Chapter 11: Preemption of State Law Protection of Software by Federal Intellectual Property Law (Cont.)





Bonito Boats, Inc. v. Thunder Craft Boats, Inc.
Supreme Court of the United States
489 U.S. 141 (1989)

Justice O'Connor delivered the opinion of the Court.

We must decide today what limits the operation of the federal patent system places on the States' ability to offer substantial protection to utilitarian and design ideas which the patent laws leave otherwise unprotected. In Interpart Corp. v. Italia, 777 F.2d 678 (1985), the Federal Circuit concluded that a California law prohibiting the use of the "direct molding process" to duplicate unpatented articles posed no threat to the policies behind the federal patent laws. In this case, the Florida Supreme Court came to a contrary conclusion. It struck down a Florida statute which prohibits the use of the direct molding process to duplicate unpatented boat hulls, finding that the protection offered by the Florida law conflicted with the balance struck by Congress in the federal patent statute between the encouragement of invention and free competition in unpatented ideas. We granted certiorari to resolve the conflict, and we now affirm the judgment of the Florida Supreme Court.

Bonito Boats, Inc. (Bonito), developed a hull design for a fiberglass recreational boat which it marketed under the trade name Bonito Boat Model 5VBR. Designing the boat hull required substantial effort on the part of Bonito. A set of engineering drawings was prepared, from which a hardwood model was created. The hardwood model was then sprayed with fiberglass to create a mold, which then served to produce the finished fiberglass boats for sale. The 5VBR was placed on the market sometime in 1976. There is no indication in the record that a patent application was ever filed for protection of the utilitarian or design aspects of the hull, or for the process by which the hull was manufactured. The 5VBR was favorably received by the boating public, and "a broad interstate market" developed for its sale.

In 1983, after the Bonito 5VBR had been available to the public for over six years, the Florida Legislature enacted Fla. Stat. § 559.94 (1987). The statute makes it "unlawful for any person to use the direct molding process to duplicate for the purpose of sale any manufactured vessel hull or component part of a vessel made by another without the written permission of that other person." The statute also makes it unlawful for a person to "knowingly sell a vessel hull or component part of a vessel duplicated in violation of subsection (2)." Damages, injunctive relief, and attorney's fees are made available to "any person who suffers injury or damage as the result of a violation" of the statute. The statute was made applicable to vessel hulls or component parts duplicated through the use of direct molding after July 1, 1983.

Bonito filed this action in the Circuit Court of Orange County, Florida. The complaint alleged that respondent here, Thunder Craft Boats, Inc. (Thunder Craft) had violated the Florida statute by using the direct molding process to duplicate the Bonito 5VBR fiberglass hull, and had knowingly sold such duplicates in violation of the Florida statute. Bonito sought injunctive relief as well as an accounting of profits, treble damages, punitive damages, and attorney's fees. Respondent filed a motion to dismiss the complaint, arguing that under this Court's decisions in Stiffel and Compco the Florida statute conflicted with federal patent law and was therefore invalid under the Supremacy Clause of the Federal Constitution. The trial court granted respondent's motion.

On appeal, a sharply divided Florida Supreme Court agreed with the lower court conclusion that the Florida law impermissibly interfered with the scheme established by the federal patent laws. The majority read our decisions in Sears and Compco for the proposition that "when an article is introduced into the public domain, only a patent can eliminate the inherent risk of competition and then but for a limited time." Relying on the Federal Circuit's decision in the Interpart case, the three dissenting judges argued that the Florida antidirect molding provision "does not prohibit the copying of an unpatented item. It prohibits one method of copying; the item remains in the public domain."

Article I, § 8, cl. 8, of the Constitution gives Congress the power "to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." The Patent Clause itself reflects a balance between the need to encourage innovation and the avoidance of monopolies which stifle competition without any concomitant advance in the "Progress of Science and useful Arts."

As we have noted in the past, the Clause contains both a grant of power and certain limitations upon the exercise of that power. Congress may not create patent monopolies of unlimited duration, nor may it "authorize the issuance of patents whose effects are to remove existent knowledge from the public domain, or to restrict free access to materials already available." Graham v. John Deere Co.

From their inception, the federal patent laws have embodied a careful balance between the need to promote innovation and the recognition that imitation and refinement through imitation are both necessary to invention itself and the very lifeblood of a competitive economy. Soon after the adoption of the Constitution, the First Congress enacted the Patent Act of 1790, which allowed the grant of a limited monopoly of 14 years to any applicant that "hath...invented or discovered any useful art, manufacture, or device, or any improvement therein not before known or used." In addition to novelty, the 1790 Act required that the invention be "sufficiently useful and important" to merit the 14-year right of exclusion. Section 2 of the Act required that the patentee deposit with the Secretary of State, a specification and if possible a model of the new invention, "which specification shall be so particular, and said models so exact, as not only to distinguish the invention or discovery from other things before known and used, but also to enable a workman or other person skilled in the art or manufacture...to make, construct, or use the same, to the end that the public may have the full benefit thereof, after the expiration of the patent term."

The first Patent Act established an agency known as the "Commissioners for the promotion of Useful Arts," composed of the Secretary of State, the Secretary of War, and the Attorney General, any two of whom could grant a patent. Thomas Jefferson was the first Secretary of State, and the driving force behind early federal patent policy. For Jefferson, a central tenet of the patent system in a free market economy was that "a machine of which we were possessed, might be applied by every man to any use of which it is susceptible." He viewed a grant of patent rights in an idea already disclosed to the public as akin to an ex post facto law, "obstructing others in the use of what they possessed before." Jefferson also played a large role in the drafting of our Nation's second Patent Act, which became law in 1793. The Patent Act of 1793 carried over the requirement that the subject of a patent application be "not known or used before the application." A defense to an infringement action was created where "the thing, thus secured by patent, was not originally discovered by the patentee, but had been in use, or had been described in some public work anterior to the supposed discovery of the patentee." Thus, from the outset, federal patent law has been about the difficult business of what Jefferson termed "drawing a line between the things which are worth to the public the embarrassment of an exclusive patent, and those which are not."

Today's patent statute is remarkably similar to the law as known to Jefferson in 1793. Protection is offered to "whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof." 35 U.S.C. § 101. Since 1842, Congress has also made protection available for "any new, original and ornamental design for an article of manufacture." 35 U.S.C. § 171. To qualify for protection, a design must present an aesthetically pleasing appearance that is not dictated by function alone, and must satisfy the other criteria of patentability. The novelty requirement of patentability is presently expressed in 35 U.S.C. §§ 102(a) and (b), which provide:

A person shall be entitled to a patent unless—

(a) the invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country, before the invention thereof by the applicant for patent, or

(b) the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country more than one year prior to the date of application for patent in the United States.

Sections 102(a) and (b) operate in tandem to exclude from consideration for patent protection knowledge that is already available to the public. They express a congressional determination that the creation of a monopoly in such information would not only serve no socially useful purpose, but would in fact injure the public by removing existing knowledge from public use. From the Patent Act of 1790 to the present day, the public sale of an unpatented article has acted as a complete bar to federal protection of the idea embodied in the article thus placed in public commerce.

In the case of Pennock v. Dialogue, 2 Pet. 1 (1829), Justice Story applied these principles under the patent law of 1800. The patentee had developed a new technique for the manufacture of rubber hose for the conveyance of air and fluids. The invention was reduced to practice in 1811, but letters patent were not sought and granted until 1818. In the interval, the patentee had licensed a third party to market the hose, and over 13,000 feet of the new product had been sold. The Court concluded that the patent was invalid due to the prior public sale, indicating that, "if [an inventor] suffers the thing he invented to go into public use, or to be publicly sold for use...his voluntary act or acquiescence in the public sale and use is an abandonment of his right." The Court noted that under the common law of England, letters patent were unavailable for the protection of articles in public commerce at the time of the application, and that this same doctrine was immediately embodied in the first patent laws passed in this country.

As the holding of Pennock makes clear, the federal patent scheme creates a limited opportunity to obtain a property right in an idea. Once an inventor has decided to lift the veil of secrecy from his work, he must choose the protection of a federal patent or the dedication of his idea to the public at large. As Judge Learned Hand once put it:

It is a condition upon the inventor's right to a patent that he shall not exploit his discovery competitively after it is ready for patenting; he must content himself with either secrecy or legal monopoly.

In addition to the requirements of novelty and utility, the federal patent law has long required that an innovation not be anticipated by the prior art in the field. Even if a particular combination of elements is "novel" in the literal sense of the term, it will not qualify for federal patent protection if its contours are so traced by the existing technology in the field that the "improvement is the work of the skillful mechanic, not that of the inventor." In 1952, Congress codified this judicially developed requirement in 35 U.S.C. § 103, which refuses protection to new developments where "the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person of ordinary skill in the art to which said subject matter pertains." The nonobviousness requirement extends the field of unpatentable material beyond that which is known to the public under § 102, to include that which could readily be deduced from publicly available material by a person of ordinary skill in the pertinent field of endeavor. Taken together, the novelty and nonobviousness requirements express a congressional determination that the purposes behind the Patent Clause are best served by free competition and exploitation of that which is either already available to the public, or that which may be readily discerned from publicly available material. See Aronson v. Quick Point ("The stringent requirements for patent protection seek to ensure that ideas in the public domain remain there for the use of the public").

The applicant whose invention satisfies the requirements of novelty, nonobviousness, and utility, and who is willing to reveal to the public the substance of his discovery and "the best mode...of carrying out his invention," 35 U.S.C. § 112, is granted "the right to exclude others from making, using, or selling the invention throughout the United States," for a period of 17 years. 35 U.S.C. § 154. The federal patent system thus embodies a carefully crafted bargain for encouraging the creation and disclosure of new, useful, and nonobvious advances in technology and design in return for the exclusive right to practice the invention for a period of years:

[The inventor] may keep his invention secret and reap its fruits indefinitely. In consideration of its disclosure and the consequent benefit to the community, the patent is granted. An exclusive enjoyment is guaranteed him for seventeen years, but upon expiration of that period, the knowledge of the invention inures to the people, who are thus enabled without restriction to practice it and profit by its use.

United States v. Dubilier Condenser Corp., 289 U.S. 178, 186-187 (1933).

The attractiveness of such a bargain, and its effectiveness in inducing creative effort and disclosure of the results of that effort, depend almost entirely on a backdrop of free competition in the exploitation of unpatented designs and innovations. The novelty and nonobviousness requirements of patentability embody a congressional understanding, implicit in the Patent Clause itself, that free exploitation of ideas will be the rule, to which the protection of a federal patent is the exception. Moreover, the ultimate goal of the patent system is to bring new designs and technologies into the public domain through disclosure. State law protection for techniques and designs whose disclosure has already been induced by market rewards may conflict with the very purpose of the patent laws by decreasing the range of ideas available as the building blocks of further innovation. The offer of federal protection from competitive exploitation of intellectual property would be rendered meaningless in a world where substantially similar state law protections were readily available. To a limited extent, the federal patent laws must determine not only what is protected, but also what is free for all to use. "[A] federal decision to forgo regulation in a given area may imply an authoritative federal determination that the area is best left unregulated, and in that event would have as much pre-emptive force as a decision to regulate."

Thus our past decisions have made clear that state regulation of intellectual property must yield to the extent that it clashes with the balance struck by Congress in our patent laws. The tension between the desire to freely exploit the full potential of our inventive resources and the need to create an incentive to deploy those resources is constant. Where it is clear how the patent laws strike that balance in a particular circumstance, that is not a judgment the States may second-guess. We have long held that after the expiration of a federal patent, the subject matter of the patent passes to the free use of the public as a matter of federal law. Where the public has paid the congressionally mandated price for disclosure, the States may not render the exchange fruitless by offering patent-like protection to the subject matter of the expired patent. "It is self-evident that on the expiration of a patent the monopoly created by it ceases to exist, and the right to make the thing formerly covered by the patent becomes public property."

In our decisions in Sears and Compco, we found that publicly known design and utilitarian ideas which were unprotected by patent occupied much the same position as the subject matter of an expired patent. This Court found that the unlimited protection against copying which the Illinois law accorded an unpatentable item whose design had been fully disclosed through public sales conflicted with the federal policy embodied in the patent laws. The Court stated:

In the present case the pole lamp sold by Stiffel has been held not to be entitled to the protection of either a mechanical or a design patent. An unpatentable article, like an article on which the patent has expired, is in the public domain and may be made and sold by whoever chooses to do so. What Sears did was to copy Stiffel's design and sell lamps almost identical to those sold by Stiffel. This it had every right to do under the federal patent laws.

A similar conclusion was reached in Compco. The injunction against copying of an unpatented article, freely available to the public, impermissibly "interfered with the federal policy, found in Art. I, § 8, cl. 8, of the Constitution and in the implementing federal statutes, of allowing free access to copy whatever the federal patent and copyright laws leave in the public domain."

The preemptive sweep of our decisions in Sears and Compco has been the subject of heated scholarly and judicial debate. Read at their highest level of generality, the two decisions could be taken to stand for the proposition that the States are completely disabled from offering any form of protection to articles or processes which fall within the broad scope of patentable subject matter. Since the potentially patentable includes "anything under the sun that is made by man," Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980), the broadest reading of Sears would prohibit the States from regulating the deceptive simulation of trade dress or the tortious appropriation of private information.

That the extrapolation of such a broad preemptive principle from Sears is inappropriate is clear from the balance struck in Sears itself. The Sears Court made it plain that the States "may protect businesses in the use of their trademarks, labels, or distinctive dress in the packaging of goods so as to prevent others, by imitating such markings, from misleading purchasers as to the source of the goods." Trade dress is, of course, potentially the subject matter of design patents. Yet our decision in Sears clearly indicates that the States may place limited regulations on the circumstances in which such designs are used in order to prevent consumer confusion as to source. Thus, while Sears speaks in absolutist terms, its conclusion that the States may place some conditions on the use of trade dress indicates an implicit recognition that all state regulation of potentially patentable but unpatented subject matter is not ipso facto preempted by the federal patent laws.

What was implicit in our decision in Sears, we have made explicit in our subsequent decisions concerning the scope of federal preemption of state regulation of the subject matter of patent. Thus, in Kewanee we held that state protection of trade secrets did not operate to frustrate the achievement of the congressional objectives served by the patent laws. Despite the fact that state law protection was available for ideas which clearly fell within the subject matter of patent, the Court concluded that the nature and degree of state protection did not conflict with the federal policies of encouragement of patentable invention and the prompt disclosure of such innovations.

Several factors were critical to this conclusion. First, because the public awareness of a trade secret is by definition limited, the Court noted that "the policy that matter once in the public domain must remain in the public domain is not incompatible with the existence of trade secret protection." Second, the Kewanee Court emphasized that "trade secret law provides far weaker protection in many respects than the patent law." This point was central to the Court's conclusion that trade secret protection did not conflict with either the encouragement or disclosure policies of the federal patent law. The public at large remained free to discover and exploit the trade secret through reverse engineering of products in the public domain or by independent creation. Thus, the possibility that trade secret protection would divert inventors from the creative effort necessary to satisfy the rigorous demands of patent protection was remote indeed. Finally, certain aspects of trade secret law operated to protect noneconomic interests outside the sphere of congressional concern in the patent laws. As the Court noted, "[a] most fundamental human right, that of privacy, is threatened when industrial espionage is condoned or is made profitable." There was no indication that Congress had considered this interest in the balance struck by the patent laws, or that state protection for it would interfere with the policies behind the patent system.

We have since reaffirmed the pragmatic approach which Kewanee takes to the pre-emption of state laws dealing with the protection of intellectual property. See Aronson ("State law is not displaced merely because the contract relates to intellectual property which may or may not be patentable; the states are free to regulate the use of such intellectual property in any manner not inconsistent with federal law"). At the same time, we have consistently reiterated the teaching of Sears and Compco that ideas once placed before the public without the protection of a valid patent are subject to appropriation without significant restraint.

At the heart of Sears and Compco is the conclusion that the efficient operation of the federal patent system depends upon substantially free trade in publicly known, unpatented design and utilitarian conceptions. In Sears, the state law offered "the equivalent of a patent monopoly," in the functional aspects of a product which had been placed in public commerce absent the protection of a valid patent. While, as noted above, our decisions since Sears have taken a decidedly less rigid view of the scope of federal pre-emption under the patent laws, e.g., we believe that the Sears Court correctly concluded that the States may not offer patent-like protection to intellectual creations which would otherwise remain unprotected as a matter of federal law. Both the novelty and the nonobviousness requirements of federal patent law are grounded in the notion that concepts within the public grasp, or those so obvious that they readily could be, are the tools of creation available to all. They provide the baseline of free competition upon which the patent system's incentive to creative effort depends. A state law that substantially interferes with the enjoyment of an unpatented utilitarian or design conception which has been freely disclosed by its author to the public at large impermissibly contravenes the ultimate goal of public disclosure and use which is the centerpiece of federal patent policy. Moreover, through the creation of patent-like rights, the States could essentially redirect inventive efforts away from the careful criteria of patentability developed by Congress over the last 200 years. We understand this to be the reasoning at the core of our decisions in Sears and Compco, and we reaffirm that reasoning today.

We believe that the Florida statute at issue in this case so substantially impedes the public use of the otherwise unprotected design and utilitarian ideas embodied in unpatented boat hulls as to run afoul of the teaching of our decisions in Sears and Compco. It is readily apparent that the Florida statute does not operate to prohibit "unfair competition" in the usual sense that the term is understood. The law of unfair competition has its roots in the common-law tort of deceit: its general concern is with protecting consumers from confusion as to source. While that concern may result in the creation of "quasi-property rights" in communicative symbols, the focus is on the protection of consumers, not the protection of producers as an incentive to product innovation. Judge Hand captured the distinction well in Crescent Tool Co. v. Kilborn & Bishop Co., 247 F. 299, 301 (CA2 1917), where he wrote:

The plaintiff has the right not to lose his customers through false representations that those are his wares which in fact are not, but he may not monopolize any design or pattern, however trifling. The defendant, on the other hand, may copy plaintiff's goods slavishly down to the minutest detail: but he may not represent himself as the plaintiff in their sale.

With some notable exceptions, including the interpretation of the Illinois law of unfair competition at issue in Sears and Compco, the common-law tort of unfair competition has been limited to protection against copying of nonfunctional aspects of consumer products which have acquired secondary meaning such that they operate as a designation of source. The "protection" granted a particular design under the law of unfair competition is thus limited to one context where consumer confusion is likely to result; the design "idea" itself may be freely exploited in all other contexts.

In contrast to the operation of unfair competition law, the Florida statute is aimed directly at preventing the exploitation of the design and utilitarian conceptions embodied in the product itself. The sparse legislative history surrounding its enactment indicates that it was intended to create an inducement for the improvement of boat hull designs. The Florida scheme offers this protection for an unlimited number of years to all boat hulls and their component parts, without regard to their ornamental or technological merit. Protection is available for subject matter for which patent protection has been denied or has expired, as well as for designs which have been freely revealed to the consuming public by their creators.

In this case, the Bonito 5VBR fiberglass hull has been freely exposed to the public for a period in excess of six years. For purposes of federal law, it stands in the same stead as an item for which a patent has expired or been denied: it is unpatented and unpatentable. See 35 U.S.C. § 102(b). Whether because of a determination of unpatentability or other commercial concerns, petitioner chose to expose its hull design to the public in the marketplace, eschewing the bargain held out by the federal patent system of disclosure in exchange for exclusive use. Yet, the Florida statute allows petitioner to reassert a substantial property right in the idea, thereby constricting the spectrum of useful public knowledge. Moreover, it does so without the careful protections of high standards of innovation and limited monopoly contained in the federal scheme. We think it clear that such protection conflicts with the federal policy "that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent." Lear.

That the Florida statute does not remove all means of reproduction and sale does not eliminate the conflict with the federal scheme. In essence, the Florida law prohibits the entire public from engaging in a form of reverse engineering of a product in the public domain. This is clearly one of the rights vested in the federal patent holder, but has never been a part of state protection under the law of unfair competition or trade secrets. See Kewanee ("A trade secret law, however, does not offer protection against discovery by...so-called reverse engineering, that is by starting with the known product and working backward to divine the process which aided in its development or manufacture"); see also Chicago Lock Co. v. Fanberg, 676 F.2d 400, 405 (CA9 1982) ("A lock purchaser's own reverse-engineering of his own lock, and subsequent publication of the serial number-key code correlation, is an example of the independent invention and reverse engineering expressly allowed by trade secret doctrine").

The duplication of boat hulls and their component parts may be an essential part of innovation in the field of hydrodynamic design. Variations as to size and combination of various elements may lead to significant advances in the field. Reverse engineering of chemical and mechanical articles in the public domain often leads to significant advances in technology. If Florida may prohibit this particular method of study and recomposition of an unpatented article, we fail to see the principle that would prohibit a State from banning the use of chromatography in the reconstitution of unpatented chemical compounds, or the use of robotics in the duplication of machinery in the public domain.

Moreover, as we noted in Kewanee, the competitive reality of reverse engineering may act as a spur to the inventor, creating an incentive to develop inventions that meet the rigorous requirements of patentability. The Florida statute substantially reduces this competitive incentive, thus eroding the general rule of free competition upon which the attractiveness of the federal patent bargain depends. The protections of state trade secret law are most effective at the developmental stage, before a product has been marketed and the threat of reverse engineering becomes real. During this period, patentability will often be an uncertain prospect, and to a certain extent, the protection offered by trade secret law may "dovetail" with the incentives created by the federal patent monopoly. In contrast, under the Florida scheme, the would-be inventor is aware from the outset of his efforts that rights against the public are available regardless of his ability to satisfy the rigorous standards of patentability. Indeed, it appears that even the most mundane and obvious changes in the design of a boat hull will trigger the protections of the statute.

Given the substantial protection offered by the Florida scheme, we cannot dismiss as hypothetical the possibility that it will become a significant competitor to the federal patent laws, offering investors similar protection without the quid pro quo of substantial creative effort required by the federal statute. The prospect of all 50 States establishing similar protections for preferred industries without the rigorous requirements of patentability prescribed by Congress could pose a substantial threat to the patent system's ability to accomplish its mission of promoting progress in the useful arts.

Finally, allowing the States to create patent-like rights in various products in public circulation would lead to administrative problems of no small dimension. The federal patent scheme provides a basis for the public to ascertain the status of the intellectual property embodied in any article in general circulation. Through the application process, detailed information concerning the claims of the patent holder is compiled in a central location. The availability of damages in an infringement action is made contingent upon affixing a notice of patent to the protected article. The notice requirement is designed "for the information of the public," and provides a ready means of discerning the status of the intellectual property embodied in an article of manufacture or design. The public may rely upon the lack of notice in exploiting shapes and designs accessible to all.

