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Court Finds Uniform Commercial Code Applies to Commoditized Software

Posted in Litigation

We’ve all seen the ads on the Internet—computer-optimization software designed to make your old PC operate like it’s brand new. Many consumers see these advertisements and, frustrated with the performance of their computers, purchase such software with the aim of speeding up their sluggish machines. But what happens when the software doesn’t work as advertised? The answer for Christopher Rottner was to file a lawsuit.

In Rottner v. AVG Technologies, U.S., Inc., Rottner claimed to have downloaded a free trial of AVG Technologies’ program, PC TuneUp. After an initial scan of his computer, PC TuneUp reported that Rottner’s computer had critical errors, which it had repaired. The program then recommended that Rottner purchase the full version of the software to maintain the integrity of his computer. He did so. After installing the full version of PC TuneUp and an update, however, his computer crashed, causing Rottner to lose all of his personal files—yet he had purchased PC TuneUp to prevent this very scenario from occurring.

Rottner filed a class action lawsuit in federal court in Massachusetts against AVG Technologies (“AVG”), alleging that AVG had falsely inflated the effectiveness of PC TuneUp. More specifically, Rottner alleged six different bases for the lawsuit, but one is of particular importance: a claim for breach of express warranty. AVG moved to dismiss Rottner’s claims, which the court granted in part, but denied with regard to the breach of express warranty claim.

Applying Massachusetts choice-of-law principles, the Rottner court initially determined that Delaware law applied to this dispute because of the Delaware governing law provision in PC TuneUp’s End User License Agreement (EULA). The court then had to determine whether PC TuneUp constituted a good or a service because the Delaware Uniform Commercial Code (UCC) governs only the sale of goods and has specific provisions with regard to express and implied warranties. AVG argued that its agreement with Rottner was for the sale of a service, not a good, and that the UCC was inapplicable to the dispute. The court, however, disagreed.

Delaware, like many other states, uses a “predominance test” when assessing whether a contract is for the sale of goods or services. This test can be rather complicated when dealing with software because software is not easily classified as a good or a service in any given context.

For example, under this test, software may constitute a service when it is specifically designed to accommodate a business’s unique practices (i.e., software that is designed to operate a manufacturing company’s patented machines).

In contrast, software may constitute a good when it is an off-the-shelf commodity, such as word processing software. The Rottner court concluded that the PC TuneUp software was a good, and not a service, noting that PC TuneUp was generally available; that it was not specifically designed to meet Rottner’s computer needs; and that Rottner was able to purchase, download and install PC TuneUp in a single transaction.

The court’s characterization of PC TuneUp as a good meant that the UCC’s provisions regarding express and implied warranties applied to the sale of PC TuneUp. The UCC states that express warranties are created when a seller makes a promise to a buyer about the goods, or when a seller offers a description of the goods (meaning that the goods must conform to the description). The court also noted that a clause “generally disclaiming ‘all warranties, express or implied’ cannot reduce the seller’s obligation with respect to such a description.”

In Rottner, the EULA for PC TuneUp included an express warranty that the software would “perform substantially in accordance with the applicable specification.” Rottner argued that this language was vague and undefined—and the court agreed. Without a meaningful definition of PC TuneUp’s “applicable specifications,” the court found that the “only rational recourse for the consumer is to turn to the advertising claims and the claims broadcast by PC TuneUp itself as the ‘applicable specifications.’” In its advertisements, PC TuneUp purported to boost Internet speed, eliminate freezing and crashing, optimize disk space and speeds, extend battery life, protect privacy, monitor hard drive health and restore the PC to its peak performance. The court held that—even if the EULA’s express warranty were not vague—these representations constituted an express warranty of PC TuneUp’s functionality. That is, the court looked beyond the EULA’s express warranty to define its provisions. Rottner serves as a reminder that software companies should be very careful when advertising their products and should take care not to overstate their functionality.

Rottner also brought a claim for breach of the UCC’s implied warranty of merchantability, but this claim was dismissed. The implied warranty of merchantability covers a range of buyer’s expectations in a transaction, including the expectation that goods are fit for the ordinary purposes for which such goods are used. Unlike Massachusetts law, which Rottner argued unsuccessfully was the applicable law, Delaware law allows merchants to disclaim the implied warranty of merchantability so long as the disclaimer is conspicuous to the consumer and specifically mentions merchantability. The court dismissed Rottner’s claim for breach of implied warranty because AVG’s EULA disclaimed the implied warranty of merchantability in all capital letters.

Rottner v. AVG Technologies has important implications with regard to software lawsuits. First, the decision serves as a reminder that a company’s advertising claims may be regarded as express warranties, especially if, as in Rottner, the company’s EULA incorporates a vague express warranty.

Second, the more commoditized and generic the software, the more likely such software may be treated as a good rather than a service, at least under Delaware law. This tendency to treat commoditized software as a good should encourage software developers to be very clear in their EULAs regarding their express warranties because they are often operating in a gray area of the law.

Finally, a software vendor should be aware of the significant differences among states regarding these issues and should choose wisely in selecting a particular state’s law to govern the vendor’s EULA, including any warranty provisions in such EULA.