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. Letter from Consumers Union to NCCUSL Opposing UCC 2B

October 7, 1997

 

Mr. Geoffrey C. Hazard, Jr.
Director
The American Law Institute
4025 Chestnut Street
Philadelphia, PA 19104-3099

 

Re: Concerns about UCC Article 2B

 

Dear Mr. Hazard:

Consumers Union, the nonprofit publisher of Consumer Reports, appreciates this opportunity to express our serious and abiding concerns about draft UCC Article 2B.

We believe that the ALI should not schedule the draft for a final reading at its 1998 Annual Meeting, both because of serious substantive flaws in the draft and because approving the draft in a form close to its present form would create a disturbing precedent for other future on-line contracting law.

The Article 2B draft is permeated by two fundamental policy choices. The first choice is broad drafter autonomy. The draft purports to temper drafter autonomy with a general requirement that the licensee manifest assent to the record or, in some cases, to a term, but the draft undermines this concept by allowing the licensor to define in its own documents what conduct constitutes a manifestation of assent. The many problems with this approach are discussed in part B.1, below.

The second fundamental policy choice made in the draft is to permit licenses to protect licensors from most liability, and instead place those risks on the customer. For example, the draft allocates risk to customers by making it easy to eliminate the warranty of system integration; making it easy to eliminate the warranty of non-infringement; permitting the licensor to choose the law and, for non-consumer customers, the forum; and creating a way to preserve contract exclusions of incidental and consequential damages when the limited remedy selected by the licensor failed or was unconscionable. These are real risks. The Article 2B draft places or permits them to be placed on the customer.

A. Procedural issues

1. The final shape of Article 2B remains too uncertain to be scheduled for a final reading before the ALI in 1998

There are two important procedural issues about the timing of the ALI's consideration of Article 2B. First, the ultimate shape of the Article 2B draft remains so unclear that the ALI Council should decline to schedule it for a final ALI reading in 1998. We have been told that the drafting committee voted at its late-September meeting to replace one key provision affecting consumers, and to remove another. The drafting committee apparently voted to replace the section on unexpected, deal-breaking terms with an approach that makes most or all terms enforceable if they are seen before sale or if a refund opportunity is available after the sale. This appears to be a fundamentally different approach from the one taken in the current draft.

The drafting committee also voted to remove section 2B-311, which both codified and limited the obligation to use reasonable care to try to avoid viruses. These two sections, on invalid terms and on viruses, are at the top of the list of asserted benefits for licensees in Article 2B. September 25, 1997 Draft, Preface, "Licensee Benefits," p. 3. We respectfully suggest that the draft should not be scheduled for final evaluation by the ALI membership when the draft now before the Council is so significantly different from the anticipated final product.

2. Article 2B should not be approved by the ALI before Article 2, because adoption of Article 2B would create pressure for pro-licensor/seller provisions of Article 2B to be copied into Article 2 for on-line sales and for other sales

The second key procedural issue is the appropriateness of the ALI considering Article 2B for final approval in 1998 when the redraft of Article 2 remains unfinished. If Article 2B is adopted before the revision of Article 2 is completed, there will be natural pressure by vendors of goods to get the same pro-seller restrictions on liability, ability to impose post-sale terms, ability to choose law unrelated to the transaction, and so forth. This pressure could be particularly extreme where goods and information are competing products, or where they are sold on-line by the same seller to the same customers. Article 2B's provisions are too low to serve as a lowest common denominator for on-line consumer contracts.

Article 2B's choice of law provision illustrates this problem. Section 2B-108(a) provides bluntly that any choice of law term in an agreement is enforceable. Sections 2B-108(a) and 109 would permit a licensor to place terms in its license forcing a small business licensee (or an individual home-based user of professional-purpose software) to sue in Bosnia under the law of Mexico. If these sections are enacted for on-line software and information contracts, on-line sellers of goods can be expected to seek to have the same rules added to the UCC for sale of goods over the Internet.

We believe that Article 2B's broad authorization of law-shopping among jurisdictions with no connection to the transaction is poor public policy. Even if this were good public policy for licenses, however, it might look very different when the issue was, for example, food safety. Would we permit the grocery chain that accepts and fills weekly grocery shopping orders on-line for local customers to opt into the food safety laws of Mexico in its on-line contract?

It would be dangerous to adopt Article 2B without considering how to restrict its anti-customer provisions from expanding beyond licenses. Adopting Article 2B before completion of Article 2, however, does just that.

