MEMORANDUM AND NOTES:

SEPTEMBER, 1996 DRAFTING COMMITTEE MEETING

Introduction

    This memorandum accompanies the September, 1996 draft of Article 2B (September Draft). The memorandum discusses issues raised at the 1996 Annual Meeting of the Conference and in correspondence from and discussion with various groups before and after that meeting. The result of those events has been a relatively large number of changes in the draft presented to the Annual Meeting (July Draft).

 A major source of input comes from the public comments at the Annual Meeting. In addition, the Reporter received many editorial suggestions in writing and several commissioners took the time to go through the entire draft with suggestions for style and other changes after the meeting. I would like to extend my personal appreciation and that of the Committee for all of the effort that this has involved. To the extent possible, these suggestions were incorporated in the text. In addition, meetings occurred with the ABA Subcommittee on Software Contracting, with a Committee of the New York City Bar Ass’n, with a group that broadly represents participants (licensor and licensee) in the motion picture and record industry, a Committee of the American Intellectual Property Law Association, and with various other groups. These groups neither represent exclusively licensor interests, nor are they committed to any result in the development of Article 2B other than to produce the best product possible. Extensive written comments, in addition to those of the commissioners noted above, were received from the Consumer’s Union, the Information Industry Association (on-line information providers), and others.

GENERAL BALANCE

    Shortly before the Annual Meeting, the representatives of the Consumer’s Union distributed a memorandum to Uniform Law Commissioners in which that organization expressed "serious concerns about the approach and balance of draft Article 2B. [It] eliminates protections for consumers and other licensees of computer software that would be available under current Article 2." During the floor discussion, several commissioners expressed a similar concern. This proposition, which surprised many who have been involved in Article 2B as a project for many years, needs to be addressed by the Drafting Committee. Specific issues are discussed below, but it is initially important to examine the premise itself in context of the September Draft (and the July Draft).

    When comments on this point are reviewed in context of the entire draft and in light of current Article 2, while a number of important issues arise, much of the general concern reflects a focus on a relatively limited number of issues and a lack of attention to many areas in which Article 2B in fact increases licensee rights and protection as contrasted to current law, under either Article 2 or common law. The issues primarily focused on deal with warranty, perfect tender, and product liability questions. The lack of attention to other areas is attributable at least in part to a failure to fully communicate to the Conference and others the composite impact of the Draft. To understand the overall impact of the Draft, these other topics need to be considered.

    The first step is to focus on what comparisons are being made. Draft Article 2 revisions contain a number of new consumer protections and product liability theories. As drafted, Article 2B does not focus on consumers, but on a broader theme of mass market licenses which includes business and consumer transactions (but see discussion below of whether this should be retained). The Draft takes no direct position on products liability law, leaving evolution of product liability theory (if any) in the area of information products to the courts. Importantly, except for imbedded software(left to Article 2) and two cases that have not been followed in reference to technical data products, there is no case or statutory law currently applying product liability theory to information products. If Article 2 is correct in developing and expanding law to goods in consumer and products liability contexts in light of modern case law and statutory developments, no similar justification exists in the area of information licensing and a failure to include these in the Draft does not reflect a retrenchment or denial of rights. Additionally, the acceptability of the approach taken by proposed Article 2 on these points is far from established and is the subject of current objection by various interested groups.

    The relevant comparison in reference to "balance" is between current law and Article 2B. On that comparison, while Article 2B as drafted contains some changes in law, on balance there is a broad expansion of licensee rights (mass market and other) as contrasted to current law and, especially, as compared to current Article 2. In many cases, the draft parallels and, in a number of areas, expands protections even as compared to proposed revisions to Article 2, many of which are highly controversial.

    In addition to a memorandum that lays out a number of specific areas, the Consumer’s Union letter lists five areas that are the "most important " areas in which that group seeks improvement of draft Article 2B from its perspective:

    1) the addition of a simple statutory mechanism for a full refund for nonconforming mass market software if the protections of the "perfect tender" rule are not retained;

    2) a higher dividing line between mass market and other licenses;

    3) improved treatment of unexpected terms which are standard in the industry;

    4) elimination of the partial preemption of state consumer statutes; and

    5) treatment of the merchantability, virus, and non-infringement issues.

With respect to issues (2) and (3), it is important to recognize that the July Draft of Article 2B already far exceeds current law in most states (including current Article 2B) with respect to licensee protection in most states. The argument there is not that Article 2B denies licensee protections, but that it should go further beyond existing law.

    On issue (2), it is important to recognize that the innovation in Article 2B that focuses on mass market contracts, rather than consumer contracts, goes far beyond current and proposed Article 2 and well beyond state law in most jurisdictions. It incorporates various business transactions under a mantel of protection (mass market) commonly reserved only for consumers. That same innovation was discussed in Article 2 and was apparently rejected by that Committee. There are no differences that make a mass market focus for goods any less pertinent than that focus for information products. A small business buyer often purchases goods in much the same way that a consumer does (at retail). In any event, whatever line and definition is correct (see below), the dividing line does not reduce consumer protection.

