Software Products: As Goods for Sale Or a License?

A sale contract in a supplier’s order form involves a software program to be delivered or shipped in compact disc (CD-ROM) for a stated price, payable during the transaction, and with a perpetual subscription term to an end user.

Is the software program, arguably a licensing agreement, “goods” under the California Commercial Code? Is software sold or licensed? Section 2105(1) thereof defines “goods” as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other then money in which the price is to be paid, investment securities (Division 8) and things in action.”

In SoftMan Products Company, LLC v. Adobe Systems Inc., 171 F. Supp. 2d 1075 (C.D. Cal.2001) the Central California District Court noted that “a number of courts have held that the sale of software is the sale of a good within the meaning of Uniform Commercial Code.”

License Not Sale Of Software:

In Adobe System Inc. v. Stargate Software Inc., 216 S. Supp, 2d 105 (N.D Cal, 2002), the Northern California (San Jose) declined to adopt the Softman analysis of the Central California (Los Angeles) District Court, and reached a different conclusion.

It concluded that “based on the clear and unambiguous language of the relevant contracts (Off or On Campus Educational Reseller Agreement [“OCRA”] and End User License Agreement [“EULA,”] coupled with the multiple restrictions on title placed on the seller (Stargate Software Inc.) in the above agreements, the transaction should be characterized as a license, rather than a sale.”

Indeed, the preamble of the “EULA” states that “Adobe grants to you a non-exclusive license to use the Software and Documentation, provided that you agree to the following.” And paragraph 2 of the “EULA” states that “the software is owned by Adobe and its suppliers.”

The San Jose Court, in Stargate Software Inc. supra, adopted its own analysis in Adobe Systems, Inc. v. One Stop Micro, 84 F. Supp. 2d 1086, 1092 ( N.D. Cal 2000) to wit: ” due to the substantially similar nature and terms of the EULA in both cases,” which only granted the end user with “a license to use the software” and maintained “numerous restrictions on title with respect to the end user.”

A license is not a “good” that can be sold under the California Commercial Code.

Sale Not License Of Software:

In the Softman case, supra, the Central District of California Court in Los Angeles arrived at a different conclusion, although Adobe also argued therein that “the ‘EULA’ requires construction of the transaction as a license rather than a sale.”

The Los Angeles Court found that Softmanwas not bound by the “EULA” because there was no assent to its terms. The “EULA” agreement was not enclosed with the individual Adobe software disk, and consumers were asked to agree to its terms as part of the installation process. But Softman, a Los Angeles-based company that distributed computer software products primarily through its website, had not attempted to load the software that it sold.

Citing a number of courts, the Los Angeles Court referred to the characterization of Adobe’s “EULA” as “shrinkwrap” licenses that are invalid, unconscionable, and/or unacceptable contracts of adhesion that require express assent by the purchaser to be valid, under Uniform Commercial Code § 2-207.

But it declined to reach the question of the general validity of “shrinkwrap” licenses because Softman was not bound by the “EULA” since there was no assent to its terms.

It however concluded “that the circumstances surrounding the transaction strongly suggest that the transaction is in fact a sale rather than a license.” It further listed the “indicia” of a sale of goods rather a license, to wit: “The purchaser commonly obtains a single copy of the software, with documentation, for a single price, which the purchase pays at the time of the transaction, and which constitutes the entire payment for the ‘license,’ (and) the license runs for an indefinite term without provisions for a renewal.”

Restrictions On Title vs. Substance of Transaction:

SoftMan Products Company was a distributor of computer software products as well as Stargate Software Inc. Both were not end users governed by “EULA,” but rather resellers governed by “OCRA.”

One of the contentions of Adobe in Stargate, supra, was that it retained ownership of its software, the acompanying documentation, and all other related materials pursuant to the “OCRA.”

But Startgate argued that language in Adobe’s “OCRA” contained word such as “owned by reseller” and ” repurchase” by Adobe. Still, the San Jose Court in “Stargate, supra, concluded that “additional languages indicated that the ‘OCRA’ only confers a license.”

Thus, the San Jose Court in the Silicon Valley, in Stargate, supra, favored Adobe, a leading software development and publishing company, over Stargate, a discount software distributor, by focusing its analysis on restrictions on title that limit the reseller’s ability to distribute Adobe’s software.

On the other hand, the Los Angeles Court far from the Silicon Valley in “Softman supra, favored SoftMan, a Los Angeles-based computer software distribution company, over Adobe, by focusing its analysis on the substance of the transaction, the above-stated indicia of sale of goods.

Commentators like Prof. Raymond Nimmer, The Law of Computer Technology (1992), and David A. Rice, Licensing the Use of Computer Program Copies and the Copyright Act First Sale Doctrine, 30 Jurimetrics J. 157 (1990) have urged courts to look at the substance rather than the form of licensing agreements.

As Prof. Nimmer has written: “The pertinent issue is whether, as in a lease, the user may be required to return the copy to the vendor after the expiration of a particular period. If not, the transaction conveyed not only possession, but also transferred ownership of the copy.”

Conclusion:

A sale of goods or a license? The two conflicting analyses discussed above are irreconcilable, whether the buyer is a reseller or end user. For the buyers, software products are more advantageously characterized as “goods,” rater than as license.

Vice-versa for the software developer.

Territorial jurisdiction may to have influenced the above-stated courts in their analyses and decisions.