Morris Manning & Martin, LLP

Software Distribution Agreements

I. INTRODUCTION

A. Focus


The purposes of this article and related presentation are:

  1. To review the forms of software distribution and common problems faced in drafting these documents.
  2. To analyze recent court decisions relating to computer and software distribution.
  3. To review the impact of the AICPA Statement of Position 97-2 on Software Revenue Recognition on the drafting of distribution agreements.
  4. To examine contract provisions in distribution agreements and drafting considerations.
  5. To review proposed Article 2B of the Uniform Commercial Code.

B. Who are the parties in the software distribution channel?

  1. User
  2. Software Developer
  3. Independent Contractor/Agent
  4. Distributor
  5. Dealer
  6. Value Added Reseller (VAR)
  7. Original Equipment Manufacturer (OEM)
  8. Mail Order Operation
  9. Bulletin Board Operator
  10. Internet Services Provider
  11. Software Pirate
  12. Internet Services/Bulletin Board Subscriber

C. What are the overriding considerations?

  1. Your client's desires and business objectives, and the objectives of the other parties
  2. Protection of your client's legal and contractual rights and compliance with any existing contractual commitments
  3. Properly reflecting your client's intentions in a single, integrated agreement
  4. Drafting an agreement (with recitals) which is capable of being understood and interpreted by third parties (and a judge, jury, arbitration panel or mediator)
  5. Staying within your client's budget for legal fees (for example, by standardizing distribution agreements and optional provisions)
  6. Anticipating related problems and future issues (for example, assignments, mergers or acquisitions, future software releases and updates, new media, EDI, taxation concerns)
  7. Anticipating international issues, as well as domestic considerations (especially the EC Software Directive, EC Block Exemptions, U.N. Convention for the International Sale of Goods, export and import controls and intellectual property issues)

II. VARIATIONS OF SOFTWARE DISTRIBUTION AGREEMENTS

A. Standard Distribution Agreement - A contract providing a third party with rights to distribute computer software packaged by the vendor and distributed as an off-the-shelf product.

B. OEM Agreement - A contract permitting the OEM to bundle a software program with another product (hardware or software), possibly granting a right to reproduce computer software from a master diskette and/or to private label the software or bundled product.

C. Corporate Distribution Agreement - A volume licensing agreement permitting a large user to obtain copies of software and associated documentation from the vendor, with provisions for updates and enhancements and possible training by the vendor or distributor.

D. Site Licensing Arrangement - An agreement permitting widespread distribution of software by a user within a defined user community and possibly granting reproduction rights for software and documentation.

E. Independent Contractor/Sales Representative Agreement - A relationship in which an independent third party locates prospective distributors, dealers, OEMs, value added resellers, or government personnel desiring to obtain licensing and/or distribution rights to a software product based on a software operating system.

F. Development Agreement - A contract in which a third party obtains rights to create derivative works of a software program and/or documentation, generally with associated distribution rights and specific reference to ownership of the derivatives.

G. Operating System Development Agreement - Similar to development agreement, but with significant restrictions as to use of source code and distribution of modified product.

H. International Distribution - Specialized distribution arrangement with provisions unique to international distribution and foreign competition and intellectual property regulations.

I. On-Line Distribution Agreements - Agreements which are entered into electronically and which in many instances do not meet the Statute of Frauds requirement. Clickwrap agreements would fall into this category. Please refer to the ProCD case as well as the materials on UCC Article 2B.

J. Website Development Agreements - Specialized development agreement for Internet based products, which would include website hosting and content design agreements.

III. THE COMMON PROBLEMS

Based on a review of cases in the past decade, there are several recurring problems which arise in software distribution arrangements and contract drafting. The most significant issues are:

A. Definitions - Inadequate (or omitted) definitions
B. Specifications - Incomplete or nonexistent specifications
C. Facts - Failure to have the facts before drafting the agreement
D. Terminology - Imprecise contract wording -- consider the following two examples:
Provision from Agreement dated November 22, 1985 between Apple Computer, Inc. and Microsoft Corporation which was at the center of the litigation between these parties:
Apple hereby grants to Microsoft a non-exclusive, worldwide, royalty-free, perpetual, non-transferable license to use these derivative works in present and future software programs and to license them to and through third parties for use in their software programs.
Paragraph 1 of Agreement of Sale dated July 27, 1981 between Seattle Computer Products, Inc. and Microsoft Corporation, Inc.:
The product consists of all versions, presently existing and as may be developed by either party in the future, single-user and multi-user, of the disk operating system with utilities which Seller has developed or may develop for use on the 8086 microprocessor. Seller has named the product "86-DOS". A description of the features of the product is contained in Seller's instruction manual entitled "86-DOS" Disk Operating System for the 8086 Version "0.3" dated November 15, 1980, and additional features are described in the attached Exhibit "A". The product also includes all source code and object code relating thereto, and all instructions and technical manuals relating thereto.
E. Territory - Failure to define geographical area in which distribution activities may occur
F. Contract Administration - Ignoring the terms and conditions of the finalized agreement

IV. RECENT COURT DECISIONS - COMPUTER AND SOFTWARE DISTRIBUTION

A. Jurisdiction

CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996).
The Sixth Circuit held that an Ohio court could assert personal jurisdiction over a Texas resident who had entered into an electronic commercial contract with CompuServe from his home in Texas to market his shareware software programs.
Bensusan Restaurant Corp. v. King, The Docket No. 86-9344 (1997) U.S. App. LEXIS 23742 (2d Cir. Sept. 10, 1997).
The Court held that the defendant’s mere establishment of a worldwide website that was accessible to New York residents, without more, was insufficient to confer specific jurisdiction over a nonresident defendant under New York’s long arm statute in a lawsuit arising out of rights to a trademark used on the defendant’s website.
Inset Systems, Inc. v. Instruction Set, Inc., 937 F.Supp. 161 (D. Conn. 1996). 
The Court held that a defendant’s mere operation of a website to promote its business, which may be accessed by residents of the forum state, is sufficient to confer specific jurisdiction in a dispute arising out of the domain name used on the site.
Boothroyd Dewhurst, Inc. v. The Board of Trustees, 5 CCH Computer Cases ¶47,305 (1995).
A Rhode Island Court was found to have in personal jurisdiction over a California University where the University entered a license agreement with a Rhode Island software developer. Since parties and witnesses were located in both Rhode Island and California, venue in Rhode Island was also deemed proper.

