This letter from the IT, Privacy & eCommerce committee of the American Corporate Counsel Association and their concerns with the new American Law Institute's Principles of the Law of Software Contracts. These Principles could dramatically alter the law of software contracts. For more information, see my blog: http://lawandlifesiliconvalley.com/blog/?p=240

1. Association of Corporate Counsel
IT, Privacy & eCommerce Committee
May 11, 2009
Professor Robert A. Hillman
Reporter
Cornell Law School
220 Myron Taylor Hall
Ithica, NY 14853-4901
Email: rah16@cornell.edu
Dean Maureen A. O’Rourke
Boston University School of Law
765 Commonwealth Avenue
Room 478
Boston, MA 02215-1401
Email: morourke@bu.edu
Re: ALI Principles of the Law of Software Contracts
Dear Professor Hillman and Dean O’Rourke:
The Association of Corporate Counsel’s IT, Privacy & eCommerce Committee1
(“ITPEC”) expresses our sincere appreciation to the American Law Institute for agreeing
to schedule a call with us to discuss the ALI’s draft Principles of Software Contracts. We
believe we have vital input to offer. Our in-house counsel members negotiate and
adjudicate software licenses of all types and sizes on behalf of licensees and licensors.
We believe that the Principles would benefit, and be more persuasive, as a result of
broader involvement and comment by in-house counsel. After review of the Principles
and as further described in the attached discussion topics, the ITPEC believes that the
marketplace for software in the United States would suffer if many Sections of the
Principles are adopted in their current form.
We believe that there are helpful aspects of the Principles. Many Sections of the
Principles seek to recite existing law in a convenient, single source. The ITPEC members
representing software licensees and licensors are concerned, however, that many Sections
would create uncertainty, introduce cost and limit flexibility for businesses and
consumers without a clear benefit. The Principles also would mandate consumer-
oriented protections for business licensees that would negatively impact America’s share
of the competitive $221 billion market for worldwide enterprise software as well as
software innovation and development in the United States.
1
The ITPEC is a Committee of over 4,000 in-house lawyers who practice IT, privacy or ecommerce law.

2. We are informed that the ALI seeks to approve the Principles on May 19th. Based on our
review of the Principles and the changes they would make to existing law, we believe that
this time frame is insufficient. Taking into account the magnitude and difficulty of the
ALI’s stated effort “to clarify and unify the law of software transactions” and the harmful
consequences of missing the mark to a key US industry, the ITPEC urges the ALI to
reserve additional time to consider carefully the views of lawyers representing companies
that license software. We request that the ALI extend the approval date and publish free
of charge the Principles on the Internet to permit further review and comment by the
ITPEC and others. We hope the ALI will consider seriously our request for additional
time and greater transparency. In any event we look forward to discussing the Principles
with you.
Yours truly,
ACC IT, Privacy & eCommerce Committee
Cc: Professor Lance Liebman, Director
Attachment
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3. ACC IT, Privacy & eCommerce Committee (“ITPEC”)
Discussion Topics for ALI Principles of Software Contracts
The Association of Corporate Counsel’s IT, Privacy & eCommerce Committee
(“ITPEC”) expresses our sincere appreciation to the ALI for agreeing to schedule a call
with us to discuss the ALI’s draft Principles of Software Contracts. In particular we
thank Professor Robert A. Hillman, the Reporter for the Principles, and Dean Maureen A.
O’Rourke, the Associate Reporter for their willingness to schedule a call to speak with us
and to receive our comments to the Principles.
Although we understand that the Principles currently are set to be reviewed and
potentially approved by the ALI during its annual meeting later this month on May 18, 19
and 20th, the Principles came to the attention of the ITPEC, thanks to a presentation to the
ITPEC by Mark Radcliffe of DLA Piper, only in early April 2009. The ITPEC quickly
mobilized a subcommittee to review the Principles (the “subcommittee”). By late April,
the subcommittee reviewed the Principles and discussed a draft of this document during
ITPEC’s monthly call on May 7th.
Although the members of the subcommittee were able to review the Principles thanks to
the generosity of the ALI, unfortunately many ITPEC members and representatives of
other licensors and licensees that will be impacted by the Principles have not read the
Principles and may have no knowledge of their existence. In addition, the Principles do
not appear to have received sufficient public scrutiny commensurate with their significant
potential impact, perhaps in part because the Principles appear not to have been widely
publicized and as a result of the $40 fee to access a draft of the Principles.
The ITPEC is concerned that the process by which the Principles were drafted was not
sufficiently transparent to the individuals and entities that will be impacted by them. In
particular, the mainstream views of in-house counsel have not been sufficiently
represented. It appears that few members of the ALI team who drafted the Principles are
in-house counsel representing licensees or licensors. ITPEC believes that in-house
counsel who routinely negotiate software licenses of all types and sizes have critical
practical input to offer that has not yet been sufficiently considered.
