†1990 Lawrence B. Levy and Suzanne Y. Bell

† Partner, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA. Indiana University, B.S. (with honors) 1980; Harvard Law School, J.D. (cum laude) 1983.

†† Associate, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA. Middlebury College, B.A. (cum laude) 1980; Columbia University, M.S. 1982; Stanford Law School, J.D. (with distinction) 1988.

The authors gratefully acknowledge the contribution of Paul Rothstein, a student at Stanford Law School, for his assistance in the preparation of this article.

1. Raysman & Brown, Strict Product Liability for Software and Data, N.Y.L.J., Sept. 15, 1988 at 3, 3; Gemignani, Product Liability and Software,. 8 RUTGERS COMPUTER & TECH. L.J. 173, 173-75 (1981).

2. Zammit & Savio, Tort Liability For High Risk Computer Software, 23 PLI/PAT 373, 375 (1987).

3. Blodgett, Suit Alleges Software Error, A.B.A. J., Dec. 1, 1986, at 22.

4. 699 F.2d 714 (5th Cir. 1983).

5. Id. at 723.

6. See infra note 40 and accompanying text.

7. See infra note 84 and accompanying text.

8. Software is generally licensed and not sold, and the UCC by its terms applies to sales. However, when courts have found that software is a "good," they have not allowed the fact that software is licensed to insulate vendors from liability under the UCC.

9. See Comment, "Computer Malpractice" and Other Legal Problems Posed by Computer "Vaporware," 33 VILL. L. REV. 835, 855 (1988).

10. See infra notes 11-13 and accompanying text.

11. 492 N.E.2d 314 (Ind. Ct. App. 1986).

12. Id. at 318.

13. Id.

14. No. 80-73315, E.D. Mich., Southern Div., discussed in Software Contract Held to be Sale of Goods, 6 COMPUTER L. STRATEGIST 1, 8 (July 1989).

15. Id.

16. Id.

17. Id.

18. In these "hybrid" cases, courts consider the software to be a "good" and then proceed to the question of whether the goods or services aspect of the transaction predominated. See Triangle Underwriters, Inc. v. Honeywell, Inc., 457 F. Supp. 765, 769 (E.D.N.Y. 1978), modified 604 F.2d 737 (2d Cir. 1979) ("The system was subject to sale, and the services provided ... were incidental to that sale."); see also Chatlos Sys., Inc. v. Nat'l Cash Register Corp., 479 F. Supp. 738, 742-43 (D.N.J. 1979).

19. See infra notes 20-24 and accompanying text.

20. 147 Wis. 2d 500, 434 N.W.2d 97 (Ct. App. 1988).

21. Id. at 508, 434 N.W.2d at 100.

22. Id. at 509, 434 N.W.2d at 100.

23. 1987 U.S. Dist LEXIS 6442 (N.D. Ill. July 10, 1987) (motion to dismiss or strike plaintiff's claims), 1988 U.S. Dist LEXIS 2030 (N.D. Ill. Mar. 4, 1988) (motion to dismiss plaintiff's amended complaint), 1989 U.S. Dist LEXIS 10105 (N.D. Ill. Aug. 21, 1989) (motion to dismiss defendants' amended counterclaim).

24. 1987 U.S. Dist LEXIS 6442 at 12.

25. 772 F.2d 543 (9th Cir. 1985).

26. Id. at 546.

27. Id.

28. Id.; see also Chatlos Sys., Inc. v. Nat'l Cash Register Corp., 479 F. Supp. 738, 742-43 (D.N.J. 1979); Triangle Underwriters, Inc. v. Honeywell, Inc., 457 F. Supp. 765, 769 (E.D.N.Y. 1978), modified 604 F.2d 737 (2d Cir. 1979).

29. 707 F.2d 671 (2d Cir. 1983) (applying Colorado law).

30. Id. at 672-73.

31. Id. at 676-77.

32. 767 F.2d 1288 (9th Cir. 1985).

33. Id. at 1294-96.

34. 342 So. 2d 1053 (Fla. Dist. Ct. App. 1977).

35. Id. at 1056-57.

36. See Rodau, Computer Software: Does Article 2 of the Uniform Commercial Code Apply?, 35 EMORY L.J. 853, 857-60 (1986).

37. Birnbaum, Strict Products Liability And Computer Software, 8 COMPUTER/L. J. 135, 148 (1988); Comment, Computer Software and Strict Products Liability, 20 SAN DIEGO L. REV. 439, 453 (1983).

