ProCD, Inc. v. Zeidenberg: A legal basis for Shrink Wrap Agreements

*  Pratyush Singh

ProCD v Zeidenberg[1] is a prominent case of the United States Court of Appeals for the Seventh  Circuit. The  case was first decided by Judge Crabb of the District Court for the Western District of Wisconsin, who gave a judgment in favor of the defendant. However, the plaintiff, ProCD appealed to the 7^th Circuit court, where it was heard by a three-judge bench of consisting of Judges John Louis Coffey, Joel Martin Flaum and Frank H. Easterbrook. The judgement, written by Judge Easterbrook, was unanimously in favor of the plaintiff. The final judgement is widely known for providing a legal basis for shrink-wrap agreements, a relatively recent type of contract.

ProCD had compiled a database containing names, telephone numbers and addresses of over 95 million people using 3000 local telephone directories[2]. The process of compiling and organizing these listing costed over 10 million dollars[3]. ProCD had implemented a system of price discrimination and would thus charge commercial users more than non-commercial users. Price discrimination helped ProCD reduce the cost of the software for both commercial users and non-commercial users as it allowed the company to accrue the cost of compilation from two different markets. To the non-commercial users, the database was sold as a CD-ROM called ‘SelectPhone’. Zeidenberg purchased the software from a store in Wisconsin and using the database created his own service called Silken Mountain Web Services, that offered the same information at a lower price than ProCD. The cause of action in this case was that Zeidenberg had disregarded the license agreement within the box which put restrictions on the purchaser from copying, duplicating, and distributing the database or putting it to commercial use. The outside of the box did not mention any of the aforementioned restrictions or terms of use, however, it did state that the use of the software was subject to the terms and conditions contained within the box. This constituted what is called a shrink-wrap agreement, where the terms of the contract are not known to the offeree at the time of purchase.

There were two essential issues discussed by the court. The first issue was whether shrink-wrap agreements are valid or not i.e. whether Zeidenberg and ProCD entered into an enforceable contract or not. Commercial Contracts in the United States are governed by state law, the Uniform Commercial Code[4], and established principles of common law[5]. In ProCD v Zeidenberg, the first obstacle in the way of contract formation was the fact that the packaging of the CD-ROM did not detail the terms of the contract, rather included an incorporation clause that stated that the purchase of the product implies acceptance to the terms contained within. Given the common law principle of mirror image rule, which requires that the offeror and offeree should agree to the same terms in the same sense for a contract to be valid, the contract here seems to be void as the offeree cannot agree to terms he or she is unaware of.

However, this leads to consequences that are incredibly unfavorable for trade and commerce. As Judge Easterbrook points out in his opinion, if contracts between the consumer and the manufacturer are only valid if the consumer is first made aware of all the terms and conditions that the purchase entails, it would require the manufacturer to print lengthy user agreements on the packaging which may not even be possible[6]. On the other hand, the consumers would have to endure the inconvenience of going over the entire end user agreement every time before they purchase a product, besides paying increased prices for the product[7]. Therefore, if the market transactions of a modern economy are strictly subjected to common law principles of contracts, it would lead to gross inefficiencies and failures. The Uniform Commercial Code was enacted with the intent of making commercial transactions more standardized and efficient[8]. One of the purposes of drafting the UCC was to undo the rigidity and inefficiency imposed by old common law principles that are not well suited for the fast-paced commerce of present. In fact, section 2-207 of the UCC[9] effectively diminishes the mirror image rule by stating that “A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.”[10] Even though Judge Easterbrook did not rely on this section in his decision, it still helps us in our analysis and conveys the intent behind drafting the UCC.

The rejection of the mirror image rule in the UCC has also been pointed out by numerous academics like Douglas G. Baird and Robert Weisberg of Stanford, who in their assessment of the Uniform Commercial Code not only pointed out the repudiation of the mirror image rule but also approved of it by concluding that “the drafters of 2-207 had the salutary, indeed the unexceptional purpose of overcoming the rigidity of one of the oldest and most mechanical common-law rules of offer and acceptance—the mirror-image rule, by arguing that the principles underlying the rule remain fundamentally sound.”[11] Baird and Weisberg’s commentary on section 2-207 tells us that the section does not completely do away with the rule, however, it seriously undermines it by making acceptance much more flexible. It also tells us the purpose with which the drafters of the Code drafted it, which seems to be in line with Judge Easterbrook’s decision on shrink-wrap agreements. The judgement promotes the same goals that the UCC strives for by making acceptance much more flexible, without completely sacrificing the common law doctrine. Judge Easterbrook reasons that acceptance in such cases is not complete with the purchase of the product, rather it is only complete after the purchase and subsequent use of the product, following which if unsatisfied with the terms, the purchaser could simply reject the offer by returning the product and seeking a refund. This approach gives the consumers the opportunity to read the terms without causing inconveniences or slowing down the pace of trade.