B. Some key problems with Article 2B

The Article 2B draft:

1. Does not contain a meaningful restraint on unexpected terms.

2. Places too much risk on the customer.

3. Overstates the benefits provided to licensees.

4. Deviates from the language of current Article 2 in ways that create new hurdles for licensees and a pro-licensor, anti-customer tilt.

5. Creates a poor template for on-line contracting law by explicitly displacing state consumer protection laws that require agreement, consent, or conspicuousness.

1. The draft does not contain a meaningful restraint on unexpected terms

The Preface to the draft states that Article 2B "requires affirmative acts of assent to a record instead of mere passive retention." Properly implemented, this could be a real benefit. However, the draft's definition of manifest assent undercuts the very idea of assent. It allows a record to conspicuously define what conduct will constitute manifest assent to that record. Defining manifest assent as doing whatever the record conspicuously says constitutes assent eviscerates the principle of assent.

The draft also contains the useful concept of assent to a term, but it executes that concept in a way that undercuts it. The draft states that assent to a term requires opportunity to review and authentication or conduct that relates specifically to that term. Section 2B-112(c). Unfortunately, the type of conduct permitted as proof of assent to a term is conduct which consumers engage in for a very different purpose than the purpose of assenting to terms. Section 2B-112(d) authorizes "click here" installation screens to constitute assent to a term.

After the consumer has shopped, selected, paid, taken delivery, and invested time in beginning to install software, then a screen pops up that says "click here to agree with our term on [limited remedy, damages, places of use, or whatever.]" As a practical matter, requiring assent but then defining assent to exist whenever the customer clicks through screens referencing terms creates a form of assent which will often be entirely fictional.

The issue of assent to standard form contracts is difficult. Efficiency concerns for sellers/licensors make individualization of the transaction impossible, and efficiency concerns for buyers/licensees make understanding of the terms unlikely. A rule which recognizes the efficiency needs of the licensor by authorizing standard form contracts should also recognize the efficiency needs of the customer not to have to read and seek legal advice on every standard form. The efficiency needs of the consumer can be served by placing strong outside limits on the types of standard form contract terms that will be enforceable. Article 2B does not contains an adequate restriction on the terms of standard form licenses, and it cannot do so as long as it takes the position that once there has been a manifestation of assent to a term, it is enforceable.

Restatement of Contracts, second, section 211 identifies a type of contract term which courts may refuse to enforce. Section 2B-208 of the September 25, 1997 Article 2B draft contains the seed of the Restatement concept, although it is hemmed in with numerous restrictions and exceptions. In late September, the drafting committee apparently voted to eliminate the Restatement approach from the draft, replacing it with an ABA task force proposal.

The replacement section which was approved in concept has not yet been drafted, and its contours are uncertain. The ABA task force proposal would make all not-unconscionable terms enforceable even if the terms were harsh, unexpected, or imposed after the deal was completed, so long as the consumer could have sought a refund and some limited damages if he or she had read and objected to the terms. There was apparently some discussion at the drafting committee meeting of a further restriction on extreme terms, but it is not clear whether or not that will be added to the new section which is to replace section 2B-208.

It is not clear what the next draft will contain on this crucial issue. The ABA task force approach imposes a duty to read if a refund is available after reading the terms. Without seeing the future text, it is hard to predict the effects of any new section based on the ABA proposal. The prospects for consumers, however, are not good.

A refund opportunity alone is not an adequate protection against unknown terms, because consumers usually learn of objectionable terms only when they are invoked by the contract drafter. Suppose, for example, that a standard form contract contains a disclaimer of the implied system integration warranty - that hardware and software sold together as an integrated system will in fact work together. Because the term can be imposed after the transaction, the consumer will have no reason to know of this disavowal of responsibility when he or she shops, orders, and pays. When the consumer receives delivery, why should he or she expect that the terms of the contract are still being settled or changed? How likely is it that the consumer will read every part of every document in the box or on the screen to see if the seller has just imposed new terms in a deal that the consumer regards as completed? The consumer is likely to become aware of the restrictive term only when he or she tries to enforce the original bargain that the parts of the system would work together. The opportunity to reject the transaction due to the disclaimer term may expire long before the consumer even knows that there is a problem.

2. The draft allocates too much risk to the customer

The draft allocates too much risk to the consumer in the remedy sections discussed here, and in the disclaimer sections discussed in part 4 below.

