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Federal Copyright Law Does Not Preempt Software Shrink-Wrap License

01-1108
August 20, 2002

Decision icon Decision

Last Month at the Federal Circuit - September 2002

Judges: Rader (author), Clevenger, and Dyk

In Bowers v. Baystate Technologies, Inc., No. 01- 1108 (Fed. Cir. Aug. 20, 2002), the Federal Circuit affirmed the jury’s verdict that Baystate Technologies, Inc. (“Baystate”) had breached Harold L. Bowers’s shrink-wrap license agreement (“the Agreement”) but reversed the verdict that Baystate had infringed Bowers’s U.S. Patent No. 4,993,514 (“the ’514 patent”).

In the mid 1980s, Bowers created a digitizing tablet template (a kind of “smart” mouse pad) and associated software to improve the user interface of computer-aided design (“CAD”) programs. Bowers patented his creation, called Cadjet, and bundled it with Geodraft, another CAD add-on program that ensures that a design complies with geometric dimensioning and tolerance (“GD&T”) standards. By 1990, the bundled programs were being sold as the Designer’s Toolkit with a shrink-wrap license that prohibited any reverse engineering.

In 1989, Baystate developed and marketed a similar CAD add-on program called Draft-Pak that included a tablet template and a GD&T program. By January 1991, Baystate had obtained copies of the Designer’s Toolkit. Three months later, Baystate released a substantially revised Draft-Pak version, incorporating many of the features of the Designer’s Toolkit.

In May 1991, Baystate sued Bowers for a DJ that, among other things, its products did not infringe the ‘514 patent. Bowers counterclaimed for copyright infringement, patent infringement, and breach of the Agreement. The jury found for Bowers on all of his counterclaims and awarded him substantial damages for his breach of contract claim.

Baystate appealed to the Federal Circuit, arguing that the federal Copyright Act preempts the prohibition of reverse engineering in the Agreement. The Federal Circuit held that, under First Circuit law, the Copyright Act does not preempt the breach of contract claim. The Court ruled that the First Circuit does not interpret the Copyright Act to require preemption as long as a state cause of action requires an extra element, beyond mere copying, preparation of derivative works, performance, distribution, or display. The Court noted, however, that under First Circuit law, not every extra element of a state-law claim will establish a qualitative variance between the rights protected by federal copyright law and those protected by state law.

Although the First Circuit had not yet expressly addressed whether the Copyright Act preempts a state-law contract claim that restrains copying, the Federal Circuit concluded that the First Circuit would have found no preemption of the shrink-wrap contract claim in this case. The Court reasoned that the First Circuit would follow the majority of other circuits and hold that the Copyright Act does not preempt contractual restraints on copyrighted articles because the mutual assent and consideration between parties required by a contract claim provides the extra qualitative element needed to distinguish the contract claim from a copyright claim. A copyright is a right against the world, while contracts, in general, affect only their parties and do not create exclusive rights, the Court stated.

Having settled the preemption issue, the Federal Circuit found that substantial evidence supported the jury’s verdict of breach of contract by reverse engineering the Designer’s Toolkit. Among other things, the record showed that Baystate had scheduled two weeks to analyze the Designer’s Toolkit while developing the new version of its own product. Further, Baystate’s president testified that Baystate generally analyzed competitors’ products to duplicate their functionality. The Court also noted the extensive and unusual similarities between the Designer’s Toolkit and Baystate’s product: the overall structure of the two programs were the same, the user interfaces were very similar, and both programs contained the same unusual, idiosyncratic design choices and inadvertent design flaws.

Concerning the patent infringement, the Court construed the claims differently than did the district court and concluded that given that construction, no reasonable jury could have found infringement.