David Baumer, 2004

1
David Baumer, 2004

• Important Contract Issues for Technology Companies

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E-commerce

• Virtually all businesses now have e-commerce
  capabilities
• An important legal issue is website use of
  warranties
• U.S. warranty law is governed by Article 2 of the
  UCC
• Also important is the Magnuson-Moss (MM) Warranty
  Act and
• Regulations of the FTC
• Other relevant laws include the CISG, UETA, and
  E-SIGN
• Note that the CISG is limited to B2B transactions
  and does not apply to consumer sales

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Express Warranties

• Any affirmation of fact or promise
• Made by the seller to a buyer, which
• Relates to the good, and
• Becomes part of the basis of the bargain
• Express warranties can be created by
• Any description of the goods, which is part of
  the basis of the bargain
• Any sample or model which is part of the basis of
  the bargain
• An express warranty creates strict liability for
  the warrantor (seller)
• Express warranties can be created by oral
  statements of the sales force or contained in
  brochures or trade show displays

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Express Warranties

• Controlling inadvertent creation of express
  warranties
• Strict control of sales staff
• Inform purchasers of what is being guaranteed
• Provide written documentation of all items
  discussed
• Parol evidence rule
• Written contracts take precedence over oral or
  written statements made before the contract
• All extraneous statements can be excluded with
  integration clauses
• The net effect is that oral statements by sales
  staff and showroom demonstrations are excluded

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Express Warranties

• Controlling the creation of express warranties
• Note that the parol evidence rule does not
  prevent introduction of evidence to show fraud
• Nevertheless, purchasers who are relying on
  promises made by the sales staff, promotional
  material or demonstrations, should get these
  promises explicitly in writing

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Implied Warranties

• Implied warranties are part of every sale of
  goods contract,
• Unless specifically disclaimed
• Under the UCC a seller impliedly warrants that
• The goods sold are merchantable, which means
• Fit for the ordinary uses for which such goods
  are used,
• Are adequately contained and packaged
• Conform to any promises made on the packaging,
• Meet industry standards

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Implied Warranties

• Also implied is the warranty of fitness for a
  particular use if
• The buyer relies on the sellers judgment and
• The seller has reason to know of the buyers
  reliance
• Also implied in a UCC Section 2 sale
• Warranty of title and against infringement
• The seller warrants that he owns the goods he is
  selling and that the purchaser will not infringe
  a patent or other IP by purchasing or using

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Exclusion of Implied Warranties

• Sellers regard implied warranties as an uncertain
  liability
• Generally sellers seek to exclude implied
  warranties
• Exclusionary language must be carefully crafted
• UCC allows as is or with all faults to be
  used to exclude all implied warranties
• Most people will not buy goods where the sellers
  excludes all warranties, express or implied
• In general sellers want to contour exactly what
  they are liable for in the sale of goods
• Disclaimers of implied warranties must be
  conspicuous
• To exclude the implied warranty of
  merchantability, it must be named

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Exclusion of Implied Warranties

• The Magnuson-Moss Act is a federal statute that
  requires all written warranties to be labeled
• As either full or limited
• For a full warranty, implied warranties cannot be
  limited or excluded
• For limited warranties, implied warranties can
  only be limited to the duration of express
  warranties

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Remedies for Breach of Warranty

• Breach of warrantycompensatory damages
• Section 2-714 calls for damages equal to the
  difference between what
• Was received and
• What was promised
• Benefit of the bargain
• Between businesses agreements to limit damages
  are generally enforceable
• Limitations of liability commonly enforced so
  long as the remedy offered buyers or clients does
  not fail in its essential purpose
• Often fallback remedies are appropriate to avoid
  the unlimited liability portions of the UCC

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Remedies for Breach of Warranty

• Sellers want to limit liability to replacement of
  defective units
• Sellers want to avoid liability for consequential
  damages
• Damages that are a consequence of the breach of
  warranty are recoverable such as
• Lost profits
• The damages due to breach of warranty must have
  been reasonably foreseeable
• Damages that the seller had reason to know about

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Limitations of Liability

• LOL are allowed as long as they are not
  unconscionable
• In the case of consumer goods, limitations of
  liability are prima facie unconscionable if
  damages are for personal injury
• There is procedural unconscionability and
• Substantive unconscionability
• In many states there are additional consumer
  protection laws
• It is good practice to make all LOLs conspicuous
• If the remedy fails in its essential purpose, the
  courts are split on whether limitations of
  liability are still in effect

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X-Wrap Licenses

• X-Wrap licenses are merely an extension of form
  contracts
• X-wrap licenses are increasingly used and
  enforced as long as the business follows
  reasonable procedures
• Shrink wrap licenses have been common in software
  licenses for years
• By breaking the seal, you are bound to all the
  terms in the contract
• One way to prevent reverse engineering in
  software is to make a prohibition of it part of
  the license agreement
• Also prohibited are sales, modifications,
  copying, renting sublicensing