The ITPEC urges the ALI to extend the deadline for comment. The ITPEC also urges the
ALI to post the Principles on the Internet for comment and without charge. This will
enable the ALI to review recommendations from a broad cross-section of licensees and
licensors that have experience with these license agreements, and from the public at
large. This would be consistent with recent positive trends towards transparency and
public collaboration in software and information technology. Indeed, these trends are
reflected throughout the Principles, which require such publication on the Internet of
software licenses in various instances.
The goal of the Principles to “seek to clarify and unify the law of software transactions”
(on Page 2) is both ambitious and, as recent history has shown in the unsuccessful efforts
3

4. to draft UCC Article 2B or to adopt UCITA as an industry standard, challenging. ITPEC
acknowledges that in an effort to achieve this goal the ALI has undertaken a significant
effort in drafting the nearly 300 page Principles. In view of the magnitude and difficulty
of this effort and the harmful consequences of missing the mark on a key industry within
the United States, the ITPEC reiterates its hope that ALI will reserve additional time to
consider the mainstream views of lawyers representing companies that license software.
ITPEC believes that there are helpful aspects of the Principles. Many Sections of the
Principles are recitations of existing law and it is helpful to consolidate such recitations in
a single source. We also thank the ALI for clarifying, as a result of informal preliminary
discussions to date we had with the ALI, that e-commerce is excluded from the scope of
the Principles. We similarly thank the ALI for attempting to address our concern that the
automated disablement provision, which requires among other things a court order in
each case of disablement, would be onerous to apply, among others, in the ASP context
or the context of sophisticated businesses which have contracted an arrangement which
would allow automated disablement under carefully negotiated conditions.
We remain concerned, however, that other aspects of the Principles may create
uncertainty, encourage litigation, and increase costs without a significant benefit. In
many areas, the Principles would impose dramatic changes to established law which thus
far has enabled companies to conduct business in a predictable manner in a free market.
This predictability is important to the marketplace and should not be upset unless
unforeseen changes are justified by a clear and demonstrated need. Many changes
proposed by the Principles, however, are overly prescriptive and mandate corrections to
perceived problems in existing law where ITPEC practitioners representing both
licensees and licensors believe no such problems currently exist.
The Principles mandate consumer-oriented protections for sophisticated business
licensees. These are unnecessary in large segments of the marketplace where some
corporate licensees currently may possess more leverage than their licensors, particularly
in the case of licensors which are small businesses. The Principles’ prescriptive
protections for business licensees, as well as consumers, would result in higher software
license fees or the costs of the protections may be internalized by licensors thereby
reducing the funds available to US licensors to invest in new research and development.
The ITPEC is not aware of any major call for these costly and prescriptive protections
from licensees, particularly business licensees. The adjudication bound to result from
disputes over these protective provisions, many of which are confusing, overly broad, and
unduly burdensome, also would increase costs to licensors. The net result would be a
drag on the competitiveness of the US software marketplace and industry.
ITPEC practitioners representing smaller licensors assert that they do not possess
leverage in negotiating against large corporate consumers and that Principles would
further tip the balance of negotiations in a manner that smaller licensors are not well
equipped to bear. Low barriers to entry have enabled many such small software
companies to emerge in the past two decades within the United States. These small
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5. businesses often lack negotiation leverage with many of the large corporate licensees to
which they sell. These businesses may lack the resources to absorb the costs the
proposed Principles will impose on them.
As requested by the ALI, set forth below are more detailed written comments illustrating
our concerns in greater detail and targeting roughly a dozen key Sections of the Principles
to facilitate our upcoming scheduled discussion. The format is structured as questions
raised by the pertinent Sections of the Principles followed by the recommendations of the
ITPEC subcommittee in brackets. The subcommittee’s recommendations are approved
by the broader ITPEC.
1. General Comment
Should the Principles add a Section stating that courts should consider the context
of an agreement before applying the Principles to override any provision agreed to
by the parties? Contextual factors to be considered in such an analysis may
include whether the licensee is a consumer or is a sophisticated business, the
nature of the software, the amount at stake, whether the software is open source or
commercial, the channel through which the software is sourced, each party’s
expectations and knowledge of the other party’s expectations, and other factors
that may arise. Rather than taking this approach, the Principles use the concept of
a “standard form of transfer of generally available software” to distinguish
situations in which extra consumer-like protection is mandated. This “standard
form of transfer of generally available software” is defined as “a transfer using a
standard form of (1) a small number of copies of software to an end user; or (2)
the right to access software to a small number of end users if the software is
generally available to the public under substantially the same standard terms” (see
Section 1.01(l)). This definition thereby extends consumer like protections to
both large and small businesses.
