Biddle & Colletti: A Primer for Software Licensing

A review of recent presentations made by prominent information technology vendors to investment bankers, financial managers and analysts, strongly suggests that the pursuit of "recurring revenue streams" continues to be THE dominant strategic objective of most, if not all, such organizations. This overriding strategic focus and the need to protect valuable intellectual property rights in information technology products and services demand licenses and services and support agreements which place a variety of limitations upon which rights which are granted to user/customers. While suggestions for new licensing models and practices have proposed in recent years by industry organizations such asUser Recommended Solutions (See Appendix A for the most recent version of OURS "Software Licenses -- A Guideline"), and there has been a proliferation of new approaches reflecting ever changing technology platforms, the underlying themes of vendor control and certainty of payment remain unchanged. In the face of such dynamic changes, the laws governing commercial practices and intellectual property rights continue to struggle to keep pace, the recent attention to revision of the Uniform Commercial Code being only one example.FOOTNOTE* In the meantime, the information technology field demands better private contracts "fill the gaps" in the legal framework, although vestiges of rigid contracting traditions from the "mainframe era" remain.

The dominance of the vendor community in setting the de facto standards for the commercialization of the products and services of the information technology is nothing new and, in fact, pre-dates the computer industry itself which is barely fifty years old. In fact, the tradition can be traced back to the office machinery sales, marketing and contracting traditions pioneered in the late nineteenth and early twentieth centuries by John Henry Patterson of the National Cash Register Company and his most famous trainee, Thomas J. Watson, Sr. of International Business Machines Corporation. By the time that IBM "unbundled" software from its equipment in 1969, thereby allowing for the creation of the U.S. software industry, it had placed its imprimatur on the industry so indelibly that even its present competitors such as Microsoft Corporation follow many of its marketing and contracting practices, even without admitting that they are doing so.

These contracting practices, particularly those contained in traditional "standard" software licenses, are predictably weighted in favor of the vendor. Trade association "standards" published by organizations such as the Software Publishers Association, the Information Industry Association and the Information Technology Association (formerly ADAPSO -- the Association of Data Processing Service Organizations) and the models presented by OURS all reflect this bias to varying degrees. Happily for the United States, the industry remains young, brash and dynamic. The "standards" in a particular deal will reflect the relative negotiating leverage of each of the parties, and there is plenty of room for negotiation.

In the last two or three years, large software licensors such as Computer Associates, Microsoft and IBM have begun to depart from traditional "tiered" licensing pricing and to use a variety of software licensing models depending upon the type of software being licensed and the relative bargaining position of the licensee. Variations include, but are not limited to:

single end-user
single machine
single network
limited number of concurrent users
measured use (cost related to volume of use and measurement devices
included in acquisition)
enterprise wide
world wide (or geographic limits on use)
tiered (tied to specific technology platforms and/or enterprises)
platform specific with varying limitations

Licensing practices still vary widely in the U.S. vendor community; the marketplace remains dynamic, but many of the key issues which will surface in most negotiated licensing deals can be predicted with certain variations reflecting technological considerations or, perhaps, individual vendor or industry preferences. These recurring issues are discussed below with both vendor and user viewpoints presented in order to give a balanced picture of the concerns of both "sides of the table".

II. SIGNIFICANT LICENSING, "USE" AND SUPPORT ISSUES

A. Scope of Use: Can the software be used by a single entity, by many entities and/or by concurrent users? If it can be used by many entities, can it be used by nonaffiliates, or only by affiliates? How can the license agreement address scope of use where an affiliate becomes a non-affiliate? How should changes in technology platforms (e.g. transition to client-server based applications) affect the "balancing" of competing licensor/licensee interests?

(1)

(2) Failure to provide for appropriate license flexibility can provide the licensor with sufficient leverage to enable it to demand higher license and maintenance fees for usage beyond that specified in the license agreements. [Footnote 1]

(a)

(b) Where additional subsidiaries (or, in some cases, even divisions) need to use the software and the license fails to provide for such use. [Footnote 2]

(c) Where a licensee wishes to dispose of a subsidiary or division and the subsidiary or division needs to use the software for its business after the disposition. Even where a software license provides for use of the software by affiliates, failing to provide for continued use for some limited transitional period after an affiliate is no longer affiliated with the original licensee can provide the licensor with exceptional leverage in an acquisition, because the software may be (at least temporarily) crucial to the business which the licensee is transferring. In many cases, the licensor knows that its refusal to consent to continued usage by the disposed subsidiary or division after the disposition can force a licensee to pay at least "nuisance value" license fees to the licensor in order to keep a disposition on track.

