Shifting the Burden in Software Licensing Agreements

By Gilstrap, Stephen S. | The Yale Law Journal, March 2012 | Go to article overview

Shifting the Burden in Software Licensing Agreements


Gilstrap, Stephen S., The Yale Law Journal


Consumer information is exchanged more frequently with each passing day. Indeed, the number of electronic payments in the United States in 2009 totaled 84.5 billion, representing a 31% increase since 2006. (1) Whether consumers purchase clothing online or swipe their Visa cards after dinner, personal information moves constantly through the electronic channels of commerce. As consumers expect to purchase goods more easily in this electronic economy, they also rely increasingly on businesses to protect their personal information. (2)

Businesses protect consumer information by installing encryption and data security software. Recently, one state even mandated that businesses take specific and complex preventive measures to help ensure that security breaches do not occur. (3) As many companies are now required to use data security software, software vendors find themselves in increasingly strong bargaining positions when negotiating software licensing agreements. (4) Further, the highly specialized nature of this software and the consolidation within the software security industry mean that fewer vendors provide these products, and businesses in need of this software face increasingly asymmetrical negotiations. (5) Certain companies, including smaller businesses, face the most pressure because they have fewer options for recourse if a fair licensing agreement is not reached. (6)

Some critics also argue that this level of industry consolidation has led to a decline in the quality of products offered by some software vendors. (7) Despite the fact that some software companies are arguably providing a lower quality good, the bargaining power created by consolidation in the industry-combined with the fact that many businesses are statutorily required to use data security software--allows these companies to disclaim practically all liability stemming from a security breach, even where the software fails. (8)

Moreover, as businesses acquire and transmit more consumer information, the potential liabilities associated with a security breach increase. Indeed, several of the worst data security breaches have occurred in recent years. (9) One example involved TJX Companies, a clothing retailer. In 2007, TJX suffered a breach and lost roughly 45.7 million credit card numbers. (10) By 2008, the cost of this security breach was estimated at $226 million, and this figure was expected to climb because of pending litigation, including a class-action lawsuit. (11)

Although the number of people affected and the frequency of security breaches are troubling, this Comment focuses on a company's potential liability after a breach. In doing so, however, it offers a solution that provides software vendors with strong incentives to manufacture more secure products.

When businesses lose information because of a security breach, they face massive costs, as illustrated by the TJX breach. Recently, many states have increased these costs by passing more complex and expensive reporting requirements. These disclosure statutes shift greater costs from consumers to the businesses that hold their information should a breach occur. While these changes affect the relationship between consumers and businesses, software licensing agreements between vendors and businesses remain unchanged. In short, these agreements continue to restrict vendors' liabilities, allowing them to avoid these new burdens. The ability of vendors to avoid these liabilities is especially troubling considering that in 2010 more than a quarter of security breaches were due to a system failure. (12)

To address this situation, this Comment argues that courts should adopt a fairer remedy under the Uniform Commercial Code (UCC) by holding unreasonable limitations on liability unenforceable when contractual remedies frustrate the essential purposes of the contract. This remedy will allow businesses to spread costs more efficiently, will give the proper incentives to software vendors, (13) and will allow the UCC to achieve its goal of allowing expectation damages in the case of a breach. …

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Shifting the Burden in Software Licensing Agreements
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