Microsoft has teamed up with its open-source rival The Linux Foundation to oppose provisions in a potentially critical document which would grant new rights to licensees of commercial software.
The American Law Institute (ALI) is not a legislative or judiciary body, and its holdings, therefore, do not immediately carry the force of law. “Immediately” is the operative term, however, since the ALI’s publications and draft laws (particularly its magisterial Restatements of major bodies of American law) command great attention and respect among judges, law professors, leading practitioners and other vanguards of legal evolution and are widely regarded as authorities in their respective areas. Hence Microsoft and The Linux Foundation’s grave concern over the ALI’s “Principles of the Law of Software Contracts,” expressed in an open letter to the ALI dated May 14, 2009. (The letter can be downloaded here.)
The primary bone of contention is a provision in the Principles that creates a warranty by “transferors” of commercial software to anyone in the normal chain of distribution that there are no material hidden defects in the software of which the transferor was aware at the time of transfer. This warranty is implied and non-disclaimable, meaning that the licensee’s rights exist even if no warranty appears in the license agreement, and there is no way for the software provider to shirk liability for the warranty, such as by including standard boilerplate in its contract stating that the software is provided “as is, with all defects.” The warranty does not apply to software provided “free-of-charge,” only to software which is transferred for payment, but, as Microsoft and The Linux Foundation point out in their letter, this exclusion is a little ambiguous, since some vendors’ revenue models involve charging for services or support of software rather than for the initial software download or purchase. In their letter they also requested a delay in the adoption of the Principles so that software developers and distributors could have more say, but the ALI turned them down, approving the Principles at its May 19-20 annual meeting.
Having represented both software vendors and software licensees on countless occasions, I agree with Microsoft and The Linux Foundation that a non-disclaimable implied warranty of no hidden defects represents a radical departure from the law of software licensing as it exists today. Courts have generally held that software licenses are governed by Article 2 of the Uniform Commercial Code (UCC), which also provides for implied warranties to protect buyers of goods, but enables vendors to disclaim these warranties by including certain prominent language in their contracts. In other words, Article 2 of the UCC provides default terms which parties to a contract are free to bargain around. It is not clear why software should be treated any differently from, say, the computer on which it runs. Furthermore, high-dollar-value software acquisitions are usually negotiated transactions between sophisticated business entities, who often submit — or should submit — the agreements for review by licensing counsel (that’s where I come in).
Now that the Principles of the Law of Software Contracts have been adopted, software vendors and users and their respective counsels will have to wait to see whether courts and legislatures will follow the ALI’s lead in granting new rights to licensees. Please check this blog for the latest updates.