Technology vendors must be proactive in dealing with COVID-19 problems

Early action now on possible performance issues will “flatten the curve” of customer problems in the coming weeks and months. 

Here are three things technology and software vendors can do right now to get ahead of problems that may appear (if they are not already) with services such as development, implementation and support:

  • Check your contracts to see whether there are any “material assumptions” that have failed or will fail – perhaps because of some governmental action or unavailability of personnel.
  • Consider whether a change order would be appropriate to redefine the scope of services, timing for performance, or the fees to be charged.
  • See if any delay in your performance is excused on the basis of force majeure. If so, do you need to give notice to your customer that you are claiming force majeure?

Learn from IBM: Do what is required when there are failures of material assumptions.

In 2006, the State of Indiana signed a $1.3 billion contract with IBM to revamp the technology of the State’s welfare system. The economy went south in 2008. In the complicated breach of contract litigation that followed, IBM argued, among other things, that the economic downturn resulted in the failure of one of the material assumptions of the agreement. IBM urged the court to consider that failure of assumption when deciding whether IBM had materially breached its contract to develop and deploy the system.

The Indiana supreme court rejected IBM’s arguments. Why? Not because the economic downturn was not a failure of a material assumption. (It might have been.) Indeed, the contract specifically said that one of the parties’ material assumptions was that the economy would not take a downturn. But IBM did not do what the contract required in light of the downturn – it did not submit a change order request in response to the failure of the assumption, as the contract required.

Change orders anyway?

Even if your contract does not contain material assumptions, it may contain a procedure for procuring change orders. Parties include change order provisions so that they have an organized pathway for making changes to the scope, timing or pricing when circumstances – whether dramatic or trivial – change while the contract is being performed. Vendors should consider whether a simple change to the parties’ obligations can be made now to reduce bigger problems later. It is better for a ship to correct its course early in the journey rather than after many weary days at sea.

And from a practical, customer-focused perspective, the discussions around possible change orders gives a vendor the opportunity to communicate with its customer. This gives the vendor the chance to assure the customer that services are safe in the long run, and can work to build trust and goodwill that will be key in the further development and collaboration that is going to happen in the technology space once this COVID-19 episode has come to a close. 

Force majeure notice – it is critically important

In the litigation against the state of Indiana, IBM also claimed that severe flooding in the state in 2008 was a force majeure event that excused IBM’s performance. Again, as with the argument for failure of material assumption, IBM did not do what it was required to do under the terms of the contract to avail itself of this excuse in performance.

The court found that force majeure did not apply because IBM did not give appropriate notice as required under the agreement. This highlights a critical takeaway – if a vendor sees an upcoming need to claim that it cannot perform due to some circumstance arising from causes outside its control, it is better to place the customer on notice of that fact sooner rather than later.   

So, here are the key questions to ask right now:

  • Has a material assumption failed? If so, what must I do?
  • Would a request for change order be appropriate?
  • What do I need to do before claiming force majeure?

Being proactive now, in the early stages of the COVID-19 crisis, will – just as in the epidemiological context – flatten the curve of problems later.

State of Indiana v. IBM Corp., 51 N.E.3d 150 (Ind. 2016)

Breaking a contract because of COVID-19 – force majeure and other issues

Changing market and other economic situations will no doubt put many parties in the situation of not being able to perform under the contracts they’ve entered into. Below is a brief video outlining the doctrines of:

  • force majeure
  • frustration of purpose
  • impossibility

During this lockdown I hope to generate more content like this. Please like and subscribe! Thanks. 

Software development breach of contract lawsuit moves forward

Plaintiff sued defendant software developer for breach of contract and other claims, asserting that defendant failed to develop and deliver a video editing application on time and within budget. Defendant moved to dismiss the case, arguing that plaintiff had failed to state a claim upon which relief may be granted. The court denied the motion to dismiss the breach of contract claim, allowing that claim to move forward.

The court found that plaintiff had successfully pled a breach of contract claim under Texas law. Defendant had argued that the parties agreed to benchmark the developed software’s performance in comparison to “recreational” software, but that plaintiff later demanded the software be benchmarked against professional grade software. Plaintiff responded that it had asked defendant to benchmark the program’s speed to iMovie, which it characterized as recreational and not professional.

