To see the press release on our launch, please click here.

Again, for any of you who have not read our earlier postings on this subject, the importance of the Principles is that they may be used by courts to interpret and rule on disputes regarding software contracts in the future. Thus, software companies may want to take the time now to review their form agreements in anticipation of the possibility that the Principles may be used to interpret those agreements down the road.

So, what do you as a software company need to know about the Principles’ treatment of warranties?

Well, for the non-lawyers reading this blogposting : contracts can have express warranties, which are warranties that have to be spelled out very conspicuously in a contract to apply, and implied warranties, which are warranties which are read into an agreement. So, in talking about this subject, we are addressing what the new Principles say about the language that has to be in an express warranty to be valid, as well as what implied warranties will be read into a software contract, regardless whether the contract specifically talks about those warranties or not. We are also addressing what the Principles say about a party’s ability to disclaim certain warranties.

On the issue of express warranties, the Principles adopt the standard Uniform Commerical Code (”UCC”) view of express warranty, but interestingly enough do not require use of the words “warrant” or “guarantee” to constitute an express warranty. Also, the Principles clarify that distributors or dealers cannot be liable for breach of a software developer’s warranty, provided that they merely “transfer” the warranty provided by the developer but do not “adopt” that warranty themselves. The Principles provide that disclaimers of express warranties are unenforceable only if a reasonable party would not expect the exclusion or modification.While the position on disclaimers is a little unexpected, the Principle’s position on express warranties is bascially in line with what we as attorneys would expect.

On the issue of implied warranties, the Principles largely take the UCC position, allowing for an implied warranty of merchantability and an implied warranty of fitness for a particular purpose, and allowing both warranties to be disclaimed. However, the Principles do take a few noteworthy positions on the issue of implied warranties. First of all, the Principles take the position that one warranty cannot be disclaimed: the warranty that the software contains no material hidden defects of which the party was aware at the time of transfer. Also, the Principles say that this warranty does not take the place of any action for misrepresentation or any remedies. Second, the Principles take the position, that no implied warranty regarding material hidden defects that will be read into an agreement, where the purchaser of the software has tested the software in advance as fully as desired or unreasonably has refused to test it, provided that the warranties are with respect to defects that a test should or would have revealed. The position advocated by the Principles suggests that, if software companies are not already offering free trials or evaluation licenses to potential customers, it may be in their best interest to start doing so, in order to ensure that an implied warranty regarding hidden defects is not read into their software contracts.

In addition to addressing express and implied warranties, the Principles also take the position that these warranties automatically extend to certain third party beneficiaries such as immediate family, household members, and guests, and any other person who uses the software in a manner contemplated or that should have been contemplated by the software company. However, the Principles clarify that any disclaimers that would be effective against the purchaser are also effective against third party beneficiaries, so the Principles do not require the inclusion of any express disclaimer against third party beneficiaries.

What should you take away from this posting? Well, the important take-away point is that the Principles read in an implied warranty that there are no material hidden defects that cannot be disclaimed, but that this burden on the part of a software company may be negated by ensuring that the purchaser thoroughly tests the software in advance. So, if you are software company and you are not already taking steps to ensure software purchasers test the product in advance, you may want to implement policies now to ensure that this happens in the future.

Other related postings:

American Law Institute Approves Principles of the Law of Software Contracts
Series on ALI Software Contract Principles: Changes Default Rule from Implied Warranty to Implied Indemnification Against Infringement

According to an explanation on the website, TOSbackup.org was launched with the intention of increasing public awareness about online terms of service, and to help the public monitor changes to the terms of service for the websites they are using. The launch follows the recent uproar on the blogosphere over changes to the Facebook terms and conditions, and the controversy over the terms and conditions for the Amazon Kindle’s new beta product for blogs.

So far, the website is tracking twenty (20) companies’ online terms, including but not limited to Google, Twitter, Apple, Ebay, Myspace, and YouTube. The website is equipped with RSS feeds, so users can easily track updates as they are posted to the Internet.

The launching of Tosbackup.org is an exciting development, which is likely to a huge impact over the Internet. While in the past companies could make daily revisions to their terms and conditions and those revisions could go almost unnoticed, Tosbackup.org is now going to make it possible for the blogosphere to have daily and direct oversight over corporate terms and condition changes. It is inevitable that this is going to change the dynamic between companies and website users and perhaps make them a little more reluctant to modify their terms and conditions–at least to the extent that the modifications are at all controversial. In my opinion, it levels the playing field significantly between companies, who typically establish that they have the right to amend their terms at any time without prior notice, and consumers, who generally seek predictable terms which are also fair and reasonable.

