THE COMPUTER LAW SECURITY REPORT 2 CLSR

before the contract comes into being. On some documents you will see the following type of clause: 'Before you open this package, carefully read the following legal agreement regarding your use of the enclosed product. Opening this package indicates that you accept this agreement and will abide by it. If you do not agree with what is says, return the package unopened and your money will be refunded: There are two ways in law to view this clause. The first is that since you will probably already have become the owner of the product before you see this additional material, the contents of that proposed agreement cannot bind you since you have not been given the opportunity either to accept or reject those terms before ownership passed. There is a general rule that you are only bound by terms of which you have notice before the contract is made. Thus, when you buy a program through the post, you become the owner of the medium upon which the software is stored, whether disc or cassette, as soon as the program is taken off the shelf for packaging prior to despatch to you. The timing of the communication of the additional terms is crucial. If you do not become aware of the terms until after ownership of the disc or cassette has passed, those terms cannot bind you. The second view would be that the subsequent document represents a separate agreement and that, by an express term, the acceptance is to be by performance only and not by communication. This is a rule which applies in situations involving unilateral contracts, eg, an offer to pay a reward for anyone identifying a person unlawfully copying copyright software or documentation. It would not be necessary for you to notify the offeror that you were about to investigate where certain items of software had come from with a view to claiming the reward. Simply sending in the desired information constitutes acceptance. This rule is, however, somewhat limited in its application and is not likely to apply in this situation. However, once you have notice of these terms, any subsequent purchase of software will be taken to be subject to the rules in that supplementary document ie. those terms become incorporated into the contract by continuing to deal with the firm, knowing that additional terms are always imposed. Should those terms subsequently be varied without express notice being given to you in advance, you will have one purchase in hand before they will apply to you. There is a fundamental rule which states that you are presumed to read each and every term of the agreement. If you do not bother to do so, and thus fail to notice something prejudicial to your interests, the court is not sympathetically inclined towards you.

David Marshall, Correspondent. Author Best Terms: A Guide to Software Acquisition where this article first appeared.

o0o

Atwater 1986 Conference on THE WORLD INFORMATION ECONOMY: RISKS AND OPPORTUNITIES 4-7 November, 1986. Montreal, Quebec, Canada Organisers: International Institute for Information and Communications

Objectives of conference This conference will be the first major event of its kind. It will follow the initiation of the next GATT round of trade negotiations in September. By focussing on conflicts inherent in the current world information environment, it will aim at the

reduction of obstacles to trade in/transfer of information-based services. Representatives of industry, national governments and international organisations will address substantive issues such as disincentives to trade, data fraud, the absence of an appropriate dispute resolution process, and the need for an independent international forum. The conference will aim at the harmonisation of the various legitimate concerns and interests in the world information economy, eg., users' need for flexibility and freedom and individual and national concerns regarding privacy and sovereignty.

Participants Participants will include high-level representatives of major users, major suppliers, national governments and international organisations, Five keynote speakers at the ministerial and corporate chief executive officer level will be featured. Simultaneous translation from English to French and French to English will be provided.

Details from: ATWATER Institute, 3940 Cote des Neiges, Suite D-3 Montreal, Quebec, CANADA H3H lW2 Telephone: (514) 931-2319

S O F T W A R E L I C E N S I N G A N D L E A S I N G

Until comparatively recently, the financing of computer procurement by leasing arrangements was confined to the hardware. As the gap between hardware and software costs has narrowed, more users are requiring finance to pay software licence fees, particularly if the bulk of the fee is an 'up front' payment. Consequently when arranging lease finance for equipment purchase, it will be extended to cover also the initial cost of the software. The arrangement is to the benefit of the user, who is able to spread his costs over a period of time, and to the supplier, who receives his money up-front and without any drawn out period of credit. But to some extent, in providing finance for the software, the lessor takes a risk. The leasing company will of course acquire title in the equipment, but acquires no rights whatsoever in the software. The lessor pays the licence fees, but it is usually the lessee who acquires the right to use the software. If the leasing agreement runs its term, then this relationship does not present any problem, the lessor will recover its investment. If for any reason, the lessee defaults on his lease payments however, the lessor may wish to recover its investment by proceeding against the lessee for the remainder of the payments due. The lessee has probably stopped paying because of problems with the software. A three-cornered dispute can develop with the software supplier and the customer arguing over responsibilities and liabilities, and the lessor caught up in the middle.

Insolvency If the lessee defaults on grounds of insolvency, the lessor faces a different sort of problem. If it wants to sell or re-lease the equipment to a third party, the attraction of the deal may lie in being able to supply the software as well in the form of a total system. It is at this stage that the lessor finds out that he has no rights to grant a software licence to a prospective purchaser nor to assign the existing licence. It is likely that the original licence between the supplier and the user would provide for a termination of the licence on grounds of insolvency with all copies of the software being returned to the supplier. The lessor is therefore dependent upon the supplier's being willing to grant a new licence which will of course be at a fee. One way of getting round this would be for the leasing

