Copyright (c) 1997 Harvard Journal of Law & Technology
Harvard Law School

Winter, 1997

10 Harv. J. Law & Tec 353

LENGTH: 8383 words

NOTE: CONTRACTING BEYOND COPYRIGHT: PROCD, INC. V. ZEIDENBERG

Brandon L. Grusd*
 

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* J.D., Harvard Law School, Class of 1998.

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SUMMARY:
  ... In ProCD, Inc., v. Zeidenberg, the United States Court of Appeals or the Seventh Circuit held that shrinkwrap licensing agreements included with software products sold off the shelf are valid contracts under Article 2 of the Uniform Commercial Code ("U.C.C. ...  Because the shrinkwrap license in ProCD sought to prohibit the copying of material unprotected by the Copyright Act, the Seventh Circuit should have followed the district court's analysis and held the license preempted. ...  ProCD maintained that through these acts Zeidenberg had infringed its copyright in the software, violated the express provisions of the shrinkwrap license provided with the software, violated the Wisconsin Computer Crimes Act, and misappropriated its product. Zeidenberg argued that the uploaded data was not susceptible of copyright protection, the shrinkwrap license was invalid, and the Copyright Act preempted ProCD's state law claims. ...  This software, which allowed the user to access and sort the SelectPhone data, was clearly protected by copyright. ...  Writing for a unanimous three-judge panel, Judge Easterbrook held that the shrinkwrap license included with the SelectPhone software was binding on Zeidenberg and that the state law contract claim was not preempted by the Copyright Act. ...  In order to be bound by the contract, the consumer must know the exact terms of the license, or, at the very least, enjoy the right to return the software after discovering undesired terms. ...

TEXT:

 I. INTRODUCTION

In ProCD, Inc., v. Zeidenberg, n1 the United States Court of Appeals or the Seventh Circuit held that shrinkwrap licensing agreements n2 included with software products sold off the shelf are valid contracts under Article 2 of the Uniform Commercial Code ("U.C.C.") and that the Copyright Act does not preempt the enforcement of such contracts. Because the Seventh Circuit's result is contrary to that reached by the Third and Fifth Circuits, n3 the federal courts are now split on the status of shrinkwrap licenses, an issue of considerable significance for the software industry and the subject of vibrant academic debate. n4

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n1 86 F.3d 1447 (7th Cir. 1996).
n2 Shrinkwrap is the plastic wrapping encasing the boxes in which software is usually sold. Some such agreements purport to bind the purchaser with the breaking of the shrinkwrap seal to open the box -- hence the term "shrinkwrap license." See ProCD, 86 F.3d at 1499. The terms "end-user licenses" and "mass marketed licenses" are synonymous. Typically, such licenses disclaim all express or implied warranties, prohibit decompilation and reverse engineering, and prohibit subsequent resale of the physical copy bought from the manufacturer. See ProCD, Inc. v. Zeidenberg, 908 F. Supp. 640, 650 (W.D. Wis.), rev'd, 86 F.3d 1447 (7th Cir. 1996); see also, e.g., Mark A. Lemley, Intellectual Property and Shrinkwrap Licenses, 68 S. CAL. L. REV. 1239, 1267-84 (1995); Maureen O'Rourke, Drawing the Boundary Between Copyright and Contract: Copyright Preemption of Software License Terms, 45 DUKE L.J. 479, 481 & n.10 (1995); Lloyd L. Rich, Mass Market Software and the Shrinkwrap License, 23 COLO. LAW. 1321, 1321 (1994).
n3 See Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th Cir. 1988) (holding that a state law declaring shrinkwrap licenses enforceable was preempted by the Copyright Act); Step-Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91 (3d Cir. 1991) (holding that the terms of a shrinkwrap license did not become part of the parties' sales agreement under U.C.C. §  2-207); see also Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993) (treating a shrinkwrap license as a proposal to modify an existing sales contract under U.C.C. §  2-209 and holding it invalid without the express assent of both parties). It appears that ProCD is the first case to address both the U.C.C. and copyright dimensions of shrinkwrap license enforceability.
n4 See supra note 2. In view of this outpouring of academic commentary, the volume of litigation has been surprisingly low. See ProCD, 908 F. Supp. at 650 (W.D. Wis. 1996). Note that a current proposal to amend the U.C.C. would make these licenses enforceable, thus disposing of the contract issue; the preemption issue, however, would remain unresolved. See generally Lemley, supra note 2, at 1259-63.

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The Seventh Circuit reached the correct result in finding shrinkwrap licenses generally valid contracts. Enforceable shrinkwrap licenses are  efficient and will not unduly burden software purchasers in a competitive market. The court was incorrect, however, in concluding that no contract rights are preempted by the Copyright Act. Because the shrinkwrap license in ProCD sought to prohibit the copying of material unprotected by the Copyright Act, the Seventh Circuit should have followed the district court's analysis and held the license preempted.

