see the future of contracts as prohibiting even the
fairest of uses. The issue of whether
parties can contract around Feist or what kind of clauses violate section
107 of the Copyright Act are really
federal questions and should be addressed as such.
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n84. 3A Arthur L. Corbin, Corbin
on Contracts 314 (1960 & Supp. 1994) (emphasis added).
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A bill, H.R. 3048, "The Digital Era
Copyright Enhancement Act," was introduced by Congressman Rick Boucher
(D-Va.) in the First Session of
the 105th Congress. Section 7 of that bill mirrors the Nimmer proposal:
When a work is distributed to the
public subject to non-negotiable license terms, such terms shall not be
enforceable under the common law
or statutes of any state to the extent that they -
(1) limit the reproduction, adaptation,
distribution, performance, or display, by means of transmission or
otherwise, of material that is uncopyrightable
under section 102(b) or otherwise; or
[*110] (2) abrogate or
restrict the limitations on exclusive rights specified in sections 107
through 114 and
sections 117 and 118 of this title.
n85
We should await action on that bill
for clarification about whether federal policy prohibits the types of clauses
sought to be declared unenforceable
by the Nimmer proposal.
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n85. The Digital Era Copyright Enhancement
Act, H.R. 3048, 105th Cong. (1998).
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Parenthetically, I note that Representative
Boucher introduced H.R. 3048 as a substitute amendment to H.R.
2281, the WIPO Copyright Treaties
Implementation Act. The Committee overwhelmingly rejected the Boucher
amendment. Moreover, the House passed
by voice vote first H.R. 2652, and then H.R. 2281, both containing
the Collections of Information Antipiracy
Act, which would explicitly provide federal protection to
uncopyrightable materials. n86 Interestingly,
section 1205(a) of H.R. 2652 and section 1305(a) of H.R. 2281,
specifically reserve a role for
contract, stating that "nothing in this chapter shall affect...the law
of contract."
In any event, at least the right
issue is before the right body. Rather than attempting a backdoor fix to
a
federal problem by changes to the
U.C.C., the authors should address their concerns to a federal forum.
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n86. See Juliana Gruenwald, House-Passed
Measure Would Punish Misuses of Data Collections, 1998 Cong. Q.
1392 (May 23, 1998); Juliana Gruenwald,
House Passes Protections Against Digital and On-Line Theft;
Conference Faces New Issues, 1998
Cong. Q. 2182 (Aug. 8, 1998).
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Conclusion
The Copyright Act and contract law
are not at war with each other, nor should we manufacture a war
between the two. If contract terms,
negotiated or "non-negotiable," violate strongly held federal or state
public policy, courts will not uphold
them. The real problem for the Article's authors is their conviction that
reverse engineering and fair use
restrictions fall within the category of strongly held federal or state
public
policy, despite their failure to
persuade Congress or the federal courts to so hold. What they fail to realize
is
that others just as firmly believe
that no such strong federal policy exists. Mr. Nimmer and his co-authors
need
to join the issue in federal court
or in Congress and let the chips fall where they may. Harming industries
through the unintended consequences
of the authors' proposed amendment to Article 2B in an attempt to
short-circuit the proper federal
approach is not the answer.