The Florida scheme blurs this clear federal demarcation between public and private property. One of the fundamental purposes behind the Patent and Copyright Clauses of the Constitution was to promote national uniformity in the realm of intellectual property. Since the Patent Act of 1800, Congress has lodged exclusive jurisdiction of actions "arising under" the patent laws in the federal courts, thus allowing for the development of a uniform body of law in resolving the constant tension between private right and public access. Recently, Congress conferred exclusive jurisdiction of all patent appeals on the Court of Appeals for the Federal Circuit, in order to "provide nationwide uniformity in patent law." This purpose is frustrated by the Florida scheme, which renders the status of the design and utilitarian "ideas" embodied in the boat hulls it protects uncertain. Given the inherently ephemeral nature of property in ideas, and the great power such property has to cause harm to the competitive policies which underlay the federal patent laws, the demarcation of broad zones of public and private right is "the type of regulation that demands a uniform national rule." Absent such a federal rule, each State could afford patent-like protection to particularly favored home industries, effectively insulating them from competition from outside the State.

Petitioner and its supporting amici place great weight on the contrary decision of the Court of Appeals for the Federal Circuit in Interpart Corp. v. Italia. In upholding the application of the California "anti-direct molding" statute to the duplication of unpatented automobile mirrors, the Federal Circuit stated:

The statute prevents unscrupulous competitors from obtaining a product and using it as the "plug" for making a mold. The statute does not prohibit copying the design of the product in any other way; the latter if in the public domain, is free for anyone to make, use or sell.

The court went on to indicate that "the patent laws 'say nothing about the right to copy or the right to use, they speak only in terms of the right to exclude.'"

We find this reasoning defective in several respects. The Federal Circuit apparently viewed the direct molding statute at issue in Interpart as a mere regulation of the use of chattels. Yet, the very purpose of antidirect molding statutes is to "reward" the "inventor" by offering substantial protection against public exploitation of his or her idea embodied in the product. Such statutes would be an exercise in futility if they did not have precisely the effect of substantially limiting the ability of the public to exploit an otherwise unprotected idea.

As amicus points out, the direct molding process itself has been in use since the early 1950's. Indeed, U.S. Pat. No. 3,419,646, issued to Robert L. Smith in 1968, explicitly discloses and claims a method for the direct molding of boat hulls. The specifications of the Smith Patent indicate that "it is a major object of the present invention to provide a method for making large molded boat hull molds at very low cost, once a prototype hull has been provided." In fact, it appears that Bonito employed a similar process in the creation of its own production mold. It is difficult to conceive of a more effective method of creating substantial property rights in an intellectual creation than to eliminate the most efficient method for its exploitation. Sears and Compco protect more than the right of the public to contemplate the abstract beauty of an otherwise unprotected intellectual creation — they assure its efficient reduction to practice and sale in the marketplace.

Appending the conclusionary label "unscrupulous" to such competitive behavior merely endorses a policy judgment which the patent laws do not leave the States free to make. Where an item in general circulation is unprotected by patent, "reproduction of a functional attribute is legitimate competitive activity." Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844, 863 (1982) (White, J., concurring in result). See also Bailey v. Logan Square Typographers, Inc., 441 F.2d 47, 51 (CA7 1971) (Stevens, J.) ("That which is published may be freely copied as a matter of federal right").

Finally, we are somewhat troubled by the Interpart court's reference to the Mine Safety case for the proposition that the patent laws say "nothing about the right to copy or the right to use." As noted above, the federal standards for patentability, at a minimum, express the congressional determination that patent-like protection is unwarranted as to certain classes of intellectual property. The States are simply not free in this regard to offer equivalent protections to ideas which Congress has determined should belong to all. For almost 100 years it has been well established that in the case of an expired patent, the federal patent laws do create a federal right to "copy and to use." Sears and Compco extended that rule to potentially patentable ideas which are fully exposed to the public. The Interpart court's assertion to the contrary is puzzling, and flies in the face of the same court's decisions applying the teaching of Sears and Compco in other contexts. See Gemveto Jewelry Co. v. Jeff Cooper Inc., 800 F.2d 256, 259 (CA Fed. 1986) (vacating injunction against copying of jewelry designs issued under state law of unfair competition "in view of the Sears and Compco decisions which hold that copying of the article itself that is unprotected by the federal patent and copyright laws cannot be protected by state law").

Our decisions since Sears and Compco have made it clear that the Patent and Copyright Clauses do not, by their own force or by negative implication, deprive the States of the power to adopt rules for the promotion of intellectual creation within their own jurisdictions. See Aronson; Goldstein; Kewanee. Thus, where "Congress determines that neither federal protection nor freedom from restraint is required by the national interest," the States remain free to promote originality and creativity in their own domains.

Nor does the fact that a particular item lies within the subject matter of the federal patent laws necessarily preclude the States from offering limited protection which does not impermissibly interfere with the federal patent scheme. As Sears itself makes clear, States may place limited regulations on the use of unpatented designs in order to prevent consumer confusion as to source. In Kewanee, we found that state protection of trade secrets, as applied to both patentable and unpatentable subject matter, did not conflict with the federal patent laws. In both situations, state protection was not aimed exclusively at the promotion of invention itself, and the state restrictions on the use of unpatented ideas were limited to those necessary to promote goals outside the contemplation of the federal patent scheme. Both the law of unfair competition and state trade secret law have coexisted harmoniously with federal patent protection for almost 200 years, and Congress has given no indication that their operation is inconsistent with the operation of the federal patent laws.

The Florida statute at issue here offers protection beyond that available under the law of unfair competition or trade secret, without any showing of consumer confusion, or breach of trust or secrecy. The Florida statute is aimed directly at the promotion of intellectual creation by substantially restricting the public's ability to exploit ideas that the patent system mandates shall be free for all to use.

Like the interpretation of Illinois unfair competition law in Sears and Compco, the Florida statute represents a break with the tradition of peaceful coexistence between state market regulation and federal patent policy. The Florida law substantially restricts the public's ability to exploit an unpatented design in general circulation, raising the specter of state-created monopolies in a host of useful shapes and processes for which patent protection has been denied or is otherwise unobtainable. It thus enters a field of regulation which the patent laws have reserved to Congress. The patent statute's careful balance between public right and private monopoly to promote certain creative activity is a "scheme of federal regulation ... so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it." Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947).

Congress has considered extending various forms of limited protection to industrial design either through the copyright laws or by relaxing the restrictions on the availability of design patents. Congress explicitly refused to take this step in the copyright laws, and despite sustained criticism for a number of years, it has declined to alter the patent protections presently available for industrial design. It is for Congress to determine if the present system of design and utility patents is ineffectual in promoting the useful arts in the context of industrial design. By offering patent-like protection for ideas deemed unprotected under the present federal scheme, the Florida statute conflicts with the "strong federal policy favoring free competition in ideas which do not merit patent protection." Lear. We therefore agree with the majority of the Florida Supreme Court that the Florida statute is preempted by the Supremacy Clause, and the judgment of that court is hereby affirmed.

Notes

1. The Court says:

Taken together, the novelty and nonobviousness requirements express a congressional determination that the purposes behind the Patent Clause are best served by free competition and exploitation of that which is either already available to the public, or that which may be readily discerned from publicly available material.

Compare that view of 35 U.S.C. §§ 102(b) and 103 with that of the Kewanee Court and the government brief in that case.

How would this passage apply to a state law prohibiting all unauthorized reverse engineering? A state law prohibiting reverse engineering if the product was marketed with a conspicuous label saying "this product is licensed only for use other than in reverse engineering"?

Professor Rice maintains:

Bonito Boats stilled any remaining doubts. It is inconceivable, in the wake of Bonito Boats, that the Court would sustain trade secret law which was recast to make reverse engineering unlawful.

David A. Rice, Public Goods, Private Contract and Public Policy: Federal Preemption of Software License Prohibitions Against Reverse Engineering, 53 U. Pitt. L. Rev. 543, 587 (1992).

Are your remaining doubts entirely stilled? Do you agree, no more perspective shifts from now on — like Capitol Records to Sears and Lear to Goldstein/Kewanee/Aronson to Bonito Boats? History has ended. Aaron Ogden is crushed forever.

2. Consider the passage quoted above from Bonito Boats and the Court's similar statements set out below:

The novelty and nonobviousness requirements of patentability embody a congressional understanding, implicit in the Patent Clause itself, that free exploitation of ideas will be the rule, to which the protection of a federal patent is the exception.

Both the novelty and the nonobviousness requirements of federal patent law are grounded in the notion that concepts within the public grasp, or those so obvious that they readily could be, are the tools of creation available to all. They provide the baseline of free competition upon which the patent system's incentive to creative effort depends.

Do these in effect give the Statute of Monopolies preemptive force? Should we now say, "Yes, Virginia, there is a national competition policy"? Is it to be defined by the Sherman Act's definition of what is an antitrust violation, as Bork and Kitch indicated? By what?

Does the "tools of creation" passage in Bonito Boats raise Benson's argument, that algorithmic tools must be kept nonstatutory subject matter, to the Supremacy Clause level? What would this do to a state law that requires the following?

Anyone who uses in a computer program distributed in East Virginia any new algorithm or data structure that its proprietor has registered with the Secretary of State of E. Va. must pay a 1% royalty to the registrant until 5 years after the date of registration.

What would Justice Burger have said? Conceive also "The Devil and Daniel Webster" redux. Counsel for Aaron Ogden and Thomas Gibbons, respectively, are called up to debate the point, with Burger, J., called up to preside. What do they respectively say?

3. Compare the following passage from Bonito Boats with the conflict analysis provided in Goldstein and Kewanee:

Moreover, the ultimate goal of the patent system is to bring new designs and technologies into the public domain through disclosure. State law protection for techniques and designs whose disclosure has already been induced by market rewards may conflict with the very purpose of the patent laws by decreasing the range of ideas available as the building blocks of further innovation. The offer of federal protection from competitive exploitation of intellectual property would be rendered meaningless in a world where substantially similar state law protections were readily available.

4. Kewanee considered two means for legitimately learning a trade secret. One was by reverse engineering of a freely marketed product reverse-engineerably embodying the trade secret. The other, courtesy of the "ripeness of time concept," was independent creation. The Florida statute did not forbid independent creation at all or reverse engineering in general. It forbade only plug molding. The Bonito Boats Court saw plug molding as a particular narrow species of reverse engineering.

Why was the Court concerned over Florida's forbidding this one narrow kind of reverse engineering? Other forms of reverse engineering and independent creation were still left open. The Federal Circuit felt that was enough. Why didn't the Court agree?

5. Suppose the quasi–property plug molding law of Florida is Lear–ized: Florida passes a statute (the Florida Equitable Servitudes on Chattels Law) that says that the sale of a product with a conspicuous label stating a use restriction is binding, as a contract, on direct purchasers and on indirect purchasers with or without notice. Bonito sells its boat with a label prohibiting plug molding use. Thunder Craft buys one of the boats, defiantly ignores the label, and plug molds. Bonito sues in Florida state court for specific performance and gets it, along with an injunction against future similar breaches of contract. What result in the Supreme Court?

Does it make any difference if Thunder Craft, with or without notice of the restriction, had bought the boat from a customer of Bonito who had removed the label?

6. The aftermath of this case was that Congress enacted 17 U.S.C. §§ 1301-1332 in 1998. This law creates ten years of copyright-like protection for boat hull designs. But the law was too late for Bonito Boats. According to the U.S. Coast Guard, Bonito Boats went out of business July 16, 1991. For a summary of the boat hull law, see the Copyright Office's analysis.



Section 301 of the 1976 Copyright Act
17 U.S.C. § 301

§ 301 Preemption with respect to other laws

(a) On and after January 1, 1978, all legal or equitable rights 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, whether created before or after that date and whether published or unpublished, are governed exclusively by this title. Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.

(b) Nothing in this title annuls or limits any rights or remedies under the common law or statutes of any State with respect to —

Note

The language in (b)(3) between the brackets was in the bill, as reported to the House floor. Goldstein and Kewanee had been decided. (Quick Point was still to come.) Section 301 was intended to bring uniformity to copyright law by replacing the former dual system of state regulation for unpublished works and federal regulation for published works, with a single federal system applicable to published and unpublished works.

The following letter to Congress, commenting on the bill, reflects concerns in the Justice Department's Antitrust Division about changes to § 301 that had recently occurred (the bracketed passage). The letter also expresses the Antitrust Division's views about the appropriate preemptive relationship between federal intellectual property law and state laws operating in the same field.

Curiously, the Justice Department’s letter does not mention the Supreme Court's decisions in Goldstein and Kewanee. How do you account for that omission?



Justice Department Letter on § 301

DEPARTMENT OF JUSTICE
Washington, D.C. 20530


July 27, 1976

Honorable Robert Kastenmeier,
Chairman, Subcommittee on Courts, Civil
    Liberties and the Administration of Justice
Committee on the Judiciary
House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:

On May 8, 1975, Deputy Assistant Attorney General Irwin Goldbloom represented this Department before your Subcommittee on Courts, Civil Liberties and the Administration of Justice during hearings on H.R. 2223, a bill “For the general revision of the Copyright Law, title 17 of the United States Code, and for other purposes.”

For a number of reasons, which will be discussed separately below, we would like to supplement the Department's earlier testimony.

. . .

II.

On February 19, 1976, the Senate passed S. 22, the Senate omnibus copyright reform bill, making certain changes to section 301. We believe that these changes have anticompetitive implications which should be called to your attention.

Section 301 would provide that the federal Copyright Act would preempt all state regulation of rights in the nature of copyright protection. However, certain exceptions to complete preemption would be made by subsection (b) of section 301. The Senate-passed bill made two significant additions to the exceptions, both of which are opposed by this Department. These additions seemingly allow (1) protection under the theory of misappropriation, and (2) less preemption than the committee intended with respect to state law regarding sound recordings made prior to 1972.

A. Misappropriation

Paragraph (3) of section 301(b) would exempt from pre-emption, state common law or statutory rights that are not equivalent to the exclusive rights granted by the Copyright Act. The Copyright Act would grant rights such as the exclusive right to make copies of the copyrighted work (section 106). In addition to the rights that paragraph (3) previously specifically listed as non-equivalent rights (e.g., breach of contract and breach of trust) the committee has now added “rights against misappropriation not equivalent to any of such exclusive rights.” The committee report accompanying the bill asserts that there is a need for this provision because “state law should” be able to permit the misappropriation theory to apply. S. Rep. 94-473, 94th Cong., 1st Sess. 116 (1975) (hereinafter, “Senate Report”).

This Department is concerned that inclusion of the above quoted phrase in section 301 would sanction use of the highly anticompetitive “misappropriation” theory, and may defeat the underlying purpose of the preemption section.

1. The Misappropriation Doctrine is Anticompetitive

This Department strongly opposes allowance of monopolies based on the theory of “misappropriation.” This term is not defined in the proposed Act, but the concept apparently stems from the much-criticized decision of the Supreme Court in International News Service v. Associated Press, 248 U.S. 215 (1918) (hereinafter, the “INS” case). In INS, the Supreme Court held that the defendant news service committed an unlawful act of unfair competition by copying the plaintiff's uncopyrighted published new[s] stories from east coast newspapers and wiring them [to] west coast subscribing newspapers. The Court found that even though the plaintiff would have had no rights against the public, who were entitled or privileged to copy the articles, nonetheless the defendant had “misappropriated” the published work done by the plaintiff and was therefore liable to the plaintiff. The Court's theory was that the defendant's conduct was unlawful because it sought to “reap where it has not sown” (248 U.S. at 239). This unjust enrichment theory could be used broadly to prohibit the copying of uncopyrighted published materials, the manufacture by others of unpatented goods, the use by a doctor of a surgical technique developed by another doctor, or the use of an advertising technique which another has developed at his own expense. The effect of the theory is boundless—it is potentially applicable each time a person engages in conduct that imitates some work that was developed at another's expense.

The courts generally have declined to follow the suggestion in the INS case that the traditional unfair competition doctrine be expanded to cover so-called “misappropriation.” See, e.g., G. Ricordi & Co. v. Haendler, 194 F.2d 914, 916 (2d Cir. 1952); National Comics Pub., Inc. v. Fawcett Pub., Inc., 191 F.2d 594, 603 (2d Cir. 1951); RCA Mfg. Co. v. Whiteman, 114 F.2d 86, 90 (2d Cir.), cert. denied, 311 U.S. 712 (1940); Cheney Bros. v. Doris Silk Corp., 35 F.2d 279, 280 (2d Cir. 1929), cert. denied, 281 U.S. 728 (1930). Indeed, District Judge Wyzanaski once stated his belief that the Supreme Court would follow the Brandeis dissent in INS and overrule INS if given the opportunity. Triangle Pub., Inc. v. New England Newspaper Pub. Co., 46 F. Supp. 198, 204 (D. Mass 1942). This view is supported by the recent Sears and Compco decisions, in which the Supreme Court reversed decisions from a court of appeals that prohibited copying of unpatented products, without even attempting to distinguish INS. See also Columbia Broadcasting System, Inc. v. DeCosta, 377 F.2d 315, 318 (1st Cir.), cert. denied, 389 U.S. 1007 (1967), in which the court found both that INS was no longer authoritative, since it occurred before Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938), and that it was overruled by Sears and Compco.

The New York State courts, in a series of cases beginning with appropriation of news and artistic productions, retrieved the “misappropriation” theory of INS from innocuous desuetude and gradually extended the doctrine into the area of unfair competition in the sale of ordinary merchandise. The INS doctrine has also been codified in the New York General Business Law (§ 368-d). The bulk of authority elsewhere in the United States, however, is against the recognition of “misappropriation” as an independent basis for recovery in imitation cases (West Point Mfg. Co. v. Detroit Stamping Co., 222 F.2d 581, 598-99 (6th Cir. 1955) (misappropriation is “contrary to the great weight of authority”)).

This Department supports the position taken in the foregoing majority line of cases, and opposes any attempt to limit nondeceptive copying of uncopyrighted or unpatented subject matter by the general public. We believe that sound policy reasons underlie the weight of authority that opposes the INS “misappropriation” doctrine.

The “misappropriation” theory is vague and uncertain. The “misappropriation” provision of section 301 does not indicate what it is that is not to be appropriated. It may extend beyond an appropriation of the forms or styles of ordinary merchandise to include an appropriation of mere ideas, or technology or other know-how long in the public domain. Neither the INS case, other cases, nor proposed paragraph (3) adequately defines the conduct prohibited, or establishes any standard for distinguishing improper, as opposed to proper, copying.

The “misappropriation” doctrine may be used contrary to copyright and antitrust policies to sustain perpetual monopolies over printed matter, and contrary to patent and antitrust policies to sustain perpetual monopolies over alleged inventions which do not qualify for patent protection. In the Sears and Compco cases, noted above, the Supreme Court set aside such grants and held the states to be without power to block off from the public the non-deceptive copying of an unpatentable article. The Court held this on the ground that such grants contravene the federal patent statutes and constitutional provisions.

Furthermore, imitation is the life-blood of competition. Mere commercial copying is neither unlawful, nor immoral; instead it is often a commercial and economic necessity. Copying very often supports and promotes competition—it spurs further invention and innovation, permits newcomers to enter markets, and generally, by bringing forward functionally equivalent products and services, is a necessary condition for the competitive forces of the marketplace acting to lower prices, satisfy consumer demand, and allocate production optimally.

2. Preemption Would Be Nullified

Paragraph (3), as noted above, lists causes of action, such as for breach of contract, that are specifically identified in the introductory phrase as giving “rights that are not equivalent to any of the exclusive rights” that would be granted by section 106 of the proposed Copyright Act. These are causes of action different in nature from that for copyright infringement (see Senate Report, p. 115). Apparently what is meant is that, for example, one may sue to enjoin reproduction of an uncopyrighted book if there is a contract between the parties prohibiting the defendant from reproducing it. Thus, reproducing the literary expression itself may be prohibited under a cause of action for breach of contract.

Similarly, paragraph (3) exempts from preemption “rights against misappropriation not equivalent to any of such rights” specified in section 106. This apparently would permit states to prohibit the reproduction of the literary expression itself under a “misappropriation” theory. “Misappropriation” would stand in the place of breach of contract as a cause of action in the book example above. Any copying of copyrightable subject matter that has not been federally protected could be prohibited under the amorphous theory of “misappropriation.”

The Senate Report states (p. 116) that reproduction of “the literary expression” itself should be preempted and should not be able to be prohibited under the “misappropriation” theory; yet that is what inclusion of the term “misappropriation” in paragraph (3) would prohibit. The preemption sought by the omnibus Copyright Act revision bill would be nullified by paragraph (3).

While “misappropriation” is almost certain to nullify preemption, any of the causes of action listed in paragraph (3) following the phrase “as specified by section 106 “ may be construed to have the same effect. For example, a court could construe the copying of an uncopyrighted published book to be an invasion of the author's right to privacy, i.e., the right to keep the control of the publication of his book privately to himself. In order to more clearly delineate to the courts the area to be preempted, we recommend striking the specific causes of action listed in paragraph (3) so as to amend that paragraph to preempt only: “(3) activities violating legal or equitable rights that are not equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106;”.

3. Recommendation

For the reasons discussed, this Department recommends that section 301(b)(3) be amended as suggested above....


Notes on Justice Department Letter on § 301

1. Section 301 was amended on the floor in accordance with the Justice Department's proposal (in the DOJ letter), and was enacted without the language shown earlier in brackets. The legislative history (122 Cong. Rec. 32015 (Sept. 22, 1976)) surrounding this change, however, is confusing to say the least. Congressman Seiberling, who introduced the DOJ amendment first stated that it would save the preemptive effect of § 301 from being nullified by the inclusion of certain examples. Having misappropriation as an example could encourage states to pass misappropriation laws, which could render § 301 meaningless. (Congressman Seiberling essentially summarized and paraphrased the DOJ letter.)

Congressman Railsback (ranking minority member on subcommittee) then asked him, by way of clarification, to indicate his agreement that his amendment would not change the existing state of the law as it may exist in those states that have recognized the misappropriation doctrine. Seiberling stated that he agreed with that and said the amended bill would leave state law alone, whereupon Railsback said that he accepted the amendment.

The intellectual property subcommittee chairman (Congressman Kastenmeier, to whom the DOJ letter had been addressed) then said that he thought the amendment was consistent with the DOJ letter and accepted it. Since Chairman Kastenmeier and ranking minority member Railsback both said they agreed with the amendment, it was adopted without further comment.

2. The remaining copyright decisions in this chapter involve preemption under § 301, which since 1976 dominates the copyright preemption field. Are the things in the deleted bracketed language, above, now unattended or preempted?

3. Are the principles set down in the Supreme Court's preemption decisions now immaterial? Does § 301 address all of the kinds of preemption that the Supreme Court decisions have considered?