II. THE DISTRICT COURT DECISION

Software manufacturer ProCD brought suit in the United States District Court for the Western District of Wisconsin for injunctive and monetary relief against Matthew Zeidenberg, a purchaser of its Select-Phone CD-ROM product. SelectPhone is a database of over ninety-five million telephone listings compiled from around 3000 local telephone books. n5 Zeidenberg acknowledged that he had copied the SelectPhone listings and uploaded them to the World Wide Web, where they could be accessed for a price. n6 ProCD maintained that through these acts Zeidenberg had infringed its copyright in the software, violated the express provisions of the shrinkwrap license provided with the software, violated the Wisconsin Computer Crimes Act, n7 and misappropriated its product. Zeidenberg argued that the uploaded data was not susceptible of copyright protection, the shrinkwrap license was invalid, and the Copyright Act preempted ProCD's state law claims. n8 On cross motions for summary judgment, Chief Judge Crabb ruled in favor of Zeidenberg. n9

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n5 See ProCD, 908 F. Supp. at 643.
n6 See ProCD, 86 F.3d at 1450.
n7 WIS. STAT. §  943.70 (1996).
n8 See ProCD, 908 F. Supp. at 643-44.
n9 See id. at 644.

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A. Copyright Analysis

Chief Judge Crabb first ruled that Zeidenberg had not infringed ProCD's copyright by copying the SelectPhone data. In Feist Publications, Inc. v. Rural Telephone Service Co., n10 the Supreme Court held that an alphabetical arrangement of listings in a telephone book failed to achieve the modicum of creativity necessary for copyright protection. As here, the listings were copied and made available to the public. n11 ProCD  did not attempt to distinguish Feist, and the court held that its listings were not protected by copyright. n12

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n10 499 U.S. 340 (1991).
n11 See id. at 343. Both the plaintiff and defendant in Feist distributed their listings to the public for free; they charged a fee for yellow pages advertising and competed on that basis. See id.
n12 See ProCD, 908 F. Supp. at 647. It was of no moment that ProCD had distributed its listings on CD-ROM rather than in the pages of a book. The Copyright Act of 1976 states: "copyright protection subsists, in accordance with this title, in original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, whether directly or with the aid of a machine or device." 17 U.S.C. §  102 (1994) (emphasis added).

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ProCD also argued that Zeidenberg had infringed by copying the SelectPhone software to his hard drive in order to upload the data. This software, which allowed the user to access and sort the SelectPhone data, was clearly protected by copyright. n13 Chief Judge Crabb rejected ProCD's argument, however, in light of §  117 of the Copyright Act, which authorizes the user to copy the program insofar as such copying is an "essential step in the utilization of the computer program." n14 Here, the accused copy was necessary if Zeidenberg used the software at all. n15

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n13 See ProCD, 908 F. Supp. at 647.
n14 17 U.S.C. §  117 (1994), quoted in ProCD, 908 F. Supp. at 648. In consequence, Chief Judge Crabb deemed it unnecessary to decide whether the equitable doctrine of fair use may have authorized Zeidenberg to make an intermediate copy of SelectPhone to access its uncopyrighted elements. See ProCD, 908 F. Supp. at 650 (citing Sega Enters., Ltd. v. Accolade, Inc., 977 F.2d 1510, 1520 (9th Cir. 1992); Atari Games Corp. v. Nintendo of Am., Inc., 975 F.2d 832, 843 (Fed. Cir. 1992)).
n15 See ProCD, 908 F. Supp. at 648-49. Chief Judge Crabb thought it unnecessary to adopt the "broad proposition" upheld in Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 261 (5th Cir. 1988), that under §  117 purchasers may copy software for purposes not intended by the copyright owner. Zeidenberg had "used SelectPhone TM exactly as plaintiff intended: to access and download data." ProCD, 908 F. Supp. at 649. Chief Judge Crabb's characterization, however, may be a bit facile: one could just as easily say that Zeidenberg had not simply accessed data, but accessed data for distribution via the Internet. This formulation leads naturally to the conclusion that Zeidenberg had deviated from ProCD's intent as expressed in the license terms.

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B. Contract Analysis

Looking to Article 2 of the U.C.C. for guidance on the contract question, n16 the district court entertained three possible approaches:
(1) the shrinkwrap license constituted an offer subject to a right of inspection under U.C.C. §  2-206;
(2) the terms were a written confirmation of a previously established sales contract under §  2-207; and
(3) the terms were a proposed modification of the sales contract under §  2-209. n17
 
 ProCD argued for the first interpretation, asserting that Zeidenberg accepted the software by using it. n18 Zeidenberg maintained that the latter two interpretations were controlling. n19

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n16 The court noted that the consensus view is to treat these "licenses" as sales of goods under the U.C.C. See ProCD, 908 F. Supp. at 651-52 (citing Lemley, supra note 2, at 1244 n.23).
n17 See id. at 651.
n18 See id. It is unclear whether ProCD was arguing that acceptance of the offer or of the goods was contingent on use. Cf. infra note 54 (discussing the Seventh Circuit's distinction between these two concepts).
n19 See ProCD, 908 F. Supp. at 651.

