THE LAW OF SOFTWARE CONTRACTS : CASES AND MATERIALS Gregory E. Maggs Professor of Law The George Washington University Law School Prepared for the Munich Intellectual Property Law Summer Program First Session (June 29-July 10, 2015) ASSIGNMENT FOR FIRST CLASS: Please read the course syllabus (next page) and pages 1-19 of these materials. LAW OF SOFTWARE CONTRACTS COURSE SYLLABUS 1. Coverage of the Course . This course will cover seven important topics arising out of the sale of computer software. These topics are: (1) whether sales of software should be viewed as contracts for the sale of goods; (2) the extent to which contracts allowing the use of software also, or alternatively, should be viewed as merely copyright licenses; (3) the extent to which copyright law may restrict terms in software contracts; (4) the validity of forming software contracts using “shrink wrap” and “click wrap”; (5) the legal status of open source public licenses; (6) the enforceability of limitations on the buyer’s remedies in software contracts; and (7) the permissibility of self-help remedies against software buyers (e.g., remotely disabling computer programs). 2. Prerequisites . This course has no prerequisites. It also does not impermissibly overlap in coverage with any other course. Therefore, all students may take this course and any subsequent course, including Copyright Law. 3. Meeting Times. This course is offered during the first session of the Munich Intellectual Property Summer Program. The course will meet from 9:00 a.m. to 10:40 a.m. on Monday-Thursday during the first week (June 29-July 2) and Monday-Wednesday during the second week (July 6-8). 4. Office Hours and Contact Information . I will generally be available to answer questions both immediately before class and after class. In addition, you may contact me by email at [email protected]. 5. Reading Assignments . We will read these materials in order from start to finish. For the first class, please read pages 1-19. I will announce how far to read for each subsequent class. Please come to class prepared to discuss the reading. 6. Final Examination . On Friday, July 10, at 9:00 a.m. (unless the schedule changes) you will be given a 1-hour open-book final examination. You may consult any written materials when taking the examination. The examination will consist of short essay questions pertaining to the material covered in class. For practice, please see Appendix B, which contains two past final examinations and their grading guides. TOPICS 1. Viewing Software Contracts as Contracts for the Sale of Goods . 1 Neilson Business Equipment Center v. Monteleone . 2 Advent Systems v. Unisys Corp. ....................... 3 2. Viewing Software Contracts as Copyright Licenses ............ 7 A. Application of Copyright Law to Software . 7 B. Licenses to Use Copyrighted Software . 8 Microsoft Office End User License Agreement . 10 Geoscan, Inc. of Texas v. Geotrace Technologies, Inc. .... 12 MAI Systems Corp. v. Peak Computer, Inc. ............. 14 DSC Communications Corp. v. Pulse Communications, Inc. 19 C. Application of the First Sale Doctrine to Software ......... 26 Vernor v. Autodesk, Inc. ............................ 27 Action Tapes, Inc. v. Mattson ........................ 39 D. Fair Use Doctrine and Software Licenses . ........ 40 Wall Data Inc. v. Los Angeles County Sheriff’s Dept. ..... 41 3. How Copyright Law May Restrict Terms of Software Contracts . 50 A. Copyright Preemption of Contract Terms . .... 50 National Car Rental System v. Computer Associates Int’l. 52 Davidson & Associates v. Jung ...................... 58 B. Misuse of Copyright ............................ 64 Lasercomb America, Inc. v. Reynolds ................. 65 Atari Games Corp. v. Nintendo of America, Inc. ......... 73 Alcatel USA, Inc. v. DGI Technologies ................ 79 Apple Inc. v. Psystar Corp . ......................... 82 4. Shrink Wrap and Click Wrap Software Licenses . ........... 92 ProCD, Inc. v. Zeidenberg .......................... 92 Specht v. Netscape Communications Corp. ............ 104 People ex rel. Spitzer v. Direct Revenue, LLC .......... 110 5. Public Licenses and Open Source Software . ........ 118 Testimony of Carol A. Kunze on Behalf of Red Hat, Inc. ... 120 The GNU General Public License (GPL) . 122 Harald Welte v. *** Deutschland GmbH ................ 126 Wallace v. International Business Machines Corp. ........ 126 Computer Associates International v. Quest Software ...... 130 6. Limitations on the Buyer’s Remedies . .......... 132 Chatlos Systems v. National Cash Register .............. 132 RRX Industries, Inc. v. Lab-Con, Inc. ................... 135 Piper Jaffray & Co. v. SunGard Systems Intern. .......... 138 7. Self-Help Remedies in Software Contracts . .......... 143 Franks & Sons, Inc. v. Information Solutions, Inc. ......... 144 American Computer Trust Leasing v. Jack Farrell Imp. Co. 146 Clayton X-Ray Co. v. Professional Sys. Corp. ............ 149 APPENDICES A. Selected Provisions of the U.S. Copyright Law . ............ 152 B. Past Final Examinations and their Grading Guides ........... 