Sales (including sales of licenses) of packaged software are governed today by UCC Article 2. Article 2B establishes new rules that are unfavorable for consumers and small business customers. It creates a contracting structure in which customers don't get to see the terms of their software contracts until after the sale (which will almost certainly encourage overreaching and discourage competition in terms like warranty terms). It approves, as a normal way of doing business, contracts that provide no performance standards that a customer can hold the publisher up to (no implied warranty, no express warranty, and a new improved-for-the-seller definition of "material breach"), that provide the customer with no reasonable forum in the event that a standard could be enforced, and that provide the customer with no remedies beyond a (perhaps partial) refund even if the customer prevails in an action. This style of contracting also affects the economics of quality in the software industry. Competitive pressures today drive companies to rush their products to market. Legal accountability for defects creates a countervaling pressure. When you minimize the seller's accountability to its customers, you weaken that balance. The result will be worse product, shipped more quickly. Over the long term, this can't be good for the industry, and it is certainly no good for the customer over any term.
I don't know any consumer advocate who thinks that Article 2B is even close to acceptability. With all due respect to the benefits claimed for us by the proponents of Article 2B, my sense is that the only significant benefit offered small customers by Article 2B is uniformity of the law. Though uniformity is normally of great value, when the nearly uniform result is "customers lose," the benefit is diminished.
At its Annual Meeting, in May, 1998, the American Law Institute passed the following resolution (available at www.ali.org):
The current draft of proposed UCC Article 2B has not reached an acceptable balance in its provisions concerning assent to standard form records and should be returned to the Drafting Committee for fundamental revision of the several related sections governing assent.
The authors of the ALI resolution (Braucher and Linzer) wrote in their supporting memo:
The Draft reflects a persistent bias in favor of those who draft standard forms, most commonly licensors. It would validate practices that involve post-purchase presentation of terms in both business and consumer transactions (using "shrink-wrap" and "clickwrap"), undermining the development of competition in contingent terms, such as warranties and remedies. It would also allow imposition of terms outside the range of reasonable expectations and permit routine contractual restrictions on uses of information traditionally protected by federal intellectual property law. A fundamental change of approach is needed.
Article 2B adopts the shrink-wrap/clickwrap model--the seller collects your money first and shows you the terms after you take the product home, open it up, and start installing it on your computer. If you don't agree with the terms, you reject the license, trundle the program back to the store (or mail it back to the mail order company) and ask for a refund. This is the approach in current use by software publishers (see, e.g., T. Smedinghoff, The SPA Guide to Contracts and the Legal Protection of Software. Software Publishers Association, 1993). It has run into trouble in the courts. (Step-Saver Data Systems, Inc. v. Wyse Technology and The Software Link, Inc., 939 F.2d 91, 3rd Cir., 1991; Vault Corp. v. Quaid Software Ltd, 847 F.2d 255, 5th Cir. , 1988; Arizona Retail Systems, Inc. v. The Software Link 831 F. Supp. 759, D. Arizona, 1993; M. Lemley, Intellectual Property and Shrinkwrap Licenses, 68 S. Cal. L.R. 1239, 1995.)
The Step-Saver court, for example, threw out a disclaimer of implied warranties and a remedy limitation because they were presented to the customer (a merchant reseller of software) after the sale. The court held that these were material changes to the contract terms that are automatically provided under Article 2 when a sale is made (money collected, goods shipped) without the disclaimers and limitations being incorporated in the contract at the time of sale.
Article 2B initially dealt with these decisions by overriding them (i.e. by changing the law). Consider the Reporter's Notes to Section 2B-308 (Mass-Market Licenses) of the February, 1996 draft of Article 2B:
"This section reverses Wyse Technology v. Step-Saver, where the court used 2-207 to hold that a shrink wrap license in software packages delivered after a prior telephone contract did not become part of the sale contract. See also Arizona Retail Sys., Inc. v. Software Link, Inc., 831 F. Supp. 759, 22 UCC Rep. Serv2d 70 (D Ariz. 1993) (shrink wrap enforceable in transaction where no prior agreement, but not enforceable where there was a prior telephone agreement)."
Since Step-Saver was decided, the 7th Circuit approved a click-wrap license in ProCD, Inc. v. Zeidenberg 86 F.3d 1447, 7th Cir. 1996, and the 2B-will-overrule-Step-Saver comment has come out of the 2B notes. However, in a non-computer case, the First Circuit recently cited Step-Saver as a majority-rule opinion (Ionics, Inc. v. Elmwood Sensors, Inc., 110 F.3d 184, 189 and footnote 4, 1st Cir. 1997) adopting Step-Saver's approach in preference to the Roto-Lith (297 F.2d 497, 1962) approach to post-sale modification of terms, which the Circuit overruled.
