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Remedies Provisions of Article 2B

 

Copyright © Cem Kaner, 1996. All rights reserved.

(This memo was written for the January 10-12, 1997 meeting of the Article 2B Drafting Committee.)

 


To: Article 2B Distribution
From: Cem Kaner
Re: Remedies provisions of Article 2B
Date: December 10, 1996


Article 2B provides virtually no remedies to the mass-market customer, while providing significant remedies to the mass-market licensor. This document suggests some ways to rectify this imbalance without imposing impossible burdens on licensors.

In my view, the fundamental imbalance between licensors and licensees lies in the remedies available to both. There are no realistic remedies for mass-market customers and, therefore, this law provides them with no rights.

NOTE: I have separately forwarded suggestions to Pat Fry on examples of losses and expenses suffered by mass-market software customers. I am not distinguishing between different types of consequential losses here because I am awaiting Pat's next proposal. I am hoping that this memo will complement, rather than conflict with, Pat's analysis.

 

  • PROBLEM 1: In practice, it will be extremely easy under Article 2B for the mass-market licensor to drive up the licensee's transaction costs beyond any level that would make it reasonable for a licensee to pursue its remedies.

    Recommendation: Article 2B should follow Article 2 and provide the licensee with a "minimum adequate remedy." The amount and nature of such a remedy could vary appropriately under the specific circumstances.

    PROBLEM 2: Article 2B allows licensors to exclude incidental damages. The rationale for excluding consequentials doesn't apply to incidentals.

    Recommendation: Revise 2B-706(d) as follows (deleting incidentals):

    (d) Consequential damages may be excluded or limited by agreement, unless the exclusion or limitation is unconscionable.

    PROBLEM 3: Article 2B allows mass-market licensors to easily exclude liability for all consequential damages without providing any realistic mechanism for licensees to exclude consequential damages.

    Recommendation: Revise 2B-706(d) as follows:

    (d) Consequential damages may be excluded or limited by agreement, unless the exclusion or limitation is unconscionable. However, a licensor that excludes consequential damages may not recover consequential damages from a licensee.

    PROBLEM 4: Article 2B allows mass-market licensors to easily exclude liability for all consequential damages even when the losses were caused by a material bug that was known to the licensor, but not known to the licensee, at the time that the licensor licensed the software.

    Recommendation: Revise 2B-706 as follows:

    (d) Consequential damages may be excluded or limited by agreement, to the extent that exclusion or limitation is not unconscionable. However, a licensor that excludes consequential damages may not recover consequential damages from a licensee.

    (e) Exclusion or limitation of consequential damages that result from a material defect in the software that was known to the licensor at the time of delivery of the software to the licensee is unconscionable.

    PROBLEM 5: It seems outrageous that Article 2B places a duty of reasonable care on the licensee (2B-701(b) requires the licensee to take reasonable care to protect its data) while imposing no duty on the licensor of taking reasonable care to ensure that damage-inducing errors do not arise. If the drafters of the statute want to determine recovery levels by applying negligence standards, let them provide for a comparative negligence standard that applies to both sides.

  •  

    PROBLEM 1: In practice, it will be extremely easy under Article 2B for the mass-market licensor to drive up the licensee's transaction costs beyond any level that would make it reasonable for a licensee to pursue its remedies.

    As drafted, Article 2B allows the mass-market licensor to exclude all liability for consequential and incidental losses. (2B-706(d).) The mass-market customer is not entitled to a cure (2B-618(b)) Additionally, the customer is not even entitled to a refund unless the errors in the software are "material."

    Article 2B allows the licensor to bury these terms in a statement of the license (calling this a License "Agreement" is a misuse of the language) that the customer will only see after paying for the software, taking the software back to her home or office, and beginning to load it on her computer. The customer is deemed to have accepted the terms of the agreement if she (or her secretary) presses the <Enter> key to continue installing the software when the installation program displays a few lines of the license and calls for an <Enter> or mouse-click on "I agree" to complete the installation.