B. Arbitration

In Re Application of Leonard Burnstein, et al. v. On-Line Software International, 7 CCH Computer Cases ¶47,553 (1996).
A confidentiality order issued with respect to certain subpoenaed material obtained from a competitor in the computer software industry, which restricted access to the material to outside counsel and the experts retained by the parties was properly issued by the arbitrator. Orders are upheld in order to protect the confidentiality of trade secrets obtained in the course of discovery.
Synchronics, Inc. v. Realworld Corporation, 6 CCH Computer Cases ¶47,313 (1995).
An arbitrator did not exceed his authority where he ordered the manufacturer to retract statements made in bad faith about the distributor in trade publications. The fact that the precise equitable relief ordered by the arbitrator was not contemplated in advance by the distributor did not deem the relief outside of the arbitrator's authority.
Tractor Trailer Supply Co. et al v. NCR Corp., et al., 5 CCH Computer Cases ¶47,072 (1994).
One computer system ("System") was purchased by four corporations to service their integrated computing needs. The terms and conditions of the agreement were signed by only one of the corporations as "Customer". The System was paid for by a leasing company, Executive Investments, for the benefit of the four corporations. The Terms and Conditions contained an arbitration clause. When the System failed to operate, the four corporations and Executrain filed a court proceeding against the vendor. The non-signatories to the Terms and Conditions claimed they were not bound by the arbitration clause in the agreement. Executrain as the agent of the signatory corporation was held bound by the clause. The non-signatory corporations were also held bound by the arbitration clause since they based their standing to sue on allegations arising out of the acquisition of the System, such claim "falling squarely within the scope" of the arbitration clause. Also, the non-signatory corporations were deemed third party beneficiaries of the Terms and Conditions and could not deny such status for purposes of avoiding arbitration.
SCS Business & Technical Institute, Inc. v. Interactive Learning Systems, Inc., 3 CCH Computer Cases ¶46,687 (1992).
An arbitration decision awarding statutory damages for copyright infringement, in the absence of a valid copyright registration, was in manifest disregard of the law and was vacated.
St. Luke's v. SMS, 3 CCH Computer Cases ¶46,722 (1991).
A Michigan federal judge affirmed an arbitrator's award of $850,000 to a dissatisfied computer user, even though the agreement between the user and the vendor limited liability of the vendor to the amount of license fees paid at the time of the dispute (approximately $300,000). The court noted that the validity of the limitation on liability provision was itself a "dispute or controversy" to be resolved by arbitration. After reviewing the liability provision, the arbitrator had correctly found "a failure of essential purposes in the limited remedies."
Com-Tech Associates International, Inc. v. Computer Associates International, Inc., No. 91-7093 (2nd Cir. 1991). 
A software developer filed for arbitration of a contract dispute. The court denied the defendant/software developer's motion to compel arbitration, even though the contract included an arbitration provision. The motion was denied because the defendant had waited eighteen months after it had answered the complaint in a lawsuit until moving to compel arbitration.
In the Matter of the Application of American Multimedia, Inc. v. Dalton Packaging, Inc., 2 CCH Computer Cases ¶46,357 (1989).
Arbitration provision in two-sided purchase order transmitted by facsimile machine was held enforceable, even though the seller was not in receipt of the reverse side of the purchase order containing the arbitration provision. The parties had previously accepted and filed more than one hundred identical two-sided orders which contained the arbitration provision. The court concluded that a dispute should be resolved in favor of arbitration unless it can be shown that it was not meant to be arbitrated.

C. Terminology - Turnkey

Diversified Graphics, Ltd. v. Groves, 868 F.2d 293 (8th Cir. 1989).
A Big Six accounting firm was held liable for breach of a duty of care to a computer user. The user had requested a "turnkey" computer system. The court concluded that such a system should require that the user "merely turn the key" in order to operate the computer for productive purposes.

D. Terminology - Compatibility

Princeton Graphics Operating, L.P. v. NEC Home Electronics, Inc., 732 F. Supp. 1258 (S.D.N.Y. 1990).
A computer monitor manufacturer falsely advertised monitors as being "compatible" with the IBM PS/2 computer. The computer monitor was not "compatible" as that term was understood by the advertisement's targeted consumers, namely the retail market. The monitor did not meet the appropriate standard because it produced a rolling screen image and distortion.

E. Terminology - Best Efforts

PRC Realty Systems, Inc. v. National Association of Realtors, Inc., U.S. Court of Appeals, Fourth Circuit. No. 91-1125, August 4, 1992. (Unreported decision)
A distributor’s obligation to use "best efforts" to induce its customers to use the licensor's software services was violated where the distributor used the licensor's software to develop a competing product and service which undermined the "best efforts" promise. The court recited a definition of "best efforts" as follows:
A "best efforts" obligation does not require [the promisor] to accomplish a given objective . . . it requires [the promisor] to make a diligent, reasonable, and good faith effort to accomplish that objective. The obligation takes into account unanticipated events and the exigencies of continuing business and does not require such events or exigencies be overcome at all costs. It requires only that . . . all reasonable efforts within a reasonable time to overcome any hurdles and accomplish the objective [be made].

