Jul 17 2007

Software is not goods

The idea that licensed software should be treated the same in law as a refrigerator that has been sold is absurd and has drawn increasing levels of rejection. Now, one state and two additional appellate courts have joined in understanding that software is intangible. Oklahoma has become another state to specifically exclude information assets, like software, from the scope of UCC Article 2 by explicit amendment of its statutes. The tailored themes of Article 2 focus on traditional sales of goods and have nothing to say about rights or methods in transactions in IP rights, information and other intangibles, except as Article 2 years ago set out general ideas such as unconscionability and good faith.



That software and other intangibles are not within the idea of goods is also recognized by many courts. The Eleventh Circuit in Systems Unlimited, Inc. v. Cisco Systems, 2007 WL 1047064 (11th Cir. 2007) explicitly recognized the distinction between tangibles (a refrigerator or a diskette) and intangibles (software). It held that a sale of software assets was not a sale of goods. Because it was not a sale of goods, it did not contain an express or implied obligation to deliver copies of the software to the transferee.



There are two messages here. One, as the nature of software becomes increasingly clear, courts (and legislatures) are unlikely to make a false analogy between the software and the physical media on which a copy might exist. Two, lawyers and parties who do not recognize this may leave huge gaps in their transactions.



The contract was a settlement agreement between Systems and Cisco. Cisco: “granted, bargained, sold, transferred and delivered … the following: Any and all of [Cisco]'s right, title and interest in any … intellectual property of any kind associated with any software, code or data, including [mentioning specific software] and including any and all available copies thereof and any and all books and records related thereto by [Cisco]....”



Cisco never delivered copies of the software to Systems.



The court held that there was no express obligation to deliver copies.



Furthermore, there was no implied obligation under Article 2 of the UCC because, well simply because Article 2 did not apply. The court correctly explained: “Systems also argues that the UCC imposes a duty on Cisco to deliver the software. We will assume without deciding that Systems' reading of the UCC is correct. Even so, the provisions of the UCC only apply to contracts that deal predominately with “transactions in goods.” The sale of intellectual property, which is what is involved here, is not a transaction in goods. Thus, the UCC does not apply.”



The U.S. Supreme Court dealt with the same type of issue under a different law, but also acknowledged the distinction between copies and software in Microsoft Corp. v. AT & T Corp., 2007 WL 1237838 (2007). The statute here provides that patent infringement liability if a person provides components of a patented invention to persons outside the U.S. without authority. (271(f)) Microsoft provided master disks to international licensees containing an allegedly infringing invention. The court concluded that this did not satisfy the requirement of providing “components”.



The Court emphasized that software code in the abstract is merely an idea and not a “component” of a machine. Thus, when Microsoft supplied a master disk to recipients in other countries, it was not “supplying” a component, but merely an abstraction, even though the recipient was expected to and did in fact make copies from the master disk into the machines or copies it resold.



So we have an increasing recognition that the software code and functionality it creates is not within the idea of being a tangible “good”. Providing a transferee with the right to copy software (in general or in its own computer) is not a transaction in goods. Making exercise of that right possible by providing a copy of that software does not change the nature of the transaction – it is a transaction in information, not in goods.
Written By:Jerry Myers On July 17, 2007 3:42 PM

Ray,

Who knows - maybe some of our luddite brothers in the bar will finally realize that UCITA deserves reconsideration!!

Jerry

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