Chapter Eight
Sales, Licensing, and E-Commerce
A MANAGER’S DILEMMA: PUTTING IT INTO PRACTICE
When Is a Seller Responsible for a Known Software Defect?
Issues Presented: (a) Did Timberline have any legal obligation to notify its customers when it
became aware of a defect in its Bid Analysis software that could result in significant errors in
the calculation of bids? (b) Did it have an ethical obligation to notify its customers?
(a) Mortenson argued that the purchase order constituted a fully integrated contract and
that the terms of the Timberline’s shrink-wrap license, including the limitation of remedies
provision, were not part of that contract. Timberline countered that the parties did not intend
The Supreme Court of Washington concluded that the UCC allowed the formation of
“layered contracts,” that the terms of the license were therefore part of the contract between
Mortenson and Timberline, and that Mortenson’s use of the software constituted its assent to
the license. Mortenson Co. v. Timberline Software Corp., 998 P.2d 205 (Wash. 2000). The court
pointed out that the terms of the license were either set forth explicitly or referenced in
numerous locations, and concluded that “it was not necessary for Mortenson to actually read
the agreement in order to be bound by it.”
Mortenson would be unable to sue Timberline for negligence, even though Timberline
continued to sell a product that it knew to be defective. A commercial purchaser of a product is
generally precluded from suing for negligence or strict liability to recover a loss that is solely
economic. Even if the software had caused personal injury or property damage, it is unlikely
that Mortenson could have successfully sued for strict liability because strict liability is limited
to defective “products.” To date, most courts that have addressed the definition of a “product”
have required that the product be tangible, and they have accordingly excluded software.
(b) Even though Timberline has no contract or tort liability, it could be argued that
Timberline had an ethical obligation to notify all of its customers once it became aware of a
Even if Timberline had no general ethical duty to warn its customers that the software
bug could result in errors to bids generated because it did not appear to be a major problem that
affected most customers, Timberline arguably should have advised Mortenson that the error
message it reported frequently resulted in an error in the bid calculation. After all, when other
Timberline customers had encountered the same problem, Timberline had sent a newer version
of the software to some of those customers.
QUESTIONS AND CASE PROBLEMS
Question 1
Issues Presented: (a) Is a contract to purchase software and to have it installed and
maintained a contract involving the sale of goods covered by the UCC or services? (b) Does a
breach of warranty action claiming that a glass of water exploded in a restaurant customer’s
hand involve a sale of goods? (c) Does a breach of warranty action after a medical device was
implanted in a person involve a sale of goods or services?
(a) In Wachter Mgmt. Co. v. Dexter & Chaney, Inc., 144 P.3d 747 (Kan. 2006), the Supreme
Court of Kansas found that this contract was for a sale of goods to which the UCC applied. A
sale of computer software is considered to be a sale of goods subject to the UCC when the
(b) In Gunning ex. rel. Gunning v. Small Feast Caterers, Inc., 777 N.Y.S.2d 268 (Sup. 2004),
the Kings County Supreme Court held that the offer of the glass of water to the patron was a
sale of goods for the purposes of the implied warranty of merchantability under the UCC. UCC
(c) In Brandt v. Boston Scientific Corp., 792 N.E.2d 296 (Ill. 2003), the Illinois Supreme
Court concluded that the transaction between Brandt and the Health Center was for services
Question 2
Issue Presented: Did the photograph and caption on Cruisers’ brochure create an express
warranty?
Wasatch responded to Boud’s argument by claiming that Boud could not rightfully rely
on the brochure photograph and caption as an express warranty. The court in Boud v. SDNCO,
Inc., 54 P.3d 1131 (Utah 2002), agreed with Wasatch for two reasons.
First, explained the court, the photograph and accompanying caption did not create an
express warranty. The Utah Code, which adopts the Uniform Commercial Code’s provisions
governing express warranties, states that an “affirmation of fact or promise made by [a] seller . .
Question 3
Issues Presented: Did Hunger and Hardie-Tynes enter into a contract? If so what were its
terms? Would your answer differ if the 2003 revisions to UCC Article 2 were adopted?