Suppose that the federal copyright law (see 17 U.S.C. § 201(b); Community for Creative Non–Violence v. Reid, 490 U.S. 730 (1989)) says that ownership of a work that an employee creates acting within the scope of his or her employment belongs to the employer absent a written agreement to the contrary. Suppose that the East Dakota Computer Programmers Rights Law says that a computer program that an employee writes belongs to the employee unless and until the employee specifically assigns ownership to the employer or another person by an instrument executed after the creation of the computer program and in return for a separate consideration of no less than 10% of the fair market value of the computer program. What does § 301 say to that?

Suppose that state law says that it is a tort to advise a computer program vendor's customers that the computer program is an infringing copy of another person's computer program, if the effect is to cause customers not to deal with the vendor. What does § 301 say about that?

4. For a different approach toward drafting preemption legislation, see Richard H. Stern, On Defining the Concept of Infringement of Intellectual Property Rights in Algorithms and Other Abstract Computer-Related Ideas, 23 AIPLA Q.J. 400, 503 (1995):

(f) This section is intended fully to occupy the field of legal regulation of the subject matter, and it shall not be contravened, modified, or supplemented by any other provision of any law.

For an explanation, see id. at 510-514. This clause relates to a proposed statutory authorization of “reasonable” shrink-wrap restrictions, making violation of the restrictions acts of infringement, but the specific context is not material. The language against supplementation invokes a decision quoted in Bonito Boats – Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947) (a “scheme of federal regulation...so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.”). How does § 301 address the issue of restriking a balance that Congress struck in the statute?



Vault Corp. v. Quaid Software Ltd.
United States Court of Appeals
847 F.2d 255 (5th Cir. 1988)

Reavley, Circuit Judge.

Vault brought this copyright infringement action against Quaid, seeking damages and preliminary and permanent injunctions. The district court denied Vault's motion for a preliminary injunction, holding that Vault did not have a reasonable probability of success on the merits. By stipulation of the parties, this ruling was made final and judgment was entered accordingly. We affirm.

Factual Background

Vault produces computer diskettes under the registered trademark prolok, which are designed to prevent the unauthorized duplication of programs placed on them by software computer companies [software vendors], Vault’s customers. To use a program, a purchaser [software end user] loads the diskette into the disk drive of a computer, thereby allowing the computer to read the program into its memory. The purchaser can then remove the diskette from the disk drive and operate the program from the computer’s memory. This process is repeated each time a program is used.

The protective device placed on a PROLOCK diskette by Vault is comprised of two parts: a “fingerprint” and a software program (“Vault’s program”). The “fingerprint” is a small mark, physically placed on the magnetic surface of each PROLOCK diskette, which contains certain information that cannot be altered or erased. Vault’s program is a set of instructions to the computer which interact with the “fingerprint” to prevent the computer from operating the program recorded on a PROLOCK diskette (by one of Vault’s customers) unless the computer verifies that the original PROLOCK diskette, as identified by the “fingerprint,” is in the computer’s disk drive. While a purchaser can copy a PROLOCK protected program onto another diskette, the computer will not read the program into its memory from the copy unless the original PROLOCK diskette is also in one of the computer’s disk drives. The fact that a fully functional copy of a program cannot be made from a PROLOCK diskette prevents purchasers from buying a single program and making unauthorized copies for distribution to others.

A PROLOCK diskette contains two programs, the program placed on the diskette by a software [vendor] company (e.g., word processing) and the program placed on the diskette by Vault which interacts with the “fingerprint” to prevent unauthorized duplication of the software company’s program. We use the term “software program” or “program” to refer to the program placed on the diskette by one of Vault’s customers (a computer company) and “Vault’s program” to refer to the program placed on the diskette by Vault as part of the “protective device.” We collectively refer to the “fingerprint” and Vault’s program as the “protective device.”

Each version of PROLOCK has been copyrighted and Vault includes a license agreement with every PROLOCK package that specifically prohibits the copying of Vault’s program.

Quaid’s product, a diskette called “CopyWrite,” contains a feature called “RAMKEY” which unlocks the PROLOCK protective device and facilitates the creation of a fully functional copy of a program placed on a PROLOCK diskette. The process is performed simply by [the end user’s] copying the contents of the PROLOCK diskette onto the CopyWrite diskette, which can then be used to run the software program without the original PROLOCK diskette in a computer disk drive. RAMKEY interacts with Vault’s program to make it appear to the computer that the CopyWrite diskette contains the “fingerprint,” thereby making the computer function as if the original PROLOCK diskette is in its disk drive. A copy of a program placed on a CopyWrite diskette can be used without the original, and an unlimited number of fully functional copies can be made [by end users] in this manner from the program originally placed on the PROLOCK diskette.

Copyright Infringement Issues

Vault brought this action against Quaid, seeking preliminary and permanent injunctions to prevent Quaid from advertising and selling RAMKEY; an order impounding all of Quaid’s copies of CopyWrite which contain the RAMKEY feature; and monetary damages in the amount of $100 million. Vault asserted, among other things, copyright infringement claims that Quaid, by providing RAMKEY to its customers, contributes to the infringement of Vault’s copyright and the copyrights of its customers in the programs that Vault’s customers place on PROLOCK diskettes.

Section 117 of the Copyright Act limits a copyright owner’s exclusive rights under § 106 by permitting an owner of a computer program to make certain copies of that program without obtaining permission from the program’s copyright owner. With respect to Vault’s first two claims of copyright infringement, Quaid contends that its activities fall within the § 117 exceptions and that it has, therefore, not infringed Vault’s exclusive rights. To appreciate the arguments of the parties, we examine the legislative history of § 117.

Legislative Background

In 1974, Congress established the National Commission on New Technological Uses of Copyrighted Works (“CONTU”) to perform research and make recommendations concerning copyright protection for computer programs. Before receiving CONTU’s recommendations, Congress amended the Copyright Act in 1976 to include computer programs in the definition of protectable literary works and to establish that a program copied into a computer’s memory constitutes a reproduction. Congress delayed further action and enacted an interim provision to maintain the status quo until CONTU completed its study and made specific recommendations.

In 1978, CONTU issued its final report. After acknowledging the importance of balancing the interest of proprietors in obtaining “reasonable protection” against the risks of “unduly burdening users of programs and the general public,” the Report recommended the enactment of a new § 117 which would proscribe the unauthorized copying of computer programs but permit a “rightful possessor” of a program to make or authorize the making of another copy or adaptation of that computer program, provided:

(1) that such a new copy or adaptation is created as an essential step in the utilization of the computer program in conjunction with a machine and that it is used in no other manner, or

(2) that such new copy or adaptation is for archival purposes only....

In 1980, Congress enacted the Computer Software Copyright Act which adopted the recommendations contained in the CONTU Report. The Act’s legislative history, contained in a short paragraph in a committee report, merely states that the Act “embodies the recommendations of [CONTU] with respect to clarifying the law of copyright of computer software.” The absence of an extensive legislative history and the fact that Congress enacted proposed § 117 with only one change have prompted courts to rely on the CONTU Report as an expression of legislative intent.

Contributory Infringement

Vault contends that, because [end user] purchasers of programs placed on PROLOCK diskettes use the RAMKEY feature of CopyWrite to make unauthorized copies, Quaid’s advertisement and sale of CopyWrite diskettes with the RAMKEY feature violate the Copyright Act by contributing to the infringement of Vault’s copyright and the copyrights owned by Vault’s [software vendor] customers. Vault asserts that it lost customers and substantial revenue as a result of Quaid’s contributory infringement, because software companies which previously relied on PROLOCK diskettes to protect their programs from unauthorized copying have discontinued their use.

While a purchaser of a program on a PROLOCK diskette violates § 106(1) by making and distributing unauthorized copies of the program, the Copyright Act does not expressly render anyone liable for the infringement committed by another. The Supreme Court in Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417 (1984), after examining the express provision in the Patent Act which imposes liability on an individual who “actively induces infringement of a patent,” 35 U.S.C. § 271(b)-(c), and noting the similarity between the Patent and Copyright Acts, recognized the availability, under the Copyright Act, of vicarious liability against one who sells a product that is used to make unauthorized copies of copyrighted material. The Court held that liability based on contributory infringement could be imposed only where the seller had knowledge of the fact that its product was used to make unauthorized copies of copyrighted material, and that the sale of a product “does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses.”

While Quaid concedes that it has actual knowledge that its product is used to make unauthorized copies of copyrighted material, it contends that the RAMKEY portion of its CopyWrite diskettes serves a substantial noninfringing use by allowing purchasers of programs on PROLOCK diskettes to make archival copies as permitted under 17 U.S.C. § 117(2), and thus that it is not liable for contributory infringement.

Vault’s allegation of contributory infringement focuses on the RAMKEY feature of CopyWrite diskettes. Therefore, in determining whether Quaid engaged in contributory infringement, the issue properly presented is whether the RAMKEY feature has substantial noninfringing uses.

Quaid asserts that RAMKEY serves the legitimate purpose of permitting purchasers of programs recorded on PROLOCK diskettes to make archival copies under § 117(2) and that this purpose constitutes a substantial noninfringing use. At trial, witnesses for Quaid testified that software programs placed on floppy diskettes are subject to damage by physical and human mishap and that RAMKEY protects a purchaser’s investment by providing a fully functional archival copy that can be used if the original program on the PROLOCK–protected diskette, or the diskette itself, is destroyed.

Quaid contends that an archival copy of a PROLOCK protected program, made without RAMKEY, does not serve to protect against these forms of damage because a computer will not read the program into its memory from the copy unless the PROLOCK diskette containing the original undamaged program is also in one of its disk drives, which is impossible if the PROLOCK diskette, or the program placed thereon, has been destroyed due to physical or human mishap.

Congress, following CONTU’s advice, provided that an owner of a computer program may make a copy of that program “for archival purposes only.” An owner of a program is entitled, under § 117(2), to make an archival copy of that program in order to guard against all types of risks, including physical and human mishaps as well as mechanical and electrical failure.

Because § 117(2) permits the making of fully functional archival copies, it follows that RAMKEY is capable of substantial noninfringing uses. Quaid’s advertisement and sale of CopyWrite diskettes with the RAMKEY feature does not constitute contributory infringement.

Louisiana’s Shrink–Wrap Law

Vault alleged that Quaid breached its license agreement by decompiling or disassembling Vault’s program in violation of the Louisiana Software License Enforcement Act (the “License Act”), La. Rev. Stat. Ann. § 51:1961. Vault seeks an injunction to prevent Quaid from decompiling or disassembling prolok.

Louisiana’s License Act permits a software producer to impose a number of contractual terms upon software purchasers provided that the terms are set forth in a license agreement which comports with the License Act and that this license agreement accompanies the producer’s software. Enforceable terms include the prohibition of: (1) any copying of the program for any purpose; and (2) modifying and/or adapting the program in any way, including adaptation by reverse engineering, decompilation or disassembly. The terms “reverse engineering, decompiling or disassembling” are defined as “any process by which computer software is converted from one form to another form which is more readily understandable to human beings, including without limitation any decoding or decrypting of any computer program which has been encoded or encrypted in any manner.”

Vault’s license agreement accompanies prolok and comports with the requirements of the License Act. The license provides that “[y]ou may not copy, modify, translate, convert to another programming language, decompile or disassemble” Vault’s program.

The district court held that Vault’s license agreement was “a contract of adhesion which could only be enforceable if the [Louisiana License Act] is a valid and enforceable statute.” The court noted numerous conflicts between Louisiana’s License Act and the Copyright Act, including: (1) while the License Act authorizes a total prohibition on copying, the Copyright Act allows archival copies and copies made as an essential step in the utilization of a computer program, 17 U.S.C. § 117; (2) while the License Act authorizes a perpetual bar against copying, the Copyright Act grants protection against unauthorized copying only for the life of the author plus fifty years, 17 U.S.C. § 302(a); and (3) while the License Act places no restrictions on programs which may be protected, under the Copyright Act, only “original works of authorship” can be protected, 17 U.S.C. § 102. The court concluded that, because Louisiana’s License Act “touched upon the area” of federal copyright law, its provisions were preempted and Vault’s license agreement was unenforceable.

In Stiffel the Supreme Court held that “[w]hen state law touches upon the area of [patent or copyright statutes], it is ‘familiar doctrine’ that the federal policy ‘may not be set at naught, or its benefits denied’ by the state law.” Section 117 of the Copyright Act permits an owner of a computer program to make an adaptation of that program provided that the adaptation is either “created as an essential step in the utilization of the computer program in conjunction with a machine,” § 117(1), or “is for archival purpose only,” § 117(2). The provision in Louisiana’s License Act, which permits a software producer to prohibit the adaptation of its licensed computer program by decompilation or disassembly, conflicts with the rights of computer program owners under § 117 and clearly “touches upon an area” of federal copyright law. For this reason, and the reasons set forth by the district court, we hold that at least this provision of Louisiana’s License Act is preempted by federal law, and thus that the restriction in Vault’s license agreement against decompilation or disassembly is unenforceable.


Notes

1. What kinds of condition should a copyright owner be entitled to place on use of a computer program? On use by a buyer under a negotiated contract? On use by customers (such as end users) not in privity with the copyright owner?

2. Can a copyright owner get the same effects as a limited field–of–use license on software sold to others by placing a restrictive label on the software? Consider this hypothetical shrink-wrap license clause:

You are not licensed, or otherwise authorized, to reproduce this computer program (including doing so by loading it into RAM) except for nonbusiness purposes on a single CPU located in your private place of residence; any other use is, and will be treated as, copyright infringement.

I buy a copy of a spreadsheet program labelled with this clause, and I intend to use it in my office for my operations research consultant business. Would I be an infringer under the Louisiana License Act? Is there any preemption problem with that?

3. Why does the Fifth Circuit cite Stiffel and not cite § 301? What does § 301 say to the Louisiana License Act?

Is a prohibition of disassembly equivalent to one of the exclusive rights? Can you contrive a theory under which disassembly is a species of reproduction or of preparation of a derivative work, so that it is “equivalent” to §106(1) or (2)? Did applying the License Act to Quaid’s conduct require an interpretation of the License Act that made it duplicate the prohibitions of § 106(1) or (2)?

Is that so contrived that it makes more sense simply to say that the License Act forbids Quaid to do what § 117(1) says is permissible to do? (Or to do something that is a necessary step toward that end?) Does that suggest that the drafters of § 301 may have failed to understand the problem? That they had too limited a concept of the preemption doctrine?

If you accept the Fifth Circuit’s argument of conflict with § 117, Vault is a stronger case for preemption, at least on a formal level, than Sears, Lear, or Bonito Boats. In those cases, the Court had to find an implicit command of competition in the patent clause and/or statute or at least a disturbance of a carefully struck balance in the patent statute. Here, § 117 says in so many words that Congress wants to allow the making of archival copies. The instant case is thus like such prior cases as Free v. Bland, 369 U.S. 663 (1962) (federal law says that surviving coowner of bond succeeds to title; state law says that decedent’s heir succeeds); Franklin Nat’l Bk. v. New York, 347 U.S. 373 (1954) (federal law authorizes bank to use “Savings” in its title but state law prohibits it); Amalgamated Ass’n of Employees v. Wisconsin Employment Relations Bd., 430 U.S. 383, 398-99 (1951) (state anti-strike law conflicts with NLRA’s protection of right to strike).

4. The Fifth Circuit passed over a point that could have been a stopper at the threshold. A user’s rights under § 117 apply only to a user who “owns” a copy of the computer program. Shrink-wrap licenses purport to retain title in the vendor and merely “license” the customer to use the computer program, subject to various conditions. Indeed, the Louisiana License Act allows the imposition of the shrink-wrap restrictions involved in this case only “if title to the copy of computer software has been retained by the licensor.” The Vault “licenses” expressly stated:

This copy of the PROLOCK Software Protection System and this prolok Software Protection Diskette (the “Licensed Software”) are licensed to you, the end-user, for your own internal use. Title to the Licensed Software and all copyrights and proprietary rights in the Licensed Software shall remain with Vault.

Perhaps the Fifth Circuit considered it unnecessary to observe that a transaction having all the earmarks of a sale does not become a non-sale simply because the seller designates it a license. (Smith: “Call me a taxi.” Jones: “OK, you’re a taxi.” Does that make Smith a vehicle?) See generally Straus v. Victor Talking Machine Co., 243 U.S. 490 (1917)(courts would have to be “perversely blind” to allow seller’s use of term “license” instead of “sale” to validate imposition of restrictions impermissible in sale of machine, where transaction has functional characteristics of sale).



Gates Rubber Co. v. Bando Chem. Indus., Ltd.
United States Court of Appeals
9 F.3d 823 (10th Cir. 1993)

Ebel, Circuit Judge.

We conclude that the district court erroneously extended copyright protection to certain unprotectable elements of the computer program. We also conclude that the district court failed properly to determine the protectability of many of the elements of Gates' program which it found to have been copied by the defendants. Accordingly, we remand the copyright claims to the district court for a reconsideration of the programs in light of the test we set forth herein, which involves a determination of whether there was copying and a determination of whether the copying constitutes actionable infringement through application of the abstraction-filtration-comparison test.

Considering the trade secret claims, we conclude that Gates' claims were not preempted by federal law, that Gates made an adequate showing that certain of its mathematical constants were valuable trade secrets, and that Gates took adequate steps to protect the confidentiality of such trade secrets below and on appeal. Accordingly, we affirm those portions of the district court's opinion with respect to the trade secret claims.

Facts

Gates Rubber Co. (“Gates”), is a Colorado corporation that manufactures rubber belts for use in industrial machinery. Gates leads the industry in sales of industrial machine belts. In order to determine the proper rubber belt for a particular machine it is necessary to perform complicated calculations involving numerous variables. The complexity of these calculations is such that they have customarily been performed by an engineer and significant variance in outcome often resulted. In order to facilitate the efficient and accurate selection of belts, and to boost the sales of their products, Gates developed a computer program entitled “Design Flex 4.0.” With this program a salesman can input a number of variables and thereby calculate the proper Gates belt for a machine. The program uses published formulas in conjunction with certain mathematical constants developed by Gates to determine belt size. Gates obtained a Certificate of Copyright Registration on its Design Flex program.

The defendant, Bando American (“Bando”), is a division of a Japanese corporation that competes with Gates in the manufacture and sale of industrial belts. Numerous Bando employees were formerly employees of Gates, including the defendants Hanano (Bando's president), Newman, and Piderit.

Until 1988, the defendant Piderit was a Gates employee. While at Gates, Piderit had access to Gates’ Design Flex program, including its components and the design and access codes. In 1988, Bando hired Piderit away from Gates and assigned him to develop a program that would assist in the selection of the proper belts for industrial machinery. In June of 1989, Bando introduced a demonstration copy of “Chauffeur,” a computer program similar to Gates’ Design Flex program. The Chauffeur program was made available in March of 1990.

The Trade Secret Issue

The district court concluded that Bando had misappropriated trade secrets belonging to Gates and ordered Bando to “return any and all information containing the constants used in either the Chauffeur program or the Design Flex program” and restrained Bando from further use of these constants. Bando appeals this order and the underlying finding of trade secret misappropriation alleging that the state law misappropriation claim is preempted by 17 U.S.C. § 301, and that the constants have no competitive economic value and are therefore not appropriately considered trade secrets.

A. Federal Preemption of the Trade Secret Claims

Bando contends that the district court incorrectly considered Gates' state law misappropriation claim because the claim was preempted by 17 U.S.C. § 301(a). However, § 301(a) is qualified by § 301(b), which provides in relevant part:

(b) Nothing in this title annuls or limits any rights or remedies under the common law or statutes of any State with respect to —

(1) subject matter that does not come within the subject matter of copyright as specified by §§ 102 and 103, including works of authorship not fixed in any tangible medium of expression; . . . or

(3) activities violating legal or equitable rights that are not equivalent to any of the exclusive rights within the general scope of copyright as specified by § 106;....

Thus, a state common law or statutory claim is preempted by § 301 if: (1) the work is within the scope of the “subject matter of copyright” as specified in 17 U.S.C. §§ 102 and 103; and (2) the rights granted under state law are “equivalent to any... exclusive rights within the...scope of [federal] copyright” as set out in 17 U.S.C. § 106.

Gates alleged that the use of the proprietary data, engineering formula, and the code of the Design Flex and the Life in Hours computer programs constitute a misappropriation of the trade secrets of Gates. The parties do not dispute that the computer programs at issue in this case fall within the “subject matter of copyright” as specified by 17 U.S.C. §§ 102 and 103. Accordingly, the question before us is whether the rights granted by those provisions of the Colorado Uniform Trade Secrets Act upon which Gates relies are equivalent to any of the exclusive rights granted by the Copyright Act.

17 U.S.C. § 106 of the Copyright Act grants to the copyright owner the exclusive rights to: (i) reproduce the copyrighted work; (ii) prepare derivative works; (iii) distribute copies of the work; (iv) perform the work publicly; and (v) display the work publicly. In order to determine whether Gates' misappropriation claim asserts rights equivalent to those delineated in § 106, we refer to the elements of the state law cause of action. Federal law will preempt a state-created right if that right may be abridged by an act which, in and of itself, would infringe one of the exclusive rights established by federal law. However, if a state cause of action requires an extra element, beyond mere copying, preparation of derivative works, performance, distribution or display, then the state cause of action is qualitatively different from, and not subsumed within, a copyright infringement claim and federal law will not preempt the state action.

Under Colorado law, to prove misappropriation of a trade secret, a plaintiff must show: (i) that he or she possessed a valid trade secret, (ii) that the trade secret was disclosed or used without consent, and (iii) that the defendant knew, or should have known, that the trade secret was acquired by improper means. The breach of a duty of trust or confidence is the gravamen of such trade secret claims and supplies the extra element that qualitatively distinguishes such trade secret causes of action from claims for copyright infringement that are based solely on copying. Because Gates' claim for trade secret misappropriation under the Colorado Uniform Trade Secrets Act requires proof of a breach of trust or confidence — proof that is not required under the Copyright Act — Gates' state law claims are not preempted by federal law.

B. The Economic Value of the Constants

The appellants claim that the district court erred when it failed to set forth the elements of a trade secret claim and make specific findings as to each element. Further, the appellants argue that if the court had engaged in this analysis the constants would not have been found to be trade secrets because they had no competitive economic value.

Recognizing that the term “trade secret” defies exact definition, the Colorado courts have enunciated a number of factors that are relevant in determining whether a trade secret exists. They include:


We are unable to find that the district court erred in its implicit finding that the constants were trade secrets and that they were misappropriated. There is evidence that Gates spent in excess of 25,000 man hours and over $500,000 developing and upgrading the Design Flex program. The program was considered to be one of the best of its kind and was an efficient application and marketing tool. Gates took extensive measures to protect the program and, in particular, the constants.

Although there is some evidence that some of the constants might be “reverse engineered” through mathematical trial and error, that fact alone does not deprive the constants of their status as trade secrets.

We conclude that Gates' trade secret claims are not preempted by federal law, that Gates made an adequate showing that the trade secrets were valuable, and that Gates took adequate steps to protect the confidentiality of the trade secrets below and on appeal. Accordingly, that portion of the district court's opinion concerning the trade secret claim is affirmed.

