86 F.3d 1447 (1996)

No. 96-1139.

Argued May 23, 1996.
Decided June 20, 1996.

[1448] Michael J. Lawton, Kenneth B. Axe, Lathrop & Clark, Madison, WI, Thomas N. O'Connor (argued), John T. Gutkoski, Lauren C. Panora, Hale & Dorr, Boston, MA, for ProCD, Inc.

Keith Napolitano, Madison, WI, David A. Austin (argued), Madison, WI, for Matthew Zeidenberg and Silken Mountain Web Services, Inc.

June M. Besek, Morton D. Goldberg, Jesse M. Feder, Schwab, Goldberg, Price & Dannay, New York City, for Information Industry Ass'n, amicus curiae, American Medical Ass'n, amicus curiae and Association of American Publishers, amicus curiae.

Christopher A. Meyer, Michael R. Klipper, Meyer & Klipper, Washington, DC, for Business Software Alliance, amicus curiae.

Barry D. Weiss, Stuart Smith, Ronald Julian Palenski, Gordon & Glickson, Chicago, IL, Kenneth A. Wasch, Mark Nebergall, Software Publishers Ass'n, Inc., Washington, DC, for Software Publishers Ass'n, amicus curiae.

Mark Alan Lemley, University of Texas School of Law, Austin, TX, Peter M.C. Choy, American Committee for Interoperable Systems, Mountain View, CA, for American Committee for Interoperable Systems, amicus curiae.

Before COFFEY, FLAUM, and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Must buyers of computer software obey the terms of shrinkwrap licenses? The [1449] 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. 908 F.Supp. 640 (W.D.Wis.1996). The parties and numerous amici 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

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 Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991). See Paul J. Heald, The Vices of Originality, 1991 Sup.Ct. Rev. 143, 160-68. ProCD sells a version of the database, called SelectPhone (trademark), on CD-ROM discs. (CD-ROM means "compact disc — read only memory." 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 (or, as ProCD prefers, "listings") can be read and manipulated by other software, such as word processing programs.

The database in SelectPhone (trademark) 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 (trademark) 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.

[1450] 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 (trademark) 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 (trademark) 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 (trademark) 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. 908 F.Supp. at 654.

II

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. 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. See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F.Supp. 208 (E.D.N.Y.1994). 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. Peeters v. State, 154 Wis. 111, 142 N.W. 181 (1913). 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 [1451] 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. See E. Allan Farnsworth, 1 Farnsworth on Contracts § 4.26 (1990); Restatement (2d) of Contracts § 211 comment a (1981) ("Standardization of agreements serves many of the same functions as standardization of goods and services; both are essential to a system of mass production and distribution. Scarce and costly time and skill can be devoted to a class of transactions rather than the details of individual transactions."). 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. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991); see also Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, ___ U.S. ___, 115 S.Ct. 2322, 132 L.Ed.2d 462 (1995) (bills of lading). 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 [1452] 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, so we use the regular numbering system. Wis. Stat. § 402.201 corresponds to UCC § 2-201, and other citations are easy to derive.) 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 standardform 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, see 908 F.Supp. at 655-56 — 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. See Northrop Corp. v. Litronic Industries, 29 F.3d 1173 (7th Cir.1994) (Illinois law); Douglas G. Baird & Robert Weisberg, Rules, Standards, and the Battle of the Forms: A Reassessment of § 2-207, 68 Va. L.Rev. 1217, 1227-31 (1982). 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 [1453] 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, see Gillen v. Atalanta Systems, Inc., 997 F.2d 280, 284 n. 1 (7th Cir.1993); 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 (trademark) 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. Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756 (7th Cir.1996). 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

The district court held that, even if Wisconsin treats shrinkwrap licenses as contracts, § 301(a) of the Copyright Act, 17 U.S.C. § 301(a), prevents their enforcement. 908 F.Supp. at 656-59. 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 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". 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. 908 F.Supp. at 656-57. Baltimore Orioles, Inc. v. Major League Baseball Players Ass'n, 805 F.2d 663, 676 (7th Cir.1986), supports that conclusion, with which commentators agree. E.g., Paul Goldstein, III Copyright § 15.2.3 (2d ed.1996); Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 101[B] (1995); William F. Patry, II Copyright Law and Practice 1108-09 (1994). 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 sections 102 and 103, even if federal law does not afford protection to them. Cf. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989) (same principle under patent laws).

[1454] 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 System, Inc. v. Computer Associates International, 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, 908 F.Supp. at 658, 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 (trademark) 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 Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974), 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 Pencil Co., 440 U.S. 257, 99 S.Ct. 1096, 59 L.Ed.2d 296 (1979), 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. See also Kennedy v. Wright, 851 F.2d 963 (7th Cir. 1988). 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 Pencil Co. could not do that, neither can Zeidenberg.

Although Congress possesses power to preempt even the enforcement of contracts about intellectual property — or railroads, on which see Norfolk & Western Ry. v. Train Dispatchers, 499 U.S. 117, 111 S.Ct. 1156, 113 L.Ed.2d 95 (1991) — courts usually read preemption clauses to leave private contracts unaffected. American Airlines, Inc. v. Wolens, ___ U.S. ___, 115 S.Ct. 817, 130 L.Ed.2d 715 (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." 49 U.S.C.App. § 1305(a)(1). 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 [1455] 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. ___ U.S. at ___-___, 115 S.Ct. at 824-25. Although some principles that carry the name of contract law are designed to defeat rather than implement consensual transactions, id. at ___ n. 8, 115 S.Ct. at 826 n. 8, the rules that respect private choice are not preempted by a clause such as § 1305(a)(1). Section 301(a) plays a role similar to § 1301(a)(1): 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 Pencil Company 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. Rockwell Graphic Systems, Inc. v. DEV Industries, Inc., 925 F.2d 174, 180 (7th Cir.1991). 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.

REVERSED AND REMANDED.

105 F.3d 1147 (1997)

No. 96-3294.

Argued December 10, 1996.
Decided January 6, 1997.
Rehearing and Suggestion for Rehearing Denied February 3, 1997.

[1148] Daniel A. Edelman (argued), Cathleen M. Combs, James O. Latturner, Charles E. Petit, Edelman & Combs, Chicago, IL, for Plaintiffs-Appellees.

Terry M. Grimm, Thomas J. Wiegand, Winston & Strawn, Robert M. Rader (argued), Winston & Strawn, Washington, DC, for Defendants-Appellants.

Before CUMMINGS, WOOD, Jr., and EASTERBROOK, Circuit Judges.

Rehearing and Suggestion for Rehearing En Banc Denied February 3, 1997.

EASTERBROOK, Circuit Judge.

A customer picks up the phone, orders a computer, and gives a credit card number. Presently a box arrives, containing the computer and a list of terms, said to govern unless the customer returns the computer within 30 days. Are these terms effective as the parties' contract, or is the contract term-free because the order-taker did not read any terms over the phone and elicit the customer's assent?

One of the terms in the box containing a Gateway 2000 system was an arbitration clause. Rich and Enza Hill, the customers, kept the computer more than 30 days before complaining about its components and performance. They filed suit in federal court arguing, among other things, that the product's shortcomings make Gateway a racketeer (mail and wire fraud are said to be the predicate offenses), leading to treble damages under RICO for the Hills and a class of all other purchasers. Gateway asked the district court to enforce the arbitration clause; the judge refused, writing that "[t]he present record is insufficient to support a finding of a valid arbitration agreement between the parties or that the plaintiffs were given adequate notice of the arbitration clause." Gateway took an immediate appeal, as is its right. 9 U.S.C. § 16(a)(1)(A).

The Hills say that the arbitration clause did not stand out: they concede noticing the statement of terms but deny reading it closely enough to discover the agreement to arbitrate, and they ask us to conclude that they therefore may go to court. Yet an agreement to arbitrate must be enforced "save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Doctor's Associates, Inc. v. Casarotto, ___ U.S. ___, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996), holds that this provision of the Federal Arbitration Act is inconsistent with any requirement that an arbitration clause be prominent. A contract need not be read to be effective; people who accept take the risk that the unread terms may in retrospect prove unwelcome. Carr v. CIGNA Securities, Inc., 95 F.3d 544, 547 (7th Cir.1996); Chicago Pacific Corp. v. Canada Life Assurance Co., 850 F.2d 334 (7th Cir.1988). Terms inside Gateway's box stand or fall together. If they constitute the parties' contract because the Hills had an opportunity to return the computer after reading them, then all must be enforced.

ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996), holds that terms inside a box of software bind consumers who use the software after an opportunity to read the terms and to reject them by returning the product. Likewise, Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991), enforces a forum-selection clause that was included among three pages of terms attached to a cruise ship ticket. ProCD and Carnival Cruise Lines exemplify the many commercial transactions in which people pay for products with terms to follow; ProCD discusses others. 86 F.3d at 1451-52. The district court concluded in ProCD that the contract is formed when the consumer pays for the software; as a result, the court held, only terms known to the consumer at that moment are part of the contract, and provisos inside the box do not count. Although this is one way a contract [1149] could be formed, it is not the only way: "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." Id. at 1452. Gateway shipped computers with the same sort of accept-or-return offer ProCD made to users of its software. ProCD relied on the Uniform Commercial Code rather than any peculiarities of Wisconsin law; both Illinois and South Dakota, the two states whose law might govern relations between Gateway and the Hills, have adopted the UCC; neither side has pointed us to any atypical doctrines in those states that might be pertinent; ProCD therefore applies to this dispute.

Plaintiffs ask us to limit ProCD to software, but where's the sense in that? ProCD is about the law of contract, not the law of software. Payment preceding the revelation of full terms is common for air transportation, insurance, and many other endeavors. Practical considerations support allowing vendors to enclose the full legal terms with their products. Cashiers cannot be expected to read legal documents to customers before ringing up sales. If the staff at the other end of the phone for direct-sales operations such as Gateway's had to read the four-page statement of terms before taking the buyer's credit card number, the droning voice would anesthetize rather than enlighten many potential buyers. Others would hang up in a rage over the waste of their time. And oral recitation would not avoid customers' assertions (whether true or feigned) that the clerk did not read term X to them, or that they did not remember or understand it. Writing provides benefits for both sides of commercial transactions. Customers as a group are better off when vendors skip costly and ineffectual steps such as telephonic recitation, and use instead a simple approve-or-return device. Competent adults are bound by such documents, read or unread. For what little it is worth, we add that the box from Gateway was crammed with software. The computer came with an operating system, without which it was useful only as a boat anchor. See Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756, 761 (7th Cir. 1996). Gateway also included many application programs. So the Hills' effort to limit ProCD to software would not avail them factually, even if it were sound legally — which it is not.

For their second sally, the Hills contend that ProCD should be limited to executory contracts (to licenses in particular), and therefore does not apply because both parties' performance of this contract was complete when the box arrived at their home. This is legally and factually wrong: legally because the question at hand concerns the formation of the contract rather than its performance, and factually because both contracts were incompletely performed. ProCD did not depend on the fact that the seller characterized the transaction as a license rather than as a contract; we treated it as a contract for the sale of goods and reserved the question whether for other purposes a "license" characterization might be preferable. 86 F.3d at 1450. All debates about characterization to one side, the transaction in ProCD was no more executory than the one here: Zeidenberg paid for the software and walked out of the store with a box under his arm, so if arrival of the box with the product ends the time for revelation of contractual terms, then the time ended in ProCD before Zeidenberg opened the box. But of course ProCD had not completed performance with delivery of the box, and neither had Gateway. One element of the transaction was the warranty, which obliges sellers to fix defects in their products. The Hills have invoked Gateway's warranty and are not satisfied with its response, so they are not well positioned to say that Gateway's obligations were fulfilled when the motor carrier unloaded the box. What is more, both ProCD and Gateway promised to help customers to use their products. Long-term service and information obligations are common in the computer business, on both hardware and software sides. Gateway offers "lifetime service" and has a round-the-clock telephone hotline to fulfil this promise. Some vendors spend more money helping customers use their products than on developing and manufacturing them. The document in Gateway's box includes promises of [1150] future performance that some consumers value highly; these promises bind Gateway just as the arbitration clause binds the Hills.

Next the Hills insist that ProCD is irrelevant because Zeidenberg was a "merchant" and they are not. Section 2-207(2) of the UCC, the infamous battle-of-the-forms section, states that "additional terms [following acceptance of an offer] are to be construed as proposals for addition to a contract. Between merchants such terms become part of the contract unless ...". Plaintiffs tell us that ProCD came out as it did only because Zeidenberg was a "merchant" and the terms inside ProCD's box were not excluded by the "unless" clause. This argument pays scant attention to the opinion in ProCD, which concluded that, when there is only one form, "sec. 2-207 is irrelevant." 86 F.3d at 1452. The question in ProCD was not whether terms were added to a contract after its formation, but how and when the contract was formed — in particular, whether a vendor may propose that a contract of sale be formed, not in the store (or over the phone) with the payment of money or a general "send me the product," but after the customer has had a chance to inspect both the item and the terms. ProCD answers "yes," for merchants and consumers alike. Yet again, for what little it is worth we observe that the Hills misunderstand the setting of ProCD. A "merchant" under the UCC "means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction", § 2-104(1). Zeidenberg bought the product at a retail store, an uncommon place for merchants to acquire inventory. His corporation put ProCD's database on the Internet for anyone to browse, which led to the litigation but did not make Zeidenberg a software merchant.

At oral, argument the Hills propounded still another distinction: the box containing ProCD's software displayed a notice that additional terms were within, while the box containing Gateway's computer did not. The difference is functional, not legal. Consumers browsing the aisles of a store can look at the box, and if they are unwilling to deal with the prospect of additional terms can leave the box alone, avoiding the transactions costs of returning the package after reviewing its contents. Gateway's box, by contrast, is just a shipping carton; it is not on display anywhere. Its function is to protect the product during transit, and the information on its sides is for the use of handlers

("Fragile!" This Side Up!" ♲↑☂)

rather than would-be purchasers.

Perhaps the Hills would have had a better argument if they were first alerted to the bundling of hardware and legal-ware after opening the box and wanted to return the computer in order to avoid disagreeable terms, but were dissuaded by the expense of shipping. What the remedy would be in such a case — could it exceed the shipping charges? — is an interesting question, but one that need not detain us because the Hills knew before they ordered the computer that the carton would include some important terms, and they did not seek to discover these in advance. Gateway's ads state that their products come with limited warranties and lifetime support. How limited was the warranty — 30 days, with service contingent on shipping the computer back, or five years, with free onsite service? What sort of support was offered? Shoppers have three principal ways to discover these things. First, they can ask the vendor to send a copy before deciding whether to buy. The Magnuson-Moss Warranty Act requires firms to distribute their warranty terms on request, 15 U.S.C. § 2302(b)(1)(A); the Hills do not contend that Gateway would have refused to enclose the remaining terms too. Concealment would be bad for business, scaring some customers away and leading to excess returns from others. Second, shoppers can consult public sources (computer magazines, the Web sites of vendors) that may contain this information. Third, they may inspect the documents after the product's delivery. Like Zeidenberg, the Hills took the third option. By keeping the computer beyond 30 days, the Hills accepted Gateway's offer, including the arbitration clause.

The Hills' remaining arguments, including a contention that the arbitration [1151] clause is unenforceable as part of a scheme to defraud, do not require more than a citation to Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). Whatever may be said pro and con about the cost and efficacy of arbitration (which the Hills disparage) is for Congress and the contracting parties to consider. Claims based on RICO are no less arbitrable than those founded on the contract or the law of torts. Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 238-42, 107 S.Ct. 2332, 2343-46, 96 L.Ed.2d 185 (1987). The decision of the district court is vacated, and this case is remanded with instructions to compel the Hills to submit their dispute to arbitration.

104 F.Supp.2d 1332 (2000)

No. CIV. A. 99-2499-KHV.

June 15, 2000.

[1333] [1334] William S. Klocek, Parkville, MO, pro se.

R. Lawrence Ward, Richard M. Paul, III, Jamee Maurer Klein, Shughart, Thomson & Kilroy, P.C., Kansas City, MO, for Gateway, Inc.

Samuel P. Logan, James K. Logan, Logan Law Firm LLC, Olathe, KS, for Hewlett-Packard, Inc.

MEMORANDUM AND ORDER

VRATIL, District Judge.

William S. Klocek brings suit against Gateway, Inc. and Hewlett-Packard, Inc. on claims arising from purchases of a Gateway computer and a Hewlett-Packard scanner. This matter comes before the Court on the Motion to Dismiss (Doc. # 6) which Gateway filed November 22, 1999 and Defendant Hewlett-Packard, Inc.'s Motion To Dismiss, Or In The Alternative For Stay Of Proceedings (Doc. # 16) filed December 22, 1999, the Motion (Doc. # 2) to certify a class which plaintiff filed October 29, 1999, the Motion For Sanctions, Expenses and Punitives [sic] (Doc. # 11) which plaintiff filed December 3, 1999, the Motion for a Writ of Certiorari (Doc. # 12) which plaintiff filed December 6, 1999, and the Motion for Verification (Doc. # 24) which plaintiff filed January 25, 2000. For reasons stated below, the Court overrules Gateway's motion to dismiss, sustains Hewlett-Packard's motion to dismiss, and overrules the motions filed by plaintiff.

A. Gateway's Motion to Dismiss

Plaintiff brings individual and class action claims against Gateway, alleging that it induced him and other consumers to purchase computers and special support packages by making false promises of technical support. Complaint, ¶¶ 3 and 4. Individually, plaintiff also claims breach of contract and breach of warranty, in that Gateway breached certain warranties that its computer would be compatible with standard peripherals and standard internet services. Complaint, ¶¶ 2, 5, and 6.

Gateway asserts that plaintiff must arbitrate his claims under Gateway's Standard Terms and Conditions Agreement ("Standard Terms"). Whenever it sells a computer, Gateway includes a copy of the Standard Terms in the box which contains the computer battery power cables and instruction manuals. At the top of the first page, the Standard Terms include the following notice:

NOTE TO THE CUSTOMER:

[1335] This document contains Gateway 2000's Standard Terms and Conditions. By keeping your Gateway 2000 computer system beyond five (5) days after the date of delivery, you accept these Terms and Conditions.

The notice is in emphasized type and is located inside a printed box which sets it apart from other provisions of the document. The Standard Terms are four pages long and contain 16 numbered paragraphs. Paragraph 10 provides the following arbitration clause:

DISPUTE RESOLUTION. Any dispute or controversy arising out of or relating to this Agreement or its interpretation shall be settled exclusively and finally by arbitration. The arbitration shall be conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The arbitration shall be conducted in Chicago, Illinois, U.S.A. before a sole arbitrator. Any award rendered in any such arbitration proceeding shall be final and binding on each of the parties, and judgment may be entered thereon in a court of competent jurisdiction.^[1]

Gateway urges the Court to dismiss plaintiff's claims under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq. The FAA ensures that written arbitration agreements in maritime transactions and transactions involving interstate commerce are "valid, irrevocable, and enforceable." 9 U.S.C. § 2.^[2] Federal policy favors arbitration agreements and requires that we "rigorously enforce" them. Shearson/American Exp., Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (quoting Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 84 L.Ed.2d 158, (1985)); Moses, 460 U.S. at 24, 103 S.Ct. 927. "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Moses, 460 U.S. at 24-25, 103 S.Ct. 927.

FAA Section 3 states:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. § 3. Although the FAA does not expressly provide for dismissal, the Tenth Circuit has affirmed dismissal where the applicant did not request a stay. See Armijo v. Prudential Ins. Co. of Am., 72 F.3d 793, 797 (10th Cir.1995). Here, neither Gateway nor plaintiff requests a stay. Accordingly, the Court concludes that dismissal is appropriate if plaintiff's claims are arbitrable.^[3]Accord Fedmet Corp. v. [1336] M/V BUYALYK, 194 F.3d 674, 678 (5th Cir.1999) (dismissal appropriate if all issues raised before court are arbitrable); Sparling v. Hoffman Constr. Co., 864 F.2d 635, 638 (9th Cir.1988); (district court had discretion to dismiss arbitrable claims); see also Black & Veatch Int'l Co. v. Wartsila NSD North Am., Inc., 1998 WL 953966, Case No. 97-2556-GTV (D.Kan. Dec. 17, 1998) (dismissing case and compelling arbitration).

Gateway bears an initial summary-judgment-like burden of establishing that it is entitled to arbitration. See, e.g., Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54 n.9 (3d Cir.1980) (standard on motion to compel arbitration is same as summary judgment standard); Doctor's Assoc., Inc. v. Distajo, 944 F.Supp. 1010, 1014 (D.Conn.1996), aff'd, 107 F.3d 126 (2d Cir.1997) (same); Dougherty v. Mieczkowski, 661 F.Supp. 267, 270 n. 1 (D.Del.1987). Thus, Gateway must present evidence sufficient to demonstrate the existence of an enforceable agreement to arbitrate. See, e.g., Oppenheimer & Co. v. Neidhardt, 56 F.3d 352, 358 (2d Cir. 1995). If Gateway makes such a showing, the burden shifts to plaintiff to submit evidence demonstrating a genuine issue for trial. Id.; see also Naddy v. Piper Jaffray, Inc., 88 Wash.App. 1033, 1997 WL 749261, *2, Case Nos. 15431-9-III, 15681-8-III (Wash.App. Dec.4, 1997). In this case, Gateway fails to present evidence establishing the most basic facts regarding the transaction. The gaping holes in the evidentiary record preclude the Court from determining what state law controls the formation of the contract in this case and, consequently, prevent the Court from agreeing that Gateway's motion is well taken.

Before granting a stay or dismissing a case pending arbitration, the Court must determine that the parties have a written agreement to arbitrate. See 9 U.S.C. §§ 3 and 4; Avedon Engineering, Inc. v. Seatex, 126 F.3d 1279, 1283 (10th Cir.1997). When deciding whether the parties have agreed to arbitrate, the Court applies ordinary state law principles that govern the formation of contracts. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). The existence of an arbitration agreement "is simply a matter of contract between the parties; [arbitration] is a way to resolve those disputes — but only those disputes — that the parties have agreed to submit to arbitration." Avedon, 126 F.3d at 1283 (quoting Kaplan, 514 U.S. at 943-945, 115 S.Ct. 1920). If the parties dispute making an arbitration agreement, a jury trial on the existence of an agreement is warranted if the record reveals genuine issues of material fact regarding the parties' agreement. See Avedon, 126 F.3d at 1283.

Before evaluating whether the parties agreed to arbitrate, the Court must determine what state law controls the formation of the contract in this case. See id. at 1284. In diversity actions, the Court applies the substantive law, including choice of law rules, that Kansas state courts would apply. See Moore v. Subaru of Am., 891 F.2d 1445, 1448 (10th Cir. 1989). Kansas courts apply the doctrine of lex loci contractus, which requires that the Court interpret the contract according to the law of the state in which the parties performed the last act necessary to form the contract. See Missouri Pac. R.R. Co. v. Kansas Gas and Elec. Co., 862 F.2d 796, 798 n. 1 (10th Cir.1988) (citing Simms v. Metropolitan Life Ins. Co., 9 Kan.App.2d 640, 642-43, 685 P.2d 321 (1984)).

The parties do not address the choice of law issue, and the record is unclear where they performed the last act necessary to [1337] complete the contract. Gateway presents affidavit testimony that it shipped a computer to plaintiff on or about August 31, 1997, Affidavit of David Blackwell, ¶ 5 (attached to Memorandum in Support of Motion to Dismiss (Doc. # 8)), but it provides no details regarding the transaction. Plaintiff's complaint alleges that plaintiff lives in Missouri and, if Gateway shipped his computer, it presumably shipped it to Missouri. See Complaint, p. 1 (Doc. # 1). In his response to Gateway's motion, however, plaintiff states that on August 27, 1997 he purchased the computer in person at the Gateway store in Overland Park, Kansas, and took it with him at that time. Response to Motion to Dismiss, ¶¶ 2(b) and 2(d) (Doc. # 9). Depending on which factual version is correct, it appears that the parties may have performed the last act necessary to form the contract in Kansas (with plaintiff purchasing the computer in Kansas), Missouri (with Gateway shipping the computer to plaintiff in Missouri), or some unidentified other states (with Gateway agreeing to ship plaintiff's catalog order and/or Gateway actually shipping the order).^[4]

The Court discerns no material difference between the applicable substantive law in Kansas and Missouri and — as to those two states — it perhaps would not need to resolve the choice of law issue at this time. See Avedon, 126 F.3d at 1284 (choice of law analysis unnecessary if relevant states have enacted identical controlling statutes); see also Missouri Pacific, 862 F.2d at 798 n. 1 (applying Kansas law where record did not indicate where final act occurred and parties did not raise issue); Phillips Petrol. Co. v. Shutts, 472 U.S. 797, 816, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985) ("There can be no injury in applying Kansas law if it is not in conflict with that of any other jurisdiction connected to this suit").^[5]

The Uniform Commercial Code ("UCC") governs the parties' transaction under both Kansas and Missouri law. See K.S.A. § 84-2-102; V.A.M.S. § 400.2-102 (UCC applies to "transactions in goods."); Kansas Comment 1 (main thrust of Article 2 is limited to sales); K.S.A. § 84-2-105(1) V.A.M.S. § 400.2-105(1) ("`Goods' means all things ... which are movable at the time of identification to the contract for sale ...."). Regardless whether plaintiff purchased the computer in person or placed an order and received shipment of the computer, the parties agree that plaintiff paid for and received a computer from Gateway. This conduct clearly demonstrates a contract for the sale of a computer. See, e.g., Step-Saver Data Sys., Inc. v. Wyse Techn., 939 F.2d 91, 98 (3d Cir.1991). Thus the issue is whether the contract of sale includes the Standard Terms as part of the agreement.

State courts in Kansas and Missouri apparently have not decided whether terms received with a product become part of the parties' agreement. Authority from other courts is split. Compare Step-Saver, 939 F.2d 91 (printed terms on computer software package not part of agreement); Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F.Supp. 759 (D.Ariz.1993) (license agreement shipped with computer software not part of agreement); and U.S. Surgical Corp. v. Orris, Inc., 5 F.Supp.2d 1201 (D.Kan.1998) (single use restriction on product package not binding agreement); [1338] with Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.), cert. denied, 522 U.S. 808, 118 S.Ct. 47, 139 L.Ed.2d 13 (1997) (arbitration provision shipped with computer binding on buyer); ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996) (shrinkwrap license binding on buyer);^[6]and M.A. Mortenson Co., Inc. v. Timberline Software Corp., 140 Wash.2d 568, 998 P.2d 305 (2000) (following Hill and ProCD on license agreement supplied with software).^[7] It appears that at least in part, the cases turn on whether the court finds that the parties formed their contract before or after the vendor communicated its terms to the purchaser. Compare Step-Saver, 939 F.2d at 98 (parties' conduct in shipping, receiving and paying for product demonstrates existence of contract; box top license constitutes proposal for additional terms under § 2-207 which requires express agreement by purchaser); Arizona Retail, 831 F.Supp. at 765 (vendor entered into contract by agreeing to ship goods, or at latest by shipping goods to buyer; license agreement constitutes proposal to modify agreement under § 2-209 which requires express assent by buyer); and Orris, 5 F.Supp.2d at 1206 (sales contract concluded when vendor received consumer orders; single-use language on product's label was proposed modification under § 2-209 which requires express assent by purchaser); with ProCD, 86 F.3d at 1452 (under § 2-204 vendor, as master of offer, may propose limitations on kind of conduct that constitutes acceptance; § 2-207 does not apply in case with only one form); Hill, 105 F.3d at 1148-49 (same); and Mortenson, 998 P.2d at 311-314 (where vendor and purchaser utilized license agreement in prior course of dealing, shrinkwrap license agreement constituted issue of contract formation under § 2-204, not contract alteration under § 2-207).

Gateway urges the Court to follow the Seventh Circuit decision in Hill. That case involved the shipment of a Gateway computer with terms similar to the Standard Terms in this case, except that Gateway gave the customer 30 days — instead of 5 days — to return the computer. In enforcing the arbitration clause, the Seventh Circuit relied on its decision in ProCD, where it enforced a software license which was contained inside a product box. See Hill, 105 F.3d at 1148-50. In ProCD, the Seventh Circuit noted that the exchange of money frequently precedes the communication of detailed terms in a commercial transaction. See ProCD, 86 F.3d at 1451. Citing UCC § 2-204, the court reasoned that by including the license with the software, the vendor proposed a contract that the buyer could accept by using the software after having an opportunity to read the license.^[8]ProCD, 86 F.3d at 1452. Specifically, the court stated:

A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct [1339] that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance.

ProCD, 86 F.3d at 1452. The Hill court followed the ProCD analysis, noting that "[p]ractical considerations support allowing vendors to enclose the full legal terms with their products." Hill, 105 F.3d at 1149.^[9]

The Court is not persuaded that Kansas or Missouri courts would follow the Seventh Circuit reasoning in Hill and ProCD. In each case the Seventh Circuit concluded without support that UCC § 2-207 was irrelevant because the cases involved only one written form. See ProCD, 86 F.3d at 1452 (citing no authority); Hill, 105 F.3d at 1150 (citing ProCD). This conclusion is not supported by the statute or by Kansas or Missouri law. Disputes under § 2-207 often arise in the context of a "battle of forms," see, e.g., Diatom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1574 (10th Cir.1984), but nothing in its language precludes application in a case which involves only one form. The statute provides:

Additional terms in acceptance or confirmation.

(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract [if the contract is not between merchants]....

K.S.A. § 84-2-207; V.A.M.S. § 400.2-207. By its terms, § 2-207 applies to an acceptance or written confirmation. It states nothing which requires another form before the provision becomes effective. In fact, the official comment to the section specifically provides that §§ 2-207(1) and (2) apply "where an agreement has been reached orally ... and is followed by one or both of the parties sending formal memoranda embodying the terms so far agreed and adding terms not discussed." Official Comment 1 of UCC § 2-207. Kansas and Missouri courts have followed this analysis. See Southwest Engineering Co. v. Martin Tractor Co., 205 Kan. 684, 695, 473 P.2d 18, 26 (1970) (stating in dicta that § 2-207 applies where open offer is accepted by expression of acceptance in writing or where oral agreement is later confirmed [1340] in writing);^[10]Central Bag Co. v. W. Scott and Co., 647 S.W.2d 828, 830 (Mo.App. 1983) (§§ 2-207(1) and (2) govern cases where one or both parties send written confirmation after oral contract). Thus, the Court concludes that Kansas and Missouri courts would apply § 2-207 to the facts in this case. Accord Avedon, 126 F.3d at 1283 (parties agree that § 2-207 controls whether arbitration clause in sales confirmation is part of contract).

In addition, the Seventh Circuit provided no explanation for its conclusion that "the vendor is the master of the offer." See ProCD, 86 F.3d at 1452 (citing nothing in support of proposition); Hill, 105 F.3d at 1149 (citing ProCD). In typical consumer transactions, the purchaser is the offeror, and the vendor is the offeree. See Brown Mach., Div. of John Brown, Inc. v. Hercules, Inc., 770 S.W.2d 416, 419 (Mo. App.1989) (as general rule orders are considered offers to purchase); Rich Prods. Corp. v. Kemutec Inc., 66 F.Supp.2d 937, 956 (E.D.Wis.1999) (generally price quotation is invitation to make offer and purchase order is offer). While it is possible for the vendor to be the offeror, see Brown Machine, 770 S.W.2d at 419 (price quote can amount to offer if it reasonably appears from quote that assent to quote is all that is needed to ripen offer into contract), Gateway provides no factual evidence which would support such a finding in this case. The Court therefore assumes for purposes of the motion to dismiss that plaintiff offered to purchase the computer (either in person or through catalog order) and that Gateway accepted plaintiff's offer (either by completing the sales transaction in person or by agreeing to ship and/or shipping the computer to plaintiff).^[11]Accord Arizona Retail, 831 F.Supp. at 765 (vendor entered into contract by agreeing to ship goods, or at latest, by shipping goods).

Under § 2-207, the Standard Terms constitute either an expression of acceptance or written confirmation. As an expression of acceptance, the Standard Terms would constitute a counter-offer only if Gateway expressly made its acceptance conditional on plaintiff's assent to the additional or different terms. K.S.A. § 84-2-207(1); V.A.M.S. § 400.2-207(1). "[T]he conditional nature of the acceptance must be clearly expressed in a manner sufficient to notify the offeror that the offeree is unwilling to proceed with the transaction unless the additional or different terms are included in the contract." Brown Machine, 770 S.W.2d at 420.^[12] [1341] Gateway provides no evidence that at the time of the sales transaction, it informed plaintiff that the transaction was conditioned on plaintiff's acceptance of the Standard Terms. Moreover, the mere fact that Gateway shipped the goods with the terms attached did not communicate to plaintiff any unwillingness to proceed without plaintiff's agreement to the Standard Terms. See, e.g., Arizona Retail, 831 F.Supp. at 765 (conditional acceptance analysis rarely appropriate where contract formed by performance but goods arrive with conditions attached); Leighton Indus., Inc. v. Callier Steel Pipe & Tube, Inc., 1991 WL 18413, *6, Case No. 89-C-8235 (N.D.Ill. Feb. 6, 1991) (applying Missouri law) (preprinted forms insufficient to notify offeror of conditional nature of acceptance, particularly where form arrives after delivery of goods).

Because plaintiff is not a merchant, additional or different terms contained in the Standard Terms did not become part of the parties' agreement unless plaintiff expressly agreed to them. See K.S.A. § 84-2-207, Kansas Comment 2 (if either party is not a merchant, additional terms are proposals for addition to the contract that do not become part of the contract unless the original offeror expressly agrees).^[13] Gateway argues that plaintiff demonstrated acceptance of the arbitration provision by keeping the computer more than five days after the date of delivery. Although the Standard Terms purport to work that result, Gateway has not presented evidence that plaintiff expressly agreed to those Standard Terms. Gateway states only that it enclosed the Standard Terms inside the computer box for plaintiff to read afterwards. It provides no evidence that it informed plaintiff of the five-day review-and-return period as a condition of the sales transaction, or that the parties contemplated additional terms to the agreement.^[14]See Step-Saver, 939 F.2d at 99 (during negotiations leading to purchase, vendor never mentioned box-top license or obtained buyer's express assent thereto). The Court finds that the act of keeping the computer past five days was not sufficient to demonstrate that plaintiff expressly agreed to the Standard Terms. Accord Brown Machine, 770 S.W.2d at 421 (express assent cannot be presumed by silence or mere failure to object). Thus, because Gateway has not provided evidence sufficient to support a finding under Kansas or Missouri law that plaintiff agreed to the arbitration provision contained in Gateway's Standard Terms, the Court overrules Gateway's motion to dismiss.

[1342] The motion also must be overruled because Kansas and Missouri law may not apply. As noted above, the Court must interpret the contract according to the law of the state in which the parties performed the last act necessary to form the contract. Gateway's motion does not address the choice of law issue, and the record is woefully unclear where the parties performed the last act necessary to complete the contract. Gateway therefore has not established that its motion is meritorious. If Gateway contends that the issue of contract formation is governed by some law other than that of Kansas or Missouri, it shall file a supplemental motion which cites the factual and legal basis for its position. The Court will review that submission and decide whether to order a jury trial on the existence of an agreement to arbitrate. See Avedon, 126 F.3d at 1283.

B. Hewlett-Packard's Motion to Dismiss

Plaintiff brings individual and class action claims against Hewlett-Packard, claiming that it breached a duty to warn consumers that its products are incompatible with Gateway computers. Complaint, ¶ 7. Hewlett-Packard asserts that the Court lacks diversity jurisdiction under 28 U.S.C. § 1332(a) because plaintiff does not seek damages in excess of $75,000.

Federal courts are courts of limited jurisdiction and may exercise jurisdiction only when specifically authorized to do so. See Castaneda v. I.N.S., 23 F.3d 1576, 1580 (10th Cir.1994). A court lacking jurisdiction must dismiss the cause at any stage of the proceeding in which it becomes apparent that jurisdiction is lacking. Scheideman v. Shawnee County Bd. of County Comm'rs, 895 F.Supp. 279, 280 (D.Kan.1995) (citing Basso v. Utah Power & Light Co., 495 F.2d 906, 909 (10th Cir. 1974)); Fed.R.Civ.P. 12(h)(3). The party who seeks to invoke federal jurisdiction bears the burden of establishing that such jurisdiction is proper. Basso, 495 F.2d at 909 (10th Cir.1974). When federal jurisdiction is challenged, plaintiff bears the burden of showing why the case should not be dismissed.^[15]Jensen v. Johnson County Youth Baseball League, 838 F.Supp. 1437, 1439-40 (D.Kan.1993).

Challenges to jurisdiction under Fed.R.Civ.P. 12(b)(1) generally take two forms: facial attacks on the sufficiency of jurisdictional allegations or factual attacks on the accuracy of those allegations. Holt v. U.S., 46 F.3d 1000, 1002-3 (10th Cir. 1995). Defendant's motion falls within the former category, and neither party relies on evidence outside the complaint. "[W]here the motion to dismiss states that it affirmatively appears from the allegations of the complaint that the requisite jurisdictional amount is not involved, the question of jurisdiction may be determined on the allegations of the complaint, without the production of any evidence." Gibson v. Jeffers, 478 F.2d 216, 220-21 (10th Cir. 1973).

Ordinarily, the amount plaintiff claims in the pleadings controls if he apparently makes the claim in good faith. F & S Const. Co. v. Jensen, 337 F.2d 160, 162 (10th Cir.1964).

But if, from the face of the pleadings, it is apparent, to a legal certainty, that plaintiff cannot recover the amount claimed, or if from the proofs, the court is satisfied to a like certainty that the plaintiff never was entitled to recover that amount, and that his claim was therefore colorable for the purpose of conferring jurisdiction, the suit will be dismissed.

Jensen, 337 F.2d at 162 (quoting St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 289, 58 S.Ct. 586, 82 L.Ed. 845 (1938)).

[1343] Plaintiff's only response regarding the amount of damages is: "A careful reading of the complaint shows damages in excess of $24,000.00." Plaintiff's Response to Hewlett-Packard's Support of Gateway's Motion to Dismiss or Stay, ¶ 1 (Doc. # 23) filed January 25, 2000 (emphasis added).^[16] The Court agrees with plaintiff's statement. In the opening paragraph of the complaint, plaintiff alleges generally that defendants have caused him personal damages in excess of $350,000 and caused class damages exceeding $350,000. At the end of the complaint, plaintiff itemizes the damages as follows: $350,000 in actual damages (including lost time of over $300,000, see Complaint, ¶ 3) and $3,500,000 in punitive damages against Gateway; $24,000 plus unitemized punitive damages against Gateway; and $24,000 plus unitemized punitive damages against Hewlett Packard. Complaint, pp. 6-7.^[17]

Merely alleging damages in excess of $24,000 is not sufficient to meet plaintiff's burden of establishing that jurisdiction is proper. While plaintiff is not necessarily required to specify an exact amount of punitive damages, see, e.g., Bell v. Preferred Life Assur. Soc. of Montgomery, Ala., 320 U.S. 238, 241, 64 S.Ct. 5, 88 L.Ed. 15 (1943) (issue is whether it appears to a legal certainty that plaintiff could not recover sufficient actual and punitive damages to meet jurisdictional requirement), plaintiff must allege enough facts to convince the Court that recoverable damages will bear a reasonable relation to the minimum jurisdictional requirement. See Gibson, 478 F.2d at 221. In the complaint, plaintiff alleges only that Hewlett-Packard sold him a scanner without warning him that it was not compatible with Gateway computers, and that Hewlett-Packard had a duty to warn of any incompatibility problems. See Complaint, ¶ 7. He alleges no facts to support actual damages of $24,000, nor does he allege facts to show that he is entitled to punitive damages or the amount thereof. Plaintiff argues that the Court has jurisdiction over joinder claims against Hewlett-Packard under Rules 18, 19 and 20 of the Federal Rules of Civil Procedure. Rule 18 deals with joinder of claims and remedies against a single party, however, and joinder under Rules 19 and 20 requires independent subject matter jurisdiction over the claims against the joined defendant. See 7 Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure: Civil 2d §§ 1610, 1659. Thus, regardless of the joinder rules, plaintiff must claim damages exceeding $75,000 against Hewlett-Packard in order to satisfy the diversity jurisdictional requirement. Plaintiff fails to do so. Thus, the Court finds that Hewlett-Packard's motion to dismiss should be sustained.^[18]

C. Plaintiff's Motions

Plaintiff has filed four motions which are currently pending before the Court. First, he asks the Court to certify a class.^[19] A prerequisite for class action [1344] certification is a finding by the Court that the representative party can "fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a)(4). Due process requires that the Court "stringently" apply the competent representation requirement because class members are bound by the judgment (unless they opt out), even though they may not actually be aware of the proceedings. Albertson's, Inc. v. Amalgamated Sugar Co., 503 F.2d 459, 463-64 (10th Cir.1974). Because a layperson ordinarily does not possess the legal training and expertise necessary to protect the interests of a proposed class, courts are reluctant to certify a class represented by a pro se litigant. See 7A Charles A. Wright, Arthur R. Miller, Mary Kay Kane, Federal Practice and Procedure § 1769.1 n. 12; see also Oxendine v. Williams, 509 F.2d 1405, 1407 (4th Cir. 1975) (pro se prisoners are not adequate representatives for a class). Moreover, although plaintiff has the right to appear pro se on his own behalf, he may not represent another pro se plaintiff in federal court. 28 U.S.C. § 1654; see, e.g., U.S. v. Grismore, 546 F.2d 844 (10th Cir.1976); Herrera-Venegas v. Sanchez-Rivera, 681 F.2d 41, 42 (1st Cir.1982); U.S. v. Taylor, 569 F.2d 448 (7th Cir.1978). Accordingly, the Court concludes that plaintiff is not an adequate class representative and overrules his motion to certify a class.

Second, plaintiff requests a "writ of certiorari" to the District Court of Johnson County, Kansas, for a transcript and certified copy of all documents in a prior case. Courts generally have their own procedures for obtaining transcripts and certified copies of documents in a prior case. Plaintiff provides no information to lead the Court to conclude otherwise, nor does he cite any legal authority to support that this Court has the power to grant his unusual request.^[20] Accordingly, the Court overrules plaintiff's motion for a "writ of certiorari."

Finally, plaintiff seeks sanctions against Gateway counsel because of alleged deficiencies in their citation to legal authorities, and he urges the Court to require certain defense counsel to verify that they have notified courts that he has lodged an ethical complaint against them. The Court finds no merit to either request and therefore overrules both motions.

IT IS THEREFORE ORDERED that the Motion to Dismiss (Doc. # 6) which defendant Gateway filed November 22, 1999 be and hereby is OVERRULED. If Gateway contends that the issue of contract formation is governed by some law other than that of Kansas or Missouri, on or before June 30, 2000, it shall file a supplemental motion to dismiss and compel arbitration and cite the factual and legal basis for its position. Plaintiff no later than July 24, 2000 shall file any response. Gateway's reply, if any, shall be filed no later than August 7, 2000. The Court will review those submissions and decide whether to order a jury trial on the existence of an agreement to arbitrate. In presenting these materials, however, the parties are ordered to brief the matter in a summary judgment motion format and scrupulously follow Rule 56, Fed.R.Civ.P., and D. Kan. Rule 56.1.

IT IS FURTHER ORDERED that Defendant Hewlett-Packard, Inc.'s Motion To Dismiss, Or In The Alternative For Stay Of Proceedings (Doc. # 16) filed December 22, 1999 be and hereby is SUSTAINED in part, in that plaintiff's complaint against Hewlett-Packard is dismissed for lack of subject matter jurisdiction.

IT IS FURTHER ORDERED that the Motion (Doc. # 2) to certify a class which plaintiff filed October 29, 1999 be and [1345] hereby is OVERRULED; the Motion For Sanctions, Expenses and Punitives [sic] (Doc. # 11) which plaintiff filed December 3, 1999 be and hereby is OVERRULED; the Motion for a Writ of Certiorari (Doc. # 12) which plaintiff filed December 6, 1999 be and hereby is OVERRULED, and the Motion for Verification (Doc. # 24) which plaintiff filed January 25, 2000 be and hereby is OVERRULED.

[1] Gateway states that after it sold plaintiff's computer, it mailed all existing customers in the United States a copy of its quarterly magazine, which contained notice of a change in the arbitration policy set forth in the Standard Terms. The new arbitration policy afforded customers the option of arbitrating before the International Chamber of Commerce ("ICC"), the American Arbitration Association ("AAA"), or the National Arbitration Forum ("NAF") in Chicago, Illinois, or any other location agreed upon by the parties. Plaintiff denies receiving notice of the amended arbitration policy. Neither party explains why — if the arbitration agreement was an enforceable contract — Gateway was entitled to unilaterally amend it by sending a magazine to computer customers.

[2] The FAA does not create independent federal-question jurisdiction; rather, "there must be diversity of citizenship or some other independent basis for federal jurisdiction" before the Court may act. Moses H. Cone Memorial Hosp. v. Mercury Const. Corp., 460 U.S. 1, 25 n. 32, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). In this case, plaintiff asserts diversity jurisdiction.

[3] It is not clear whether Gateway asks the Court to compel arbitration in addition to dismissal. Compare Motion to Dismiss (Doc. # 6), p. 2 (Gateway "requests this Court to dismiss the complaint ... so that [plaintiff] can pursue his arbitration remedy"); Memorandum in Support of Motion to Dismiss (Doc. # 8), p. 5 ("this action should be dismissed and plaintiff ordered to pursue his remedy through arbitration"); Reply Memorandum in Support of Motion to Dismiss (Doc. # 14), p. 3 ("this action should be dismissed so that plaintiff can pursue his arbitration remedy").

[4] While Gateway may have shipped the computer to plaintiff in Missouri, the record contains no evidence regarding how plaintiff communicated his order to Gateway, where Gateway received plaintiff's order or where the shipment originated.

[5] Paragraph 9 of the Standard Terms provides that "[t]his Agreement shall be governed by the laws of the State of South Dakota, without giving effect to the conflict of laws rules thereof." Both Kansas and Missouri recognize choice-of-law provisions, so long as the transaction at issue has a "reasonable relation" to the state whose law is selected. K.S.A. § 84-1-105(1); Mo.Rev.Stat. § 400.1-105(1). At this time, because it must first determine whether the parties ever agreed to the Standard Terms, the Court does not decide whether Kansas or Missouri (or some other unidentified state) would recognize the choice of law provision contained in the Standard Terms.

[6] The term "shrinkwrap license" gets its name from retail software packages that are covered in plastic or cellophane "shrinkwrap" and contain licenses that purport to become effective as soon as the customer tears the wrapping from the package. See ProCD, 86 F.3d at 1449.

[7] The Mortenson court also found support for its holding in the proposed Uniform Computer Information Transactions Act ("UCITA") (formerly known as proposed UCC Article 2B) (text located at www.law.upenn.edu/library/ulc/ucita/UCITA_99.htm), which the National Conference of Commissioners on Uniform State Laws approved and recommended for enactment by the states in July 1999. See Mortenson, 998 P.2d at 310 n. 6, 313 n. 10. The proposed UCITA, however, would not apply to the Court's analysis in this case. The UCITA applies to computer information transactions, which are defined as agreements "to create, modify, transfer, or license computer information or informational rights in computer information." UCITA, §§ 102(11) and 103. In transactions involving the sale of computers, such as our case, the UCITA applies only to the computer programs and copies, not to the sale of the computer itself. See UCITA § 103(c)(2).

[8] Section 2-204 provides: "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 contract." K.S.A. § 84-2-204; V.A.M.S. § 400.2-204.

[9] Legal commentators have criticized the reasoning of the Seventh Circuit in this regard. See, e.g., Jean R. Sternlight, Gateway Widens Doorway to Imposing Unfair Binding Arbitration on Consumers, Fla. Bar J., Nov. 1997, at 8, 10-12 (outcome in Gateway is questionable on federal statutory, common law and constitutional grounds and as a matter of contract law and is unwise as a matter of policy because it unreasonably shifts to consumers search cost of ascertaining existence of arbitration clause and return cost to avoid such clause); Thomas J. McCarthy et al., Survey: Uniform Commercial Code, 53 Bus. Law. 1461, 1465-66 (Seventh Circuit finding that UCC § 2-207 did not apply is inconsistent with official comment); Batya Goodman, Honey, I Shrink-Wrapped the Consumer: the Shrinkwrap Agreement as an Adhesion Contract, 21 Cardozo L.Rev. 319, 344-352 (Seventh Circuit failed to consider principles of adhesion contracts); Jeremy Senderowicz, Consumer Arbitration and Freedom of Contract: A Proposal to Facilitate Consumers' Informed Consent to Arbitration Clauses in Form Contracts, 32 Colum. J.L. & Soc. Probs. 275, 296-299 (judiciary (in multiple decisions, including Hill) has ignored issue of consumer consent to an arbitration clause). Nonetheless, several courts have followed the Seventh Circuit decisions in Hill and ProCD. See, e.g., M.A. Mortenson Co., Inc. v. Timberline Software Corp., 140 Wash.2d 568, 998 P.2d 305 (license agreement supplied with software); Rinaldi v. Iomega Corp., 1999 WL 1442014, Case No. 98C-09-064-RRC (Del.Super. Sept. 3, 1999) (warranty disclaimer included inside computer Zip drive packaging); Westendorf v. Gateway 2000, Inc., 2000 WL 307369, Case No. 16913 (Del. Ch. March 16, 2000) (arbitration provision shipped with computer); Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (N.Y.App.Div.1998) (same); Levy v. Gateway 2000, Inc., 1997 WL 823611, 33 UCC Rep. Serv.2d 1060 (N.Y.Sup. Oct. 31, 1997) (same).

[10] In Southwest Engineering, the court was concerned with the existence of an enforceable contract under the UCC statute of frauds and it determined that the parties' notes satisfied the writing requirement. It found that a subsequent letter which contained additional material terms did not become part of the agreement under § 2-207, however, because the parties did not expressly agree to the change in terms. See Southwest Engineering, 205 Kan. at 693-94, 473 P.2d at 25. The court further found that § 2-207 did not apply to its analysis because at the time of the letter, the parties had already memorialized the agreement in writing and there was no outstanding offer to accept or oral agreement to confirm. See Southwest Engineering, 205 Kan. at 695, 473 P.2d at 26.

[11] UCC § 2-206(b) provides that "an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance either by a prompt promise to ship or by the prompt or current shipment ..." The official comment states that "[e]ither shipment or a prompt promise to ship is made a proper means of acceptance of an offer looking to current shipment." UCC § 2-206, Official Comment 2.

[12] Courts are split on the standard for a conditional acceptance under § 2-207. See Daitom, 741 F.2d at 1576 (finding that Pennsylvania would most likely adopt "better" view that offeree must explicitly communicate unwillingness to proceed with transaction unless additional terms in response are accepted by offeror). On one extreme of the spectrum, courts hold that the offeree's response stating a materially different term solely to the disadvantage of the offeror constitutes a conditional acceptance. See Daitom, 741 F.2d at 1569 (citing Roto-Lith, Ltd. v. F.P. Bartlett & Co., 297 F.2d 497 (1st Cir.1962)). At the other end of the spectrum, courts hold that the conditional nature of the acceptance should be so clearly expressed in a manner sufficient to notify the offeror that the offeree is unwilling to proceed without the additional or different terms. See Daitom, 741 F.2d at 1569 (citing Dorton v. Collins & Aikman Corp., 453 F.2d 1161 (6th Cir.1972)). The middle approach requires that the response predicate acceptance on clarification, addition or modification. See Daitom, 741 F.2d at 1569 (citing Construction Aggregates Corp. v. Hewitt-Robins, Inc., 404 F.2d 505 (7th Cir.1968)). The First Circuit has since overruled its decision in Roto-Lith, see Ionics, Inc. v. Elmwood Sensors, Inc., 110 F.3d 184, and the Court finds that neither Kansas nor Missouri would apply the standard set forth therein. See Boese-Hilburn Co. v. Dean Machinery Co., 616 S.W.2d 520, (Mo.App.1981) (rejecting Roto-Lith standard); Owens-Corning Fiberglas Corp. v. Sonic Dev. Corp., 546 F.Supp. 533, 538 (D.Kan.1982) (acceptance is not counter-offer under Kansas law unless it is made conditional on assent to additional or different terms (citing Roto-Lith as comparison)); Daitom, 741 F.2d at 1569 (finding that Dorton is "better" view). Because Gateway does not satisfy the standard for conditional acceptance under either of the remaining standards (Dorton or Construction Aggregates), the Court does not decide which of the remaining two standards would apply in Kansas and/or Missouri.

[13] The Court's decision would be the same if it considered the Standard Terms as a proposed modification under UCC § 2-209. See, e.g., Orris, 5 F.Supp.2d at 1206 (express assent analysis is same under §§ 2-207 and 2-209).

[14] The Court is mindful of the practical considerations which are involved in commercial transactions, but it is not unreasonable for a vendor to clearly communicate to a buyer — at the time of sale — either the complete terms of the sale or the fact that the vendor will propose additional terms as a condition of sale, if that be the case.

[15] While the Court holds pro se pleadings to less stringent standards than pleadings drafted by lawyers, pro se litigants must follow the same procedural rules as any other litigant. See Hughes v. Rowe, 449 U.S. 5, 9, 101 S.Ct. 173, 66 L.Ed.2d 163 (1980); Green v. Dorrell, 969 F.2d 915, 917 (10th Cir.1992). The Court may not assume the role of advocate for a pro se litigant. Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir.1991).

[16] Plaintiff does not address the amount of damages claimed in Plaintiff's Response to Defendant Hewlett-Packard's Motion to Dismiss or Stay (Doc. # 20) filed January 5, 2000 or Plaintiff's Adendum [sic] to his Memoranda in Support (Doc. # 21) filed January 6, 2000.

[17] Plaintiff further claims that the "class of consumers who've purchased Gateway Computers and Hewlett-Packard scanners are owed damages plus punitives [sic] as can be shown." Complaint, p. 7. Plaintiff may not aggregate the claims of the class members, however, to meet the amount in controversy requirement. See Zahn v. International Paper Co., 414 U.S. 291, 294-95, 94 S.Ct. 505, 38 L.Ed.2d 511 (1973); Leonhardt v. Western Sugar Co., 160 F.3d 631, 637-38 (10th Cir. 1998) (each plaintiff in class action diversity action must meet jurisdictional amount in controversy; aggregation allowed only if plaintiffs unite to enforce a single title or right in which they have a common and undivided interest).

[18] Because the Court concludes that it lacks subject matter jurisdiction, it does not reach Hewlett-Packard's claim that plaintiff has failed to state a claim upon which relief may be granted.

[19] Neither defendant has filed a response to the motion to certify. On January 4, 2000, the Court entered an order staying Hewlett-Packard's time to file a response to 30 days after defendant receives a transcript of plaintiff's deposition. The record does not reveal the status of plaintiff's deposition or the transcript thereof.

