Article 2B – The Consumer Essay, Research Paper

A new law will probably be introduced into state legislatures which will

govern all contracts for the development, sale, licensing, and support of

computer software. This law, which has been in development for about ten

years, will be an amendment to the Uniform Commercial Code. The

amendment is called Article 2B (Law of Licensing) and is loosely based on

UCC Article 2 (Law of Sales), which governs sales of goods in all 50 states.

A joint committee of the National Conference of Commissioners on Uniform

State Laws (NCCUSL) and the American Law Institute is drafting the

changes to the UCC. The UCC was drafted in the 1950’s and currently

governs the sales of goods but not products like software, which are licensed,

not sold. Basically, when you purchase software, you are purchasing the

information and rights to use the software. Article 2B creates standards for

licensing these information products, including rules for interpreting

warranties, legal remedies, liability and risk. This project began to give

consideration to instituting a separate article of the UCC for software and

related contracts. Article 2B is designed to bring uniformity across states and

across the goods vs. services issue. It is intended to make software contract

laws more consistent and clear among states. If laws are consistent from state

to state it makes it easier for buyers and sellers to understand how to do

business with each other. There is a great benefit in creating a uniform system

for software products and services, however, this proposal for Article 2B

does have major flaws. Article 2B employs a contracting model that excludes

negotiation and that doesn’t reveal terms of the contract to the customer until

after the sale is complete. It also adopts a licensing model that says when you

buy software, you are really only buying the right to use it. Consumers also

have little or no opportunity to read warranties and disclaimers before

purchasing the product. The draft of Article 2B eliminates some of the legal

protections that software buyers currently take benefit from. For example, it

reduces vendor liability for software defects and viruses and allows vendors

to charge separately for software licenses, maintenance and support. Critics

say that Article 2B is biased in favor of software vendors. While this is the

dominant issue for this paper, there are some positive ideas proposed in the

amendment. It creates balance and structure, reduces uncertainty and

non-uniformity of licensing law, sets performance standards, and innovates

the concept of mass-market transactions. The Mass-Market License is a

standard-form, non-negotiable, license. Companies use standard-form

contracts instead of trying to negotiate a separate contract for each buyer, or

licensee. The lengthy legal forms that most don’t read when installing software

are shrink-wrap licenses. These mass-market licenses restrict rights of users.

Licenses involve restrictions on the use of intellectual property. They can have

nondisclosure provisions, restrictions on how the product is used and who

can use it, and restrictions on transfer of the licensed product. Software

companies solely benefit from this where they can not only dictate the terms

of the agreement, but they can also avoid consumer defect and privacy

protections laws that apply to a sale of goods. An example of a typical

shrink-wrap license on-line is as follows: Attention, Please Read: Installing

this software constitutes your acceptance of the terms and conditions of the

license agreement. Other rules and regulations of installing this software are:

1. The product cannot be rented, loaned or leased. 2. The customer shall not

disclose the results of any benchmark test to any third party without Network

Associates’ prior written approval. 3. The customer will not publish reviews

of the product without prior written consent from Network Associates. By

loading any software, you may be inadvertently entering into a contract.

Software publishers claim that these one-sided contracts are legally binding,

but American courts disagree. Article 2B says that the publisher doesn’t have

to show software customers the terms until after the sale, when it’s too late to

do comparison shopping. By then, the consumer has already started installing

the software. The customer is deemed to have accepted the terms of the

contract if he/she uses the product instead of returning it. All of the terms of

the agreement are now fully enforceable as if the consumer had reviewed,

discussed, and signed a paper contract before the sale. Many of the

shrink-wrap software licenses say that once you break the seal and use the

software, you’re releasing the vendor from all warranties. Basically, the

software has been sold “as is” and you’ve given up your legal recourse if it

doesn’t perform as claimed, damages your computer, or has bugs that lead to

errors. Under the Magnuson-Moss Warranty Improvement Act customers

are entitled to see the warranty of any goods sold for $15 or more. It is not

unreasonable to assume that software purchased for home usage would be

covered by the Act. But software customers rarely get to see the warranties

provided with software until after the sale. Article 2B characterizes

mass-market software sales as licenses, which may not be covered by the

Magnuson-Moss Act. Products normally come with an implied warranty of

merchantability, which states that the product will be fit for ordinary use, it

will conform to the claims on the packaging and in the manual, and it will pass

without objection in the trade. An implied warranty comes with a product at

the time of sale unless it is conspicuously disclaimed. Implied warranties are

so easy to disclaim as long as they are conspicuous in the sense that you

know the terms. For instance, you buy a software program from a store, take

it home and install it and a License Agreement is displayed. It says that there

are no warranties, express or implied, and that incidental and consequential

damages are excluded. You have a chance to click on “I accept these terms”

