To: ALI members

From: Gail Hillebrand, (415) 431-6747, hillga@consumer.org

Date: April 28, 1997

Re: Issues for Consumers in UCC Article 2B

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Recent news reports have discussed the impact of draft UCC Article 2B on consumers as users of software and of on-line services. The draft’s provisions affecting consumers and other users have been discussed in the Washington Post, the San Jose Mercury News, and Infoworld, among other publications. As you may know, Ralph Nader recently wrote to Bill Gates about the Article 2B draft.

I have been a sometime participant in the meetings of the Article 2B drafting committee, attending two meetings and submitting written comments on the draft in my capacity as a consumer advocate employed by Consumers Union. As a new member of the ALI, I take seriously my obligation to "check my client at the door." At the same time, I hope that I can provide a useful perspective developed over the past few years of examining the drafts of Article 2B for their impact on consumers. The following comments are therefore intended to identify issues which I see in the Article 2B draft for consumers. I must disclose, however, that they are similar to comments which I have previously made on behalf of Consumers Union to the Article 2B drafting committee. These comments based on the March 21, 1997 draft. A new draft is expected soon, but was not available when these comments were prepared. [Ed. note: The text of the Annual Meeting draft, though bearing an April 14 date on its cover, is unchanged from that of the March 21 draft described in this memorandum.]

The overall effect of the Article 2B draft is to provide consumers and other small users of software and on-line services with few and easily waivable rights. The draft adopts the basic concept of party autonomy, applying a theoretical model calling for the widest possible enforceability of contract terms regardless of whether they were in fact the product of a mutual agreement or instead were prepared and imposed by the licensor. The party autonomy model does not provide a reasonable fit with the realities of "take it or leave it" licenses commonly offered to consumers, small businesses, and to many other users of software and on-line services. The result of the use of this theoretical model is that the draft permits nearly free reign to licensors to impose license terms. It imposes few duties on licensors, and makes it easy to disclaim most of those duties which it does impose.

The Article 2B draft takes a very useful step by recognizing a duty of reasonable care to avoid undisclosed viruses, but then undermines the duty by providing several very easy ways to satisfy it. Section 2B-313. First, in any transaction involving on-line contracts or software delivered by electronic delivery (including downloading over the Internet), the duty of reasonable care is completely satisfied by language in a contract stating that no action was taken to insure exclusion of viruses. Section 2B-313(c)(2). Second, negligent introduction of viruses by a licensor is protected if the licensee "failed to exercise reasonable care to avoid or prevent loss." Section 2B-313(d). This contributory negligence doctrine may mean that any licensee who does not back up his or her data will have no claim for losses caused by a virus which destroys that information. It may also be read to say that a party that does not regularly use an anti-virus program has no claim even if the virus was caused by professionally developed and marketed software.

Possible solution: Sections 2B-313(c)(2) and (d) should be eliminated. The duty of a merchant or manufacturer of software to exercise reasonable care to avoid viruses should be nondisclaimable in all consumer and other mass market transactions.

The Article 2B draft takes a useful step in section 2B-308 by codifying a rule similar to, although slightly weaker than, Restatement (Second) of Contracts section 211(3). Section 2B-308(b)(1) disfavors terms in standard form contracts that a seller should have known could not reasonably have been expected, but only if the unexpected term is so extreme that it would have caused an ordinary reasonable buyer to reject the license. The Restatement rule is a little stronger, since the expectations it examines are those of the other party, not of an ordinary reasonable person. Draft Article 2 formulates the test in a much more useful way, focusing not on whether the term would have caused refusal of the deal, but on the objective reasonable expectations of the buyer about the particular term sought to be enforced.

Despite its limited form, the Article 2B draft’s incorporation of the Restatement concept that there are limits on the enforceability of unexpected terms in standard form contracts is welcome. Unfortunately, the Article 2B draft seriously undermines the effect of Section 2B-308 by including a series of ways to validate a term which cannot pass its weakened Restatement test. Thus, the draft validates standard form license terms which are so extreme that the licensor knew or should have known that they would cause an ordinary reasonable mass market licensee to refuse the license so long as:

1. There was a manifestation of assent to that term (such as a "Click here to agree" screen) [2B-308(c)];

2. There was an opportunity to review the term before payment and a general assent to the whole license, not necessarily to the term [2B-308(b) bracketed language in March 21, 1997 draft];

3. There was a disclosure on the packaging before payment of the license fee without any assent to the license or to the particular term [2B-308(e)]; or

4. The unexpected term was "part of the product description" [2B-308(e)].

Certain terms, including disclaimers of the implied warranty of merchantability and excluders of incidental and consequential damages, need not meet even these weak standards if they are conspicuous under a set of categories of per se conspicuousness which includes small capital letters and hard-to-read contrasting colors. [Sections 2B-406(e), 2B-703(d), 2B-102(6)].

Manifestation of assent is a worthwhile goal, but the Article 2B definition of manifest assent will not attempt to ascertain the bargain of the parties in fact. Instead, it appears designed to validate virtually any contract term by defining a manifestation of assent to occur whenever there was an opportunity to review a term and to engage in conduct (i.e. "click here") related to that term.

