Federal Preemption and Contract Invalidation of Quasi-Open-Source Software Development Agreements

 

 

 

 

Term Paper for Legal Issues of the 21st Century, Spring 2001

Professor David D. Friedman

Santa Clara University School of Law

 

 

 

 

Brian S. Boyer

May 5, 2001


Table of Contents

Summary.............................................................................................................................. 3

Introduction......................................................................................................................... 4

The International Scope of Internet Transactions in Intellectual Property Rights............. 5

Contract Principles, UCITA and the Problem of Technological Protection....................... 8

Dichotomy between Intellectual Property Law and Contract Law and the Relation to Preemption Principles....................................................................................................... 15

Patent Law......................................................................................................... 17

Copyright Law.................................................................................................. 19

Trade Secret Law............................................................................................... 24

Police Power Over the Contract........................................................................................ 27

Police Power over the Contract under UCITA................................................. 29

Contract Preemption by Federal Law and Invalidation by Public Policy under UCITA. 31

Analyses............................................................................................................................ 34

Application of Preemption Principles............................................................... 34

Statutory Preemption.................................................................................... 34

Conflict Preemption...................................................................................... 38

Application of Contract Invalidation Principles............................................... 39

Invalid for Unfairness.................................................................................... 39

Invalid for Unconscionability........................................................................ 42

Invalid for Public Policy................................................................................ 43

Open-Source Software Development Contracts............................................................... 45

Applications to Possible Provisions in Software Development Contracts....... 47

Broadly Define Material Breach:  Maximize Property Control.................... 48

Prohibit Reverse Engineering:  Prevent Fair Use........................................... 50

Requiring Covenant-Not-To-Compete:  Restrain Competition.................... 51

Require Transfer of Ownership:  Retain Ensuing Rights.............................. 52

Require All Works to be Joint Works:  At Least Share in Profits................. 55

Conclusion......................................................................................................................... 57


Summary

The open-source software development concept has proven to be a monumental improvement over old methods of “closed” or in-house software development.  The power of the internet to share information is combined with its ability to facilitate transactions to produce a truly a world-wide multi-party development effort.  As a result, a copyrighted software program can be stressed in ways that traditional development could never accomplish.  The result is a highly developed piece of work that was accomplished at breakneck speed.  Financial gains have been proven to the extent that large organizations have felt the impact and have been experimenting with the concept.  As a result, “open-source” agreements can be mutated into agreements that merely give the information provider the advantages while taking away user rights that are inherent in copyright and contract policy.  This paper sets the landscape by discussing the international need for contract limitations.  Both federal preemption and contract invalidation principles are then presented to provide a basic understanding of the metes and bounds of the freedom to contract within the realm of the highly developed intellectual property regime.  Private software development contracts should be limited to the confines of the federal purpose of intellectual property law in order to increase predictability in internet transactions, increase harmony in transactions made between citizens of different states and nations, and protect intellectual property rights of parties in weaker bargaining positions.  A contract that exceeds the scope of intellectual property law can be preempted by federal law or invalidated through general contract principles and public policy.


Introduction

The thesis of this paper is that private software development contracts should be limited to the confines of the federal purpose of intellectual property law in order to increase predictability in internet transactions, increase harmony in transactions made between citizens of different states and nations, and protect intellectual property rights of parties in weaker bargaining positions.  A contract that exceeds the scope of intellectual property law can be preempted by federal law or invalidated through general contract principles and public policy.

Limiting contract provisions in the United States to the confines of intellectual property law will create interstate uniformity and promote harmony in international transactions over the internet.  In the United States, an individual’s freedom to act is limited by both state and federal law, and interpretation of the US Constitution by Congress and the US Supreme Court establishes these limits.  The US Supreme Court has determined that the state can control its own economic policy, which includes the power to regulate contractual freedom.  Intellectual property rights are provided by the US Constitution, legislated by Congress, and interpreted and enforced by the courts.  The State purpose in controlling contract law is to strengthen and protect the economic well-being of its citizens, whereas the federal purpose of intellectual property protection is two-fold:  to provide an economic incentive to create while maximizing public access to that creativity to promote a competitive marketplace.  The primary issue in this paper is whether state or federal law should control the balance between intellectual property and commerce objectives in contract agreements.  Federal preemption power of the Copyright Act, and federal preemption power in general, are examined in light of the relative purposes of each legal regime.

The first section of this paper looks at the international scope of internet transactions.  The second section reviews contract principles, the design of the Uniform Commercial Code (UCC) and its relation to the Uniform Computer Information Transactions Act (UCITA), and the problems of electronic self-help.  The third section examines the dichotomy between intellectual property and commerce as it relates to preemption principles.  The fourth section analyzes preemption and contract principles in general as applied to intellectual property contracts and then applies those tools to the open-source software concept.  The paper concludes by reexamining arguments in light of the goals and analyses presented in the context of provisions that may exist in software development agreements.

The International Scope of Internet Transactions in Intellectual Property Rights

The internet allows parties at opposite ends of the world to form contracts in the time it takes to click “I Agree,” but the tension between intellectual property and commerce varies between nations and creates different contract expectations.  Both the United States (US) and the European Union (EU) have recognized the tension, but the EU has a system to direct state economic policy.  Each US state retains control over its own economic policy limited only by federal preemption.  Thus, although the US cannot dictate economic policy, it can preempt state power to avoid frustration of intellectual property law.

The internet is not only a place where private individuals can exchange expression freely, but it is also a place where private businesses can transact in valuable information.  Unfortunately for the intellectual property owner, the internet is a medium where this information can easily be infringed, misappropriated, or passed off as the work of another by anyone with a home personal computer.  Contract law has been used as a tool to maintain control over transactions involving intellectual property rights over the internet.  Protective legislation may be insufficient in protecting property rights violated over the internet, since tortfeasors often cannot be identified, are not subject to jurisdiction, or even if subject to jurisdiction, cannot be served.  As a result, electronic self-help protection has been combined with contracts to more effectively control property without relying on enforcement of legislation.

The internet simplifies entering contractual agreements with parties anywhere in the world, and the parties to such contracts often pay little attention to the terms.  Contracts involving intellectual property encompass potential issues of infringement and breach.  As a result, such contracts involve both the law of “the place where the contract was made” and the law of “the place where the act occurred.”  Commonality in law between states and nations becomes essential to understanding contractual expectations, such as what “good faith and fair dealing” means in a particular circumstance, what constitutes a material breach, and the contemplated cost of breach.  Intellectual property protection carries with it a very strong notion of territoriality.  As such, there may always be differences in the protection that nations give intellectual property, but the importance of geographical boundaries between nations should decrease as the understanding of transactional expectations regarding intellectual property increases.  Limiting US contract provisions to the confines of intellectual property policy should facilitate this harmony by providing harmony between the states.  The Preface in the most recent UCITA states it well:  The need for a coherent, uniform body of law has never been greater.  Revolutions in telecommunications and computer technology have made geography increasingly irrelevant to modern commerce…The liberating promise of technology cannot be fully realized unless there is predictability in the legal rules that govern such transactions.”[1]

The European Union (EU) has developed a tripartite structure, similar to the US in order to enact and harmonize commercial regulations governing and protecting the 15 member states of the Union.[2]  The EU enacts Regulations that serve as the supreme law directly applicable to the states.  Directives are enacted to harmonize law between the states through guidelines that the states are free to frame however they choose.  In particular, Europe has formed a Directive to harmonize expectations in software rights and contract limitations are a part of that plan.[3]  In a similar pursuit for harmony, the US joined the Berne convention in an effort to make copyright practice uniform between members of the convention.  The US has preemption principles, rather than directives.  Preemption principles are better than directives in that they are enforceable against the parties, whereas directives are only enforceable against the state that did not enact the national law as directed.[4]  Thus, US transactions involving copyrighted material can be better defined on a national basis by keeping contract provisions within the confines of copyright policy through federal preemption.  First, such transactions within the US could not usurp fair use reserved to the public.[5]  Second, such transactions between US citizens would be better defined.  The supporting argument is that since state law cannot frustrate the purpose of federal law, private parties cannot use contracts to defeat the purposes and design of federal intellectual property law.

Contract Principles, UCITA and the Problem of Technological Protection

UCITA is modeled on the UCC, which is driven by the need for uniformity between jurisdictions.  States control contract law and UCITA appears to allow electronic restraint and electronic self-help, which through freedom to define material breach, arguably frustrate the purpose of federal intellectual property law.  Electronic restraint appears to be free of any regulation, and if a breach is material, electronic self-help can be used anywhere, except mass-market contracts.  The evolution of such legal and technological power to define and enforce your own contracts creates the need for well-defined limits of contract enforcement.

Private parties to a contract, the state, and the federal government all have different interests in controlling transactions.  Contracts are promises that can be remedied by law if breached and must be based on mutual assent and consideration, where such consideration must be based on a bargain for exchange, and valuable.[6]  Contracts must not only be based on good faith and fair dealing[7], but regulations governing transactions should be uniform between jurisdictions to harmonize contract expectations and protect parties in a weaker bargaining position from unconscionable terms.[8]  Private parties want freedom from government intervention and have argued for freedom of contract in light of due process considerations of liberty and property.[9]  In Lochner,[10] the number of hours that could be worked in a bakery was limited by a statute that was struck down.  The statute was a product of politics in which labor unions had organizational power to control consumer prices and the bargaining power of workers that would be willing to work longer for less money.[11]  The State wants to control economic policy to protect citizens from such arrangements by creating legislation and exercising police power.[12]  The Federal government wants to harmonize law and prevent forum shopping while preserving the purposes of federal law.[13]  Current law has identified the problems of the Lochner era and says that there is not a fundamental right to contract, but rather that the state has sovereign authority to legislate economic policy.[14]

Uniformity was a main purpose of enacting the Uniform Commercial Code (UCC).  The goal was to create a uniform body of sales law, and in particular, uniform regulation of the sale of goods.[15]  The emphasis on uniformity among jurisdictions is expressly stated as one of the three purposes and policies of the code.[16]  Parties are allowed to contract out of the UCC with the sole exception that the obligations of good faith, diligence, reasonableness and care cannot be waived.[17]  The UCC is essentially stand alone where enacted, except where general principles of law and equity can supplement,[18] and applies to the State where enacted if there is an “appropriate relation” to the transaction, unless the parties choose the law of another State or nation with a “reasonable relation” to the transaction.[19]  Remedies for breach are limited to restore the aggrieved party to the position he would have been in if the contract were fully performed, but no punitives or consequential damages are allowed.[20]  Important to the scope of this discussion, the UCC recognizes differences in expertise that relate to relative bargaining power between merchants and buyers.[21]  The seller is obligated to transfer and deliver and the buyer is obligated to accept and pay as agreed in the contract, but the court has discretion to invalidate all or part of a contract for unconscionable or illegal terms.[22]

