Infosys 204
I was pleased with the responses to Assignment #2 and was glad to see that most of you took my last memo to heart both in terms of writing and substance. Keep up the good work!
A few of my points on look-and-feel from the last memo don’t seem to have sunk all the way in. That’s disappointing. If you don’t understand the user requirements the first time around, that’s one thing. But more than once is just bad engineering. So with regret I must announce a somewhat draconian rule: any future paper that is handed in that is not double-spaced, with a font size of at least 12 point, or with margins less than what you see in this memo will be returned unread and ungraded and will be considered late.
Some of you also need to reread the last memo, especially my detailed (!) explanation about the interaction of closed quotation marks and other punctuation. I can’t imagine how I could have been clearer about that, either.
Since many of you used footnotes for the first time in Assignment #2, let me say a little about footnotes. First of all, to continue the punctuation lesson, when a footnote comes at the end of a sentence, the note number goes after the period. If there is a closed quote after the period, the note number goes after that.
More concretely, I don’t especially care what footnote standard you follow, but you must follow some standard and follow it consistently. The Chicago Manual of Style is fine, as is the Harvard Uniform Citation system (the “Blue Book”), or the Chicago Maroon Book. The rules for citing cases, articles, books and other legal material are similar between all systems, but some of you aren’t following any of them (for a case, for example, you must give at least the case name, the reporter and page, the court and year of decision). The basic idea is that you must provide a footnote when you make a statement that either quotes from or relies on another text for support, and the note must be sufficient for the reader to easily find the source and verify that it says what you say it says. This includes websites—the title and the URL at least must be provided.
There were really two basic parts to Assignment #2 – I asked you to analyze the Hotelling-Elder transaction under the Terms of Service Agreement and First Sale Doctrine and tell me if the transaction violated the Agreement. Then I asked you to tell me if you thought the transaction should be allowed and to give a socio-economic argument that supported your view.
What I was looking for in the first part of the paper was solid textual analysis of the Agreement and the excerpt of the Copyright Act that I gave you, which required you to understand both the transaction and the agreement. In the second part of the paper, I wanted to see how you did at weighing the bigger social and economic interests at stake.
Some papers did a particularly good job with one or the other of the two parts; others did solid work in both. A few papers sort of missed the boat (or both boats) and if you think that might apply to yours I encourage you to come see me after you’ve read this memo. What I didn’t want to see were a lot of conclusions and moral judgments about the future of the music industry (at least not without solid analytic support), and I specifically told you not to tell me the law was “clear” when it isn’t or that allowing or not allowing resale of digital products is “unfair” or “unjust.” Some of you couldn’t resist the temptation, which wasn’t necessarily fatal but always distracted from the analysis.
As with Assignment #1, there was no right answer, but there were certainly a few important provisions of the Terms of Service (ToS) agreement that ought to have been referenced and discussed (and please be specific in the future about the terms that you are referring to—telling me that there was no violation because the sale was not commercial doesn’t help me if I don’t know where you saw a reference to commercial sales).
As an aside, a violation of a terms of service agreement (or indeed any breach of any contract) is not “illegal,” a word most of you used in your discussion for or against. A contract is not law, so a failure to follow it is not breaking the law. It is illegal to drive 35 miles per hour down Shattuck Avenue; it is a violation of the Terms of Service Agreement to download an iTune to more than three computers. Of course some breaches of the contract, e.g., misusing the Apple logo, are also illegal acts—a violation of trademark or copyright law, in other words. But be careful to distinguish between the two. Apple does not have police powers to enforce its contracts.
Section 13(a)
One thing I was particularly pleased to see was that many of you noted the poor drafting of Section 13(a) of the ToS agreement. The sentence that begins, “You agree not to modify, rent, lease, loan, sell, distribute, or create derivative works based on the Service, in any manner . . .” is missing a noun; it should read “You agree not to modify, rent, lease, loan, sell, or distribute the Service, or create derivative works based on the Service, in any manner . . . .” As written, one could argue that all that is being said here refers to derivative works,[1] and then only of the Service (that is, the iTunes store and its related software), not to non-derivative distributions of the music files (the “Products,” although Section 13(a) does refer to the Service as including audio clips). Section 13(a) is badly written, which is a surprise given how many consumers Apple expected to be bound by the agreement, but there you go. In general, courts will strictly construe contracts against the side that drafted them, especially when the other side had little negotiating power. On the other hand, this is a pretty obvious technical error and would probably be “corrected” by a court if you argued solely on the basis of the error. In any case, the close and active reading was impressive.
