Research on Intellectual Property Warranty in International Digital Trade
——From the Perspective of Software Trade

Yang Enyi,Zhou Xinjun

（Law School of Guangdong University of Foreign Studies,Guangzhou 510555）

Abstract：While magnifying intellectual property risks,International digital trade has put forward new requirements for the system of rights warranty for defective rights in contract law.International uniform substantive law -United Nations Convention on Contracts for the International Sale of Goods (hereinafter referred to as “CISG”) -has continuously extended its scope of application to digital trade such as software.The obligation to guarantee intellectual property rights(IPR) under Article 42 CISG requires the seller to ensure that the buyer’s use of the purchased goods will not infringe the IPR of third parties.However,examining the factors of intellectual property protection in the digital software trade,it is found that the time limit,the buyer’s use restriction,and the nature of third-party rights or claims set by CISG Article 42 are yet to be clarified.It is suggested that an IPR defect notification obligation be created during the period between contract signing and delivery,that a “subjective warranty” provision be added to the scope of contractual use,and that an agreed-upon IPR warranty clause should be included in the contract to eliminate the ambiguity of legislation.

Key words：International digital trade；CISG；Intellectual property defects warranty；Software trade

1 Introduction of Digital Trade and Intellectual Property Warranty

1.1 Digital Trade

Digital technology and the Internet have profoundly influenced international trade.The globalized marketplace has developed into an effective information system.The unprecedented growth of international trade in goods,services,and intellectual property(IP) has marked the mainstream of globalized digital trade supported by digital technology.

Some scholars define digital trade from the perspective of transaction targets.Digital trade refers to an international trade model that delivers digital products,digital services,and data information,which consists of digital product (service) trade and data information trade[11].It can be concluded that,compared with traditional trade,data and information products have been added to the transaction target in digital trade.

Judging from the above-mentioned definition,data trade can be categorized into digital trade[2],which can be further divided into software trade and non-software trade.In software trade,the import and export of software products are mainly traded in software through CD-ROM and other carriers or by downloading the client through the Internet and obtaining the usage right after authorization.The latter trading model is being used increasingly with the advancement of digital technology.Specifically,the application of cloud computing in software trade enables the acquisition of software resources across national borders through network and storage.It enables users to obtain such resources and services through any device and operating system at any time,place,or operating system.Due to the application of cloud computing,the development and use of the software are gradually breaking the geographical boundaries[3],thus facilitating the international software trade.

1.2 Intellectual Property Warranty in Digital Trade

Along with its rapid growth,digital trade also raises the issue of IP warranties in contract law.Crossing network borders is more accessible than crossing physical borders,which allows more small and medium-sized enterprises to participate in trade across different jurisdictions.Although occurrence of expensive legal actions in foreign courts in international digital trade is rare,companies should still pay attention to IP risk management.

There are three forms of digital trade,B2C,C2C,and B2B.In B2B trade,the seller exports goods or services,and the buyer imports them for resale or other commercial use.By law or contractual terms,the seller is required to provide the buyer with a guarantee of IP rights.Suppose the IPR owner sues for infringement after the goods or services have been imported into his country.In that case,the seller shall be hold liable for the buyer’s infringement.

A warranty for IP in digital trade covers the legality and validity of the rights and the buyer’s protection against third-party infringement claims.The seller has an IP warranty obligation by law or by agreement between the parties,which means that with an agreed warranty clause,the seller’s IP warranty obligation is determined by the content of the agreement;In the absence of a warranty clause,the seller also has an IP warranty obligation under applicable law.

2 Intellectual Property Warranty Rules in International Software Trade

Digital trade rules are fragmented due to the inconsistent regulatory measures across countries.Predictability of rules is extremely important for private entities in commercial transactions as fragmentation of rules means increased transaction costs.International Harmonized Substantive Law is a “shared” law that serves to ensure greater global consistency and predictability in the area of commercial activity,as is sought in traditional trade in physical commodity.