New law has been proposed to handle digital transfer of information.  Article 2 of the UCC handles sales of goods, whereas services are handled by the Restatement (Second) of Contracts.  Both statutes are based on general contract principles of mutual assent, bargain for exchange, valuable consideration, and breach.  However, our economy has developed a market for information, which is an intangible good and doesn’t fit well within either scheme.  This lack of fit led to the development of Article 2B, which began through multiple revisions as an outgrowth of the UCC.  UCC2B lost the support of ALI as a result of too much information provider bias in seeking regulatory control through contract provisions that threatened the rights of information users.  The withdrawal of ALI prevented adoption of the code into the UCC, but the NCCUSL continued revisions under the new title, Uniform Computer Information Transactions Act (UCITA).  UCITA has addressed many of the concerns over information provide bias regarding the right of possession, prevention of use, and self-help repossession.[23]

Parties are not limited to just designing their own contracts, but they can also enforce those terms electronically.  Self-help allows contracting parties to create and enforce their own contractual boundaries without judicial intervention.  Electronic self-help is a unique means of enforcing contracts involving software.  Such technology provides the means for a licensor to remotely repossess software, program software to terminate upon specified conditions, or program software to activate a digital lock upon breach.  To avoid abuse of electronic self-help, UCITA requires the following:  mutual assent to the self-help provision, at least 15 days notice before exercising self-help, and limiting self-help to cases of material breach.[24]  Further, UCITA does not allow electronic self-help in mass-market contracts, situations where information is inseparably commingled with the licensor’s information, and cases where the public could suffer harm from such enforcement.[25]  Abuse of self-help must be controlled, so UCITA provides the licensee with recourse for wrongful use of such electronic self-help technology.[26]

Allowing parties the freedom to define a “material breach” leaves much room for software contracts to frustrate IP law, despite limitations under UCITA.[27]  UCITA appears to remove all limitations on electronic self-help if done without a breach of peace and done outside of mass-market contracts.[28]  Further, UCITA does not limit use of electronic restraint to prevent a licensee from breaching terms.[29]  Thus, although UCITA has not been widely adopted,[30] the debates and revisions surrounding UCITA nonetheless reflect the main interests and concerns regarding information transactions and provide a very strong framework for state legislation.  Particular to this discussion, it should be noted that UCITA does recognize the potential for conflict between Copyright law and electronic self-help.[31]

Dichotomy between Intellectual Property Law and Contract Law and the Relation to Preemption Principles

Federal intellectual property law balances public policy goals of developing an incentive to create by giving property rights to creators, while maximizing public access to creations in order to promote a competitive marketplace.[32]  States have the freedom to regulate intellectual property within the confines of the purpose of federal intellectual property law.[33]  The objective of contract law over the sale of goods is three-fold:  1) simply, clarify, and modernize commercial transactions law; 2) permit expansion of commercial practice through custom, usage, and party agreement; and 3) make law uniform among jurisdictions.[34]  The US Supreme Court has addressed the intellectual property balance by leaving unprotected ideas in the public domain to copy and compete.  As such, the state can regulate unprotected material without threat of preemption.[35]  Parties to a contract may seek relief under both contract and intellectual property laws if there is no double remedy.[36]

Until 1978, state law controlled unauthorized copying, sale, and performance of unpublished works through common-law copyright protection.[37]  Now, federal protection attaches as soon as the work is fixed in a tangible medium of expression.[38]  The general principle of preemption is that federal law is supreme over state law under the Supremacy Clause.[39]  There are generally two forms of federal preemption:  field and conflict.  Field preemption occurs when federal law consumes an entire field without room for state regulation.  Conflict preemption occurs when added state protection conflicts with the purposes of federal law.  An example of conflict preemption would be a state law that attempts to prohibit public access to unprotected subject matter.[40]  Another form of preemption is provided by statute.  For example, the Copyright Act expressly preempts state law if two elements are met:  the state provides rights equivalent to those enumerated in the Act, and the subject matter of concern is copyrightable.[41]  A comparison and synthesis of patent, copyright, and trademark law provides general policy principles that should be followed in federal preemption analysis, as well as any attempt to invalidate a contract by public policy.

Patent Law

The purpose of patent law is to provide an incentive to create by granting economic rights while maximizing public access to creativity to stimulate competition.  Courts balance this purpose with the purpose of contract law when determining contract rights.  For example, the incentive to create can be obtained by allowing contracts over unprotected subject matter, but the subject matter must not be removed from the public domain.  Parties to the contract can limit themselves from accessing material in the public domain, since others can still copy and compete, as long as the subject matter was not in the public domain prior to the contract.  Thus, the issue is whether the contract terms are generally preempted by the public policy of patent law.

Patent protection is provided for inventions that meet requirements of subject matter, novelty, and nonobviousness.[42]  Patented inventions are protected for a term of 20 years from the time of filing to allow time for return on investment prior to giving the invention to the public.  Patent owners often recoup and profit by charging royalties through license agreements.  Further, licenses can defeat the first-sale doctrine by avoiding complete transfer of ownership.[43]  Thus, allowing parties to design their own contracts concerning their intellectual property is also incentive to create.  Problems occur when licenses are either misused to get patent-like protection over unprotectible property[44], or to give patent rights greater than those awarded by Congress[45].

The incentive to create can be obtained by allowing contracts over unprotected subject matter, but the subject matter must not be removed from the public domain.  Parties to the contract can limit themselves from accessing material in the public domain, since others can still copy and compete, as long as the subject matter was not in the public domain prior to the contract.  In Sears[46], the defendant copied an unprotected lamp, so the plaintiff tried to claim damages through state unfair competition law.  The US Supreme Court held that the balance in public interest between the incentive to create and free competition requires that unprotected ideas remain in the public domain to copy.  In Kewanee[47], the US Supreme Court held that where Congress has “drawn no balance” to unprotected subject matter, the state should be free to regulate.  In Aronson[48], the US Supreme Court looked to the Kewanee 3-fold purpose test to uphold a contract despite lack of patent protection:  Congress’ purpose in passing patent laws are (1) incentive to invent; (2) promote disclosure of inventions; and (3) ensure unprotected material stays in public domain.  The US Supreme Court held that by enforcing a contract regarding an unprotected key ring, the inventor had the incentive of gaining royalties, sales under the contract discloses the idea to the public, and parties not privy to the contract could still copy the idea.  Further, the key ring idea was not taken from the public, since the key ring had not yet been offered for sale.  In Bonito[49], the US Supreme Court held that a state statute that protected a plug mold process that was not kept secret was preempted, since such protection would frustrate Congress’ purpose of keeping unprotected ideas in public domain.

Copyright Law

The purpose of copyright law is to provide an incentive to create by granting economic rights while maximizing distribution of that creativity to the public.  Reverse engineering of copyrighted software programs is fair use, stimulates competition and expands the market by allowing access to unprotected functional elements.  Contracts that control copyrightable subject matter and create rights equivalent to the enumerated federal copyrights are preempted under §301.  Even if the contract rights are not equivalent to those enumerated in §301, the contract can still be preempted for frustrating the purpose of the Copyright Act.  Thus, the issues become whether the contract terms are statutorily preempted or generally preempted by the public policy of copyright law.

Copyright law protects the owner’s right of reproduction, preparation of derivative works, distribution, public performance, and public display, but the fair use exception leaves a portion of those rights in the public domain.[50]  In all cases, the court must look to four factors to determine whether there is fair use of the protected expression:  (1) purpose and character of the use; (2) nature and character of the protected work; (3) amount and substantiality of portion used; and (4) effect of use on the potential market or value of the work.[51]  In computer programs, the unprotected elements are hidden in object code, and the law allows reverse engineering of software programs in order to obtain those elements and prevent software developers from gaining a monopoly over public domain material.  In Altai,[52] the court held that reverse engineering of a computer program is essential to separate expression from idea so that the public can gain access to elements of the software program that must remain public domain, such as elements that provide function, efficiency, and external factors such as compatibility.  The method of abstraction-filtration-comparison is described to illustrate how the protected portion of a program is obtained and compared to the alleged infringing program.  In Sega,[53] the court held it is fair use for a competing software manufacturer to copy protected object code to reverse engineer if there is a legitimate reason, and reverse engineering is the only way to access the unprotected ideas.  The purpose and character of the use was commercial, and thus presumptively unfair, but the use was only intermediate copying to acquire unprotected elements, and the defendant’s work was independent.  The nature of the protected work demanded less protection, since computer programs are functional in character, despite their creative element.  The amount and substantiality taken is irrelevant if the ultimate use is limited to fair use, and the effect on the potential market was to increase competition through use of public domain material, but also to expand material available to consumers.

Copyright law expressly preempts state law that provides rights equivalent to those enumerated in the Copyright Act while allowing states to provide additional protection by adding extra elements to those rights[54].  However, the state must not frustrate Congress’ purposes and objectives.[55]  Congress intended to make copyright law uniform through §301 of the Copyright Act by abolishing any state created rights equivalent to copyright over subject matter that falls within the scope of copyright law.[56]  For §301 to preempt state law, the subject matter the state is trying to protect must first fall within the Copyright Act,[57] and second, the state law must protect rights equivalent to those enumerated in the Copyright Act.[58]  Thus, an otherwise valid contract will prevail over federal intellectual property policy if neither §301 nor conflict preemption is present.

The first question in §301 preemption analysis is whether unprotected material is copyrightable subject matter, and the mere fact that subject matter failed to meet the standards of copyright law does not necessarily make it fall outside of the Copyright Act.[59]  Unprotected subject matter within a copyrighted expression has been held to be copyrightable subject matter,[60] such that state law protecting such subject matter within the protected expression may be preempted by §301.  In NBA[61], the court held that unprotected subject matter within a copyrighted expression is part of that expression, so that a state claim for misappropriation of uncopyrightable facts within copyrightable expression is preempted by §301.  In Board of Trustees of the University of Alabama,[62] the court held that ideas and methods in a doctoral dissertation were copyrightable subject matter, although unprotected, and thus preempted by §301.  The major argument to these holdings is that once material within a copyrightable expression is not protected, it is no longer copyrightable subject matter and state law concerning such matter should control.[63]  However, even if this major argument were to preclude preemption under the Copyright Act, conventional preemption analysis may still prevail.  The Sears[64] conflict preemption argument that unprotected material is public domain by act of Congress may still provide a means of preempting state law over such subject matter.

