Principles of the Law of Software Contracts

Principles of the Law of Software Contracts


The Principles of the Law of Software Contracts was approved by the American Law Institute (ALI) in 2009.  They are meant to clarify the ambiguity created by conflicting legal decisions and the application of multiple laws to software licenses, such as intellectual property law (copyrights), Article two of the UCC, and various consumers (especially warranty acts).  There is concern in the software industry about provision in the principles, especially in two areas: (1) perceived limitations on negotiating the terms of software licenses for business, and (2) the “nondisclaimable warranty” and hidden material defects in software, where the definitions of hidden and defects may be unclear.


E-commerce and the Law


The growth of e-commerce has led to both hope and despair in many quarters.  In 1998, the U.S. and Japan issued a Joint statement on Electronic Commerce that recognized that electronic commerce will be “an engine of economic growth in the Twenty First Century.”  “The Governments of the U.S. and Japan recognize the importatnce of working together to promote global electronic commerce.”  Four general principles were endorsed:


«     The private sector should lead in the development of electronic commerce and in establishing business practices

«     Both governments should avoid imposing unnecessary regulations or restrictions on electronic commerce

«     Governments should encourange effective self-regualtion theough codes of conduct, model contracts, guidelines, and enforce mechanisms developed by the private sector.

«     Operation and harmonization among all countries, from all regions of the world and all levels of development, will assist in the construction of a seamless environment for electronic environment.



Electronic Signatures


One critical issues in e-commerce transactions is the legality of electronic or digital signatures for contractual purposes.  The term digital signature is used generically to mean electronic authentication of documents.  The United Nations Commission on International Trade Law (UNCITRAL) provided the Model Law on Electronic Signatures in 2001.  Most countries, including Canada, Japan, China, India, Brazil, the Russian Federation, Malaysia, and the U.S, have electronic signatures but they vary in complexity.  The European Union Signature Directive provides an in-depth legal framework for electronic signatures and their validity inside and between EU countries.


«     The U.S. E-sign Act


  • ·        In the U.S. have passed legislation on electronic signatures.  The passage of the Electronic Signatures in Global and National Commerce Act in June 2000 was an attempt to develop uniform rules across the country.
  • ·        The E- sign bill was introduced to regulate interstate commerce by means of permitting and encouraging the continued expansion of electronic commerce through the operation of free market forces and for other purposes.  This statute grants on line legal or financial agreements signed with a digital signature or chain of electronic code equivalent




«     The U.S. E-Sign Act


U.S. Uniform Electronic Transactions Act


The Uniform Electric Transactions Act (UETA) was approved and recommended for enactment by the National Conference of Commissioners on Uniform State Laws in July 1999. UETA validates the use of electronic records and electronic signatures. Forty-six states, the District of Columbia, Puerto Rico, and the Virgin islands have adopted UETA. Georgia, Illinois, New York, and Washington have not adopted the uniform act, but have statues pertaining to electronics transactions.

            The federal E-Sign Act allows a state to preempt the act if it has enacted UETA. UETA and the E-Sign Act bear many similarities and in some situations the language of UETA was borrowed by the authors of the E-Sign bill. However, there are differences. UETA is more comprehensive than E-sign and addresses some topics differently. UETA contains provisions for the following issues that are not dealt with in the E-Sign Act:


«     Attribution. An electronic record or signature is attributed to a person if it was an act of that person.

«     Effect of other state law. UETA recognizes that an electronic signature is just as effective, valid, and enforcement as paper. However, questions of authority, forgery, and contract formation are determined by other state law.

«     Effect of party agreement. The parties to the contract are free to enter into agreements concerning their use of electronic media.

«     Send and receive. UETA ties the determination of when an electronic record is sent or received to the communications systems used by the parties to the contract.

«     Effect of change or error. E-sign does not contain such provisions for dealing with mistakes in electronic communications, while UETA does contain such provisions for breaches in security procedures and mistakes made by an individual dealing with an electronic agent. Unless otherwise specified, the rules of mistake apply.

«     Admissibility. UETA specifies that electronic records cannot be excluded as evidence solely because they are in electronic format.


Antitrust and E-Marketplaces


As discussed in Chapter 4, a business-to-business e-marketplace is an Internet exchange where goods are traded. Both the Federal Trade Commission (FTC) and the U.S. Department of Justice have raised questions about the potential for price fixing and collusion.

            Two different types of e-marketplaces exist. The first type, those run by a neutral third party in which buyers pool their requirements for specific items, such as office suppliers, are not under scruntiny. The second type, industry sites owned and operated by competitors who together represent more than 50 percent of an industry market share, raise antitrust concerns.

            Three activities cause the concern: (1) the potential for sharing information among competitors that may allow for price increase or the development of a monopoly, (2) the danger of one buyer or a consortium of buyers acting as one  to coerce a supplier to accept a price lower than what would occur in a competitive market, and (3) suppliers that may not be in a position to freely decide not to participate.

            Supporters of industry e-marketplaces argue that firewalls can be used to protect against competitors sharing information. Such e-marketplaces also are compared to Internet shopping malls where direct competitors co-late and share expenses for things like security. Well-crafted B2B operating rules may be enough to eliminate concerns and traditional antitrust analysis is feasible.