[The subcommittee recommends strongly against using the “standard form”
approach or imposing generally new mandatory legal protections for licensees.
At a minimum, the subcommittee recommends limiting the scope of the
Principles’ consumer-oriented “standard form” protections to consumers, and not
businesses. The subcommittee and the ITPEC which supports the subcommittee’s
recommendations are composed of in-house counsel vigorously representing
businesses of different sizes. Businesses are not in need of the consumer-like
protections that the Principles impose generally, or the further heightened
“standard form” protections that would apply whenever, for example, businesses
acquire a “small number” of copies of software. In a free and competitive market,
sophisticated business licensees negotiate the important license provisions they
require or, if unavailable, find alternative solutions. Consumers act collectively to
reject undesirable license terms; for example, in response to consumer criticism
Facebook recently rolled back changes to its terms of use and Google recently
5

6. narrowed the scope of its use of information obtained from consumers licensing
its Chrome browser.2
We believe the newly protective approach of the Principles would create
uncertainty, generate litigation, and impose unnecessary transaction costs and
costly mandatory remedies. The unintended consequence of the revisions to
existing law imposed by the Principles would be to increase the cost of software
licensing in the United States, thereby weakening licensees, licensors and the
competitiveness of the US market. The subcommittee urges the ALI not to create
new laws to protect licensees, including in particular business licensees, and to
reject the “standard form” approach. The subcommittee recommends including a
Section within the Principles which advises courts to consider the context of an
agreement before applying the Principles to override any provision agreed to by
the parties.
The subcommittee reiterates its appreciation to the Reporter for clarifying that the
Principles do not apply to business to business ecommerce or ecommerce web
sites such as Amazon where the primary purpose of the interaction is to enter
transactions as opposed to licensing software.]
2. Section 1.14 Forum-Selection Clauses
This Section provides that parties may not enter into an enforceable agreement to
choose an exclusive forum that is “unfair or unreasonable.” Comment a notes that
“courts should be more willing to enforce as fair and reasonable negotiated
forum-selection clauses between sophisticated businesses.” Should the Principles
to address choice of forum clauses at all?
[The subcommittee believes that Section 1.14 is not necessary or advisable. The
Principles state with respect to the Topic of the Principles in which Section 1.14 is
located, “Topic 3 also raises the question dealt with throughout these Principles,
namely, is there anything to add to already existing law . . . .” (page 45). There
are laws that already adequately address forum selection. In addition, it is not
advisable for the Principles to change the choice of forum rules, particularly in the
context of commercial, non-consumer software transactions. The commercial
certainty associated with forum-selection clauses in commercial contracts
between businesses in a free market is important and should not be subject to
post-hoc litigation arguments regarding whether the clause was “unfair” or
“unreasonable.”
It is not advisable for one set of forum selection rules to apply only to software
transactions while all other transactions would presumably continue to be
governed by longstanding forum selection laws. In a complex sale, where a
corporate customer is acquiring hardware, software and associated services, the
Principles would create uncertainty in the law regarding choice of forum where
2
See Rob Pegoraro, Washington Post, “Facebook Retreats on Terms of Service,” dated February 18, 2009,
http://voices.washingtonpost.com/fasterforward/2009/02/facebook_retreats_on_terms_of.html; Ellen
Nakashima, Washington Post, “Google Promises Privacy Fixes in Its Chrome Browser,” dated September
9, 2008, http://www.washingtonpost.com/wp-dyn/content/article/2008/09/08/AR2008090802472.html.
6

7. such uncertainty currently does not exist. The same comment applies generally to
the other Sections of the Principles which would modify existing law.]
3. Section 2.02 Standard-Form Transfers of Generally Available Software;
Enforcement of the Standard Form
This Section provides, among others, that in order for a transfer of software to
qualify as being performed pursuant to a “standard-form transfer” (see “General
Comment,” Point 1 above for discussion of standard-form transfer), the software
license must be accessible prior to initiation of the transfer, as in publicly posted
by the licensor on the Internet (see (c)(1)). Should this be the case? Subsection
(e) further places the burden of establishing the conditions for a standard-form
transfer on the licensor.
The effect of the transfer not qualifying as a “standard-form transfer” is unclear;
clause (e) seems to imply that in such cases the agreement may not be
enforceable.
