To: Members of the American Law Institute

From: Jean Braucher and Peter Linzer

Re: Assent issues in Proposed UCC Article 2B

Date: May 5, 1998

We believe that the Tentative Draft (April 15, 1998), Uniform Commercial Code Article 2B, takes a flawed approach to basic issues of contract law, particularly concerning assent. This is more than a philosophical or jurisprudential difference of opinion; this new UCC Article would affect billions of dollars in transactions involving software and information. While problems with many sections of the draft are detailed in the accompanying examples and discussion, we do not ask the membership to adopt specific drafting solutions during our Annual Meeting. Rather, we think it appropriate for the Institute membership to express its disapproval of the underlying philosophy exhibited in the current draft and to ask the Drafting Committee to produce legislation in keeping with principles of freedom of contract expressed in the Restatement (Second) of Contracts.

Moved: The American Law Institute membership supports the following statement:

MEMORANDUM IN SUPPORT

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 "shrinkwrap" and "clickwrap"), undermining the development of competition in contingent terms, such as warranties and remedies. It also would 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 in approach is needed. The purpose of this broad Motion is to reject the Draft’s general approach to finding contractual assent, an approach found in several interrelated sections (Sections 2B-203, 2B-207, 2B-208, 2B-111 and 2B-304). While these Sections as written should be stricken, simply striking them will not produce an acceptable draft without some rethinking and redrafting. The purpose of this Motion is to return the Draft to the Drafting Committee for that work. After giving some examples of how the Draft in its present form would work, we discuss more generally the provisions that produce these results.

Two cases illustrate many of the problems with proposed Article 2B’s treatment of assent to standard forms and show how the Draft deviates from long-standing contract law:

Many courts would now apply Article 2 to this transaction and find that the terms of the transaction are those on which the two forms agree, plus the gap-fillers of Article 2. Section 2-207(3). This would mean that User Co. would get an implied warranty of merchantability, disputes would be subject to resolution by litigation, and the "future changes" clause would not become part of the contract. Under Article 2B, the terms would be those of the "click through" license, and Producer Co. would get its warranty disclaimer and its arbitration term. Sections 2B-203(b)(1)(A) and (c)(2), 2B-207, and 2B-111. In addition, Producer Co. would have the right under Article 2B to change even material terms of the contract, by giving notice, and User Co. would not have the right to cancel if it did not like the changes. Section 2B-304. Article 2 has no comparable provision to give blanket validity to "future changes" without further assent of the other party. Compare current Article 2, Section 2-209(1)(permitting modification, which requires both parties to agree).

Again, many courts now would apply Article 2 to the transaction, and they would not enforce the license delivered after purchase, making the warranty disclaimer and "no review" term ineffective. In addition, the Magnuson-Moss Warranty Act probably applies to the transaction, so that warranty terms must be made available prior to purchase on request. 15 U.S.C. Section 2302(a); 16 C.F.R. Section 702.3(a)(2). Thus, Retail Store violated Magnuson-Moss by not providing access to the content of written warranties when asked about them by User. Also, implied warranties cannot be disclaimed when a written warranty is given, so that Producer Co. has also violated Magnuson-Moss. 15 U.S.C. section 2308.

Under Article 2B, however, User would be bound to all terms in the "click through" license, unless they are unconscionable. Sections 2B-208(a), 2B-111. The right of refund in Section 2B-208(b) would be lost when User clicked. The implied warranty could be effectively disclaimed in terms provided after purchase, unless Magnuson-Moss pre-empts Article 2B on this point (which may well be the case, although licensors are not warned of that possibility in Article 2B). Also, under Article 2B, there is an attempt to disown Section 211(3) of the Restatement (Second) of Contracts, which makes bizarre or oppressive terms unenforceable, whether in commercial or consumer contracts. See Section 211, comment e. Compare Sections 2B-207 and 2B-208 and Reporter’s Notes to those section. (See especially Reporter’s Note 1 to 2B-208.) Thus, User would not have the "reasonable expectations" doctrine as a tool to challenge the enforceability of the "no reviews" term. Because Article 2B validates post-transaction presentation of terms, the fact that the term was in a "click through" license may not be enough to show "procedural" unconscionability, making it hard to use that theory because unconscionability case law usually requires both substantive and procedural unconscionability.

Standard form contracts are a fact of commercial life, with significant economies of scale in the production of contracts, akin to those achieved in the mass production of goods and services. This point is made in the Restatement (Second) of Contracts, Section 211, comment a. On the other hand, the Restatement also recognizes significant costs associated with standard form contracts, including the problem that those drafting them "may be tempted to overdraw." Id. at comment c. The very ease of drafting forms has led to their proliferation, making it impossible for either individuals or businesses to read and understand all the contracts to which they purportedly "assent." The idea that reading form documents is not realistic is embodied in sales law, existing Article 2, Section 2-207, which finds assent and provides gap-filling terms even though forms exchanged are not mirror images, in recognition that commercial sellers and buyers do not read and reconcile the forms they exchange.