This year, the 2B drafting committee has adopted a variation that is sometimes said by some people to give customers substantially better rights. This variation still allows sellers/licensors to hide their contracts until after the sale, but the buyer can get a refund of her postage if she rejects the terms and returns the product without using it.
Contrast this with current Article 2 jurisprudence--in many states, sellers cannot effectively hide remedy excluions until after the sale. To the best of my knowledge, no court in any state has said that effective post-sale warranty disclaimers can be made in a mass-market setting and few courts have allowed them in a commercial setting unless the buyer actually agreed to the modification. (On remedies, see J. White & R.S. Summers, 1 Uniform Commercial Code, 4th Ed., West Publishing, 1995, supp. 1998, for a discussion of the materiality of remedy limitations and the issues of post-sale modification. On the warranty disclaimer, see also C. Kaner & D. Pels, Bad Software: What To Do When Software Fails, John Wiley & Sons, available in September, 1998.)
My key issue with the postage-refund-enhanced right of return, though, is that it doesn't solve the core problem. You can't find out the terms until after you buy the product. Typically, you discover the terms when you try to use the product, long after you've stopped being in a shopping frame of mind. And even if you do return the product, all you get to do is to buy something else in the uninformed hope that its terms will be better. In other products (such as cars and computer hardware) there is competition based on the length of warranty and the details of the service contracts. By allowing software publishers to hide such terms until after the sale, Article 2B removes a source of pressure on companies to engage in that type of competition.
I agree with George Graff, the Advisor from the ABA's Science and Technology Section, who said:
"The committee adopted a 'right of return' rule, which, in my view, does nothing to deal with the real problem--the fact that mass-market licenses are generally structured in a way so as to conceal their contents from all but the most persistent customers."
How can a mass market customer prove that a product is defective?
Under 2B, the mass-market customer will have little to rely on in terms of standards that he can hold the product up to. Thus, it will be harder to prove that an entirely unsatisfactive product is defective.
The whole purpose of the law of warranty is to determine what it is that the seller has in essence agreed to sell.
And, quoting a comment from Article 2 on express warranty:
The precise time when words of description or affirmation are made . . . is not material. The sole question is whether the language is fairly to be regarded as part of the contract.
Unfortunately, this is not the approach of every state. Different states interpret "basis of the bargain" differently and a manual that was not seen by the customer until after the sale might be a source of express warranties in Virginia but not in New York.
Article 2B retains the basis-of-the-bargain test for determining whether a statement is a warranty or not, leaving the law non-uniform and unclear.
It seems ludicrous that 2B will allow sellers to enforce statements that they put in the package, that played no role in the bargain with the customer (who doesn't see the terms until after the sale), while 2B will demand a basis-of-the-bargain proof before allowing customers to enforce the same seller's other statements that appear inside the same package.
Additionally, under Article 2B (sections 2B-402(a) (3) and 2B-402(b)), product demonstrations are less likely (than Article 2-313(1) (c) ) to create warranties that the product will conform to the demonstration.
Whether or not a product is materially defective is a key issue. If the defect is not material, then the customer is entitled to a partial refund (perhaps) plus incidental and consequential damages (unless these are excluded, as they always are in mass-market contracts.) He cannot cancel the contract and return the defective product.
Article 2B redefines "material breach." in a way that will typically make proof of materiality more difficult for mass-market products than current law. (Footnote)
Even if you can prove a serious breach, the publisher's technical support staff can slip a waiver of liability into an update. When you install the bug fix, you manifest assent (by clicking <OK> during installation) to a term that says you release the publisher from all liability for the complained-about (and other) defects. This would be enforceable under Section 2B-605(a).
The customer who does suffer a material breach has to be able to enforce the contract somewhere. But under 2B, the publisher gets to choose (write into the shrink-wrapped license and enforce the term) what country's or state's laws apply to the software.(Article 2B Section 2B-107--for example, Corel chooses Ireland for WordPerfect) and where the suit can be brought.
The publisher can choose what courthouse, in what state or country, can hear any complaints filed against it (2B-108) "unless the the choice is unreasonable and unjust." This "unfair and unjust" language might sound like a protection, but it comes from a line of cases starting (in the consumer context) with Carnival Cruise Lines v. Shute 499 U.S. 585 (1991) (Footnote) that have held forum selection clauses enforceable (not both "unreasonable and unjust") even though they would probably deprive the customer plaintiff of his or her day in court. We talked about this repeatedly in the Article 2B meetings. Small customers with small claims will be effectively barred from bringing many types of lawsuits by this rule because the exclusive forum is too far away. In February 1998, the Drafting Committee considered a motion that when the following conditions are all met, a consumer can sue the publisher in small claims court in her home state:
This proposed compromise protected individuals (only) who had a claim that would be too small to fly across the country (or the world) to sue for. But it also protected businesses strongly by leaving the choice of forum clauses intact in the cases that publishers most fear: lawsuits by all businesses and all class action suits. The Drafting Committee voted down the motion.