[The subcommittee recommends strongly against using the “standard-form
transfer” approach for the reasons stated in Point 1 above. The subcommittee also
reiterates that this Section is not necessary to protect business licensees, which are
sophisticated customers and may possess more leverage than their licensors, as
well as consumer licensees, who have shown in important cases that they are able
to convince licensors to modify undesirable terms. In addition, the effect of a
licensor not satisfying the requirements for a “standard-form transfer” when
required is unclear.
The specific requirement that businesses post license terms on the Internet or
otherwise make them available is unnecessarily prescriptive of licensor business
practices in both the commercial and retail contexts. The requirement should not
be construed to require licensors to post pricing terms or multiple versions of the
same agreement.
The minimum mandatory remedy of a retail consumer licensee who obtains
software and decides that the license terms are too onerous should be no more
than a right to return the software for a refund within a reasonable period of time.]
4. Section 2.03 Contract Modification
The licensor may not modify a standard-form agreement by notifying the
transferee, even if the transferee agrees that notice alone is sufficient and no
further assent is required (Clause (d)). “Fresh assent” is required in respect of
each modification. Should this be the case? Is there a clear or compelling reason
why in a free market parties should be prohibited from agreeing upon such an
approach? What would the implication be for a large corporate licensee who does
not wish to be bothered with signing serial amendments, and whose license
agreement specifies that modifications are deemed accepted if the licensee pays
its next year’s renewal fees after notification? What would the implications be for
Internet organizations that service millions of customers? Do millions of
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8. customers desire to click their “fresh assent” in response to every change in terms
to every Internet software service to which they subscribe?
[This mandatory protection is not advisable in the context of business transactions
and it should not be imposed as a matter of law in the consumer context.
Software by its nature evolves in ways which may require changes to license
terms, which may make this requirement to get “fresh assent” onerous. The need
for the “fresh assent” protection is lessened by the free market, the press, privacy
advocates, bloggers and government agencies which act as a check on software
providers who behave sub-optimally.
Whether it is a good business practice in the case of some retail software
transactions to require “opt in” responses to notice of contract changes, it should
not be required by law. With the press and public and private watchdogs on their
side, consumers have acted collectively to reject onerous changes to license
provisions where consumers care about the revisions, such as in the examples of
the Facebook terms of use and the Google browser cited above. In addition, the
Principles restate many other longstanding remedies available to consumer and
business licensees such as the ability to challenge contract provisions on public
policy grounds (Section 1.10) and unconscionability grounds (Section 1.11) that
render this overly prescriptive provision unnecessary.
The subcommittee also observes that licensed software may include the software
of other providers, which would put the licensor of such software in the difficult
position of having to obtain “fresh assent” to any changes in such third party
licenses. The “fresh assent” protection would be costly to implement, especially
for the many small businesses that exist in the software industry, because the
mechanism to obtain “fresh assent” would involve the development of IT and
business processes.]
5. Section 3.02 Express Quality Warranties
Section 3.02(b)(i) provides that an “affirmation of fact or promise made by the
transferor to the transferee, including by advertising or by a record packaged with
or accompanying the software, that relates to the software and on which a
reasonable transferee could rely creates an express warranty that the software will
conform to the affirmation of fact or promise.” This provision applies to all
software contracts, not only standard-form contacts. This provision does not
require reliance on a statement or a connection to the negotiation. Instead, it
broadens the “basis of the bargain” test under UCC 2-313, which had provided
that statements that become a “basis of the bargain” in negotiation are treated as
express warranties. Is this new approach to express warranties necessary or
advisable, particularly in view of Sections 3.06 (“Disclaimer of Warranties”) and
4.01 (“Contractual Modification or Limitation of Remedy”) described below?
[The subcommittee believes it would be a mistake to change existing law
regarding express warranties solely for software products. The “basis of the
bargain” test embodied in the law of express warranties is the result of an
evolution of over a hundred years of judicial experience in adjudicating disputes
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9. to reach a just result. It enables buyers and sellers today to conduct business with
confidence and predictability.
The subcommittee does not believe there is any aspect unique to software, or
history of unjust results in court cases involving software, that would necessitate
the special express warranty rules for software products that are proposed by the
Principles. The subcommittee believes the proposed warranty may encourage
litigation, thereby increasing costs to licensees and licensors. Courts may struggle
with the new approach to express warranties of the Principles, such as whether a
reasonable transferee could have reasonably relied on particular representations.
This Section 3.02 seeks to move existing law to the result that a reasonable
transferee may rely on any statement made by a licensor outside the contract as if
it were written into the contract as an express warranty. This result, combined
with the weakening of the effect of licensor disclaimers by Sections 3.06
(“Disclaimer of Express and Implied Warranties”) and 4.01 (“Contractual
Modification or Limitation of Remedy”), could enable a licensee to bootstrap an
extra-contractual statement which turns out to not be the case into a breach of
express warranty for which the licensor will assume anywhere from significant
mandatory minimum liability to unlimited liability.
