I recently advised a client on a software contract involving the question of whether the contract would be deemed to involve “software” at all.  The context was a technology vendor bidding on a contract to provide technology to a federal government agency.  The question of whether “software” was actually being provided under the contract was important because ownership of any software created pursuant to the contract would be subject to fairly broad ownership rights to the benefit of the government.  See for example, 48 CFR 27.4 (“Rights in Data and Copyrights”) and 48 CFR 27.404-1 (“Unlimited rights data”).  However, in this case the vendor was not technically “delivering” any software at all, but instead was delivering access to a website.    

In fact, no code was being delivered, not even executables.  No downloadable software or object code or source code was being delivered at all.  The vendor was to host the service entirely, making it available to the government via an internet website, in the most literal definition of “Software as a Service” (SaaS).

But with a SaaS contract, since no software is being delivered, where the only thing actually being delivered is access to and use of a website, wouldn’t that make the contract squarely outside the meaning of a “sale of goods” governed by Article 2 of the Uniform Commercial Code (UCC)?  (See UCC § 2-102)  And accordingly, if not governed by the UCC, then likewise not subject to the UCC’s implied warranties:

• Warranty of Title and Against Infringement; Buyer’s Obligation Against Infringement. (§ 2-312)
• Implied Warranty: Merchantability; Usage of Trade. (UCC § 2-314) 
• Implied Warranty:  Fitness for Particular Purpose. (§ 2-315)

I recently wrote about the question of whether a license for software qualified as a “sale of goods” under the UCC, but the issue there was whether a license to software would qualify as “goods” at all, since in many cases software is uniquely developed for a specific circumstance or customer, or is customized with modules, “look and feel” and other customer-specific add-ons based on a core base technology.

So for example, in a recent federal court case in Massachusetts, Rottner v. AVG Technologies, 12-10920-RGS (D. Mass, May 3, 2013) [pdf], the court wrote, “[s]oftware is not clearly a good or a service in the abstract, and may qualify as either [a good or a service] depending on the particular circumstances of the case.”  At this point, the court distinguished cases involving “custom designed software” from “generally available standardized software”.  In Rottner, where the user “was able to download and install the full version of the software after a one-stop payment over the internet,” the software at issue was clearly “generally available standardized software” and therefore clearly a “good” covered by the UCC.

But the court in Rottner also pointed out that UCC § 2-105 (from Delaware’s code) defines covered “goods” as those that are “movable at the time of identification to the contract for sale”.  With a SaaS contract for software services, regardless of whether the deliverable is “customized designed software” or “generally available standardized software”, if the software isn’t actually being delivered at all – but rather access only to the software via a website – would this involve goods “movable at the time of identification to the contract for sale”?  It would seem not.

Adron Beene, a lawyer, writes,

[W]hen a software license has all the underpinnings of a sale, the UCC will apply. See RRX Industries, Inc. v. Lab-Con, Inc.  772 F.2d 543 (9th Cir.1985).  The key is the good or services analysis.  The court will look at the deal and determine if it is more of a sale of a good or a service.
(emphasis added)

Beene’s commentary really addresses the question of whether software should be treated as a good or service.  It does not really address the question of whether, even if software is a “good”, whether a license agreement itself constitutes a “sale” of goods.

Richard Raysman of Holland & Knight wrote a few years ago about a federal district court case in Kansas where the court relied on the lack of transfer of title – that by itself – under a software license agreement to hold that the contract dispute was not governed by the UCC.  That case was Digital Ally, Inc. v. Z3 Technology, LLC, 2010 WL 3974674 (D. Kan. Sept. 30, 2010)

In Digital Ally, the court quoted the definition of “sale” from Nebraska’s UCC: “[a] `sale’ consists in the passing of title from the seller to the buyer for a price.”  (emphasis in original)  The court next looked to the software license agreement, which contained this common clause addressing title and ownership of licensed software:

The Licensed Materials are licensed, not sold to LICENSEE, and can only be used in accordance with the terms of this Agreement. LICENSOR retains title and ownership of the Licensed Materials, including all intellectual property rights.

Or as the court summarized it, the software license agreement “expressly states that it does not provide for the passing of title from [the vendor] to [the customer].”

The court conceded the point that software could – and usually would – constitute a “good”, but found trouble with the concept of a “sale” having taken place where the parties expressly agreed that the transaction was a license and not a sale.

Certainly the court in Digital Ally seems to bless the view that parties to a software transaction may – enforceably – agree by contract that the transaction is a “service”.  Which seems consistent with the general philosophy of contractual freedom under the UCC, which clearly permits parties to contractually agree to waive application of the UCC’s implied warranties even if the UCC applies to the transaction in the first place, under UCC § 2-316.

Unlike a traditional software license agreement, a SaaS contract is different in an even more fundamental way, since not only is there – literally – no sale of software, there is not even a license agreement.  So for example, under Oracle’s “Software As A Service Agreement” [pdf]:

You acknowledge that Oracle has no delivery obligation and will not ship copies of the Oracle programs to you as part of the services. You agree that you do not acquire under the agreement any license to use the Oracle programs specified in the ordering document in excess of the scope and/or duration of the services. Upon the end of the agreement or the services thereunder, your right to access or use the Oracle programs specified in the ordering document and the services shall terminate.
(emphasis added)

I wrote previously that 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?)  So, for example, a common contractual clause for software license agreements (including SaaS agreements) will disclaim all implied warranties, like this:

Except as specifically set forth in this section, ______ hereby disclaims all warranties, whether express, implied, statutory or otherwise, including without limitation any implied warranties of merchantability or fitness for a particular purpose, any warranties regarding title or against infringement, or any warranties that may arise from usage of trade or course of dealing ….

However, I added that the ambiguity of the UCC’s application to these transactions – see the entire discussion above – causes contract parties to include these waivers.  So is the court in Digital Ally correct that, calling a transaction a license – or better yet, mutually agreeing that the transaction does not involve a “sale” – by itself would take the transaction outside the jurisdiction of the UCC and its customer-protective implied warranties?  It really does seem that the court in Digital Ally got it right, but probably due to the long list of precedential authorities for and against this position, practicing lawyers haven’t taken many chances with the uncertainty.  More to come.

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