Psystar's Open Computer, which appears likely to face a legal challenge from Apple in due time.
(Credit: 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.
(Credit: 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?
(Credit: 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.
Psystar is back online selling "white box" Macs with a few subtle changes, and one employee has already played the monopoly card.
As you might recall, Psystar's Web site was overwhelmed Monday after it was found to be selling cheap computers with Mac OS X Leopard preinstalled. This caused quite the commotion, as Apple does not license its operating system to other hardware makers, and specifically prohibits (PDF) end users from installing Mac OS X on anything other than an "Apple labeled" computer.
Psystar's OpenPro Computer, which is available with Mac OS X Leopard preinstalled.
(Credit: Psystar)Ars Technica noted that Psystar made several changes to its Web site while it was down Monday. First of all, the product is no longer the OpenMac, it's the Open Computer. Psystar's owner, Rudy Pedraza, told Ars that Psystar did that on their own to "avoid any issues." Wonder what those might be.
The company is also now offering the "OpenPro Computer" in addition to the Open Computer, which might remind you of a certain desktop computer sold by a certain California company that uses a piece of fruit as a logo. That machine costs $999, can be upgraded to quad-core processors, and is available with Leopard preinstalled.
And, in perhaps the most necessary change, they changed the nails-on-a-chalkboard "not non-safe" phrase attached to the description of whether or not you should install Mac OS X updates to your Open Computer. Grammarians, rejoice.
None of those changes will allow Psystar to escape the basic question about its business model: Apple doesn't permit the installation of its operating system on anything but its hardware. One Psystar employee told Information Week that this requirement means Apple is behaving like a monopoly. "What if Microsoft said you could only install Windows on Dell computers?" the employee told IW.
Psystar is positioning itself as the "open" computer company. The Open Computer uses techniques--hacks, really--developed by the OSx86 project to free Leopard from the confines placed on it by Apple.
"Psystar has assembled a system that is completely operational with Leopard called the Open Computer. We call it the Open Computer to reflect the opening of what has previously been a hardware monopoly," the company wrote on a Web page describing the Open Computer.
Since they brought it up, let's review the basic definition of a monopoly, shall we? And remember, there's nothing illegal about having a monopoly, it's only when you use that monopoly for nefarious purposes that you get pinched.
The business section of Answers.com says, "A monopoly is a market condition in which a single seller controls the entire output of a particular good or service. A firm is a monopoly if it is the sole seller of its product and if its product has no close substitutes. Close substitutes are those goods that could closely take the place of a particular good; for example, a Pepsi soft drink would be a close substitute for a Coke drink, but a juice drink would not."
Debate the aesthetics all you want, but I'd argue that Windows and Linux are, for the purposes of personal computing, close substitutes to Mac OS X. They can run a personal computer. They can connect you to the Internet. They can run a basic suite of productivity applications.
You may prefer Mac OS X for a variety of reasons, but Apple's requirement that you can only run Mac OS X on Apple hardware doesn't prevent you from using a personal computer. If the only other substitutes were Palm OS phones or AIX servers, maybe you would have a beef.
Answers.com goes further to say: "The fundamental cause of monopoly is barriers to entry; these are technological or economic conditions of a market that raise the cost for firms wanting to enter the market above the cost for firms already in the market or otherwise make new entry difficult."
This is not the only computer in the universe.
(Credit: Apple)If Mac OS X was the only operating system in the entire universe, and Apple required you to use its hardware, lawyers would have a field day. That's because the barriers to entry into the personal computing business would be impossible to overcome, since a license for Mac OS X is not for sale.
The meat of Psystar's sales pitch is that they can sell you a Mac for cheaper than Apple. So let's consider the third element of a monopoly: the ability to set prices.
Again from Answers.com: "The major difference between a monopoly and a competitive firm is the monopoly's ability to influence the price of its output. Because a competitive firm is small relative to the market, the price of its product is determined by market conditions.
There's a long-standing argument about whether or not Macs are more expensive pound-for-pound with Windows PCs. But however you slice it, Apple doesn't have the ability to force people to pay astronomical prices for the Mac; if Macs cost four times as much as similarly configured Windows PCs, no one would buy them.
Companies are free to charge somewhat more for a similar product if they can prove to people that there is a value attached to that price. If they can't demonstrate that value, people won't buy the product. No one cares that Porsche charges more for the Cayenne than Volkswagen does for the Touareg, and those are practically the same car. That's because Porsche demonstrates more value with a better interior, cushier options, and the cachet associated with driving a Porsche.
The Psystar employee, identified only as "Robert," said the company had no plans to stop selling Open Computers with Leopard preinstalled, and hinted Psystar would be willing to fight Apple. However, Pedraza, who is likely in more of a position to decide those things than Robert, declined to comment to Ars on Psystar's next steps. Apple likewise declined to comment on Psystar or any possible action it might be considering.
I think they're tilting at windmills, but I'd be very interested to see if Psystar has the wherewithal (and the cash) needed to finance a legal test of Apple's end-user license agreement for Leopard. Courts have ruled on specific provisions within EULAs, but it doesn't appear that the general concept has really been tested under U.S. law. Maybe it's time.
But until that day, companies are not required to sell products simply because somebody wants that product.
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