Although the judgement does not use section 2-207 to reinforce its understanding of the UCC, it does cite section 2-204(1) to support its reasoning[12], which states that “[a]vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts  the vendor proposes to treat as acceptance.”[13] The judgement also distinguishes acceptance of the contract and the acceptance of goods by relying on section 2-606 of the UCC, which states that a buyer accepts goods only after he fails to make a rejection after an opportunity to inspect.[14] Although, this approach  comfortably balances the rights and protections of the consumer with the practicalities of the market, it is not without its disadvantages. A seller may include vastly unfair terms in the offer, for example, disallowing the buyer from returning the product which would in effect let them evade the very reasoning employed by this judgement. However, a court could still void such unfair contracts relying on the established principles of contract law.[15] Moreover, sellers would further be discouraged from including unfair terms in their offers as it would put the entire contract at the risk of being declared void, which would also end the very protections the contracted granted to them. The competition of the market would also make sure that the sellers do not try to take unfair advantage of their increased bargaining power as Easterbrook points out, buyers do not just compare the specifications of the products but also things like the terms of the purchase, the warranty etc[16]. Therefore, sellers would again be discouraged from using unfair terms as they would lose their market share to their competitors. Hence, it can be concluded that the first part of the judgement provided an effective remedy for contracting in commerce, by providing a basis for the validity of the shrink-wrap agreements. However, there is another bone of contention that needs discussion. In this case, the shrink-wrap agreement was conferring protection from duplication and distribution to non-copyrightable information.

Even though the judgement rightly held shrink-wrap agreements to be valid in general, but by holding ProCD’s shrink-wrap agreement to be valid, it essentially granted copyright like protections to ProCD’s database of telephone numbers, addresses and zip-codes etc. which is non-copyrightable information. By doing so, the bench gave a decision contrary to the provisions of the Copyright Act of 1976[17]. The U.S.C 17 Section 301 of the Copyright Act, 1976 states that the Act preempts “legal or equitable rights [under state law]that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103.”[18]

There is no disagreement as to whether ProCD’s database was copyrightable or not as Judge Easterbrook in his decision confirms that even though the information in the database was much more expansive and organized than a common directory, it still lacked the originality to be copyrightable.[19] Moreover, there also is no disagreement as to whether ProCD’s database qualified as copyright subject-matter as is required by section 301 as Judge Easterbrook confirms this as well in his decision.[20] However, Judge Easterbrook still held that the contract was valid and enforceable. He based his decision on the theoretical distinction between the rights conferred by contracts and the rights conferred by a copyright. He argued that a copyright is a right the holder of the copyright has “against the whole world”[21] while a contract is a private agreement between two parties and thus the rights conferred to ProCD by the contract were not equivalent to a copyright as they only protected ProCD against any infringement by the defendant – Zeidenberg. In theory this may be true, however, in practice this is a distinction without a difference as nearly all the  consumers purchase the software from the manufacturer, which essentially gives ProCD copyright like rights against everyone who has a copy of the software. Judge Easterbrook also provides an example to support his argument – he explains that if anyone found an unwrapped copy of the CD-ROM on the street, he would not be bound by the contract, which would not be the case had it been a copyright[22].

However, not only does the example ignore the practical reality of the world, it also ignores the fact that now most if not all of the software are sold over the internet making it impossible to bypass the contract and thus in effect giving the sellers a quasi-copyright like protection. Another issue with this part of the judgement is that it does not apply the established test for determining federal preemption – the extra element test. The extra element test dictates that for federal preemption to not apply to a breach of contract claim, there must be an extra element in the facts of the case that distinguishes it from a copyright claim[23]. In the cases that were cited in the judgement – Acorn Structures Inc. v Swantz; National Car Rental System, Inc. v Computer Associates International Inc.  and Taquino v Teledyne Monarch Rubber  the differentiating element was the fact that these contracts involved negotiation between the parties[24]. However, in  ProCD v Zeidenberg, the contract was a standardized contract with no scope for negotiation as has been pointed out earlier in the essay. It has also been held that mere aware consent or intent to contract does not qualify as an extra element[25]. Therefore, it can be said that the case could not have been exempted from federal preemption.

