What is the significance of thinking of software as a “good”, as opposed to a “service”? A recent case showed that various implied warranties under the Uniform Commercial Code (UCC) apply only to sales of “goods”, but frequently will apply to software licenses. The case also showed how software makers can be held liable for promises they make about performance of their software, despite disclaimers in a software license agreement.
A software vendor licensed its software to a customer, who agreed to the vendor’s end user license agreement (EULA) as a condition of the transaction. The case is Rottner v. AVG Technologies, 12-10920-RGS (D. Mass, May 3, 2013) [pdf]. The software vendor argued that the customer’s agreement to the vendor’s EULA rendered inapplicable the customer’s reliance on warranties provided anywhere other than in the EULA. If correct, that would have meant that the only applicable warranties were those expressly made in the EULA, and the inapplicability of any warranties provided under law including under the UCC. But also inapplicable would be any warranties based on claims made by the vendor in any advertisements or promotions about the software’s capabilities.
The software at issue was a product called “PC TuneUp”, distributed by AVG Technologies. As the court noted, Section 5 of PC TuneUp’s EULA “disclaims all other warranties not expressly provided, and section 10c of the EULA … disavows any previous representations”. The only warranties “expressly provided” in the EULA were that (i) “the medium (if any) on which the [s]oftware is delivered will be free of material defects” and (ii) “the software will perform substantially in accordance with the applicable specification.” However, it turns out there was no “applicable specification”, which might have meant that this express warranty referred to nothing. But that omission led the court to accept the customer’s argument that this express warranty in the EULA had to mean something.
The court wrote:
In particular, “a contract is normally a contract for a sale of something describable and described. A clause generally disclaiming ‘all warranties, express or implied’ cannot reduce the seller’s obligation with respect to such description . . . .” Quoting Bell Sports, Inc. v. Yarusso, 759 A.2d 582, 592 (Del. 2000), quoting UCC § 2-313 cmt. 4. Moreover, I am confident that the Delaware courts would consider PC TuneUp’s claimed functionality as an express warranty separate and apart from the EULA’s content-less warranty provisions. (emphasis added)
But what was that “something describable and described”? In the absence of any useful guidance from the EULA itself, the court looked to the software’s “claimed functionality” as itself being an express warranty covered under the EULA, even if that functionality was claimed outside of the EULA and even if the EULA stated that any warranties made outside of the EULA were void. And in this case, the vendor made it easy for the court, since the software itself touted its own virtues every time it was run, through frequent announcements to the user about what the user could expect.
First lesson: Even in the absence of (and even with a disclaimer of) express warranties, a vendor of software cannot escape the evident and sometimes not-so evident claims made by its own product.
But what about PC TuneUp’s claims in its advertising, claims that were clearly “previous representations” disavowed by the terms of the EULA? AVG Technologies stated on its website that PC TuneUp would “boost Internet speeds,” “eliminate freezing and crashing” and “optimize disk speeds.” As noted above, the EULA disclaimed “previous representations”, but the “claimed functionality” made by the software itself would obviously be something that wasn’t “previous”. Would the customer then have had a case based simply on breaches of warranties from the advertising?
AVG Technologies argued that its software was a “service” and therefore not subject to the UCC’s various implied warranties applicable to sales of “goods”. The customer argued otherwise. Why does that fight matter? The court held that the software was indeed a “good” covered by the UCC, and therefore the various warranties provided by the UCC for all “sales of goods” applied to this transaction.
And that meant that the UCC’s various implied warranties – those applicable to all sales of goods – applied to the sale of PC TuneUp in this case. Those implied warranties are:
Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement. (§ 2-312)
(1) Subject to subsection (3) [i.e. right to disclaim the warranty under contract], there is in a contract for sale a warranty by the seller that:
(a) the title conveyed shall be good and its transfer rightful and shall not unreasonably expose the buyer to litigation because of any colorable claim to or interest in the goods; and
(b) the goods shall be delivered free from any security interest or other lien or encumbrance of which the buyer at the time of contracting has no knowledge.
(2) Unless otherwise agreed, a seller that is a merchant regularly dealing in goods of the kind warrants that the goods shall be delivered free of the rightful claim of any third person by way of infringement or the like but a buyer that furnishes specifications to the seller must hold the seller harmless against any such claim that arises out of compliance with the specifications.
Implied Warranty: Merchantability; Usage of Trade. (UCC § 2-314)
(1) Unless excluded or modified under [Section 2-316], a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.…” (emphasis added)
What is “merchantable”?
(2) Goods to be merchantable must be at least such as
(a) pass without objection in the trade under the contract description; and …
(c) are fit for the ordinary purposes for which such goods are used; and …
(f) conform to the promise or affirmations of fact made on the container or label if any.
Implied Warranty: Fitness for Particular Purpose. (§ 2-315)
Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under [Section 2-316] an implied warranty that the goods shall be fit for such purpose. (emphasis added)
For the customer here, however, even if the UCC governed this transaction, the UCC also permits the parties to agree to waive applicability of the UCC’s implied warranties. (See references in quoted UCC sections above.) And that’s what happened in this case under the software vendor’s EULA. As the court stated,
Delaware law permits the disclaimer of the [UCC’s] implied warranty of merchantability if the disclaimer is conspicuous (and mentions merchantability). Del. Code tit. 6, § 2-316. Delaware law also permits the disclaimer of the implied warranty of fitness if the disclaimer is in writing and conspicuously displayed. Id. Here, the EULA presents the disclaimer in capital letters in section 5c, and specifically identifies both the implied warranties of merchantability and fitness.
