ISVs May Have More Power Over Retailers Than Anyone Suspected

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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, 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.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.