It should also be noted that the decision not only avoided the provisions of the Copyright Act, 1976 on unfounded facts, it was also contrary to the Supreme Court judgement in in Feist Publications, Inc. v Rural Telephone Service Co.[26] (1991), even though it is the authoritative judgement for such suits. In this case, the respondent – Rural Telephone Service Co. was a telephone service provider that used to publish a directory containing the list of all of its subscribers. The appellant, Feist Publications published a phone book that listed all the subscribers of all the different service providers in the area. To get the list of Rural Telephone Service’s subscriber, Feist used its directory and consequently was sued. The Supreme Court held that Rural Telephone Service’s directory was not protected by copyright as facts are not copyrightable. In her judgement, Justice Sandra Day O’Connor stated “Many compilations consist of nothing but raw data—i.e. wholly factual information not accompanied by any original expression. On what basis may one claim a copyright upon such work? Common sense tells us that 100 uncopyrightable facts do not magically change their status when gathered together in one place. The key to resolving the tension lies in understanding why facts are not copyrightable: The sine qua non of copyright is originality.”[27] Thus, the judgement made it clear that the basis for copyright protection was originality of the work while rejecting the sweat of the brow doctrine according to which copyright could be awarded if it is found that significant effort was put in by the party into producing the intellectual property. If we study the ProCD decision in the light of the Feist judgement and Justice O’Connor’s statement it becomes very clear that ProCD’s database did not qualify for the kind of protections it was allowed to have by the Seventh Circuit Court. Although, the creation of the database required a lot of effort and expense, but it lacked the requisite originality and since the Supreme Court rejected effort as a basis for copyright, the Seventh Circuit Court should have turned to other avenues to ensure justice and prevent freeriding like unfair competition law. Copyright law is essential as it provides economic incentives to the creators, however, at the same time it reduces the access of others to such knowledge and resources. The reason why the Copyright Act, 1976 preempts the state laws and why it was held in Feist that originality is the criterion for granting copyrights is that pushing copyright laws to an extreme negatively affects the public policy goal of encouraging innovation[28] as it would limit people’s access to pre-existing works. Similarly, if the copyright law is pushed to the other extreme, it would again hinder the development of new knowledge as creators would not have enough incentives to put the amount of work and expenses their creations require. Thus, copyright laws should attempt to strike a balance between the two extremes in order to create an environment conducive to creativity, originality, and innovation. 

Therefore, it may be concluded that the decision was correct in holding that shrink-wrap contracts are usually valid and enforceable. In fact, by providing a legal basis for their validity the judgement removed the theoretical legal hurdles in the way of commercial contracting and thus greatly smoothened the inconveniences of commercial transactions. However, the court did not evince the same pragmatism that characterized the first part of the judgement in the second part, as it used a theoretical nuance to differentiate between the protections conferred by copyright law and those conferred by contract law. The distinction created by the court, in practice, was a distinction without a difference. Therefore, the court should not have held that such shrink-wrap contracts that protect uncopyrightable information are not preempted by federal copyright law. By doing so the court may have disturbed the balance struck by the Copyright Act, 1976 and thus even though it protected the work of an organization in this instance, in the long run the decision could prove to be harmful to creativity and innovation.

[1] 86 F.3d 1447 (7th Cir. 1996)

[2] 86 F.3d 1447 (7th Cir. 1996) [2]

[3] Ibid.

[4] Uniform Commercial Code 1952

[5] O’Rourke MA, “Copyright Preemption After the ProCD Case : A Market Based Approach” [1997] Berkeley Technology Law Review 53

[6] 86 F.3d 1447 (7th Cir. 1996) [8]

[7] 86 F.3d 1447 (7th Cir. 1996) [9]

[8]Malcolm WD, “The Uniform Commercial Code in the United States” (1963) 12 International and Comparative Law Quarterly 226

[9] UCC 1952, s. 2-207

[10] ibid

[11] Baird DG and Weisberg R, “Rules, Standards, and the Battle of the Forms: A Reassessment of Section 2-207” (1982) 68 Virginia Law Review 1217

[12] UCC 1952, s. 2-204(1)

[13] ibid

[14] UCC 1952, s. 2-606

[15] Grusd BL, “CONTRACTING BEYOND COPYRIGHT: PRoCD, INC. V. ZEIDENBERG” (1997) 10 Harvard Law Review 353

[16] 86 F.3d 1447 (7th Cir. 1996) [15]

[17] Copyright Act 1976

[18] Copyright Act 1976, s.301

[19] 86 F.3d 1447 (7th Cir. 1996) [2]

[20] 86 F.3d 1447 (7th Cir. 1996) [16]

[21] 86 F.3d 1447 (7th Cir. 1996) [17]

[22] ibid

[23] Covottaa B and Sergeeff P, “ProCD, Inc. v. Zeidenberg” (1998) 13 Brekeley Technology Law Review 35

[24] ibid

[25] ibid

[26] 499 U.S. 340

[27] 499 U.S. 340 [IIA]

[28] Covottaa B and Sergeeff P, “ProCD, Inc. v. Zeidenberg” (1998) 13 Brekeley Technology Law Review 35