Related blogpostings:
Facebook Licensing Controversy Prompts Public to Take Closer Look at Social Networking Site Terms and Conditions
Facebook Reverses Decision and Announces Temporary Return to Prior Terms and Conditions
Facebook Adopts Townhall Format to Allow Users to Comment and Vote on New Statement of Rights and Responsibilities
Blogosphere Reacts to Licensing Terms for Amazon’s New Kindle Publishing for Blogs

What are the issues to be looked at in Bilski?

First, the Court will look at whether the Federal Circuit erred in its holding that a process must be tied to a particular machine or apparatus, or that it must transform a particular article into a different state or thing to be eligible for patent protection (also known as the “Machine or Transformation Test”). Second, the Court will look at whether or not the Machine or Transformation Test, which effectively denies patent protection to many business methods, contradicts clear Congressional intent.

The outcome of this case will likely determine whether or not many business methods are patentable, including many software patents.

In case you have not been following the Bilski case, the facts behind the ruling are as follows:

The patent application was filed in April, 1997 to protect a method of hedging risk in the field of commodities trading. The patent examiner rejected the claims on the basis that the invention was not directed to the technological arts. The rejection was appealed, and the Board found that the examiner was wrong to use the “technological arts” test but that the invention was still not eligible for patent protection due to the fact that the claims did not involve any patent eligible transformation and only claimed an abstract idea ineligible for patent protection. Also, the Board found that the process did not produce a useful, concrete or tangible result.

The Federal Circuit’s decision looked at two earlier Supreme Court decisions: Benson and Diehr. Both Diehr and Benson involved software programs, and looked at whether claims involving a particular mathematical equation were patentable. Benson basically established that a mathematical formula in itself was not patentable. In contrast, Diehr established that a distinction existed between patenting mathematical formulas and patenting specific applications of mathematical formulas. The Federal Circuit used these precedents and later decisions upholding those precedents as the basis for determining that its “Machine or Transformation Test” applied to determine whether a particular process is in fact patentable. It is expected that the Supreme Court may revisit these decisions as part of its consideration of this case.

So, the importance of the Supreme Court taking Bilski is that the Supreme Court is expected to clarify what the test should be for the patentability of method claims. This clarification will inevitably have widespread implications for the technology industry, since it may affect the validity of existing method patents as well as the future patentability of method inventions.
From a licensing perspective: this decision could potentially limit what can be commercialized through patent licensing. More importantly, the decision could call into question the validity of a number of existing patent licenses.

Needless to say, this case is one that the Silicon Valley will be closely watching. The Silicon Valley IP Licensing Law Blog will continue to keep you posted on any developments as they arise.

What is the plan? According to Ars Technica, it seems that the Associated Press plans to deploy some sort of “mysterious new misappropriation heat-seeking system” technology over the web to track down material taken from Associated Press articles.

Now interestingly enough, the interview seemed to suggest that the Associated Press plans to take a somewhat softer stance on blogosphere quotes than they seemed to indicate this past year. Ars Technica spoke with AP news editor Ted Bridis, who promised that the main concern of the Associated Press was “wholesale theft” and not bloggers who “excerpt a relevant passage, and then derive some commentary.”

Did the outrage in the blogosphere cause a change of heart at the Associated Press? One can hope. While such a continued assault would provide for some very interesting blogging and legal commentary on my part, I personally think it would prove to be a bad business move on the part of the Associated Press. Also, I think it could have a detrimental effect on the blogosphere as well.

Somehow, however, I am not convinced, as it is just very hard to reconcile this new, kinder and more gentle Associated Press approach described in the interview with previous quotes and prior actions taken by the Associated Press — particularly with respect to the Drudge Retort.

Apparently, Drudge Retort Publisher Rogers Cadenhead agrees, warning Ars Technica, “If AP’s guidelines end up like the ones they shared with me, we’re headed for a Napster-style battle on the issue of fair use.”

The Silicon Valley IP Licensing Law Blog will continue to follow this issue as it unfolds.

Related Blog Postings:
Blogosphere Reacts to Associated Press Assault on Fair Use Doctrine
Blog Content Licensing: Is there a market for it?
Should the Blogosphere Adopt the Creative Commons Licensing Model?

If you have ever taken part in a software contract negotiation, you know that much of that negotiation will focus on negotiating indemnification language. For those of you who may not be familiar with the concept of indemnification, this is when one party takes on the legal responsibilities and more importantly, the financial responsibilities, for a potential lawsuit and often for the legal defense of that lawsuit. In the case of a software contract, the indemnification at issue is typically the intellectual property infringement risk: generally, the risk that the developers of the software code may have incorporated infringing code into the software.

