May 8, 1997

Kenneth Wasch
President
Software Publishers Association
1730 M Street, NW
Suite 700
Washington, DC 20036-4510

Dear Mr. Wasch,

I am responding to your letter to Ralph Nader dated April 7, 1997 that was circulated at the UCC 2B meeting in Santa Monica, CA April 11-13, 1997. Your letter mischaracterizes several matters which I want to clarify.

In your letter you state that SPA "has never issued any statement giving blanket support to any of the successive drafts of the Article 2B." First, Mr. Nader did not claim that SPA was giving "blanket" support to 2B, and indeed it is a meaningless objection because it is difficult to imagine anyone providing "blanket" support for a complex draft that now spans nearly 200 pages. Second, in meetings that I have attended, lawyers who claim to represent SPA have repeatedly made statements supportive of the direction and content of Article 2B. They have consistently voiced strong support for those parts of the draft that favor vendors over customers.

Confirming my sense of SPA's position is a report on your website of the last annual NCCUSL meeting. SPA notes that Article 2B was criticized as "overly biased in favor of licensors" and that the drafting committee was admonished to "go back to the drawing board and develop a more balanced draft." The report said that SPA will undertake an effort to "educate" NCCUSL because "SPA believes the draft is already balanced …."[1] I take this to mean SPA supported the draft - especially in areas of contention between licensors and customers which are the exact issues highlighted in Mr. Nader's letter. Whether this amounts to "blanket" approval - a term not used by Mr. Nader - is an attempt to obscure the issue.

In your letter to Mr. Nader, you also suggest that shrinkwrap license terms are currently enforceable but limited by the concept of unconscionability. As you stated:

[I]t is our view that these terms will be enforceable under contract law unless they are objectionable as unconscionable in the industry.

As for the validity of shrinkwrap licenses, you say that SPA believes they are enforceable under current law. Shrinkwrap licenses have been held enforceable in one court. The Seventh Circuit's ProCD [3] decision is a slender reed upon which to build an assertion that such licenses are fully enforceable nationwide - especially since shrinkwrap license terms have been invalidated in several cases involving business purchasers. Courts have found that the license terms are preempted by federal law or the license terms are an invalid attempt to materially modify the transaction after the contract has been formed.[4] Businesses are traditionally accorded less protection than consumers. Courts that have viewed shrinkwrap with suspicion in the business context would be even more inclined to invalidate them in a consumer transaction. Software licenses are also analogous to post-sale warranty disclaimers, which are often invalidated in the consumer context.

Legality aside, unilateral licenses are unfair. Indeed, you have objected to exactly this type of one-sided license when it was imposed upon a segment of SPA's membership. In your testimony before the Federal Trade Commission on "Innovation-Based Competition," you objected to licenses that are dictated by a licensor who is able to demand extremely favorable terms. When your members were faced with one-sided licenses, you went to the government seeking regulatory relief. So much for, as you claim in your letter, supporting the "bedrock principle of freedom on contract." As you stated:

In these situations, the licensor effectively dictates the terms of the required license -- essentially on a take-it-or-leave-it basis.[5]

In your letter, you claim that UCC 2B does not allow a company to dictate "the state to which a consumer may travel to pursue legal action." You misstate both Mr. Nader's letter and Article 2B. Mr. Nader's letter refers to "customer," not the far more limited class of "consumers" that you mention. As you know, 2B defines "consumer" narrowly, so the few protections supplied to consumers are not available to most purchasers. Article 2B makes a forum selection clause binding on a consumer unless the consumer can prove both of the following: 1. That the court has no jurisdiction over the consumer - that is, the consumer must prove under the Due Process Clause of the U.S. Constitution, that the court is unable to compel the consumer to appear in that state; and, 2. That appearing in this court would "unfairly disadvantage" the consumer.[6] This falls short of eliminating all forum selection clauses for consumers.

More importantly, the software customers that will be bound by forum selection clauses (including sole proprietors, home-based offices, and small non-profits and businesses), represent the vast majority of the mass market. According to the SPA Software Sales Report for the second quarter of 1996, software categories most likely to be purchased by consumers - Entertainment, Home Creativity, Home Education, and Word Processor - represents only 27% of the market. Software purchased by "non-consumers" make up 73% of the market,[7] and this rough estimate is likely to be well below the actual number because all word processor programs and other products would have a significant percentage of purchasers that do not fit within 2B's consumer definition. Article 2B's forum selection clause expressly gives software companies the ability dictate where non-consumers must travel to in order to pursue a legal remedy. This section will therefore restrict, if not eliminate, the ability of most software purchasers to obtain a legal remedy due to the dramatically increased cost of bringing suit hundreds or thousands of miles from home.

