- Perfect Tender
- Mass Market versus Consumer
- License versus Sale
Carlisle C Ring, Jr.
Vice President & General Counsel
Atlantic Research Corporation
1577 Spring Hill Road
Vienna, VA 22182
Re: Comments on UCC 2B
Dear Connie,
I am writing to provide my comments on the current draft of Article 2B. These comments will focus on issues raised during the Tampa meeting and those that are likely to be addressed during the San Francisco meeting. I have attempted to be as concrete as possible and where practical I have suggested alternative language for the provisions of Article 2B that are of particular concern.
The Tampa meeting of the Drafting Committee was illuminating and while I believe there has been some progress from a consumer perspective, significant work must be done to make the draft more balanced. One thing that seems certain is that the Drafting Committee will have no shortage of input from industry sources due to their keen interest in Article 2B and financial ability to participate in this process. Individual consumers and even consumer organizations do not have comparable resources which makes attending the drafting meetings almost impossible. The Drafting Committee is therefore under a special burden to protect the interests of consumers. I hope my comments, as one of the few consumer representatives participating in this process, will be helpful in providing the Drafting Committee with a different view of Article 2B and assist the Committee in arriving at a fair balance between consumer and industry interests.
Although the draft of Article 2B has improved with regard to consumer issues, there are many areas that still lean too far in favor of industry. The Drafting Committee must not lose perspective when considering the current draft and the few amendments that have been made toward consumer protection. This process has become a little like a department store that raises its prices 20% in November so it can have a 10% off sale during December's holiday season. The draft was viewed as being imbalanced toward industry interests and the few provisions intended to provide more protection to consumers have done little to effect the status of the draft as a whole.
Industry representatives are quick to state that this provision or that concept is "unacceptable." Some provisions adopted by the Committee must strike industry as "unacceptable" at first. When cooler heads prevail and the draft is examined as a whole, some specific terms may make them uncomfortable, but they will recognize the reality that the industry will not be unduly impacted. And some provisions in Article 2B should make industry uncomfortable. Any attempt to draft a document treating so many disparate interests with fairness requires compromise. Not getting everything you want is the essence of this process and that goes for the software industry as well as every other player to be effected by Article 2B. In sum, if industry walks away from this process without having to make some hard compromises in order to correct the imbalances of the current draft, the Drafting Committee can rest assured that it will be unfair to consumers.
II. BROAD POLICY CONCERNS
A true perfect tender rule that takes into account the unique qualities of software must be formulated. As the draft currently stands, the purchaser is given almost no protection due to the narrowness of the perfect tender rule as it would apply to these types of transactions. This is an important matter and a detailed discussion is provided on pages 8-9, Section 2B-608 Refusal of Defective Tender.
Article 2B should move further toward an approach that seeks to provide consumer protection in the mass market. The class of purchasers that should be protected under mass market provisions includes individuals as well as small and medium businesses. An individual, an accounting firm, and a hospital are similarly situated when purchasing the majority of the mass market software they use. They are all likely to be relatively unsophisticated in these matters and rely upon the software publisher. Each of these customers takes the software on almost the identical terms. As mass market purchasers they should be accorded similar protections. Merchant to merchant transactions or purchases outside the mass market are the only transactions that warrant less protection. While there will inevitably be some level of over- inclusiveness with this approach, this is much more equitable than providing consumer protection only to the minuscule class of purchasers that would fall under the definition of consumer in 2B-102 (7).
License versus Sale
Several industry trade associations have opposed for obvious reasons altering the current approach taken by Article 2B in characterizing software sales as "license" transactions. This approach is rationalized by industry through a combination of historical assumption and claims of consumer convenience. In recent correspondence, the American Electronics Association, Information Industry Association, Information Technology Industry Council, and the Software Publishers Association threatened to withdraw from the 2B drafting process and further stated that "any uniform law embodying those views would be actively and vigorously opposed by our membership in any state in which it was introduced."[1] This threat, however, does little to allay the substantive concerns of federal preemption raised by Professor David Rice. In addition, the industry claims that Professor Rice is alone in criticizing 2B's approach. Might this be because the Article 2B process is dominated by industry representatives? At the very least, the Drafting Committee must look beyond the insular crowd that frequents the 2B meetings. An effort to bring in other perspectives on this matter is essential.