The second question is whether the state law protects rights equivalent to those in §106.  The extra-elements test is one way of making that determination.  If there is an extra element that makes the state cause of action qualitatively different than the copyright action, then §301 does not preempt.  In Baltimore Orioles[65], the court held there was not preemption where extra elements in a state law publicity claim did not make the claim qualitatively different from copyright, since the “purpose” of both claims is to promote performances that appeal to the public.  In Harper & Row[66], the court held there was not preemption even though the state claim for tortious interference with contract requires extra elements of awareness and intent in copying the material, since these elements only broadened the “scope” of the right and did not change the “nature” of the claim that the copyright law was meant to protect.  However, in Del Madera[67], the court held that an implied promise not to copy a map was enough to preempt a state claim of unjust enrichment, since the implied promise not to use or copy materials within the subject matter of copyright is the “essence” of copyright protection.

Trade Secret Law

The purpose of trade secret law is to provide an incentive to create by granting economic rights while preserving commercial morality, which is a narrower policy goal than copyright.  Trade secret adds the element of police protection over commercial behavior and seems to protect contracts controlling trade secrets from federal preemption.  However, since trade secret protection is cumulative to other forms of protection, loss of trade secret status can revive copyright protection and thus preemption.  Thus, the issues become whether the material is in fact a trade secret, and if not, whether statutory or general preemption apply.

Trade secret is state law and protects valuable information, so that parties can maintain a competitive advantage in production or sale of goods or services whether or not the information is capable of any other form of protection.[68]  The goals of trade secret law are to (1) provide an incentive to create know-how that may ultimately benefit the public while (2) discouraging improper conduct by competitors.[69]  Trade secret violations occur when the secret was acquired, disclosed, or used either through improper means or misappropriation.[70]  Copyright preemption through §301 will only occur when the extra elements of trade secret law, which are proof that the trade secret was acquired or used through improper means or misappropriation, serve different purposes than copyright infringement.  The purpose of both copyright and trade secret are to protect the owner from unauthorized use by another.  The difference is that trade secret protection is narrowed to violations that include an element of knowledge of the misappropriation or improper means, whereas copyright infringement does not require such knowledge.  Thus, the argument against federal preemption of trade secret law would be that the state is providing extra protection to the public by policing commercial morality.[71]  In Kewanee[72], the court formulates a three-fold purpose test defining the federal purpose of patent law to hold that there is no preemption of trade secret law in general, because trade secrets provide an incentive to create, do not take material from the public domain, and although trade secrets do frustrate public disclosure of ideas, the state interest in policing commercial behavior outweighs the slight chance that parties would choose trade secret protection where patent protection is available.[73] 

Trade secret law requires continuous use of the know-how to deserve protection, in addition to consideration of 6 other factors:  (1) whether the know-how is widely known outside of claimant’s business; (2) who knows of the know-how within claimants business; (3) the methods used to keep the know-how secret; (4) the value of the know-how to claimant and competitors; (5) the amount spent in developing the know-how; and (6) the difficulty for others to properly acquire or develop the know-how.[74]  As a result, information may not meet the requirements of trade secret protection even though the owner would like to claim such protection. 

If reasonable efforts are not taken to maintain secrecy, the information will lose trade secret status.  In Rockwell,[75] the plaintiff distributes trade secret “piece-part” diagrams to subcontractors through confidentiality agreements.  The defendant argued the diagrams were not trade secret because thousands were distributed, copied, and distributed to others without permission, all of which were outside plaintiff’s business.  The plaintiff argued that disclosure is often necessary for efficient exploitation of a trade secret.  The issue became whether distribution of a large volume of trade secret material to outsiders without restriction on copying or requiring return removes trade secret status.  The court held that the volume distributed is not as important as whether distribution was limited to suit a purpose, and whether the trade secret owner made reasonable efforts under the circumstances to maintain the secret.  The court reasoned that requiring little maintenance of the secret would provide “windfall” protection over information with little value to the owner, whereas requiring too much protection would reduce commercial efficiency.  Thus, the level of effort required to maintain a trade secret must be limited to what is reasonable.

Police Power Over the Contract

An aggrieved party can not only seek relief through federal preemption, but can also seek relief through invalidation of the contract using general invalidation principles or through public policy.

Regardless of whether the contract is preempted by federal law, the contract will not be enforceable unless it is valid.  A legally enforceable contract requires mutual assent to a valuable consideration that was bargained-for and involves a legal detriment to both parties.[76]  Both parties must have the capacity to enter a contract, which excludes infants and the mentally ill.[77]  Contracts can be invalid for unfairness,[78] unconscionability,[79] or on grounds of public policy.[80]  Contracts can be unfair for misunderstanding,[81] mistake,[82] or overreaching by misrepresentation,[83] as well as illegality.[84]  A contract is unconscionable where, in light of the commercial background and needs of the particular trade or case, the provisions are so one-sided as to be unconscionable under the circumstances existing at the time of assent.[85]  Contracts can be invalid on grounds of public policy where legislation says that such provision is unenforceable, where enforcing the provision is clearly outweighed by public policy under the circumstances,[86] or where there is an unreasonable restraint of trade.[87]

Breach of contract affords remedies for both material and non-material breach, but there is no duty of return performance if the breach is material.[88]  In determining whether a breach is material, the court looks to five factors:  1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected; 2) the extent to which the injured party can be adequately compensated for the benefit of which the party will be deprived; 3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; 4) the likelihood that the party failing to perform or to offer to perform will cure the failure, taking into account all the circumstances, including any reasonable assurances; and 5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.[89]  This means that if a breach is material, it may be possible to get damages for the entire expected performance under the contract, rather than damages for only the affected provisions.

Police Power over the Contract under UCITA

UCITA follows the same basic contract validity principles as the UCC and Restatement but appears to have a stronger sense of enforcing the contract, allowing parties to define what is material for purposes of breach, and making sure parties can obtain the benefit of the bargain.

UCITA and Article 2 are based upon the principle of freedom of contract, such that the terms and effect of a contract can be varied by agreement with some exception.  Both statutes provide default rules that apply only if the parties do not specify some other rule.  Parties want flexibility, but legal rights in contracts are unclear without certain default rules.  Formation of contracts and invalidation for unfairness and unconscionability generally follow existing state law, but may be supplemented or displaced by UCITA.[90]  For example UCITA agrees that assent to the contract binds the parties, even if they did not read the contract, understand, or separately assent to each term.  Enforceability of terms is affected by unconscionability, public policy, good faith, etc.  However, UCITA does not agree with the Restatement (Second) of Contracts that says where a party believes the other party would not have assented if he knew about a particular term, the term is not part of the agreement.[91]  Absent unconscionability, fraud or similar conduct, parties are bound by the terms to which they assent after having had an opportunity to review.  UCITA follows the unconscionability standard of Article 2 but exceeds Article 2 in authorizing courts to strike down over-reaching language that frustrates fundamental public policy.[92]

The concept of breach as defined by UCITA is based on the principle that parties are entitled to the performance for which they bargain.[93]  Any breach entitles the other party to damages, but UCITA adopts the rule in common law and international law that some breaches are so immaterial that they do not justify cancellation of the contract.  In such cases, it is better to preserve a contract with minor problems than allow cancellation and cause loss of value to one party or unfair opportunism to the other.  Materiality depends on the agreement, and the agreement can either define what is material or simply say cancellation is agreed upon for any type of breach.  If breach is not defined in the contract, then the court has to weigh the circumstances, the aggrieved party’s perspective in light of the nature of the bargain, and the expected benefits.  UCITA provides three ways to identify what is material: contract terms defining materiality, a substantial failure to perform an essential term, and a breach causing substantial harm to the aggrieved party or a denial of a reasonably expected significant benefit.[94]  Thus, UCITA appears to allow the parties free reign over defining a material breach, and this freedom appears to be absent under the Restatement (Second) of Contracts and the UCC.

Contract Preemption by Federal Law and Invalidation by Public Policy under UCITA

Contracts can be preempted partially or entirely by federal law that directly regulates specific terms, but there is no general federal preemption power over contracts.  Public policy can outweigh and invalidate contracts, and such policy is strongest when legislated and not purely local.  Policy supporting innovation, competition, and fair use are most likely to invalidate contract provisions, but this likelihood is reduced by free negotiation of risk allocation and benefit in the market.  UCITA provides for invalidation through public policy interests, but appears to favor contract enforcement over preemption or invalidation by public policy.

The concept of federal preemption, violation of public policy, and consumer protection are combined in a single section of UCITA.[95]  Essentially, UCITA recognizes the conflict between the goals of federal intellectual property and contract law.  The Reporter’s Notes in §105 focus on state interest in contract enforcement, the First Amendment interest in public access to information, and free competition.  In essence, §105 of UCITA recognizes that federal law preempts any conflicting provision of UCITA, and that any term violating fundamental public policy may nullify the entire contract, be severed from the contract, or be limited by the court to avoid the conflict.  UCITA does not recognize a general preemption power over contract by patent or copyright law, but does recognize that such federal rules may directly regulate specific contract terms.  However, UCITA does not define to what extent this may occur.[96]  This paper addresses some particular provisions that may exercise this principle.

Broader public policy interests can invalidate a term even where federal law does not specifically preempt, or the term is not unconscionable.[97]  This power to enforce public policy over freedom of contract is also recognized in the Restatement (Second) of Contracts.[98]  Courts should try to override contract terms only where such policy is stated by legislature and should consider the following:  (1) the extent to which enforcement or invalidation of the term will adversely affect the interests of each party to the transaction or the public, (2) the interest in protecting expectations arising from the contract, (3) the purpose of the challenged term, (4) the extent to which enforcement or invalidation will adversely affect other fundamental public interests, (5) the strength and consistency of judicial decisions applying similar policies in similar contexts, (6) the nature of any express legislative or regulatory policies, and (7) the values of certainty of enforcement and uniformity in interpreting contractual provisions.[99]  Invalidating on the basis of public policy must also consider the national and international nature of transactions.  As such, courts should hesitate when invalidating terms based on purely local policies.  Where parties have negotiated for terms in their agreement, courts should be even more reluctant to set aside terms of the agreement.

The public policies UCITA recognizes as the most likely to invalidate transactions are innovation, competition, and fair use, but UCITA feels that contract law will usually not frustrate these policies, since contract allocates risks and benefits in ways that are market dependent.  This is particularly true when the information is trade secret, since this information is restricted to the contracting parties and is not in the public domain where “public” policy weighs heaviest.[100]  In fact, UCITA suggests looking to patent and copyright law for guidance on public policy limits, and further discusses how the Digital Millenium Copyright Act (DMCA) has expressly handled the policy conflict between separating expression from idea in order to reverse engineer copyrighted expressions for interoperability in programs that are digitally locked.[101]  For example, courts now must allow breach of digital locks in order to obtain interoperability computer programs through reverse engineering.[102]

Analyses

The previous discussion indicates that an aggrieved party can seek resolve through preemption or invalidation of the contract.  Preemption analysis involves looking at §301 and general preemption principles.  Invalidation looks at basic contract principles and public policy.  This section attempts to consolidate and apply the above principles in a generic manner to understand the limits of their use.

