Headed in reverse

SUPPOSE YOU'RE A software developer with the good habit of keeping an eye on what the competition is doing. And suppose you find a new feature in your competitor's latest release that your customers would probably like. Can you implement a similar feature, or would that make you guilty of violating the "no reverse engineering" clause in your competitor's shrink-wrap license?

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Outlandish as it may seem, a recent federal appellate court ruling appears to be saying that you indeed would be guilty of violating a contractual obligation in such circumstances. On Aug. 20, the Federal Circuit Court of Appeals issued a decision in the Massachusetts case of Bowers vs. Baystate Technologies, upholding the enforceability of a standard on reverse engineering in Bowers' shrink-wrap agreement. Quite simply, if the court's decision truly becomes the law of the land, it has the potential to destroy the software industry in this country.

The case goes back more than 10 years, when Bowers and Baystate Technologies had competing add-on products for CadKey, a computer-aided design product. In 1991, Baystate released a new version of its product that Bowers felt duplicated too closely the menu structure of its interface template for CadKey.

Baystate officials acknowledged in later testimony that they had indeed spent several weeks analyzing Bowers' product in what they considered routine competitive analysis. Baystate appears to have argued that the similarities in the products were due to the fact they were both implementing ANSI (American National Standards Institute)-standard CAD commands for the same underlying product. Suits and countersuits followed, involving patent and copyright claims as well as breach of the reverse engineering clause, with Bowers triumphing in a jury trial. Baystate appealed and, in the meantime, Baystate acquired CadKey itself, becoming CadKey Corp.

In its decision last month, the Federal Circuit Court reversed the patent infringement verdict (for which you can be grateful, since it spares you having to hear my rant about the utter stupidity of software patents). Unfortunately, it saw no reason to consider the merits of Bowers' copyright infringement case because "the shrink-wrap agreements in this case are far broader than the protection afforded by copyright law." I say that's unfortunate because it means we don't know what evidence of copyright infringement was presented to the original jury. Were there signs of source code being copied, or was it all based on the "look-and-feel" arguments in vogue for software copyright cases at the time? Not knowing those facts, we can't really say who deserves to win this case.

What's really important here is not whether Bowers or Baystate/CadKey wins, but the precedent the court is setting with the facts as it presents them. This decision flies in the face of some well-known Federal Circuit Court decisions that have basically said that, in a case like this, the reverse engineering clause would apply only to aspects of Baystate's product that infringed Bowers' intellectual property rights. Instead, this court held federal copyright law would 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."

The implications of this interpretation of a shrink-wrap license being a real contract are pretty staggering. As Bowers' law firm, Banner & Witcoff, Ltd. of Washington, D.C., put it in a press release after the decision was issued, "This decision is important for software companies that routinely analyze the features of competitors' products when making an improved version of their own product ... a company, which analyzes a competitor's product in violation of a shrink-wrap license agreement, may be liable for substantial damages."

Others who are less happy about the decision agreed that it could have very serious consequences. "The biggest problem is that, the way the court wrote the decision, it seems to have found that a shrink-wrap restriction is not preempted," says Jonathan Band, an intellectual property attorney at Morrison Foerster in Washington, D.C. "Having come up with this problematic decision, it could be followed by other courts."

According to Band, Baystate/CadKey is filing for a rehearing of the case, and there is some hope that the court will entertain briefs from interested parties who were previously unaware of the case. So it's not yet time for panic. Even if the ruling does stand, it doesn't overturn the very different precedents that exist in several other federal circuits.

Still, it's a step in a very dangerous direction. It's somewhat ironic that the court chose to take such a UCITA-like approach to treating a shrink-wrap as an example of "freedom of contract." I suspect even some of UCITA's biggest supporters will be less than overjoyed with this decision. Under the criteria this court applied, wouldn't Microsoft be as guilty of reverse engineering Netscape to create Internet Explorer as Baystate was of reverse engineering Bowers' product?

Virtually all software companies have prohibitions against reverse engineering in their shrink-wrap licenses, yet virtually all software companies reverse engineer other products. It's not just a matter of keeping up in the feature wars -- reverse engineering is a necessary tool for interoperability and security purposes. But judges and juries may not understand this, and the consequences of their lack of understanding in this most litigious of societies could be very grave indeed. Like it or not, the competition is going to analyze your software to make their own better. It's just a matter of whether that competition will be doing so in this country or somewhere else.