Section 8(a)
Section 8(a) is also poorly written. What are you promising when you agree to the statement that begins, “[y]ou should not reveal your Account information to anyone else . . . .”? (It doesn’t say, as one of you misquoted it, “you shall not reveal…”!) It really doesn’t bind Hotelling in any way, and certainly doesn’t constitute a breach for him to reveal his account information in spite of this admonition. But, as many of you noted, Section 14(a) is a little clearer. It says that a failure to safeguard account information is grounds for termination. The termination clause is always an important one to read, although it will usually make references to other conditions scattered through the contract.
On to the substance of the transaction. Did Hotelling violate the agreement by transferring his account? Some of you argued that the transfer of the account was a sale of his copy of the song (which, in effect and intent, it was), and that selling his copy was prohibited as a commercial use (Section 9(b)). Some of you also suggested that his sale of the account was an attempt to circumvent the security technology (Section 9(a)), which was clever although I think a weaker argument. Others pointed out that the sale of the account was not a sale of the song at all, which is technically true but a little formalist and unlikely to pass the smell test in court (judges generally don’t go for “form over substance” arguments).
Was the sale, by the way, a commercial use? It’s true as many of you said that the term commercial is not defined, but be careful too not to complain about everything needing definition or clarity—that’s why the agreement is already as long as it is, and we’d hate to encourage Apple to make it even longer.
Having said that, there is a general argument that goes pretty far in IP disputes that “commercial” has a pretty broad definition. Users of Napster who give away their MP3 files with no hope or intent to profit by the sharing are still surely engaged in commercial activity. Whether or not a transfer of IP constitutes commercial use (an important element, for example, of fair use, and of the exclusive right of copying) really depends more on the effect such transfers have on the copyright holder’s exclusive rights. If the transfer has the effect of greatly impairing the exclusive control over markets and channels that copyright gives to authors, in other words, the transfer is commercial regardless of whether any money changed hands, or whether the seller made a profit (Hotelling here lost money on the deal). I don’t mean to suggest that this was a commercial use; only that determining that would require a broader view of the effects of such transactions rather than a simple examination of the money flow.
Most of you waited until later to bring in First Sale, but a few of you wisely brought it into the first part of the assignment. Assuming for the moment that First Sale applies to digital copies (a big if we’ll get to in a moment), do we need to examine the ToS at all? Remember I told you that many contracts (especially those that are simply given to consumers without negotiations, so-called “contracts of adhesion”) contain terms and conditions the drafters know perfectly well are prohibited by law—examples include waivers of liability even when injury is caused by one’s own negligence (in most states) or, in California in particular, non-compete clauses that conflict with Section 16600. So if First Sale applies to iTunes, it really doesn’t matter how explicit Apple is in trying to deny consumers that right—such terms are simply ignored; they are null and void even if explicit and agreed to by the buyers. You can’t agree to sell yourself into slavery—society’s need to ban that practice is strong enough that we have forbidden private parties even to negotiate it, and doing so is generally not considered to be a violation of the freedom of contract guaranteed by the Fifth Amendment.
Of course it is not at all clear that First Sale does apply here. There is the text of the Copyright Act, which many of you handled nicely, that speaks only to the right of sellers to resell their copies, and the fact that copies are defined as fixed in tangible media—whether media that exists today or is later invented. Does a digital download ever meet that definition? The Copyright office’s report on DMCA tells you only that we’re not sure, and that there are strong policy reasons (see below) why the answer should go both ways.
Though no one made this argument, I think in fairness to Apple we ought at least to entertain the idea that the difficulty in parsing the ToS agreement may be intentional. After all, Apple is trying hard to balance the interests of two hostile groups here—record labels and other IP owners on the one hand and music consumers on the other. If they said explicitly you couldn’t resell your songs they’d be blasted by the user community, and if they explicitly said you could they’d probably be unable to get the agreement of the copyright owners to license the songs in the first place. Those of you who tried to pass moral judgment on Apple for being untrue to its culture of consumer advocacy weren’t being entirely fair to the company—getting iTunes to work at all, even on a trial basis, required some compromises. They might really be trying to save the music industry from itself.