Intellectual Property Laws


In the Knowledge Age, more and more wealth is derived from intellectual capital. According to the World Intellectual Property Organization (WPO), intellectual property (IP) refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. Intellectual property is divided into two categories.

            Industrial property includes inventions (patents), trademarks, industrial designs, and geographic industries of source. Copyright includes literary and artistic works such as novels, poems, and plays; films; musical works; artistic works such as drawings, paintings, photographs, and sculptures; and architectural designs. Rights related to copyright include those of performing artists in their performances, producers of sound recordings, and those of broadcasters in their radio and television programs.


Emerging Issues in Intellectual Property Rights


According to the World Intellectual Property Organization (WIPO), the emerging issues in intellectual property range from the Internet to health care to nearly all aspects of science and technology and literature and the arts. The legal issues of who actually owns intellectual capital are of great concern globally. New technology enables the rapid and widespread duplication and transfer of information. However, should access give unlimited rights when intellectual property interests are involved? What is fair use? Does existing domestic and international law adequately address the challenges caused by new technology?

            WIPO is an international organization dedicated to promoting the use and protection of intellectual property. Headquartered in Geneva, Switzerland, WIPO is one of the 16 specialized agencies of the United Nations. It has 180 nations as member states and administers 23 international treaties dealing with different aspects of intellectual property protection. Information on WIPO can be found at The World Trade Organization also has new agreements on trade in services and intellectual property rights.

            WIPO research has dealt with intellectual property issues related to access to drugs and health care, small and medium-sized enterprises, electronic commerce programs and activities, Internet domain disputes, genetic resources, and traditional knowledge and folklore.


Copyright Law


The U.S. Copyright Act is federal legislation enacted by Congress to protect the writings of authors. As technology has changed, the term “writings” has expanded and the Copyright Act now reaches architectural designs, software, the graphic arts, motion pictures, and sound recordings.

            A copyright gives the owner the exclusive right to reproduce, distribute, perform, display, or license his or her work. The owner also receives the exclusive right to producer or license derivatives of his or her work with limited exceptions for types of “fair use,” such as book reviews. A Copyright is a form of protection provided to the authors of “original works of authorship” including literary, dramatic, musical, artistic, and certain other intellectual works, both published and unpublished. The 1976 Copyright Act generally gives the owner of copyright the exclusive right to produce the copyrighted work, to prepare derivative works, to distribute copies or phonorecords of the copyrighted work, to perform the copyrighted work publicly, or to display the copyrighted work publicly.

            To be covered by copyright, a work must be original and in a concrete “medium of expression.” Under current law, works are covered whether or not a copyright notice is attached and whether or not the work is registered. The Copyright Office of the U.S. Library of Congress administers the act 150 countries have ratified the Berne Convention, the leading international treaty dealing with copyright, which is administered by WIPO.




A patent is a property right granted by the U.S. Patent Office (or a similar agency in other countries) to provide the inventor/developer the sole rights of making, using and selling the item in question-and denying others the right to also do so, unless the inventor decides to sell the patents rights. An invention must be novel, useful, and not of an obvious nature.


Types of Invention. “Utility” patents are issued for four general types of inventions/discoveries: (1) machines, (2) human made products, (3) compositions of matter, and (4) processing methods. Changing technology has led to an ever-expanding understanding of what constitutes a human-made product. This has led to additions to the Patent Act for design and plat patents.


Patent Infringement and Liability. Utility patents are normally issued for a nonrenewable period of 20 years, measured from date of application. Design patents last 14 years from the date the patent is granted. There is an implicit warrant that a supplier’s regular products do not infringe against the patent rights of any third party. A contractual clause may transfer this responsibility to the buyer.

            When the buyer orders goods to be assembled, prepared, or manufactured to the buyer’s specifications, then the buyer warrants that there is no infringement of patent or trademark. If there is a charge of infringement of a patent or trademark, the buyer may be liable to legal action. There is a tacit representation on the part of the buyer that the seller will be safe in manufacturing according to the specifications, and the buyer then is obliged to indemnify the seller for any loss suffered (UCC Section 2-312).

            If a charge of patent infringement is made against the buyer, the supplier should be notified promptly so that the charge can be defended, or settlement made, in a timely manner. Also, if a seller attempts to include a patent disclaimer clause in the sales contract, the buyer should be extremely cautious in accepting such a clause, since there may be costly litigation if patent infringement has occurred.


Protection Clause. Sometimes a buyer contracts with a supplier to manufacture an item, to the buyer’s specifications, that includes a new idea, process, or product that has not yet been awarded patent protection. This often happens in high-technology industries. To guard against losing the right to the new development and possible subsequent financial rewards, the buyer includes a protection clause in the contract.


Recent Developments. Two recent developments in patent law are of interest to supply managers.


  1. 1.      The danger of infringing broadly worded patents, such as those related to e-commerce technology, has decreased dramatically as a result of a recent ruling by a federal appeals court.