159 TOPIC 1 VIEWING SOFTWARE CONTRACTS AS CONTRACTS FOR THE SALE OF GOODS When you buy software, like a word processing program or a computer game, you generally agree to contractual terms. These terms may limit your ability to copy, use, or resell the software, they may restrict your remedies if the software is defective, they may give the producer or vendor of the software various rights if you fail to pay, and so forth. If disagree- ments arise about the effect or enforceability of these terms, an immediate question is: What law governs the dispute? These materials address this question, covering many of the most important topics. Further information about the law of software contracts can be found in a variety of sources, some dealing with contract law and others dealing with copyright law. One of the most comprehensive reference works is a one- volume treatise by the American Law Institute (the organization which has produced the famous Restatements of the Law) called Principles of the Law of Software Contracts (2010). These materials cite the Principles on numerous topics. The complete text of the Principles is available through WestLaw and also through HeinOnline to which many university libraries subscribe. ___________________ ARTICLE 2 OF THE UNIFORM COMMERCIAL CODE In the United States, almost all courts now agree that article 2 of the Uniform Commercial Code is one of the laws that governs software contracts. Article 2 is a model law adopted in 49 states and various federal territories to govern contracts for the sale of goods. Article 2 defines goods as “things movable at the time of identification to the contract.” U.C.C. 2- 105(1). The following two cases show the reasoning that courts have used in deciding that software falls within this definition. The first case addresses a situation in which software is sold together with a computer. The second case concerns software sold by itself, a more difficult issue. —————————— 1 2 LAW OF SOFTWARE CONTRACTS NEILSON BUSINESS EQUIPMENT CENTER , INC . V. MONTELEONE 524 A.2d 1172 (Del. 1987) [Seller Neilson Business Equipment Center, Inc. (Neilson) agreed to supply a computer system to Dr. Italo V. Monteleone. Under the contract, the computer system would come with installed software that would automate Dr. Monteleone’s recordkeeping. When the software did not work as anticipated, Dr. Monteleone sued Neilson for breach of implied warranties under article 2 of the Uniform Commercial Code. Neilson argued that article 2 did not apply to the sale of software because a sale of software is not a sale of goods.] Neilson urges us to separate the contract into three distinct subparts- hardware, software and services. Defendant contends that only the hardware can be classified as “goods” under the Code, that there was nothing defective about the hardware, and thus plaintiff’s claims for breaches of implied warranties fail. Neilson further argues that software is an intangible, and that intangibles do not constitute “goods” subject to the Code. That argument is innovative, but unpersuasive. Neilson contracted to supply a turn-key computer system; that is, a system sold as a package which is ready to function immediately. The hardware and software elements are combined into a single unit—the computer system—prior to sale. The trial court’s factual conclusion that the computer system is predominantly “goods” is supported by substantial evidence. Dr. Monte- leone did not intend to contract separately for hardware and software. Rather, he bought a computer system to meet his information processing needs. Any consulting services rendered by Neilson were ancillary to the contract, and cannot reasonably be treated as standing separately to escape the implied warranties of the Uniform Commercial Code. Notes 1. Two Ways to Buy Software. This case involves a very common situation. Most new computers are sold with both an operating system and other programs already installed. But some software, like a computer game, is usually sold separately and installed by the user of the computer. 2. Problem. Suppose you buy a new laptop computer on sale for $595. The laptop comes with Microsoft Windows and Microsoft Office already installed. Buying these two software packages separately for installation onto a computer that you already own would cost more than $595. (The idea that buying the software separately is more expensive than buying a TOPIC 1 : SOFTWARE CONTRACTS AS SALES OF GOODS 3 computer already loaded with the software may seem odd, but it is not uncommon.) Would article 2 apply to your purchase of the computer under the rationale in Neilson ? —————————— ADVENT SYSTEMS LTD . V . UNISYS CORP . 925 F.2d 670 (3d Cir. 1991) WEIS, Circuit Judge. [Advent Systems Limited sued Unisys Corporation for breach of contract, claiming that Unisys promised to pay Advent System to develop document management software and then repudiated that promise. Unisys defended on grounds that the alleged promise to pay for the software was not enforceable because it was not evidenced by a sufficient signed writing, as required by the “statute of frauds” provision in U.C.C.