ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Tuesday, May 11, 2021

New Scholarship from Acclaimed Novelist Nancy Kim: License v. Sales

Like WindNancy Kim, whose new novel (left) is now a top seller in multiple categories (see below) and is available on Kindle, has also published some new scholarship, Revisiting the License v. Sale Conundrum, in the Loyola L.A. Law Review.  

Contract terms can determine whether a transaction is a sale or a license.  As a result, consumers, who likely will not be reading their contracts carefully, may think that they have purchased a good when then are in fact, mere licensees.  The article focuses on two factors: "whether the terms affect the 'sold' portion or the 'licensed' portion" and when the transaction is agreed upon.  If parties are going to restrict the rights of the purchaser/licensee, any restrictions must be communicated before the transaction occurs (109).

The article is a useful corollary to Nancy's body of work on the requirements of contractual consent.  Citing "efficiency," courts have found ways to impose contractual terms on consumers who have not given meaningful consent to those terms, usually because they never had a meaningful opportunity to do so.  In the case of licenses, courts have substituted their normative view that certain transactions should be treated as licenses for a factual analysis of whether or not the transactions in question actually are licenses (110).  Reversing Hans Kelsen's famous dictum, Nancy stresses that one cannot reason from an ought to an is.

Screen Shot 2021-05-11 at 8.43.33 AMA review of Ninth Circuit case law reveals that contractual language identifying a transaction as a license "is helpful but not determinative."  Everything depends on timing and the nature of the restrictive provisions (123).  Nancy explains how rolling contracts developed as a means of protecting a seller's self-replicating innovations.  The need for such protections is nicely illustrated in the Supreme Court case, Bowman v. Monsanto, in which Monsanto sought to prevent a grower from replanting genetically modified seeds 124-26).  Judge Easterbrook's notorious opinion in ProCD v. Zeidenberg then paved the way for opportunism by seller, who could use rolling contracts to impose terms on unwary consumers (126-27).  

Nancy helpfully summarizes the consequences of the seemingly impenetrable case law as follows: 

First, an authorized sale—and only an authorized sale—triggers the copyright first sale doctrine and patent exhaustion. Second, a contractual breach differs from infringement. Infringement occurs when the licensee exceeds the scope of the license but not where the licensee breaches another provision. Finally, a contract may give rise to both a claim for breach and a claim for infringement; however, the claims cannot be for violating the same provision (140).

Nancy then provides a method for determining whether a transaction is a sale or a license.  Parties may shape the transaction using contracts, but their power to do so differs depending on whether the transaction involves a patent or a copyright (141).  The analysis is too complicated for me to attempt to summarize here.  Fortunately, Nancy provides a nifty flow chart that maps out the analysis (153-54). 

Nancy_kimIn her conclusion, Nancy again notes the sellers' legitimate interest in protecting themselves against opportunistic buyers/licensees who may exploit intellectual property baked into  goods.  Licensing transactions are one way for sellers to do so.  However, Nancy raises concerns that businesses might "exploit the licensing model to impose contractual terms and defeat the reasonable expectations" of those who use their products (155).  Here, as in much of her work, Nancy stresses the need for transparency, including a requirement that consumers specifically assent to terms that clarify restrictions on the uses to which they can put the products that they get through a transaction that they might otherwise think of as a sale but may be a license.

As Nancy makes clear in her introduction, the difference between licenses and sales are a big deal.  Consumers' interests in the goods for which they have licenses are significantly different from and inferior to the rights they have in goods that they purchase.  The differences will have an impact on everything from alienability to privacy, and those differences will only become more important as we slide imperceptibly into a world we share not only with ordinary consumer goods and but also with the Internet of things, the pod-people of consumer goods.

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