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The court adopted Zeidenberg's approach. Chief Judge Crabb noted first that payment for the software was sufficient to
create a contract under U.C.C. §  2-204. n20 Because the shrinkwrap license terms were hidden from Zeidenberg at the time of sale, these terms were not a part of the original contract -- the mere reference to the license on the outside of the package was insufficient to incorporate them. n21 Instead, the court explained, the shrinkwrap license was either a proposed modification to the contract under §  2-209 or a written confirmation of the agreement under §  2-207. n22 Though ProCD argued that Zeidenberg had waived his rights to inspection, revocation, and rejection under §  2-206, Chief Judge Crabb noted that this section contains no such rights. n23 While such rights can be found in § §  2-602 and 2-608, n24 in her view these sections were inapposite: designed to protect the consumer from damaged or otherwise unsatisfactory goods, they do not include a right to inspect the terms of sale. n25

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n20 See id. at 652. This section states: "A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract." U.C.C. §  2-204(1) (1995).
n21 See id. at 654 (noting that "defendants did not receive the opportunity to inspect or consider those terms. Mere reference to the terms at the time of initial contract formation does not present buyers an adequate opportunity to decide whether they are acceptable"). The court distinguished McCrimmon v. Tandy Corp., 202 Ga. App. 233 (1991) (enforcing a limited warranty available for inspection by the customer prior to purchase). See ProCD, 908 F. Supp. at 651.
n22 See ProCD, 908 F. Supp. at 652. The court noted that it was following the general approach of both Step-Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91 (3d Cir. 1991) (relying on §  2-207) and Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993) (relying on §  2-209).
n23 See ProCD, 908 F. Supp. at 652; U.C.C. §  2-206 (1995). Section 2-206 states the general rule that an offer may be accepted in any manner reasonable under the circumstances and treats several details concerning offers to buy goods for immediate shipment.
n24 These sections come into play once the sales contract has been struck. Under §  2-602, if the purchased goods fail to meet the contract specifications, the purchaser may reject them "within a reasonable time after their delivery or tender." U.C.C. §  2-602 (1995). The purchaser accepts the goods, however, by failing to reject them after a reasonable opportunity for inspection. See U.C.C. §  2-606(1) (1995). In this case, the seller's obligation is discharged unless the conditions specified in §  2-608 obtain, in which case the purchaser is allowed a reasonable time within which to revoke its acceptance. See U.C.C. §  2-608 (1995).
n25 See ProCD, 908 F. Supp. at 652.

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Proceeding under either §  2-207 or §  2-209 led to the same result. n26 Zeidenberg's continued use of the product did not constitute the express assent required under §  2-209 before a proposed modification will be incorporated into an existing contract. n27 Under §  2-207, terms later added to a contract between merchants are treated as proposals that become binding only if they do not materially alter the contract. n28 Chief Judge Crabb noted that the purpose of §  2-207 is to forestall the "battle of forms" that would result between contracting merchants bound by the last form issued. Because an actual battle of forms was unlikely in the instant context, §  2-209 afforded the preferable way to dispose of the issue. Nevertheless, the court declared the contested terms invalid under §  2-207, n29 stressing Zeidenberg's inability to bargain over, object to, or even review the shrinkwrap license prior to the software purchase. n30

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n26 See id. at 655.
n27 See id. (citing Arizona Retail, 831 F. Supp. at 759, 765-66).
n28 See U.C.C. §  2-207(2)(b) (1995).
n29 See ProCD, 908 F. Supp. at 655 (citing Step-Saver, 939 F.2d at 99). The court noted that "it is improbable to think that the drafters wanted consumers to be held to additional proposed terms in situations in which merchants were given protection." Id.
n30 See id. ProCD also argued that Zeidenberg should have been bound by the license terms as to subsequent purchases of updated versions of the software, in view of his actual knowledge of the terms. The court rejected this argument as well, noting that "each software purchase creates a new contract." See id. at 655-56.