Possible solutions: There are two very different ways to address the issue of unexpected terms drafted by one party. Both require that unexpected terms include more terms than just those which would have caused the user to reject the license, since users may have little choice but to accept software regardless of the terms if there are few suppliers of particular types of software for particular systems.

The first approach builds on the idea of assent. If the concept of assent is to be used to justify unexpected terms in a standard form license, then manifestation of assent must be defined so that the conduct constituting it in fact is likely to indicate actual consent. Clicking through screens when installing a program is unlikely to do so.

The second approach would be used if the decision is made that form contracts must be validated for efficiency reasons regardless of whether or not there was real assent. Under this approach Article 2B would include a list, by category or type, of terms which a drafter may not include in such a standard form license, plus a strong outside limit on surprising terms.

3. Issue: The implied warranty of merchantability does not include a warranty that the program will not damage ordinarily configured systems. The notes to Section 2B-403, which govern the implied warranty, indicate that the drafting committee rejected a motion to define this warranty to include a promise that a program would not damage ordinarily configured systems.

Possible solution: The implied warranty of merchantability should include the idea that the licensed program will not damage systems which the packaging identifies as appropriate for use of the program.

4. Issue: The draft makes it easier to disclaim the implied warranty of merchantability. Two parts of section 2B-406 make it significantly easier to eliminate the implied warranty of merchantability under draft Article 2B than under current Article 2. First, under current Article 2, the implied warranty of merchantability may be eliminated by language which "in common understanding" calls attention of the buyer to the absence of warranty. That standard appears in the Article 2B draft, but it is not mandatory as under current Article 2. Instead, the Article 2B draft provides in Section 2B-406(b)(2) that language which mentions "warranty of merchantability" or is of similar import is sufficient. The general requirements of the language in "common understanding call attention" to its effect in Section (e)(4) applies only where Section (2) has not been satisfied. Second, the draft would broaden the ability to eliminate all implied warranties by language such as "as is." Under current Article 2, expressions such as "as is" or "with all faults" eliminate implied warranties "unless the circumstances indicate otherwise." UCC Article 2-316(3)(a). Under Section 2B-406, by contrast, those phrases will eliminate implied warranties regardless of the circumstances. Section 2B-406(b)(4).

Possible solution: Section 2B-406 should be redrafted to require at least the same restrictions on disclaimer of the implied warranty of merchantability as are found in current Article 2. If Article 2B were to truly address consumer expectations, disclaimers of the implied warranty of merchantability would be inoperable in consumer software and on-line services.

5. Issue: The draft eliminates the ability of a court to find all remedies that become available if a limited remedy such as repair or replace doesn’t work. The draft eliminates the ability of a court to find, even in a consumer case, that limitations on other code remedies (excluder clauses) are dependent upon a failed remedy and therefore fail if the limited remedy fails. Section 2B-703(c) makes these exclusions of remedy per se independent unless the license expressly states otherwise. Since licensors are unlikely to draft their exclusions to give consumers or others rights to all Code remedies when a limited remedy fails, this leaves consumers with few remedies after the limited remedy selected by the licensor fails of its essential purposes.

Possible solution: Section 2B-703(c) should be eliminated. The draft should either be silent on the issue of failure of essential purpose or provide that excluder clauses fail when a limited remedy in a consumer license fails.

6. Issue: The draft makes it easy to eliminate vendor responsibility for incidental and consequential damages through per se conspicuous clauses which may not in fact be conspicuous. Article 2B appears to set up a method for permitting a consumer to refuse to agree with the term of a license, but it places the burden on the consumer both to read the license and to take back the software and demand a refund if the license terms are not acceptable. Section 2B-308. However, even that very weak standard does not apply to terms eliminating responsibility to consequential or incidental damages. Those are enforceable if merely conspicuous, which is defined elsewhere to be quite meaningless (for example, under Article 2B small print capital letters, LIKE THIS, are legally conspicuous). Section 2B-703(d); Section 2B-102(a)(6).

Possible solution: Terms limiting damages should be subject to at least the same standard for judging whether they become part of the contract as other terms in a standard form license. To do this, the last sentence of Section 2B-703(d) should be deleted. In addition, Section 2B-102(a)(6) should be modified to offer only a list of factors which should be weighed in determining conspicuousness, not a definition of things which are per se conspicuous.

7. Issue: The draft of Article 2B expressly preempts some aspects of existing state consumer protection statutes. Section 2B-104(b) interferes with existing state consumer protection statutes which may require actual signature, consent or agreement. For example, this section would eliminate the application to software and on-line contracts of any existing state consumer protection statute defining conspicuous differently than it is defined in Article 2B. The interference with existing state consumer protection laws might undermine any state law requiring true consent, not just "manifest assent" before personal information (including credit card information) could be sold or given to third parties. Although the commentary asserts that state privacy laws are preserved, Section 2B-104(b) subjects all consumer protection statutes to trumping by Article 2B.