Application of Preemption Principles

Recall that copyright law preempts contract law through either express statutory preemption or general conflict preemption.

Statutory Preemption

Even though the material is copyrightable subject matter and the right is equivalent that provided by the Copyright Act, some courts hold that contracts affecting unprotected copyrightable subject matter are not preempted, since they simply uphold agreements between parties to the contract and do not remove unprotected material from the public domain.  The reasoning is that federal preemption should only apply to conflicting state law, not to private contracts, since copyrights are held out against the world, whereas contracts only apply to the parties.

The issue of whether state contract law is preempted by §301 looks at two questions:  first, whether the contract provision under scrutiny affects copyrightable subject matter, and second, whether the rights affected by the provision are equivalent those enumerated in §106.  The court must look at any extra elements in the contract claim that are not present in a copyright infringement claim to determine if there is equivalence between the contract right and the copyright.  The only extra element in a contract claim is bargain-for-exchange.[103]  If the extra element does not provide a qualitative difference between the state law claim and copyright, §301 preempts.  Thus, the issue regarding §301 will be whether bargain-for-exchange element has a different purpose, nature, or essence than the copyright protection.

The purpose and nature of copyright is to stimulate creation and dissemination of expressive works by granting authors economic rights.  Using the Baltimore Orioles “purpose” rule, one could argue that the purpose of a bargain-for-exchange is to ensure that the holder of the economic right receives valuable consideration for that right, or if the consideration for the contract is the copyright itself, that the copyright is valid.  In one sense, both the element of unauthorized use of the copyright and the element of bargain-for-exchange have the purpose of protecting the economic right of the copyright owner, and thus are not qualitatively different.  In another sense, it could be argued that bargain-for-exchange protects both parties, not just the copyright owner.  Thus, statutory preemption may or may not apply to contracts controlling copyrighted material.  It is at this juncture that a judge must decide whether national uniformity is a more important purpose than preserving state freedom to control contracts.

The 7th Circuit has held that contracts affecting unprotected intellectual property are enforceable, since they only uphold agreements between parties to the contract and do not remove unprotected material from the public domain.  The reasoning is that federal preemption should only apply to conflicting state law, not to private contracts.  In ProCD[104], the court held that a shrinkwrap contract restricting use of public domain telephone directory data is valid, since those not parties to the contract are free to collect and compile all 3000 phone directories if they choose.  Only parties to the contract are affected.  The defendant argued copyright preemption, since telephone directory compilations are generally not protectible by copyright.[105]  In the preemption analysis, the court pointed out one function of §301(a):  to prevent states from giving special protection to works that Congress decided should be in the public domain.  The court found database material to be copyrightable subject matter under §301, but questioned whether contract rights could be equivalent to copyrights.  The court said they are not, since copyrights are enforceable against the world, whereas contracts are enforceable only against the parties to the contract.  Further, a purpose of contracts is to promote private ordering essential to an efficient market, whereas a purpose of federal preemption law is to prevent states from regulating in areas reserved to the federal government.[106]  Therefore, the argument is that there should only be preemption where there is threat of state regulations that conflict with federal purpose, not where private parties contract for market efficiency.  The court in ProCD cited examples where courts have upheld or may uphold trade secret contracts for unpatentable material,[107] rental contracts for copyrighted videotapes,[108] and contracts involving unpatentable material not yet in public domain.[109]

Conflict Preemption

General federal preemption determines whether state law conflicts with federal purpose, but courts can vary in their interpretation of the purpose.

General federal preemption simply looks at whether the contract provision conflicts with the purposes of federal law rather than whether the state law is qualitatively different.[110]  Conflict preemption is not always clear on its face, since courts may vary in their interpretation of the purpose of a particular copyright law.  For example, in Rano,[111] the court held that an oral agreement with no specified duration would be terminable at-will by state contract law, but federal copyright law requires the agreement to specify the term, or the term is not terminable until 35 years have passed from the start of the license.  On the contrary, the court in Walthal[112] held that the 35 year limit is the maximum rather than the minimum term, allowing contracts without a specified term to terminate at-will.  Thus, the court has discretion to determine the purpose of the federal law and then rule on whether the state law frustrates that purpose.

Application of Contract Invalidation Principles

Recall that contracts can be invalid for unfairness, unconscionability, or public policy.  In general, UCITA follows traditional contract law with respect to general principles and adds an emphasis on the ability to invalidate contracts for public policy conflicts while also stressing the importance of enforcing the contract to ensure each party gets the benefit of the bargain.  Thus, there seems to be tension between the UCC and UCITA in that UCITA adds protection through greater recognition of public policy, but UCITA also stresses enforcement of the contract above all else.

Invalid for Unfairness

A contract would be unfair if assent or consideration is based on misunderstanding, mistake, or overreaching by misrepresentation.

Misunderstanding[113] negates assent in that either one or both of the parties did not agree to the same thing, but thought they did, and the difference is material.[114]  The court will uphold the contract in the aggrieved party’s favor if one of the parties knows of both meanings and the aggrieved party does not, but will void the agreement if neither knew or had reason to know of a material difference in meaning or both knew and had reason to know of the difference.  Thus, a licensee that “agrees to give up his program” may not actually be agreeing to giving up the copyright.  More importantly, the licensor may know or have reason to know that the licensee misunderstood.[115]  In this case, the licensee should be able to maintain the agreement while keeping his copyright.  Mistake[116] in contract formation is a risk that can be allocated by contract such that an otherwise voidable contract will stand.[117]  An aggrieved party can void a contract for a material mutual mistake, but can only void for unilateral mistake where enforcement would be unconscionable, or the other party knew, had reason to know, or caused the mistake.[118] 

A mistake becomes elevated to a misrepresentation[119] in four ways:  a party knows that disclosing a fact (1) is necessary to prevent a previous assertion from becoming a misrepresentation, fraudulent, or material;[120] (2) would correct a mistake as to a basic assumption the other party is relying on and nondisclosure would be in bad faith and unfair; (3) would correct a mistake as to the other party’s understanding of the effect of the contract; and (4) would merely give the other party what he is entitled to because of confidentiality or trust.  A contract is void where the misrepresentation affects the character and essential terms of the contract and induces assent by a party that neither knew nor had a reasonable opportunity to know the character or essential terms.[121]  A contract is voidable by the aggrieved party when based on a fraudulent or material misrepresentation that the aggrieved party was justified in relying upon, or based on a material misrepresentation by a third-party that the aggrieved party was justified in relying upon, unless the other party relied materially on the transaction in good faith without reason to know of the misrepresentation by the third party.[122]

In addition to assent, the contract must have valid consideration.[123]  The consideration must be “valuable” in that it constitutes a legal detriment, on the part of the return promise.[124]  Courts do not determine whether the exchange is fair, and in fact consideration can be excessive,[125] but consideration cannot be overreaching.[126]  Both sides must suffer a legal detriment to have valid consideration.  California state law holds that a promisor cannot offer as consideration that which he is not lawfully entitled to at the time of consent,[127] and that mere disclosure of an unprotected idea can be the bargained-for consideration before it is disclosed, but the disclosed idea cannot be subject to restriction.[128]  In Walton Water,[129] the court held that a promise not to sell a watch in return for receiving the watch as a gift was not a legal detriment, since at the time the promise was made, the recipient had no such right in the watch to give.  Validity of consideration only needs to be based on a good faith claim in that a reasonable person could believe the claim is well-founded.[130]  Thus, even foregoing a right that you do not have can serve as valid consideration if you had a good faith belief in that right.

Invalid for Unconscionability

A contract is substantively unconscionable where, in light of the commercial background and needs of the particular trade or case, the provisions are so one-sided as to be unconscionable under the circumstances existing at the time of assent.  A contract is procedurally unconscionable where there is a gross imbalance in bargaining power and sophistication between parties and the resulting terms are oppressive.

The goal of the defense of unconcionability is “to prevent oppression and unfair surprise…and not [to disturb allocation of risks] due to superior bargaining power.”[131]  A contract is substantively unconscionable where, in light of the commercial background and needs of the particular trade or case, the provisions are so one-sided as to be unconscionable under the circumstances existing at the time of assent.[132]  For example, it is unconscionable to stipulate punitive remedies,[133] limit consequential damages,[134] and in some states you cannot eliminate implied warranties.[135]  A contract can be procedurally unconscionable where there is a gross imbalance in bargaining power and sophistication between parties and the resulting terms are oppressive.  In Walker Thomas Furniture,[136] the court held it was unconscionable for plaintiff to require in a standard form contract that all items purchased at various times on credit be lumped into one account and subject to repossession for nonpayment at any time.  The court reasoned that since the defendant was on welfare and was caring for seven children, the unequal bargaining position provided opportunity for the plaintiff to exploit the defendant, making the term unconscionable.  The court can sever the unconscionable term, construe the term to remove the unconscionable element, or void the entire contract.[137]

Invalid for Public Policy

Contracts can be invalid on grounds of public policy where either legislation states that such provision is unenforceable, where enforcing the provision is clearly outweighed by public policy under the circumstances, or where there is an unreasonable restraint of trade.

UCITA recognizes both federal preemption of contract and invalidation by public policy.[138]  Contracts can be invalid on grounds of public policy where either legislation says that such provision is unenforceable or where enforcing the provision is clearly outweighed by public policy under the circumstances,[139] or where there is an unreasonable restraint of trade.[140] 

Both UCITA and the Restatement (Second) of Contracts generally look at the following:  (1) existence and nature of express legislation or policy; (2) public interest invalidating and party interest in enforcing the contract; (3) relevant judicial decisions; (4) general interest in enforcing contracts.[141]  The Restatement (Second) of Contracts also recognizes invalidation of provisions that restrain trade.[142]  A non-ancillary promise not to compete is unreasonable, but an ancillary promise not to compete is only unreasonable under two conditions:  (1) the restraint is greater than needed to protect the promisee’s interest, or (2) the promisee’s need is outweighed by hardship to the promisor and likely injury to the public.  Examples of “ancillary” promises would be where a business seller agrees not to compete in a way that devalues the business sold, or where an employee agrees not to compete with his employer.

