October 2014

Intentional breach of contract

Under US law, the courts as a general matter (outside of special contexts like insurance) refuse to penalize intentional breaches of contract. If the damages resulting from the breach are outweighed by the loss caused by compliance with the contract, the courts will usually not punish the breaching party merely because of that party's intention to breach. "The traditional goal of contract remedies is compensation of the promisee for the loss resulting from the breach, not compulsion of the promisor to perform his promises. Therefore, ‘willful’ breaches have not been distinguished from other breaches …." Freeman & Mills, Inc. v. Belcher Oil Co. (Cal. S. Ct. 1995). The concept of "efficient breach" under US law is based on "the understanding that people will sometimes intentionally break their contracts for no other reason than that it benefits them financially." Sierra v. Lockerby (9th Cir. 2008).

I have three questions I'd like to pose with respect to the "efficient breach" concept:

The absolute best anti-reverse engineering clause I've ever seen

Because relevant US and EU software copyright law permits reverse engineering as "fair use", blanket contractual prohibitions on reverse engineering (eg, "Licensee will not reverse engineer, decompile, decode, decrypt, disassemble, or in any way derive source code from, the Licensed Software") might not be enforced. See eg SAS Institute, Inc. v. World Programming Ltd. (ECJ 2012); Vault v. Quaid Software Ltd. (US 5th Cir. 1988). These jurisdictions countenance reverse engineering as fair use if conducted in order to achieve interoperability between the licensed software and independently created software.

Most drafters of technology license agreements representing licensors recognize this, and consequently use the following commonly found formulation: "Licensee will not reverse engineer, decompile, decode, decrypt, disassemble, or in any way derive source code from, the Licensed Software, except to the extent enforcement of the foregoing is prohibited by applicable law."

The problem with this clause, however, is that it operates in a purely binary fashion: if the licensee's activities are within the legal contours of fair use, the anti-reverse engineering clause will not be enforced. If they are not, then the clause will be enforced. This type of clause is not much of an improvement over a simple blanket prohibition. No effort is made to attempt to define in advance what the parties would consider fair use.

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