Date: Mon, 23 Nov 1998 17:19:51 -0800 (PST)
From: Phil Agre <pagre@alpha.oac.ucla.edu>
To: "Red Rock Eater News Service" <rre@lists.gseis.ucla.edu>
Subject: [RRE]Article 2B progress

[Here is some news on the troubles that are engulfing the proposed rules
governing the sale of software under the US Uniform Commercial Code.]

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Date: Thu, 19 Nov 1998 19:38:43 -0500
From: Cem Kaner <kaner@kaner.com>
Subject: Article 2B progress (final draft)

[...]

-----------------

1. GENERAL
2. ISSUES FOR CUSTOMERS AND DEVELOPERS
3. ISSUES FOR WRITERS

1. GENERAL

Overall take: The November meeting was a PR meeting. A few provisions
were adopted that will give the appearance of consumer protection but
that will actually provide minimal (if any) additional protection. A
wide range of motions were made, and dozens of written requests were
made, to adopt some genuine customer protections. They were rejected.

The 2B process has polarized and become unproductive. Opposition
continues to grow and the bill will almost certainly be actively and
vigorously opposed in every state.

Opposition to 2B has been mounting -- 2B has been actively opposed
(with letters to NCCUSL asking that the project be tabled or
cancelled) or severely criticized by the American Association of
Law Libraries, the American Library Association, the American Society
of Media Photographers, the Association for Computing Machinery,
the Association of Research Libraries, the Consumer Federation of
America, the Consumer Project on Technology (Ralph Nader), Consumers
Union, the Independent Computer Consultants Association, the Institute
for Electrical & Electronic Engineering, the Magazine Publishers
of America, the Motion Picture Association of America, the
National Association of Broadcasters, the National Cable Television
Association, the National Consumer League, the National Music
Publishers Association, the Newspaper Association of America, the
National Writers Union, the Recording Industry Association of America,
the Sacramento Area Quality Association, the Society for Information
Management, the Special Libraries Association, the United States
Public Interest Research Group, and several other individuals and
associations.  (Also, the Federal Trade Commission recently filed a
commentary on 2B that highlights ways in which it works to customers'
disadvantage.)

2. ISSUES FOR CUSTOMERS AND DEVELOPERS

A.      The scope of 2B was narrowed somewhat, so that it excludes a
few more products. For example, it excludes contracts for the retail
sale of books. It might also exclude contracts for writing these
books (though I don't think it does). It still includes all contracts
involved in the development, maintenance, sale, documentation,
licensing, and support of software, along with all types of electronic
information. Thus a book on disk is covered by 2B whereas the same
book in print is not.

B.      Motion to allow courts to disallow provisions that violate
"fundamental" public policies. This is a watered down version
of the Perlman amendment. As far as I can tell, it essentially
restates current law, though some attorneys believe that with the
requirement that the provision "violate" (rather than conflict with)
a "fundamental" public policy, the clause is narrower than current
law. A motion to drop "fundamental" was deleted. For software
developers at the meeting, the acid test was this -- with this
amendment, can we have any confidence that a clause banning reverse
engineering of a mass market software product will be strick down?
Answer -- No. Similarly, can we have any confidence of striking down a
clause in a mass market software product that says that the purchaser
cannot use this product to help develop a competing product? No. At
the extreme, what about the clause that says that you may not write
a review of this product without the publisher's permission--is this
clause banned? I don't think we can have confidence in this. First
point to note is that all of these restrictions would be lawful and
enforceable in a signed, negotiated contract. 2B says that mass-market
terms are to be treated as if they were signed and explicitly agreed
to. So what distinction will a court rely on in tossing out these
terms? More to the point, will a court rely on them consistently?
Consider the recent case of Gateway 2000 v Hill, in which the court
enforced an oppressive arbitration clause (the cost of arbitration
would probably exceed the cost of the computer). A court in New York
considered the same clause and ruled it unconscionable--fine for
the New York customer, but cold comfort for Hill. The same problem
will arise for software developers and customers who have to rely
on a vague and restricted public policy unconscionability theory for
salvation. Sometimes it will work, sometimes not, you have to decide
whether you can afford the risk. Small developers and small customers
who cannot afford the lawsuits will be well advised to be cautious,
more cautious than they would be under current law. Along with
the wording of the amendment, the comments that accompany the new
provision certainly don't help. They are vague and far from cleanly
supportative of any customer or developer right.

