White SW Computer Law
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BEST PRACTICE IN MASS MARKET SOFTWARE LICENSING

Steve White, Principal - White SW Computer Law

Software distribution via the Internet is becoming more common as e-commerce expands globally. Suppliers are able to cut out the middleman and consumers are able to access the most up to date version of the software at the time of purchase. It sounds like all parties should be pleased with this form of distribution, but have they considered whether the “click wrap” agreement that they probably used to conduct the transaction is enforceable?

1. Distributing software via a web site - How effective are click wrap licenses?

There has been legal discussion in many jurisdictions as to whether shrink wrap contracts are enforceable. A shrink wrap licence usually comes with packaged software (often encased in shrink wrap plastic). These licences usually state that if you have opened the packaging and have loaded the software onto your computer, then you are deemed to have accepted the terms of the agreement. Arguments have been raised that the contract is actually created when the purchase is made and so the supplier should not be allowed to impose additional contractual terms on the customer, at a later time.

Similar issues arise in relation to click wrap contracts, usually used in Internet transactions. Click wrap contracts are commonly created by e-mail when a customer who must indicate his agreement to the terms of the contract clicks on a button stating “I agree” or similar.

Traditionally, two or more parties enter into a contract before the customer takes possession of the purchased goods. The terms of the contract are negotiated and sometimes recorded in a written agreement. In comparison, the licence terms and conditions for a click wrap agreement are often not provided until the time of installation of the software that has been previously purchased. It is debatable whether the contract arose when the software was purchased or later when the customer agrees to the terms of the click wrap agreement, which may not be displayed until the software is installed. The notion of agreeing to contractual terms by clicking your mouse rather than by written signature also challenges the traditional concepts of contractual agreement.

The Australian Courts have not yet ruled as to the enforceability of click wrap contracts. A guide to the possible outcome of an Australian matter is provided by the American case: Hotmail Corporation ( "Hotmail" ) v Van$ Money Pie Inc ( "VMP" ). In April 1998 a Californian Court found that customers were bound by terms and conditions detailed at Hotmail's web site as a result of having clicked on a button marked “I agree”. The Court issued a preliminary injunction to prevent VMP from using Hotmail's services as a result of VMP's breach of Hotmails terms and conditions, which it had an opportunity to review.

VMP sent spam advertising allegedly pornographic material and configured the return address for their e-mails to falsely indicate that they were sent from a Hotmail e-mail address. Hotmail provides free e-mail services subject to the term that, amongst others, that Hotmail e-mail accounts will not be used to send spam. As a result of receiving complaints from recipients of the spam, Hotmail sued VMP to stop them from sending spam that stated it came from a Hotmail account, and from using Hotmail accounts as mail boxes to receive to replies to the spam.

Another US case which discusses the validity of contracts formed online is CompuServe Inc v Patterson. The USconstitution requires that there is more than a minimal connection between the defendant and the place where a law suit is filed. In this matter, Patterson, a software developer who lived in Texas, entered into a Shareware Registration Agreement with CompuServe, who are based in Ohio by typing “Agree” at various places in the on-line agreement. The Court found that non residents can be sued in a State if they transact business there. It was held that although Patterson had never been to Ohio, that there were substantial ties between Patterson and Ohio due to computer transactions such as Patterson's subscription to CompuServe and its shareware registration agreement. The Court decided that the contracts should be governed by Ohio law.

To assist the supplier in defending any possible claim that its click wrap licence is invalid:

  • The customer should be made aware as early as possible that any transaction between the parties is subject to the terms and conditions of the click wrap agreement.
  • The terms and conditions should be prominently displayed to the customer in a clear and concise way so that an average person can understand the nature and terms of the agreement, before they have agreed to same;
  • The customer should be requested to accept or reject your terms and conditions by typing “I agree” or “I do not agree” or by clicking on buttons stating “I agree” or “I do not agree”, or similar;
  • Ideally, if the customer does not accept the terms and conditions, the sale should not proceed; and
  • The customer should be given notice at the time of purchase that the transaction is subject to the click wrap agreement.

The supplier's terms and conditions should include all standard contract terms such as limitation of liability, warranties etc to limit its contractual obligations, but it should be remembered that any unusual or oppressive terms may not be allowed by the Courts.