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C. Federal Copyright Preemption

The district court next ruled that §  301 of the Copyright Act n31 precluded enforcement of the shrinkwrap license. Section 301 preempts any state law right satisfying two conditions. First, the right must attach to a work that "comes within the subject matter of copyright as specified by sections 102 and 103" of the Copyright Act. n32 Second, it must be "equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106." n33 Chief Judge Crabb cited Baltimore Orioles v. Major League Baseball Players n34 for the proposition that "the 'subject matter of copyright' includes works that fit within the general subject matter of § §  102 and 103, whether or not the  works qualify for actual protection." n35 Under §  103, copyright protection extends to compilations of facts which have been "selected, coordinated, or arranged" in a sufficiently creative manner. n36 Because the SelectPhone data was such a compilation, and failed to achieve copyright protection only for lack of creativity, it met the first prong of the preemption test. n37 As to the second prong, Chief Judge Crabb noted that preemption applies unless there is "an extra element that makes the state law claim qualitatively different from the underlying copyright claim." n38 The contract claim, however, was "nothing more than an effort to prevent defendants from copying and distributing [ProCD's] data." n39 Thus ProCD's contract claim was identical in practicality to claims which would have arisen under §  106 had the SelectPhone arrangement enjoyed copyright protection. n40

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n31 17 U.S.C. §  301 (1994).
n32 17 U.S.C. §  301(a) (1994).
n33 Id. Among the rights specified in §  106 are those of reproduction, distribution, and creation of derivative works. See 17 U.S.C. §  106 (1994).
n34 805 F.2d 663, 674 (7th Cir. 1986) (holding that the Copyright Act preempted a state law right of publicity claim in baseball players' television performances even though the performances were unprotected for lack of creativity).
n35 ProCD, 908 F. Supp. at 656. Chief Judge Crabb noted that "other courts have ruled similarly." Id. (citing Harper & Row Publishers, Inc. v. Nation Enters., 723 F.2d 195, 201 (2d Cir. 1983), rev'd on other grounds, 471 U.S. 539 (1985); Ehat v. Tanner, 780 F.2d 876, 877 (10th Cir. 1985); Nash v. CBS, Inc., 704 F. Supp. 823, 832 (N.D. Ill. 1989)).
n36 17 U.S.C. §  101 (1994) (defining the term "compilation"). Section 103(a) expressly includes compilations within the subject matter of copyright. See 17 U.S.C. §  103(a) (1994).
n37 See ProCD, 908 F. Supp. at 657.
n38 Id. at 657-58 (citing, inter alia, Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1164 (1st Cir. 1994); Harper & Row Publishers, Inc. v. Nation Enters., 723 F.2d 195, 201 (2d Cir. 1983)).
n39 ProCD, 908 F. Supp. at 657. The court noted the holdings of several tribunals that a claim for breach of contract can never be equivalent to a claim asserted under §  106. See id. (citing National Car Rental Sys., Inc. v. Computer Assoc. Int'l, Inc., 991 F.2d 426, 433 (8th Cir. 1993); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488, 1501 (5th Cir. 1990); Acorn Structures, Inc. v. Swantz, 846 F.2d 923, 926 (4th Cir. 1988); Trenton v. Infinity Broadcasting Corp., 865 F. Supp. 1416, 1429 (C.D. Cal. 1994)).
n40 The court ruled that the misappropriation claim and the claim under the Wisconsin Computer Crimes Act were likewise preempted. See ProCD, 908 F. Supp. at 659-62.

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III. THE SEVENTH CIRCUIT'S DECISION

The Seventh Circuit reversed and remanded. Writing for a unanimous three-judge panel, Judge Easterbrook held that the shrinkwrap license included with the SelectPhone software was binding on Zeidenberg and that the state law contract claim was not preempted by the Copyright Act. n41

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n41 ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1449 (7th Cir. 1996). The court did not pass on the other claims, viewing them as unnecessary to its decision. See id.

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 A. Contract Analysis

Judge Easterbrook agreed in the first instance with the principle that "one cannot agree to hidden terms." n42 His conclusion, however, was that upon running the program for the first time, Zeidenberg was put on sufficient notice of the license terms, which were "splashed . . . on the screen" in such a way that Zeidenberg could not continue without indicating his acceptance. n43 Zeidenberg then acquiesced to the terms by continuing to use the software. n44

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n42 Id. at 1450.
n43 Id. at 1452.
n44 See id.

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Judge Easterbrook found support for this result in economic analysis, opining that consumers are better off under a regime of enforceable shrinkwrap licenses. n45 He relied first on the familiar argument that standardized license agreements obviate costly bargaining over substantially identical terms in repeated transactions of the same type. Pointing to insurance contracts, airplane tickets, and concert tickets as familiar examples, he noted that "transactions in which the exchange of money precedes the communication of detailed terms are common." n46 Such transactions typically create enforceable contracts, because requiring express assent prior to payment would be inefficient. n47 Next Judge Easterbrook argued that, in the specific context of computer software, refusing to enforce such agreements would subject manufacturers to broad implied warranty terms and consequential damages. Such an arrangement would harm consumers by "driving prices through the ceiling." n48 Judge Easterbrook also indicated that, despite the individual software purchaser's evident lack of bargaining power, the competitive market was the proper mechanism to punish vendors for faulty software or unreasonable license terms. n49