C.      Motion defeated to amend 2B-105(c) by dropping "unfair"
from "unfair competition". The issue was that 2B states that does
not displace laws governing "competition." Commissioner Steve Chow
(whose brief initially led to the drafting of 2B-105(c)) argued that
a narrow range of laws governed "unfair competition" and a broader
range governed "competition." His argument was and continues to be that
2B cn be interpreted as including rules (or allowing contract terms)
that involve competition. This is inappropriate without extensive and
explicit consideration of laws governing competition.

D.      Request to clarify the relationship between 2B and consumer
protection law was not discussed. The call for comments for this
meeting stated that we should make specific recommendations and all
recommendations would be considered. There was a flood of specific
comments and proposals, most of which were not considered. One of
these was a proposal that Todd Paglia have made several times, that
was raised by a Commissioner at the annual NCCUSL meeting and that
(as I recall it) the drafting committee promised to clarify in the
near future (near to last July). The issue is this -- 2B takes a
transaction that is normally treated as an Article 2 sale of goods
(sales/licenses of packaged software are almost always treated as
sales of goods under Article 2 of the UCC) and redefines it as a
licensing transaction. As Microsoft's lawyer, Bob Gomulkiewicz put
it in the title of a recent paper, "The Product Is The License" (the
software is just something that comes with the license). In this case,
we are no longer dealing with a sale of goods, and it would appear
any consumer protection laws that specifically apply to sales of goods
no longer have software transactions within their scope. But 2B very
specifically states that it defers to consumer protection laws, and
members of the drafting committee have cited this provision repeatedly
to say that there is no change in consumer protection. All that Todd
and I want is some clarifying language that says that, for purposes
of interpretation of the applicability of consumer protection laws,
a sale of a mass-market software license will be treated as equivalent
to a sale of goods. I prominently highlighted this one in my
submission of issues to the drafting committee. The drafting committee
has never voted on this repeatedly recommended provision, and they
chose not to consider it or vote on it again this time. As David Pels
and I said about this in our book, BAD SOFTWARE (and as several of us
have said orally many times), the committee's consistent failure to
clear this up suggests that it is their intention to have 2B do what
it appears to do, to take software outside of the scope of many of the
most important consumer protection laws.

E.      Motion defeated to require publishers to post a link to
their license on their website, if they are selling their product on
their website. This would have implemented part of the American Law
Institute resolution from last May, in which the Article 2B drafting
committee was told to fundamentally revise its rules regarding
assent. The ALI resolution was drafted by Jean Braucher and Peter
Linzer. The resolution considered by the drafting committee was
drafted by Jean Braucher. The committee rejected it. The repeated
request from ALI (especially via Braucher) is that customers be given
a copy of the contract, or at least be easily able to get a copy of
the contract on request, before they pay for the software. The policy
that the ALI is most actively trying to defend is the free market
-- if customers can know the terms of the contracts before the sale,
there can be competition on terms like warranty length and scope
and on the cost of technical support. In contrast, if customers
have to wait to see these terms until after they buy the software,
the likelihood of genuine, informed competition over such terms is
dramatically reduced. Braucher's motion was very narrow -- if you
sell software on the web, you have to provide a hyperlink to the
license. We have heard time and again that this is no big deal. I have
been told by several publishers' lawyers that they already do this
-- post their terms for customers to see, and therefore there is no
need for this regulation. That argument has been made previously in
drafting committee meetings. But a study by Dan Coolidge (head of the
computer and technology group within the ABA's Law Practice Management
Section) showed that few publishers do post their licenses. And this
time, when there was a resolution imposing this as a requirement,
publishers' lawyers all of a sudden started saying that this would
be very difficult and expensive. It is worth comparing this response
to the Magnuson-Moss Act, which requires sellers of consumer goods to
make their warranties available to customers. (If consumer software is
no longer "consumer goods" then the Mag Moss Act will no longer apply
-- see C above.)

F.      Request (rejected) to require publishers to make "conspicuous"
terms available to the customer before the sale. (This was made at
the July meeting of the Drafting Committee.) Rejected. Terms are
conspicuous even if the customer can't see them before the sale, so
long as they are printed in capital letters in a typeface larger than
the surrounding text. Issues involving conspicuousness were considered
again at the Emeryville meeting and the language was not significantly
improved, despite a wide range of proposals.