Frequently, when two parties use forms to establish the terms of a contract, they are not
aware that the terms of the forms may conflict. The differences in terms do not, however,
preclude a finding that the two parties have entered into a contract. UCC Section 2-207, called
Question 4
Issue Presented: Is C.W. liable for nonperformance of its contract with Aquila?
C.W. responded to Aquila’s suit by arguing that its nonperformance of the contract was
excused by virtue of its labor dispute that amounted to a force majeure event under the terms of
the contract. The district court disagreed with the factual premise underlying C.W.’s defense,
finding that geological, not labor, problems were the primary force inhibiting C.W.’s
As a factual matter, C.W. argued that its labor dispute caused all of its coal production
problems and, thus, as a force majeure event of which Aquila had written notice, the labor
dispute excused all of its deficient performance under the contract. The geological troubles, on
the other hand, were merely “symptoms” of the labor dispute, not an “independent malady.”
After a review of the factual record, the court refused to find clear error in the district court’s
Alternatively, C.W. argued that Aquila had actual notice of its geological difficulties that
substituted for the written notice required under the contract. While this may have been true,
explained the court, Aquila did not have actual notice that C.W. considered the geological
difficulties to be a force majeure. Indeed, C.W. repeatedly downplayed the significance of its
geological problems, promising Aquila that they would be resolved quickly. According to the
court, “notice that a party to a contract has some soon–to-be rectified problem is materially and
consequentially different from notice that a party has a serious and potentially enduring
problem qualifying as a force majeure event.”
Question 5
Issues Presented: When is an express warranty created? How can an express warranty be
disclaimed?
In Bell Sports, Inc. v. Yarusso, 759 A.2d 582 (Del. 2000), the Supreme Court of Delaware
noted that the UCC provides that express warranties of a seller of goods are created by (1) any
affirmation of fact or promise made by the seller to the buyer that relates to the goods and
becomes part of the basis of the bargain, (2) any description of the goods that is made part of the
Having found that Bell had made an express warranty, the court concluded that Bell’s
effort to disclaim it in the manual’s “Five Year Limited Warranty” was ineffective as a matter of
law. It explained:
While the manual contains disclaimers warning potential users that the helmet
cannot prevent all injuries, other representations were made to assure a potential
Question 6
Issue Presented: Is Van Tassell required to arbitrate her claims?
The court in Van Tassell v. United Marketing Group, LLC, 2011 U.S. Dist. LEXIS 72088
(N.D. Ill. July 5, 2011), held that Van Tassell was not required to arbitrate her claims.
Browsewrap agreements, the type of online contract at issue in this case, do not require
the user to manifest assent to the terms and conditions expressly – the user need not sign a
document or click an “accept” or “I agree” button, as they would in a clickwrap agreement.
Thus, a party gives his or her assent simply by using the website. Because no affirmative action
is required by the website user to agree to the terms of a contract other than his or her use of the
website, the determination of the validity of a browsewrap contract depends on whether the
user has actual or constructive knowledge of a website’s terms and conditions
Question 7
Issues Presented: Who is a merchant? Does a customer waive the implied warranty of
merchantability by examining goods before it purchases them?
The implied warranty of merchantability only applies to a merchant, whom Section 2–
104 of the UCC defines as (i) “a person who deals in goods of the kind,” or (ii) “by his
occupation holds himself out as having knowledge or skill peculiar to the practices or goods
involved in the transaction.”
American Brass also raised the defense of waiver under Section 2-316 of the UCC,
claiming that Westmin had waived the warranty of merchantability by testing the dust before
purchase. Section 2-316 states that “when the buyer before entering into the contract has
Question 8
Issues Presented: What is Cablescope’s defense to ASK’s breach of contract suit? How will
the court decide?
As a defense to ASK’s breach of contract suit, Cablescope argued that the goods
delivered were non-conforming and the installation was defective, and that consequently ASK
did not complete its obligations under the contract. The court in ASK Technologies, Inc. v.
Second, Cablescope did not reject or revoke the goods he received from ASK in
accordance with U.C.C. Section 2. Under this section, an unsatisfied buyer can (1) reject the non-
conforming goods; (2) accept the goods and later revoke acceptance; or (3) accept the goods and
sue for damages resulting from the non–conformity. In this case, Cablescope’s continued