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n45 See id. at 1451-52.
n46 Id. at 1451.
n47 See id. (citing RESTATEMENT (SECOND) OF CONTRACTS §  211 cmt. a (1981)).
n48 Id. at 1452. Judge Easterbrook also noted that the contested restraint enabled ProCD to engage in price discrimination by charging commercial users of its product more than non-commercial users. Without the restraint, ProCD would be unable to prevent non-commercial arbitragers from purchasing the database at the low price and reselling it to commercial users, undercutting ProCD's commercial price. According to Judge Easterbrook, ProCD would then raise the non-commercial price of its database, harming those users who could no longer afford it. See id. at 1449-50.
n49 See id. at 1453.

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Turning to the U.C.C., Judge Easterbrook rested his analysis on §  2-204. n50 He noted that the vendor, as "master of the offer," may specify the mode of acceptance; the buyer accepts by performing in a manner consistent with that specified. n51 Judge Easterbrook held that by placing the software on the shelf, ProCD had proposed a contract, the acceptance of which was conditioned on use of the software. Had Zeidenberg found the license terms unacceptable, he could have rejected the offer by returning the product. n52 Judge Easterbrook also reviewed the inspection and revocation argument rejected by the district court. n53 In his view, the right of revocation under U.C.C. §  2-602 extended to the terms of sale: "the terms of the license are conceptually identical to the contents of the package. . . . Terms of use are no less a part of "the product" than are the size of the database and the speed with which the software compiles listings." n54

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n50 See id. at 1452. The Seventh Circuit thus adopted none of the three approaches suggested by the district court, though the analysis under §  2-204 is functionally quite similar to the approach under § §  2-602, 2-606, and 2-608 rejected by the district court and discussed in dictum by the Seventh Circuit. See supra note 24; infra note 54. On the district court's treatment of §  2-204, see supra note 20 and accompanying text.
n51 See ProCD, 86 F.3d at 1452.
n52 See id. at 1452-53.
n53 See supra notes 23-25 and accompanying text.
n54 ProCD, 86 F.3d at 1453. Judge Easterbrook was careful to note the distinction between acceptance of the offer under §  2-204 and acceptance of the goods under §  2-606. He indicated that §  2-204 was sufficient to dispose of the issue here; he addressed §  2-606 "only to show that . . . the U.C.C. consistently permits the parties to structure their relations so that the buyer has a chance to make the final decision after a detailed review." Id.

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B. Federal Copyright Preemption

Judge Easterbrook disagreed with the district court's conclusion that the rights asserted by ProCD under state law were equivalent to those specified in §  106 of the Copyright Act. n55 While a copyright is "a right against the world," the binding force of rights created under contract extends only to the participants in the agreement. n56 Thus, Judge Easterbrook reasoned, unlike the rights granted in §  106, contractual rights are not "exclusive rights" reserved by the author and, as such, can never be equivalent to rights granted by the Copyright Act. n57 To reinforce this point, Judge Easterbrook invoked the example of "everyday transactions in intellectual property" n58 -- surely §  301 does  not preempt the agreements between a video rental store and its customers, despite the undisputed copyright in the rented material. n59

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n55 See id. Thus the Seventh Circuit followed the approaches of the Fourth, Fifth, and Eighth Circuits. See supra note 39.
n56 ProCD, 86 F.3d at 1454.
n57 See id.
n58 Id.
n59 See id.

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Judge Easterbrook also addressed the interplay between federal and state intellectual property protection outside the copyright context. The Supreme Court's decisions in Kewanee Oil Co. v. Bicron Corp. n60 and Aronson v. Quick Point Pencil Co. n61 turned on the idea that enforcement of the state law rights in question removed no information from the public domain; the same consideration applied here. Furthermore, contractual limitations on software reverse engineering "serve the same procompetitive functions as does the law of trade secrets." n62

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n60 416 U.S. 470 (1974) (holding that state trade secret laws -- including nondisclosure agreements -- are consistent with the federal patent laws because they allow third parties to discover and use the information through reverse engineering).
n61 440 U.S. 257 (1979) (holding that contracts to pay for intellectual property may be enforced even where federal law does not protect that property).
n62 ProCD, 86 F.3d at 1455 (citing Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174, 180 (7th Cir. 1991)).

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IV. DISCUSSION

Judge Easterbrook reached the correct result on the U.C.C. issue. His understanding of copyright preemption, however, proves too narrow, as the analysis below will reveal.

A. Contract Analysis

Shrinkwrap licenses are contracts of adhesion: they are offered to consumers on a "take it or leave it" basis with no opportunity to bargain for the contract terms. n63 As the varying approaches in the ProCD opinions illustrate, the U.C.C. is of little direct help in divining the circumstances under which such contracts are to be enforced. Thus to find the answer we must turn to broader considerations of public policy.

