Software License Battle Brews in 50 States

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Software License Battle Brews in 50 States

Consumer advocates, industry lawyers clash over the draft law

By Neil Munro

Staff Writer

Lawyers for the software industry are using a reform effort by all 50 states to bolster the controversial legal status of software licenses.

The draft legislation, being prepared by a 15-person panel of the Chicago-based National Conference of Commissioners on Uniform State Laws, would allow companies to enforce contract terms written inside the shrink-wrapped software sold in stores or via mail order catalogs.

These shrink-wrapped licenses are controversial because industry officials argue they must be obeyed by the buyer, despite the buyer's inability to read the contract before buying the product. In 1996, sales of shrink-wrapped software amounted to roughly $10 billion.

The draft legislation will undermine legal protection for consumers and businesses, said Gail Hillebrand, who is the San Francisco-based litigation counsel for Consumers Union of U.S. Inc., which is based in Yonkers, N.Y. It would allow software companies to disavow any legal damages caused by their products, automatically monitor customers' use of their software and remotely shut down the software during any contract dispute, she said.

"The [software] industry is winning, and consumers and [businesses] are losing," she said.

But industry officials disagreed, calling the draft legislation reasonable.

"It is a work in progress .... If we were insensitive [to consumer concerns], the state legislatures would not enact" the draft language, said Bruce Munson, a Wisconsin state official and one of the 10 state officials on the NCCUSL panel drafting the legislation in cooperation with industry lawyers.

Over the last year, he said, "we probably have become more attuned to the objections of consumers" because of criticisms made by consumer representatives.

"Industry will be giving up a little [and] consumers will be giving up a little" to reach a balanced draft that allows the software industry to continue its rapid growth and also protects consumers, said Bion Gregory, legislative counsel for the California Legislature and a member of the NCCUSL panel.

The NCCUSL panel was formed at the behest of industry officials to revise Article 2 of the nationwide Uniform Commercial Code, which does not adequately deal with the legal complexities of software licensing, said participants.

The new law, dubbed Article 2B, will complement the existing Article 2, which was gradually prepared by state officials to regulate the sale of goods - cars, food, computers - but not the licensing of software, participants said.

These legal shortcomings were demonstrated in two recent lawsuits in the Chicago area where software companies lost in the lower courts, forcing them to appeal. In both cases, the Chicago appeals court judge sided with the industry lawyers and upheld the shrink-wrapped contracts.

Shrink-wrapped licenses "have been dragged through the courts with checkered results .... There's a lot of volatility" in the law's attitude, said Irv Moskatel, a Los Angeles-based lawyer who attends the NCCUSL's meetings. The process "is very much on a fast track," he said.

For the software industry, the main purpose of the NCCUSL's 2B reform is to ensure that the shrink-wrapped contracts are enforceable, said Mark Nebergall, an attorney who represents the Washington-based Software Publishers Association at the NCCUSL meetings. A second purpose is to provide a legal foundation for contracts made online, such as when a consumer or business buys a software license via the Internet.

The NCCUSL will hold public meetings on the 2B reform in February, April and May at which industry lawyers will continue to press for legal provisions upholding the shrink-wrapped licenses, said Nebergall.

After these meetings, the proposed legislation will be debated in July by all of the state officials who are part of the NCCUSL. Then the legislation will be reviewed by the Philadelphia-based American Law Institute.

The institute, which mostly consists of academic lawyers, will meet in May 1998 to vote on the proposed legislation. Afterward, it will be sent to the 50 state legislatures for consideration.

Hillebrand attacked the draft legislation, saying industry has had too much influence in the reform. The resulting draft legislation removes protection for consumers and small-businesses that use shrink-wrapped software, she said.

For example, the draft Article 2B allows companies to evade incidental or consequential damages that might result from a faulty software product, such as a badly designed program intended to help people track their consumption of prescription drugs, said Hillebrand.

But the draft Article 2B would make no difference in that case, said Nebergall. If anything went wrong, "you are going to sue for wrongful death. You would not go to court on a contract claim," he said. Also, software companies can't guarantee their products are error-free, he said, adding that damages are "the big black hole of liability that everyone [in the software industry] is afraid of."

Hillebrand also charged that Article 2B would allow a software vendor to automatically track the use of a product to ensure consumers or businesses did not exceed the terms of the software license. The law would also grant a "self-help remedy," allowing them to automatically stop the use of the product at 200 hours or 2 years, she said. And in the event of a contract dispute, companies would be allowed by Article 2B's self-help remedy to switch off the software, regardless of the consequences or the users' wishes, she said.

In response, Nebergall said software companies don't turn off consumers' software and are already allowed to switch off software used by business clients.

Gregory said the self-help remedy does not have much support on the NCCUSL committee, and may be dropped. "The committee has a healthy skepticism" about the provision, he said.

Hillebrand also said the draft Article 2B allowed companies to disavow any verbal promises made by technical support staff or by salespeople after the user buys the software license.

"That's standard [throughout contract law] .... I would argue that [buyers] get no" protection beyond what is in the contract, said Nebergall. The article 2B legislation will not change existing federal and state consumer protection laws, nor will it substantially change laws governing business-to-business transactions, he said. Indeed, it extends some consumer protections to the small businesses that buy shrink-wrapped software, he said.

Article 2B is chiefly concerned with mass-market, shrink-wrapped software, not custom-built software software.

Munson said that the issues raised by Hillebrand are still being debated by the NCCUSL panel. For example, software vendors may need the right under business-to-business contracts to switch off their software after an extended contract dispute with the client, but may not be given the same rights when the software license is bought by a consumer, he said. "The question is where will this draft end up? ... That is in flux right now ... and we have not got to the end of [the liability issue]," said Munson.


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