F. Integration Clause

Svs, Inc. v. Rabbit Ears Productions, Inc., 3 CCH Computer Cases ¶46,726 (1991).
A distribution agreement included an integration clause which stated that all prior agreements were superseded by the agreement in question. Provisions in other sections of the agreement referred to two earlier agreements which were amended as part of the agreement in question. The court held that the plain language of the contract under review indicated that the parties did not intend the agreement in question to supersede the preceding two contracts.
Bridgestone/Firestone Inc. v. Oracle Corp., Computer Industry LR, Sept. 18, 1991, p. 13, 678 (N.D. CA., San Francisco Div., No. C-91-1420-DLJ).
Oracle was the successful bidder on a Firestone project and entered into a contract with Firestone to supply software and services to the Firestone MasterCare System service centers. Firestone claimed Oracle failed to deliver key software modules on dates specified in an oral agreement made by Oracle sales representatives. The court concluded that the language of the written contract clearly expressed the intent of the parties to integrate the contract, at least as to the warranty disclaimers. As the court stated, "[t]he Agreement clearly did not intend to include under the warranty documents such as sales brochures and similar material which Oracle gave Firestone during the negotiations leading to the Agreement."
Unisys Corp. v. Pergament Distributors, Inc., 2 CCH Computer Cases ¶46,425 (1991).
Unisys and Pergament entered into an installment purchase agreement for Pergament to acquire a computer system. A Unisys branch manager furnished Pergament with a letter purporting to give Pergament a right to cancel the contract. The Unisys branch manager represented that the side letter would be "rubber stamped" by his superiors. The court concluded the side letter was unenforceable in light of the integration clause in the contract and the further provision that no modification, amendment or waiver would be valid unless in writing and signed by the duly authorized representatives of the parties. The court also noted that Pergament had failed "to make the necessary inquiry" into the branch manager's authority and that such failure to act constituted negligence by Pergament.
Financial Timing Publications, Inc. v. Compugraphic Corp., 2 CCH Computer Cases ¶46,267 (1990).
An integration clause in a computer sales contract did not preclude the buyer's reliance on the manufacturer's representative's misrepresentations. Therefore, the buyer was entitled to raise a fraud claim against the manufacturer. The relevant integration clause read as follows:
This Agreement is the complete agreement between the parties. Customer acknowledges that he has read this Agreement, understands it, and agrees to be bound by its terms and conditions. Neither party shall be bound by any statement or representation not contained in this Agreement.

G. Indemnity

Schweber Electronics v. National Semiconductor Corp., 3 CCH Computer Cases ¶46,700 (1992).
A designer and seller of add-on computer products purchased one of its components from National Semiconductor. Customers soon began to complain that the computer products were inoperable, and a lawsuit was filed against the distributor of the product manufactured by National Semiconductor. The court concluded that National Semiconductor had granted an implied indemnity based on breach of warranty where the distributor was an innocent third party. The limitation of liability clause was not applied to the indemnity claim. In addition, public policy supported the conclusion that the limitations clauses could not be applied to the indemnity claim, since the limitation or exclusion would be unconscionable.
Hooper Associates, Ltd. v. AGS Computers, Inc., 2 CCH Computer Cases ¶46,221 (1989).
Indemnity clause in computer purchase agreement did not expressly permit the purchaser to recover attorneys' fees incurred during a lawsuit against the computer dealer. The court held the indemnity was intended to apply to third-party claims, rather than a direct lawsuit between the dealer and the purchaser.

H. Warranty

NMP Corporation v. Parametric Technology Corporation, 7 CCH Computer Cases ¶47,707 (1997). 
The Court ruled that since the license agreement made it clear that any maintenance plan was to be a separate agreement, the 90 day warranty contained in the license agreement covered defects appearing within 90 days following the software’s installation. Since no defects appeared in the software during that period, plaintiff’s breach of warranty claim was time barred.
Spagnol Enterprises, Inc. and Delmar Leasing Corp. v. Digital Equipment Corp., 2 CCH Computer Cases ¶46,219 (1989).
Computer purchaser was entitled to maintain a breach of implied warranty claim against DEC even though the computer was purchased from an OEM and not from DEC, the manufacturer. Under Pennsylvania law, the privity of contract requirement in lawsuits by purchasers against remote manufacturers for breach of implied warranty has been eliminated.
Ritchie Enterprises v. Honeywell Bull, Inc., 730 F. Supp. 1041 (D.C. Kan. 1990).
The exclusion of all express or implied warranties in a computer sales contract prevented the purchaser from asserting its breach of warranty claims. The court also concluded that the failure by a computer vendor to correct a problem in accordance with a limited remedy provision did not revive the disclaimed warranties, but does abrogate the remedy limitation provision. The court also noted that a provision in the contract providing for a refund of the purchase price prevents a limited remedy from failing of its essential purpose. The relevant terms of the computer agreement were as follows:
3.1 Customer's exclusive remedy and Honeywell's entire liability for equipment, Software Products, Auxiliary Products, documentation and services is set forth in the Supplements.
3.2 In no event is Honeywell liable for any indirect, special or consequential damages arising out of the Agreement or the use of any equipment, Software Products, Auxiliary Products, Documentation and services provided under the Agreement.
Customer's exclusive remedy and Honeywell's entire liability in contract, tort or otherwise for equipment is the repair or exchange of any parts which Honeywell determines during the applicable warranty period are defective in workmanship or material. All exchanged parts are the property of Honeywell. If, however, after repeated efforts, Honeywell is unable to repair or exchange such defective part, then Customer's exclusive remedy and Honeywell's entire liability in contract, tort, or otherwise is the payment by Honeywell of actual damages in an amount not to exceed the amount paid for the irreparable device.

I. Response Time

USM Corp. v. Arthur D. Little Systems, Inc., 2 CCH Computer Cases ¶46,223 (1989).
A computer dealer breached an express warranty by delivering a computer system with a response time of between ten and thirty seconds (as opposed to a response time of eight or nine seconds as set forth in the purchase contract). The express warranty was intended to extend both to the computer system's performance as well as to its functioning. The court noted "[f]rom the point of view of a user, a system which could perform all the necessary functions but not at a speed which could accomplish the required work within a reasonable time would be of little value."