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n63 See, e.g., Lemley, supra note 2, at 1286-89; I. Trotter Hardy, Contracts, Copyright, and Preemption in a Digital World, 1 RICH. J.L. & TECH. 2, 29-32 (1995); David A. Rice, Public Goods, Private Contract and Public Policy: Federal Preemption of Software License Prohibitions Against Reverse Engineering, 53 U. PITT. L. REV. 543, 563-64 (1992).

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As usual, the main considerations in crafting an appropriate rule are economic efficiency and fairness. As Judge Easterbrook notes, a regime of enforceable shrinkwrap licenses produces the efficiency benefit of transaction cost savings. n64 Particularly in the realm of mass sales of  products and services, standard form contracts save both producers and consumers time and money in negotiating individual contracts. n65 These efficiency benefits must be weighed against the potential for sellers to include hidden terms, not reviewable at the time of purchase, which unfairly burden the purchaser. It does not seem probable, however, that producers will include terms in their shrinkwrap licenses that are manifestly unfair. First, the courts are equipped to apply the usual tests of contract law to invalidate such terms. n66 Second, it is unlikely that in a reasonably competitive market consumers will continue to purchase software binding them to such unconscionable terms. As Judge Easterbrook notes, suppliers of computer software will compete with each other not only on the quality of the actual software program, but also on the terms of the license. n67 So long as consumers have adequate information concerning the license terms, those that have the best overall package (including the quality of the software, the price, and the terms of use) will attract more customers. Furthermore, even if a manufacturer could exploit imperfect information to foist unfair terms on consumers, its resulting reputation for unfairness would drive it out of business. Thus, no rational manufacturer facing a competitive market would attempt to include such terms in its license. n68

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n64 See supra notes 45-47 and accompanying text; see also, e.g., Robert W. Gomulkiewicz & Mary L. Williamson, A Brief Defense of Mass Market Software License Agreements, 22 RUTGERS COMPUTER & TECH. L.J. 335, 341-46 (1996); Celeste L. Tito, The Servicewrap: 'Shrinkwrap' for Mass-Marketed Software Services, 13 COMPUTER LAW. 19, 19 (1996).
n65 See Rice, supra note 63, at 563 (noting that shrinkwrap licenses are a "rational and expedient response to the evolution of market conditions and arrangements; neither contemporary theory nor actual practice would render either the contracts or their specific terms unenforceable solely because they are contracts of adhesion.").
n66 See, e.g., Gomulkiewicz & Williamson, supra note 64, at 345; 3 ARTHUR LINTON CORBIN, CORBIN ON CONTRACTS §  559A(B) (Supp. 1997); U.C.C. §  2-302 (1995) ("Unconscionable Contracts or Clauses"). Courts will refuse to enforce contract terms when they work oppressive burdens or unfair surprise on one of the parties in light of the circumstances. See, e.g., Wheeler v. St. Joseph Hosp., 133 Cal. Rptr. 775, 783 (Ct. App. 1976); U.C.C. §  2-302 cmt. 1 (1995). Judge Easterbrook noted that unconscionable terms in the shrinkwrap license context can be addressed through standard contract analysis. See ProCD, 86 F.3d at 1449.
n67 See ProCD, 86 F.3d at 1453 (citing Digital Equip. Corp. v. Uniq Digital Techs., Inc., 73 F.3d 756 (7th Cir. 1996)).
n68 Of course the markets in computer software will rarely be perfectly competitive. Insofar as they deviate too far from the competitive norm, however, the problem is best dealt with by antitrust law.

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The legal rule should, of course, work to ensure that consumers have adequate information. In order to be bound by the contract, the consumer must know the exact terms of the license, or, at the very least, enjoy the right to return the software after discovering undesired terms. Under Judge Easterbrook's formulation in ProCD, Zeidenberg could have rejected the contract by returning the SelectPhone program; because he failed to do so, he was bound by the contract. Thus, Judge  Easterbrook's approach is sound, at least as to shrinkwrap licenses which do not implicate copyright preemption concerns.

