Enforcing Reverse Engineering Prohibitions in Shrink- and Click-wrap Licenses: A Report on Bowers v. Baystate Technologies, Inc.

Until recently, it was unclear whether courts would uphold such shrink-wrap restrictions on reverse engineering, since these provisions attempted to achieve by “adhesion contract” what could not be achieved through copyright. Accordingly, some commentators argued such restrictions are preempted by the Copyright Act, 17 U.S.C. '301(a), since there was no arms length negotiation of the underlying license. See eg, David McGowan, Free Contracting, Fair Competition, and Article 2B: Some Refelctions on Federal Competition Policy, Information Transactions, and “Aggressive Neutrality,” Berkeley Tech. L.J. 13:1173 (1998); Dennis S. Karjala, Federal Preemption of Shrinkwrap and On-Line Licenses, 22 U. Dayton L. Rev. 511 (1997).

However, in a recent decision from the Federal Circuit, Bowers v. Baystate Technologies, Inc., 2003 U.S. App. Lexis 1423 (Fed. Cir. Jan. 29, 2003), vacated on reh'g, 302 F.3d 1334 (Fed. Cir. 2002), a divided panel held that enforcement of a shrink-wrap's anti-reverse engineering clause was not, in fact, preempted by the Copyright Act. That opinion, which is based on the law of the First Circuit, revised an earlier opinion from the same court that reached the same conclusion, but without extensive analysis of the preemption question. 302 F.3d 1334 (Fed. Cir. 2002). The court in Bowers agreed to rehear the matter specifically to address the copyright issue, and received submission from amici that included 33 intellectual property law professors and several policy groups, including the American Library Association, urging the Federal Circuit to recognize that preemption might occur in some instances. See Professor Mark A. Lemley, Brief of Amici Curiae in Support of Petition for Panel Rehearing and Rehearing En Banc, Bowers v. Baystate Technologies, Inc., available at www.law.berkeley.edu/institutes/bclt/pubs/lemley/bowers.pdf [hereinafter "Brief of Amici"]. But the court rejected this notion.

In the case, the plaintiff, Harold Bowers, had sold a patented software product called Designer's Toolkit as part of a shrink-wrap license that prohibited reverse engineering. Baystate purchased copies of the software and three months later introduced a product that incorporated many of the same capabilities as Designer's Toolkit. Baystate then sought declaratory judgment that it did not infringe Bower's patent and that the patent was invalid and unenforceable, prompting Bowers to file counterclaims for patent infringement, copyright infringement, and breach of contract. The jury found for Bowers on all counts, but the District Court of Massachusetts set aside the award of damages for copyright infringement as duplicative of the contract damages. Both parties appealed, with Baystate claiming the jury's award for breach of contract was unlawful since the claim should have been preempted by the Copyright Act.

The Bowers majority upheld the jury's determination, noting at the outset that “Courts respect freedom of contract and do not lightly set aside freely-entered agreements.” Bowers at 10. The majority then noted that the First Circuit does not require preemption of a cause of action “as long as 'a state cause of action requires an extra element, beyond mere copying, preparation of derivative works, performance, distribution or display.'” Id. at 10-11, quoting Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1164, 32 U.S.P.Q.2d 1385, 1397 (1st Cir. 1994). In applying that “extra element” rule, the majority elected to follow the reasoning of the Seventh Circuit in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 39 U.S.P.Q.2d 1161 (7th Cir. 1996). Specifically, it found that “'the mutual assent and consideration required by a contract claim render that claim qualitatively different from copyright infringement,'” such that a breach of contract claim founded on a prohibition on reverse engineering possesses the requisite “extra element” to remove it from Copyright's preemption. Bowers at 14, quoting ProCD, 86 F.3d at 1454. In reaching this decision, the court fully acknowledged that reverse engineering is protected by the First Amendment as a form of fair use, but held that “the First Circuit's view distinguishing a state law contract claim having additional elements of proof from a copyright claim” did nothing to undermine copyright law. Id. at 15.

