Comments on: Freedom of Contract and Contract Costs

By: Adaku praise

Adaku praise — Fri, 28 Nov 2008 13:35:14 +0000

How can we discuss the concept of freedom of contract

By: Adaku praise

Adaku praise — Fri, 28 Nov 2008 09:35:14 +0000

How can we discuss the concept of freedom of contract

By: Adaku praise

Adaku praise — Fri, 28 Nov 2008 08:35:14 +0000

How can we discuss the concept of freedom of contract

By: Soma

Soma — Mon, 24 Nov 2008 04:19:07 +0000

Congress and the courts have specifically considered and rejected the idea that this kind of factual information should be covered by copyright law.

By: Tim Lee

Tim Lee — Tue, 04 Nov 2008 16:03:14 +0000

The problem is that the no-reverse-engineering clause is specifically targeted at the small minority of users who want to reverse engineer. The firm isn't going to sign separate agreements with those people because they don't want people reverse engineering their software and producing compatible versions that could compete with their own. See, for example, the BNetD case.

By: WilsonF

WilsonF — Tue, 04 Nov 2008 15:24:37 +0000

Tim;

Thanks for giving me a good take at what benefits can come from unlicensed software. It's something for me to chew on.

I still think it's possible that this type of offer and acceptance can be efficiency increasing. I wonder then if the small number of users who want to reverse engineer the product can't simply get together and sign separate agreements with the software companies? Clearly still we have a situation where the company derives a benefit from making a contract with all users that only a small number of users would have rejected. It's just a less obviously efficiency-enhancing provision. This reverse engineering issue is really interesting.

It's hard for my to deny the enormous benefits of open office. I will ponder...

By: Tim Lee

Tim Lee — Tue, 04 Nov 2008 05:28:40 +0000

Hey Wilson,

Thanks for the thoughtful reply. I think this is where we disagree:

If Pro-CD is not able to prevent Zeidenberg from using the software in a commercial fashion, he can do a lot of damage to their business. They'd just rather not sell it to consumers at all than be unable to impose this contract on Zeidenberg.

The Pro-CD case is a great example, and I'm glad you brought it up. However, I don't think we ought to start with the assumption that ProCD needs to be able to employ a particular business model and then reason backwards to the legal system required to support that business model. I think it's way too pessimistic to assume that in the absence of this particular enforcement mechanism, that they'd be unable to engage in price discrimination and therefore unable to produce their product at all.

More to the point, if you think that the kind of information ProCD produced is worthy of copyright-like protection, the right way to deal with that is to amend copyright to include some kind of right database protection. Congress and the courts have specifically considered and rejected the idea that this kind of factual information should be covered by copyright law. It strikes me as perverse to use a contract-copyright hybrid to allow copyright holders to restrict the use of their works in ways that neither contract law nor copyright law, by themselves, permit.

Now, you want to know what the big deal is. A key point is that the fact that some activity is only performed by a small fraction of customers doesn't necessarily mean that it's not important. As a computer geek, my personal hobby horse is reverse engineering. Software EULAs routinely have clauses forbidding reverse engineering, which makes it very hard for engineers to examine software, learn how it works, and produce interoperable software or hardware devices.

Why does that matter? Well, consider Open Office. It exists because some determined free software developers reverse engineered the Microsoft Office file formats and implemented competitive versions. Open Office produces immense social benefits. Its users obviously benefit from it, but users of Microsoft Office also benefit, because it gives Microsoft some competition and saves customers money. So all things being equal, it's better to have a policy that makes projects like Open Office easier to create.

So lots of people benefit from Open Office and therefore rely indirectly on the benefits of reverse engineering, but only a tiny fraction of those people actually want to engage in reverse engineering themselves. So it's to everyone's benefit to have contract that don't make it too easy to restrict reverse engineering, even though only a few people will actually take advantage of that privilege.

To return to my earlier point, copyright law protects reverse engineering as fair use for precisely the reasons I described above. So software developers' efforts to write "no reverse engineering" rules into their EULAs amounts to an effort to expand their monopolies beyond the bounds permitted by ordinary copyright law. If Congress decides that reverse engineering isn't beneficial after all, it can amend copyright law to say that reverse engineering is fair use. But as long as copyright law permits reverse engineering, I think contract law should look very skeptically at novel interpretations of contract law that effectively nullify the traditional limits on the scope of copyright protection.

By: AlexHarris

AlexHarris — Tue, 04 Nov 2008 04:07:07 +0000

Clearly, what you economist types (and I include Tim in that statement) will think of the contracts in question depends on how good you think their content is. If the contracts all said "...and, further, the customer agrees to paint Bill Gates' house and wash Paul Allen's cat and the customer is deemed to accept this agreement by breathing for thirty seconds after having received these terms," I doubt you would be such a fan. Tim's point is that, in principle, such obviously inefficiently one-sided terms can sneak in when one side can make a "contract" on behalf of both parties.

I'm a deontologist. I don't care what the terms say. It's just plain unjust to bind me to something I never agreed to.

By: WilsonF

WilsonF — Tue, 04 Nov 2008 00:14:59 +0000

To clarify, I would say that it's OK to impose a reviewing cost in this situation since that cost is likely to be very very low–people won't review because they have no incentive to, and the benefits that construe to the software company are large.

By: WilsonF

WilsonF — Mon, 03 Nov 2008 23:38:49 +0000

Tim, I have very much enjoyed this series of posts from both you and Alex. . .I'm not an expert on these matters, but I find this question really interesting. I basically still don't see the efficiency problem here.

"Rather, the goal should be to align incentives so that a party only offers a contract if its benefits to all parties outweigh its expected costs."

I think it's easy to imagine a world where this assumption leads to the conclusion that contracts should be this easy to form. The 'half-the-costs' analysis fails because the items at issue are very small probability, so to any individual consumer the benefits for negotiating on them are vanishingly small, but to a company that sells a million units, the benefits are large.

The terms do not apply to the vast majority of consumers; either they are uninterested because the terms relate to unlikely situations (forum selection clauses, like in Carnival Cruise) or they relate to conduct the user has no intention of engaging in (such as commercial exploitation, as in Pro-CD). If Pro-CD is not able to prevent Zeidenberg from using the software in a commercial fashion, he can do a lot of damage to their business. They'd just rather not sell it to consumers at all than be unable to impose this contract on Zeidenberg.

If the alternative is forcing Pro-CD to paste the necessarily complex agreement on the outside of the box, or to make people read it at the door of Best Buy, no one is going to buy their product. However, in a world with shrinkwrap contracts people can happily buy the Pro-CD software, and take it home and use it and never risk violating the license agreement.

I think (but don't know, an important distinction) that the reason other products aren't sold with special contractual attachments is that the potential benefits are rather small, and the market is keeping them in check rather than a theory of agreement. Maybe I'm wrong, maybe the court has held them unenforceable, but I would think that between Carnival Cruise and Pro-CD if there was something there they'd exist. I could be totally wrong about this stuff, but those are my thoughts.

As you know, I love your stuff. Keep it coming.

http://people.hofstra.edu/peter_j_spiro/cyberla...