Software licenses contain standard provisions limiting the liability of the vendor. Typical provisions have a two-tiered structure that: (i) disclaims liability for lost profits, incidental, consequential and indirect damages, loss of good will, data loss, computer failure, or punitive damages; and (ii) places a limit on overall damages under the contract (usually limited to fees paid or some multiple of fees paid).
Limitation of liability clauses are usually enforceable by courts. In certain situations, however, courts will fail to enforce a limitation of liability clause. Generally courts are reluctant to enforce limitation of liability clauses where the protected party commits willful or grossly negligent acts.
In Baidu Inc. v. Register.com Inc. Baidu alleged that Baidu’s site was hacked when Register.com negligently allowed a third party to change account details even though the third party did not know Baidu’s security questions and security code. In response Register.com filed a motion to dismiss arguing that the contract between the parties contained language stating that Register.com “will not be liable for any indirect, incidental, or consequential damages of any kind,” and capping Register.com’s liability at $500.
The Court denied Register.com’s limitation of liability defense despite the language of the contract stating that limitation of liability clauses are rendered ineffective as a matter of public policy in cases where the protected party commits willful or grossly negligent acts.
Software vendors need to understand that broadly worded limitation of liability provisions may not provide any protection in cases of gross negligence or willful misconduct. In light of the Register.com decision, Software vendors should consider supplementing the general language in their software licenses with language that protects against specific, foreseeable events.
The attorneys at Marcus Stephen Harris, LLC are available to discuss and advise on software license limitation of liability issues. Principal, Attorney Marcus Stephen Harris, has years of software licensing experience, both in-house and in private practice, and has negotiated hundreds of software licensing agreements.