38. See infra notes 102-40 and accompanying text.

39. Zammit & Savio, supra note 2, at 382.

40. "Unless the context otherwise requires, this Article applies to transactions in goods...." U.C.C. § 2-102 (1989); see supra notes 6-39 and accompanying text.

41. Levy, Software Warranties: Multiple Issues and Drafting Considerations, 5 COMPUTER LAW. 14, 15-16 (1988).

42. "Unless excluded or modified ... , a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind." U.C.C. § 2-314(1) (1989). "Goods to be merchantable must be at least such as ... are fit for the ordinary purposes for which such goods are used ...." Id. § 2-314(2)(c).

43. Id. § 2-315.

44. Id. § 2-713(1).

45. Id. §§ 2-713(1), 2-715(1).

46. Id. §§ 2-713(1), 2-715(2).

47. Id. § 2-715(2).

48. See supra note 3 and accompanying text.

49. In Pennsylvania, privity of contract is not required to recover for breach of UCC warranties of merchantability and fitness for a particular purpose under Sections 2-314 and 2-318 of the Pennsylvania Uniform Commercial Code. Holding that Section 2-318 should be co-extensive with the state's doctrine of strict product liability, a Pennsylvania court allowed a purchaser to recover damages from a computer manufacturer for breach of implied warranty even though the purchaser had actually purchased the computer system from a reseller who had purchased it from the computer manufacturer. The disclaimers and limitations in the manufacturer's contract with the reseller did not apply to the reseller's customer. Spagnol Enter., Inc. v. Digital Equipment Corp., 568 A.2d 948, 390 Pa. Super. 372 (1989).

50. See infra notes 99-101, 105-106 and accompanying text.

51. See infra notes 102-51 and accompanying text.

52. Plaintiffs apparently have had some success under this theory. Reece, Liability for Defective Computer Software, 1987 COMPUTER L. REP. 853, 855.

53. Kopf, Debugging the Computer Contract: A Preventive Strategy Based on a Review of Vendor Liability, 20 U.C.C. L.J. 130, 154 (1987).

54. No. 86 C 10231, published in 1985 COMPUTER L. REP. 630.

55. Id. at 631-32.

56. Id. at 634-35.

57. See, e.g., Harper Tax Servs., Inc. v. Quick Tax Ltd., 686 F. Supp. 109, 113 (D. Md. 1988) (material representation of fact must be "false and known false by the defendant").

58. See Harper Tax Servs., Inc., 686 F. Supp. at 114 ("Under New York law a claim of negligent misrepresentation is stated only in special circumstances and upon certain allegations including the existence of a nexus of intimacy between the parties approaching that of privity and closer than that of ordinary buyer and seller."); Conley, Tort Theories of Recovery Against Vendors of Defective Software, 13 RUTGERS COMPUTER & TECH. L.J. 1, 20-22 (1987).

59. See Computer Sys. Eng'g, Inc. v. Quantel Corp., 740 F.2d 59, 65-66 (1st Cir. 1984) (fraud claim upheld on appeal where purchaser neither knew nor could have known of defects in software).

60. Gregg & Folk, Liability for Substantive Errors in Computer Software, COMPUTER L. REP. 18, 20 (1986) (citing W. PROSSER & W. KEETON, PROSSER AND KEETON ON TORTS 657 (5th ed. 1984)).

61. See Midgely v. S.S. Kresge Co., 55 Cal. App. 3d 67, 127 Cal. Rptr. 217 (1976), discussed in Birnbaum, supra note 37, at 150-51.

62. For a catalog of such "rogue computer programs," see Branscomb, Rogue Computer Programs and Computer Rogues: Tailoring the Punishment to Fit the Crime, 16 RUTGERS COMPUTER & TECH. L.J. 1, 4-5 (1990).

63. Zammit & Savio, supra note 2, at 391.

64. Id. at 396. Contra Invacare Corp. v. Sperry Corp., 612 F. Supp 448, 454 (N.D. Ohio 1984).

65. Reece, supra note 52, at 855.

66. Office Supply Co. v. Basic/Four Corp., 538 F. Supp. 776, 791-92 (E.D. Wis. 1982); Reece, supra note 52, at 855; Kopf, supra note 53, at 149.

67. See supra notes 61-66 and accompanying text.

68. Zammit & Savio, supra note 2, at 397.

69. See, e.g., Chatlos Sys., Inc. v. Nat'l Cash Register Corp., 479 F. Supp. 738, 740 n.1 (D.N.J. 1979); Triangle Underwriters, Inc. v. Honeywell, Inc., 457 F. Supp. 765, 770-71 (E.D.N.Y. 1978), modified 604 F.2d 737 (2d Cir. 1979); Zammit & Savio, supra note 2, at 397-98.