G.      Request (from the Society for Information Mgmt) (rejected)
to entitle non-mass-market customers (which will include many of
the purchases by small businesses) to a refund if they reject the
terms of a license that are presented post-sale. (see 2b-112(c)--only
mass-market customers have a refund right. Non-mass market customers
can reject the license but are not entitled to a refund.)  This has
seemed like a remarkable provision to me in 2B. 2B constantly refers
to the idea that it is OK to enforce terms in a contract that are
presented post-sale because these are subject to a rule requiring
"manifest assent" (click "I agree" during installation). The argument
that this is genuine assent comes from the refund right -- if you
don't agree to the terms, yo can get your money back. 2B implements
the refund right for mass-market customers, but a very wide range
of small business transactions will not meet the requirements of
"mass-market" -- for these customers, if they choose not to assent
to the terms of the license, they are not entitled to a refund. They
just get to say "no" to terms that they were not allowed to see until
after they paid for the product, and then throw the product away,
without refund.  This is one of the many ways in which 2B severely
disadvantages small business customers. It is much worse for them
than current law, and much worse for them than it is for consumers.
Unfortunately, their interests have not been represented in 2B
meetings.

H.      Motion (rejected) to allow transferability in the event
of a sale of all of the assets of your business. Under 2B-502, the
publisher can declare that any license (mass-market or not) is not
transferrable. If you buy a computer game and get tired of it, you
can't lend, sell, rent, or donate it to your kid sister. And if you
have a business that you sell, watch out. If your business owns a
computer, you cannot transfer the software that is on that computer
without permission of the software publisher. One software developer
pointed out that he has more than 150 licenses on his computer.
To sell it (and the software with it) under 2B would require an
inventory to discover the 150 licenses, then 150 letters to (if
you can find them) the publishers, and negotiation/payment/whatever
with all 150. Imagine the extent to which this can drive up the costs
of a merger or acquisition. The M&A complexity was discussed, and
publishers' lawyers (and some committee members) said that it would
just be another incremental expense of a merger or acquisition,
nothing to worry about. Motion defeated.

I.      Requirement (passed) that for a publisher to be allowed
to include post-sale terms in the contract, it has to say so at the
time of sale. So, when you buy the software product, the product must
say on the box (or in the advertisement, or whatever) something like
"additional terms to follow." This purely formal requirement is being
presented as a significant consumer protection by the NCCUSL press
release. I don't think that any consumer advocate would call it a
protection.

J.      Motion (rejected) to hold software publishers accountable
for statements of fact (things you can prove true or false) that they
make to customers about their products in the manual that accompanies
the product. For example, the user manual in a mass-market sale
automatically becomes usable by the customer as a specification
of what the product is supposed to do. This is already the law
in several states. The initial proposal (from the Society for
Information Management, and from various consumer advocates) was that
statements of fact in the manual should automatically create express
warranties. After all, these are statements of fact by the seller to
the buyer about the product, that come with the product. We shouldn't
have to argue about whether these are part of the "basis of the
bargain" in a world that will enforce the seller's OTHER post-sale
statements (the license terms) that the seller will not provide
customers until after the sale. The motion made, by Commissioner Fry,
was even weaker than this. It provided that a manual included with
the product MAY BE a source of express warranties even if the customer
didn't see the manual until after the sale. This leaves the decision
for any given product/manual up to the court. One benefit of the
provision is to make clear to publishers that the manual might be
an express warranty, which will encourage publishers to put their
documentation through a QA pass. (50% of software publishers don't
submit their manuals to Testing groups, according to repeated years of
the Customer Care Survey of Software Support Practices.)  This is less
strong than current law in several states, but the motion was rejected
anyway.

