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Ready To Bet the Farm Your Software Has No Hidden Material Defects?

If imposed by the courts, the Principles would impose consumer-type protections on business software licenses

The software industry is, as they say, up to its ass in alligators and few, if any, players know they could be lunch.

Cast your mind back a few weeks to when the American Law Institute (ALI), which has far more clout than it deserves, came up with its Principles of the Law of Software Contracts, a bit of insanity that both Microsoft and the Linux Foundation, rare-if-never allies, joined in protesting (see www.slideshare.net/markradcliffe/microsoft-linux-foundation-letter1).

Their extraordinary alliance proved fruitless.

The IT Privacy and eCommerce Committee of the Association of Corporate Counsels, which represents 4,000 in-house counsels, also broken into a sweat (www.slideshare.net/markradcliffe/acc-itpec-letter-and-discussion-points-...).

See, these Principles dreamed up a new, unprecedented, “non-disclaimable” warranty meant to unrealistically guarantee that software has no hidden material defect.

This warranty, good for the life of the product, provides that licensors are liable for “hidden” material defects if they’re aware of them when the software is sold.

It isn’t found in any case law and incorporates new and difficult concepts like “hidden” and “material.” The notion of a “non-disclaimable” warranty is arguably inconsistent with existing laws, according to DLA Piper partner Mark Radcliffe, an IP and software licensing lawyer who’s trying to raise awareness of the threat.

He is, by the way, pro bono general counsel to the Open Source Initiative (OSI), the open source license arbiter.

If nothing else, he says, it’s likely to lead to significant litigation without any clear benefit to licensees, make software more expensive and simply remove some software from the market.

He suggests that universities may refuse to contribute code to either open source or commercial projects for fear of liability.

According to Radcliffe, the Principles seek to “clarify and unify the law of software transactions” given conflicting legal decisions and the mare’s nest of laws governing them, but the idealistic concepts they introduce – without seeking outside input – are overly prescriptive and defy 20 years of existing law.

Lawyers from DLA Piper and other firms expressed concern about the Principles and asked that approval be delayed to deal with these concerns, but the Principles were approved in May anyway without addressing these concerns.

Although ALI tinkered with the Principles, which are dangerous because naive courts – even outside the US – are likely to take direction from them, the minor changes made no significant difference.

If imposed by the courts, the Principles would impose consumer-type protections on business software licenses although the two are quite different because of the sophistication and negotiating leverage of business licensees coupled with businesses’ ability to enforce their rights. And businesses would be hamstrung in negotiating terms, their freedom of contract gone.

Radcliffe claims the Principles are a “solution searching for a problem” and a field day for litigators lured by glint of unlimited liability in a world where disclaimers, including direct and consequential damages, do not apply.

Radcliffe says lawyers dealing with software licensing need to understand key aspects of the Principles so they can consider their application to software licenses, but more importantly so they can assist the industry in responding to the Principles.

“Without a clear industry response to the Principles,” he says, “judges may incorrectly assume that the Principles define the law as it should be. The publication of a proposal for law reform should not substitute for the legislative process or have the effect of overriding established statutory authority.”

There’s no pending case, but Radcliffe says software licensors need to consider the possibility that courts will be influenced by the Principles.

He recommends that licensors read Chapter 3 of the Principles to understand the new approach to express warranties and implied warranties and determine if their licenses fall into the category of “Standard Form Transfer of Generally Available Software,” which usually applies to retail-type licenses.

The definition of “Standard Form Transfer of Generally Available Software” 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 Standard Form License obligations.

The Principles set the standard as to when a “reasonable” licensor would believe that the licensee intends to be bound. However, they also include a “safe harbor” to make such licenses enforceable, which requires the following:

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” (in other word, that 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.

Radcliffe also says to consider how to implement these requirements in other sales situations, such as telephone sales.

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 IP infringement which requires that the disclaimer be in a record, conspicuous and employ clear language).

Review advertising and packaging to ensure that they don’t create an express warranty and review disclaimers and other remedies to ensure that they meet the new standards in the Principles.

Ensure that any use of “automatic disablement” (the use of electronic means to disable or materially impair the functionality of the software) isn’t used in “standard form transfer of generally available software” or consumer contracts and, if used, complies the new obligations in the Principles.

Maintain records of your license agreements and any modifications, particularly for Standard Form Licenses.

Consider implementing a method of disclosing the “material” bugs to comply with the new “non-disclaimable” warranty of no hidden material defects.

Review the limitation of liabilities and remedies to meet the new requirements in Section 4.

Radcliffe is working with a number of industry groups to respond to the Principles. To keep updated on these efforts, see www.linuxfoundation.org/principlesofsoftwarecontracts.

There’s a webinar on thee Principles at https://cc.callinfo.com/play?id=e0wjcw.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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