Open-Source Software Development Contracts

An extraordinary example of the way in which computer technology has increased mankind’s potential productivity is the success of the open-source software concept.[143]  Open-source software development contracts combine the internet’s power to share information with its ability to facilitate transactions to produce a world-wide multi-party development effort.  As a result, a copyrighted software program can be offered to the world for development through the internet as opposed to traditional development among a closed environment.  Independent software developers gain name recognition and retain ownership in their derivative work rather than forfeiting ownership to their employer under the work-for-hire doctrine.[144]  Private businesses get work done for nothing.  Open-source has shown great potential for financial success.[145]

Open-source software development utilizes a world-wide range of expert resources that are not available to “closed” software development.[146]  The result is a very competitive software development approach with advances that may far exceed that of any comparable industry in the past.  The problem is that open-source software development contracts have the potential for parties in a superior bargaining position to contract independent software developers out of their Constitutionally granted intellectual property rights.

While open-source contracts have a very well defined set of limitations, software development agreements that do not meet these limitations could be designed to operate in an open-source-like manner.  Such contracts would give the original owner control over not only the original work but also control over derivative works produced by others.  As a result, these contracts could frustrate the purpose of intellectual property law.[147]  An example of a recent open-source software license that attempted to frustrate intellectual property law in this manner was the Apple Public Source License (APSL).[148]  Although controversial, the license was held to have three flaws:  disrespect for privacy,[149] central control,[150] and possibility of revocation at any time.[151]  After much debate, two of the three flaws were removed, with the remaining flaw being the disrespect for privacy.[152]  The closing argument to this debate has been that “Apple has grasped perfectly the concept with which “open-source” is promoted, which is ‘show users the source and they will help you fix bugs.’  What Apple has not grasped – or has dismissed – is the spirit of free software, which is that we form a community to cooperate on the commons of software.”[153]

Applications to Possible Provisions in Software Development Contracts

This section is merely a cursory glance at some provisions that may arise in the design of a contract.  Full analysis of each provision with supporting case law would be a nice addition to this work, but would require more information on the limitations of what qualifies as a certified open-source software license, along with case analysis in that context.  For purposes of this paper, a cursory analysis is used to gain a feel for the problems.  In the set of provisions that follow, the owner of the open-source software kernel wants to benefit from the open-source software concept but has the conflicting interest of maximizing control over his intellectual property.  The owner doesn’t want freedom from government intervention, but rather wants to use government intervention for his property control while pushing the limits of contract law to extend that control.  Thus, the owner contemplates a contract that contains a variety of provisions that maintain control over how the licensee uses and develops the software by defining what constitutes a breach, whether the licensee can decompile the software to examine the kernel, and the licensee’s freedom to sell his creation for profit.  These provisions deal with the concerns over policy issues of fair use, innovation, and competition.

Broadly Define Material Breach:  Maximize Property Control

Provision:  “I can restrain you from breaching particular use provisions and I can repossess for breach of other provisions.”

An attractive provision for an owner that wants to exercise control over his work would require the user to accept the terms of self-help repossession of software that is activated upon any use that breaches the contract in any way.  This provision would allow the owner to take the software away from the user for simply taking advantage of his rights under copyright policy.  Perhaps the user will violate a term that prohibits reproduction of database information within the software that is not protected, or maybe the user will circumvent a digital lock for the sole purpose of debugging the program.  The user may try to reverse engineer in order to make a competing program that performs better than the “kernel,” thus supporting the purposes of intellectual property law.

Application of Preemption Principles

Both patent and copyright policy could be frustrated in this scenario.  For example, conditioning a license of a patented idea on package licensing of expired or otherwise unprotected ideas would remove material from the public domain and acquire patent-like protection for unprotectible subject matter.  Restrictions on fair use of a copyrighted program such as by not allowing access to unprotected ideas within the expression, not allowing use of the expression for academic purposes, etc. are also examples where allowing a liberal definition of fair breach could usurp the purpose of copyright law.  There could be even more fundamentally violative restrictions such as prohibiting distribution of your derivative work to a particular race, thus invoking the 14th Amendment rather than intellectual property law.  Perhaps the user of a program is developing a derivative work with personal information commingled with the kernel and there is a provision stating that the program as a whole will be electronically repossessed upon one late payment.  The users personal information would be taken without due process, and in fact, UCITA prohibits this type of provision anyway.

Application of Contract Principles

The contract would most likely be invalidated by unconscionability or public policy, although it is always possible that a party in an inferior bargaining position misunderstood or was mistaken about a particular term.  Free reign over defining what is material may allow for very mundane breaches that could be written in for the sake of repossession in such a way that a party in an inferior bargaining position may not understand.  Such provision would probably raise to the level of unconscionability.  Likewise, the same public policy issues that govern intellectual property law and are used in federal preemption analysis would apply to contract invalidation.  The court may not find federal preemption over the contract, but may find invalidation of a term as violative of state or federal public policy.

Prohibit Reverse Engineering:  Prevent Fair Use

Provision:  “You may only add code to the kernel in the manner provided and shall not reverse engineer the kernel in order to produce software for use in this or any other market.”

An attractive provision for an owner that wants to exercise control over his work would be to prohibit reverse engineering of the kernel of an open-source software program.  The relationship between the “right” and the “exception” in copyright law provides a good basis for a contract provision that would conflict with the purposes of copyright law.

Application of Preemption Principles

Federal law makes it reasonably clear that the owner of a copyright can expressly transfer that right in writing, as long as the writing evidences knowledge on the part of the owner that a right is being transferred.  The rights transferable are enumerated in the Copyright Act.  However, the Copyright Act also provides “fair use” exceptions to those enumerated rights, and these rights belong to the public.  Fair use is not a copyright of the owner, but rather a public right that has developed into statutory law and represents Congressional interpretation of the limits of copyright protection.  Allowing private parties to contract out of such interpretation frustrates the purpose of federal law and threatens concepts of preemption.

Reverse engineering furthers the purpose of copyright law by allowing separation of the unprotected idea from the protected expression in order to promote a competitive marketplace.  To allow the design of a contract provision precluding such activity would frustrate one purpose of copyright law – to set boundaries on the commingling of protected material with unprotected material.  Such provision would also frustrate purpose of patent law, which requires stringent standards for such protection of ideas, the standards of which were not met by the idea in question.  To allow a contract provision to piggyback such patent-like protection to copyright would effectively eviscerate the need for patenting of the idea within the kernel.  However, if the kernel were to be kept truly secret, trade secret protection may allow for such provision.  The question becomes whether an open-source software program that is open to all on the internet is truly secret.  Notice that the kernel is not to be tampered with, along with a digital lock, would probably be reasonable steps to maintain the secret.  Thus, trade secret law may provide the means to prohibit reverse engineering. 

Application of Contract Principles

The court probably could not find misunderstanding, mistake, misrepresentation, or violation of public policy in the case of a trade secret.  A contract that clearly states that you cannot reverse engineer should be clear on its face, and it has already been held that federal law does not preempt state trade secret law.  However, if the idea in the program is not a trade secret, then federal policy may dictate that such unprotected information must stay in the public domain.

Requiring Covenant-Not-To-Compete:  Restrain Competition

Provision:  “Your access to the original and evolved code is likely the source of any products you later create that could compete in the relevant market.  Thus you may not compete in the relevant market for X years after expressly withdrawing from the development program.”

A software owner that is unsuccessful at protecting his property through electronic self-help, restraint, or injunction for breach of contract, as well as loss of the idea due to reverse engineering by the licensee, may choose to attempt a restraint on competition by requiring the licensee sign a covenant not to compete.

Application of Preemption Principles

Patent policy wants unprotected ideas to remain in the public domain to stimulate such competition, and copyright law does the same.  Trade secret law would police against improper acquisition and use of the information, so it would probably work in the licensor’s favor. 

Application of Contract Principles

A contract should not be able to simply overlook the aforementioned requirements.  The purpose of providing an incentive to create is frustrated, and a contract should not be able to simply overlook such policy.

Require Transfer of Ownership:  Retain Ensuing Rights

Provision:  “Anything you create from the original or evolved code is mine.”

Perhaps the owner of the kernel will require immediate transfer of ownership of rights to derivative works.  Exclusive rights must be transferred in writing that shows knowledge that a particular right has been surrendered, according to copyright law, but nonexclusive rights do not.[154]  In Friedman,[155] a software developer produced two medical database programs and expressed in writing to plaintiff that the programs are “your property” for $15K.  The developer sold the programs to others, claiming that she only meant to transfer the physical program and not the copyright, and the plaintiff sued.  Trial court held that an agreement stating a program is “your property” is sufficient to indicate transfer of copyrights, and any ambiguity can be cleared up by showing parole evidence such as course of dealings and trade custom.  State courts will generally interpret a contract, so this is again a circumstance where the judge has discretion to either promote uniformity by supporting the federal purpose or maintaining state power over contracts.  In Cohen,[156] a movie producer was not satisfied with a work of special effects, fired the creator, and used the creation anyway without paying.  The owner of the work sued, and the court held that even without written agreement to transfer, an implied nonexclusive license can be constructed to use the work for its intended purpose.  Thus, sometimes a court can stretch to meet the benefit of the bargain.

Application of Preemption Principles

This provision directly violates both patent and copyright policy.  Patent law provides protection for the inventor, while copyright provides protection to the author with the exception of the work-for-hire doctrine.  Both §301 and general preemption should apply and prevail against this provision.  Work-for-hire status applies agency analysis[157] and independent contractor work-for-hire status requires the work to fall into the enumerated categories[158], and if both parties expressly agree in writing that the work shall be considered work-for-hire.[159]  A contract should not be able to simply overlook such requirements.  In Reid,[160] an artist donated his services to produce a sculpture but never agreed to give up his copyrights.  Plaintiff sued for ownership of the copyrights under the work-for-hire doctrine, and the court looked to agency factors to determine whether the defendant was an employee.  The court held that defendant was not an employee, so not a work-for-hire.  Further, the court held that even if both parties had signed agreement that it was work-for-hire, the work did not fall into one of the nine enumerated categories for such assignment of work-for-hire status.  In Aymes,[161] the court held that a computer programmer under contract without provision for transferring ownership is not under work-for-hire, where the programmer has the sole expertise, is receiving no benefits, and the hiring party is not taking care of taxes, does not control the manner and means of creation, and cannot assign extra duties.