In the US, revisions to the Uniform Commercial Code are being drafted, which will enable easier enforcement of shrink wrap and click wrap licences. Of particular relevance to software transactions is the proposed new Article 2B. It is anticipated that, if adopted, this article will serve as guidance for courts interpreting various types of electronic software licences. The most current draft of UCC 2B can be viewed at http://www.law.upenn.edu/library/ulc.

The issue of shink wrap licences will be covered later today. However, you should also consider the decisions of ProCD v Matthew Zeidenberg & Silken Mountain Web Services Inc and Beta Computers (Europe) Ltd v Adobe Systems (Europe Pty Ltd) together with the new provisions of the Trade Practices Act which are very applicable.

2. Liability of suppliers for faults, consequential loss and damages

Typical causes of action arise from :

  • breach of contract
  • the Trade Practices Act (1974) (Cth) ( “the TPA” )
  • other relevant legislation such as the Goods Act (Vic) 1958 ( “the Goods Act” )
  • the Copyright Act 1968 (Cth), the Patents Act 1990 (Cth) etc
  • tort

2.1 Contract

If a condition or essential term of a contract is breached then there may be a claim for damages for losses incurred as well as the common law right to terminate the contract. A condition or essential term is a term of the contract going to the very root of the contract. However, in the case of a click wrap licence, the parties must agree that there was a binding contract in place for this to be an issue.

Recoverable damages may include a claim for money to put the customer in the same situation as if the contract had been performed including loss of bargain (expectation loss) and damage suffered and expenditure incurred in reliance of the contract (reliance loss). If the term is a warranty only then a claim only arises for damages or for rectification of the problem.

In Australia, the TPA and the various parallel state statutes give rise to implied terms that goods will correspond with their description where they are sold by description and be of a merchantable quality and fit for a particular purpose where one is specified. Further, legislation such as the Goods Act also give rise to further rights in relation to the sale of certain goods.

In connection with contracts of hire or supply of services in certain circumstances there is an implied warranty that there must be care and skill expended in providing the services and where services are requested for a particular purpose or result then there is an implied warranty that the services will be reasonably fit for that purpose.

For Australian software distributors, one of the clauses in your click wrap agreement should state that the Agreement is governed by Australian law and that the customer consents to the Australian legal jurisdiction. Without such clauses, by distributing over the Internet, you must consider the laws in your customer's country and whether or not you breach those laws in your supply of goods and services. If you do not obtain your customer's consent to the Australian jurisdiction, you could also find yourself to be a party in a foreign law suit should there be any fault in the software.

When a software program is downloaded using a click wrap agreement, an interesting question arises as to the liability for the distribution of the program, should it contain material, which infringes a third party's copyright. Arguably, an infringement occurs when the software is downloaded as this is when the unauthorised copy is made.

If such an infringement occurs, the customer could possibly be found liable for copyright infringement, as they have directly caused the infringement to occur, even where the customer had no knowledge that the infringement was occurring. It would be necessary to analyse the terms of the click wrap licence to determine whether the customer had any recourse against the supplier.

If you are offering goods or services over the Internet, you should consider whether your rights in relation to the goods and services allow to you to offer same to the world. In many distribution agreements, the territory may be expressed to exclude distribution by electronic means. It is particularly important if your are appointing distributors for your own product and want to retain sole control over electronic distribution that the territory allotted to the distributor(s) expressly excludes distribution via the Internet.

A US matter of A & A Records Inc and Ors v Internet Site known as Fresh Kutz and Anor saw various record companies applying for relief from the Court including an order that the Internet Service Provider which hosts the web site prevent any access to the site to prevent further copyright infringement and to prevent destruction of evidence. Fresh Kutz provided illegal copies of musical recordings at no fee and enabled visitors to the site to download and create further illegal copies. Despite the fact that the owner of the web site was unknown at the time, the Court ordered, amongst other things, that the owner of the web site or its agents cease infringing the record companies' copyright, from destroying any records and computer files connected to the web site, and to block access to all infringing copies of musical recordings on the web site.

Web site owners should expect that Courts around the globe will continue to order heavy penalties for activities on web sites which involve infringement of copyright. The potential orders against web site owners for the loss and damage caused by their actions should be borne in mind when adding any material to your web site which may potentially be infringing someone else's copyright.