Notes

1. The court of appeals says:

Although there is some evidence that some of the constants might be “reverse engineered” through mathematical trial and error, that fact alone does not deprive the constants of their status as trade secrets.

What additional fact(s), if any, could deprive the constants of their trade secret status?

2. What if Gates had sold copies of Design Flex in retail outlets such as Egghead? What if disassembling the computer program as sold at Egghead or other reverse engineering would provide the constants? What if Gates used a shrinkwrap license forbidding disassembly or other reverse engineering?



ProCD, Inc. v. Zeidenberg
United States Court of Appeals
86 F.3d 1447 (7th Cir. 1996)

Easterbrook, Circuit Judge.

Must buyers of computer software obey the terms of shrinkwrap licenses? The district court held not, for two reasons: first, they are not contracts because the licenses are inside the box rather than printed on the outside; second, federal law forbids enforcement even if the licenses are contracts. The parties and numerous amicus curiae have briefed many other issues, but these are the only two that matter—and we disagree with the district judge's conclusion on each. Shrinkwrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, or if they are unconscionable). Because no one argues that the terms of the license at issue here are troublesome, we remand with instructions to enter judgment for the plaintiff.

I. Background

ProCD, the plaintiff, has compiled information from more than 3,000 telephone directories into a computer database. We may assume that this database cannot be copyrighted, although it is more complex, contains more information (nine-digit zip codes and census industrial codes), is organized differently, and therefore is more original than the single alphabetical directory at issue in Feist. ProCD sells a version of the database, called SelectPhone, on CD-ROM discs. (The “shrinkwrap license” gets its name from the fact that retail software packages are covered in plastic or cellophane “shrinkwrap,” and some vendors, though not ProCD, have written licenses that become effective as soon as the customer tears the wrapping from the package. Vendors prefer “end user license,” but we use the more common term.) A proprietary method of compressing the data serves as effective encryption too. Customers decrypt and use the data with the aid of an application program that ProCD has written. This program, which is copyrighted, searches the database in response to users’ criteria (such as “find all people named Tatum in Tennessee, plus all firms with ‘Door Systems’ in the corporate name”). The resulting lists can be read and manipulated by other software, such as word processing programs.

The database in SelectPhone cost more than $10 million to compile and is expensive to keep current. It is much more valuable to some users than to others. The combination of names, addresses, and SIC codes enables manufacturers to compile lists of potential customers. Manufacturers and retailers pay high prices to specialized information intermediaries for such mailing lists; ProCD offers a potentially cheaper alternative. People with nothing to sell could use the database as a substitute for calling long distance information, or as a way to look up old friends who have moved to unknown towns, or just as an electronic substitute for the local phone book. ProCD decided to engage in price discrimination, selling its database to the general public for personal use at a low price (approximately $150 for the set of five discs) while selling information to the trade for a higher price. It has adopted some intermediate strategies too: access to the SelectPhone database is available via the America Online service for the price America Online charges to its clients (approximately $3 per hour), but this service has been tailored to be useful only to the general public.

If ProCD had to recover all of its costs and make a profit by charging a single price — that is, if it could not charge more to commercial users than to the general public — it would have to raise the price substantially over $150. The ensuing reduction in sales would harm consumers who value the information at, say, $200. They get consumer surplus of $50 under the current arrangement but would cease to buy if the price rose substantially. If because of high elasticity of demand in the consumer segment of the market the only way to make a profit turned out to be a price attractive to commercial users alone, then all consumers would lose out—and so would the commercial clients, who would have to pay more for the listings because ProCD could not obtain any contribution toward costs from the consumer market.

To make price discrimination work, however, the seller must be able to control arbitrage. An air carrier sells tickets for less to vacationers than to business travelers, using advance purchase and Saturday-night-stay requirements to distinguish the categories. A producer of movies segments the market by time, releasing first to theaters, then to pay-per-view services, next to the videotape and laserdisc market, and finally to cable and commercial TV. Vendors of computer software have a harder task. Anyone can walk into a retail store and buy a box. Customers do not wear tags saying “commercial user” or “consumer user.” Anyway, even a commercial-user-detector at the door would not work, because a consumer could buy the software and resell to a commercial user. That arbitrage would break down the price discrimination and drive up the minimum price at which ProCD would sell to anyone.

Instead of tinkering with the product and letting users sort themselves — for example, furnishing current data at a high price that would be attractive only to commercial customers, and two-year-old data at a low price — ProCD turned to the institution of contract. Every box containing its consumer product declares that the software comes with restrictions stated in an enclosed license. This license, which is encoded on the CD-ROM disks as well as printed in the manual, and which appears on a user's screen every time the software runs, limits use of the application program and listings to non-commercial purposes.

Matthew Zeidenberg bought a consumer package of SelectPhone in 1994 from a retail outlet in Madison, Wisconsin, but decided to ignore the license. He formed Silken Mountain Web Services, Inc., to resell the information in the SelectPhone database. The corporation makes the database available on the Internet to anyone willing to pay its price — which, needless to say, is less than ProCD charges its commercial customers. Zeidenberg has purchased two additional SelectPhone packages, each with an updated version of the database, and made the latest information available over the World Wide Web, for a price, through his corporation.

ProCD filed this suit seeking an injunction against further dissemination that exceeds the rights specified in the licenses (identical in each of the three packages Zeidenberg purchased). The district court held the licenses ineffectual because their terms do not appear on the outside of the packages. The court added that the second and third licenses stand no different from the first, even though they are identical, because they might have been different, and a purchaser does not agree to—and cannot be bound by—terms that were secret at the time of purchase.

II. UCC Issues

Following the district court, we treat the licenses as ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts and the Uniform Commercial Code (UCC). Whether there are legal differences between “contracts” and “licenses” (which may matter under the copyright doctrine of first sale) is a subject for another day. Zeidenberg does not argue that Silken Mountain Web Services is free of any restrictions that apply to Zeidenberg himself, because any effort to treat the two parties as distinct would put Silken Mountain behind the eight ball on ProCD's argument that copying the application program onto its hard disk violates the copyright laws. Zeidenberg does argue, and the district court held, that placing the package of software on the shelf is an “offer,” which the customer “accepts” by paying the asking price and leaving the store with the goods.

In Wisconsin, as elsewhere, a contract includes only the terms on which the parties have agreed. One cannot agree to hidden terms, the judge concluded. So far, so good — but one of the terms to which Zeidenberg agreed by purchasing the software is that the transaction was subject to a license. Zeidenberg's position therefore must be that the printed terms on the outside of a box are the parties’ contract — except for printed terms that refer to or incorporate other terms.

But why would Wisconsin fetter the parties’ choice in this way? Vendors can put the entire terms of a contract on the outside of a box only by using microscopic type, removing other information that buyers might find more useful (such as what the software does, and on which computers it works), or both. The “Read Me” file included with most software, describing system requirements and potential incompatibilities, may be equivalent to ten pages of type; warranties and license restrictions take still more space.

Notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike. Doubtless a state could forbid the use of standard contracts in the software business, but we do not think that Wisconsin has done so.

Transactions in which the exchange of money precedes the communication of detailed terms are common. Consider the purchase of insurance. The buyer goes to an agent, who explains the essentials (amount of coverage, number of years) and remits the premium to the home office, which sends back a policy. On the district judge's understanding, the terms of the policy are irrelevant because the insured paid before receiving them. Yet the device of payment, often with a “binder” (so that the insurance takes effect immediately even though the home office reserves the right to withdraw coverage later), in advance of the policy, serves buyers’ interests by accelerating effectiveness and reducing transactions costs. Or consider the purchase of an airline ticket. The traveler calls the carrier or an agent, is quoted a price, reserves a seat, pays, and gets a ticket, in that order. The ticket contains elaborate terms, which the traveler can reject by canceling the reservation. To use the ticket is to accept the terms, even terms that in retrospect are disadvantageous. Just so with a ticket to a concert. The back of the ticket states that the patron promises not to record the concert; to attend is to agree. A theater that detects a violation will confiscate the tape and escort the violator to the exit. One could arrange things so that every concertgoer signs this promise before forking over the money, but that cumbersome way of doing things not only would lengthen queues and raise prices but also would scotch the sale of tickets by phone or electronic data service.

Consumer goods work the same way. Someone who wants to buy a radio set visits a store, pays, and walks out with a box. Inside the box is a leaflet containing some terms, the most important of which usually is the warranty, read for the first time in the comfort of home. By Zeidenberg's lights, the warranty in the box is irrelevant; every consumer gets the standard warranty implied by the UCC in the event the contract is silent; yet so far as we are aware no state disregards warranties furnished with consumer products. Drugs come with a list of ingredients on the outside and an elaborate package insert on the inside. The package insert describes drug interactions, contraindications, and other vital information — but, if Zeidenberg is right, the purchaser need not read the package insert, because it is not part of the contract.

Next consider the software industry itself. Only a minority of sales take place over the counter, where there are boxes to peruse. A customer may place an order by phone in response to a line item in a catalog or a review in a magazine. Much software is ordered over the Internet by purchasers who have never seen a box. Increasingly software arrives by wire. There is no box; there is only a stream of electrons, a collection of information that includes data, an application program, instructions, many limitations (“MegaPixel 3.14159 cannot be used with BytePusher 2.718”), and the terms of sale. The user purchases a serial number, which activates the software's features. On Zeidenberg's arguments, these unboxed sales are unfettered by terms — so the seller has made a broad warranty and must pay consequential damages for any shortfalls in performance, two “promises” that if taken seriously would drive prices through the ceiling or return transactions to the horse-and-buggy age.

According to the district court, the UCC does not countenance the sequence of money now, terms later. (Wisconsin's version of the UCC does not differ from the Official Version in any material respect.) One of the court's reasons—that by proposing as part of the draft Article 2B a new UCC § 2-2203 that would explicitly validate standard-form user licenses, the American Law Institute and the National Conference of Commissioners on Uniform Laws have conceded the invalidity of shrinkwrap licenses under current law—depends on a faulty inference. To propose a change in a law's text is not necessarily to propose a change in the law's effect. New words may be designed to fortify the current rule with a more precise text that curtails uncertainty. To judge by the flux of law review articles discussing shrinkwrap licenses, uncertainty is much in need of reduction—although businesses seem to feel less uncertainty than do scholars, for only three cases (other than ours) touch on the subject, and none directly addresses it. See Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991); Vault Corp. v. Quaid Software Ltd., 847 F.2d 255, 268-70 (5th Cir. 1988); Arizona Retail Systems, Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993). As their titles suggest, these are not consumer transactions. Step-Saver is a battle-of-the-forms case, in which the parties exchange incompatible forms and a court must decide which prevails. Our case has only one form; UCC § 2-207 is irrelevant. Vault holds that Louisiana's special shrinkwrap-license statute is preempted by federal law, a question to which we return. And Arizona Retail Systems did not reach the question, because the court found that the buyer knew the terms of the license before purchasing the software.

What then does the current version of the UCC have to say? We think that the place to start is § 2-204(1): “A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.” 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. And that is what happened. ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure. This Zeidenberg did. He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance. So although the district judge was right to say that a contract can be, and often is, formed simply by paying the price and walking out of the store, the UCC permits contracts to be formed in other ways. ProCD proposed such a different way, and without protest Zeidenberg agreed. Ours is not a case in which a consumer opens a package to find an insert saying “you owe us an extra $10,000” and the seller files suit to collect. Any buyer finding such a demand can prevent formation of the contract by returning the package, as can any consumer who concludes that the terms of the license make the software worth less than the purchase price. Nothing in the UCC requires a seller to maximize the buyer's net gains.

Section 2-606, which defines “acceptance of goods”, reinforces this understanding. A buyer accepts goods under § 2-606(1)(b) when, after an opportunity to inspect, he fails to make an effective rejection under § 2-602(1). ProCD extended an opportunity to reject if a buyer should find the license terms unsatisfactory; Zeidenberg inspected the package, tried out the software, learned of the license, and did not reject the goods. We refer to § 2-606 only to show that the opportunity to return goods can be important; acceptance of an offer differs from acceptance of goods after delivery; but the UCC consistently permits the parties to structure their relations so that the buyer has a chance to make a final decision after a detailed review.

Some portions of the UCC impose additional requirements on the way parties agree on terms. A disclaimer of the implied warranty of merchantability must be “conspicuous.” UCC § 2-316(2), incorporating UCC § 1-201(10). Promises to make firm offers, or to negate oral modifications, must be “separately signed.” UCC §§ 2-205, 2-209(2). These special provisos reinforce the impression that, so far as the UCC is concerned, other terms may be as inconspicuous as the forum-selection clause on the back of the cruise ship ticket in Carnival Lines. Zeidenberg has not located any Wisconsin case — for that matter, any case in any state — holding that under the UCC the ordinary terms found in shrinkwrap licenses require any special prominence, or otherwise are to be undercut rather than enforced. In the end, the terms of the license are conceptually identical to the contents of the package. Just as no court would dream of saying that SelectPhone must contain 3,100 phone books rather than 3,000, or must have data no more than 30 days old, or must sell for $100 rather than $150 — although any of these changes would be welcomed by the customer, if all other things were held constant — so, we believe, Wisconsin would not let the buyer pick and choose among terms. Terms of use are no less a part of “the product” than are the size of the database and the speed with which the software compiles listings. Competition among vendors, not judicial revision of a package's contents, is how consumers are protected in a market economy. ProCD has rivals, which may elect to compete by offering superior software, monthly updates, improved terms of use, lower price, or a better compromise among these elements. As we stressed above, adjusting terms in buyers’ favor might help Matthew Zeidenberg today (he already has the software) but would lead to a response, such as a higher price, that might make consumers as a whole worse off.

III. Preemption Issues

The district court held that, even if Wisconsin treats shrinkwrap licenses as contracts, § 301(a) of the Copyright Act prevents their enforcement. The relevant part of § 301(a) preempts any “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 § 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 §§ 102 and 103”. ProCD's software and data are “fixed in a tangible medium of expression”, and the district judge held that they are “within the subject matter of copyright”. The latter conclusion is plainly right for the copyrighted application program, and the judge thought that the data likewise are “within the subject matter of copyright” even if, after Feist, they are not sufficiently original to be copyrighted.

One function of § 301(a) is to prevent states from giving special protection to works of authorship that Congress has decided should be in the public domain, which it can accomplish only if “subject matter of copyright” includes all works of a type covered by §§ 102 and 103, even if federal law does not afford protection to them.

But are rights created by contract “equivalent to any of the exclusive rights within the general scope of copyright”? Three courts of appeals have answered “no.” National Car Rental Sys. Inc. v. Computer Assoc. Int'l, Inc., 991 F.2d 426, 433 (8th Cir. 1993); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488, 1501 (5th Cir. 1990); Acorn Structures, Inc. v. Swantz, 846 F.2d 923, 926 (4th Cir. 1988). The district court disagreed with these decisions, but we think them sound. Rights “equivalent to any of the exclusive rights within the general scope of copyright” are rights established by law — rights that restrict the options of persons who are strangers to the author. Copyright law forbids duplication, public performance, and so on, unless the person wishing to copy or perform the work gets permission; silence means a ban on copying. A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create “exclusive rights.” Someone who found a copy of SelectPhone on the street would not be affected by the shrinkwrap license — though the federal copyright laws of their own force would limit the finder's ability to copy or transmit the application program.

Think for a moment about trade secrets. One common trade secret is a customer list. After Feist, a simple alphabetical list of a firm's customers, with address and telephone numbers, could not be protected by copyright. Yet Kewanee holds that contracts about trade secrets may be enforced — precisely because they do not affect strangers’ ability to discover and use the information independently. If the amendment of § 301(a) in 1976 overruled Kewanee and abolished consensual protection of those trade secrets that cannot be copyrighted, no one has noticed — though abolition is a logical consequence of the district court's approach. Think, too, about everyday transactions in intellectual property. A customer visits a video store and rents a copy of Night of the Lepus. The customer's contract with the store limits use of the tape to home viewing and requires its return in two days. May the customer keep the tape, on the ground that § 301(a) makes the promise unenforceable?

A law student uses the Lexis database, containing public-domain documents, under a contract limiting the results to educational endeavors; may the student resell his access to this database to a law firm from which Lexis seeks to collect a much higher hourly rate? Suppose ProCD hires a firm to scour the nation for telephone directories, promising to pay $100 for each that ProCD does not already have. The firm locates 100 new directories, which it sends to ProCD with an invoice for $10,000. ProCD incorporates the directories into its database; does it have to pay the bill? Surely yes; Aronson v. Quick Point holds that promises to pay for intellectual property may be enforced even though federal law (in Aronson, the patent law) offers no protection against third-party uses of that property. But these illustrations are what our case is about. ProCD offers software and data for two prices: one for personal use, a higher price for commercial use. Zeidenberg wants to use the data without paying the seller's price; if the law student and Quick Point could not do that, neither can Zeidenberg.

Although Congress possesses power to preempt even the enforcement of contracts about intellectual property — or railroads — courts usually read preemption clauses to leave private contracts unaffected. American Airlines, Inc. v. Wolens, 115 S.Ct. 817 (1995), provides a nice illustration. A federal statute preempts any state “law, rule, regulation, standard, or other provision relating to rates, routes, or services of any air carrier.” Does such a law preempt the law of contracts — so that, for example, an air carrier need not honor a quoted price (or a contract to reduce the price by the value of frequent flyer miles)? The Court allowed that it is possible to read the statute that broadly but thought such an interpretation would make little sense. Terms and conditions offered by contract reflect private ordering, essential to the efficient functioning of markets. Although some principles that carry the name of contract law are designed to defeat rather than implement consensual transactions, the rules that respect private choice are not preempted by a clause such as that in Wolens. Section 301(a) plays a similar role: it prevents states from substituting their own regulatory systems for those of the national government. Just as § 301(a) does not itself interfere with private transactions in intellectual property, so it does not prevent states from respecting those transactions. Like the Supreme Court in Wolens, we think it prudent to refrain from adopting a rule that anything with the label “contract” is necessarily outside the preemption clause: the variations and possibilities are too numerous to foresee. National Car Rental likewise recognizes the possibility that some applications of the law of contract could interfere with the attainment of national objectives and therefore come within the domain of § 301(a). But general enforcement of shrinkwrap licenses of the kind before us does not create such interference.

Aronson emphasized that enforcement of the contract between Aronson and Quick Point would not withdraw any information from the public domain. That is equally true of the contract between ProCD and Zeidenberg. Everyone remains free to copy and disseminate all 3,000 telephone books that have been incorporated into ProCD's database. Anyone can add SIC codes and zip codes. ProCD's rivals have done so. Enforcement of the shrinkwrap license may even make information more readily available, by reducing the price ProCD charges to consumer buyers. To the extent licenses facilitate distribution of object code while concealing the source code (the point of a clause forbidding disassembly), they serve the same procompetitive functions as does the law of trade secrets. Licenses may have other benefits for consumers: many licenses permit users to make extra copies, to use the software on multiple computers, even to incorporate the software into the user's products. But whether a particular license is generous or restrictive, a simple two-party contract is not “equivalent to any of the exclusive rights within the general scope of copyright” and therefore may be enforced.

Notes

1. What was computer science Ph.D. candidate Zeidenberg up to? Was Silken Mountain Web simply a commercial enterprise—some moonlight employment? Was Zeidenberg a self–elected information Robin Hood providing “power to the people” by Feistian hijacking? The “information wants to be free” equivalent of an animal rights advocate who raids labs and zoos? (Does that matter in a preemption analysis? After all, this is not supposed to be like a 17 U.S.C. § 107 exercise. Or is it?)

The opinions say several inconsistent things (emphasis supplied):

Zeidenberg decided he could download data from Select Phone and make it available to third parties over the Internet for commercial purposes. [District court.]

Because the public could access defendants’ database for free, plaintiff believed its ability to sell Select Phone was jeopardized. [District court.]

Plaintiff's arguments boil down to the proposition that it is unfair and commercially destructive to allow defendants to take the information plaintiff assembled with a significant investment of time, effort and money and use it for commercial purposes without paying any compensation to plaintiff. [District court.]

He formed Silken Mountain Web Services, Inc., to resell the information in the SelectPhone database. The corporation makes the database available on the Internet to anyone willing to pay its price—which, needless to say, is less than ProCD charges its commercial customers. [Court of appeals.]

According to an AP wire report of June 24, 1996, Zeidenberg published numbers free on the Silken Mountain Web site in hopes of making money by attracting advertisers to the site (which appear not to have materialized). The same AP report quoted the president of the Software Publishers Association as saying, “Had the district court's decision not been reversed, there could have been catastrophic implications for thousands of software publishers.”

After losing in the Seventh Circuit, Zeidenberg may have run out of funds and providers of free legal services (amicus curiae and amicus datorum), making it impracticable for him to seek Supreme Court resolution of any circuit conflict between Step–Saver and this ruling. Alternatively, it has been said, ProCD (encouraged to do so by software publisher filers of amici curiae briefs on its side) made Zeidenberg an offer he couldn't refuse — accept a permanent injunction, seek no further review, and ProCD would forget about the damages. This preserved the precedent of the first court of appeals opinion upholding a shrinkwrap license.

In any event, Zeidenberg has thrown in the sponge and agreed to stop his Internet dissemination of the data on ProCD's CD ROMs. No certiorari petition was filed.

2. On what points do the district court and court of appeals agree? First, the court of appeals says, “We may assume that this database cannot be copyrighted.” The district court so held in part A(1) of its opinion. Second, what of the alleged copyright infringement by placing on hard disk the search engine or computer software that is used to access and retrieve data from the CD ROM? On this point, the district court found that the defendants did not distribute this software and at most “reproduced it by placing it on hard disk for convenience in use—an act the district court considered within the § 117 exemption. The court of appeals did not address this issue. It may therefore be assumed that the court of appeals did not disagree with the district court's ruling that no copyright infringement occurred.

The case then comes down to two issues, on which the court of appeals and district court disagreed: (1) Was the use restriction of the shrinkwrap license a binding contract? (2) If so, did federal copyright law preempt that application of state contract law?

3. Whether the use restriction was a binding contract is outside the scope of this course. Judge Easterbrook's approach to this issue illustrates the University of Chicago Law School method of legal analysis. Judge Crabb's approach below (908 F. Supp. 640 (W.D. Wis. 1996)) proceeds more along the lines of traditional doctrinal analysis. Still another approach is that of the ALI, whose Reporter, Professor Raymond Nimmer, proposed amending the UCC to make shrinkwrap licenses enforceable where the user has had an opportunity to review the terms within a reasonable time after beginning to use the software and “manifests assent” (see language at end of part B of Judge Crabb's opinion), but his proposals have met resistance, even when restyled as a model software transaction law.