The subcommittee asks what is special about software that creates a clear and
compelling need to direct courts to look outside the contract in a way that is
different from buying another product, such as content, computer hardware,
pharmaceuticals, autos or other items? If the ALI believes that principles of
contract law should be changed more broadly to benefit buyers generally, the
Principles of the Law of Software Contracts are not the appropriate forum to
effect such a change.]
6. Section 3.05 Other Implied Warranties
Should the Principles impose a non-disclaimable warranty of no material hidden
defect for all forms of software contracts, as follows?:
“A transferor that receives money or a right to payment of a monetary obligation
in exchange for the 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. This warranty may not be
excluded. In addition, this warranty does not displace an action for
misrepresentation or its remedies.”
The Principles explain that “[a] defect exists if the software is not fit for its
ordinary purposes” and that “[n]egligence on the part of transferors in failing to
discover defects is not covered by the Section and is the subject of products-
liability law.” The Principles state, “[s]oftware that requires major workaround to
achieve contract-promised functionality and causes long periods of downtime or
never achieves promised functionality ordinarily would constitute a material
defect.” The Principles state that this new, non-disclaimable warranty does not
replace a separate claim for misrepresentation. In what ways is this existing legal
remedy inadequate? What does it mean for an institution to be “aware” of a
9

10. hidden defect? What does “defect” mean, particularly in the context of software
in which there are tradeoffs between different legitimate development approaches
that could, with the benefit of hindsight, be recast as defects?3 The need to make
such design tradeoffs is present, for example, in the context of security design,
design of software for handheld devices with system limitations, as well as other
areas. What is unique about software licensing that it should require a non-
disclaimable warranty of quality where other products in other industry have not
needed such a warranty? Why are large enterprise licensees in particular
incapable of negotiating for sufficient warranty protection in a free market?
[The subcommittee believes that as drafted, the non-disclaimable warranty of no
material hidden defects would present uncertainty for which the subcommittee
does not see a clear justification. The subcommittee also is unclear as to why this
new warranty is necessary in view of the availability to licensee of the remedies
of misrepresentation and fraud in the inducement, and as to how the scope of this
new warranty obligation would compare with such claims under existing law.
The Principles do not specify a duration for this non-disclaimable, implied
warranty. The Magnuson-Moss Warranty Act does not require repairs or
replacements in perpetuity to protect consumers.4 Why should the law of
software contracts require more than that? Why should sophisticated businesses
not be allowed to disclaim this warranty through good faith bargaining in a free
market?
The subcommittee would like the ALI to clarify how a claim for breach of the
proposed warranty of no material hidden defect compares to a claim of
misrepresentation or fraud in the inducement. How does this new warranty apply
in the case of development of software in which the licensee may expect there
could be material defects, such as in beta or early development software, which is
a key part of software innovation in the industry, or in the development of
software in which there are tradeoffs between different legitimate design
approaches that could, as noted above, be recast as “defects” with the benefit of
hindsight?
The warranty of no material hidden defect also appears to overlap with the
implied warranty of merchantability because in many cases software with a
material defect would not be fit for the ordinary purpose for which it is to be used.
The subcommittee is concerned that this new warranty raises these and other
questions which have not been sufficiently explained by the Principles. The
subcommittee does not see any particular aspect of software necessitates this
special, non-waivable warranty even in a business contract setting, particularly
when long-standing commercial law, as reflected in the UCC, permits disclaimers
of implied warranties provided sufficient notice is given.
3
Software development is often collaborative, with different pieces of a product developed by different
departments located in different countries. Over time, new features and patches are added, which is why
software has been compared to a “hand-woven rug,” with unavoidable and hidden imperfections.
4
It requires manufacturers to make parts and manuals available for a period of seven years from the last
sale date.
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11. The subcommittee believes that the lack of certainty or clear and compelling need
for this new warranty, as drafted, will generate unnecessary costs which can be
avoided by ongoing reliance on a well-developed body of law and existing
remedies. We repeat the theme that if the ALI believes that principles of contract
law should be changed more broadly to benefit buyers, the Principles of the Law
of Software Contracts are not the appropriate forum to effect such a change.]
7. Sections 3.01 Implied Indemnification Against Infringement and 3.05 Other
Implied Warranties
Some of the subcommittee members noted that the scope of both of these sections
is limited to agreements involving software for which the transferor receives
money or the right to payment of a monetary instrument, essentially carving out
software provided free-of-charge. The overview to Part 3 explains that open
source software warrants a different approach, because it is created by dispersed
developers coming together, who may have little control over the quality of the
end product or insight into what IP rights may be infringed. Some subcommittee
members support this view and the resulting treatment of open source software in
the Principles. Other subcommittee members assert that this may be true for some
open source software, but it is not true for large open source projects sponsored
by large commercial entities who stand to benefit by charging for related support
and services.