(d) Where expanded software usage requires hardware upgrades and the license either permits the software to be used only on specifically identified equipment or explicitly requires an additional license fee for use of the software on upgraded hardware.

[Footnote 3]

b. Matching license fees to actual or anticipated costs of providing services: software usage beyond that envisioned by the licensor may result in more frequent licensee requests for assistance not separately covered by a software support agreement; relocation or "wide deployment" of hardware could result in additional out-of-pocket expenses for on-site services; hardware could be installed in an inappropriate environment; use on upgraded or different equipment could cause unpredictable operating results.[Footnote 4]

c. Ensuring that obligations of confidentiality and nondisclosure are observed by licensees and that inappropriate parties (e.g., competitors) do not obtain improper access to software or intellectual property as a result of overly permissive scope of license.[Footnote 5]

d. Enabling the licensor to monitor location of and environment in which software is used in order to maximize quality control for software maintenance, problem resolution, and training.

e. Controlling expectations of users as to the scope of usage in order to avoid problems caused by greater usage than envisioned (e.g., degradation of response times resulting from access by too many users or overburdening of resources) [Footnote 6]. Disputes are likely to arise where the licensee believes that the licensor should provide additional hardware if system performance becomes degraded as a result of broad/intensive system usage; problems can become intensified where broad usage pushes hardware requirements beyond the capacity of any hardware manufactured by a particular hardware manufacturer -- especially if the system is proprietary and designed for use on hardware of only some manufacturers.

f. Maintaining revenue streams to enable licensor to invest in research and development to modify and enhance existing software products and services and develop new ones.

B. Allocation of Ownership of Modifications Made by the Licensee. Which party or parties should own software modifications made by the licensor, by the licensee or at the licensee's request, by third parties, or jointly by the licensor and the licensee?

1. Major Licensee Objectives:

[Footnote 7]

(1)

(2) Obtaining potential economic benefits through payments from the licensor for marketing rights or through direct marketing by the licensee to third parties as a result of licensee's retention of intellectual property ownership or sufficiently broad licensing rights.

2. Major Licensor Objectives:

b. Eliminating the possibility of a claim by the licensee that modifications of the licensor's software which may involve modification of items created by or with the licensee require the licensee's consent.

c. Maintaining quality control through awareness of the modifications to the licensor's software which are being used by licensees and by determining (and controlling) the manner in which modifications are documented and implemented.

d. Monitoring and controlling third parties' use of modifications to the software in order to minimize third party claims against the licensor alleging infringement or other wrongful use of such third parties' intellectual property, an increasingly important issue as more patents for software are issued by the U.S. Patent and Trademark Office.

e. Minimizing potential disputes regarding ownership when the licensor seeks to transfer title of the software or sell its business.

f. Minimizing the risk that the licensee's ownership (or joint ownership) of modifications embodying the licensor's intellectual property may inadvertently provide the licensee with unlimited rights to use such intellectual property and/or unlimited opportunity to provide it to third parties.

(1)

(2) Few licensees are willing to assume other potential liability to third parties arising from modifications to which those licensees seek to claim ownership, and few licensees are willing to devote resources to assisting the licensor in making any licensee-owned enhancements function properly as part of a later version or release of the licensor's software.

(3) Joint ownership arrangements can greatly increase the difficulty of negotiating the manner in which infringement claims against third parties are undertaken -- i.e., determining who controls litigation and settlement negotiations, who bears the expenses of litigation and the risk of possible adverse litigation results, and how the proceeds of any recovery are to be allocated.

C. Source Code Access: To what extent should the licensee be permitted access to software source code, and what should the licensee's obligations be with respect to such access? [Footnote 8] Should additional license fees be charged for source code? Should increased nondisclosure restrictions be imposed upon the licensee if the licensee is granted access to source code?