B. Federal Copyright Preemption

The preemption issue -- which is as steeped in policy considerations as the first question -- is a special case of the familiar incentive-access problem of copyright law. Expanding the scope of copyright protection increases the economic value of the creative works to which it attaches. As the incentives of individuals to produce creative works increase, so does society's store of such works. n69 This is the animating rationale of United States copyright law; it is enshrined in the Constitution. n70 At the same time, however, the increased rights invariably limit the access of other parties to the use and enjoyment of these works, including the creation of new works drawing upon their copyrighted predecessors. n71 In the extreme case, the constitutional goal of encouraging creativity would be utterly defeated if no one could enjoy its results. It is the difficult task of copyright law to balance the two competing goals of encouraging creativity and promoting access to works of authorship thus created. n72

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n69 See Glynn S. Lunney, Jr., Reexamining Copyright's Incentives-Access Paradigm, 49 VAND. L. REV. 483, 492-95 (1996).
n70 See U.S. CONST. art. I, §  8, cl. 8 (empowering Congress "to promote the Progress of Science and the useful Arts, by securing for limited Times to Authors and Inventors the exclusive right to their respective Writings and Discoveries"); see also, e.g., Jeremy Waldron, From Authors to Copiers: Individual Rights and Social Values in Intellectual Property, 68 CHI.-KENT L. REV. 841, 848-49 (1993) (noting that "the Constitution stipulates that authors' rights are created to serve the social good").
n71 See Lunney, supra note 69, at 495-98.
n72 See id. at 485.

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The question in ProCD is the extent to which rights created under contract will upset the balance between these goals struck by the Supreme Court as a matter of copyright law in Feist. n73 On the one hand, ProCD presents what appears to be a particularly onerous "free rider" problem: databases are very expensive to create and very easy to copy. n74 Absent some form of protection, the price of databases will tend to be driven down to the cost of reproducing them, and database creators will be denied a return on their investments. The contractual "quasi-copyrights" to which manufacturers have turned in response are clearly less expansive than true copyrights -- they are powerless to prevent free riding by those who have obtained a copy of the program without  purchasing it from the manufacturer. n75 Nevertheless, because such use will necessarily be rare, n76 shrinkwrap licenses can significantly ameliorate the free rider problem. On the other hand, the Supreme Court was aware of this free rider problem when it disavowed "sweat of the brow" as the touchstone of copyrightability in Feist. n77 The courts have not been consistent on the issue whether federal copyright laws preempt these quasi-copyright contracts. n78 To find the answer, we must view these contracts in the light of Feist, refracted through the lens of §  301.

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n73 Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340 (1991).
n74 Indeed, Judge Easterbrook states that the cost of creating and updating ProCD's database exceeded $ 10 million. See ProCD, 86 F.3d at 1449.
n75 See ProCD, 86 F.3d at 1454.
n76 The only way it is likely to arise, apart from illegal copying, is if the purchaser from the manufacturer sells or gives copies of the program to a third party. The manufacturer could probably prevent such transfers by retaining ownership of the physical medium on which the copy is stored. Furthermore, merely running the program -- which requires the computer to load a copy of it into RAM -- may constitute copyright infringement unless the §  117 exemption applies. See MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). Section 117 by its terms applies only to "the owner of a copy" of the program; mere possessors cannot claim the benefit of the exemption. 17 U.S.C. §  117 (1994). Whether a subsequent possessor of the copy is an owner for purposes of §  117 will not always be an easy question. See generally David Nimmer, Brains and Other Paraphernalia of the Digital Age, 10 HARV. J.L. & TECH. 1, 21-22 (1996).
n77 See Feist, 499 U.S. at 349-50.
n78 Some courts have held such contracts preempted. See, e.g., Vault Corp. v. Quaid Software, Ltd., 847 F.2d 255 (5th Cir. 1988); American Movie Classics Co. v. Turner Entertainment Co., 922 F. Supp. 926, 931 (S.D.N.Y. 1996); Wolff v. Institute of Elec. & Elec. Eng'rs, Inc., 768 F. Supp. 66 (S.D.N.Y. 1991). Compare the cases cited in note 39, supra, in which the contracts were enforced.

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Recall that copyright preemption poses two discrete legal questions. n79 As to the first question, both courts in ProCD agreed that fact compilations, even if unprotected for lack of creativity, nevertheless fall under the subject matter of copyright and thus within the ambit of §  301. n80 This result is undoubtedly correct. If states were free to remove unprotected works of authorship from the public domain, the preemption clause would have little meaning. n81 This result is also consistent with the language of the House Report. n82 As to the second criterion, however -- that the legal or equitable right asserted must be equivalent to one of the exclusive rights under §  106 of the Copyright Act -- Judge Easterbrook's analysis is not as convincing. His argument is that, because copyright operates against the world whereas contracts bind only the parties, no  right under a contract can be equivalent to a right under the Copyright Act, and therefore no contract term can be preempted by §  301. n83 Yet because federal law is always broader in application than state law, no state law would be preempted on a rigorous application of this idea. n84 Otherwise, it is difficult to see where to draw the line circumscribing equivalent state rights. n85