70. 868 F.2d 293 (8th Cir. 1989).

71. Id. at 296-97.

72. Id. at 297.

73. 492 N.E.2d 314 (Ind. Ct. App. 1986).

74. Id. at 319.

75. Id.

76. Rev. Rul. 85-189, 1985-2 C.B. 341.

77. Id. at 342.

78. Rev. Proc. 80-40, 1980-2 C.B. 734.

79. Rev. Rul. 85-189, 1985-2 C.B. at 342.

80. Standards and trends in software programming education are discussed in STAFF OF SUBCOMM. ON INVESTIGATIONS AND OVERSIGHT, HOUSE COMM. ON SCIENCE, SPACE, AND TECHNOLOGY, 101ST CONG., 1ST SESS., BUGS IN THE PROGRAM: PROBLEMS IN FEDERAL GOVERNMENT COMPUTER SOFTWARE DEVELOPMENT AND REGULATION 23-25 (Comm. Print 1989).

81. See W. PROSSER, HANDBOOK OF THE LAW OF TORTS 164 (4th ed. 1971).

82. See supra note 2 and accompanying text.

83. See supra notes 76-79 and accompanying text.

84. "Thus far efforts to find strict liability as to the services themselves have entirely failed." Id. at 679, quoted in Birnbaum, supra note 37, at 146.

85. As stated by the court in Scott v. White Trucks, a plaintiff "without fault on his part" may recover under this theory if he "proves ... that the product was defective when it left the hands of the manufacturer." 699 F.2d 714, 716-17 (5th Cir. 1983), (quoting Weber v. Fidelity & Casualty Ins. Co., 250 So. 2d 754, 755 (La. 1971), and Madden v. Louisiana Power & Light Co., 33 So. 2d 249, 253 (La. Ct. App. 1976)).

86. Scott, 699 F.2d at 716 (quoting Weber v. Fidelity & Casualty Ins. Co., 250 So. 2d at 755).

87. RESTATEMENT (SECOND) OF TORTS § 402A (1965).

88. Zammit & Savio, supra note 2, at 385-86.

89. Id. at 384-85.

90. Id.

91. RESTATEMENT (SECOND) OF TORTS, supra note 87, § 402A; Raysman & Brown, supra note 1, at 3.

92. Raysman & Brown, supra note 1, at 4; Frank, Tort Adjudication and the Emergence of Artificial Intelligence Software, 21 SUFFOLK U. L. REV. 623, 647 (1987). A Pennsylvania court, however, held that a purchaser may recover for a breach of statutory warranties against a remote manufacturer for purely economic loss. Spagnol Enters., Inc. v. Digital Equipment Corp., 568 A.2d 948, ___ Pa. Super. ___ (1989), discussed supra note 49.

93. See Conley, supra note 58, at 29-30.

94. Note, Developing a New Set of Liability Rules for a New Generation of Technology: Assessing Liability for Computer-Related Injuries in the Health Care Field, 7 COMPUTER/L. J. 517, 530 (1987); Birnbaum, supra note 37, at 135.

95. See supra notes 29-33 and accompanying text.

96. See supra note 2 and accompanying text.

97. Lawrence, Strict Liability, Computer Software and Medicine: Public Policy at the Crossroads, 23 TORT & INS. L.J. 1, 15 (1987). This is different from, e.g., Saloomey v. Jeppesen & Co., 707 F.2d 671 (2d Cir. 1983), in which the error was a navigational chart that incorrectly indicated that an airport had a full instrument landing system. Id. at 673.

98. Note, supra note 94, at 531.

99. This type of license accompanies the software but is not signed by the user. It gives the purchaser the right to return the software if the purchaser refuses to agree to the terms of the license. See Note, The Enforceability of State "Shrink-Wrap" License Statutes in Light of Vault Corp. v. McQuaid Software, Ltd., 74 CORNELL L. REV. 222, 233 (1988).

100. Levy, supra note 41, at 17.

101. See supra notes 51-52 and accompanying text.

102. 513 So. 2d 700 (Fla. Dist. Ct. App. 1987).

103. Id. at 701.

104. See infra note 132 and accompanying text.

105. See, e.g., Badger Bearing Co. v. Burroughs Corp., 444 F. Supp. 919, 923 (E.D. Wisc. 1977) (rejecting claim of unconscionability); Reece, supra note 52, at 854-55.