Despite these widely accepted realities, Article 2B adopts a hard version of fictional assent to form contracts. While the Reporter’s Notes claim that the approach serves freedom of contract, it would in fact undermine freedom of contract in favor of regulation by the one who drafts the form. In addition to dictating limited quality assurance and remedies, the drafter could impose form terms restricting uses of information traditionally protected by federal intellectual property law. The Reporter’s Notes also portray Article 2B as a collection of "default rules" that can be displaced by the parties’ agreement. But in the vast majority of transactions, including acquisitions by business users, the "parties’ agreement" will be the terms of the drafter’s form, first presented to the user after order and payment for purported assent by a click on a computer screen during installation. Only the largest or most specialized transactions will involve assent after negotiation.

The American Law Institute should not abandon its balanced compromise view of what is objectively manifested by blanket assent, a view adopted in the Restatement (Second) of Contracts. Blanket assent to a standard form is "to the type of transaction." Section 211, comment c. The Restatement explains, "Although customers typically adhere to standardized agreements and are bound by them without even appearing to know the standard terms in detail, they are not bound to unknown terms which are beyond the range of reasonable expectation." Id. at comment f.

In a commercial world dependent on form contracts, at least two forms of checks are needed: (1) pre-transaction availability of terms to permit shopping, and (2) a doctrine to make bizarre or oppressive terms unenforceable. A third section below discusses several other, although not all, assent problems in Article 2B.

1. Pre-transaction availability of terms

Pre-transaction availability of terms reduces the costs of shopping for the best terms and makes market competition possible. If terms are presented after purchase, the only way to shop for the best terms is to make multiple purchases and return products that come with objectionable terms, a costly proposition that impedes competition. In addition to the time involved, the purchaser may already feel committed to the deal, having ordered and paid and in some instances waited for delivery. If terms were available pre-contract, it would be possible for reporters for computer or other periodicals to gather them and publicize who is offering the best terms. While it is true that there is competition in many aspects of the software market, it is not so clear that the industry is as yet interested in competing on the basis of contingent terms involving quality assurance and remedies. It is to be hoped that the industry will evolve in the direction of warranty competition, making it inadvisable to codify current practices that may stand in the way of that goal.

Post-purchase terms are troublesome under contract law. If a contract has already been formed, as in an Internet or telephone purchase directly between the producer and the end-user, there is no consideration for the new terms. Modern contract doctrine makes modifications enforceable without consideration in some circumstances but requires a change in circumstances not anticipated by the parties at the outset of the transaction. The Restatement, in Section 89(a), makes modifications binding without consideration "if the modification is fair and equitable in view of circumstances not anticipated by the parties when the contract was made...." See also Article 2, Section 2-209, c. 2. ("‘[G]ood faith’ ... may in some situations require an objectively demonstrable reason for seeking a modification.") Thus, modification does not fit the situation where the software producer plans from the outset to present terms post-purchase.

Conditional assent or manipulation of when acceptance occurs are other possible doctrinal ways to attempt to make terms enforceable even though delivered after order and payment. However, software producers often do not use these techniques because they want the customer to feel that a deal has already been made. Article 2B would not require licensors to communicate at the time a transaction is entered into that the terms have not yet been presented. The Article 2B drafting committee should investigate new pro-competitive approaches that take advantage of the communicative power of computer technology. This would be in keeping with the admonition of the White House Report on Global Electronic Commerce not to carry existing law unthinkingly on to the Internet. Technology could be used to attempt to better communicate terms, rather than to obscure them. For example, in an on-line transaction, there is no reason a seller of goods or licensor of software cannot present the terms before an order is made. To facilitate shopping in general, terms could be available at Web sites.

To the extent that terms are now presented post-transaction, using "shrinkwrap" or "click through" contracts or similar methods, sellers or licensors who are well-advised by counsel know that it is doubtful that the terms are enforceable. Codifying the validity of this practice as a means to impose any term, unless unconscionable, would constitute a major shift in the balance in software transactions. Software licensors, by means of a simple "click" during installation, could routinely get all of the following: warranty disclaimers, remedy limitations, choice of law, choice of forum, prohibitions on reverse engineering and criticism, and future changes clauses. Something more meaningful in the way of assent is essential.

2. Policing Bizarre or Oppressive Terms

The Restatement (Second) of Contracts in Section 211(3) recognizes a modest limit on blanket assent to standardized contracts. As explained in comment c to that section, the drafter may be tempted to overreach. The assent that a customer gives is blanket, but as comment f points out, that should not reasonably be interpreted as giving the drafter a blank check. Under comment f, the limit on form terms is that they not be "bizarre or oppressive" or eviscerate terms explicitly agreed to or eliminate the dominant purpose of the transaction. The doctrine of reasonable expectations is closely related to the policy against unconscionable terms and the rule of interpretation of contracts against drafters. Id. at comment f.