    On issue (3), Article 2B adopts a variation of a proposed treatment of standard forms suggested in the Restatement (Second) of Contracts which excludes surprising terms that are "bizarre or oppressive [or] that eliminate the dominant purpose of the transaction." The Restatement proposal has been adopted in less than ten jurisdictions in the almost twenty years that it has been in the Restatement and, with very few exceptions, even in those states is commonly applied to insurance and similarly complex contracts. Article 2B exceeds, by far, licensee protections under current law in this respect. Article 2, as currently enacted, does not provide any protection, even to consumers, similar to that contained in the Article 2B proposal. Again, while one might dispute the terms on which this increased protection is granted (see below), those terms do not deny current protections to any group, but rather expand licensee protections in the mass market.

    The other three issues are discussed below (as are these first two) and involve policy and practice choices in which a number of interests need to be recognized and accommodated. Beyond that, and much more important, however, are the relatively large number of provisions in the July Draft and the September Draft that extend new protections or favorable default rule presumptions to licensees of information in the mass market and otherwise, or at least, retain existing Article 2 law. These include, but are not limited to:

        1.    2B-106 gives consumers [mass market] protections on choice of law terms that are not found in draft Article 2 and exceed current law in the Restatement or in Article 1 rules.

        2.    2B-107 gives consumers [mass market] protections on choice of forum that exceed draft Article 2 and current law, including a U.S. Supreme Court decision.

        3.    2B-102 extends consumer-like protections to some businesses through the concept of "mass market" contract.

        4.    2B-308 excludes some surprising terms and limits effectiveness of mass market forms to cases where procedural guidelines are followed, notice, and a true opportunity to review and decide if the terms of the contract are acceptable exists.

        5.    2B-320 provides protection against viruses introduced by lack of care and requires that any disclaimer of this be conspicuous; no current case law deals with this issue and Article 2 (current and revised) ignores it.

        6.    2B-402 carries forward existing express warranty law.

        7.    2B-403 carries forward the implied warranty of merchantability for mass market licenses.

        8.    2B-406 generally requires that exclusion or modification of a warranty in a mass market license be in a record and conspicuous and requires a record to disclaim warranties in most other cases (draft Article 2 deletes this last provision).

        9.    2B-406 requires "plain language" and more informative warranty disclaimer in mass market section (exceeds current and proposed Article 2).

        10.    2B-502(b)(3) gives a mass market licensee a right to transfer similar to a first sale whether or not a first sale occurred.

        11.    2B-311 creates an interpretation rule that clears up ambiguities to give licensees their commercially intended bargain and reverses some case law that interprets grants in a license against the licensee.

        12.    2B-619 provides that in a system of separate products selected by the licensor the individual products will work together as a system, which obligation may be breached even if each individual item is perfect.

        13.    2B-109(c) provides that non-substantial nonpayment or delay is not cause for canceling the contract as compared to the perfect performance rule in Article 2A-523 (except in an installment contract).

        14.    2B-109(c) suggests that noncompliance with agreed performance standards constitutes a material breach.

        15.    2B-313 provides a right to make back-up copies which right does not exist under copyright law unless the party is the owner of a copy of computer software.

        16.    2B-314 gives broad rights of use in the absence of express limiting language in the license.

        17.    2B-316 presumes a perpetual license in a mass market and some other settings, compared to common law which would provide for a contract terminable at will.

        18.    2B-319 information delivered by the licensee to the other party remains the property of the licensee and is subject to confidentiality restrictions if there is reason to know that it is not generally public (e.g., customer lists, etc.).

        19.    2B-322 requires express authorization in the contract for electronic devices limiting use to the express contract terms.

        20.    2B-323 creates a data protection (privacy) right limiting unauthorized use of data about the licensee that does not exist under modern privacy law and is not provided in Article 2.

        21.    2B-401 gives a warranty of non- infringement pertaining to use of the licensed information; current case law under Article 2 holds that the warranty there does not pertain to infringing uses.

        22.    2B-404 expands warranty law in many states to include information services contracts.

        23.    2B-502 creates presumptions of transferability by the nonexclusive licensee that go beyond existing law and, arguably, push the limits of federal policy restrictions.

        24.    2B-612 presumes that acceptance of a stage in a multistage project is conditional until acceptance of all stages; article 2 uses installment contract idea which does not give a right to refuse prior installments as conditionally accepted.

         25.    2B-617 provides that a retailer is not protected by a producer’s contract disclaimers or other limitations and must separately deal with its obligations..

        26.    2B-618 gives the client of a developer an implied license in the product and requires a pre-completion statement of rights clearance by the licensor on request of the licensee.

        27.    2B-704(e) makes enforceable a clause providing that there will be "no cancellation" even if a breach is material.

        28.    2B-708 allows a discovery rule to extend the limitations period to five years; Article 2 does not provide a discovery rule.

        29.    2B-712 precludes self-help and allows it, only under restrictive conditions, if a breach is material independent of contract and allows it only if the licensee manifested assent specifically to a term providing for that remedy; neither Article 9 nor Article 2A similarly restrict self help.

        30.    2B-618 requires a licensor in a software development contract to give notice that it used independent contractors and assurance that either all rights are cleared or that no effort was made in this regard.

        31.    2B-111 in an electronic contract environment, disallows " authentication procedures" that are not commercially reasonable, thereby precluding imposition of unreasonable provisions on a licensee.

        32.    2B-112 in an electronic contract environment, disallows liability for a buyer-licensee for misuse of code or the like unless there was an element of fault (negligence) involved in causing the harm.

There are other provisions that could, as well, be viewed in the same manner. Whether a particular provision benefits a consumer or merely benefits only other licensees can be debated. Given these provisions, however, one needs to question the impression of overall imbalance.

