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When Are Terms & Conditions Abusive?

April 27, 2011

Sometimes, an industry evolves a set of practices that many customers view as deeply unfair, yet once they are widely adopted, there is little the customer can do about them.

That – I am told – is the situation in the technology equipment sector with regard to the provision of product maintenance and repair services. According to my discussions with members of the Service Industry Association, manufacturers in medical, point of sale, computer hardware, ATMs, credit card and other technologies have steadily been imposing contract terms that restrict a customer’s rights and service options in the following ways:

  • Buyers of technology equipment do not really “own” equipment because they cannot resell, transfer, or otherwise redeploy without the approval of the OEM.  (and payment of additional fees)
  • Buyers of technology which does not operate without a non-transferrable “special purpose software” license are similarly constrained.
  • OEMS are in many cases denying access to end users (and their repair agents) as an “infringement” of their IP. However, the IP of the unit is not touched or modified by the repair process.

These complaints sound somewhat familar to me. I recall 20 years ago how major manufacturers sought to control the personal computer and server markets through constraining rights of resale or limiting access because of ‘licensed internal code’. They also prevented cross-border trade (and therefore price shopping) by limiting warranty rights to the country of purchase.

The motives of the manufacturers in cases like this are clear. They want to control product resale and thereby protect prices; and they want to earn lucrative service revenues. So are we simply seeing the return of some old practices, which will be eroded either by regulation, or through litigation, or by a new market entrant gaining share by offering more customer-friendly terms?

Obviously third party service providers care about this issue because it threatens their livelihood. But what about customers? Why aren’t they being more vocal? Why aren’t service category managers pushing back on their suppliers?

I would welcome your views and experiences.

7 Comments
  1. trish permalink

    several points: Many customers contracted with hardware OEMs and agreed to exclusivity to get better pricing …too bad if it’s no longer working out for them.
    All of the industries you listed have high vulnerabilities for personal information content or HIPPA data involved, no resale says in less than 10 characters, what would otherwise take a lawyer pages to define restrictions and guidelines for “cleaning” the hardware, prior to transfer. Really it’s in the customers best interest from a liability point of view to never resell any HW that potentially has personal information on it. And if none of this impresses you, understand that they will all be on a cloud in the near future anyway ..with new T&Cs, etc, they can try to get what they want then.
    Ask your customers if they ever dream of reselling their AC/Heating unit, or some other almost “real”, real estate …computer HW really isn’t much different.

    And that’s my free advise for the month 🙂 Have fun! Trish

    • Trish, thanks so much for these insights! They are very helpful points – and very much the sort of information I was hoping to elicit.

  2. John H Goldberger permalink

    Tim – I don’t care for these practices either. I think buyers of technology often fall victim to market forces that lead to very hard sourcing decisions. In our current economic environment, as emerging countries like China and Singapore contribute to increased demand, we see an impact on pricing, quality, supply, delivery, service and onerous terms and conditions. It is, then, a matter of leverage. If a large global corporation represents a sizable account within the OEM’s ability to ensure adequate and timely supply capacity, quality and service levels, globally, then your negotiating position is much improved. That’s the ideal scenario. Unfortunately, many companies are victim to unpalatable practices. I think there are ways to minimize the negative impact, but it takes more sourcing time and money. It could even result in a cooperative among competing organizations.

    Great Question!!!

    John H Goldberger
    http://www.linkedin.com/in/johngoldberger

  3. A number of readers sent comments by e-mail; I attach them here:

    It appears that OEM owners are not really selling a product but licensing the use of the product under restrictions. Thus, from that perspective, access to the product by technicians, etc., is a violation of the “license” and therefore a breach of the license. Is this an infringement of intellectual property? In my opinion, intellectual property typically does not include breach of licenses – licenses are simply contractual agreements.

    The only infringement of intellectual property is caused where the sales agreement states that the software is patented or copyrighted.

    Sometimes the definition of intellectual property is used broadly.

    ________________________________________
    Interesting view, although I think it is too one-sided. In the market we operate, the selling of HW/Telco equipments is heavily dominated by procurement power. They impose terms that are really a stretch for most of the vendors: LDs in the range of 30+%, uncapped liability, unreasonable warranty around IPR, unlimited indemnification on IPR infringement and I can continue filling a page quite easily. More over the competition from the far-east is shirking and eroding the margins, deal after deal by forcing vendor consolidation or going off the market (Marconi, Nortel, Nokia, etc).

    In my own experience, in the last years the real abusive terms were coming from the buying side….
    ________________________________________

    In my opinion, the behaviours summarised in the last 2 of your 3 bullet points are simply undefendable and should rightly be prohibited – preferably by legislation to prevent the cycle being repeated with respect to new products or future technology.

    Bullet point 1 is a little more complicated. The transfers envisaged all seem likely to involve physical movement of equipment which may inevitably involve additional re-installation charges or create unreasonable guarantee risks and maintenance problems (eg if the equipment is put into an unsuitable environment about which the OEM has no knowledge or control). On the other hand, if the customer accepted a supply contract which fairly covered these implications – say by amending the supplier’s obligations or allowing reasonable recovery of unexpected costs – the currently onerous conditions could not be justified.

