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Remember the fear and foreboding caused by the “Y2K bug”? Many projected the possibility that our world would come crashing down at midnight on Jan. 1, 2000, because it was feared that the computer programs that run our banks, power and water utilities, medical facilities, transportation facilities, automobiles, airplanes, traffic controls and even our coffeepots and VCRs would be unable to handle the date 01/01/00. In addition to the economic losses that invariably arise from computer problems, many forecasts were for substantive property damage, injuries and even death. As we now know, Jan. 1, 2000, went off virtually without a hitch. The potential liability under contract and tort theories against software and computer vendors for the chaos that might have ensued was largely diverted. The question of legal and economic responsibility for software defects quickly fell from the headlines. Nonetheless, the potential for software defects causing serious financial losses or physical damage is still a threat in today’s technology-based society. The theories under which software developers may be held liable for such defects are of important concern, not only to users who are harmed by such defects, but also to software developers and vendors who need to be able to assess accurately their exposure to liability in manufacturing and developing new software. This article provides an overview of the various theories under which vendors may be held liable for software defects. IS SOFTWARE A ‘GOOD’ OR A ‘SERVICE’? The threshold question for determining the scope of a vendor’s liability for software defects is whether the software package in question is a “good” or a “service.” If the software is deemed a good, its vendor may be subject not only to common law breach of contract principles, but also to the liability provisions under � 2 of the Uniform Commercial Code (UCC) and strict product liability if the software is defective. If software is considered a service, then a vendor may be subject to liability under negligence theories as well as to common law breach of contract principles. Whether software is a good or a service is most often addressed by our courts in deciding whether or not to apply the provisions of UCC � 2, which governs contracts for the sale of goods. The general trend of the courts is to consider software a product, particularly when the software is sold in conjunction with computer hardware or is installed on the plaintiff’s computer system, thus lending to the software a “tangible form.” Advent Systems Limited v. Unisys Corp., 925 F.2d 670, 675-76 (3d Cir. 1991). Thus, for example, mass-marketed software is usually considered a good. Conversely, software packages that consist primarily of specialized, custom-programming services, or that include significant maintenance, training, operation and/or support services, are more likely to be considered a “service” rather than a good. Conopco Inc. v. McCreadie, 826 F. Supp. 855, 871 (D.N.J. 1993). With increasing frequency, however, courts tend to consider the software portion of the contract a contract for the sale of goods even in “hybrid” goods and services contracts. Accordingly, it is important for software developers and vendors to assess their exposure to liability under � 2 of the UCC, as well as under strict product liability principles, if a software defect could lead to personal injury or injury to an end user’s property. APPLICATION OF THE UCC Application of the UCC to the sale or license of software programs is significant because the UCC provides for implied warranties, disclaimers and limitations on liability which are not necessarily provided for at common law. For example, the UCC provides for liability of a vendor for breaching not only express warranties, but also implied warranties of merchantability and of fitness of the software for a particular purpose. The UCC provides an out, however. Vendors can escape liability under these implied warranties by including a conspicuous disclaimer of all warranties as part of a software license agreement. See, e.g., Hou-Tex Inc. v. Landmark Graphics, 2000 Tex. App. LEXIS 4627 (July 13, 2000) (holding express disclaimer of all warranties barred breach of warranty claims under the UCC). Vendors also can contractually limit their exposure to large monetary damages for breach by providing a provision in licensing agreements that the purchaser’s remedies are limited to repair or replacement of the defective software or the cost thereof. In this way, a vendor can avoid liability for consequential damages, incidental damages, lost profits or other “reasonably anticipated” losses for breach of contract. These disclaimers and limitation provisions now are commonly included in mass-market licensing of software in what are called “shrink-wrap” licenses, which are printed on computer software packaging. These licenses have been held to be enforceable contractual agreements by our courts. ProCD Inc. v. Zeidenberg, 86 F.3d 1447, 1449 (7th Cir. 1996) (holding that shrink-wrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general). In the near future, the question of applicability of the UCC to software licenses and other contracts for information technology may become moot as new laws are adopted to govern the sale and licensing of software and other information technology commodities. For example, the Uniform Computer Information Transactions Act (UCITA) was approved in July 1999 by the National Conference of Commissioners on Uniform State Laws as a proposed uniform state law applicable to software licenses and computer information contracts. [FOOTNOTE 1]UCITA goes beyond the UCC, including provisions that grant a statutory right to a cost-free refund if terms of a license are not acceptable to a purchaser. In addition, UCITA includes the implied warranties of merchantability and fitness for a particular purpose, along with newly-created implied warranties of quiet enjoyment, of system integration and, in some situations, of accuracy of data. UCITA was enacted last spring in Maryland and Virginia. Bills proposing the adoption of UCITA also have been introduced in the legislatures in Delaware, District of Columbia, Hawaii, Illinois, New Jersey and Oklahoma. [FOOTNOTE 2]It remains to be seen whether UCITA will be adopted nationwide. STRICT PRODUCT LIABILITY SUITS In addition to contractual liability for defects, software vendors are susceptible to liability suits under the theory of strict product liability in situations where software has caused bodily injury or damage to property other than the software itself. Unlike claims brought under contract or negligence theories, every entity in the chain of distribution of the product may be liable to the plaintiff for damages resulting from the injury and, generally, any user of the product has standing to sue for injuries resulting from defects in the product. However, damages that may be recovered