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ISVs May Have More Power Over Retailers Than Anyone Suspected

Written by Mark Rasch
January 24th, 2013

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

When there is a retail IT contractual dispute with a software vendor—as is now happening with Lands’ End—that ISV (or cloud or other “as a service” provider) may have a contractual right to terminate access to the software or service, with or without notice.

Under what has been called “digital repossession,” software vendors may even have the right to decide for themselves whether the terms of a contract have been breached and to simply terminate access to the software or the service. The key here is to make sure both software license agreements and service agreements have a “soft landing” provision that ensures the vendor is paid for its services while limiting the impact of a sudden withdrawal of the service or software.

Both parties in the Lands’ End contract agree that the contract, entered into in 1993, granted the retailer a license to use the software for 20 years—expiring in 2013. However, the parties disagree over when that license to use the software began—from the date of the contract (in January) or from the date the software went “live” and the company was able to “use” the software (in October). Lands’ End wants time to transition to a new software vendor, and the vendor wants to grant Lands’ End a “perpetual” license for just under $1 million. Lands’ End’s lawsuit asks the court decide whether it can continue to use the software until October. So the vendor has the retailer over a barrel—at least for a while.

But as we move to the “everything-as-a-service” model, the retailer will increasingly not own any of its infrastructure. Not only will the HR systems and processing exist with a vendor (and a cloud provider), but the data will be stored remotely, access to the data will be provided by another vendor, data analytics will be provided by yet another vendor,

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etc. There are significant cost, flexibility and other reasons for retailers to go to the “as-a-service” model. But they should think of the relationship as a marriage. And a marriage for which a prenuptial agreement is essential.

In the early days of computers, there were several cases where software developers determined that licensees didn’t make appropriate payments and, therefore, shut down the computer programs.

In 1988, in Franks & Sons Inc. v. Information Solutions Inc., the software developer installed a “drop-dead” code in the program. When the customer failed to pay as promised, the developer activated (or allowed to be activated) the drop-dead code, which kept the customer from accessing the software as well as any stored information. The problem was that the customer didn’t know about the drop-dead code. Under those circumstances, the court found that it would be “unconscionable” to allow the software developer to hold the licensee ransom, essentially using self-help to shut down the business until the developer was paid. The court noted:

Public policy favors the non-enforcement of abhorrent contracts. Here, without the knowledge of Plaintiff, Defendants have included a surprise in their product which chills the functioning of any business whose operation is a slave to the computer. If the Plaintiff had known about this device at the time it entered into the contract with the Defendant then the result would be different. Here it would be unconscionable for the Court to give credence to this economic duress.

However, it wasn’t clear whether the sole problem in that case was the fact that the “drop-dead” software was not disclosed or that the developer, by using the undisclosed code, was holding the licensee hostage.


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