[20] A "certiorari" is "[a]n extraordinary writ issued by an appellate court, at its discretion, directing a lower court to deliver the record in the case for review." Black's Law Dictionary (1996). This Court does not have appellate jurisdiction over the District Court of Johnson County, Kansas.

306 F.3d 17 (2002)

Docket Nos. 01-7870, 01-7872, 01-7860.

Argued: March 14, 2002.
Decided: October 1, 2002.

[18] [19] [20] Roger W. Yoerges, Wilmer Cutler & Pickering, Washington, DC (Patrick J. Carome, Joseph R. Profaizer, Darrin A. Hostetler, Wilmer Cutler & Pickering, Washington, DC, on the brief; David C. Goldberg, America Online, Inc., Dulles, VA, of counsel), for Defendants-Appellants.

Joshua N. Rubin, Abbey Gardy, LLP, New York, N.Y. (Jill S. Abrams, Courtney E. Lynch, Richard B. Margolies, Abbey Gardy, LLP, New York, NY, on the brief; James V. Bashian, Law Offices of James V. Bashian, New York, NY; George G. Mahfood, Leesfield, Leighton, Rubio & Mahfood, Miami, FL, of counsel), for Plaintiffs-Appellees.

Before McLAUGHLIN, LEVAL, and SOTOMAYOR, Circuit Judges.

SOTOMAYOR, Circuit Judge.

This is an appeal from a judgment of the Southern District of New York denying a motion by defendants-appellants Netscape Communications Corporation and its corporate parent, America Online, Inc. (collectively, "defendants" or "Netscape"), to compel arbitration and to stay court proceedings. In order to resolve the central question of arbitrability presented here, we must address issues of contract formation in cyberspace. Principally, we are asked to determine whether plaintiffs-appellees ("plaintiffs"), by acting upon defendants' invitation to download free software made available on defendants' webpage, agreed to be bound by the software's license terms (which included the arbitration clause at issue), even though plaintiffs could not have learned of the existence of those terms unless, prior to executing the download, they had scrolled down the webpage to a screen located below the download button. We agree with the district court that a reasonably prudent Internet user in circumstances such as these would not have known or learned of the existence of the license terms before responding to defendants' invitation to download the free software, and that defendants therefore did not provide reasonable notice of the license terms. In consequence, plaintiffs' bare act of downloading the software did not unambiguously manifest assent to the arbitration provision contained in the license terms.

We also agree with the district court that plaintiffs' claims relating to the software at issue — a "plug-in" program entitled SmartDownload ("SmartDownload" or "the plug-in program"), offered by Netscape to enhance the functioning of the separate browser program called Netscape Communicator ("Communicator" or "the browser program") — are not subject to an arbitration agreement contained in the license terms governing the use of Communicator. Finally, we conclude that the district court properly rejected defendants' argument that plaintiff website owner Christopher Specht, though not a party to any Netscape license agreement, is nevertheless required to arbitrate his claims concerning SmartDownload because he allegedly benefited directly under SmartDownload's license agreement. Defendants' theory that Specht benefited whenever visitors employing SmartDownload downloaded certain files made available on his website is simply too tenuous and speculative to justify application of the legal doctrine that requires a nonparty to an arbitration agreement to arbitrate if he or she has received a direct benefit under a contract containing the arbitration agreement.

We therefore affirm the district court's denial of defendants' motion to compel arbitration and to stay court proceedings.

BACKGROUND

I. Facts

In three related putative class actions,^[1] plaintiffs alleged that, unknown to them, their use of SmartDownload transmitted to defendants private information about plaintiffs' downloading of files from the Internet, thereby effecting an electronic surveillance of their online activities in violation of two federal statutes, the Electronic Communications Privacy Act, 18 U.S.C. §§ 2510 et seq., and the Computer Fraud and Abuse Act, 18 U.S.C. § 1030.

Specifically, plaintiffs alleged that when they first used Netscape's Communicator — a software program that permits Internet browsing — the program created and stored on each of their computer hard drives a small text file known as a "cookie" that functioned "as a kind of electronic identification tag for future communications" between their computers and Netscape. Plaintiffs further alleged that when they installed SmartDownload — a separate software "plug-in"^[2] that served to enhance Communicator's browsing capabilities — SmartDownload created and stored on their computer hard drives another string of characters, known as a "Key," which similarly functioned as an identification tag in future communications with Netscape. According to the complaints in this case, each time a computer user employed Communicator to download a file from the Internet, SmartDownload "assume[d] from Communicator the task of downloading" the file and transmitted to Netscape the address of the file being downloaded together with the cookie created by Communicator and the Key created by SmartDownload. These processes, plaintiffs claim, constituted unlawful "eavesdropping" on users of Netscape's software products as well as on Internet websites from which users employing SmartDownload downloaded files.

In the time period relevant to this litigation, Netscape offered on its website various software programs, including Communicator and SmartDownload, which visitors to the site were invited to obtain free of charge. It is undisputed that five of the six named plaintiffs — Michael Fagan, John Gibson, Mark Gruber, Sean Kelly, and Sherry Weindorf — downloaded Communicator from the Netscape website. These plaintiffs acknowledge that when they proceeded to initiate installation^[3] of Communicator, they were automatically shown a scrollable text of that program's license agreement and were not permitted to complete the installation until they had clicked on a "Yes" button to indicate that they accepted all the license terms.^[4] If a user attempted to install Communicator without clicking "Yes," the installation would be aborted. All five named user plaintiffs^[5] expressly agreed to Communicator's license terms by clicking "Yes." The Communicator license agreement that these plaintiffs saw made no mention of SmartDownload or other plug-in programs, and stated that "[t]hese terms apply to Netscape Communicator and Netscape Navigator"^[6] and that "all disputes relating to this Agreement (excepting any dispute relating to intellectual property rights)" are subject to "binding arbitration in Santa Clara County, California."

Although Communicator could be obtained independently of SmartDownload, all the named user plaintiffs, except Fagan, downloaded and installed Communicator in connection with downloading SmartDownload.^[7] Each of these plaintiffs allegedly arrived at a Netscape webpage^[8] captioned "SmartDownload Communicator" that urged them to "Download With Confidence Using SmartDownload!" At or near the bottom of the screen facing plaintiffs was the prompt "Start Download" and a tinted button labeled "Download." By clicking on the button, plaintiffs initiated the download of SmartDownload. Once that process was complete, SmartDownload, as its first plug-in task, permitted plaintiffs to proceed with downloading and installing Communicator, an operation that was accompanied by the clickwrap display of Communicator's license terms described above.

The signal difference between downloading Communicator and downloading SmartDownload was that no clickwrap presentation accompanied the latter operation. Instead, once plaintiffs Gibson, Gruber, Kelly, and Weindorf had clicked on the "Download" button located at or near the bottom of their screen, and the downloading of SmartDownload was complete, these plaintiffs encountered no further information about the plug-in program or the existence of license terms governing its use.^[9] The sole reference to SmartDownload's license terms on the "SmartDownload Communicator" webpage was located in text that would have become visible to plaintiffs only if they had scrolled down to the next screen.

Had plaintiffs scrolled down instead of acting on defendants' invitation to click on the "Download" button, they would have encountered the following invitation: "Please review and agree to the terms of the Netscape SmartDownload software license agreement before downloading and using the software." Plaintiffs Gibson, Gruber, Kelly, and Weindorf averred in their affidavits that they never saw this reference to the SmartDownload license agreement when they clicked on the "Download" button. They also testified during depositions that they saw no reference to license terms when they clicked to download SmartDownload, although under questioning by defendants' counsel, some plaintiffs added that they could not "remember" or be "sure" whether the screen shots of the SmartDownload page attached to their affidavits reflected precisely what they had seen on their computer screens when they downloaded SmartDownload.^[10]

In sum, plaintiffs Gibson, Gruber, Kelly, and Weindorf allege that the process of obtaining SmartDownload contrasted sharply with that of obtaining Communicator. Having selected SmartDownload, they were required neither to express unambiguous assent to that program's license agreement nor even to view the license terms or become aware of their existence before proceeding with the invited download of the free plug-in program. Moreover, once these plaintiffs had initiated the download, the existence of SmartDownload's license terms was not mentioned while the software was running or at any later point in plaintiffs' experience of the product.

Even for a user who, unlike plaintiffs, did happen to scroll down past the download button, SmartDownload's license terms would not have been immediately displayed in the manner of Communicator's clickwrapped terms. Instead, if such a user had seen the notice of SmartDownload's terms and then clicked on the underlined invitation to review and agree to the terms, a hypertext link would have taken the user to a separate webpage entitled "License & Support Agreements." The first paragraph on this page read, in pertinent part:

The use of each Netscape software product is governed by a license agreement. You must read and agree to the license agreement terms BEFORE acquiring a product. Please click on the appropriate link below to review the current license agreement for the product of interest to you before acquisition. For products available for download, you must read and agree to the license agreement terms BEFORE you install the software. If you do not agree to the license terms, do not download, install or use the software.

Below this paragraph appeared a list of license agreements, the first of which was "License Agreement for Netscape Navigator and Netscape Communicator Product Family (Netscape Navigator, Netscape Communicator and Netscape SmartDownload)." If the user clicked on that link, he or she would be taken to yet another webpage that contained the full text of a license agreement that was identical in every respect to the Communicator license agreement except that it stated that its "terms apply to Netscape Communicator, Netscape Navigator, and Netscape SmartDownload." The license agreement granted the user a nonexclusive license to use and reproduce the software, subject to certain terms:

BY CLICKING THE ACCEPTANCE BUTTON OR INSTALLING OR USING NETSCAPE COMMUNICATOR, NETSCAPE NAVIGATOR, OR NETSCAPE SMARTDOWNLOAD SOFTWARE (THE "PRODUCT"), THE INDIVIDUAL OR ENTITY LICENSING THE PRODUCT ("LICENSEE") IS CONSENTING TO BE BOUND BY AND IS BECOMING A PARTY TO THIS AGREEMENT. IF LICENSEE DOES NOT AGREE TO ALL OF THE TERMS OF THIS AGREEMENT, THE BUTTON INDICATING NON-ACCEPTANCE MUST BE SELECTED, AND LICENSEE MUST NOT INSTALL OR USE THE SOFTWARE.

Among the license terms was a provision requiring virtually all disputes relating to the agreement to be submitted to arbitration:

Unless otherwise agreed in writing, all disputes relating to this Agreement (excepting any dispute relating to intellectual property rights) shall be subject to final and binding arbitration in Santa Clara County, California, under the auspices of JAMS/EndDispute, with the losing party paying all costs of arbitration.

Unlike the four named user plaintiffs who downloaded SmartDownload from the Netscape website, the fifth named plaintiff, Michael Fagan, claims to have downloaded the plug-in program from a "shareware" website operated by ZDNet, an entity unrelated to Netscape. Shareware sites are websites, maintained by companies or individuals, that contain libraries of free, publicly available software. The pages that a user would have seen while downloading SmartDownload from ZDNet differed from those that he or she would have encountered while downloading SmartDownload from the Netscape website. Notably, instead of any kind of notice of the SmartDownload license agreement, the ZDNet pages offered only a hypertext link to "more information" about SmartDownload, which, if clicked on, took the user to a Netscape webpage that, in turn, contained a link to the license agreement. Thus, a visitor to the ZDNet website could have obtained SmartDownload, as Fagan avers he did, without ever seeing a reference to that program's license terms, even if he or she had scrolled through all of ZDNet's webpages.

The sixth named plaintiff, Christopher Specht, never obtained or used SmartDownload, but instead operated a website from which visitors could download certain electronic files that permitted them to create an account with an internet service provider called WhyWeb. Specht alleges that every time a user who had previously installed SmartDownload visited his website and downloaded WhyWeb-related files, defendants intercepted this information. Defendants allege that Specht would receive a representative's commission from WhyWeb every time a user who obtained a WhyWeb file from his website subsequently subscribed to the WhyWeb service. Thus, argue defendants, because the "Netscape license agreement... conferred on each user the right to download and use both Communicator and SmartDownload software," Specht received a benefit under that license agreement in that SmartDownload "assisted in obtaining the WhyWeb file and increased the likelihood of success in the download process." This benefit, defendants claim, was direct enough to require Specht to arbitrate his claims pursuant to Netscape's license terms. Specht, however, maintains that he never received any commissions based on the WhyWeb files available on his website.

II. Proceedings Below

In the district court, defendants moved to compel arbitration and to stay court proceedings pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 4, arguing that the disputes reflected in the complaints, like any other dispute relating to the SmartDownload license agreement, are subject to the arbitration clause contained in that agreement. Finding that Netscape's webpage, unlike typical examples of clickwrap, neither adequately alerted users to the existence of SmartDownload's license terms nor required users unambiguously to manifest assent to those terms as a condition of downloading the product, the court held that the user plaintiffs had not entered into the SmartDownload license agreement. Specht, 150 F.Supp.2d at 595-96.

The district court also ruled that the separate license agreement governing use of Communicator, even though the user plaintiffs had assented to its terms, involved an independent transaction that made no mention of SmartDownload and so did not bind plaintiffs to arbitrate their claims relating to SmartDownload. Id. at 596. The court further concluded that Fagan could not be bound by the SmartDownload license agreement, because the shareware site from which he allegedly obtained the plug-in program provided even less notice of SmartDownload's license terms than did Netscape's page. Id. at 596-97. Finally, the court ruled that Specht was not bound by the SmartDownload arbitration agreement as a noncontracting beneficiary, because he (1) had no preexisting relationship with any of the parties, (2) was not an agent of any party, and (3) received no direct benefit from users' downloading of files from his site, even if those users did employ SmartDownload to enhance their downloading. Id. at 597-98.

Defendants took this timely appeal pursuant to 9 U.S.C. § 16, and the district court stayed all proceedings in the underlying cases pending resolution of the appeal. This Court has jurisdiction pursuant to § 16(a)(1)(B), as this is an appeal from an order denying defendants' motion to compel arbitration under the FAA. Mediterranean Shipping Co. S.A. Geneva v. POL-Atlantic, 229 F.3d 397, 402 (2d Cir. 2000).

DISCUSSION

I. Standard of Review and Applicable Law

A district court's denial of a motion to compel arbitration is reviewed de novo. Collins & Aikman Prods. Co. v. Bldg. Sys., Inc., 58 F.3d 16, 19 (2d Cir. 1995). The determination of whether parties have contractually bound themselves to arbitrate a dispute — a determination involving interpretation of state law — is a legal conclusion also subject to de novo review. Chelsea Square Textiles, Inc. v. Bombay Dyeing & Mfg. Co., Ltd., 189 F.3d 289, 295 (2d Cir.1999); see also Shann v. Dunk, 84 F.3d 73, 77 (2d Cir.1996) ("The central issue — whether, based on the factual findings, a binding contract existed — is a question of law that we review de novo."). The findings upon which that conclusion is based, however, are factual and thus may not be overturned unless clearly erroneous. Chelsea Square Textiles, 189 F.3d at 295.

If a court finds that the parties agreed to arbitrate, it should then consider whether the dispute falls within the scope of the arbitration agreement. Genesco, Inc. v. T. Kakiuchi & Co., Ltd., 815 F.2d 840, 844 (2d Cir.1987). A district court's determination of the scope of an arbitration agreement is reviewed de novo. Oldroyd v. Elmira Sav. Bank, FSB, 134 F.3d 72, 76 (2d Cir.1998). In addition, whether a party may be compelled to arbitrate as a result of direct benefits that he or she allegedly received under a contract entered into by others is an issue of arbitrability that is reviewed de novo. Cf. Smith/Enron Cogeneration Ltd. P'ship, Inc. v. Smith Cogeneration Int'l, Inc., 198 F.3d 88, 95 (2d Cir.1999) ("[W]hether an entity is a party to the arbitration agreement ... is included within the broader issue of whether the parties agreed to arbitrate.").

The FAA provides that a "written provision in any ... contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction ... shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."^[11] 9 U.S.C. § 2. It is well settled that a court may not compel arbitration until it has resolved "the question of the very existence" of the contract embodying the arbitration clause. Interocean Shipping Co. v. Nat'l Shipping & Trading Corp., 462 F.2d 673, 676 (2d Cir.1972). "[A]rbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." AT & T Techs., Inc. v. Communications Workers of Am., 475 U.S. 643, 648, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986) (quotation marks omitted). Unless the parties clearly provide otherwise, "the question of arbitrability — whether a[n] ... agreement creates a duty for the parties to arbitrate the particular grievance — is undeniably an issue for judicial determination." Id. at 649, 106 S.Ct. 1415.

The district court properly concluded that in deciding whether parties agreed to arbitrate a certain matter, a court should generally apply state-law principles to the issue of contract formation. Mehler v. Terminix Int'l Co., 205 F.3d 44, 48 (2d Cir.2000); see also Perry v. Thomas, 482 U.S. 483, 492 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987) ("[S]tate law, whether of legislative or judicial origin, is applicable [to the determination of whether the parties agreed to arbitrate] if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally."). Therefore, state law governs the question of whether the parties in the present case entered into an agreement to arbitrate disputes relating to the SmartDownload license agreement. The district court further held that California law governs the question of contract formation here; the parties do not appeal that determination.

II. Whether This Court Should Remand for a Trial on Contract Formation

Defendants argue on appeal that the district court erred in deciding the question of contract formation as a matter of law. A central issue in dispute, according to defendants, is whether the user plaintiffs actually saw the notice of SmartDownload's license terms when they downloaded the plug-in program. Although plaintiffs in their affidavits and depositions generally swore that they never saw the notice of terms on Netscape's webpage, defendants point to deposition testimony in which some plaintiffs, under repeated questioning by defendants' counsel, responded that they could not "remember" or be entirely "sure" whether the link to SmartDownload's license terms was visible on their computer screens. Defendants argue that on some computers, depending on the configuration of the monitor and browser, SmartDownload's license link "appears on the first screen, without any need for the user to scroll at all." Thus, according to defendants, "a trial on the factual issues that Defendants raised about each and every Plaintiffs' [sic] downloading experience" is required on remand to remedy the district court's "error" in denying defendants' motion as a matter of law.

Section 4 of the FAA provides, in relevant part, that "[i]f the making of the arbitration agreement ... be in issue, the court shall proceed summarily to the trial thereof." 9 U.S.C. § 4. We conclude for two reasons, however, that defendants are not entitled to a remand for a full trial. First, during oral argument in the district court on the arbitrability of the five user plaintiffs' claims, defendants' counsel repeatedly insisted that the district court could decide "as a matter of law based on the uncontroverted facts in this case" whether "a reasonably prudent person could or should have known of the [license] terms by which acceptance would be signified." "I don't want you to try the facts," defendants' counsel told the court. "I think that the evidence in this case upon which this court can make a determination [of whether a contract existed] as a matter of law is uncontroverted."^[12] Accordingly, the district court decided the issue of reasonable notice and objective manifestation of assent as a matter of law. "[I]t is a well-established general rule that an appellate court will not consider an issue raised for the first time on appeal." Greene v. United States, 13 F.3d 577, 586 (2d Cir. 1994); see also Gurary v. Winehouse, 190 F.3d 37, 44 (2d Cir.1999) ("Having failed to make the present argument to the district court, plaintiff will not be heard to advance it here."). Nor would it cause injustice in this case for us to decline to accept defendants' invitation to consider an issue that defendants did not advance below.

Second, after conducting weeks of discovery on defendants' motion to compel arbitration, the parties placed before the district court an ample record consisting of affidavits and extensive deposition testimony by each named plaintiff; numerous declarations by counsel and witnesses for the parties; dozens of exhibits, including computer screen shots and other visual evidence concerning the user plaintiffs' experience of the Netscape webpage; oral argument supplemented by a computer demonstration; and additional briefs following oral argument. This well-developed record contrasts sharply with the meager records that on occasion have caused this Court to remand for trial on the issue of contract formation pursuant to 9 U.S.C. § 4. See, e.g., Interbras Cayman Co. v. Orient Victory Shipping Co., S.A., 663 F.2d 4, 5 (2d Cir.1981) (record consisted of affidavits and other papers); Interocean Shipping, 462 F.2d at 676 (record consisted of pleadings, affidavits, and documentary attachments). We are satisfied that the unusually full record before the district court in this case constituted "a hearing where evidence is received." Interocean Shipping, 462 F.2d at 677. Moreover, upon the record assembled, a fact-finder could not reasonably find that defendants prevailed in showing that any of the user plaintiffs had entered into an agreement on defendants' license terms.

In sum, we conclude that the district court properly decided the question of reasonable notice and objective manifestation of assent as a matter of law on the record before it, and we decline defendants' request to remand for a full trial on that question.

III. Whether the User Plaintiffs Had Reasonable Notice of and Manifested Assent to the SmartDownload License Agreement

Whether governed by the common law or by Article 2 of the Uniform Commercial Code ("UCC"), a transaction, in order to be a contract, requires a manifestation of agreement between the parties. See Windsor Mills, Inc. v. Collins & Aikman Corp., 25 Cal.App.3d 987, 991, 101 Cal.Rptr. 347, 350 (1972) ("[C]onsent to, or acceptance of, the arbitration provision [is] necessary to create an agreement to arbitrate."); see also Cal. Com.Code § 2204(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.").^[13] Mutual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract. Binder v. Aetna Life Ins. Co., 75 Cal.App.4th 832, 848, 89 Cal.Rptr.2d 540, 551 (1999); cf. Restatement (Second) of Contracts § 19(2) (1981) ("The conduct of a party is not effective as a manifestation of his assent unless he intends to engage in the conduct and knows or has reason to know that the other party may infer from his conduct that he assents."). Although an onlooker observing the disputed transactions in this case would have seen each of the user plaintiffs click on the SmartDownload "Download" button, see Cedars Sinai Med. Ctr. v. Mid-West Nat'l Life Ins. Co., 118 F.Supp.2d 1002, 1008 (C.D.Cal.2000) ("In California, a party's intent to contract is judged objectively, by the party's outward manifestation of consent."), a consumer's clicking on a download button does not communicate assent to contractual terms if the offer did not make clear to the consumer that clicking on the download button would signify assent [30] to those terms, see Windsor Mills, 25 Cal.App.3d at 992, 101 Cal.Rptr. at 351 ("[W]hen the offeree does not know that a proposal has been made to him this objective standard does not apply."). California's common law is clear that "an offeree, regardless of apparent manifestation of his consent, is not bound by inconspicuous contractual provisions of which he is unaware, contained in a document whose contractual nature is not obvious." Id.; see also Marin Storage & Trucking, Inc. v. Benco Contracting & Eng'g, Inc., 89 Cal. App.4th 1042, 1049, 107 Cal.Rptr.2d 645, 651 (2001) (same).

Arbitration agreements are no exception to the requirement of manifestation of assent. "This principle of knowing consent applies with particular force to provisions for arbitration." Windsor Mills, 101 Cal.Rptr. at 351. Clarity and conspicuousness of arbitration terms are important in securing informed assent. "If a party wishes to bind in writing another to an agreement to arbitrate future disputes, such purpose should be accomplished in a way that each party to the arrangement will fully and clearly comprehend that the agreement to arbitrate exists and binds the parties thereto." Commercial Factors Corp. v. Kurtzman Bros., 131 Cal.App.2d 133, 134-35, 280 P.2d 146, 147-48 (1955) (internal quotation marks omitted). Thus, California contract law measures assent by an objective standard that takes into account both what the offeree said, wrote, or did and the transactional context in which the offeree verbalized or acted.

A. The Reasonably Prudent Offeree of Downloadable Software

Defendants argue that plaintiffs must be held to a standard of reasonable prudence and that, because notice of the existence of SmartDownload license terms was on the next scrollable screen, plaintiffs were on "inquiry notice" of those terms.^[14] We disagree with the proposition that a reasonably prudent offeree in plaintiffs' position would necessarily have known or learned of the existence of the SmartDownload license agreement prior to acting, so that plaintiffs may be held to have assented to that agreement with constructive notice of its terms. See Cal. Civ.Code § 1589 ("A voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting."). It is true that "[a] party cannot avoid the terms of a contract on the ground that he or she failed to read it before signing." Marin Storage & Trucking, 89 Cal.App.4th at 1049, 107 Cal. Rptr.2d at 651. But courts are quick to add: "An exception to this general rule exists when the writing does not appear to be a contract and the terms are not called to the attention of the recipient. In such a case, no contract is formed with respect to the undisclosed term." Id.; cf. Cory v. Golden State Bank, 95 Cal.App.3d 360, 364, 157 Cal.Rptr. 538, 541 (1979) ("[T]he provision in question is effectively hidden from the view of money order purchasers until after the transactions are completed. ... Under these circumstances, it must be concluded that the Bank's money order purchasers are not chargeable with either actual or constructive notice of the service charge provision, and therefore cannot be deemed to have consented to the provision as part of their transaction with the Bank.").

Most of the cases cited by defendants in support of their inquiry-notice argument are drawn from the world of paper contracting. See, e.g., Taussig v. Bode & Haslett, 134 Cal. 260, 66 P. 259 (1901) (where party had opportunity to read leakage disclaimer printed on warehouse receipt, he had duty to do so); In re First Capital Life Ins. Co., 34 Cal.App.4th 1283, 1288, 40 Cal.Rptr.2d 816, 820 (1995) (purchase of insurance policy after opportunity to read and understand policy terms creates binding agreement); King v. Larsen Realty, Inc., 121 Cal.App.3d 349, 356, 175 Cal.Rptr. 226, 231 (1981) (where realtors' board manual specifying that party was required to arbitrate was "readily available," party was "on notice" that he was agreeing to mandatory arbitration); Cal. State Auto. Ass'n Inter-Ins. Bureau v. Barrett Garages, Inc., 257 Cal.App.2d 71, 76, 64 Cal.Rptr. 699, 703 (1967) (recipient of airport parking claim check was bound by terms printed on claim check, because a "ordinarily prudent" person would have been alerted to the terms); Larrus v. First Nat'l Bank, 122 Cal.App.2d 884, 888, 266 P.2d 143, 147 (1954) ("clearly printed" statement on bank card stating that depositor agreed to bank's regulations provided sufficient notice to create agreement, where party had opportunity to view statement and to ask for full text of regulations, but did not do so); see also Hux v. Butler, 339 F.2d 696, 700 (6th Cir.1964) (constructive notice found where "slightest inquiry" would have disclosed relevant facts to offeree); Walker v. Carnival Cruise Lines, 63 F.Supp.2d 1083, 1089 (N.D.Cal.1999) (under California and federal law, "conspicuous notice" directing the attention of parties to existence of contract terms renders terms binding) (quotation marks omitted); Shacket v. Roger Smith Aircraft Sales, Inc., 651 F.Supp. 675, 691 (N.D.Ill. 1986) (constructive notice found where "minimal investigation" would have revealed facts to offeree).

As the foregoing cases suggest, receipt of a physical document containing contract terms or notice thereof is frequently deemed, in the world of paper transactions, a sufficient circumstance to place the offeree on inquiry notice of those terms. "Every person who has actual notice of circumstances sufficient to put a prudent man upon inquiry as to a particular fact, has constructive notice of the fact itself in all cases in which, by prosecuting such inquiry, he might have learned such fact." Cal. Civ.Code § 19. These principles apply equally to the emergent world of online product delivery, pop-up screens, hyperlinked pages, clickwrap licensing, scrollable documents, and urgent admonitions to "Download Now!". What plaintiffs saw when they were being invited by defendants to download this fast, free plug-in called SmartDownload was a screen containing praise for the product and, at the very bottom of the screen, a "Download" button. Defendants argue that under the principles set forth in the cases cited above, a "fair and prudent person using ordinary care" would have been on inquiry notice of SmartDownload's license terms. Shacket, 651 F.Supp. at 690.

We are not persuaded that a reasonably prudent offeree in these circumstances would have known of the existence of license terms. Plaintiffs were responding to an offer that did not carry an immediately visible notice of the existence of license terms or require unambiguous manifestation of assent to those terms. Thus, plaintiffs' "apparent manifestation of ... consent" was to terms "contained in a document whose contractual nature [was] not obvious." Windsor Mills, 25 Cal.App.3d at 992, 101 Cal.Rptr. at 351. Moreover, the fact that, given the position of the scroll bar on their computer screens, plaintiffs may have been aware that an unexplored portion of the Netscape webpage remained below the download button does not mean that they reasonably should have concluded that this portion contained a notice of license terms. In their deposition testimony, plaintiffs variously stated that they used the scroll bar "[o]nly if there is something that I feel I need to see that is on — that is off the page," or that the elevated position of the scroll bar suggested the presence of "mere[ ] formalities, standard lower banner links" or "that the page is bigger than what I can see." Plaintiffs testified, and defendants did not refute, that plaintiffs were in fact unaware that defendants intended to attach license terms to the use of SmartDownload.

We conclude that in circumstances such as these, where consumers are urged to download free software at the immediate click of a button, a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms.^[15] The SmartDownload webpage screen was "printed in such a manner that it tended to conceal the fact that it was an express acceptance of [Netscape's] rules and regulations." Larrus, 266 P.2d at 147. Internet users may have, as defendants put it, "as much time as they need[ ]" to scroll through multiple screens on a webpage, but there is no reason to assume that viewers will scroll down to subsequent screens simply because screens are there. When products are "free" and users are invited to download them in the absence of reasonably conspicuous notice that they are about to bind themselves to contract terms, the transactional circumstances cannot be fully analogized to those in the paper world of arm's-length bargaining. In the next two sections, we discuss case law and other legal authorities that have addressed the circumstances of computer sales, software licensing, and online transacting. Those authorities tend strongly to support our conclusion that plaintiffs did not manifest assent to SmartDownload's license terms.

B. Shrinkwrap Licensing and Related Practices

Defendants cite certain well-known cases involving shrinkwrap licensing and related commercial practices in support of their contention that plaintiffs became bound by the SmartDownload license terms by virtue of inquiry notice. For example, in Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.1997), the Seventh Circuit held that where a purchaser had ordered a computer over the telephone, received the order in a shipped box containing the computer along with printed contract terms, and did not return the computer within the thirty days required by the terms, the purchaser was bound by the contract. Id. at 1148-49. In ProCD, Inc. v. Zeidenberg, the same court held that where an individual purchased software in a box containing license terms which were displayed on the computer screen every time the user executed the software program, the user had sufficient opportunity to review the terms and to return the software, and so was contractually bound after retaining the product. ProCD, 86 F.3d at 1452; cf. Moore v. Microsoft Corp., 293 A.D.2d 587, 587, 741 N.Y.S.2d 91, 92 (2d Dep't 2002) (software user was bound by license agreement where terms were prominently displayed on computer screen before software could [33] be installed and where user was required to indicate assent by clicking "I agree"); Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 251, 676 N.Y.S.2d 569, 572 (1st Dep't 1998) (buyer assented to arbitration clause shipped inside box with computer and software by retaining items beyond date specified by license terms); M.A. Mortenson Co. v. Timberline Software Corp., 93 Wash.App. 819, 970 P.2d 803, 809 (1999) (buyer manifested assent to software license terms by installing and using software), aff'd, 140 Wash.2d 568, 998 P.2d 305 (2000); see also I.Lan Sys., 183 F.Supp.2d at 338 (business entity "explicitly accepted the clickwrap license agreement [contained in purchased software] when it clicked on the box stating `I agree'").

These cases do not help defendants. To the extent that they hold that the purchaser of a computer or tangible software is contractually bound after failing to object to printed license terms provided with the product, Hill and Brower do not differ markedly from the cases involving traditional paper contracting discussed in the previous section. Insofar as the purchaser in ProCD was confronted with conspicuous, mandatory license terms every time he ran the software on his computer, that case actually undermines defendants' contention that downloading in the absence of conspicuous terms is an act that binds plaintiffs to those terms. In Mortenson, the full text of license terms was printed on each sealed diskette envelope inside the software box, printed again on the inside cover of the user manual, and notice of the terms appeared on the computer screen every time the purchaser executed the program. Mortenson, 970 P.2d at 806. In sum, the foregoing cases are clearly distinguishable from the facts of the present action.

C. Online Transactions

Cases in which courts have found contracts arising from Internet use do not assist defendants, because in those circumstances there was much clearer notice than in the present case that a user's act would manifest assent to contract terms.^[16]See, e.g., Hotmail Corp. v. Van$ Money Pie Inc., 47 U.S.P.Q.2d 1020, 1025 (N.D.Cal. 1998) (granting preliminary injunction based in part on breach of "Terms of Service" agreement, to which defendants had assented); America Online, Inc. v. Booker, 781 So.2d 423, 425 (Fla.Dist.Ct. App.2001) (upholding forum selection clause in "freely negotiated agreement" contained in online terms of service); Caspi v. Microsoft Network, L.L.C., 323 N.J.Super. 118, 732 A.2d 528, 530, 532-33 (N.J.Super.Ct.App.Div.1999) (upholding forum selection clause where subscribers to online software were required to review license terms in scrollable window and to click "I Agree" or "I Don't Agree"); Barnett v. Network Solutions, Inc., 38 S.W.3d 200, 203-04 (Tex.App.2001) (upholding forum selection clause in online contract for registering Internet domain names that required users to scroll through terms before accepting or rejecting them); cf. Pollstar v. Gigmania, Ltd., 170 F.Supp.2d 974, 981-82 (E.D.Cal.2000) (expressing [34] concern that notice of license terms had appeared in small, gray text on a gray background on a linked webpage, but concluding that it was too early in the case to order dismissal).^[17]

After reviewing the California common law and other relevant legal authority, we conclude that under the circumstances here, plaintiffs' downloading of SmartDownload did not constitute acceptance of defendants' license terms. Reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to those terms by consumers are essential if electronic bargaining is to have integrity and credibility. We hold that a reasonably prudent offeree in plaintiffs' position would not have known or learned, prior to acting on the invitation to download, of the reference to SmartDownload's license terms hidden below the "Download" button on the next screen. We affirm the district court's conclusion that the user plaintiffs, including Fagan, are not bound by the arbitration clause contained in those terms.^[18]

IV. Whether Plaintiffs' Assent to Communicator's License Agreement Requires Them To Arbitrate Their Claims Regarding SmartDownload

Plaintiffs do not dispute that they assented to the license terms governing Netscape's Communicator. The parties disagree, however, over the scope of that license's arbitration clause. Defendants contend that the scope is broad enough to encompass plaintiffs' claims regarding SmartDownload, even if plaintiffs did not separately assent to SmartDownload's license terms and even though Communicator's license terms did not expressly mention SmartDownload. Thus, defendants argue, plaintiffs must arbitrate.

The scope of an arbitration agreement is a legal issue that we review de novo. Oldroyd, 134 F.3d at 76. "[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." Genesco, 815 F.2d at 847 (quotation marks omitted). Although "the FAA does not require parties to arbitrate when they have not agreed to do so," Volt Info. Sciences, Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989), arbitration is indicated unless it can be said "with positive assurance" that an arbitration clause is not susceptible to an interpretation that covers the asserted dispute. Thomas James Assocs., Inc. v. Jameson, 102 F.3d 60, 65 (2d Cir.1996) (quotation marks omitted).

The Communicator license agreement, which required arbitration of "all disputes relating to this Agreement (excepting any dispute relating to intellectual property rights),"^[19] must be classified as "broad." Coregis Ins. Co. v. Am. Health Found., 241 F.3d 123, 128-29 (2d Cir.2001). Where the scope of an arbitration agreement is broad,

there arises a presumption of arbitrability; if, however, the dispute is in respect of a matter that, on its face, is clearly collateral to the contract, then a court should test the presumption by reviewing the allegations underlying the dispute and by asking whether the claim alleged implicates issues of contract construction or the parties' rights and obligations under it.... [C]laims that present no question involving construction of the contract, and no questions in respect of the parties' rights and obligations under it, are beyond the scope of the arbitration agreement.

Collins & Aikman, 58 F.3d at 23. In determining whether a particular claim falls within the scope of the parties' arbitration agreement, this Court "focus[es] on the factual allegations in the complaint rather than the legal causes of action asserted." Genesco, 815 F.2d at 846. If those allegations "touch matters" covered by the Netscape license agreement, plaintiffs' claims must be arbitrated. Id.

To begin with, we find that the underlying dispute in this case — whether defendants violated plaintiffs' rights under the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act — involves matters that are clearly collateral to the Communicator license agreement. While the SmartDownload license agreement expressly applied "to Netscape Communicator, Netscape Navigator, and Netscape SmartDownload," the Communicator license agreement expressly applied only "to Netscape Communicator and Netscape Navigator." Thus, on its face, the Communicator license agreement governed disputes concerning Netscape's browser programs only, not disputes concerning a plug-in program like SmartDownload. Moreover, Communicator's license terms included a merger or integration clause stating that "[t]his Agreement constitutes the entire agreement between the parties concerning the subject matter hereof." SmartDownload's license terms contained the same clause. Such provisions are recognized by California courts as a means of excluding prior or contemporaneous parol evidence from the scope of a contract. See Franklin v. USX Corp., 87 Cal. App.4th 615, 105 Cal.Rptr.2d 11, 15 (2001). Although the presence of merger clauses is not dispositive here, we note that defendants' express desire to limit the reach of the respective license agreements, combined with the absence of reference to SmartDownload in the Communicator license agreement, suggests that a dispute regarding defendants' allegedly unlawful use of SmartDownload is clearly collateral to the Communicator license agreement.

This conclusion is reinforced by the other terms of the Communicator license agreement, which include a provision describing the non-exclusive nature of the grant and permission to reproduce the software for personal and internal business purposes; restrictions on modification, decompilation, redistribution or other sale or transfer, and removal or alteration of trademarks or other intellectual property; provisions for the licensor's right to terminate and its proprietary rights; a complete disclaimer of warranties ("as is") and an entire-risk clause; a limitation of liability clause for consequential and other damages, together with a liquidated damages term; clauses regarding encryption and export; a disclaimer of warranties for high risk activities; and a miscellaneous paragraph that contains merger, choice-of-law, arbitration, and severability clauses, non-waiver and non-assignment provisions, a force majeure term, and a clause providing for reimbursement of the prevailing party in any dispute. Apart from the potential generic applicability of the warranty and liability disclaimers, a dispute concerning alleged electronic eavesdropping via transmissions from a separate plug-in program would not appear to fall within Communicator's license terms. We conclude, therefore, that this dispute concerns matters that, on their face, are clearly collateral to the Communicator license agreement.

Having determined this much, we next must test the presumption of arbitrability by asking whether plaintiffs' allegations implicate or touch on issues of contract construction or the parties' rights and obligations under the contract. Collins & Aikman, 58 F.3d at 23; Genesco, 815 F.2d at 846. That is, even though the parties' dispute concerns matters clearly collateral to the Communicator license terms, we must determine whether plaintiffs by their particular allegations have brought the dispute within the license terms. Defendants argue that plaintiffs' complaints "literally bristled with allegations that Communicator and SmartDownload operated in conjunction with one another to eavesdrop on Plaintiffs' Internet communications." We disagree. Plaintiffs' allegations nowhere collapse or blur the distinction between Communicator and SmartDownload, but instead consistently separate the two software programs and assert that SmartDownload alone is responsible for unlawful eavesdropping. Plaintiffs begin by alleging that "SmartDownload facilitates the transfer of large files over the Internet by permitting a transfer to be resumed if it is interrupted." Plaintiffs then explain that "[o]nce SmartDownload is downloaded and running on a Web user's computer, it automatically connects to Netscape's file servers and downloads the installation program for Communicator." Plaintiffs add that defendants also encourage visitors to Netscape's website "to download and install SmartDownload even if they are not installing or upgrading Communicator."

Plaintiffs go on to point out that installing Communicator "automatically creates and stores on the Web user's computer a small text file known as a `cookie.'" There follow two paragraphs essentially alleging that cookies were originally intended to perform such innocuous tasks as providing "temporary identification for purposes such as electronic commerce," and that the Netscape cookie performs this original identifying, and entirely lawful, function. Separate paragraphs then describe the "Key" or "UserID" that SmartDownload allegedly independently places on user's computers, and point out that "SmartDownload assumes from Communicator the task of downloading various files. Communicator itself could and would perform these downloading tasks if SmartDownload were not installed." "Thereafter," the complaints continue,

each time a Web user downloads any file from any site on the Internet using SmartDownload, SmartDownload automatically transmits to defendants the name and Internet address of the file and the Web site from which it is being sent. Within the same transmission, SmartDownload also includes the contents of the Netscape cookie previously created by Communicator and the "Key" previously created by SmartDownload.

In the course of their description of the installation and downloading process, plaintiffs keep SmartDownload separate from Communicator and clearly indicate that it is SmartDownload that performed the allegedly unlawful eavesdropping and made use of the otherwise innocuous Communicator cookie as well as its own "Key" and "UserID" to transmit plaintiffs' information to Netscape. The complaints refer to "SmartDownload's spying" and explain that "Defendants are using SmartDownload to eavesdrop." Plaintiffs' allegations consistently distinguish and isolate the functions of SmartDownload in such a way as to make it clear that it is through SmartDownload, not Communicator, that defendants committed the abuses that are the subject of the complaints.

After careful review of these allegations, we conclude that plaintiffs' claims "present no question involving construction of the [Communicator license agreement], and no questions in respect of the parties' rights and obligations under it." Collins & Aikman, 58 F.3d at 23. It follows that the claims of the five user plaintiffs are beyond the scope of the arbitration clause contained in the Communicator license agreement. Because those claims are not arbitrable under that agreement or under the SmartDownload license agreement, to which plaintiffs never assented, we affirm the district court's holding that the five user plaintiffs may not be compelled to arbitrate their claims.

V. Whether Plaintiff Specht Can Be Required To Arbitrate as a Nonparty Beneficiary

Plaintiff Specht operated a website that he claims defendants electronically spied on every time users employing SmartDownload to enhance their browser software downloaded, from his site, software files that he provided for setting up an account with a separate service called WhyWeb. Defendants counter that Specht received a "direct benefit" under the "Netscape license agreement," which they say authorized consumers to use SmartDownload and Communicator to obtain Specht's files. Defendants contend that if a user who obtained a file from Specht's site subsequently subscribed to WhyWeb's service, Specht would receive a commission from WhyWeb. Thus, according to defendants, if users employing SmartDownload accessed his site and obtained WhyWeb files, Specht would receive a direct benefit "because the software assisted in obtaining a WhyWeb file and increased the likelihood of success in the download process." Specht, however, claims that he received no commissions from providing WhyWeb software.

We note at the outset that defendants do not argue, as indeed they could not, that Specht benefited from SmartDownload license agreements entered into by the named user plaintiffs or the putative class [39] that they represent. A contract theory of third-party benefits requires a predicate contract, and we have already determined that the user plaintiffs did not assent to the SmartDownload license agreement. We are thus asked, in effect, to imagine a class of users who, having obtained SmartDownload and/or Communicator after properly assenting to license terms, visited Specht's website by means of Communicator or a non-Netscape browser enhanced by SmartDownload and, while there, downloaded WhyWeb files which they proceeded to use to subscribe to WhyWeb, in turn triggering a commission fee from WhyWeb for Specht.

Even accepting arguendo this strained and roundabout hypothesis, we must reject defendants' legal conclusion. Typically, whether a contract benefits or accords rights to a third party (most often, the right to enforce the contract) depends significantly on the intention of the original contracting parties. See Sessions Payroll Mgmt., Inc. v. Noble Constr. Co, Inc., 84 Cal.App.4th 671, 680, 101 Cal.Rptr.2d 127, 133 (2000) (explaining that a third-party beneficiary may enforce a contract made expressly for its benefit and has the burden of proving that the contracting parties actually promised the performance). Clearly, Netscape and these unknown visitors to Specht's website did not expressly confer or intend to confer any contractual benefits on Specht or website operators generally (other than defendants). Defendants therefore take a different tack, arguing that they need only show that Specht received some direct benefit, knowingly or not, under a Netscape license agreement.

To support this claim, defendants cite American Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349 (2d Cir. 1999). But the benefit at issue in American Bureau of Shipping was much more direct than that described by defendants. There, a ship classification society, which had issued an interim certification of classification (ICC) for a racing yacht that later suffered hull damage allegedly resulting from defective design, sought to compel the yacht's builder, owners, and insurers to arbitrate pursuant to arbitration clauses contained in the ICC and other contracts. The owners never signed any arbitration agreement, but this Court noted that a nonsignatory could be "estopped from denying its obligation to arbitrate when it receives a `direct benefit' from a contract containing an arbitration clause." Id. at 353 (citing Thomson-CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 778-79 (2d Cir.1995)).^[20] The Court held that the yacht owners had received the following direct benefits under the relevant contracts: (1) significantly lower insurance rates on the yacht; (2) the ability to sail under the French flag; and possibly (3) the ability to register the yacht. Id.; cf. Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060 (2d Cir.1993) (holding that a nonsignatory to an arbitration agreement was bound to arbitrate because it knowingly received direct benefits, which included the right to use a trade name, under the relevant contract).

Even if defendants' theory of Specht's SmartDownload-enhanced potential for earning commissions were more convincing, such an abstract advantage is not remotely as tangible and definite as the benefits that have led this Court to compel nonsignatories to arbitrate. Nor does the intricate, Rube Goldberg-like chain of events postulated by defendants constitute a "direct" benefit in the sense contemplated by American Bureau of Shipping and Deloitte Noraudit. Because we conclude that Specht was not a direct beneficiary under SmartDownload's license agreement or any other Netscape agreement, we affirm the district court's refusal to compel arbitration of his claims.^[21]

CONCLUSION

For the foregoing reasons, we affirm the district court's denial of defendants' motion to compel arbitration and to stay court proceedings.

[1] Although the district court did not consolidate these three cases, it noted that its opinion denying the motion to compel arbitration and to stay court proceedings "appl[ied] equally to all three cases." Specht v. Netscape Communications Corp., 150 F.Supp.2d 585, 587 n. 1 (S.D.N.Y.2001). On August 10, 2001, this Court consolidated the appeals.

[2] Netscape's website defines "plug-ins" as "software programs that extend the capabilities of the Netscape Browser in a specific way — giving you, for example, the ability to play audio samples or view video movies from within your browser." (http://wp.netscape.com/plugins/) SmartDownload purportedly made it easier for users of browser programs like Communicator to download files from the Internet without losing their progress when they paused to engage in some other task, or if their Internet connection was severed. See Specht, 150 F.Supp.2d at 587.

[3] There is a difference between downloading and installing a software program. When a user downloads a program from the Internet to his or her computer, the program file is stored on the user's hard drive but typically is not operable until the user installs or executes it, usually by double-clicking on the file and causing the program to run.

[4] This kind of online software license agreement has come to be known as "clickwrap" (by analogy to "shrinkwrap," used in the licensing of tangible forms of software sold in packages) because it "presents the user with a message on his or her computer screen, requiring that the user manifest his or her assent to the terms of the license agreement by clicking on an icon. The product cannot be obtained or used unless and until the icon is clicked." Specht, 150 F.Supp.2d at 593-94 (footnote omitted). Just as breaking the shrinkwrap seal and using the enclosed computer program after encountering notice of the existence of governing license terms has been deemed by some courts to constitute assent to those terms in the context of tangible software, see, e.g., ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1451 (7th Cir.1996), so clicking on a webpage's clickwrap button after receiving notice of the existence of license terms has been held by some courts to manifest an Internet user's assent to terms governing the use of downloadable intangible software, see, e.g., Hotmail Corp. v. Van$ Money Pie Inc., 47 U.S.P.Q.2d 1020, 1025 (N.D.Cal. 1998).

[5] The term "user plaintiffs" here and elsewhere in this opinion denotes those plaintiffs who are suing for harm they allegedly incurred as computer users, in contrast to plaintiff Specht, who alleges that he was harmed in his capacity as a website owner.

[6] While Navigator was Netscape's "stand-alone" Internet browser program during the period in question, Communicator was a "software suite" that comprised Navigator and other software products. All five named user plaintiffs stated in affidavits that they had obtained upgraded versions of Communicator. Fagan, who, as noted below, allegedly did not obtain the browser program in connection with downloading SmartDownload, expressed some uncertainty during his deposition as to whether he had acquired Communicator or Navigator. The identity of Fagan's browser program is immaterial to this appeal, however, as Communicator and Navigator shared the same license agreement.

[7] Unlike the four other user plaintiffs, Fagan chose the option of obtaining Netscape's browser program without first downloading SmartDownload. As discussed below, Fagan allegedly obtained SmartDownload from a separate "shareware" website unrelated to Netscape.

[8] For purposes of this opinion, the term "webpage" or "page" is used to designate a document that resides, usually with other webpages, on a single Internet website and that contains information that is viewed on a computer monitor by scrolling through the document. To view a webpage in its entirety, a user typically must scroll through multiple screens.

[9] Plaintiff Kelly, a relatively sophisticated Internet user, testified that when he clicked to download SmartDownload, he did not think that he was downloading a software program at all, but rather that SmartDownload "was merely a piece of download technology." He later became aware that SmartDownload was residing as software on his hard drive when he attempted to download electronic files from the Internet.

[10] In the screen shot of the SmartDownload webpage attached to Weindorf's affidavit, the reference to license terms is partially visible, though almost illegible, at the bottom of the screen. In the screen shots attached to the affidavits of Gibson, Gruber, and Kelly, the reference to license terms is not visible.

[11] The parties do not dispute, nor could they, that the software license agreement at issue "involv[ed] commerce" within the meaning of 9 U.S.C. § 2, see Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 273-74, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995) (construing the broad phrase "involving commerce" to be the functional equivalent of "affecting commerce"), or that the agreement is a "written provision" despite being provided to users in a downloadable electronic form. The latter point has been settled by the Electronic Signatures in Global and National Commerce Act ("E-Sign Act"), Pub.L. No. 106-229, 114 Stat. 464 (2000) (codified at 15 U.S.C. §§ 7001 et seq.), which provides that "a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form." Id. § 7001(a)(1); see also Cal. Civ.Code § 1633.7(b) ("A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.").

[12] Later, when Judge Hellerstein suggested that it was "an issue of fact ... to be tried" whether plaintiff Fagan downloaded SmartDownload from Netscape's webpage or from the ZDNet shareware site, defendants' counsel stated: "I am not sure there is an issue of fact. It is sort of a summary judgment kind of standard." Still later, counsel remarked: "I think we established that there really is no genuine issue that Mr. Fagan got his smart download [sic] [by visiting the Netscape webpage from which he] fairly had notice that there was a license agreement." Defendants' position that there was "no genuine issue" regarding reasonable notice of the existence of the license terms is consistent with this Circuit's standard for determining whether a trial is required on the issue of the making of an arbitration agreement. See Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126, 129-30 (2d Cir.1997) ("As when opposing a motion for summary judgment under Fed.R.Civ.P. 56, the party requesting a jury trial must submit evidentiary facts showing that there is a dispute of fact to be tried." (quotation marks omitted)); Doctor's Assocs., Inc. v. Stuart, 85 F.3d 975, 983-84 (2d Cir.1996) ("To warrant a trial under 9 U.S.C. § 4, the issue raised must be `genuine.'" (quotation marks omitted)).

[13] The district court concluded that the SmartDownload transactions here should be governed by "California law as it relates to the sale of goods, including the Uniform Commercial Code in effect in California." Specht, 150 F.Supp.2d at 591. It is not obvious, however, that UCC Article 2 ("sales of goods") applies to the licensing of software that is downloadable from the Internet. Cf. Advent Sys. Ltd. v. Unisys Corp., 925 F.2d 670, 675 (3d Cir.1991) ("The increasing frequency of computer products as subjects of commercial litigation has led to controversy over whether software is a `good' or intellectual property. The [UCC] does not specifically mention software."); Lorin Brennan, Why Article 2 Cannot Apply to Software Transactions, PLI Patents, Copyrights, Trademarks, & Literary Property Course Handbook Series (Feb.Mar.2001) (demonstrating the trend in case law away from application of UCC provisions to software sales and licensing and toward application of intellectual property principles). There is no doubt that a sale of tangible goods over the Internet is governed by Article 2 of the UCC. See, e.g., Butler v. Beer Across Am., 83 F.Supp.2d 1261, 1263-64 & n. 6 (N.D.Ala.2000) (applying Article 2 to an Internet sale of bottles of beer). Some courts have also applied Article 2, occasionally with misgivings, to sales of off-the-shelf software in tangible, packaged formats. See, e.g., ProCD, 86 F.3d at 1450 ("[W]e treat the [database] licenses as ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts and the Uniform Commercial Code. 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."); I.Lan Sys., Inc. v. Nextpoint Networks, Inc., 183 F.Supp.2d 328, 332 (D.Mass.2002) (stating, in the context of a dispute between business parties, that "Article 2 technically does not, and certainly will not in the future, govern software licenses, but for the time being, the Court will assume that it does").

Downloadable software, however, is scarcely a "tangible" good, and, in part because software may be obtained, copied, or transferred effortlessly at the stroke of a computer key, licensing of such Internet products has assumed a vast importance in recent years. Recognizing that "a body of law based on images of the sale of manufactured goods ill fits licenses and other transactions in computer information," the National Conference of Commissioners on Uniform State Laws has promulgated the Uniform Computer Information Transactions Act ("UCITA"), a code resembling UCC Article 2 in many respects but drafted to reflect emergent practices in the sale and licensing of computer information. UCITA, prefatory note (rev. ed. Aug.23, 2001) (available at www.ucitaonline.com/ucita.html). UCITA — originally intended as a new Article 2B to supplement Articles 2 and 2A of the UCC but later proposed as an independent code — has been adopted by two states, Maryland and Virginia. See Md.Code Ann. Com. Law §§ 22-101 et seq.; Va.Code Ann. §§ 59.1-501.1 et seq.

We need not decide today whether UCC Article 2 applies to Internet transactions in downloadable products. The district court's analysis and the parties' arguments on appeal show that, for present purposes, there is no essential difference between UCC Article 2 and the common law of contracts. We therefore apply the common law, with exceptions as noted.

[14] "Inquiry notice" is "actual notice of circumstances sufficient to put a prudent man upon inquiry." Cal. State Auto. Ass'n Inter-Ins. Bureau v. Barrett Garages, Inc., 257 Cal. App.2d 71, 64 Cal.Rptr. 699, 703 (Cal.Ct.App. 1967) (internal quotation marks omitted).

[15] We do not address the district court's alternative holding that notice was further vitiated by the fact that the reference to SmartDownload's license terms, even if scrolled to, was couched in precatory terms ("a mild request") rather than mandatory ones. Specht, 150 F.Supp.2d at 596.

[16] Defendants place great importance on Register.com, Inc. v. Verio, Inc., 126 F.Supp.2d 238 (S.D.N.Y.2000), which held that a user of the Internet domain-name database, Register.com, had "manifested its assent to be bound" by the database's terms of use when it electronically submitted queries to the database. Id. at 248. But Verio is not helpful to defendants. There, the plaintiff's terms of use of its information were well known to the defendant, which took the information daily with full awareness that it was using the information in a manner prohibited by the terms of the plaintiff's offer. The case is not closely analogous to ours.