    It is now common practice to charge customers for support calls. A software publisher might charge $3 or $5 per minute or might charge $25 to $100 (or more) per "incident". These rates can add up. For example, calls about device compatibility or operating system configuration problems can take an hour. (Data reported at OpCon West '96 by a Microsoft representative indicated that calls involving MS Office 95 and printer-related issues had been averaging over an hour per call. This accords well with my experience with other products.) Some publishers will refund the charge if, in their opinion, the customer is calling about a known bug. However, not all publishers do this. (I don't choose to single out companies here, but managers at well-known software companies have personally assured me that they do not refund customer call charges in the event of a call over a known bug, or they don't do so unless the customer makes a fuss about it.) Call centers are under significant pressure to become profit centers in their businesses, and it is difficult for them to grant credit to customers for bugs that result in many phone calls or long phone calls. Finally, several publishers outsource some or all of the support function to third parties. The billing / reimbursement arrangements between publishers and third party support organizations can be complex and may make it uneconomical for the third party to provide support for specific problems when the customer will not pay for the call.

    The cumulative cost of the calls to report a bug, seek help, and ultimately to demand a refund because of a material bug can easily exceed the cost of the software itself. A refund under these circumstances is a purely illusory remedy. It would have cost the customer less to silently accept the breach and throw the software away than to report the bug and demand a remedy.

    Additionally, when the customer calls complaining about a serious bug, the publisher may or may not admit that the bug is material. Representatives of the publishers trade associations have attempted to get the drafting committee to agree to insert a provision that states that a disclaimer of all warranties, express and implied, is not unconscionable -- even though the publisher cannot disclaim its express warranties. Such purported disclaimers of express warranties are common in software licenses. These serve to prevent claims by customers by misleading them about their rights. Why should we expect publishers to be any more forthright than this in post-sale, verbal dealings with customers?

    The cost of proving that a defect is material can easily exceed the purchase price of the software.

    Software publishers impose other transaction costs on customers who have defective products. For example:

     

    These examples are by no means exhaustive. When we declare in statute that a licensor's limitation of remedies to a refund is valid, even if this would not be a "minimum adequate remedy", we create an environment in which the licensor is encouraged to follow its own cost/benefit analyses in determining whether or not to provide even a refund.

    Recommendation: Article 2B should follow Article 2 and provide the licensee with a "minimum adequate remedy." The amount and nature of such a remedy could vary appropriately under the specific circumstances.


    PROBLEM 2: Article 2B allows licensors to exclude incidental damages. The rationale for excluding consequentials doesn't apply to incidentals.

    Under 2B102(a)(17) "Incidental damages"

     

  • (A) includes compensation for any commercially reasonable charge, expense, and commission incurred after breach by the other party in:

     

  • (i) inspection, receipt, transportation, care, or custody of property;

    (ii) stopping shipment;

    (iii) effecting cover, return, or resale of property;

    (iv) reasonable efforts otherwise to mitigate the consequences of breach; and

    (v) actions otherwise incidental to the breach;

     

  • (B) but do not include consequential or [direct] [general] damages.

  • Publishers' representatives have regaled us with the potential harms of allowing compensation for consequential damages. They state that they are concerned because:

     

    These concerns don't apply for incidentals. The amounts involved are generally small. If they skyrocket, it is usually because the publisher is requiring the customer to jump through hoops. The publisher can thus manage the size of the loss by managing the responsiveness of its customer support organization.

    Recommendation: Revise 2B-706(d) as follows (deleting incidentals):

     

  • (d) Consequential damages may be excluded or limited by agreement, unless the exclusion or limitation is unconscionable.
  •  

    PROBLEM 3: Article 2B allows mass-market licensors to easily exclude liability for all consequential damages without providing any realistic mechanism for licensees to exclude consequential damages.

    In the mass-market contract, the licensor sets the terms and reveals these to the customer after the sale has taken place. The customer has no opportunity to negotiate the terms. Very few non-lawyers will understand the consequences of these terms.

    Article 2B allows the licensor to exclude incidental and consequential damages, restricting remedies, for example, to repair, replacement, or refund. As 2-719(b) makes explicit (and see Reporters' Notes, 2-719, Note 3), if the limited remedy fails of its essential purpose, the customer does not have recourse to the default remedies. As far as I can tell, in this case, the customer is simply cheated out of his money, with no remedy available.

    In contrast, the UCC builds in several default remedy provisions for licensors, that the licensor will not exclude. In the bargaining structure created under Article 2B, the customer has no opportunity to exclude these damages.