Your assertion that "contrary to the statement contained in [Mr. Nader's] letter, the current draft [of UCC 2B] contains no provision dealing with the enforceability of mandatory arbitration terms," is technically accurate, but highly misleading. Mr. Nader's letter was based on the January 1997 draft of Article 2B, in which forum selection and arbitration were both covered in 107. The Drafting Committee decided to split the two clauses so they could be considered separately. In the March 1997 draft (which Mr. Nader had not received at the time he sent the letter to Mr. Gates), arbitration had been taken out of 107 but a new stand-alone arbitration section had not yet been inserted into the draft. We will probably see the new clause in the May or July draft. To say that the most recent draft does not "contain" such a clause, without explaining that its removal was temporary, distorts the true status of UCC 2B.

The justification in your letter for the almost complete ability of software companies to escape liability for the consequences of defective products rings hollow. You claim that "careful computer users routinely back-up their data" and that "data re-entry usually is minimal." This has not been our experience. You cite no data in support of this assertion. Please forward to me whatever study you are relying upon. We would be most interested to see any empirical support for the counterintuitive claim that consumers are not damaged by software defects.

You also state in your letter that under UCC 2B a company cannot "disclaim all warranties and deny that a product conforms to statement [sic] made on packaging or user manuals …." The section on express warranties, UCC 2B 402, specifies that product descriptions, including advertising and presumably software manuals and other documentation, may be considered express warranties. Were the situation that simple, we would have no disagreement.

However, UCC 2B 402 (a)(2) goes on to require that in order to become an express warranty, a representation must become part of the "basis of the bargain." The states vary in defining which statements become part of the basis of the bargain. In some states, such as Virginia, the court will treat statements of fact that come with the product as express warranties whether or not the customer heard or read them before buying the product.[8] This is our interpretation of the proper way to read the Official Comments to Section 313 of the current Article 2 of the Uniform Commercial Code, and this is the direction that has been taken by the drafting committee for the revisions to Article 2. It focuses on what the company agreed to sell and imposes the fairly mild requirement that the product do what the company says it will do.

In other states, such as New York, a representation cannot become part of the basis of the bargain unless the customer relied upon it in making the purchase.[9] Therefore, a purchaser of software in New York that did not read the manual or documentation could not hold the software company liable on an express warranty theory if the product fails to function in accordance with the manual and other documentation. This would be a common situation in these states because in online and mail order purchases, customers rarely get a chance to read the manual or examine the package prior to purchase.

At the next Article 2B Drafting Committee meeting, we will propose that Article 2B be revised to eliminate the "basis of the bargain" requirement, so all statements of fact made in the documentation and on the package will be treated as express warranties under the law. You state in your letter to Mr. Nader that the law already creates a warranty that the product conforms to the statements on the packaging and in the manuals. For this reason, I trust that you will join us in proposing that the Committee eliminate this opportunity for misunderstanding in the draft of 2B.

On the issue of virus liability you claim that the "express language of the draft" requires companies "in most all cases" to exercise reasonable care to remove all viruses, or the draft might alternatively require an implied warranty that the product is virus-free. Under the draft, for any product costing $ 501 or more, or for any product delivered online (such as over the Internet on the world wide web, an increasingly popular point of sale), the software publisher can avoid all liability for a virus just by including a provision buried in the license that eliminates this responsibility. The virus protection that does exist - for mass market customers purchasing a physical copy of software in a traditional retail or mail order transaction - is far from absolute. Section 2B-313(d) allows a company to escape liability if it can show that the customer did not "exercise reasonable care to prevent or avoid loss." This provides a convenient loophole for companies that will attempt, even though they infected a customer's computer with a virus, to claim that the customer is to blame for not backing up data more frequently, or for not using their own virus checker or for not updating their virus checker frequently enough.

Furthermore, the implied warranty proposal, which was rejected at the April meeting, would have allowed the software publisher to disclaim liability for viruses for all customers (including small-purchase-price customers), just by including a "conspicuous" disclaimer, as you stated. What you failed to mention is that under 2B a disclaimer is statutorily defined as conspicuous even if it is contained within the software package, hidden from the customer at least until the software is installed, and it may never be seen.