    The point of this list is not that there are no provisions in the Draft that could be viewed as contrary to some licensee interests or as providing for changes in law that might be so perceived. It is, however, in the nature of a new law-making process, that balances are struck and accommodations achieved. These provisions are part of the balance. In each case, the licensee’s rights are expanded or new legal principles are proposed to balance rights in a context where no law currently exists. None of the above narrow the rights of a licensee under current law. Most significantly expand those rights.

    When one examines draft Article 2B for provisions that alter and arguably reduce consumer or other licensee protections, it is important to make the comparison with existing law as separate and apart from the as yet not enacted provisions of the proposed revision of Article 2. The political and policy sustainability of that article remains untested and contested. As contrasted to current law, the following lists arguable changes in licensee protections:

     1.    Article 2 requires a clause prohibiting oral modifications of a contract to be signed by a consumer; Article 2B contains no similar rule.

     2.    Article 2 defines merchantability to include passing without objection in the trade; Article 2B in the July Draft does not contain that rule.

     3.    Article 2B provides that consequential damages are not available unless expressly agreed to by the parties.

     4.    Article 2B proposes modification of non-UCC consumer rules to accommodate electronic contracting (the coordinating committee recommended that Article 2 conform to 2B on this point).

     5.    Article 2 requires perfect tender in reference to the buyer’s right to reject goods in a single delivery; Article 2B uses the common law material breach standard.

     6.    Article 2 has no self-help repossession unless a security interest is obtained; Article 2B allows self-help but restricts Article 9 and Article 2A rights.

     7.    Article 2 expressly provides that unreasonably large liquidated damages are unenforceable, but this sentence is being deleted based on a vote of the Conference; Article 2B (July Draft) disallowed liquidated damages that are unreasonable, a more restrictive standard than in draft Article 2.

     8.    Article 2B adopts a traditional contract third party beneficiary rule; Article 2 has three distinct options dealing generally with non-privity liability.

     9.    Article 2 refers to handling of goods as a basis for remedies for breach; Article 2B imposes a duty to mitigate on the licensor, but treats the normal remedy as reflecting the intangible nature of the property.

     10.    Article 2A allows for unconscionable inducement of a contract in consumer leases; like existing Article 2, Article 2B does not adopt the idea of inducement.

     11.    Article 2 includes personal injury and property damages in the definition of consequential damages; Article 2B does not exclude or expressly include such damages.

     12.    Article 2 provides for an absolute warranty of non-infringement, but only covers goods as delivered; Article 2B limits the warranty to no knowledge, but covers infringing us es.

Whether the balance tilts one way or another perhaps lies in the eyes of the beholder. Clearly, however, as currently in draft form and in light of existing intellectual property rights law, Article 2B does not lean entirely toward licensors under any standard of perception.

MASS MARKET DEFINITION

    As noted above, the idea of a "mass market" contract is a potentially major innovation in Article 2B. That innovation shifts from a focus on a distinction between consumer and other contracts, to a focus on the distinction between mass market and other contracts. The effect of the shift is to extend elements of consumer protection law to business licensee and to bring in various marketplace assumptions about transferability and the like that may be pertinent to mass market environments. The Article 2 Drafting Committee, after relatively extensive debate in the initial stages of that project, rejected this change.

    The Drafting Committee should specifically examine and make general policy decisions regarding the use of the "mass market" paradigm in Article 2B and whether the paradigm should be abandoned or its use and definition significantly refined. In part, the need for this re-examination lies in a recurring tendency to equate "mass market" with "consumer" transactions. While the one incorporates the other (e.g., consumer transactions occur in the mass market), the idea of a mass market transaction goes far beyond the idea of a consumer transaction. Indeed, with respect to transactions that fall within this concept, a significant percentage if not a majority of licensees will be businesses, rather than consumers (e.g., commercial grade word processing; network operating software, database products, project management software). Some of these will be small businesses, but under current licensing practice, many of the licensees will be large business entities, larger than the licensor from whom they are "protected."

    The Drafting Committee should examine the role that this concept plays in the Draft. Three issues need to be addressed and resolved:

     1.    Should the mass market paradigm be abandoned and replaced with the more traditional consumer-commercial dichotomy that prevails in all other areas of law and that, apparently, will be retained in Article 2 and revised Article 2A?

     2.    If the mass market paradigm is not abandoned in full, should its use be restricted to cases involving marketplace assumptions and the concept of a consumer licensee used where the underlying policy entails consumer protection?

     3.    If the mass market paradigm is retained in whole or in part, how should the concept be defined in order to ensure a proper scope of application?

The definition of the term has been extremely difficult and, as discussed below, the current draft advances a new proposal in light of debate at the Annual Meeting and elsewhere. The Consumer’s Union letter argues for increase of the prior $1,000 dollar limit, largely to ensure that the term encompasses both current and future consumer license transactions.

     Scope of Application.

    In the current Draft, the idea of a mass market license is employed in two distinct ways. The blurring of the two presents a potentially important conceptual problem if allowed to dominate discussion.