    Here are some examples:

     

     

     

    I don't understand what public policy is served by a law that will predictably and inevitably provide consequential damages only to licensors. It is true that licensees can often limit their exposure to the risk of consequential damages by not revealing confidential information and by not breaching the contract in other ways (such as by breaching the restrictions on use, location of use, identified users, etc.). But it is just as true that the licensor can limit its risks by not knowingly shipping products with serious bugs and by not otherwise knowingly breaching its contracts. Why give licensors a break -- why create a law that makes it trivially easy for licensors to give themselves a break -- while making it virtually impossible for licensees to limit their own liability?

    Recommendation: Revise 2B-706(d) as follows:

     

  • (d) Consequential damages may be excluded or limited by agreement, unless the exclusion or limitation is unconscionable. However, a licensor that excludes consequential damages may not recover consequential damages from a licensee.
  •  

    PROBLEM 4: Article 2B allows mass-market licensors to easily exclude liability for all consequential damages even when the losses were caused by a material bug that was known to the licensor, but not known to the licensee, at the time that the licensor licensed the software.

    Publishers' representatives have protested that they cannot be required to pay consequential damages because whenever they release a product, they would be betting their business on the non-occurrence of serious bugs in the code. It is impossible to find all bugs in any non-trivial program. (It really is impossible to do this. For now, check my book, Testing Computer Software, ITCP 1993. I will also be writing an explanation of this problem for a non-computer audience within the next few months.)

    Given that it is impossible to find every bug, a publisher who can be held fully accountable for every bug will go out of business. We risk killing the industry with an unrestricted consequential damages risk. That result would not serve customers any more than it would serve licensors.

    On the other hand, most (probably all) software publishers "defer" (decide not to fix) many bugs that are discovered during the development process. Some of these are very serious. If the publisher can reasonably foresee the consequences of a bug that it is knowingly leaving in a product, I don't see why we should force the customer to absorb those consequences. The publisher can limit its risks very easily, by fixing the bug.

    Recommendation: Revise 2B-706 as follows:

     

  • (d) Consequential damages may be excluded or limited by agreement, to the extent that exclusion or limitation is not unconscionable. However, a licensor that excludes consequential damages may not recover consequential damages from a licensee.

    (e) Exclusion or limitation of consequential damages that result from a material defect in the software that was known to the licensor at the time of delivery of the software to the licensee is unconscionable.

  •  

    PROBLEM 5: It seems outrageous that Article 2B places a duty of reasonable care on the licensee (2B-701(b) requires the licensee to take reasonable care to protect its data) while imposing no duty on the licensor of taking reasonable care to ensure that damage-inducing errors do not arise. If the drafters of the statute want to adopt negligence standards, let the standards be present for both sides, and let the rule be comparative negligence, not contributory.

    Beyond raising this issue, I don't yet have valuable comments to make about Problem 5, so I'll stop here.

    Thank you for considering this analysis.

     

    Cem Kaner attends Article 2B meetings as an observer. He consults on technical and management issues, practices law, and teaches within the software development community. His book, Testing Computer Software, received the Award of Excellence in the Society for Technical Communication's 1993 Northern California Technical Publications Competition. He has managed every aspect of software development, including software development projects, software testing groups and user documentation groups. He has also worked as a programmer, a human factors analyst / UI designer, a salesperson, a technical writer, an associate in an organization development consulting firm, and as an attorney (typically representing customers and software development service providers). He has also served pro bono as a Deputy District Attorney, as an investigator/mediator for Santa Clara County's Consumer Affairs Department, as an Examiner for the California Quality Awards. He holds a B.A. (Math, Philosophy, 1974), a J.D. (1993), and a Ph.D. (Experimental Psychology, 1984) and is Certified in Quality Engineering by the American Society for Quality Control. He teaches at UC Berkeley Extension, and by private arrangement, on software testing and on the law of software quality.


    Return to Bad Software: What To Do When Software Fails.

    The articles at this web site are not legal advice. They do not establish a lawyer/client relationship between me and you. I took care to ensure that they were well researched at the time that I wrote them, but the law changes quickly. By the time you read this material, it may be out of date. Also, the laws of the different States are not the same. These discussions might not apply to your circumstances. Please do not take legal action on the basis of what you read here, without consulting your own attorney.
    Questions or problems regarding this web site should be directed to Cem Kaner, kaner@kaner.com.
    Last modified: Monday November 10, 1997. Copyright © 1997, Cem Kaner. All rights reserved.