106. Sullivan, Minimizing Exposure to Strict Products Liability as a Technology Licensor, 9 Licensing L. & Bus. Rep. 73, 76 (1986); Vault Corp. v. McQuaid Software Ltd., 655 F. Supp. 750 (E.D. La. 1987), aff'd 847 F.2d 255 (5th Cir. 1988).

107. Levy, supra note 41, at 17.

108. See supra notes 6-39 and accompanying text.

109. U.C.C. §§ 2-314, 2-315 (1989).

110. "[T]o exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for example, that 'There are no warranties which extend beyond the description on the face hereof.'" Id. § 2-316(2). See also Reece, supra note 52, at 855; Comment, supra note 9, at 867.

An implied warranty also can be excluded or modified by "course of dealing, course of performance, or trade usage." U.C.C. § 2-316(3)(c). In addition, where the buyer examined the goods (or a sample or model of them) before entering into the sales contract, there are no implied warranties "with regard to defects which an examination ought in the circumstances to have revealed to him [or her]." Id. § 2-316(3)(b).

111. U.C.C. § 1-201(10).

112. Id.

113. 874 F.2d 653 (9th Cir. 1989), amended 890 F.2d 108 (1989).

114. 874 F.2d at 658.

115. 798 F.2d 299 (8th Cir. 1986).

116. Id. at 303.

117. 15 U.S.C. §§ 2301-2312 (1988).

118. Id. § 2308(a).

119. Id. § 2308(b).

120. Mislow, Reducing the High Risk of High Tech: Legal Planning for the Marketing of Computer Systems, 23 AM. BUS. L.J. 123, 137- 38 (1985). In Micro-Managers, Inc. v. Gregory, 147 Wis. 2d 500, 434 N.W.2d 97 (Wis. Ct. App. 1988), the trial court found that the software developer had "used its skill and expertise in good faith to design and develop the software," as it had promised its customer. 147 Wis. 2d at 517, 434 N.W.2d at 104. As a result, the appeals court held that the developer had substantially complied with and had not breached the contract, even though the customer complained that the software did not perform as expected. Id., 434 N.W.2d at 104.

121. "[An] agreement ... may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts ...." U.C.C. § 2-719(1)(a) (1989). See also Earman Oil Co. v. Burroughs Corp., 625 F.2d 1291, 1298 (5th Cir. 1980).

122. 538 F. Supp. 776 (E.D. Wis. 1982).

123. Id. at 778.

124. Id. at 786.

125. Id. at 791.

126. U.C.C. § 2-719(2) (1989).

127. Reece, supra note 52, at 855.

128. "Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this Act." U.C.C. § 2-719(2).

129. 772 F.2d 543 (9th Cir. 1985).

130. Id. at 547.

131. Id. See also Hawaiian Tel. Co. v. Microform Data Sys., Inc., 829 F.2d 919 (9th Cir. 1987) (contractual provision limiting consequential damages from failure of computer system not enforced when no system had been delivered at all).

132. The clauses provided in this Article are provided only as examples and should not be used without considering the needs of each situation.

133. This is authorized by U.C.C. § 2-719 (1989).

134. 686 F. Supp. 109 (D. Md. 1988).

135. Id. at 112 (emphasis in original).

136. U.C.C. § 2-718(1).

137. Id.

138. Reece, supra note 52, at 855.

139. A provision that requires careful attention is the limitation on consequential damages, especially as it relates to the remedies for breach of warranty. Any limitation of consequential damages clause should be separated from the clause limiting the remedies available upon breach of warranty; and it should be expressly applicable to a breach under any provision of the agreement, including the warranty provisions. If the limitation of consequential damages clause is construed to apply only to the limitation on warranty remedies, it can be invalidated by showing that the limitation on warranty remedies failed of its essential purpose. See U.C.C. § 2-719(2) and RRX Indus., Inc. v. Lab-con, Inc., 772 F.2d 543 (9th Cir. 1985); compare Kearney & Trecker Corp. v. Master Engraving Co., 107 N.J. 584, 527 A.2d 429 (1987). In addition,, the United States Court of Appeals of the Ninth Circuit, has held that when the limitation of consequential damages is part of the warranty disclaimer, the limitation does not apply to a breach of contract arising from a failure to develop and deliver the computer system at issue. Hawaiian Tel. Co. v. Microform Data Sys., Inc., 829 F.2d 919 (1987).