The draft validates contract language preserving exclusions of incidental and consequential damages even if the limited remedy selected by the licensor has failed of its essential purpose or is unconscionable. Section 2B-703(c). What public policy could support protecting licensors who have chosen to adopt unworkable or unconscionable limited remedies? Providing a way for the contract language to be used to preserve excluder clauses in this situation seems to reduce the incentive for the licensor to structure and implement a good limited remedy in the first instance.

The risk of incidental or consequential damages is likely to fall on the customer under Article 2B. The draft validates terms eliminating responsibility for consequential or incidental damages if they are conspicuous, and defines as conspicuous things that are unlikely to actually come to the consumer's attention (e.g., any contrasting font or color, no matter how hard to read). Section 2B-703(d); section 2B-102(a)(7).

The customer bears the risk that software or information which is held by a third party may be damaged or destroyed after the customer is given an access code and before the customer downloads the information. Section 2B-624(c)(3). This section makes no distinctions based on who selected the third party to hold the information, who was insured for the loss, or whether the information destroyed was unique or could easily be replaced by the licensor transmitting another copy. In all these cases, the customer's only way to get the software or information he or she has already paid for is to purchase another copy.

Persons injured by software may also bear increased risk under Article 2B, since they are unlikely to have a contract cause of action for these injuries. Article 2B contains no presumption like the one in section 2-719(3) against exclusions of consequential personal injury damages, even if the software was sold as a means to avoid personal injury, such as medication tracking software.

3. The alleged benefits to licensees of the draft are overstated because many of those benefits are easily lost through boilerplate license language

The alleged benefits to consumers and other licensees claimed by Article 2B are seriously overstated. Preface, Sept. 25, 1997 draft, p. 3. Many of those asserted benefits will be easily avoided through boilerplate language in the license. For example, the Preface says that the draft "gives licensee a right of quiet enjoyment," but the draft makes it easy to abrogate that right with language in the record stating: "there is no warranty of quiet enjoyment or against infringement," or words of similar import. Section 2B-401(d). One of the main things a customer buys with a license is quiet enjoyment - the right to use the information without infringing on others' rights. The draft makes it very simple to eliminate this basic element of what the customer has paid for by using legal jargon which consumers may receive only after they have paid and taken delivery.

Similarly, the Preface identifies as a licensee benefit that the draft "creates an implied warranty for system integration." Section 2B-405(b) creates that benefit, but section 2B-406 makes it easy to eliminate it. The warranty is destroyed by a statement that "There is no warranty that this information or my efforts will fulfill any of your particular purposes or needs." Section 2B-406(b)(3). Article 2B permits a licensor who knows that the purchaser is relying on the licensor's skill and judgment to select hardware and software that will work together to take the order, accept payment, and then ship the components and software with a printed enclosure or on-screen term that eliminates any warranty that the materials shipped will work together as promised.

The Preface also identifies as a benefit to consumers that the draft "prohibits choices of forum that unfairly disadvantages [sic] a consumer." This protection for consumers is real, but quite limited. Because of Article 2B's narrow definition of who is a consumer, there will be no protection against unfair forum selection clauses for individuals who pay for software to use for professional purposes at home. Section 2B-102(a)(8). Individuals with a business purpose may be sued or forced to take their litigation to any judicial forum in the world which is designated in the license. The draft also leaves open whether there will be any protection even for consumers against unreasonable and unjust forum selection clauses in on-line access contracts. Section 2B-109.

4. The language used in Article 2B deviates from that of current Article 2 in ways that create new hurdles for licensees

The language of Article 2B deviates from the language of current Article 2 in a variety of ways that could bias the statute against licensees. For example, puffing exists under Article 2 when a statement purports "to be merely the seller's opinion or commendation of the goods." Section 2-313(2). Article 2B moves "merely" so that it no longer qualifies statements purporting to be the licensor's opinion or commendation. Section 2B-402(b). The line between an opinion and a promise can be difficult to find. Article 2B's elimination of the "merely" qualification from statements purporting to be opinion or commendation could shift that line toward protecting more licensor statements, even when those statements were part of the basis of the bargain.