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n79 See supra text accompanying notes 32-33.
n80 See ProCD, 86 F.3d at 1453; supra notes 34-37 and accompanying text.
n81 See 1 DAVID NIMMER & MELVILLE B. NIMMER, NIMMER ON COPYRIGHT §  101[B][2], at 1-42.2 to 1-44.1.
n82 See H.R. REP. No. 94-1476, at 129-33 (1976), reprinted in 1976 U.S.C.C.A.N. 5659, 5747 ("As long as the work fits within the general subject matter categories of section 102 and 103, the bill prevents the States from protecting it even if it fails to achieve Federal statutory copyright because it is too minimal or lacking in originality to qualify, or because it has fallen into the public domain.").
n83 See ProCD, 86 F.3d at 1454.
n84 For instance, a state law prohibiting the copying of non-creative fact compilations would bind only those users of the work to whom it applied under the prevailing choice of law doctrine. Thus the law would be narrower in scope than federal copyright, just as contract rights are. Nevertheless, the hypothetical state law seems to be in the core of what §  301 proscribes.
n85 Furthermore, Congress removed from the preemption clause a provision that would have excluded all contracts from preemption. See 122 CONG. REC. H10910 (daily ed. Sept. 22, 1976). This deletion supports the inference that at least some contracts may be preempted.

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A more meaningful approach would apply §  301 by examining the act giving rise to the breach of contract and asking whether that act could give rise to a claim under §  106. n86 In ProCD the answer is undeniably affirmative; thus the contract there would be preempted. The alternative would allow individuals to contract beyond copyright -- that is, to use the mechanism of contract to restrict access to what Congress has made available to everyone. n87

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n86 This formulation in terms of acts is consistent with the "extra element" test embraced by the district court. See supra notes 38-40 and accompanying text; ProCD, 908 F. Supp. at 658 (distinguishing National Car Rental Sys., Inc. v. Computer Assoc. Int'l, Inc., 991 F.2d 426 (8th Cir. 1993), on the ground that "the plaintiff [in that case] did not claim that the defendant had improperly reproduced, distributed, or displayed the software, all of which would be claims that would have to [be] brought under federal copyright law").
n87 In Feist, the Supreme Court suggested that Congress lacks the constitutional authority to protect non-creative works. See Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 346-47 (1991). This does not mean, however, that Congress is powerless to preempt state protection of such works. Rather, its authority to encourage authorship includes the power to preserve the store of public-domain facts on which all creative works must rely.

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Judge Easterbrook's concerns about the perverse results flowing from a proposal such as this are unfounded. For instance, he asks rhetorically whether a student may sell his unrestricted LEXIS access to a law firm. n88 The unstated suggestion is that the answer must be "no" under any sensible scheme of law, but "yes" under a rule favoring Zeidenberg. This suggestion, however, is incorrect. The action that breaches the contract here is the student's grant of access to the law firm,  which violates no right granted in §  106; thus the contract would not be preempted under the proposal offered here. n89

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n88 See ProCD, 86 F.3d at 1454.
n89 What the hypothetical does illustrate is that the proposed scheme fails to solve the free rider problem. Such a solution, however, is for Congress and not the courts to fashion. Note that a bill creating sui generis database protection has been proposed as an amendment to Title 15. See H.R. 3531, 104th Cong. §  4 (1996).

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It could be argued that the proposed approach elevates form over substance. Perhaps there is no real difference between copying the information from LEXIS and selling it on the one hand, and providing the law firm with access on the other. On this view, the instant proposal may seem at least as arbitrary as Judge Easterbrook's approach. The response to this argument is twofold. First, any division between equivalent and non-equivalent rights will necessarily involve some degree of arbitrariness; nevertheless, the approach suggested here is consonant with the basic precepts of copyright. Copyright law is not concerned with the question whether a service such as LEXIS can charge for its use, nor is it concerned with the enforcement of contracts that protect the service. It is concerned with the underlying information. Second, closer scrutiny reveals that the two scenarios are not functionally identical. In the second situation, the costs of transmitting the information between the student and the firm will undoubtedly be higher. But the discrepancy between the costs of creation and reproduction is precisely what intellectual property protection in general seeks to offset. Forcing the copier to use the higher cost method of access seems a fair compromise between allowing copyright protection or its equivalent to attach -- in opposition to the combined mandate of Feist and §  301 -- and allowing no protection whatsoever.

V. CONCLUSION

It remains to be seen whether the courts will arrive at a consensus on the issue of shrinkwrap license enforceability. The Seventh Circuit reached the correct result as to contracts which do not seek to prevent copying; moreover, despite the contrary approaches of Step-Saver n90 and Arizona Retail, n91 the current proposal to amend the U.C.C. is encouraging. n92 Yet four circuits now adhere to Judge Easterbrook's unduly narrow view of copyright preemption. n93 The incentive-access dilemma is a difficult and inevitable problem of copyright protection. By allowing individuals to contract beyond copyright, the Seventh Circuit failed to  recognize that it is the province of Congress, and not individuals, to strike the appropriate balance.

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n90 Step-Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91 (3d Cir. 1991).
n91 Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993).
n92 See supra note 4.
n93 See supra notes 39 & 55.

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