The reasonable expectations doctrine of the Restatement has been incorporated into the UNIDROIT Principles for International Commercial Contracts, Article 2.20, (principles for commercial, not consumer, contracts). The unenforceability of unfair terms is generally recognized in Europe, Japan and many other legal systems. Article 2B will have no chance of achieving the goal of serving as a model for global software and electronic commerce if it hews to a narrow and fictional view that blanket assent means assent even to unfair terms. As of last summer the doctrine of reasonable expectations was included in the Article 2B draft (for mass-market contracts). The Drafting Committee for Article 2B voted to eliminate it last September, while the Revised Article 2 Drafting Committee continues to work on codifying the doctrine at least for consumer transactions. Neither the Restatement nor the UNIDROIT Principles restrict the doctrine to consumer or mass-market contracts.

3. Other Issues

A. Allowing one who drafts a contract to define what "manifests assent." Allowing one party, the drafter, to define objectivity is a perversion of the objective theory of contract, yet Article 2B-111(a)(2) does just that by stating that the drafter may designate conduct or operations as manifesting assent. In addition to allowing drafters to set forth what actions will manifest assent, the Reporter’s Notes to Section 2B-111 recognize as sufficient devices to manifest assent, ones that a drafter might specify: (a) opening of shrinkwrap, and (b) clicking on a screen with an undisplayed license. There is reason to question whether these are adequate formalities to carry with them the idea of assent, particularly blanket assent to a long license when not in the context of a bargain, but rather in the context of supposed post-purchase validation of terms. In the Statute of Frauds, contract law has treated signing a writing as of particular significance as a formality. See also Restatement Section 211(1), referring to signing a writing as a clear case of manifestation of assent (subject to the reasonable expectations doctrine). Adoption of a digital signature in an electronic record ought to be given equal significance, but clicking--something computer users often do hundreds of times a day--is much less significant than using a code or identifying symbol pre-designated as a means of authentication.

Under contract law, oral bargain is also treated as a sufficient formality for formation. But opening a package or clicking on a computer screen after a bargain has been entered into does not necessarily satisfy the functions of a formality identified by Lon Fuller (the cautionary, evidentiary and "channeling" functions, the last meaning a device that parties know courts will treat as significant). It would be easy for a user of software to fail to understand that opening a package or clicking a computer screen has legal effect, and questions about the agency of the one opening or clicking could undercut the evidentiary function (does it matter if an employee without actual authority or your six-year-old child did the opening or the clicking?) Especially in the business context, issues concerning the agency of installing technicians would undercut the supposed certainty of the Draft’s approach.

B. Validating "Future Changes" Clauses. Section 2B-304(b) permits a drafter to put into a license a term permitting future changes in the terms, so long as notice is given at the time of the change, but without the need for the other party’s further assent. (Although the section uses the term "modification," this is a misleading characterization, because true modifications require mutual assent at the time of the change.) Under Section 2B-304(b), a term authorizing future changes need not be called to the attention of an adhering party or separately assented to. In mass-market contracts, Article 2B requires that the non-drafter have a right to terminate the contract at the time a change is made, but only if the change deals with a material term. Thus, a nonmaterial change that a party objects to comes in and the objecting party cannot terminate. In a nonmass-market contract, a party who "manifests assent" to a license with a future changes clause does not have a right to terminate even if a material change is made. Could the drafter increase the rate for future use, without giving the other party a right to terminate? It seems the answer is yes. The fact that someone agreed to such a "future changes" clause, without limitation to nonmaterial or advantageous changes, seems to be good evidence that the clause was not read or understood.

Only in nonmass-market licenses are material changes binding, without right to terminate as to future performance, under future change clauses. Should this allay concern about Section 2B-304(b)? The definition of a mass-market transaction in Section 2B-102(31) does not include many transactions that in common understanding might be considered mass-market ones. For example, a solo dentist who signed up for an on-line dental reference service for $50 a month for two years would not be engaging in a mass-market transaction because dental reference services are not marketed to "the general public as a whole." Thus, a dentist entering into such a license could be subject to higher charges (say, increasing the fee per month to $75) without the right to cancel the contract.

The idea of a category broader than "consumer contract" is in general a good one, to reflect that many non-consumers are as unsophisticated and as unlikely to be represented by counsel as consumers (or as likely to have too little at stake to make it worth while to use a lawyer when making the transaction or dealing with a dispute). However, the way the "mass-market" category is used in Article 2B is to give mass-market licensees the "default" rights that all buyers of goods have under Article 2, at most, and to give nonmass-market licensees less. The definition of mass-market transaction and the use of this concept in Article 2B need further attention.

The assent provisions in the current Article 2B draft would have a synergistic effect, amounting to a delegation of regulatory power to licensors who draft form contracts. The American Law Institute should ask the Drafting Committee to engage in fundamental rethinking to achieve a more balanced policy position on basic contract law issues.