K.      Motion approved to loosen the standards for the implied
warranty of merchantability. This had been part of a 3-part compromise
that was originally co-introduced by Bob Gomulkiewicz (Microsoft) and
I nearly two years ago. The first two parts narrowed the circumstances
under which a publisher could be sued for breach of warranty. The
third provided that statements on the product packaging should be
treated as express rather than implied warranties. (The statements
on the package will be treated as express warranties if the customer
sees the package before the sale. But the mail order customer and
the internet customer don't see the package. So suppose they get
the product, it has a pack of lies on the box -- The product doesn't
breach the contract by not meeting these statements because they
would not be, in some states, warranties. The drafting committee
chose not to adopt the third provision (in their rejection of the
motion that descriptions of the product that come with the product
are warranties--see J.). But, not surprisingly, it adopted the
additional publisher protections by a vote of 8-0. I don't object,
and explained to the drafting committee that I did not object, to the
two protections afforded to the publishers. No one has an interest
in subjecting software publishers to a risk of frivolous lawsuits.
But goshdarn it, I do wish that there was some way that consumers
and publishers could reach compromise agreements (as we did in this
case) with some confidence that both sides of the compromise will be
honored. I don't see any basis for negotiation if we can't have at
least that much assurance.

I've done a lot of work with consumer lobbyists (some who attend 2B
meetings and some who don't), trying to broker compromises between
them and publishers.  This work has been greeted with some genuine
cynicism. They have predicted that when I come in with a compromise,
the committee will accept the terms that favor the publisher and toss
out the terms that favor the customer. That's exactly what happened
in this meeting. I don't object to the terms they adopted, but the
adoption of only the one side of the bargain makes my work (finding
common ground) harder.

Over the three years that I've worked on 2B, several of my publisher-
protective recommendations have passed. I can't remember a single
one of my small-customer-side recommendations that has passed. This
consistent imbalance played a big factor in my change in position from
publicly supporting a compromise to publicly recommending that we kill
2B.

L.      Limit on Forum Selection. Defeated. This motion was requested
by the IEEE and by various customer's advocates. It was introduced by
Commissioner Fry. It would normally recognize the publisher's (hidden
inside the box, presented inconspicuously post-sale, nonnegotiable)
forum selection clause.  But there is one exception. If (a) you
bought the software under a mass-market license and (b) the total
amount in controversy is less than your state's small claims court
jurisdictional limit and (c) you can obtain personal jurisdiction over
the customer under other law, then you can sue the publisher in your
own state. A previous version of this motion, from Commissioner Rice,
restricted it further to consumer licenses. It was defeated several
months ago. In the discussion this time, as in the discussion
previously, it was recognized that customers with small claims would
not be able to afford to travel to a foreign jurisdiction to present
their claim. The forum selection clause, if enforced, will in effect
take away their right to sue for breach of contract. The main argument
on the other side is that publishers who do business in 50 states
don't want to have to defend their products in 50 states, and
they might have to give in on suits because they are too expensive
to defend. As before, where there is an issue of balance of risk
between publisher and customer, the balance is tipped in favor of the
publisher. This is, after all, Article 2B, the Software Publishers
Protection Act.

One straw issue that was raised in the meeting was that the
jurisdictional limit of some small claim courts is large (allegedly
$30,000). That is too big a suit, it was said. OK, they could have
amended to cap it at your state's small claims limit or $5000 (or
whatever) whichever is smaller. But that's not what was done. The bulk
of the discussion was about who should lose their right to a day in
court, the consumer or the seller -- and the predictable result of
that type of discussion in a 2B meeting ensued.

M. The main customer protection adopted involved self-help. SIM
(Society for Information Mgmt) has stated repeatedly that they will
actively oppose 2B if it does not restrict the publisher's ability to
engage in self-help (shutoff of the software without your agreement
and without supervision by a court.)

The committee adopted an amendment that restricted the publisher's
ability to engage in one type of self-help, that being the sending
of a message to your computer, at whatever time it chooses, to tell
the software to shut down.  However, the committee refused to place
a constraint on a much more powerful self-help provision, section
2B-310. Here is the language. Note particularly 310(c) and 310(d).

2B-310 (a)  In this section, "restraint" means a program, code,
device, or similar electronic or physical limitation that restricts
use of information.
        (b) A party entitled to enforce a limitation on use of
information which does not depend on a breach of contract by the other
party may include a restraint in the information or a copy of the
information and use that restraint if:
                (1) a term of the agreement authorizes use of the
restraint;
                (2) the restraint prevents uses of the information
which are inconsistent with the agreement or with informational rights
which were not granted to the licensee;
                (3) the restraint prevents use of the information
after expiration of the stated duration of the contract or a stated
number of uses; or
                (4) the restraint prevents use when the contract
terminates, other than on expiration of a stated duration or number of
uses, and the licensor gives reasonable notice to the licensee before
further use is prevented.
        (c) Unless authorized by a term of the agreement, this section
does not permit a restraint that affirmatively prevents or makes
impracticable a licensee's access to its own information in the
licensee's possession by means other than by use of the licensor's
information or informational rights.
        (d) A party that includes or uses a restraint pursuant
to subsection (b) or (c) is not liable for any loss caused by its
authorized use of the restraint.
        (e) This section does not preclude electronic replacement
or disabling of an earlier copy of information by the licensor in
connection with delivery of a new copy or version under an agreement
to electronically replace or disable the earlier copy with an upgrade
or other new information.