2.3 Tort

In brief, an action in the tort of negligence requires:

  • a duty of care to be owed by the tortfeasor to the plaintiff
  • that there has been a breach of that duty
  • that as a result of that breach the plaintiff has suffered damage which is not too remote.

The standard of care required usually adopted is that of a reasonable man. In considering whether a standard of reasonable care has been met the court may consider issues such as the size of the risk, the likelihood of injury, the severity of the consequences, the cost and practicality of minimising the risk, the common practice of persons engaged in similar conduct and statutory guidelines regarding the required code of conduct. Negligence has not been widely used in Australia. It is, however, a very likely cause of action in relation to Year 2000 disputes in conjunction with a Trade Practices Claim.

3. Decompilation, reverse engineering and confidential information

USA

The practice of software reverse engineering was examined in the US case Sega Enterprises Ltd v Accolade, Inc. Reverse engineering a software program usually involves the creation of a disassembled copy of the original object code and then the production of a non-infringing software program. This process gives rise to a potential copyright problem in that the disassembled code could be considered to be a derivative work of the original program. In normal circumstances, you need to seek the permission of the copyright holder before creating a derivative work.

The Court decided in the Sega matter that decompilation constituted a copyright infringement. This decision was not followed in the matter of Atari Games Corporation v Nintendo, Inc. In this matter the Court held that decompilation of a software program for the purpose of studying the ideas behind the software may be a permissible fair use. Following the decision in the Atari matter, the original decision in the Sega matter was reversed on appeal.

AUSTRALIA

In June 1997, the Federal Court of Australia handed down a decision in the matter of Powerflex Pty Ltd v Data Access Corporation which changes the direction of copyright protection in Australia. This matter had been appealed from an earlier decision that certain words such as “save”, “display” and “find” were computer programs, and therefore copyright works, belonging to Data Access. In this appeal, the Court held that these words do not in themselves or collectively constitute computer programs.

This decision brings Australian case law more into line with recent US rulings such as Lotus Development Corporation v Borland International Inc in which the US Supreme Court refused to grant copyright protection to Lotus 1-2-3's spreadsheet command menu. It was also found that the macros contained in the Powerflex program did not infringe the copyright in the Data Access program. However, a Huffman table in the Powerflex program was found to have infringed Data Access' copyright. This case should not be construed as removing the possibility of a “look and feel” claim, however, it does make such a claim more difficult to maintain.

In Admar Computers Pty Ltd v Ezy Systems Pty Ltd & Ors the Federal Court was asked to examine evidence relating to a pseudocode analysis of software on the question of copyright infringement and breach of confidentiality in circumstances where an employee left his employer and published a similar and competing product to this former employer. Psuedocode anaysis is the examination of source code's logic flow. In this case, an employee left a firm and commenced to sell a rival software product. The former employer conducted a pseudocode analysis which produced evidence that the Ezy system was based upon the Admar system. However, the Court noted that copyright is intended to grant protection to the expression of an idea, not the idea itself. Since the source code of the Admar software program had not been reproduced by Ezy, there was found to be no infringement of copyright. However, the pseudocode analysis evidence was found to be relevant in the claim for breach of confidence in that it suggested use of Admar's source code by a former employee in developing the Ezy source code.

The concept that the Australian Copyright Act does not afford protection to an idea, but instead to the form of expression of the idea was recently examined by the Federal Court in the matter of Coogi Australia Pty Ltd v Hysport International Pty Ltd . Hysport used a computerised knitting machine to knit fabric, which Coogi claims was an infringement of its copyright in both the fabric and the computer program used to manufacture the fabric. Hysport had used a program written in a different language to that used by Coogi. The computer program used by Hysport was a variation of another program written by examining the Coogi fabric and analysing the stitches required to create a similar fabric. The Court held that Hysport had not infringed Coogi's copyright in the fabric or the copyright in the computer program used in manufacturing the fabric. It was considered that the evidence relied upon by Coogi, that the two computer programs were similar at the functional level of expression, was not relevant to the question of copyright infringement.

4. Jurisdiction

When examining the liability of the supplier, an important consideration is the jurisdiction that governs the transaction. If the click wrap agreement does not specify which laws govern the agreement and in which jurisdiction the agreement is made, the supplier could be subject to laws in its customer's location that are very different to the laws in the supplier's state and country.