Still other approaches might focus on whether the shrinkwrap terms are “reasonable” or are not “unusual” (irrespective of reasonableness). A proposed section of an intellectual property law making it an act of infringement to disobey intentionally a “reasonable” (not unduly restrictive) shrinkwrap restriction is presented in Richard H. Stern, On Defining the Concept of Infringement of Intellectual Property Rights in Algorithms and Other Abstract Computer-Related Ideas, 23 AIPLA Q.J. 400, 503 (1995). The concept of reasonableness proposed is based largely on the policies of misuse law and the limitations on scope of copyright that follow 17 U.S.C. § 106. For example, a restriction imposed to prevent infringement is rebuttably presumed reasonable. A restriction against first sale, debugging, archival use, adaptation, fair use, or reverse engineering is rebuttably presumed unreasonable. A general test based on the doctrine of necessary and ancillary restraints is also suggested.

4. The subject matter involved in the ProCD case is data of a kind that Feist says is unprotectable under copyright law. Feist says that this kind of subject matter could not be protected under the copyright clause, because it lacks originality and is therefore not the Writing of an Author. It is generally considered that Congress cannot overrule Feist or pass a database-protection law under the copyright clause, which is limited to Writings of Authors.

Could Congress create a tort, property, or quasi–property right under the commerce clause to protect subject matter lacking originality, without offending the negative aspect of the patent and copyright clause? (See Bonito Boats (“As we have noted in the past, the Clause contains both a grant of power and certain limitations upon the exercise of that power”).) Can states? (That is a problem that Judge Easterbrook's opinion, rested as it is solely on § 301, does not address.) Database protection bills have been introduced recently in Congress. The EU has adopted a directive requiring member states to enact sui generis database legislation.

5. Is ProCD more like Lear or Quick Point? Is there a public interest comparable to that involved in Lear, that is harmed by state law protection of uncopyrightable data? Or does this case present just a trivial contract dispute over things comparable to cheap keyholders of no importance to the public? (Recall, there are other sources of this data, as Judge Easterbrook emphasizes. ProCD is no Microsoft, or for that matter it is not even a Rural Telephone Service (cf. Feist).)

Or, to consider a different preemption parameter, is this a kind of subject matter that needs national uniformity of regulation and cannot abide a patchwork quilt of disparate state regulation? But what if Congress fails to act, as it has thus far? Does that mean that there can be no regulation at all? Is congressional failure to act a conscious withholding of protection? Is this a Goldstein situation?

Is this Kewanee country? According to Bonito Boats, several factors were critical to the outcome in Kewanee. First, there is no problem here that matter in the public domain will be taken out of the public domain. Second, the legal protection is not monopoly–like. There is no risk of diversion of database custom away from the federal intellectual property store.

On the other hand, a major factor in Kewanee (according to the Bonito Boats analysis) is lacking here: Where is that “most fundamental human right, that of privacy, [which] is threatened when industrial espionage is condoned or is made profitable”? Or some state interest comparable to it? ProCD might argue for the state's supervening interest in the sanctity of promise–keeping, on which our entire contract law rests; pacta sunt servanda. To which Zeidenberg might respond: “For a shrinkwrap license? Please, give me a break.” Finally, where are the long decades of peaceful co–existence of state trade secret law alongside patent law, to which the Kewanee Court felt some degree of deference is due? Shrinkwrap licenses of software products emerged in the 1980s. “Clickwrap licenses” (where the user clicks on an icon on the screen to manifest consent to the license) are even newer. (But see their predecessors, which were held unlawful in Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917) (use restriction on patented machine); Straus v. Victor Talking Machine Co., 243 U.S. 490 (1917) (price restriction on patented machine); Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908)(price restriction on copyrighted book); Adams v. Burke, 84 U.S. (17 Wall.) 452 (1873) (geographic use restriction on patented coffin lid.)

Somehow, Toto, I don't think we're in Kewanee country. Maybe Aronson country.

6. The court of appeals says:

Think for a moment about trade secrets. One common trade secret is a customer list. After Feist, a simple alphabetical list of a firm's customers, with address and telephone numbers, could not be protected by copyright. Yet Kewanee holds that contracts about trade secrets may be enforced — precisely because they do not affect strangers’ ability to discover and use the information independently. If the amendment of § 301(a) in 1976 overruled Kewanee and abolished consensual protection of those trade secrets that cannot be copyrighted, no one has noticed — though abolition is a logical consequence of the district court's approach.

Does the court of appeals say that the contents of these 3000 telephone directories are trade secrets? Is state law here within Kewanee (whose overruling “no one has noticed”) and therefore not preempted? What kind of trade secret is this? Moreover, what kind of trade secret can it be if ProCD has been selling these CDs to the general public through retail stores and providing their contents on America Online? If the material is not a trade secret, what is the court of appeals’ point?

7. Consider this argument:

A customer visits a video store and rents a copy of Night of the Lepus. The customer's contract with the store limits use of the tape to home viewing and requires its return in two days. May the customer keep the tape, on the ground that § 301(a) makes the promise unenforceable?

Why doesn't § 301 make the promise to return the tape at the end of the rental unenforceable? Is it because § 301 does not purport to change rentals into outright sales? Does that suggest that maybe the problem here has to do with whether a notice on a leaflet inside, or even printed on the outside of, a box can turn a sale of goods on the open market into something else? The ordinary rule for patented and copyrighted products is that a sale of an article terminates the intellectual property owner's right of control over the article sold, and that notices to the contrary are ineffective. The rule and its present status, however, are not simple and straightforward. See generally Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917); Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908); Intel Corp. v. ULSI Sys. Technology, Inc., 995 F.2d 1566 (Fed. Cir. 1993), cert. denied, 114 S. Ct. 923 (1994); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992); Richard H. Stern, Post-Sale Patent Restrictions After Mallinckrodt — An Idea in Search of Definition, 5 Alb. L.J. Sci. & Tech. 1 (1994).

In the main, 17 U.S.C. § 109(a) codifies this rule. That section provides a limitation on § 106 exclusive rights. Does § 301 address § 109’s limitations on § 106, or is it necessary to consider Stiffel or Bonito Boats preemption to examine possible conflicts with § 109? In any case, consider how or whether the court of appeals’ opinion addresses the possible implications of § 109. Is there automatically no possible conflict here because an unoriginal database is not copyrightable?

8. The hypothetical of the law student reselling Lexis access may raise the same issue. The law student did not buy goods as Zeidenberg did. Therefore, § 109 has no application and the law student has no property right in goods to resell to others. The court of appeals says of the law student and Lepus videotape rental that “these illustrations are what our case is about.” Are they?

9. In the end, the court of appeals denies trying to establish a general rule as to preemption vel non of copyright–related contracts, in that “the variations and possibilities are too numerous to foresee.” That is sound, prudent, magisterial, circumspect in tone. Is the court willing to leave it there?

What about these parting zingers after that?–

To the extent licenses facilitate distribution of object code while concealing the source code (the point of a clause forbidding disassembly), they serve the same procompetitive functions as does the law of trade secrets. Licenses may have other benefits for consumers....

But whether a particular license is generous or restrictive, a simple two-party contract is not “equivalent to any of the exclusive rights within the general scope of copyright” and therefore may be enforced.

Whether it is procompetitive or anticompetitive to forbid disassembly, in general, is at the very least ground for debate. In some specific cases, however, surely it is anticompetitive to prohibit disassembly. See Sega Enterprises, Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992). Would the Sega court have considered it procompetitive to enforce a shrinkwrap license on Sega's video games, that forbade Accolade’s disassembly?

How do you harmonize the last zinger quotation with the preceding circumspect one? First, is a shrinkwrap license associated with a mass–marketed software product properly characterized as a simple two–party contract? More to the point, why wasn't Adkins’ simple two–party contract (which really was just a two–party contract) with Lear immunized from preemption on this basis? For other examples of “simple, two-party contracts” (relating to patents or copyrights) that the Supreme Court has held unenforceable under contract law for reasons of public policy, see Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502 (1917); Straus v. Victor Talking Machine Co., 243 U.S. 490 (1917); Bobbs-Merrill Co. v. Straus, 210 U.S. 339 (1908); Adams v. Burke, 84 U.S. (17 Wall.) 452 (1873).

Or while we're at it, why not re-enact Stiffel and Bonito Boats with the following simple two-party contracts (in the ProCD sense): Stiffel places a label on the pole lamp, or a statement in an accompanying leaflet, saying that the buyer must not copy the design and buyers that do not like that limitation should return the goods for a refund. Bonito Boats uses a similar label saying not to plug–mold. What result?

10. ProCD is one of those proverbial hard cases, which proverbially do not foster good precedent. Zeidenberg's activities were unattractive, even if he had been a database Robin Hood (which he no more was than was any real, bow–and–arrow–toting bandit in Sherwood Forest ever was). But hard cases force us to re-examine our principles, to determine how much courage we have in our convictions.

Consider whether it makes sense to have Feist refuse copyright protection to databases and then turn around and let 50 different states experiment with database protection. To state a general rule that the Copyright Clause lies dormant until Congress specifically addresses the particular subject matter is irrational, for Feist did not deny protection simply on the basis of some technicality or out of caprice. Feist denied protection for reasons of policy. Just as a state plug molding law can undermine patent policy by protecting that which federal law has said shall be available for common use, so too can state protection of unoriginal works of non-authorship undermine copyright policy. It can undermine copyright policy, but does it?

The law classifies unoriginal written matter as not being writings-of-authors for the same kind of reason that Baker v. Selden (and later 17 U.S.C. § 102(b)) placed ideas, systems, and discoveries outside the statutory scheme of protection. It subverts those policies to permit the states to do what federal law says that federal copyright law should not do. But how much subversion occurs when it is a white-pages telephone book that is taken out of the public domain?

On the other hand, it is perhaps unwise to leave database proprietors at the mercy of self–styled Robin Hoods. Understandably, software proprietors are dissatisfied with advice to be patient until Congress occupies the field with a database protection law.

It is left as an exercise for the reader to describe a legal solution to the problem of how to address conduct such as that of Zeidenberg. Consider, in this connection, whether it is material that database protection is a matter that Congress left unattended (if that is so), not a matter as to which Congress specifically declared a federal policy that the subject matter should be in the public domain (cf. Bonito Boats). What if Rural had placed an anti-copying notice in its telephone book. Thus: "Your acceptance of this book signifies that you agree not to copy its contents. If you don't like that, give back the book."



Bowers v. Baystate Technologies, Inc.
United States Court of Appeals for the Federal Circuit
320 F.3d 1317 (Fed. Cir. 2003) (revised opinion), cert. denied, - U.S. - (June 26, 2003)

Before CLEVENGER, RADER, and DYK, Circuit Judges. Opinion for the court filed by Circuit Judge RADER. Concurring/dissenting opinion filed by Circuit Judge DYK.

RADER, Circuit Judge.

Following trial in the United States District Court for the District of Massachusetts, the jury returned a verdict for Harold L. Bowers (Bowers) on his patent infringement, copyright infringement, and breach of contract claims, while rejecting Baystate Technologies, Inc.'s (Baystate's) claim for patent invalidity. The jury awarded Mr. Bowers separate damages on each of his claims. The district court, however, omitted the copyright damages ($1.9 million) as duplicative of the contract damages ($3.8 million). Because substantial evidence supports the jury’s verdict that Baystate breached the contract, this court affirms that verdict. This court holds also that the district court did not abuse its discretion in modifying the damages award. Nevertheless, because no reasonable jury could find that Baystate infringes claim 1 as properly construed, this court reverses the patent infringement verdict.

I.

Bowers created a template to improve computer aided design (CAD) software, such as the CADKEY tool of Cadkey, Inc. Bowers received a patent for his template, U.S. Pat. No. 4,933,514 (‘514 patent).

Generally, a CAD software program has many commands that the software presents to the user in nested menus many layers deep. The layering often makes it difficult for a user to find quickly a desired command. The claimed template addresses this problem. The template places the many CAD commands in a claimed visual and logical order.

Baystate sued Bowers for declaratory judgment that 1) Baystate’s products do not infringe the ‘514 patent, 2) the ‘514 patent is invalid, and 3) the ‘514 patent is unenforceable. Bowers filed counterclaims for copyright infringement, patent infringement, and breach of contract. Following trial, the jury found for Bowers and awarded damages. Baystate filed timely motions for judgment as a matter of law (JMOL), or for a new trial, on all of Bowers’ claims. Baystate appeals the district court’s denial of its motions for JMOL or a new trial.

II.

Baystate raises a number of issues that are not unique to the jurisdiction of this court. On those issues, this court applies the law of the circuit from which the appeal is taken, here the First Circuit.

A.

Baystate contends that the Copyright Act preempts the prohibition of reverse engineering embodied in Bowers’ shrink-wrap license agreements. Swayed by this argument, the district court considered Bowers’ contract and copyright claims coextensive. The district court instructed the jury that “reverse engineering violates the license agreement only if Baystate’s product that resulted from reverse engineering infringes Bowers’ copyright because it copies protectable expression.” Bowers lodged a timely objection to this instruction. This court holds that, under First Circuit law, the Copyright Act does not preempt or narrow the scope of Bowers’ contract claim.

Courts respect freedom of contract and do not lightly set aside freely-entered agreements. Nevertheless, at times, federal regulation may preempt private contract. The Copyright Act provides that “all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright ... are governed exclusively by this title.” 17 U.S.C. § 301(a). The First Circuit does not interpret this language 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.” Data Gen. Corp. v. Grumman Sys. Support Corp., 36 F.3d 1147, 1164 (1st Cir. 1994) (quoting Gates Rubber Co. v. Bando Chem. Indus.). Nevertheless, “[n]ot 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.”

In Data General, Data General alleged that Grumman misappropriated its trade secret software. Grumman obtained that software from Data General’s customers and former employees who were bound by confidentiality agreements to refrain from disclosing the software. . In defense, Grumman argued that the Copyright Act preempted Data General’s trade secret claim. The First Circuit held that the Copyright Act did not preempt the state law trade secret claim. Beyond mere copying, that state law claim required proof of a trade secret and breach of a duty of confidentiality. These additional elements of proof, according to the First Circuit, made the trade secret claim qualitatively different from a copyright claim. In contrast, the First Circuit noted that claims might be preempted whose extra elements are illusory, being “mere label[s] attached to the same odious business conduct.” For example, the First Circuit observed that “a state law misappropriation claim will not escape preemption ... simply because a plaintiff must prove that copying was not only unauthorized but also commercially immoral.”

The First Circuit has not addressed expressly whether the Copyright Act preempts a state law contract claim that restrains copying. This court perceives, however, that Data General’s rationale would lead to a judgment that the Copyright Act does not preempt the state contract action in this case. Indeed, most courts to examine this issue have found that the Copyright Act does not preempt contractual constraints on copyrighted articles. See, e.g., ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) (holding that a shrink-wrap license was not preempted by federal copyright law); Wrench LLC v. Taco Bell Corp., 256 F.3d 446, 457 (6th Cir. 2001) (holding a state law contract claim not preempted by federal copyright law); Nat’l Car Rental Sys., Inc. v. Computer Assocs. Int’l, Inc., 991 F.2d 426, 433 (8th Cir. 1993); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488, 1501 (5th Cir. 1990); Acorn Structures v. Swantz, 846 F.2d 923, 926 (4th Cir. 1988); but see Lipscher v. LRP Publs., Inc., 266 F.3d 1305, 1312 (11th Cir. 2001).

In ProCD, for example, the court found that the mutual assent and consideration required by a contract claim render that claim qualitatively different from copyright infringement. Consistent with Data General’s reliance on a contract element, the court in ProCD reasoned: “A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create ‘exclusive rights.' Indeed, the Supreme Court recently noted “[i]t goes without saying that a contract cannot bind a nonparty.” EEOC v. Waffle House, Inc., 534 U.S. 279 (2002). This court believes that the First Circuit would follow the reasoning of ProCD and the majority of other courts to consider this issue. This court, therefore, holds that the Copyright Act does not preempt Bowers’ contract claims.

In making this determination, this court has left untouched the conclusions reached in Atari Games v. Nintendo, 975 F.2d 832 (Fed. Cir. 1992), regarding reverse engineering as a statutory fair use exception to copyright infringement. In Atari, this court stated that, with respect to 17 U.S.C. § 107 (fair use section of the Copyright Act), “[t]he legislative history of section 107 suggests that courts should adapt the fair use exception to accommodate new technological innovations.” Atari, 975 F.2d at 843. This court noted “[a] prohibition on all copying whatsoever would stifle the free flow of ideas without serving any legitimate interest of the copyright holder.” Id. Therefore, this court held “reverse engineering object code to discern the unprotectable ideas in a computer program is a fair use.” Id. Application of the First Circuit’s view distinguishing a state law contract claim having additional elements of proof from a copyright claim does not alter the findings of Atari. Likewise, this claim distinction does not conflict with the expressly defined circumstances in which reverse engineering is not copyright infringement under 17 U.S.C. § 1201(f) (section of the Digital Millennium Copyright Act) and 17 U.S.C. § 906 (section directed to mask works).

Moreover, while the Fifth Circuit has held a state law prohibiting all copying of a computer program is preempted by the federal Copyright Act, Vault Corp. v. Quaid Software, Ltd., 847 F.2d 1488 (5th Cir. 1988), no evidence suggests the First Circuit would extend this concept to include private contractual agreements supported by mutual assent and consideration. The First Circuit recognizes contractual waiver of affirmative defenses and statutory rights. Thus, its case law indicates the First Circuit would find that private parties are free to contractually forego the limited ability to reverse engineer a software product under the exemptions of the Copyright Act. Of course, a party bound by such a contract may elect to efficiently breach the agreement in order to ascertain ideas in a computer program unprotected by copyright law. Under such circumstances, the breaching party must weigh the benefits of breach against the arguably de minimis damages arising from merely discerning non-protected code.

This court now considers the scope of Bowers’ contract protection. In this case, the contract unambiguously prohibits “reverse engineering.” That term means ordinarily “to study or analyze (a device, as a microchip for computers) in order to learn details of design, construction, and operation, perhaps to produce a copy or an improved version.” Random House Unabridged Dictionary (1993). Thus, the contract in this case broadly prohibits any “reverse engineering” of the subject matter covered by the shrink-wrap agreement.

The record amply supports the jury’s finding of a breach of that agreement. The shrink-wrap agreements in this case are far broader than the protection afforded by copyright law. The evidence supports the jury’s verdict of a contract breach based on Baystate's reverse engineering. The similarities included the interrelationships between program screens, the manner in which parameter selection causes program branching, and the manner in which the GD&T symbols are drawn. Witnesses also testified that those similarities extended beyond structure and design to include many idiosyncratic design choices and inadvertent design flaws. This court is especially reluctant to substitute its judgment for that of the jury on the sufficiency and interpretation of that evidence. In any event, the record fully supports the jury’s verdict that Baystate breached its contract with Bowers.

Baystate does not contest the contract damages amount on appeal. Thus, this court sustains the district court’s award of contract damages. Mr. Bowers, however, argues that the district court abused its discretion by dropping copyright damages from the combined damage award. To the contrary, this court perceives no abuse of discretion.

The shrink-wrap license agreement prohibited, inter alia, all reverse engineering of Mr. Bowers’ software, protection encompassing but more extensive than copyright protection, which prohibits only certain copying. Mr. Bowers’ copyright and contract claims both rest on Baystate’s copying of Mr. Bowers’ software. Following the district court’s instructions, the jury considered and awarded damages on each separately. This was entirely appropriate. The law is clear that the jury may award separate damages for each claim, “leaving it to the judge to make appropriate adjustments to avoid double recovery.”

In this case, the breach of contract damages arose from the same copying and included the same lost sales that form the basis for the copyright damages. The district court, therefore, did not abuse its discretion by omitting from the final damage award the duplicative copyright damages. Because this court affirms the district court’s omission of the copyright damages, this court need not reach the merits of Mr. Bowers’ copyright infringement claim [or Baystate's defenses such as fair use].

B.

. . . In sum, this court perceives no basis upon which a reasonable jury could find that Baystate’s accused templates infringe claim 1 of the ‘514 patent. Hence, this court reverses the district court’s denial of Baystate’s motion for JMOL of non-infringement.

CONCLUSION

Because substantial evidence supports the jury’s verdict that Baystate breached its contract with Bowers, this court affirms that verdict. This court holds also that the district court did not abuse its discretion in omitting as duplicative copyright damages from the damage award. Because no reasonable jury could find that Baystate infringes properly construed claim 1, this court reverses the verdict of patent infringement.


DYK, Circuit Judge, concurring in part and dissenting in part.

I join the majority opinion except insofar as it holds that the contract claim is not preempted by federal law. Based on the petition for rehearing and the opposition, I have concluded that our original decision on the preemption issue, reaffirmed in today’s revision of the majority opinion, was not correct. By holding that shrinkwrap licenses that override the fair use defense are not preempted by the Copyright Act, 17 U.S.C. §§ 101 et seq., the majority has rendered a decision in conflict with the only other federal court of appeals decision that has addressed the issue – the Fifth Circuit decision in Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th Cir. 1988). The majority’s approach permits state law to eviscerate an important federal copyright policy reflected in the fair use defense, and the majority’s logic threatens other federal copyright policies as well. I respectfully dissent.

I

Congress has made the Copyright Act the exclusive means for protecting copyright. The Act provides that “all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright ... are governed exclusively by this title.” 17 U.S.C. § 301(a) (2000). All other laws, including the common law, are preempted. “[N]o person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.” Id.

The test for preemption by copyright law, like the test for patent law preemption, should be whether the state law “substantially impedes the public use of the otherwise unprotected” material. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 157, 167 (1989) (state law at issue was preempted because it “substantially restrict[ed] the public's ability to exploit ideas that the patent system mandates shall be free for all to use.”); Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 231-32 (1964). In the copyright area, the First Circuit has adopted an “equivalent in substance” test to determine whether a state law is preempted by the Copyright Act. Data Gen. Corp. v. Grumman Sys. Support Corp. 36 F.3d 1147, 1164-65 (1st Cir. 1994). That test seeks to determine whether the state cause of action contains an additional element not present in the copyright right, such as scienter. If the state cause of action contains such an extra element, it is not preempted by the Copyright Act. Id. However, “such an action is equivalent in substance to a copyright infringement claim [and thus preempted by the Copyright Act] where the additional element merely concerns the extent to which authors and their licensees can prohibit unauthorized copying by third parties.” Id. at 1165 (emphasis in original).

II

The fair use defense is an important limitation on copyright. Indeed, the Supreme Court has said that “[f]rom the infancy of copyright protection, some opportunity for fair use of copyrighted materials has been thought necessary to fulfill copyright’s very purpose, ‘[t]o promote the Progress of Science and useful Arts. . . .’ U.S. Const., Art. I, § 8, cl.8.” Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 575 (1994). The protective nature of the fair use defense was recently emphasized by the Court in the Eldred case, in which the Court noted that “copyright law contains built-in accommodations,” including “the ‘fair use’ defense [which] allows the public to use not only facts an ideas contained in the copyrighted work, but also expression itself in certain circumstances.”

