DEALING WITH THE FLAWS:PRINCIPLES OF LAW OF SOFTWARE CONTRACTS
By Mark Radcliffe
The American Law Institute ("ALI") approved the Principles of the Law of Software Contracts (the "Principles") on May 19, 2009. The Principles seek to “clarify and unify the law of software transactions,” but would introduce a number of new concepts which are overly prescriptive and inconsistent with existing law. The concern about the Principles in the software industry has led to strange alliances in opposition: Microsoft Corporation and the Linux Foundation, who are fierce competitors with radically different views of licensing, sent a joint letter to the ALI to express their concern about the provisions in the Principles and request a delay in their approval. Many lawyers have expressed concern that the Principles may introduce cost and uncertainty, limit flexibility for businesses and consumers, and have a negative impact on the software industry in the United States. The best example of this approach is the new “non disclaimable” warranty of no hidden material defects. This warranty provides that licensors are liable for "hidden" material defects if they are aware of them at the time of the transaction. Yet this warranty is not otherwise found in the case law and incorporates new and difficult concepts, such as "hidden" and "material." In addition, the concept of a "non disclaimable" warranty is fundamentally inconsistent with the approach of the existing laws with both Article 2 and both federal and state consumer statutes. This warranty, if adopted, is likely to lead to significant litigation without any clear benefit to licensees. Despite these flaws, software licensors need to deal with the likelihood that the courts will be influenced by the Principles. We recommend that licensors take the following steps (we have included references to the main relevant sections of the Principles, but other sections may also be implicated; the final version can be ordered from the ALI website http://www.ali.org/): 1. Read Chapter 3 of the Principles to understand the new approach to express warranties and implied warranties. 2. Determine if your licenses are in the category of “Standard Form Transfer of Generally Available Software,” which generally is meant to apply to retail type of licenses. The actual definition is “a transfer using a standard form of (1) a small number of copies of software to an end user or (2) the right to access software to a small number of end users if the software is generally available to the public under substantially the same standard terms” (Standard Form License) and ensure that you comply with the new obligations for Standard Form Licenses. The Principles set the standard as when a “reasonable” licensor would believe that the licensee intends to be bound. However, the Principles include a “safe harbor” to make such licenses enforceable, which requires the following:
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a) make the Standard Form License available prior to the transfer of the software, preferably easily accessible from the home page; b) ensure that the licensee has reasonable access to the Standard Form License prior to the payment (or completion of the transaction if no payment is received); c) ensure that for electronic transactions, acknowledgement by the licensee at the end of the Standard Form License or adjacent to the Standard Form License or for Standard Form License attached to packaged software, the right to return the unopened package of the software within a reasonable period for a refund; d) permit the licensee to store and reproduce a copy of the Standard Form License if only available electronically. Other obligations applying to Standard Form Licenses include: a) ensuring that the Standard Form License are “reasonably comprehensible” (i.e. the terms can be understood by a reasonable person of average intelligence and education); b) deleting any electronic disablement remedy; c) deleting any advance agreement to modifications and implement a procedure to ensure that the licensee has a method of acknowledgement of the modification. You should also consider how to best implement these requirements in other sales situations, such as telephone sales. 3. Review disclaimers of implied warranties to ensure that they comply with the new standards imposed by the Principles (this issue is particularly important for the implied indemnity for intellectual property infringement which requires that the disclaimer be in a record, conspicuous and employ clear language). 4. Review advertising and packaging to ensure that it does not create an express warranty and review disclaimers and other remedies to ensure that they meet the new standards in the Principles. 5. Ensure that any use of “automatic disablement” (the use of electronic means to disable or materially impair the functionality of the software) is not used in “standard form transfer of generally available software” or consumer contracts and, if used in any other context, complies with the new obligations in the Principles. 6. Maintain records of your license agreements and any modifications, particularly for Standard Form Licenses.
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7. Consider implementing a method of disclosing the “material” bugs to comply with the new “non disclaimable” warranty of no hidden material defects. 8. Review the limitation of liabilities and remedies to meet the new requirements.
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