The American Courts once again are the main source of opinions in regard to jurisdiction afforded to Internet based agreements. In December 1996, the Minnesota District Court ruled that the State of Minnesota had jurisdiction over Granite Gate Resorts Inc and its President, who are based in Nevada. Granite Gate provided a commercial sports betting service which is illegal in Minnesota but represented that such a betting service was legal. The agreement between Granite Gate and its customers provided that all claims against Granite Gate must be commenced in Belize, whereas claims against customers could be brought in the customer's home state. The Court used a five-factor test (This test differs in Australia and other US States) to determine whether Minnesota Courts had jurisdiction and considered:

  • the quantity of contacts
  • the nature and quality of the contacts
  • the connection with the cause of action with the contacts
  • interest of the State in having the matter before the Courts of Minnesota
  • convenience of the parties

Records produced by Granite showed that Minnesota residents had both Internet and telephone contacts with Granite and as the defendants had an advertisement on the World Wide Web, accessible by Minnesota residents, it was ruled that the State of Minnesota had jurisdiction to take consumer protection action against the defendants. As a supplier, you may want to consider excluding customers from certain jurisdictions, if the laws in other countries weigh to heavily in the customer's favour.

In the US case of Superguide Corporation v Daniel Kegan, Superguide was seeking to register the trade mark “Superguide”. Kegan, the holder of the trade mark “Macguide” objected to the registration of the mark in relation to computer goods or services. Superguide filed a declaratory relief action, which Kegan sought to dismiss due to lack of jurisdiction. The North Carolina Court was asked to consider whether it had jurisdiction over Kegan, a resident of Illinois. The Court found that due to Kegan's Internet based business having customers in North Carolina, there was sufficient contact with Kegan arising in North Carolina for that state's Courts to have jurisdiction over the dispute. There is continuing case law, particularly arising in the US, which illustrates the importance of having customers agree to submit to the legal jurisdiction in your location. It is a real possibility that an Australian supplier could be sued in the US in relation to goods or services delivered or ordered via the Internet.

One of the latest US decisions with respect to legal jurisdiction and the Internet, Cybersell Inc v Cybersell Inc and Ors suggests that if your Web Site acts only as a means of advertising or as a source of information, the US Courts will not be able to assert jurisdiction. If, however, you sell goods and/or services over the Internet, it is possible that a US resident or business could issue legal proceeding in the US against you or your business.

Another issue in relation to jurisdiction may arise if there has been a Court order which bans your business from selling its goods in another country, for example if your use of a certain product name infringes a registered trade mark in that country. Would you still be able to sell your product to individuals in that country via the Internet, using a click wrap agreement?

In 1981 in the US, Playboy Enterprises Inc obtained an injunction against Chuckleberry Publishing Inc and Tattilo Edtrice SpA to prevent them from selling their magazine Playmen in the US. The injunction prevented Tattilo from using the trade marks “Playboy” or “Playmen” or any other confusingly similar word in conjunction with the sale or distribution of English language publications and related products in the US. Fifteen years later In Playboy Enterprises Inc v Chuckleberry Publishing Inc & Ors , the Court found that by offering access to American customers via the Internet, Tattilo was in contempt of Court by breaching the injunction. Tattilo was ordered to:

  • shut down its Internet site in Italy or refrain from taking new subscriptions from US residents
  • invalidate user names and passwords previously purchased by US residents and refund the remainder of their subscriptions
  • pay to Playboy, all gross profits earned from its Internet services provided to US residents
  • revise its Internet site to indicate that no subscriptions are available to US residents
  • pay Playboy's legal costs
  • pay US$1,000 per day until it complies with this order.

This order is particularly important as the judgment for damages could most likely be transferred to Italy for enforcement under international convention obligations whereas the injunction may not.

5. Conclusion

There are many developments, which we should expect to see in the near future which will see electronic commerce spreading widely throughout the world. Whenever there are such huge changes in technology, there is always a lag period before our laws can be updated and modified to suit the new commercial environment. Pioneers in electronic commerce should take particular care that their activities do not drop them in hot water in regard to both Australian and International laws.

STEVE WHITE
WHITE SW COMPUTER LAW
SEPTEMBER 1998

www.computerlaw.com.au

© White SW Computer Law 1998

This article is a guide only and should not be used as a substitute for proper legal advice, readers should make their own enquiries and seek appropriate legal advice.


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