140. "Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable." U.C.C. § 2-719(3). Note that there are different standards by which different types of plaintiffs may assert this barrier. "Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not." Id.; compare Collins v. Uniroyal, Inc., 126 N.J. Super. 401, 407-408, 315 A.2d 30, 34-35 (N.J. Super. Ct. App. Div. 1973) (per curiam), aff'd, 64 N.J. 260, 315 A.2d 16 (1974) (analyzing meaning of "prima facie unconscionable" in consumer context) with Harper Tax Servs., Inc. v. Quick Tax Ltd., 686 F. Supp. 109, 112-13 (D. Md. 1988) (rejecting unconscionability argument in commercial context).

141. 127 Ariz. 278, 619 P.2d 1055 (Ariz. Ct. App. 1980).

142. Id. at 281, 619 P.2d at 1058.

143. Investors Premium Corp. v. Burroughs Corp., 389 F. Supp. 39, 44 (D.S.C. 1974) (integration clause upheld; outside statements regarding the capabilities of the system held inadmissible); Office Supply Co. v. Basic/Four Corp, 538 F. Supp. 776, 782 (E.D. Wis. 1982) (integration clause prevented admission of parol evidence to vary the terms of the agreement; however, integration clause does not affect implied warranties, which "will be held to exist unless they are specifically excluded.").

144. 874 F.2d 653 (9th Cir.), modified, reh'g denied, 890 F.2d 108 (1989).

145. Id. at 657, modified, reh'g denied, 890 F.2d at 112. For other cases in which vendors were held liable for inadvertent express warranties, see Redmac, Inc. v. Computerland of Peoria, 140 Ill. App. 3d 741, 489 N.E.2d 380 (1986); Fundin v. Chicago Pneumatic Tool Co., 152 Cal. App. 3d 951 (1984); Northern States Power Co. v. ITT Meyer Indus., 777 F.2d 405 (8th Cir. 1985); discussed in Levy, supra note 41, at 15-16.

146. Comment, supra note 9, at 848-50; Reece, supra note 52, at 854; Sierra Diesel Injection Serv., Inc. v. Burroughs Corp., 651 F. Supp. 1371, 1377 (D. Nev.) (motion for reconsideration of magistrate's order), 656 F. Supp. 426 (evidentiary hearing) (1987), aff'd, 874 F.2d 653 (9th Cir.), modified, reh'g denied, 890 F.2d 108 (1989).

147. See supra note 132 and accompanying text.

148. See supra notes 61-62 and accompanying text.

149. Kopf, supra note 53, at 157.

150. U.C.C. § 2-725(1) (1989); Mislow, supra note 120, at 133. In general, a cause of action "accrues" when a breach of contract occurs, regardless of the buyer's lack of knowledge of the breach. U.C.C. § 2-725(2). There are separate provisions concerning suits for breach of warranty. Id.

151. IBM v. Catamore Enters., Inc., 548 F.2d 1065, 1076 (1st Cir. 1976), cert. denied, 431 U.S. 960 (1977); Cristo, The Applicability of Negligence and Malpractice to Data Processing Situations, COMPUTER L. REP. 570, 576-77 (1983).

152. See supra notes 51-52 and accompanying text.

153. See also Birnbaum, supra note 37, at 153.

154. Gregg & Folk, supra note 60, at 22-23.

155. Zaharoff, Expert Systems: Strategies for Minimizing Liability, 6 COMPUTER LAW. 31, 31 (1989).

156. See supra note 2 and accompanying text.

157. Mislow, supra note 120, at 134-35.

158. "Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description." U.C.C. § 2-313(1)(b) (1989); see supra notes 41-43 and accompanying text; see also supra note 145 and cases mentioned therein.

159. See supra notes 52-60 and accompanying text.

160. See supra notes 141-47 and accompanying text.

161. Zaharoff, supra note 155, at 33.

162. See supra notes 51-98 and accompanying text.

163. Sullivan, supra note 106, at 75.

164. Cf. Community for Creative Non-Violence v. Reid, ___ U.S. ___, 109 S. Ct. 2166 (1989) (establishing criteria for determining when a third party is to be considered an employee for the purposes of the U.S. Copyright Act).

165. Sullivan, supra note 106, at 75.

166. Id. at 77; Zaharoff, supra note 155, at 32.

167. Sullivan, supra note 106, at 78-79. An insurance company now offers computer virus coverage as part of its standard Electronic Data Protection policy. Allstate Insurance Becomes First Company to Offer Computer Virus Insurance, 1989 COMPUTER L. REP. 1019.

168. See supra notes 76-79 and accompanying text.

169. Zaharoff, supra note 155, at 31; Birnbaum, supra note 37, at 155-57.