are limited to compensation for personal injury and property damage; economic loss usually is not recoverable. To apply the theory of strict liability to software, a purchaser must have used the software in a reasonable fashion and the product must have reached the purchaser without substantial change. Individuals injured by software due to a defect in manufacture or design or to a failure to warn need only show that the product caused the injury and that the product was sold in the defective or unreasonably dangerous condition. By rendering moot the issue of whether a vendor acted reasonably in manufacturing or designing the software, strict product liability forces software developers effectively to guarantee unconditionally the safety of their products and, possibly, to indemnify its distributors and dealers from suits for strict liability. While software defects most often result in commercial losses rather than injuries to persons or property, personal injury may result from defects in software used in areas where the physical safety of individuals and their property is vital, such as in medicine, law enforcement, transportation, construction, engineering or agriculture. While some commentators argue that application of strict product liability to emerging technologies may thwart development of important software and systems in such areas as medical equipment and treatment or transportation, others counter that costs associated with such liability may be taken into account in the price of the software itself or by purchasing insurance. RECOVERING DAMAGES IF SOFTWARE IS A ‘SERVICE’ Recovering damages for defects in software may be a more daunting task if the software is categorized as a “service.” Because strict product liability and the added protections of the UCC are not applicable to services, users must rely on negligence theory to recover from software vendors. To prove negligence in the development of software, the user must show that, aside from a contractual duty to perform, the vendor had a duty to use a specific standard of care, usually “reasonableness,” and that the vendor breached that duty. For example, a vendor may fail in its duty of reasonable care by failing to write or test the program properly, correct bugs in the program, provide proper instruction on operation of the program, provide warnings regarding limitations of the program or provide adequate security or virus protection. See Invacare Corp. v. Sperry Corp., 612 F. Supp. 448, 453-54 (N.D. Ohio 1984) (allowing negligence suit where vendor negligently advised plaintiff to purchase a computer system inadequate for his needs). Next, the user must show that a breach of duty by the vendor caused the user’s injury and that plaintiff suffered damages as a result. Often, courts will limit recoverable damages to those for personal injury or property damage under the economic loss doctrine. See Hou-Tex Inc. v. Landmark Graphics, supra(holding negligence claims against software programmer were barred by economic loss rule); NMP Corp. v. Parametric Tech. Corp., 958 F. Supp. 1536, 1546-47 (N.D. Okla. 1997) (holding economic loss doctrine barred negligence claims for defective software). A negligence claim may be more difficult to prove, given the variables and pitfalls in determining what duty a vendor owes and what is “reasonable” in providing software programs or services, outside of performing obligations set forth in the software agreement. Further, vendors can avail themselves of defenses such as assumption of risk and contributory or comparative negligence (depending on the applicable law). In an attempt to up the ante, many have pushed for recognition of a heightened duty of care on the part of software developers under a theory of professional malpractice. However, the courts have been almost unanimously reluctant to create a new tort of professional malpractice against software developers and computer programmers. See Heidtman Steel Products Inc. v. Compuware Corp., 1999 U.S. Dist. LEXIS 21700 (N.D. Ohio 1999) (noting virtually all jurisdictions that addressed the question of professional liability on the part of computer consultants have declined to do so); see also Diversified Graphics Ltd. v. Groves, 868 F.2d 293, 296-97 (8th Cir. 1989) (permitting a malpractice claim against an accounting firm that provided computer consulting services). The primary reason for this reluctance is that, unlike the practice of medicine or law, there are no established standards, licensing requirements or regulations that govern the performance of software programmers. As such, it is difficult or impossible to define the professional standards that a programmer must meet to avoid liability for malpractice. PREVENTION IS BEST DEFENSE So what can a software vendor do to minimize risk of liability for defects that may arise in its software? Vendors should try to minimize their risk through contractual limitations on liability. For example, vendors can disclaim all express or implied warranties, limit monetary damages to the value of the product itself or specify liquidated damages at a certain amount. Generally, contractual limitations on liability for economic damages are upheld in commercial settings unless they are unconscionable in some way. Further, a contractual standard of care can be included in a contract in an attempt to provide a more concrete guide by which the parties may determine the reasonableness of the vendor’s performance. For example, the contract can set forth the time period in which the product should be delivered and during which any bugs should be fixed. The contract can also specify obligations of the user, such as the obligation to use backup programs, to hire qualified operators and to immediately notify the vendor of bugs in the program after they are discovered. In addition to contractual limitations on liability, software vendors may protect themselves through insurance and indemnification programs as well as by implementing quality checks and assurances at every stage of the development, manufacture and distribution of software and other technology-based products. Indeed, the noneventfulness of Y2K can undoubtedly be attributed, at least in substantial part, to the prophylactic measures taken by programmers for several years prior to 01/01/00 to ensure that systems were properly reprogrammed to account for a four-digit year. Obviously, correcting a defect before it has the opportunity to cause loss or injury is the best protection software vendors — and software users — have. ::::FOOTNOTES:::: FN1The full text of UCITA is available online at www.law.upenn.edu/bll/ ulc/ucita/ucita200.htm. FN2A regularly updated report on the status of UCITA bills throughout the country can be found at www.ucitaonline.com. Patrick E. Bradley is a partner and Jennifer R. Smith is an associate in the Princeton, N.J., office of Herrick, Feinstein LLP. Telephone: (609) 452-3800.

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