The Law and Economics of Reverse Engineering

Article excerpt

I. INTRODUCTION

Reverse engineering has a long history as an accepted practice. What it means, broadly speaking, is the process of extracting know-how or knowledge from a human-made artifact. (1) Lawyers and economists have endorsed reverse engineering as an appropriate way to obtain such information, even if the intention is to make a product that will draw customers away from the maker of the reverse-engineered product. (2) Given this acceptance, it may be surprising that reverse engineering has been under siege in the past few decades.

While some encroachments on the right to reverse-engineer have been explicit in legal rulemaking, others seem implicit in new legal rules that are altogether silent on reverse engineering, including the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (3) and the Economic Espionage Act of 1996 (EEA). (4) TRIPS is an international treaty that, among other things, obligates member states of the World Trade Organization to protect trade secrets, yet it neither requires nor sanctions a reverse engineering privilege. (5) The EEA created the first federal cause of action for trade secrecy misappropriation. Its lack of a reverse engineering defense has troubled some commentators because rights granted under the EEA arguably implicate certain reverse engineering activities previously thought to be lawful. (6)

Among the explicit legal challenges to reverse engineering are these: In the 1970s and 1980s some states forbade the use of a direct molding process to reverse-engineer boat hulls. (7) In the late 1970s and early 1980s, the semiconductor industry sought and obtained legislation to protect chip layouts from reverse engineering to make clone chips. (8) In the mid-1980s and early 1990s, a controversy broke out about whether decompilation, a common form of reverse engineering of computer programs, was legal as a matter of copyright law. (9) Even after U.S. courts ruled that decompilation was acceptable for purposes such as achieving interoperability, (10) a related controversy broke out over the enforceability of licenses forbidding reverse engineering of software and other digital information. (11) More recently, questions have arisen about whether the decompilation of computer programs infringes upon patent rights in software components. (12) In 1998, Congress outlawed the reverse engineering of technical protections for digital versions of copyrighted works and prohibited both the creation and distribution of tools for such reverse engineering (except in very limited circumstances) as well as the disclosure of information obtained in the course of lawful reverse engineering. (13)

Our objectives in this Article are, first, to review legal developments regarding the right to reverse-engineer, and second, to understand their economic consequences.

We start in Part II with a discussion of the well-established legal right to reverse-engineer manufactured goods. In our view, the legal rule favoring reverse engineering in the traditional manufacturing economy has been economically sound because reverse engineering is generally costly, time-consuming, or both. Either costliness or delay can protect the first comer enough to recoup his initial research and development (R&D) expenditures. (14) If reverse engineering (and importantly, the consequent reimplementation) of manufactured goods becomes too cheap or easy, as with plug-molding of boat hulls, it may be economically sound to restrict this activity to some degree.

In Parts Ill, IV, and V, we consider the law and economics of reverse engineering in three information-based industries: the semiconductor chip industry, the computer software industry, and the emerging market in technically protected entertainment products, such as DVD movies. In all three contexts, rules restricting reverse engineering have been adopted or proposed. …