Significantly, the majority and the dissent in Bowers differed in their views as to the nature of the decision by the Fifth Circuit in Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 7 U.S.P.Q.2d 1281 (5th Cir. 1988). There, the Fifth Circuit ruled that a Louisiana state law that allowed enforcement of a shrink-wrap license was in conflict with, and, thus preempted by copyright law. The state law allowed a software producer to use shrink-wrap licenses to prohibit all copying and reverse engineering of the product. The Fifth Circuit ruled that this law was preempted by copyright law because it conflicted with rights granted to the users under the Copyright Act. Therefore, the Fifth Circuit found that the shrink-wrap license terms prohibiting reverse engineering were unenforceable.

The Bowers majority distinguished Vault by arguing that private contractual agreements are not the same as a state law that prevents all copying of a computer program. Bowers, at 15-16. The majority suggested that because “private parties are free to contractually forego the limited ability to reverse engineer a software product under the exemptions of the Copyright Act,” the situation in Vault was inapposite. However, the majority also noted that such a private party could intentionally breach the shrink-wrap prohibition, but would have to “weigh the benefits of breach against the arguably de minimus damages arising from merely discerning non-protected code.” Id. at 17.

The dissent disagreed with the majority's analysis and argued that to the extent state contract law permitted enforcement of a shrink-wrap or click-wrap license, commonly viewed as a contract of adhesion, the situation was indistinguishable from Vault. The dissent claimed that in such circumstance the state contract law “is no different in substance from a hypothetical black dot law,” and hence a shrink-wrap condition prohibiting legitimate reverse engineering of software lacked the “extra element” that is necessary to separate a breach of contract claim from a copyright claim. Id. at 43. Indeed, the dissent foresaw that taken to its logical conclusion, permitting enforcement of such contractual provisions could result in parties attempting to restrict other traditional copyright protections in different contexts, such as by including a restriction stating that a particular transaction is not a sale for purposes of the “first sale” doctrine. Id. See also, 17 U.S.C. '109(a).

Bowers is an important decision, and likely is only the first of what soon may be many opinions addressing the question of whether anti-reverse engineering provisions are enforceable. In fact, the division between the Bowers majority and dissent mirrors the ongoing debate.

Anti-reverse engineering provisions obviously protect intellectual property, and thus may encourage companies to develop products.

See, generally, Arthur R. Miller, Copyright Protection for Computer Programs, Databases, and Computer-Generated Works: Is Anything New Since CONTU?, Harv. L. Rev. 977, 1026-27 (1993). Additionally, rather than waiting to obtain patent protection, companies may introduce products more quickly to the benefit of both consumers and the entire industry.

On the other hand, enforcement of the shrink-wrap license also may quell innovation by preventing competitors from introducing new software products that improve upon or complement the original work. See, eg, Brief of Amici, note 6. Indeed, the Supreme Court has recognized that reverse engineering is “an essential part of innovation” which “often leads to significant advances in technology.” Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 160 (1989).

There is no “easy” answer to the question which view will ultimately hold sway. In fact, it may well be that it is the Supreme Court who ultimately will have to settle this important question of law. Until then, though, Bowers is likely to be viewed as the seminal decision on the matter.

The practice of “reverse engineering,” whereby one company obtains the product of a competitor and works backwards “to divine the process which aided in its development or manufacture,” has long been accepted as a legitimate (and sometimes wholly necessary) practice in the computer software marketplace. Kewanee Oil Co. v Bicron Corp., 416 U.S. 470, 476 (1974). It also has been upheld by Courts as a form of “fair use,” whereby competitors may make copies of one another's source or object code for purposes of study and analysis without incurring liability for copyright infringement. See, eg, Sony Computer Entertainment Inc. v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000); Sega Enterprises Ltd. v. Accolade, Inc. , 977 F.2d 510 (9th Cir. 1992) (amended opinion); Atari Games Corp. v. Nintendo , 975 F.2d 832 (Fed. Cir. 1992).