Another subtle change tilting the draft toward licensors is in the section on the implied warranty of merchantability. Current section 2-314(2)(c) recognizes that the implied warranty of merchantability warrants that goods be "fit for the ordinary purposes for which such goods are used." Section 2B-403(a)(2) changes "used" to "distributed." Under Article 2B, a computer program and its physical medium must "be fit for the ordinary purposes for which it is distributed." A court could find that the change from purposes for use to purposes for distribution alters the perspective by which fitness for ordinary purposes is measured. Article 2B places the emphasis on the purposes of the distributors, not the users.

One deviation from the language of current Article 2 which is more than shading is a new limit on when samples and models create express warranties. Under current Article 2, a sample or model creates an express warranty if it is made part of the basis of the bargain. Under section 2B-402(a)(2), however, a sample, model, or demonstration which is part of the basis of the bargain does not create an express warranty unless the sample, model, or demonstration was "of a final product." The reporter's notes suggest that the purpose of the restriction is to permit samples which both parties know are only test versions. A test version could already be excluded as not part of the basis of the bargain if in fact both parties knew the test version differed from the expected final product. The addition of the broad new "final product" precondition to when a sample or model can create an express warranty means that even when a sample, model, or demonstration is used in a way which makes it part of the basis of the bargain, a licensor can still escape express warranty responsibility by showing that the sample it chose to use was not of a final product.

In a new area, access contracts, the draft also uses language that may substantially fail to protect licensees. One major on-line provider has been the subject of public outcry over difficulties subscribers faced in getting on-line, and allegations that it accepted more subscribers than could reasonably access its services in a timely manner. Section 2B-614(d) offers a broad safe harbor from breach of contract for intermittent and occasional failures to have access available if the failures are consistent with industry standards or scheduled downtime, without any qualification that either of these conditions be reasonable. As with many other sections of Article 2B, the rule offered in this section broadly validates industry choice without the restraint of standards of reasonableness, consistency with consumer expectations, or the like. This particular section can be easily fixed by adding reasonableness qualifiers. However, it illustrates a point of view that is woven throughout the draft. It would be very difficult to find, much less eliminate, all of the instances where the language creates a subtle but persistent pro-industry, anti-customer tilt.

5. The draft creates a bad precedent for on-line contracting law

Article 2B is not the appropriate template for on-line consumer contracts. First, Article 2B contains a wholesale abrogation of other consumer law defining "conspicuous," "consent," and "agreement," and it also eliminates signature requirements in favor of authentication. 2B-104(b)(2)(3)(4). Article 2B defines assent as manifested by engaging in conduct which the document defines to be assent. The harm to consumers of that approach to assent will be magnified if, by extending Article 2B to all on-line contracting, this drafter-determined definition of assent replaces all state consumer protection statutes requiring consent or agreement. That would be the effect of applying section 2B-104(b)(4) to all on-line contracting.

Second, Article 2B contains a host of pro-drafter standards which will foster limitations on remedy. Many of these are entirely unjustified for on-line contracts for goods. For example, Article 2B omits the long-standing rule of section 2-719(3) that limitation of consequential damages for personal injury in the case of consumer goods is prima facie unconscionable. If Article 2B provides the future law for on-line contracting, would the purchaser of a car through an Internet broker be deprived of this important protection? Adoption of Article 2B's strongly pro-purveyor approach would create an unfortunate and inappropriate pressure for weakened consumer protections in non-information, Internet-based transactions.

Conclusion

The Article 2B draft gives too much power to licensees to create enforceable contract terms even when those terms are so surprising that no reasonable consumer could have expected them in the contract. It is not clear what will be put in the draft on the issue of surprising terms beyond an opportunity for a refund at a time when the consumer will have no reason to know about the offending term. The draft allocates too much risk to consumers and other licensees. The draft overstates the benefits it provides to licensees. It deviates from the language of current Article 2 in ways that create a pro-licensor, anti-customer tilt. Finally, the draft will provide a powerful, but wrong, precedent for other types of on-line contracting.

The fundamental policy choices of drafter autonomy and restricted provider liability underlie the Article 2B draft. The result of these two policy choices is that Article 2B will produce a fairly consistent legal result over a variety of factual settings. That result will be: "The licensor wins." No product worthy of the imprimatur of the American Law Institute is likely to emerge from the drafting process as long as it is guided by these two principles. For this reason, Consumers Union respectfully suggests that the ALI Council should decline to schedule Article 2B for a final reading at its 1998 Annual Meeting.

Very truly yours,

 

Gail Hillebrand

 

GH:tb
cc: Ray Nimmer


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