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ISVs May Have More Power Over Retailers Than Anyone Suspected

January 24th, 2013

In 1991, in American Computer Trust Leasing v. Jack Farrell Implement Co.—763 F. Supp. 1473 (D. Minn. 1991)—the software developer, in a dispute over payment for the software, remotely deactivated the software. The contract provided that the developer, who owned the software, could remotely access the licensee’s computer to service the software and that if the licensee defaulted, the agreement was cancelled. When the licensee didn’t pay, the developer told the company it was going to deactivate the program—which it promptly did. The licensee’s lawsuit for damages failed because, the court noted, the deactivation was “merely an exercise of [the developer’s] rights under the software license agreement.” This was true even though the agreement did not specifically state that self-help was a proposed remedy.

There were many other cases in the late 1980s and early 1990s involving software developers either putting drop-dead code in their products or remotely disabling code when they thought the other party was in breach. Thus, a Dallas medical device software developer was sued in 1989 (the case was settled) for using a phone line to deactivate software that compiled patients’ lab results. In 1990, during a dispute about the performance of a piece of code, the developer simply logged in and removed the code, until the licensee released the developer from any liability. The licensee claimed that the general release was signed under duress, because he was being held economic hostage. This case was Art Stone Theatrical Corp. v. Technical Programming & Support Systems Inc.—549 N.Y.S.2d 789 (App. Div. 1990).

In another widely reported case, a small software developer, Logisticon Inc., installed malware within software delivered to cosmetic company Revlon that paralyzed Revlon’s shipping operations for three days (losses were about $20 million) when the developer claimed that Revlon breached the contract. Logisticon simply claimed this was an “electronic repossession.” The case was settled out of court.

In the 1991, the case of Clayton X-Ray Co. v. Professional Systems Corp.—812 S.W.2d 565 (Mo. Ct. App. 1991)—a company likewise involved in a payment dispute, logged into the licensee’s computer and disabled the software they owned. When the licensee tried to log on to see its files, the only thing visible was a copy of the unpaid bill. A jury awarded the licensee damages, partly because the existence of the logic bomb was not disclosed.

Finally, in Werner, Zaroff, Slotnick, Stern & Askenazy v. Lewis—588 N.Y.S.2d 960 (Civ. Ct. 1992)—a law firm contracted with a company to develop billing and insurance software. When the software reached a certain number of bills (and when the developer decided it had not been paid) it shut down, disabling access to the law firm’s files. The law firm successfully sued, receiving punitive damages.

So what is the lesson from all these cases? First, if you exercise “self-help” without telling the purchaser, you may open yourself up to damages. Does the Microsoft EULA adequately tell you what will happen if you don’t activate the product or if you can’t establish that it is genuine? Well, not exactly. It does tell you that some parts of the product won’t work; but it also ambiguously says the product itself won’t work. Moreover, it allows Microsoft—through fine print in a generally unread and non-negotiable agreement—to create an opportunity for economic extortion. Remember, all the cases from the 1980s and 1990s involved sophisticated parties (on both sides) who negotiated individual license agreements not mass market software.

If you disagree with me, I’ll see you in court, buddy. If you agree with me, however, I would love to hear from you.


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