[The subcommittee unanimously shares the Principles’ goals of ensuring that
individuals who contribute to open source projects are not subject to these
provisions. The subcommittee is split, however, as to whether these provisions
should not apply to large companies. Some in the subcommittee agree with the
ALI’s approach, and others disagree. Those who disagree assert that large
corporate sponsors of software development projects, with substantial knowledge
and control over the end product, and which distribute the software free-of-charge
while seeking payment for related services, should not be able to avoid
application of these provisions. Those who oppose the ALI’s treatment of open
source software also believe that the net result is that commercial competitors
would be treated differently under the Principles based solely on their business
model. Those who support the ALI’s treatment believe that it justifiably reflects
the business realities and public expectations regarding open source software, and
that selectively requiring indemnification against infringement and other implied
warranties by some open source licensors but not others would be unfair,
impractical and disruptive to the open source community.
Some subcommittee members also believe that contracts between commercial
entities should be the result of good faith bargaining and terms, such as
indemnification, should not be implied as a matter of law. These members of the
subcommittee note that the Principles permit indemnification to be modified or
deleted if done so conspicuously in writing, but that should not be necessary.]
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12. 8. Section 3.06 Disclaimer of Express and Implied Warranties
A. The Section, which applies to all forms of software contracts and not only
standard form contracts, states “[a] statement intending to exclude or modify an
express warranty is unenforceable if a reasonable transferee would not expect the
exclusion or modification” (see clause (a)). The comments explain, “For
example, a disclaimer may be unexpected notwithstanding its conspicuousness if
the warranty is clear and definitive. If a contract states definitively that software
is “compatible with Windows Vista,” but also disclaims all express and implied
warranties, a reasonable transferee would not expect the disclaimer to apply to the
statement and the disclaimer falls out of the contract” (page 200). Is this a fair
summary of what the law is or should be?
[Although the subcommittee has not had time to independently research this issue,
case law cited by the Principles indicates that the Section overstates the scope of
express warranties. Case law cited by the Principles indicates that parties to a
software license can negotiate an enforceable disclaimer of express warranties and
that the test of the enforceability of the disclaimer in the context of a particular
statement is not whether an objective “reasonable transferee” would have
expected the disclaimer to apply to a statement; rather it is whether the particular
licensee at issue knowingly agreed to a comprehensive disclaimer that covers the
type of statement at issue.
The subcommittee found the Principles’ comments and examples to this Section
to be confusing. On the one hand, they suggest courts may take into account the
particular facts before them and are not simply constrained to consider what an
abstract “reasonable transferee” would expect. On the other hand, some examples
appear to require that a disclaimer must specifically identify each statement that
may be construed as an express warranty to be enforceable. The comments to the
Principles appear to incorrectly reject, or minimize the significance of, case law
holding that an effective disclaimer need not specifically disclaim each and every
extra-contractual statement. The subcommittee does not believe the Principles
clarify the law in this area.
The subcommittee expresses particular concern over this Section 3.06 in the
business to business context in which licensees carefully negotiate disclaimers.
The subcommittee also expresses concern in the consumer context in which there
are transactions in which consumers understand their remedy will be limited. The
marketplace quickly disposes of substandard software, thereby also rendering
unnecessary the newly protective elements of Section 3.06.5 The subcommittee
reiterates its concern stated above in the first comment that the Principles should
not advise courts to override a contractual agreement between the parties based on
a new theory of law without first considering the particular facts of the case.]
B. The Section states that exclusions of the implied warranties of merchantability
and fitness for a particular purpose must be, among others, “conspicuous” (see
5
In addition, with privacy advocates and consumer watchdogs, the press, and law enforcement on their
side, consumers and businesses always have the remedy of fraud available for egregious cases. We are not
aware of a rash of any such incidents that would justify the changes in law imposed by the Principles.
12

13. clauses (c) and (d)). The comments explain that the location of the disclaimer
“weighs heavily” and that disclaimers that are not displayed on the “one of the
first few screens” will not be enforceable (page 203). Should this be the case
where the parties to the contract are sophisticated? What would the effect be on
business to business ecommerce platforms? Have consumers become accustomed
to such disclaimers so that whether they are placed on the third screen or sixth
screen should not determine the validity of the disclaimer?
[The subcommittee believes that the conspicuousness of disclaimer requirement is
not necessary or advisable. Businesses understand how to interpret disclaimers.