    The first use corresponds to the original intent in developing that term in early drafts. The idea of a mass market is used as a factor in identifying default rule presumptions that correspond to ordinary expectations in the modern marketplace. Thus, for example, mass market licenses are presumed to create a right in the licensee to retransfer the copies obtained subject to compliance with intellectual property-based concepts that all copies be transferred. The marketplace supports an assumption that these rights flow to the licensee in that marketplace unless the contract directly and effectively negates that presumption. By and large, the goal here is not only to parallel modern assumptions, but to give the licensee the benefit of default rules that parallel what affirmative rights it would have if it were an owner of a copy of software under current copyright law.

    The second use is as a vehicle through which to enact consumer protections. This involves, for example, requirements with respect to disclaimer of warranties, where a conspicuous term in a record is required for disclaimer in mass market licenses, but not in other commercial licenses (standard form or otherwise). In these uses, Article 2B extends far beyond current law in protecting business licensees as if they were consumers. This choice needs to be directly addressed and either accepted despite the reluctance of Article 2 and most bodies of current contract law in this country to do so, or rejected or significantly refined.

    For purposes of reference, the following provisions of the September Draft contain provisions tailored to "mass market" licenses:

     ' 2B-105: Applying Article by Agreement (mass market cannot opt in)

     ' 2B-106: Choice of Law (one alternative restricts contract choice)

     ' 2B-107: Choice of Forum (restricts contract choice)

     ' 2B-308: Mass Market License (requires express notice of and consent to some terms)

     ' 2B-315: Duration of Contract (default rule is perpetual license)

     ' 2B-319: Viruses (disclosure to be conspicuous)

     ' 2B-403: Warranty of Quality (merchantability required)

     ' 2B-406: Disclaimer of Warranty (must be conspicuous and in a record)

     ' 2B-502: Assignment or Transfer of Licensee Interest (allows transfer)

     ' 2B-507: Priority of Transfer (allows transferee priority)

     ' 2B-601: Performance (suggestion re material breach on tender of product)

In addition, the Consumer’s Union letter and memorandum argue that additional protections should be incorporated into other sections, including the parole evidence rule, oral modification rules, and the liquidated damages rules.    

    1.     Should the mass market paradigm be abandoned and replaced with the more traditional consumer-commercial dichotomy?

    As we all understand, Article 2B addresses highly important transactions that are central to the new information marketplace. In doing so, we are exploring a number of new concepts that will alter some aspects of modern law. The basic question is, whether, having taken on this field, we should also undertake a reconceptualization of consumer protection law. A subsidiary of that question involves whether in doing so we can avoid either of two very likely results: either an over-extension of consumer-like protections to business entities that do not receive these protections in any other law, or a narrowing of consumer protections because they are integrated into policy choices relating to business licenses.

    These are not insignificant questions and the appropriate answers are not immediately apparent. There has never been an affirmative case made to and accepted by the Committee that Article 2B should expand consumer protection into business transactions. The need to do so is not clear. Certainly, when considered in Article 2, the viewpoint that this need exists did not motivate a change in law, even though that Committee has undertaken a number of other potentially significant changes in existing Article 2. Software and information content transactions do not create a different environment that argues for broader protection, nor do they inherently shift the balance of interests that has traditionally prevailed in modern law. Indeed, the developing and dynamic nature of the industries involved here might suggest an approach that minimizes restraints and relies on a very vibrant market and innovation pattern to protect parties.

    The premise that argues for extending consumer protections to business licensees basically hinges on the proposition that the two types of transactions are often analogous or identical. The individual who acquires software (or a copy machine) for use in her business is not, so the proposition might go, any different from that individual acquiring the same product for use at home. Indeed, in correspondence and debates about mass market contracts, the common tendency has been to ignore the expansive nature of the line drawn and to treat all mass market transactions as if they were all consumer transactions.

    This line-drawing argument, of course, is rejected in Article 2 and not accepted in most bodies of contract law or consumer protection law. Yet, it has some substantive merit. However, the type of argument raised by line-drawing will be present in any case where a statutory line is drawn defining the limits of protective policy. It was, in fact, raised under the mass market concept with reference to whether a $1,000 transactional cap was too low to cover all of the relevant transactions.

    If the mass market paradigm is discarded, the Committee will be required to examine what assumptions are appropriate in reference to the sections listed above. For example, consumer protection might be adopted with respect to:

     ' 2B-105: Application by Agreement

     ' 2B-106: Choice of Law

     ' 2B-107: Choice of Forum

     ' 2B-308: Mass Market License

     ' 2B-403: Warranty of Quality

     ' 2B-406: Disclaimer of Warranty

     ' 2B-601: Performance

The Committee would then address what assumptions should be made in the other, previously mass market contexts and also discuss Consumer Union suggestions in other sections in reference to consumer protection law without the competing consideration of how this should apply to business transactions.

Alternatives:

     1.    Delete reference to mass market transactions and employ the traditional consumer-commercial dichotomy throughout Article 2B.

     2.    Retain the reference to mass market licenses subject to resolution of the issues raised below.

Reporter’s Recommendation:

Adopt proposition 2, but take steps to ensure that the mass market concept is not improperly used to expand concepts applicable to consumers into setting that go beyond those to which most consumer protection laws extend.

    2.    If the mass market paradigm is not abandoned, should its use be restricted to marketplace assumptions and a consumer approach used where the underlying policy entails consumer protection?

    If the Drafting Committee discards the mass market paradigm, , it can avoid the next two questions. If the paradigm is retained, then a decision must be made about when and how it should be applied. As discussed above, the fundamental decision is whether the same paradigm should be used to enact consumer protection and to build default rules that relate to marketplace elements. In essence, the question is whether the concepts should be decoupled?