1. Major Licensee Objectives:

[Footnote 9]

b. Enabling the licensee to maintain the software should it decide that it is better suited to maintain the software.

c. Ensuring access to information and materials necessary to maintain and/or enhance and modify software if (a) the licensor fails to maintain or is unable to maintain the software or (b) the licensor ceases doing business.

(1)

[Footnote 10]

(2) Although source code escrow arrangements provide some reassurance (See Appendix B for Sample Three Party Escrow Agreement), there is no guarantee that they will provide the security sought by the licensee. Continuing licensor duties to provide updates, enhancements, etc. to source code corresponding to software updates and enhancements may not be met; the licensee may be unable to verify that source code is accurate and complete; and unless carefully drafted to favor the licensee, source code escrow agreements may provide the licensor with the opportunity to challenge release of source code through time-consuming litigation or alternative dispute settlement procedures, thereby thwarting the purpose of the escrow provisions (at least from the licensee's point of view).

(3) From the licensee's perspective, there is still no adequate substitute for actual delivery of source code with the software and all enhancements.

2. Major Licensor Objectives:

b. Maintaining greater quality control and maximizing uniformity of software delivered to different licensees by minimizing or removing the individual licensees' opportunity to modify the software.

(1)

(2) The licensor will be able to avoid problems caused by attempting to integrate licensee modifications with licensor-created software modifications, enhancements, updates, new releases, etc.

c. Minimizing temptations of (possibly unqualified) user personnel to modify software merely because source code provides them with the opportunity to attempt software modifications (a concern not infrequently expressed even by licensees).

d. Minimizing administrative burdens of providing source code to licensees and/or escrow agents.

e. The most advantageous position for the licensor is simply to provide that software will be licensed only in object form and that source code will not be released under any circumstances.

f. Licensee leverage or other conditions often necessitate source code escrow arrangements.

(1)

(2) The licensor is potentially at odds with the licensee where the licensee has filed for reorganization under Chapter 11 of the United States Bankruptcy Code; the licensor may have strong incentives to challenge release of source code in such a case because release may make it more difficult to renegotiate maintenance or other contractual terms to make them more favorable to the licensor.

(3) One alternative to a source code escrow is to provide source code to the licensee under the terms of the license agreement for an additional license fee, to compensate the licensor for the risks and burdens associated with releasing source code.

(4) The licensor should ensure that an escrow agent is competent and appropriate to serve as an escrow agent for source code. For example, some licensees have attempted to have their attorneys, consultants or even their own employees or officers named as escrow agents. Clearly, an agent of the licensee serving as escrow agent is likely to be perceived by a licensor as failing to act impartially if that agent releases source code to the licensee. Another risk is that the licensee's agent will fail to store source code securely (or even misplace it) or will otherwise fail to care for it properly; this risk increases as source code enhancements and modifications are delivered to the agent over a long period of time. Finally, the licensee's agent may be unable to verify completeness or accuracy of the source code (or the licensor may not permit an agent of the licensee to verify it). Accordingly, it is usually in the best interests of both parties that a source code escrow specialist be used as escrow agent if an escrow arrangement is necessary.

D. Proprietary Rights Issues: How will each party balance its obligations not to disclose trade secrets or other proprietary information of the other party with the necessity of access to purportedly confidential information by various third parties?

1. Major Licensee Objectives:

b. Maximizing the opportunity to benefit from knowledge gained by access to the licensor's intellectual property where such benefit is not detrimental to the licensor's business.

c. Maximizing the ability of consultants, accountants and other third parties to assist the licensee in vendor selection and system auditing and to assist the licensee in improved use of software.

d. Provide the licensee with the opportunity to promote greater competition among licensors by communicating to one licensor the terms of another licensor's proposed contract terms.

e. Avoiding frivolous claims of breach of confidentiality obligations by the licensor for release of information which is not truly proprietary or with respect to which there is no justification for protection.

f. Maximizing the opportunity to obtain implementation and maintenance services from third parties in order to ensure that such services will be available or to ensure that the licensor cannot extract unreasonable fees for such services.