III. IMPORTANT SECTIONS TO BE DISCUSSED IN SAN FRANCISCO
2B-102 CONSPICUOUSNESS
The definition of conspicuous in 2B-102 (6) should be focused upon providing the purchaser with the information prior to purchase. Including within the software box the most conspicuous of disclaimers on purple paper with bright yellow, 18 point type is of no practical consequence when the purchaser, having discovered terms it deems unacceptable, will be unlikely to pack it back into the box, return to the store, and seek a refund. This is not reality. Conspicuousness should focus on getting important disclaimers on the front of the software package in a form that will be brought to the attention of a reasonable purchaser. In addition, once conspicuousness is aimed at providing purchasers with pre-sale information, this section should be in the form of guidelines rather than a per se rule. Conspicuousness is a question of fact that a court is in a better position to determine based upon the particular situation.
2B-308 MASS-MARKET LICENSES
This section validates the shrink-wrap license and is contrary to the weight of existing authority in the mass market context. In combination with 2B-112 and 2B-113, the terms of the mass market license may be assented to after the sale. These licenses are contracts of adhesion - purchasers do not have any ability to read the terms before purchase, the terms are dictated by industry and become effective after the contract has been completed, and purchasers have no real choice because shopping around for different terms (which are now allowed to be concealed within the package), will likely be fruitless.
The claimed ability of a purchaser to read the terms of the shrink- wrap license and return the product for a refund is not a viable protection. The chance of a purchaser actually opening up the software and reading through the entire agreement is slim at best. The idea that purchasers will do so and then return the software due to the unfavorable license terms is even more remote. And even if a consumer went this far, they may be foiled by a software retailer with a "no return" policy. The chance that a purchaser will actually continue to push on and return the software directly to the manufacturer goes from highly unlikely to hopeless. Assuming a consumer of such persistence actually exists, he or she may then go back to the software retailer and do what? Start this process all over with a competing brand that will probably have similar terms contained within the package?
The supposed protections afforded purchasers are ineffective. And yet the draft goes even further by requiring in section (b)(1) that the reasonableness of the terms be determined not by the expectations of a reasonable purchaser, but by assumptions a software publisher makes with regard to what it believes the purchaser would think is reasonable. This section seems to go to incredible lengths, to the point of requiring that the software publisher perform mental gymnastics in setting term it feels a purchaser would find not surprising, rather than rely on the reasonable expectations of the consumer.
In addition, section (c) makes effective those terms that were unreasonable to expect so long as assent is manifested. Under 2B-112, manifesting assent is broadly defined including failing to return the item or clicking on an icon where the actual terms are in a separate record. The combined effect of these provisions is entirely one-sided and must be redrafted with some consumer-sided interests in mind. If an expansion of current law in recognizing mass market shrink-wrap licenses is to be adopted, and it should not be, at the very least purchaser interests must be given significant protection. The ability of publishers to restrict or eliminate Fair Use and the First Sale Doctrine with standardized contract forms goes beyond software, an expansion in itself, to include music CDs. Thus, used CD stores will become a thing of the past. That this may be used to expand into analog works is even more potentially oppressive, putting public libraries at risk. The validity of shrink-wrap licenses should not be declared in this forum. At the very least, the important policy considerations raised herein must be more effectively preserved.
2B-706 CONTRACTUAL MODIFICATION OF REMEDY
Contractual modifications should not leave the purchaser in a mass market transaction with unconscionability as a protective floor. Where a contractual modification eliminates incidental and consequential damages in favor of a limited remedy, it should be void if the remedy fails to provide a minimum adequate remedy consistent with the language of Article 2. The following addition is suggested to section (d):
(d) Consequential damages and incidental damages may be excluded or limited by agreement, unless the exclusion or limitation is unconscionable. The exclusion of consequential damages and incidental damages is void if the aggrieved party is deprived of a minimum adequate remedy under the circumstances.