Application of Contract Principles

Not only would arguments from the preemption analysis work for public policy invalidation arguments, but mistake should also apply.  Misrepresentation will apply if the licensor knew or had reason to know that the licensee would not have signed but for his lack of knowledge of his rights, although UCITA tends not to impose such a duty on the licensor.  Requiring surrender of property rights on such terms may indicate an attempt to use a superior bargaining position to such a degree that the contract becomes very one-sided.  As such, the provision could be considered unconscionable.  In addition, the licensee is granting something he does not yet own as consideration, so the contract may fail for lack of consideration if there is no other valid consideration at the time of agreement.  Further, a public policy consideration is that such a provision may frustrate innovation.

Require All Works to be Joint Works:  At Least Share in Profits

Provision:  “Since I created the kernel, I share in the profits from anything you produce from the original or evolved code.”

Perhaps the owner of the kernel will require the owner of the derivative to share subsequent profits.  Each party must not only make an independent contribution, but must also intend at the time the contract was formed to merge the work.[162]  Although patent owners don’t have to share proceeds from joint work, copyright owners must account to each other.  In Thomson,[163] the plaintiff helped produce the rock opera “Rent” and sought co-authorship status despite no express mutual intent.  The court held there was not co-authorship although both parties made independent contributions, since it could not find intent by inference when looking at the following factors: decision making power, billing, and conduct in agreements with third parties.

Application of Preemption Principles

If the idea is patentable, the joint inventors have equal rights and are not required to share in the profits.  If the copyrightable expression is the property right, then the licensor must prove that the licensee intended to merge his work with the licensor’s.  Joint authors have equal rights to the property but are responsible for an accounting of profits to each other.  Thus, such a provision would clearly frustrate federal law.

Application of Contract Principles

Mistake and misrepresentation could once again apply, as well as unconscionability, depending on the relative bargaining power and respective levels of knowledge between the parties.  The public policy issues would follow the preemption analysis and would likely show a frustration of the purpose of innovation and competition.

Conclusion

The analysis has shown how too much freedom to design contracts without restriction, define what is material to the contract, and provide electronic self-help remedies and restraint, can create agreements that frustrate the purpose of federal intellectual property law as well as public policy in general.  Federal preemption and general contract principles can be used to invalidate such agreements.  Thus, a party in a weaker bargaining position may have reasonable opportunities for relief.  However, by limiting contract provisions to the confines of intellectual property law, contractual expectations can be harmonized on an interstate and international level.

Internet based contracts are inherently limited in enforceability due problems of jurisdiction over the parties, service of process, and standing.  As such, public enforcement by the courts can be problematic, which make enforcement by self-help means or private reputational mechanisms very attractive.[164]  Use of private ordering through reputational mechanisms and technological self-help protection can enhance the protection above that which copyright can provide and provide more of an incentive for authors to create.[165]  However, such private ordering cannot stand alone, must recognize its limitations within the metes and bounds of intellectual property and contract policy and only be used to supplement the legal framework which must exist in harmony with other nations.  As a result, the prevailing issue is the struggle between state sovereignty and federal supremacy.

The state sovereignty argument is that state law should control economic choices in contract provisions, since contract law defines the rights between parties to the contract, whereas copyright law gives the owner rights against the world.  However, the argument that the contract is limited to “only the parties” fails in non-exclusive contracts, since the number of persons bound by the contract may effectively be everyone in the world that wants the product.  For example, one party giving up reverse engineering rights through an exclusive contract may be found to have given conscionable and valid consideration, but requiring the world to give up such rights may be unconscionable by Congress’ interpretation of copyright law.  The gray area of concern is with nonexclusive contracts that can have from one to several affected parties.  The issue becomes one of determining how many parties can be required to give up rights they would otherwise have under federal law by entering a contract allowed under state law.  To allow an indeterminate number of parties to contract away from the purposes of copyright law could open up a host of new problems to the already problematic interpretation of fair use.

The argument supporting federal control is that giving the states freedom to contract out of copyright law under their sovereign authority over economic policy would create forum shopping and frustrate the purposes of intellectual property law.  States would produce a varying set of laws to attract commerce to that state rather than promote the federal plan.  Such state power would chip away at the purposes of intellectual property law by allowing protection under the guise of contract that the well-established federal system would not provide.  For example, if an inventor of a software program could obtain copyright protection over the expression but not patent protection over the idea, he could choose the law of a state to govern any contracts over use of his expressive work and further restrict access to his idea.

Circumstances upon which parties can contract out of federally granted rights must be controlled, if allowed at all.  Prohibiting such provisions in non-exclusive contracts would serve as a measurable boundary between parties that likely bargained for exchange and those that did not.  An exclusive contract limits the number of parties that can be affected by the transaction to those in the exclusive contract, so the likelihood that the contract was the product of good faith and fair dealing increases, or at least the damage to the public decreases.  A non-exclusive contract is simply a covenant not to sue, and may be used with multiple parties.  If the terms are such that a portion of licensees will eventually find the agreement unprofitable and breach, then there are still other licensees to rely on as well as the potential to enter more agreements. 

Many benefits could be realized by limiting the scope of contract provisions to the confines of intellectual property law.  The problem of defining a material breach would be clarified and provide for a less controversial use of self-help technology without fear that the owner is overreaching his copyrights.  The problem of bargaining power would be reduced, since Congress has already defined the property rights that parties can properly claim against the world.  The problem of defining a valid consideration would be alleviated, since the parties could not offer more than what they truly own within the bounds of Congressional legislation.

Finally, limiting software development contracts to the confines of the federal purpose of intellectual property law should increase predictability in internet transactions, increase harmony in transactions made between citizens of different states and nations, and protect intellectual property rights of parties in weaker bargaining positions.  A contract that exceeds the scope of intellectual property law can be preempted by federal law or invalidated through general contract principles and public policy.



[1] See UCITA Prefatory Note at 4 (August, 2000)

[2] The US has 50 sovereign states that make and enforce their own laws, but federal law develops through a separation of powers system in our three branch government: executive, legislative, and judicial.  Federal law has exclusive jurisdiction over certain enumerated fields under the Supremacy Clause of the US Constitution.  Federal supremacy provides uniformity in application of law and avoids forum shopping.  The EU has 3 branches of government, much like the US:  the European Council, the Parliament, and the European Court of Justice (ECJ).  The Council and Parliament have a co-decision making procedure where the Council legislates in the form of “Regulations” and “Directives” and Parliament reviews.  However, the Council is considered the executive, so it is both legislative and executive in character.  The ECJ decides only European Law under European Treaty, and like US federal law, European Law is Supreme.  The problem is with enforcement of European Law:  the Commission can sue a member state in the ECJ but there is no way to enforce the judgment – no police power.

[3] See E.C. Software Directive (91/250/EEC)(directs member states to give software protection for expression only, provides specific contours for legislation, and complies with the Berne Convention.)

[4] See Francovich (ECJ)(held that EU citizen has claim against the state for not enacting Directive in proscribed time frame), cited by Professor Michael Lehman, International and Comparative IP, Santa Clara University School of Law, Santa Clara, CA.

[5] See supra note 3 at Art. 6.  Contracts in the EU cannot expressly preclude reverse engineering of software, whereas contracts in the US routinely do so.

[6] Restatement (Second) of Contracts §§1, 17, 71. (1992)

[7] Restatement (Second) of Contracts §205. (1992)

[8] Restatement (Second) of Contracts §208; UCC §2-302. (1992)

[9] U.S. Const. Art. I, §10 (“no State shall pas any Law impairing the Obligation of Contracts.”); Allgeyer v. Louisiana 165 US 578 (1897)(dicta that “liberty” in due process clause allows citizen to enter all contracts which may be proper, necessary, and essential to [enjoyment of all his faculties].); Lochner v. NY 198 US 45 (1905)(held essentially that freedom to contract is a fundamental right and used a near strict scrutiny standard);

[10] See id.

[11] Geoffrey R. Stone, Constitutional Law 827 at n.5 (3rd ed. 1996)

[12] See id. 827 at n.4 (“…the theoretical basis of the Lochner Era [is undermined once one recognizes] that the market status quo [is] itself the product of government choices.  [Once it becomes] clear that harms produced by the marketplace [are themselves] products of public choices, efforts to alleviate those harms [must] be regarded as permissible exercises of government power.”)

[13] See US Const. Art. VI, Cl.2 (“This Constitution, and the Laws of the United States…shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding”); H.R. Rep. No. 94-1476, 94th Cong., 2d Sess. 129-33 (1976)(states Congress’ intent to make copyright law uniform through §301 of the Copyright Act by abolishing any state created rights equivalent to copyright over subject matter that falls within the scope of copyright law)

[14] The substantive due process approach was gradually abandoned and culminated in the ruling that in matters concerning ordinary commercial transactions, legislative support is to be presumed, and that actual reasons need not be set forth.  See US v. Carolene Products 304 US 144 (1938)(facts supporting regulation of filled milk are assumed, not proven); Duke Power v. Corolina Envir Study Group 438 US 59 (1978)(economic regulation falls within state police power and is assumed constitutional unless arbitrary and irrational.)

[15] Through the 19th century, transactions in goods were primarily handled by common law according to trade custom, and decisions were based on “land law” principles.  The result was a very non-uniform body of sales law, so the Uniform Sales Act was produced by the National Conference of Commissioners on Uniform State Laws (NCCUSL) and enacted in 1906.  The act adopted by over thirty states, but still did not cover many problems related to sales of goods.  As a result, Congress proposed a federal sales act in 1940.  The NCCUSL managed to postpone the federal sales act and gain support for a comprehensive Uniform Commercial Code (UCC) to cover many commercial transactions, including the sale of goods.  The problem of uniformity between state contract laws persisted even after the UCC was approved in 1952 by the NCCUSL and the American Law Institute (ALI).  The non-uniformity occurred because the states adopted the code but began making changes.  In order to curb non-uniformities, the UCC was again revised in 1962 to incorporate changes adopted or proposed by the states.  Selections for Contracts 1-2 (E. Allan Farnsworth and William F. Young, compilers, Foundation Press 1992)

[16] UCC §1-102 (1992).  The underlying purposes and policies of the act are three-fold:  1) simply, clarify, and modernize commercial transactions law; 2) permit expansion of commercial practice through custom, usage, and party agreement; and 3) make the law uniform among jurisdictions.

[17] See id.  However, the parties may agree on the performance standard if not unreasonable.

[18] See id.  This includes capacity to contract, duress, fraud, misrepresentation, coercion, mistake, or other validating or invalidating cause.

[19] See id.

[20] UCC §1-106 (1992)

[21] UCC §§2-103,104 (1992).  A “buyer” is simply a person that buys or contracts to buy goods, whereas the “merchant” has “knowledge or skills peculiar to the goods or practices involved…”

[22] UCC §§2-301,302 (1992).  Unconscionability is determined by the circumstances surrounding the contract at the time it was made.