2.1 Application of International Commercial Contract Law in Software Trade

The CISG,the quintessence of international commercial contract law,has been in operation for 40 years since its adoption.However,some special types of transactions,such as digital software transactions were not taken into account at the time of its formulation.However,relying on its interpretation mechanism,the CISG has gradually expanded its scope of application to include the sale of digital software①.The reasoning of a 2015 Dutch court decision on computer software is a manifestation of the broad application scope of the CISG,namely that “the international nature of the CISG,the promotion of uniformity in its application and the observance of the integrity of international trade must be taken into account when applying the law,” and that “the term‘goods’ in the CISG is to be interpreted broadly to include intangible goods as well,such as downloaded copies of software”②.In addition,the existence of Article 3 of the CISG③allows some contracts of a mixed nature to still be regulated by the CISG,which provides a basis for software sales to be regulated by the CISG.

While the CISG has shown a tendency to extend its application to digital software transactions,trade of digital software still differs from traditional trade of tangible goods.Digital software is intangible,and it is not limited by geography.Therefore,protection of IPR over software is more complex than traditional goods.Purchasers of digital software do not have absolute discretion in using the software as purchasers of traditional goods.For example,the right to resell may be limited by license agreements.In order to regulate such transactions,the U.S.National Conference on Uniform State Laws approved Uniform Computer Information Transactions Act(hereinafter referred to as“UCITA”),and the European Union adopted Directive (EU)2019/770 on certain aspects concerning contracts for the supply of digital content and digital services (hereinafter referred to as“Digital Content Directive”) and Directive (EU) 2019/771 concerning contracts for the sale of goods,which are all legislative attempts to provide for the IP warranty rule with a certain degree of sophistication.The CISG,as traditional commercial contract law,has to be re-examined as to whether its IP security provisions are suitable for today’s needs,as they were developed before the digital age.

2.2 Intellectual Property Warranty Rules in International Commercial Contract Law

CISG,along with its statutory IP warranty clause,is generally applicable to B2B sales contracts in digital trade.Under Article 42 of the CISG,the seller must deliver goods free from any right or claim of a third party based on industrial or other IPR,and the seller knew or could not have been unaware of such rights or claims at the time of the conclusion of the contract,provided that the right or claim is based on industrial property or other IP under the law of the State where the goods will be resold or otherwise used,if the parties concluded the contract with a view to the goods being resold or otherwise used in that State;or in any other case,under the law of the State where the buyer has his place of business.

The obligations of the seller under Article 42 do not extend to cases where: the buyer knew or could not have been unaware of the right or claim at the time of the conclusion of the contract;the right or claim results from the seller’s compliance with technical drawings,designs,formulations or other such specifications furnished by the buyer.

In addition to the CISG,national laws may also serve as the governing law for regulating international software trade.These domestic laws were introduced later than the CISG and are considered more appropriate to the social reality of the digital age.

There is no specific provision in the Chinese Civil Code regarding intellectual property warranty,which obliges the sellers of sale contracts to deliver the goods free of any third-party rights unless otherwise provided by law.Therefore,IPR should be classified as the rights of third parties.There are three specific rules in the Chinese Civil Code: First,buyers may stop payment to sellers if they can prove the existence of third-party IPR in the goods of trade,unless the sellers offer the appropriate guarantees.Second,to balance the interests of both buyers and sellers,the Civil Code provides safeguards for sellers,i.e.,sellers may be exempted from the obligation of IP warranty provided that the buyers have known or should have known the third-party rights of the goods when concluding the contracts.Third,if the seller intentionally or through gross negligence fails to inform the buyer of a defect in the IPR,the seller is not entitled to claim mitigation or exemption from liability even if the contractual agreement mitigates or exempts the seller from the IPR of the subject property④.

Article 10 of the EU Digital Content Directive provides that the seller shall ensure that the buyer’s use of the purchased digital product does not infringe the rights of third parties,regardless of whether the usage of the digital product is in accordance with its subjective requirements at the time of the conclusion of the contract,or statutory objective requirements⑤.Section 401 of the U.S.UCITA provides that the seller is obliged to ensure that the buyer’s use of the computer information does not infringe the rights of third parties during the term of use,within the scope of the license.

Domestic legislation takes into account the specificity of digital content.In the following,the problematic aspects of the CISG intellectual property warranty rules will be examined through comparison with those of domestic rules.

3 The Dilemma of Applying Intellectual Property Warranty in International Software Trade

For international software trade,there are three problems with Article 42 of CISG that need to be addressed.First,the duration of seller’s obligation for IPR warranty is too short.Second,the seller’s obligation is not adjusted to the scope of use.Third,the nature of third-party rights or claims is unclear.