  1. 2.      Under a new rule enacted by the U.S. Patent and Trademark Office (USPTO), proprietary information contained in patent applications will now be made public 18 months after the application is filed. Also under this new rule, organization believes a patent application to be too broad, the organization may submit written materials to the USPTO in am attempt to persuade the USPTO that the patent application should not be allowed to issue as a patent.




A trademark is a logo, brand name, or design that is new or distinctive enough to market or represent a company or its goods and services. It protects the owner of the mark by ensuring the exclusive right to use it to identify goods or services, or to authorize another to use it in return for payment. The protection period varies but a trademark can be renewed indefinitely for a fee. Trademark protection is enforced by the courts, which in most systems have the authority to block trademark infringement.

            The trademark system facilities global trade. It promotes initiative and enterprise worldwide by rewarding the owners of trademarks with recognition and financial profit. If enforced, it also hinder unfair competitors, such as counterfeiters, from using similar distinctive signs to market inferior or different products or services.

            The manufacture and sale of counterfeit goods is a problem in some industries. In some, such as aerospace, counterfeit parts of inferior design, material, and manufacture may cause loss of life. In others, such as shoes, clothing, and accessories the loss is a degradation of brand as well as financial losses. The lack of international intellectual property laws exacerbates this situation. What is illegal in one country is a perfectly acceptable sector of the economy in another.


Industrial Design


An Industrial design is the ornamental or aesthetic aspect o0f an article. This includes its three-dimensional features, such as the shape or surface of an article, or two-dimensional features, such as patterns, lines, or color. Industrial designs are applied to wide variety of products of industry and handcraft such as clinical and medical instruments, luxury items, housewares, electrical appliances, vehicles, and architectural structures. To be protected under most national laws, an industrial design must appeal to the eye. It does not protect any technical features of the article to which it is applied.


Geographical Indication


A geographical indication is a sign used on goods from a specific geographical origin that posses qualities or a reputation due to its origin. It may be used for a variety of agricultural products such as “Tuscany” for olive oil produced in a specific area of Italy of “Roquefort” for cheese produced in France, or “Champagne” for sparkling wine produced in that region of France. Yes, that is why California bubbly is called sparkling wine, not champagne.


Product Liability


From lead paint on toys to e-coli on spinach to melamine in  milk and pet food, keeping products safe for consumers is an ongoing challenge across industries and countries. Product liability refers to the liability of any or all parties along the manufacturing supply chain for damage caused by that product. This includes the manufacturer, the wholesaler, and the retail store owner. Liability suits have been filed over inherent defects in products that are harmed customers.

            Product safety and product liability considerations have been more important for several reasons: (1) Lawsuits, large settlements, and greater public awareness have occurred when government regulations and oversight increase and judicial interpretations of the existing laws favor plaintiff; (2) a reduction or elimination of either regulations or oversights leads to lax control within and among supply chains, resulting in large product recalls; (3) the growth of global supply chains and the inherent difficulties of managing all aspects of safety and quality across borders and across legal and regulatory systems increase the risk of harm to consumers.

            The definition of product liability has expanded from tangible goods to include intangibles (gas), naturals (pets), real estate (house), and writings (navigational charts). The change move to create a body of law covering software is largely focused on liability issues. The supply managers’ role and responsibility increases as firms attempt to reduce the financial threat or product and service liability problems.

            Claims can be used based on negligence, strict liability, or breach of warranty of fitness.


Strict Liability


Product liability is generally considered a strict liability offences. This means that the defendant is liable when it is shown that the product was defective. No amount of care on the part of the manufacture exonerates it from its legal liability if it is demonstrated that the product was defective.

            There are three types of relevant product defects: design defects, manufacturing defects, and defects in marketing in marketing. Design defects occur when a product may perform its function but is inherently dangerous due to a design flaw. Manufacturing defects occur during the construction or production of the item. Marketing defects result from improper instructions and failures to warn consumers of latent dangers in the product.

            The United States does not have a federal products liability law. State statues apply. However, the U.S. Department of Commerce promulgated a Model Uniform Products Liability Act (MUPLA) for voluntary state use. The law of Products liability is found mainly in common law (case law) and in Article 2, Sections 314-315, of the UCC, which deal with implied and express warranties of merchantability.

Implications for Supply. Part of the strategic role of supply managers is to minimize organizational risk. Taking a more active role in designing for procurability and sustainability is one way for supply managers to be more strategic. Considering potential risks associated costs throughout the life of a product can help the organization avoid product liability suits. In the sourcing, evaluating, selecting, contracting, and receiving stages, there is opportunities to recognize and deal with potential product liability. The earlier in the process this is done, the lower the cost to financials and reputation or brand. This requires close internal relationships with designs, engineering, quality control, manufacturing, and marketing to ensure that the organization is not being unreasonably exposed to product liability lawsuits. It also requires a close relationship and involvement with top management to ensure that the costs of failure is fully understood and included in organizational risk management.

            The increased application of strict liability tests and the lack of federal product liability laws mean that an organization may assume greater liability based on the actions of the purchaser. Supply mangers must ensure defect-free materials and components capable of performing a full range of applications and uses, in compliance with relevant standards, tests, criteria for product safety.