ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Wednesday, January 16, 2013

Teaching Sales, Issue 2: When Is Software a Good and What of the Cloud?

This is the second in a series of posts on issues that arise in a Sales course.  

SoftwareAs Holly K. Towle lays it out in, Enough Already: It Is Time to Acknowledge that UCC Article 2 Does not Apply to Software and Other Information, 52 S. Tex. L. Rev. 531 (2011), many courts simply apply Article 2 to software licenses without much consideration of the law of licenses  Others apply the law of licenses, which she thinks is appropriate.  Her approach makes sense when we're talking about mass-marketed software provided to consumers through licenses.  In fact, courts ought to take notice of the fact that all U.S. jursdictions have now clarified the status of software as a "general intangible" and not a good through the revisions to UCC Article 9 adopted in all fifty states.  

But what of custom-made software that may not be licensed but sold to the client who will be its exclusive user?  My impression from the limited caselaw I have reviewed on the subject suggests that courts recognized early on that software consists of both tangible and intangible elements.  They seem to have assumed that the intangible elements (the services provided in developing software, for example) could be easily separated from the tangible elements (the disks, drives or hardware associated with the delivery of the software).  On this line of reasoning, only the latter are goods.  That distinction strikes me as artificial.  Unless the deal involves a lot of hardware, the cost of the "goods" is trivial compared to the costs of software development, and in fact, with digital downloads and cloud computing, there may not be a good at issue at all.  That is, my office used to be cluttered with the boxes that held the disks on which my software came to me.  I may have naively thought of software as a good then because those boxes made software look like a good.  Now, my software either comes pre-loaded or I download it without the aid of a disk or external drive.   Now it looks much less good-like, but of course, how it looks should not matter.

Towle draws on IP law to argue that software is really "information" and information ought to be treated differently from tangible goods.  I'm not sure I understand why that distinction matters if we are dealing with a sale rather than a license.  A lot of things that we consider goods are really just information, in the sense that Towle uses it.  Books are just information, but a sale of books is a sale of goods (although she is correct that you cannot return a lousy novel based on a breach of the implied warranty of merchantability).  There are lots of other items that we buy about which is could be said that the costs of development constitute a large part of the costs of the good, but the UCC does not ask about cost breakdowns; it just asks if the subject of the transaction is moveable at the time that it is identified to the contract.  Electricity has been held to be a good because it moves.  So does information.  More particularly, custom-made software, White & Summers point out, does not really seem much different from any other specially-manufactured good, which the UCC treats as a good for the purposes of Article 2.  

I recommend Towle's article.  She has persuaded me that courts err in trying to apply Article 2 to software licensing transactions, but when it comes to custom-designed software that is actually sold, rather than licensed, to the end user, I think a strong case can be made for applying Article 2.  

I do not know if the software design companies agree to flat out sell the software they develop.  It might be safer for them to license it so that they can re-use the code for other businesses that might need similar software designed for their specific needs.  If that's the way these deals are done, it follows from Towle's reasoning that licensing law, rather than Article 2 should apply to those transactions as well.


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I've been a software licensing guy for a long time and I can count the number of custom software "sales" on one hand.

What really happens in most transactions where the developer is creating custom code is that the buyer receives a perpetual license to the code. And if the development of the code is going to be fully funded by a single buyer, that buyer typically negotiates an exclusivity provision (or a royalty return). As you surmise, the developer wants to ultimately retain ownership of the code if for no other reason that the individual components of developed code can be recycled into other potential projects and they don't want to have to reinvent the wheel.

This can also be of significant benefit to the buyer (licensee) as well, especially if they have successfully negotiated strong IP Indemnification language.

In addition, most of the software licenses I've ever worked have an explicit UCC disclaimer to prevent its application to the deal - so even if we subsequently do own any of the code, the UCC still wouldn't apply.

Posted by: Jeff Gordon | Jan 16, 2013 7:41:14 PM

And let's not forget the Principles of the Law of Software Contracts. The Tulane Law Review published a symposium issue in 2010 that discussed the Principles and the issues that you raise in your post (and related issues).

Posted by: Nancy Kim | Jan 17, 2013 1:42:32 PM

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