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. rvices 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. 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.