Consumers understand that disclaimers nearly always are present in lengthy legal
terms and conditions. The subcommittee believes it would be preferable for
courts to rely on existing law regarding the enforceability of disclaimers than to
prescribe specific requirements. The subcommittee refers to its concerns above in
response to this Section 3.06.]
9. Section 3.08 Integration, Ambiguity and Parol Evidence
The Section provides that merger clauses in standard-form transfers of generally
available software are only “probative but not conclusive on the issue” (clause
(c)). As with forum selection clauses discussed in Point 2, above, what is unique
about software that the body of law governing parol evidence should be changed
for that area? What would the effect be on licensors that sell small numbers of
copies of software to end users using a standard form license? This Section
provides examples in which it would appear that misrepresentation or fraud in the
inducement already may exist as adequate remedies to the licensee so that
nullification of a merger clause under this Section 3.08 is not necessary.
[The subcommittee believes it is not necessary to lessen the enforceability of
merger clauses in the context of software licensing. The subcommittee believes
the economy is best served by the uniform application of commercial laws across
all products and services except where there is a clear and compelling reason to
deviate.
The subcommittee is concerned that the net effect of this Section 3.08 and
Sections 3.02 (“Express Quality Warranties”), 3.06 (“Disclaimer of Express and
Implied Warranties”) and 4.01 (“Contractual Modification or Limitation of
Remedy”) could enable a “standard form” licensee to bootstrap a refusal of a
licensor to repair or replace “defective” software into a claim with unlimited
liability, despite a disclaimer providing for a limited remedy.]
10. Section 3.11 Breach and Material Breach
The comments to this Section provide that a non-assignment clause is breached in
the event of a merger (pages 243-44). This is not necessarily the case and
depends on the jurisdiction and type of merger. For example, where a licensee is
the receiving entity in a reverse merger an assignment of the licensee’s software
agreements may not occur. Is it necessary or helpful for the Principles to address
this area, overriding statutory intent in many states, where corporate statutes
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14. provide that a merger “vests” property in the surviving corporation, in contrast to
treating mergers as transfers?
[The subcommittee believes this Section is unnecessary and in some cases is
incorrect. There is a well developed body of law regarding non-assignment
clauses that should be sufficient to address this issue without the need to specify
rules that apply only to the software context.]
11. Section 4.01 Contractual Modification or Limitation of Remedy
A. This Section, which applies to all forms of contracts, provides that “if
Circumstances cause an exclusive or limited remedy to fail of its essential
purpose, the aggrieved party may recover a remedy as provided in these
Principles or applicable outside law” (clause (b)).6 The comments state that “[a]
limited remedy fails of its essential purpose when the transferor is unable or
unwilling to provide the transferee with conforming software within a reasonable
time regardless of the transferor’s best or good-faith efforts” (page 258). Is this a
fair summary of the law or what it should be? What is “conforming” versus non-
conforming software? Is there any time limit on the ability of a licensee to
discover software is not “conforming”? Also, the limited remedy most mentioned
in the Principles is the repayment or refund of monies. Should this Section
therefore exclude open source or free software?
[The subcommittee believes that this provision is not necessary where the licensee
would not expect a full refund, such as in the case of a sophisticated business
licensee which negotiated a lesser remedy with a licensor or a consumer licensee
who subscribes to one of many widely available free ASP services or buys a low
cost software application. When licensors license software, they price their
exposure to the customer. On a macro and often individual level, as the mandated
exposure of software licensors increases as a cost of doing business, so the cost of
the software to licensees increases or the costs are absorbed by licensors which
have less funds available to conduct R&D. As noted, the negative impact from
this and the other protective provisions of the Principles will hit the US software
industry and disproportionately affect software licensors whose home market is
the United States.7
If a licensee is able to use the software and derive benefit before returning it, the
licensee may be unjustly enriched by a full refund and the licensor denied the
benefit of its bargain. A pro-rated refund may be more appropriate in such
circumstances.
6
Section 4.01(a) provides that parties may limit or alter damages, including limiting the licensee’s remedy
to return the software in return for repayment. Section 4.01(a), however, is subject to Section 4.01(b).
Section 4.01(b) appears to override 4.01(a) by providing that such limits may fail of their essential purpose,
which the comments to 4.01 state occurs when the licensor provides “defective” software and does not cure
the defect or provide a refund.
7
It would not be surprising to see certain foreign software companies avoid or scale back operations in US
markets or set up thinly capitalized US entities to avoid litigation liability if the Principles were adopted by
US courts.
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15. Some in the subcommittee believe that this provision is particularly problematic
in the context of open source software or freeware, while others in the
subcommittee disagree for the reasons stated in Point 7 above. In any event, this
provision would increase the cost of software or discourage its development and
sale in US markets.]