What is important about the ALI Software Contract Principles that involves indemnification? Well, the Principles now provide for an implied indemnification that can be disclaimed in a software contract. This is a change of approach from the approaches set forth in Article 2 of the Uniform Commercial Code (U.C.C.) and the Uniform Computer Information Transactions Act (UCITA), which provided for an implied warranty of noninfringement that can be disclaimed. For those of you who are not familiar with the UCC and UCITA, for your purposes, you need to understand that rather than reading an implied warranty of noninfringement into your contract that you can choose to adhere to or disclaim in a disclaimer of warranties, which was the previous “standard,” the Principles now provide for an implied indemnification that you can either choose to adhere to or to disclaim in a disclaimer of indemnification.

In addition, the Principles also now provide certain remedies to a party in an infringement scenario, to the extent that those remedies are not excluded in the agreement.

What is the rationale for this change? The Principles explain as follows:

[The change] respects the customs that have developed in the industry. The hope is that by changing the applicable default rule from an implied warranty to the narrower obligation of implied indemnification, more vendors will be willing to offer a tailored indemnity rather than disclaiming liability altogether.

Interestingly enough, the Principles create a carve-out on this rule for parties who do not pay for the software, in a nod to the open source community. The Principles explain:

Open-source developers often are a large, diverse group and individual contributors may not have access to counsel to assist them in evaluating copyright claims and searching for patents, many of which may be invalid. An indemnification duty therefore may have a chilling effect on participation in open-source projects.

What should you take away from this posting? Well, if you are a company that offers software for sale, you may want to take another look at your form contracts and consider whether revisions should be made to the indemnification and remedies sections in response to the Principles. As we explained in yesterday’s posting, while the Principles are not at this point law, they could become law and are likely to become authoritative to courts, so it could pay to give them some consideration in advance of a contract dispute.

Related Postings:
American Law Institute Approves Principles of the Law of Software Contracts

For those blog readers who are not familiar with the ALI, this is a legal professional organization, which is known for publishing authoritative restatements of the law. It is considered to be a professional honor to be elected to the ALI, whose membership includes judges, lawyers, and teachers from the United States and foreign countries. Membership is limited to 3000.

Why is the work of ALI important? Well, this is because the restatements are generally considered authoritative by the courts. In this case, the ALI has drafted “principles” rather than a “restatement.” The Introduction to the current draft of the Principles explains this distinction as follows:

In light of the many percolating legal issues that pertain to the formation and enforcement of software agreements, an attempt to “restate” this law would be premature. . . . Instead of restating the law, a “Principles” project accounts for the case law and recommends best practices, without unduly hindering the law’s adaptability to future developments. . . .[A]lthough these Principles often employ prescriptive language, a “Principles” Project is not the law unless and until a court adopts it. Courts can apply the Principles as definitive rules, as a “gloss” on the common law, U.C.C. Article 2, or other statutes, or not at all as they see fit.

So, given the significance of the ALI’s work, software companies need to be informed about the work of the ALI in this area, since the Principles may be treated as authoritative at some point down the road if a dispute over one of their software contracts ever ends up in court.

Though the The Prinz Law Office has not been involved in the ALI drafting project, the Silicon Valley IP Licensing Blog has obtained a draft of the Principles. This blogposting is the first of a series of postings that we will make on the Principles: the plan is to share with you some of the highlights of the Principles, so that if you as a blog reader are in the software industry, you will have some understanding of the important points to be taken away from the Principles and can consider whether or not you may want to make some revisions to your standard contracts in anticipation that these Principles may be utilized by a court on your contracts down the road.

If you would like to obtain your own copy of the draft of the Principles of the Law of Software Contracts, drafts are being made available for purchase at the ALI website.

In an email sent out to Copyright Office subscribers, the Copyright Office stated as follows:

A recent Washington Post article focused on the lengthy processing times the Copyright Office is experiencing in wake of its transition from a paper-based to an electronic processing environment. The Copyright Office is working diligently to improve processing times and service to the public in general. To clarify, current processing times by filing method are as follows:
• E-Service with Electronic Deposit: 5 months for 90% to be completed; 33% completed in 2.5 months
• E-Service with Physical Deposit: 6.5 months for 90% to be completed; 33% completed in 3 months
• Paper Claims: 18 months for 90% to be completed; 33% completed in 12 months

As I indicated in my blogposting last week, I personally have experienced some of these recent delays: if the Copyright Office response is accurate, then I must be falling into the ten percent (10%) of electronic filings that are taking longer than five months to process. Having said this, it is helpful to have some understanding of the Copyright Office’s current processing timetable, and I for one, appreciated the Copyright Office taking the time to issue a response to these reports.