J. Rescission


International Software Solutions, Inc. v. Atlanta Pressure Treated Lumber Company, 2 CCH Computer Cases ¶46,302 (1990).
A purchaser of a computer system was entitled to a refund for nonperformance, even though the purchaser did not return the software or hardware to the seller prior to commencing a lawsuit. The court concluded that the computer vendor terminated communications with the buyer after failing to correct deficiencies in the system, thereby making it unreasonable for the system to be returned to the seller.

K. Revocation

BellSouth Telesensor, Plaintiff-Appellant v. Information Systems & Networks Corporation, 6 CCH Computer Cases ¶47,317 (1995).
BellSouth as a subcontractor delivered nonconforming components to Information Systems & Networks Corporation ("ISN") for use in the development of a security system for the Navy. After accepting the nonconforming components ISN attempted to work with BellSouth to fix the nonconformities and the parties agreed to a deadline for BellSouth to cure the nonconformities. The nonconformities were not cured by the deadline and ISN eventually lost the Navy contract. Five months past the cure deadline, ISN informed BellSouth of its revocation of acceptance of the components. The court found the revocation proper despite the delay and despite the fact that ISN had used some of the equipment delivered by BellSouth. However, the court refused to grant ISN damages resulting from loss of the Navy contract.

L. Negligent Referral/Representation

Pied Piper, Inc. v. Datanational Corporation, 6 CCH Computer Cases ¶47,364 (1995).
IBM recommended that Pied Piper, Inc. ("Pied Piper") purchase hardware and software from the authorized IBM dealer, Datanational. Pied Piper claimed that IBM should be liable for negligent referral since the customized software provided by Datanational was "inadequate and flawed." However, the court held that a business entity does not owe a legal duty to another to investigate the competency of a third party entity, and thus, IBM could not be negligently liable to Pied Piper.
Walter Raczynski Product Design v. International Business Machines Corp., 5 CCH Computer Cases ¶47,105 (1994).
IBM, as the manufacturer of computer hardware and software, was not liable in recommending a software package to the purchaser because IBM was not in the business of providing information.

M. Dealership and Franchise Laws

Instructional Systems v. Computer Curriculum Corp., No. A-1179 (N.J. October 19, 1992).
The New Jersey Supreme Court held that a distribution agreement where the parties shared a "community of interest" and the distributor had the right to use the producer's name, trademark and logo and the duty to use best efforts to promote the producer's products was governed by the New Jersey Franchise Practices Act. The agreement was entitled "Reseller Agreement" and had been terminated by the licensor for failure of the licensee to meet certain standards of performance.
J.I. Case Co. v. Early's, Inc., 721 F. Supp. 1082 (E.D. Mo. 1989).
Dealer's failure to satisfy computer manufacturer's computer installation requirement constituted "good cause" for termination of dealership agreement. Missouri Dealership Act defines "good cause" for termination as the failure to substantially comply with essential and reasonable requirements imposed upon a dealer that are the same as those imposed upon similarly situated dealers. Dealer failed to comply with the computer requirement by neglecting to purchase software to connect with manufacturer's communication network.

N. Uniform Commercial Code

System Design and Management Information, Inc. v. Kansas City Post Office Employees Credit Union, 2 CCH Computer Cases ¶46,339 (1990).
Contract between software developer and credit union involving both the license of software and performance of software services was a contract predominantly for the sale of goods governed by Article 2 of the UCC. Software services were merely incidental to the distribution of the software and did not require categorization of the contract as one for services rather than for goods.

O. Security Interest

In re Peregrine Entertainment, Ltd., 2 CCH Computer Cases ¶46,345 (1990).
Security interest in copyrights and accounts receivable generated by the copyrights are not perfected until filing with the Copyright Office. The filing of a UCC financing statement with the Secretary of State or other state public authority is inadequate to perfect an interest in copyrighted works.

P. Source Code

Art Stone Theatrical Corp. v. Technical Programming & Systems Support of Long Island, Inc., 2 CCH Computer Cases ¶46,259 (1990).
Computer software system purchaser signed a general release of claims after computer seller removed purchaser's source code without purchaser's knowledge or consent. Computer seller refused to reinstate the source code until purchaser signed a general release relating to computer performance problems. The court held that the dismissal of a breach of contract and warranty action was improper because the purchaser's claim of duress raised factual issues. Removal of the source code allegedly resulted in a worthless system that disrupted the purchaser's business, leaving no choice but to sign the release proposed by the computer vendor.

Q. Oral Communications

Software Clearing House, Inc. v. Intrak, Inc., 3 CCH Computer Cases ¶46,721 (1990).
A developer and supplier of computer software entered into a series of exclusive sales contracts with a software marketer. Subsequently, the parties orally modified the compensation arrangement under the agreement. The court concluded that a gratuitous oral agreement to modify a prior written agreement is binding if it is acted upon by the parties and if a refusal to enforce the modification would result in a fraud or injury to the promisee. Subsequent acts and agreements may modify the terms of the contract, and, unless otherwise specified, neither consideration nor a writing is necessary.
Boggan v. Datasystems Network Corp., 3 CCH Computer Cases ¶46,704 (1992).
During negotiations, a prospective purchaser gave verbal assent to the seller's "wish list" and stated that "I think we have a deal." Subsequently, a written purchase agreement was signed by the parties. The court concluded that any statements during the negotiations were expression of intent, not assertions of fact.

