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Howrey LLP
The
Washington Supreme Court has upheld the liability limitations
in a software license agreement even though an alleged defect
in the software caused a contractor to underbid a project
by $1.95 million. M.A. Mortenson Co., Inc. v. Timberline
Software Corp., 140 Wn.2d 568, 998 P.2d 305 (2000)
Contractor
M. A. Mortenson Co. used computer bid preparation software
in bidding on a Seattle medical center construction project.
Mortenson was low bidder. After its bid was accepted, Mortenson
discovered that the software apparently had undercalculated
the bid by $1.95 million.
Mortenson
bought the software with a purchase order issued to an authorized
dealer for the software company, who helped install the
software. The software was shrink-wrapped. The manufacturer's
licensing agreement was printed on each diskette pouch for
the software and on the inside cover of the instruction
manual. It limited recovery of any damages resulting from
use of the software to the purchase price of the software.
It disclaimed consequential damages. The license agreement
told purchasers that if they did not agree to the terms,
they could return the software for a complete refund.
The
software generated 19 error messages on the day the bid
was submitted. Mortenson nevertheless submitted the bid
generated by the software. Discovery revealed that Timberline
was aware of the bug that caused the error message received
by Mortenson but had deemed it not to be a "major problem,"
believing it unlikely to occur during use.
Mortenson
sued Timberline Software Corporation for the $1.95 million
underbid. However, the trial court granted summary judgment
to Timberline, the appellate court affirmed and the Washington
Supreme Court also affirmed.
Mortenson
argued that the purchase order, which contained no liability
limits, and not the license agreement defined the parties'
contract and that the damage limitation was unenforceable
and unconscionable.
All
of the courts held that the shrink-wrap license agreement
was a valid way of contracting under Washington law and
the Uniform Commercial Code. Thus, the terms of the license
agreement were part of the contract.
The
Supreme Court also determined that the liability limitation
was not unconscionable. It held that the issue of unconscionability
deals with the parties' allocation of risk at the time of
contracting and is not applicable to latent defects such
as the subsequently discovered software bug.
It
also held that the shrink-wrap agreement was not procedurally
unconscionable because it was conspicuously displayed. The
court also noted that Mortenson was a sophisticated software
buyer and elsewhere noted that the license agreement allowed
Mortenson to return the software and obtain a refund if
it did not accept the terms of the software license agreement.
Mortenson
also argued that it had not read the license agreement and,
therefore, should not be bound by it. The court held that
the agreement was enforceable because Mortenson had a chance
to read the agreement but did not.
This
case is important to companies that use software for several
reasons. The Washington Supreme Court was very clear in
finding that shrink-wrap agreements are not unconscionable,
at least in business-to-business transactions. The Supreme
Court cited three recent cases from other courts enforcing
shrink-wrap agreements. It also quoted the trial judge as
saying "if this case had arisen in 1985 rather than
1997, I might have a different ruling."
This
trend means that software consumers need to take shrink-wrap
agreements seriously, read them and understand their provisions.
If the terms are not acceptable, buyers need to return the
software and buy another brand or negotiate a more favorable
license agreement.
Realistically,
whether software companies would, through negotiation, agree
to remove or raise liability limitations is questionable.
If they are unwilling to do so, then software buyers need
to understand the risk they have assumed and provide for
it.
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For more information about the issues covered in this report, please contact Paul Berning in our San Francisco office at 415-848-4996 or at paulberning@howrey.com or contact your Howrey attorney. For more information about Howrey's Construction Practice Group, click here.
©2000 Howrey LLP
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