[17] Although the parties here do not refer to it, California's consumer fraud statute, Cal. Bus. & Prof.Code § 17538, is one of the few state statutes to regulate online transactions in goods or services. The statute provides that in disclosing information regarding return and refund policies and other vital consumer information, online vendors must legibly display the information either:

(i) [on] the first screen displayed when the vendor's electronic site is accessed, (ii) on the screen on which goods or services are first offered, (iii) on the screen on which a buyer may place the order for goods or services, (iv) on the screen on which the buyer may enter payment information, such as a credit card account number, or (v) for nonbrowser-based technologies, in a manner that gives the user a reasonable opportunity to review that information.

Id. § 17538(d)(2)(A). The statute's clear purpose is to ensure that consumers engaging in online transactions have relevant information before they can be bound. Although consumer fraud as such is not alleged in the present action, and § 17538 protects only California residents, we note that the statute is consistent with the principle of conspicuous notice of the existence of contract terms that is also found in California's common law of contracts.

In addition, the model code, UCITA, discussed above, generally recognizes the importance of conspicuous notice and unambiguous manifestation of assent in online sales and licensing of computer information. For example, § 112, which addresses manifestation of assent, provides that a user's opportunity to review online contract terms exists if a "record" (or electronic writing) of the contract terms is "made available in a manner that ought to call it to the attention of a reasonable person and permit review." UCITA, § 112(e)(1) (rev. ed. Aug.23, 2001) (available at www.ucitaonline.com/ucita.html). Section 112 also provides, in pertinent part, that "[a] person manifests assent to a record or term if the person, acting with knowledge of, or after having an opportunity to review the record or term or a copy of it ... intentionally engages in conduct or makes statements with reason to know that the other party or its electronic agent may infer from the conduct or statement that the person assents to the record or term." Id. § 112(a)(2). In the case of a "mass-market license," a party adopts the terms of the license only by manifesting assent "before or during the party's initial performance or use of or access to the information." Id. § 209(a).

UCITA § 211 sets forth a number of guidelines for "internet-type" transactions involving the supply of information or software. For example, a licensor should make standard terms "available for review" prior to delivery or obligation to pay (1) by "displaying prominently and in close proximity to a description of the computer information, or to instructions or steps for acquiring it, the standard terms or a reference to an electronic location from which they can be readily obtained," or (2) by "disclosing the availability of the standard terms in a prominent place on the site from which the computer information is offered and promptly furnishing a copy of the standard terms on request before the transfer of the computer information." Id. § 211(1)(A-B). The commentary to § 211 adds: "The intent of the close proximity standard is that the terms or the reference to them would be called to the attention of an ordinary reasonable person." Id. § 211 cmt. 3. The commentary also approves of prominent hypertext links that draw attention to the existence of a standard agreement and allow users to view the terms of the license. Id.

We hasten to point out that UCITA, which has been enacted into law only in Maryland and Virginia, does not govern the parties' transactions in the present case, but we nevertheless find that UCITA's provisions offer insight into the evolving online "circumstances" that defendants argue placed plaintiffs on inquiry notice of the existence of the SmartDownload license terms. UCITA has been controversial as a result of the perceived breadth of some of its provisions. Compare Margaret Jane Radin, Humans Computers, and Binding Commitment, 75 Ind. L.J. 1125, 1141 (2000) (arguing that "UCITA's definition of manifestation of assent stretches the ordinary concept of consent"), with Joseph H. Sommer, Against Cyberlaw, 15 Berkeley Tech. L.J. 1145, 1187 (2000) ("There are no new legal developments [in UCITA's assent provisions]. The revolution — if any — occurred with [Karl] Llewellyn's old Article 2, which abandoned most formalisms of contract formation, and sought a contract wherever it could be found."). Nonetheless, UCITA's notice and assent provisions seem to be consistent with well-established principles governing contract formation and enforcement. See Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L.Rev. 429, 491 (2002) ("[W]e contend that UCITA maintains the contextual, balanced approach to standard terms that can be found in the paper world.").

[18] Because we conclude that the Netscape webpage did not provide reasonable notice of the existence of SmartDownload's license terms, it is irrelevant to our decision whether plaintiff Fagan obtained SmartDownload from that webpage, as defendants contend, or from a shareware website that provided less or no notice of that program's license terms, as Fagan maintains. In either case, Fagan could not be bound by the SmartDownload license agreement. Further, because we find that the California common law disposes of the issue of notice and assent, we do not address plaintiffs' arguments based on California's Commercial Code § 2207, the UCC Article 2 provision governing the "battle of the forms." Moreover, having determined that the parties did not enter into the SmartDownload license agreement, we do not reach plaintiffs' alternative arguments concerning unconscionability.

[19] A question not raised by the parties is whether this dispute involves "intellectual property rights." Certainly, Netscape's intellectual property ("IP") rights would not seem to be implicated, even though Netscape may in some sense employ its IP — in the form of computer software — to plant cookies and, as plaintiffs allege, harvest users' personal information. But do plaintiffs have IP rights in their personal information? Certain cases have recognized, mostly under a trespass-to-chattels theory, that computer and database owners enjoy possessory interests in their computer equipment, bandwidth, and server capacity, but these interests are analyzed in terms of traditional personal property, not IP. See, e.g., Verio, 126 F.Supp.2d at 249-53; eBay, Inc. v. Bidder's Edge, Inc., 100 F.Supp.2d 1058, 1069-72 (N.D.Cal.2000). Moreover, plaintiffs' personal information, stored in cookies, is the sort of factual data that are expressly excluded from federal copyright protection. See Nihon Keizai Shimbun, Inc. v. Comline Bus. Data, Inc., 166 F.3d 65, 70 (2d. Cir.1999) ("That copyright does not extend to facts is a `most fundamental axiom of copyright law.'") (quoting Feist Publ'ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 344, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991)). Thus, copyrights are not implicated here. Nor are trade secrets, good will, or other valuable intangibles. In consequence, plaintiffs' claims would not appear to be shielded from arbitration on the ground that this is a "dispute relating to intellectual property rights." This is not an issue that we decide today, however.

[20] Cf. County of Contra Costa v. Kaiser Found. Health Plan, Inc., 47 Cal.App.4th 237, 54 Cal. Rptr.2d 628, 631 (1996)(noting that California cases binding nonsignatories to arbitrate their claims fall into two categories: (1) where a benefit was conferred on the nonsignatory as a result of a contract; and (2) where a preexisting relationship existed between the nonsignatory and one of the parties to the arbitration agreement).

[21] Plaintiffs argue in the alternative that their claims are inarbitrable because the Electronic Communications Privacy Act and the Computer Fraud and Abuse Act reflect a congressional intent to preclude arbitration of claims arising under those statutes. In view of our disposition of this case, we need not address that argument.

Steven E. Sletten, Robert E. Cooper, Robert H. Platt and Mark S. Lee, New York, New York, for Plaintiffs.

William Taylor, New York, New York, for Defendants.

TICKETS.COM'S NOTICE OF MOTION AND MOTION FOR SUMMARY JUDGMENT ON CONTRACT, TRESPASS AND COPYRIGHT CLAIMS

HUPP, J.

ORDER

[1] This motion by defendant Tickets.com, Inc. (hereafter TX) for summary judgment on plaintiffs Ticketmaster Corporation and Ticket Online–CitySearch, Inc. (hereafter collectively TM), intellectual property issues is denied as to the contract claim of TM and granted as to the copyright and trespass to chattels claims, which are dismissed by this minute order.

At this point in the case, both parties have narrowed their claims. TM, the original plaintiff, has narrowed its intellectual property claims to a contract theory, a copyright theory, and a trespass to chattels theory. The court finds triable issues of fact on the contract theory and finds no triable issues of fact and grants summary judgment on the copyright and trespass to chattels claims.

Many of the factual items are not contested, although the legal result of applying the law to the uncontested facts is heavily contested. Among the uncontested facts are the following: Both TM and TX are in the business of selling tickets to all kinds of "events" (sports, concerts, plays, etc.) to the public. They are in heavy competition with one another, but operate in distinctive ways. TM is the largest company in the industry. It sells tickets by the four methods of ticket selling–venue box office, retail outlets, by telephone, and over the internet. Telephone and internet sales require the customer to establish credit with the ticket seller (usually by credit card). Internet sales have been the fastest growing segment of the industry. TX at the time of the events considered in this motion was primarily (but not exclusively) an internet seller. Both TM and TX maintain a web page reachable by anyone with an internet connection. Each of their web pages has many subsidiary (or interior) web pages which describe one event each and provide such basic information as to location, date, time, description of the event, and ticket prices. The TM interior web pages each have a separate electronic address or Uniform Resource Locator ("URL") which, if possessed by the internet user, allows the user to reach the web page for any particular event by by-passing the "home" web page and proceeding past the index to reach the interior web page for the event in question. The TM interior web pages provide telephone numbers for customers or allow the customer to order tickets to the event by interactive computer use. A charge is made for the TM service.

TM principally does business by exclusive contracts with the event providers or their producers, and its web pages only list the events for which TM is the exclusive ticket seller. TX also sells tickets to a number of events for which it is the ticket seller. At one point, its web pages attempted to list all events for which tickets were available whether or not TX sold the tickets. Its interior web pages also listed the event, the date, time, ticket prices, and provided for internet purchase if TX could sell the tickets. When TX could not sell the tickets, it listed ticket brokers who sold at premium prices. In early 2000, TX discontinued this practice of listing events with tickets sold by other ticket brokers. Until early 2000, in situations where TM was the only source of tickets, TX provided a "deep link" by which the customer would be transferred to the interior web page of TM's web site, where the customer could purchase the ticket from TM. This process of "deep linking" is the subject of TM's complaint in this action, of which there is now left the contract, copyright, and trespass theories.

[2] Starting in 1998 and continuing to July 2001, when it stopped the practice, TX employed an electronic program called a "spider" or "crawler" to review the internal web pages (available to the public) of TM. The "spider" "crawled" through the internal web pages to TM and electronically extracted the electronic information from which the web page is shown on the user's computer. The spider temporarily loaded this electronic information into the Random Access Memory ("RAM") of TX's computers for a period of from 10–15 seconds. TX then extracted the factual information (event, date, time, tickets prices, and URL) and discarded the rest (which consisted of TM identification, logos, ads, and other information which TX did not intend to use; much of this discarded material was protected by copyright). The factual information was then organized in the TX format to be displayed on the TX internal web page. The TX internal web page carried no TM identification and had only the factual information about the event on it which was taken from TM's interior web page but rearranged in TX format plus any information or advertisement added by TX. From March 1998, to early 2000, the TX user was provided the deep linking option described above to go directly from the TX web site to the relevant TM interior web page. This option stopped (or was stopped by TM) in early 2000. For an unknown period afterward, the TX customer was given the option of linking to the TM home page, from which the customer could work his way to the interior web page in which he was interested. (The record does not reveal whether this practice still exists or whether TM objects to it.) Thus, the intellectual property issues in this case appear to be limited to events which occurred between November 1998, when spidering started, and July 2001, when it stopped. The "deep linking" aspect of the case is relevant only from March 1998, to early 2000, when it stopped.

The contract aspect of the case derives from a notice placed on the home page of the TM web site which states that anyone going beyond that point into the interior web pages of the web site accepts certain conditions, which include, relevant to this case, that all information obtained from the website is for the personal use of the user and may not be used for commercial purposes. Earlier in this case (and at the time of the motion for preliminary injunction) the notice was placed at the bottom of the home page of the TM web site, so that a user without an especially large screen would have to scroll down the page to read the conditions of use. Since then, TM has placed in a prominent place on the home page the warning that proceeding further binds the user to the conditions of use. As one TX executive put it, it could not be missed. At the time of the preliminary injunction motion, the court commented that there was no evidence that the conditions of use were known to TX. Since then, there has been developed evidence that TX was fully familiar with the conditions TM claimed to impose on users, including a letter from TM to TX which quoted the conditions (and a reply by TX stating that it did not accept the conditions). Thus, there is sufficient evidence to defeat summary judgment on the contract theory if knowledge of the asserted conditions of use was had by TX, who nevertheless continued to send its spider into the TM interior web pages, and if it is legally concluded that doing so can lead to a binding contract. For reasons dealing with the desirability of clear unmistakable evidence of assent to the conditions on trial of such issues, the court would prefer a rule that required an unmistakable assent to the conditions easily provided by requiring clicking on an icon which says "I agree" or the equivalent. Such a rule would provide certainty in trial and make it clear that the user had called to his attention the conditions he or she accepted when using the web site. (The court notes that Professor Lemley also approves this approach, but this is treated as a legal opinion, not a fact). However, the law has not developed this way. Use of a cruise ship ticket with a venue provision printed on the back commits one to the venue provided. (Carnival Cruise Lines '91 499 U.S. 585, 113 L.Ed.2d 622.) The Carriage of Goods by Sea Act, the Carmack Act, and the Warsaw Convention provide that limitations of liability on the bill of lading, air waybill, or airplane ticket are enforceable if the services are used by the customer. The "shrinkwrap" cases find the printed conditions plainly wrapped around the cassette or CD enforceable. Even the back of your parking lot ticket may be enforceable. The principle has been applied to cases similar to this. (Register.com SDNY'00 126 FSupp2d 238; Pollstar EDCA'00 170 FSupp2d 974.) The principle has long been established that no particular form of words is necessary to indicate assent–the offeror may specify that a certain action in connection with his offer is deemed acceptance, and ripens into a contract when the action is taken. (Binder '99 75 CA4th 832, 89 CR2d 540; Penn Security Life Ins. 62 CA3d 302, 133 CR 59.) Thus, as relevant here, a contract can be formed by proceeding into the interior web pages after knowledge (or, in some cases, presumptive knowledge) of the conditions accepted when doing so. In Specht 2Cir'02 306 F.3d 17, the court found that there was no mutual assent when a notice of the existence of license terms governing the use of software was visible to internet users only if they scrolled down the screen. That case is distinguishable from the facts at hand on the grounds that in Specht, the plaintiff's terms of use were not plainly visible or known to defendants. See id. at 31. Moreover, Specht involved a different set of circumstances, that of consumers invited to download free software from an internet site that did not contain a plainly visible notice of license terms. See id. at 32. As a result, the TX motion for summary judgment on the contract issue is denied.

[3] The trespass to chattels issue requires adapting the ancient common law action to the modern age. No cases seem to have reached the appellate courts although there appears to be a number of district court cases. One case (Intel v. Hamadi '01 94 CA4th 325, 114 CR 244) is pending in the California Supreme Court since it granted a hearing which has the effect of vacating the state Court of Appeal opinion (and which has no precedent value once the hearing was granted). The court is informed that the eBayNDCA'00 100 FSupp2d 1058 preliminary injunction was not appealed. At the time of the preliminary injunction motion, only the eBaycase was before the court. Since then, there have been a number of district court cases discussing the chattel theory (some published and some not). These cases tend to support the proposition that mere invasion or use of a portion of the web site by a spider is a trespass (leading at least to nominal damages), and that there need not be an independent showing of direct harm either to the chattel (unlikely in the case of a spider) or tangible interference with the use of the computer being invaded. However, scholars and practitioners alike have criticized the extension of the trespass to chattels doctrine to the internet context, noting that this doctrinal expansion threatens basic internet functions (i.e., search engines) and exposes the flaws inherent in applying doctrines based in real and tangible property to cyberspace. See, e.g., Laura Quilter, Cyberlaw: The Continuing Expansion of Cyberspace Trespass to Chattels, 17 Berkeley Tech. L.J. 421 (2002); Clifton Merrell, Trespass to Chattels in the Age of the Internet, 80 Wash. U.L.Q. 675 (2002); Mary Anne Bendotoff and Elizabeth R. Gosse, "Stay Off My Cyberproperty!": Trespass to Chattels on the Internet (2001), 6 Intell. Prop. L. Bull. 12; Edward Lee, Rules and Standards for Cyberspace, 77 Notre Dame L.Rev. 1275, 1283–1284 (2002). Pending appellate guidance, this court comes down on the side of requiring some tangible interference with the use or operation of the computer being invaded by the spider. Restatement (Second) of Torts § 219 requires a showing that "the chattel is impaired as to its condition, quality, or value." Therefore, unless there is actual dispossession of the chattel for a substantial time (not present here), the elements of the tort have not been made out. Since the spider does not cause physical injury to the chattel, there must be some evidence that the use or utility of the computer (or computer network) being "spiderized" is adversely affected by the use of the spider. No such evidence is presented here. This court respectfully disagrees with other district courts' finding that mere use of a spider to enter a publically available web site to gather information, without more, is sufficient to fulfill the harm requirement for trespass to chattels.

TM complains that the information obtained by the use of the spider was valuable (and even that it was sold by TX), and that it spent time and money attempting to frustrate the spider, but neither of these items shows damage to the computers or their operation. One must keep in mind that we are talking about the common law tort of trespass, not damage from breach of contract or copyright infringement. The tort claim may not succeed without proof of tort-type damage. Plaintiff TM has the burden to show such damage. None is shown here. The motion for summary judgment is granted to eliminate the claim for trespass to chattels. This minute order is the order eliminating that claim. This approach to the tort of trespass to chattels should hurt no one's policy feelings; after all, what is being attempted is to apply a medieval common law concept in an entirely new situation which should be disposed of by modern law designed to protect intellectual property interests.

[4] The copyright issues are more difficult. They divide into three issues. The first is whether the momentary resting in the TX computers of all of the electronic signals which are used to form the video representation to the viewer of the interior web pages of the TX computer constitutes actionable copyright infringement. The second is whether the URLs, which were copied and used by TX, contain copyrightable material. The third is whether TX's deep-linking caused the unauthorized public display of TM event pages. In examining these questions, we must keep in mind a prime theorem of copyright law–facts, as such, are not subject to copyright protection. What is subject to copyright protection is the manner or mode of expression of those facts. Thus, addresses and telephone numbers contained in a directory do not have copyright protection (Feist Publications 499 U.S. 350, 113 L.Ed.2d 358), despite the fact that time, money, and effort went into compiling the information. Similarly, in this case, the existence of the event, its date and time, and its ticket prices, are not subject to copyright. Anyone is free to print (or show on the internet) such information. Thus, if TX had sat down a secretary at the computer screen with instructions manually to go through TM's web sites and pick out and write down purely factual information about the events, and then feed it into the TX web pages (using the TX distinctive format only), no one could complain. The objection is that the same thing was done with an electronic program. However, the difference is that the spider picks up all of the electronic symbols which, if it had been put on a monitor with the right software, would duplicate the TM web page. However, this is not the way it was done. The spider picks up the electronic symbols and loads them momentarily (for 10 to 15 seconds) into the RAM of the TX computers, where a program picks up the factual data (not protected), places same into the TX format for its web pages, and immediately discards the balance, which may consist of TM logos, TM advertisements, TM format for presentation of the material, and other material which is copyrightable. Thus, the actual copying (if it can be called that) is momentary while the non-protected material, all open to the public, is extracted. Is this momentary resting of the electronic symbols from which a TM web page could be (but is not) constructed fair use where the purpose is to obtain non-protected facts? The court thinks the answer is "yes". There is not much law in point. However, there are two Ninth Circuit cases which shed light on the problem. They are Sony Computer Entertainment 9 Cir '00 203 F3d 596 and Sega 9 Cir '92 977 F.2d 1510. In each of these cases, the alleged infringer attempted to get at non-protected source code by reverse engineering of the plaintiff's copyrighted software. In doing so, the necessary method was to copy the software and work backwards to derive the unprotected source code. The copied software was then destroyed. In each case, this was held to be fair use since it was necessary to temporarily copy the software to obtain the non-protected material. There may be a difference with this case, however, at least TM claims so. It asserts in its points and authorities that taking the temporary copy in this case was not the only way to obtain the unprotected information, and that TX was able to, and in actuality did purchase such information from certain third-parties. Both Sony and Sega stated that the fair use was justified because reverse engineering (including taking a temporary copy) was the only way the unprotected information could be obtained. Although this court recognizes that the holdings of Sony and Sega were limited to the specific context of "disassembling" copyrighted object code in order to access unprotected elements contained in the source code, this court believes that the "fair use" doctrine can be applied to the current facts.

[5] Taking the temporary copy of the electronic information for the limited purpose of extracting unprotected public facts leads to the conclusion that the temporary use of the electronic signals was "fair use" and not actionable. In determining whether a challenged use of copyrighted material is fair, a court must keep in mind the public policy underlying the Copyright Act: to secure a fair return for an author's creative labor and to stimulate artistic creativity for the general good. This court sees no public policy that would be served by restricting TX from using spiders to temporarily download TM's event pages in order to acquire the unprotected, publicly available factual event information. The rest of the event page information (which consisted of TM identification, logos, ads, and other information) was discarded and not used by TX and is not exposed to the public by TX. In temporarily downloading TM's event pages to its RAM through the use of spiders, TX was not exploiting TM's creative labors in any way: its spiders gathered copyrightable and non-copyrightable information alike but then immediately discarded the copyrighted material. It is unlikely that the spiders could have been programmed to take only the factual information from the TM web pages without initially downloading the entire page.

Consideration of the fair use factors listed in 17 USC § 106 supports this result. First, TX operates its site for commercial purposes, and this fact tends to weigh against a finding of fair use. Campbell '94 510 U.S. 569, 585, 127 L.Ed.2d 500, 519. TX's use of the data gathered from TM's event pages was only slightly transformative. As for the second factor, the nature of the copyrighted work, the copying that occurred when spiders download the event page, access the source code for each page, and extract the factual data embedded in the code, is analogous to the process of copying that the Sony court condoned (however, the Court recognizes that the fair use holding from that decision does not fit perfectly onto the facts at hand). Third, because TX's final product-the TX web site-did not contain any infringing material, the "amount and substantiality of the portion used" is of little weight. Connectix 9Cir'00 203F3d at 606 (quoting Sega 9Cir'93 977 F.2d at 1526–1537). The fourth factor (the effect on the market value of the copyrighted work) is, of course nil, and weighs towards finding fair use. TM's arguments and evidence regarding loss of advertising revenue, as well as the loss of potential business with Volt Delta, are not persuasive.

The second copyright problem is whether the URLs (Uniform Resource Locator) are subject to copyright protection. The URLs are copied by TX and, while TX was deep hyper-linking to TM interior web pages, were used by TX to allow the deep-linking (by providing the electronic address of the particular relevant TM interior web page). This electronic address is kept in TX's computer (not provided to the customer) but was used to connect the customer to the TM interior web page when the customer pushed the button to be transferred to the web page of the broker who sells the tickets. In fact, anyone who uses the TM interior web page–TM customer or not–uses the URL to get there, although sometimes through another computer which also has the URL. TM contends that, although the URLs are strictly functional, they are entitled to copyright protection because there are several ways to write the URL, and, thus, original authorship is used. The court disagrees. A URL is simply an address, open to the public, like the street address of a building, which, if known, can enable the user to reach the building. There is nothing sufficiently original to make the URL a copyrightable item, especially the way it is used. Feist Publications '91 499 U.S. 340, 345, 113 L.Ed.2d 358, 369. There appear to be no cases holding the URLs to be subject to copyright. On principle, they should not be.

[6] The third copyright problem is whether TX's deep-linking caused the unauthorized public display of TM event pages in violation of TM's exclusive rights of reproduction and display under 17 U.S.C. § 106. The Ninth Circuit in Kelly 9 Cir '02 280 F3d 934, recognized that inline linking and framing of full-sized images of plaintiff's copyrighted photographs within the defendant's web site violated the plaintiff's public display rights. In that case, defendant's web site contained links to plaintiff's photographs (which were on plaintiff's publicly available website). Users were able to view plaintiff's photographs within the context of defendant's site: Plaintiff's images were "framed" by the defendant's window, and were thus surrounded by defendant web page's text and advertising. In one short paragraph in a declaration offered on the preliminary injunction motion, TM alleges that when a user was deep-linked from the TX site to a TM event page, a smaller window was opened. The smaller window was described as containing a page from the TM web site which was "framed" by the larger window. At the time of the preliminary injunction motion, TX stated that whether "framing" occurs or not depends on the settings on the user's computer, over which TX has no control. Thus, framing occurred on some occasions but not on others. However, TX says that it "did not try to disguise a sale by use of frames occurring on the Tickets.com website." (Reply, p. 10) TX further states that when users were linked to TM web pages, the TM event pages were clearly identified as belonging to TM.

However, even if the TM interior web site page was "framed" within the TX web page, this case is distinguishable from Kelly. In Kelly, the defendant's site would display a variety of "thumbnail" images as a result of the user's search. By clicking on the desired thumbnail image, a user could view the "Images Attributes" page, which displayed the original full-size image, a description of its dimensions, a link to the originating web site, and defendant's banner and advertising. The full-size image was not technically located on defendant's web site, but was taken directly from the originating web site. However, only the image itself, and not any other part of the originating web site, was displayed on the "Images Attributes" page. The Ninth Circuit determined that by importing plaintiff's images into its own web page, and by showing them in the context of its own site, defendant infringed upon plaintiff's exclusive public display right.

In this case, a user on the TX site was taken directly to the originating TM site, containing all the elements of that particular TM event page. Each TM event page clearly identified itself as belonging to TM. Moreover, the link on the TX site to the TM event page contained the following notice: "Buy this ticket from another online ticketing company. Click here to buy tickets. These tickets are sold by another ticketing company. Although we can't sell them to you, the link above will take you directly to the other company's web site where you can purchase them." (2d Am.Compl.Ex.I) (emphasis in original) Even if the TM site may have been displayed as a smaller window that was literally "framed" by the larger TX window, it is not clear that, as matter of law, the linking to TX event pages would constitute a showing or public display in violation of 17 U.S.C. § 106(5). Accordingly, summary judgment is granted on the copyright claims of TM and it is eliminated from this action.

Michelle C. Doolin (argued), Leo P. Norton, and Erin E. Goodsell, Cooley LLP, San Diego, CA, for Defendant–Appellant.

Gretchen Carpenter (argued), and Brian R. Strange, Strange & Carpenter, Los Angeles, CA, for Plaintiff–Appellee.

Appeal from the United States District Court for the Central District of California, Josephine L. Staton, District Judge, Presiding. D.C. No. 8:12–cv–00812–JST–RNB.

Before JOHN T. NOONAN and KIM McLANE WARDLAW, Circuit Judges, and ROSLYN O. SILVER, Senior District Judge.^[*]

OPINION

NOONAN, Circuit Judge:

[1] Barnes & Noble, Inc. ("Barnes & Noble") appeals the district court's denial of its motion to compel arbitration against Kevin Khoa Nguyen ("Nguyen") pursuant to the arbitration agreement contained in its website's Terms of Use. In order to resolve the issue of arbitrability, we must address whether Nguyen, by merely using Barnes & Noble's website, agreed to be bound by the Terms of Use, even though Nguyen was never prompted to assent to the Terms of Use and never in fact read them. We agree with the district court that Barnes & Noble did not provide reasonable notice of its Terms of Use, and that Nguyen therefore did not unambiguously manifest assent to the arbitration provision contained therein.

We also agree with the district court that Nguyen is not equitably estopped from avoiding arbitration because he relied on the Terms of Use's choice of law provision.

We therefore affirm the district court's denial of Barnes & Noble's motion to compel arbitration and to stay court proceedings.

I. Background

A.

The underlying facts are not in dispute. Barnes & Noble is a national bookseller that owns and operates hundreds of bookstores as well as the website <www.barnesandnoble.com>. In August 2011, Barnes & Noble, along with other retailers across the country, liquidated its inventory of discontinued Hewlett–Packard Touchpads ("Touchpads"), an unsuccessful competitor to Apple's iPad, by advertising a "fire sale" of Touchpads at a heavily discounted price. Acting quickly on the nationwide liquidation of Touchpads, Nguyen purchased two units on Barnes & Noble's website on August 21, 2011, and received an email confirming the transaction. The following day, Nguyen received another email informing him that his order had been cancelled due to unexpectedly high demand. Nguyen alleges that, as a result of "Barnes & Noble's representations, as well as the delay in informing him it would not honor the sale," he was "unable to obtain an HP Tablet during the liquidation period for the discounted price," and was "forced to rely on substitute tablet technology, which he subsequently purchased ... [at] considerable expense."

B.

In April 2012, Nguyen filed this lawsuit in California Superior Court on behalf of himself and a putative class of consumers whose Touchpad orders had been cancelled, alleging that Barnes & Noble had engaged in deceptive business practices and false advertising in violation of both California and New York law. Barnes & Noble removed the action to federal court and moved to compel arbitration under the Federal Arbitration Act ("FAA"), arguing that Nguyen was bound by the arbitration agreement in the website's Terms of Use.

The website's Terms of Use are available via a "Terms of Use" hyperlink located in the bottom left-hand corner of every page on the Barnes & Noble website, which appears alongside other hyperlinks labeled "NOOK Store Terms," "Copyright," and "Privacy Policy." These hyperlinks also appear underlined and set in green typeface in the lower lefthand corner of every page in the online checkout process.

[2] Nguyen neither clicked on the "Terms of Use" hyperlink nor actually read the Terms of Use. Had he clicked on the hyperlink, he would have been taken to a page containing the full text of Barnes & Noble's Terms of Use, which state, in relevant part: "By visiting any area in the Barnes & Noble.com Site, creating an account, [or] making a purchase via the Barnes & Noble.com Site ... a User is deemed to have accepted the Terms of Use."Nguyen also would have come across an arbitration provision, which states:

XVIII. DISPUTE RESOLUTION

Any claim or controversy at law or equity that arises out of the Terms of Use, the Barnes & Noble.com Site or any Barnes & Noble.com Service (each a "Claim"), shall be resolved through binding arbitration conducted by telephone, online or based solely upon written submissions where no in-person appearance is required. In such cases, arbitration shall be administered by the American Arbitration Association under its Commercial Arbitration Rules (including without limitation the Supplementary Procedures for Consumer–Related Disputes, if applicable), and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

....

Any claim shall be arbitrated or litigated, as the case may be, on an individual basis and shall not be consolidated with any Claim of any other party whether through class action proceedings, class arbitration proceedings or otherwise.

....

Each of the parties hereby knowingly, voluntarily and intentionally waives any right it may have to a trial by jury in respect of any litigation (including but not limited to any claims, counterclaims, cross-claims, or third party claims) arising out of, under or in connection with these Terms of Use. Further, each party hereto certifies that no representative or agent of either party has represented, expressly or otherwise, that such a party would not in the event of such litigation, seek to enforce this waiver of right to jury trial provision. Each of the parties acknowledges that this section is a material inducement for the other party entering into these Terms of Use.

Nguyen contends that he cannot be bound to the arbitration provision because he neither had notice of nor assented to the website's Terms of Use. Barnes & Noble, for its part, asserts that the placement of the "Terms of Use" hyperlink on its website put Nguyen on constructive notice of the arbitration agreement. Barnes & Noble contends that this notice, combined with Nguyen's subsequent use of the website, was enough to bind him to the Terms of Use. The district court disagreed, and Barnes & Noble now appeals.

II. Standard of Review

"We review the denial of a motion to compel arbitration de novo." Cox v. Ocean View Hotel Corp., 533 F.3d 1114, 1119 (9th Cir.2008). Underlying factual findings are reviewed for clear error, Balen v. Holland Am. Line Inc., 583 F.3d 647, 652 (9th Cir.2009), while "[t]he interpretation and meaning of contract provisions" are reviewed de novo, Milenbach v. Comm'r, 318 F.3d 924, 930 (9th Cir.2003).

III. Discussion

A.

[3] The FAA, 9 U.S.C. § 1 et seq., requires federal district courts to stay judicial proceedings and compel arbitration of claims covered by a written and enforceable arbitration agreement. Id. § 3. The FAA limits the district court's role to determining whether a valid arbitration agreement exists, and whether the agreement encompasses the disputes at issue. See Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir.2000). The parties do not quarrel that Barnes & Noble's arbitration agreement, should it be found enforceable, encompasses Nguyen's claims. The only issue is whether a valid arbitration agreement exists.

In determining whether a valid arbitration agreement exists, federal courts "apply ordinary state—law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995). Federal courts sitting in diversity look to the law of the forum state—here, California—when making choice of law determinations. Hoffman v. Citibank (S.D.), N .A., 546 F.3d 1078, 1082 (9th Cir.2008) (per curiam). Under California law, the parties' choice of law will govern unless section 187(2) of the Restatement (Second) of Conflict of Laws dictates a different result.Id.

Here, the parties agree that the validity of the arbitration agreement is governed by New York law, as specified by the Terms of Use's choice of law provision. But whether the choice of law provision applies depends on whether the parties agreed to be bound by Barnes & Noble's Terms of Use in the first place. As the district court acknowledged in its order, we need not engage in this circular inquiry because both California and New York law dictate the same outcome. Thus, in evaluating the validity of Barnes & Noble's arbitration agreement, we apply New York law, to the extent possible.

For the reasons that follow, we hold that Nguyen did not enter into Barnes & Noble's agreement to arbitrate.

B.

"While new commerce on the Internet has exposed courts to many new situations, it has not fundamentally changed the principles of contract." Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 403 (2d Cir.2004). One such principle is the requirement that "[m]utual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract."Specht v. Netscape Commc'ns Corp., 306 F.3d 17, 29 (2d Cir.2002) (applying California law).

Contracts formed on the Internet come primarily in two flavors: "clickwrap" (or "click-through") agreements, in which website users are required to click on an "I agree" box after being presented with a list of terms and conditions of use; and "browsewrap" agreements, where a website's terms and conditions of use are generally posted on the website via a hyperlink at the bottom of the screen. See Register.com, 356 F.3d at 428–30. Barnes & Noble's Terms of Use fall in the latter category.

"Unlike a clickwrap agreement, a browsewrap agreement does not require the user to manifest assent to the terms and conditions expressly ... [a] party instead gives his assent simply by using the website." Hines v. Overstock.com, Inc., 668 F.Supp.2d 362, 366–67 (E.D.N.Y.2009) (citation and quotation marks omitted) (alteration in original). Indeed, "in a pure—form browsewrap agreement, 'the website will contain a notice that—by merely using the services of, obtaining information from, or initiating applications within the website—the user is agreeing to and is bound by the site's terms of service.' " Fteja v. Facebook, Inc., 841 F.Supp.2d 829, 837 (S.D.N.Y.2012) (quoting United States v. Drew, 259 F.R.D. 449, 462 n. 22 (C.D.Cal.2009)). Thus, "by visiting the website—something that the user has already done—the user agrees to the Terms of Use not listed on the site itself but available only by clicking a hyperlink." Id. "The defining feature of browsewrap agreements is that the user can continue to use the website or its services without visiting the page hosting the browsewrap agreement or even knowing that such a webpage exists." Be In, Inc. v. Google Inc., No. 12–CV–03373–LHK, 2013 WL 5568706, at *6 (N.D.Cal. Oct. 9, 2013). "Because no affirmative action is required by the website user to agree to the terms of a contract other than his or her use of the website, the determination of the validity of the browsewrap contract depends on whether the user has actual or constructive knowledge of a website's terms and conditions." Van Tassell v. United Mktg. Grp., LLC, 795 F.Supp.2d 770, 790 (N.D.Ill.2011) (citing Sw. Airlines Co. v. BoardFirst, LLC, No. 06–CV–0891–B, 2007 WL 4823761, at *4 (N.D.Tex. Sept. 12, 2007)); see also Mark A. Lemley, Terms of Use, 91 Minn. L.Rev. 459, 477 (2006) ("Courts may be willing to overlook the utter absence of assent only when there are reasons to believe that the [website user] is aware of the [website owner's] terms.").

[4] Were there any evidence in the record that Nguyen had actual notice of the Terms of Use or was required to affirmatively acknowledge the Terms of Use before completing his online purchase, the outcome of this case might be different. Indeed, courts have consistently enforced browsewrap agreements where the user had actual notice of the agreement. See, e.g., Register.com,356 F.3d at 401–04 (finding likelihood of success on the merits in a breach of browsewrap claim where the defendant "admitted that ... it was fully aware of the terms" of the offer); Sw. Airlines Co., 2007 WL 4823761, at *4–6 (finding proper contract formation where defendant continued its breach after being notified of the terms in a cease and desist letter); Ticketmaster Corp. v. Tickets.com, Inc.,No. CV–997654, 2003 WL 21406289, at *2 (C.D.Cal. Mar. 7, 2003) (denying defendants' summary judgment motion on browsewrap contract claim where defendants continued breaching contract after receiving letter quoting the browsewrap contract terms). Courts have also been more willing to find the requisite notice for constructive assent where the browsewrap agreement resembles a clickwrap agreement—that is, where the user is required to affirmatively acknowledge the agreement before proceeding with use of the website. See, e.g., Zaltz v. JDATE, 952 F.Supp.2d 439, 451–52 (E.D.N.Y.2013) (enforcing forum selection clause where prospective members had to check box confirming that they both read and agreed to the website's Terms and Conditions of Service to obtain account); Fteja, 841 F.Supp.2d at 838–40 (enforcing forum selection clause in website's terms of service where a notice below the "Sign Up" button stated, "By clicking Sign Up, you are indicating that you have read and agree to the Terms of Service," and user had clicked "Sign Up").

But where, as here, there is no evidence that the website user had actual knowledge of the agreement, the validity of the browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry notice of the terms of the contract. Specht, 306 F.3d at 30–31;see also In re Zappos.com, Inc. Customer Data Sec. Breach Litig., 893 F.Supp.2d 1058, 1064 (D.Nev.2012). Whether a user has inquiry notice of a browsewrap agreement, in turn, depends on the design and content of the website and the agreement's webpage. Google, 2013 WL 5568406, at *6. Where the link to a website's terms of use is buried at the bottom of the page or tucked away in obscure corners of the website where users are unlikely to see it, courts have refused to enforce the browsewrap agreement. See, e.g., Specht, 306 F.3d at 23 (refusing to enforce terms of use that "would have become visible to plaintiffs only if they had scrolled down to the next screen"); In re Zappos. com, 893 F.Supp.2d at 1064 ("The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use."); Van Tassell, 795 F.Supp.2d 792–93 (refusing to enforce arbitration clause in browsewrap agreement that was only noticeable after a "multi-step process" of clicking through non-obvious links); Hines, 668 F.Supp.2d at 367(plaintiff "could not even see the link to [the terms and conditions] without scrolling down to the bottom of the screen—an action that was not required to effectuate her purchase"). On the other hand, where the website contains an explicit textual notice that continued use will act as a manifestation of the user's intent to be bound, courts have been more amenable to enforcing browsewrap agreements. See, e.g., Cairo, Inc. v. Crossmedia Servs., Inc., No. 04–04825, 2005 WL 756610, at *2, *4–5 (N.D.Cal. Apr. 1, 2005)(enforcing forum selection clause in website's terms of use where every page on the website had a textual notice that read: "By continuing past this page and/or using this site, you agree to abide by the Terms of Use for this site, which prohibit commercial use of any information on this site"). But see Pollstar v. Gigmania, Ltd ., 170 F.Supp.2d 974, 981 (E.D.Cal.2000) (refusing to enforce browsewrap agreement where textual notice appeared in small gray print against a gray background). In short, the conspicuousness and placement of the "Terms of Use" hyperlink, other notices given to users of the terms of use, and the website's general design all contribute to whether a reasonably prudent user would have inquiry notice of a browsewrap agreement.

[5] Barnes & Noble argues that the placement of the "Terms of Use" hyperlink in the bottom left-hand corner of every page on the Barnes & Noble website, and its close proximity to the buttons a user must click on to complete an online purchase, is enough to place a reasonably prudent user on constructive notice. It is true that the location of the hyperlink on Barnes & Noble's website distinguishes this case from Specht, the leading authority on the enforceability of browsewrap terms under New York law. There, the Second Circuit refused to enforce an arbitration provision in a website's licensing terms where the hyperlink to the terms was located at the bottom of the page, hidden below the "Download" button that users had to click to initiate the software download. See Specht, 306 F.3d at 30. Then–Second Circuit Judge Sotomayor, writing for the panel, held that "a reference to the existence of license terms on a submerged screen is not sufficient to place consumers on inquiry or constructive notice of those terms." Id. at 32.By contrast, here the "Terms of Use" link appears either directly below the relevant button a user must click on to proceed in the checkout process or just a few inches away. On some pages, the content of the webpage is compact enough that a user can view the link without scrolling. On the remaining pages, the hyperlink is close enough to the "Proceed with Checkout" button that a user would have to bring the link within his field of vision in order to complete his order.

But the proximity or conspicuousness of the hyperlink alone is not enough to give rise to constructive notice, and Barnes & Noble directs us to no case law that supports this proposition.^[1]The most analogous case the court was able to locate is PDC Labs., Inc. v. Hach Co., an unpublished district court order cited by neither party. No. 09–1110, 2009 WL 2605270 (C.D.Ill. Aug. 25, 2009). There, the "Terms [and Conditions of Sale] were hyperlinked on three separate pages of the online ... order process in underlined, blue, contrasting text."Id. at *3. The court held that "[t]his contrasting text is sufficient to be considered conspicuous," thereby placing a reasonable user on notice that the terms applied. Id. It also observed, however, that the terms' conspicuousness was reinforced by the language of the final checkout screen, which read, " 'STEP 4 of 4: Review terms, add any comments, and submit order,' " and was followed by a hyperlink to the Terms. Id. (emphasis added).

As in PDC, the checkout screens here contained "Terms of Use" hyperlinks in underlined, color-contrasting text. But PDC is dissimilar in that the final screen on that website contained the phrase "Review terms." PDC Labs, 2009 WL 2605270, at *3. This admonition makes PDC distinguishable, despite the court's explanation that the blue contrasting hyperlinks were sufficiently conspicuous on their own. That the PDC decision couched its holding in terms of procedural unconscionability rather than contract formation further distinguishes it from our case. See id.

[6] In light of the lack of controlling authority on point, and in keeping with courts' traditional reluctance to enforce browsewrap agreements against individual consumers,^[2] we therefore hold that where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on—without more—is insufficient to give rise to constructive notice. While failure to read a contract before agreeing to its terms does not relieve a party of its obligations under the contract, Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1, 11 (1988), the onus must be on website owners to put users on notice of the terms to which they wish to bind consumers. Given the breadth of the range of technological savvy of online purchasers, consumers cannot be expected to ferret out hyperlinks to terms and conditions to which they have no reason to suspect they will be bound.

Barnes & Noble's argument that Nguyen's familiarity with other websites governed by similar browsewrap terms, including his personal website < www.kevinkhoa.com>, gives rise to an inference of constructive notice is also of no moment. Whether Nguyen has experience with the browsewrap agreements found on other websites such as Facebook, LinkedIn, MySpace, or Twitter, has no bearing on whether he had constructive notice of Barnes & Noble's Terms of Use. There is nothing in the record to suggest that those browsewrap terms are enforceable by or against Nguyen, much less why they should give rise to constructive notice of Barnes & Noble's browsewrap terms.

C.

Barnes & Noble argues in the alternative that the district court erroneously rejected its argument that Nguyen should be equitably estopped from avoiding arbitration because he ratified the Terms of Use by relying on its choice of law provision in his complaint and asserting class claims under New York law. Reviewing the district court's decision for abuse of discretion, Kingman Reef Atoll Invs., LLC v. United States, 541 F.3d 1189, 1195 (9th Cir.2008), we reject Barnes & Noble's argument for two reasons.

First, the doctrine of direct benefits estoppel does not apply to the facts at hand. Federal courts have recognized that the obligation to arbitrate under the FAA does not attach only to one who has personally signed the arbitration provision. Thomson–CSF, S.A. v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir.1995). Instead, a non-signatory to an arbitration agreement may be compelled to arbitrate where the nonsignatory "knowingly exploits" the benefits of the agreement and receives benefits flowing directly from the agreement. See MAG Portfolio Consultant, GMBH v. Merlin Biomed Grp. LLC, 268 F.3d 58, 61 (2d Cir.2001); see also Belzberg v. Verus Invs. Holdings Inc., 999 N.E.2d 1130, 1134 (N.Y.2013). But Nguyen is not the type of non-signatory contemplated by the rule. Equitable estoppel typically applies to third parties who benefit from an agreement made between two primary parties. See, e .g., Wash. Mut. Fin. Grp., LLC v. Bailey, 364 F.3d 260, 267–68 (5th Cir.2004) (estopping nonsignatory wife of borrower from avoiding arbitration clause of loan agreement made between her husband and lender); Parillo v. Nataro, 229 N.Y.S.2d 492, 493–94 (Sup.Ct.1962) (applying equitable estoppel to third-party beneficiary of insurance contract). Here, Nguyen is not a third-party beneficiary to Barnes & Noble's Terms of Use, and whether he is a primary party to the Terms of Use lies at the heart of this dispute.

[7] Second, we are unable to find any case law holding that reliance on a contract's choice of law provision in itself constitutes a "direct benefit." The closest case is HD Brous & Co., Inc. v. Mrzyglocki, an unpublished district court decision, in which the court compelled arbitration against a nonsignatory petitioner in part because the non-signatory had sought to limit the respondent's choice of substantive law by relying on the agreement's choice of law provision. No. 03 Civ.8385 (CSH), 2004 WL 376555, at *8 (S.D.N.Y. Feb. 26, 2004). But HD Brous is distinguishable because the agreement there served as the foundational document for the business relationship between the parties and explicitly named the petitioner as the intended beneficiary. Id. It can hardly be said here that the choice of New York law—chosen unilaterally by Barnes & Noble—was intended to benefit Nguyen. Any benefit derived by Nguyen under New York law—whether it be the possibility of statutory or treble damages on Nguyen's nationwide class claims—is merely incidental.

In light of these distinguishing facts, the district court did not abuse its considerable discretion in rejecting Barnes & Noble's estoppel argument.

* * *

We hold that Nguyen had insufficient notice of Barnes & Noble's Terms of Use, and thus did not enter into an agreement with Barnes & Noble to arbitrate his claims.

AFFIRMED.

[*] The Honorable Roslyn O. Silver, Senior District Judge for the U.S. District Court for the District of Arizona, sitting by designation.

[1] Indeed, in cases where courts have relied on the proximity of the hyperlink to enforce a browsewrap agreement, the websites at issue have also included something more to capture the user's attention and secure her assent. See, e.g.,5381 Partners LLC v. Sharesale.com, Inc., No. 12–CV–4263 JFB AKT, 2013 WL 5328324, at *7 (E.D.N.Y. Sept. 23, 2013) (in addition to hyperlink that appeared adjacent to the activation button users had to click on, website also contained a text warning near the button that stated "By clicking and making a request to Activate, you agree to the terms and conditions in the [agreement]"); Zaltz, 952 F.Supp.2d at 451–52 (users required to check box confirming that they had reviewed and agreed to website's Terms and Conditions, even though hyperlink to Terms and Conditions was located on the same screen as the button users had to click on to complete registration).

[2] See Woodrow Hartzog, Website Design as Contract, 60 Am. U.L.Rev. 1635, 1644 (2011) (observing that courts "tend to shy away from enforcing browsewrap agreements that require no outward manifestation of assent"); Lemley, 91 Minn. L.Rev. at 472–77 ("An examination of the cases that have considered browsewraps in the last five years demonstrates that the courts have been willing to enforce terms of use against corporations, but have not been willing to do so against individuals.").

150 F.Supp.2d 613 (2001)

No. 01 CIV. 1728(SHS).

July 11, 2001.

[614] OPINION

STEIN, District Judge.

In this copyright infringement action, Random House, Inc. seeks to enjoin Rosetta Books LLC and its Chief Executive Officer from selling in digital format eight specific works on the grounds that the authors of the works had previously granted Random House—not Rosetta Books— the right to "print, publish and sell the work[s] in book form." Rosetta Books, on the other hand, claims it is not infringing upon the rights those authors gave Random House because the licensing agreements between the publisher and the author do not include a grant of digital or electronic rights.^[1] Relying on the language of the contracts and basic principles of contract interpretation, this Court finds that the right to "print, publish and sell the work[s] in book form" in the contracts at issue does not include the right to publish the works in the format that has come to be known as the "ebook." Accordingly, Random House's motion for a preliminary injunction is denied.

BACKGROUND

In the year 2000 and the beginning of 2001, Rosetta Books contracted with several authors to publish certain of their works—including The Confessions of Nat Turner and Sophie's Choice by William Styron; Slaughterhouse-Five, Breakfast of Champions, The Sirens of Titan, Cat's Cradle, and Player Piano by Kurt Vonnegut; and Promised Land by Robert B. Parker—in digital format over the internet. (Def. Ex. 21-23; http://www.rosetta-books.com/pages/about_us.html.) On February 26, 2001 Rosetta Books launched its ebook business, offering those titles and others for sale in digital format. (Cantos Aff. ¶ 2, Ex. A; http://www.rosetta-books.com). The next day, Random House filed this complaint accusing Rosetta Books of committing copyright infringement and tortiously interfering with the contracts Random House had with Messrs. Parker, Styron and Vonnegut by selling its ebooks. It simultaneously moved for a preliminary injunction prohibiting Rosetta from infringing plaintiff's copyrights.

A. Ebooks

Ebooks are "digital book[s] that you can read on a computer screen or an electronic [615] device." (Hrg. at 13;^[2] http://www.rosetta-books.com/pages/about_ebooks.html) Ebooks are created by converting digitized text into a format readable by computer software. The text can be viewed on a desktop or laptop computer, personal digital assistant or handheld dedicated ebook reading device. (Van Dam Decl. ¶ 9.) Rosetta's ebooks can only be read after they are downloaded into a computer that contains either Microsoft Reader, Adobe Acrobat Reader, or Adobe Acrobat eBook Reader software. (Dwyer Decl. ¶ 11; Hrg. at 15.)

Included in a Rosetta ebook is a book cover, title page, copyright page and "eforward" all created by Rosetta Books. Although the text of the ebook is exactly the same as the text of the original work, the ebook contains various features that take advantage of its digital format. For example, ebook users can search the work electronically to find specific words and phrases. They can electronically "highlight"^[3] and "bookmark"^[4] certain text, which can then be automatically indexed and accessed through hyperlinks. They can use hyperlinks in the table of contents to jump to specific chapters.

Users can also type electronic notes which are stored with the related text. These notes can be automatically indexed, sorted and filed. Users can also change the font size and style of the text to accommodate personal preferences; thus, an electronic screen of text may contain more words, fewer words, or the same number of words as a page of the original published book. In addition, users can have displayed the definition of any word in the text. (Dwyer Decl. ¶¶ 6(g), 7.) In one version of the software, the word can also be pronounced aloud.^[5] (Dwyer Decl. ¶ 7.)

Rosetta's ebooks contain certain security features to prevent users from printing, emailing or otherwise distributing the text. Although it is technologically possible to foil these security features, anyone who does so would be violating the licensing agreement accompanying the software. (Hrg. at 12; Dwyer Decl. ¶ 7.)

B. Random House's licensing agreements

While each agreement between the author and Random House differs in some respects, each uses the phrase "print, publish and sell the work in book form" to convey rights from the author to the publisher. (Sarnoff Aff. Ex. A ¶ 1(a)(i), Ex. B, ¶ 1(a)(i), Ex. C ¶ 1(a), Ex. D ¶ 1(a), Ex. E ¶ 1(a).)

1. Styron Agreements

Forty years ago, in 1961, William Styron granted Random House the right to publish The Confessions of Nat Turner. Besides granting Random House an exclusive license to "print, publish and sell the work in book form," Styron also gave it the right to "license publication of the work by book clubs," "license publication of a reprint edition," "license after book publication the [616] publication of the work, in whole or in part, in anthologies, school books," and other shortened forms, "license without charge publication of the work in Braille, or photographing, recording, and microfilming the work for the physically handicapped," and "publish or permit others to publish or broadcast by radio or television ... selections from the work, for publicity purposes ...." (Sarnoff Aff. Ex. A ¶ 1(a)(ii)-(vi).) Styron demonstrated that he was not granting Random House the rights to license publication in the British Commonwealth or in foreign languages by crossing out these clauses on the form contract supplied by Random House. (Id. ¶ 1(b), (c); Hrg. at 44; Def. Mem. at 8.)

The publisher agreed in the contract to "publish the work at its own expense and in such style and manner and at such a price as it deems suitable." (Sarnoff Aff. Ex. A ¶ 2.) The contract also contains a non-compete clause that provides, in relevant part, that "[t]he Author agrees that during the term of this agreement he will not, without the written permission of the Publisher, publish or permit to be published any material in book or pamphlet form, based on the material in the work, or which is reasonably likely to injure its sale." (Id. at ¶ 8.) Styron's contract with Random House for the right to publish Sophie's Choice, executed in 1977, is virtually identical to his 1961 contract to publish The Confessions of Nat Turner. (Sarnoff Aff. Ex. B.)

2. Vonnegut Agreements

Kurt Vonnegut's 1967 contract granting Random House's predecessor-in-interest Dell Publishing Co., Inc. the license to publish Slaughterhouse-Five and Breakfast of Champions follows a similar structure to the Styron agreements. Paragraph # 1 is captioned "grant of rights" and contains those rights the author is granting to the book publisher. Certain rights on the publisher's form contract are crossed out, indicating that the author reserved them for himself. (Sarnoff Aff. Ex C, ¶ 1(b), (e); Hrg. at 44; Def. Mem. at 10.) One of the rights granted by the author includes the "[e]xclusive right to publish and to license the Work for publication, after book publication ... in anthologies, selections, digests, abridgements, magazine condensations, serialization, newspaper syndication, picture book versions, microfilming, Xerox and other forms of copying, either now in use or hereafter developed." (Sarnoff.Aff.Ex. C. ¶ 1(d).)

Vonnegut specifically reserved for himself the "dramatic ... motion picture (silent and sound) ... radio broadcasting (including mechanical renditions and/or recordings of the text) ... [and] television" rights. (Sarnoff Aff. Ex. C ¶ 5.) Unlike the Styron agreements, this contract does not contain a non-compete clause.

Vonnegut's 1970 contract granting Dell the license to publish The Sirens of Titan, Cat's Cradle, and Player Piano contains virtually identical grants and reservations of rights as his 1967 contract. However, it does contain a non-compete clause, which provides that "the Author... will not publish or permit to be published any edition, adaptation or abridgment of the Work by any party other than Dell without Dell's prior written consent." (Sarnoff Aff. Ex. D ¶ 10(e).)

3. Parker Agreement

Robert B. Parker's 1982 contract granting Dell the license to publish Promised Land is similar to the 1970 Vonnegut contract. (Sarnoff Aff. Ex. E ¶ 1; Hrg. at 44; Def. Mem. at 12.) Paragraph # 1 contains the "grant of rights," certain of which have been crossed out by the author. The contract does grant Random House the right [617] to "Xerox and other forms of copying of the printed page, either now in use or hereafter developed." (Sarnoff Aff. Ex. E ¶ 1(d).) Parker also reserved the rights to the "dramatic ... motion picture (silent and sound) ... radio broadcasting ... television ... mechanical or electronic recordings of the text ...." (Sarnoff. Aff. Ex. E ¶ 5.) There is also a non-compete clause that provides, in relevant part, that "[t]he Author ... will not, without the written permission of Dell, publish or permit to be published any material based on the material in the Work, or which is reasonably likely to injure its sale." (Sarnoff Aff. Ex. E ¶ 18.)