The court looked past this benchmarking aspect and found that even in light of the apparent disagreement on the standard, the allegations in the complaint – that defendant had not provided a viable product under the agreement – were sufficient to support a breach of contract claim.

Polar Pro Filters, Inc. v Frogslayer LLC, 2019 WL 5400934 (S.D. Texas, October 22, 2019)

Browsewrap enforceable: hyperlinked terms on defendant’s website gave reasonable notice

Plaintiff was bound by forum selection clause found in online terms and conditions. 

Plaintiff sued TripAdvisor and some related defendants (including Viator, a company that TripAdvisor acquired) for a number of torts arising from an ATV accident that plaintiff had while on a tour in Mexico that she had booked online through defendants’ website. Defendants moved to dismiss, or in the alternative, to transfer the matter to federal court in Massachusetts based on the forum selection clause found in the Terms and Conditions that plaintiff agreed to when she booked the tour. The court granted the motion to transfer. 

To purchase the tour, plaintiff was required to click on a “Book Now” icon, directly under which the following message was located: “[b]y clicking Book Now and making a reservation, I acknowledge that I have read and agree to be bound by Viator’s Terms and Conditions and Privacy Statement.” The phrase “Viator’s Terms and Conditions” appeared in blue underlined text, in the form of a hyperlink, which directed the consumer to the website’s Terms and Conditions.

Viator’s Terms and Conditions included a forum selection clause, which, in relevant part, provided:

[T]his agreement is governed by the laws of the Commonwealth of Massachusetts, USA. You hereby consent to the exclusive jurisdiction and venue of courts in Boston, Massachusetts, USA and stipulate to the fairness and convenience of proceedings in such courts for all disputes arising out of or relating to the use of this Website. You agree that all claims you may have against Viator, Inc. arising from or relating to this Website must be heard and resolved in a court of competent subject matter jurisdiction located in Boston, Massachusetts.

The court found that plaintiff had agreed to the forum selection clause, and that the clause was enforceable. In determining whether plaintiff was bound by the clause, the court was guided by “fundamental precepts of contract law.” More specifically, under New Jersey law, “[a] contract term is generally binding if the contract has been mutually agreed upon by the parties, is supported by valid consideration, and does not violate codified standards or offend public policy.” W. Caldwell v. Caldwell, 26 N.J. 9, 24-26 (1958).

Plaintiff had argued that the Terms and Conditions amounted to an invalid browsewrap agreement, because she neither received reasonable notice of their existence, nor provided an unambiguous manifestation of assent. Primarily relying upon Specht v. Netscape, plaintiff argued that she was not bound by the Terms and Conditions, because Viator’s website was designed so that a user can use its services without affirmatively assenting to the web page’s terms of use. According to plaintiff, she was ultimately permitted to purchase the ATV tour without ever being asked to check a box or click an “I Agree” button, or even acknowledge that the Terms existed. Without proper notice, plaintiff maintained that enforcing the forum selection was not appropriate. 

The court disagreed. It found that the hyperlinked terms on defendant’s website adhered to the requirements of reasonable notice. Regardless of whether plaintiff was required to scroll through the Check Out page, the hyperlinked Terms and Conditions were conspicuously placed directly underneath the “Book Now” icon. Based on its location, therefore, the court found that the hyperlink was not hidden in an area of the screen that plaintiff was unlikely to notice, but, instead, was clearly displayed in a section of the webpage that she needed to review in order to effectuate her purchase of the ATV tour. Stated differently, the hyperlink was placed within the immediate proximity of an icon that plaintiff was required to click, for the purpose of confirming her purchase on defendant’s website. 

Mucciariello v. Viator, Inc., No. 18-14444, 2019 WL 4727896, D.N.J. (September 27, 2019)

About the Author: Evan Brown is a Chicago technology and intellectual property attorney. Call Evan at (630) 362-7237, send email to ebrown [at] internetcases.com, or follow him on Twitter @internetcases. Read Evan’s other blog, UDRP Tracker, for information about domain name disputes.

