Commercial Law

• Author: George Takach
• Profession: Adjunct Professor
• Pages: 423-514

The business of selling computers, software, and information-based

products differs from other enterprises in a number of legally important

ways. The computer industry is driven by three interrelated phenome-

na. Perhaps the most fundamental and far reaching, and a function of

the first dynamic of computer law,1is the short product cycle in the com-

puter business. Short product cycles also result in a unique aspect of

software — it invariably has errors or bugs in it. Another result of short

product cycles is that the distribution channels for much hardware, and

most software and information-based products, are multitiered and

complex. These three characteristics of the computer industry raise a

number of legal issues. Short product cycles and complicated product

distribution channels have implications under competition law. Infor-

mation-based products also tend to be licensed, rather than sold, there-

by differentiating them from most other goods. Licensing products in an

environment of rapid technological change can be legally challenging.

Computer products also present questions under negligence law and

raise issues regarding the applicability to them of sale of goods legisla-

tion. As software is critical to a company’s well-being, it is not surpris-

ing that bankruptcy issues are of concern to a supplier and user of

423

1 The four dynamics of computer law, namely, the rapid pace of technological

change, the elusive nature of information, and the blurring of private/public and

national/international, are an important, unifying theme of this book. For a dis-

cussion of these dynamics, see chapter 8, section A, “Computer Law: Dynamics.”

COMMERCIAL LAW

chapter 5

technology-oriented products. And, as in all areas of commercial

endeavour, tax questions can pose intriguing problems for the suppliers

and users of computer, software, and information-based products. Two

other subjects are also worth mentioning: international trade law

because of the global nature of the computer industry and its strategic

role in the world economy; and labour law because of the profound

impact that technology has had on the workplace. This chapter con-

cludes with a review of how well (or poorly) traditional insurance poli-

cies provide coverage against computer-related risks, and in particular

whether software, data, and intellectual property are covered under

these policies. In most of these subareas of the law there are few statutes,

or even provisions within statutes, devoted to computer and information

products.2Rather, the analysis often involves reviewing a general com-

mercial law rule and assessing how well (or poorly) it applies to a high

technology issue. In conducting this analysis, the dynamics of comput-

er law should be kept in mind. As noted above, particularly relevant to

this chapter are the rapid pace of technological change and, depending

on the issue area (such as sales legislation and tax), the elusive nature of

information and the blurring of the national and international realms.

A. MARKETING COMPUTER AND

INFORMATION-BASED PRODUCTS

1) Short Product Cycles

The incredible rate of technology development, the first dynamic of

computer law, translates into a commercial environment characterized

by short, and ever-shortening, product cycles. In virtually all submarkets

of the computer business, innovation is measured in weeks or months

rather than years. Most computer software and information-based prod-

ucts have short shelf lives, at least for any particular version of the prod-

uct. One report in the United States noted that the “extraordinarily rapid

pace of technological change in information technology (IT) hardware

and software … creates the equivalent of three to five [automotive]

model changes each year.”3Moreover, every segment of the computer

424 COmputer Law

2 An interesting exception is Quebec’s Charter of the French Language, R.S.Q. 1977,

c. C-11, which requires that a supplier’s French-language version of software (if

one exists) be made available in Quebec at the same time as the English-language

version.

3 Cited in Margaret E. McConnell, “The Process of Procuring Information Tech-

nology” (Winter 1996) 25:2 Public Contract Law Journal 385.

market is characterized by intense competition. New entrants are con-

tinually bringing to market new products. Marketing people in the com-

puter business talk in terms of narrow temporal windows of opportunity

to get a new product or version out into the marketplace before it invari-

ably collides with a competitor’s subsequent version.

The business and legal impact of short product cycles is significant.

It leads, for example, to the formation of numerous alliances within the

industry among different companies and organizations. These arrange-

ments vary in terms of degree and intensity from product distribution

agreements, to joint R&D agreements, to full-blown mergers. In each

case, however, there is the common thread of understanding that in

today’s technology business it is very difficult for one firm to possess in

house all the required core competencies. Some large technology firms,

such as Microsoft, Intel, and Cisco, are acquiring minority positions in

smaller companies to bolster the market for products that will increase

demand for these companies’ core products, as well as to use these

investment targets as surrogate R&D test beds.4All these different

types of arrangements raise competition law issues. From another per-

spective, the short product cycles raise, often to unreasonable levels,

expectations within the user community. This can result in liability

claims, sounding both in contract and in negligence, if ultimately the

products or services do not measure up to these expectations.

2) Imperfect Software

The creation of software normally involves several distinct phases,

from the initial high-level design, through coding the instructions and

statements, and finally to an exercise of testing to find and fix as many

problems as possible before it is shipped to customers.5Although most

software products undergo a significant amount of testing, it is a cen-

tral fact of software development that it is virtually impossible to detect

and eradicate all the bugs in advance. Bug-free software, if such a state

were even attainable, would be so expensive and time-consuming as to

make it impractical in a commercial setting, at least given how that

environment is structured currently. Thus, suppliers of software offer

support programs to users of their products, a major element of which

is the correction of bugs that come to light once the customer has com-

menced to use the software product. Another component of the typical

software support program is the provision of future versions and

Commercial Law 425

4 “Silicon Valley’s New Sugar Daddies,” The Economist, 12 July 1997.

5 See chapter 1, section A.3, “Software.”