Technology &
Internet Law

Virtual Components -
The Ultimate Ecommerce Product?

When I first met with the then editor of Components In Electronics in early Summer 1999, Christine Evans-Pughe, she asked me if I could eventually do a piece specifically on issues arising from the sale of "virtual components" on the Internet.  I think the time has finally come to do as she wanted, so this month's article features these products so ideally suited to sale over the Net, quintessential "e" products. 

Virtual components are effectively small pieces of software (small function blocks) and as such are available in digital form.  They can be sold over the Internet or by posting disks or CD-ROMS in the "real world".  In this article the focus is on the on-line sales of the products. 

There are many legal issues arising from the on-line sale of virtual components, from copyright to consumer law issues.  The latter is less of a problem - most sales of virtual components are business-to-business and so avoid the consumer laws.  Where they do apply, however, they can be a problem. 

Some consumer laws only apply to goods and hence will not apply to digital on-line sales (i.e. where the component is downloaded on-line) but confusingly will apply to the same product if it is supplied on a disk or CD-ROM (as they are then classed as goods, even though the major part of the "product" is digital).  So, for instance, if they are "goods" and are sold for a particular purpose, if they then do not achieve that purpose, they will be subject to the implied warranty about the goods being fit for their purpose which will entitle the buyer to a full refund.  If they are not, they escape such a claim unless it can be established that a legally binding representation to that effect was made. 

The UK version of the Distance Selling Directive (which was postponed by the Government at the eleventh hour earlier this year but is expected to be in force in the very near future) applies to goods and services sold to consumers but thankfully should not, in practice, apply to software sales. 

If, as most virtual component sales will be, the transaction is business-to-business, then the supplier is far more free to impose its own terms (as long as any limitations on liability are "reasonable" under the Unfair Contract Terms Act 1977).  Of course, as always, it is important to make sure that those terms are not only appropriately drafted but that they are effectively positioned on the site to ensure they are going to be enforceable. 

It is open to a company to seek to exclude much potential liability in its on-line terms of business, e.g. for any possible representations regarding suitability for a particular purpose.  An important issue to consider is how far it is possible to protect the company from liability if a component does not work.  If one attempts to exclude liability for a product in relation to the very heart of its purpose, then any exclusion of liability is almost doomed to failure - i.e. it is not reasonable to seek to exclude all liability if the product is fundamentally flawed. 

Instead, you may try and set a reasonable limit on your liability.  Whether such a provision is likely to succeed depends upon the particular case.  Upper limits on liability can work but they must be reasonable in all the circumstances - you often see limits by reference to the value of a particular contract or the amount for which the company is insured against that liability.  The latter is more likely to be reasonable, especially if the buyer's attention is brought to the limitation clauses.  Fixed low figures are more likely to fail.  These are generalisations and it is important to look at each contract in context. 

Other important issues to address will include the terms of the licence for use of the virtual component software.  The sophisticated buyer is going to want to see warranties about the seller's ownership of copyright or its right to grant the licence in the first place, particularly where the buyer is using the virtual component for a product it will sell on to third parties, as the vast majority will be.  The licence must clearly spell out exactly what the buyer can do with the component and what it cannot. 

For instance, you might be perfectly happy that the buyer uses the component in its own products as part of a larger product but, on the other hand, may not want the buyer to sell on your product as a separate item.  Others may be perfectly happy for it to be sold on or given away free if it spreads the company name or brings some other advantage - even then the licence must specify that your company copyright notice (and logo?) must not be removed, tampered with or obscured in any way.  This is just one of many potential issues. 

Having terms is one thing but enforcing them is another thing altogether.  With business-to-business sales, you are likely to be able to ensure that the terms themselves are governed by English law and that disputes are dealt with in English courts of law, although this does not prevent other local laws and jurisdiction applying in some situations (business-to-consumer sales in the EU will always be subject to local consumer laws in the buyer's country). 

A major problem with virtual components is the usual copyright security issue - i.e. all the legal terms in the world will not prevent people copying software.  You may have rights but by exposing your product to on-line sales, you risk that people will copy it illegally.  You then have to consider whether it is practical to "police" it or whether it is possible to use technological means to prevent copying.  Security is an important point too - could a hacker steal your products too?  The answer always has to be yes but it is up to your company how much it invests in defending itself against attack. 

As is often the case, the law cannot provide all the answers.  It is just part of the armoury to protect your investment.  Other answers include software and even insurance - "cyberliability" insurance such as that which we will shortly be offering (www.ecomrisks.co.uk) can plug many holes, especially legal costs incurred in protecting your assets.

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