FREE ESSAY ON ARTICLE 2B

ARTICLE 2B

A new law will probably be introduced into state legislatures which will govern all
contracts for the development, sale, licensing, and support of computer software. This
law, which has been in development for about ten years, will be an amendment to the
Uniform Commercial Code. The amendment is called Article 2B (Law of Licensing) and is
loosely based on UCC Article 2 (Law of Sales), which governs sales of goods in all 50
states. A joint committee of the National Conference of Commissioners on Uniform State
Laws (NCCUSL) and the American Law Institute is drafting the changes to the UCC.
The UCC was drafted in the 1950's and currently governs the sales of goods but not
products like software, which are licensed, not sold. Basically, when you purchase
software, you are purchasing the information and rights to use the software. Article 2B
creates standards for licensing these information products, including rules for
interpreting warranties, legal remedies, liability and risk. 
This project began to give consideration to instituting a separate article of the UCC for
software and related contracts. Article 2B is designed to bring uniformity across states
and across the goods vs. services issue. It is intended to make software contract laws
more consistent and clear among states. If laws are consistent from state to state it
makes it easier for buyers and sellers to understand how to do business with each other.
There is a great benefit in creating a uniform system for software products and services,
however, this proposal for Article 2B does have major flaws.
Article 2B employs a contracting model that excludes negotiation and that doesn't reveal
terms of the contract to the customer until after the sale is complete. It also adopts a
licensing model that says when you buy software, you are really only buying the right to
use it. Consumers also have little or no opportunity to read warranties and disclaimers
before purchasing the product. The draft of Article 2B eliminates some of the legal
protections that software buyers currently take benefit from. For example, it reduces
vendor liability for software defects and viruses and allows vendors to charge separately
for software licenses, maintenance and support. 
Critics say that Article 2B is biased in favor of software vendors. While this is the
dominant issue for this paper, there are some positive ideas proposed in the amendment.
It creates balance and structure, reduces uncertainty and non-uniformity of licensing
law, sets performance standards, and innovates the concept of mass-market transactions. 
The Mass-Market License is a standard-form, non-negotiable, license. Companies use
standard-form contracts instead of trying to negotiate a separate contract for each
buyer, or licensee. The lengthy legal forms that most don't read when installing software
are shrink-wrap licenses. These mass-market licenses restrict rights of users. Licenses
involve restrictions on the use of intellectual property. They can have nondisclosure
provisions, restrictions on how the product is used and who can use it, and restrictions
on transfer of the licensed product.
Software companies solely benefit from this where they can not only dictate the terms of
the agreement, but they can also avoid consumer defect and privacy protections laws that
apply to a sale of goods. An example of a typical shrink-wrap license on-line is as
follows:
Attention, Please Read: Installing this software constitutes your acceptance of the terms
and conditions of the license agreement. Other rules and regulations of installing this
software are:
1. The product cannot be rented, loaned or leased.
2. The customer shall not disclose the results of any benchmark test to any third party
without Network Associates' prior written approval.
3. The customer will not publish reviews of the product without prior written consent
from Network Associates.
By loading any software, you may be inadvertently entering into a contract. Software
publishers claim that these one-sided contracts are legally binding, but American courts
disagree. Article 2B says that the publisher doesn't have to show software customers the
terms until after the sale, when it's too late to do comparison shopping. By then, the
consumer has already started installing the software. The customer is deemed to have
accepted the terms of the contract if he/she uses the product instead of returning it.
All of the terms of the agreement are now fully enforceable as if the consumer had
reviewed, discussed, and signed a paper contract before the sale.
Many of the shrink-wrap software licenses say that once you break the seal and use the
software, you're releasing the vendor from all warranties. Basically, the software has
been sold "as is" and you've given up your legal recourse if it doesn't perform as
claimed, damages your computer, or has bugs that lead to errors. Under the Magnuson-Moss
Warranty Improvement Act customers are entitled to see the warranty of any goods sold for
$15 or more. It is not unreasonable to assume that software purchased for home usage
would be covered by the Act. But software customers rarely get to see the warranties
provided with software until after the sale. Article 2B characterizes mass-market
software sales as licenses, which may not be covered by the Magnuson-Moss Act.
