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Anyone who has bought software is probably familiar with clickwrap agreements. To use a program, you click a box that indicates you agree to what the manufacturer calls a “license agreement.” There is no negotiating — if there is no click, there is no installation. Undoubtedly, only a tiny fraction of users ever actually reads the agreement. Those who do may find that the license prevents users from selling or transferring the software, limits the number of computers that may connect to a machine running the program, prohibits certain uses (such as reverse engineering), and strictly limits warranties. While typical users believe they have bought the software, the license says that software “is licensed, not sold.” Clickwrap agreements are cousins to “shrinkwrap” agreements common in packaged software products. A purchaser — or licensee — demonstrates assent by ripping through the plastic on a product’s package. Clickwrap licenses are likely to become even more important, and more restrictive, as distributors of software, movies, music and books attempt to control the use and distribution of their intellectual property. Critics have said that clickwraps nullify rights traditionally granted to consumers under copyright law — such as fair use and the first-sale doctrine, which allows owners of copyrighted materials to sell or lend those items. So far, the courts have been favorable to clickwraps, although the issue is far from settled. At least three challenges to clickwrap agreements have to be considered: whether the agreements are valid contracts; whether they are pre-empted by the Copyright Act; and whether they are a “misuse” of copyright. The most basic challenge to clickwraps — that merely clicking the box is not “acceptance” of an offer to enter into an agreement — does not seem to be a promising line of attack. While some early cases took a skeptical view of this issue See Step-Saver Data Systems Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991), the trend is now going the other way. For example, in January, in i.Lan Systems Inc. v. Netscout Service Level Corp., a federal judge in Massachusetts held that clickwrap licenses can create a contractual relationship. The court reasoned that, if shrinkwrap licenses are enforceable through implicit assent, then the more explicit clickwrap licenses also must pass muster. i.Lanis consistent with the approach of the proposed Uniform Computer Information Transactions Act, which explicitly recognizes clickwraps, as long as a consumer has the opportunity to review the proposed license. Maryland and Virginia are the only states that have adoped the model law; seven other states and the District of Columbia are considering it. LICENSE OR SALE? While this issue appears settled, there is uncertainty over when an agreement will be deemed a license, or instead a sale, of copyrighted goods. The distinction is significant because a licensee may be prohibited from reselling, while an owner, protected by the first-sale doctrine, is free to do so. Two conflicting cases from California federal courts, involving the same party, illustrate the debate. In Softman Products Co. LLC v. Adobe Systems Inc.(2001), a software vendor bought discounted sets of Adobe software and then violated the Adobe license agreements by reselling individual components of the package. The Central District of California found that Adobe had sold, not licensed, its products to distributors, so that the vendor was protected by the first-sale doctrine. The court looked to what it called “the economic realities of the exchange,” and stressed that the software buyer usually obtains a single copy of a program, for a single price, and that the so-called license runs for an indefinite term without provision for renewal. The same is likely to be true of a clickwrap “license” offered to a consumer. The Softmancase conflicts with the Northern District of California’s finding in Adobe Systems Inc. v. One Stop Micro Inc.(2000). That decision found that an Adobe distribution agreement was indeed a license. That court brushed aside the claim that an Adobe distribution agreement was a sale, relying on expert testimony about the extensive use of licenses in the software industry, and concluding that the significant restrictions in the agreement themselves made it clear that the parties had agreed to a license. PRE-EMPTION Calling the transaction a license rather than a sale alone does not end the debate. Licenses are subject to pre-emption under � 301 of the Copyright Act. The section broadly pre-empts “all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright.” Those exclusive rights include reproduction, distribution and preparation of derivative works. A judge could conceivably determine that certain licenses are pre-empted by copyright law. Many courts focus on whether the right in question is infringed by the mere act of reproduction or distribution, in which case it is pre-empted, or whether an extra element beyond that act is required to establish the claim. The most sweeping decision on pre-emption is the 7th Circuit U.S. Court of Appeals’ opinion in ProCD Inc. v. Zeidenberg(1996). ProCD produced a CD-ROM including data from more than 3,000 phone books. In doing so, it took advantage of the Supreme Court’s decision, in Feist Publications Inc. v. Rural Telephone Service Co. Inc.(1991), that a phone directory could not be copyrighted. To try to prevent others from turning the tables and reselling its work, ProCD created a shrinkwrap license forbidding commercial use of the product. Matthew Zeidenberg ignored the license and made the database available on the Internet, for a fee. The 7th Circuit rejected Zeidenberg’s defense that the shrinkwrap was pre-empted by the Copyright Act. It reasoned that rights created by contract are by nature not equivalent to rights established by law. “A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create ‘exclusive rights.’ Someone who found a copy of [ProCD's product] on the street would not be affected by the shrinkwrap license — though the federal copyright laws of their own force would limit the finder’s ability to copy or transmit the application program,” the court said. While the court did not establish a firm rule that no contract claims can be pre-empted, its logic supports that result, and has been read that way by some courts. See Architectronics Inc. v. Control Systems Inc., 935 F. Supp. 425 (S.D.N.Y. 1996). Most courts, however, have declined to embrace the proposition that all state law contract claims survive pre-emption simply because they involve the additional element of promise. See Wrench LLC v. Taco Bell Corp.,256 F.3d 446, 457 (6th Cir. 2001). Instead, pre-emption is limited to contracts that only protect exclusive rights granted under copyright laws. Most provisions of software clickwrap agreements should survive that test. No court yet has ruled that contracts that prohibit the exercise of rights granted under the copyright laws are pre-empted. COPYRIGHT MISUSE The still-evolving doctrine of copyright misuse — which was given impetus by the 4th U.S. Circuit Court of Appeals’ decision in Lasercomb America Inc. v. Reynolds(1990) — provides a defense to copyright infringement. The defendant must show that a copyright is being used in a manner that violates the public policy embodied in the grant of a copyright. While misuse is most clear when restrictions in a copyright license accomplish an antitrust violation, that is not necessary. For example, in Practice Management Information Corp. v. American Medical Association(1997) the 9th Circuit found misuse without proof of an antitrust violation when the American Medical Association licensed a coding system to a government agency for free, on the condition that the agency agree not to use any other system on Medicare and Medicaid claim forms. Misuse may be invoked by a defendant in a copyright action, even though that party is not affected by the misuse. Any infringer of the copyrighted material covered by a license that imposes conditions deemed to constitute misuse may invoke the doctrine. Until the offending provisions are removed from the license agreement the copyright is unenforceable. For those reasons, and because of its unpredictability, the doctrine may pose a danger to copyright holders. While it has yet to be applied to clickwrap agreements, it may well operate as a limit on the restrictions copyright owners can impose, particularly when those restrictions can be expected to have an impact on competition or market conditions. No court yet has ruled that contracts that prohibit the exercise of rights granted under the copyright laws are pre-empted. Lewis Clayton is a litigation partner in Paul, Weiss, Rifkind, Wharton & Garrison, www.paulweiss.com, and co-chair of the firm’s intellectual property litigation group. Susanna Buergel, an associate at the firm, assisted in the preparation of this article.

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