DISCUSSION

A. Preliminary Injunction Standard for Copyright Infringement

Random House seeks a preliminary injunction against Rosetta Book's alleged infringing activity pursuant to 17 U.S.C. § 502(a) of the Copyright Act. In order to obtain a preliminary injunction, Random House must demonstrate "(1) irreparable harm and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions about the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting relief." ABKCO Music, Inc. v. Stellar Records, Inc., 96 F.3d 60, 64 (2d Cir.1996); see also Consumers Union of U.S., Inc. v. General Signal Corp., 724 F.2d 1044, 1048 (2d Cir. 1983); Tienshan, Inc. v. C.C.A Int'l Inc., 895 F.Supp. 651, 655 (S.D.N.Y.1995). In addition, if the moving party establishes a prima facie case of copyright infringement, then a presumption of irreparable harm arises. See ABKCO Music, 96 F.3d at 64; Wainwright Sec., Inc. v. Wall Street Transcript Corp., 558 F.2d 91, 94 (2d Cir.1977); Dynamic Solutions, Inc. v. Planning & Control, Inc., 646 F.Supp. 1329, 1337 (S.D.N.Y.1986).

B. Ownership of a Valid Copyright

Two elements must be proven in order to establish a prima facie case of infringement: "(1) ownership of a valid copyright, and (2) copying of constituent elements of the work that are original." Feist Publications, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 361, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991); see also ABKCO Music, 96 F.3d at 64; Tienshan, 895 F.Supp. at 655. In this case, only the first element—ownership of a valid copyright—is at issue, since all parties concede that the text of the ebook is identical to the text of the book published by Random House.

It is well settled that although the authors own the copyrights to their works, "[t]he legal or beneficial owner of an exclusive right under a copyright is entitled ... to institute an action for any infringement of that particular right committed while he or she is the owner of it." 17 U.S.C. § 501(b); see also Essex Music, Inc. v. ABKCO Music & Records, Inc., 743 F.Supp. 237, 241 (S.D.N.Y.1990) ("Plaintiff as an exclusive licensee has the right to institute an action for copyright infringement."); Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 12.02[b] at 12-50-51 (May, 2000) ("[A]n exclusive licensee may not sue for infringement of rights as to which he is not licensed, even if the subject matter of the infringement is the work as to which he is a licensee."). The question for resolution, therefore, is whether Random House is the beneficial owner of the right to publish these works as ebooks.

1. Contract Interpretation of Licensing Agreements—Legal Standards

Random House claims to own the rights in question through its licensing agreements with the authors. Interpretation [618] of an agreement purporting to grant a copyright license is a matter of state contract law. See Flack v. Friends of Queen Catherine Inc., 139 F.Supp.2d. 526, 536 (S.D.N.Y.2001); see also Boosey & Hawkes Music Publishers, Ltd. v. Walt Disney Co., 145 F.3d 481, 487 (2d Cir.1998); Bourne v. Walt Disney Co., 68 F.3d 621, 628-29 (2d Cir.1995); Video Trip Corp. v. Lightning Video, Inc., 866 F.2d 50, 52 (2d Cir.1989) ("[T]he real question presented was whether the claimant had ownership which could only be resolved by determining the contractual obligations of the parties. Neither substantive nor procedural copyright law was involved in the resolution of the dispute."); Bartsch v. Metro-Goldwyn-Mayer, Inc., 391 F.2d 150, 153 (2d Cir. 1968); Bloom v. Hearst Entm't, Inc., 33 F.3d 518, 522 (5th Cir.1994). All of the agreements state that they "shall be interpreted according to the law of the State of New York." (Sarnoff Aff. Ex. A ¶ 21, Ex. B ¶ 22; Sarnoff Aff. Ex. C ¶ 16, Ex. D ¶ 16, Ex. E ¶ 16 ("in accordance with the laws of the State of New York").)

In New York, a written contract is to be interpreted so as to give effect to the intention of the parties as expressed in the contract's language. See Terwilliger v. Terwilliger, 206 F.3d 240, 245 (2d. Cir. 2000) (citing Breed v. Insurance Co. of N. Am., 46 N.Y.2d 351, 355, 385 N.E.2d 1280, 1283, 413 N.Y.S.2d 352, 355 (1978)). The court must consider the entire contract and reconcile all parts, if possible, to avoid an inconsistency. See Terwilliger, 206 F.3d at 245; Laba v. Carey, 29 N.Y.2d 302, 308, 277 N.E.2d 641, 644, 327 N.Y.S.2d 613, 618 (1971).

Determining whether a contract provision is ambiguous is a question of law to be decided by the court. See Morse/Diesel, Inc. v. Trinity Indus., Inc., 67 F.3d 435, 443 (2d Cir.1995); W.W.W. Assocs., Inc. v. Frank Giancontieri, 77 N.Y.2d 157, 162, 566 N.E.2d 639, 642, 565 N.Y.S.2d 440, 443 (1990). Pursuant to New York law, "[c]ontract language is ambiguous if it is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Sayers, 7 F.3d at 1095 (internal quotations and citation omitted); see also Bloom, 33 F.3d at 522 (citing N.Y.U.C.C. § 2-202, Official Comment 1). "No ambiguity exists when contract language has a `definite and precise meaning, unattended by danger of misconception in the purport of the [contract] itself, and concerning which there is no reasonable basis for a difference of opinion.'" Sayers, 7 F.3d at 1095 (quoting Breed, 46 N.Y.2d at 355, 385 N.E.2d at 1283, 413 N.Y.S.2d at 355).

If the language of a contract is ambiguous, interpretation of the contract becomes a question of fact for the finder of fact and extrinsic evidence is admissible. See Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir.1992); Raine v. CBS Inc., 25 F.Supp.2d 434, 444 (S.D.N.Y.1998); Hartford Accident & Indem. Co. v. Wesolowski, 33 N.Y.2d 169, 172, 305 N.E.2d 907, 909, 350 N.Y.S.2d 895, 898 (1973).

These principles are in accord with the approach the U.S. Court of Appeals for the Second Circuit uses in analyzing contractual language in disputes, such as this one, "about whether licensees may exploit licensed works through new marketing channels made possible by technologies developed after the licensing contract—often called `new use' problems." Boosey & Hawkes Music Publishers, Ltd. v. Walt Disney Co., 145 F.3d 481, 486 (2d Cir. 1998). The two leading cases in this Circuit [619] on how to determine whether "new uses" come within prior grants of rights are Boosey and Bartsch v. Metro-Goldwyn-Mayer, Inc., 391 F.2d 150 (2d Cir.1968), decided three decades apart.

In Bartsch, the author of the play "Maytime" granted Hans Bartsch in 1930 "the motion picture rights [to `Maytime'] throughout the world," including the right to "copyright, vend, license and exhibit such motion picture photoplays throughout the world; together with the further sole and exclusive rights by mechanical and/or electrical means to record, reproduce and transmit sound, including spoken words...." 391 F.2d at 150. He in turn assigned those rights to Warner Bros. Pictures, which transferred them to MGM. In 1958 MGM licensed its motion picture "Maytime" for viewing on television. Bartsch sued, claiming the right to transmit the play over television had not been given to MGM.

Judge Henry Friendly, for the Second Circuit, wrote in 1968 that "any effort to reconstruct what the parties actually intended nearly forty years ago is doomed to failure." Id. at 155. He added that the words of the grant by Bartsch "were well designed to give the assignee [i.e., MGM] the broadest rights with respect to its copyrighted property." Id. at 154. The words of the grant were broad enough to cover the new use—i.e. viewing on television —and Judge Friendly interpreted them to do so. This interpretation, he wrote, permitted the licensee to "properly pursue any uses which may reasonably be said to fall within the medium as described in the license." Id. at 155. That interpretation also avoided the risk "that a deadlock between the grantor and the grantee might prevent the work's being shown over the new medium at all." Id.

In Boosey, the plaintiff was the assignee of Igor Stravinsky's copyrights in the musical composition, "The Rite of Spring." In 1939, Stravinsky had licensed Disney's use of "The Rite of Spring" in the motion picture "Fantasia." Fifty-two years later, in 1991, Disney released "Fantasia" in video format and Boosey brought an action seeking, among other relief, a declaration that the grant of rights did not include the right to use the Stravinsky work in video format. In Boosey, just as in Bartsch, the language of the grant was broad, enabling the licensee "to record in any manner, medium or form, and to license the performance of, the musical composition [for use] in a motion picture." 145 F.3d at 484.

At the Second Circuit, a unanimous panel focused on "neutral principles of contract interpretation rather than solicitude for either party." Id. at 487. "What governs," Judge Pierre Leval wrote, "is the language of the contract. If the contract is more reasonably read to convey one meaning, the party benefitted by that reading should be able to rely on it; the party seeking exception or deviation from the meaning reasonably conveyed by the words of the contract should bear the burden of negotiating for language that would express the limitation or deviation. This principle favors neither licensors nor licensees. It follows simply from the words of the contract." Id.

The Second Circuit's neutral approach was specifically influenced by policy considerations on both sides. On the one hand, the approach seeks to encourage licensees—here, the publishers—to develop new technologies that will enable all to enjoy the creative work in a new way. On the other hand, it seeks to fulfill the purpose underlying federal copyright law—to encourage authors to create literary works. See Boosey, 145 F.3d at 487, 488 n. 4.

[620] 2. Application of Legal Standards

Relying on "the language of the license contract and basic principles of interpretation," Boosey, 145 F.3d at 487 n. 3, as instructed to do so by Boosey and Bartsch, this Court finds that the most reasonable interpretation of the grant in the contracts at issue to "print, publish and sell the work in book form" does not include the right to publish the work as an ebook. At the outset, the phrase itself distinguishes between the pure content— i.e. "the work"—and the format of display —"in book form." The Random House Webster's Unabridged Dictionary defines a "book" as "a written or printed work of fiction or nonfiction, usually on sheets of paper fastened or bound together within covers" and defines "form" as "external appearance of a clearly defined area, as distinguished from color or material; the shape of a thing or person." Random House Webster's Unabridged Dictionary (2001), available in searchable form at http://www.allwords.com.

Manifestly, paragraph # 1 of each contract —entitled either "grant of rights" or "exclusive publication right"—conveys certain rights from the author to the publisher. (Sarnoff Aff. Ex. A ¶ 1, Ex. B, ¶ 1, Ex. C ¶ 1, Ex. D ¶ 1, Ex. E ¶ 1.) In that paragraph, separate grant language is used to convey the rights to publish book club editions, reprint editions, abridged forms, and editions in Braille. This language would not be necessary if the phrase "in book form" encompassed all types of books. That paragraph specifies exactly which rights were being granted by the author to the publisher. Indeed, many of the rights set forth in the publisher's form contracts were in fact not granted to the publisher, but rather were reserved by the authors to themselves. For example, each of the authors specifically reserved certain rights for themselves by striking out phrases, sentences, and paragraphs of the publisher's form contract. This evidences an intent by these authors not to grant the publisher the broadest rights in their works.

Random House contends that the phrase "in book form" means to faithfully reproduce the author's text in its complete form as a reading experience and that, since ebooks concededly contain the complete text of the work, Rosetta cannot also possess those rights. (Hrg. at 39; Green Aff. ¶ 5; Miller Aff. ¶ 15.) While Random House's definition distinguishes "book form" from other formats that require separate contractual language—such as audio books and serialization rights—it does not distinguish other formats specifically mentioned in paragraph # 1 of the contracts, such as book club editions and reprint editions. Because the Court must, if possible, give effect to all contractual language in order to "safeguard against adopting an interpretation that would render any individual provision superfluous," Sayers, 7 F.3d at 1095, Random House's definition cannot be adopted.

Random House points specifically to the clause requiring it to "publish the work at its own expense and in such a style and manner and at such a price as [Random House] deems suitable" as support for its position. (Sarnoff Aff. Ex. A ¶ 2.) However, plaintiff takes this clause out of context. It appears in paragraph # 2, captioned "Style, Price and Date of Publication," not paragraph # 1, which includes all the grants of rights. In context, the phrase simply means that Random House has control over the appearance of the formats granted to Random House in the first paragraph; i.e., control over the style of the book.

Random House also cites the non-compete clauses as evidence that the authors granted it broad, exclusive rights in their [621] work. Random House reasons that because the authors could not permit any material that would injure the sale of the work to be published without Random House's consent, the authors must have granted the right to publish ebooks to Random House. This reasoning turns the analysis on its head. First, the grant of rights follows from the grant language alone. See Boosey, 145 F.3d at 488. Second, non-compete clauses must be limited in scope in order to be enforceable in New York. See American Broad. Cos. v. Wolf, 52 N.Y.2d 394, 403-04, 420 N.E.2d 363, 367-68, 438 N.Y.S.2d 482, 486-87 (1981); Columbia Ribbon & Carbon Mfg. Co., Inc. v. A-1-A Corp., 42 N.Y.2d 496, 500, 369 N.E.2d 4, 6, 398 N.Y.S.2d 1004, 1007 (1977). Third, even if the authors did violate this provision of their Random House agreements by contracting with Rosetta Books—a point on which this Court does not opine—the remedy is a breach of contract action against the authors, not a copyright infringement action against Rosetta Books. See, e.g., Harlequin Enter. Ltd. v. Warner Books, Inc., 639 F.Supp. 1081 (S.D.N.Y.1986).

The photocopy clause—giving Random House the right to "Xerox and other forms of copying, either now in use or hereafter developed"—similarly does not bolster Random House's position. Although the clause does appear in the grant language paragraph, taken in context, it clearly refers only to new developments in xerography and other forms of photocopying. Stretching it to include new forms of publishing, such as ebooks, would make the rest of the contract superfluous because there would be no reason for authors to reserve rights to forms of publishing "now in use." This interpretation also comports with the publishing industry's trade usage of the phrase. See, e.g. (Fowler Decl. ¶¶ 12, 20, Congdon Decl. ¶ 27, Borchardt Decl. ¶ 23).^[6]

Not only does the language of the contract itself lead almost ineluctably to the conclusion that Random House does not own the right to publish the works as ebooks, but also a reasonable person "cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business," Sayers, 7 F.3d at 1095, would conclude that the grant language does not include ebooks.^[7] "To print, publish and sell the work in book form" is understood in the publishing industry to be a "limited" grant. See Field v. True Comics, 89 F.Supp. 611, 613-14 (S.D.N.Y.1950); see also Melville B. Nimmer & David Nimmer, Nimmer on Copyright, § 10.14[C] (2001) (citing Field).

In Field v. True Comics, the court held that "the sole and exclusive right to publish, print and market in book form"— [622] especially when the author had specifically reserved rights for himself—was "much more limited" than "the sole and exclusive right to publish, print and market the book." 89 F.Supp. at 612 (emphasis added). In fact, the publishing industry generally interprets the phrase "in book form" as granting the publisher "the exclusive right to publish a hardcover trade book in English for distribution in North America." 1 Lindey on Entertainment, Publishing and the Arts Form 1.01-1 (2d ed.2000) (using the Random House form contract to explain the meaning of each clause); see also Borchardt Decl. ¶¶ 9-13, Brann Decl. ¶¶ 5-9, Congdon Decl. ¶¶ 9-17, Donald Farber Decl. ¶¶ 7-17, Fowler Decl. ¶¶ 10, 20-24, Friedman Decl. ¶ 7, Levine Decl. ¶¶ 9-14, Maass Decl. ¶¶ 8-14. But see Klebanoff Dep. at 153-54 (acknowledging that the phrase, on its own, outside the context of a specific contract may include other forms of books such as book club editions, large print editions, leather bound editions, trade and mass market paperbacks); Levine Dep. at 37-38; Bloom Decl. Ex. K.

3. Comparison to Prior "New Use" Caselaw

The finding that the five licensing agreements at issue do not convey the right to publish the works as ebooks accords with Second Circuit and New York case law. Indeed, the two leading cases limned above that found that a particular new use was included within the grant language— Boosey, 145 F.3d 481 (2d Cir.1998), and Bartsch, 391 F.2d 150 (2d Cir.1968)—can be distinguished from this case on four grounds.

First, the language conveying the rights in Boosey and Bartsch was far broader than here. See Boosey, 145 F.3d at 486; Bartsch, 391 F.2d at 153. Second, the "new use" in those cases—i.e. display of a motion picture on television or videocassette —fell squarely within the same medium as the original grant. See Boosey, 145 F.3d at 486 (describing videocassettes and laser discs as "subsequently developed methods of distribution of a motion picture"); Bourne, 68 F.3d at 630 ("[T]he term `motion picture' reasonably can be understood to refer to `a broad genus whose fundamental characteristic is a series of related images that impart an impression of motion when shown in succession .... Under this concept the physical form in which the motion picture is fixed— film, tape, discs, and so forth—is irrelevant.'") (quoting S.Rep. No. 92-72, at 5 (1971), U.S.Code Cong. & Admin.News 1971, pp. 1566, 1571); see also Bloom, 33 F.3d at 523.

In this case, the "new use"—electronic digital signals sent over the internet—is a separate medium from the original use— printed words on paper. Random House's own expert concludes that the media are distinct because information stored digitally can be manipulated in ways that analog information cannot. (Van Dam Dep. at 29-30, 36, 42.) Ebooks take advantage of the digital medium's ability to manipulate data by allowing ebook users to electronically search the text for specific words and phrases, change the font size and style, type notes into the text and electronically organize them, highlight and bookmark, hyperlink to specific parts of the text, and, in the future, to other sites on related topics as well, and access a dictionary that pronounces words in the ebook aloud. The need for a software program to interact with the data in order to make it usable, as well as the need for a piece of hardware to enable the reader to view the text, also distinguishes analog formats from digital formats. See Greenberg v. National Geographic Soc'y, 244 F.3d 1267, 1273 n. 12 (11th Cir.2001) (Digital format is not analogous to reproducing the magazine in microfilm [623] or microfiche because it "requires the interaction of a computer program in order to accomplish the useful reproduction involved with the new medium.").

Therefore, Boosey and Bartsch, which apply to new uses within the same medium, do not control this case. See, e.g., Raine, 25 F.Supp.2d 434, 445 (S.D.N.Y. 1998) (finding that the right to "television broadcasts" did not include broadcasts on cable television or videocassettes); General Mills, Inc. v. Filmtel Int'l Corp., 195 A.D.2d 251, 252, 599 N.Y.S.2d 820, 821-22 (1st Dep't 1993); Tele-Pac, Inc. v. Grainger, 168 A.D.2d 11, 570 N.Y.S.2d 521 (1st Dep't 1991) (distinguishing Second Circuit "new use" doctrine by holding that right to "broadcast[ ] by television or any other similar device now known or hereafter to be made known" was so dissimilar from display on videocassette and videodisc "as to preclude consideration of video rights as even falling within the `ambiguous penumbra' of the terms used in the agreement").

The third significant difference between the licensee in the motion picture cases cited above and the book publisher in this action is that the licensees in the motion picture cases have actually created a new work based on the material from the licensor. Therefore, the right to display that new work—whether on television or video—is derivative of the right to create that work. In the book publishing context, the publishers, although they participate in the editorial process, display the words written by the author, not themselves.

Fourth, the courts in Boosey and Bartsch were concerned that any approach to new use problems that "tilts against licensees [here, Random House] gives rise to antiprogressive incentives" insofar as licensees "would be reluctant to explore and utilize innovative technologies." Boosey, 145 F.3d at 488, n. 4; see also Bartsch, 391 F.2d at 155. However, in this action, the policy rationale of encouraging development in new technology is at least as well served by finding that the licensors —i.e., the authors—retain these rights to their works. In the 21st century, it cannot be said that licensees such as book publishers and movie producers are ipso facto more likely to make advances in digital technology than start-up companies.

Other case law interpreting the scope of book publishing licensing agreements is similarly unhelpful to Random House. In Dolch v. Garrard Pub. Co., 289 F.Supp. 687 (S.D.N.Y.1968), the district court found that a license granting the publisher "the exclusive right of publication of the books" included the right to publish the books in paperback. Besides the obvious distinction that the grant language in Dolch is far broader—there is no distinction between "book" and "work"—the Dolch Court was applying Illinois contract law—not New York—which is far stricter about the use of parol evidence. See id. at 695.

In Dresser v. William Morrow & Co., 278 A.D. 931, 105 N.Y.S.2d 706 (1st Dep't 1951), aff'd 304 N.Y. 603, 107 N.E.2d 89 (N.Y.1952), the issue was whether an author could receive additional payments for reprint editions of his book when his publishing contract only provided for an "outright fixed payment." The Dresser court found that, under the terms of the contract, he could not. Id. at 932, 105 N.Y.S.2d at 707. The court relied on the fact that the contract was "at variance with the usual pattern of contracts between author and publisher." Id., 105 N.Y.S.2d at 707. Here, although each contract is slightly different, none varies greatly from the usual pattern of contracts between author and publisher; therefore, there is no reason to depart from the usual meaning of such contracts.

In contrast to Dresser and Dolch, other federal courts applying New York law [624] have interpreted publishing licensing agreements more narrowly. See Werbungs Und Commerz Union Austalt v. Collectors' Guild, Ltd., 930 F.2d 1021, 1026 (2d Cir.1991) (finding contract which conveys "right, title and interest in said two editions and all earnings therefrom" ambiguous as to whether it conveyed rights in the illustrations contained in those editions as well); Field, 89 F.Supp. at 613 (finding right to "publish, print and market in book form... the work" is limited right and does not include publication of cartoon strip in a magazine).

C. Balance of Hardships

Because Random House cannot establish a prima facie case of copyright infringement, it is not likely to succeed on the merits and is not entitled to a presumption of irreparable harm. Random House has made no showing of irreparable harm; therefore, it cannot meet the test for obtaining a preliminary injunction. Even if it could show such harm, and could be considered to have presented sufficiently serious questions about the merits to make them a fair ground for litigation, the balance of hardships does not tip decidedly in Random House's favor. Random House fears that Rosetta's ebooks will harm its goodwill with its customers and cause direct competition in Random House's own efforts to establish its ebook business. Rosetta worries that a preliminary injunction will effectively put its new company out of business because it will impede its ability to publish any works previously licensed to other publishers. While both parties present valid concerns, Random House has not demonstrated that its concerns decidedly outweigh Rosetta's.

CONCLUSION

Employing the most important tool in the armamentarium of contract interpretation —the language of the contract itself— this Court has concluded that Random House is not the beneficial owner of the right to publish the eight works at issue as ebooks. This is neither a victory for technophiles nor a defeat for Luddites. It is merely a determination, relying on neutral principles of contract interpretation, that because Random House is not likely to succeed on the merits of its copyright infringement claim and cannot demonstrate irreparable harm, its motion for a preliminary injunction should be denied.

[1] The Authors Guild, Inc., the Association of Authors' Representatives, Inc., Penguin Putnam Inc., Simon and Schuster, Inc., Time Warner Trade Publishing Inc., and the Perseus Books Group have appeared as amici curiae.

[2] References to "Hrg. at _" are to the pages of the transcript of the evidentiary hearing and oral argument of Random House's motion for a preliminary injunction held on May 8, 2001.

[3] "Highlighting" is marking passages of digital text in a transparent color with the use of an electronic stylus. (Hrg. at 21.)

[4] "Bookmarking" is flagging a portion of electronic text which enables a user to jump directly to that text at a later point in time. (Hrg. at 22.)

[5] Ebooks themselves are in the process of evolving. In development is the ability to incorporate within the ebook audio, graphics, full-motion video, and internet hyperlinks related to the electronic text. (Dwyer Decl. ¶ 10.)

[6] Similarly, Rosetta's argument that the contractual clause in which the authors reserve motion picture and broadcasting rights for themselves in certain contracts also means that the authors reserved the ebook rights is without merit. Such reservation clauses, unless they expressly cover the new use in question, "contribute[] nothing to the definition of the boundaries of the license." See Boosey, 145 F.3d at 488.

[7] Although Boosey recognizes that extrinsic evidence of industry custom is not likely to be helpful in analyzing the intent of the parties, it does not prohibit considering trade usage in understanding specific terms of the contract. See id. at 488, 489 (acknowledging that evidence of industry custom will not likely illuminate the intent of the parties, but nonetheless taking into account industry custom in interpreting the meaning of a specific clause).

Even were this Court to find the contracts ambiguous, thus allowing consideration of extrinsic evidence other than trade usage to determine whether Random House has a likelihood of success on the merits, a review of that evidence leads to the conclusion that it is unhelpful to either party.

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

[486] Ginsburg, J., delivered the opinion of the Court, in which Rehnquist, C. J., and O'Connor, Scalia, Kennedy, Souter, and Thomas, JJ., joined. Stevens, J., filed a dissenting opinion, in which Breyer, J., joined, post, p. 506.

Laurence H. Tribe argued the cause for petitioners. With him on the briefs were Jonathan S. Massey, Bruce P. Keller, Jeffrey P. Cunard, Michael R. Potenza, Peter C. Johnson, and Thomas C. Goldstein.

Laurence Gold argued the cause for respondents Tasini et al. With him on the brief were Patricia A. Felch, Daniel W. Sherrick, Michael H. Gottesman, and Leon Dayan. [487] Emily Maruja Bass filed a brief for respondents Garson et al.^[*]

Justice Ginsburg, delivered the opinion of the Court.

This copyright case concerns the rights of freelance authors and a presumptive privilege of their publishers. The litigation was initiated by six freelance authors and relates to articles they contributed to three print periodicals (two newspapers and one magazine). Under agreements with the periodicals' publishers, but without the freelancers' consent, two computer database companies placed copies of the freelancers' articles—along with all other articles from the periodicals in which the freelancers' work appeared—into three databases. Whether written by a freelancer or staff member, each article is presented to, and retrievable by, the user in isolation, clear of the context the original print publication presented.

The freelance authors' complaint alleged that their copyrights had been infringed by the inclusion of their articles in the databases. The publishers, in response, relied on the [488] privilege of reproduction and distribution accorded them by § 201(c) of the Copyright Act, which provides:

"Copyright in each separate contribution to a collective work is distinct from copyright in the collective work as a whole, and vests initially in the author of the contribution. In the absence of an express transfer of the copyright or of any rights under it, the owner of copyright in the collective work is presumed to have acquired only the privilege of reproducing and distributing the contribution as part of that particular collective work, any revision of that collective work, and any later collective work in the same series." 17 U. S. C. § 201(c).

Specifically, the publishers maintained that, as copyright owners of collective works, i. e., the original print publications, they had merely exercised "the privilege" § 201(c) accords them to "reproduc[e] and distribut[e]" the author's discretely copyrighted contribution.

In agreement with the Second Circuit, we hold that § 201(c) does not authorize the copying at issue here. The publishers are not sheltered by § 201(c), we conclude, because the databases reproduce and distribute articles standing alone and not in context, not "as part of that particular collective work" to which the author contributed, "as part of . . . any revision" thereof, or "as part of . . . any later collective work in the same series." Both the print publishers and the electronic publishers, we rule, have infringed the copyrights of the freelance authors.

I

A

Respondents Jonathan Tasini, Mary Kay Blakely, Barbara Garson, Margot Mifflin, Sonia Jaffe Robbins, and David S. Whitford are authors (Authors). Between 1990 and 1993, they wrote the 21 articles (Articles) on which this dispute centers. Tasini, Mifflin, and Blakely contributed 12 Articles to The New York Times, the daily newspaper published by [489] petitioner The New York Times Company (Times). Tasini, Garson, Robbins, and Whitford wrote eight Articles for Newsday, another New York daily paper, published by petitioner Newsday, Inc. (Newsday). Whitford also contributed one Article to Sports Illustrated, a weekly magazine published by petitioner Time, Inc. (Time). The Authors registered copyrights in each of the Articles. The Times, Newsday, and Time (Print Publishers) registered collective work copyrights in each periodical edition in which an Article originally appeared. The Print Publishers engaged the Authors as independent contractors (freelancers) under contracts that in no instance secured consent from an Author to placement of an Article in an electronic database.^[1]

At the time the Articles were published, all three Print Publishers had agreements with petitioner LEXIS/NEXIS (formerly Mead Data Central Corp.), owner and operator of NEXIS, a computerized database that stores information in a text-only format. NEXIS contains articles from hundreds of journals (newspapers and periodicals) spanning many years. The Print Publishers have licensed to LEXIS/ NEXIS the text of articles appearing in the three periodicals. The licenses authorize LEXIS/NEXIS to copy and sell any portion of those texts.

Pursuant to the licensing agreements, the Print Publishers regularly provide LEXIS/NEXIS with a batch of all the articles published in each periodical edition. The Print Publisher codes each article to facilitate computerized retrieval, then transmits it in a separate file. After further coding, LEXIS/NEXIS places the article in the central discs of its database.

[490] Subscribers to NEXIS, accessing the system through a computer, may search for articles by author, subject, date, publication, headline, key term, words in text, or other criteria. Responding to a search command, NEXIS scans the database and informs the user of the number of articles meeting the user's search criteria. The user then may view, print, or download each of the articles yielded by the search. The display of each article includes the print publication (e. g., The New York Times), date (September 23, 1990), section (Magazine), initial page number (26), headline or title ("Remembering Jane"), and author (Mary Kay Blakely). Each article appears as a separate, isolated "story"—without any visible link to the other stories originally published in the same newspaper or magazine edition. NEXIS does not contain pictures or advertisements, and it does not reproduce the original print publication's formatting features such as headline size, page placement (e. g., above or below the fold for newspapers), or location of continuation pages.

The Times (but not Newsday or Time) also has licensing agreements with petitioner University Microfilms International (UMI). The agreements authorize reproduction of Times materials on two CD—ROM products, the New York Times OnDisc (NYTO) and General Periodicals OnDisc (GPO).

Like NEXIS, NYTO is a text-only system. Unlike NEXIS, NYTO, as its name suggests, contains only the Times. Pursuant to a three-way agreement, LEXIS/ NEXIS provides UMI with computer files containing each article as transmitted by the Times to LEXIS/NEXIS. Like LEXIS/NEXIS, UMI marks each article with special codes. UMI also provides an index of all the articles in NYTO. Articles appear in NYTO in essentially the same way they appear in NEXIS, i. e., with identifying information (author, title, etc.), but without original formatting or accompanying images.

[491] GPO contains articles from approximately 200 publications or sections of publications. Unlike NEXIS and NYTO, GPO is an image-based, rather than a text-based, system. The Times has licensed GPO to provide a facsimile of the Times' Sunday Book Review and Magazine. UMI "burns" images of each page of these sections onto CD—ROMs. The CD— ROMs show each article exactly as it appeared on printed pages, complete with photographs, captions, advertisements, and other surrounding materials. UMI provides an index and abstracts of all the articles in GPO.

Articles are accessed through NYTO and GPO much as they are accessed through NEXIS. The user enters a search query using similar criteria (e. g., author, headline, date). The computer program searches available indexes and abstracts, and retrieves a list of results matching the query. The user then may view each article within the search result, and may print the article or download it to a disc. The display of each article provides no links to articles appearing on other pages of the original print publications.^[2]

B

On December 16, 1993, the Authors filed this civil action in the United States District Court for the Southern District of New York. The Authors alleged that their copyrights were infringed when, as permitted and facilitated by the Print Publishers, LEXIS/NEXIS and UMI (Electronic Publishers) placed the Articles in the NEXIS, NYTO, and GPO databases (Databases). The Authors sought declaratory [492] and injunctive relief, and damages. In response to the Authors' complaint, the Print and Electronic Publishers raised the reproduction and distribution privilege accorded collective work copyright owners by 17 U. S. C. § 201(c). After discovery, both sides moved for summary judgment.

The District Court granted summary judgment for the Publishers, holding that § 201(c) shielded the Database reproductions. 972 F. Supp. 804, 806 (1997). The privilege conferred by § 201(c) is transferable, the court first concluded, and therefore could be conveyed from the original Print Publishers to the Electronic Publishers. Id., at 816. Next, the court determined, the Databases reproduced and distributed the Authors' works, in § 201(c)'s words, "as part of . . . [a] revision of that collective work" to which the Authors had first contributed. To qualify as "revisions," according to the court, works need only "preserve some significant original aspect of [collective works]—whether an original selection or an original arrangement." Id., at 821. This criterion was met, in the District Court's view, because the Databases preserved the Print Publishers' "selection of articles" by copying all of the articles originally assembled in the periodicals' daily or weekly issues. Id., at 823. The Databases "highlight[ed]" the connection between the articles and the print periodicals, the court observed, by showing for each article not only the author and periodical, but also the print publication's particular issue and page numbers. Id., at 824 ("[T]he electronic technologies not only copy the publisher defendants' complete original `selection' of articles, they tag those articles in such a way that the publisher defendants' original selection remains evident on line.").

The Authors appealed, and the Second Circuit reversed. 206 F. 3d 161 (1999). The Court of Appeals granted summary judgment for the Authors on the ground that the Databases were not among the collective works covered by § 201(c), and specifically, were not "revisions" of the periodicals in which the Articles first appeared. Id., at 167-170. Just as § 201(c) does not "permit a Publisher to sell a hard [493] copy of an Author's article directly to the public even if the Publisher also offered for individual sale all of the other articles from the particular edition," the court reasoned, so § 201(c) does not allow a Publisher to "achieve the same goal indirectly" through computer databases. Id., at 168. In the Second Circuit's view, the Databases effectively achieved this result by providing multitudes of "individually retrievable" articles. Ibid. As stated by the Court of Appeals, the Databases might fairly be described as containing "new antholog[ies] of innumerable" editions or publications, but they do not qualify as "revisions" of particular editions of periodicals in the Databases. Id., at 169. Having concluded that § 201(c) "does not permit the Publishers," acting without the author's consent, "to license individually copyrighted works for inclusion in the electronic databases," the court did not reach the question whether the § 201(c) privilege is transferable. Id., at 165, and n. 2.

We granted certiorari to determine whether the copying of the Authors' Articles in the Databases is privileged by 17 U. S. C. § 201(c). 531 U. S. 978 (2000). Like the Court of Appeals, we conclude that the § 201(c) privilege does not override the Authors' copyrights, for the Databases do not reproduce and distribute the Articles as part of a collective work privileged by § 201(c). Accordingly, and again like the Court of Appeals, we find it unnecessary to determine whether the privilege is transferable.

II

Under the Copyright Act, as amended in 1976, "[c]opyright protection subsists . . . in original works of authorship fixed in any tangible medium of expression .. . from which they can be perceived, reproduced, or otherwise communicated." 17 U. S. C. § 102(a). When, as in this case, a freelance author has contributed an article to a "collective work" such as a newspaper or magazine, see § 101 (defining "collective work"), the statute recognizes two distinct copyrighted works: "Copyright in each separate contribution to a collec[494]tive work is distinct from copyright in the collective work as a whole . . . ." § 201(c) (emphasis added). Copyright in the separate contribution "vests initially in the author of the contribution" (here, the freelancer). Ibid. Copyright in the collective work vests in the collective author (here, the newspaper or magazine publisher) and extends only to the creative material contributed by that author, not to "the preexisting material employed in the work," § 103(b). See also Feist Publications, Inc. v. Rural Telephone Service Co., 499 U. S. 340, 358 (1991) (copyright in "compilation"—a term that includes "collective works," 17 U. S. C. § 101—is limited to the compiler's original "selection, coordination, and arrangement").

Prior to the 1976 revision, as the courts below recognized, see 206 F. 3d, at 168; 972 F. Supp., at 815, authors risked losing their rights when they placed an article in a collective work. Pre-1976 copyright law recognized a freelance author's copyright in a published article only when the article was printed with a copyright notice in the author's name. See Copyright Act of 1909, § 18, 35 Stat. 1079. When publishers, exercising their superior bargaining power over authors, declined to print notices in each contributor's name, the author's copyright was put in jeopardy. See Kaminstein, Divisibility of Copyrights, Study No. 11, in Copyright Law Revision Studies Nos. 11-13, prepared for the Senate Committee on the Judiciary, 86th Cong., 2d Sess., 18 (1960). The author did not have the option to assign only the right of publication in the periodical; such a partial assignment was blocked by the doctrine of copyright "indivisibility." See id., at 11. Thus, when a copyright notice appeared only in the publisher's name, the author's work would fall into the public domain, unless the author's copyright, in its entirety, had passed to the publisher. See id., at 18. Such complete transfer might be accomplished by a contract, perhaps one with a provision, not easily enforced, for later retransfer of rights back to the author. See id., at 20-22. Or, absent a specific contract, a court might find that an author had tacitly [495] transferred the entire copyright to a publisher, in turn deemed to hold the copyright in "trust" for the author's benefit. See id., at 18-19; see generally 3 M. Nimmer & D. Nimmer, Copyright § 10.01[C][2], pp. 10-12 to 10-14 (2000).

In the 1976 revision, Congress acted to "clarify and improve [this] confused and frequently unfair legal situation with respect to rights in contributions." H. R. Rep. No. 94— 1476, p. 122 (1976) (hereinafter H. R. Rep.).^[3] The 1976 Act rejected the doctrine of indivisibility, recasting the copyright as a bundle of discrete "exclusive rights," 17 U. S. C. § 106 (1994 ed. and Supp. V),^[4] each of which "may be transferred [496] . . . and owned separately," § 201(d)(2).^[5] Congress also provided, in § 404(a), that "a single notice applicable to the collective work as a whole is sufficient" to protect the rights of freelance contributors. And in § 201(c), Congress codified the discrete domains of "[c]opyright in each separate contribution to a collective work" and "copyright in the collective work as a whole." Together, § 404(a) and § 201(c) "preserve the author's copyright in a contribution even if the contribution does not bear a separate notice in the author's name, and without requiring any unqualified transfer of rights to the owner of the collective work." H. R. Rep. 122.

Section 201(c) both describes and circumscribes the "privilege" a publisher acquires regarding an author's contribution to a collective work:

"In the absence of an express transfer of the copyright or of any rights under it, the owner of copyright in the collective work is presumed to have acquired only the privilege of reproducing and distributing the contribution as part of that particular collective work, any revision of that collective work, and any later collective work in the same series." (Emphasis added.)

A newspaper or magazine publisher is thus privileged to reproduce or distribute an article contributed by a freelance author, absent a contract otherwise providing, only "as part of" any (or all) of three categories of collective works: (a) "that collective work" to which the author contributed her work, (b) "any revision of that collective work," or (c) "any later collective work in the same series." In accord with Congress' prescription, a "publishing company could reprint [497] a contribution from one issue in a later issue of its magazine, and could reprint an article from a 1980 edition of an encyclopedia in a 1990 revision of it; the publisher could not revise the contribution itself or include it in a new anthology or an entirely different magazine or other collective work." H. R. Rep. 122-123.

Essentially, § 201(c) adjusts a publisher's copyright in its collective work to accommodate a freelancer's copyright in her contribution. If there is demand for a freelance article standing alone or in a new collection, the Copyright Act allows the freelancer to benefit from that demand; after authorizing initial publication, the freelancer may also sell the article to others. Cf. Stewart v. Abend, 495 U. S. 207, 229 (1990) ("[w]hen an author produces a work which later commands a higher price in the market than the original bargain provided, the copyright statute [i. e., the separate renewal term of former 17 U. S. C. § 24] is designed to provide the author the power to negotiate for the realized value of the work"); id., at 230 (noting author's "inalienable termination right" under current 17 U. S. C. §§ 203, 302 (1994 ed. and Supp. V)). It would scarcely "preserve the author's copyright in a contribution" as contemplated by Congress, H. R. Rep. 122, if a newspaper or magazine publisher were permitted to reproduce or distribute copies of the author's contribution in isolation or within new collective works. See Gordon, Fine-Tuning Tasini: Privileges of Electronic Distribution and Reproduction, 66 Brooklyn L. Rev. 473, 484 (2000).^[6] [498]

III

In the instant case, the Authors wrote several Articles and gave the Print Publishers permission to publish the Articles in certain newspapers and magazines. It is undisputed that the Authors hold copyrights and, therefore, exclusive rights in the Articles.^[7] It is clear, moreover, that the Print and Electronic Publishers have exercised at least some rights that § 106 initially assigns exclusively to the Authors: LEXIS/NEXIS' central discs and UMI's CD—ROMs "reproduce . . . copies" of the Articles, § 106(1); UMI, by selling those CD—ROMs, and LEXIS/NEXIS, by selling copies of the Articles through the NEXIS Database, "distribute copies" of the Articles "to the public by sale," § 106(3); and the Print Publishers, through contracts licensing the production of copies in the Databases, "authorize" reproduction and distribution of the Articles, § 106.^[8]

[499] Against the Authors' charge of infringement, the Publishers do not here contend the Authors entered into an agreement authorizing reproduction of the Articles in the Databases. See supra, at 489, n. 1. Nor do they assert that the copies in the Databases represent "fair use" of the Authors' Articles. See 17 U. S. C. § 107 ("fair use of a copyrighted work . . . is not an infringement"; four factors identified among those relevant to fair use determination). Instead, the Publishers rest entirely on the privilege described in § 201(c). Each discrete edition of the periodicals in which the Articles appeared is a "collective work," the Publishers agree. They contend, however, that reproduction and distribution of each Article by the Databases lie within the "privilege of reproducing and distributing the [Articles] as part of . . . [a] revision of that collective work," § 201(c). The Publishers' encompassing construction of the § 201(c) privilege is unacceptable, we conclude, for it would diminish the Authors' exclusive rights in the Articles.

In determining whether the Articles have been reproduced and distributed "as part of" a "revision" of the collective works in issue, we focus on the Articles as presented to, and perceptible by, the user of the Databases. See § 102 (copyright protection subsists in original works fixed in any medium "from which they can be perceived, reproduced, or otherwise communicated"); see also § 101 (1994 ed., Supp. V) (definitions of "copies" and "fixed"); Haemmerli, Commentary: Tasini v. New York Times Co., 22 Colum.-VLA. J. L. & Arts 129, 142-143 (1998). In this case, the three Databases present articles to users clear of the context provided either by the original periodical editions or by any revision of those editions. The Databases first prompt users to search the universe of their contents: thousands or millions of files containing [500] individual articles from thousands of collective works (i. e., editions), either in one series (the Times, in NYTO) or in scores of series (the sundry titles in NEXIS and GPO). When the user conducts a search, each article appears as a separate item within the search result. In NEXIS and NYTO, an article appears to a user without the graphics, formatting, or other articles with which the article was initially published. In GPO, the article appears with the other materials published on the same page or pages, but without any material published on other pages of the original periodical. In either circumstance, we cannot see how the Database perceptibly reproduces and distributes the article "as part of" either the original edition or a "revision" of that edition.

One might view the articles as parts of a new compendium—namely, the entirety of works in the Database. In that compendium, each edition of each periodical represents only a miniscule fraction of the ever-expanding Database. The Database no more constitutes a "revision" of each constituent edition than a 400-page novel quoting a sonnet in passing would represent a "revision" of that poem. "Revision" denotes a new "version," and a version is, in this setting, a "distinct form of something regarded by its creator or others as one work." Webster's Third New International Dictionary 1944, 2545 (1976). The massive whole of the Database is not recognizable as a new version of its every small part.

Alternatively, one could view the Articles in the Databases "as part of" no larger work at all, but simply as individual articles presented individually. That each article bears marks of its origin in a particular periodical (less vivid marks in NEXIS and NYTO, more vivid marks in GPO) suggests the article was previously part of that periodical. But the markings do not mean the article is currently reproduced or distributed as part of the periodical. The Databases' reproduction and distribution of individual Articles—simply as [501] individual Articles—would invade the core of the Authors' exclusive rights under § 106.^[9]

The Publishers press an analogy between the Databases, on the one hand, and microfilm and microfiche, on the other. We find the analogy wanting. Microforms typically contain continuous photographic reproductions of a periodical in the medium of miniaturized film. Accordingly, articles appear on the microforms, writ very small, in precisely the position in which the articles appeared in the newspaper. The Times, for example, printed the beginning of Blakely's "Remembering Jane" Article on page 26 of the Magazine in the September 23, 1990, edition; the microfilm version of the Times reproduces that same Article on film in the very same position, within a film reproduction of the entire Magazine, in turn within a reproduction of the entire September 23, 1990, edition. True, the microfilm roll contains multiple editions, and the microfilm user can adjust the machine lens to focus only on the Article, to the exclusion of surrounding material. Nonetheless, the user first encounters the Article in context. In the Databases, by contrast, the Articles appear disconnected from their original context. In NEXIS and NYTO, the user sees the "Jane" Article apart even from the remainder of page 26. In GPO, the user sees the Article within the context of page 26, but clear of the context of page 25 or page 27, the rest of the Magazine, or the remainder of the day's newspaper. In short, unlike microforms, the Databases do not perceptibly reproduce articles as part of the [502] collective work to which the author contributed or as part of any "revision" thereof.^[10]

Invoking the concept of "media neutrality," the Publishers urge that the "transfer of a work between media" does not "alte[r] the character of" that work for copyright purposes. Brief for Petitioners 23. That is indeed true. See 17 U. S. C. § 102(a) (copyright protection subsists in original works "fixed in any tangible medium of expression"). But unlike the conversion of newsprint to microfilm, the transfer of articles to the Databases does not represent a mere conversion of intact periodicals (or revisions of periodicals) from one medium to another. The Databases offer users individual articles, not intact periodicals. In this case, media neutrality should protect the Authors' rights in the individual Articles to the extent those Articles are now presented individually, outside the collective work context, within the Databases' new media.^[11]

For the purpose at hand—determining whether the Authors' copyrights have been infringed—an analogy to an [503] imaginary library may be instructive.^[12] Rather than maintaining intact editions of periodicals, the library would contain separate copies of each article. Perhaps these copies would exactly reproduce the periodical pages from which the articles derive (if the model is GPO); perhaps the copies would contain only typescript characters, but still indicate the original periodical's name and date, as well as the article's headline and page number (if the model is NEXIS or NYTO). The library would store the folders containing the articles in a file room, indexed based on diverse criteria, and containing articles from vast numbers of editions. In response to patron requests, an inhumanly speedy librarian would search the room and provide copies of the articles matching patron-specified criteria.

Viewing this strange library, one could not, consistent with ordinary English usage, characterize the articles "as part of" a "revision" of the editions in which the articles first appeared. In substance, however, the Databases differ from the file room only to the extent they aggregate articles in electronic packages (the LEXIS/NEXIS central discs or UMI CD—ROMs), while the file room stores articles in spatially separate files. The crucial fact is that the Databases, like the hypothetical library, store and retrieve articles separately within a vast domain of diverse texts. Such a storage and retrieval system effectively overrides the Authors' exclusive [504] right to control the individual reproduction and distribution of each Article, 17 U. S. C. §§ 106(1), (3). Cf. Ryan v. Carl Corp., 23 F. Supp. 2d 1146 (ND Cal. 1998) (holding copy shop in violation of § 201(c)).

The Publishers claim the protection of § 201(c) because users can manipulate the Databases to generate search results consisting entirely of articles from a particular periodical edition. By this logic, § 201(c) would cover the hypothetical library if, in response to a request, that library's expert staff assembled all of the articles from a particular periodical edition. However, the fact that a third party can manipulate a database to produce a noninfringing document does not mean the database is not infringing. Under § 201(c), the question is not whether a user can generate a revision of a collective work from a database, but whether the database itself perceptibly presents the author's contribution as part of a revision of the collective work. That result is not accomplished by these Databases.

The Publishers finally invoke Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417 (1984). That decision, however, does not genuinely aid their argument. Sony held that the "sale of copying equipment" does not constitute contributory infringement if the equipment is "capable of substantial noninfringing uses." Id., at 442. The Publishers suggest that their Databases could be liable only under a theory of contributory infringement, based on enduser conduct, which the Authors did not plead. The Electronic Publishers, however, are not merely selling "equipment"; they are selling copies of the Articles. And, as we have explained, it is the copies themselves, without any manipulation by users, that fall outside the scope of the § 201(c) privilege.

IV

The Publishers warn that a ruling for the Authors will have "devastating" consequences. Brief for Petitioners 49. The Databases, the Publishers note, provide easy access to [505] complete newspaper texts going back decades. A ruling for the Authors, the Publishers suggest, will punch gaping holes in the electronic record of history. The Publishers' concerns are echoed by several historians, see Brief for Ken Burns et al. as Amici Curiae, but discounted by several other historians, see Brief for Ellen Schrecker et al. as Amici Curiae; Brief for Authors' Guild, Inc., Jacques Barzun et al. as Amici Curiae.

Notwithstanding the dire predictions from some quarters, see also post, at 520 (Stevens, J., dissenting), it hardly follows from today's decision that an injunction against the inclusion of these Articles in the Databases (much less all freelance articles in any databases) must issue. See 17 U. S. C. § 502(a) (court "may" enjoin infringement); Campbell v. Acuff-Rose Music, Inc., 510 U. S. 569, 578, n. 10 (1994) (goals of copyright law are "not always best served by automatically granting injunctive relief"). The parties (Authors and Publishers) may enter into an agreement allowing continued electronic reproduction of the Authors' works; they, and if necessary the courts and Congress, may draw on numerous models for distributing copyrighted works and remunerating authors for their distribution. See, e. g., 17 U. S. C. § 118(b); Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U. S. 1, 4-6, 10-12 (1979) (recounting history of blanket music licensing regimes and consent decrees governing their operation).^[13] In any event, speculation about [506] future harms is no basis for this Court to shrink authorial rights Congress established in § 201(c). Agreeing with the Court of Appeals that the Publishers are liable for infringement, we leave remedial issues open for initial airing and decision in the District Court.

* * *

We conclude that the Electronic Publishers infringed the Authors' copyrights by reproducing and distributing the Articles in a manner not authorized by the Authors and not privileged by § 201(c). We further conclude that the Print Publishers infringed the Authors' copyrights by authorizing the Electronic Publishers to place the Articles in the Databases and by aiding the Electronic Publishers in that endeavor. We therefore affirm the judgment of the Court of Appeals.

It is so ordered.

Justice Stevens, with whom Justice Breyer joins, dissenting.

This case raises an issue of first impression concerning the meaning of the word "revision" as used in § 201(c) of the 1976 revision of the Copyright Act of 1909 (1976 Act). Ironically, the Court today seems unwilling to acknowledge that changes in a collective work far less extensive than those made to prior copyright law by the 1976 "revision" do not merit the same characterization.

To explain my disagreement with the Court's holding, I shall first identify Congress' principal goals in passing the 1976 Act's changes in the prior law with respect to collective works. I will then discuss two analytically separate questions [507] that are blended together in the Court's discussion of revisions. The first is whether the electronic versions of the collective works created by the owners of the copyright in those works (Print Publishers or publishers) are "revision[s]" of those works within the meaning of 17 U. S. C. § 201(c). In my judgment they definitely are. The second is whether the aggregation by LEXIS/NEXIS and UMI (Electronic Databases) of the revisions with other editions of the same periodical or with other periodicals within a single database changes the equation. I think it does not. Finally, I will consider the implications of broader copyright policy for the issues presented in this case.

I

As the majority correctly observes, prior to 1976, an author's decision to publish her individual article as part of a collective work was a perilous one. Although pre-1976 copyright law recognized the author's copyright in an individual article that was included within a collective work, those rights could be lost if the publisher refused to print the article with a copyright notice in the author's name. 3 M. Nimmer & D. Nimmer, Nimmer on Copyright § 10.01[C][2], p. 10-12 (2000).

This harsh rule was, from the author's point of view, exacerbated by the pre-1976 doctrine of copyright "indivisibility," which prevented an author from assigning only limited publication rights to the publisher of a collective work while holding back all other rights to herself.^[1]Ibid. The indivisibility of copyright, in combination with the danger of losing copyright protection, put significant pressure on an author seeking to preserve her copyright in the contribution to [508] transfer the entire copyright over to the publisher in trust. See Kaminstein, Divisibility of Copyrights, Study No. 11, in Copyright Law Revision Studies Nos. 11-13, prepared for the Senate Committee on the Judiciary, 86th Cong., 2d Sess., 18-22 (1960) (hereinafter Kaminstein).^[2] Such authors were often at the mercy of publishers when they tried to reclaim their copyright. Id., at 21.^[3]

The 1976 Act's extensive revisions of the copyright law had two principal goals with respect to the rights of freelance authors whose writings appeared as part of larger collective works. First, as the legislative history of § 201(c) unambiguously reveals, one of its most significant aims was to "preserve the author's copyright in a contribution even if the contribution does not bear a separate notice in the author's name, and without requiring any unqualified transfer of rights to the owner of the collective work." H. R. Rep. No. 94-1476, p. 122 (1976) (hereinafter H. R. Rep.) (discussing the purpose of § 201(c)). Indeed, § 404(a) states that "a single notice applicable to the collective work as a whole is sufficient" to protect the author's rights.

The second significant change effected by the 1976 Act clarified the scope of the privilege granted to the publisher of a collective work. While pre-1976 law had the effect of encouraging an author to transfer her entire copyright to the [509] publisher of a collective work, § 201(c) creates the opposite incentive, stating that, absent some agreement to the contrary, the publisher acquires from the author only "the privilege of reproducing and distributing the contribution as part of that particular collective work, any revision of that collective work, and any later collective work in the same series."^[4] Congress intended this limitation on what the author is presumed to give away primarily to keep publishers from "revis[ing] the contribution itself or includ[ing] it in a new anthology or an entirely different magazine or other collective work. " H. R. Rep. 122-123.^[5]

[510] The majority is surely correct that the 1976 Act's new approach to collective works was an attempt to "`clarify and improve the . . . confused and frequently unfair legal situation' " that existed under the prior regime. Id., at 122. It is also undoubtedly true that the drafters of the 1976 Act hoped to "enhance the author's position vis-à-vis the patron." Ante, at 495, n. 3. It does not follow, however, that Congress' efforts to "preserve the author's copyright in a contribution," H. R. Rep. 122, can only be honored by a finding in favor of the respondent authors.

Indeed, the conclusion that the petitioners' actions were lawful is fully consistent with both of Congress' principal goals for collective works in the 1976 Act. First, neither the publication of the collective works by the Print Publishers nor their transfer to the Electronic Databases had any impact on the legal status of the copyrights of the respondents' individual contributions.^[6] By virtue of the 1976 Act, respondents remain the owners of the copyright in their individual works. Moreover, petitioners neither modified respondents' individual contributions nor, as I will show in Part II, published them in a "new anthology or an entirely different magazine or other collective work. " Id., at 122— 123 (emphasis added). Because I do not think it is at all obvious that the decision the majority reaches today is a result clearly intended by the 1976 Congress, I disagree with the Court's conclusion that a ruling in petitioners' favor [511] would "shrink authorial rights" that "Congress [has] established." Ante, at 506 (emphasis added).