Products normally come with an implied warranty of merchantability, which states that the
product will be fit for ordinary use, it will conform to the claims on the packaging and
in the manual, and it will pass without objection in the trade. An implied warranty comes
with a product at the time of sale unless it is conspicuously disclaimed. Implied
warranties are so easy to disclaim as long as they are conspicuous in the sense that you
know the terms. For instance, you buy a software program from a store, take it home and
install it and a License Agreement is displayed. It says that there are no warranties,
express or implied, and that incidental and consequential damages are excluded. You have
a chance to click on "I accept these terms" or "I want a refund". If you choose the
latter, you take the product back to the store and get a full refund.
Express warranties cannot be disclaimed. An express warranty is any statement of fact by
the seller to the buyer about the product that becomes part of the basis of the bargain.
This phrase generally means that if a reasonable customer would interpret the seller's
statements as factual descriptions of the product that the customer has bought, and would
be even slightly influenced by the statements in deciding whether to buy or keep the
product, then they are considered basis of the bargain statements.
Article 2B allows the seller to exclude incidental damages and consequential damages.
These exclusions do not have to be conspicuous. Publishers are allowed to put damage
limitation clauses in the license that excludes these expenses. Incidental expenses can
include all costs of reporting a defect and returning the product. Software support is
increasingly being done on a fee-basis where you pay for a support contract, you pay per
call, or you pay per minute. A customer who spends money on support calls to report
defects that were known to the publisher at the time it shipped the product, isn't
entitled to a refund of these charges. The unethical publisher basically gets to profit
from its own defects. So not only don't you get reimbursed for incidental damages, but
the cost of contacting the Customer Service Rep to report a legitimate problem becomes
the profit of the software publisher. 
The public does not benefit from a law that cuts off their right to know before the sale
what guarantees the product comes with. Article 2B will help publishers reduce their
customer support costs in ways that don't improve the quality of their products. A
company spends money on prevention of problems, appraisal (looking for problems),
internal failure costs such as cost of bug fixes or lost time due to bugs found before
the product is shipped, and external failure costs which include tech support costs, lost
customer goodwill, and warranty costs. This analysis encourages employees to think about
their companies' costs as opposed to their customers' costs. The Article will
substantially reduce a seller's legal and competitive exposure for shipping bad software.
Companies should and will spend less than they do now to prevent, find, and fix bugs
because it will now cost them less when they ship defective products to consumers.
Article 2B allows software publishers to sell software with serious know defects without
fear of any significant consequences. Software is routinely released with many serious,
known defects because companies seek short-term profits, while sacrificing long-term
customer satisfaction, to meet ship dates. Companies fear being exploited by the
competition if knowledge of the defects was released. 
A software defect is a material breach of the contract for sale or license of the
software if it is so serious that the customer can justifiably demand a fix, cancel the
contract, return the software, and demand a refund. If the defect is not material, then
the customer is probably stuck with the program, and entitled to at most, a partial
refund. Article 2B will make it easier for software publishers to refuse a refund. If you
buy software that is not mass-market, then you no longer have the right to reject the
product due to non-material defects that you discover during inspection. Also, the
publisher is only required to give a refund if the product is so defective that it has
materially breached the contract. But even for a significant bug, the company can force a
customer to prove in court that the bug is so serious that the customer is entitled to a
full refund instead of a partial refund.
If the contract is for a mass-market license, then a breach is only material if the
software fails to perform in conformance with the end user documentation, or if the
software's performance is unreasonable and as a result, it deprives the consumer of a
significant benefit of the product or it results in costs to the consumer that exceed the
price paid for the software. 
Article 2B requires the customer to maintain backup systems just in case the software
publisher breaches the contract. The customer cannot recover compensation for losses that
could have been avoided with regular backups. The customer should not have to spend time,
effort and money on preventive steps, before a breach, to minimize the damages that will
be incurred if the publisher should happen to breach. 
Sellers rely on contracts and laws that make it harder for customers to sue them. In
mass-market agreements, we already see clauses that avoid all warranties and that
eliminate liability even for significant losses caused by a defect that the publisher
knew about when it shipped the product. 
The seller isn't required to deliver a perfect program, just one that substantially does
what was promised. The Article requires the seller to fix a nonconformity that is not
material or very serious. This effort to cure is only required with products other than
mass-market licenses. It is easy for the mass-market software publisher to escape
liability for incidental and consequential damages. Under 2B, a nonmaterial breach does
not entitle the customer to cancel the contract and get a refund, but it does entitle the
aggrieved party to the appropriate remedies including incidental and consequential
damages, however, 2B also allows the seller to exclude these damages.