    Interestingly, there is another example of these sorts of unreasonable T&Cs that could potentially affect a very large number of domestic consumers and so attract early corrective legislation. Effective ownership of ebooks is similarly restricted and purchase of these does not confer the same rights to sell on or lend as applies with conventional books even though they often cost as much to buy.

    A bit of googling will bring up details of some fairly recent litigation in America. Amazon recently had to reach an out of court settlement with some customers (in the region of $200k each) when ebook purchases were remotely and deliberately deleted by Amazon from their Kindles. Ironically, because truth is often more amazing than fiction, the ebook involved was “1984” by George Orwell – perhaps Big Brother is already here!
    ________________________________________
    Thanks for starting this discussion so interesting and important

    I totally agree with you and I wonder why buyers don’t take action to get more freedom, more choice, more power having a more active role in the buying process instead of passively accepting everything the OEM decides for them.

    The FUD (Fear, uncertainty and doubt) is a tactic pretty old nowadays since this term started to be used 50 years ago in the server market but it seems that many buyers are still very unaware of it and so vulnerable to it.

    Personally I work in the secondary market of networking equipment (where Cisco Systems is the leader just to be clear) so I see this every day.

    I invite everybody who is reading this post to contact me to have more information about how end-users all around the world are gaining more decisional power and more freedom just with minimal changes in their way to work.

    Coming back to the topic of this conversation and particularly about license, the first thing to do is to understand if the OEM’s policy has a real legal value, if it is backed up by a real law or , as sometimes happens, has not a real legal fundament.

    For example the Law says, under First Sale Doctrine – section 109 of the US Copyright act. part of copyright law recognized since 1908…

    1. “The owner of a particular copy or phonorecord, lawfully made or purchased from the copyright owner… is entitled, WITHOUT THE AUTHORITY OF THE COPYRIGHT OWNER, to sell or otherwise dispose of that copy or phonorecord” This is the principle that allows the existence of EBay, libraries and used-type businesses in general.

    2. The first sale doctrine specifically addresses computer programs, and prohibits the rental, but not the sale, of computer programs that may be easily copied. It goes further, however, and this the KEY regarding specifically Cisco routers and switches in general to state that “a computer program which is embodied in a machine or product…” is excluded from even the rental restriction and may be rented or sold by any legal owner.

    In addition the legal precedence under In THE LAW OF COMPUTER TECHNOLOGY Professor Raymond Nimmer discusses this fact specifically (1.18 [1] p. 1-103). Every court has repeatedly held that a single payment for a perpetual user license and perpetual possession of a product is, in fact, a sale of property and therefore transfers full title and use rights of that property, software or otherwise.

  4. Trish Oschmann permalink

    You point to a weakness of T&Cs for embedded sw vs licensed sw. Obviously more granularity is needed on the embedded side. PLenty of consumer items have embedded software , do you really want and or intend to extend rental rights to your thermostat’s SW? Perhaps so if you can call into it from a remote location and change it (much like a router or switch perhaps), but what about your child’s thermometer. Do we really want to increase the price of a 10 dollar healthcare item just to write up lenghty T&Cs addressing embedded software that is specific to the HW it’s riding on? Perhaps a definition of a unit is needed, i.e. a unit with embedded sw in which no change, upgrade, etc. ; SW with a closed routine maybe? Engineers input would be good here. Units consisting of HW and SW but of negligible value and or alternative use can be seen as a Unit and the T&Cs effect that “product” in it’s entirity or globally. THis all sounds good until Hollywood uses the embedded SW in a stuffed animal to communicate with aliens 🙂

    Don’t forget about embedded OS and 3rd party obligation there.

    Whoever offered more information, I’ll take it, I am always interested in more brainfood 🙂
    koschmann@epix.net

    • We are reaching out to a couple of experts who have been identified as a result of this dialog. I will make sure to feed back their thoughts.

    • A comment received from Gay Gordon-Byrne:

      Tricia is right on the money with the need for standards for differentiation between embedded software and licensed software. Licensed software which delivers application value is very different from software needed as a platform above which licensed software rides. Many such bits of IP are in fact written by the providers of the parts and not the finished product. For example, NVIDIA provides their own IP for their graphic cards which is not separately licensed. A PC buyer can freely transfer NIVIDIA equipment and can have the product serviced without asking permission of NVIDIA. Same as Tricia expects with thermometer or a thermostat.

      The most abusive OEM policies occur when embedded software is treated as application software. Restrictions on transfer of such special purpose software effectively turns a hardware item into a worthless brick.

      A good definition of a unit/asset is one of our goals. We view special purpose software as those routines needed to operate the equipment independent of any application. So if an automobile needs a piece of software to execute its “fly by wire” instructions from the throttle to the engine, such software should flow smoothly with the automobile and the buyer not hamstrung to sign a license agreement. Taking the analogy to it logical conclusion, if we allow many current OEM terms and conditions to flow into the auto, not only would a buyer be compelled to sign license agreements for these internal bits of code, but they would have to purchase a separate license maintenance agreement in order to get service, perhaps to the extent that the license agreement would prevent the purchase and installation of aftermarket tires or oil changes done at Jiffy Lube. These policies sound ridiculous when applied to an automobile but are analogous.

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