Lawyers, money needed for Psystar's legal battle

They can probably skip the guns, but Psystar faces an uphill--if not impossible--legal battle if Apple takes action to halt the sales of Open Computers running Mac OS X.

Tom Krazit Former Staff writer, CNET News
Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.
Tom Krazit
6 min read
Psystar's Open Computer, which appears likely to face a legal challenge from Apple in due time. CNET Networks

How much longer can Psystar get away with selling Open Computers?

Now that Psystar has satisfied any doubts that it's a real company making real products, the propriety of those products seems bound to be tested. In case you missed it, Psystar is currently selling Open Computers with Apple's Mac OS X Leopard preinstalled, in what appears to be a clear violation of Apple's software license agreement for that product.

There's a running joke about the number of consumers that actually read the licensing agreements that come along with new software. But these types of agreements have been upheld by several U.S. court rulings as valid contracts between a software maker and a customer, even if the customer didn't have a chance to read the licensing agreement until after they purchased the product.

What makes this case interesting is that many believe so-called shrink-wrap or click-wrap licenses are ripe for a new challenge on the basis that EULAs (end user licensing agreements) allow software companies to put almost anything they can dream up in the agreement. An attempt earlier this decade to unify the various ways states treat the issue around the Uniform Computer Information Transactions Act, which would have once and for all made shrink-wrap licenses binding contracts, never really got off the ground after heated opposition to the business-friendly terms of that proposal. Specific provisions of EULAs have been deemed unlawful, but the general concept that software customers license software, rather than purchase it, has endured.

If Apple decides to take action, Psystar will be on the defensive. According to legal experts, the company will need a significant amount of cash to fight off Apple's likely challenges on several different fronts. While Psystar might be able to make some headway, their only apparent hope of scoring a decisive win is to go for the antitrust home run and convince a court that Apple's domination of the market for computers running Mac OS X is harming consumers.

Rudy Pedraza, the head of Psystar, said that on the advice of his lawyers he was unable to comment on the legal issues potentially facing Psystar, although he did say that the company has yet to receive any contact from Apple. An Apple representative declined to comment on Psystar.

License to drive

The looming Psystar-Apple battle centers on the licensing agreement that Apple requires Leopard users to accept if they want to use the product, in much the same manner as almost every piece of software sold in the world. The most pertinent line is probably this one: "This License allows you to install, use and run one (1) copy of the Apple Software on a single Apple-labeled computer at a time. You agree not to install, use or run the Apple Software on any non-Apple-labeled computer, or to enable others to do so."

Apple's licensing agreement for Mac OS X Leopard says you can only install it on Apple-labeled hardware. Apple

There's little doubt Psystar is installing Apple software on non-Apple-labeled computers, said Richard Vermut, a lawyer with Rogers Towers in Florida who specializes in software licensing and technology patent matters. "Generally speaking, a software developer has the right to sell software with these shrink-wrap licenses, or end-user agreements, and they are enforceable" unless the terms of the license would harm the consumer or otherwise violate existing laws, he said.

The precedent for enforcing these types of licenses dates back to a 1996 case called ProCD vs. Zeidenberg, Vermut said. Back in the early 1990s, ProCD sold a specially organized compilation of a phone directory on a compact disc that Matthew Zeidenberg copied onto his hard drive and made available over the Internet for a cheaper price. ProCD sued Zeidenberg, claiming he was violating the terms of the license that came along with the software by redistributing the software.

To enter into a contract, the terms of the contract have to be "offered and accepted," Vermut said. The lower district court said the licenses were not enforceable because the terms were on the inside of the package, and therefore couldn't be accepted before purchasing the product. But the U.S. Court of Appeals for the 7th Circuit overturned that ruling, determining that "shrink-wrap 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)."

In the ProCD case, Zeidenberg had the opportunity to review the license prior to installing the software on his computer, and his decision to click "I agree" constitutes acceptance of the terms of that license, the appeals court ruled. If you can back out of the deal after reading the terms, by declining to install the software or returning the box, you've asserted your right-of-refusal under that ruling.

This isn't exactly the most forthright way of doing business, but it's been the way software sales have worked for a long time, said Chris Ridder, a fellow at Stanford Law School's Center for Internet and Society. "There are a lot of problems with shrink-wrap licenses, but there's a good chance the court would find it enforceable."

Vermut agreed. "For the most part, looking at more recent cases, courts are following ProCD," he said. "There still isn't any appellate court decision that is giving wholesale refusal to recognize this type of licensing."

One argument that Psystar could try to advance is that when you purchase software, the company is actually selling it to you, not leasing it with certain rights granted the way things exist now, Ridder said. This would allow Psystar to invoke the "first-sale doctrine" that allows owners of copyright works to sell or redistribute that product without running afoul of copyright restrictions.

You can't invoke the first-sale doctrine if what you purchased was a license. However, a 2001 case involving Adobe ruled that in some circumstances, courts will accept the notion of software having been sold, rather than licensed.

Big fish, little pond

Psystar's best shot--albeit a long one--at keeping its doors open for business would be to argue that Apple is illegally tying the purchase of its operating system to the purchase of its hardware because it has a monopoly on the sale of Mac OS X-based computers, said Jim Burdett, an attorney with Venable in Washington, D.C.

Burdett, a lawyer at Compaq during what he jokingly called the "First Clone Wars," said Psystar would have to convince a judge that the relevant market in this case is limited to just Mac OS X-based computers, not personal computers in general. Obviously, Apple has a very small share of the general personal computer operating system market but a rather large share of the Mac OS X market.

Do you buy a Mac because of the software, or because of the hardware? Apple

"People want Mac clones for the operating system, not the hardware," Burdett said. Apple will try to argue that its hardware is just as important a factor in making a Mac vs. PC buying decision, but Psystar will try to prove that with the response to the Open Computer, there is significant demand for Apple's operating system on non-Apple hardware.

"It would be an interesting situation to argue from the Sherman Act side, if you had the money," Burdett said. "I don't think it's too insurmountable, it's just a very costly issue to raise." Apple, with billions in cash, could easily fend off Psystar appeals for years if it can get a favorable ruling on its licensing agreement, or convince a judge to view the applicable market as the personal computing market in general.

This is the heart of the Psystar matter, and why the company has drawn so much attention over the past two weeks. Apple has been able to argue convincingly for years that the unique combination of its hardware and software is what makes a Mac a Mac. And now, a company has come along trying to challenge that definition, at a time when demand for the Mac has probably never been higher.

While the early reviews on the Open Computer are lukewarm at best, Psystar isn't trying to craft a high-end PC. It's trying to demonstrate that people want Mac OS X at cheaper prices. In the long run, buying Mac OS X on the cheap may not be a wise investment, but people still buy Kias, eat at McDonald's, and drink Natural Light for some reason.

Psystar seems determined, and we're just going to have to wait and see how the first legal salvos play out. It seems very unlikely that Psystar has the resources to mount a legal challenge to Apple's EULA--in effect, the concept of EULAs in general--but in the right venue, with the right judge, they could at least score some legal points while making a name, and some profits, for themselves.