Likewise, some of you were very disappointed at the gap between the marketing for iTunes and the reality of the ToS agreement. This was a clever argument but ultimately unconvincing to me or, more to the point, unconvincing as a matter of law. First of all, Steve Jobs said only that users don’t want to subscribe to music, they want to own it. He didn’t say he understood that they wanted to own it and be able to resell it. The point he is making is that once you buy a song, you shouldn’t have to ever pay again to listen to it—whether based on the passage of time or the number of times you listen to it, an unpleasant feature of other experiments in digital distribution. iTunes does not renege on that promise.
In addition, marketing messages that make reference to “buying” “copies” of songs using iTunes may be misleading, but under no applicable U.S. standard would they be considered fraudulent (you would have a better case in Europe). The ability to divest yourself of tangible property is certainly one of the rights we commonly associate with ownership in general, but it isn’t the only one. Certainly a more central feature of ownership is that the seller is unable to divest you later of your own use or enjoyment of the subject of the sale, and that is the case with iTunes. You do “own” the songs you “buy,” even if you can’t resell or bequeath them.
In any case, absent fraud the marketing material is irrelevant—the ToS is the only binding document, as Section 23 makes clear. The point of these “entire agreement” clauses is to highlight to the parties that any other material presented during the marketing or negotiation phases of the transaction--written or oral--is not binding if it does not make it into the final agreement. Even if the seller promised you the world but the agreement grants you only a visit to Nebraska, if you sign it the promise is irrelevant. For all the institutional reasons we have discussed so far in class, courts are loathe of weigh evidence outside the “four corners” of a contract—they will do so under limited circumstances (none of which applies here), but you would hardly want to rely on that.
Yet another reason it is essential in any situation to READ THE DOCUMENT before you agree to it—whether it is a license to digital media or an employment agreement.
2. The Socio-Economic Argument
Once again, there was no right answer, and what I was most hopeful to find in your papers was thoughtful, subtle appreciations of the costs and benefits to society as a whole from your choice of “First Sale” regime—either the no resell regime or the unfettered resell regime. Telling me that it’s only fair to be able to resell your copy of an iTune because, after all, you paid for it, is just a conclusion, and a circular one at that. Rather than lay out both cases, I’ll just highlight what I thought were some of the best points made by papers on arguing for either of the two regimes:
Economically, indeed, the resale market may be there as a safety valve for what I called the “deadweight loss” inherent in copyright—the monopoly price being higher than marginal cost of each unit and therefore leaving out certain buyers who would pay a profitable price but not the monopoly price. Sellers may not easily be able to offer the optimal price to each buyer (“perfect price discrimination” in economic terms) without undermining the overall market—one reason, for example, that Priceline makes it so difficult to specify what flight or hotel you want is that they want to make sure business travelers don’t use the service. In books, price discrimination is used but at a very gross level—if you want to wait a year for the book and get an inferior physical copy, you can buy the paperback for much less than the hardcover, for example.
So the system may have built-in the First Sale doctrine, now codified in 17 U.S.C. § 109 (2003), to minimize the amount of dead-weight loss caused by the grant of exclusive rights for limited times. The risk, of course, is that if the resale market is too robust, it will become the exception that swallows the rule. Since digital media can be copied and transferred at (a) almost zero marginal cost and (b) almost zero degradation of quality in each subsequent transfer, there is reason to worry that a secondary market will do more harm than for physical media to the copyright owner’s primary market and, therefore, upset the balance between incentives and net social loss. If producers can’t be confident of recovering their costs and making a market rate of return on their investment, we’ll have less IP in the first place, and everyone loses.
Enough! On to Assignment #3.
[1] A “derivative work” is not a copy but, like a film adaptation of a book, an interpretation of the protected expression in a different and protected medium. See 17 U.S.C. § 101. So if the sentence is read to prohibit only the sale of derivative works, then Hotelling would not have violated Section 13(a) since he sold (at best) a copy.