JULY - AUGUST THE COMPUTER LAW AND SECURITY REPORf

company to enter into an agreement with the software supplier whereby the leasing company acquires a licence to use the software along with the right to grant sub-licences to lessees, and in the event of a licensee's insolvency to grant a new sub- licence to a subsequent purchaser. There is however at the time of writing, some question as to whether such an arrangement is workable under certain provisions of the Consumer Credit Act 1974, in respect of 'regulated hire- agreements' (i.e. sales to non-corporate customers with a value of less than £15,000). It has been suggested that such a sub-licence might be regarded as altering the terms of the lease agreement. Another option involves drawing a distinction between the intellectual property rights in the software and the media on which the software is stored. In this way the lessor would pay for and acquire title in the discs or tapes whilst the right to use the software would be the subject of a separate leasing agreement between the software supplier and the lessee. To obtain full financial value from such an arrangement though, there would have to be an artificial 'weighting' of the price of the media. In summary therefore, special arrangements will need to be made for the licensing of software in a leasing transaction. The lessee will need to examine both the lease agreement and the software licence to see from whom the licence is obtained and what sort of warranties are given. The lessor will need to ensure that it has the right to re-license the software in the event of licensee's default and thus protect its investment, and the software supplier wilt wish to structure the transaction so as to maximise its licence fee income.

David Greaves

o0o - -

W H E N A S O F T W A R E L I C E N S O R FILES FOR B A N K R U P T C Y T H E L I C E N S E E MAY LOSE R I G H T S When signing a license agreement, most users assume that their right to use the software will be unimpaired as long as the appropriate fee is paid. But what if the vendor files for bankruptcy? In a recent case, a vendor's filing for bankruptcy resulted in the user losing the right to use the technology it has licensed. Although the decision, Lubrizo/Enterprises, Inc. v. Richmond Meta/Finishers, /nc., 756 F.2d 1043 (4th Cir. 1985), did not involve computer programs, the legal principles involved are applicable to the licensing of software. In July 1982, Richmond Metal Finishers, Inc. (RMF) and Lubrizol Enterprises, Inc. (Lubrizol) entered into an agreement under which RMF was to license a metal coating processing technology to Lubrizol. According to the license agreement, RMF owed certain duties to Lubrizol. It has to: (1) notify Lubrizol of any patent infringement suit and to defend in such suit; (2) notify Lubrizol of any other use or licensing of the process, and to reduce royalty payments if a lower royalty agreement was reached with another licensee; and (3) indemnify Lubrizol for losses arising out of any misrepresentation or breach of warranty by RMF. Lubrizol, for its part, was required to: (1) account and pay royalties for use of the process; (2) cancel certain existing indebtedness; and (3) deliver written quarterly sales reports and keep books of account, subject to inspection by an independent certified public accountant. The licensing agreement prevented Lubrizol from using RMF's technology until May 1, 1983. RMF filed its bankruptcy petition before that date, however.

Executory contract found In an effort to survive the bankruptcy, RMF attempted to reject the license agreement with Lubrizol as an executory contract under Sec. 365(a) of the Bankruptcy Code. That section permits a trustee in bankruptcy to reject an executory contract, which is one in which performance remains due on both sides. A rejection of the contract would permit RMF to sell or license its technology uninhibited by the restrictive provisions of the Lubrizol license agreement. The Bankruptcy Court held that the license agreement was executory and rejected it. The District Court then reversed the Bankruptcy Court and disallowed the rejection. An appeal to the Fourth Circuit followed, which reversed the District Court and held that RMF should be allowed to reject its technology licensing agreement with Lubrizol as executory. In deciding whether the license agreement was executory, the Court of Appeals applied the often cited test formulated by Professor Countryman: "A contract is executory if the obligation of both bankrupt and the other party to the contract are so far unperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other." The court noted, however, that a contract is not executory as to a party simply because the party is obliged to make money payments to the other party. Nevertheless, the court found unperformed obligations on the part of both Lubrizol and RMF that went beyond the mere promise to pay money. The court then concluded that the contract was executory as to both parties. In addressing the further issue of whether rejection of the executory licensing contract would be advantageous to the bankrupt, the Court relied on the uncontested testimony of RMF's President. The court concluded that four factors favoured the rejection of the RMF-Lubrizol contract: (1) the metal coating process (the technology) was RMF's principal asset; (2) the technology represented the primary potential source of funds by which RMF might emerge from bankruptcy; (3) the sale or further licensing of the technology would be facilitated by rejecting the contract; and (4) RMF's continuous obligation to Lubrizol under the agreement would hinder its ability to sell or license its technology to other potential licensees on more advantageous terms. Applying the sound business judgement rule to the facts, the court held that rejection of the license agreement would be advantageous to RMF. The court went on to note, however, that the rejection of Lubrizol's agreement with RMF did not deprive it of all its rights, since Sec. 365(g) of the Bankruptcy Code allowed Lubrizol to treat the rejection as a breach and seek money damages from RME But Lubrizol could not obtain the remedy of specific performance of the contract said the court, because that would contradict the legislative intent of Sec. 365(g).

Protection for software users Keeping the lessons of Lubrizol in mind, what can a user do to minimise the risk of losing its licensed rights to use software? The best way is for the user to enter separate agreements for each commercially different relationship with the vendor. For example, the computer program maintenance agreement should be separate and distinct from the license agreement. Likewise, if the user will be sublicensing the licensed computer programs to others, it should consider negotiating a distribution agreement with the vendor, separate from the license agreement, granting it the right to sublicense. Some vendors tend to group several agreements (e.g., the license, maintenance, and source code escrow agreements) into a "master agreement." While this may save time at the