Proponents of reverse engineering argue that it results in the public obtaining less expensive (and often higher quality) products. The practice is reviled, however, by many prominent software companies that view it as impairing their ability to protect intellectual property that often has been developed at great expense.

Not surprisingly, therefore, it has become common for software and hardware vendors to attempt to limit reverse engineering through the use of prohibitions contained within so-called “shrink-wrap” and “click-wrap” license agreements. Such licenses typically are unilaterally imposed upon consumers as a result of their opening the plastic wrapping on the outside of floppy disks, or by their clicking on the words “I agree” during Internet transactions. By accepting the terms of the license in this fashion, the purchasers also necessarily agree that they will not attempt to determine the functionality or underlying nature of the software through otherwise lawful practices, such as reverse engineering. If they ignore this prohibition, the purchasers presumably breach the contract and could be held liable for damages.

Until recently, it was unclear whether courts would uphold such shrink-wrap restrictions on reverse engineering, since these provisions attempted to achieve by “adhesion contract” what could not be achieved through copyright. Accordingly, some commentators argued such restrictions are preempted by the Copyright Act, 17 U.S.C. '301(a), since there was no arms length negotiation of the underlying license. See eg, David McGowan, Free Contracting, Fair Competition, and Article 2B: Some Refelctions on Federal Competition Policy, Information Transactions, and “Aggressive Neutrality,” Berkeley Tech. L.J. 13:1173 (1998); Dennis S. Karjala, Federal Preemption of Shrinkwrap and On-Line Licenses, 22 U. Dayton L. Rev. 511 (1997).

However, in a recent decision from the Federal Circuit, Bowers v. Baystate Technologies, Inc., 2003 U.S. App. Lexis 1423 (Fed. Cir. Jan. 29, 2003), vacated on reh'g, 302 F.3d 1334 (Fed. Cir. 2002), a divided panel held that enforcement of a shrink-wrap's anti-reverse engineering clause was not, in fact, preempted by the Copyright Act. That opinion, which is based on the law of the First Circuit, revised an earlier opinion from the same court that reached the same conclusion, but without extensive analysis of the preemption question. 302 F.3d 1334 (Fed. Cir. 2002). The court in Bowers agreed to rehear the matter specifically to address the copyright issue, and received submission from amici that included 33 intellectual property law professors and several policy groups, including the American Library Association, urging the Federal Circuit to recognize that preemption might occur in some instances. See Professor Mark A. Lemley, Brief of Amici Curiae in Support of Petition for Panel Rehearing and Rehearing En Banc, Bowers v. Baystate Technologies, Inc., available at www.law.berkeley.edu/institutes/bclt/pubs/lemley/bowers.pdf [hereinafter "Brief of Amici"]. But the court rejected this notion.

In the case, the plaintiff, Harold Bowers, had sold a patented software product called Designer's Toolkit as part of a shrink-wrap license that prohibited reverse engineering. Baystate purchased copies of the software and three months later introduced a product that incorporated many of the same capabilities as Designer's Toolkit. Baystate then sought declaratory judgment that it did not infringe Bower's patent and that the patent was invalid and unenforceable, prompting Bowers to file counterclaims for patent infringement, copyright infringement, and breach of contract. The jury found for Bowers on all counts, but the District Court of Massachusetts set aside the award of damages for copyright infringement as duplicative of the contract damages. Both parties appealed, with Baystate claiming the jury's award for breach of contract was unlawful since the claim should have been preempted by the Copyright Act.