We correctly held in Atari Games Corp. v. Nintendo of America, Inc., 975 F.2d 832, 843 (Fed. Cir. 1992), that reverse engineering constitutes a fair use under the Copyright Act. The Ninth and Eleventh Circuits have also ruled that reverse engineering constitutes fair use. Bateman v. Mnemonics, Inc., 79 F.3d 1532, 1539 n.18 (11th Cir. 1996); Sega Enters. Ltd. v. Accolade, Inc., 977 F.2d 1510, 1527-28 (9th Cir. 1992). No other federal court of appeals has disagreed.

We emphasized in Atari that an author cannot achieve protection for an idea simply by embodying it in a computer program. “An author cannot acquire patent-like protection by putting an idea, process, or method of operation in an unintelligible format and asserting copyright infringement against those who try to understand that idea, process, or method of operation.” 975 F.2d at 842. Thus, the fair use defense for reverse engineering is necessary so that copyright protection does not “extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work,” as proscribed by the Copyright Act. 17 U.S.C. § 102(b).

III

A state is not free to eliminate the fair use defense. Enforcement of a total ban on reverse engineering would conflict 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. See Bonito Boats, 489 U.S. at 157.

I nonetheless agree with the majority opinion that 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. See, e.g., Nat’l Car Rental Sys., Inc. v. Computer Assocs. Int’l, Inc., 991 F.2d 426 (8th Cir. 1993); Acorn Structures v. Swantz, 846 F.2d 923, 926 (4th Cir. 1988). See also Taquino v. Teldyne Monarch Rubber, 893 F.2d 1488 (5th Cir. 1990). But see Wrench LLC v. Taco Bell Corp., 256 F.3d 446, 457 (6th Cir. 2001) (“If the promise amounts only to a promise to refrain from reproducing, performing, distributing or displaying the work, then the contract claim is preempted.”). 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. See Data Gen., 36 F.3d at 1164-65. However, state law giving effect to shrinkwrap 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. See Fuentes v. Shevin, 407 U.S. 67, 95 (1972). 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 “shrinkwrap agreements ... [that] are far broader than the protection afforded by copyright law.”

IV

There is, moreover, no logical stopping point to the majority’s reasoning. The amici rightly question whether under our original opinion the first sale doctrine and a host of other limitations on copyright protection might be eliminated by shrinkwrap licenses in just this fashion. See Brief for Electric Frontier Foundation et al. as Amici Curiae If by printing a few words on the outside of its product a party can eliminate the fair use defense, then it can also, by the same means, restrict a purchaser from asserting the “first sale” defense, embodied in 17 U.S.C. § 109(a), or any other of the protections Congress has afforded the public in the Copyright Act. That means that, under the majority’s reasoning, state law could extensively undermine the protections of the Copyright Act.

V

The Fifth Circuit’s decision in Vault directly supports preemption of the shrinkwrap limitation. The majority states that Vault held that “a state law prohibiting all copying of a computer program is preempted by the federal Copyright Act” and then states that “no evidence suggests the First Circuit would extend this concept to include private contractual agreements supported by mutual assent and consideration.” But, in fact, the Fifth Circuit held that the specific provision of state law that authorized contracts prohibiting reverse engineering, decompilation, or disassembly of computer programs was preempted by federal law because it conflicted with a portion of the Copyright Act and because it “’touche[d] upon an area’ of federal copyright law.” 847 F.2d at 269-70 (quoting Sears, Roebuck, 376 U.S. at 229). From a preemption standpoint, there is no distinction between a state law that explicitly validates a contract that restricts reverse engineering (Vault) and [an interpretation of] general common law that permits such a restriction (as here). On the contrary, the preemption clause of the Copyright Act makes clear that it covers “any such right or equivalent right in any such work under the common law or statutes of any State.” 17 U.S.C. § 301(a) (emphasis added).

I do not read ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), the only other court of appeals shrinkwrap case, as being to the contrary, even though it contains broad language stating that “a simple two-party contract is not ‘equivalent to any of the exclusive rights within the general scope of copyright.’” Id. at 1455. In ProCD, the Seventh Circuit validated a shrinkwrap license that restricted the use of a CD-ROM to non-commercial purposes, which the defendant had violated by charging users a fee to access the CD-ROM over the Internet. The court held that the restriction to non-commercial use of the program was not equivalent to any rights protected by the Copyright Act. Rather, the “contract reflect[ed] private ordering, essential to efficient functioning of markets.” Id. at 1455. The court saw the licensor as legitimately seeking to distinguish between personal and commercial use. “ProCD offers software and data for two prices: one for personal use, a higher prices for commercial use,” the court said. The defendant “wants to use the data without paying the seller’s price.” Id. at 1454. The court also emphasized that the license “would not withdraw any information from the public domain” because all of the information on the CD-ROM was publicly available. Id. at 1455.

The case before us is different from ProCD. The Copyright Act does not confer a right to pay the same amount for commercial and personal use. It does, however, confer a right to fair use, 17 U.S.C. § 107, which we have held encompasses reverse engineering.

ProCD and the other contract cases are also careful not to create a blanket rule that all contracts will escape preemption. The court in that case emphasized that “we think it prudent to refrain from adopting a rule that anything with the label ‘contract’ is necessarily outside the preemption clause.” 86 F.3d at 1455. It also noted with approval another court’s “recogni[tion of] the possibility that some applications of the law of contract could interfere with the attainment of national objectives and therefore come within the domain” of the Copyright Act. The Eighth Circuit too cautioned in National Car Rental that a contractual restriction could impermissibly “protect rights equivalent to the exclusive copyright rights.” 991 F.2d at 432.

I conclude that Vault states the correct rule; that state law authorizing shrinkwrap licenses that prohibit reverse engineering is preempted; and that the First Circuit would so hold because the extra element here “merely concerns the extent to which authors and their licensees can prohibit unauthorized copying by third parties.” Data Gen., 36 F.3d at 1165. I respectfully dissent.

Notes

1. The majority opinion states:

In Data General, Data General alleged that Grumman misappropriated its trade secret software. ... The First Circuit held that the Copyright Act did not preempt the state law trade secret claim. Beyond mere copying, that state law claim required proof of a trade secret and breach of a duty of confidentiality. These additional elements of proof, according to the First Circuit, made the trade secret claim qualitatively different from a copyright claim.

In ProCD, for example, the court found that the mutual assent and consideration required by a contract claim render that claim qualitatively different from copyright infringement. Consistent with Data General’s reliance on a contract element, the court in ProCD reasoned: “A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create ‘exclusive rights.' ... This court, therefore, holds that the Copyright Act does not preempt Bowers’ contract claims.

Would any contract claim ever be preempted under this rationale? Would any contract claim lack “the mutual assent and consideration required by a contract claim [that] render[s] that claim qualitatively different from copyright infringement”? How does that square with the rationale of the Lear decision?

In Lear, the Supreme Court set the stage for its analysis by summarizing the competing interests at stake:

The uncertain status of licensee estoppel in the case law is a product of judicial efforts to accommodate the competing demands of the common law of contracts and the federal law of patents. On the one hand, the law of contracts forbids a purchaser to repudiate his promises simply because he later becomes dissatisfied with the bargain he has made. On the other hand, federal law requires that all ideas in general circulation be dedicated to the common good unless they are protected by a valid patent.

The Court then concluded that the interests of the public in assuring free use of ideas that are really in the public domain predominated:

Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor's discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued. ... [E]nforcing this contractual provision would undermine the strong federal policy favoring the full and free use of ideas in the public domain.

Do comparable policies apply to reverse engineering of computer software? In the context of copyright infringement — or in the context of a promise not to commit copyright infringement where the promise is supported by “mutual assent and consideration”?

2. If policy favors reverse engineering of copyright-protected computer programs, is that policy embodied in the preemption doctrine? Elsewhere? In Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1993), and Sony Computer Entertainment v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000), the Ninth Circuit established what amounts to a per se rule in favor of reverse engineering of computer programs to gain access to their ideas. The court said:

W]here disassembly is the only way to gain access to the ideas and functional elements embodied in a copyrighted computer program and where there is a legitimate reason for seeking such access, disassembly is a fair use of the copyrighted work, as a matter of law.

The rationale appears to be based on a court-posited policy that the public is entitled to access to the ideas embodied in copyright-protected computer programs:

[T]he fair use doctrine preserves public access to the ideas and functional elements embedded in copyrighted computer software programs. This approach is consistent with the ultimate aim of the Copyright Act, to stimulate artistic creativity for the general public good. [Internal quotes and alterations omitted.]

The court recognized that the accused infringer's activity would cost the copyright owner economic losses, but it considered the losses damnum absque injuria. Hardware sales in the one case (Sony-Connectix), and video game cassette sales in the other case (Sega-Accolade), were not legitimate fruits of the copyright monopoly in the copied code. The Sony-Connectix court said:

Sony understandably seeks control over the market for devices that play games Sony produces or licenses. The copyright law, however, does not confer such a monopoly. See Sega: "[A]n attempt to monopolize the market by making it impossible for others to compete runs counter to the statutory purpose of promoting creative expression and cannot constitute a strong equitable basis for resisting the invocation of the fair use doctrine."

How should one apply these principles to the Baystate case?

3. One conceptual problem, here, is that fair use does not figure at all in the Federal Circuit's analysis. How did that happen? Because the Federal Circuit held that the $1.9 million damages for Baystate's copyright infringement (not addressed in the opinion) were subsumed within the $3.8 million damages for breach of contract, the Federal Circuit further held that consideration of the copyright infringement claim, and of Baystate's defenses to it (such as fair use), was academic and thus unnecessary. Implicit in the Federal Circuit's rejection of preemption arguments is the assumption that copyright law's policy that the public has a right to access the ideas in software is just a limitation on copyright infrinmgement claims. The limitation is not an affirmative right that goes beyond that, for example, one that carries over to contract law claims. Does this sound like something addressed in Bonito Boats?

In Bonito Boats the Court said:

The States are simply not free ... to offer equivalent protections to ideas which Congress has determined should belong to all. For almost 100 years it has been well established that in the case of an expired patent, the federal patent laws do create a federal right to "copy and to use." Sears and Compco extended that rule to potentially patentable ideas which are fully exposed to the public.

Do the copyright laws, since Baker v. Selden, establish a comparable federal right to copy and use ideas in published computer software?

4. An amicus curie brief generally supporting preemption is available at the link. Another, from the IEEE, is also available. A page of links to other material concerning the case is also available at an IEEE Web site.



Motorola, Inc. v. Varo, Inc.,
United States District Court
656 F.Supp. 716 (N.D.Tex. 1986)

Maloney, District Judge.

Plaintiff Motorola, Inc. (“Motorola”) is the holder of U.S. Pat. No. 4,132,550 (“the patent”). It filed this civil action charging that Varo, Inc. and Varo Semiconductor, Inc. (“Varo”) infringed this patent.

The patent describes a process for making germanium semiconductor devices. Part of the process described in the patent requires the use of a photosensitive material of a certain quality. Varo has, now or in the past, purchased a photosensitive material, commonly called a photoresist, from the three Third Party Defendants — Hunt Chem. Corp., KTI Chems., Inc., and Eastman Kodak Co. Varo contends that it has used the photoresist purchased from the Third Party Defendants in making semiconductors which Motorola claims were made using the process described in the patent.

35 U.S.C. § 271(b) provides: “Whoever actively induces infringement of a patent shall be liable as an infringer.”

Varo does not have a direct claim under the patent laws for inducement of infringement. Only Motorola as the patent owner could have such a claim. There is the question, however, of whether or not Varo may have a claim for contribution from Hunt and Kodak as joint tortfeasors.

Any cause of action under the patent laws is governed by federal law, not by state law. See Sears Roebuck & Co. v. Stiffel Co. The patent laws clearly do not give an action for contribution on their face, so we must decide whether Congress has implied such a cause of action or whether one should be found as a part of the federal common law.

Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77 (1981) instructs us to first look to the statute to see if such a cause of action can be fairly implied. This Court finds that Congress did not mean to give a party such as Varo a claim for contribution since the patent law defines who is a contributory infringer in 35 U.S.C. § 271(c), which reads:

Whoever sells a component of a patented machine, manufacture, combination or composition, or a material or apparatus for use in practicing a patented process, constituting a material part of the invention, knowing the same to be especially adapted for use in an infringement of such patent, and not a staple article or commodity of commerce suitable for substantial noninfringing use, shall be liable as a contributory infringer.

Congress, having defined contributory infringement by statute, could not have intended the courts to imply some other definition and allow a cause of action upon it.

Varo’s second count is for breach of this warranty of freedom from infringement. Both Hunt and Kodak demur on the substance of the law. The Texas UCC, V.T.C.A. Bus. & C. § 2.312(c), provides:

Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

Varo admitted that Kodak has given Varo no warranty other than the one alleged under § 2.312, above. These are the factual allegations of Varo’s complaint against Hunt and the nut of Varo’s case:

As a proximate result of Hunt’s specific instruction and inducement, Varo relied upon those instructions and used the resins manufactured, sold, and distributed by Hunt in the process of forming photoresist patterns specifically described by Hunt in both its oral and written instructions.

As can be readily seen from this allegation, Varo does not complain that the chemical, the photoresist, itself, violates any part of the patent. The allegation is purely that Varo was induced to use the photoresist in a process that violates the teachings of the patent, a process patent.

This sort of allegation, that the buyer was induced by the seller to purchase the good and then use it to infringe a process patent is wholly outside the language of § 2.312. The delivery of a good is warranted to be free of all claims of infringement. There is no warranty that a buyer’s use of the good will be free of all infringement. Varo’s proposed reading of § 2.312 would have Hunt warrant that it has not induced Varo to infringe the patent. This would be a warranty as to conduct, not as to goods.

Also, to read any such warranty into § 2.312 is likely to render the section unconstitutional as an infringement upon Congress’s monopoly of legislation as to patents. This proposed warranty as to conduct would amount to an allowance by the State of Texas of a cause of action for inducement of patent infringement. As the Supreme Court said in Stiffel, the states may not allow causes on action for patent infringement.

Hunt’s and Kodak’s motions for summary judgment are granted.

Note

The background of this case, in very simplified form, is that Motorola had a patent on making semiconductor chips in the usual way but using a particular kind of photoresist. Photoresist is a subtance used in forming a stencil on the semiconductor material. Imagine spreading a kind of thin rubber cement over the surface of a semiconductor wafer. Then you put a stencil (called a "mask") over the coating and shine ultraviolet light on the mask. The ultraviolet light changes the bonds of the coating in those places where the mask permits exposure. This change leaves some of the photoresist soluble and some insoluble, permitting the pattern of the mask to be imposed on the semiconductor surface. This is a main part of the standard process for manufacturing semiconductor chips. The patent, in effect, was on a process of using photoresist having only small particles (say, less than 1 micron in diameter) to manufacture chips in the otherwise usual way.

Kodak and Hunt sold photoresist to Varo, presumably knowing about Motorola's patent; perhaps, they thought that the patent was invalid. Varo apparently had no knowledge of the patent. But intent to infringe is not an element of direct infringement under § 271(a). So Varo was out of luck when Motorola sued it for using the photoresist in the ordinary way. Varo then asked its suppliers to stand behind their products and reimburse Varo for the damages it had to pay to Motorola. They declined.

This case illustrates a weakness in the UCC's implied warranty of good title. UCC § 2-312. Its drafters knew about direct infringement by infringement of a product patent and about contributory infringement when a supplier sells infringing goods to a customer. The drafters apparently had no concept of how a supplier can get a customer into trouble by selling it non-infringing goods that, when used in the customary way, cause the customer to become liable for direct infringement of a product or process patent. Therefore, unless a buyer places in its purchase order or contract an express seller warranty against use of the goods for their intended purpose giving rise to infringement liability, the buyer will be left on the hook as Varo was.

Varo attempted to fill the gap in § 2-312 by trying to imply a cause of action against a seller for tortiously causing a customer to become liable for using the goods sold it. It arguably sounds something like constructive fraud, but the courts do not appear willing to endorse it. Perhaps, Varo's problem was that it made the claim sound too much like inducing infringement under § 271(b) instead of making it sound like a common law claim, say, negligence or fraud. That invited a preemption holding.



Chemtron, Inc. v. Aqua Products, Inc.
United States District Court
830 F. Supp. 314 (E.D. Va. 1993)

Hilton, District Judge.

Plaintiff Chemtron filed a complaint for patent infringement against defendant/third party plaintiff Aqua. The action is based upon U.S. Pat. No. 5,007,559 by Young for a Method and Apparatus for Dispensing a Particulate Material (the '559 patent). This device includes a detergent dispenser, detergent container with a screen cap, and a method for dispensing detergent into a dishwashing machine. Aqua alleges that it installs detergent dispensers and distributes detergent-filled containers to restaurants and restaurant service corporations, for use in dishwashers. Third party defendant Viking manufactures detergent dispensers and disposable plastic caps for placement on disposable detergent containers for use with Viking's detergent dispensers. Viking sells component parts such as the detergent dispensers and plastic caps to Aqua.

Aqua filed a third party complaint against Viking for contribution and indemnification, based upon the Uniform Commercial Code (UCC) warranty against infringement, § 2-312. Aqua asserts that the UCC warranty is applicable due to Viking's sale of “certain dispenser goods including solid bowls for powdered detergent containers.”

In lieu of filing an answer, Viking filed this motion to dismiss pursuant to FRCP 12(b)(6), for failure to state a claim upon which relief can be granted. For the reasons stated below, this motion to dismiss must be granted and Aqua's third party complaint should be dismissed.

UCC § 2-312, like the other provisions of Article Two of the UCC, applies to the sale of goods. The warranty against infringement, an implied warranty under the UCC, coexists with the UCC's warranties of good title and that the seller's goods are free from liens and encumbrances:

Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

When the goods are delivered and title is transferred, the warranty against infringement serves to provide assurances that the goods sold to the buyer are not subject to third party claims.

This language, however, should not be construed to mean that the buyer, after receiving a clean title to purchased goods, can subsequently incur a lien or liability on the purchased goods by his own actions, and then impose such liability on the seller. Accordingly, a buyer, such as Aqua, should not be entitled to purchase goods from a seller, such as Viking, which are not subject to any infringement action, use the non-infringing component goods in an infringing device and incur liability to a third–party patentee, Chemtron, and then turn around and attempt to impose liability on the original seller of the component parts.

In Motorola v. Varo, Inc., 656 F. Supp. 716 (N.D. Tex. 1986), a defendant manufacturer sought damages from one of its suppliers based on theories of contribution and breach of the UCC warranty against infringement, § 2-312. In that case the defendant had used the supplier's products and formed photoresists, which the defendant then used to infringe on the plaintiff's patented semiconductor manufacturing process. After first denying the defendant's claim for contribution from its supplier under federal patent law, the court then found that the warranty extends only to those goods as transferred from the seller/supplier to the buyer. It does not regulate the buyer's conduct after purchase. The court found that the defendant's reading of the UCC would have the seller/supplier warrant that it has not induced the buyer to infringe on a patent, which would be a “warranty as to conduct, not as to goods.”

Similarly, Viking manufactured and sold to Aqua detergent dispensers and plastic caps for placement on disposable detergent containers. At the time of sale these dispensers and caps were delivered free from any third party complaints against infringement. Aqua was sued by Chemtron for direct infringement of the ’559 patent and for inducement of infringement based upon its infringing apparatus, which was assembled from non-infringing component parts, some of which were obtained from Viking. As in Motorola, the UCC's warranty against infringement should not apply in such situation.

Aqua's expansive interpretation of § 2-312 is also inappropriate because to read any such warranty into the section “is likely to render the section unconstitutional as an infringement upon Congress’ monopoly of legislation as to patents.” Any cause of action under the patent laws is governed by federal law, not by state law, or by the UCC. See U.S. Const. art. I, § 8, cl. 8; Sears Roebuck & Co. v. Stiffel Co.

Because any cause of action under the patent laws is governed by federal law, Aqua’s allegations regarding contribution and indemnity also fail to state claims upon which relief can be granted. There is no claim for contribution under the U.S. patent laws, and none may arise under state law as it is preempted by federal law. Therefore, Aqua's assertion that Viking is liable for contribution fails to state a claim upon which relief can be granted. Aqua’s claim that Viking is liable to indemnify it and hold it harmless is like-wise unfounded, for Viking has not alleged any grounds in its third party complaint, outside the UCC warranty provisions, upon which such a claim may be based.

For the aforementioned reasons third party defendant Viking's motion to dismiss the third party complaint should be granted.




Hydramatic Packing Co. v. Sea Gull Lighting, Inc.
United States Court of Appeals for the Federal Circuit
83 F.3d 1390 (Fed. Cir. 1996)

Before Rich, Michel and Plager, Circuit Judges. Rich, Circuit Judge.

Appellant Hydramatic Packing Co. (Hydramatic) appeals from the judgment of the district court concluding that Hydramatic’s state law claim against appellee Sea Gull Lighting, Inc. (Sea Gull) is precluded because the state statute is preempted by federal patent law. We reverse and remand.

Background

Plaintiff Craig H. Cover (Cover) commenced this case as a patent infringement action in which he sued Hydramatic for contributory infringement and Sea Gull for direct infringement of his U.S. Patent No. 4,605,992 (’992 patent). Hydramatic filed a cross-claim against Sea Gull for indemnification under § 2312(c) of the Uniform Commercial Code, which Pennsylvania has adopted.

The ’992 patent describes a lighting fixture system having a batt of thermal insulation to protect the wiring from heat produced by a bulb. Hydramatic manufactures insulation products based on the specifications of its customers. Sea Gull, a lighting fixture manufacturer, produced certain lighting fixtures that incorporated multi-layered batts of insulation manufactured to its specifications by Hydramatic. Cover’s infringement action was premised on Sea Gull’s manufacture of lighting fixtures containing the insulation parts obtained from and manufactured by Hydramatic.

In 1986, Cover entered into an exclusive license arrangement with Pacor to commercialize the patent. Thereafter, Pacor began to supply multi-layered batts of insulation to Sea Gull, which designated these insulation units as part numbers 6254 and 6255. Of particular relevance is the fact that Pacor did not mark the insulation units with the number of the patent in accordance with 35 U.S.C. § 287. Pacor sold these insulation units to Sea Gull until 1993.

In 1988, however, Sea Gull began furnishing Hydramatic with drawings and specifications to make Sea Gull part numbers 6254 and 6255. Hydramatic produced these parts in accordance with Sea Gull’s specifications from July 1988 until late 1993. In 1989, Cover learned that Sea Gull was not obtaining all of its insulation units from Pacor, Cover’s exclusive licensee. Rather, Cover discovered that Sea Gull was ordering insulation units from Hydramatic. As a result, Cover wrote a cease and desist letter to Hydramatic. Shortly thereafter, Cover wrote a letter to Sea Gull, stating, in relevant part:

To purchase these patented parts from a known violator [Hydramatic] of the patents is in itself a violation of the patents, and I trust that your company would not have intentionally done so.