I spent a few minutes reviewing the new pricelist, and in my opinion, the increases are fairly modest and should not be much of a concern to the average copyright registrant. Filing prices for the registration of a basic electronic claim will remain $35.00, but the price of a Form CO filing will increase to $50.00 from the current $45.00, and the price of a paper filing of Forms PA, SR, TX, VA, and SE will go up to $65.00 from the current $45.00. In addition, the price of a Form GR/CP paper filing on a claim in a group of periodicals, published periodicals, or database updates will increase to $65.00 from the current $45.00, and the registration of a claim in a group of daily newspapers or newsletters will increase from the current $70.00 to $80.00.

Incidentally, there was one price decrease: supplmental registration prices dropped from $115.00 to $100.00.

All in all, this rate increase should not cause too many companies or individuals much concern: while we all may feel the loss of $10.00 or $20.00 a bit more than we used to in better times, this increase certainly is not one that will break many banks or cause many companies or individuals to rethink registration.

According to the Washington Post, the delays mean that it now takes eighteen months instead of six months to receive a copyright registration, and the expectation is that the problem will get worse. The irony, however, is that the slowdowns are due to the Copyright Office’s adoption of a new electronic system, which was supposed to make the process faster.

Since I file copyright registrations for clients as well as for the firm, I can attest to the fact that the process seems to have really slowed down in the past year. I’ve not yet reached eighteen month delays, but certainly the process does not seem to be moving forward as it has in the past. I am a little concerned that what was promised to be a four month process when I called the Copyright Office and spoke with them months ago about the new system is going to turn into a twelve to eighteen month process for me and my clients as well.

What’s going on? Why is the electronic system which was supposed to speed copyright registrations up instead slowing the registration process down? Well, according to the Washington Post, it is the technology itself that is causing the problem. The Washington Post reported:

The trouble is twofold. Workers say the electronic system is slow and prone to crashing. Managers say the challenge has been retraining the staff to use the system. Both sides agree the more significant problem is the fact that much of the public is still using paper applications, which must be painstakingly entered by hand into the new electronic database.

About 45 percent of applications are still in paper form. The staff is spending so much time handling the paper claims, it doesn’t have enough time to process electronic applications, which has created delays for online claims now, too. It now takes six months to process electronic claims when it should take one month.

Of the 10,000 applications that pour into the Copyright Office each week, the staff can process about 7,000, adding 3,000 untouched applications to a growing pile that currently totals about 523,000. Workers are now handling paper applications received in late 2007

So, is this just a temporary problem? One can hope that once the technology is a little more comfortable for the office that it will in fact speed up processing times. Having said this, I cannot help but wonder if copyright attorneys will not soon be joining patent attorneys in their calls for reform of the system. The backlog in the USPTO has been a constant concern of the patent attorneys I know, so it is not inconceivable to think that copyright attorneys would soon be just as frustrated with the backlogs as their patent attorney peers have long been.

Assuming you are one of the many who are waiting on copyright registrations: what does this really mean for you or your business? Well, this is where the article was a little confusing. If you are waiting on your registration, the main consequence is that you cannot file suit against infringers. A registration is required for the filing of an infringement suit. In addition, there will not be notice of your registration on file with the copyright office, so a public record of ownership will not be available to potential infringers, who may or may not do research before infringing.

Having said this, to clear up a few points from the article: copyright ownership exists from the moment it is fixed in a tangible form of expression. So, completing registration does not have an impact on who owns the copyright in the work, nor does it have any bearing on the use of a copyright notice on your work. You absolutely should use a copyright notice on your work to advise potential infringers that you own the work, even if you have not yet received the registration certificate. In addition, once you have filed for the registration, you lock in the effective date of the registration as of the date that you sent in the registration, so there is no requirement that you have to hold off on publishing the work until you receive the certificate (assuming you have not already started publishing the work). Similarly, there is no requirement that you would have to hold off performing the work until you receive the registration (assuming you have not already started performing the work). The only real impediment that you will likely face as you wait for your certificate will have to do with infringement: you may not be as effective in enforcing your copyright against an infringer until you receive the certificate. So, enforcement may need to wait until you receive your registration certificate in hand. Having said this, except for this one issue, the fact that you are having to wait for your registration should not be a serious concern.