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Federal Copyright Law Does Not Preempt Software Shrink-Wrap License

01-1108
January 29, 2003

Decision icon Decision

Last Month at the Federal Circuit - February 2003

Judges: Rader (author), Clevenger, and Dyk (dissenting)

In Bowers v. Baystate Technologies, Inc., No. 01- 1108 (Fed. Cir. Jan. 29, 2003), the Federal Circuit issued a revised opinion vacating its original opinion entered August 20, 2002, Bowers v. Baystate Technologies, Inc., 302 F.3d 1334 (Fed. Cir. 2002). In the revised opinion, the Federal Circuit further clarified its reasoning as to why Harold L. Bowers’s shrink-wrap license agreement (“the Agreement”) was not preempted by the federal Copyright Act. In addition, the Federal Circuit again affirmed the jury’s verdict that Baystate Technologies, Inc. (“Baystate”) had breached the Agreement and again reversed the verdict that Baystate had infringed Bowers’s U.S. Patent No. 4,993,514 (“the ’514 patent”).

Bowers sold a bundle of computer-aided design (“CAD”) programs called the Designer’s Toolkit, and the Agreement prohibited any reverse engineering of the programs in the Designer’s Toolkit. In addition, the Designer’s Toolkit included a user-template feature that was claimed by the ‘514 patent. Baystate obtained copies of the Designer’s Toolkit, reverse-engineered many of its features, and introduced its own product called Draft-Pak version 3.

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, breach of contract, and patent infringement. A jury found for Bowers and awarded damages for each of the counterclaims. The district court, however, set aside the copyright damages as duplicative of the contract damages. Baystate appealed, arguing that the Copyright Act preempted Bowers’s state-law claim for breach of the Agreement. Bowers also appealed, arguing that the copyright damages should not have been set aside.

In its first opinion entered August 20, 2002, the Federal Circuit held that, under First Circuit law, the Copyright Act did not preempt the state-law breach of contract claim. The Court reasoned that the First Circuit would hold that the Copyright Act does not preempt contractual restraints on copyrighted articles because a state-law contract claim requires proof of extra qualitative elements, such as mutual assent and consideration, that are beyond a federal-copyright claim. Therefore, the Court concluded that the First Circuit would have found no preemption of the Agreement.

In its revised opinion entered January 29, 2003, the Court further clarified that it left unaltered the conclusions reached in Atari Games Corp. v. Nintendo of America, Inc., 975 F.2d 832 (Fed. Cir. 1992), where it held that the Copyright Act defined the circumstances in which reverse engineering of a computer program was considered fair use. The Court noted that, in the present case, its application of First Circuit law was for determining whether the state-law contract claim was distinguishable from the federal-copyright claim and had not changed the federal-law definition of fair use. Therefore, the Court concluded that the findings of Atari were not altered by the present decision.

In addition, the Federal Circuit acknowledged that the Fifth Circuit had held that the federal Copyright Act preempted a state law prohibiting all copying of a computer program. The Federal Circuit found, however, that the First Circuit would not extend the Fifth Circuit’s ruling to preempt a contract between private parties. The Federal Circuit found that the First Circuit would hold that private parties to a contract are allowed to waive their rights to reverse-engineer a product under exemptions of the Copyright Act. Therefore, the Federal Circuit concluded that the Agreement was not preempted under First Circuit law.

Having settled the preemption issue, the Federal Circuit found that substantial evidence supported the jury’s verdict of breach of contract. Among other things, the Court noted that the record showed the extensive similarities between the Designer’s Toolkit and Baystate’s product, including the same unusual, idiosyncratic design choices and inadvertent design flaws. Therefore, the Court agreed that the evidence showed Baystate had reverse-engineered the Designer’s Toolkit in violation of the Agreement.

Concerning patent infringement, the Court construed the claims differently than did the district court and concluded, given that construction, that no reasonable jury could have found infringement. The Court also found that the district court had not abused its discretion in omitting the copyright damages since both the contract and copyright damages arose from the same copying by Baystate.

Judge Dyk concurred-in-part, but dissented with the majority insofar as it holds that the contract claim is not preempted by federal law. He concluded, based on the petition for rehearing and opposition, that a state is not free to eliminate the fair-use defense provided under federal copyright law. He argued that, unlike a negotiated contract, shrink-wrap licenses allow a copyright holder to unilaterally eliminate the fair-use defense.