(1)

(2) As previously indicated, where the licensor has filed for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code, it may reject a maintenance agreement in an attempt to extract additional maintenance fees for future maintenance services. The opportunity to obtain maintenance services from third parties may provide the opportunity to prevent the licensor from negotiating excessive (or indeed, any) additional maintenance fees in such a case unless the licensor agrees to deal fairly with the licensee.

2. Major Licensor Objectives:

b. Minimizing non-standard implementation procedures or software modifications by third parties in order to minimize difficulties of providing maintenance or other services to licensees.

c. Minimizing the risk that a concession made to one licensee under special circumstances will have to be made for other licensees because the concession has become widely known.

d. Minimizing possibility of defection by key employees.

E. What Type of Modifications are Provided to a Licensee Under a Software Warranty or Maintenance Agreement: How will the parties agree upon meaningful contractual distinctions between "enhancements", "new releases", "new versions", and "new products", and which will be provided as part of warranty or maintenance services? [Footnote 11]

1. Major Licensee Objectives:

b. Obtaining timely modifications of software to provide for regulatory changes or operating procedures.

c. Ensuring that the licensor makes timely modifications to software to conform to revisions in operating system software or to third party software to which the licensor's software is interfaced.

d. Ensuring that the software used by the licensee does not become obsolete in comparison with the software of the licensor's competitors.

e. Maximizing licensee flexibility to forego implementing modifications, new releases, etc. when they adversely affect software functionality or system performance (e.g., where they require additional hardware); when possible, making the licensor responsible for hardware upgrades necessitated by software modifications or enhancements.

f. Ensuring that maintenance services will be made available at a predictable and reasonable price for the estimated life of the system.

2. Major Licensor Objectives:

b. Maximizing return on investment by concentrating on software modifications for which fees can be obtained from many licensees (i.e., where resources are limited, avoiding custom work which is unique to a particular licensee).

c. Obtaining additional development and maintenance fees for significant improvements of software beyond the improvements envisioned under warranty obligations or maintenance agreements.

d. Maximizing uniformity of software used by various licensees through such measures as requiring licensees to implement corrections or modifications to the software within a particular timeframe.

e. Maximizing flexibility of opportunity to enhance software without being responsible for additional hardware required to operate such software.

F. Licensor Responsibility for Hardware Performance: To what extent can the licensee rely upon the licensor to provide appropriate hardware configuration recommendations? [Footnote 12]

1. Major Licensee Objectives:

(1)

[Footnote 13]

(2) The argument that the licensor should be responsible for additional hardware requirements is strengthened where the licensor profits from hardware sales through value added reseller agreements or similar arrangements.

c. When upgrades are required due to causes set forth in (a) and (b) above, avoiding license fee increases where license fees are tied to CPU capacity or some other hardware criteria.

2. Major Licensor Objectives:

b. Maximizing flexibility to enhance software to provide greater functionality even when it may require additional hardware.

(1)

(2) Avoiding hardware responsibility due to unforeseen or unpredictable factors (e.g., regulatory agency reporting requirements or operating system software revisions which require software modifications).

G. Remedies Upon Breach or Termination: (focusing on those negotiated by the parties rather than those which would most likely result from litigation). [Footnote 14]

1. Major Licensee Objectives:

b. Carefully documenting features/functions and performance criteria for the software and related items being furnished to the licensee by the licensor.

c. Carefully documenting vendor representatives' statements, promises, etc. even if contractually excluded by an integration/merger clause in the license agreement, to support the development of causes of action for fraud, misrepresentation, violation of state deceptive practices laws, computer professional "malpractice" etc.[Footnote 15]

2. Major Licensor Objectives:

[Footnote 16]

[Footnote 17]

H. Assignability of License: To what extent should the parties be able to assign the software license or maintenance agreements to third parties (paying particular attention to successor entities)?

1. Major Licensee Objectives:

(1)

(2) As previously indicated, the licensor may perceive its extraordinary leverage as an opportunity to impose exorbitant fees or obtain other concessions for its consent to assignment where the licensee is disposing of part of its business in a manner which requires the licensor's consent to assignment of a software license. [Footnote 18]

(3) The licensee should attempt to have the same assignment rights under any maintenance agreements as it has under its license agreements, since an assignable license without an assignable maintenance agreement can provide the licensor with an additional opportunity to impose higher maintenance fees (note, however, that a maintenance agreement with broad assignment rights which fails to provide for an obligation by the licensor to provide maintenance services at a predictable fee level for the estimated life of the software can have similar undesirable results).

