New software contract principles prompt worries

The recently approved principles say those who sell software should guarantee no "hidden material defects"

IT vendors and tech industry groups say a new set of legal principles for software contracts developed by the American Law Institute (ALI) could stifle innovation and raise the cost of software, even though they are meant to protect consumers.

One section in the sprawling, 300-plus page document, "The Principles of the Law of Software Contracts," is particularly drawing fire. It states that parties who receive payment for software "warrants to any party in the normal chain of distribution that the software contains no material hidden defects of which the transferor was aware at the time of the transfer."

Given the inherently buggy nature of software, the language may open up the software industry to crushing liability claims, stifling its ability to innovate and driving up prices for customers, vendors and industry associations contend.

Microsoft and the Linux Foundation made headlines in May when, in unlikely fashion, they teamed up on an open letter criticizing the principles, saying they go too far and are not necessary.

"There is no great failure in terms of substandard quality or unmet expectations that would justify imposition of new mandatory rules, particularly given existing remedies under misrepresentation and consumer protection laws," it states in part. The letter didn't stop the ALI from approving the guidelines' final draft later that month.

The ALI, which is made up of lawyers, judges and legal scholars, is a long-standing American nonprofit organization that seeks to clarify laws. While their findings are not binding, judges often turn to them for reference when making decisions.

This has observers like attorney Mark Radcliffe worried.

The language is "very flawed," said Radcliffe, a partner with the global law firm DLA Piper, who specializes in intellectual property and has represented software vendors.

"If this document never got any traction with judges that would be fine with me," Radcliffe said. "[But] the ALI has a great reputation, and judges have a lot of well-earned confidence in them. If they say this is ... best practice then this is going to have an enormous impact."

"Nobody can make a software program that doesn't have defects. Nobody even tries to achieve that," Radcliffe said.

Critics also say words like "material" and "hidden" are too vague. In addition, the principles were created without enough participation from the legal and software vendor community, Radcliffe claimed.

"This is a project that virtually every lawyer I speak with has never heard of," he said. "It was completely off the radar screen. These are lawyers that do software licensing inside major corporations."

But one ALI member who worked on the project scoffed at the idea.

"The idea that this warranty is a sandbagging is absurd," said Cem Kaner, a professor of software engineering at the Florida Institute of Technology, via e-mail.

ALI began developing the principles in 2004, and "lawyers for the publishers were involved from the start," Kaner added. "The warranty of no non-disclosed, known, material defects was put in very early, maybe even the first draft. It was discussed at every meeting that I attended. It appeared in every draft that I read."

Kaner noted that the final version of the principles "go to great lengths to exclude open-source software," which carries no price tag.

But in cases where open source components are part of a commercial offering, judges would "have to make case-by-case determinations about the extent to which warranties apply to the package that would not normally apply to the open source parts of the package," Kaner said.

Meanwhile, other lawyers say there's no guarantee this particular ALI project will have great influence.

Rather than being presented as a "restatement of law," ALI's document presents the guidelines as principles, said ALI member Eric Goldman, an associate law professor at the University of Santa Clara School of Law, and director of the school's High Tech Law Institute.

While the ALI does "terrific work," that decision puts the document "in a very ambiguous bucket as to whether anyone's going to pay attention to it," Goldman said.

The document's own introduction is careful to note the distinction.

"These Principles seek to clarify and unify the law of software transactions. In light of the many percolating legal issues that pertain to the formation and enforcement of software agreements, an attempt to 'restate' this law would be premature," it reads in part.

Kaner characterized the document as a sort of beginning point. "The ALI Principles don't pretend to be legislation. They provide a detailed conceptual framework that some (maybe many) (maybe most) judges will use when deciding commercial software cases, and in rendering those decisions, the judges will criticize and polish the framework and its details, until eventually, we understand the problems well enough to draft legislation that can be accepted by a broad consensus," he said.

"The ALI Principles don't pretend to be legislation. They provide a detailed conceptual framework that some (maybe many) (maybe most) judges will use when deciding commercial software cases, and in rendering those decisions, the judges will criticize and polish the framework and its details, until eventually, we understand the problems well enough to draft legislation that can be accepted by a broad consensus," he said.

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