Caseflicks

Court of Appeals for the Seventh Circuit • 1996

ProCD, Inc. v. Zeidenberg

86 F.3d 1447 | 1996 U.S. App. LEXIS 14951

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Takeaway

In short, this case holds that shrinkwrap terms accepted through use after notice and a chance to return the product are enforceable contracts, and that ordinary bilateral software-license restrictions are not displaced by copyright preemption.

Background

ProCD compiled data from more than 3,000 telephone directories into its SelectPhone database, sold on CD-ROM with a copyrighted search application. It charged approximately $150 for consumer copies restricted to noncommercial use, while charging commercial users more. The restrictions appeared in an enclosed manual, on the discs, and on-screen whenever the software ran; buyers could return the product for a refund if they rejected the terms.

Matthew Zeidenberg bought consumer copies of SelectPhone, saw and accepted the license terms while using the software, but then used the data through his company, Silken Mountain Web Services, to sell online access at prices below ProCD's commercial rates. ProCD sued to stop that use. The district court held the shrinkwrap licenses unenforceable because their terms were not disclosed on the outside of the package, and further held that Copyright Act § 301(a) preempted enforcement of the licenses. The Seventh Circuit reversed and remanded with instructions to enter judgment for ProCD.

Issues

Issue #1

Whether a shrinkwrap software license, disclosed after purchase but before use and accompanied by a right to return the product, can form an enforceable contract under Wisconsin law and the Uniform Commercial Code.

Holding

Yes. ProCD validly proposed that use of the software after an opportunity to review the license would constitute acceptance, and Zeidenberg accepted by using the software without returning it.

Reasoning

The court rejected the premise that a retail contract must be complete when the buyer pays at the register. Under UCC § 2-204(1), a sales contract may be formed in any manner sufficient to show agreement. As master of the offer, a seller may specify the conduct that counts as acceptance; ProCD specified that the buyer could review the license and accept it by using the software.

ProCD gave buyers reasonable notice that the product was subject to an enclosed license, made the terms available in the manual, on the discs, and on the computer screen, and gave buyers the option to return the package for a refund. Zeidenberg had an opportunity to inspect the terms, was required to indicate acceptance to proceed with the program, and continued to use the product. His conduct therefore manifested assent.

The court analogized shrinkwrap terms to familiar transactions in which payment precedes receipt and review of full terms: insurance policies, airline tickets, concert tickets, product warranties, and drug-package inserts. Requiring all terms to appear on the outside of a software box would be impractical and would needlessly raise transaction costs, especially for software sold by mail, telephone, or electronic transmission.

UCC provisions requiring special prominence or signatures for particular terms, such as warranty disclaimers and no-oral-modification clauses, imply that ordinary terms need not satisfy those heightened requirements. UCC § 2-606 also supports the commercial importance of allowing buyers to inspect delivered goods and reject them if the terms are unacceptable. No Wisconsin authority required ordinary shrinkwrap terms to be displayed on the box exterior.

The court also emphasized that the license was not an unexpected post-sale demand for additional payment. It was part of the product ProCD offered, including its price and permitted uses. Absent a generally applicable contract defense, such as illegality or unconscionability, courts should enforce those terms rather than revise the parties' bargain. Zeidenberg did not contend that the noncommercial-use restriction was substantively objectionable.

Issue #2

Whether Copyright Act § 301(a) preempts enforcement of ProCD's shrinkwrap license restricting commercial use of data that may itself be uncopyrightable.

Holding

No. A two-party contractual restriction is not equivalent to the exclusive rights protected by copyright and is therefore not preempted by § 301(a).

Reasoning

The court agreed that both ProCD's copyrighted application program and its database fall within the Copyright Act's subject matter for § 301(a) purposes, even if the database lacks sufficient originality to receive copyright protection after Feist. The preemption inquiry therefore turned on whether the contract right was equivalent to a copyright right.

Copyright creates rights against the world: absent permission, anyone is barred from copying, performing, or otherwise exercising the owner's exclusive statutory rights. A contract ordinarily binds only its parties. The shrinkwrap license restricted Zeidenberg because he agreed to it; a stranger who found a SelectPhone copy would not be bound by that agreement. Thus, the contract did not create a copyright-like exclusive right.

The court found support in decisions enforcing agreements about intellectual property that federal law does not itself protect, including contracts involving trade secrets and promises to pay for unpatented ideas. Enforcing such bargains does not remove information from the public domain or prevent strangers from independently discovering, copying, or using it.

Enforcement of ProCD's license left everyone else free to compile and distribute telephone-directory information, add zip codes or industrial codes, and compete with ProCD. The agreement simply required Zeidenberg to honor the price-and-use terms under which he acquired ProCD's product. Such private ordering can promote distribution by allowing ProCD to charge consumers less while charging commercial users more.

The court declined to announce that every claim labeled contract is automatically immune from copyright preemption. Some uses of contract law might interfere with federal copyright objectives. But ordinary enforcement of this bilateral shrinkwrap license did not displace the federal copyright scheme and was not preempted.