In your letter you admit that even a term that would cause a reasonable person to refuse the license is valid under UCC 2B if an "I Agree" icon for this term is clicked with a mouse. This is an extremely dangerous provision that will allow software companies to impose unreasonable license terms on powerless purchasers. UCC 2B takes advantage of the customer in this situation because the decision to buy the product has been made, and money has already changed hands. When the "I Agree" icons appear during installation the customer is in "installation mode," and is highly likely to click on any icon necessary in order to install the software. This is a fundamentally different decision than those traditionally made during a purchase, when the terms of the sale (a license under 2B) are at issue. By imposing distance and time between the purchase decision and the supposed assent to the license, licensors will be able to slip extremely unfair license terms past customers who are just trying to get the product they already paid for working.

In conclusion, I disagree with your letter's interpretation of the law, Article 2B, and Mr. Nader's correspondence. Nonetheless, I look forward to working together with SPA and all the other participants in the Article 2B drafting process to protect the customers that make your industry among the most lucrative economic sectors in the United States and the world.

Sincerely,

Todd J. Paglia

cc: Ray Nimmer
Carlisle Ring

1. See Washington Connections 1.7, The Chronicle of SPA Government Affairs Activity, August 1996 (http://www.spa.org/gvmnt/wash1_7.htm#anchor1747375).

2. This information is summarized in the Article 2 Draft at http://www.law.upenn.edu/library/ulc/ucc2/397art2.htm

3. ProCD v. Zeidenberg, 86 F.3d 1447 (7^th Cir. 1996).

4. Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3^rd Cir. 1991); Arizona Retail Systems, Inc. v. The Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993); Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5^th Cir. 1988).

5. Federal Trade Commission Hearings on Global and Innovation-Based Competition, Testimony of Ken Wasch, President, Software Publishers Association, Washington, D.C., December 20, 1995 (http://www.spa.org/gvmnt/papers/kentest.htm).

6. The consumer's lawyer might well win an argument about unfairness. But as we all saw in Carnival Cruise Lines v. Shute, 499 U.S. 585, 111 S. Ct. 1522, 113 L.Ed. 2d 622 (1991), courts have varying notions of what is "unfair" when it comes to forum selection clauses.

7. North American PC Software Sales Reach $2.18 Billion in Second Quarter 1996, Washington, DC -- Sept. 25, 1996 (http://www.spa.org/research/releases/96Q2nort.htm).

8. Daughtrey v. Ashe 413 S.E.2d 336 (Virginia 1992); see also Utah v. GAF Corp., 760 P.2d 310 (Utah 1988), Massey-Ferguson v. Laird, 432 So. 2d 1259 (Alabama 1983).

9. Several states follow the rule of the old Uniform Sales Act and interpret "basis of the bargain" under the UCC to be a continuation of the requirement that actual reliance must be shown for an express warranty to be valid. See Gregg v. U.S. Industries, Inc., 887 F.2d 1462, 1472 (11^th Cir. 1989) ("Many cases under New York warranty law support the district court's charge that a showing of reliance is necessary to establish a breach of warranty claim."). The law is not entirely settled in New York but it is clear that other states also follow the approach whereby an express warranty exists only where a buyer relies upon the seller's claims. Phillips v. Ripley & Fletcher, 541 A.2d 946, 950 (Maine 1988) ("[T]he purchaser must show reliance in order to make out a cause of action for breach of warranty."); Hillcrest Country Club v. N.D. Judds Co., 461 N.W.2d 55, 61 (Neb. 1990) ("This court has held that "[s]ince an express warranty must have been 'made part of the basis of the bargain,' it is essential that the plaintiffs prove reliance upon the warranty.") (citing Wendt v. Beardmore Suburban Chevrolet, 219 Neb. 775, 780, 366 N.W.2d 424, 428 (Neb. 1985)); Thursby v. Reynolds Metals Co., 466 So.2d 245, 250 (Fla. 1984) ("[A]n express warranty is generally considered to arise only where the seller asserts a fact of which the buyer is ignorant prior to the beginning of the transaction . . . and on which the buyer justifiably relies as part of the "basis of the bargain . . . .") (citations omitted); Southwestern Bell Telephone Company v. FDP Corp., 811 S.W.2d 572, fn2 (Texas 1991) ("Courts and commentators are divided on the extent to which [basis of the bargain] abrogates the common law requirement of reliance.").