II

Not only is petitioners' position consistent with Congress' general goals in the 1976 Act, it is also consistent with the text of § 201(c). That provision allows the publisher of a collective work to "reproduc[e] and distribut[e] the contribution as part of that particular collective work, any revision of that collective work, and any later collective work in the same series." The central question in this case, then, is whether petitioners are correct when they argue that publication of the respondents' articles in the various Electronic Databases at issue in this case is nothing more than "reproduc[tion] and distribut[ion] [of] the contribution as part of . . . revision[s] of [the original] collective work[s]" in which respondents' articles appeared. I agree with petitioners that neither the conversion of the Print Publishers' collective works from printed to electronic form, nor the transmission of those electronic versions of the collective works to the Electronic Databases, nor even the actions of the Electronic Databases once they receive those electronic versions does anything to deprive those electronic versions of their status as mere "revision[s]" of the original collective works.

A proper analysis of this case benefits from an incremental approach. Accordingly, I begin by discussing an issue the majority largely ignores: whether a collection of articles from a single edition of the New York Times (i. e., the batch of files the Print Publishers periodically send to the Electronic Databases) constitutes a "revision" of an individual edition of the paper. In other words, does a single article within such a collection exist as "part of" a "revision"? Like the majority, I believe that the crucial inquiry is whether the article appears within the "context" of the original collective work. Ante, at 502. But this question simply raises the further issue of precisely how much "context" is enough.

[512] The record indicates that what is sent from the New York Times to the Electronic Databases (with the exception of General Periodicals OnDisc (GPO)) is simply a collection of ASCII text files representing the editorial content of the New York Times for a particular day.^[7] App. 73a. Each individual ASCII file contains the text of a single article as well as additional coding intended to help readers identify the context in which the article originally appeared and to facilitate database searches. Thus, for example, to the original text of an article, the New York Times adds information on the article's "headline, byline and title," "the section of the paper in which the article had originally appeared," and "the page in the paper or periodical on which the article had first appeared." Id., at 75a—76a.^[8]

I see no compelling reason why a collection of files corresponding to a single edition of the New York Times, standing alone, cannot constitute a "revision" of that day's New York Times. It might be argued, as respondents appear to do, that the presentation of each article within its own electronic file makes it impossible to claim that the collection of files as a whole amounts to a "revision." Brief for Respondents Tasini et al. 34. But the conversion of the text of the overall collective work into separate electronic files should not, by itself, decide the question. After all, one of the hallmarks of copyright policy, as the majority recognizes, ante, at 502, is the principle of media neutrality. See H. R. Rep. 53.

No one doubts that the New York Times has the right to reprint its issues in Braille, in a foreign language, or in [513] microform, even though such revisions might look and feel quite different from the original. Such differences, however, would largely result from the different medium being employed. Similarly, the decision to convert the single collective work newspaper into a collection of individual ASCII files can be explained as little more than a decision that reflects the different nature of the electronic medium. Just as the paper version of the New York Times is divided into "sections" and "pages" in order to facilitate the reader's navigation and manipulation of large batches of newsprint, so too the decision to subdivide the electronic version of that collective work into individual article files facilitates the reader's use of the electronic information. The barebones nature of ASCII text would make trying to wade through a single ASCII file containing the entire content of a single edition of the New York Times an exercise in frustration.^[9]

Although the Court does not separately discuss the question whether the groups of files that the New York Times sends to the Electronic Databases constitute "revision[s]," its reasoning strongly suggests that it would not accept such a characterization. The majority, for example, places significant emphasis on the differences between the various Electronic Databases and microform, a medium that admittedly qualifies as a revision under § 201(c).^[10] As with the conversion of individual editions into collections of separate article files, however, many of the differences between the [514] electronic versions and microform are necessitated by the electronic medium. The Court therefore appears to back away from principles of media neutrality when it implicitly criticizes ASCII-text files for their inability to reproduce "Remembering Jane" "in the very same position, within a film reproduction of the entire Magazine, in turn within a reproduction of the entire September 23, 1990, edition." Ante, at 501.^[11]

In contrast, I think that a proper respect for media neutrality suggests that the New York Times, reproduced as a collection of individual ASCII files, should be treated as a "revision" of the original edition, as long as each article explicitly refers to the original collective work and as long as substantially the rest of the collective work is, at the same time, readily accessible to the reader of the individual file. In this case, no one disputes that the first pieces of information a user sees when looking at an individual ASCII article file are the name of the publication in which the article appeared, the edition of that publication, and the location of the article within that edition. I agree with the majority that such labeling alone is insufficient to establish that the individual file exists as "part of" a revision of the original collective work. See ante, at 500-501. But such labeling is not all there is in the group of files sent to the Electronic Databases.

In addition to the labels, the batch of electronic files contains the entire editorial content of the original edition of the New York Times for that day. That is, while I might agree that a single article, standing alone, even when coded with identifying information (e. g., publication, edition date, [515] headline, etc.), should not be characterized as a "part of" a larger collective work, I would not say the same about an individual article existing as "part of" a collection of articles containing all the editorial content of that day's New York Times. This is all the more true because, as the District Court correctly noted, it is the Print Publishers' selection process, the editorial process by which the staff of the New York Times, for example, decides which articles will be included in "All the News That's Fit to Print," that is the most important creative element they contribute to the collective works they publish. 972 F. Supp. 804, 823 (SDNY 1997).^[12] While such superficial features as page placement and column width are lost in ASCII format, the Print Publishers' all-important editorial selection is wholly preserved in the collection of individual article files sent to the Electronic Databases.

To see why an electronic version of the New York Times made up of a group of individual ASCII article files, standing alone, may be considered a § 201(c) revision, suppose that, instead of transmitting to NEXIS the articles making up a particular day's edition, the New York Times saves all of the individual files on a single floppy disk, labels that disk "New York Times, October 31, 2000," and sells copies of the disk to users as the electronic version of that day's New York Times. The disk reproduces the creative, editorial selection of that edition of the New York Times. The reader, after all, has at his fingertips substantially all of the relevant content of the October 31 edition of the collective work. Moreover, each individual article makes explicit reference to that selection by including tags that remind the reader that it is a part of the New York Times for October 31, 2000. Such a disk might well constitute "that particular collective work"; it would surely qualify as a "revision" of the original collective [516] work. Yet all the features identified as essential by the majority and by the respondents would still be lacking. An individual looking at one of the articles contained on the disk would still see none of the original formatting context and would still be unable to flip the page.

Once one accepts the premise that a disk containing all the files from the October 31, 2000, New York Times can constitute a "revision," there is no reason to treat any differently the same set of files, stored in a folder on the hard disk of a computer at the New York Times. Thus, at least before it is republished by the Electronic Databases, the collection of files that the New York Times transmits to them constitutes a revision, in electronic form, of a particular edition of the New York Times.

III

The next question, then, is whether anything that the Electronic Databases do to the transmitted "revision" strips it of that status. The heart of the Court's reasoning in this respect, as I understand it, is that, once received and processed by Electronic Databases, the data transmitted by the New York Times cannot be viewed as "revisions" within the meaning of § 201(c) because of the way that data is stored and made available to the public by those Databases. First, the Court points to the fact that "the three Databases present articles to users clear of the context provided either by the original periodical editions or by any revision of those editions." Ante, at 499. I have already addressed these formatting concerns. Second, and not wholly unrelated to the first point, however, the Court appears to think that the commingling of my hypothetical collection of ASCII article files from the October 31, 2000, New York Times with similar collections of files from other editions of the New York Times (or from other periodicals) within one database would deprive that collection of revision status. See ante, at 501, n. 9. Even if my imaginary floppy disk could, in isolation, be considered a revision, the majority might [517] say, that status would be lost if the floppy disk were to contain, not only the files from the October 31, 2000, New York Times, but also from the New York Times for every other day in 2000 (and other years) and from hundreds of other periodicals. I disagree.

If my hypothetical October 31, 2000, floppy disk can be a revision, I do not see why the inclusion of other editions and other periodicals is any more significant than the placement of a single edition of the New York Times in a large public library or in a bookstore. Each individual file still reminds the reader that he is viewing "part of" a particular collective work. And the entire editorial content of that work still exists at the reader's fingertips.^[13]

It is true that, once the revision of the October 31, 2000, New York Times is surrounded by the additional content, it can be conceptualized as existing as part of an even larger collective work (e. g., the entire NEXIS database). See ante, at 500. The question then becomes whether this ability to conceive of a revision of a collective work as existing within a larger "collective work" changes the status of the original revision. Section 201(c)'s requirement that the article be published only as "part of . . . any revision of that collective work " does not compel any particular answer to that question. A microfilm of the New York Times for October 31, 2000, does not cease to be a revision of that individual collective work simply because it is stored on the same roll of film as other editions of the Times or on a library shelf containing hundreds of other microfilm periodicals. Nor does § 201(c) compel the counterintuitive conclusion that the microfilm version of the Times would cease to be a revision simply because its publishers might choose to sell it on rolls of film that contained a year's editions of both the New York Times and the Herald-Tribune. Similarly, the placement of [518] our hypothetical electronic revision of the October 31, 2000, New York Times within a larger electronic database does nothing to alter either the nature of our original electronic revision or the relationship between that revision and the individual articles that exist as "part of" it.

Finally, the mere fact that an individual user may either view or print copies of individual articles stored on the Electronic Databases does not change the nature of the revisions contained within those databases. The same media-specific necessities that allow the publishers to store and make available the original collective work as a collection of individual digital files make it reasonable for the Electronic Databases to enable the user to download or print only those files in which the user has a particular interest. But this is no different from microfilm. Just as nothing intrinsic in the nature of microfilm dictates to a user how much or how little of a microform edition of the New York Times she must copy, nothing intrinsic in the Electronic Databases dictates to a user how much (or how little) of a particular edition of the New York Times to view or print. It is up to the user in each instance to decide whether to employ the publisher's product in a manner that infringes either the publisher's or the author's copyright. And to the extent that the user's decision to make a copy of a particular article violates the author's copyright in that article, such infringing third-party behavior should not be attributed to the database.^[14] See Sony Corp. of America v. Universal City Studios, Inc., 464 U. S. 417, 434 (1984).

IV

My reading of "revision," as encompassing products like the Electronic Databases, is not the only possible answer to [519] the complex questions presented by this case. It is, nevertheless, one that is consistent with the statutory text and entirely faithful to the statute's purposes. Respect for the policies motivating its enactment, to which I now turn, makes it wrong for the Court to reject this reading of § 201(c).

It is likely that the Congress that enacted the 1976 revision of the law of copyright did not anticipate the developments that occurred in the 1980's which gave rise to the practices challenged in this litigation. See Miller, Copyright Protection for Computer Programs, Databases, and Computer-Generated Works: Is Anything New Since CONTU?, 106 Harv. L. Rev. 977, 979 (1993) (in 1976, "Congress . . . decided to avoid grappling with technological issues that obviously required more study than the legislative process was then willing to give them").^[15] Thus, in resolving ambiguities in the relevant text of the statute, we should be mindful of the policies underlying copyright law.

Macaulay wrote that copyright is "a tax on readers for the purpose of giving a bounty to writers." T. Macaulay, Speeches on Copyright 11 (A. Thorndike ed. 1915). That tax restricts the dissemination of writings, but only insofar as necessary to encourage their production, the bounty's basic objective. See U. S. Const., Art. I, § 8, cl. 8. In other words, "[t]he primary purpose of copyright is not to reward the author, but is rather to secure `the general benefits derived by the public from the labors of authors.' " 1 M. Nimmer & D. Nimmer, Copyright § 1.03[A] (2000) (quoting Fox Film Corp. v. Doyal, 286 U. S. 123, 127 (1932)); see also Breyer, The Uneasy Case for Copyright: A Study of [520] Copyright in Books, Photocopies, and Computer Programs, 84 Harv. L. Rev. 281, 282 (1970) (discussing the twin goals of copyright law—protecting the reader's desire for access to ideas and providing incentives for authors to produce them). The majority's decision today unnecessarily subverts this fundamental goal of copyright law in favor of a narrow focus on "authorial rights." Ante, at 506. Although the desire to protect such rights is certainly a laudable sentiment,^[16] copyright law demands that "private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts." Twentieth Century Music Corp. v. Aiken, 422 U. S. 151, 156 (1975) (emphasis added).

The majority discounts the effect its decision will have on the availability of comprehensive digital databases, ante, at 504-505, but I am not as confident. As petitioners' amici have persuasively argued, the difficulties of locating individual freelance authors and the potential of exposure to statutory damages may well have the effect of forcing electronic archives to purge freelance pieces from their databases.^[17] "The omission of these materials from electronic collections, for any reason on a large scale or even an occasional basis, undermines the principal benefits that electronic archives offer historians—efficiency, accuracy and comprehensiveness." ^[18] Brief for Ken Burns et al. as Amici Curiae 13.

[521] Moreover, it is far from clear that my position even deprives authors of much of anything (with the exception of perhaps the retrospective statutory damages that may well result from their victory today).^[19] Imagine, for example, that one of the contributions at issue in this case were a copyrighted version of John Keats' Ode on a Grecian Urn, published on page 29 of our hypothetical October 31, 2000, New York Times. Even under my reading of § 201(c), Keats retains valuable copyright protection. No matter how well received his ode might be, it is unlikely—although admittedly possible—that it could be marketed as a stand-alone work of art. The ode, however, would be an obvious candidate for inclusion in an anthology of works by romantic poets, in a collection of poems by the same author, or even in "a 400-page novel quoting a [poem] in passing," ante, at 500. The author's copyright would protect his right to compensation for any such use. Cf. Stewart v. Abend, 495 U. S. 207, 228 (1990) (discussing the value to authors of derivative works). Moreover, the value of the ode surely would be enhanced, not decreased, by the accessibility and readership of the October 31, 2000, edition of the New York Times. The ready availability of that edition, both at the time of its first publication and subsequently in libraries and electronic databases, would be a benefit, not an injury, to most authors. Keats would benefit from the poem's continued availability to database users, by his identification as the author of the piece, and by the database's indication of the fact that the poem first appeared in a prestigious periodical on a certain date. He would not care one whit whether the database indicated [522] the formatting context of the page on which the poem appeared. What is overwhelmingly clear is that maximizing the readership of the ode would enhance the value of his remaining copyright uses.

Nor is it clear that Keats will gain any prospective benefits from a victory in this case. As counsel for petitioners represented at oral argument, since 1995, the New York Times has required freelance authors to grant the Times "electronic rights" to articles. Tr. of Oral Arg. 7. And the inclusion of such a term has had no effect on the compensation authors receive. See ibid. This is understandable because, even if one accepts the majority's characterization of the Electronic Databases as collections of freestanding articles, demand for databases like NEXIS probably does not reflect a "demand for a freelance article standing alone," ante, at 497, to which the publishers are greedily helping themselves. Cf. Ryan v. Carl Corp., 23 F. Supp. 2d 1146, 1150-1151 (ND Cal. 1998) ("[T]he value added by the publisher to a reproduced article is significant").

Instead, it seems far more likely that demand for the Electronic Databases reflects demand for a product that will provide a user with the means to quickly search through scores of complete periodicals. The comments of historian Douglas Brinkley are instructive in this respect:

"'As an historian, when I want to write a biography, if I'm going to write a biography of Bill Clinton, the first thing I would do would be to index The New York Times. I would work through [the] microfiche and get any time Bill Clinton's name ever appeared in The New York Times. I'd get a copy of that. So, you'd have boxes of files. So for each month, here's Clinton this month. . . .You then would fill that in with . . . other obvious books or articles from Foreign Affairs or Foreign Policy or The New Yorker, or the like and you'd start getting your first biography of Bill Clinton.' " Panel Discussion: The Observer's View (D. Brinkley, M. [523] Frankel, H. Sidey), White House Historical Association (Nov. 16, 2000) (C—SPAN Archives No. 160577) (quoted in Brief for Ken Burns et al. as Amici Curiae 17).

Users like Douglas Brinkley do not go to NEXIS because it contains a score of individual articles by Jonathan Tasini.^[20] Rather, they go to NEXIS because it contains a comprehensive and easily searchable collection of (intact) periodicals. [524] See id., at 8 ("The efficiency, accuracy, reliability, comprehensiveness and immediacy of access offered by searchable fulltext digital archives are but a few of the benefits historians and other researchers have reaped from the advancement in the technology of information").

Because it is likely that Congress did not consider the question raised by this case when drafting § 201(c), because I think the District Court's reading of that provision is reasonable and consistent with the statute's purposes, and because the principal goals of copyright policy are better served by that reading, I would reverse the judgment of the Court of Appeals. The majority is correct that we cannot know in advance the effects of today's decision on the comprehensiveness of electronic databases. We can be fairly certain, however, that it will provide little, if any, benefit to either authors or readers.

[*] Briefs of amici curiae urging reversal were filed for Advance Publications, Inc., et al. by Charles S. Sims, Jerry S. Birenz, Harold W. Fuson, Jr., Andrew A. Merdek, Barbara W. Wall, Katherine Hatton, Barbara Cohen, and Clifford M. Sloan; for the National Geographic Society by Kenneth W. Starr, Christopher Landau, Terrence B. Adamson, and Robert G. Sugarman; for the Software & Information Industry Association et al. by Henry B. Gutman, Arthur R. Miller, and James F. Rittinger; and for Ken Burns et al. by Michael F. Clayton and Brett I. Miller.

Briefs of amici curiae urging affirmance were filed for the American Library Association et al.by Arnold P. Lutzker; for the Authors Guild, Inc., et al. by Leon Friedman; for the International Federation of Journalists by Thomas M. Peterson and Brett M. Schuman; and for Ellen Schrecker et al. by Theodore M. Lieverman.

Briefs of amici curiae were filed for the American Intellectual Property Law Association by Paul E. Lacy and Daniel W. McDonald; and for the American Society of Media Photographers, Inc., et al. by L. Donald Prutzman and Victor S. Perlman.

[1] In the District Court, Newsday and Time contended that the freelancers who wrote for their publications had entered into agreements authorizing reproduction of the Articles in the databases. The Court of Appeals ruled that Newsday's defense was waived, and rejected Time's argument on the merits. Neither petitioner presses the contention here.

[2] For example, the GPO user who retrieves Blakely's "Remembering Jane" article will see the entirety of Magazine page 26, where the article begins, and Magazine page 78, where the article continues and ends. The NYTO user who retrieves Blakely's article will see only the text of the article and its identifying information (author, headline, publication, page number, etc.). Neither the GPO retrieval nor the NYTO retrieval produces any text on page 27, page 79, or any other page. The user who wishes to see other pages may not simply "flip" to them. She must conduct a new search.

[3] Two Registers of Copyrights have observed that the 1976 revision of the Copyright Act represented "a break with a two-hundred-year-old tradition that has identified copyright more closely with the publisher than with the author." Letter from M. Peters to Rep. McGovern, reprinted in 147 Cong. Rec. E182 (Feb. 14, 2001) (hereinafter Peters Letter) (quoting Ringer, First Thoughts on the Copyright Act of 1976, 22 N. Y. L. S. L. Rev. 477, 490 (1977)). The intent to enhance the author's position vis-à-vis the patron is also evident in the 1976 Act's work-for-hire provisions. See Community for Creative Non-Violence v. Reid, 490 U. S. 730, 742-750 (1989); see also 17 U. S. C. § 203(a)(5) (inalienable authorial right to revoke a copyright transfer). Congress' adjustment of the author/publisher balance is a permissible expression of the "economic philosophy behind the [Copyright Clause]," i. e., "the conviction that encouragement of individual effort [motivated] by personal gain is the best way to advance public welfare." Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U. S. 539, 558 (1985) (quoting Mazer v. Stein, 347 U. S. 201, 219 (1954)).

[4] As amended, § 106 now provides: "Subject to sections 107 through 121, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following:

"(1) to reproduce the copyrighted work in copies or phonorecords;

"(2) to prepare derivative works based upon the copyrighted work;

"(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

"(4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly;

"(5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and

"(6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission."

[5] It bears repetition here, see supra, at 493, that we neither decide nor express any view on whether the § 201(c) "privilege" may be transferred.

[6] The dissenting opinion suggests that a ruling for the Publishers today would maintain, even enhance, authors' "valuable copyright protection." Post, at 521 (opinion of Stevens, J.). We are not so certain. When the reader of an article in a periodical wishes to obtain other works by the article's author, the Databases enable that reader simply to print out the author's articles, without buying a "new anthology . . . or other collective work," H. R. Rep. 122-123. In years past, books compiling stories by journalists such as Janet Flanner and Ernie Pyle might have sold less well had the individual articles been freely and permanently available on line. In the present, print collections of reviews, commentaries, and reportage may prove less popular because of the Databases. The Register of Copyrights reports that "freelance authors have experienced significant economic loss" due to a "digital revolution that has given publishers [new] opportunities to exploit authors' works." Peters Letter E182.

More to the point, even if the dissent is correct that some authors, in the long run, are helped, not hurt, by Database reproductions, the fact remains that the Authors who brought the case now before us have asserted their rights under § 201(c). We may not invoke our conception of their interests to diminish those rights.

[7] The Publishers do not claim that the Articles are "work[s] made for hire." 17 U. S. C. § 201(b). As to such works, the employer or person for whom a work was prepared is treated as the author. Ibid. The Print Publishers, however, neither engaged the Authors to write the Articles as "employee[s]" nor "commissioned" the Articles through "a written instrument signed by [both parties]" indicating that the Articles shall be considered "work[s] made for hire." § 101 (1994 ed., Supp. V) (defining "work made for hire").

[8] Satisfied that the Publishers exercised rights § 106 initially assigns exclusively to the Author, we need resolve no more on that score. Thus, we do not reach an issue the Register of Copyrights has argued vigorously. The Register maintains that the Databases publicly "display" the Articles, § 106(5); because § 201(c) does not privilege "display," the Register urges, the § 201(c) privilege does not shield the Databases. See Peters Letter E182—E183.

[9] The dissenting opinion takes as its starting point "what is sent from the New York Times to the Electronic Databases." See post, at 512-516. This case, however, is not ultimately about what is sent between Publishers in an intermediate step of Database production; it is about what is presented to the general public in the Databases. See supra, at 499-500. Those Databases simply cannot bear characterization as a "revision" of any one periodical edition. We would reach the same conclusion if the Times sent intact newspapers to the Electronic Publishers.

[10] The Court of Appeals concluded NEXIS was infringing partly because that Database did "almost nothing to preserve the copyrightable aspects of the [Print] Publishers' collective works," i. e., their original "selection, coordination, and arrangement." 206 F. 3d 161, 168 (CA2 1999). We do not pass on this issue. It suffices to hold that the Databases do not contain "revisions" of the Print Publishers' works "as part of" which the Articles are reproduced and distributed.

[11] The dissenting opinion apparently concludes that, under the banner of "media neutrality," a copy of a collective work, even when considerably changed, must constitute a "revision" of that collective work so long as the changes were "necessitated by the . . . medium." Post, at 514. We lack the dissent's confidence that the current form of the Databases is entirely attributable to the nature of the electronic media, rather than the nature of the economic market served by the Databases. In any case, we see no grounding in § 201(c) for a "medium-driven" necessity defense, post, at 514, n. 11, to the Authors' infringement claims. Furthermore, it bears reminder here and throughout that these Publishers and all others can protect their interests by private contractual arrangement.

[12] The Publishers have frequently referred to their products as "electronic libraries." We need not decide whether the Databases come within the legal coverage of the term "libraries" as used in the Copyright Act. For even if the Databases are "libraries," the Copyright Act's special authorizations for libraries do not cover the Databases' reproductions. See, e. g., 17 U. S. C. § 108(a)(1) (reproduction authorized "without any purpose of direct or indirect commercial advantage"); § 108(b) (1994 ed., Supp. V) (reproduction authorized "solely for purposes of preservation and security or for deposit for research use"); § 108(c) (1994 ed., Supp. V) (reproduction "solely for the purpose of replacement of a copy or phonorecord that is damaged, deteriorating, lost, or stolen, or if the existing format in which the work is stored has become obsolete").

[13] Courts in other nations, applying their domestic copyright laws, have also concluded that Internet or CD—ROM reproduction and distribution of freelancers' works violate the copyrights of freelancers. See, e. g., Union Syndicale des Journalistes Français v. SDV Plurimédia (T. G. I., Strasbourg, Fr., Feb. 3, 1998), in Lodging of International Federation of Journalists (IFJ) as Amicus Curiae; S. C. R. L. Central Station v. Association Generale des Journalistes Professionnels de Belgique (CA, Brussels, Belg., 9e ch., Oct. 28, 1997), transl. and ed. in 22 Colum.-VLA J.L. & Arts 195 (1998); Heg v. De Volskrant B. V. (Dist. Ct., Amsterdam, Neth., Sept. 24, 1997), transl. and ed. in 22 Colum.-VLA J. L. & Arts, at 181. After the French Plurimédia decision, the journalists' union and the newspaper-defendant entered into an agreement compensating authors for the continued electronic reproduction of their works. See FR3 v. Syndicats de Journalistes (CA, Colmar, Sept. 15, 1998), in Lodging of IFJ as Amicus Curiae. In Norway, it has been reported, a similar agreement was reached. See Brief for IFJ as Amicus Curiae 18.

[1] Contractual attempts to assign such limited rights were deemed by courts to create mere licenses,such that the failure to accompany the article with an individual copyright in the author's name allowed the article to pass into the public domain. See 3 M. Nimmer & D. Nimmer, Copyright § 10.01[A], p. 10-5; § 10.01[C][2], p. 10-12 (2000).

[2] Cf. Goodis v. United Artists Television, Inc., 425 F. 2d 397 (CA2 1970) (creating a legal fiction in which the publisher to whom an author gave first publication rights was considered the legal owner of the author's copyright, which the publisher was deemed to hold in trust for the "beneficial owner," the author).

[3]

"Usually, publishers are perfectly willing to return copyright to the author, at least with respect to everything except enumerated serial or reprint rights. There have been allegations that smaller publishers sometimes believe that they are entitled to share in the subsidiary rights and refuse to reassign, or insist upon sharing part of the profits of [the] sales to motion picture, television or dramatic users. In these cases, the author must undertake the burden of proving his contract with the publisher and demonstrating his capacity to sue." Kaminstein 21.

[4] Respondents Garson and Robbins argue that the § 201(c) privilege is completely nontransferable. See Brief for Respondents Garson et al. 26— 29. The District Court properly rejected this argument, see 972 F. Supp. 804, 815-816 (SDNY 1997), which, in my view, is supported by neither the text nor the legislative history of § 201(c). Publishers obviously cannot assign their publication privilege to another publisher such that the author's work appears in a wholly different collective work, but nothing in § 201(c) clearly prohibits a publisher from merely farming out the mundane task of printing or distributing its collective work or its revision of that collective work. Because neither the majority nor the Court of Appeals has reached this issue, however, see ante, at 493; 206 F. 3d 161, 165, and n. 2 (CA2 2000), I will not address it further.

[5] As the District Court observed, representatives of authors had objected to an earlier draft of the 1976 Act that might have been read to give publishers the right to change the text of the contributions. That version gave publishers the privilege to print the individual article "`as part of that particular collective work and any revisions of it.' " 972 F. Supp., at 819. Harriet Pilpel, "a prominent author representative," expressed the following concern: "`I have but one question with reference to the wording, and that is with respect to the wording at the end of subsection (c) `. . . and any revisions of it.' If that means `any revision of the collective work' in terms of changing the contributions, or their order, or including different contributions, obviously the magazine writers and photographers would not object. But there is an implication, or at least an ambiguity, that somehow the owner of the collective work has a right to make revisions in the contributions to the collective work. This is not and should not be the law, and consequently I suggest that the wording at the end of subsection (c) be changed to make that absolutely clear.' " 1964 Revision Bill with Discussions and Comments, 89th Cong., 1st Sess., pt. 5,p. 9 (H. Comm. Print 1965), quoted in 972 F. Supp., at 819.

[6] Nor is the majority correct that, even if respondents retained copyright in their individual articles, the conclusion that petitioners could republish their collective works on the Electronic Databases would drain that copyright of value. See infra, at 521-522. Even on my view of this case, respondents retain substantial rights over their articles. Only the respondents, for example, could authorize the publication of their articles in different periodicals or in new topical anthologies wholly apart from the context of the original collective works in which their articles appeared.

[7] ASCII (American Standard Code for Information Interchange) is a standard means for storing textual data. It assigns a unique binary code for each letter of the alphabet, as well as for numbers, punctuation, and other characters. It cannot be used to convey graphical information. See C. Mackenzie, Coded Character Sets: History and Development 211-213 (1980).

[8] Substantially the same process was used by the other Print Publishers to prepare their files for electronic publication. App. 74a.

[9] An ASCII version of the October 31, 2000, New York Times, which contains 287 articles, would fill over 500 printed pages. Conversely, in the case of graphical products like GPO, the demands that memory-intensive graphics files can place on underpowered computers make it appropriate for electronic publishers to divide the larger collective work into manageably sized subfiles. The individual article is the logical unit. The GPO version of the April 7, 1996, New York Times Magazine, for example, would demand in the neighborhood of 200 megabytes of memory if stored as a single file, whereas individual article files range from 4 to 22 megabytes, depending on the length of the article.

[10] See Brief for Respondents Garson et al. 4-5, n. 3.

[11] The majority's reliance on the fact that the GPO user cannot "flip" the page to see material published on other pages, ante, at 491, n. 2, and that the text database articles "appear disconnected from their original context," ante, at 501, appears to be nothing more than a criticism of Electronic Databases' medium-driven decision to break down the periodicals it contains into smaller, less unwieldy article units. See n. 9, supra.

[12]

"The New York Times perhaps even represents the paradigm, the epitome of a publication in which selection alone reflects sufficient originality to merit copyright protection." 972 F. Supp., at 823.

[13] In NEXIS, for example, the reader can gather all the content of the October 31, 2000, New York Times by conducting the following simple search in the correct "library": "date (is 10/31/2000)."

[14] The majority finds that NEXIS infringes by "cop[ying]" and "distribut[ing]" copies of respondents' articles to the public. Perhaps it would be more accurate to say that NEXIS makes it possible for users to make and distribute copies. In any event, the Court has wisely declined to reach the question whether the Electronic Databases publicly "display" the articles within the meaning of § 106. Ante, at 498, and n. 8.

[15] See also H. R. Rep. 116. In the quarter century since the 1976 Act became law, "the databases [in existence] have grown by a factor of 39 . . . . In 1975, the 301 databases in existence contained about 52 million records. The 11,681 databases in 1999 contained nearly 12.86 billion records for a growth by a factor of 242." Williams, Highlights of the Online Database Industry and the Internet: 2000, in Proceedings of the 21st Annual National Online Meeting 1 (M. Williams ed. 2000).

[16] But see Breyer, The Uneasy Case for Copyright: A Study of Copyright in Books, Photocopies, and Computer Programs, 84 Harv. L. Rev. 281, 286-290 (1970) (criticizing the use of copyright as a means of protecting authorial rights).

[17] Indeed, today's decision in favor of authors may have the perverse consequence of encouraging publishers to demand from freelancers a complete transfer of copyright. If that turns out to be the case, we will have come full circle back to the pre-1976 situation.

[18] If the problem is as important as amici contend, congressional action may ultimately be necessary to preserve present databases in their entirety. At the least, Congress can determine the nature and scope of the problem and fashion an appropriate licensing remedy far more easily than can courts. Cf.17 U. S. C. § 108(d)(1).

[19] It is important to remember that the prospect of payment by the Print Publishers was sufficient to stimulate each petitioner to create his or her part of the collective works, presumably with full awareness of its intended inclusion in the Electronic Databases.

[20] Even assuming, as the majority does, see ante, at 497-498, n. 6, that the existence of databases like NEXIS may have some adverse effect on the market for stand-alone compilations of authors' contributions to collective works, I fail to see how, on that basis, electronic databases are any different from microform. With respect to effects on the market for stand-alone works, the only difference between the two products is the speed with which digital technology allows NEXIS users to retrieve the desired data. But the 1976 Act was not intended to bar the use of every conceivable innovation in technology that might "`giv[e] publishers [new] opportunities to exploit authors' works.' " Ante, at 498, n. 6. Copyright law is not an insurance policy for authors, but a carefully struck balance between the need to create incentives for authorship and the interests of society in the broad accessibility of ideas. See U. S. Const., Art. I, § 8, cl. 8 (in order to promote production, Congress should allow authors and inventors to enjoy "exclusive Right[s]," but only "for limited Times" (emphasis added)); see also supra, at 519-520. The majority's focus on authorial incentive comes at the expense of the equally important (at least from the perspective of copyright policy) public interest.

Moreover, the majority's single-minded focus on "authorial rights" appears to lead it to believe that, because some authors may benefit from its decision, that decision must be the one intended by Congress. It cites the "`economic philosophy behind the [Copyright Clause]' " as consistent with its view that Congress adjusted "the author/publisher balance" precisely to avoid the types of uses embodied in the Electronic Databases. See ante, at 495, n. 3. But, as I have already argued, see supra, at 519, there is no indication that Congress ever considered the issue presented in this case. It thus simply begs the question for the majority to argue that the right not to have a work included within the Electronic Databases is an "authorial right" that "Congress [has] established," ante, at 506 (emphasis added), or that—given Congress' failure clearly to address itself to the question—a decision allowing such inclusion would amount to "diminish[ing] " authorial "rights" on the basis of "our conception of their interests," ante, at 498, n. 6 (emphasis added).

629 F.3d 928 (2010)

Nos. 09-15932, 09-16044.

Argued and Submitted June 7, 2010.

Filed December 14, 2010.

[934] Lance C. Venable (argued) and Joseph R. Meaney of Venable, Campillo, Logan & Meaney, P.C., for plaintiff-appellant/cross-appellee MDY Industries LLC and plaintiff-appellant/third-party-defendant-appellee Michael Donnelly.

Christian S. Genetski (argued), Shane M. McGee, and Jacob A. Sommer of Sonnenschein Nath & Rosenthal LLP, for defendants-appellees/cross-appellants Blizzard Entertainment, Inc. and Vivendi Games, Inc.

George A. Riley, David R. Eberhart, and David S. Almeling of O'Melveny & Myers LLP, for amicus curiae Business Software Alliance.

Scott E. Bain, Keith Kupferschmid, and Mark Bohannon, for amicus curiae Software & Information Industry Association.

Brian W. Carver of the University of California, Berkeley, School of Information, and Sherwin Siy and Jef Pearlman, for amicus curiae Public Knowledge.

Robert H. Rotstein, Steven J. Metalitz, and J. Matthew Williams of Mitchell Silberberg & Knupp LLP, for amicus curiae Motion Picture Association of America, Inc.

Before: WILLIAM C. CANBY, JR., CONSUELO M. CALLAHAN and SANDRA S. IKUTA, Circuit Judges.

OPINION

CALLAHAN, Circuit Judge:

Blizzard Entertainment, Inc. ("Blizzard") is the creator of World of Warcraft ("WoW"), a popular multiplayer online role-playing game in which players interact in a virtual world while advancing through the game's 70 levels. MDY Industries, LLC and its sole member Michael Donnelly ("Donnelly") (sometimes referred to collectively as "MDY") developed and sold Glider, a software program that automatically plays the early levels of WoW for players.

[935] MDY brought this action for a declaratory judgment to establish that its Glider sales do not infringe Blizzard's copyright or other rights, and Blizzard asserted counterclaims under the Digital Millennium Copyright Act ("DMCA"), 17 U.S.C. § 1201 et seq., and for tortious interference with contract under Arizona law. The district court found MDY and Donnelly liable for secondary copyright infringement, violations of DMCA § 1201(a)(2) and (b)(1), and tortious interference with contract. We reverse the district court except as to MDY's liability for violation of DMCA § 1201(a)(2) and remand for trial on Blizzard's claim for tortious interference with contract.

I.

A. World of Warcraft

In November 2004, Blizzard created WoW, a "massively multiplayer online role-playing game" in which players interact in a virtual world. WoW has ten million subscribers, of which two and a half million are in North America. The WoW software has two components: (1) the game client software that a player installs on the computer; and (2) the game server software, which the player accesses on a subscription basis by connecting to WoW's online servers. WoW does not have single-player or offline modes.

WoW players roleplay different characters, such as humans, elves, and dwarves. A player's central objective is to advance the character through the game's 70 levels by participating in quests and engaging in battles with monsters. As a player advances, the character collects rewards such as in-game currency, weapons, and armor. WoW's virtual world has its own economy, in which characters use their virtual currency to buy and sell items directly from each other, through vendors, or using auction houses. Some players also utilize WoW's chat capabilities to interact with others.

B. Blizzard's use agreements

Each WoW player must read and accept Blizzard's End User License Agreement ("EULA") and Terms of Use ("ToU") on multiple occasions. The EULA pertains to the game client, so a player agrees to it both before installing the game client and upon first running it. The ToU pertains to the online service, so a player agrees to it both when creating an account and upon first connecting to the online service. Players who do not accept both the EULA and the ToU may return the game client for a refund.

C. Development of Glider and Warden

Donnelly is a WoW player and software programmer. In March 2005, he developed Glider, a software "bot" (short for robot) that automates play of WoW's early levels, for his personal use. A user need not be at the computer while Glider is running. As explained in the Frequently Asked Questions ("FAQ") on MDY's website for Glider:

Glider . . . moves the mouse around and pushes keys on the keyboard. You tell it about your character, where you want to kill things, and when you want to kill. Then it kills for you, automatically. You can do something else, like eat dinner or go to a movie, and when you return, you'll have a lot more experience and loot.

Glider does not alter or copy WoW's game client software, does not allow a player to avoid paying monthly subscription dues to Blizzard, and has no commercial use independent of WoW. Glider was not initially designed to avoid detection by Blizzard.

The parties dispute Glider's impact on the WoW experience. Blizzard contends that Glider disrupts WoW's environment [936] for non-Glider players by enabling Glider users to advance quickly and unfairly through the game and to amass additional game assets. MDY contends that Glider has a minimal effect on non-Glider players, enhances the WoW experience for Glider users, and facilitates disabled players' access to WoW by auto-playing the game for them.

In summer 2005, Donnelly began selling Glider through MDY's website for fifteen to twenty-five dollars per license. Prior to marketing Glider, Donnelly reviewed Blizzard's EULA and client-server manipulation policy. He reached the conclusion that Blizzard had not prohibited bots in those documents.

In September 2005, Blizzard launched Warden, a technology that it developed to prevent its players who use unauthorized third-party software, including bots, from connecting to WoW's servers. Warden was able to detect Glider, and Blizzard immediately used Warden to ban most Glider users. MDY responded by modifying Glider to avoid detection and promoting its new anti-detection features on its website's FAQ. It added a subscription service, Glider Elite, which offered "additional protection from game detection software" for five dollars a month.

Thus, by late 2005, MDY was aware that Blizzard was prohibiting bots. MDY modified its website to indicate that using Glider violated Blizzard's ToU. In November 2005, Donnelly wrote in an email interview, "Avoiding detection is rather exciting, to be sure. Since Blizzard does not want bots running at all, it's a violation to use them." Following MDY's anti-detection modifications, Warden only occasionally detected Glider. As of September 2008, MDY had gross revenues of $3.5 million based on 120,000 Glider license sales.

D. Financial and practical impact of Glider

Blizzard claims that from December 2004 to March 2008, it received 465,000 complaints about WoW bots, several thousand of which named Glider. Blizzard spends $940,000 annually to respond to these complaints, and the parties have stipulated that Glider is the principal bot used by WoW players. Blizzard introduced evidence that it may have lost monthly subscription fees from Glider users, who were able to reach WoW's highest levels in fewer weeks than players playing manually. Donnelly acknowledged in a November 2005 email that MDY's business strategy was to make Blizzard's anti-bot detection attempts financially prohibitive:

The trick here is that Blizzard has a finite amount of development and test resources, so we want to make it bad business to spend that much time altering their detection code to find Glider, since Glider's negative effect on the game is debatable. . . . [W]e attack th[is] weakness and try to make it a bad idea or make their changes very risky, since they don't want to risk banning or crashing innocent customers.

E. Pre-litigation contact between MDY and Blizzard

In August 2006, Blizzard sent MDY a cease-and-desist letter alleging that MDY's website hosted WoW screenshots and a Glider install file, all of which infringed Blizzard's copyrights. Donnelly removed the screenshots and requested Blizzard to clarify why the install file was infringing, but Blizzard did not respond. In October 2006, Blizzard's counsel visited Donnelly's home, threatening suit unless MDY immediately ceased selling Glider and remitted all profits to Blizzard. MDY immediately commenced this action.

[937] II.

On December 1, 2006, MDY filed an amended complaint seeking a declaration that Glider does not infringe Blizzard's copyright or other rights. In February 2007, Blizzard filed counterclaims and third-party claims against MDY and Donnelly for, inter alia, contributory and vicarious copyright infringement, violation of DMCA § 1201(a)(2) and (b)(1), and tortious interference with contract.

In July 2008, the district court granted Blizzard partial summary judgment, finding that MDY's Glider sales contributorily and vicariously infringed Blizzard's copyrights and tortiously interfered with Blizzard's contracts. The district court also granted MDY partial summary judgment, finding that MDY did not violate DMCA § 1201(a)(2) with respect to accessing the game software's source code.

In September 2008, the parties stipulated to entry of a $6 million judgment against MDY for the copyright infringement and tortious interference with contract claims. They further stipulated that Donnelly would be personally liable for the same amount if found personally liable at trial. After a January 2009 bench trial, the district court held MDY liable under DMCA § 1201(a)(2) and (b)(1). It also held Donnelly personally liable for MDY's copyright infringement, DMCA violations, and tortious interference with contract.

On April 1, 2009, the district court entered judgment against MDY and Donnelly for $6.5 million, an adjusted figure to which the parties stipulated based on MDY's DMCA liability and post-summary judgment Glider sales. The district court permanently enjoined MDY from distributing Glider. MDY's efforts to stay injunctive relief pending appeal were unsuccessful. On April 29, 2009, MDY timely filed this appeal. On May 12, 2009, Blizzard timely cross-appealed the district court's holding that MDY did not violate DMCA § 1201(a)(2) and (b)(1) as to the game software's source code.

III.

We review de novo the district court's (1) orders granting or denying summary judgment; (2) conclusions of law after a bench trial; and (3) interpretations of state law. Padfield v. AIG Life Ins., 290 F.3d 1121, 1124 (9th Cir.2002); Twentieth Century Fox Film Corp. v. Entm't Distrib., 429 F.3d 869, 879 (9th Cir.2005); Laws v. Sony Music Entm't, Inc., 448 F.3d 1134, 1137 (9th Cir.2006). We review the district court's findings of fact for clear error. Twentieth Century Fox, 429 F.3d at 879.

IV.

We first consider whether MDY committed contributory or vicarious infringement (collectively, "secondary infringement") of Blizzard's copyright by selling Glider to WoW players.^[1]See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1454 (7th Cir.1996) ("A copyright is a right against the world. Contracts, by contrast, generally affect only their parties."). To establish secondary infringement, Blizzard must first demonstrate direct infringement. See A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004, 1019, 1022 (9th Cir.2001). To establish direct infringement, Blizzard must demonstrate copyright ownership and violation of one of its exclusive rights by Glider users. Id. at 1013. MDY is liable for contributory infringement if it has "intentionally induc[ed] or encourag[ed] direct infringement" by [938] Glider users. MGM Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930, 125 S.Ct. 2764, 162 L.Ed.2d 781 (2005). MDY is liable for vicarious infringement if it (1) has the right and ability to control Glider users' putatively infringing activity and (2) derives a direct financial benefit from their activity. Id. If Glider users directly infringe, MDY does not dispute that it satisfies the other elements of contributory and vicarious infringement.

As a copyright owner, Blizzard possesses the exclusive right to reproduce its work. 17 U.S.C. § 106(1). The parties agree that when playing WoW, a player's computer creates a copy of the game's software in the computer's random access memory ("RAM"), a form of temporary memory used by computers to run software programs. This copy potentially infringes unless the player (1) is a licensee whose use of the software is within the scope of the license or (2) owns the copy of the software. See Sun Microsystems, Inc. v. Microsoft Corp., 188 F.3d 1115, 1121 (9th Cir.1999) ("Sun I"); 17 U.S.C. § 117(a). As to the scope of the license, ToU § 4(B), "Limitations on Your Use of the Service," provides:

You agree that you will not . . . (ii) create or use cheats, bots, "mods," and/or hacks, or any other third-party software designed to modify the World of Warcraft experience; or (iii) use any third-party software that intercepts, "mines," or otherwise collects information from or through the Program or Service.

By contrast, if the player owns the copy of the software, the "essential step" defense provides that the player does not infringe by making a copy of the computer program where the copy is created and used solely "as an essential step in the utilization of the computer program in conjunction with a machine." 17 U.S.C. § 117(a)(1).

A. Essential step defense

We consider whether WoW players, including Glider users, are owners or licensees of their copies of WoW software. If WoW players own their copies, as MDY contends, then Glider users do not infringe by reproducing WoW software in RAM while playing, and MDY is not secondarily liable for copyright infringement.

In Vernor v. Autodesk, Inc., we recently distinguished between "owners" and "licensees" of copies for purposes of the essential step defense. Vernor v. Autodesk, Inc., 621 F.3d 1102, 1108-09 (9th Cir.2010); see also MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 519 n. 5 (9th Cir. 1993); Triad Sys. Corp. v. Se. Express Co., 64 F.3d 1330, 1333, 1335-36 (9th Cir.1995); Wall Data, Inc. v. Los Angeles County Sheriff's Dep't, 447 F.3d 769, 784-85 (9th Cir.2006). In Vernor, we held "that a software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user's ability to transfer the software; and (3) imposes notable use" restrictions. 621 F.3d at 1111 (internal footnote omitted).

Applying Vernor, we hold that WoW players are licensees of WoW's game client software. Blizzard reserves title in the software and grants players a non-exclusive, limited license. Blizzard also imposes transfer restrictions if a player seeks to transfer the license: the player must (1) transfer all original packaging and documentation; (2) permanently delete all of the copies and installation of the game client; and (3) transfer only to a recipient who accepts the EULA. A player may not sell or give away the account.

Blizzard also imposes a variety of use restrictions. The game must be used only for non-commercial entertainment purposes and may not be used in cyber cafes and computer gaming centers without Blizzard's [939] permission. Players may not concurrently use unauthorized third-party programs. Also, Blizzard may alter the game client itself remotely without a player's knowledge or permission, and may terminate the EULA and ToU if players violate their terms. Termination ends a player's license to access and play WoW. Following termination, players must immediately destroy their copies of the game and uninstall the game client from their computers, but need not return the software to Blizzard.

Since WoW players, including Glider users, do not own their copies of the software, Glider users may not claim the essential step defense. 17 U.S.C. § 117(a)(1). Thus, when their computers copy WoW software into RAM, the players may infringe unless their usage is within the scope of Blizzard's limited license.

B. Contractual covenants vs. license conditions

"A copyright owner who grants a nonexclusive, limited license ordinarily waives the right to sue licensees for copyright infringement, and it may sue only for breach of contract." Sun I, 188 F.3d at 1121 (internal quotations omitted). However, if the licensee acts outside the scope of the license, the licensor may sue for copyright infringement. Id. (citing S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1087 (9th Cir.1989)). Enforcing a copyright license "raises issues that lie at the intersection of copyright and contract law." Id. at 1122.

We refer to contractual terms that limit a license's scope as "conditions," the breach of which constitute copyright infringement. Id. at 1120. We refer to all other license terms as "covenants," the breach of which is actionable only under contract law. Id. We distinguish between conditions and covenants according to state contract law, to the extent consistent with federal copyright law and policy. Foad Consulting Group v. Musil Govan Azzalino, 270 F.3d 821, 827 (9th Cir.2001).

A Glider user commits copyright infringement by playing WoW while violating a ToU term that is a license condition. To establish copyright infringement, then, Blizzard must demonstrate that the violated term — ToU § 4(B) — is a condition rather than a covenant. Sun I, 188 F.3d at 1122. Blizzard's EULAs and ToUs provide that they are to be interpreted according to Delaware law. Accordingly, we first construe them under Delaware law, and then evaluate whether that construction is consistent with federal copyright law and policy.

A covenant is a contractual promise, i.e., a manifestation of intention to act or refrain from acting in a particular way, such that the promisee is justified in understanding that the promisor has made a commitment. See Travel Centers of Am. LLC v. Brog, No. 3751-CC, 2008 Del. Ch. LEXIS 183, *9 (Del. Ch. Dec. 5, 2008); see also Restatement (Second) of Contracts § 2 (1981). A condition precedent is an act or event that must occur before a duty to perform a promise arises. AES P.R., L.P. v. Alstom Power, Inc., 429 F.Supp.2d 713, 717 (D.Del.2006) (citing Delaware state law); see also Restatement (Second) of Contracts § 224. Conditions precedent are disfavored because they tend to work forfeitures. AES, 429 F.Supp.2d at 717 (internal citations omitted). Wherever possible, equity construes ambiguous contract provisions as covenants rather than conditions. See Wilmington Tr. Co. v. Clark, 325 A.2d 383, 386 (Del.Ch.1974). However, if the contract is unambiguous, the court construes it according to its terms. AES, 429 F.Supp.2d at 717 (citing 17 Am.Jur.2d Contracts § 460 (2006)).

Applying these principles, ToU § 4(B)(ii) and (iii)'s prohibitions against [940] bots and unauthorized third-party software are covenants rather than copyright-enforceable conditions. See Greenwood v. CompuCredit Corp., 615 F.3d 1204, 1212, (9th Cir.2010) ("[H]eadings and titles are not meant to take the place of the detailed provisions of the text," and . . . "the heading of a section cannot limit the plain meaning of the text." (quoting Bhd. of R.R. Trainmen v. Balt. & Ohio R.R., 331 U.S. 519, 528-29, 67 S.Ct. 1387, 91 L.Ed. 1646 (1947))). Although ToU § 4 is titled, "Limitations on Your Use of the Service," nothing in that section conditions Blizzard's grant of a limited license on players' compliance with ToU § 4's restrictions. To the extent that the title introduces any ambiguity, under Delaware law, ToU § 4(B) is not a condition, but is a contractual covenant. Cf. Sun Microsystems, Inc. v. Microsoft Corp., 81 F.Supp.2d 1026, 1031-32 (N.D.Cal.2000) ("Sun II") (where Sun licensed Microsoft to create only derivative works compatible with other Sun software, Microsoft's "compatibility obligations" were covenants because the license was not specifically conditioned on their fulfillment).

To recover for copyright infringement based on breach of a license agreement, (1) the copying must exceed the scope of the defendant's license and (2) the copyright owner's complaint must be grounded in an exclusive right of copyright (e.g., unlawful reproduction or distribution). See Storage Tech. Corp. v. Custom Hardware Eng'g & Consulting, Inc., 421 F.3d 1307, 1315-16 (Fed.Cir.2005). Contractual rights, however, can be much broader:

[C]onsider a license in which the copyright owner grants a person the right to make one and only one copy of a book with the caveat that the licensee may not read the last ten pages. Obviously, a licensee who made a hundred copies of the book would be liable for copyright infringement because the copying would violate the Copyright Act's prohibition on reproduction and would exceed the scope of the license. Alternatively, if the licensee made a single copy of the book, but read the last ten pages, the only cause of action would be for breach of contract, because reading a book does not violate any right protected by copyright law.

Id. at 1316. Consistent with this approach, we have held that the potential for infringement exists only where the licensee's action (1) exceeds the license's scope (2) in a manner that implicates one of the licensor's exclusive statutory rights. See, e.g., Sun I, 188 F.3d at 1121-22 (remanding for infringement determination where defendant allegedly violated a license term regulating the creation of derivative works).^[2]

Here, ToU § 4 contains certain restrictions that are grounded in Blizzard's exclusive rights of copyright and other restrictions that are not. For instance, ToU § 4(D) forbids creation of derivative works based on WoW without Blizzard's consent. A player who violates this prohibition [941] would exceed the scope of her license and violate one of Blizzard's exclusive rights under the Copyright Act. In contrast, ToU § 4(C)(ii) prohibits a player's disruption of another player's game experience. Id. A player might violate this prohibition while playing the game by harassing another player with unsolicited instant messages. Although this conduct may violate the contractual covenants with Blizzard, it would not violate any of Blizzard's exclusive rights of copyright. The antibot provisions at issue in this case, ToU § 4(B)(ii) and (iii), are similarly covenants rather than conditions. A Glider user violates the covenants with Blizzard, but does not thereby commit copyright infringement because Glider does not infringe any of Blizzard's exclusive rights. For instance, the use does not alter or copy WoW software.

Were we to hold otherwise, Blizzard — or any software copyright holder — could designate any disfavored conduct during software use as copyright infringement, by purporting to condition the license on the player's abstention from the disfavored conduct. The rationale would be that because the conduct occurs while the player's computer is copying the software code into RAM in order for it to run, the violation is copyright infringement. This would allow software copyright owners far greater rights than Congress has generally conferred on copyright owners.^[3]

We conclude that for a licensee's violation of a contract to constitute copyright infringement, there must be a nexus between the condition and the licensor's exclusive rights of copyright.^[4] Here, WoW players do not commit copyright infringement by using Glider in violation of the ToU. MDY is thus not liable for secondary copyright infringement, which requires the existence of direct copyright infringement. Grokster, 545 U.S. at 930, 125 S.Ct. 2764.

It follows that because MDY does not infringe Blizzard's copyrights, we need not resolve MDY's contention that Blizzard commits copyright misuse. Copyright misuse is an equitable defense to copyright infringement, the contours of which are still being defined. See Practice Mgmt. Info. Corp. v. Am. Med. Ass'n, 121 F.3d 516, 520 (9th Cir.1997). The remedy for copyright misuse is to deny the copyright holder the right to enforce its copyright during the period of misuse. Since MDY does not infringe, we do not consider whether Blizzard committed copyright misuse.

We thus reverse the district court's grant of summary judgment to Blizzard on its secondary copyright infringement [942] claims. Accordingly, we must also vacate the portion of the district court's permanent injunction that barred MDY and Donnelly from "infringing, or contributing to the infringement of, Blizzard's copyrights in WoW software."

V.

After MDY began selling Glider, Blizzard launched Warden, its technology designed to prevent players who used bots from connecting to the WoW servers. Blizzard used Warden to ban most Glider users in September 2005. Blizzard claims that MDY is liable under DMCA § 1201(a)(2) and (b)(1) because it thereafter programmed Glider to avoid detection by Warden.

A. The Warden technology

Warden has two components. The first is a software module called "scan.dll," which scans a computer's RAM prior to allowing the player to connect to WoW's servers. If scan.dll detects that a bot is running, such as Glider, it will not allow the player to connect and play. After Blizzard launched Warden, MDY reconfigured Glider to circumvent scan.dll by not loading itself until after scan.dll completed its check. Warden's second component is a "resident" component that runs periodically in the background on a player's computer when it is connected to WoW's servers. It asks the computer to report portions of the WoW code running in RAM, and it looks for patterns of code associated with known bots or cheats. If it detects a bot or cheat, it boots the player from the game, which halts the computer's copying of copyrighted code into RAM.