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X-Wrap Licenses

• There is a long history of challenges to their
  enforceability
• Most have been eliminated if vendors are
  reasonable
• Customers must
• Have notice of the terms in the click-wrap
• a reasonable opportunity to read them
• Reasonable opportunity to return the goods
• After having an opportunity to inspect the goods
• Still oddball terms will not be enforced
• Industry standards are crucial in determining
  what is reasonable and what is unconscionable
• Unusual terms should be conspicuous

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Click-Wrap Licenses

• Same principles apply to online transactions
• Must be a showing of customer assent to the terms
  of click-wrap agreement
• Again the key to enforceability is for the seller
  to follow certain reasonable steps
• Use of conspicuous headings is prudent
• Some vendors have terms that penalize users if
  they criticize the software
• These terms have been generally ruled
  unconscionable

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UCITA, UETA, and E-SIGN

• The Uniform Computer Information Transactions Act
  (UCITA)
• Has been withdrawn by the NCCUSLonly two states
  adopted
• Limitations of Article 2 are recognized
• The sale of goods is not the same as licensing
  information
• The NCCUSL also proposed UETA, Uniform Electronic
  Transactions Act
• Mainly deals with legal parity between paper and
  electronic records

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UCITA, UETA, and E-SIGN

• The net effect of UETA and E-SIGN is that for
  most online transactions
• Electronic records have parity with paper
  documents
• UETA does not apply when state law indicates that
  electronic records are not legal
• E-SIGN defines transactions for which it does not
  applymainly, important, domestic transactions
  such as divorce
• There is a lot of overlap between the exclusions
  in UETA and E-SIGN
• E-SIGN requires all electronic records to
  storable and printable

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E-Commerce Contract Law

• Parity between electronic and paper records seems
  to be firmly established for many transactions
• The electronic record must be storable and
  printable
• Signatures
• Digital signatures are being allowed as a
  substitute
• Relies on two-key encryption
• Additional security can be added through CAs
• Failure to account for theft of keys may generate
  unlimited liability
• E-SIGN a federal statute
• Requires consumer opt-in for electronic contracts
  and digital signatures
• There are a number of disclosures that must be
  made by the vendor also

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Electronic Agents

• The authority of electronic agents is
  increasingly an issue
• Increasingly issues as to warranties and other
  contract terms are being negotiated without human
  intervention
• A principal is bound by the actions of electronic
  agents they select
• Under UCITA the principal is bound if the
  electronic agent authenticates the electronic
  offer, or
• Engages in operations that indicate acceptance

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Mass Market Licenses

• Two terms that are unconscionable and therefore
  unenforceable
• Terms that prohibit commenting on software, and
• Terms that prohibit reverse engineering for
  purpose of securing interoperability
• Also unenforceable are
• Terms that violate public policy, and
• Terms that are unconscionable
• The fair use exception applies regardless of the
  terms to the license
• Terms that are buried in the license such that a
  reasonable person would not notice
• Consumers must have the right to return the item
  once they have been exposed to the license
• Vendors are required to pay consumers if
  installation of software harms their computers
  and the license only becomes visible during
  installation

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Warranties

• The big three Article 2 implied warranties are
  present in UCITA
• Merchantability, fitness for use, and
  non-infringement
• In addition UCITA codifies a new warranty,
  accuracy of information
• This warranty is limited to situations in which
  the vendor is providing customized advice through
  the software
• The warranty is limited by a reasonableness
  guarantee
• Vendor only liable for not using reasonable care
  when dispensing information

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Strategic Alliances

• Strategic alliances (SA)
• Firms that join forces for long-term formal
  ventures
• SAs appear to be more prevalent in high-tech
  industries
• Among the reasons for SAs are
• Acquisition of technology
• Manufacturing capacity
• Distribution capabilities
• Risk diversification and cost sharing
• Access to capital, geographic expansion,
  marketing, reduction of infringement risks, and
  prevention of competitors access to technology

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Strategic Alliances

• At the heart of many SAs is IP rights
• SA agreements should spell out in some detail who
  owns what
• The contracts should be very detailed as to
  various aspects of IP ownership
• Who is going to pay for patent applications?
• Who is going to in charge of marketing and
  distribution
• Disclaimers of implied warranties are routine,
  but express warranties are generally present
• Limitations of liability are almost always
  enforced against businesses

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Alternative Dispute Resolution

• Disputes are going to take place in SAs
• ADR is superior to court litigation in resolving
  disputes while maintaining the SA
• Litigation is slow and expensive and
• Creates animosity
• TSs are frequently lost during litigation
• ADR is quick, private and relatively inexpensive

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Alternative Dispute Resolution

• Mediation
• Neutral third party facilitates a settlement, but
  does not have the power to impose a result
• Mediation is increasingly being used because
  there is no clear winner or loser
• Mediators are generally experts in the field
• Mediation is often an interim step before
  arbitration
• Minitrials
• Often make use of mediators and jurors
• Decision is not binding but is a reality check
• Jurors are often executives from the firms

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Alternative Dispute Resolution

• Arbitration
• Private, quick and relatively inexpensive
• An arbitrator acts like a judge and makes a
  decision after a hearing
• In general decisions of arbitrators are
• Respected by the courts and
• Not appealable unless there is evidence of fraud
  or lack of consent
• Arbitrators are generally experts in the field