Possible solution: Section 2B-104(b) should be eliminated. The basic policy of the current code that consumer protection law is not displaced by the UCC should be continued. A direction could be given to state legislatures to examine their other statutes to see whether or not the policies underlying requirements in those statutes for signature, consent, or conspicuousness are in fact equally well served by Article 2B’s concepts of authentication and manifestation of assent and by its per se definitions of conspicuousness.

Weakening of general restraint on waiver of the duty of reasonable care: The draft appears to weaken the general rule contained in Article 1 of the UCC that obligations of reasonable care may not be varied by agreement. Section 2B-115, addressing waivers, does not repeat the general limitation found in Section 1-102 against waiver of the obligation of reasonable care.

The definition of mass market license is too narrow: Mass market license is the key defining term which determines whether the general approach of the broadest possible deference to the contract language will be given, even if drafted by only one party.

Easy to eliminate any warranty that licensed software does not infringe on intellectual property rights of others: The draft presents two forms of the basic warranty of title and noninfringement, but then states that the warranty may be entirely eliminated by language in the record provided to a licensee which states "There is no warranty of title or authority." It seems highly unlikely that an ordinary consumer will know that this legal jargon means that the licensor who is selling access to the software may not in fact have the right to do so. Section 2B-401(e).

Reasonably foreseeable modifications void warranties: Any modification, even if reasonably expectable by the licensor, eliminates all warranties. Section 2B-407 provides that any modification by a licensee, except a modification made using the capabilities of the program intended for those purposes or one agreed to by the licensor, eliminates all warranties. This is true even if the modification had nothing to do with the defect for which a claim is being made under the warranty. Section 2B-407.

Licensee right to inspect before payment is limited by licensor determination of what is confidential: Section 2B-609 of the draft recognizes the right to inspect before payment, but narrows that right by stating that a licensee may not inspect before payment in a manner which would disclose or jeopardize any information which the licensor has designated to be confidential or a trade secret. There appears to be little in the draft to prevent the licensor from designating all of its code as involving confidential information. Section 2B-609(a)(4).

Risk of loss on the buyer: If a software user pays a license fee and receives an access code to download software, the user and not the licensor bears the loss if the software is destroyed or damaged before the consumer uses the access code to get the software. Section 2B-624(c)(2).

No notice to users before termination of on-line service: Consumers and other persons using on-line services must give reasonable notice before they can end their access contracts, but the on-line service provider can end these contracts at any time without notice. Section 2B-627(a) and (b).

No requirement for a minimum adequate remedy: Article 2B rejects the approach being taken in the revisions of Article 2 (on the sale of goods) to require at least a minimum adequate remedy in each transaction. See notes to Section 2B-703.

No protection from elimination of liability for personal injury in a standard form license: Current contract law for the sale of goods, which some courts have treated as applying to licensees of software (especially shrink-wrap software) protects consumers from contract terms that say that the maker is not responsible for personal injury caused by the product. UCC Section 2-719(3). Article 2B apparently has no such provision. The draft’s silence on this issue will make it easy for software makers to escape all contractual responsibility for foreseeable harm caused by their software. Such harm might include foreseeable personal injury from a software program which is supposed to manage medications, monitor a pacemaker, or a similar program.

Apparent shortening of statute of limitations: Although not entirely clear, Section 2B-705 appears to shorten the statute of limitations period when a warranty extends to future performance. Section 2B-705 and notes.

Licensor may discontinue access to software without notice for material breach or without breach if contract so provides: A licensor may discontinue access for a material breach of the contract without notice. Under this section, for example, a licensor could deprive a small business of its mailing list without notice for missing a single payment. See Section 2B-714, discontinuance for material breach; Section 2B-108(a), making every breach material if the license says so. The right to discontinue without notice is also given to the licensor if the license agreement so provides, even if there has been no breach.

Licensor may remove software from a user’s computer system: The Article 2B draft authorizes a software maker to remove software from a user’s machine without notice under certain conditions. Since a software maker might add a "back door" to the software to do this, a consumer or business might be using its computer system at one moment and at the next moment find that the crucial software in that system no longer works. Section 2B-716.

Consumer issues can be contentious, since they frequently require more than a simple rule endorsing whatever the drafter has placed in the contract documents. However, unless the ALI intends to promulgate an Article 2B which is limited solely to custom software contracts, it must address issues affecting consumers and other small users.

* The Article 2B draft is complex and highly technical, and new drafts are being issued frequently. This list does not reflect all of the provisions of the draft affecting consumers, and does not attempt to identify the many additional issues for home office users, small businesses, and others who are not defined as consumers under the draft. More information can be found at two websites containing comments and analysis about the potential impact of Article 2B on consumers and small commercial licensees. They are http://www.cptech.org/ucc and http://www.kaner.com. A website containing comments by members of the software industry and many other participants in the Article 2B process is found at http://www.SoftwareIndustry.org.

Prepared by: Gail Hillebrand
Consumers Union West Coast Regional Office
1535 Mission Street
San Francisco, CA 94103
hillga@consumer.org

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