The district court found that the letter to Sea Gull did not constitute notice of infringement. Therefore, according to the district court, since Pacor did not mark its insulation units sold to Sea Gull in accordance with 35 U.S.C. § 287(a), Sea Gull was not liable for damages, if at all, until after the complaint was filed by Cover.

Cover settled with Sea Gull before trial, and the case between them was dismissed with prejudice. Sea Gull agreed to pay Cover $75,000. Hydramatic also settled with Cover and agreed to pay him $175,000 in liquidated compensatory damages. Furthermore, Hydramatic and Cover stipulated that Hydramatic would not contest the validity, infringement, or enforceability of the patent. As a result of these settlement agreements, the only claim remaining for trial was Hydramatic’s cross-claim against Sea Gull for indemnification under § 2312(c).

With respect to Hydramatic’s cross-claim, the district court stated that “[f]ederal law preempts state law where simultaneous compliance with state and federal law is impossible or would frustrate the purpose of federal law.” On the assumption that Sea Gull was not liable for damages because it did not have notice of infringement until the complaint was filed, the district court held that “Hydramatic’s state law claim seeking to impose liability on Sea Gull is preempted.” Thus, according to the district court, compliance with § 2312(c) of the Pennsylvania UCC would frustrate the purpose of § 287(a) of the federal patent code.

Discussion

Under the Supremacy Clause, state laws are invalid if they “interfere with, or are contrary to the laws of Congress, made in pursuance of the Constitution.” Gibbons v. Ogden. Inherent in our patent system is a “tension between the desire to freely exploit the full potential of our inventive resources and the need to create an incentive to deploy those resources” by granting the right to exclude to those who promote the progress of the useful arts. Bonito Boats. In other words, there are public costs associated with the right to exclude, and our patent system seeks to maintain an efficient balance between incentives to create and commercialize and public costs engendered by these incentives. (Public costs include (1) inflated prices, invariably absorbed by the consumer, which frequently accompany exclusive rights; and (2) overinvestment.)

Where this balance between free exploitation of knowledge and the aforesaid incentives is clear, states may not intervene and provide protection to subject matter that is statutorily unprotected by our patent laws. On the other hand, “states are free to regulate the use of...intellectual property in any manner not inconsistent with federal law.” Aronson v. Quick Point.

This case, one of first impression, requires us to assess the relationship between the federal patent code and Pennsylvania UCC. Specifically, we are faced with the question of whether 35 U.S.C. § 287(a) of the patent code preempts § 2312(c) of the UCC. Section 287(a) states, in relevant part:

In the event of failure...to mark [the patented article], no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice.

The state law warranty provision, § 2312(c), is as follows (emphasis added):

Warranty of merchant regularly dealing in goods. Unless otherwise agreed a seller who is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer who furnishes specifications to the seller must hold the seller harmless against any such claim which arises out of compliance with the specifications.

The emphasized final provision controls here.

Although in determining whether a state statute is preempted, “there can be no one crystal clear distinctly marked formula,” Hines v. Davidowitz, 312 U.S. 52 (1941), the Supreme Court has set forth three grounds for pre-emption:

Applying these tests to the case at hand, it is rather clear upon reading § 287(a) of the patent code that Congress did not explicitly preempt state commercial law. With respect to field preemption, Title 35 occupies the field of patent law, not commercial law between buyers and sellers. Therefore, field preemption does not apply here. We are left with conflict preemption. Thus, we must ask ourselves whether there is such a direct conflict between § 287(a) of the patent code and UCC § 2312(c) that compliance with both the patent law and state law is a “physical impossibility,” or whether the state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress” in enacting § 287(a). We hold that there is no conflict preemption in that the UCC neither renders compliance with the patent code a “physical impossibility” nor “stands as an obstacle to the accomplishment and execution” of the patent laws.

The patent law defines rights between the patentee and persons who wish to make, use, sell or offer for sale the patented invention. Inasmuch as Sea Gull and Hydramatic settled with the patentee, the patentee and the patent code are no longer in the picture. Sea Gull and Hydramatic remain, and their legal relationship is defined and governed by § 2312(c) of the UCC, which has nothing to do with the liability of Sea Gull and Hydramatic under the patent laws, which are simply irrelevant at this point.

Sea Gull asserts that for § 2312(c) to apply there has to be a “rightful claim” of infringement. Because the patentee, argues Sea Gull, did not mark his goods in accordance with § 287(a), there was no “rightful claim,” thus saving Sea Gull from patent liability. As such, the UCC cannot impose patent liability where the patent law forbids it. This argument misses the point. By focusing on the phrase “rightful claim” in § 2312(c) and asking us to equate “rightful claim” with patent liability, Sea Gull, in essence, is making a statutory construction argument, which has the effect of avoiding the preemption issue.

However, preemption is the issue, and the focus of our inquiry is on the interaction, if any, between § 287(a) and § 2312(c). Once the patentee left the picture, so did § 287(a). There is simply nothing on the face of § 287(a) that pertains to anyone but the infringer and the patentee. At issue, therefore, is the legal relationship between two contracting parties, and it is § 2312(c) which defines this relationship. On its face, § 2312(c) shifts all costs, including attorney fees, to the buyer who furnishes a seller with specifications that leads to a “rightful claim” of infringement. This state law, unlike the state laws in previous patent preemption cases, does not purport to provide exclusive property rights to “creations which would otherwise remain unprotected under federal law.” In short, we cannot discern any conflict between §§ 287(a) and § 2312(c).

Furthermore, to adopt Sea Gull’s “rightful claim” argument would not lead to judicious public policy inasmuch as parties would eschew settlement and be forced to go to trial to discern whether a “rightful claim” exists under federal patent law. We cannot lend our imprimatur to such a policy.

Therefore, we reverse the district court’s judgment based on its holding that compliance with the UCC would frustrate the damages limitations set forth in 35 U.S.C. § 287. We reverse and remand for further proceedings consistent with our decision.



Hunter Douglas, Inc. v. Harmonic Design, Inc.
United States Court of Appeals for the Federal Circuit
153 F.3d1318 (Fed. Cir. 1998)

Before Clevenger, Bryson, and Gajarsa, Circuit Judges. Clevenger, Circuit Judge.

In this appeal, we consider to what extent federal patent law preempts state law causes of action prohibiting tortious activities in the marketplace, when to prevail on them, the plaintiff must prove that a United States patent is either invalid or unenforceable. In addition, we consider whether, under 28 U.S.C. § 1338, such state law causes of action arise under federal patent law for purposes of exclusive federal jurisdiction over them. We understand § 1338(a), as construed by both the U.S. Supreme Court and this court, to mandate that federal courts have exclusive jurisdiction over state law causes of action in which a substantial question of federal patent law is pleaded as a necessary element of that claim. Next, we rule that the application of a state law tort is preempted if, in holding a defendant liable for the conduct alleged and proved by the plaintiff, there would be conflict with federal patent law. Otherwise, if the state law tort, as-applied, does not conflict with federal patent law, then the tort is not preempted. The combined result of these rulings is to divest state courts of jurisdiction over state law torts that are subject to § 1338(a) jurisdiction, and to allow only those that survive the preemption analysis to proceed.

Hunter Douglas, Inc., and Hunter Douglas Fabrication Co. (collectively “Hunter Douglas”) filed suit against Harmonic Design, Inc. (“Harmonic”), Springs Industries, Inc. (“Springs”), and Springs Window Fashions Division, Inc. (“SWFD”) (collectively “the Defendants”). In its complaint, Hunter Douglas pleaded federal and state causes of action. The District Court for the Central District of California dismissed the claim for relief that was based on federal law and exercised jurisdiction over the state law claims, but held that federal patent law preempted them. We affirm the dismissal of Hunter Douglas’s alleged federal cause of action, affirm the jurisdictional results, and vacate and remand the district court’s preemption rulings.

I

The parties are involved in the manufacture and sale of motorized window blinds. Harmonic owns several patents that claim window-blind technology (the “Harmonic patents”). Springs and SWFD have an exclusive license from Harmonic to commercialize window shades that use the claimed invention of one of the patents. In its complaint, Hunter Douglas alleges that certain claims of the Harmonic patents are invalid because they are either anticipated, obvious, or neither enabled nor particularly pointed out and distinctly claimed. In addition, Hunter Douglas alleges that the Harmonic patents are unenforceable because of inequitable conduct.

Hunter Douglas alleges that it has incurred, and continues to incur, damages because of the allegedly invalid and unenforceable claims of the Harmonic patents. In its complaint, Hunter Douglas emphasizes that Harmonic “acted with willful and wanton disregard” in procuring the invalid and unenforceable patent claims, and that “Harmonic made [misrepresentations] with intent to deceive and mislead the [Patent and Trademark Office (PTO)] and to gain an unfair and unwarranted competitive advantage.” Hunter Douglas asserts that Springs and SWFD, “by claiming to hold exclusive rights” under the Harmonic patents, “acted with willful and wanton disregard” because they “knew or should have known” that claims of the Harmonic patents were invalid and unenforceable. Finally, Hunter Douglas contends that the Defendants “acted . . . with intent to hinder, delay, or exclude competition . . . by unfair and unlawful means,” and that, “[b]y falsely and recklessly asserting title to public property,” they “have slandered and injured” Hunter Douglas’s rights.

The complaint asserts federal jurisdiction under 28 U.S.C. §§ 1331, 1338(a), 1367, and 2201. It sets forth seven claims for relief. In the first, Hunter Douglas seeks a declaratory judgment of noninfringement, invalidity, or unenforceability of claims of the Harmonic patents. In this same first count, Hunter Douglas alternatively alleges that, under Article I, § 8, clause 8 of the U.S. Constitution – the Patent Clause – and 35 U.S.C. §§ 102, 103, it has a federal right to use and copy material that is in the public domain. Hunter Douglas asserts that the Defendants, by obtaining invalid and unenforceable patent claims, violated that right. Counts two through seven plead causes of action that are creatures of California law. They are (2) unfair competition, (3) violation of the Unfair Competition Act, California Business & Professional Code § 17200 et seq., (4) injurious falsehood, (5) negligence, (6) intentional interference with prospective economic advantage, and (7) negligent interference with prospective economic advantage. For relief, Hunter Douglas seeks a declaration that it has a federal right to use the subject matter of certain claims of the Harmonic patents, that those claims are invalid under 35 U.S.C. §§ 102, 103, or 112, and that the Harmonic patents are unenforceable because of inequitable conduct. Hunter Douglas further seeks damages and injunctive relief based on the state law causes of action.

II

A

Springs and SWFD moved to dismiss all the counts both for lack of subject matter jurisdiction and for failure to state a claim under Fed. R. Civ. P. 12(b)(1), (6).

Hunter Douglas in the first count pleaded both a declaratory judgment action of noninfringement, invalidity, and unenforceability, and a federal right to copy and to use. The district court dismissed both versions with prejudice. With respect to the declaratory judgment action, the court ruled that there was no “actual controversy” to allow for jurisdiction under the Declaratory Judgment Act, 28 U.S.C. § 2201(a). According to the district court, Hunter Douglas did not have a reasonable apprehension of being sued for patent infringement. With respect to the federal right to copy and to use, the court held that there was no cause of action to enforce such a right. According to the district court, Hunter Douglas asked the court to imply a new cause of action. Stating that there was no reason to believe that Congress had intended to create such a cause of action, the court refused. Consequently, the court dismissed the first count.

With respect to counts two through seven, which plead state law causes of action, the district court denied the motion to dismiss for lack of subject matter jurisdiction. Under 28 U.S.C. § 1338(a), the “district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents.” The Supreme Court has held that, under § 1338(a), there are two classes of actions arising under federal patent law: those in which the federal law creates the cause of action, and those in which “the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal patent law.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 809 (1988). Because federal law did not create the state law causes of action, they were not members of the first class, the district court ruled, but they were members of the second class because they required the plaintiff to prove that the patent claims at issue are, in some way, defective. The court concluded that the issues of whether a patent is valid or enforceable are substantial questions of federal patent law. As a result, the court exercised jurisdiction over counts two through seven.

B

On the second motion to dismiss, the district court, stating that federal patent law preempts the state law causes of action, dismissed them with prejudice. As the district court recited, there are three ways in which federal law preempts state law: explicit, field, and conflict preemption. The district court ruled that Congress had not explicitly preempted the state law causes, but held that there was both field and conflict preemption. For field preemption, the court concluded that, because Hunter Douglas could not bring a federal cause of action to invalidate the patent claims at issue, it should not be able to invalidate them through a state law claim. For conflict preemption, because the state law causes of action required Hunter Douglas to prove that certain patent claims were invalid, the district court held that these actions were in conflict with federal patent law. On these two alternative grounds, the district court dismissed counts two through seven.

III

We begin by considering whether there was federal jurisdiction. The district court dismissed count one in response to the Defendants’ motion based on Rule 12(b)(1), (6), but it did not specify on which ground it relied. The district court asserted jurisdiction over counts two through seven. We must assure ourselves that the district court’s decisions concerning jurisdiction are correct and, as well, must satisfy ourselves that we possess jurisdiction over this appeal.

A

For there to be original jurisdiction in the federal courts, there must be both judicial power under Article III of the U.S. Constitution and Congress must have invested the district courts with jurisdiction. To satisfy the first prerequisite, Article III requires a case or controversy.

For the second, although Article III empowers federal courts to hear cases “arising under” federal law, a federal district court may only exercise jurisdiction pursuant to a congressional enactment. Of import here, 28 U.S.C. § 1338(a) provides that “[t]he district courts shall have original jurisdiction of any civil action arising under any Act of Congress relating to patents . . . . Such jurisdiction shall be exclusive of the courts of the states in patent . . . cases.” Because 28 U.S.C. § 1295(a)(1) provides that this court’s appellate jurisdiction derives from § 1338(a) jurisdiction, were the district court to have original jurisdiction over the action under § 1338(a), then we would have appellate jurisdiction under § 1295(a)(1). See, e.g., Christianson.

In considering “arising under” jurisdiction, the Supreme Court explained in Franchise Tax Board v. Construction Laborers Vacation Trust, 463 U.S. 1, 8 (1983), that the statutory phrase has:

[R]esisted all attempts to frame a single, precise definition for determining which cases fall within, and which cases fall outside, the original jurisdiction of the district courts. . . . [T]he phrase "arising under" masks a welter of issues regarding the interrelation of federal and state authority and the proper management of the federal judicial system.

Accordingly, “determinations about federal jurisdiction require sensitive judgments about congressional intent, judicial power, and the federal system.”

In Christianson, the Supreme Court succinctly summarized the jurisdictional boundaries set by § 1338(a):

1338(a) jurisdiction . . . extend[s] only to those cases in which a well-pleaded complaint establishes either [1] that federal patent law creates the cause of action or [2] that the plaintiff's right to relief necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of the well-pleaded claims.

Franchise Tax, which considered jurisdiction under § 1331, illuminates the two possible types of federal jurisdiction under § 1338(a) enunciated in Christianson. There is federal jurisdiction under the first type if, in the words of Justice Holmes, federal law “creates the cause of action.” This definition is not limiting, however, for “it is well settled that Justice Holmes’ test is more useful for describing the vast majority of cases that come within the district courts’ original jurisdiction than it is for describing which cases are beyond district court jurisdiction.” Under the second source of jurisdiction, a case arises under federal law “where the vindication of a right under state law necessarily turn[s] on some construction of federal law.”

At least two doctrines restrict the reach of “arising under” jurisdiction under §§ 1331 and 1338(a). Under the first, the “well-pleaded complaint” rule, “whether a claim ‘arises under’ patent law ‘must be determined from what necessarily appears in the plaintiff’s statement of his own claim in the bill or declaration, unaided by anything alleged in anticipation or avoidance of defenses which it is thought the defendant may interpose.’” Christianson, Under the second, “a claim supported by alternative theories in the complaint may not form the basis for 1338(a) jurisdiction unless patent law is essential to each of those theories.”

Finally, were we to hold that any one of the seven pleaded counts arise under federal patent law in accordance with § 1338(a), then the district court’s exercise of jurisdiction over Hunter Douglas’s remaining claims might have been proper under 28 U.S.C. § 1367, which provides for “[s]upplemental jurisdiction” at the discretion of the district court “over all other claims that are so related to claims in the action within [the district’s court] original jurisdiction that they form part of the same case or controversy under Article III.”

B

Hunter Douglas pleads in its first count both a declaratory judgment action of noninfringement, invalidity, and unenforceability, and an implied federal cause of action to enforce a federal right to copy and to use. We determine that there is no jurisdiction over this count, no matter how pleaded. First, we hold that Hunter Douglas failed to satisfy the “actual controversy” requirement of the Declaratory Judgment Act. Accordingly, we affirm the dismissal of Hunter Douglas’s first claim, when treated as a declaratory judgment action, because the district court lacked judicial power to hear it.

Second, we dismiss Hunter Douglas’s alternative rendition of claim one because we reaffirm, consistent with our precedent, that there is neither a federal right to copy and to use, be it constitutional or statutory in source, nor an implied remedy for that purported right. Although we affirm the district court’s dismissal of Hunter Douglas’s implied cause of action, we conclude, for the reasons set forth below, that it must be dismissed for want of jurisdiction under Fed. R. Civ. P. 12(b)(1), not for failing to state a claim upon which relief can be granted under Fed. R. Civ. P. 12(b)(6), because the implied cause of action is, in a legal sense, wholly insubstantial. As a result, pleading count one does not bestow federal jurisdiction over the state law actions under § 1367.

1

For a district court to have jurisdiction over a declaratory judgment action, there must be an “actual controversy.” 28 U.S.C. 2201(a). This requirement is identical to the constitutional requirement of Article III that there be a case or controversy. When a declaratory judgment plaintiff alleges that the claims of a patent are not infringed, invalid, or unenforceable, we apply a two-step test to determine whether there is an actual controversy. This two-step inquiry provides that there must be “(1) an explicit threat or other action by the patentee, which creates a reasonable apprehension on the part of the declaratory plaintiff that it will face an infringement suit, and (2) present activity which could constitute infringement or concrete steps taken with the intent to conduct such activity.”

Under this test, the district court’s dismissal of the declaratory judgment action was proper. In concluding that there was no actual controversy, the district court held that Hunter Douglas had not alleged any facts indicating that it had a reasonable apprehension, stemming from the Defendants’ conduct, of an infringement suit based on the Harmonic patents. The most that Hunter Douglas has alleged is that the Defendants own the Harmonic patents and that they have publicized them. Hunter Douglas did not allege that the Defendants have signaled an intention, in any way, to file suit claiming infringement of the Harmonic patents by Hunter Douglas’s future product. Accordingly, because Hunter Douglas has failed to allege any activity by which the Defendants have created a reasonable apprehension of suit, we affirm the district court’s dismissal of the first claim, when writ as a declaratory judgment action, for lack of jurisdiction.

2

With respect to the impression of count one as pleading an implied cause of action, the argument for original and appellate jurisdiction has three essential parts: first, that under either the Patent Clause or Title 35, there is a federal right to copy and to use that which is in the public domain; second, that there is an implied cause of action to enforce that right; and third, that the implied cause of action arises under “any Act of Congress relating to patents” so as to provide for original jurisdiction under § 1338(a) and appellate jurisdiction in this court under § 1295(a)(1). Because we hold, consistent with our precedent, that there is neither a federal right to copy and to use nor an associated cause of action, we do not consider the third part of the argument.

Leatherman Tool Group Inc. v. Cooper Industries, Inc., 131 F.3d 1011 (Fed. Cir. 1997), disabuses Hunter Douglas of its ill-conceived legal position. In that case, Cooper Industries, Inc. (“Cooper”) argued that there was both a federal right to copy and a supporting cause of action on the basis of the Supreme Court’s opinion in Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141 (1989). See Leatherman, 131 F.3d at 1014. We explained that, contrary to Cooper’s assertion, “the federal patent laws do not create any affirmative right to make, use, or sell anything.” In Bonito Boats, “[t]he Supreme Court merely stated that while the patent laws provide the right to exclude others from making, using, or selling a claimed invention for a statutorily limited amount of time, if such rights could be but were not awarded under the patent laws, the states may not provide commensurate protection.” Hence, “the patent laws create no affirmative right supporting a cause of action against a competitor to assert a right to make or copy what is in the public domain and excluded from patent protection.”

Not only are we bound by the Leatherman holding, but Hunter Douglas has also not presented any argument persuading us, in the least, that such a right exists under either the Patent Clause or Title 35. In addition, even if there were such a right, Hunter Douglas has not convinced us that there would be a remedy. In arguing for a remedy to protect a constitutionally based right, Hunter Douglas cites Bivens v. Six Unknown Named Agents of Federal Bureau of Narcotics, 403 U.S. 388 (1971), which implied a federal remedy of damages for violations of the Fourth Amendment by federal officers. However, Hunter Douglas does not address the subsequent Supreme Court law refusing to imply a remedy when Congress has already provided an “elaborate remedial system.” Congress has enacted such a system under federal patent law and thereby arguably precluded a constitutional remedy for the purported right. Were that right to have a statutory origin in Title 35, as opposed to a constitutional one, then for there to be an implied cause of action, under Cort v. Ash, 422 U.S. 66 (1975), a four-part test would need to be satisfied. Hunter Douglas has not even presented that law. Consequently, even if there were a right, which there is not, we would not necessarily imply a remedy.

Although we reject Hunter Douglas’s arguments, we still must determine whether count one should be dismissed under Rule 12(b)(1) for lack of jurisdiction or under Rule 12(b)(6) for failure to state a claim, a distinction overlooked by the district court. The distinction is nontrivial, for if dismissal is for the latter reason, then there would be original jurisdiction over count one, which might support jurisdiction over counts two through seven under § 1367. In contrast, if dismissal is for the former reason, then claim one could not serve as the jurisdictional magnet for the accompanying claims.

We hold that count one, when understood to allege a remedy for a federal right to copy and to use, must be dismissed for lack of jurisdiction because it is entirely insubstantial. “[W]holly insubstantial and frivolous” claims do not merit federal jurisdiction. As our preceding critique makes manifest, Hunter Douglas’s allegation of a right and remedy is, without doubt, meritless. Leatherman reached the same conclusion, for it transferred the remaining claims in that case to another regional circuit court because appellate jurisdiction in this circuit, which derives from § 1338(a) jurisdiction, did not lie. Hence, in accordance with Leatherman and our own view of the insubstantiality of count one, we sustain its dismissal for lack of jurisdiction.