2B-712 LICENSOR'S SELF-HELP
The self-help provision requiring no resort to judicial process is an extraordinary right and should be limited. The safeguards in the provision require litigation and are therefore of little practical use. Because of the expense and delay involved in litigation, most mass market purchasers will never pursue such a remedy even if their damages are quite substantial. A limitation of self-help to the non-mass market sector would be a more balanced approach.
IV. ANALYSIS OF THE SECTIONS DISCUSSED AT THE TAMPA MEETING
2B-319 ELECTRONIC VIRUSES
(a) In addressing the obligations imposed upon each party in performing or sending electronic messages, the draft prohibits the transmission of "an undisclosed extraneous program, code, or virus . . . ." The use of "extraneous" in this section causes some confusion and should be eliminated. A virus or defective portion of a program may be central and integral, rather than extraneous, but this should not relieve a party of liability where it may reasonably be expected to cause damage.
(b)(2) This section should only apply to non-mass market transactions. Further, the inclusion of "circumstances" as a way to provide notice that a virus risk exists makes the provision too broad. It is difficult to imagine a case in which a publisher would not claim that the circumstances put the purchaser on notice that actions have not been taken to eliminate or significantly reduce the inclusion of viruses. Restricting this section to the terms of the agreement strikes a better balance in the non-mass market context.
(e) Although (e) was unanimously eliminated by the Drafting Committee, it is likely to be redrafted in some form. While perfection in virus removal is not possible, there are tremendous economies of scale in requiring each publisher to take reasonable measures, rather than imposing this burden on every mass market purchaser. In the mass market the duty of the publisher to use reasonable care to eliminate viruses should not be disclaimable. Suggested redraft:
(e) Language in a record or display is sufficient under subsection (b)(2) if it states "Warning: May contain viruses or potentially damaging code," or words of similar import. The language disclaiming the obligation under subsection (b)(2) must be conspicuous. A disclaimer is not valid in a mass-market transaction unless it otherwise complies with this section and the software is offered free of charge for a non-commercial purpose.
This modification eliminates the problems expressed in Tampa with regard to the hypothetical scenario in which a college student or hobbyist creates shareware and puts it on a web site. If the hobbyist or student charges for the product or offers it for a commercial purpose, it seems reasonable that responsibilities, as defined by (c), be assumed to eliminate viruses. This preserves the ability of hobbyists to create and innovate without being required to accept liability for viruses passed on to others, while preserving protection for the mass market purchaser.
2B-320 ELECTRONIC REGULATION OF PERFORMANCE
Section (d) should be clarified to allow a purchaser to refuse delivery of a new version of software/information and preserve the current working version. For example, if a consumer has purchased a software program and is entitled to or has separately purchased periodic updates, the consumer should not have the working version automatically replaced or disabled when the new version may have significant bugs. When the purchaser does not have the ability to prevent automatic disabling of the prior version, the purchaser is left without a functional version. It seems most logical to keep this kind of provision limited to non-mass market transactions.
2B-401 WARRANTY AND OBLIGATIONS CONCERNING AUTHORITY AND NONINFRINGEMENT
As it is currently written, section (b) places too much of a burden on the purchaser because the warranty is only to the extent that the "licensor has no reason to know" that the information product infringes upon intellectual property rights. Further, the purchaser's warranty is limited only to "any authorized use intended by the licensee and known to the licensor . . . ." Noninfringement is more appropriately put squarely on the vendor as the entity offering the product and the best able to assure compliance. The following redraft is suggested:
(b) Except for the lessor in a finance lease, a licensor that is a merchant regularly dealing in information of the kind warrants that, at the time of the transfer, any copies transferred by the licensor, or the information, when used in any authorized use, does not infringe an existing intellectual property right of a third party, except as disclosed to or otherwise known by the licensee.
