Software Licensing Law May Curb User Rights

The Consumer's Union has charged that proposals for a new nationwide uniform software licensing law will undermine consumers rights -- particularly in the area of warranties, rights to "perfect tender," and product liability questions. The drafting committee of the National Conference of Commissioners on Uniform State Laws, the group preparing the new law, is mildly defensive about the charge. In a memorandum accompanying the Sept. 4 draft of the proposal, they respond by noting that the proposal also includes provisions giving purchasers of software rights not previously available.

Regular readers of this column know that the long process of writing a new software licensing article to the Uniform Commercial Code has been underway for more than a year. The proposal, once completed and approved by the Uniform Law Commissioners, will be submitted to the 50 state legislatures for enactment into law.

Just before the commissioners' annual meeting in July, the Consumers Union circulated a memorandum to the Uniform Law Commissioners in which the consumer advocates expressed serious reservations about the approach and balance of the draft software article. They charged that the proposal presented to the Commissioners at the July meeting eliminated protections for consumers and other licensees of computer software that would be available under current law. Several commissioners echoed this concern during floor debate on the proposal.

The Consumer's Union was unhappy with the draft because it partially preempts state consumer rights laws, fails to treat emerging issues such as liability for viruses and the licensee's exposure to copyright infringement liability, fails to provide a simple statutory requirement for a full refund if the software does not comply in every respect with the terms of the contract between the licensee and licensor, and eliminates the licensee's right to collect certain money damages from the purveyors of defective software.

The drafting committee has taken issue with the Consumer's Union, claiming that their proposal is already balanced and creates a number of rights that consumers have not previously enjoyed when purchasing software licenses. For example, the drafting committee claims that its proposal includes statutory liability for viruses in software unless the licensor used "reasonable care" to prevent their introduction. This is a protection not currently available under the UCC, but the September draft also notes that liability for viruses can be excused if the licensor gives notice that he has not taken steps to protect against them. The draft also gives a mass market software licensee the right to transfer his license to another, provides a right to make backup copies and creates the presumption that all mass market software licenses are perpetual.

In a provision important to integrators, the draft provides that if the licensee relies on the integrator to select components to create an integrated system, the integrator is liable for assuring that all of the hardware and software elements function together as a system in the manner described in the agreement. It would not be enough that each of the components works perfectly on its own. Under the September proposal, a licensee would have up to five years from the date of injury or one year from the date of discovery of the injury, whichever occurs first, to bring a legal action for a defective system or software.

Even with these and other new protections available to consumers under the proposal, the drafting committee acknowledges that consumers would lose certain protections under the current draft. Perhaps the most significant loss would be the right to so-called consequential damages from defective software unless an agreement specifically allowed them.

This was the most hotly debated item at the Uniform Law Commissioner's July meeting. Without consequential damages, aggrieved purchasers can recover for the price of defective software, but not for the lost profits, lost data or other damages that may naturally follow. On the other hand, if software manufacturers were put into the position of insuring the businesses that use their software against any remotely connected loss, the price of software would soon be unattainable.

Under current law, most negotiated software agreements exclude consequential damages. Software sold in shrink-wrap, on the other hand, is frequently considered a "good," and consequential damages are recoverable. There is no sound reason for distinguishing between the two based simply on how it is sold.

Over the next several months, the drafting committee will attempt to define when consequential damages for losses from defective software might be recoverable. Among the possible cases are those involving intentional or bad faith breach of the contract, wrongful disclosure of confidential information and wrongful repossession of software.

The drafting committee will meet again in November.

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