by Kimberly Mulligan, Partner

As Building Information Modeling (BIM) becomes increasingly prevalent, it is worth re-visiting case law addressing the enforceability of software licenses.  Software purchasers, such as contractors or design professionals planning to build a project utilizing BIM technology, should be aware that software licenses often contain limitations of liability, limitations of remedies, arbitration clauses, choice of venue provisions, and other terms that may impact the purchaser’s legal rights.

The cases generally discuss two types of software licenses: “shrinkwrap” licenses and “clickwrap” licenses.  A shrinkwrap license agreement is one in which the terms of the license are printed either on or in the box containing the software.  Generally, the terms state that use of the software constitutes assent to the terms of the license.  With clickwrap licenses, the terms of the license agreement appear on the computer, and the user typically must click a dialog box which says “I agree” before proceeding to install the software.

Shrinkwrap Licenses: M.A. Mortenson Company, Inc. v. Timberline Software Corporation

A leading shrinkwrap license case is M.A. Mortenson Company, Inc. v. Timberline Software Corporation, 998 P.2d 305 (Wash. 2000).  In Mortenson, a general contractor contacted a software manufacturer regarding the purchase of construction bidding software. After the manufacturer quoted a price for the software, the general contractor issued a purchase order to the software manufacturer. The purchase order set forth the purchase price, installation fee, delivery charges, and sales tax.  The purchase order did not contain an integration clause (i.e., a statement that the purchase order constituted the full and final agreement between the parties).  The software arrived on disks in plastic pouches.  The license agreement was printed on the outside of each plastic pouch, and was also set forth on the inside cover of the accompanying instruction manuals.

The following cautionary language preceded the terms of the license agreement:

CAREFULLY READ THE FOLLOWING TERMS AND CONDITIONS BEFORE USING THE PROGRAMS.  USE OF THE PROGRAMS INDICATES YOUR ACKNOWLEDGEMENT THAT YOU HAVE READ THIS LICENSE, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS.  IF YOU DO NOT AGREE TO THESE TERMS AND CONDITIONS, PROMPTLY RETURN THE PROGRAMS AND USER MANUALS TO THE PLACE OF PURCHASE AND YOUR PURCHASE PRICE WILL BE REFUNDED.  YOU AGREE THAT YOUR USE OF THE PROGRAM ACKNOWLEDGES THAT YOU HAVE READ THIS LICENSE, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS.

Mortenson at 308.  The license agreement itself contained a clause entitled “LIMITATIONS OF REMEDIES AND LIABILITY.” This provision excluded certain types of damages, including consequential damages, and stated that “DAMAGES IN NO EVENT SHALL EXCEED THE LICENSE FEE PAID FOR THE RIGHT TO USE THE PROGRAMS.” Mortenson at 309.

The general contractor used the bidding software to prepare a bid for a construction project in Seattle.  While preparing the bid, the software malfunctioned 19 times, each time displaying an error message.  The contractor submitted the bid prepared by the software.  After being awarded the project, the contractor discovered that its bid was nearly $2 million lower than intended.  The contractor filed suit in Washington state court against the software manufacturer and its local authorized dealer, asserting claims for breach of express and implied warranties.  During discovery, the contractor learned that the software manufacturer had been aware of the “bug” in the software that allegedly caused the error in the contractor’s bid.

The software manufacturer moved for summary judgment, arguing that the limitations of remedies provision in the license agreement barred the contractor’s recovery. The contractor contended that its purchase order set forth the contract between the parties, and that it never agreed to the terms set forth in the license agreement.  The trial court granted summary judgment in favor of the software manufacturer, and the Court of Appeals of Washington affirmed the trial court’s decision.