(4) License provisions addressing proprietary rights should also be carefully scrutinized to ensure that the licensor is not able to circumvent permissive assignment provisions by claiming that restrictive proprietary rights provisions override such assignment provisions.

2. Major Licensor Objectives:

b. Preventing circumvention of anti-assignment provisions by the licensee's sale of its stock to a third party (e.g., by providing that a change in control of the licensee constitutes a prohibited assignment).

c. Preventing assignment of license to an entity for which higher license and maintenance fees would otherwise have been required because of greater software usage (one way to reduce this risk is to tie the license fee to the licensee's hardware configuration or some other usage-related standard).

d. Taking measures to ensure that the licensor will receive appropriate compensation for any additional burdens resulting from servicing an assignee before consent to assignment is granted.

I. Matching Licensee Payments to Licensor Performance: When should the licensor be paid for performing its contractual obligations to the licensee?

1. Major Licensee Objectives:

b. Reducing the difficulty of obtaining damages for breaches by licensor of its contractual obligations by providing licensee with opportunity for setoff instead of having to attempt to retrieve payments made to licensor.

c. Minimizing the amount with respect to which the licensee will become an unsecured creditor of the licensor if the licensor files a petition for liquidation or reorganization pursuant to the United States Bankruptcy Code and has not performed all of its obligations to the licensee (note that this risk is more effectively addressed by a thorough review of the licensor's financial condition before entering into license and maintenance agreements with the licensor).

d. Obtaining use of funds until the licensor has performed its obligations to the licensee.

e. Minimizing the possibility that the licensee will be found to have breached the covenant of good faith and fair dealing by withholding payment without justification. [Footnote 19]

2. Major Licensor Objectives:

b. Minimizing the risk that the licensee will disrupt the licensor's business operations by failing to pay for goods or services when contractually obligated to do so.

c. Reducing the probability that a collection action (or an action by the licensor to recover its property) against the licensee will be necessary if a dispute arises and the licensee refuses to pay amounts which the licensor believes it is owed.

d. Minimizing the amount with respect to which the licensor will become an unsecured creditor to the licensee if the licensee files for liquidation or reorganization pursuant to the United States Bankruptcy Code before payments owed to the licensor have been made.

FOOTNOTES

* "The Uniform Commercial Code and Contracting for Computer Products and Services -- Some Drafting and Contract Negotiation Considerations" by M.H. Biddle in Pennsylvania Bar Institute's Computer Law and Telecommunications Contracts, Licenses and Litigation (1986); "An Empirical Analysis of Software Licensing Law and Practices (part 1 of a two part series on the newly proposed Article 2 of the Uniform Commercial Code)", 10 The Computer Law Association Bulletin No.3 (1995); Note "Software and the UCC", 65 BOSTON L. REV. 129, 131 (1985); "Software as Goods under the Uniform Commercial Code", Report by the Committee on Computer Law, 40 Rec. A.B. City N.Y. 756 (1985); Note, "Computer Programs as Goods Under the UCC", 77 MICH. L. REV. ). See Also Advent Systems, Ltd. v. Unisys Corp. 925 F.2d 670 (3d Cir. 1991) (in applying Article 2 of the U..C.C. to a mixed contract for goods and services, the Court held that software is a "good" when fixed in a medium such as a disc, and in the course of reaching such a conclusion summarized the prior Pennsylvania and other case law and commentaries relating to the subject). [return]