B. The Digital Millennium Copyright Act

Congress enacted the DMCA in 1998 to conform United States copyright law to its obligations under two World Intellectual Property Organization ("WIPO") treaties, which require contracting parties to provide effective legal remedies against the circumvention of protective technological measures used by copyright owners. See Universal City Studios, Inc. v. Corley, 273 F.3d 429, 440 (2d Cir.2001). In enacting the DMCA, Congress sought to mitigate the problems presented by copyright enforcement in the digital age. Id. The DMCA contains three provisions directed at the circumvention of copyright owners' technological measures. The Supreme Court has yet to construe these provisions, and they raise questions of first impression in this circuit.

The first provision, 17 U.S.C. § 1201(a)(1)(A), is a general prohibition against "circumventing a technological measure that effectively controls access to a work protected under [the Copyright Act]." The second prohibits trafficking in technology that circumvents a technological measure that "effectively controls access" to a copyrighted work. 17 U.S.C. § 1201(a)(2). The third prohibits trafficking in technology that circumvents a technological measure that "effectively protects" a copyright owner's right. 17 U.S.C. § 1201(b)(1).

C. The district court's decision

The district court assessed whether MDY violated DMCA § 1201(a)(2) and (b)(1) with respect to three WoW components. First, the district court considered the game client software's literal elements: the source code stored on players' hard drives. Second, the district court considered the game client software's individual non-literal elements: the 400,000+ discrete visual and audible components of the game, such as a visual image of a monster or its audible roar. Finally, it considered the game's dynamic non-literal [943] elements: that is, the "real-time experience of traveling through different worlds, hearing their sounds, viewing their structures, encountering their inhabitants and monsters, and encountering other players."

The district court granted MDY partial summary judgment as to Blizzard's § 1201(a)(2) claim with respect to WoW's literal elements. The district court reasoned that Warden does not effectively control access to the literal elements because WoW players can access the literal elements without connecting to a game server and encountering Warden; they need only install the game client software on their computers. The district court also ruled for MDY following trial as to Blizzard's § 1201(a)(2) claim with respect to WoW's individual non-literal elements, reasoning that these elements could also be accessed on a player's hard drive without encountering Warden.

The district court, however, ruled for Blizzard following trial as to its § 1201(a)(2) and (b)(1) claims with respect to WoW's dynamic non-literal elements, or the "real-time experience" of playing WoW. It reasoned that Warden effectively controlled access to these elements, which could not be accessed without connecting to Blizzard's servers. It also found that Glider allowed its users to circumvent Warden by avoiding or bypassing its detection features, and that MDY marketed Glider for use in circumventing Warden.

We turn to consider whether Glider violates DMCA § 1201(a)(2) and (b)(1) by allowing users to circumvent Warden to access WoW's various elements. MDY contends that Warden's scan.dll and resident components are separate, and only scan.dll should be considered as a potential access control measure under § 1201(a)(2). However, in our view, an access control measure can both (1) attempt to block initial access and (2) revoke access if a secondary check determines that access was unauthorized. Our analysis considers Warden's scan.dll and resident components together because the two components have the same purpose: to prevent players using detectable bots from continuing to access WoW software.

D. Construction of § 1201

One of the issues raised by this appeal is whether certain provisions of § 1201 prohibit circumvention of access controls when access does not constitute copyright infringement. To answer this question and others presented by this appeal, we address the nature and interrelationship of the various provisions of § 1201 in the overall context of the Copyright Act.

We begin by considering the scope of DMCA § 1201's three operative provisions, §§ 1201(a)(1), 1201(a)(2), and 1201(b)(1). We consider them side-by-side, because "[w]e do not . . . construe statutory phrases in isolation; we read statutes as a whole. Thus, the [term to be construed] must be read in light of the immediately following phrase. . . ." United States v. Morton, 467 U.S. 822, 828, 104 S.Ct. 2769, 81 L.Ed.2d 680 (1984); see also Padash v. I.N.S., 358 F.3d 1161, 1170 (9th Cir.2004) (we analyze the statutory provision to be construed "in the context of the governing statute as a whole, presuming congressional intent to create a coherent regulatory scheme").

1. Text of the operative provisions

"We begin, as always, with the text of the statute." Hawaii v. Office of Hawaiian Affairs, ___ U.S. ___, 129 S.Ct. 1436, 1443, 173 L.Ed.2d 333 (2009) (quoting Permanent Mission of India to United Nations v. City of New York, 551 U.S. 193, 197, 127 S.Ct. 2352, 168 L.Ed.2d 85 (2007)). Section 1201(a)(1)(A) prohibits "circumvent[ing] [944] a technological measure that effectively controls access to a work protected under this title." Sections 1201(a)(2) and (b)(1) provide that "[n]o person shall manufacture, import, offer to the public, provide, or otherwise traffic in any technology, product, service, device, component, or part thereof, that —

§ 1201(a)(2)                                  § 1201(b)(1)

(A)                                           (A)
is primarily designed or produced             is primarily designed or produced
for the purpose of                            for the purpose of
circumventing a technological measure         circumventing protection afforded
                                              by a technological measure
that effectively controls access              that effectively protects
to a work protected under this title;                 a right of a copyright owner;
(B)                                           (B)
has only limited commercially significant     has only limited commercially significant
purpose or use other than                     purpose of use other than
to circumvent a technological measure         to circumvent protection afforded by a
                                              technological measure
that effectively controls access              that effectively protects a
to a work protected under this title;         right of a copyright owner under this title
                                              in a work or portion thereof;
(C)                                           (C)
is marketed by a person or another acting     is marketed by that person or another acting
in concert with that person                   in concert with that person
with that person's knowledge for use          with that person's knowledge for use
in circumventing                              in circumventing protection afforded by
a technological measure that                  a technological measure that
effectively controls access to                effectively protects a
a work protected under this title.            right of a copyright owner under this title in
a                                             portion or work thereof."

(emphasis added).

2. Our harmonization of the DMCA's operative provisions

For the reasons set forth below, we believe that § 1201 is best understood to create two distinct types of claims. First, § 1201(a) prohibits the circumvention of any technological measure that effectively controls access to a protected work and grants copyright owners the right to enforce that prohibition. Cf. Corley, 273 F.3d at 441 ("[T]he focus of subsection 1201(a)(2) is circumvention of technologies designed to prevent access to a work"). Second, and in contrast to § 1201(a), § 1201(b)(1) prohibits trafficking in technologies that circumvent technological measures that effectively protect "a right of a copyright owner." Section 1201(b)(1)'s prohibition is thus aimed at circumventions of measures that protect the copyright itself: it entitles copyright owners to protect their existing exclusive rights under the Copyright Act. Those exclusive rights are reproduction, distribution, public performance, public display, and creation of derivative works. 17 U.S.C. § 106. Historically speaking, preventing "access" to a protected work in itself has not been a right of a copyright owner arising from the Copyright Act.^[5]

Our construction of § 1201 is compelled by the four significant textual differences between § 1201(a) and (b). First, § 1201(a)(2) prohibits the circumvention of [945] a measure that "effectively controls access to a work protected under this title," whereas § 1201(b)(1) concerns a measure that "effectively protects a right of a copyright owner under this title in a work or portion thereof." (emphasis added). We read § 1201(b)(1)'s language — "right of a copyright owner under this title" — to reinforce copyright owners' traditional exclusive rights under § 106 by granting them an additional cause of action against those who traffic in circumventing devices that facilitate infringement. Sections 1201(a)(1) and (a)(2), however, use the term "work protected under this title." Neither of these two subsections explicitly refers to traditional copyright infringement under § 106. Accordingly, we read this term as extending a new form of protection, i.e., the right to prevent circumvention of access controls, broadly to works protected under Title 17, i.e., copyrighted works.

Second, as used in § 1201(a), to "circumvent a technological measure" means "to descramble a scrambled work, to decrypt an encrypted work, or otherwise to avoid, bypass, remove, deactivate, or impair a technological measure, without the authority of the copyright owner." 17 U.S.C. § 1201(a)(3)(A). These two specific examples of unlawful circumvention under § 1201(a) — descrambling a scrambled work and decrypting an encrypted work — are acts that do not necessarily infringe or facilitate infringement of a copyright.^[6] Descrambling or decrypting only enables someone to watch or listen to a work without authorization, which is not necessarily an infringement of a copyright owner's traditional exclusive rights under § 106. Put differently, descrambling and decrypting do not necessarily result in someone's reproducing, distributing, publicly performing, or publicly displaying the copyrighted work, or creating derivative works based on the copyrighted work.

The third significant difference between the subsections is that § 1201(a)(1)(A) prohibits circumventing an effective access control measure, whereas § 1201(b) prohibits trafficking in circumventing devices, but does not prohibit circumvention itself because such conduct was already outlawed as copyright infringement. The Senate Judiciary Committee explained:

This . . . is the reason there is no prohibition on conduct in 1201(b) akin to the prohibition on circumvention conduct in 1201(a)(1). The prohibition in 1201(a)(1) is necessary because prior to this Act, the conduct of circumvention was never before made unlawful. The device limitation on 1201(a)(2) enforces this new prohibition on conduct. The copyright law has long forbidden copyright infringements, so no new prohibition was necessary.

S.Rep. No. 105-90, at 11 (1998). This difference reinforces our reading of § 1201(b) as strengthening copyright owners' traditional rights against copyright infringement and of § 1201(a) as granting copyright owners a new anti-circumvention right.

Fourth, in § 1201(a)(1)(B)-(D), Congress directs the Library of Congress ("Library") to identify classes of copyrighted works for which "noninfringing uses by persons who are users of a copyrighted work are, or are likely to be, adversely affected, and the [anti-circumvention] prohibition contained in [§ 1201(a)(1)(A)] shall not apply to such users with respect to such classes of works for the ensuing 3-year period." There is no analogous provision in § 1201(b). We impute this lack of symmetry to Congress' need to balance [946] copyright owners' new anti-circumvention right with the public's right to access the work. Cf. H.R.Rep. No. 105-551, pt. 2, at 26 (1998) (specifying that the House Commerce Committee "endeavored to specify, with as much clarity as possible, how the right against anti-circumvention (sic) would be qualified to maintain balance between the interests of content creators and information users."). Sections 1201(a)(1)(B)-(D) thus promote the public's right to access by allowing the Library to exempt circumvention of effective access control measures in particular situations where it concludes that the public's right to access outweighs the owner's interest in restricting access.^[7] In limiting the owner's right to control access, the Library does not, and is not permitted to, authorize infringement of a copyright owner's traditional exclusive rights under the copyright. Rather, the Library is only entitled to moderate the new anti-circumvention right created by, and hence subject to the limitations in, DMCA § 1201(a)(1).^[8]

Our reading of § 1201(a) and (b) ensures that neither section is rendered superfluous. A violation of § 1201(a)(1)(A), which prohibits circumvention itself, will not be a violation of § 1201(b), which does not contain an analogous prohibition on circumvention. A violation of § 1201(a)(2), which prohibits trafficking in devices that facilitate circumvention of access control measures, will not always be a violation of § 1201(b)(1), which prohibits trafficking in devices that facilitate circumvention of measures that protect against copyright infringement. Of course, if a copyright owner puts in place an effective measure that both (1) controls access and (2) protects against copyright infringement, a defendant who traffics in a device that circumvents that measure could be liable under both § 1201(a) and (b). Nonetheless, we read the differences in structure between § 1201(a) and (b) as reflecting Congress's intent to address distinct concerns by creating different rights with different elements.

3. Our construction of the DMCA is consistent with the legislative history

Although the text suffices to resolve the issues before us, we also consider the legislative history in order to address the parties' arguments concerning it. Our review of that history supports the view that Congress created a new anticircumvention right in § 1201(a)(2) independent of traditional copyright infringement and granted copyright owners a new weapon against copyright infringement in § 1201(b)(1). For instance, the Senate Judiciary Committee report explains that § 1201(a)(2) and (b)(1) are "not interchangeable": they were "designed to protect two distinct rights and to target two distinct classes of devices," and "many devices will be subject to challenge only under one of the subsections." [947] S.Rep. No. 105-190, at 12 (1998). That is, § 1201(a)(2) "is designed to protect access to a copyrighted work," while § 1201(b)(1) "is designed to protect the traditional copyright rights of the copyright owner." Id. Thus, the Senate Judiciary Committee understood § 1201 to create the following regime:

[I]f an effective technological protection measure does nothing to prevent access to the plain text of the work, but is designed to prevent that work from being copied, then a potential cause of action against the manufacturer of a device designed to circumvent the measure lies under § 1201(b)(1), but not under § 1201(a)(2). Conversely, if an effective technological protection measure limits access to the plain text of a work only to those with authorized access, but provides no additional protection against copying, displaying, performing or distributing the work, then a potential cause of action against the manufacturer of a device designed to circumvent the measure lies under § 1201(a)(2), but not under § 1201(b).

Id. The Senate Judiciary Committee proffered an example of § 1201(a) liability with no nexus to infringement, stating that if an owner effectively protected access to a copyrighted work by use of a password, it would violate § 1201(a)(2)(A)

[T]o defeat or bypass the password and to make the means to do so, as long as the primary purpose of the means was to perform this kind of act. This is roughly analogous to making it illegal to break into a house using a tool, the primary purpose of which is to break into houses.

Id. at 12. The House Judiciary Committee similarly states of § 1201(a)(2), "The act of circumventing a technological protection measure put in place by a copyright owner to control access to a copyrighted work is the electronic equivalent of breaking into a locked room in order to obtain a copy of a book." See H.R.Rep. No. 105-551, pt. 1, at 17 (1998). We note that bypassing a password and breaking into a locked room in order to read or view a copyrighted work would not infringe on any of the copyright owner's exclusive rights under § 106.

We read this legislative history as confirming Congress's intent, in light of the current digital age, to grant copyright owners an independent right to enforce the prohibition against circumvention of effective technological access controls.^[9] In § 1201(a), Congress was particularly concerned with encouraging copyright owners to make their works available in digital formats such as "on-demand" or "pay-per-view," which allow consumers effectively to "borrow" a copy of the work for a limited time or a limited number of uses. As the House Commerce Committee explained:

[A]n increasing number of intellectual property works are being distributed using a "client-server" model, where the work is effectively "borrowed" by the user (e.g., infrequent users of expensive software purchase a certain number of uses, or viewers watch a movie on a pay-per-view basis). To operate in this environment, content providers will need both the technology to make new uses possible and the legal framework to ensure they can protect their work from piracy.

[948] See H.R.Rep. No. 105-551 pt. 2, at 23 (1998).

Our review of the legislative history supports our reading of § 1201: that section (a) creates a new anticircumvention right distinct from copyright infringement, while section (b) strengthens the traditional prohibition against copyright infringement.^[10] We now review the decisions of the Federal Circuit that have interpreted § 1201 differently.

4. The Federal Circuit's decisions

The Federal Circuit has adopted a different approach to the DMCA. In essence, it requires § 1201(a) plaintiffs to demonstrate that the circumventing technology infringes or facilitates infringement of the plaintiff's copyright (an "infringement nexus requirement"). See Chamberlain Group, Inc. v. Skylink Techs., Inc., 381 F.3d 1178, 1203 (Fed.Cir.2004); Storage Tech. Corp. v. Custom Hardware Eng'g & Consulting, Inc., 421 F.3d 1307 (Fed.Cir.2005).^[11]

The seminal decision is Chamberlain, 381 F.3d 1178 (Fed.Cir.2004). In Chamberlain, the plaintiff sold garage door openers ("GDOs") with a "rolling code" security system that purportedly reduced the risk of crime by constantly changing the transmitter signal necessary to open the door. Id. at 1183. Customers used the GDOs' transmitters to send the changing signal, which in turn opened or closed their garage doors. Id.

Plaintiff sued the defendant, who sold "universal" GDO transmitters for use with plaintiff's GDOs, under § 1201(a)(2). Id. at 1185. The plaintiff alleged that its GDOs and transmitters both contained copyrighted computer programs and that its rolling code security system was a technological measure that controlled access to those programs. Id. at 1183. Accordingly, plaintiff alleged that the defendant — by selling GDO transmitters that were compatible with plaintiff's GDOs — had trafficked in a technology that was primarily used for the circumvention of a technological measure (the rolling code security system) that effectively controlled access to plaintiff's copyrighted works. Id.

The Federal Circuit rejected the plaintiff's claim, holding that the defendant did not violate § 1201(a)(2) because, inter alia, the defendant's universal GDO transmitters did not infringe or facilitate infringement of the plaintiff's copyrighted computer programs. Id. at 1202-03. The linchpin of the Chamberlain court's analysis is its conclusion that DMCA coverage is limited to a copyright owner's rights under the Copyright Act as set forth in § 106 of the Copyright Act. Id. at 1192-93. Thus, it held that § 1201(a) did not grant copyright owners a new anti-circumvention right, but instead, established new [949] causes of action for a defendant's unauthorized access of copyrighted material when it infringes upon a copyright owner's rights under § 106. Id. at 1192, 1194. Accordingly, a § 1201(a)(2) plaintiff was required to demonstrate a nexus to infringement — i.e., that the defendant's trafficking in circumventing technology had a "reasonable relationship" to the protections that the Copyright Act affords copyright owners. Id. at 1202-03. The Federal Circuit explained:

Defendants who traffic in devices that circumvent access controls in ways that facilitate infringement may be subject to liability under § 1201(a)(2). Defendants who use such devices may be subject to liability under § 1201(a)(1) whether they infringe or not. Because all defendants who traffic in devices that circumvent rights controls necessarily facilitate infringement, they may be subject to liability under § 1201(b). Defendants who use such devices may be subject to liability for copyright infringement. And finally, defendants whose circumvention devices do not facilitate infringement are not subject to § 1201 liability.

Id. at 1195 (emphasis added). Chamberlain concluded that § 1201(a) created a new cause of action linked to copyright infringement, rather than a new anti-circumvention right separate from copyright infringement, for six reasons.

First, Chamberlain reasoned that Congress enacted the DMCA to balance the interests of copyright owners and information users, and an infringement nexus requirement was necessary to create an anti-circumvention right that truly achieved that balance. Id. at 1196 (citing H.R.Rep. No. 105-551, at 26 (1998)). Second, Chamberlain feared that copyright owners could use an access control right to prohibit exclusively fair uses of their material even absent feared foul use. Id. at 1201. Third, Chamberlain feared that § 1201(a) would allow companies to leverage their sales into aftermarket monopolies, in potential violation of antitrust law and the doctrine of copyright misuse. Id. (citing Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451, 455, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992) (antitrust); Assessment Techs. of WI, LLC v. WIREdata, Inc., 350 F.3d 640, 647 (7th Cir.2003) (copyright misuse)). Fourth, Chamberlain viewed an infringement nexus requirement as necessary to prevent "absurd and disastrous results," such as the existence of DMCA liability for disabling a burglary alarm to gain access to a home containing copyrighted materials. Id.

Fifth, Chamberlain stated that an infringement nexus requirement might be necessary to render Congress's exercise of its Copyright Clause authority rational. Id. at 1200. The Copyright Clause gives Congress "the task of defining the scope of the limited monopoly that should be granted to authors . . . in order to give the public appropriate access to their work product." Id. (citing Eldred v. Ashcroft, 537 U.S. 186, 204-05, 123 S.Ct. 769, 154 L.Ed.2d 683 (2003) (internal citation omitted)). Without an infringement nexus requirement, Congress arguably would have allowed copyright owners in § 1201(a) to deny all access to the public by putting an effective access control measure in place that the public was not allowed to circumvent.

Finally, the Chamberlain court viewed an infringement nexus requirement as necessary for the Copyright Act to be internally consistent. It reasoned that § 1201(c)(1), enacted simultaneously, provides that "nothing in this section shall affect rights, remedies, limitations, or defenses to copyright infringement, including fair use, under this title." The Chamberlain court opined that if § 1201(a) creates liability for access without regard to the remainder of the Copyright Act, it "would [950] clearly affect rights and limitations, if not remedies and defenses." Id.

Accordingly, the Federal Circuit held that a DMCA § 1201(a)(2) action was foreclosed to the extent that the defendant trafficked in a device that did not facilitate copyright infringement. Id.; see also Storage Tech., 421 F.3d 1307 (same).

5. We decline to adopt an infringement nexus requirement

While we appreciate the policy considerations expressed by the Federal Circuit in Chamberlain, we are unable to follow its approach because it is contrary to the plain language of the statute. In addition, the Federal Circuit failed to recognize the rationale for the statutory construction that we have proffered. Also, its approach is based on policy concerns that are best directed to Congress in the first instance, or for which there appear to be other reasons that do not require such a convoluted construction of the statute's language.

i. Statutory inconsistencies

Were we to follow Chamberlain in imposing an infringement nexus requirement, we would have to disregard the plain language of the statute. Moreover, there is significant textual evidence showing Congress's intent to create a new anticircumvention right in § 1201(a) distinct from infringement. As set forth supra, this evidence includes: (1) Congress's choice to link only § 1201(b)(1) explicitly to infringement; (2) Congress's provision in § 1201(a)(3)(A) that descrambling and decrypting devices can lead to § 1201(a) liability, even though descrambling and decrypting devices may only enable non-infringing access to a copyrighted work; and (3) Congress's creation of a mechanism in § 1201(a)(1)(B)-(D) to exempt certain non-infringing behavior from § 1201(a)(1) liability, a mechanism that would be unnecessary if an infringement nexus requirement existed.

Though unnecessary to our conclusion because of the clarity of the statute's text, see United States v. Gallegos, 613 F.3d 1211, 1214 (9th Cir.2010), we also note that the legislative history supports the conclusion that Congress intended to prohibit even non-infringing circumvention and trafficking in circumventing devices. Moreover, in mandating a § 1201(a) nexus to infringement, we would deprive copyright owners of the important enforcement tool that Congress granted them to make sure that they are compensated for valuable non-infringing access — for instance, copyright owners who make movies or music available online, protected by an access control measure, in exchange for direct or indirect payment.

The Chamberlain court reasoned that if § 1201(a) creates liability for access without regard to the remainder of the Copyright Act, it "would clearly affect rights and limitations, if not remedies and defenses." 381 F.3d at 1200. This perceived tension is relieved by our recognition that § 1201(a) creates a new anti-circumvention right distinct from the traditional exclusive rights of a copyright owner. It follows that § 1201(a) does not limit the traditional framework of exclusive rights created by § 106, or defenses to those rights such as fair use.^[12] We are thus unpersuaded by Chamberlain's reading of the DMCA's text and structure.

[951] ii. Additional interpretive considerations

Though we need no further evidence of Congress's intent, the parties, citing Chamberlain, proffer several other arguments, which we review briefly in order to address the parties' contentions. Chamberlain relied heavily on policy considerations to support its reading of § 1201(a). As a threshold matter, we stress that such considerations cannot trump the statute's plain text and structure. Gallegos, 613 F.3d at 1214. Even were they permissible considerations in this case, however, they would not persuade us to adopt an infringement nexus requirement. Chamberlain feared that § 1201(a) would allow companies to leverage their sales into aftermarket monopolies, in tension with antitrust law and the doctrine of copyright misuse.^[13]Id. (citing Eastman, 504 U.S. at 455, 112 S.Ct. 2072 (antitrust); Assessment Techs., 350 F.3d at 647 (copyright misuse)). Concerning antitrust law, we note that there is no clear issue of anti-competitive behavior in this case because Blizzard does not seek to put a direct competitor who offers a competing role-playing game out of business and the parties have not argued this issue. If a § 1201(a)(2) defendant in a future case claims that a plaintiff is attempting to enforce its DMCA anti-circumvention right in a manner that violates antitrust law, we will then consider the interplay between this new anti-circumvention right and antitrust law.

Chamberlain also viewed an infringement nexus requirement as necessary to prevent "absurd and disastrous results," such as the existence of DMCA liability for disabling a burglary alarm to gain access to a home containing copyrighted materials. 381 F.3d at 1201. In addition, the Federal Circuit was concerned that, without an infringement nexus requirement, § 1201(a) would allow copyright owners to deny all access to the public by putting an effective access control measure in place that the public is not allowed to circumvent. 381 F.3d at 1200. Both concerns appear to be overstated,^[14] but even accepting them, arguendo, as legitimate concerns, they do not permit reading the statute as requiring the imposition of an infringement nexus. As § 1201(a) creates a distinct right, it does not disturb the balance between public rights and the traditional rights of owners of copyright under the Copyright Act. Moreover, § 1201(a)(1)(B)-(D) allows the Library of Congress to create exceptions to the § 1201(a) anticircumvention right in the public's interest. If greater protection of the public's ability to access copyrighted works is required, Congress can provide such protection by amending the statute.

[952] In sum, we conclude that a fair reading of the statute (supported by legislative history) indicates that Congress created a distinct anti-circumvention right under § 1201(a) without an infringement nexus requirement. Thus, even accepting the validity of the concerns expressed in Chamberlain, those concerns do not authorize us to override congressional intent and add a non-textual element to the statute. See In Re Dumont, 581 F.3d 1104, 1111 (9th Cir. 2009) ("[W]here the language of an enactment is clear or, in modern parlance, plain, and construction according to its terms does not lead to absurd or impracticable consequences, the words employed are to be taken as the final expression of the meaning intended."). Accordingly, we reject the imposition of an infringement nexus requirement. We now consider whether MDY has violated § 1201(a)(2) and (b)(1).

E. Blizzard's § 1201(a)(2) claim

1. WoW's literal elements and individual non-literal elements

We agree with the district court that MDY's Glider does not violate DMCA § 1201(a)(2) with respect to WoW's literal elements^[15] and individual non-literal elements, because Warden does not effectively control access to these WoW elements. First, Warden does not control access to WoW's literal elements because these elements — the game client's software code — are available on a player's hard drive once the game client software is installed. Second, as the district court found:

[WoW's] individual nonliteral components may be accessed by a user without signing on to the server. As was demonstrated during trial, an owner of the game client software may use independently purchased computer programs to call up the visual images or the recorded sounds within the game client software. For instance, a user may call up and listen to the roar a particular monster makes within the game. Or the user may call up a virtual image of that monster.

Since a player need not encounter Warden to access WoW's individual non-literal elements, Warden does not effectively control access to those elements.

Our conclusion is in accord with the Sixth Circuit's decision in Lexmark International v. Static Control Components, 387 F.3d 522 (6th Cir.2004). In Lexmark, the plaintiff sold laser printers equipped with an authentication sequence, verified by the printer's copyrighted software, that ensured that only plaintiff's own toner cartridges could be inserted into the printers. Id. at 530. The defendant sold microchips capable of generating an authentication sequence that rendered other manufacturers' cartridges compatible with plaintiff's printers. Id.

The Sixth Circuit held that plaintiff's § 1201(a)(2) claim failed because its authentication sequence did not effectively control access to its copyrighted computer program. Id. at 546. Rather, the mere purchase of one of plaintiff's printers allowed "access" to the copyrighted program. Any purchaser could read the program code directly from the printer memory without encountering the authentication sequence. Id. The authentication sequence thus blocked only one form of access: the ability to make use of the printer. However, it left intact another form of access: the review and use of the computer program's literal code. Id. The Sixth Circuit explained:

Just as one would not say that a lock on the back door of a house "controls access" to a house whose front door does not contain a lock and just as one would [953] not say that a lock on any door of a house "controls access" to the house after its purchaser receives the key to the lock, it does not make sense to say that this provision of the DMCA applies to otherwise-readily-accessible copyrighted works. Add to this the fact that the DMCA not only requires the technological measure to "control access" but requires the measure to control that access "effectively," 17 U.S.C. § 1201(a)(2), and it seems clear that this provision does not naturally extend to a technological measure that restricts one form of access but leaves another route wide open.

Id. at 547.

Here, a player's purchase of the WoW game client allows access to the game's literal elements and individual non-literal elements. Warden blocks one form of access to these elements: the ability to access them while connected to a WoW server. However, analogously to the situation in Lexmark, Warden leaves open the ability to access these elements directly via the user's computer. We conclude that Warden is not an effective access control measure with respect to WoW's literal elements and individual non-literal elements, and therefore, that MDY does not violate § 1201(a)(2) with respect to these elements.

2. WoW's dynamic non-literal elements

We conclude that MDY meets each of the six textual elements for violating § 1201(a)(2) with respect to WoW's dynamic non-literal elements. That is, MDY (1) traffics in (2) a technology or part thereof (3) that is primarily designed, produced, or marketed for, or has limited commercially significant use other than (4) circumventing a technological measure (5) that effectively controls access (6) to a copyrighted work. See 17 U.S.C. § 1201(a)(2).

The first two elements are met because MDY "traffics in a technology or part thereof" — that is, it sells Glider. The third and fourth elements are met because Blizzard has established that MDY markets Glider for use in circumventing Warden, thus satisfying the requirement of § 1201(a)(2)(C).^[16] Indeed, Glider has no function other than to facilitate the playing of WoW. The sixth element is met because, as the district court held, WoW's dynamic non-literal elements constitute a copyrighted work. See, e.g., Atari Games [954] Corp. v. Oman, 888 F.2d 878, 884-85 (D.C.Cir.1989) (the audiovisual display of a computer game is copyrightable independently from the software program code, even though the audiovisual display generated is partially dependent on user input).

The fifth element is met because Warden is an effective access control measure. To "effectively control access to a work," a technological measure must "in the ordinary course of its operation, require[ ] the application of information, or a process or a treatment, with the authority of the copyright owner, to gain access to the work." 17 U.S.C. § 1201(a)(3)(B). Both of Warden's two components "require[ ] the application of information, or a process or a treatment . . . to gain access to the work." For a player to connect to Blizzard's servers which provide access to WoW's dynamic non-literal elements, scan. dll must scan the player's computer RAM and confirm the absence of any bots or cheats. The resident component also requires a "process" in order for the user to continue accessing the work: the user's computer must report portions of WoW code running in RAM to the server. Moreover, Warden's provisions were put into place by Blizzard, and thus, function "with the authority of the copyright owner." Accordingly, Warden effectively controls access to WoW's dynamic non-literal elements.^[17] We hold that MDY is liable under § 1201(a)(2) with respect to WoW's dynamic non-literal elements.^[18] Accordingly, we affirm the district court's entry of a permanent injunction against MDY to prevent future § 1201(a)(2) violations.

F. Blizzard's § 1201(b)(1) claim

Blizzard may prevail under § 1201(b)(1) only if Warden "effectively protect[s] a right" of Blizzard under the Copyright Act. Blizzard contends that Warden protects its reproduction right against unauthorized copying. We disagree.

First, although WoW players copy the software code into RAM while playing the game, Blizzard's EULA and ToU authorize all licensed WoW players to do so. We have explained that ToU § 4(B)'s bot prohibition is a license covenant rather than a condition. Thus, a Glider user who violates this covenant does not infringe by continuing to copy code into RAM. Accordingly, MDY does not violate § 1201(b)(1) by enabling Glider users to avoid Warden's interruption of their authorized copying into RAM.

Second, although WoW players can theoretically record game play by taking screen shots, there is no evidence that Warden detects or prevents such allegedly infringing copying.^[19] This is logical, because [955] Warden was designed to reduce the presence of cheats and bots, not to protect WoW's dynamic non-literal elements against copying. We conclude that Warden does not effectively protect any of Blizzard's rights under the Copyright Act, and MDY is not liable under § 1201(b)(1) for Glider's circumvention of Warden.^[20]

VI.

The district court granted Blizzard summary judgment on its claim against MDY for tortious interference with contract ("tortious interference") under Arizona law and held that Donnelly was personally liable for MDY's tortious interference. We review the district court's grant of summary judgment de novo. See Canyon Ferry Rd. Baptist Church of East Helena, Inc. v. Unsworth, 556 F.3d 1021, 1027 (9th Cir.2009). We view the evidence in the light most favorable to non-movant MDY in determining whether there are any genuine issues of material fact. Id. Because we conclude that there are triable issues of material fact, we vacate and remand for trial.

A. Elements of Blizzard's tortious interference claim

To recover for tortious interference under Arizona law, Blizzard must prove: (1) the existence of a valid contractual relationship; (2) MDY's knowledge of the relationship; (3) MDY's intentional interference in inducing or causing the breach; (4) the impropriety of MDY's interference; and (5) resulting damages. See Safeway Ins. Co. v. Guerrero, 106 P.3d 1020, 1025 (Ariz.2005); see also Antwerp Diamond Exch. of Am., Inc. v. Better Bus. Bur. of Maricopa County, Inc., 130 Ariz. 523, 637 P.2d 733, 740 (1981).

Blizzard satisfies four of these five elements based on undisputed facts. First, a valid contractual relationship exists between Blizzard and its customers based on the operative EULA and ToU. Second, MDY was aware of this relationship: it does not contend that it was unaware of the operative EULA and ToU, or unaware that using Glider breached their terms. In fact, after Blizzard first attempted to ban Glider users, MDY modified its website to notify customers that using Glider violated the ToU. Third, MDY intentionally interfered with Blizzard's contracts. After Blizzard used Warden to ban a majority of Glider users in September 2005, MDY programmed Glider to be undetectable by Warden. Finally, Blizzard has proffered evidence that it was damaged by MDY's conduct.

Thus, Blizzard is entitled to summary judgment if there are no triable issues of material fact as to the fourth element of its tortious interference claim: whether MDY's actions were improper. To determine whether a defendant's conduct was improper, Arizona employs the seven-factor test of Restatement (Second) of Torts § 767. See Safeway, 106 P.3d at 1027; see also Wagenseller v. Scottsdale Mem'l Hosp., 147 Ariz. 370, 710 P.2d 1025, 1042-43 (1985), superseded in other respects by A.R.S. § 23-1501. The seven factors are (1) the nature of MDY's conduct, (2) MDY's motive, (3) Blizzard's interests with which MDY interfered, (4) the interests MDY sought to advance, (5) the social interests in protecting MDY's freedom of action and Blizzard's contractual [956] interests, (6) the proximity or remoteness of MDY's conduct to the interference, and (7) the relations between MDY and Blizzard. Id. A court should give greatest weight to the first two factors. Id. We conclude that summary judgment was inappropriate here, because on the current record, taking the facts in the light most favorable to MDY, the first five factors do not clearly weigh in either side's favor, thus creating a genuine issue of material fact.

1. Nature of MDY's conduct and MDY's motive

The parties have presented conflicting evidence with respect to these two most important factors. Blizzard's evidence tends to demonstrate that MDY helped Glider users gain an advantage over other WoW players by advancing automatically to a higher level of the game. Thus, MDY knowingly assisted Glider users to breach their contracts, and then helped to conceal those breaches from Blizzard. Blizzard's evidence also supports the conclusion that Blizzard was negatively affected by MDY's Glider sales, because Glider use: (1) distorts WoW's virtual economy by flooding it with excess resources; (2) interferes with WoW players' ability to interact with other human players in the virtual world; and (3) strains Blizzard's servers because bots spend more continuous time in-game than do human players. Finally, Blizzard introduced evidence that MDY's motive was its three and a half to four million dollar profit.

On the other hand, MDY proffered evidence that it created Glider in 2005, when Blizzard's ToU did not explicitly prohibit bots.^[21] Glider initially had no anti-detection features. MDY added these features only after Blizzard added Warden to WoW. Blizzard did not change the EULA or ToU to proscribe bots such as Glider explicitly until after MDY began selling Glider. Finally, MDY has introduced evidence that Glider enhances some players' experience of the game, including players who might otherwise not play WoW at all. Taking this evidence in the light most favorable to MDY, there is a genuine issue of material fact as to these factors.

2. Blizzard's interests with which MDY interferes; the interest that MDY seeks to advance; the social interest in protecting MDY's and Blizzard's respective interests

Blizzard argues that it seeks to provide its millions of WoW players with a particular role-playing game experience that excludes bots. It contends, as the district court determined, that MDY's interest depends on inducing Blizzard's customers to breach their contracts. In contrast, MDY argues that Glider is an innovative, profitable software program that has positively affected its users' lives by advancing them to WoW's more interesting levels. MDY has introduced evidence that Glider allows players with limited motor skills to continue to play WoW, improves some users' romantic relationships by reducing the time that they spend playing WoW, and allows users who work long hours to play WoW. We further note that, if the fact-finder decides that Blizzard did not ban bots at the time that MDY created Glider, the fact-finder might conclude that MDY had a legitimate interest in continuing to sell Glider. Again, the parties' differing [957] evidence creates a genuine issue of material fact that precludes an award of summary judgment.

3. Proximity of MDY's conduct to the interference; relationship between MDY and Blizzard

MDY's Glider sales are the but-for cause of Glider users' breach of the operative ToU. Moreover, Blizzard and MDY are not competitors in the online role-playing game market; rather, MDY's profits appear to depend on the continued popularity of WoW. Blizzard, however, chose not to authorize MDY to sell Glider to its users. Even accepting that these factors favor Blizzard, we do not think that they independently warrant a grant of summary judgment to Blizzard. As noted, we cannot hold that five of the seven "impropriety" factors compel a finding in Blizzard's favor at this stage, including the two (nature of MDY's conduct and MDY's motive) that the Arizona courts deem most important. Accordingly, we vacate the district court's grant of summary judgment to Blizzard.^[22]

B. Copyright Act preemption

MDY contends that Blizzard's tortious interference claim is preempted by the Copyright Act. The Copyright Act preempts state laws that confer rights equivalent to the exclusive rights of copyright under 17 U.S.C. § 106 (i.e., reproduction, distribution, public display, public performance, and creation of derivative works). 17 U.S.C. § 301(a). However, the Copyright Act does not preempt state law remedies with respect to "activities violating legal or equitable rights that are not equivalent to any of the exclusive rights [of copyright]." 17 U.S.C. § 301(b)(3).

Whether, in these circumstances, tortious interference with contract is preempted by the Copyright Act is a question of first impression in this circuit. However, we have previously addressed a similar tortious interference cause of action under California law and found it not preempted. See Altera Corp. v. Clear Logic, Inc., 424 F.3d 1079, 1089-90 (9th Cir.2005). In so holding, we relied on the Seventh Circuit's analysis in ProCD, 86 F.3d 1447, which explained that because contractual rights are not equivalent to the exclusive rights of copyright, the Copyright Act's preemption clause usually does not affect private contracts. Altera, 424 F.3d at 1089; see ProCD, 86 F.3d at 1454 ("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.'"). The Fourth, Fifth, and Eighth Circuits have also held that the Copyright Act does not preempt a party's enforcement of its contractual rights. See Nat'l Car Rental Sys., Inc. v. Comp. 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).

This action concerns the anti-bot provisions of ToU § 4(b)(ii) and (iii), which we have held are contract-enforceable covenants rather than copyright-enforceable conditions. We conclude that since Blizzard seeks to enforce contractual rights that are not equivalent to any of its exclusive rights of copyright, the Copyright Act does not preempt its tortious interference claim. Cf. Altera, 424 F.3d at 1089-90. Accordingly, we hold that Blizzard's tortious interference claim under Arizona law is not preempted by the Copyright Act, [958] but we vacate the grant of summary judgment because there are outstanding issues of material fact.^[23]

VII.

The district court found that Donnelly was personally liable for MDY's tortious interference with contract, secondary copyright infringement, and DMCA violations. We vacate the district court's decision because we determine that MDY is not liable for secondary copyright infringement and is liable under the DMCA only for violation of § 1201(a)(2) with respect to WoW's dynamic non-literal elements. In addition, we conclude that summary judgment is inappropriate as to Blizzard's claim for tortious interference with contract under Arizona law. Accordingly, on remand, the district court shall reconsider the issue of Donnelly's personal liability.^[24] The district court's decision is VACATED and the case is REMANDED to the district court for further proceedings consistent with this opinion.

Each side shall bear its own costs.

[1] Alternatively, MDY asks that we determine whether there are any genuine issues of material fact that warrant a remand for trial on Blizzard's secondary copyright infringement claims. We find none.

[2] See also S.O.S., 886 F.2d at 1089 (remanding for infringement determination where licensee exceeded the license's scope by preparing a modified version of software programs without licensor's authorization); LGS Architects, Inc. v. Concordia Homes, Inc., 434 F.3d 1150, 1154-57 (9th Cir.2006) (licensor likely to prove infringement where licensee used architectural plans for project outside the license's scope, where licensee's use may have included unauthorized reproduction, distribution, and public display of the plans); Frank Music Corp. v. Metro-Goldwyn-Mayer, Inc., 772 F.2d 505, 511 (9th Cir. 1985) (hotel infringed copyright by publicly performing copyrighted music with representations of movie scenes, where its public performance license expressly prohibited the use of accompanying visual representations).

[3] A copyright holder may wish to enforce violations of license agreements as copyright infringements for several reasons. First, breach of contract damages are generally limited to the value of the actual loss caused by the breach. See 24 Richard A. Lord, Williston on Contracts § 65:1 (4th ed.2007). In contrast, copyright damages include the copyright owner's actual damages and the infringer's actual profits, or statutory damages of up to $150,000 per work. 17 U.S.C. § 504; see Frank Music Corp. v. MGM, Inc., 772 F.2d 505, 512 n. 5 (9th Cir.1985). Second, copyright law offers injunctive relief, seizure of infringing articles, and awards of costs and attorneys' fees. 17 U.S.C. §§ 502-03, 505. Third, as amicus Software & Information Industry Association highlights, copyright law allows copyright owners a remedy against "downstream" infringers with whom they are not in privity of contract. See ProCD, Inc., 86 F.3d at 1454.

[4] A licensee arguably may commit copyright infringement by continuing to use the licensed work while failing to make required payments, even though a failure to make payments otherwise lacks a nexus to the licensor's exclusive statutory rights. We view payment as sui generis, however, because of the distinct nexus between payment and all commercial copyright licenses, not just those concerning software.

[5] 17 U.S.C. § 106; see also Jay Dratler, Cyberlaw: Intellectual Prop. in the Digital Millennium, § 1.02 (2009) (stating that the DMCA's "protection is also quite different from the traditional exclusive rights of the copyright holder . . . [where the] exclusive rights never implicated access to the work, as such").

[6] Perhaps for this reason, Congress did not list descrambling and decrypting as circumventing acts that would violate § 1201(b)(1). See 17 U.S.C. § 1201(b)(2)(A).

[7] For instance, pursuant to § 1201(a), the Library of Congress recently approved circumvention of the technological measures contained on the iPhone and similar wireless phone handsets known as "smartphones," in order to allow users to install and run third-party software applications on these phones. See http://www.copyright.gov/fedreg/2010/75fr 43825.pdf.

[8] In addition to these four textual differences, we note that § 1201(a)(2) prohibits the circumvention of "a technological measure," and § 1201(b)(1) prohibits the circumvention "of protection afforded by a technological measure." In our view, these terms have the same meaning, given the presumption that a "legislative body generally uses a particular word with a consistent meaning in a given context." Graham County Soil & Water Conservation Dist. v. United States ex rel. Wilson, ___ U.S. ___, 130 S.Ct. 1396, 176 L.Ed.2d 225, (2010) (quoting Erlenbaugh v. United States, 409 U.S. 239, 243, 93 S.Ct. 477, 34 L.Ed.2d 446 (1972)) (internal quotation marks omitted).

[9] Indeed, the House Commerce Committee proposed, albeit unsuccessfully, to move § 1201 out of Title 17 altogether "because these regulatory provisions have little, if anything, to do with copyright law. The anticircumvention provisions (and the accompanying penalty provisions for violations of them) would be separate from, and cumulative to, the existing claims available to copyright owners." H.R.Rep. No. 105-551 (1998), pt. 2, at 23-24.

[10] The Copyright Office has also suggested that § 1201(a) creates a new access control right independent from copyright infringement, by expressing its view that the fair use defense to traditional copyright infringement does not apply to violations of § 1201(a)(1). U.S. Copyright Office, The Digital Millennium Copyright Act of 1998: U.S. Copyright Office Summary 4 (1998), available at http://www. copyright.gov/legislation/dmca.pdf ("Since the fair use doctrine is not a defense to the act of gaining unauthorized access to a work, the act of circumventing a technological measure in order to gain access is prohibited.").

[11] The Fifth Circuit in its subsequently withdrawn opinion in MGE UPS Systems, Inc. v. GE Consumer and Industrial, Inc., 95 U.S.P.Q.2d 1632, 1635 (5th Cir.2010), embraced the Federal Circuit's approach in Chamberlain. However, its revised opinion, 622 F.3d 361 (5th Cir.2010), avoids the issue by determining that MGE had not shown circumvention of its software protections. Notably, the revised opinion does not cite Chamberlain.

[12] Like the Chamberlain court, we need not and do not reach the relationship between fair use under § 107 of the Copyright Act and violations of § 1201. Chamberlain, 381 F.3d at 1199 n. 14. MDY has not claimed that Glider use is a "fair use" of WoW's dynamic non-literal elements. Accordingly, we too leave open the question whether fair use might serve as an affirmative defense to a prima facie violation of § 1201. Id.

[13] Copyright misuse is an equitable defense to copyright infringement that denies the copyright holder the right to enforce its copyright during the period of misuse. Practice Mgmt. Info. Corp. v. Am. Med. Ass'n, 121 F.3d 516, 520 (9th Cir.1997). Since we have held that § 1201(a) creates a right distinct from copyright infringement, we conclude that we need not address copyright misuse in this case.

[14] The Chamberlain court's assertion that the public has a constitutional right to appropriately access copyright works during the copyright term, 381 F.3d at 1200, cited Eldred v. Ashcroft, 537 U.S. 186, 204-05, 123 S.Ct. 769, 154 L.Ed.2d 683 (2003). The Eldred decision, however, was quoting the Supreme Court's previous decision in Sony Corp. of America v. Universal City Studios, Inc., which discussed the public's right of access after the copyright term. 464 U.S. 417, 429, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984) ("[T]he limited grant [of copyright] . . . is intended to motivate the creative activity of authors and inventors by the provision of a special reward, and to allow the public access to the products of their genius after the limited period of exclusive control has expired.").

[15] We also agree with the district court that there are no genuine issues of material fact on Blizzard's § 1201(a)(2) claim regarding WoW's literal elements.

[16] To "circumvent a technological measure" under § 1201(a) means to "descramble a scrambled work, to decrypt an encrypted work, or otherwise to avoid, bypass, remove, deactivate, or impair a technological measure, without the authority of the copyright owner." 17 U.S.C. § 1201(a)(3)(A) (emphasis added). A circuit split exists with respect to the meaning of the phrase "without the authority of the copyright owner." The Federal Circuit has concluded that this definition imposes an additional requirement on a § 1201(a)(2) plaintiff: to show that the defendant's circumventing device enables third parties to access the copyrighted work without the copyright owner's authorization. See Chamberlain, 381 F.3d at 1193. The Second Circuit has adopted a different view, explaining that § 1201(a)(3)(A) plainly exempts from § 1201(a) liability those whom a copyright owner authorizes to circumvent an access control measure, not those whom a copyright owner authorizes to access the work. Corley, 273 F.3d at 444 & n. 15; see also 321 Studios v. MGM Studios, Inc., 307 F.Supp.2d 1085, 1096 (N.D.Cal.2004) (same).

We find the Second Circuit's view to be the sounder construction of the statute's language, and conclude that § 1201(a)(2) does not require a plaintiff to show that the accused device enables third parties to access the work without the copyright owner's authorization. Thus, Blizzard has satisfied the "circumvention" element of a § 1201(a)(2) claim, because Blizzard has demonstrated that it did not authorize MDY to circumvent Warden.

[17] The statutory definition of the phrase "effectively control access to a work" does not require that an access control measure be strong or circumvention-proof. Rather, it requires an access control measure to provide some degree of control over access to a copyrighted work. As one district court has observed, if the word "effectively" were read to mean that the statute protects "only successful or efficacious technological means of controlling access," it would "gut" DMCA § 1201(a)(2), because it would "limit the application of the statute to access control measures that thwart circumvention, but withhold protection for those measures that can be circumvented." See Universal City Studios v. Reimerdes, 111 F.Supp.2d 294, 318 (S.D.N.Y. 2000) ("Defendants would have the Court construe the statute to offer protection where none is needed but to withhold protection precisely where protection is essential.").

[18] We note that the DMCA allows innocent violators to seek reduction or remittance of damages. See 17 U.S.C. § 1203(c)(5).

[19] No evidence establishes that Glider users engage in this practice, and Glider itself does not provide a software mechanism for taking screenshots or otherwise reproducing copyrighted WoW material.

[20] The district court permanently enjoined "MDY and Michael Donnelly from engaging in contributory or vicarious copyright infringement and from violating the DMCA with respect to Blizzard's copyrights in and rights to" WoW. Because we conclude that MDY is not liable under § 1201(b)(1), we vacate the aspect of the permanent injunction dealing with MDY's and Donnelly's § 1201(b)(1) liability.

[21] When MDY created Glider in 2005, Blizzard's ToU prohibited the use of "cheats" and "unauthorized third-party software" in connection with WoW. The meaning of these contractual terms, including whether they prohibit bots such as Glider, is ambiguous. In Arizona, the construction of ambiguous contract provisions is a jury question. See Clark v. Compania, Ganadera de Cananea, S.A., 94 Ariz. 391, 385 P.2d 691, 697-98 (1963).

[22] Because the district court entered a permanent injunction based on MDY's liability for tortious interference, we also vacate that permanent injunction.

[23] Because we determine that there are triable issues of fact, we need not, and do not, address MDY's further contentions: that (1) Blizzard has unclean hands because it changed the ToU to ban bots after this litigation began; and (2) MDY is not liable for tortious interference because it only "honestly persuaded" people to buy Glider.

[24] If MDY is found liable at trial for tortious interference with contract, the district court may consider Donnelly's personal liability for that tortious interference. Moreover, the district court may determine whether Donnelly is personally liable for MDY's violation of DMCA § 1201(a)(2). In light of the foregoing disposition regarding Donnelly's personal liability, we also vacate in toto the district court's permanent injunction against Donnelly, though the district court may consider the propriety of an injunction against Donnelly if it finds him liable for MDY's § 1201(a)(2) violations or for tortious interference with contract.

[1375] Victoria K. Hall, Law Office of Victoria K. Hall, of Bethesda, MD, argued for plaintiff-appellant.

R. Scott Jerger, Field Jerger LLP, of Portland, OR, argued for defendants-appellees.

Anthony T. Falzone, Stanford Law School, Center for Internet and Society, of Stanford, CA, for amici curiae Creative Commons Corporation, et al. With him on the brief was Christopher K. Ridder.

Before MICHEL, Chief Judge, PROST, Circuit Judge, and HOCHBERG,^[*] District Judge.

HOCHBERG, District Judge.

We consider here the ability of a copyright holder to dedicate certain work to free public use and yet enforce an "open source" copyright license to control the future distribution and modification of that work. Appellant Robert Jacobsen ("Jacobsen") appeals from an order denying a motion for preliminary injunction. Jacobsen v. Katzer, No. 06-CV-01905 JSW, 2007 WL 2358628 (N.D.Cal. Aug. 17, 2007). Jacobsen holds a copyright to computer programming [1376] code. He makes that code available for public download from a website without a financial fee pursuant to the Artistic License, an "open source" or public license. Appellees Matthew Katzer and Kamind Associates, Inc. (collectively "Katzer/Kamind") develop commercial software products for the model train industry and hobbyists. Jacobsen accused Katzer/Kamind of copying certain materials from Jacobsen's website and incorporating them into one of Katzer/Kamind's software packages without following the terms of the Artistic License. Jacobsen brought an action for copyright infringement and moved for a preliminary injunction.

The District Court held that the open source Artistic License created an "intentionally broad" nonexclusive license which was unlimited in scope and thus did not create liability for copyright infringement. The District Court reasoned:

The plaintiff claimed that by modifying the software the defendant had exceeded the scope of the license and therefore infringed the copyright. Here, however, the JMRI Project license provides that a user may copy the files verbatim or may otherwise modify the material in any way, including as part of a larger, possibly commercial software distribution. The license explicitly gives the users of the material, any member of the public, "the right to use and distribute the [material] in a more-or-less customary fashion, plus the right to make reasonable accommodations." The scope of the nonexclusive license is, therefore, intentionally broad. The condition that the user insert a prominent notice of attribution does not limit the scope of the license. Rather, Defendants' alleged violation of the conditions of the license may have constituted a breach of the nonexclusive license, but does not create liability for copyright infringement where it would not otherwise exist.

Jacobsen, 2007 WL 2358628 at *7 (internal citations omitted).

On this basis, the District Court denied the motion for a preliminary injunction. We vacate and remand.

I.

Jacobsen manages an open source software group called Java Model Railroad Interface ("JMRI"). Through the collective work of many participants, JMRI created a computer programming application called DecoderPro, which allows model railroad enthusiasts to use their computers to program the decoder chips that control model trains. DecoderPro files are available for download and use by the public free of charge from an open source incubator website called SourceForge; Jacobsen maintains the JMRI site on SourceForge. The downloadable files contain copyright notices and refer the user to a "COPYING" file, which clearly sets forth the terms of the Artistic License.

Katzer/Kamind offers a competing software product, Decoder Commander, which is also used to program decoder chips. During development of Decoder Commander, one of Katzer/Kamind's predecessors or employees is alleged to have downloaded the decoder definition files from DecoderPro and used portions of these files as part of the Decoder Commander software. The Decoder Commander software files that used DecoderPro definition files did not comply with the terms of the Artistic License. Specifically, the Decoder Commander software did not include (1) the author' names, (2) JMRI copyright notices, (3) references to the COPYING file, (4) an identification of SourceForge or JMRI as the original source of the definition files, and (5) a description of how the files or computer code had been changed from the original source code. The Decoder Commander software also changed [1377] various computer file names of Decoder-Pro files without providing a reference to the original JMRI files or information on where to get the Standard Version.^[1]

Jacobsen moved for a preliminary injunction, arguing that the violation of the terms of the Artistic License constituted copyright infringement and that, under Ninth Circuit law, irreparable harm could be presumed in a copyright infringement case. The District Court reviewed the Artistic License and determined that "Defendants' alleged violation of the conditions of the license may have constituted a breach of the nonexclusive license, but does not create liability for copyright infringement where it would not otherwise exist." Id. at *7. The District Court found that Jacobsen had a cause of action only for breach of contract, rather than an action for copyright infringement based on a breach of the conditions of the Artistic License. Because a breach of contract creates no presumption of irreparable harm, the District Court denied the motion for a preliminary injunction.