3.1 Seller’s Obligation for Intellectual Property Warranty Ends Too Early

Under Article 42 CISG,the time limitation “at the time of the conclusion of the contract” is a critical dividing point in the seller’s liability for the IP warranty.Suppose the seller knew or could not have been unaware of the existence of rights and claims of third parties based on IPR at the time of the conclusion of the contract.In that case,it should be liable for defects in IPR,provided other conditions of Article 42 are met.However,Article 42 does not seem to impose any obligation on the seller if he becomes aware of the rights or claims of third parties after the conclusion of the contract.Namely,any information available after the conclusion of the contract is no longer taken into account[4].Thus,no liability for defects in IP would arise,and the seller would not have to take any action to deal with the situation after the conclusion of the contract.

The time limit in Article 42 CISG is intended to protect the interests of sellers.Using the time of contracting as the point in time for the particularization of third-party IPR allows for predictability of risk and is also more favorable to the seller’s subsequent production and supply.However,critical voices point out that: If the seller learns of the infringement of the goods only after the contract is signed and does not remedy the situation,the treatment would violate the principle of balance of interests in international trade transactions[5].

In the case of such subject matter as digital software,both the U.S.UCITA and the EU Digital Content Directive set the cut-off point for the seller’s IP security obligations at the time of delivery of the subject matter of the contract.It’s believed that such regulation is more in line with the characteristics of software transactions than that of CISG.The application of digital technology in the software trade enables real-time matching of the user’s demand and the vendor’s supply,real-time service,and on-demand supply.The interval between contract formation and delivery is being shortened.Placing the point at which the seller’s obligation to guarantee IPR ends at the time of delivery will not cause too much disadvantage to the seller.It can also avoid the proliferation of situations in which the seller remains indifferent to infringement after the contract’s conclusion and before the software’s delivery.

3.2 Seller’s Obligation for Intellectual Property Warranty is not Adjusted for the Scope of Use

Although CISG adjusts part of international software transactions as sales contracts,the licensing model of software transactions often limits the buyer’s scope of use of the software.For example,in cases where the copyright is attached to the computer software,the buyer is prohibited from reselling the purchased software.Due to this,the IPR guarantee obligation in software transactions should be further limited according to the scope of use in the agreement.

The EU Digital Content Directive limits the seller’s obligation to ensure that the buyer can use the subject matter of the digital content by the contract.The notes accompanying Section 401 of the UCITA also state that “the warranty does not cover claims of infringement resulting from the licensee’s (buyer’s) decision to use the information together with other information or property.”For example,in a license of a spreadsheet program,the warranty is that the spreadsheet itself does not infringe the rights of others.Suppose the licensee uses the software’s capabilities to implement an inventory control system covered by a patent held by a third party.In that case,the infringement arises from the licensee’s use of the system,not the software⑥.

3.3 The Nature of Third-party Rights or Claims is Unclear

The wording of Article 42 CISG does not indicate what nature of third-party rights or claims should be the seller’s responsibility,which raises the question of whether the seller is responsible for any (including clearly unfounded) claims of third parties concerning the goods.Most scholars believe that Article 42 CISG protects against not only justified claims but also claims of third parties that are not justified.They hold that it is essential to protect the buyer’s smooth use of the goods.Thus,the buyer should not be involved in the litigation of third-party IPR infringement.

In fact,there are two interests at stake,namely,the buyer’s interest in not involving in a lawsuit and the seller’s interest in not being held liable for ‘a(chǎn)rbitrary claims’[6].The seller should not be held liable for a lawsuit filed by a third party in apparent bad faith.To tackle such a situation,the seller should inform of the buyer that the claim is unfounded when faced with such a bad faith claim.Rather than being held directly liable for breach of its IP warranty obligations,the seller can negotiate with the third party or respond aggressively in the litigation to have the court or tribunal dismiss the claim.

The above two arguments show that the seller should not be liable for arbitrary third-party claims and that the buyer has the right to use the software at his will.However,it’s not specified in the CISG regarding the nature of eligible third-party claims for which the seller is liable or the actions the seller should take,which brings uncertainty to the software trade.