1. See S.O.S., Inc. v. Payday, Inc., 886 F.2d 1081 (9th Cir. 1989) confirming that because copyright rights, particularly those set forth in Section 106 of the Copyright Act of 1976, as amended, Title 17 U.S.C., must be granted expressly by a licensor to a licensee, great care must be taken by a licensee to ensure that the license grant is sufficiently broad to include all necessary use, modification, etc., since the license will almost certainly be construed against conferring such rights upon the licensee unless they are expressly granted by the licensor. In the last few years Computer Associates (CA) has been active in seeking to obtain additional license fees for alleged use of its software beyond the scope permitted by CA or by licenses of software vendors acquired by CA. See National Car Rental System, Inc. v. Computer Associates International, Inc., 991 F.2d 426 (8th Cir. 1993) (CA's license restricted National's use of the software to internal operations of its own data. The court held National breached the license when it used the software to process data for affiliated companies.); GTE Service Corp., et al. v. Computer Associates International, Inc. No. (Conn. Super Ct., Stamford-Norwalk, filed 2/11/94)(settled mid-1994) and Computer Associates International, Inc. v. State Street Bank and Trust Co., 789 F.Supp. 470 (D. Mass. 1992) (case settled in 1992 prior a trial on the merits). Several other cases involving CA and its licensees have been settled during the last two or three years. See also 1st Fidelity Ends Software Dispute, The American Banker, August 5, 1993 (First Fidelity Bancorp. of Lawrenceville, N.J. settled software dispute by agreeing to a five-year enterprise license after the Federal District Court in New Jersey enjoined CA from unilaterally discontinuing software support prior to a trial on the merits); CA Settles User License Suit, Computerworld, April 12, 1993 (involving First Interstate Bancorp). See also Outsourcers: Beware of Client/Server Licensing Trap, Computer Reseller News, June 7, 1993 (which reported on CA's action seeking $2 billion in damages from Electronic Data Systems Corp. for breach of contract and misuse of CA's software, a dispute which was settled in 1994. Electronic Data Systems Corp. v. Computer Associates International, Inc. No. 3:92-CV-0055-X (N.D. Tex. January 9, 1992 and Feb. 22, 1994); Computer Associates International, Inc. v. Electronic Data Systems Corp., 816 F. Supp. 845 (E.D.N.Y. 1993)(action dismissed on account of Texas litigation)). This trend is a result of outsourcing (computer industry jargon for contracting out for various kinds of information technology services and products rangin from "facilities management" transactions involving the transfer of all information technology functions of an enterprise to an outside vendor to limited contracting out for equipment maintenance). Although certainly not a uniformly recognized legal term, outsourcing is most frequently used to refer to the physical transfer of hardware and software from a company's in-house data processing department to a third-party vendor. The third-party vendor is not recognized as an authorized licensee under strict scope of use provisions. The outsourcing field has been led during the last several years by several large vendors such as Electronic Data Systems Corp. (soon to be "spun off" by General Motors Corp.?), ISSC (an IBM affiliate) and niche vendors such as Shared Medical Systems Corp. (healthcare) and Alltel Information Services, Inc., formerly Systematics, (financial institutions). For an example of some of the employment law issues which outsourcing raises for employers which "transition" employees to an outsourcer/vendor, See Carroll v. Blue Cross/Blue Shield of Massachusetts, U.S. App. LEXIS 24090 (1st Cir. 1994). [return]

2. See MAI Systems Corp. v. Peak Computer Inc., 991 F.2d 511 (9th Cir. 1993) (Peak provided maintenance for MAI computer systems. In the course of its work, Peak temporarily operated the MAI customer's computer. The court concluded that running the customer's computer and loading the operating system software into RAM constituted a violation of MAI's copyright because the license scope of use did not include use by third party maintenance companies); Advanced Computer Systems of Michigan, Inc. v. MAI Systems Corp. 845 F. Supp. 356 (E.D.Va. 1994); and H.R. 533 (introduced by Rep. Knollenberg on Jan.17, 1995 to amend Section 117 of the Copyright Act to reverse the Peak decision by permitting the "rightful possessor" rather than just the "owner" of copyrighted computer program to authorized copying of the program). [return]

3. See Microsoft Corporation v. BEC Computer Co., Inc., 818 F. Supp. 1313 (C.D. Cal. 1992) clarified, 1992 U.S. Dist. LEXIS 20870 (C.D. Cal Nov. 5, 1992). [return]