[23] The licensor of software contracts has the power to regain possession of all copies of licensed information and any other material part of the contract, which were to be returned upon breach or termination of the contract.  The licensor can also prevent further use of such information.  Such power can be exercised without the court by self-help repossession if there is (1) no breach of peace, (2) no foreseeable risk of personal injury or (3) no significant physical damage to information or property other than licensed information.  Licensor has the right to otherwise get expedited judicial relief to stop use and repossess the software when self-help repossession is not possible.  See UCITA §§815, 816 (August, 2000).

[24] See id at §§815 comment 3, 816(b),(d).

[25] See UCITA §§815 comment 5, 816 (August 2000)

[26] See id.  The licensee also retains reciprocal power of self-help where the licensee transfers information to licensor in return for continued use of information.  The rules of notice and assent are the same, as well as the limitations.  Most importantly, the licensee can claim direct, incidental, and consequential damages resulting from misuse of self-help, and consequential damages cannot be waived or altered by agreement in three cases:  (1) licensor had reason to know use of the remedy would cause the damages, (2) the licensee gave licensor notice that such damages would result, and (3) licensor gave no notice before exercising self-help.

[27] See UCITA §816(i), which seems to eviscerate the limitations by stating that §816 does not apply if “the licensor obtains possession of a copy without a breach of peace and the electronic self-help is used solely with respect to that copy,” suggesting that there are no limitations to self-help if there is no breach of peace.  No comments address §816(i), but it appears to rest on the common law principles that property can be repossessed upon failure to perform under the contract if there is no breach of the peace.  Further, since §816 does not deal with electronic restraints, the licensor can still prevent any breach by such electronic restraint.  Thus, parties can agree on the terms of a material breach that frustrate federal intellectual property law, and then enforce those terms through self-help provisions outside of the mass market, or by electronic restraint.  See UCITA §701 comment (August, 2000) (material breach is violation of provision essential to performance of contract and is basis for cancellation, whereas non-material breach is merely agreed upon term of use.)

[28] See supra note 27.

[29] See UCITA §816 comment 1 (“This section does not limit use of electronic restraint to prevent breach by limiting the licensee’s performance to the contract terms or to use electronics when a licensee terminates by its own terms or otherwise without breach.)

[30] To date, UCITA has only been adopted by two states:  Virginia and Maryland.

[31] UCITA points out that the limitations on electronic self-help in §816 do not limit self-help under the UCC, and such limitations may be affected by the Copyright Act.  See UCITA §816 comment 1.

[32] See Article 1, §8, Clause 8 of the US Constitution for the Intellectual Property Clause, and Article 1, §8, Clause 3 for the Commerce Clause.

[33] See the 10th Amendment and Article VI, Clause 2 of the US Constitution.

[34] See UCC §1-102 (1992)

[35] See Sears, Roebuck & Co v. Stiffel Co. 376 US 225 (1964)(held cannot use state law to claim damages for copying of unprotected lamp, since unprotected ideas are public domain); Goldstein v. California 412 US 546 (1973)(held state can regulate duplication of sound recordings, since such protection was not afforded by Congress and thus does not conflict with the purposes of the Copyright Act.)

[36] See Kepner-Tregoe Inc. v. Vroom, 186 F.3d 283 (2nd Cir., 1999).

[37] The 1976 Copyright Act established a single federal system for copyright protection.

[38] See 17 USC §102(a)

[39] Federal law prevails over conflicting state law.  Art. VI, Clause 2 of the U.S. Constitution says that “This Constitution, and the Laws of the United States…shall be the supreme Law of the Land…”

[40]  Bonito Boats v. Thunder Craft Boats 489 US 141(1989)(holding that unpatentable boat hulls cannot be protected under state law that wants to protect industry, since ideas that do not meet patent standards are open to public.)

[41] See 17 USC §301.

[42] See 15 USC §§101-103.

[43] Sale of the physical embodiment of an invention is implied license to use, resell, and repair, and thus is known as the “doctrine of exhaustion” since such sale exhausts the patent owner’s rights to that particular item.  Licensing is a way of retaining rights, since the license can expressly limit the rights transferred.

[44] See Computer Assoc Int’l, Inc. v. Altai, Inc. 982 F2d 693 (2d Cir. 1992)(held that state law cannot restrict use of unprotected ideas within a software program by providing that such use is breach of contract.).

[45] See Brulotte v. Thys Co. 379 US 29, 33-34 (US 1964)(held that licensor cannot extend patent rights beyond term by requiring licensee to pay royalty on expired patents as part of license portfolio.)

[46] See supra at note 35.

[47] See Kewanee Oil Co v. Bicron Corp. 416 US 470 (1974)(held state trade secret protection of process of growing crystals did not frustrate federal law, since trade secret is not in public domain to begin with)

[48] See Aronson v. Quick Point Pencil 440 US 257 (1979)(held contract enforcement in this case furthered Congress’ purpose of encouraging disclosure of ideas, since the contract led to sale of the “key ring” idea, and enforcement of the contract would not prevent others from copying the idea.)

[49] See Bonito Boats Inc. v. Thundercraft Boats, Inc. 489 US 141 (1989)(held that allowing state law to prohibit use of unpatentable plug mold process would frustrate Congress’ purpose of keeping public ideas in public domain, since the plug mold process was not kept secret.)

[50] See 17 USC §106.  Fair use is an equitable principle applied on a case-by-case basis, and an example of such fair use is applying the protected expression as necessary for criticism, comment, news reporting, teaching, scholarship, or research.  See 17 USC §107.

[51] See id.

[52] Computer Assoc v. Altai 982 F2d 693 (2d Cir. 1992)(explains the abstraction-filtration-comparison method of reverse engineering software.)

[53] See Sega Ent v. Accolade, Inc. 977 F2d 1510 (9th Cir 1992)(intermediate copying of videogame code to achieve interoperability with game consoles was fair use.)

[54] See 17 USC §301(a)(“This section [preempts any] legal or equitable rights [under state law] that equivalent to any of the exclusive rights within the general scope of copyright as specified by §106 in works of authorship that fixed in a tangible medium of expression and come within the subject matter of copyright as specified by §§102 and 103.); Computer Assoc v. Altai 982 F2d 693 (2d Cir. 1992)(held that state trade secret law is not preempted by copyright law since there is the extra element of breach of confidentiality.); See National Basketball Ass’n v. Motorola, Inc. 105 F3d 841 (2d Cir 1997)(held that a narrow hot news exception will survive preemption based on three extra elements:  D is free-riding on P’s cost, D is threatening P’s incentive, and info is time-sensitive.)

[55] See US Const. Art. VI, Cl.2 (“This Constitution, and the Laws of the United States…shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.”)

[56] See H.R. Rep. No. 94-1476, 94th Cong., 2d Sess. 129-33 (1976)

[57] See 17 USC §§102, 103.

[58] See 17 USC §106.

[59] See Feist Publications, Inc. v. Rural Telephone Service 499 US 340 (1991)(held that directory information in white pages of telephone book are not protectable by copyright since they are unoriginal facts without enough creativity in the compilation; copyrightable expression must be original to the author and contain at least a modicum of creativity.)

[60] See 17 USC §§102(b)(copyright protection does not extend to ideas, procedures, processes, systems, methods of operation, concepts, principles and discoveries.); Computer Assoc v. Altai 982 F2d 693 (2d Cir. 1992)(held that parts of a computer program necessary for efficiency are functional ideas and not protected by the copyright even though they are proper subject matter.)

[61] See National Basketball Ass’n v. Motorola, Inc. 105 F3d 841 (2d Cir 1997)(held that facts taken from within a copyrightable sports broadcast are proper subject matter of copyright.)

[62] See US v. Board of Trustees of the Univ of Alabama 104 F3d 1453 (4th Cir 1997)(denies argument that unprotectable subject matter within copyrighted material is not part of copyrightable subject matter.).

[63] See id.

[64] See supra note 35

[65] See Baltimore Orioles, Inc. v. Major League Baseball Players Ass’n 805 F2d 663 (7th Cir 1986).

[66] See Harper & Row Publ v. Nation Enterprises 723 F2d 195 (2d Cir 1983)(complaint was that defendant copied memoirs and reduced the value to the extent that a potential licensee rejected the contract.)

[67] See Del Madera Prop v. Rhodes and Gardner, Inc.  820 F2d 973 (9th Cir 1987).

[68] Cal. Civ. Code §3426.1 (“Trade secret means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:  (1) derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”)

[69] See Restatement of Torts §757 comment b.

[70] See Cal. Civ. Code §3426.1 (“improper means” includes theft, bribery, misrepresentation, breach or inducement of breach of confidence, or espionage…Reverse engineering or independent derivation are not improper means.  “Misappropriation” means acquiring a secret while knowing or having reason to know that it was acquired by improper means, or disclosing or using a secret without consent that was acquired by improper means.)

[71] See supra note 69

[72] See supra note 47.

[73] See id.  Kewanee 3-fold purpose test to uphold a contract despite lack of patent protection:  Congress’ purpose in passing patent laws are (1) incentive to invent; (2) promote disclosure of inventions; (3) ensure material in public domain stays there.

[74] See id.

[75] See Rockwell Graphics Sys. v. Dev Ind., Inc. 925 F2d 174 (7th Cir. 1991)

[76] See Restatement (Second) of Contracts §§1, 17, 71, 79 (1992).  The legal detriment requirement says that you must have legal rights over what you offer for consideration, and you can’t offer that which you are legally obligated to provide anyway.

[77] See Restatement (Second) of Contracts §§14, 15 (1992)

[78] See Restatement (Second) of Contracts §205 (1992)

[79] See Restatement (Second) of Contracts §208; UCC §2-302 (1992)(“The basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.”)

[80] See Restatement (Second) of Contracts §§178, 187, 188 (1992)

[81] See Restatement (Second) of Contracts §20 (1992)

[82] See Restatement (Second) of Contracts §§152, 15 (1992)

[83] See Restatement (Second) of Contracts §§161-164, 168, 169 (1992).  The Restatement also addresses duress and undue influence in this chapter, but these are outside of the scope of this paper.

[84] Beyond the scope of this paper.

[85] See UCC §2-302 comment (1992)(“The basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.”)

[86] See Restatement (Second) of Contracts §178 (1992)

[87] See Restatement (Second) of Contracts §§187, 188 (1992).  A non-ancillary promise not to compete is unreasonable, but an ancillary promise not to compete is only unreasonable under two conditions:  (1) it is greater than needed to protect the promisee’s interest, or (2) the promisee’s need is outweighed by hardship to the promisor and likely injury to the public.  Examples of “ancillary” promises would be where a business seller agrees not to compete in a way that devalues the business sold, or where an employee agrees not to compete with his employer.

