After having read the appellate court decision again, now for the 5th time, the trial court and the parties have some work to do.
The concurring opinion has many gems, but the more interesting issue is presented at the end, where the concurrence notes:
"This suggests that, in some cases at least, a belatedly disclosed restriction may lose some or all of its contractual force because there was no reason it could not be disclosed prior to the promisor‟s entry into the agreement. The restriction should also be required to fall within the zone of reasonable expectation from the perspective of the licensee. This criterion might be implicated by an undisclosed restriction unrelated to the subject matter of the agreement, or one that unexpectedly impaired the economic value of the licensed information or technology.
These criteria will have to be fine-tuned, and others may have to be articulated, as this area of the law evolves in light of commercial practice and judicial experience. In my view, however, they or something like them should determine whether the General Specifications were contractually binding on Kaleidescape. I would remand the matter to the trial court to consider that question in light of these and similar considerations."
CCA argued that K breached sections 1.5 and 2.1.2. Section 1.5 states that CSS is concerned with preventing casual users from unauthorized copying. I think breach of section 1.5 is tough to prove, as it does appear to relate to the purpose of the agreement, not a restriction on activities of the licensee. K has also taken steps to comply with section 1.5 by having all owners agree to not copying content not owned, as well as other steps to prevent serial copying by owners. Section 1.5 will not likely be the crux of the disputes when this case returns to the trial court.
The real issue is breach of section 2.1.2, which apparently requires disc in tray for playback. The interesting point here is that CCA could have disclosed this requirement (and other similar requirements of a very low technical level) before K agreed to the contract. If that's true, the trial court could rule that K is not bound by 2.1.2 and therefore there is no breach. Such a ruling preserves the rule of law stated by the appellate court that certain contractual provisions can bind the parties without being disclosed before contract formation, yet those undisclosed provisions are part of the agreement. Other items that "unexpectedly impaired the economic value of the licensed information or technology" must be disclosed if there is not a valid basis for the belated disclosure. It's hard to imagine a valid basis for not disclosing that all licensed equipment using CSS requires the disc to be in the tray prior to playback.
This follows the example of the franchisee and secret recipes in the opinion. The franchisor can rightfully withhold secret recipes that need to be followed by a franchisee, but must disclose that secret recipes are being withheld, and if those recipes are not followed, there will be a breach. This would prevent the franchisor from not disclosing some other hidden gem like "franchisee is required to buy uber-expensive mixing machine from franchisor in order to implement required secret recipes." For something like this to be enforceable, even if not disclosed upfront, the franchisor would be required to initially disclose that 1) secret recipes are being withheld and 2) machine of $X cost must be purchased by franchisee before the franchisee entered into the agreement.
In this case, CCA could rightfully withhold the decryption keys and other truly confidential information that needs to be both protected from disclosure to the public and also implemented by a licensed device. K would be bound by those confidential techical specifications withheld, but later disclosed. CCA, however, could not withhold important information from a licensee where the non-disclosure is not justified on confidential grounds. With that understanding, CCA cannot enforce section 2.1.2 (disc in tray requirement) against K because CCA could have, and should have, disclosed 2.1.2 at the outset of the agreement, but withheld that disclosure without an adequate justification.
Maybe this is wishful thinking and a hyper-technical point, but it seems fairly logical. What if, as part of the later technical requirements, CCA now wants to require all licensed devices to become inoperable after 500 DVDs are played?
The appellate court suggests that type of later-disclosed restriction may be a valid post-agreement restriction that can be incorporated and enforced, if one accepts the proposition that ALL later-disclosed terms are enforceable.
It seems the concurrence recognizes that there needs to be some boundary as to what must be disclosed upfront for enforceability purposes, or a licensee may not receive the bargained-for exchange because the actual exchange (license) might not be commercially reasonable, had the licensee understood the restriction at the contract formation stage.
K will likely press the position that "a belatedly disclosed restriction may lose some or all of its contractual force because there was no reason it [section 2.1.2] could not be disclosed prior to the promisor's entry into the agreement." From what is stated in the opinion, CCA is going to have address this in a very creative way.
Although I am an IP lawyer, none of this constitutes legal advice, just my humble opinion as a Kscape owner.
Jay