Court will not aid company that was banned from accessing Facebook API

Facebook’s ability to decisively police the integrity of its platforms was without question a pressing public interest.

Plaintiffs provided software-as-a-service to help their clients locate social media content, gain approval to use that content, and then re-purpose it in the clients’ own advertising and marketing activities.

Previously, plaintiffs had operated in partnership with Facebook, whereby plaintiffs had access to the Facebook Open Graph API. In late August 2019 (a few weeks after a Business Insider article identified plaintiffs as misusing the Instagram platform) Facebook terminated the marketing partnership and access to the API.

After efforts to informally resolve the situation failed, plaintiffs, perhaps emboldened by the Ninth Circuit’s recent decision in hiQ v. LinkedIn, sued Facebook and Instagram asserting a number of claims, including breach of contract and tortious interference, and also sought a declaratory judgment that plaintiffs did not violate the Computer Fraud and Abuse Act. Plaintiffs sought a temporary restraining order that would have restored access to the platforms pending the case’s determination on the merits. But the court denied the motion. 

No irreparable harm likely

The court rejected plaintiffs’ argument that they would suffer irreparable harm if access was not restored. It found that plaintiffs’ allegations of imminent harms shared a common fatal flaw in that they merely alleged speculative harm – they did not sufficiently demonstrate that irreparable harm was likely to occur.

Plaintiffs did establish for purposes of this motion that much (though not all) of the work they conducted for clients before losing API access involved Facebook. But the court found that plaintiffs had not sufficiently shown that they would actually lose current customers, or fail to acquire new prospective customers, if access were not restored. 

Further, the court found that plaintiffs’ CEO’s statement that “this will soon reach a tipping point where [plaintiffs] can no longer operate” was not specific enough to demonstrate there was irreparable harm. “The extraordinary relief of a pre-adjudicatory injunction demands more precision with respect to when irreparable harm will occur than ‘soon.’ Such vague statements are insufficient evidence to show a threat of extinction.”

Not in the public’s interest

The court also found that the “public’s interest caution[ed] against issuing injunctive relief at this time.” 

Plaintiffs argued that the public interest favored an injunction because one would prevent the imminent destruction of plaintiffs’ business, preserve employee jobs, and generally allow plaintiffs to continue operating. Additionally, they argued that the public interest would be served by enjoining defendants’ wrongful conduct.

Defendants argued that the public had an interest in allowing Facebook to exclude those who act impermissibly on its platform and jeopardize user privacy by, in this instance, automating data collection and scraping content en masse. Defendants argued that the public has an interest in allowing them latitude to enforce rules preventing abuse of their platforms.

The court decided that awarding injunctive relief at this stage would compel Facebook to permit a suspected abuser of its platform and its users’ privacy to continue to access its platform and users’ data for weeks longer, until a preliminary injunction motion could be resolved. Moreover, as precedent within Facebook’s policy-setting organization and potentially with other courts, issuing an injunction at this stage could handicap Facebook’s ability to decisively police its social-media platforms in the first instance. Facebook’s enforcement activities would be compromised if judicial review were expected to precede rather than follow its enforcement actions.

And although the public certainly has some interest in avoiding the dissolution of companies and the accompanying loss of employment, the court found that Facebook’s ability to decisively police the integrity of its platforms was without question a pressing public interest. In particular, the court noted, the public has a strong interest in the integrity of Facebook’s platforms, policing of those platforms for abuses, and protection of users’ privacy.

Stackla, Inc. v. Facebook Inc., No. 19-5849, 2019 WL 4738288 (N.D. Cal., September 27, 2019)

Web design feature killed express license argument in copyright case

Plaintiff sued defendant for copyright infringement over unlicensed use of plaintiff’s musical works in advertisements that defendant created and uploaded to YouTube. Defendant argued that the language and structure of plaintiff’s website – from which the works were downloaded – resulted in an express license or at least an implied license to use the musical works for commercial purposes. The court rejected these arguments and awarded summary judgment to plaintiff. 

