The American Law Institute (“ALI”) approved the Principles of the Law of Software Contracts (the “Principles”) on May 19, 2009. I have discussed these Principles in the past in this blog http://lawandlifesiliconvalley.com/blog/?p=134. Although the Reporters (the title given those managing the project) have made some changes to the earlier draft, the current draft continues to have significant flaws. The Principles were meant to clarify the ambiguity created by conflicting legal decisions and  the application of multiple laws to software licenses, such as intellectual property law (including, most importantly, copyright), Article 2 of the Uniform Commercial Code (“Article 2”) and various consumer laws (the federal Magnusson Moss Warranty Act and state laws such as the Song Beverly Warranty Act in California). Unfortunately, they have made the situation worse because many of their recommendations relating to ”best practices” are new and not consistent with existing law.

The Principles have the stated goal of summarizing the case law and recommending best practices, but the Reporters have included many new concepts which impose consumer type protections on both consumer and business software licenses. Yet consumer and business licenses are quite different because of the negotiation leverage of licensees who are businesses as well as the ability of businesses to enforce their rights. The result is a significant lack of flexibility in negotiating the terms of the license for businesses. Moreover, this dramatic change does not appear to be addressing any significant problem in the market.

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 existing laws including Article 2  and both federal and state consumer warranty statutes. This warranty, if adopted, is likely to lead to significant litigation without any clear benefit to licensees.

The concern about the Principles in the software industry has led to unusual bedfellows: Microsoft Corporation and the Linux Foundation, who are fierce competitors with radically different approaches to 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. The Principles were, nonetheless, approved.  

Despite these flaws, software licensors need to deal with the likelihood that the courts will be influenced by the Principles and need to review their agreements and processes. I will be providing a more detailed discussion of the major provisions in a series of blog posts. The Principles can be purchased at the ALI website at http://www.ali.org/.