[88] See Restatement (Second) of Contracts §237 (1992).

[89] See Restatement (Second) of Contracts §241 (1992).

[90] See UCITA §104 (August, 2000).

[91] Compare Restatement (Second) of Contracts § 211(3) to UCITA §208 comment 7 (August, 2000).

[92] See UCITA Prefatory Note at 3 (August, 2000)

[93] See UCITA §701 (August, 2000).

[94] See id.

[95] See UCITA §105 (August, 2000).

[96] See id at Reporter’s Notes 2 (August, 2000).

[97] See UCITA §§105(a), (b), Reporter’s Notes 3; See also UCITA §111 (August, 2000).

[98] See Restatement (Second) of Contracts §178 (1992).

[99] See id.  In applying these factors, courts should consider the position taken in the Restatement (Second) of Contracts § 178, comment b (“Enforcement will be denied only if the factors that argue against enforcement clearly outweigh the law’s traditional interest in protecting the expectations of the parties, its abhorrence of any unjust enrichment, and any public interest in enforcement of the particular term.”)

[100] See UCITA §105 Reporter’s Notes 3 (August, 2000).

[101] See id.; 17 USC §§1201-1205 (1999)

[102] See id at §1201(f)

[103] Copyright infringement claims require the owner to prove (1) ownership of a valid copyright, and (2) unauthorized use of that right.  Contract claims require proof of a valid contract and breach of agreement, which requires proof of (1) mutual assent; (2) bargain-for-exchange; and (3) valid consideration.  In either claim, P needs to prove lack of agreement regarding the act, and valid ownership (the copyright or consideration).  Thus, the extra element in the contract claim is bargain-for-exchange.

[104] Plaintiff invested over 10 million dollars into a database that contains over 3000 phone directories and sold the database to commercial users for a much higher price than non-commercial users.  To prevent non-commercial users from reselling the software for commercial use at a lower price, ProCD included such restrictions inside the package in a separate document as well as in the software itself that were to be read after the package is opened.  The defendant ignored this “shrinkwrap license” and marketed his non-commercial version over the internet.  The court held shrinkwrap licenses valid and gave examples of airline tickets, concert tickets, and warranties and warnings inside of box containing electronics, noting that it would be difficult to impossible to put all terms on outside of box.  The court held that shrinkwrap licenses are generally valid unless unconscionable or otherwise violate law, if there is notice on outside, terms on inside, and a right to return the software for refund if terms are unacceptable.  Contract provisions that restrict use are not prempted by §301, since contracts only involve parties to the contract, whereas copyright is held out against the world.  Consumer interest is protected by competition between vendors.  See ProCD v. Zeidenberg 86 F3d 1447 (7th Cir. 1996)

[105] See Feist Publications, Inc. v. Rural Telephone Service 499 US 340 (1991)(held that directory information in white pages of telephone book are not protectable by copyright since they are unoriginal facts without enough creativity in the compilation; copyrightable expression must be original to the author and contain at least a modicum of creativity.)

[106] See id, citing American Airlines, Inc. v. Wolens 115 S. Ct. 817 (1995)(stating that federal statute preempting state interference with federally regulated airline rates could be read broadly to preempt contracts but do not since contracts reflect private ordering essential to efficient markets, whereas the federal statute’s purpose is to prevent states from substituting their own regulation for federal regulation.)

[107] See supra note 47.

[108] This was stated as a hypothetical with no authority but the copyright owner has the right to distribute the first authorized copy of his work, whether by sale, gift, loan, or rental.  See 17 USC §106(3).  The rental right deals with limitations and exceptions to the “first sale” doctrine.  The Copyright Act has made the first sale doctrine statutory, stating that copyrights cease upon first sale of the authorized copy.  See 17 USC §109(a)(“…the owner of a particular copy…lawfully made…, or any person authorized…, is entitled…to sell or otherwise dispose of the possession of that copy…”).

[109] See supra note 48.

[110] Federal law preempts where the field is completely occupied by federal law, or where state law conflicts with the purpose of federal law.  Since the state can provide intellectual property protection, field preemption does not apply.  However, the state cannot frustrate the purpose of federal intellectual property law.  The Copyright Act expressly preempts state law  that protects copyrightable subject matter and provides rights equivalent to those enumerated in the Copyright Act.  See 17 USC §301.  Courts have determined that “equivalent” means “not qualitatively different.”

[111] See Rano v. Sipa 987 F2d 580 (9th Cir. 1993)

[112] See Walthal v. Rusk 172 F3d 481 (7th Cir. 1999)

[113] See Restatement (Second) of Contracts §20 (1992)

[114] See Restatement (Second) of Contracts §20 (1992).

[115] See id at (2)(a)

[116] See Restatement (Second) of Contracts §§152, 15 (1992)

[117] See Restatement (Second) of Contracts §154 (1992).

[118] See Restatement (Second) of Contracts §§152, 153 (1992).

[119] See Restatement (Second) of Contracts §§161-164, 168, 169 (1992).  The Restatement also addresses duress and undue influence in this chapter, but these are outside of the scope of this paper.

[120] See Restatement (Second) of Contracts §162 (1992).

[121] See Restatement (Second) of Contracts §163 (1992).

[122] See Restatement (Second) of Contracts §164 (1992).

[123] See Restatement (Second) of Contracts §17 (1992).

[124] See Whitney v. Stearns 16 Me. 390, 397 (1839)(“A cent or a peppercorn…would constitute a valuable consideration.”)

[125] See Black Ind., Inc. v. Bush 110 F.Supp 801 (NJ 1953)(held that making excessive profit as a result of circumstances after a valid contract is not a basis for failure of consideration.)

[126] See McKinnon v. Benedict 157 NW2d 665 (Wis. 1968)(held that it is overreaching to require restrictions on use of land that far exceed the value of a loan for the land.)

[127] See Cal. Civ. Code §1605.

[128] See Desny v. Wilder 45 Cal 2d 715 (1956)

[129] See Walton Water v. Village of Walton 143 NE 786 (1924)

[130] See Murphy v. T.Rowe Price Prime Reserve Fund, Inc. 8 F3d 1420 (9th Cir 1993)(held that a promise to pay interest in funds held by mistake is valid consideration, even though statute precluded the right to such interest, as long as the claim to interest was made in good faith.)

[131] See UCC §2-302 comment (1992). 

[132] See UCC §2-302 comment (1992)

[133] See UCC §2-718(1) (1992).

[134] See UCC §2-719(3) (1992).

[135] See UCC §2-316 (1992).

[136] See Williams v. Walker-Thomas Furniture Co. 350 F2d 445 (DC Cir. 1965)(held that repossession of all defendants furniture based on late payment for last item purchased was unconscionable as a standard form provision.)

[137] See Restatement (Second) of Contracts §208 (1992).

[138] See UCITA §105 (August, 2000).

[139] See Restatement (Second) of Contracts §178 (1992)

[140] See Restatement (Second) of Contracts §§187, 188 (1992).

[141] See UCITA §105 comment (August, 2000); Restatement (Second) of Contracts §178.

[142] See Restatement (Second) of Contracts §§187, 188 (August, 2000).

[143] The basic understanding of the concept has gained recognition primarily from the success of the Linux operating system development.  See Eric S. Raymond, The Cathedral and the Bazaar (1999)(discusses the the overall success of open-source development with the overriding principle that “given enough eyeballs, all bugs are shallow.”)

[144] Ego boosting, known as “egoboo” is the only real reward for the efforts of the developers.  See supra note 143 at 65.

[145] Red Hat, a Linux-support company went public with great success in that its stock rose 272% on the first day.  See Patrick Bobko, Linux and General Public Licenses:  Can Copyright Keep “Open-Source” Software Free? 28 AIPLA Q. J. 81 (2000)(citing Mark Clothier, Red Hat Shares Soar 272% on First Day, Atlanta Journal and Constitution, Aug. 12, 1999 at C2.)

[146] “Perhaps in the end the open-source culture will triumph not because cooperation is morally right or software “hoarding” is morally wrong, but simply because the closed-source world cannot win an evolutionary arms race with open-source communities that can put orders of magnitude more skilled time into a problem.”  See supra note 143 at 67.

[147] Some may argue that any violation present in contract law is mild compared to the manner in which the open-source concept was meant to be used, where “an open-source license must protect an unconditional right of any party to modify and redistribute open-source software, [with the implicit theory] that anyone can hack anything.”  See supra note 143 at 87; See also http://www.opensource.org (provides guidelines for certification of a true open-source agreement.)

[148] See http://www.opensource.apple.com/apsl.  This the third year of development of the APSL, and is version 1.2, January 4, 2001.

[149] You can’t make a modified version and use it without publishing.  See http://www.gnu.org/philosophy/apsl.html.

[150] Anyone releasing the a modified version, or any use for other than research and development, must notify Apple.  See supra note 149.

[151] Apple can revoke the license and forbid any further use if there are any claims of patent or copyright infringement.  See supra note 149.

[152] See supra note 149.

[153] See supra note 149.

[154] See 17 USC §§101, 201, 204.

[155] See Friedman v. Stacely Data Proc Serv. 17 USPQ2d 1858 (ND ILL. 1990).

[156] See Effects Assoc. v. Cohen 908 F2d 555 (9th Cir. 1990).

[157] The agency factors in determining whether a worker is an employee are the right to control manner and means of work, skill required, source of tools, location of work, duration of relation, right to assign additional work, discretion over when and how long to work, method of pay, who hires assistants, regular business of hiring party, is hiring party in business, are benefits paid, and does hiring party handle tax treatment. 

[158] The enumerated categories in which a work by an independent contractor can be work-for-hire by express agreement are as follows:  a contribution to a collective work, part of a motion picture or other audiovisual, translation, supplementary work, a test, a compilation, an instructional text, or an atlas See 17 USC §101.

[159] See supra note 154

[160] See Community for Creative Non-violence v. Reid 490 US 730 (US 1989).  Note that every case since Reid has found independent contractor status where no benefits or social security taxes were paid.

[161] See Aymes v. Bonelli 980 F2d 857 (2d Cir 1992).

[162] See §101.

[163] See Thomson v. Larson 147 F3d 195 (2d Cir 1998)

[164] See David D. Friedman, Contracts in Cyberspace, http://www.daviddfriedman.com/Academic/Course_Pages/21st_…/Contracts_in_Cyberspace.html (available as of May 2001).

[165] See David D. Friedman, In Defense of Private Orderings:  Comment on Julie Cohen’s “Copyright and the Jurisprudence of Self Help”, 13 Berkeley Tech. L.J. 1151, 1172 (1998).