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H E U N I V E R S I T Y O F
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L E C T R O N I C C O M M E R C
E : V E R S I O N 2.0
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Congratulations to the Fall 2001 class for an excellent semester.
eCommerce will return next year.
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eContracts III: Limits on Contractual
Terms
R E A D I N G S
Part I
Public Policy Limitations on Contract Terms
While contract law is in some sense
"private" law, it still exists pursuant to a background of state law
enforcement procedures. Therefore, it cannot be fully separated from
public policy issues.
Some public policy issues are considered
important enough that courts will refuse to enforce terms that conflict
with them, or state law will often specifically prohibit contracts
with specified terms. For example, UCITA itself contemplates such
a limitation:
SECTION 111. UNCONSCIONABLE
CONTRACT OR TERM.
(a) If a court as a matter
of law finds a contract or a term thereof to have been unconscionable
at the time it was made, the court may refuse to enforce the contract,
enforce the remainder of the contract without the unconscionable
term, or limit the application of the unconscionable term so as
to avoid an unconscionable result.
(b) If it is claimed or appears
to the court that a contract or term thereof may be unconscionable,
the parties must be afforded a reasonable opportunity to present
evidence as to its commercial setting, purpose, and effect to aid
the court in making the determination.
Much of the controversy over UCITA
and other eContracts has resulted from this question: where, if anywhere,
are the limits to the terms of electronic contracts?
To investigate this question, review
the following:
Mark Lemley,
Beyond Preemption: The Law and Policy of Intellectual Property
Licensing, 87 Cal. L. Rev. 111 (1999) [pdf, 60 kb, edited]
(public policy sections)
Part 2:
Federal Preemption Issues
Contract law is, as a general matter,
a creature of state -- rather than federal -- law. Where terms of
a contract purport to limit or alter the action of a federal law --
copyright law, for example -- the matter of federal preemption is
raised.
This issue was raised in ProCD,
because the plaintiff was using the shrinkwrap agreement to give itself
copyright-like protections, notwithstanding that the subject matter
of the software -- a CD-ROM of phone numbers -- was not subject to
copyright protection.
ProCd v Zidenberg,
86 F.3d 1447 (7th Cir 1996). [pdf, 16 kb, edited]
There are other ways, of course,
that the issue of preemption can arise in a contract dispute. In his
article, Beyond Preemption, Mark Lemley of Boalt Hall suggests
several ways that federal preemption is implicated in eContract issues:
Mark Lemley,
Beyond Preemption: The Law and Policy of Intellectual Property
Licensing, 87 Cal. L. Rev. 111 (1999) [pdf, 68 kb, edited]
(preemption sections)
N O T E S & Q U E S
T I O N S
1. Much of the discussion about "limits"
on terms is equally applicable to "normal" as well as
electronic contracts. Are there reasons to consider electronic contracts
differently from real-world contracts? That is, do electronic contracts
raise special issues that we might not see (or might see less often)
in typical contractual relationships? Do any differences justify
a special appraoch?
2. As a practical matter, do you think that courts
are likely to impose limits on eContracts?
3. What do you think of the ProCD decision
with respect to preemption? Is Judge Easterbrook right that contracts
are solely "private ordering" that does not "withdraw any information
from the public"? What if I proposed a contract covering a copyrightable
work that stated, in relevant part, the following: "you agree not
to quite, cite, or otherwise discuss this work in any manner not
explicitly approved by me." Do you see any problems with this?
4. Lemley notes that there are three basic kinds
of preemption: (1) "field" preemption, where Congress has stated
that an entire "field" is exclusively federal; (2) "conflicts" preemption,
where a state law directly conflicts with a federal statute; and
(3) "implied conflicts preemption", where a state law "stands in
the way" of the achievement of Congressional objectives.
Copyright law has a "field" preemption statute,
17 U.S.C. § 301, which prevents state laws that grant rights
"equivalent to any of the exclusive rights" in Copyright. ProCD,
as you saw above, rejected that § 301 prevented the contract
at issue there. But ProCd didn't address conflicts preemption. Why
do you think? Should it have? Would the result have changed?