C

Because there is no jurisdiction in the district court over count one, the remaining six state law counts stand naked, insofar as at least one of them must provide for “arising under” jurisdiction under § 1338(a) for there to be original jurisdiction. None of them are creatures of federal law, so for there to be subject matter jurisdiction over counts two through seven, at least one of them must satisfy the second type of § 1338(a) jurisdiction. If so, then under § 1367, the district court’s exercise of jurisdiction over the remaining state law claims would have been proper, in that it would have been an abuse of discretion for the district court not to hear them together. Because we determine that count four, which pleads an injurious falsehood, belongs in federal court under § 1338(a), we affirm the district court’s exercise of jurisdiction over all of the state law claims. Hence, there is both original and appellate jurisdiction to decide whether the state law claims are preempted by federal patent law.

Under the second type of § 1338(a) jurisdiction, to determine whether a state law cause of action “necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of the well-pleaded claims,” Christianson teaches that we are to look to the elements of the claims appearing on the face of the complaint. Our scrutiny of the claims pleaded is thorough, for we must ascertain whether all the theories by which a plaintiff could prevail on a claim rely solely on resolving a substantial question of federal patent law.

We analyze claim four of the complaint alleging that the Defendants committed an injurious falsehood. This cause of action requires, among other elements, an allegation of a false statement. The complaint alleges that the falsity is the Defendants’ assertion that they “hold exclusive rights to make or sell window shades covered by one or more of the [Harmonic patents].” The assertion is false, Hunter Douglas contends in the complaint, because certain claims of the Harmonic patents are invalid and all of the claims are unenforceable.

Like the district court, we hold that this count, as pleaded, arises under § 1338(a). First, the action satisfies the well-pleaded complaint rule, for a required element of the state law cause of action – a falsity – necessarily depends on a question of federal patent law, in that either certain claims of the Harmonic patents are invalid or all of the claims are unenforceable. To make out that falsity, count four relies on only federal patent law. Second, all the theories upon which Hunter Douglas could prevail depend on resolving a question of federal patent law, because Hunter Douglas does not plead, in its complaint, any other basis for a falsity on the Defendants’ part.

We next hold that the questions of federal patent law — validity, and enforceability — are “substantial” enough to convey § 1338(a) jurisdiction. In prescribing a substantiality requirement in Christianson, the Court implicitly relied on the reasoning from Merrell Dow. There, the Court held that there was no § 1331 jurisdiction over a state law claim alleging that, because the defendant Merrell Dow had misbranded a drug in violation of the Federal Food, Drug, and Cosmetic Act (the “FDCA”), there was a rebuttable presumption of negligence on Merrell Dow’s part. Of critical importance to the holding in Merrell Dow was the Court’s conclusion that Congress has provided no federal remedy by which a private party could enforce the FDCA provisions presented. Consequently:

Given the significance of the assumed congressional determination to preclude federal private remedies, the presence of the federal issue as an element of the state tort is not the kind of adjudication for which jurisdiction would serve congressional purposes and the federal system. . . . We simply conclude that the congressional determination that there should be no federal remedy for the violation of this federal statute is tantamount to a congressional conclusion that the presence of a claimed violation of the statute as an element of a state cause of action is insufficiently "substantial" to confer federal-question jurisdiction.

To explain further its Merrell Dow holding, the Court referred favorably to commentators who “have suggested that [the Court’s] § 1331 decisions can best be understood as an evaluation of the nature of the federal interest at stake.”

In the substantiality requirement of Christianson, the Court subsumed the Merrell Dow concern with the nature of the federal interest at stake. In Merrell Dow, the absence of a congressionally approved private remedy indicated that Congress thought the federal interest at stake not substantial enough to warrant federal question jurisdiction. In contrast to the FDCA, for which Congress provided no private remedy, Congress clearly intended for private parties to enforce federal patent law, most notably through an infringement suit, see 35 U.S.C.§ 271, or the corresponding declaratory judgment action, see 28 U.S.C. § 2201(a). Hence, the Christianson inquiry, by requiring a “substantial” question of federal patent law, entirely accords with the concern over congressional intent that the Court made paramount in Merrell Dow. To decide which issues of federal patent law are substantial enough to warrant § 1338(a) jurisdiction, then, we consider the nature of the federal issues at stake.

Post-Christianson, we have held that, for purposes of § 1338(a) jurisdiction, at least four issues of federal patent law are substantial enough to satisfy the jurisdictional test. They are infringement, inventorship issues, attorney fees under 35 U.S.C. 285, and the revival of an allegedly unintentionally abandoned patent application under 35 U.S.C. 41, 133, or in the alternative, the right to file a continuation application.

Were we to conclude that validity and enforceability, unlike infringement, were not substantial enough, then there would be no § 1338(a) jurisdiction over count four, because Hunter Douglas could prevail under theories that do not depend on a substantial question of federal patent law. In keeping with our precedent, we treat validity and enforceability the same as infringement. We see no reason why our jurisdictional jurisprudence should distinguish the first two from the latter. Each of these issues is substantial in the federal scheme, for they are essential to the federally created property right: one determines whether there is a property right, another whether that right is enforceable, and the third what is the scope of that right.

In deciding that the issues of validity and enforceability are substantial enough, we also look to the purposes that Congress intended to promote by forming this court. In enacting the Federal Courts Improvement Act of 1982, which created this court, Congress made manifest its intent to effect “a clear, stable, uniform basis for evaluating matters of patent validity/invalidity and infringement/noninfringement,” so as to “render[] more predictable the outcome of contemplated litigation, facilitate[] effective business planning, and add[] confidence to investment in innovative new products and technology.” To achieve those goals, we conclude that validity and enforceability represent federal interests of great stake over which, when the other requirements of § 1338(a) are satisfied, we should exert our appellate jurisdiction under § 1295(a)(1) via § 1338(a) jurisdiction. To conclude otherwise would undermine Congress’s expectations for this court.

In accordance with § 1338(a) jurisprudence, as informed by Congress’s intent for this court, we affirm the original jurisdiction and thereby assert our appellate jurisdiction under § 1295(a)(1) over count four. With one claim properly in federal court, the others follow under § 1367.

IV

We next consider whether these state law causes of action, which are appropriately before us, are preempted by federal patent law.

A

Under the Supremacy Clause, “it has been settled that state law that conflicts with federal law is ‘without effect.’” The Supreme Court has set forth two presumptions that guide the preemption analysis. First, it is presumed that Congress does not “cavalierly” preempt state law causes of action, for “the States are independent sovereigns in our federal system.” “[T]he historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress,” particularly when Congress has “legislated . . . in a field which the States have traditionally occupied.” Second, preemption analysis is guided by the “oft-repeated” principle that “[t]he purpose of Congress is the ultimate touchstone.”

Supreme Court precedent establishes that state law is preempted in any one of three ways, which are explicit, field, and conflict preemption. Because federal patent law plainly does not provide for explicit preemption, we of course agree with the district court that there is no preemption on this ground.

Field and conflict preemption rely on an implicit congressional intent to preempt. Under field preemption, state law is preempted when it regulates conduct in a field that Congress intends the federal government to occupy exclusively. Such an intent may be inferred from a “scheme of federal regulation . . . so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it,” or when congressional legislation “touch[es] a field in which the federal interest is so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.”

Alternatively, state law is preempted to the extent that it actually conflicts with federal law. Thus, there is conflict preemption when it is impossible for a private party to comply with both state and federal requirements, or when state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”

Finally, the Supreme Court has recognized that these three categories of preemption are not “rigidly distinct.” For example, field preemption is a species of conflict preemption, for a “state law that falls within a preempted field conflicts with Congress’ intent (either express or plainly implied) to exclude state regulation.”

B

We recently considered the general preemptive effect of federal patent law in Dow Chemical Co. v. Exxon Corp., 139 F.3d 1470 (Fed. Cir. 1998), in which we ruled that federal patent law did not preempt two state unfair competition claims. In that case, the plaintiff pleaded state law claims for intentional interference with both the performance of a contract and prospective contractual relations, each of which relied on proving that the patent was unenforceable because of inequitable conduct. Importantly, the plaintiff alleged the “bad faith enforcement of a reputedly unenforceable patent,” in that the defendant “allegedly knew that its patent was unenforceable when it engaged in market misconduct.” Five Supreme Court cases provided us with “substantial guidance”: Sears, Roebuck & Co. v. Stiffel Co., Compco Corp. v. Day-Brite Lighting, Inc., Kewanee Oil Co. v. Bicron Corp., Aronson v. Quick Point Pencil Co., and Bonito Boats, Inc. v. Thunder Craft Boats, Inc.

In Dow Chemical, we understood the Supreme Court precedent to preempt state laws that “seek to offer patent-like protection to intellectual property inconsistent with the federal scheme.” See also, e.g., Cover v. Hydramatic Packing Co., 83 F.3d 1390, 1394 & n.3 (Fed. Cir.) (construing the Supreme Court precedent in the same manner). We concluded, however, that this precedent does not dictate whether a state law unfair competition claim relying on a violation of federal patent law is not preempted by federal patent law.

Although this quintet of cases does not decide the preemption issue on appeal here, it sets forth the essential criteria – the “objectives of the federal patent laws”– for determining whether there is field or conflict preemption. Kewanee The objectives are:

First, patent law seeks to foster and reward invention; second it promotes disclosure of inventions to stimulate further innovation and to permit the public to practice the invention once the patent expires; third, the stringent requirements for patent protection seek to assure that ideas in the public domain remain there for the free use of the public.

Aronson. These objectives are in some “tension” with one another, and Congress struck a “balance” between them through federal patent law. Bonito Boats. Referring to these goals, we held in Dow Chemical that there was no preemption of the two state law torts as pleaded by the plaintiff.

C

We readily conclude that, in accordance with Dow Chemical, there is no reason to believe that the clear and manifest purpose of Congress was for federal patent law to occupy exclusively the field pertaining to state unfair competition law. Because of the lack of such congressional intent, in conjunction with the underlying presumption disfavoring preemption, there is no field preemption of state unfair competition claims that rely on a substantial question of federal patent law.

Dow Chemical, at the very least, compels this result, for if there were field preemption, then the state law claims in that case would presumably have been preempted. We accept Dow Chemical’s logic and incorporate it here. Of significant import to that decision, which we repeat here because of its relevance to the issue of field preemption, is the observation that state unfair competition law regulates conduct in a different field from federal patent law. The state law remedies in Dow Chemical were directed to allegedly tortious conduct in the marketplace: “[S]tate law governs the maintenance of orderly contractual relations and this function is not preempted merely because patents and patent issues are presented in the substance of those contracts.”

Both the Supreme Court and this court have distinguished between the two fields in which federal patent law and state unfair competition law operate. In Bonito Boats, the Court opined: “Both the law of unfair competition and state trade secret law have coexisted harmoniously with federal patent protection for almost 200 years, and Congress has given no indication that their operation is inconsistent with the operation of the federal patent laws.” We espoused a similar view:

Unfair competition law and patent law have long existed as distinct and independent bodies of law, each with different origins and protecting different rights. . . .

The distinction between the law of unfair competition and patent law is also evident in the general statutory framework enacted by Congress. Whereas patent law is completely preempted by federal law, the law of unfair competition remains largely free from federal exclusivity. The provisions of Title 35 governing patents are not in pari materia with the state and federal provisions governing unfair competition.

Not only does this precedent show the substantial difference between the two fields, but it also demonstrates that the regulation of business affairs is traditionally a matter for state regulation. See also, e.g., California v. ARC Am. Corp., 490 U.S. 93, 101 (1989) (“Given the long history of state common-law and statutory remedies against monopolies and unfair business practices, it is plain that this is an area traditionally regulated by the States.” Hence, under the Court’s preemption jurisprudence, the presumption against preemption has greater force because of the states’ long-standing governance of such affairs. That reinforced presumption instructs against field preemption.

In holding no field preemption, we vacate the district court’s ruling. The district court erroneously held to the contrary, because it believed that patent claims may not be held to be invalid or unenforceable in the adjudication of a state law cause of action unless the case also has a cause of action created by federal patent law in which invalidity or unenforceability could have been raised. This belief is wrong, for the Supreme Court has repeatedly confirmed that federal patent law issues housed in a state law cause of action are capable of being adjudicated, even if there is no accompanying federal claim.

Finally, rejecting field preemption is the better choice in this context, for conflict preemption is a more precise means of determining which state law causes of action are preempted than the blunt tool of field preemption. Defining the field of unfair competition is not an easy task. “The common law concept of ‘unfair competition’ has not been confined to any rigid definition and encompasses a variety of types of commercial or business conduct considered ‘contrary to good conscience.’” See International News Serv. v. Associated Press, 248 U.S. 215, 240 (1918)). Debating the boundaries of the unfair competition field, which would surely come about were field preemption to bite, ignores the reasons for preemption. Instead, with no field preemption, we consider whether a state law cause of action conflicts with the purposes of federal patent law, which is the preferred focus for our preemption analysis.

D

For conflict preemption, we consider whether the state law actions frustrate “the accomplishment and execution of the full purposes and objectives of Congress.” We vacate the district court’s dismissal of the state law causes of action for conflict preemption, and remand for it to apply the analysis set forth below.

To determine whether these state law torts are in conflict with federal patent law and accordingly preempted, we assess a defendant’s allegedly tortious conduct. If a plaintiff bases its tort action on conduct that is protected or governed by federal patent law, then the plaintiff may not invoke the state law remedy, which must be preempted for conflict with federal patent law. Conversely, if the conduct is not so protected or governed, then the remedy is not preempted. This approach, which considers whether a state law tort, “as-applied,” conflicts with federal patent law, is consistent with that employed by the Supreme Court in cases involving preemption of state unfair competition law. See, e.g., Sears (holding that state unfair competition law cannot be applied to “give protection of a kind that clashes with the objectives of the federal patent laws”); Compco (holding that state unfair competition law cannot be applied to impose liability on those who deceive the public by palming off a copy as an original).

The Supreme Court has employed a similar approach, which focuses on the conduct alleged to be in conflict with federal law, for determining the preemptive scope of federal law. For example, in Linn v. United Plant Guard Workers of America, 383 U.S. 53 (1966), the Supreme Court considered the extent to which the National Labor Relations Act (NLRA) barred a state civil action for libel stemming from a labor dispute. Instead of preempting the particular state libel law on its face, the Court “limit[ed] the availability of state remedies for libel to those instances in which the complainant can show that the defamatory statements were circulated with malice and caused him damage,” for these requirements “guard[] against abuse of libel actions and unwarranted intrusion upon free discussion envisioned by the [NLRA].” In California Coastal Commission v. Granite Rock Co., 480 U.S. 572 (1987), the Court refused to preempt state permitting regulations in their entirety because of an alleged conflict with federal mineral law, for there was “a possible set of permit conditions not in conflict with federal law.” As the Supreme Court noted, a state law is not per se preempted unless every fact situation that would satisfy the state law is in conflict with federal law. By limiting the extent of preemption to those instances when the application of state law would conflict with federal law, this approach best respects the states’ sovereign nature.

Two types of conduct that federal patent law immunizes from state tort liability are relevant to this appeal. First, federal patent law bars the imposition of liability for conduct before the PTO unless the plaintiff can show that the patentholder’s conduct amounted to fraud or rendered the patent application process a sham. In Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (1998), decided shortly after Dow Chemical, we held that federal patent law shields a patent holder from federal antitrust liability for conduct in obtaining a patent unless the antitrust plaintiff proves “that the asserted patent was obtained through knowing and willful fraud.”In Abbott Laboratories v. Brennan, 952 F.2d 1346 (Fed. Cir. 1991), we barred a state tort action based on a patent holder’s conduct before the PTO “at least unless it is shown that the entire federal agency action was a ‘sham.’” Nobelpharma and Abbott Laboratories strike a balance between a patent holder’s rights under federal patent law and obligations under other federal law with a conduct-based test. In so doing, the law supplies a clear line that divides a patent holder’s protected conduct from that which could expose it to liability.

Second, federal patent law bars the imposition of liability for publicizing a patent in the marketplace unless the plaintiff can show that the patentholder acted in bad faith. See, e.g., Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 869 (Fed. Cir. 1997) (“[A] patentee must be allowed to make its rights known to a potential infringer so that the latter can determine whether to cease its allegedly infringing activities, negotiate a license if one is offered, or decide to run the risk of liability and/or the imposition of an injunction.”); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 709 (Fed. Cir. 1992) (stating that a patentholder “that has a good faith belief that its patents are being infringed violates no protected right when it so notifies infringers”); Concrete Unlimited Inc. v. Cementcraft, Inc., 776 F.2d 1537, 1539 (Fed. Cir. 1985) (holding that a patentholder “did only what any patent owner has the right to do to enforce its patent, and that includes threatening alleged infringers with suit”).

These two precepts of federal patent law mandate that such conduct may not be the subject of state tort liability. Accordingly, in a case involving a patent holder’s conduct in obtaining or publicizing its patent, if the plaintiff were to fail to allege that the defendant patent holder was guilty of fraudulent conduct before the PTO or bad faith in the publication of a patent, then the complaint would be dismissed for failure to state a claim upon which relief can be granted because of federal preemption. If the complaint were sufficient but the proof were not to show such conduct, then the claim would fail on the merits. Of course, neither fraud nor bad faith need be a required element of a state law tort for that cause of action to stave off preemption by federal patent law, because a plaintiff could prove fraud or bad faith for a tort that not only would be met by such a showing of proof, but also would be satisfied by less. Although to state and maintain a claim under a state law tort, a plaintiff may not be required to allege or prove that the patentholder perpetrated fraud before the PTO or acted in bad faith in the marketplace, to escape preemption, the plaintiff would need to allege and prove ultimately such conduct. To require less would impermissibly alter the balance between the competing purposes of federal patent law that Congress has prescribed.

Our holding in Dow Chemical is in harmony with this conduct-based approach. In that case, because the plaintiff alleged the bad faith enforcement of a patent, the state law torts were not preempted. As explained above, the defendant’s conduct for which the plaintiff sought relief under state law was neither protected nor governed by federal patent law. Hence, the state law torts, as-applied, were not preempted.

Here, in the complaint, Hunter Douglas made several general allegations concerning the Defendants’ conduct both before the PTO and in the marketplace in relation to the Harmonic patents. However, it is not clear on its face that the complaint alleges that the Defendants’ conduct amounted to either fraud or bad faith. Consequently, we remand for the district court to decide whether, in accordance with the guidelines set forth above, Hunter Douglas’s allegations in the complaint are sufficient to survive a motion to dismiss the state law counts on the basis of preemption by federal patent law and, if so, whether there is evidence to support those allegations.

V

The confluence of our jurisdictional and preemption rulings raises federalism concerns. By holding that there is § 1338(a) jurisdiction over state law torts that plead a substantial question of federal patent law as a necessary element, we not only allow plaintiffs to bring such actions in federal court, but we also divest state courts of jurisdiction over them, for such cases belong exclusively in federal court. See 28 U.S.C. 1338(a). This outcome is not merely hypothetical; state courts have dismissed state law actions because of exclusive federal jurisdiction. Nor is this outcome necessarily limited to state tort claims; this analysis conceivably applies to all state remedies so predicated on federal patent law. This result emerges from the Supreme Court’s decision in Christianson, holding that § 1338(a), which provides for exclusive jurisdiction, should be interpreted in the same fashion as § 1331, which provides for concurrent jurisdiction. The impact, in federalism terms, is that state judiciaries will lose the opportunity to interpret state law in those limited circumstances when a state law cause of action pleads a substantial question of federal patent law as a necessary element. Even so, the preeminence of the states’ laws will receive its full and appropriate due, for to resolve the state law elements of such actions, federal courts will be obligated to apply state law in accordance with Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).

To avoid this result, it has been suggested that we should preempt all state law torts premised on federal patent law. We believe, however, that such an outcome would cause more harm to federal-state relations than the result here. Requiring state law torts that plead as a necessary element a substantial question of federal patent law to proceed in federal court is a less severe intrusion on states’ authority than barring them altogether.

Our holdings here chart the most deferential course in regard to the states’ authority while still fulfilling our congressionally mandated responsibilities to exercise §§ 1338(a) and 1295(a)(1) jurisdiction and to enforce federal preemption. The jurisdictional and preemption analyses, although both intimately linked to congressional intent, pose different questions drawn from different statutory provisions. Even if there is no preemption of a particular state law tort as-applied, that does not mean that Congress does not want there to be exclusive federal jurisdiction over that claim. Indeed, it is not only entirely reasonable, but eminently sensible for Congress to have stayed its power under the Supremacy Clause, in deference to the sovereignty of the states, but to have intended that state law actions predicated on federal patent law be heard exclusively in federal court to ensure the integrity of that law. Accordingly, state torts that plead a substantial question of federal patent law as a necessary element and that are not in preemptory conflict with that law belong in federal court. Finally, we note and emphasize that when a state tort is preempted for conflict with federal patent law, the tort falls only in the suit in which the federal patent law is implicated. In other settings apart from federal patent law, the state tort remains viable and actionable.

Notes

1. In U.S. Valves, Inc. v. Dray, 212 F.3d 1368 (Fed. Cir. 2000), the Federal Circuit held that a breach of contract suit arose under the patent laws. The issue was whether by selling certain valves a licensor breached its license agreement that granted the licensee the exclusive right, which was exclusive against the licensor, to commercialize the valve invention disclosed in a pending patent application, any resulting patent, and any improvements thereon. The court held that to determine whether the valves were covered by the agreement required a determination of whether the valves infringed the patents and thus an interpretation of patent law, making the case one arising under the patent laws. Under Hunter Douglas, can such a breach of contract suit hereafter be brought in state court? Must the suit be brought in federal district court? How does that square with Lear v. Adkins?

2. In Midwest Industries, Inc. v. Karavan Trailers, Inc., 175 F.3d 1356 (Fed. Cir. 1999) (in banc), cert. denied, 528 U.S. 1019 (1999), the Federal Circuit held that it would thenceforth apply Federal Circuit law, rather than regional circuit law, in determining whether patent law conflicts with other federal statutes or preempts state law causes of action.

3. In Holmes Group, Inc. v. Vornado Air Circulation Systems, Inc., 122 S.Ct. 1889 (2002), the Supreme Court rejected the Federal Circuit’s view that cases in which a plaintiff sued under other than the patent laws, but the defendant filed a counterclaim under the patent laws, “arose under” the patent laws. The Court held that what the complaint pleaded determined whether the case arose under the patent laws. In Vornado, the plaintiff had brought a declaratory judgment under a trade dress claim; the defendant then filed a counterclaim for patent infringement. The Federal Circuit held that the case arose under the patent laws. The Supreme Court reversed, holding that the case did not arise under the patent laws under the “well pleaded complaint” rule, which governed. The Court did not share the Federal Circuit’s concern that all patent-related cases should be funneled through the Federal Circuit on appeal, and saw no problem in seeing some of them travel through state courts or other federal courts of appeal. It is unclear what effect, if any, Vornado will have on the ruling in Hunter Douglas that federal district court jurisdiction is exclusive over state tort cases involving a determination of patent validity.





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