The contractor appealed the decision to the Supreme Court of Washington, which also affirmed the decisions of the two lower courts.  The Court found that the purchase order did not constitute an integrated contract between the parties because the purchase order lacked certain important terms (e.g., how many hours of software support the manufacturer would provide to the contractor and terms governing a contemplated future upgrade of the software).  Moreover, the Court noted, the purchase order did not contain an integration clause.  The Supreme Court of Washington also disagreed with the contractor’s argument that the license terms were merely the manufacturer’s request to add additional or different terms that were never agreed upon by the parties.  Instead, the Court held that the contractor’s “use of the software constituted assent to the agreement, including the license terms.” Mortenson at 313.  Finally, the Court concluded that the limitations of remedies clause in the license agreement was not unconscionable, stating that “[i]n a purely commercial transaction, especially involving an innovative product such as software, the fact an unfortunate result occurs after the contracting process does not render an otherwise standard limitation of remedies clause substantively unconscionable.” Mortenson at 315.  Additionally, the Court noted that the limitations of remedies clause was “not hidden in a maze of fine print,” and that the contractor had “more than ample opportunity to read and understand the terms of the license.” Id.

Clickwrap Licenses:  i.LAN Systems, Inc. v. Netscout Service Level Corporation

A similar case concerning clickwrap license agreements is i.LAN Systems, Inc. v. Netscout Service level Corporation, 183 F. Supp. 2d 328 (D. Mass. 2002).  In i.LAN, a network monitoring company entered into a contract with a software manufacturer.  In the contract, the network monitoring company agreed to resell the manufacturer’s software to customers.  The network monitoring company also issued a purchase agreement to the manufacturer, through which it purchased the software.  The software itself contained a clickwrap license agreement to which the network monitoring company agreed while installing the software.  The clickwrap license agreement stated, in part, that the manufacturer’s liability for damages were limited to the license fees paid for the software.

Disputes arose between the parties, and the network monitoring company filed suit against the manufacturer.  The network monitoring company moved for summary judgment, contending that the court should award specific performance in the form of perpetual upgrades of the software and unlimited support from the software manufacturer.  The manufacturer filed a cross-motion for summary judgment, arguing that the limitation of remedies clause in the clickwrap license agreement limited its liability to the purchase price of the software.

The court agreed with the manufacturer that specific performance was not available to the network monitoring company.  Apart from the provisions of the clickwrap license, the court found that the network monitoring company could only obtain specific performance if the software was a “unique” product under the Uniform Commercial Code.  The court determined that the software was not a unique product, however, because it was massproduced and because the network monitoring company could have purchased other, similar software for the same purpose.  Consequently, the court determined that the only remedy available to the network monitoring company was monetary damages.  That being the case, the court then addressed whether the clickwrap license agreement (with its limitation of remedies provision) was enforceable.

The court determined that the clickwrap license was enforceable.  The court opined that clickwrap licenses further commercial transactions, stating that “‘money now, terms later’ is a practical way to form contracts, especially with purchasers of software.” i.LAN at 338.  The court found that the network monitoring company explicitly accepted the terms of the clickwrap license by clicking on the “I accept” dialog box during installation of the software.  Additionally, the court found that the network monitoring company implicitly accepted the terms of the clickwrap license because the terms were not “material” under the Uniform Commercial Code.  The court reached this conclusion because, in prior agreements between the parties, the manufacturer “consistently included” limitations of liability and warranty disclaimers.  Therefore, the court stated, “there can be no unreasonable surprise or hardship” from enforcing the terms of the clickwrap license.  Id.

Conclusion

Both Mortenson and i.LAN demonstrate that purchasers of software may be held to the terms contained in software license agreements.  Although other reported cases do reach different conclusions than Mortenson and i.LAN, construction professionals should be aware that software license agreements may contain terms that affect legal rights and remedies.  Therefore, contractors should carefully read the provisions in license agreements accompanying software they may wish to purchase, giving particular consideration to the software’s intended use.  If a malfunction in the software may result in significant monetary damages (as may be the case with BIM or bidding programs, for example), contractors should consider seeking legal counsel to negotiate more favorable terms.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.

Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.