R. End User Licenses

ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). (Easterbrook, J.) reversing 908 F.Supp. 640 (W.D. Wis. 1996).
The defendants bought, over the counter, a copy of a CD-ROM telephone directory containing thousands of telephone numbers. The defendants copied the data to a hard disk drive and made the data (but not the plaintiff’s search engine software) available on the Internet. The CD-ROM vendor sued, claiming copyright infringement and breach of a shrink-wrap license agreement. The district court granted summary judgment for the defendants, holding that:
  • The copyright claim was defeated by the Supreme Court’s Feist decision that the white pages of the telephone directory are not sufficiently original to be copyrightable;
  • Under the Step-Saver rationale, the shrink-wrap license terms were not binding on the defendants, who did not have an opportunity to consider an attempt to bargain over those terms before buying the CD-ROM;
  • The result was not changed by the facts that the CD-ROM package had a small notice on the outside that license terms were contained within the package;
  • The result was not changed by the fact that the defendants had purchased additional CD-ROMs after the first one, because the shrink-wrap license terms within the package might have changed by the time they made their subsequent purchases;
  • In any event, the plaintiff’s breach of contract claim was pre-empted by the Copyright Act.
The Seventh Circuit reversed. In an opinion by Judge Easterbrook, the court held that the "shrink-wrap" licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general (for example, if they violate a rule of positive law, of if they are unconscionable).
Step-Saver Data Systems, Inc.  v. Wyse Technology and The Software Link, Inc., 939 F.2d 91 (3rd Cir. 1991).
Step-Saver, a value added reseller ("VAR") obtained software from The Software Link, Inc. ("TSL"), a software vendor, by placing telephone orders to TSL. TSL accepted the orders and shipped the goods to Step-Saver. After placing the telephone order, Step-Saver sent purchase orders to TSL, detailing the items to be purchased and other relevant terms. TSL would ship the order promptly along with an invoice. A customer sued the VAR asserting the software was not capable of performing as a multi-user system. The VAR sued TSL, the software developer. TSL defended by reciting the provision of the TSL shrink-wrap license agreement which limited liability and disclaimed warranties. The court held that the parties did not mutually intend the shrink-wrap license to constitute the final expression of, or a binding modification to, the agreement reached previously by the parties as a result of telephone orders and acceptances.

S. Ownership of Copyright

Playboy Enterprises v. Frena, 839 F.Supp. 1552 (M.D. Fla. 1993).
The defendant operated a subscription bulletin board containing copyrighted photographs from Playboy Magazine. The digitized images could be browsed online or downloaded for subsequent viewing. The defendant contended that he did not know the pictures were being uploaded and downloaded from his bulletin board. Playboy sued for copyright infringement, trademark infringement and unfair competition. The Court granted Playboy summary judgment on all three claims. First, the bulletin board’s transmission of digitized images from Playboy Magazine constituted direct infringement on copyright owner’s public distribution and public display rights. The Court found that it did not matter whether the defendant intended to infringe Playboy’s copyrights or even knew of the infringement.
Thomas A. Cramer v. Crestar Financial Corporation, 6 CCH Computer Cases ¶47,312 (1995). [The court has designated this opinion as Not For Publication.]
The director of a bank's information systems ("Employee") developed a P.O.S. program which the bank used to provide POS support services. Although the Employee developed much of the program at home, the program was deemed a work for hire within the scope of the Employee's employment since the Employee's job required him to work on weekends and at home. Also important was the fact that the creation of the program was within the Employee's scope of responsibility and was written, at least in part, for the bank's benefit.
Marvin Siebersma, doing business as SEMCO v. Don L. Vande Berg, doing business as Vande Berg Scales, 6 CCH Computer Cases ¶47,303 (1995).
Siebersma developed computer software while working as an independent contractor for Vande Berg Scales ("VBS"). Siebersma and VBS entered an agreement where VBS paid Siebersma royalties during the period of the relationship between VBS, such royalties to end upon the termination of Siebersma's engagement with VBS. Based upon the agreement, the court reversed a summary judgment in favor of Siebersma, holding that the agreement supported the possibility that Siebersma may have sold his copyright ownership in the software for the royalties.

T. Misuse of Copyright

Triad Systems Corp. v. Southeastern Express Co., 64 F. 3d 1330 (9th Cir. Aug. 31, 1995).
Triad manufactured computers and designed, sold and licensed software. Triad's license agreement prohibited unauthorized duplication and third-party use. Southeastern competed with Triad for the business of servicing and maintaining the Triad computer systems. To service the systems, Southeastern technicians used Triad's OS, utilities and diagnostic software. When the computer was turned on by Southeastern, copies of the OS software were made in the computer's random access memory in violation of the Triad's copyright ownership. [See the MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Circ. 1993), holding that the loading of OS software into the random access memory of a computer constitutes copying under the Copyright Act.] Southeastern's affirmative defense of "fair use" was denied by the court because Southeastern's use of the software was commercial in nature and Southeastern indiscriminately copied the entire software program. Southeastern's defense that Triad was misusing its copyright was also unavailable since "Triad did not attempt to prohibit Southeastern or any other ISO from developing its own service software to compete with Triad."
Lasercomb America, Inc. v. Reynolds and Holiday Steel Rule Die Corp., 2 CCH Computer Cases ¶46,327(1991).
A software licensor included a provision in its license agreement prohibiting a licensee of the software from independently creating competitive software. The court concluded that this provision constituted misuse of the copyright in the software and precluded an infringement action against a licensee. The court noted that the licensor misused its copyright by attempting to suppress any attempt by the licensee to independently implement the idea expressed in the software. The relevant provision in the license agreement was as follows:
  1. Licensee agrees during the term of this Agreement [99 years] that it will not permit or suffer its directors, officers and employees, directly or indirectly, to write, develop, produce or sell computer assisted die making software.
  2. Licensee agrees during the term of this Agreement and for a period of one (1) year after the termination of this Agreement that it will not write, develop, produce or sell, or assist others in the writing, developing, producing or selling computer assisted die making software, directly or indirectly, without Lasercomb's prior written consent. Any such activity undertaken without Lasercomb's written consent shall nullify any warranties or agreements of Lasercomb set forth herein.
Qad, Inc. v. ALN Associates, Inc., 770 F. Supp. 1261 (N.D. Ill. 1991).
Qad developed and marketed business software for Hewlett-Packard minicomputers. ALN later developed a similar software product and was sued by Qad. Citing Lasercomb, the court held that the plaintiff had misused its copyright to obtain a preliminary injunction against the defendant's use of software in which the plaintiff itself had no rights. The plaintiff had failed to disclose the copyrightable authorship of third parties in the software program in its copyright registration application filed with the U.S. Copyright Office.