4. But See Foote Memorial Hospital/PCIS Litigation, No. 87-CV 60139-AA (E.D. Mich.) (unpublished). Electronic Data Systems (EDS) and Foote Memorial Hospital (Foote) entered into an agreement in which EDS would supply hardware and software for a Patient Care Information System (PCIS). Foote leased the hardware through Western Financial Resources, Inc. (Western). Under the lease agreement, Western required Foote to obtain Western's permission prior to any assignment of contract rights. The PCIS failed to perform properly and EDS agreed to assume Foote's liability to Western. Western refused to consent to the assignment unless it was paid $143,000, the amount it expected to realize under the original agreement. The magistrate held Western was merely seeking additional fees and had no legitimate reason to deny the assignment. Standards of good faith may require a lessor or licensor to submit a bona fide reason for requesting additional fees. [return]

5. See Julie Research Laboratories v. Select Photographic Engineering, 810 F. Supp. 513 (S.D.N.Y. 1992) aff'd in part, vacated in part, remanded, 998 F.2d 65 (2d Cir., 1993). Inventor, Julie, failed to execute confidentiality and nondisclosure agreements with Select. Julie sued Select for misappropriation of trade secrets. The court, denying Julie's misappropriation claim, gave considerable weight to the fact that no confidentiality or nondisclosure agreements existed. [return]

6. See S&H Computer Systems, Inc. v. SAS Institute, Inc., 568 F.Supp. 416 (M.D. Tenn. 1983) later proceeding 605 F.Supp. 816 (M.D. Tenn. 1985). This case furnishes a good example of license provisions which were effectively used by the licensor to prevent overbroad and unauthorized uses of the software by the licensee. [return]

7. See Marco v. Accent Publishing, 969 F.2d 1547 (3d Cir. 1992). Parties should expressly provide for ownership rights in licensing and software development agreements. Licensor should also secure proprietary rights for derivative programs it intends to license. Licensee should be aware of licensor's status as an independent contractor for purposes of copyright ownership. See Community for Creative Non-Violence v. Reid, 109 S.Ct. ); Aymes v. Bonelli, 980 F.2d 857 (2d Cir. 1992), remanded 4 CCH Computer Cases 47,034 (1994). [return]

8. See Hudson v. Gold Rush Messenger Service, Inc. No. 84 Civ. 9327 (S.D.N.Y., Apr. 16, 1987) (unpublished). In the absence of an express provision in a software license agreement, a licensee's right to obtain source code will not be implied. [return]

9. See CMAX/Cleveland, Inc. v. UCR, Inc., 804 F.Supp. 337 (M.D. Ga. 1992). [return]

10. See generally Note, "The Intellectual Property Bankruptcy Protection Act: Legislative Relief for Software Licensees from Licensor Bankruptcy", Software Law Journal v. III, p. 91 (1989); See Also Encino Business Management, Inc. v. Prize Frize, Inc., 32 F.3d 426 (9th Cir. 1994). [return]

11. See Infosystems Technology, Inc. v. Logical Software Inc., 835 F.2d 874 (4th Cir. 1987). In this case the court sought to construe an ambiguous series of license agreements which did not clearly distinguish between "enhancements" and "separately marketed", independent software products). Since the contract contained the following exclupatory language, the Court found that the software licensor (Logical Software) had a low level of accountabilty: "Logical Software does not warrant that the operation of the LOGIX Software will be uninterrupted or error free, or that all bugs or software defects will be corrected". [return]

12. See Electro-Matic Products, Inc. v. Prime Computer, Inc., 1989 U.S. App. LEXIS 13037 (6th Cir. Aug. 28, 1989). [return]

13. See Data Processing Services, Inc. v. L.H. Smith, 492 N.E.2d 314 (Ind. Ct. App. 1986); Diversified Graphics, Ltd. v. Groves, 868 F.2d 293 (8th Cir. 1989)(applying the higher "malpractice" standard of care to an accountant who acted as a systems selection consultant). But see RKB Enterprises Inc. v. Ernst & Young, 582 N.Y.S.2d 814 (N.Y. App. Div. 1992). Court refused to recognize tort of computer malpractice for consulting information regarding appropriate hardware configuration, but acknowledged cause of action for intentional fraudulent inducement; Chatlos Systems, Inc. v. National Cash Register Corp., 479 F. Supp. 738 (D. N.J. 1979) aff'd in part, rev'd in part on other grounds, 635 F.2d 1081 (3d Cir. 1981), aff'd after remand, 670 F.2d 1304 (3d Cir. 1982), cert denied, 457 U.S. ) (refusing to recognize separate tort of "computer malpractice"). [return]