B. The Section further allows for the disclaimer of consequential damages but
states in the comments that “[o]f course, a consequential-damages limitation may
well be unconscionable when the limited remedy fails, such as when the
transferor refuses to repair or replace defective software despite a contractual
obligation to do so and with full knowledge that the transferee is suffering large
consequential damages as a result. A consequential-damages provision also
would be unconscionable if the limited remedy is itself unconscionable” (page
260). Is this a fair summary of the law or what it should be? Could this comment
enable a licensee to bootstrap a refusal of a licensor to repair or replace software,
despite a disclaimer providing for a lesser remedy, into a claim with unlimited
liability?
[The subcommittee believes that the Section overstates the ability of a licensee to
override a consequential damages limitation, which under current law will depend
on particular circumstances and will not automatically occur whenever a
dissatisfied licensee facing a breach of contract is not provided a full refund. The
subcommittee believes it is unnecessary to revise this law in the context of
software agreements. The subcommittee is concerned that the net effect of
Sections 3.02 (“Express Quality Warranties”), 3.06 (“Disclaimer of Express and
Implied Warranties”), and this Section 4.01 could enable any licensee to bootstrap
a refusal of a licensor to repair or replace “defective” software into a claim of
unlimited liability, despite a disclaimer providing for a lesser remedy.]
12. Section 4.03 Use of Automated Disablement to Impair Use
This Section restricts the use of automated disablement, defined as “electronic
means to disable or materially impair the functionality of software.” The Section
provides that a licensor may not use disablement in the case of a standard form
transfer of generally available software (Clause (c)). The Section imposes
unlimited liability on the licensor for improper disablement (Clause (e)). Should
the definition of disablement include the termination of access to an ASP or web
site providing software? Would this provision restrict an application service
provider or web site provider from disabling a user’s password, and under what
circumstances? How will courts resolve disputes when a licensor disables
software after non-payment by a licensee who subsequently claims it withheld
payment due to non-conformance of the software? Does this situation expose
licensors to unlimited liability for non-conformance, thereby usurping otherwise
enforceable liability limits for non-conformance that were the product of good
faith bargaining? Will this uncertainty created by the Principles lead licensors to
seek court orders before disabling software thereby increasing the cost of software
to licensees and licensors and increasing the burden on our judicial system? How
does this Section relate to Section 4.04 (Cancellation), and could this Section
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16. require a licensor to continue providing access, services or support after
termination?
[This provision represents another departure from existing law in a manner for
which the subcommittee does not see a clear or compelling justification. The
provision takes away the ability of licensors to bargain for automatic disablement
as a realistic, cost effective option to protect their intellectual property. This
provision also would hamper licensors’ ability to protect against piracy or misuse
of software. This Section 4.03 could make it difficult for a licensor in some
situations to enforce its rights to terminate a contract under Section 4.04
(“Cancellation”).
The subcommittee observes that if the ALI adopts Section 4.01 as drafted, against
the recommendation of the subcommittee, licensees will have significant remedies
thereunder which would act as a deterrent to improper disablement and render this
Section 4.03 unnecessary.
One effect of this Section will be that without the option of reasonable automatic
disablement, some licensors will feel compelled to conduct additional due
diligence on customers before licensing. These costs will increase the cost of
doing business and be passed on to customers or will be absorbed by licensors
which will then have less funds to invest in R&D. Without the option of
automated disablement, licensors also may be unwilling to accept the exposure of
dealing with some customers, hurting those customers’ and licensors’ businesses.
The subcommittee expresses its appreciation that the ALI is reviewing this
provision in the context of ASP access, but notes that its concerns are broader.]
13. Minor comments/typos:
Page 54, lines 19 through 26, state that “[t]he original transferor generally cannot
directly enforce its agreement with the original transferee against a remote
transferee. The original transferor may be able to enforce rights under a third-
party-beneficiary theory if the original transferee included restrictions in its
agreement with the remote transferee. The availability of that theory is governed
by outside law, not the Principles.” Does this statement sufficiently recognize
that certain open source licenses and other similar licenses that automatically
apply to a user as a contractual agreement, regardless of whether the user obtains
the software at issue from the original licensor or a downstream user?
Page 87, line 14, states “Comment a. resume here”. Apparently some additional
text was intended.
The drafters notes in Section 3.05 refer to illustrations 2, 3 and 4, but these
illustrations are missing.
Section 4.04(c) should provide “Except as otherwise provided in the agreement or
under provisions of the agreement which by their terms survive as provided under
Section 4.04(d),” [italicized language added to preserve efficacy of survival
clauses, as in 4.04(d)]
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