or “I want a refund”. If you choose the latter, you take the product back to

the store and get a full refund. Express warranties cannot be disclaimed. An

express warranty is any statement of fact by the seller to the buyer about the

product that becomes part of the basis of the bargain. This phrase generally

means that if a reasonable customer would interpret the seller’s statements as

factual descriptions of the product that the customer has bought, and would

be even slightly influenced by the statements in deciding whether to buy or

keep the product, then they are considered basis of the bargain statements.

Article 2B allows the seller to exclude incidental damages and consequential

damages. These exclusions do not have to be conspicuous. Publishers are

allowed to put damage limitation clauses in the license that excludes these

expenses. Incidental expenses can include all costs of reporting a defect and

returning the product. Software support is increasingly being done on a

fee-basis where you pay for a support contract, you pay per call, or you pay

per minute. A customer who spends money on support calls to report defects

that were known to the publisher at the time it shipped the product, isn’t

entitled to a refund of these charges. The unethical publisher basically gets to

profit from its own defects. So not only don’t you get reimbursed for

incidental damages, but the cost of contacting the Customer Service Rep to

report a legitimate problem becomes the profit of the software publisher. The

public does not benefit from a law that cuts off their right to know before the

sale what guarantees the product comes with. Article 2B will help publishers

reduce their customer support costs in ways that don’t improve the quality of

their products. A company spends money on prevention of problems,

appraisal (looking for problems), internal failure costs such as cost of bug

fixes or lost time due to bugs found before the product is shipped, and

external failure costs which include tech support costs, lost customer

goodwill, and warranty costs. This analysis encourages employees to think

about their companies’ costs as opposed to their customers’ costs. The

Article will substantially reduce a seller’s legal and competitive exposure for

shipping bad software. Companies should and will spend less than they do

now to prevent, find, and fix bugs because it will now cost them less when

they ship defective products to consumers. Article 2B allows software

publishers to sell software with serious know defects without fear of any

significant consequences. Software is routinely released with many serious,

known defects because companies seek short-term profits, while sacrificing

long-term customer satisfaction, to meet ship dates. Companies fear being

exploited by the competition if knowledge of the defects was released. A

software defect is a material breach of the contract for sale or license of the

software if it is so serious that the customer can justifiably demand a fix,

cancel the contract, return the software, and demand a refund. If the defect is

not material, then the customer is probably stuck with the program, and

entitled to at most, a partial refund. Article 2B will make it easier for software

publishers to refuse a refund. If you buy software that is not mass-market,

then you no longer have the right to reject the product due to non-material

defects that you discover during inspection. Also, the publisher is only

required to give a refund if the product is so defective that it has materially

breached the contract. But even for a significant bug, the company can force

a customer to prove in court that the bug is so serious that the customer is

entitled to a full refund instead of a partial refund. If the contract is for a

mass-market license, then a breach is only material if the software fails to

perform in conformance with the end user documentation, or if the software’s

performance is unreasonable and as a result, it deprives the consumer of a

significant benefit of the product or it results in costs to the consumer that

exceed the price paid for the software. Article 2B requires the customer to

maintain backup systems just in case the software publisher breaches the

contract. The customer cannot recover compensation for losses that could

have been avoided with regular backups. The customer should not have to

spend time, effort and money on preventive steps, before a breach, to

minimize the damages that will be incurred if the publisher should happen to

breach. Sellers rely on contracts and laws that make it harder for customers

to sue them. In mass-market agreements, we already see clauses that avoid

all warranties and that eliminate liability even for significant losses caused by a