Note that in this regard, at least one court has
held, as a matter of conflicts preemption, that shrinkwrap contracts
purporting to eliminate the right of an owner of computer software
to "reverse engineer" improvements or interoperability are unenforceable:
Vault
v Quaid, 847 F.2d 255 (1988) (pdf, 20 kb, edited)
Note also the approach taken by the software owner
in DSC v Pulse Communications, 170 F.3d 1354 (Fed. Cir. 1999).
In that case, Pulse purchased software from DSC, which Pulse bundled
with hardware that it in turn sold to third parties. DSC, wanting
to expand into this market, sued to prevent Pulse from using its
software. DSC sold the software under a license agreement that expressly
limited the right of Pulse to further transfer the software, a provision
that runs counter to § 117 of the Copyright law. However, instead
of finding conflicts preemption, the court stated:
Not only do the agreements characterize
the [defendants] as non-owners of copies of the software, but
the restrictions imposed on the [defendants]' rights with respect
to the software are consistent with that characterization. In
particular, the licensing agreements severely limit the rights
of the [defendants] with respect to the software in ways that
are inconsistent with the rights normally enjoyed by owners of
copies of software. Section 106 of the Copyright Act, 17 U.S.C.
§ 106, reserves for a copyright owner the following exclusive
rights in the copyrighted work: the right to reproduce the work;
the right to prepare derivative works; the right to distribute
copies of the work; the right to perform the work publicly; and
the right to display the work publicly. Those rights are expressly
limited, however, by sections 107 through 120 of the Act. Of particular
importance are the limitations of sections 109 and 117. As we
have seen, section 117 limits the copyright owner's exclusive
rights by allowing an owner of a copy of a computer program to
reproduce or adapt the program if reproduction or adaptation is
necessary for the program to be used in conjunction with a machine.
Section 109, which embodies the "first sale" doctrine, limits
the copyright owner's otherwise exclusive right of distribution
by providing, in relevant part, that the owner of a particular
copy . . . is entitled, without the authority of the copyright
owner, to sell or otherwise dispose of the possession of that
copy.
. . .
Each of the agreements limits the contracting
[defendants]'s right to transfer copies of the software or to
disclose the details of the software to third parties. For example,
[one] agreement provides that [defendants] shall "not provide,
disclose or make the Software or any portions or aspects thereof
available to any person except its employees on a 'need to know'
basis without the prior written consent of [DSC] . . . ." Such
a restriction is plainly at odds with the section 109 right to
transfer owned copies of software to third parties. The agreements
also prohibit the [defendants] from using the software on hardware
other than that provided by DSC. If the [defendants] were "owners
of copies" of the software, section 117 would allow them to use
the software on any hardware, regardless of origin. Because the
agreements substantially limit the rights of the
[defendants] compared to the rights they would enjoy as "owners
of copies" of the software under the Copyright Act, the contents
of the agreements support the characterization of the [defendants]
as non-owners of the copies of the software.
. . .
In light of the restrictions [**20] on
the [defendants]' rights in the copies of the POTS-DI software,
we hold that it was improper for the court to conclude, as a matter
of law, that the [defendants] were "owners" under section 117
of the copies of DSC's software that were in their possession.
The court was therefore incorrect to rule, at the close of DSC's
case, that section 117 of the Copyright Act gave the [defendants]
the right to copy the POTS-DI software when using Pulsecom's POTS
cards without violating DSC's copyright in the software. Accordingly,
we reverse the district court's order granting judgment for Pulsecom
on DSC's contributory infringement claim.
What do you think of this analysis? Why didn't
the DSC v Pulse court address preemption?
5. Lemley ultimately concludes that preemption
is not the "silver bullet" for those who believe that eContracts
are likely to contain onerous and one-sided terms. Why does he draw
this conclusion? Do you think he's right?
[ pageprints
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[ notes ]
C
O P Y R I G H T © 2001 R. P O L K W
A G N E R.