    The two issues appear to be different. Thus, consumer protection questions typically focus on an assumption that a combination of lack of bargaining power, lack of business purpose, and a naiveté about contracts require special requirements of notice and, perhaps, limitations on the ability to create contract terms related to performance and quality characteristics of the product being purchased (e.g., warranties of performance). The marketplace issues deal with what assumptions should be made in the absence of contract terms about the licensee’s ability to use, modify, copy, transfer, or otherwise employ the information it acquires in the mass market. A distinction between consumer and mass market licenses that reflects these different functions is not irrational and, indeed, as described above, modern law (and draft revisions of Article 2) approach these issues based on a distinction between consumer and commercial transactions.

    The question can be framed by the following hypothetical:

    Assume that two identical transactions occur. Consumer acquires a computer and popular database software for use in his home. Lawyer, the managing partner of ABC law firm, acquires the same computer and software for use in the law firm’s accounting system. Both purchases are made at Montgomery Ward Department Store. Assume that both transactions are documented by a standard form that disclaims implied warranties, but is not in conspicuous language. The form contains a term dealing with use of the system that a reasonable party would find surprising and sufficiently oppressive that it would turn down the transaction if it were made aware of the term. The contract is silent on the term of the license. Consumer and Lawyer manifest assent to the forms.

     As to the disclaimer: Under Article 2 revisions, the disclaimer is enforceable against Lawyer’s firm, but not Consumer. Under the mass market approach of Article 2B, the disclaimer is not enforceable against either party since these are mass market transactions.

     As to the surprising term: Under proposed Article 2, the term is unenforceable against Consumer (protected consumer) and enforceable against Lawyer’s firm based on the idea that commercial parties have some obligation to read and understand the forms they adopt (unless a court uses an unusual, commercial application of conscionability doctrine). Under current law, the surprising term would be enforceable against both parties unless it is unconscionable or the case arose in a state that had adopted the Restatement standard.

     As to the term of the license: Article 2 does not deal with the issue. Under Article 2B, both parties have a perpetual license on the database, subject to being canceled in the event of a material breach of the license terms.

    The basic question is whether an entity such as a law firm or other commercial enterprise should receive consumer protections when it enters the mass market. The traditional answer is no. That answer reflect the idea that commercial parties have responsibility for their own decisions and the terms they accept and that part of operating a business is examining one’s contracts; in consumer statutes with dollar limits (Regulation Z, Regulation M, and Article 2A) the answer also reflects the idea that for very large transactions, even consumers ought to seek appropriate assistance or carefully examine contracts. Given that assumption, consumer protections are typically not given to businesses. Business parties are governed by general theories of contract choice; the assumption is that marketplace and other restrictions as well as self-interest adequately protect the business purchaser.

    Obviously, not all mass market business purchasers are law firms or companies of significant size and a line drawn between consumer purchase and commercial purchase can be shown to be arbitrary in some cases. But that is true under current law and will continue to be true under an definition of mass market. Positions that stand slightly on either side of any definition line are always debatable.

    If the Committee decides to not use "mass market" as the single paradigm, the most logical point of differentiation distinguishes between market assumptions relating to use and consumer protections related to protected quality. Under this approach, the concept of mass market would include consumer licenses, thus incorporating beneficial rights in default presumptions for consumers, but would use the separate concept of consumer license in cases where the underlying purpose entails consumer protection.    

    The Committee would need to discuss and apply this concept, but one possible application would make the following distinction:

     ' 2B-105: Application by Agreement

     ' 2B-106: Choice of Law

     ' 2B-107: Choice of Forum

     ' 2B-308: Mass Market License

     ' 2B-319: Viruses

     ' 2B-403: Warranty of Quality

     ' 2B-406: Disclaimer of Warranty

     ' 2B-315: Duration of Contract ( default rule is perpetual license)

     ' 2B-502: Assignment or Transfer of Licensee Interest ( allows transfer)

     ' 2B-507: Priority of Transfer ( allows transferee priority)

Alternatives:

    1.    Adopt and retain the mass market paradigm as applicable to all applicable sections, tailoring the specific rules to reflect that the protection extends to businesses as well as consumers.

    2.    Distinguish between consumer and mass market policies based on the distinction between quality protections and use expectations.

Reporter’s Recommendation:

Adopt alternative 2 and apply a differentiation along the lines suggested above.

    3. there are virtually no prior models on which to define a mass market license, making an appropriate definition has proven difficult. At the Annual Meeting, there was substantial expressed concern about a definition containing a limitation of $1,000 per item of information as being too narrow. The Consumer’s Union letter urges that the Committee adopt a far higher cap based on the observation that: "Who knows how much software will cost in the future, or whether it will be it will be bundled and sold in packages at prices above $1,000?"

    The reference to bundled software packages reflects a misreading of the intent and terms of the definition contained in the July Draft which applied the $1,000 limitation to each individual item of software. But concern about the dollar cap requires attention. In the September Draft an alternative definition is proposed that relies on terms and nature of the marketplace, rather than a dollar cap.