U. Damages

JetPac Group, Ltd. v. Bostek, Inc., 7 CCH Computer Cases ¶47,539 (1996).
The defendant, a computer supplier, that made a shipment of defective computers was held liable for direct losses to the plaintiff, consequential damages for lost prospective profits, and incidental damages incurred by the plaintiff. Defendant’s test shipment of 100 defective computers caused the plaintiff’s loss of an existing contract to supply 3,000 computers. The defendant’s liability for the consequential loss was based on knowledge of the large contract and the reasonable inference that fulfillment of the contract was dependent upon an initial shipment of nondefective computers by defendant. Incidental expenses incurred by the plaintiff in an effort to salvage the contract, such as cost of travel and increased shipping, were also charged to the defendant.
Softel, Inc. v. Dragon Medical and Scientific Communications Ltd., 6 CCH Computer Cases ¶47,366 (1995).
Dragon intentionally misappropriated software for use in its distributed interactive computer programs. Although the general rule under copyright law is that liability is several and not joint, the court held that the director of Dragon was jointly liable to the software owner because the infringement was intentional.
Management Computer Systems, Inc. v. Hawkins, 6 CCH Computer Cases ¶47,314 (1995).
An accounting firm, holding back up copies of software licensed from Management Computers Services, Inc. ("MCS") in its vault, copied, converted and used the back up software without authority from MCS. MCS was entitled to damages for conversion based upon the value of the software and the value of its use, unjust enrichment based upon the benefit received by MCS and punitive damages ten times the amount of compensatory damages awarded.

V. Customer Lists

Electronic Data Systems Corp. v. Mark E. Heinemann et al., 493 S.2d 132 Ga. (1997).
Two employees had signed an employment agreement with Electronic Data Systems Corp. ("EDS"), with a two year nonsolicitation of customers clause and then quit EDS and went off to develop software that had the same function as software they had developed for EDS. The software was held to be a trade secret because of (1) existence of confidentiality agreements with employees and customers and (2) use of security measures in the office. The Court ruled that the employees did steal the trade secrets. However, even though there was a misappropriation and unjust enrichment, the Court found that there were no damages. Further, the Court issued a "royalty injunction" instead of a "prohibitive injunction" and required that the defendants pay 7% royalty for four months. Finally, the Court found that the employees had breached their nonsolicitation covenant but because courts will not toll these type of provisions, the employees were only enjoined for three days from soliciting customers (which was the duration remaining on the nonsolicitation covenants).
Hancock v. Essential Resources, Inc., 4 CCH Computer Cases ¶46,763 (1992).
A former employer sought a preliminary injunction enforcing a restrictive and confidentiality covenant of a former employee's employment agreement. The former employer attempted to preclude the former employee from using customer lists, customer data, mailing lists, and other proprietary and confidential information. The court concluded the customer list was not a trade secret, since during the former employee's tenure, all personnel had access to the customer list, no one was instructed to keep it confidential, and the company imposed no restrictions or guidelines on its personnel with regard to the circulation of customer lists and related information.
Panther Systems II, Ltd. v. Panther Computer Systems, Inc., 3 CCH Computer Cases ¶46,690 (1991).
A computer company sued its former employee seeking to enjoin the use of customer lists. One such list had been compiled as a result of individuals who had responded to views of the company's computers in a technology trade magazine. The court concluded that the "potential" customer list was entitled to the same degree of protection as an "actual" customer list. The court concluded that where information would not otherwise qualify as a trade secret, the unauthorized physical taking of internal company documents, including detailed customer information by an employee for use in his future business or employment is unfair competition. On the other hand, where information obtained during employment relates to the identify of customers which is not secret, but is generally available from public sources to members of the trade, a former employee may disclose it without breaching a fiduciary duty of loyalty to his employer. However, this is only if the employee has not engaged in an act such as stealing or memorizing his employer's customer lists.

W. Tying Arrangements

Systemcare, Inc. v. Wang Laboratories Corporation v. Michael Wright 7 CCH Computer Cases ¶47,727 (1997) 
The plaintiff argued that Wang illegally tied the sale of its software support services to the purchase of its hardware support services through the Wang agreements. The Court found that there was a tying arrangement due to the fact that a contract between a buyer and a seller satisfied the concerted action element of Section 1 of the Sherman Act where the seller coerced a buyer’s acquiescence in a tying arrangement imposed by the seller. A Section 1 agreement was deemed present when the conspirators had a unity of purpose or a common design and understanding, or a meeting of the minds in an unlawful agreement.
Bell Atlantic Business Systems Services, Inc. v. Hitachi Data Systems Corp., and Hitachi America Ltd., and Hitachi, Ltd., 6 CCH Computer Cases ¶47,370 (1995).
Hitachi used its diagnostic tools, documentation and software ("Tools") to provide maintenance services to end-users of Hitachi DASDs. Hitachi did not independently sell or license the Tools. Bell Atlantic argued that Hitachi tied the maintenance services to the Tools. The court found that the Tools could constitute a separate product from the maintenance services. However, the Hitachi arrangement was not deemed a tying arrangement because Hitachi did not condition the "sale" of the Tools upon the purchase of maintenance services. The Tools were not sold or licensed.
Digital Equipment Corp. v. Uniq Digital Technologies, Inc., 6 CCH Computer Cases ¶47,373 (1995).
Digital Equipment Corp. ("DEC") did not unlawfully tie the purchase of its computers to the purchase of operating system software since the items were not deemed distinct separate products. In reaching its decision, the court compared the items to a car and its electrical system.
Tricom, Inc. v. Electronic Data Systems Corp., 6 CCH Computer Cases ¶47,351 (1995).
Electronic Data Systems Corp. ("EDS") licensed its mainframe CGS software to customers by requiring such customers to purchase CPU time on the EDS mainframe and access the software installed thereon. As a competitor of EDS for the sale of CPU mainframe time, Tricom alleged two antitrust violations by EDS in its licensing practices. First, Tricom argued that EDS' practices constituted a "refusal to deal" and that EDS should be required to license its CGS software to Tricom and third parties for use on the Tricom mainframe. The court rejected such argument stating that under patent and copyright law, EDS could not be compelled to license its software. Secondly, Tricom argued that EDS was illegally tying the licensing of its software to the sale of CPU time on the mainframe. EDS claimed that if its licensing arrangement were prohibited, EDS would be required to grant Tricom an indirect license, since Tricom could not operate the CGS software on its mainframe without violating EDS copyright. The court rejected EDS' claim, stating that "a copyright owner may not enforce its copyright to violate the antitrust laws . . . and may impose only legitimate restriction on the use of the copyright which do not enforce a tie." Thus, Tricom's claim that EDS improperly used its monopoly power under copyright to extend its market in the CPU time-sharing business survived a summary judgment motion by EDS.
Eastman Kodak Co. v. Image Technical, Inc., 112 S. Ct. 2072 (1992).
Kodak sold copying machines, but refused to sell spare parts to anyone but its customers. A customer was prevented from providing the spare parts to third party service organizations, thereby requiring the customer to either have Kodak perform the services or take responsibility for its own service and repair. The court found an illegal tying arrangement, despite the limited market share which Kodak had in the copier marketplace.