--------------------------

Under (c), if the publisher places language in the fine print of a
mass-market license (which you aren't allowed to see until after the
sale), the publisher can place a restraint (such as by encrypting your
files) that affirmatively prevents your access to your own information
on your own computer. Under (d), the publisher is not liable to you
for any losses caused by that restraint.

For example, suppose that Bugs, Inc. publishes BugWord 2000, a word
processor.  The program comes with a time bomb that will shut down
the program (and take out all of your word processing files with
it), on the first of the month unless you pay Bugs a license fee. You
decide that the bugs are just too much -- the publisher won't fix the
product, it just wants to keep collecting your money. But if you stop
paying, you lose your data.

How hard would you press a complaint against a company if you knew
that it could exercise this power against you with impunity?

I argued this on Sunday, asking the Drafting Committee to delete
the section.  They refused. Unfortunately, I had to leave during the
meeting to fly to Tampa.  At the time that I left, they had rejected
the deletion but were debating the idea of requiring that a publisher
make "conspicuous" a clause that authorized the publisher to
affirmatively prevent your access to your own informtion on your own
computer. Remember that a clause can be "conspicuous" under 2B even if
you are not allowed to see it before the sale, as long as it is in all
capital letters. Such a deal.

By the way, when I raised my point about the lost word processing
files, the only response that the drafters could come up with was
that a court could declare this unconscionable. I suppose that it
could, but it is hard to imagine a court declaring unconscionable a
clause that was specifically authorized by statute. Or that a court
would find it unconscionable if the customer was a business and not a
consumer. My only hope is that this type of clause is enforced against
the law firms that have been supporting the development of 2B.  That
won't help customers, but at least it will be a kind of rough justice.

ISSUES FOR WRITERS

The big news for writers is the new scope provision. Retail sale of
printed books is no longer covered by Article 2B. As I read the new
scope provision, 2B will still cover contracts for the licensing of
the manuscript to the book publisher -- if not automatically, then at
the choice of the contracting parties. In other words, the publisher
will get to choose to have the contract covered under 2B or not,
depending on what it considers more advantageous.

Contracts to document software will be covered under 2B automatically.

Contracts to write articles might be covered by 2B. The articles will
be covered if they are written for an online publisher, might not be
covered if they are written for a print publisher, and maybemaybenot
be covered if they are written for simultaneous publication in both
media.

The National Writers Union request to exclude contracts for the
creation of text to be published in any medium was denied.

The National Writers Union request to drop 2B-307(f)(1) (defining a
grant of all rights) was discussed and denied.

Recommendation (rejected) to revise 2B-306(b) (and rejected a motion
to delete 2B-306(b))), which requires publishers to provide best
efforts to market information products when they have the exclusive
license to market them. The best efforts standard is the one required
under Article 2 for exclusive licenses of goods and is also the one
used for patent licenses. But software and book publishers objected
to it. Instead, the committee let stand a "good faith" standard --
a minimal subjective standard that (as debated in two meetings) will
not even allow the licensees (authors and small software development
groups whose works are published) to provide expert evidence as to
"reasonable" promotional practices in the industry. As I've stated
to the drafting committee before, the single largest complaint of
book authors is that their book is not being appropriately publicized.
Surveys of the National Writers Union membership turn up that issue
among 87% of book authors. This is a real problem. The new language
in 2B almost completely takes away the ability of the writer to argue
that a book is under-promoted.

_______________________________________________________________________
Cem Kaner, J.D., Ph.D.
P.O. Box 1200, Santa Clara, CA 95052

http://www.kaner.com
http://www.badsoftware.com

Author (with Falk &  Nguyen) of TESTING COMPUTER SOFTWARE (2nd Ed, VNR)
Author (with David Pels) of BAD SOFTWARE (Wiley, 1998)

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