    From the perspective of those who criticized the $1,000 cap. The primary risk was that some consumer transactions in a future environment might be excluded from the consumer protection rules applied in the Draft. This use of a dollar cap is employed in Article 2A relating to leases where a lease for personal, household or family use is not a consumer lease if the total payments exceed a stated dollar figure which, in fact, is significantly higher than $1,000. Under the Article 2A rule, a consumer no longer receives consumer protection if the total amount spent in the transaction exceeds a particular dollar figure. Importantly, that rule only applies to consumers. It does not bring business leases within consumer protection rules. Article 2A excludes a consumer who acquires an expensive item from its consumer rules.

    To the extent that this definition issue involves avoiding a risk of inadvertently excluding ordinary consumer transactions from the consumer protection scope, several readily implemented solutions are apparent. One is to adopt the Article 2A approach and define a mass market license as covering all consumer licenses under a stated dollar figure (such as $5,000). Another approach would define consumer licenses as mass market in all cases, irrespective of any dollar cap and to apply an appropriate dollar cap to any remaining portion of the definition to limit business access to consumer protections.

    From the perspective of those who suggested and supported a dollar cap, the issue lies in capping the extent to which large transactions involving business entities can qualify for consumer protection. The risk being addressed here is that a company (for example Ford Motors) will acquire large amounts of software in the mass market for significant money and with resulting large risk for the licensor. A dollar cap of a low amount precludes this possibility, limiting the hypothetical Ford Motor purchase to a dollar value commonly associated with ordinary consumer protections.

    Importantly, an approach that uses the prior definition of a mass market transaction without a dollar cap would, under current practice, cover most ordinary commercial contracts involving standard forms since it would cover a standard form, non-negotiated license, where the software was not specially developed or custom designed for the particular user. That approach would be inconsistent with the Committee’s decision (also contained in Article 2’s draft) to validate commercial standard forms and would apply consumer protections throughout all commercial practice involving standard forms.

    In this Draft, a revised definition of "mass market" is proposed that focuses on the type of marketplace and terms involved in a transaction, without a dollar limitation. The intent is to focus on a mass market as defined by transactions that commonly involve consumers (the epitome’ of a mass market) and the terms and transactions that are involved therein. Thus, for example, at least under current practice, consumers do not typically acquire twenty copies of software or a so-called site license allowing multiple users of the same software copy. Contracts, even those entered in a retail store, that involve these terms are not considered to be mass market transactions unless they qualify as a consumer contract.

Alternatives:

     1.    Adopt Article 2A’s approach, defining mass market contracts to cover consumer contracts that are below $5,000 in total payments.

     2.    Modify the July Draft definition of mass market by adding a provision that all consumer contracts are mass market contracts (perhaps with a higher dollar cap) and retain the remainder of the definition (including the $1,000 cap) to cover but limit contracts involving licensees who are not consumers.

     3.    Adopt a new definition along the lines proposed in the September Draft which applies the term to all consumer contracts and to other transactions whose market context, terms, and other elements are characteristic of consumer transactions. (see ' 2B-102(28))

Reporter’s Recommendation:

I believe that on balance, Alternative 3 is preferable. It provides a flexible, but nevertheless important, limitation on business mass-market contracts, while covering consumer transactions in full.

STANDARD FORMS AND UNEXPECTED TERMS

    Article 2B, as does Article 2, introduces for the first time in the UCC, provisions expressly dealing with the enforceability and use of standard forms in contract practice. The reason for dealing with this topic arises, of course, because standard forms are common in modern commercial and modern consumer practice. Under the Article 2B format in the September Draft, standard forms are examined under three different sections: 1) 2B-307 dealing with commercial cases involving a single standard form, 2) 2B-308 dealing with mass market transactions involving a single standard form, and 3) 2B-309 dealing with conflicting standard forms. The Article 2 structure differs in terms of the categories used and the substantive rules adopted.

    Under current law, most standard form agreements are fully enforceable. Under the UCC, concepts of unconscionability apply to standard forms as to other contracts. Article 2B retains that application. Some states intermittently invalidate or restrict enforcement of "contracts of adhesion" typically involving consumer cases. The Restatement (Second) of Contracts provides that a standard forn is adopted if a party manifests assent to it, but that some terms that are surprising and oppressive may be excluded. That test has been adopted in very few states (less than ten). It defines these terms as situations where "the [party proposing the form] has reason to believe that the party manifesting such assent [to the form] would not do so if he knew that the writing contained" the term. Restatement (Second) of Contracts ' 211(c). The UNCITRAL draft of international contract law principles similarly validates standard forms based on assent, but excludes terms that the party manifesting assent could not reasonably expect to be present. To the Reporter’s knowledge, this approach has never been adopted or applied by any court in this country or, indeed, in other countries.

    Article 2B adopts a variation of the Restatement test for mass market contracts, excluding surprising and oppressive terms unless a procedures is followed that ensures that the term was brought to the party’s attention and that its consent was obtained to that term, thereby eliminating any surprise. It validates commercial contracts without the surprising term exception. The Draft of revised Article 2 adopts the UNCITRAL approach for consumer contracts, while validating standard forms in non-consumer contracts. Several issues have been raised about the approach of Article 2B, especially as it relates to mass market transactions.

Single Form Cases (Non-mass market):

    We have received no significant concerns about the validation of standard forms in non-mass market cases (although some observers have apparently criticized the analogous approach in Article 2). The approach adopted here parallels the approach that virtually all courts have taken in cases involving commercial transactions (business entity on both sides of the deal). The validation approach is grounded in concepts of blanket assent and the assumption that individuals are expected to read the terms of binding legal documents to which they affix a signature or otherwise manifest assent.