X. On-Line Distribution

Playboy Enterprises, Inc. v. Chuckleberry Publishing, Inc., 939 F.Supp. 1032 (S.D. N.Y. 1996).
The Court held that the posting of copyrighted materials on a website in Italy with active solicitation of customers to the site constitutes "distribution" in the United States which is enjoinable by a United States Court.
Central Point Software, Inc., Quarterdeck Office Systems, Inc., and Symantec Corporation v. Jimmy Nugent dba Agents of Fortune, 6 CCH Computer Cases ¶47,374 (1995).
A computer bulletin board operator who distributed and encouraged access to copyright works by its subscribers was permanently enjoined from allowing its subscribers to obtain copyrighted software posted on the bulletin board. The computer bulletin board operator was assessed statutory damages and ordered to deliver to the plaintiff all computer hardware and software used by the operator to make and distribute the copyrighted software, which included modems and central processing units.

V. DISTRIBUTION AGREEMENTS - KEY TERMS AND CONDITIONS

As noted above, the absence of detailed definitions is a common problem in drafting distribution agreements for the software industry. Presented below are numerous definitions frequently included in software distribution and licensing contracts.

A. Affiliate means a corporation which directly (or indirectly through one or more intermediaries) controls, is controlled by, or is under common control with Customer.
B. Archival Copy means one (1) copy of the Software and/or System Software made by Customer, solely as authorized herein.
C. Bundled Product means the Software as separately identified and packaged or distributed to Distributors and End-Users along with data communications hardware manufactured or distributed by Customer, provided that a written list of such data communications hardware has been provided to Vendor in advance.
D. Confidential Information means the information and materials marked or noticed by Vendor or Customer as confidential or proprietary, and any trade secrets of Vendor disclosed to Customer hereunder, but not including information that has been publicly known or available without breach of the Agreement or the Confidentiality Agreement.
E. Confidentiality Agreement is the written document at Exhibit A to be executed by Employees as provided herein.
F. Contributed Material means the revisions, modifications and/or additions made by Customer to the Documentation in order to create the User Manuals to support the operation of the Software with the system being distributed by Customer.
G. CPU means one (1) computer hardware central processing unit manufactured by ABC and obtained by Customer under this Agreement, designated by manufacturer model and a specific manufacturer serial number, as specified at Exhibit A, and for the internal, in-house use by Customer or Affiliate.
H. Derivative Work means a work which is based upon one or more preexisting works of Vendor, such as a translation, modification, revision or any other form in which such preexisting work is recast, transformed, or adapted and which, if prepared without authorization by Vendor would constitute a copyright infringement.
I. Distributor means dealers, distributors, resellers, original equipment manufacturers, value added resellers, software vendors and similar entities who obtain the Software and/or Documentation from Customer, solely for sublicensing to an End-User.
J. Documentation means the vendor's copyrighted user information relating to the operation and functionality of the Software, a copy of which is attached at Exhibit A.
K. Effective Date means the date on which an Agreement has been executed by an authorized representative of both parties.
L. Employees mean the employees or independent contractors of Customer who need to have access to the Confidential Information for purposes of operation of the Software.
M. End-User Agreement means a written agreement to be used by Customer and its Distributors in accordance with the terms of an Agreement in providing the Software to End-Users. 
N. End User means a customer of Distributor acquiring the Software and Documentation for the sole purpose of using same for internal, in-house purposes and not for redistribution, sublicensing, or resale in any form.
O. Enhancements mean modifications or revisions to the Software expanding its functionality or improving its performance.
P. Forecast means a six month projection of software distribution activity, updated on a monthly basis.
Q. Hardware means the computer hardware, peripherals, System Software, and related products provided by a third party and described at Exhibit A.
R. Implementation Fee means the estimated fee in U.S. dollars to be paid by Customer to Vendor for performance of services by Vendor under the Implementation Plan, specified at Exhibit A.
S. Implementation Plan means the written document prepared by the parties relating to implementation services to be performed by Vendor and included at Exhibit A.
T. Labels mean serialized adhesive labels for affixation to the disk on which the Software is coded.
U. License Fee means the monetary amount in U.S. dollars to be paid by Customer to Vendor for the licensing rights to the Software granted to Customer solely as set forth in this Agreement.
V. License Term means the period of time commencing with the Effective Date and continuing for four (4) years thereafter.
W. Limited Warranty means the limited, express warranty set forth in the Agreement.
X. Limited Warranty Period means the period of time set forth in the Agreement during which the Limited Warranty is in effect.
Y. Marks mean Vendor's trademarks, service marks, tradenames, logos, and insignias, as specified at Exhibit A.
Z. Module means any one (1) of the computer software applications comprising the software and described at Exhibit A.
AA. New Mark means the only trademark or trademarks to be associated with the Software and Documentation, as specified at Exhibit A.
BB. Non-Qualified Products mean any computer software, computer hardware, or other goods or products not provided by Vendor under an Agreement and not specifically approved in writing by Vendor for use with the Software in advance of operation or implementation.
CC. On-Site and Site mean solely at Customer's principal place of business.
DD. Production Use means the point in time that the Software or a respective Module may be used by Customer to perform actual operations for Customer.
EE. Software means the computer software applications in machine-readable, object code form, described by Module and performing the functions set forth at Exhibit A; provided this definition does not include the source code, human readable version of any computer software.
FF. Software Installation Date ("SID") means the date on which a respective Module is installed and loaded on the Hardware and is demonstrated by Vendor to Customer to operate substantially in accordance with the Specifications for the respective Module.
GG. Software Problem means that the Software does not execute properly on the Hardware under normal operating conditions or does not substantially conform to the Specifications.
HH. Source Code means the source code, human readable version of the Software owned exclusively by Vendor.
II. Specifications mean the technical and functional specifications for the Modules comprising the Software as set forth at Exhibit A.
JJ. Support means the Support Services relating to the Software and provided by Vendor to Customer, solely as set forth in the Support Agreement.
KK. Support Agreement means the proposed contractual relationship between Vendor and Customer covering support and maintenance to be provided by Vendor to Customer.
LL. Support Center means the personnel responsible for on-line telephone support as provided herein and located at the principal place of business of Vendor.
MM. System Software means the computer operating system and related software in machine readable, object code form required to operate the Hardware, and provided to Customer solely in accordance with the Terms and Conditions.
NN. Systems Manager means the Employee of Customer responsible for working with Vendor.
OO. Terms and Conditions mean the standard terms and conditions of third parties relating to the sale and installation of the Hardware and licensing of the System Software and other computer software, as set forth at Exhibit A.
PP. Updates mean revisions or maintenance to the Software which may be provided by Vendor in its sole discretion in accordance with the terms and conditions of the Agreement.