Thus mass-market customers probably do better under current law (the Restatement) than under 2B.
Article 2B allows the seller to exclude incidental and consequential damages (2B-703) and that exclusion will stick (unlike the result in many states under Article 2) even if the exclusive remedy provided by the contract fails of its essential purpose or is ruled unconscionable by a court (2B-703(c)). In doing this, Article 2B drops the Article 2 notion of a minimum adequate remedy (see the Official Comments to Article 2-719).
Article 2B even allows the seller to specify that a contract is noncancellable even in the event of the seller's breach (2B-703(a)).
Article 2B doesn't distinguish between defects that were known to the software publisher at time of sale and defects that were not, but this is an important distinction because publishers ship software with many known defects. (See C. Kaner & D. Pels, Article 2B and Software Customer Dissatisfaction. Circulated to the 2B Drafting Committee, May 1997. www.badsoftware.com/stats.htm.) It is becoming increasingly common for software publishers to charge customers for technical support--$3 per minute is not an unusual figure. Some publishers provide a short period of free support while others will bill for all phone calls. Suppose that you buy a $50 game, have a problem, call the publisher for support, talk with the support representative for 30 minutes until you realize that this is a known defect that the publisher will not fix, and you demand a refund. The publisher agrees. You return the product and get a check for $50. You don't get back the cost of the phone call, the cost of the postage, or the $90 you gave the publisher for the support call. All of these are incidental expenses, and the publisher has almost certainly excluded liability for incidentals. Article 2B allows this publisher to profit from its known defects.
Does other law protect the customer from losses caused by undisclosed known defects? I'm not sure. In Louisiana, probably yes. But elsewhere? There are many real estate cases that say so, and there are some goods cases that involve known defects or defects arising out of gross negligence that resulted in a personal injury, but what about cases involving simple economic loss arising out of a defect in goods that was known by the seller but not revealed to the customer at time of sale or time of delivery? If the software publisher neither makes contrary affirmative representations nor actively conceals the defect, is there a cause of action for fraud? I haven't searched exhaustively, but I have searched and I have not found statutory authority or case law that cleanly supports such a cause of action.
Article 2B creates the anomalous situation that the customer must absorb the losses caused by defects known to the publisher but not disclosed, even losses that are income for the publisher. Article 2B should fix the problem that it creates.
Software can cause losses that far exceed the price of the software. I understand the sense of allowing a publisher to exclude or limit its consequential liability. But not when those losses are caused by a defect that the publisher knew about but chose not to advise the customer about. Surely the customer is at least entitled to an opportunity to prevent or mitigate its losses by using the software in a way that avoids or manages the circumstances that trigger the effects of this defect.
I have many other concerns about Article 2B, but the foregoing ones give you a flavor of the uneven treatment of buyers and sellers under the draft statute. Given that flavor, please consider with me some issues in the economics of software quality.
Businesses spend fortunes on quality-related costs. The objective of quality engineering is to minimize the total cost of quality across the life of a product. Traditionally, quality engineers categorize quality-related costs as follows:
Note that these are all costs of the seller. A cost of the customer is an externalized cost that is not reflected in the seller's cost analysis. Customer costs are partially and indirectly reflected when they bounce back as external failure costs.
External failure costs can be roughly categorized into:
Whether the effect is intended or unintended, Article 2B in practice is a multi-pronged assault on external failure costs. It drives these costs way down in mass-market cases, and keeps them low even when quality declines. That reduces sellers' incentive to sell high quality products. In the face of competitive pressure to release products quickly, companies will be likely to ship buggier software sooner, because the costs of defects (to sellers, not to customers) have declined under 2B. The table on the next page provides examples of the costs that are driven down. Article 2B authorizes these measures, and in this world of you-can't-see-the-terms-until-after-you-buy-it contracting, we should expect to routinely see terms like these.
|CUSTOMER SUPPORT||LOST SALES||LEGAL RISKS|
|Reduce net support costs and obligations||Reduce effects of competition||Reduce probability and cost of lawsuits|
There has been some sentiment expressed that the harshest use restrictions of Article 2B will not be enforced by the courts, either under a preemption theory or under an unconscionability theory. I don't think that we can or should comfortably rely on either one:
There have been no cases in which [Copyright Act] Section 301 preemption was used successfully to challenge and invalidate a term of a contract that was enforceable as a matter of general state contract law.
Similar themes have appeared elsewhere, such as in the ProCD opinion--the claim being that Federal policy should not trump terms appearing in private contracts.
There have been no cases in which [Copyright Act] Section 301 preemption was used successfully to challenge and invalidate a term of a contract that was enforceable as a matter of general state contract law.