No express license

The basis for defendant’s argument that plaintiff’s website gave rise to an express license is not clear. In any event, plaintiff argued that a browsewrap agreement in place on the website established that the works could not be used for commercial purposes without the payment of a license fee. Citing to the well-known browsewrap case of Specht v. Netscape, 306 F.3d 17 (2d Cir. 2002), defendant argued that it did not have notice of the terms and conditions of the browsewrap agreement.

The court distinguished this case from Specht. In this case, plaintiff’s home page contained – similar to the case of Major v. McCallister, 302 S.W.3d 227 (Mo. Ct. App. 2009) – “immediately visible” hyperlinks that referenced terms of use and licensing information. A user did not have to scroll to find these links. So the terms and conditions of the browsewrap agreement were enforceable. Since the browsewrap agreement contained provisions requiring a license for commercial use, no reasonable jury could find that plaintiff had granted defendant an express license to use the musical works for commercial purposes free of charge. 

No implied license

Defendant argued in the alternative that plaintiff had granted defendant an implied license to use the musical works, based on (1) plaintiff’s company name “Freeplay,” and (2) the absence of any conspicuous warning that the works were not available for commercial use. 

The court found these arguments to be “easily disposed of.” Citing to I.A.E., Inc. v. Shaver, 74 F.3d 768 (7th Cir. 1996), the court noted that an implied license exists only when: 

  • a person (the licensee) requests the creation of a work,
  • the creator (the licensor) makes that particular work and delivers it to the licensee who requested it, and 
  • the licensor intends that the licensee-requestor copy and distribute his work.

The court found that defendant failed to prove any of these elements. Defendant never asked plaintiff to create any works. Nor did plaintiff make any works at defendant’s request to be used in defendant’s YouTube videos. Moreover, given plaintiff’s paid license requirements for business use of the copyrighted works available on its website, it could not be said that plaintiff intended that defendant download and distribute those works free of charge. Accordingly, the court found that no implied license existed.

Freeplay Music, LLC v. Dave Arbogast Buick-GMC, Inc., No. 17-42, 2019 WL 4647305 (S.D. Ohio, September 24, 2019)

About the Author: Evan Brown is a Chicago technology and intellectual property attorney. Call Evan at (630) 362-7237, send email to ebrown [at] internetcases.com, or follow him on Twitter @internetcases. Read Evan’s other blog, UDRP Tracker, for information about domain name disputes.

Sony’s EULA did not protect it from liability under CFAA and for trespass to chattel

Plaintiff filed a class action lawsuit against Sony after Sony issued a software update that bricked plaintiff’s Sony Dash. Sony moved to dismiss for failure to state a claim. The court granted the motion on a number of claims but allowed the Computer Fraud and Abuse Act (CFAA) and trespass to chattel claims to move forward.

CFAA Claim

Sony had argued that the CFAA claim should fail because plaintiff had not alleged the software update was “without authorization,” given the language of the end user license agreement, which read:

From time to time, Sony … may automatically update or otherwise modify the Software, for example, but not limited to for purposes of error correction, improvement of features, and enhancement of security features. Such updates or modifications may change or delete the nature of features or other aspects of the Software, including but not limited to features you may rely upon. You hereby agree that such updates and modifications may occur at Sony’s sole discretion, and that Sony may condition continued use of the Software upon your complete installation or acceptance of such updates or modifications.

Specifically, Sony argued that the EULA authorized Sony to “modify” the software at any time, and warned that such modifications may change or delete the nature of features or other aspects of the software, including features the consumer may rely upon. A court addressed a similar argument in In re Apple, 596 F.Supp.2d 1288 (N.D. Cal. 2008). In that case, Apple, as defendant, relied on the following language to argue that it acted “with authorization” for purposes of the CFAA when bricking iPhones that had been unlocked to access third-party applications:

IF YOU HAVE MODIFIED YOUR IPHONE’S SOFTWARE, APPLYING THIS SOFTWARE UPDATE MAY RESULT IN YOUR IPHONE BECOMING PERMANENTLY INOPERABLE

In that case, the court concluded that usage of the term “may” (as in “may result” in damage) created too much ambiguity surrounding Apple’s warning and found plaintiff’s allegations as to its CFAA claim sufficient to defeat Apple’s motion to dismiss.

