Software Developers: Think Before You Tear

The process of decompiling object code and using the source code to develop a compatible product is one type of reverse engineering which often involves repeated copying of the original computer program. Under U.S. copyright law, reverse engineering of a software package has been allowed as constituting a “fair use.”

Virtually all software companies prohibit reverse engineering in their shrink-wrap licenses. Yet virtually all software companies reverse engineer other products. It's not just a matter of keeping up - reverse engineering is often a necessary tool for interoperability and security purposes.

Software developers have successfully applied the fair use defense to defeat claims that this intermediate copying violated the owner’s copyright in the computer programmer. In 2000, the Ninth Circuit applied the fair use doctrine to further expand the ability of computer software developers legally to make intermediate copies of computer software for the purpose of developing non-infringing products.

In 1992, the Court of Appeals for the Federal Circuit concluded that reverse engineering was a statutory fair use exception to copyright infringement noting that the legislative history of the fair use exception to the Copyright Act suggests that courts should adapt it to accommodate new technological innovations. A prohibition on all copying whatsoever would stifle the free flow of ideas without serving any legitimate interest of the copyright holder. Therefore, the court held that reverse engineering of object code to discern the unprotectable ideas in a computer program is a fair use.

But ten years later, the same court has held that the fair use exception may be excluded by the terms of a shrink-wrap license.

In the case of Bowers v. Baystate Technologies Inc., the United States Court of Appeals for the Federal Circuit, applying the law of the First Circuit ruled that the prohibition against reverse engineering contained in a shrink-wrap license was not pre-empted by the Copyright Act.

Bowers’ software was a package designed to make third-party Computer Assisted Design (CAD) software, such as Cadkey Inc.’s “CADKEY” program, easier to use. Bowers bundled his software with another program under the name “Designer’s Toolkit”.

Baystate also developed and marketed a software package called “Draft-Pak” for use in conjunction with CADKEY. Bowers had earlier offered to bundle his software and associated template with Baystate technology, however Baystate believed it had “the in-house capability to develop the type of products he had proposed” and rejected his offer. Three months after the release of Bowers’ Designer’s Toolkit, Baystate released Draft-Pak 3, a substantially revised version of its earlier Draft-Pak offerings that incorporated much of the functionality of Bower’s software at a substantially lower price.

In order to gain market share over Baystate, Bowers negotiated with Cadkey Inc. to bundle Designer’s Toolkit with CADKEY. Following pressure from Baystate, Cadkey Inc. repudiated its distribution agreement with Bowers. Baystate subsequently purchased Cadkey Inc. and eliminated Bowers from the CADKEY network. Baystate then sued to invalidate Bowers’ patent. Bowers counter-sued for copyright and patent infringement as well as breach of the shrink-wrap license.

Bowers’ software license expressly prohibited all reverse engineering and the broad nature of the prohibition meant that, if the prohibition was enforceable, certain acts that would be lawful under general copyright law would be rendered impermissable by the license.

In discussing the issue, the appeals court recognized the fundamental need to “respect freedom of contract” and not lightly to set aside agreements that have been freely entered into by the parties. However, the Court also acknowledged that in certain cases wider public policy considerations will pre-empt a contract in order to protect the public interest. This may include allowing a competitor legitimately to study copyright software in order to produce an alternative product for consumers.

Given the facts of this case, and applying Massachusetts law, the court held the shrink-wrap agreement enforceable and Baystate’s reverse engineering a violation of its agreement with Bowers. The Copyright Act exception for fair use, the court ruled, did not pre-empt the state law result.

In a vigorous dissent, Judge Timothy Dyk argued that the majority’s approach permits state law (in this case Massachusetts) to eviscerate an important federal copyright policy reflected in the fair use defense. Congress, Judge Dyk argued, has made the Copyright Act the exclusive means for protecting copyright. All other laws are preempted by it. In particular, the fair use defense is an important limitation on copyright. A limitation which, as the Supreme Court itself has stated, is necessary to fulfill copyright’s very purpose, “[t]o promote the Progress of Science and useful Arts.”

The fair use defense for reverse engineering, Judge Dyk observed, is necessary so that copyright protection does not extend to the underlying idea embodied in a work. Enforcement of a ban on reverse engineering conflicts with the Copyright Act itself by protecting otherwise unprotectable material. If state law provided that a copyright holder could bar fair use of the copyrighted material by placing a black dot on each copy of the work offered for sale, there would be no question but that the state law would be preempted. A state law that allowed a copyright holder to simply label its products so as to eliminate a fair use defense would substantially impede the public’s right to fair use and allow the copyright holder, through state law, to protect material that the Congress has determined must be free to all under the Copyright Act.

Cutting to the heart of the issue, the dissent attacked the shrink-wrap agreement itself.

...a state can permit parties to contract away a fair use defense or to agree not to engage in uses of copyrighted material that are permitted by the copyright law, if the contract is freely negotiated...A freely negotiated agreement represents the “extra element” that prevents preemption of a state law claim that would otherwise be identical to the infringement claim barred by the fair use defense of reverse engineering...However, state law giving effect to shrink-wrap licenses is no different in substance from a hypothetical black dot law. Like any other contract of adhesion, the only choice offered to the purchaser is to avoid making the purchase in the first place. ...State law thus gives the copyright holder the ability to eliminate the fair use defense in each and every instance at its option. In doing so, as the majority concedes, it authorizes “shrink-wrap agreements...[that] are far broader than the protection afforded by copyright law.

The majority decision had avoided the practical implications of shrink-wrap licenses. Passing over the nature of such agreements, it had merely accepted their enforceability and applied Massachusetts law. Software sellers may soon be rushing to change their shrink-wrap agreements to invoke that state’s governing law.

In an unrelated case, a woman in California has filed a class action suit against Microsoft and other software producers challenging the validity of shrink-wrap licenses. Specifically, the suit claims that Microsoft, Symantec, CompUSA, Best Buy and other unnamed retailers don’t allow people to read “shrink wrap” licenses before they buy a product. In another case, the enforceability of an arbitration provision contained in a Netscape click-wrap agreement has been successfully challenged.

The full text of the Baystate opinion, along with related materials is available at www.eff.org/IP/Emulation/20030131-baystate-opinion.php and at http://www.ipo.org/2003/IPCourts/Bowers_v_Bay.htm.

If you would like more information about Kohrman Jackson & Krantz’s technology and e-business practice, please contact David R. Posteraro at 216-736-7218 or drp@kjk.com.