Jacobsen appeals the finding that he does not have a cause of action for copyright infringement. Although an appeal concerning copyright law and not patent law is rare in our Circuit, here we indeed possess appellate jurisdiction. In the district court, Jacobsen's operative complaint against Katzer/Kamind included not only his claim for copyright infringement, but also claims seeking a declaratory judgment that a patent issued to Katzer is not infringed by Jacobsen and is invalid. Therefore the complaint arose in part under the patent laws. See 28 U.S.C. § 2201(a); Golan v. Pingel Enter., 310 F.3d 1360, 1367 (Fed.Cir.2002) (explaining that "[i]n the context of a complaint seeking a declaration of noninfringement, the action threatened by the declaratory defendant. . . would be an action for patent infringement," and "[s]uch an action clearly arises under the patent laws"). Thus the district court's jurisdiction was based, at least in part, on 28 U.S.C. § 1338(a) as it relates to the patent laws, and we have appellate jurisdiction under 28 U.S.C. § 1292(c)(1). See 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, plant variety protection, copyrights and trademarks."); id. at § 1295(a)(1) (The Federal Circuit shall have exclusive jurisdiction "of an appeal from a final decision of a district court of the United States" if (1) "the jurisdiction of that court was based, in whole or in part, on section 1338 of this title" and (2) the case is not "a case involving a claim arising under any Act of Congress relating to copyrights, exclusive rights in mask works, or trademarks and no other claims under section 1338(a)."); id. at § 1292(c)(1) (Federal Circuit shall have jurisdiction over appeals from interlocutory orders of the district courts refusing injunctions "in any case over which the court would have jurisdiction of an appeal under section 1295").

II.

This Court looks to the interpretive law of the regional circuit for issues [1378] not exclusively assigned to the Federal Circuit. Hutchins v. Zoll Med. Corp., 492 F.3d 1377, 1383 (Fed.Cir.2007). Under Ninth Circuit law, an order granting or denying a preliminary injunction will be reversed only if the district court relied on an erroneous legal premise or abused its discretion. Wright v. Rushen, 642 F.2d 1129, 1132 (9th Cir.1981). A district court's order denying a preliminary injunction is reversible for factual error only when the district court rests its conclusions on clearly erroneous findings of fact. Sports Form, Inc. v. United Press Int'l, Inc., 686 F.2d 750, 753 (9th Cir.1982).

In determining whether to issue a preliminary injunction, the Ninth Circuit requires demonstration of (1) a combination of probability of success on the merits and the possibility of irreparable harm; or (2) serious questions going to the merits where the balance of hardships tips sharply in the moving party's favor. Perfect 10, Inc. v. Amazon.com, Inc., 487 F.3d 701, 713-14 (9th Cir.2007); Dep't of Parks & Recreation v. Bazaar Del Mundo, Inc., 448 F.3d 1118, 1123 (9th Cir.2006). In cases involving copyright claims, where a copyright holder has shown likelihood of success on the merits of a copyright infringement claim, the Ninth Circuit has held that irreparable harm is presumed. LGS Architects, Inc. v. Concordia Homes of Nev., 434 F.3d 1150, 1155-56 (9th Cir. 2006). But see MGM Studios, Inc. v. Grokster, Ltd., 518 F.Supp.2d 1197, 1212 (C.D.Cal.2007) (noting that "the longstanding rule that irreparable harm can be a presumed after a showing of likelihood of success for purposes of a copyright preliminary injunction motion may itself have to be reevaluated in light of eBay [Inc. v. MercExchange, L.L.C., 547 U.S. 388, 126 S.Ct. 1837, 164 L.Ed.2d 641 (2006)]"). Thus, for a preliminary injunction to issue, Jacobsen must either show (1) a likelihood of success on the merits of his copyright infringement claim from which irreparable harm is presumed; or (2) a fair chance of success on the merits and a clear disparity in the relative hardships that tips sharply in his favor.

A.

Public licenses, often referred to as "open source" licenses, are used by artists, authors, educators, software developers, and scientists who wish to create collaborative projects and to dedicate certain works to the public. Several types of public licenses have been designed to provide creators of copyrighted materials a means to protect and control their copyrights. Creative Commons, one of the amici curiae, provides free copyright licenses to allow parties to dedicate their works to the public or to license certain uses of their works while keeping some rights reserved.

Open source licensing has become a widely used method of creative collaboration that serves to advance the arts and sciences in a manner and at a pace that few could have imagined just a few decades ago. For example, the Massachusetts Institute of Technology ("MIT") uses a Creative Commons public license for an OpenCourseWare project that licenses all 1800 MIT courses. Other public licenses support the GNU/Linux operating system, the Perl programming language, the Apache web server programs, the Firefox web browser, and a collaborative web-based encyclopedia called Wikipedia. Creative Commons notes that, by some estimates, there are close to 100,000,000 works licensed under various Creative Commons licenses. The Wikimedia Foundation, another of the amici curiae, estimates that the Wikipedia website has more than 75,000 active contributors working on some 9,000,000 articles in more than 250 languages.

Open Source software projects invite computer programmers from around the [1379] world to view software code and make changes and improvements to it. Through such collaboration, software programs can often be written and debugged faster and at lower cost than if the copyright holder were required to do all of the work independently. In exchange and in consideration for this collaborative work, the copyright holder permits users to copy, modify and distribute the software code subject to conditions that serve to protect downstream users and to keep the code accessible.^[2] By requiring that users copy and restate the license and attribution information, a copyright holder can ensure that recipients of the redistributed computer code know the identity of the owner as well as the scope of the license granted by the original owner. The Artistic License in this case also requires that changes to the computer code be tracked so that downstream users know what part of the computer code is the original code created by the copyright holder and what part has been newly added or altered by another collaborator.

Traditionally, copyright owners sold their copyrighted material in exchange for money. The lack of money changing hands in open source licensing should not be presumed to mean that there is no economic consideration, however. There are substantial benefits, including economic benefits, to the creation and distribution of copyrighted works under public licenses that range far beyond traditional license royalties. For example, program creators may generate market share for their programs by providing certain components free of charge. Similarly, a programmer or company may increase its national or international reputation by incubating open source projects. Improvement to a product can come rapidly and free of charge from an expert not even known to the copyright holder. The Eleventh Circuit has recognized the economic motives inherent in public licenses, even where profit is not immediate. See Planetary Motion, Inc. v. Techsplosion, Inc., 261 F.3d 1188, 1200 (11th Cir.2001) (Program creator "derived value from the distribution [under a public license] because he was able to improve his Software based on suggestions sent by end-users. . . . It is logical that as the Software improved, more end-users used his Software, thereby increasing [the programmer's] recognition in his profession and the likelihood that the Software would be improved even further.").

B.

The parties do not dispute that Jacobsen is the holder of a copyright for certain materials distributed through his website.^[3] Katzer/Kamind also admits that portions of the DecoderPro software were copied, modified, and distributed as part of the Decoder Commander software. Accordingly, Jacobsen has made out a prima facie case of copyright infringement. Katzer/Kamind argues that they cannot be liable for copyright infringement because they had a license to use the material. Thus, the Court must evaluate whether the use by Katzer/Kamind was outside the scope of the license. See LGS Architects, 434 F.3d at 1156. The copyrighted materials in this case are downloadable by any user and are labeled to include a copyright notification and a COPYING file that includes the text of the Artistic License. [1380] The Artistic License grants users the right to copy, modify, and distribute the software:

provided that [the user] insert a prominent notice in each changed file stating how and when [the user] changed that file, and provided that [the user] do at least ONE of the following:

a) place [the user's] modifications in the Public Domain or otherwise make them Freely Available, such as by posting said modifications to Usenet or an equivalent medium, or placing the modifications on a major archive site such as ftp.uu.net, or by allowing the Copyright Holder to include [the user's] modifications in the Standard Version of the Package.

b) use the modified Package only within [the user's] corporation or organization.

c) rename any non-standard executables so the names do not conflict with the standard executables, which must also be provided, and provide a separate manual page for each nonstandard executable that clearly documents how it differs from the Standard Version, or

d) make other distribution arrangements with the Copyright Holder.

The heart of the argument on appeal concerns whether the terms of the Artistic License are conditions of, or merely covenants to, the copyright license. Generally, a "copyright owner who grants a nonexclusive license to use his copyrighted material waives his right to sue the licensee for copyright infringement" and can sue only for breach of contract. Sun Microsystems, Inc., v. Microsoft Corp., 188 F.3d 1115, 1121 (9th Cir.1999); Graham v. James, 144 F.3d 229, 236 (2d Cir.1998). If, however, a license is limited in scope and the licensee acts outside the scope, the licensor can bring an action for copyright infringement. See S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081, 1087 (9th Cir.1989); Nimmer on Copyright, § 1015[A] (1999).

Thus, if the terms of the Artistic License allegedly violated are both covenants and conditions, they may serve to limit the scope of the license and are governed by copyright law. If they are merely covenants, by contrast, they are governed by contract law. See Graham, 144 F.3d at 236-37 (whether breach of license is actionable as copyright infringement or breach of contract turns on whether provision breached is condition of the license, or mere covenant); Sun Microsystems, 188 F.3d at 1121 (following Graham; independent covenant does not limit scope of copyright license). The District Court did not expressly state whether the limitations in the Artistic License are independent covenants or, rather, conditions to the scope; its analysis, however, clearly treated the license limitations as contractual covenants rather than conditions of the copyright license.^[4]

Jacobsen argues that the terms of the Artistic License define the scope of the license and that any use outside of these restrictions is copyright infringement. Katzer/Kamind argues that these terms do not limit the scope of the license and are merely covenants providing contractual terms for the use of the materials, and that his violation of them is neither compensable in damages nor subject to injunctive relief. Katzer/Kamind's argument is premised upon the assumption that Jacobsen's copyright gave him no economic rights because he made his computer code available to the public at no charge. From [1381] this assumption, Katzer/Kamind argues that copyright law does not recognize a cause of action for non-economic rights, relying on Gilliam v. ABC, 538 F.2d 14, 20-21 (2d Cir.1976) ("American copyright law, as presently written, does not recognize moral rights or provide a cause of action for their violation, since the law seeks to vindicate the economic, rather than the personal rights of authors."). The District Court based its opinion on the breadth of the Artistic License terms, to which we now turn.

III.

The Artistic License states on its face that the document creates conditions: "The intent of this document is to state the conditions under which a Package may be copied." (Emphasis added.) The Artistic License also uses the traditional language of conditions by noting that the rights to copy, modify, and distribute are granted "provided that" the conditions are met. Under California contract law, "provided that" typically denotes a condition. See, e.g., Diepenbrock v. Luiz, 159 Cal. 716, 115 P. 743 (1911) (interpreting a real property lease reciting that when the property was sold, "this lease shall cease and be at an end, provided that the party of the first part shall then pay [certain compensation] to the party of the second part"; considering the appellant's "interesting and ingenious" argument for interpreting this language as creating a mere covenant rather than a condition; and holding that this argument "cannot change the fact that, attributing the usual and ordinary signification to the language of the parties, a condition is found in the provision in question") (emphases added).

The conditions set forth in the Artistic License are vital to enable the copyright holder to retain the ability to benefit from the work of downstream users. By requiring that users who modify or distribute the copyrighted material retain the reference to the original source files, downstream users are directed to Jacobsen's website. Thus, downstream users know about the collaborative effort to improve and expand the SourceForge project once they learn of the "upstream" project from a "downstream" distribution, and they may join in that effort.

The District Court interpreted the Artistic License to permit a user to "modify the material in any way" and did not find that any of the "provided that" limitations in the Artistic License served to limit this grant. The District Court's interpretation of the conditions of the Artistic License does not credit the explicit restrictions in the license that govern a downloader's right to modify and distribute the copyrighted work. The copyright holder here expressly stated the terms upon which the right to modify and distribute the material depended and invited direct contact if a downloader wished to negotiate other terms. These restrictions were both clear and necessary to accomplish the objectives of the open source licensing collaboration, including economic benefit. Moreover, the District Court did not address the other restrictions of the license, such as the requirement that all modification from the original be clearly shown with a new name and a separate page for any such modification that shows how it differs from the original.

Copyright holders who engage in open source licensing have the right to control the modification and distribution of copyrighted material. As the Second Circuit explained in Gilliam v. ABC, 538 F.2d 14, 21 (2d Cir.1976), the "unauthorized editing of the underlying work, if proven, would constitute an infringement of the copyright in that work similar to any other use of a work that exceeded the license granted by the proprietor of the copyright." Copyright licenses are designed to support the right to exclude; money damages [1382] alone do not support or enforce that right. The choice to exact consideration in the form of compliance with the open source requirements of disclosure and explanation of changes, rather than as a dollar-denominated fee, is entitled to no less legal recognition. Indeed, because a calculation of damages is inherently speculative, these types of license restrictions might well be rendered meaningless absent the ability to enforce through injunctive relief.

In this case, a user who downloads the JMRI copyrighted materials is authorized to make modifications and to distribute the materials "provided that" the user follows the restrictive terms of the Artistic License. A copyright holder can grant the right to make certain modifications, yet retain his right to prevent other modifications. Indeed, such a goal is exactly the purpose of adding conditions to a license grant.^[5] The Artistic License, like many other common copyright licenses, requires that any copies that are distributed contain the copyright notices and the COPYING file. See, e.g., 3-10 Nimmer on Copyright § 10.15 ("An express (or possibly an implied) condition that a licensee must affix a proper copyright notice to all copies of the work that he causes to be published will render a publication devoid of such notice without authority from the licensor and therefore, an infringing act.").

It is outside the scope of the Artistic License to modify and distribute the copyrighted materials without copyright notices and a tracking of modifications from the original computer files. If a down loader does not assent to these conditions stated in the COPYING file, he is instructed to "make other arrangements with the Copyright Holder." Katzer/Kamind did not make any such "other arrangements." The clear language of the Artistic License creates conditions to protect the economic rights at issue in the granting of a public license. These conditions govern the rights to modify and distribute the computer programs and files included in the downloadable software package. The attribution and modification transparency requirements directly serve to drive traffic to the open source incubation page and to inform downstream users of the project, which is a significant economic goal of the copyright holder that the law will enforce. Through this controlled spread of information, the copyright holder gains creative collaborators to the open source project; by requiring that changes made by downstream users be visible to the copyright holder and others, the copyright holder learns about the uses for his software and gains others' knowledge that can be used to advance future software releases.

IV.

For the aforementioned reasons, we vacate and remand. While Katzer/Kamind appears to have conceded that they did not comply with the aforedescribed conditions of the Artistic License, the District Court did not make factual findings on the likelihood of success on the merits in proving that Katzer/Kamind violated the conditions of the Artistic License. Having determined [1383] that the terms of the Artistic License are enforceable copyright conditions, we remand to enable the District Court to determine whether Jacobsen has demonstrated (1) a likelihood of success on the merits and either a presumption of irreparable harm or a demonstration of irreparable harm; or (2) a fair chance of success on the merits and a clear disparity in the relative hardships and tipping in his favor.^[6]

The judgment of the District Court is vacated and the case is remanded for further proceedings consistent with this opinion.

VACATED and REMANDED

[*] The Honorable Faith S. Hochberg, District Judge, United States District Court for the District of New Jersey, sitting by designation.

[1] Katzer/Kamind represents that all potentially infringing activities using any of the disputed material have been voluntarily ceased. The district court held that it could not find as a matter of law that Katzer/Kamind's voluntary termination of allegedly wrongful activity renders the motion for preliminary injunction moot because it could not find as a matter of law that it is absolutely clear that the alleged behavior could not recur. Jacobsen, 2007 WL 2358628 at *5. We agree that this matter is not moot. See also Adarand Constructors, Inc. v. Slater, 528 U.S. 216, 222, 120 S.Ct. 722, 145 L.Ed.2d 650 (2000) ("Voluntary cessation of challenged conduct moots a case . . . only if it is absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur." (emphasis in original)).

[2] For example, the GNU General Public License, which is used for the Linux operating system, prohibits downstream users from charging for a license to the software. See Wallace v. IBM Corp., 467 F.3d 1104, 1105-06 (7th Cir.2006).

[3] Jacobsen's copyright registration creates the presumption of a valid copyright. See, e.g., Triad Sys. Corp. v. SE Exp. Co., 64 F.3d 1330, 1335 (9th Cir.1995).

[4] The District Court held that "Defendants' alleged violation of the conditions of the license may have constituted a breach of the nonexclusive license . . . [and] the Court finds that Plaintiff's claim properly sounds in contract." Jacobsen, 2007 WL 2358628 at *7. Thus, despite the use of the word "conditions," the District Court treated the terms of the Artistic License as contractual covenants which did not limit the scope of the license.

[5] Open source licensing restrictions are easily distinguished from mere "author attribution" cases. Copyright law does not automatically protect the rights of authors to credit for copyrighted materials. See Gilliam, 538 F.2d at 20-21 ("American copyright law, as presently written, does not recognize moral rights or provide a cause of action for their violation, since the law seeks to vindicate the economic, rather than the personal rights of authors."); Graham, 144 F.3d at 236. Whether such rights are protected by a specific license grant depends on the language of the license. See County of Ventura v. Blackburn, 362 F.2d 515, 520 (9th Cir.1966) (copyright infringement found where the county removed copyright notices from maps licensed to it where the license granted the county "the right to obtain duplicate tracings" from photographic negatives that contained copyright notices).

[6] At oral argument, the parties admitted that there might be no way to calculate any monetary damages under a contract theory.

487 F.Supp.2d 593 (2007)

No. CIV.A.06 4925.

May 30, 2007.

[594] Jason A. Archinaco, Christopher Eric Ballod, White & Williams LLP, Philadelphia, PA, for Plaintiff.

Andrew J. Soven, Reed Smith, LLP, Philadelphia, PA, Scott D. Baker, Reed Smith LLP, San Francisco, CA, for Defendants.

[595] MEMORANDUM

EDUARDO C. ROBRENO, District Judge.

This case is about virtual property maintained on a virtual world on the Internet. Plaintiff, March Bragg, Esq., claims an ownership interest in such virtual property. Bragg contends that Defendants, the operators of the virtual world, unlawfully confiscated his virtual property and denied him access to their virtual world. Ultimately at issue in this case are the novel questions of what rights and obligations grow out of the relationship between the owner and creator of a virtual world and its resident-customers. While the property and the world where it is found are "virtual," the dispute is real.

Presently before the Court are Defendants' Motion to Dismiss for Lack of Personal Jurisdiction (doc. no. 2) and Motion to Compel Arbitration (doc. no. 3). For the reasons set forth below, the motions will be denied.

I. BACKGROUND

A. Second Life

The defendants in this case, Linden Research Inc. ("Linden") and its Chief Executive Officer, Philip Rosedale, operate a multiplayer role-playing game set in the virtual world^[1] known as "Second Life."^[2] Participants create avatars^[3] to represent themselves, and Second Life is populated by hundreds of thousands of avatars, whose interactions with one another are limited only by the human imagination.^[4] According to Plaintiff, many people "are now living large portions of their lives, forming friendships with others, building and acquiring virtual property, forming contracts, substantial business relationships and forming social organizations" in virtual worlds such as Second Life. Compl. ¶ 13. Owning property in and having access to this virtual world is, moreover, apparently important to the plaintiff in this case.

B. Recognition of Property Rights

In November 2003, Linden announced that it would recognize participants' full intellectual property protection for the digital content they created or otherwise owned in Second Life. As a result, Second Life avatars may now buy, own, and sell virtual goods ranging "from cars to homes to slot machines." Compl. ¶ 7.^[5] Most significantly [596] for this case, avatars may purchase "virtual land," make improvements to that land, exclude other avatars from entering onto the land, rent the land, or sell the land to other avatars for a profit. Assertedly, by recognizing virtual property rights, Linden would distinguish itself from other virtual worlds available on the Internet and thus increase participation in Second Life.

Defendant Rosedale personally joined in efforts to publicize Linden's recognition of rights to virtual property. For example, in 2003, Rosedale stated in a press release made available on Second Life's website that:

Until now, any content created by users for persistent state worlds, such as Everquest® or Star Wars Galaxies™, has essentially become the property of the company developing and hosting the world. . . . We believe our new policy recognizes the fact that persistent world users are making significant contributions to building these worlds and should be able to both own the content they create and share in the value that is created. The preservation of users' property rights is a necessary step toward the emergence of genuinely real online worlds.

Press Release, Linden Lab, Linden Lab Preserves Real World Intellectual Property Rights of Users of its Second Life Online Services (Nov. 14, 2003). After this initial announcement, Rosedale continued to personally hype the ownership of virtual property on Second Life. In an interview in 2004, for example, Rosedale stated: "The idea of land ownership and the ease with which you can own land and do something with it . . . is intoxicating. . . . Land ownership feels important and tangible. It's a real piece of the future." Michael Learmonth, Virtual Real Estate Boom Draws Real Dollars, USA Today, June 3, 2004. Rosedale recently gave an extended interview for Inc. magazine, where he appeared on the cover stating, "What you have in Second Life is real and it is yours. It doesn't belong to us. You can make money." Michael Fitzgerald, How Philip Rosedale Created Second Life, Inc., Feb. 2007.^[6]

Rosedale even created his own avatar and held virtual town hall meetings on Second Life where he made representations about the purchase of virtual land. Bragg Decl. ¶ 68. Bragg "attended" such meetings and relied on the representations that Rosedale made therein. Id.

C. Plaintiffs' Participation in Second Life

In 2005, Plaintiff Marc Bragg, Esq., signed up and paid Linden to participate in Second Life. Bragg claims that he was induced into "investing" in virtual land by representations made by Linden and Rosedale in press releases, interviews, and through the Second Life website. Bragg Decl. ¶¶ 4-10, 65-68. Bragg also paid Linden [597] real money as `tax" on his land.^[7] By April 2006, Bragg had not only purchased numerous parcels of land in his Second Life, he had also digitally crafted "fireworks" that he was able to sell to other avatars for a profit. Bragg also acquired other virtual items from other avatars.

The dispute ultimately at issue in this case arose on April 30, 2006, when Bragg acquired a parcel of virtual land named "Taessot" for $300. Linden sent Bragg an email advising him that Taessot had been improperly purchased through an "exploit." Linden took Taesot away. It then froze Bragg's account, effectively confiscating all of the virtual property and currency that he maintained on his account with Second Life.

Bragg brought suit against Linden and Rosedale in the Court of Common Pleas of Chester County, Pennsylvania, on October 3, 2006.^[8] Linden and Rosedale removed the case to this Court (doc, no. 1) and then, within a week, moved to compel arbitration (doe. no. 3).

II. MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION

Defendant Philip Rosedale moves to dismiss all claims asserted against him for lack of personal jurisdiction.

A. Legal Standards

A federal district court may exercise jurisdiction to the same extent as the state in which it sits; a state, in turn, may exercise jurisdiction over a non-resident defendant pursuant to its so-called "long-arm statute." Because the reach of Pennsylvania's long-arm statute "is coextensive with the limits placed on the states by the federal Constitution," the Court looks to federal constitutional doctrine to determine whether personal jurisdiction exists over Rosedale. Vetrotex Certainteed Corp. v. Consol. Fiber Glass Products Co., 75 F.3d 147, 150 (3d Cir.1996); 42 Pa. C.S.A. § 5322(b).

Personal jurisdiction can be established in two different ways: specific jurisdiction and general jurisdiction. See Helicopteros Nacionales de Colombia v. Hall, 466 U.S. 408, 414-16, 104 S.Ct. 1868, 80 L.Ed.2d 404 (1984). Specific jurisdiction is established when the basis of the "plaintiff's claim is related to or arises out of the defendant's contacts with the forum." Pennzoil Products Co. v. Colelli & Assoc., Inc., 149 F.3d 197, 201 (3d Cir.1998) (citations omitted). General jurisdiction, on the other hand, does not require the defendant's contacts with the forum state to be related to the underlying cause of action, Helicopteros, 466 U.S. at 414, 104 S.Ct. 1868, but the contacts must have been "continuous and systematic." Id. at 416, 104 S.Ct. 1868.

Bragg does not contend that general jurisdiction exists over Rosedale. Rather, he maintains that Rosedale's representations support specific personal jurisdiction [598] in this case.^[9] The Court therefore need only address whether specific jurisdiction exists.

In deciding whether specific personal jurisdiction is appropriate, a court must first determine whether the defendant has the minimum contacts with the forum necessary to have reasonably anticipated being haled into court there. Pennzoil, 149 F.3d at 201 (citing World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 100 S.Ct. 559, 62 L.Ed.2d 490 (1980)). Second, once minimum contacts have been established, a court may inquire whether the assertion of personal jurisdiction would comport with traditional conceptions of fair play and substantial justice. Id. at 201 (citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476, 105 S.Ct. 2174, 85 L.Ed.2d 528 (1985) and Int'l Shoe Co. v. Washington, 326 U.S. 310, 320, 66 S.Ct. 154, 90 L.Ed. 95 (1945)). The first step is mandatory, but the second step is discretionary. Id.

After a defendant has raised a jurisdictional defense, as Rosedale has in this case, the plaintiff bears the burden of coming forward with enough evidence to establish, with reasonable particularity, sufficient contacts between the defendant and the forum. Provident Nat'l Bank v. Cal. Fed. Savings & Loan Assoc., 819 F.2d 434, 437 (3d Cir.1987). "The plaintiff must sustain its burden of proof in establishing jurisdictional facts through sworn affidavits or other competent evidence. . . . [A]t no point may a plaintiff rely on the bare pleadings alone in order to withstand a defendant's Rule 12(b)(2) motion to dismiss for lack of in personam jurisdiction." Patterson by Patterson v. F.B.I., 893 F.2d 595, 604 (3d Cir.1990). "Once the motion is made, plaintiff must respond with actual proofs not mere allegations." Id.

B. Application

In support of the Court's exercising personal jurisdiction over Rosedale, Bragg relies on various representations that Rosedale personally made in the media "to a national audience" regarding ownership of virtual property in Second Life. Bragg maintains that Rosedale made these representations to induce Second Life participants to purchase virtual property and that such representations in fact induced Bragg to do so. Bragg also relies on the fact that he "attended" town hall meetings hosted in Second Life where he listened to Rosedale make statements about the purchase of virtual land.

1. Minimum Contacts

The first question the Court must answer, then, is whether Rosedale has minimum contacts with Pennsylvania sufficient to support specific personal jurisdiction. The Court holds that Rosedale's representations — which were made as part of a national campaign to induce persons, including Bragg, to visit Second Life and purchase virtual property — constitute sufficient contacts to exercise specific personal jurisdiction over Rosedale.

Wellness Publishing v. Barefoot provides useful guidance, albeit in a non-precedential opinion. 128 Fed.Appx. 266 (3d Cir.2005). In that case, the Third Circuit recognized that an advertising campaign of national scope could not, on its own, provide the basis for general jurisdiction in any state where advertisements were aired, but that under the appropriate circumstances, such contacts could provide the basis of exercising specific jurisdiction over a defendant in a particular state [599] where the advertisements were aired. Id.^[10]

In Barefoot, a group of defendants produced infomercials for calcium supplements and related products that ran nationally, including in New Jersey. Id. at 269. The defendants also processed telephone orders for products promoted in the infomercials. Id. The District Court dismissed the plaintiffs case for lack of personal jurisdiction in New Jersey. Id. at 270. On appeal, however, the Third Circuit reversed, holding that specific personal jurisdiction existed over the defendants that ran the infomercials in New Jersey. Id. In doing so, it analogized the defendants' promotional activities to the maintenance of a website. Id. (citing Toys "R" Us, Inc. v. Step Two, S.A., 318 F.3d 446, 452 (3d Cir.2003)).

Under the Third Circuit's jurisdictional analysis of websites, if a defendant website operator intentionally targets the site to the forum state and/or knowingly conducts business with forum state residents via the site, then the "purposeful availment" requirement is satisfied. Toys "R" Us, 318 F.3d at 452. In addition, a court may consider the level of interactivity of the website and the defendant's related non-Internet activities as part of the "purposeful availment" calculus. Id. at 453.

The Third Circuit applied this same jurisdictional analysis in Barefoot to hold that the defendants who ran the infomercials in New Jersey could be subject to personal jurisdiction in that state. 128 Fed.Appx. at 270. First, it reasoned that, as with the mere operation of a website, "an advertising campaign with national scope does not by itself give rise to general jurisdiction in a state where it is broadcast." Id. That principle was inapplicable, however, because it involved precedents where the plaintiffs injuries were unrelated to the broad case of the advertisement in the forum state, which were therefore inapplicable to a specific jurisdiction inquiry. Id. (citing Gehling v. St. George's Sch. of Med., Ltd., 773 F.2d 539 (3d Cir.1985); Giangola v. Walt Disney World Co., 753 F.Supp. 148 (D.N.J.1990)). Second, and most important for this case, the Third Circuit reasoned:

[T]he advertisement in this case induced viewers to establish direct contact with [the defendant] by calling its toll-free phone number to place orders. This inducement destroys any semblance of the passive advertising addressed in Giangola, 753 F.Supp. at 155-56, which expressly distinguished advertisements in the form of direct mail solicitations. For purposes of jurisdictional analysis, an infomercial broadcast that generates telephone customers is the equivalent of an interactive web-site through which a defendant purposefully directs its commercial [600] efforts towards residents of a forum state.

Id. at 270 (some internal citations omitted).

Barefoot's analysis applies to the facts of this case. First, Bragg has provided evidence that Rosedale helped orchestrate a campaign at the national level to induce persons, including Bragg, to purchase virtual land and property on Second Life. As part of the national campaign, Bragg made representations that were distributed nationally, including in Pennsylvania. Moreover, this case does not involve "injuries unrelated to the broadcast of the advertisement in the forum state," as was the case in Gehling or Giangola.^[11]Cf. Barefoot, 128 Fed.Appx. at 270. Rather, Rosedale's representations constitute part of the alleged fraudulent and deceptive conduct at the heart of Bragg's claims in this case.

Second, like the role of the infomericals in Barefoot, Rosedale's personal role was to "bait the hook" for potential customers to make more interactive contact with Linden by visiting Second Life's website. Rosedale's activity was designed to generate additional traffic inside Second Life. He was the hawker sitting outside Second Life's circus tent, singing the marvels of what was contained inside to entice customers to enter. Once inside Second Life, participants could view virtual property, read additional materials about purchasing virtual property, interact with other' avatars who owned virtual property, and, ultimately, purchase virtual property themselves. Significantly, participants could even interact with Rosedale's avatar on Second Life during town hall meetings that he held on the topic of virtual property.

Viewed in context, Rosedale's marketing efforts in this case are more "interactive" rather than "passive." Cf. Barefoot, 128 Fed.Appx. at 270 (emphasizing that "interactive" contacts are more significant for jurisdictional purposes than "passive" contacts). Thus, they provide more than just "tangential" support for specific personal jurisdiction. See Mesalic Fiberfloat Corp., 897 F.2d 696, 700 n. 10 (3d Cir.1990) (noting that a defendant's marketing strategy, including advertising in national publications distributed in the forum, provided only "tangential" support for specific personal jurisdiction).^[12]

The Court's decision is also consistent with the decisions of courts in other jurisdictions which have extended specific jurisdiction over defendants who have made [601] representations in national media when the dispute arose directly from those representations. See, e.g., Indianapolis Colts, Inc. v. Metro. Baltimore Football Club Ltd. P'ship, 34 F.3d 410, 412 (7th Cir.1994) (holding that national television broadcast into the forum state was sufficient for personal jurisdiction); Caddy Prods., Inc. v. Greystone Intl., Inc., No. 05-301, 2005 WL 3216689, *1-2, 2005 U.S. Dist. LEXIS 34467, *4-5 (D.Minn.2005) (holding that the defendant had sufficient contacts to support the exercise of specific personal jurisdiction, which included the defendant's marketing efforts, such as attending a national trade show and advertising in a national trade publication, coupled with defendant's shipment of the product into the forum state); Hollar v. Philip Morris Inc., 43 F.Supp.2d 794, 802-03 (N.D.Ohio 1998) (holding specific personal jurisdiction existed over tobacco company that made false representations regarding smoking to a national audience, which induced plaintiffs to continue smoking; it is "axiomatic that what is distributed and broadcast nationwide will be seen and heard in all states.") (internal quotation omitted); Thomas Jackson Publ'g Inc. v. Buckner, 625 F.Supp. 1044, 1046 (D.Neb.1985) (holding that performance of songs and interviews on national television supported finding of specific personal jurisdiction over a defendant whose songs infringed the plaintiff's copyright).

Rosedale relies heavily on cases from other jurisdictions for the proposition that his statements do not subject him to personal jurisdiction in Pennsylvania because none of the statements were targeted directly at Pennsylvania as opposed to the nation at large. See Dfts.' Reply at 3. Rosedale's first cited case, however, involves representations specifically targeted at one state, as opposed to a national audience, that merely could be accessed worldwide because they were available on the Internet. See Young v. New Haven Advocate, 315 F.3d 256, 263 (4th Cir.2002) ("[T]he fact that the newspapers' websites could be accessed anywhere, including Virginia, does not by itself demonstrate that the newspapers were intentionally directing their website content to a Virginia audience. Something more than posting and accessibility is needed to indicate that the newspapers purposefully (albeit electronically) directed their activity in a substantial way to the forum state . . ."). Rosedale did not target his representations at any particular state, but rather to the nation at large. The other two cases cited by Rosedale are also distinguishable, because they involved isolated statements that were not, as is the case here, an integral part of a larger publicity campaign of national scope. See Revell v. Lidov, 317 F.3d 467, 475 (5th Cir.2002) (finding that the court lacked personal jurisdiction over author of an Internet bulletin board posting "because the post to the bulletin board was presumably directed at the entire world" and was not "directed specifically at Texas"); Griffis v. Luban, 646 N.W.2d 527, 536 (Minn.2002) ("The mere fact that [the defendant], who posted allegedly defamatory statements about the plaintiff on the Internet, knew that [the plaintiff] resided and worked in Alabama is not sufficient to extend personal jurisdiction over [the defendant] in Alabama, because that knowledge does not demonstrate targeting of Alabama as the focal point of the . . . statements."). See also Growden v. Ed Bowlin & Assoc., Inc., 733 F2d 1149, 1151-52 & n. 4 (5th Cir.1984) (holding no personal jurisdiction existed based on ads in two national publications for the sale of an airplane, the crash of which was the subject of the litigation).

Accordingly, the Court finds that Rosedale has minimum contacts with Pennsylvania [602] sufficient to support specific personal jurisdiction.

2. Fair Play and Substantial Justice

The Court also finds that the exercise of personal jurisdiction in this case would not offend due process. See Lehigh Coal, 56 F.Supp.2d at 569 (citing Burger King, 471 U.S. at 477, 105 S.Ct. 2174). The factors to be considered in making this fairness determination are: (1) the burden on the defendant, (2) the forum State's interest in adjudicating the dispute, (3) the plaintiff's interest in obtaining convenient and effective relief, (4) the interstate judicial system's interest in obtaining the most efficient resolution of controversies and (5) the shared interest of the several states in furthering fundamental substantive social policies. Id.

Nothing on the record counsels strongly against jurisdiction based on considerations of any undue burden to Rosedale. Rosedale has not claimed that he does not have the financial ability or that he would otherwise be irreparably prejudiced by litigating this case here in Pennsylvania. The Court also notes that Rosedale has able counsel on both coasts, i.e., in both his home state of California and here in Pennsylvania. Additionally, Pennsylvania has a substantial interest in protecting its residents from allegedly misleading representations that induce them to purchase virtual property. Pennsylvania also has an interest, more particularly, in vindicating Bragg's individual rights. Finally, Bragg may obtain convenient and effective relief in Pennsylvania, the state in which he initiated this action.

C. Fiduciary Shield Doctrine

The Court must also address Rosedale's argument that, because Rosedale made the alleged representations in his corporate capacity as Chief Executive Officer of Linden, he cannot be subject to personal jurisdiction based on those representations.

The applicability of this so called "fiduciary shield" doctrine is in dispute. Although it has not definitively spoken on the issue, the Supreme Court appears to have rejected the proposition that this doctrine is a requirement of federal due process. See Calder v. Jones, 465 U.S. 783, 790, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984) ("[Defendants'] status as employees does not somehow shield them from jurisdiction. Each defendant's contacts with the forum state must be assessed individually."); Keeton v. Hustler, 465 U.S. 770, 781 n. 13, 104 S.Ct. 1473, 79 L.Ed.2d 790 (1984) ("We today reject the suggestion that employees who act in their official capacity are somehow shielded from suit in their individual capacity."). Moreover, neither the Pennsylvania Supreme Court nor the Third Circuit has squarely addressed the applicability of the fiduciary shield doctrine. See, e.g., Irons v. Transcor Am., 2002 WL 32348317, at *5 (E.D.Pa.2002).

Fortunately, it is not necessary to untangle the confused knot of caselaw surrounding the fiduciary shield's status within the Third Circuit.^[13] The Court will, in [603] Gordian fashion, cut directly through the knot, because even if the doctrine did apply, the fiduciary shield would not protect Rosedale under these circumstances.

When corporate agents invoke the fiduciary shield as a protection, courts "have held that in order to hold such a defendant subject to personal jurisdiction, it must be shown that [1] the defendant had a major role in the corporate structure, [2] the quality of his contacts with the state were significant, and [3] his participation in the tortious conduct alleged was extensive." TJS Brokerage, 940 F.Supp. at 789. First, as to his role in the company, Rosedale acted as the CEO and public face of Linden. Second, as to the quality of Rosedale's contacts, Rosedale made numerous representations that were broadcast through the national media and through the Internet, via town hall meetings, that reached Pennsylvania. These were not isolated statements, but part of a national campaign to distinguish Second Life from other virtual worlds and induce the purchase of virtual property. Third, and finally, Rosedale did not simply direct others to publicize virtual property on Second Life. He personally participated in creating such publicity and its dissemination. Representations made as part of that publicity are at the heart of Bragg's case.^[14]

Even if the fiduciary shield doctrine were expressly recognized by the Third Circuit, Rosedale's representations, though made on the behalf of Linden, would still count as contacts in the analysis of whether the Court may exercise personal jurisdiction over him. Therefore, the Court will exercise personal jurisdiction over Rosedale.

III. MOTION TO COMPEL ARBITRATION

Defendants have also filed a motion to compel arbitration that seeks to dismiss this action and compel Bragg to submit his claims to arbitration according to the Rules of the International Chamber of Commerce ("ICC") in San Francisco.

A. Relevant Facts

Before a person is permitted to participate in Second Life, she must accept the Terms of Service of Second Life (the "TOS") by clicking a button indicating acceptance of the TOS. Bragg concedes that he clicked the "accept" button before accessing Second Life. Compl. ¶ 126. Included in the TOS are a California choice of law provision, an arbitration provision, and forum selection clause. Specifically, located in the fourteenth line of the thirteenth paragraph under the heading "GENERAL PROVISIONS," and following provisions regarding the applicability [604] of export and import laws to Second Life, the following language appears:

Any dispute or claim arising out of or in connection with this Agreement or the performance, breach or termination thereof, shall be finally settled by binding arbitration in San Francisco, California under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with said rules. . . . Notwithstanding the foregoing, either party may apply to any court of competent jurisdiction for injunctive relief or enforcement of this arbitration provision without breach of this arbitration provision.

TOS ¶ 13.

B. Legal Standards

1. Federal law applies

The Federal Arbitration Act ("FAA") requires that the Court apply federal substantive law here because the arbitration agreement is connected to a transaction involving interstate commerce. State Farm Mut. Auto. Ins. Co. v. Coviello, 233 F.3d 710, 713 n. 1 (3d Cir.2000); Marciano v. MONY Life Ins. Co., 470 F.Supp.2d 518, 524 (E.D.Pa.2007) (Robreno, J.); see also Wright & Miller, Federal Practice and Procedure § 3569, at 173 (1984) ("[I]n a diversity suit . . ., the substantive rules contained in the [Federal Arbitration] Act, based as it is on the commerce and admiralty powers, are to be applied regardless of state law.").

Whether the arbitration agreement is connected to a transaction involving interstate commerce is a factual determination that must be made by the Court. State Farm, 233 F.3d at 713 n. 1. Here, Bragg is a Pennsylvania resident. Linden is a Delaware corporation headquartered in California. Rosedale is a California resident. Bragg entered into the TOS and purchased virtual land through the Internet on Second Life as a result of representations made on the national media. The arbitration agreement is clearly connected to interstate commerce, and the Court will apply the federal substantive law that has emerged from interpretation of the FAA.

2. The Legal Standard Under the FAA

Under the FAA, on the motion of a party, a court must stay proceedings and order the parties to arbitrate the dispute if the court finds that the parties have agreed in writing to do so. 9 U.S.C. §§ 3, 4, 6. A party seeking to compel arbitration must show (1) that a valid agreement to arbitrate exists between the parties and (2) that the specific dispute falls within the scope of the agreement. Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529, 532 (3d Cir.2005); PaineWebber, Inc. v. Hartmann, 921 F.2d 507, 511 (3d Cir.1990).

In determining whether a valid agreement to arbitrate exists between the parties, the Third Circuit has instructed district courts to give the party opposing arbitration "the benefit of all reasonable doubts and inferences that may arise," or, in other words, to apply the familiar Federal Rule of Civil Procedure 56(c) summary judgment standard. Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., Ltd., 636 F.2d 51, 54 & n. 9 (3d Cir.1980); see also Berkery v. Cross Country Bank, 256 F.Supp.2d 359, 364 n. 3 (E.D.Pa.2003) (Robreno, J.) (applying the summary judgment standard to a motion to compel arbitration). While there is a presumption that a particular dispute is within the scope of an arbitration agreement, Volt Info. Scis., Inc. v. Bd. of Trustees, 489 U.S. 468, 475, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989), there is no such "presumption" or "policy" that favors the existence of a valid agreement to arbitrate. Marciano, 470 F.Supp.2d at 525-26.

[605] C. Application

1. Unconscionabilty of the Arbitration Agreement

Bragg resists enforcement of the. TOS's arbitration provision on the basis that it is "both procedurally and substantively unconscionable and is itself evidence of defendants' scheme to deprive Plaintiff (and others) of both their money and their day in court." Pl.'s Resp. At 16.^[15]

Section 2 of the FAA provides that written arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. Thus, "generally applicable contract defenses, such as fraud, duress, or unconscionability, may be applied to invalidate arbitration agreements without contravening § 2." Doctor's Assocs. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996) (citations omitted). When determining whether such defenses might apply to any purported agreement to arbitrate the dispute in question, "courts generally . . . should apply ordinary state-law principles that govern the formation of contracts." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). Thus, the Court will apply California state law to determine whether the arbitration provision is unconscionable.^[16]

Under California law, unconscionability has both procedural and substantive components. Davis v. O'Melveny & Myers, 485 F.3d 1066, 1072-73 (9th Cir. 2007); Comb v. PayPal, Inc., 218 F.Supp.2d 1165, 1172 (N.D.Cal.2002). The procedural component can be satisfied by showing (1) oppression through the existence of unequal bargaining positions or (2) surprise through hidden terms common in the context of adhesion contracts. Comb, 218 F.Supp.2d at 1172. The substantive component can be satisfied by showing overly harsh or one-sided results that "shock the conscience." Id. The two elements operate on a sliding scale such that the more significant one is, the less significant the other need be. Id. at 1172; see Armendariz v. Foundation Health Psychcare Servs., Inc., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 690 (2000) ("[T]he more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa."). However, a claim of unconscionability cannot be determined merely by examining the face of the contract; there must be an inquiry into the circumstances under which the contract was executed, and the contract's purpose, and effect. Comb, 218 F.Supp.2d at 1172.

(a) Procedural Unconscionability

A contract or clause is procedurally unconscionable if it is a contract of adhesion. Comb, 218 F.Supp.2d at 1172; Flores v. Transamerica HomeFirst, Inc., 93 Cal.App.4th 846, 113 Cal.Rptr.2d 376, 381-82 (2001). A contract of adhesion, in [606] turn, is a "standardized contract, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it." Comb, 218 F.Supp.2d at 1172; Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690. Under California law, "the critical factor in procedural unconscionability analysis is the manner in which the contract or the disputed clause was presented and negotiated." Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1282 (9th Cir.2006). "When the weaker party is presented the clause and told to `take it or leave it' without the opportunity for meaningful negotiation, oppression, and therefore procedural unconscionability, are present." Id. (internal quotation and citation omitted); see also Martinez v. Master Prot. Corp., 118 Cal. App.4th 107, 12 Cal.Rptr.3d 663, 669 (2004) ("An arbitration agreement that is an essential part of a `take it or leave it' employment condition, without more, is procedurally unconscionable.") (citations omitted); O'Melveny & Myers, 485 F.3d 1066, 1074-75 (holding arbitration agreement presented on a take-it-or-leave-it basis was procedurally unconscionable, notwithstanding the fact that employee was provided three months to walk away from employment before agreement became effective).

The TOS are a contract of adhesion. Linden presents the TOS on a takeit-or-leave-it basis. A potential participant can either click "assent" to the TOS, and then gain entrance to Second Life's virtual world, or refuse assent and be denied access. Linden also clearly has superior bargaining strength over Bragg. Although Bragg is an experienced attorney, who believes he is expert enough to comment on numerous industry standards and the "rights" or participants in virtual worlds, see Pl.'s Resp., Ex. A ¶¶ 59-64, he was never presented with an opportunity to use his experience and lawyering skills to negotiate terms different from the TOS that Linden offered.

Moreover, there was no "reasonably available market alternatives [to defeat] a claim of adhesiveness." Cf. Dean Witter Reynolds, Inc. v. Superior Court, 211 Cal. App.3d 758, 259 Cal.Rptr. 789, 795 (1989) (finding no procedural unconscionability because there were other financial institutions that offered competing IRA's which lacked the challenged provision). Although it is not the only virtual world on the Internet, Second Life was the first and only virtual world to specifically grant its participants property rights in virtual land.

The procedural element of unconscionability also "focuses on . . . surprise." Gutierrez v. Autowest, Inc., 114 Cal.App.4th 77, 7 Cal.Rptr.3d 267, 275 (2003) (citations omitted). In determining whether surprise exists, California courts focus not on the plaintiff's subjective reading of the contract, but rather, more objectively, on "the extent to which the supposedly agreed-upon terms of the bargain are hidden in the prolix printed form drafted by the party seeking to enforce the disputed terms." Id. In Gutierrez, the court found such surprise where an arbitration clause was "particularly inconspicuous, printed in eight-point typeface on the opposite side of the signature page of the lease." Id.

Here, although the TOS are ubiquitous throughout Second Life,^[17] Linden buried the TOS's arbitration provision in a lengthy paragraph under the benign heading "GENERAL PROVISIONS." See TOS ¶ 13. Compare Net Global Mktg. v. Dialtone, Inc., 217 Fed.Appx. 598, 601 (9th Cir.2007) (finding procedural unconscionability [607] where "[t]here was no `clear heading' in the Terms of Service that could refute a claim of surprise; to the contrary, the arbitration clause is listed in the midst of a long section without line breaks under the unhelpful heading of `Miscellaneous'") and Higgins v. Superior Court, 140 Cal. App.4th 1238, 45 Cal.Rptr.3d 293, 297 (2006) (holding arbitration agreement unconscionable where "[t]here is nothing in the Agreement that brings the reader's attention to the arbitration provision") with Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal.4th 495, 30 Cal. Rptr.3d 787, 115 P.3d 68, 70 (2005) (finding arbitration clause was enforceable where it was in bolded font and contained the heading "BINDING ARBITRATION"). Linden also failed to make available the costs and rules of arbitration in the ICC by either setting them forth in the TOS or by providing a hyper-link to another page or website where they are available. Bragg Decl. ¶ 20.

Comb is most instructive. In that case, the plaintiffs challenged an arbitration provision that was part of an agreement to which they had assented, in circumstances similar to this case, by clicking their assent on an online application page. 218 F.Supp.2d at 1169. The defendant, PayPal, was a large company with millions of individual online customers. Id. at 1165. The plaintiffs, with one exception, were all individual customers of PayPal. Id. Given the small amount of the average transaction with PayPal, the fact that most PayPal customers were private individuals, and that there was a "dispute as to whether PayPal's competitors offer their services without requiring customers to enter into arbitration agreements," the court concluded that the user agreement at issue "satisfie[d] the criteria for procedural unconscionability under California law." Id. at 1172-73. Here, as in Comb, procedural unconscionability is satisfied.

(b) Substantive Unconscionability

Even if an agreement is procedurally unconscionable, "it may nonetheless be enforceable if the substantive terms are reasonable." Id. at 1173 (citing Craig v. Brown & Root, Inc., 84 Cal.App.4th 416, 100 Cal.Rptr.2d 818 (2000) (finding contract of adhesion to arbitrate disputes enforceable)). Substantive unconscionability focuses on the one-sidedness of the contract terms. Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 690; Flores, 113 Cal.Rptr.2d at 381-82. Here, a number of the TOS's elements lead the Court to conclude that Bragg has demonstrated that the TOS are substantively unconscionable.

(i) Mutuality

Under California law, substantive unconscionability has been found where an arbitration provision forces the weaker party to arbitrate claims but permits a choice of forums for the stronger party. See, e.g., Ticknor v. Choice Hotels Int'l, Inc., 265 F.3d 931, 940-41 (9th Cir.2001); Mercuro v. Superior Court, 96 Cal.App.4th 167, 116 Cal.Rptr.2d 671, 675 (2002). In other words, the arbitration remedy must contain a "modicum of bilaterality." Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 692. This principle has been extended to arbitration provisions that allow the stronger party a range of remedies before arbitrating a dispute, such as self-help, while relegating to the weaker party the sole remedy of arbitration.^[18]

[608] In Comb, for example, the court found a lack of mutuality where the user agreement allowed PayPal "at its sole discretion" to restrict accounts, withhold funds, undertake its own investigation of a customer's financial records, close accounts, and procure ownership of all funds in dispute unless and until the customer is "later determined to be entitled to the funds in dispute." 218 F.Supp.2d at 1173-74. Also significant was the fact that the user agreement was "subject to change by PayPal without prior notice (unless prior notice is required by law), by posting of the revised Agreement on the PayPal website." Id.

Here, the TOS contain many of the same elements that made the PayPal user agreement substantively unconscionable for lack of mutuality. The TOS proclaim that "Linden has the right at any time for any reason or no reason to suspend or terminate your Account, terminate this Agreement, and/or refuse any and all current or future use of the Service without notice or liability to you." TOS ¶ 7.1. Whether or not a customer has breached the Agreement is "determined in Linden's sole discretion." Id. Linden also reserves the right to return no money at all based on mere "suspicions of fraud" or other violations of law. Id. Finally, the TOS state that "Linden may amend this Agreement . . . at any time in its sole discretion by posting the amended Agreement [on its website]." TOS ¶ 1.2.

In effect, the TOS provide Linden with a variety of one-sided remedies to resolve disputes, while forcing its customers to arbitrate any disputes with Linden. This is precisely what occurred here. When a dispute arose, Linden exercised its option to use self-help by freezing Bragg's, account, retaining funds that Linden alone determined were subject to dispute, and then telling Bragg that he could resolve the dispute by initiating a costly arbitration process. The TOS expressly authorized Linden to engage in such unilateral conduct. As in Comb, "[f]or all practical purposes, a customer may resolve disputes only after [Linden] has had control of the disputed funds for an indefinite period of time," and may only resolve those disputes by initiating arbitration. 218 F.Supp.2d at 1175.

Linden's right to modify the arbitration clause is also significant. "The effect of [Linden's] unilateral right to modify the arbitration clause is that it could . . . craft precisely the sort of asymmetrical arbitration agreement that is prohibited under California law as unconscionable." Net Global Mktg., at 602. This lack of mutuality supports a finding of substantive unconscionability.

(ii) Costs of Arbitration and Fee-Sharing

Bragg claims that the cost of an individual arbitration under the TOS is likely to exceed $13,540, with an estimated initiation cost of at least $10,000. Pl.'s Reply at 5-6. He has also submitted a Declaration of Personal Financial Information stating that such arbitration would be cost-prohibitive for him (doc. no. 41). Linden disputes Bragg's calculations, estimating that the costs associated with arbitration [609] would total $7,500, with Bragg advancing $3,750 at the outset of arbitration. See Dfts.' Reply at 11.

At oral argument, the parties were unable to resolve this dispute, even after referencing numerous provisions and charts contained within the ICC Rules. See Tran. of 2/5/07 Hrg. at 65-74. The Court's own calculations, however, indicate that, the costs of arbitration, excluding arbitration, would total $17,250. With a recovery of $75,000,^[19] the ICC's administrative expenses would be $2,625 (3.5% of $75,000). See ICC Rules at 28. In addition, arbitrator's fees could be set between 2.0% ($1,500) and 11.0% ($8,250) of the amount at issue per arbitrator. Id. If the ICC set the arbitrator's fees at the midpoint of this range, the arbitrator's fees would be $4,875 per arbitrator. Id. Here, however, the TOS requires that three arbitrators be used to resolve a dispute. TOS ¶ 13. Thus, the Court estimates the costs of arbitration with the ICC to be $17,250 ($2,625 + (3 × $4,875)), although they could reach as high as $27,375 ($2,625 + (3 × $8,250)).^[20]

These costs might not, on their own, support a finding of substantive unconscionability. However, the ICC Rules also provide that the costs and fees must be shared among the parties, and an estimate of those costs and fees must be advanced at the initiation of arbitration. See ICC Rules of Arbitration, Ex. D to Dfts.' Reply at 28-30. California law has often been applied to declare arbitration fee-sharing schemes unenforceable. See Ting v. AT&T;, 319 F.3d 1126, 1151 (9th Cir.2003). Such schemes are unconscionable where they "impose[] on some consumers costs greater than those a complainant would bear if he or she would file the same complaint in court." Id. In Ting, for example, the Ninth Circuit held that a scheme requiring AT & T customers to split arbitration costs with AT & T rendered an arbitration provision unconscionable. Id.See also Circuit City Stores v. Adams, 279 F.3d 889, 894 (9th Cir.2002) ("This fee allocation scheme alone would render an arbitration agreement unenforceable."); Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 687 ("[T]he arbitration process cannot generally require the employee to bear any type of expenses that the employee would not be required to bear if he or she were free to bring the action in court.") (emphasis in original); Ferguson v. Countrywide Credit Indus., 298 F.3d 778, 785 (9th Cir.2002) ("[A] fee allocation scheme which requires the employee to split the arbitrator's fees with the employer would alone render an arbitration agreement substantively unconscionable.") (emphasis added).

Here, even taking Defendants characterization of the fees to be accurate, the total estimate of costs and fees would be $7,500, which would result in Bragg having to advance $3,750 at the outset of arbitration. See Dfts.' Reply at 11. The court's own estimates place the amount that Bragg would likely have to advance at $8,625, but they could reach as high as $13,687.50. Any of these figures are significantly greater than the costs that Bragg bears by [610] filing his action in a state or federal court. Accordingly, the arbitration costs and fee-splitting scheme together also support a finding of unconscionability.

(iii) Venue

The TOS also require that any arbitration take place in San Francisco, California. TOS ¶ 13. In Comb, the Court found that a similar forum selection clause supported a finding of substantive unconscionability, because the place in which arbitration was to occur was unreasonable, taking into account "the respective circumstances of the parties." 218 F.Supp.2d at 1177. As in Comb, the record in this case shows that Linden serves millions of customers across the United States and that the average transaction through or with Second Life involves a relatively small amount. See id. In such circumstances, California law dictates that it is not "reasonable for individual consumers from throughout the country to travel to one locale to arbitrate claims involving such minimal sums." Id. Indeed, "[l]imiting venue to [Linden's] backyard appears to be yet one more means by which the arbitration clause serves to shield [Linden] from liability instead of providing a neutral forum in which to arbitrate disputes." Id.