Here, Sony had used the same ambiguous “may” (as in “may change or delete the nature of features”) and even more uncertain language than in In re Apple. Unlike in In re Apple, Sony did not explicitly warn that a subsequent software update could render the Dash “permanently inoperable.” The EULA did not say that Sony could delete all features. Instead, it vaguely warned consumers that Sony “may change or delete the nature of features” that a consumer “may rely upon.” This sentence was also prefaced by the following: “From time to time, Sony … may automatically update or otherwise modify the Software, for example, but not limited to for purposes of error correction, improvement of features, and enhancement of security features.”

The court found that this preface implied that automatic software updates would improve or enhance the Dash – not destroy its functionality. The court could not say at this stage that by using the Dash and thus implicitly agreeing to the EULA, plaintiff authorized Sony to render his device inoperable. Accordingly, the court found that plaintiff plausibly pled that Sony acted “without authorization” in bricking the Dash.

Tresspass to Chattel

Under New Jersey law, “[a] cognizable claim for trespass to chattel occurs ‘when personal property, in the actual use of the owner, is injured or taken by a trespasser, so that the owner is deprived of the use of it.’” Arcand v. Brother Int’l Corp., 673 F. Supp. 2d 282, 312 (D.N.J. 2009) (quoting Luse v. Jones, 39 N.J.L. 707, 709 (N.J. 1877)). “[P]hysical contact with the chattel, for instance, where a person kicks another’s car bumper, is not required.” Id. “All that is required … is interference with the chattel as a direct or indirect result of an act done by the actor.” Id.

In this case, Sony’s software update bricked plaintiff’s Dash. The court found that contrary to Sony’s assertions, plaintiff had not consented to Sony rendering his device wholly nonfunctional by agreeing to the EULA.

Sony had also argued that plaintiff never owned the software used by the Dash (in accordance with the EULA) and therefore Sony could not be liable for altering that software in the update. But the court saw it otherwise — whether plaintiff owned the software, Sony, at a minimum, indirectly injured plaintiff’s physical Dash by rendering it completely nonfunctional through the software update. The court again looked to In re Apple wherein that court found that the plaintiffs plausibly pled trespass to chattel by alleging that Apple released a software update that rendered the plaintiffs’ iPhones permanently inoperable. On these facts, the court found that plaintiff had plausibly pled his trespass to chattel claim.

Grisafi v. Sony Electronics Inc., 2019 WL 1930756 (D.N.J. April 30, 2019)

Failure to pay software license fees was breach of contract, not copyright infringement

As part of a larger business dispute that found its way into litigation, counterclaimant DDS sued counterdefendant EGS for copyright infringement after EGS allegedly used DDS’s software without paying required license fees. EGS moved to dismiss the copyright infringement claims, asserting that there was no copyright infringement occurring, only a breach of the license agreement. The court granted the motion to dismiss. 

The court found that the provision of the agreement between the parties, requiring EGS to pay license fees, was a covenant and not a condition that must be met for use of the software to be authorized. The finding was critical because whether the failure of a non-exclusive licensee to pay royalties constitutes copyright infringement turns on the distinction between a promise subject to a condition and a covenant or contractual promise. Broadly speaking, the promise to pay royalties in a license agreement is generally considered a covenant, not a condition. 

In this case, the agreement between the parties provided that:

Upon [EGS’s] payment of [a one-time fee], and subject in each instance to [EGS’s] subsequent timely payment of the applicable [recurring] licensing fee, [DDS] hereby grants to [EGS] a limited, nonexclusive license . . . . 

The court determined this language established that DDS would install its software and then EGS would pay for the right to use the software. Under this line of thinking, the duty to pay fees did not accrue until the software was installed, meaning that payment could not be a condition on the rights to use the software (and that nonpayment would not be a failure of that condition). 

Eclipse Gaming Systems, LLC v. Antonucci, 2019 WL 3988687 (N.D. Ill. Jan. 31, 2019)

See also: