EULA Developments

Critical reaction to yesterday’s appellate decision in Davidson Associates v. Jung (f/k/a Blizzard v. BnetD) may swamp news of an equally disturbing decision this week from the Ninth Circuit, in Arizona Cartridge Remanufacturers Ass’n Inc. v. Lexmark International (pdf).

I blogged earlier on the district court’s decision in Davidson, characterizing it as “a disaster of an opinion.” The affirmance by the Eighth Circuit is little better. It is discouraging to see the text of an opinion reflect such little critical thought about what are unquestionably very, very close issues. The court’s logic amounts to agreeing with the plaintiff that its gaming business relies on a “Secret Handshake” embedded in its games and its computer network; the defendants reverse engineered that Secret Handshake in order to play games with one another on a different computer network; and when the defendants acquired their copies of the games, they “agreed,” in an EULA, that they wouldn’t do this. See Bowers v. Baystate, from the Federal Circuit. QED.

It’s important to note that while the alternative network permitted play of bootleg copies of the games, these defendants weren’t bootleggers. They bought and paid for legitimate copies of the games. By “signing” the EULAs that popped up when the games were installed (that’s the court’s term, not mine), they gave up any rights they might have had under federal copyright law to play and use their own games as they wished. Play Blizzard’s way, or take the highway.

Now one might respond: That’s not so bad, at least if gamers know what they’re buying, and if they pay a discounted price as result. That brings us to Arizona Cartridge, in which a trade association representing “remanufacturers” of Lexmark inkjet printer cartridges claimed that Lexmark’s “prebate” program — under which cartridge buyers pay less up front and “agree” (an EULA again) that they will use the cartridges only once — constitutes an unfair business practice under California law. The district court ruled for the defendants, and earlier this week the Ninth Circuit agreed. The EULA is valid and enforceable, the court noted; a manufacturer can, in effect, create a “single use only” device, at least so long as consumers nominally “agree” that this is what they’re buying. See Monsanto v. McFarling, again from the Federal Circuit.

There are obvious distinctions between the cases; I won’t go into those here. The intellectual property and competition law implications of the cases will be well-covered elsewhere. (Briefly, for all practical purposes we are witnessing the slow death of first sale and exhaustion.)

Purely as a matter of contract law, there can be little further doubt (if any doubters remained) that EULAs and similar offer-by-notice-and-acceptance-by-conduct Terms and Conditions are enforceable in virtually all domains of commercial activity, not just software. In the contracts arena, consumer advocates won the UCITA battle but are losing the ProCD war. (And they’re losing it on the authority of the patent law experts at the Federal Circuit!) What remains of a meaningful “assent” requirement is slowly, but surely, disappearing altogether.

UPDATE: I’m pretty sympathetic to much of Mark McKenna’s commentary on these cases, more sympathetic, perhaps, than he infers from the above. On the facts of the cartridge case, however, I’m not particularly bothered by the outcome here. Lexmark offers two cartridge types: “one use” cartridges and refillable cartridges. The first are cheaper than the second. So long as consumers know they have a choice, and so long as the cartridges are otherwise functionally indistinguishable, then the risk of anticompetitive behavior is low — and Lexmark isn’t doing anything wrong. (One caveat there: Not only may consumers not know they have a choice, but it’s conceivable that there is a cognitive bias in favor of the cheaper cartridge. I don’t know that such a bias — if it exists — is sufficient to change the outcome, but I do think that the narrow problem gets more complicated.)

On the other hand, and more to the point of Mark’s comment, the trend toward enforcement of EULA is bothersome precisely because the sort of nuanced analysis of the circumstances that justify the outcome in the cartridge case is almost always missing. That’s what bothers me most about the BnetD case: Not only is the outcome all wrong, but the court doesn’t seem to get the fact that this is a hard case.

UPDATE #2: Fred von Lohmann at EFF lays out the intellectual property implications of the ability to create “single use things.” The injury to consumers doesn’t come from the possibility that individual printer users will get sued if they refill “single use” printer cartridges. The injury to consumers comes from the likelihood that “single use” thing manufacturers will go after aftermarket providers — companies that refill, repair, and service — and, if they succeed in shutting down the aftermarket, “single use” manufacturers can then raise prices.

It’s right to be worried about that possibility, but the full story is more complicated.

First, though Fred points out that Lexmark’s current lawsuit is step 1 in a long-range patent-based strategy, there’s no reason to suspect that the “single use” phenomenon is or will be limited to the IP world. In this sense, the problem is bigger than Fred lets on.

Second, and despite the fact that result in the Arizona Cartridge case itself doesn’t bother me so much, there’s no guarantee that Lexmark will continue to market both cheap “prebate” cartridges and more expensive “refillable” cartridges. There is certainly no legal requirement that it do so, and though the fact that Lexmark offers choice to consumers seemed to impress the Ninth Circuit, when you get right down to it, the case turned on the fact that the court found that the contract was enforceable because consumers agreed to it when they opened the cartridge box.

But third, given the Lochnerian formalism of this conclusion, there is no meaningful distinction here between a “single use” cartridge created by “contract,” and a “single use” cartridge created by Lexmark, which (hypothetically) could sell a printer cartridge that literally self-destructs after a single use. Suppose Lexmark in fact sold such a cartridge, fully disclosing its “Mission Impossible” character on the packaging and discounting the price accordingly. Further, assume that the “self-destruct” mode causes no injury to persons and no harm to printers. May Lexmark lawfully sell (and I choose “sell” here, not “license”) such a thing? I don’t see why not; in fact, in our disposable society, I can imagine a huge demand for them.

Hard question number one: May aftermarket firms sell technology that disrupts the self-destruct sequence and allows reuse of the cartridge? Assume no patented or copyrighted technology is at stake. Is the answer so obviously “yes”? I’m not sure.

Hard question number two: If Lexmark has the right by law to sell self-destructing “single-use” printer cartridges, then why should Lexmark be prohibited from selling contractual “single-use” printer cartridges? Is it so clear that different distributional effects of the two schemes justifies a distinction?