(iv) Confidentiality Provision

Arbitration before the ICC, pursuant to the TOS, must be kept confidential pursuant to the ICC rules. See ICC Rules at 33. Applying California law to an arbitration provision, the Ninth Circuit held that such confidentiality supports a finding that an arbitration clause was substantively unconscionable. Ting, 319 F.3d at 1152. The Ninth Circuit reasoned that if the company succeeds in imposing a gag order on arbitration proceedings, it places itself in a far superior legal posture by ensuring that none of its potential opponents have access to precedent while, at the same time, the company accumulates a wealth of knowledge on how to negotiate the terms of its own unilaterally crafted contract. Id. The unavailability of arbitral decisions could also prevent potential plaintiffs from obtaining the information needed to build a case of intentional misconduct against a company. See id.

This does not mean that confidentiality provisions in an arbitration scheme or agreement are, in every instance, per se unconscionable under California law. See Mercuro v. Superior Court, 96 Cal.App.4th 167, 116 Cal.Rptr.2d 671, 679 (2002) ("While [the California] Supreme Court has taken notice of the `repeat player effect,' the court has never declared this factor renders the arbitration agreement unconscionable per se.") (citations omitted). Here, however, taken together with other provisions of the TOS, the confidentiality provision gives rise for concern of the conscionability of the arbitration clause. See also O'Melveny & Myers, 485 F.3d 1066, 1080 ("The concern is not with confidentiality itself but, rather, with the scope of the language of the [arbitration agreement.]").

Thus, the confidentiality of the arbitration scheme that Linden imposed also supports a finding that the arbitration clause is unconscionable.

(v) Legitimate Business Realities

Under California law, a contract may provide a "margin of safety" that provides the party with superior bargaining strength protection for which it has a legitimate commercial need. "However, unless the `business realities' that create the special need for such an advantage are explained in the contract itself, . . . it must be factually established." Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519, 60 Cal. Rptr.2d 138, 148 (1997). When a contract [611] is alleged to be unconscionable, "the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect to aid the court in making the determination." Cal. Civ.Code § 1670.5. The statutory scheme reflects "legislative recognition that a claim of unconscionability often cannot be determined merely by examining the, face of the contract, but will require inquiry into its setting, purpose, and effect." Stirlen, 60 Cal.Rptr.2d at 148 (citations and internal quotations omitted).

Here, neither in its briefing nor at oral argument did Linden even attempt to offer evidence that "business realities" justify the one-sidedness of the dispute resolution scheme that the TOS constructs in Linden's favor.

(c) Conclusion

When a dispute arises in Second Life, Linden is not obligated to initiate arbitration. Rather, the TOS expressly allow Linden, at its "sole discretion" and based on mere "suspicion," to unilaterally freeze a participant's account, refuse access to the virtual and real currency contained within that account, and then confiscate the participant's virtual property and real estate. A participant wishing to resolve any dispute, on the other hand, after having forfeited its interest in Second Life, must then initiate arbitration in Linden's place of business. To initiate arbitration involves advancing fees to pay for no less than three arbitrators at a cost far greater than would be involved in litigating in the state or federal court system. Moreover, under these circumstances, the confidentiality of the proceedings helps ensure that arbitration itself is fought on an uneven field by ensuring that, through the accumulation of experience, Linden becomes an expert in litigating the terms of the TOS, while plaintiffs remain novices without the benefit of learning from past precedent.

Taken together, the lack of mutuality, the costs of arbitration, the forum selection clause, and the confidentiality provision that Linden unilaterally imposes through the TOS demonstrate that the arbitration clause is not designed to provide Second Life participants an effective means of resolving disputes with Linden. Rather, it is a one-sided means which tilts unfairly, in almost all situations, in Linden's favor. As in Comb, through the use of an arbitration clause, Linden "appears to be attempting to insulate itself contractually from any meaningful challenge to its alleged practices." 218 F.Supp.2d at 1176.

The Court notes that the concerns with procedural unconscionability are somewhat mitigated by Bragg's being an experienced attorney. However, "because the unilateral modification clause renders the arbitration provision severely one-sided in the substantive dimension, even moderate procedural unconscionability renders the arbitration agreement unenforceable." Net Global Mktg., at 602 (internal citations omitted).

Finding that the arbitration clause is procedurally and substantively unconscionable, the Court will refuse to enforce it.^[21]

[612] 2. "Bluelining" the Arbitration Agreement

Alternatively, Linden has offered to ameliorate the one-sidedness of the TOS's arbitration provision by suggesting that Linden could waive the requirements for three arbitrators, post the initial fees of arbitration, and agree to arbitrate in Philadelphia instead of San Francisco. See Dfts.' Sur-Reply Brf. at 2-3 (doc. no. 2).

California law allows a court to "blueline" an arbitration agreement to remove an element that renders it substantively unconscionable. See Cal. Civ.Code § 1670.5(a) ("If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it, was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result."). However, a court is not obligated to blueline when an "arbitration provision is so permeated by substantive unconscionability that it cannot be cured by severance or any other action short of rewriting the contract." Nagrampa v. MailCoups, Inc., 469 F.3d 1257, 1293 (9th Cir.2006). Where an arbitration provision has "multiple defects that indicate a systematic effort to impose arbitration on [the plaintiff], not simply as an alternative to litigation, but as an inferior forum that works to [the defendant's] advantage," and there simply is "no single provision [the court] can strike or restrict in order to remove the unconscionable taint from the agreement," the court can simply refuse to enforce the arbitration provision. Id. (citing Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 696).

The arbitration clause before the Court is simply not one where a single term may be stricken to render the agreement conscionable. "The unilateral modification `pervade[s]' and taint[s] with illegality' the entire agreement to arbitrate, [and] severance of terms within the arbitration clause would not cure the problem." Net Global Mktg., at 602 (quoting Circuit City, 279 F.3d at 895 (citations omitted)); see also Armendariz, 99 Cal.Rptr.2d 745, 6 P.3d at 697 ("[M]ultiple defects indicate a systematic effort to impose arbitration on an employee not simply as an alternative to litigation, but as an inferior forum that works to the employer's advantage. . . . Because a court is unable to cure this unconscionability through severance or restriction, and is not permitted to cure it through reformation and augmentation, it must void the entire agreement."). Davis, at 1083-84 (refusing to rewrite arbitration agreement that contained four substantively unconscionable or void terms because "[t]hese provisions cannot be stricken or excised without gutting the agreement"). Bluelining in this case will require the redrafting of the agreement.

The Court declines to rewrite the agreement, at Linden's request, to save an unconscionable arbitration provision which Linden itself drafted and now seeks to. enforce. Rather than provide a reasonable alternative for dispute resolution, this agreement compels a one-sided resolution of disputes between the parties.

IV. CONCLUSION

For the reasons set forth above, the Court will deny Rosedale's motion to dismiss for lack of jurisdiction. The Court will also deny Defendants' motion to compel [613] arbitration. An appropriate order follows.

ORDER

AND NOW, this 30th day of May, 2007, it is hereby ORDERED that defendant Philip Rosedale's Motion to Dismiss for Lack of Jurisdiction (doc. no. 2) and defendant Linden Research, Inc.'s Motion to Compel Arbitration (doc. no. 3) are DENIED.

It is FURTHER ORDERED that Plaintiffs Motion for Leave to File Supplemental Briefs in Opposition to Defendants Motions to Dismiss and to Compel Arbitration to Address Issues Raised by the Court at Argument on February 5, 2007 (doc. no. 34) is DENIED as moot.

AND IT IS SO ORDERED.

[1] The virtual world at issue is an interactive computer simulation which lets its participants see, hear, use, and even modify the simulated objects in the computer-generated environment. See Woodrow Barfield, Intellectual Property Rights in Virtual Environments: Considering the Rights of Owners, Programmers and Virtual Avatars, 39 Akron L.Rev. 649, 649 (2006) (defining virtual world).

[2] Second Life is hosted at http://secondlife. com.

[3] The term "avatar" derives etymologically from the Sanskrit word for crossing down or descent and was used originally to refer to the earthly incarnation of a Hindu deity. Webster's II New Riverside University Dictionary 141 (1998). Since the advent of computers, however, "avatar" is also used to refer to an Internet user's virtual representation of herself in a computer game, in an Internet chat room, or in other Internet fora. See Wikipedia, Definition of Avatar, available at http://en. wikipedia.org.

[4] Judge Richard A. Posner has apparently made an appearance in Second Life as a "balding bespectacled cartoon rendering of himself" where he "addressed a crowd of other animated characters on a range of legal issues, including property rights in virtual reality." Alan Sipress, Where Real Money Meets Virtual Reality, the Jury is Still Out, Washington Post, Dec. 26, 2006, at Al.

[5] Although participants purchase virtual property using the virtual currency of "lindens," lindens themselves are bought and sold for real U.S. dollars. Linden maintains a currency exchange that sets an exchange rate between lindens and U.S. dollars. Third parties, including ebay.com, also provide additional currency exchanges.

[6] Plaintiff has inundated the Court with press releases, newspaper articles, and other media containing representations made by Rosedale regarding the ownership of property on Second Life. Plaintiff states in an affidavit that he reviewed and relied on some of these representations. Bragg Decl. ¶¶ 4-10, 65-68. It is of no moment that Plaintiff did not rely upon every single representation that Rosedale ever made regarding ownership of virtual property on Second Life. The immense quantity of such representations is relevant to showing that these are not isolated statements, but rather, part of a national campaign in which defendant Rosedale individually and actively participated.

[7] Linden taxes virtual land. In fact, according to Bragg, by June 2004, Linden reported that its "real estate tax revenue on land sold to the participants exceeded the amount the company was generating in subscriptions." Compl. ¶ 42.

[8] Bragg's complaint contains counts under the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 P.S. § 201-1, et seq. (Count I), the California Unfair and Deceptive Practices Act, Cal. Bus. & Prof. Code § 17200 (Count II), California Consumer Legal Remedies Act, Ca. Civ.Code § 1750, et seq. (Count III), fraud (Count IV), the California Civil Code § 1812.600, et seq. (Count V), conversion (Count VI), intentional interference with a contractual relations (Count VII), breach of contract (Count VIII), unjust enrichment (Count IX), and tortious breach of the covenant of good faith and fair dealing (Count X).

[9] In the conclusion of the argument section of his brief, for example, Bragg argues that Rosedale's "representations and inducements properly form the basis of specific jurisdiction against Defendant Rosedale." Pl.'s Resp. at 14.

[10] The Supreme Court has also held, under different circumstances, that defamatory statements distributed in the national media may support specific personal jurisdiction where those statements are relevant to a plaintiff's claims. In Calder v. Jones, a Californian plaintiff sued a group of Floridian defendants for placing a defamatory article about her in a nationally circulated publication. 465 U.S. 783, 788-89, 104 S.Ct. 1482, 79 L.Ed.2d 804 (1984). The plaintiff claimed that, the defendants should be subject to jurisdiction in her home state of California. Id. The Supreme Court held that, because the defendant's intentional and allegedly illegal actions were expressly aimed at California and caused harm there, jurisdiction over the defendants was "proper in California based on the `effects' of their Florida conduct in California." Id. at 789, 104 S.Ct. 1482. Here, as in Calder, Rosedale's alleged misrepresentations are relevant to Bragg's claims of fraud and deceptive practices, but Bragg has not argued that jurisdiction is proper based on Calder's effects-based jurisprudence.

[11] The Third Circuit has consistently held that advertising in national publications does not subject a defendant to general jurisdiction in every state. See, e.g., Gehling, 773 F.2d 539 at 542; Giangola, 753 F.Supp. at 156 ("In an age of modern advertising and national media publications and markets, plaintiffs' argument that such conduct would make a defendant amenable to suit wherever the advertisements were aired would substantially undermine the law of personal jurisdiction."). In Giangola, for example, a district court held that plaintiffs' viewing of advertisements displaying Walt Disney World "as a must visit" on plaintiffs' vacation agenda, and which in fact induced plaintiffs to visit Disney World, did not constitute "minimum contacts" sufficient to justify personal jurisdiction in the plaintiffs' subsequent personal injury action, because the advertisements were not in any way related to the plaintiffs' personal injury action. 753 F.Supp. at 155. Moreover, as the Third Circuit noted in Barefoot, the advertisements were passive in nature and did not involve any interactivity with the plaintiffs. Id.; Barefoot, 128 Fed.Appx. at 270.

[12] Because the Court bases its holding on the interactive nature of the marketing scheme, the its holding does not "mean that there would be nationwide (indeed, worldwide) jurisdiction over anyone and everyone who establishes an Internet website" or made representations posted on a website accessible throughout the world. Weber v. Jolly Hotels, 977 F.Supp. 327, 333 (D.N.J.1997).

[13] Some Third Circuit precedent suggests that, where the alleged contacts involve a corporate agent's personal involvement, the "corporate shield" doctrine is obviated. See Al-Khazraji v. St. Francis College, 784 F.2d 505, 518 (3d Cir.1986) ("An individual, including a director, officer, or agent of a corporation, may be liable for injuries suffered by third parties because of his torts, regardless of whether he acted on his own account or on behalf of the corporation."). On other occasions, however, after finding personal jurisdiction has existed over a corporation, the Third Circuit has remanded to address the question of whether the individual corporate agents were not subject to personal jurisdiction because their relevant contacts were established in their roles as corporate officers. See Barefoot, 128 Fed.Appx. at 269.

Numerous recent cases within this district have applied the fiduciary shield doctrine in one form or another. E.g. Schiller-Pfeiffer, Inc. v. Country Home Prods., Inc., 2004 WL 2755585 (E.D.Pa.2004) ("[A] defendant is not individually subject to personal jurisdiction merely based on his actions in a corporate capacity.") (citing TJS Brokerage & Co. v. Mahoney, 940 F.Supp. 784, 789 (E.D.Pa.1996)); D & S Screen Fund II v. Ferrari, 174 F.Supp.2d 343, 347 (E.D.Pa.2001) ("As a general rule, individuals performing acts in their corporate capacity are not subject to the personal jurisdiction of the courts of that state for those acts.").

[14] Defendants concede that the Court has personal jurisdiction over Linden. However, Bragg does not argue that personal jurisdiction was appropriate over Rosedale based on his direction of Linden as it made contacts with Pennsylvania. Bragg relies, instead, solely on Linden's individual contacts. Had Plaintiff argued the former, the Court's application of the fiduciary shield doctrine could have been a closer call.

[15] This challenge must be determined by the Court, not an arbitrator. Bellevue Drug Co. v. Advance PCS, 333 F.Supp.2d 318 (E.D.Pa. 2004) (Robreno, J.). Bragg does not challenge enforceability by claiming that a provision of the arbitration agreement will deny him a statutory right, a question of interpretation of the arbitration agreement which an arbitrator is "well situated to answer." Id. (citations omitted). Rather, Bragg claims that the arbitration agreement itself would effectively deny him access to an arbitrator, because the costs would be prohibitively expensive, a question that is more appropriately reserved for the Court to answer. Id.

[16] Both parties agree that California law should govern the question of whether the arbitration provision is unconscionable.

[17] For example, both the "Auctions" and the "Auctions FAQ" webpages in Second Life contain hyperlinks to the TOS. See Bragg Br., Ex. 2 at 9, 15.

[18] The Court notes that the Third Circuit has found that "parties to an arbitration agreement need not equally bind each other with respect to an arbitration agreement if they have provided each other with consideration beyond the promise to arbitrate." Harris v. Green Tree Fin. Corp., 183 F.3d 173, 180-81 (3d Cir.1999). In Green Tree, however, the Third Circuit was applying Pennsylvania law, not California law. Id. In any event, Pennsylvania courts have criticized this aspect of Green Tree's holding. E.g. Lytle v. CitiFinancial Servs., 810 A.2d 643, 665 (Pa.Super.Ct.2002) (holding that, under Pennsylvania law, the reservation by a company to itself of access to the courts, to the exclusion of the consumer, created a presumption of unconscionability, "which in the absence of `business realities' that compel inclusion of such a provision in an arbitration provision, render[ed] the arbitration provision unconscionable and unenforceable").

[19] The Court's calculations are based on its finding that $75,000 is at issue, the minimum necessary to satisfy the requirements of diversity jurisdiction in this case. After a hearing on Bragg's motion to remand this case back to state court; the Court found that this jurisdictional threshold had been met (doc. no. 14).

[20] At oral argument, Bragg asserted repeatedly that the schedule of arbitrator's fees in the ICC Rules represents the fee "per arbitrator," which would have to be tripled in this case as the TOS provides for three arbitrators. See Tran. of 2/5/07 Hrg. at pp. 68, 74. Defendants never refuted this point. See id.

[21] Having determined that the arbitration provision is unenforceable as an unconscionable agreement, the Court need not determine whether the specific dispute in this case falls within the scope of that agreement. The Court notes, however, that the arbitration clause clearly exempts from its scope claims for "injunctive relief." See TOS ¶ 13. At the hearing on the motion to compel arbitration, the Court asked whether Bragg wanted the Court to decide the motion to compel arbitration, or allow Plaintiff file an amended complaint seeking only injunctive relief. See Tran. of 2/5/07 Hrg. at pp. 89-90, 108. He elected to file an amended complaint. Id. Subsequently, however, he filed supplemental briefing in support of his original complaint, and after Defendants objected, filed a Proposed Amended Complaint "[a]s promised." Pl.s' Brf. in Opp. to Mot. to Compel at 12 (doc. no. 43). During, a telephone conference on May 8, 2007, however, Bragg finally clarified that he intended to stand on his original complaint.

86 F.3d 1447 (1996)

No. 96-1139.

Argued May 23, 1996.
Decided June 20, 1996.

[1448] Michael J. Lawton, Kenneth B. Axe, Lathrop & Clark, Madison, WI, Thomas N. O'Connor (argued), John T. Gutkoski, Lauren C. Panora, Hale & Dorr, Boston, MA, for ProCD, Inc.

Keith Napolitano, Madison, WI, David A. Austin (argued), Madison, WI, for Matthew Zeidenberg and Silken Mountain Web Services, Inc.

June M. Besek, Morton D. Goldberg, Jesse M. Feder, Schwab, Goldberg, Price & Dannay, New York City, for Information Industry Ass'n, amicus curiae, American Medical Ass'n, amicus curiae and Association of American Publishers, amicus curiae.

Christopher A. Meyer, Michael R. Klipper, Meyer & Klipper, Washington, DC, for Business Software Alliance, amicus curiae.

Barry D. Weiss, Stuart Smith, Ronald Julian Palenski, Gordon & Glickson, Chicago, IL, Kenneth A. Wasch, Mark Nebergall, Software Publishers Ass'n, Inc., Washington, DC, for Software Publishers Ass'n, amicus curiae.

Mark Alan Lemley, University of Texas School of Law, Austin, TX, Peter M.C. Choy, American Committee for Interoperable Systems, Mountain View, CA, for American Committee for Interoperable Systems, amicus curiae.

Before COFFEY, FLAUM, and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Must buyers of computer software obey the terms of shrinkwrap licenses? The [1449] 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. 908 F.Supp. 640 (W.D.Wis.1996). The parties and numerous amici 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

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 Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 111 S.Ct. 1282, 113 L.Ed.2d 358 (1991). See Paul J. Heald, The Vices of Originality, 1991 Sup.Ct. Rev. 143, 160-68. ProCD sells a version of the database, called SelectPhone (trademark), on CD-ROM discs. (CD-ROM means "compact disc — read only memory." 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 (or, as ProCD prefers, "listings") can be read and manipulated by other software, such as word processing programs.

The database in SelectPhone (trademark) 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 (trademark) 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.

[1450] 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 (trademark) 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 (trademark) 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 (trademark) 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. 908 F.Supp. at 654.

II

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. 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. See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F.Supp. 208 (E.D.N.Y.1994). 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. Peeters v. State, 154 Wis. 111, 142 N.W. 181 (1913). 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 [1451] 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. See E. Allan Farnsworth, 1 Farnsworth on Contracts § 4.26 (1990); Restatement (2d) of Contracts § 211 comment a (1981) ("Standardization of agreements serves many of the same functions as standardization of goods and services; both are essential to a system of mass production and distribution. Scarce and costly time and skill can be devoted to a class of transactions rather than the details of individual transactions."). 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. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 111 S.Ct. 1522, 113 L.Ed.2d 622 (1991); see also Vimar Seguros y Reaseguros, S.A. v. M/V Sky Reefer, ___ U.S. ___, 115 S.Ct. 2322, 132 L.Ed.2d 462 (1995) (bills of lading). 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 [1452] 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, so we use the regular numbering system. Wis. Stat. § 402.201 corresponds to UCC § 2-201, and other citations are easy to derive.) 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 standardform 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, see 908 F.Supp. at 655-56 — 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. See Northrop Corp. v. Litronic Industries, 29 F.3d 1173 (7th Cir.1994) (Illinois law); Douglas G. Baird & Robert Weisberg, Rules, Standards, and the Battle of the Forms: A Reassessment of § 2-207, 68 Va. L.Rev. 1217, 1227-31 (1982). 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 [1453] 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, see Gillen v. Atalanta Systems, Inc., 997 F.2d 280, 284 n. 1 (7th Cir.1993); 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 (trademark) 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. Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 73 F.3d 756 (7th Cir.1996). 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

The district court held that, even if Wisconsin treats shrinkwrap licenses as contracts, § 301(a) of the Copyright Act, 17 U.S.C. § 301(a), prevents their enforcement. 908 F.Supp. at 656-59. 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 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". 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. 908 F.Supp. at 656-57. Baltimore Orioles, Inc. v. Major League Baseball Players Ass'n, 805 F.2d 663, 676 (7th Cir.1986), supports that conclusion, with which commentators agree. E.g., Paul Goldstein, III Copyright § 15.2.3 (2d ed.1996); Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 101[B] (1995); William F. Patry, II Copyright Law and Practice 1108-09 (1994). 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 sections 102 and 103, even if federal law does not afford protection to them. Cf. Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989) (same principle under patent laws).

[1454] 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 System, Inc. v. Computer Associates International, 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, 908 F.Supp. at 658, 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 (trademark) 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 Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974), 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 Pencil Co., 440 U.S. 257, 99 S.Ct. 1096, 59 L.Ed.2d 296 (1979), 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. See also Kennedy v. Wright, 851 F.2d 963 (7th Cir. 1988). 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 Pencil Co. could not do that, neither can Zeidenberg.

Although Congress possesses power to preempt even the enforcement of contracts about intellectual property — or railroads, on which see Norfolk & Western Ry. v. Train Dispatchers, 499 U.S. 117, 111 S.Ct. 1156, 113 L.Ed.2d 95 (1991) — courts usually read preemption clauses to leave private contracts unaffected. American Airlines, Inc. v. Wolens, ___ U.S. ___, 115 S.Ct. 817, 130 L.Ed.2d 715 (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." 49 U.S.C.App. § 1305(a)(1). 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 [1455] 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. ___ U.S. at ___-___, 115 S.Ct. at 824-25. Although some principles that carry the name of contract law are designed to defeat rather than implement consensual transactions, id. at ___ n. 8, 115 S.Ct. at 826 n. 8, the rules that respect private choice are not preempted by a clause such as § 1305(a)(1). Section 301(a) plays a role similar to § 1301(a)(1): 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 Pencil Company 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. Rockwell Graphic Systems, Inc. v. DEV Industries, Inc., 925 F.2d 174, 180 (7th Cir.1991). 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.

REVERSED AND REMANDED.

320 F.3d 1317 (2003)

Nos. 01-1108, 01-1109.

January 29, 2003.

[1318] [1319] [1320] Frederic M. Meeker, Banner & Witcoff, LTD, of Washington, DC, filed a response for plaintiff-cross appellant. With him on the response were Steve S. Chang, Bradley C. Wright, and Charles W. Shifley.

Robert L. Kann, Bromberg & Sunstein LLP, of Boston, Massachusetts, filed a combined petition for panel rehearing and rehearing en banc for defendant-appellant. Of counsel were Judith R.S. Stern and Erik P. Belt.

Mark A. Lemley, Professor of Law, Boalt Hall School of Law, University of California at Berkeley, of Berkeley, CA, filed an amici curiae brief.

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 on his patent infringement, copyright infringement, and breach of contract claims, while rejecting Baystate Technologies, Inc.'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 as duplicative of the contract damages. 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.

Harold L. Bowers (Bowers) created a template to improve computer aided design (CAD) software, such as the CADKEY [1321] tool of Cadkey, Inc. Mr. Bowers filed a patent application for his template on February 27, 1989. On June 12, 1990, United States Patent No. 4,933,514 ('514 patent) issued from that application.

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. To address this problem, the claimed template works with a CAD system as illustrated in Fig. 1 of the '514 patent. In that figure, the '514 patent template lies on top of the digitizing tablet 18 of a CAD computer. The user selects data from the template with a pointing device 20. The template places the many CAD commands in a claimed visual and logical order. Figure 1 shows:

[FIGURE OMITTED]

Mr. Bowers commercialized the '514 patent template as Cadjet for use with CADKEY.

On February 1, 1993, Mr. Bowers requested reexamination of the '514 patent in view of prior art, namely the Keymaster template. Like the '514 patent template, the Keymaster template provides a unified visual representation of many CAD commands. Like the preferred embodiment of the '514 patent, the Keymaster template operates with CADKEY software. Following examiner rejections, the Board of Patent Appeals and Interferences ultimately found some amended claims of the '514 patent patentable. The PTO issued a reexamination certificate on December 9, 1997. U.S. Patent No. B1-4,933,514.

Since the early 1980s, CAD programs have assisted engineers to draft and design on a computer screen. George W. Ford, III, a development engineer and supervisor of quality control at Heinemann Electric, envisioned a way to improve Mr. Bowers' template and CAD software. Specifically, Mr. 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. These [1322] tolerances comply with the geometric dimensioning and tolerancing (GD & T) requirements in ANSI Y14.5M, a standard promulgated by the American National Standards Institute (ANSI). Geodraft works in conjunction with the CAD system to ensure that the design complies with ANSI Y14.5M-a task previously error-prone due to the standard's complexity. Geodraft automatically includes symbols specifying the correct GD & T parameters. Mr. Ford obtained a registered copyright, TX 2-939-672, covering Geodraft.

In 1989, Mr. Ford offered Mr. Bowers an exclusive license to his Geodraft software. Mr. Bowers accepted that offer and bundled Geodraft and Cadjet together as the Designer's Toolkit. Mr. Bowers sold the Designer's Toolkit with a shrink-wrap license that, inter alia, prohibited any reverse engineering.

In 1989, Baystate also developed and marketed other tools for CADKEY. One of those tools, Draft-Pak version 1 and 2, featured a template and GD & T software. In 1988 and 1989, Mr. Bowers offered to establish a formal relationship with Baystate, including bundling his template with Draft-Pak. Baystate rejected that offer, however, telling Mr. Bowers that it believed it had "the in-house capability to develop the type of products you have proposed."

In 1990, Mr. Bowers released Designer's Toolkit. By January 1991, Baystate had obtained copies of that product. Three months later, Baystate introduced the substantially revised Draft-Pak version 3, incorporating many of the features of Designer's Toolkit. Although Draft-Pak version 3 operated in the DOS environment, Baystate later upgraded it to operate with Microsoft Windows ®.

Baystate's introduction of Draft-Pak version 3 induced intense price competition between Mr. Bowers and Baystate. To gain market share over Baystate, Mr. Bowers negotiated with Cadkey, Inc., to provide the Designer's Toolkit free with CADKEY. Mr. Bowers planned to recoup his profits by selling software upgrades to the users that he hoped to lure to his products. Following pressure from Baystate, however, Cadkey, Inc., repudiated its distribution agreement with Mr. Bowers. Eventually, Baystate purchased Cadkey, Inc., and eliminated Mr. Bowers from the CADKEY network — effectively preventing him from developing and marketing the Designer's Toolkit for that program.

On May 16, 1991, Baystate sued Mr. 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. Mr. Bowers filed counterclaims for copyright infringement, patent infringement, and breach of contract.

Following trial, the jury found for Mr. Bowers and awarded $1,948,869 for copyright infringement, $3,831,025 for breach of contract, and $232,977 for patent infringement. The district court, however, set aside the copyright damages as duplicative of the contract damages and entered judgment for $5,270,142 (including prejudgment interest). Baystate filed timely motions for judgment as a matter of law (JMOL), or for a new trial, on all of Mr. Bowers' claims. Baystate appeals the district court's denial of its motions for JMOL or a new trial, while Mr. Bowers appeals the district court's denial of copyright damages. This court has jurisdiction under 28 U.S.C. § 1295(a)(1) (2000).

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. Glaxo, Inc. v. Novopharm, Ltd., 110 F.3d [1323] 1562, 1572, 42 USPQ2d 1257, 1265 (Fed. Cir.1997); Atari, Inc. v. JS & A Group, Inc., 747 F.2d 1422, 1439-40, 223 USPQ 1074, 1087 (Fed.Cir.1984) (en banc).

Under the law of the First Circuit, a court of appeals reviews without deference the district court's denial of JMOL. Larch v. Mansfield Mun. Elec. Dept., 272 F.3d 63, 67 (1st Cir.2001). The inquiry is whether the evidence, when viewed from the perspective most favorable to the non-movant, would permit a reasonable jury to find in favor of that party on any permissible claim or theory. Id. The First Circuit reviews the district court's denial of a motion for a new trial for manifest abuse of discretion. Seahorse Marine Supplies, Inc. v. P.R. Sun Oil Co., 295 F.3d 68, 82 (2002). The First Circuit will reduce or set aside a damage award only if it exceeds "any rational appraisal or estimate of the damages that could be based upon the evidence before the jury." Segal v. Gilbert Color Sys., Inc., 746 F.2d 78, 81 (1st Cir.1984) (quoting Glazer v. Glazer, 374 F.2d 390, 413 (5th Cir.1967)). Nevertheless, in the First Circuit, a district court has authority to resolve whether damages awarded by a jury are duplicative, a determination that a court of appeals reviews for an abuse of discretion. Garshman Co. v. Gen. Elec. Co., 176 F.3d 1, 6 (1st Cir.1999). Further, the First Circuit treats federal preemption as a question of law and reviews it without deference. United States v. R.I. Insurers' Insolvency Fund, 80 F.3d 616, 619 (1st Cir.1996) ("[A] federal preemption ruling presents a pure question of law subject to plenary review.").

Claim construction is a question of law that this court reviews without deference. Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448, 1454, 46 USPQ2d 1169, 1173-74 (Fed.Cir.1998) (en banc). Infringement, whether literal or under the doctrine of equivalents, is a question of fact. Bai v. L & L Wings, Inc., 160 F.3d 1350, 1353, 48 USPQ2d 1674, 1676 (Fed. Cir.1998); Optical Disc Corp. v. Del Mar Avionics, 208 F.3d 1324, 1333-34, 54 USPQ2d 1289, 1294-95 (Fed.Cir.2000). Obviousness is a question of law, Graham v. John Deere Co., 383 U.S. 1, 17, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966), premised on underlying factual determinations, Dennison Mfg. v. Panduit Corp., 475 U.S. 809, 810-11, 106 S.Ct. 1578, 89 L.Ed.2d 817 (1986). Anticipation is a question of fact. Atlas Powder Co. v. Ireco, Inc., 190 F.3d 1342, 1346, 51 USPQ2d 1943, 1945 (Fed. Cir.1999). Therefore, a district court properly may deny JMOL on these factual issues where substantial evidence supports the jury verdict. Fed.R.Civ.P. 50(a)(1); Sheils Title Co., v. Commonwealth Land Title Ins. Co., 184 F.3d 10, 19 (1st Cir. 1999).

A.

Baystate contends that the Copyright Act preempts the prohibition of reverse engineering embodied in Mr. Bowers' shrink-wrap license agreements. Swayed by this argument, the district court considered Mr. 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." Mr. 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 Mr. Bowers' contract claim.

Courts respect freedom of contract and do not lightly set aside freely-entered agreements. Beacon Hill Civic Ass'n v. Ristorante Toscano, 422 Mass. 318, 662 N.E.2d 1015, 1017 (1996). Nevertheless, at times, federal regulation may [1324] preempt private contract. Cf. Nebbia v. New York, 291 U.S. 502, 523, 54 S.Ct. 505, 78 L.Ed. 940 (1934) ("Equally fundamental with the private right is [the right] of the public to regulate [the private right] in the common interest."). 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) (quoting Gates Rubber Co. v. Bando Chem. Indus., 9 F.3d 823, 847, 28 USPQ2d 1503, 1520 (10th Cir.1993)); see also Computer Assoc. Int'l, Inc. v. Altai, Inc., 982 F.2d 693, 716 (2d Cir.1992) ("But if an `extra element' is `required instead of or in addition to the acts of reproduction, performance, distribution or display, in order to constitute a state-created cause of action, then the right does not lie "within the general scope of copyright," and there is no preemption.'") (quoting 1 Nimmer on Copyright § 1.01[B] at 1-15). 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." Id.

In Data General, Data General alleged that Grumman misappropriated its trade secret software. 36 F.3d at 1155. Grumman obtained that software from Data General's customers and former employees who were bound by confidentiality agreements to refrain from disclosing the software. Id. at 1154-55. In defense, Grumman argued that the Copyright Act preempted Data General's trade secret claim. Id. at 1158, 1165. The First Circuit held that the Copyright Act did not preempt the state law trade secret claim. Id. at 1165. Beyond mere copying, that state law claim required proof of a trade secret and breach of a duty of confidentiality. Id. These additional elements of proof, according to the First Circuit, made the trade secret claim qualitatively different from a copyright claim. Id. 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." Id. at 1165 (quoting Mayer v. Josiah Wedgwood & Sons, Ltd., 601 F.Supp. 1523, 1535, 225 USPQ 776, 784 (S.D.N.Y.1985)). 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." Id.

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, 39 USPQ2d 1161 (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, 59 USPQ2d 1434, 1441-42 (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, 26 USPQ2d 1370, 1376 (8th Cir. 1993); Taquino v. Teledyne Monarch Rubber, 893 F.2d 1488, 1501 (5th Cir.1990); Acorn Structures v. Swantz, 846 F.2d 923, [1325] 926, 6 USPQ2d 1810, 1812 (4th Cir.1988); but see Lipscher v. LRP Publs., Inc., 266 F.3d 1305, 1312, 60 USPQ2d 1468, 1473 (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. 86 F.3d at 1454. 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.'" Id. 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, 122 S.Ct. 754, 764, 151 L.Ed.2d 755 (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 Mr. Bowers' contract claims.

In making this determination, this court has left untouched the conclusions reached in Atari Games v. Nintendo regarding reverse engineering as a statutory fair use exception to copyright infringement. Atari Games Corp. v. Nintendo of America, Inc., 975 F.2d 832, 24 USPQ2d 1015 (Fed.Cir.1992). 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 255 (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. See United States v. Spector, 55 F.3d 22, 24-5 (1st Cir.1995) (holding that a contractual waiver of the statute of limitations defense constitutes an "effective waiver of defendant's rights under the statute of limitations" if the agreement were properly executed, and the "waiver is made knowingly and voluntarily."); Tompkins v. United Healthcare of New England, 203 F.3d 90, 97 (1st Cir.2000) (stating that "in some circumstances contractual waiver of statutory rights is permissible," citing Canal Elec. Co. v. Westinghouse Elec. Corp., 406 Mass. 369, 548 N.E.2d 182, 187 (Mass. 1990) ("a contractual waiver of statutory rights is permissible when the statute's purpose is the `protection of the property rights of individual parties ... rather than ... the protection of the general public.'")). Thus, case law indicates the First Circuit would find that private parties [1326] 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.

This court now considers the scope of Mr. Bowers' contract protection. Without objection to the choice of law, the district court applied Massachusetts contract law. Accordingly, contract terms receive "the sense and meaning of the words which the parties have used; and if clear and free from ambiguity the words are to be taken and understood in their natural, usual and ordinary sense." Farber v. Mutual Life Ins. Co., 250 Mass. 250, 253, 145 N.E. 535 (Mass.1924); see also Kelly v. Marx, 428 Mass. 877, 881, 705 N.E.2d 1114 (Mass.1999) ("The proper course is to enforce contracts according to their plain meaning and not to undertake to be wiser than the parties.") (quoting Guerin v. Stacy, 175 Mass. 595, 597, 56 N.E. 892 (1900) (Holmes, C.J.)).

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); see also The Free On-Line Dictionary of Computing (2001), at http://wombat.doc. ic.ac.uk/foldoc/foldoc.cgi?reverse + engineering (last visited Jul. 17, 2002). 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. As discussed above, the district court erred in instructing the jury that copyright law limited the scope of Mr. Bowers' contract protection. Notwithstanding that error, this court may affirm the jury's breach of contract verdict if substantial record evidence would permit a reasonable jury to find in favor of Mr. Bowers based on a correct understanding of the law. Larch v. Mansfield Mun. Elec. Dept., 272 F.3d 63, 69 (1st Cir.2001). The shrink-wrap agreements in this case are far broader than the protection afforded by copyright law. Even setting aside copyright violations, the record supports a finding of breach of the agreement between the parties. In view of the breadth of Mr. Bowers' contracts, this court perceives that substantial evidence supports the jury's breach of contract verdict relating to both the DOS and Windows versions of Draft-Pak.

The record indicates, for example, that Baystate scheduled two weeks in Draft-Pak's development schedule to analyze the Designer's Toolkit. Indeed, Robert Bean, Baystate's president and CEO, testified that Baystate generally analyzed competitor's products to duplicate their functionality.

The record also contains evidence of extensive and unusual similarities between Geodraft and the accused Draft-Pak — further evidence of reverse engineering. James Spencer, head of mechanical engineering and integration at the Space and Naval Warfare Systems Center, testified that he examined the relevant software programs to determine "the overall structure of the operating program" such as "how the operating programs actually executed the task of walking a user through [1327] creating a [GD&T;] symbol." Mr. Spencer concluded: "In the process of taking the [ANSI Y14.5M] standard and breaking it down into its component parts to actually create a step-by-step process for a user using the software, both Geodraft and Draft-Pak [for DOS] use almost the identical process of breaking down that task into its individual pieces, and it's organized essentially identically." This evidence supports the jury's verdict of a contract breach based on reverse engineering.

Mr. Ford also testified that he had compared Geodraft and Draft-Pak. When asked to describe the Draft-Pak interface, Mr. Ford responded: "It looked like I was looking at my own program [i.e., Geodraft]." Both Mr. Spencer and Mr. Ford explained in detail similarities between Geodraft and the accused Draft-Pak. Those 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.

Both witnesses also testified that those similarities extended beyond structure and design to include many idiosyncratic design choices and inadvertent design flaws. For example, both Geodraft and Draft-Pak offer "straightness tolerance" menu choices of "flat" and "cylindric," unusual in view of the use by ANSI Y14.5M of the terms "linear" and "circular," respectively. As another example, neither program requires the user to provide "angularity tolerance" secondary datum to create a feature control frame — a technical oversight that causes creation of an incomplete symbol. In sum, Mr. Spencer testified: "Based on my summary analysis of how the programs function, their errors from the standard and their similar nomenclatures reflecting nonstandard items, I would say that the Draft-Pak [for DOS] is a derivative copy of a Geodraft product."

Mr. Ford and others also demonstrated to the jury the operation of Geodraft and both the DOS and Windows versions of the accused Draft-Pak. Those software demonstrations undoubtedly conveyed information to the jury that the paper record on appeal cannot easily replicate. This court, therefore, 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 Mr. 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." Britton v. Maloney, 196 F.3d 24, 32 (1st Cir.1999) (citing Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 451 n. 3, 113 S.Ct. 884, 122 L.Ed.2d 247 (1993)); see also Data Gen. Corp. v. Grumman Sys. Support Corp., 825 F.Supp. 340, 346 (D.Mass.1993) ("So long as a plaintiff is not twice compensated for a single injury, a judgment may be comprised of elements drawn from separate ... remedies."), aff'd [1328] in relevant part, 36 F.3d 1147 (1st Cir. 1994). 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.

B.

Turning now to the patent counts, patent claim language defines the scope of the invention. SRI Int'l v. Matsushita Elec. Corp., 775 F.2d 1107, 1121, 227 USPQ 577, 586 (Fed.Cir.1985) (en banc). As a general rule, claim language carries the ordinary meaning of the words in their normal usage in the field of invention. Toro Co. v. White Consol. Indus., 199 F.3d 1295, 1299, 53 USPQ2d 1065, 1067 (Fed.Cir.1999). Nevertheless, the inventor may act as his own lexicographer and use the specification to supply implicitly or explicitly new meanings for terms. Markman v. Westview Instruments, Inc., 52 F.3d 967, 979-80, 34 USPQ2d 1321, 1330 (Fed.Cir.1995) (en banc), aff'd 517 U.S. 370, 116 S.Ct. 1384, 134 L.Ed.2d 577 (1996). Thus, to help determine the proper construction of a patent claim, a construing court consults the written description, and, if in evidence, the prosecution history. Id. A claim construction that excludes from its scope a preferred embodiment "is rarely, if ever, correct and would require highly persuasive evidentiary support." Vitronics Corp. v. Conceptronic, Inc., 90 F.3d 1576, 1583, 39 USPQ2d 1573, 1578 (Fed.Cir.1996).

As described previously, Mr. Bowers' invention claims a template that simplifies operation of a CAD program. A CAD program, such as CADKEY, comprises numerous commands accessible to the user in nested menus many layers deep. For example, CADKEY includes a variety of main menus, such as CREATE and TRANSFORM. Each main menu, in turn, offers many different selections. These options provide additional menus with further selection possibilities, or working functions. The CREATE main menu of CADKEY Version 3.02 is representative. A portion of that menu structure is shown below, where asterisks indicate material omitted for brevity:

[1329]
CREATE
    Line
        Endpts
            Cursor  |
            Point   | 
            Endent  | 
            Center  | 
            Intrsc  > (Position menu) 
            Alongl  | 
            Polar   | 
            Delta   | 
            Key — In| 
        String 
            (Position menu) 
        Par/prp 
            * * * 
        Tangent 
            Arc Pt
            2 Arcs 
        Hrz/vrt 
            Horiztl
            Verticl
            Both
        Angle 
        Rectang 
            * * * 
        N-Gon 
        Mesh 
            Ruled
            General 
    Arc * * * 
    Circle * * * 
    Point * * * 
    Polyin * * * 
    Fillet * * * 
    Chamfer * * * 
    Conic * * * 
    Polygon * * * 
    Spline * * *

In this menu structure, menu items indicated in italicized type represent working functions, while all others represent additional menus simply providing more menu options. For example, "Line" is a sub-menu of CREATE. Selection of "Line" [1330] leads to a variety of menu items including the sub-sub-menu "Endpts" and the working function "Angle." "Endpts," in turn, leads to a variety of working functions such as "Cursor" and "Point."

The '514 patent describes a template that presents a single visual representation of many of the available CAD program commands. Mr. Bowers asserts claim 1, the only independent claim:

1. In a computer system including a central processing unit having a keyboard entry station with a plurality of keys for data entry and a pointing device station having a pointer with at least one pointer button for data entry and responsive to positionable movement of said pointer, and including system operating functions having successive layers of a main menu of selectable group functions and [a plurality of sub-levels of sub-menus] successive series of a first layer of sub-menus, and at least a second sub-layer of sub-menus having selectable group sub-functions, accessible by successive entries on said keyboard or said pointer to select an ultimate working function, the improvement comprising:

(a) a template for use with said pointing device;

(b) indicia arranged on the template and located in a plurality of groups, one group of each corresponding to one predetermined, selectable item of said main menu and all said indicia in a respective group bearing a common group identifying characteristic;

(c) at least a second plurality of indicia, each of which corresponds to a predetermined selectable item of a sub-menu corresponding to an item of said main menu;

(d) means securing said templates in a fixed orientation to said tablet whereby said pointing device can select a working function with a single movement of the said button.

U.S. Patent No. B1-4,933,514, col. 1, l. 25 to col. 2, l. 19. The reissued claim's altered language is not at issue in this appeal.

Figs. 3A-D of the '514 patent illustrate a template according to claim 1 and configured to operate with CADKEY. That template is illustrated below as a composite of Figs. 3A-D. The template includes a variety of indicia that represent selected items from the CADKEY menus. For example, the template includes the main-menu indicia "CREATE" (middle) and "TRANSFORM" (lower-right corner). In turn, other indicia are associated with those main-menu indicia (e.g., using location and color) to form main-menu indicia groups. To illustrate, the "CREATE" main-menu indicia group includes the sub-menus "Lines," "Arcs," "Circ," "Points," "Plygns," and "Splines" (sub-menu indicia), but not the remaining "CREATE" sub-menus "Polyin," "Fillet," "Chamfer," or "Conic," see supra at pp. 15-16. In the template, each of the "CREATE" group's sub-menus has working functions in columns below. The working function indicia represent working functions dependent from the relevant sub-menu. For example, the working function indicia associated with the "Lines" sub-menu fall below that heading and include "Tan:ArcPt," "Tan:2Arcs," "Horz," "Vert," and "Horz/Vert."

[1331] [FIGURE OMITTED]

The parties dispute the meaning of paragraphs b, c, and d of claim 1. This court agrees generally with the district court's construction of paragraphs b and c. With respect to paragraph d, however, the district court erred in its construction. Under a correct construction of that paragraph, no reasonable jury could find that Baystate infringes claim 1. In view of this court's holding of noninfringement, this court does not reach the alternative ground for challenging the district court's judgment based on patent invalidity.

The district court construed paragraph b: "at least two groups must appear on a template where one group corresponds to a main menu item and the other corresponds to another main menu item." In other words, the template must include at least two main-menu indicia groups, such as the "CREATE" and "TRANSFORM" groups described above. Baystate argues, nevertheless, that the reexamination history requires that "every group of the template must correspond to a main menu item." The history of reexamination indicates otherwise.

During reexamination, Mr. Bowers noted that each group of the Keymaster template did not correspond to a main-menu item. With respect to those groups that did correspond to main-menu items, Mr. Bowers argued that those did not satisfy claim paragraphs c and d. Mr. Bowers [1332] thus admitted that a set of Keymaster template groups satisfy claim paragraph b, but he then distinguished them in view of paragraphs c and d. Specifically, Mr. Bowers stated: "Each of the groups of the Keymaster template does not correspond to one selectable item of the main menu of the Cadkey system." Baystate would read this statement to mean that the claim's reference to a "plurality" of groups on the template encompasses all groups on the template. In other words, Baystate reads "each" in several of Bowers' statement to mean "all." The claim, however, uses the term "plurality," meaning "comprising, or consisting of more than one." The Oxford English Dictionary (2d ed. 1989). Thus, Bowers' references to "each" refers to the "at least two groups" required by the claims. To read Bowers statements too strictly would exclude from claim scope the preferred embodiment of the '514 patent — a disfavored result. That embodiment includes, for example, a group "SET" that is not associated with a CADKEY main-menu item. In sum, this court agrees with the district court's interpretation of paragraph b.

With respect to paragraph c, the district court interpreted claim 1 to require "that at least two indicia contained in the second set of indicia contained within one of the at least two groups of indicia described in claim 1(b) must correspond to an item of the first submenu of the main menu item to which the group corresponds." In other words, at least one of the main-menu indicia groups paragraph b requires must include at least two indicia associated with a sub-menu of the main-menu. '514 patent at col. 4, ll. 9-16. The specification supports the trial court's interpretation. In the preferred embodiment, for example, the sub-menu "Lines" under the "CREATE" group defines two columns of indicia representing working functions. Id. at col. 4, ll. 9-16. The sub-menu indicium "Lines" and the working functions in columns below are associated with the "Lines" sub-menu of the "CREATE" main-menu, thus satisfying the claim requirement. In sum, paragraph c requires that at least one of the main-menu indicia groups include at least two indicia associated with the same sub-menu of the main-menu.

With respect to paragraph d, the district court held "that the single movement of the pointing device's button can, but need not, select a working function." Properly construed, however, this limitation requires that each of the indicia associated with the sub-menu of a main-menu group must represent a working function accessible with a single movement of the pointer button (e.g., as opposed to access through further selection via a drop-down menu). Using the "Lines" sub-menu as an example, see Figs. 3A-D supra at p. 18, paragraph d requires that all indicia below that sub-menu must represent working functions. The specification and the reexamination history support this construction of paragraph d.

As just described with respect to the "Lines" sub-menu, the '514 patent discloses a sub-menu with one or more columns of working functions. '514 patent at col. 4, ll. 9-16. This arrangement supplies the second plurality of indicia required by paragraph c. Id. at col. 4, ll. 9-16. The specification discloses expressly that all indicia associated with sub-menus (i.e., "Line," "Arcs," etc.) of the "CREATE" group represent working functions.^[1]Id. at col. 4, ll. 24-26. For example, two [1333] columns fall beneath the "Lines" sub-menu within the "CREATE" group. Each indicium in those columns, e.g., "Tan:ArcPt," "Tan:2Arcs," "Horz," "Vert," and "Horz/Vert," represents a working function that depends from the "Lines" sub-menu. Id. at col. 4, ll. 24-65 ("The individual items appearing in the rows of each of these columns [defined by the sub-menu indicia] represent an ultimate working function"). In other words, consistent with this court's construction, all the indicia associated with the sub-menus of the "CREATE" group represent working functions.

The reexamination history also precludes this court from adopting a broader construction. Specifically, with respect to "working functions," the claim language recites only that the "pointing device can select a working function with a single movement of the said button." During the reexamination proceedings, Mr. Bowers argued that the Keymaster template did not satisfy this limitation because that template's "DETAIL" and "TRANSFORM" main-menu groups included indicia that did not represent working functions. With reference to the "DETAIL" group more specifically, that group includes sub-menus "Dim," and "Arr/Wit," and an additional indicium "Misc." The Keymaster "DETAIL" group and relevant portions of the CADKEY 3.02 menu structure are shown in the figure below. In that figure, working functions are highlighted.

[FIGURE OMITTED]

The indicia "Dim," "Arr/Wit," and "Misc" each have a group of indicia underneath them. However, as shown above, none of those indicia groups includes only working functions. With respect to the group "Misc," Mr. Bowers made clear that the indicia "Note," "X-Hatch," "Change," and "Set," all represented additional menus rather than working functions. For example, selecting the indicium "X-Hatch" simply presents an opportunity to select the actual working cross-hatching functions of "Brick," "Steel," "Copper," "Alloys," "Aluminum," "Rubber," or "Marble" [1334] (not shown in the menu structure above). A user simply cannot access these cross-hatching functions through a single movement of the pointing device button using the Keymaster template. In like manner, as shown in the figure, the indicia groups associated with "Dim" and "Arr/Wit," respectively, also include indicia that do not represent working functions.

After claim construction, the infringement inquiry shifts to a comparison of the claim with the allegedly infringing device. Kemco Sales, Inc. v. Control Papers Co., 208 F.3d 1352, 1359, 54 USPQ2d 1308, 1312 (Fed.Cir.2000). To prove infringement, the patentee must show that the accused device contains each limitation of the asserted claim, Mas-Hamilton Group v. LaGard, Inc., 156 F.3d 1206, 1211, 48 USPQ2d 1010, 1014 (Fed. Cir.1998), or an equivalent of each limitation, Warner-Jenkinson Co. v. Hilton Davis Chem. Co., 520 U.S. 17, 40, 117 S.Ct. 1040, 137 L.Ed.2d 146 (1997). This comparison is a question of fact. Bai, 160 F.3d at 1353. Hence, a change in the claim construction at the appellate level generally necessitates a remand to the district court to consider new factual issues unless the record on appeal supplies substantial evidence to support the jury verdict under the new claim construction. See Fed.R.Civ.P. 50.

On the issue of literal infringement, Mr. Bowers relies upon the accused templates' "CREATE" and "TRANSFORM" groups to satisfy the limitations of claim 1. With respect to paragraph d, Mr. Bowers proffered evidence showing only that each of the "CREATE" and "TRANSFORM" groups included some, but not all, indicia representing working functions. Moreover, the record contained undisputed evidence showing that the limitations of paragraph d are not met.

Specifically, Baystate's director of MIS (management information systems), John Pentecost, produced reports comparing menu trees of the relevant versions of CADKEY with corresponding versions of Baystate's accused Draft-Pak templates. That unrebutted evidence shows that each of the sub-menus under the "CREATE" group includes an associated dependent indicium — e.g., "End Pts" depending from "Line"; "3Pts" depending from "Arc"; "Ctr + Edge" depending from "Circle"; "Pos" depending from "Point"; "String" depending from "Polyin"; "5 Cond" depending from "Conic"; "Rect" depending from "Polygon"; and "2D Cubic" depending from "Spline" — that activates menus rather than a working function. Moreover, that evidence shows that none of the "TRANSFORM" group indicia activates working functions. This court, therefore, determines that the record shows that the '514 patent is not literally infringed. Because Mr. Bowers did not assert infringement under the doctrine of equivalents, this court does not consider that issue.

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 Mr. 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.

[1335] COSTS

Each party shall bear its own costs.

AFFIRMED-IN-PART, REVERSED-IN-PART.

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.^[2] 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, 109 S.Ct. 971, 103 L.Ed.2d 118 (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, 84 S.Ct. 784, 11 L.Ed.2d 661 (1964). See also Eldred v. Ashcroft, ___ U.S. ___, 123 S.Ct. 769, 154 L.Ed.2d 683 (2003) (applying patent precedent in copyright case). 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 [1336] 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, 114 S.Ct. 1164, 127 L.Ed.2d 500 (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." Id. at ___, 123 S.Ct. 769.

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.^[3] 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) (2000).

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, 109 S.Ct. 971.

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. Teledyne 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" [1337] 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, 92 S.Ct. 1983, 32 L.Ed.2d 556 (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." Ante at 1326.

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 10. 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." Ante at 1325. 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, 84 S.Ct. 784). From a preemption standpoint, there is no distinction between a state law that explicitly validates a contract that restricts reverse engineering (Vault) and 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) (2000) (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 [1338] 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. Id. 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 (emphasis in original). I respectfully dissent.

[1] Bowers urges in a conclusory fashion that this construction would render the preferred embodiment outside the scope of the claims, a result that requires "highly persuasive evidentiary support," Vitronics Corp. v. Conceptronic, Inc., 90 F.3d 1576, 1583, 39 USPQ2d 1573, 1578 (Fed.Cir.1996). Bowers has not established his premise (that the preferred embodiment is outside the claim scope), and even if he had, the reexamination history provides just that highly persuasive evidentiary support, as this court explains below.

[2] Like the majority, I do not reach the copyright claim.

[3] In the patent context, reverse engineering is viewed as an important right of the public. Bonito Boats, 489 U.S. at 160, 109 S.Ct. 971.