    In Article 2B, this approach is buttressed by procedural protections intended to ensure that the assent obtained is actually given. Article 2 has been requested to conform to Article 2B with reference to these protections.

    The reported cases in the United States on this issue are legion in their use of language relating to freedom of contract, obligation to read, and a need to protect oneself in contracting. There is some literature arguing that, even in commercial transactions, standard forms should not be enforceable. Yet, that literature ignores the importance of form agreements to commercial practice and the costs that would ensue by drastically weakening their role in contracting practice.

    In the September Draft changes are made to reflect the fact that, in the business areas covered here, standard forms are often provided by the licensee, rather than the licensor. This is probably true in sales of goods, but clearly applicable here.

Reporter’s Recommendation:

Retain the current approach validating standard forms in commercial contracts where the assent of one party is obtained under the procedural protections created in Article 2B.

Single Form Cases (Mass Market):

    Substantial concerns have been expressed about the treatment of mass-market licenses in Article 2B, primarily from the perspective of consumer protection issues. In discussing these concerns, it is important to recognize that proposed Article 2B on this point enacts protections that represent a significant change in law in at least 40 states that have not adopted or applied the Restatement approach. This new law is protective of licensees by creating procedural protections about how assent to a form is obtained and precluding enforcement of surprising and oppressive terms that are not brought to the party;s attention and assented to in specific terms. The protection far exceed Article 2 as currently enacted since that statute does not create any protections for the assenting party. The issue is whether the draft goes far enough (or too far as to businesses) and whether a different approach to some issues would be preferable.

    The Consumer’s Union raises several concerns about current Article 2B in this regard. These are: 1) that the Union prefers the approach suggested in revised Article 2 to defining surprising terms, 2) that the Union objects to the safe harbor in the July Draft given to terms that meet federal first sale rights, and 3) that the Union objects to validating terms that are customary in the industry.

    a.    Consumer Union Support for Proposed Article 2 Consumer Rule.

    The Article 2 proposal focuses on whether a licensee could reasonably have expected a term to be present. This parallels the ideas suggested in the UNCITRAL draft, but does not follow either the Restatement or case law in any U.S. court.

     It is not clear why the Article 2 Committee opted for that approach for consumer contracts, but the approach as drafted in the most recent Article 2 proposal appears to involve a subjective analysis of the expectations of each individual consumer buyer. Indeed, the Consumer’s Union described it as a mixed test. The subjective character of the test was criticized from the floor of the Annual Meeting, but the Article 2 committee made the representation that the test was intended to be an objective test. The material distributed for the next Article 2 meeting indicates that the issue will be revisited and points out that the test in their current draft does not follow the Restatement.

    Both the Article 2 and the Article 2B proposals give licensee-buyers greater protection than they have in most states under current law. Indeed, one could ask whether that expansion of protection is appropriate given that most states have separate, protective legislation stating their own policies relating to consumer protection. Putting that issue aside, the benefits of the Article 2B approach in adopting language parallel to the Restatement are relatively strong. By paralleling the Restatement, Article 2B can draw on at least the limited case law that exists in the few states that have adopted that rule. Additionally, it can build on the analysis developed and approved by the ALI in adopting the Restatement in 1979. The Article 2 formulation charts totally new and unexplored territory for U.S. law.

    Assuming that the Article 2 approach becomes an objective test, the difference in the two approaches centers on from whose perspective a surprising and oppressive term is gauged. Article 2 references the expectations of individual consumers. Article 2B focuses on the expectations of licensors as to what consumer reactions are in general likely to occur. Between the two, the anonymous nature of the mass market argues for a perspective that deals with the creation and structuring of the terms to begin with, rather than entailing person by person analysis in that marketplace. This, of course, is why the Restatement used that perspective.

    The difference is also supported in part by the fact that the Article 2B proposal does not apply only to consumers. It covers both business and consumer deals in the mass market. Presumably, the reasonable expectations of the business user and the consumer user are different in some cases at least.

    Article 2B differs from the Restatement in several respects. For example, it builds in procedural standards and protections that amplify what is meant by "manifesting assent." Also, it provides for a restrictive procedure by which the party proposing the form can obtain assent to a particular term, thus obviating any surprise and dealing with any potential reason to know how the other party would react standard by providing actual notice of and assent to the term. The Restatement provides that the standard form "is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the [record]."

Alternatives:

    1.    Adopt an objective test variation of the Article 2 proposal for consumer contracts in identifying surprising and oppressive terms.

     2.    Retain the current Article 2B on this issue.

     3.    Eliminate the exclusion for surprising terms, leaving the issue of protecting licensees to concepts of unconscionability, good faith and the like.

Reporter’s Recommendation:

The Article 2B formulation should be retained in order to draw on existing law in some states and to provide greater certainty in the contracting process. The Committee should also consider language that parallels the interpretation language contained in the Restatement along the lines outlined in the September Draft of ' 2B-308.

    b.     Objection to the safe harbor provisions in the July Draft for terms that meet federal first sale rights.

    The Consumer’s Union expressed objections to a safe harbor provision contained in 2B-308(c)(1) of the July Draft that validate terms in a license that conform to rights that would be given to a party acquiring an information product in a transaction that constitutes a first sale under Copyright Law. The Union believes that these provisions "will transform the federal minimum package of intellectual property rights into the maximum that will ever be provided in a standard form contract under Article 2B."