14. See generally, Hospital Computer Systems v. Staten Island Hospital, 788 F.Supp. 1351 (D. N.J. 1992). [return]

15. See Bridgestone/Firestone, Inc. v. Oracle Corporation, No. C-91-1420-DJL, 1991 U.S. Dist. LEXIS 20108 (N.D. Ca. Nov. 18, 1991). Court enforced contract as written despite Firestone's claims that parties' conduct during negotiations indicated the agreement was not the complete expression of the parties' intent. Oracle's statements in its sales brochures given to Firestone during negotiations were not considered warranties under the agreement. See also RKB Enterprises Ltd. v. Ernst & Young, 582 N.Y.S.2d 814 (N.Y. App. Div. 1992). Court refused to create tort for computer malpractice. [return]

16. See St. Luke's Hospital v Shared Medical Systems, 785 F.Supp. 1243 (E.D. Mich. 1991) aff'd in part and rev'd in part, remanded, 1993 U.S. App. LEXIS 13549 (6th Cir. June 1, 1993). See also Sierra Diesel Injection Service v. Burroughs Corp., 651 F.Supp. 1371 (D.Nev. 1987), aff'd 874 F.2d 653 (9th Cir. 1989). (The court questioned whether Burroughs' warranty disclaimer was sufficiently conspicuous to be enforceable under Nevada's Uniform Commercial Code); compare Metropolitan Life Insurance Co. v. Noble Lowndes International, Inc., 600 N.Y.S. 2d 212 (N.Y. Sup. Ct. App.Div., 1993) aff'd. 84 N.Y. 2d 430 (N.Y. Ct.of Appeals)(upholding broad contractual limitation of vendor's liability for consequential damages); Jaskey Finance & Leasing v. Display Data Corp., 564 F. Supp. 160 (E.D. Pa. 1983). See also, Hawaiian Telephone Co. v. Microform Data Systems, Inc., 829 F.2d 919 (9th Cir. 1987); RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir. 1985); compare Chatlos Systems, Inc. v. National Cash Register Corp., 479 F.Supp. 738 (D. N.J. 1979), aff'd in part, rev'd in part on other grounds, 635 F.2d 1081 (3d Cir. 1981) aff'd after remand, 670 F.2d 1304 (3d Cir. 1982), cert denied, 102 S.Ct. ). [return]

17. See Werner v. Lewis, N.Y.L.J. Aug. 4, 1992 (Sup. Ct. N.Y. County August 4,1992)(Punitive damages assessed for intentionally installing software bug in program.); Franks & Sons, Inc. v. Information Solutions, Inc., 1 CCH Computer Cases para. 46,195 (U.S. Dist. Ct. N.D. Okla. Dec. 23, 1988)(court ordered developer to remove a previously undisclosed "drop dead" device from computer system and refused to enforce the software license agreement as contrary to public policy and an "abhorrent" contract. If the purchaser had known about the device prior to entering into the contract, court indicated that it would have ruled differently. In so limiting, the vendor's "electronic `self-help' remedy", the Court appears to have been influenced by the act of the vendor without giving prior notice disabling/destroying software used by a licensee without making a physical peaceful entry or seeking judicial authority) See also Advance Marketing Services Inc. v. Dayton Data Processing, 1992 Ohio App. Lexis 994 (Ohio Ct. App. March 6, 1992)(withholding of software and data considered improper.) But See American Computer Trust Leasing v. Jack Farrell Implement Co., 763 F. Supp. 1473 (D. Minn. 1991), aff'd and remanded, 967 F.2d 1208 (8th Cir. 1992). During the last decade, several states have enacted laws imposing criminal penalties upon certain types of unauthorized system access or software disablement by third parties (including, in some cases, vendors attempting to use "electronic self-help"). [return]

18. See note 4. Licensor should be required to act in good faith before charging additional fees. [return]

19. See, e.g., H/R Stone, Inc. v. Phoenix Business Systems, 660 F.Supp. 351 (S.D.N.Y. 1987). [return]

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