Article 2B might appear to be "neutral" but it makes presumptively valid (and perhaps absolutely valid) a wide, wide range of restrictions that would never be valid after a first sale.
My technical specialty in software is human factors (user interface design and usability evaluation), which grew out of my work for my first doctorate, in Human Experimental Psyc!hology. As I read this aspect of Article 2B, it is poised to set the field back by ten years. The simplest solution would be to state, "'Informational content' does not include the user interface of a computer program." Section 102(a)(26), 102(a)(36) and all the warranty exclusions and special provisions for published informational content.
I urge you to study 2B for yourself and to express your disappointment with it to the leadership of NCCUSL (Gene Lebrun, President, NCCUSL, 211 E. Ontario Street, Suite 1300, Chicago, IL 60611) and ALI. (Geoffrey Hazard, Executive Director, American Law Institute, 4025 Chestnut Street, Philadelphia, PA 19104.)
1.The federal Magnuson-Moss
Act and other state-level consumer protection laws apply to all
sales of consumer goods. There are no published court rulings
that have settled the question of the applicability of the Magnuson-Moss
Act to software, but it is generally believed that courts would
rule that the Act applies to consumer software. See, e.g. the
discussion in T. Smedinghoff, The SPA Guide to Contracts and the
Legal Protection of Software. Software Publishers Association,
Section 2B-105(c) appears to preserve consumer protection rules: "In the case of a conflict between this article and a statute or regulation of this State establishing a consumer protection in effect on the effective date of this article, the conflicting statute or regulation controls." But Article 2B characterizes the transaction as the sale of a license, an intangible, not goods. Therefore, laws that specifically apply to sales of consumer goods would appear not to apply to this transaction. I have repeatedly encouraged the Drafting Committee to revise 2B if they don't intend this result. (For example, see C. Kaner & T. Paglia, Letter to American Law Institute outlining the consumer community's priorities for its Executive Council meeting, December, 1997. www.cptech.org/ucc/dec5-97.html.) So far, the Drafting Committee has not chosen to make this change.
2. Under Article 2B
Section 2B-109, a breach is material if (2B-109(b)(1)) "the
agreement so provides" or (2B-109(b)(2)) "the breach
is a failure to perform an agreed term that is an essential element
of the agreement" or (2B-109(b)(3)) if the breach causes
"substantial harm to the aggrieved party, such as costs or
losses that significantly exceed the contract value" or "substantially
deprives "the aggrieved party of a substantial benefit it
reasonably expected under the contract." This is a high hurdle
to jump--for example, you can't ask for a refund unless the product
is causing you losses that are significantly greater than the
price you paid.
The Reporter's Notes to Section 2B-109 points to this section as being derived from the Restatement (Second) of Contracts (a leading summary of current law) which, the 2B draft says, lists five significant circumstances:
" (1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected; (2) the extent to which the injured party can be adequately compensated for the benefit of which he will be deprived; (3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (4) the likelihood that the party failing to perform or to offer to perform will cure the failure, taking into account all the circumstances, including any reasonable assurances; and (5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing."
The Restatement factors look to the circumstances,
including the seller's conduct and risks, as well as to the harm
done to the customer. We can illustrate the difference with an
example. Suppose that a publisher sold you a seriously but not
devastatingly defective product.
Under Article 2B:
In many cases, such a product will not be defective
under the Article 2B standard.
Under the Restatement of Contracts:
- the first factor is the extent to which you are deprived of a benefit. A small deprivation counts, just not for much. The deprivation doesn't have to be of a substantial benefit.
- The second factor asks whether you can be adequately compensated without canceling the contract. Sure, but not if all of your incidental expenses and consequential losses are excluded. This question isn't asked under 2B's material breach standard.
3. The Carnival Cruise
Lines case illustrates the hardship that forum selection clauses
can work on consumers. (Some background facts mentioned here are
taken from the 9th Circuit's overruled opinion, Shute v. Carnival
Cruise Lines, 897 F.2d 377, 1990). Eulala Shute lived in the State
of Washington. In Washington, she bought tickets for a cruise
from Los Angeles, California to Puerto Vallarta, Mexico. She was
injured on the ship. On the back of the ticket, in fine print,
was a forum selection clause that required Shute to file any lawsuit
in the State of Florida. This is convenient for Carnival Cruise
Lines, which is based in Florida, but Shute would have to fly
herself and all her witnesses from the West Coast to Florida.
The United States Court of Appeals (Ninth Circuit) noted that
this case "would be so gravely difficult and inconvenient
that the plaintiffs would for all practical purposes be deprived
of their day in court." It then ruled that Shute could sue
in Washington. But the United States Supreme Court held that forum
selection clauses are enforceable and that this situation was
not both "unreasonable and unjust", and ruled in favor
of Carnival Cruise Lines.