To: Article 2B Drafting Committee and Reporter
From: Gail Hillebrand
Date: April 9, 1997
Re: Comments of the March 1997 Article 2B Draft

This memo identifies some of the issues I see for consumers in the new draft. As it will reveal, we remain very concerned that the draft is harmful to consumers and other small users.

Provisions of Article 2B Which Fail to Protect Consumers of Software

(March 21, 1997 draft)* (see endnote)

Analysis prepared by West Coast Regional Office of Consumers Union** (see endnote)

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.

Retail market required: The definition of mass-market in Section 2B-102(25) may be unrealistically narrow because it is limited to licenses used in a "retail market" The comments imply that a "retail market" will include software downloaded from the Internet, but a court might disagree. If the definition does not cover Internet delivery, it will soon be outdated.

Little protection for small business: Small business users licensing software will receive very little protection from the mass-market concept. All of their transactions of over $500 will be excluded. Software makers could bundle small business software so that it is priced high enough to escape the mass-market category, even though the licensee has no ability to negotiate the terms of the license. Section 2B-102(25)(A)(i).

A small business user also could be deprived of all mass-market protections if the license permits the software to be used by two users at the same time, even if the price of that software was only $100. Section 2B-102(25)(D).

Effect on state consumer protection law: Section 2B-104(b) interferes with existing state consumer protections statutes which may require actual signature, consent or agreement. For example, it 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.

Definition of manifest assent: The draft defines a manifestation of assent to include any conduct that the record conspicuously states will constitute acceptance. This could include not undertaking to seek a refund. Section 2B-112(a)(1).

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. Compare Section 2B-115 with Section 1-102.

The draft widely validates pre-printed terms in shrink-wrap licenses and other terms which are discovered only after purchase: The draft validates shrink-wrap licenses, in which the user learns of the terms only after purchase, in at least three ways:

In Section 2B-308, every term in a license becomes part of the agreement "without regard to the knowledge or understanding of individual terms by the party assenting to the form," unless the term either conflicts with previously negotiated terms of agreement or is so extreme that the party preparing the form would know that a reasonable ordinary user would refuse the entire license if it knew about the terms. Section 2B-308(b)(1) and (2).

Even a term so extreme that a licensor should know that it would cause an ordinary licensee to refuse the whole license, it becomes part of the contract if the user "manifests assent" to the term. Manifesting assent, however, can include any conduct defined by the license to equal manifest assent. See Section 2B-308(c) and Section 2B-112(a)(1). Extremely limited protection against viruses: Section 2B-313 appears to recognize a duty of reasonable care to avoid undisclosed viruses. However, it proposes several extremely easy ways to satisfy that duty. 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). Contributory negligence doctrines are generally discredited in other areas of the law. This section is highly likely to 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 who does not regularly use a virus-finder program has no claim even if the virus was caused by professionally developed and marketed software. This section also prevents any claim that the absence of viruses is an element of merchantability of software under the implied warranty of merchantability. Section 2B-313(c)(2),(d),(f).

No warranty to users that the licensor's software does not infringe on intellectual property rights: 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).

Implied warranty of merchantability does not include any 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.

Easier to disclaim implied warranty of merchantability: It is significantly easier to eliminate the implied warranty of merchantability under draft Article 2B than under current Article 2. The implied warranty of merchantability is the basic warranty that the goods will be fit for their ordinary purposes. Under current Article 2, that warranty may be eliminated by language which "in common understanding" calls attention of the buyer to the absence of warranty. While that standard is repeated in the Article 2B draft, it is no longer required in every case. 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.

Broader effectiveness of "as-is" disclaimers even for new software: The draft would also broaden the ability to eliminate all implied warranties by language such as "as is." Under current Article 2 law, 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). In addition, the terms "as is" and "with all faults" have long been criticized by consumer advocates as not communicating that an item might not work even for their ordinary purposes.

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.

No right to refuse inadequate software delivered by electronic transmission: The Article 2B draft preserves an important right available to buyers of goods known as the perfect tender rule. Under this rule, a buyer of goods can reject goods if they do not fully comply with the contract. The Article 2B draft appropriately preserves the concept of the perfect tender rule, using the notion of refusal as a substitute for rejection. However, Section 2B-601(c) restricts refusal to software which is delivered "on a physical medium." This limitation on the right of refusal appears to be a very serious narrowing of what would be available under current Article 2. Section 2-601(c).

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).

Easy to eliminate vendor responsibility in standard form licenses: 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).

No protection from elimination of liability for personal injury: 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 harm that their software does to property (such as causing a systems crash) and to people (such as causing a fire that injures someone, or such as foreseeable personal injury from a software program which is supposed to manage medications, monitor a pacemaker, or a similar program).

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 fall-back to all remedies 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 when a limited remedy fails, this leaves consumers with few remedies.

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: The 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.

* The Article 2B draft is a highly technical and complex statute. This list does not reflect all of its impacts on consumers and other licensees, and the summaries provided here are based upon our reading of the provisions. As with any complex law, some provisions may be susceptible to more than one interpretation. This analysis is based on the draft dated March 21, 1997.

** Consumers Union is a nonprofit membership organization chartered in 1936 under the laws of New York to provide consumers with information, education, and counsel about goods, services, health and personal finance; and to initiate and cooperate with individual and group efforts and to maintain and enhance the quality of life for consumers. Consumers Union's income is solely derived from the sale of Consumer Reports, its other publications and services, and from noncommercial contributions, grants, and fees. In addition to reports on Consumers Union's own product testing, Consumer Reports with approximately 5 million paid circulation, regularly carries articles on health, product safety, marketplace economics, and legislative, judicial, and regulatory actions which affect consumer welfare. Consumers Union's publications and services carry no outside advertising and receive no commercial support.

cc: Fred Miller
Gene LeBrun

Prepared by: Gail Hillebrand

Consumers Union West Coast Regional Office
1535 Mission Street
San Francisco, CA 94103
Current as of: 4/9/97