VI. GRANT OF RIGHTS

In drafting a distribution agreement, the grant of rights is the most significant section in presenting the scope of the license(s) extended by the software developer to the distributor. There are several levels of distribution, requiring different grants of rights to the parties in the distribution chain, as noted below.

A. Distribution

  1. A non-exclusive, non-transferable, non-assignable right to promote, distribute, and market the Software
  2. Only in the Territory
  3. Only under the Marks

B. OEM

  1. A non-exclusive, non-transferable, non-assignable limited license to reproduce the Software in the English language at the principal place of business of Customer.
  2. To distribute copies of the Software in the English language, solely in accordance with the following:
    1. To Distributors and End-Users in the United States and Canada
    2. In object code, machine-readable form only
    3. Only in connection with the Marks
    4. With respect to End-Users, only on the terms and conditions of the End-User Notice
    5. With respect to Distributors, only to such parties that are legally obligated to protect the proprietary rights of Vendor in the Software
    6. Only as a Product consisting of both one (1) copy of the Software and one (1) copy of the User Manual (that is, neither the Software nor the User Manual may be distributed separately)
    7. Only on the other terms and conditions hereof

C. Corporate Customer

  1. A non-exclusive, non-transferable, non-assignable right to use the Software and Documentation On-Site as provided herein
  2. A right to use only one (1) copy of a Module and one (1) copy of the System Software by Customer or Affiliate at any time on the CPU and solely for the in-house, internal use by Customer or Affiliate
  3. A right to use one (1) copy of the Documentation in hard copy form for each Module and to use the Documentation as provided on magnetic media for Customer's internal, in-house purposes only
  4. A right to obtain the sublicensing rights as set forth in the Terms and Conditions
  5. A right to make one (1) Archival Copy to be maintained On-Site in a secure area accessible only to Customer's System Manager

D. Development Agreement (UNIX)

  1. A personal, non-transferable and non-exclusive right to use the Software in the United States
  2. For Customer's own internal business purposes
  3. And solely on or in connection with the Designated CPU for the Software
  4. With the right to modify the Software and to prepare derivative works based on such Software
  5. Provided that any such modification or derivative work that contains any part of a Software subject to the Agreement is treated the same as such Software
  6. And further provided that Vendor claims no ownership interest in any portion of such modification or derivative work that is not a part of a Software
  7. Customer may permit access to Software by its contractors, provided such access and use is exclusively for Customer in connection with work called for in written agreements between Customer and such subcontractors

E. Additional Grants

  1. Right to prepare translations of software and/or documentation
  2. Right to use a user interface or organization, sequence, and structure of a program
  3. Right to use mask sets

VII. ROYALTY AND LICENSE FEES

There are several alternatives available to a software licensor in pricing its software in a distribution program. The selection of one of the alternatives listed below may depend on the bargaining strength of the parties, the development costs associated with the software, the number of competitors in the market, or the expectations of the ultimate end user customers. In addition to providing alternative fee arrangements, the following section reviews legal considerations in establishing pricing, especially given the requirements of the antitrust laws.

A. Alternatives

  1. Per copy of software reproduced
  2. Per copy of documentation reproduced
  3. Per copy of software/documentation ordered
  4. Single fee for site licensing
  5. Fees based upon number of servers or seats utilizing the software
  6. Fees based upon number of ports utilizing the software
  7. Up-front payment for right to prepare derivative works based on source code
  8. Up-front fee for translation right
  9. Special fee for source code license
  10. Additional revenue-generating events
  11. Electronic payments

B. Legal Considerations

  1. Resale Price Maintenan