2B-402 EXPRESS WARRANTIES
This section should be made consistent such that the express warranty created by affirmation, (a)(1), and the express warranty created by sample or demonstration, (a)(2), both require that the promisor "will conform" to that promise. The easing of this standard in (a)(2) to "reasonably conform" is unnecessary because the section already contains qualifiers for differences in performance, which should be pointed out by the promisor, due to use in the real world under circumstances that differ from the demonstration. This is an important issue because it is common for salespeople to run unrealistic demos when they are in the best position to know and convey any negative performance variations that will occur with the prospective purchaser's stated intentions for using the information. The following redraft is suggested:
(2) A sample, model, or demonstration of a final product that is made part of the basis of the bargain creates an express warranty that the performance of the information will conform to the performance illustrated by the model, sample, or demonstration, taking into account such differences between the sample, model, or demonstration and the information as it would be used to the extent that these differences are made apparent by the vendor to a reasonable person in the position of the purchaser.
Section (c) creating an exception such that no warranty is created for published informational content unless the parties deal directly with each other should be deleted or at the very least clarified. It should be made clear that this section creates a warranty in the mass market sector for published informational content. An approach tracking Article 2-313 would be reasonable. It is not too much to require a vendor making affirmative representations of quality to stand by those published affirmations where the purchaser relies upon them. This will in no way restrict advertising claims and other assertions that are protected by the First Amendment. Some of the concerns raised in Tampa (the NY Times being sued because it violated an alleged warranty to print "All the News that's Fit to Print"), would clearly not create warranties and are mere puffery. Claims such as "the best," "the most effective," etc., would be protected. A vendor should be responsible for the specific quality claims it publishes and they are obviously in a good position to control these claims upon which purchasers rely. It is a minor burden to require that vendors not make false claims regarding their products, yet a major benefit will be provided to purchasers.
2B-404 IMPLIED WARRANTY: INFORMATIONAL CONTENT AND SERVICES The first sentence sets a reasonable care and workmanlike effort standard, which does not require perfection but establishes a balance between consumer and industry interests. The last sentence of section (a) tips the balance of this provision in favor of industry by stating that no breach occurs even if "informational content is not accurate or is incomplete." This is contradictory, confusing, and goes too far. The sentence should be deleted.
2B-406 DISCLAIMER OR MODIFICATION OF WARRANTY
Section (e) should be redrafted to exclude the current elimination of unconscionability where the implied warranties are waived in compliance with the rest of 2B-406. Unconscionability is an important floor of protection for purchasers that should be maintained.
2B-407 MODIFICATION OF COMPUTER PROGRAM
The last sentence does not convey that a purchaser should not lose all warranties if the purchaser loads software that by design modifies a component shared with other software. The example provided at the Tampa meeting was that some software loads onto a computer and automatically modifies/overrides a library or other similar shared files. In this case it would not be fair for the purchaser to lose all warranties and it should be clarified that the publisher of the software that was automatically overwritten is not released from the warranty obligations on the original product.
2B-408 CUMULATION AND CONFLICT OF WARRANTIES
A new section on the liability of licensors for personal injury, a version of which was defeated by vote of the Drafting Committee, should be included for discussion purposes in the draft. This is an important issue and one that will bring Article 2B in accord with Article 2. Rather than repealing current law, the Drafting Committee should recognize this basic protection instead of putting people at risk for work and non-work related personal injuries that may otherwise not be adequately resolved. The following new section is suggested:
(d) A licensor may not disclaim or limit personal injuries caused by dangerous or defective software.
2B-502 ASSIGNMENT OR TRANSFER OF PARTY'S INTEREST
Section (b)(1) does not reflect the reality that the original copy of software may no longer be functional or locatable by the purchaser. Backup copies are made for this very reason. In addition, occasionally some copy is bound to be left behind and the provision should be rewritten to accommodate transfers as they actually occur:
(1) the licensee received delivery of a copy subject to a mass-market license and transfers all known copies; or
2B-607 LICENSEE'S RIGHT TO INSPECT; PAYMENT BEFORE - INSPECTION PAYMENT
This section provides a needed shield whereby a vendor may protect itself against disclosing the information it is providing before receiving payment if to do so would risk confidentiality or wholly transfer the economic worth. For example, a contract to provide the 5 movie studios most likely to be interested in a particular film project, or 10 CEOs best qualified to run a specialized startup company. The problem is that this section allows for vendors to make spurious claims of confidentiality, etc., and thus avoid any inspection of the information. Although other remedies exist, the onus of recovering payment that should not have been transferred would now be shifted to the purchaser. Drawing a distinction between software and content in (a)(3) may alleviate some of these difficulties.