4 Improvement of Intellectual Property Rights Warranty in International Software Trade

Given that CISG is unlikely to be amended,the resolution to the aforementioned problem should rely more on the interpretation of the law and the conclusion of clearer contract terms by the parties.

4.1 Creation of a Notice Obligation after Contract Formation and Before Delivery

According to the principle of good faith,if the parties to a contract discover after the conclusion of the contract and before the delivery of the software that the software may infringe the IPR of third parties in the place of intended use or sale,they should promptly notify the other party to avoid the expansion of losses.

In terms of the consequences of breaching this obligation,the seller shall be held liable if he knew of the existence of a third party’s IPR on the software to be delivered after the conclusion of the contract and before the delivery of the goods but failed to notify the buyer;if the buyer failed to notify the seller,the buyer could not claim the damages caused by the third party’s claim of IP infringement.If both parties failed to fulfill their notification obligations,the seller shall be held liable for the breach of contract.

4.2 Addition of a Provision for Subjective Warranty Based on the Scope of Use Agreed in the Contract

Intellectual property warranties for digital software differs from those for tangible goods.The seller often restricts the scope of use by the buyer in the software license agreement.These restrictions,which were already in place for the buyer at the time the contract was concluded,should be taken into account when specifying the seller’s IP warranty obligations.

The warranty does not cover all claims of infringement,it is limited in subjective scope.The scope of the seller’s subjective warranty should be based on the scope of use.To determine the scope of use in a contract,the licensor(seller)’s public representations about the software,the contractual provisions on the rights enjoyed by the licensee,and the conditions for exercising those rights should be taken into consideration by the judges or arbitrators.Hence,the seller shall not be held liable for rights or claims that do not fall within the scope of the subjective warranty.i.e.,third-party claims arising from the buyer’s failure to use the software under the contract’s agreed-upon scope.

4.3 Clarifying Contract Terms to Eliminate Legislative Ambiguity

Compared with the risks of applying the statutory warranty,it’s advisable for business operators in digital trade to negotiate and settle the scope,conditions,and form of warranty as well as both parties’ rights and obligations in contractual clauses.Parties’warranty clause serves to specify and clarify the legal stipulation and avoid ambiguity and multiple interpretations of Article 42 of CISG.

First,if business operators’ warranty obligations cover all types of IPR,they would be exposed to immense risks.The warranty clause,on the other hand,can limit and specify the types and scope of the IPR and effectively reduce the risks of the business.The warranty clause may also be more extensive than the statutory warranty,provided that the sellers’ higher-level duties correspond to their gains from the contracts.Nonetheless,the warranty clause shall neither exclude nor mitigate the role of statutory warranty[7].Otherwise,the sellers may be suspected of selling counterfeit or pirate goods to the buyers and the contracts may be legally invalid.

Secondly,the nature of third-party rights or claims under Article 42 of CISG is unclear.It may impose excessive obligations on the seller due to the ambiguity of the legislation.In this case,it’s believed that the contract terms can be designed as follows.When a third party claims the IPR of the subject of the transaction,the buyer shall promptly notify the seller and,simultaneously,suspend its payment obligations and allow the seller to respond.The seller shall respond or appear for settlement concerning the third-party claim.After the seller has provided a reasonable answer or settled the third party’s lawsuit,the buyer shall fulfil its payment obligation to avoid,to a certain extent,attributing to the seller a completely unfounded third -party claim.

注釋：

①See CLOUT case No.122 [Oberlandesgericht K ln,Germany,26 August 1994;CLOUT case No.131 [Landgericht München,Germany,8 February 1995].

②Rechtbank Midden-Nederland.Corporate Web Solutions v.Dutch company and Vendorlink B.V.25/03/2015.

③Article 3 of CISG provides that：“This Convention does not apply to contracts in which the preponderant part of the obligations of the party who furnishes the goods consists in the supply of labour or other services.” In other words,it means that as long as the provision of labor or services does not form a preponderant part of the contract,the contract can be governed by CISG.

④See Chinese Civil Code,Art.612,Art.613,Art.614,Art.618.

⑤See EU Digital Content Directive(2019),Art.7,Art.8,and Art.10.

⑥See UCITA Section 401.Reporter’s Notes,2.a.