Supreme Court Denies Certiorari in Baystate v. Bowers

June 16, 2003. The Supreme Court denied certiorari, without opinion, in Baystate v. Bowers, a patent, copyright and contract case involving CAD software. See, Order List [10 pages in PDF], at page 4. This denial lets stand the January 29, 2003, revised opinion of the U.S. Court of Appeals (FedCir) which addressed federal preemption, shrink wrap contracts, and reverse engineering. Basically, a shrinkwrap contract barred reverse engineering of a software program. A divided Appeals Court held that the Copyright Act does not preempt state contract law that allows parties to impose a ban on reverse engineering.

Background. Harold Bowers created a template to aid in the use of computer aided design (CAD) software, such as the CADKEY tool of Cadkey, Inc. He filed a patent application for his template in 1989, and U.S. Patent No. 4,933,514 was issued in 1990.

CAD software works with menus, and menus nested within menus, which may be difficult for some to use. Bowers' patent disclosed a template, or desktop digitizing tablet, with various commands arranged in logical locations. The user points to and clicks upon the desired command.

George Ford designed Geodraft, a DOS based add-on program to operate with CAD. Geodraft allows an engineer to insert technical tolerances for features of the computer generated design. He copyrighted Geodraft. Bowers then obtained an exclusive license to Ford's Geodraft. Bowers then bundled and sold his template and Geodraft software, with a shrink wrap agreement that prohibits reverse engineering.

Baystate then developed a competing template and software, which incorporated features of Bowers' product. Under competition from Baystate, Bowers entered into a distribution agreement with Cadkey whereby Cadkey bundled Bowers' template and software for free. Bowers sought to make money off of selling software upgrades. Baystate subsequently acquired Cadkey, and repudiated the contract with Bowers.

District Court. Baystate filed a complaint in U.S. District Court (DMass) against Bowers alleging that Baystate's products do not infringe the '514 patent, that the '514 patent is invalid, and that the '514 patent is unenforceable. It sought declaratory relief. Bowers filed counterclaims for copyright infringement, patent infringement, and breach of contract, including the prohibition on reverse engineering.

The trial jury found for Bowers on all claims, and awarded him $1,948,869 for copyright infringement, $3,831,025 for breach of contract, and $232,977 for patent infringement. The District Court set aside the copyright damages as duplicative of the contract damages. The District Court rejected Baystate's claims regarding patent invalidity.

Baystate appealed. Bowers cross appealed the District Court's denial of copyright damages.

Court of Appeals: August 20, 2002, Opinion. The Appeals Court issued its original opinion on August 20, 2002. This opinion was reported at 302 F.3d 1334. It affirmed in part, and reversed in part. It affirmed the breach of contract award. It also affirmed the District Court's modification of the damages award (i.e., the copyright damages are duplicative of the contract damages). Finally, it reversed the judgment as to patent infringement, as a matter of claim construction.

The Appeals Court held that the Copyright Act, and in particular, 17 U.S.C. § 301, does not preempt or narrow  Bowers' contract claims. The Court held this as a matter of the law of the originating Court, the First Circuit. The Court further found that Bowers had presented ample evidence of reverse engineering by Baystate of the subject matter covered by the shrink wrap contract. The Court affirmed the judgment for breach of contract, and the dollar amount of the award.

The Appeals Court then affirmed the District Court's decision to set aside the jury's award of copyright damages. It wrote that "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. ... 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."

The Appeals Court also wrote that "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."

On the patent infringement claim, the Appeals Court reversed. It wrote that "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, there was no literal infringement. Bowers did not assert infringement under the doctrine of equivalents.

Petition for Rehearing. Baystate filed a combined petition for panel rehearing and rehearing en banc.

Several groups and individuals submitted an amicus curiae brief [15 pages in PDF]. The amici included the Digital Future Coalition (DFC), Association of Research Libraries (ARL), American Library Association (ALA), American Association of Law Libraries (AALL), Computer & Communications Industry Association (CCIA), Association for Computing Machinery (ACM), and others. Mark Lemley, of UC Berkeley's Boalt Hall, is listed as counsel of record for amici.

The amicus brief states that "Common among all amici is a commitment to encouraging authorship and innovation by maintaining the free flow of ideas and information. Amici are concerned that the Panel decision could disrupt this flow."

The amicus brief argued that software reverse engineering is critical to innovation and competition in the computer industry, and that the Appeals Court's August 20, 2002, opinion wrongly suggests that copyright law imposes no restriction on shrinkwrap licenses.

Amici wrote that "For this Court to allow software vendors unilaterally and without restriction to impose terms that prohibit reverse engineering would frustrate the policy of encouraging the creation of innovative and interoperable software products." They added that "Contractual restrictions on reverse engineering can also interfere with the operation of the federal patent system."

Court of Appeals: January 29, 2003, Opinion. The Appeals Court issued an order on January 29, 2003, granting the petition for panel rehearing, denying the petition for en banc rehearing, and vacating the August 20, 2002, opinion. The Appeals Court also issued a revised opinion on January 29, 2003.

The revised opinion reached the same conclusion -- that the Copyright Act does not preempt Bowers' contract claim regarding reverse engineering. The language of the revised opinion mirrors that of the original opinion. However, the revised opinion adds a partial dissent by Judge Dyk. He had joined the majority in the original opinion, but was swayed by arguments in support of the petition for rehearing.

The majority's analysis of Copyright Act preemption of state contract law is set out in more detail here. The Court first held that on issues that are not unique to the jurisdiction of the Federal Circuit, the law of the originating circuit applies. It held that under First Circuit law, the Copyright Act does not preempt or narrow Bower's contract claim.

The Appeals Court wrote that "Courts respect freedom of contract and do not lightly set aside freely-entered agreements."

"Nevertheless, at times, federal regulation may preempt private contract." The Court elaborated that "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) (2000). 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, 32 USPQ2d 1385, 1397 (1st Cir. 1994)". (Additional citations omitted.)

The Court continued that "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."

It concluded that "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 minimus damages arising from merely discerning non-protected code."

The Appeals Court then applied this law to the facts of this case. It found that "the contract unambiguously prohibits ``reverse engineering.´´" It also found that "The record amply supports the jury's finding of a breach of that agreement." Hence, it affirmed the District Court on this issue.

Dyk Dissent. Judge Timothy Dyk wrote that "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."

He issued a warning: "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."

However, he added that he dissents only as to shrinkwrap contracts, and not as to negotiated contracts. He wrote that "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."