(3) A licensee's right to inspect is subject to the confidentiality of the information. In a contract to provide informational content, if inspection would provide the licensee substantially with the value of the information before payment, the licensee does not have a right to inspect before payment.
2B-608 REFUSAL OF DEFECTIVE TENDER
The perfect tender rule included in the draft is of little actual consequence in its current formulation. In order to have perfect tender mean something for purchasers it must be a perfect tender rule that is adapted to software transactions. The point at which acceptance occurs is crucial in this context because when ordinary goods are purchased a consumer has a fair opportunity in the vast majority of transactions to determine whether the item bought meets expectations. In buying clothes, sports equipment, and even consumer electronics, the purchaser will have a good idea of whether it is a quality item by inspecting it or turning it on as the case may be. Thus acceptance is meaningful in this context.
At the Tampa meeting industry representatives pointed out that some goods transactions leave the purchaser with less knowledge about the product due to the product's sophisticated nature. The point, apparently, was that equally poor treatment of software purchasers was then more acceptable. Article 2B is being formulated to address specific transactions. Failing to tailor a perfect tender rule to provide actual perfect tender for these types of transactions (software primarily), is irresponsible and damaging to the interests of purchasers. When a purchaser leaves Egghead Software with a copy of Microsoft Word, little if anything at all can be known about the product at this point or even when it is loaded on the purchaser's computer without further use. The perfect tender rule in 2B must take into account the unique nature of software and allow for some form of inspection.
In 2B-608 (c), it should be clarified that the reasonable time before acceptance occurs during which the purchaser may exercise refusal, takes into account the unique qualities of software. In most goods transactions, the consumer has an opportunity to inspect and knows a fair amount about the item purchased when it is examined at the store or after the sale. Thus, the reasonable time for acceptance is fairly brief. In a software transactions almost nothing is known about the item purchased until it is loaded on the purchaser's computer and actually used - having the software merely appear on the screen after installation fails even to scratch the surface. As such, acceptance should not occur until a reasonable time has elapsed in this specific context in order to provide an opportunity to inspect. Without this modification there is no effective perfect tender rule. This suggestion does not extend current law, but merely tailors this provision to give purchasers protection similar to that which is applicable in the majority of Article 2 transactions:
(c) Refusal is ineffective unless made within a reasonable time after the tender and before acceptance and the party whose performance is refused is notified within a reasonable time after the breach was or should have been discovered. In a mass-market license, acceptance does not occur until 30 days after tender.
2B-613 CORRECTION AND UPDATE CONTRACTS
Section (c) provides that breaching a contract to update information "does not entitle the licensee to cancel an underlying contract concerning the information unless the breach is a material breach of the underlying contract." The problem is that where the vendor splits the services provided into distinct contracts, for example a legal research CD-ROM or database and a contract to provide monthly updates, breach of the updates contract will be argued to have no impact on the original contract: a CD-ROM of court cases from the last 50 years current to the date of the sale was promised and delivered. The problem for the purchaser is that while the underlying contract was satisfied, the breach of the updates may not be a "material breach" to the underlying contract. Nonetheless, the money spent by the purchaser on the underlying contract is a loss because without the updates the product becomes unusable quite quickly and obtaining only the updates from another provider will likely be impossible. Thus the consumer will have to purchase an new research tool in its entirety. The following redraft is suggested:
(c) Breach of a contract to correct or update information entitles the licensee to cancel an underlying contract unless the breach does not substantially reduce the value of the information provided pursuant to the underlying contract.
Todd J. Paglia