The Bowers majority upheld the jury's determination, noting at the outset that “Courts respect freedom of contract and do not lightly set aside freely-entered agreements.” Bowers at 10. The majority then noted that the First Circuit does not require preemption of a cause of action “as long as 'a state cause of action requires an extra element, beyond mere copying, preparation of derivative works, performance, distribution or display.'” Id. at 10-11, quoting Data Gen. Corp. v. Grumman Sys. Support Corp. , 36 F.3d 1147, 1164, 32 U.S.P.Q.2d 1385, 1397 (1st Cir. 1994). In applying that “extra element” rule, the majority elected to follow the reasoning of the Seventh Circuit in ProCD, Inc. v. Zeidenberg , 86 F.3d 1447, 39 U.S.P.Q.2d 1161 (7th Cir. 1996). Specifically, it found that “'the mutual assent and consideration required by a contract claim render that claim qualitatively different from copyright infringement,'” such that a breach of contract claim founded on a prohibition on reverse engineering possesses the requisite “extra element” to remove it from Copyright's preemption. Bowers at 14, quoting ProCD, 86 F.3d at 1454. In reaching this decision, the court fully acknowledged that reverse engineering is protected by the First Amendment as a form of fair use, but held that “the First Circuit's view distinguishing a state law contract claim having additional elements of proof from a copyright claim” did nothing to undermine copyright law. Id. at 15.

Significantly, the majority and the dissent in Bowers differed in their views as to the nature of the decision by the Fifth Circuit in Vault Corp. v. Quaid Software Ltd. , 847 F.2d 255, 7 U.S.P.Q.2d 1281 (5th Cir. 1988). There, the Fifth Circuit ruled that a Louisiana state law that allowed enforcement of a shrink-wrap license was in conflict with, and, thus preempted by copyright law. The state law allowed a software producer to use shrink-wrap licenses to prohibit all copying and reverse engineering of the product. The Fifth Circuit ruled that this law was preempted by copyright law because it conflicted with rights granted to the users under the Copyright Act. Therefore, the Fifth Circuit found that the shrink-wrap license terms prohibiting reverse engineering were unenforceable.

The Bowers majority distinguished Vault by arguing that private contractual agreements are not the same as a state law that prevents all copying of a computer program. Bowers, at 15-16. The majority suggested that because “private parties are free to contractually forego the limited ability to reverse engineer a software product under the exemptions of the Copyright Act,” the situation in Vault was inapposite. However, the majority also noted that such a private party could intentionally breach the shrink-wrap prohibition, but would have to “weigh the benefits of breach against the arguably de minimus damages arising from merely discerning non-protected code.” Id. at 17.

The dissent disagreed with the majority's analysis and argued that to the extent state contract law permitted enforcement of a shrink-wrap or click-wrap license, commonly viewed as a contract of adhesion, the situation was indistinguishable from Vault. The dissent claimed that in such circumstance the state contract law “is no different in substance from a hypothetical black dot law,” and hence a shrink-wrap condition prohibiting legitimate reverse engineering of software lacked the “extra element” that is necessary to separate a breach of contract claim from a copyright claim. Id. at 43. Indeed, the dissent foresaw that taken to its logical conclusion, permitting enforcement of such contractual provisions could result in parties attempting to restrict other traditional copyright protections in different contexts, such as by including a restriction stating that a particular transaction is not a sale for purposes of the “first sale” doctrine. Id. See also, 17 U.S.C. '109(a).

Bowers is an important decision, and likely is only the first of what soon may be many opinions addressing the question of whether anti-reverse engineering provisions are enforceable. In fact, the division between the Bowers majority and dissent mirrors the ongoing debate.

Anti-reverse engineering provisions obviously protect intellectual property, and thus may encourage companies to develop products.

See, generally, Arthur R. Miller, Copyright Protection for Computer Programs, Databases, and Computer-Generated Works: Is Anything New Since CONTU?, Harv. L. Rev. 977, 1026-27 (1993). Additionally, rather than waiting to obtain patent protection, companies may introduce products more quickly to the benefit of both consumers and the entire industry.

On the other hand, enforcement of the shrink-wrap license also may quell innovation by preventing competitors from introducing new software products that improve upon or complement the original work. See, eg, Brief of Amici, note 6. Indeed, the Supreme Court has recognized that reverse engineering is “an essential part of innovation” which “often leads to significant advances in technology.” Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 160 (1989).

There is no “easy” answer to the question which view will ultimately hold sway. In fact, it may well be that it is the Supreme Court who ultimately will have to settle this important question of law. Until then, though, Bowers is likely to be viewed as the seminal decision on the matter.