    The Union based this view in part on a belief that contracts that alter application of the copyright terms would be preempted. Recent case law as well as the general relationship between intellectual property law and contractual transfers makes this premise highly questionable. Indeed, the first case directly on point held that a mass market contract could create contractual restrictions even when copyright expressly denies any property rights in the relevant subject matter. More generally, the copyright rights referred to in this safe harbor exist only if the software or other product is sold and the purchaser owns the copy. It is not clear that a sale occurs unless the vendor agrees to sell, rather than make a license.

        Putting aside the niceties of copyright law and its relationship to contract, the purpose of the safe harbor was to encourage licensors to offer rights that correspond to those given to a buyer of software even if they license the product. In practice today, many mass market licenses contain grants of rights to use and make backup copies that go beyond first sale rules. The likelihood that this rule will alter that is low. Markets, rather than safe harbor rules dictate terms in most cases.

        Importantly, since we are discussing first sale rights, this safe harbor provision does not relate to warranty, disclaimer or other qualitative issues. It relates only to questions about whether the licensee can sell/transfer its copy, can make a backup, and modify for personal use.

        Ironically, copyright owners have been uncomfortable with this provision and long requested its removal.

Alternatives:

     1.    Retain the safe harbor to encourage terms in a mass market license that at minimum parallel first sale terms.

     2.    Delete the safe harbor.

Reporter’s Recommendation:

The Committee should delete the safe harbor provision to avoid the confusion that seems to have occurred with reference to the Union’s comments. Commentary to the section should discuss the effect of this section on terms that correspond to what a party receives under a sale under copyright law.

     c.    Objections to a safe harbor provision, terms that are customary in the relevant industry.

    The Consumer’s Union and some Commissioners speaking from the floor of the Annual Meeting expressed concern about use in a safe harbor provision of a reference to terms customary in industry practice contained in July Draft ' 2B-308(b). The concern was that such a provision as an alternative standard for validating a term creates a possibility that industry can dictate terms to consumers and that this risk is especially significant in contexts where market control is centered on a small number of firms whose licensing practices might de factor establish customary practice.

    This argument misconceives the purpose of the Restatement and the Article 2B (or Article 2) tests. The treatment of surprising terms does not regulate the marketplace or pass judgment on the qualitative merit of various standard form clauses. That is the function of regulation, antitrust concerns, and other areas of law. This is a contract statute and a contract law concept.

    The tests developed in Article 2B and the Restatement focus on preventing surprise in the form of unknown and unexpected terms that are oppressive in the sense that the licensee would turn down the transaction if it were aware of the term. The fact that one or a few companies might control a market such that their licensing choices define industry practice does not bear on this problem. Once the terms become customary (e.g., frequently used), the issue is whether they can still be described as "surprising." While a mass market (or any other purchaser) might desire different terms, this approach to standard forms does not allow the purchaser to dictate the licensor’s choices (nor does the standard proposed in Article 2). The market and purchaser acceptance will do this. What is defined as a problem under these approaches is surprise and that alone.

    In this respect, the Consumer’s Union position misperceives the operation of the customary practice "exception." The Union describes this as protecting contract terms that are customary, even though they are surprising and oppressive. Merely stating the proposition in this way shows the problem. The actual approach is to provide an assumption that a customary term cannot be surprising to a licensee.

    The Drafting Committee voted to retain language referring to customary practice in earlier debates. The standard merely provides an objective measure of whether it is reasonable to believe that a licensee would accept the terms. The evidence of that lies in the fact that the type of provision is common (customary) in the industry and, as a result, known, knowable, and in any event not surprising to licensees.

Alternatives:

    1.    Retain current approach defining customary industry practice as per se not surprising.

     2.    Delete the reference to customary practice.

Reporter’s Recommendation:

The Drafting Committee should review whether to retain the treatment of customary terms or to rely on the general language.

Conflicting Forms:

    In Article 2B, the third framework involves conflicting forms. Because the context requires the presence of two forms with inconsistent terms, this setting does not implicate consumer issues and the Consumer’s Union has taken no position about how conflicting form cases should be handled. The issues here involve how to deal with a vexing problem caused by many modern commercial order and shipment practices.

    Section 2B-309 implements a "knock out" rule with respect to conflicting form cases. Essentially, that approach indicates that where two forms are exchanged, consistent and non-conflicting terms come into the contract, but conflicting terms are dropped out in favor of the default terms in Article 2B. As a general approach, this seems to create an acceptable treatment of cases where exchanged invoices and purchase orders contain contradictory terms. However, there are two situations in which the issues should be reconsidered.

    a.    Terms and conditions of use.

    The first deals with contract terms dealing with restrictions on use of commercial software. Unlike with reference to transactions in goods, the nature of the product in which rights are being transferred in information transactions may hinge on what uses are permitted or licensed. Rather than merely being peripheral conditions or terms, use restrictions are often defining conditions of the product itself. Because of this, applying a knock-out rule to these terms may create numerous intrusions on the vendor’s ability to define its product. The following illustration suggests one such case.

    Vendor provides its database of telephone numbers throughout the U.S. to licensees under two different licensing programs. The one, priced at $100 per copy, restricts use of the database to non-commercial applications. The second, priced at $50,000 permits use for commercial applications. Purchaser places an order for