A software developer can be sued under certain theories. Negligence is what first comes
to mind in lawsuits over defective products, but proof of negligence can be very
difficult. You must ask if the company had actual knowledge of the problem. How carefully
did the company perform its safety analysis? How well designed is the program for error
handling and how well does the company handle customer complaints? You need to look at
whether or not the product design and development followed industry standards. Failure to
follow a standard is only relevant if the plaintiff can show that this failure caused the
harm. Does the company have a bug tracking method and did they use a consistent
methodology? Did the company make a serious effort to find errors and what test plan did
it follow. Does the documentation for the software warn people of risks? Most software
lawsuits are for breach of contract or fraud because the product usually doesn't cause
personal injury or property damage.
Fraud would apply if the company made a statement of fact to the customer and the company
knew when it made the statement that it was false. If you reasonably relied on the
statement to determine buying or returning the product, it can be classified as fraud. If
the company made a mistake and did not know that the statement was false when it made it,
then this would be negligent misrepresentation.
In a software transaction, a material breach or failure to meet specifications is grounds
for a lawsuit. The law will sometimes fail to compensate buyers of products that are
seriously defective. The proposed article would let companies simply disclaim any
liability for defects or lost data beyond the purchase price of the software itself.
Consumers need protection from the laws, not proposals like this one that will safeguard
software companies from liability. Article 2B reduces liability rather than expanding it.
Software publishers are given more power to set their terms than in current law.
If UCC 2B is enacted, your could potentially lose your rights to criticize or analyze the
product you purchased. It allows publishers to use confidentiality clauses in their
license agreements. They can have you agree to hold the software package and not publish,
communicate, or disclose to third parties any part of the package, without written
consent. Publishers have the right to create trade secrets and to enter into
nondisclosure contracts with people. The publisher is in essence, creating a
nondisclosure agreement with the whole world, one consumer at a time. This is a law that
lets publishers cut off their customers' right to read detailed, critical reviews of a
product they are considering buying. Competition in the marketplace is then decreased if
publishers can block negative reviews of their products.
Software development companies will benefit from laws that shield sellers from the
consequences of their actions which in turn strips away most of the rights of customers
who purchase mass-market products. Consumers are aware that software makers need a viable
market and some form of shrink-wrap licenses might be necessary. But software makers have
taken advantage of these buyers. If we have to accept a unilateral license, the least the
software publishers can do is provide reasonable consumer protections.
Many consumer demands may have been met, but others have not. The proposed draft is
unbalanced because it favors software vendors at the expense of consumers on many issues.
Software companies can avoid paying any damages beyond a refund, even for defects that
they knew about when they released the software. This includes damages done to the
customer's computer, charges for technical assistance - which sometimes exceed the cost
of the software itself - and time to re-enter data that was destroyed. All the financial
benefit goes to the company, and all risks that the software will not perform or actually
cause serious damage are placed solely on the purchasers of the product. 
Software companies can disclaim all warranties, denying even that the product conforms to
claims made on its packaging or in its documentation. For software bought or licensed
online, software publishers can avoid all liability for viruses in their software, even
if they would have found the virus with the simplest of tests. Article 2B even makes any
license term binding, even if it would cause an ordinary and reasonable person to refuse
the license if that party knew that the license contained the particular term, so long as
the person clicks on "I Agree" for that term.
The proposed draft provides almost no protection to customers. It shields the worst
companies from responsibility for their worst products. It will weaken the legal rights
of consumers and ultimately drag down software quality across the industry. If this
addition to the Uniform Commercial Code is passed, you could be giving up a lot more than
you intended for with that click.
Bibliography
BIBLIOGRAPHY
1. Eisenberg, Rebecca L. "2B or not 2B".
2. Hoffman, Thomas. "Users Could Be Losers Under Code Revision".
3. Kaner, Cem. "Bad Software-Who is Liable?".
4. Kaner, Cem. "What Is a Serious Bug? Defining material Breach of a Software License
Agreement". 
5. Kaner, Cem. "Uniform Commercial Code Article 2B: A New Law of Software Quality". 
6. Leibowitz, Wendy R. "In New UCC Software Contracts, Is the Customer Always Wrong?". 
7. McWilliams, Brian. "The End of Software Licenses?".
8. Nader, Ralph. "Shrinkwrap Licenses and Uniform Commercial Code Article 2B".
9. Ring, Jr., Carlyle C. "Positive Attributes of Article 2B".
10. Towle, Holly K. "Towle Memorandum - UCC Article 2B".
11. Wylie, Margie. "Shrink-wrapping the Social Contract".