Second lesson: If the applicable state’s law (Delaware in this case) permits a waiver of the UCC’s implied warranties, a properly drafted and validly consented-to waiver (e.g. a EULA) will invalidate any ability of a customer to rely on the UCC’s warranty protections. What’s proper drafting? California law firm Cadden Fuller comments on its blog that “the U.C.C. does not provide many specific rules regarding how warranties are disclaimed. In keeping with the idea that the purpose of the U.C.C. is to make business transactions easier, the U.C.C. provides that attempts to disclaim warranties should be construed reasonably and enforced unless doing so is unreasonable under the circumstances.”
Some of those guidelines:
Generally, a seller who wants to disclaim U.C.C. warranties must do so specifically. A general statement that there are “no warranties, express or implied” is usually ineffective. …. [For example], a disclaimer that disclaims the implied warranty of merchantability must specifically mention “merchantability” in the disclaimer.
[A]ll disclaimers of implied warranties to be in writing.
[A] disclaimer [must] be conspicuous. A section of a contract is conspicuous if it clearly stands out from the rest of the contract and draws the eye of the reader.
(Source: “Commercial Law: Express and Implied Warranties Under the Uniform Commercial Code” [link], Cadden & Fuller, LLP)
As discussed above, PC TuneUp’s EULA “disclaims all other warranties not expressly provided” (emphasis added), which means that express warranties survived. The vendor’s trouble here arose from claims made by the software itself (“claimed functionality”) about what the customer could expect when using the product. It is possible that, in the absence of claims “trumpeted” (the court’s word) by the product itself, this waiver of warranties may have successfully insulated the vendor against liability from its own advertising claims – claims made prior to the customer using the product.
In any event, because the product did indeed make these claims – claims that were made by the software itself each time the customer used the software and thus made prospectively – the court had no need to rule on whether the EULA was effective to waive previous claims made in advertising.
So, turns out, the problem for the software vendor here wasn’t the applicability of the UCC and its implied warranties. Whether the UCC applied here didn’t really matter, since the UCC’s warranties (even if applicable) were validly waived and the case was decided on the issue of whether the statements made by the software itself (the “claimed functionality”) constituted an express warranty that had not been waived by the EULA.
The customer separately argued that the vendor fraudulently induced the customer to sign up for the product through its advertising claims, and this claim was briefly addressed at the end of the court’s opinion. The customer argued that regardless of the EULA and its disclaimer of warranties, the vendor’s advertising claims amounted to fraud in causing the customer to enter into the transaction in the first place. The court addressed this point only in determining that the customer had adequately stated its claim to avoid the vendor’s motion to dismiss.
The software transactions where the UCC’s implied warranties may be relevant involve contracts where, obviously, the warranties have not been (validly) waived – presumably because it was assumed that the UCC did not apply in the first place. That might be the case where a software transaction involved true “services” rather than “goods”. As the court in Rottner wrote, “[s]oftware is not clearly a good or a service in the abstract, and may qualify as either depending on the particular circumstances of the case.”
The court in Rottner discusses this issue at length, concluding that PC TuneUp qualifies as a “good” covered by the UCC. The court distinguishes cases involving “custom designed software” from PC TuneUp’s “generally available standardized software” (quoting Olcott Int’l & Co. Inc. v. Micro Data Base Sys., Inc., 793 N.E.2d 1063, 1071 (Ind. App. 2003)), pointing out that “… the sale of PC TuneUp is more like the sale of a tangible good – it is “movable at the time of identification to the contract for sale.” (quoting Del. Code. tit. 6, § 2-105.) And: The user “was able to download and install the full version of PC TuneUp after a one-stop payment over the internet.”
Software License vs. Sale – Does it Matter for UCC?
An issue not discussed in Rottner, and apparently not raised by the software vendor, was whether the transaction – even if deemed to involve “goods” – should be covered by the UCC since it was a license and not technically a sale. As discussed, the UCC applies to “sales of goods”. (See UCC § 2-102) Arguably, a disclaimer of applicability of the UCC’s implied warranties suggests at least a tacit agreement between the parties that the UCC does in fact apply as a threshold matter. (Why else would a disclaimer be needed?) Of course, it is the ambiguity of the UCC’s application to these transactions that causes inclusion of these waivers. In fact, the court in Rottner quoted from a case from the US Court of Appeals for the 9th Circuit more or less codifying this uncertainty into law: “Because software packages vary depending on the needs of the individual consumer, we apply a case-by-case analysis [to the applicability of the UCC].” RRX Indus., Inc. v. Lab-Con, Inc., 772 F.2d 543, 546 (9th Cir. 1985)
I will discuss this subject in a separate blog post shortly. For now, here are two decent discussions of this issue, one specific to the issue of software licenses versus sale and application of the UCC and the second more generally covering legal developments in the UCC as applied to software contracts. UCC § 2-106 states that “A ‘sale’ consists in the passing of title from the seller to the buyer for a price.”
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