Software and the CLRA
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Software and the CLRA

by Daniel K. Slaughter

December 2012

The Consumers Legal Remedies Act (Civ. Code §§ 1750- 1784) is one of California's most important consumer protection laws. Enacted in 1970, it proscribes 24 particular advertising practices, provides for specific remedies, and contains distinct rules governing class actions.

Although the statute applies to a broad range of conduct, its impact is limited to transactions that result in the sale or lease of "goods or services," which in turn are defined as "tangible chattels" and "work, labor, and services." (Cal. Civ. Code §§ 1761(a), (b); 1770(a).)

Determining just what constitutes goods or services can be a challenge. In fact, it was nearly 40 years after passage of the CLRA that a published case first addressed the issue, when an appellate court held that the issuance of a credit card was not a good or service. (Berry v. American Express Publishing, Inc., 147 Cal. App. 4th 224 (2007).) The California Supreme Court extended that ruling two years later, holding that the CLRA does not apply to insurance policies. In so ruling, the state high court relied on the plain language of the statute as well as the fact that insurance is a contract of indemnity, which does not involve a tangible chattel, work, or labor. (Fairbanks v. Superior Court, 46 Cal. 4th 56 (2009).)

These two cases opened the door to a series of federal decisions that examined other intangibles, with inconsistent results. Some courts held that the CLRA applies to mortgage loans as a service, as long as the challenged practices involve "developing, securing and maintaining" the loan. (See Hernandez v. Hilltop Financial Mortgage, Inc., 622 F. Supp. 2d 842, 851 (N.D. Cal. 2007).) Other courts disapproved claims based on "pure" financial services including mortgage loans; ancillary services such as loan modification; and overdraft fees on debit accounts. (See Consumer Solutions REO, LLC v. Hillery, 658 F. Supp. 2d 1002 (N.D. Cal. 2009); and Guttierez v. Wells Fargo & Co., 622 F. Supp. 2d 946 (N.D. Cal. 2009).)

Software as Goods
The law is even less clear for computer software, despite its dominance in today's stream of commerce. In 2010 a federal district judge in San Jose held that software is not a good or service under the CLRA, relying on the Commercial Code's definition of "general intangibles," which includes software. (Ferrington v. McAfee, Inc., 2010 WL 3910169 (N.D. Cal. 2010).) But in a more recent case security software was deemed a service, because it continuously runs, updates, and maintains the computer. (Khoday v. Symantec Corp., 2012 WL 838611 (D. Minn. 2012) (applying California's CLRA).) In yet another ruling, the court deemed software to be a tangible good because it was shipped to the plaintiff on a disk - an increasingly uncommon mode of delivery - instead of downloaded from the Internet. (Pelletier v. Pacific Webworks, Inc., 2012 WL 43281 (E.D. Cal. 2012).)

These cases look at software in two different ways. On one hand, software is actually a license, an agreement allowing the user to access the seller's intellectual property for a set amount of time. As such, software is an intangible, like insurance or credit. On the other hand, when software is delivered via physical media - like music on a CD - it tends to be perceived as a good. These conflicting views mirror the public's confusion over whether digital music is owned and can be freely copied, or is licensed for individual use, making copying illegal.

Software as a Service
The fact that software runs a computer does not make it a service any more than an insurance policy or a credit card. Fairbanks rejected the argument that insurance is a service allowing drivers to legally operate a vehicle; Berry followed the same reasoning. Software is different because it takes the place of a wide variety of traditional services. The question is whether the CLRA will evolve to cover all software sales and leases, and if so, whether the adaptation will come through legislative amendment or judicial interpretation.

The result in a particular case may be dictated by a statute's plain language. Although it may be a historical accident that intangible goods are not covered by the CLRA, that is what the statute says. It is also what Berry, Fairbanks, and Ferrington relied on. Practitioners would be wise to pitch their claims and defenses in future cases accordingly.

Daniel K. Slaughter, of counsel at Stein & Lubin in San Francisco, is a commercial litigator specializing in advertising and other consumer class actions.

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