defect that the publisher knew about when it shipped the product. The seller

isn’t required to deliver a perfect program, just one that substantially does

what was promised. The Article requires the seller to fix a nonconformity that

is not material or very serious. This effort to cure is only required with

products other than mass-market licenses. It is easy for the mass-market

software publisher to escape liability for incidental and consequential

damages. Under 2B, a nonmaterial breach does not entitle the customer to

cancel the contract and get a refund, but it does entitle the aggrieved party to

the appropriate remedies including incidental and consequential damages,

however, 2B also allows the seller to exclude these damages. A software

developer can be sued under certain theories. Negligence is what first comes

to mind in lawsuits over defective products, but proof of negligence can be

very difficult. You must ask if the company had actual knowledge of the

problem. How carefully did the company perform its safety analysis? How

well designed is the program for error handling and how well does the

company handle customer complaints? You need to look at whether or not

the product design and development followed industry standards. Failure to

follow a standard is only relevant if the plaintiff can show that this failure

caused the harm. Does the company have a bug tracking method and did

they use a consistent methodology? Did the company make a serious effort to

find errors and what test plan did it follow. Does the documentation for the

software warn people of risks? Most software lawsuits are for breach of

contract or fraud because the product usually doesn’t cause personal injury

or property damage. Fraud would apply if the company made a statement of

fact to the customer and the company knew when it made the statement that

it was false. If you reasonably relied on the statement to determine buying or

returning the product, it can be classified as fraud. If the company made a

mistake and did not know that the statement was false when it made it, then

this would be negligent misrepresentation. In a software transaction, a

material breach or failure to meet specifications is grounds for a lawsuit. The

law will sometimes fail to compensate buyers of products that are seriously

defective. The proposed article would let companies simply disclaim any

liability for defects or lost data beyond the purchase price of the software

itself. Consumers need protection from the laws, not proposals like this one

that will safeguard software companies from liability. Article 2B reduces

liability rather than expanding it. Software publishers are given more power to

set their terms than in current law. If UCC 2B is enacted, your could

potentially lose your rights to criticize or analyze the product you purchased.

It allows publishers to use confidentiality clauses in their license agreements.

They can have you agree to hold the software package and not publish,

communicate, or disclose to third parties any part of the package, without

written consent. Publishers have the right to create trade secrets and to enter

into nondisclosure contracts with people. The publisher is in essence, creating

a nondisclosure agreement with the whole world, one consumer at a time.

This is a law that lets publishers cut off their customers’ right to read detailed,

critical reviews of a product they are considering buying. Competition in the

marketplace is then decreased if publishers can block negative reviews of

their products. Software development companies will benefit from laws that

shield sellers from the consequences of their actions which in turn strips away

most of the rights of customers who purchase mass-market products.

Consumers are aware that software makers need a viable market and some

form of shrink-wrap licenses might be necessary. But software makers have

taken advantage of these buyers. If we have to accept a unilateral license, the

least the software publishers can do is provide reasonable consumer

protections. Many consumer demands may have been met, but others have

not. The proposed draft is unbalanced because it favors software vendors at

the expense of consumers on many issues. Software companies can avoid

paying any damages beyond a refund, even for defects that they knew about

when they released the software. This includes damages done to the

customer’s computer, charges for technical assistance – which sometimes

exceed the cost of the software itself – and time to re-enter data that was

destroyed. All the financial benefit goes to the company, and all risks that the

software will not perform or actually cause serious damage are placed solely

on the purchasers of the product. Software companies can disclaim all

warranties, denying even that the product conforms to claims made on its

packaging or in its documentation. For software bought or licensed online,

software publishers can avoid all liability for viruses in their software, even if

they would have found the virus with the simplest of tests. Article 2B even

makes any license term binding, even if it would cause an ordinary and

reasonable person to refuse the license if that party knew that the license

contained the particular term, so long as the person clicks on “I Agree” for

that term. The proposed draft provides almost no protection to customers. It

shields the worst companies from responsibility for their worst products. It

will weaken the legal rights of consumers and ultimately drag down software

quality across the industry. If this addition to the Uniform Commercial Code

is passed, you could be giving up a lot more than you intended for with that

click.

1. Eisenberg, Rebecca L. “2B or not 2B”. 2. Hoffman,

Thomas. “Users Could Be Losers Under Code Revision”. 3. Kaner, Cem.

“Bad Software-Who is Liable?”. 4. Kaner, Cem. “What Is a Serious Bug?

Defining material Breach of a Software License Agreement”. 5. Kaner, Cem.

“Uniform Commercial Code Article 2B: A New Law of Software Quality”.

6. Leibowitz, Wendy R. “In New UCC Software Contracts, Is the Customer

Always Wrong?”. 7. McWilliams, Brian. “The End of Software Licenses?”.

8. Nader, Ralph. “Shrinkwrap Licenses and Uniform Commercial Code

Article 2B”. 9. Ring, Jr., Carlyle C. “Positive Attributes of Article 2B”. 10.

Towle, Holly K. “Towle Memorandum – UCC Article 2B”. 11. Wylie,

Margie. “Shrink-wrapping the Social Contract”.