Wednesday, January 16, 2008

ProCD In Depth

I've been thinking about the ProCD case again lately and would like to do a more detailed review of it. The key point that the court made in the ProCD case was that the clickwrap agreement was part of the contract for sale. In other words, the sale was not complete until Zeidenberg accepted the clickwrap agreement. Zeidenberg had the option of voiding the sale (and returning the software for a refund) if he objected to the clickwrap terms. So is this right? Can a software license agreement be inserted into a contract for sale in this way? I believe the court erred in saying that it can.

To answer this question correctly, I think the proper place to start is an inconspicuous section of the Uniform Commercial Code: section 2-313A. The relevant part of this section is part (3):
  1. If in a record packaged with or accompanying the goods the seller makes an affirmation of fact or promise that relates to the goods, provides a description that relates to the goods, or makes a remedial promise, and the seller reasonably expects the record to be, and the record is, furnished to the remote purchaser, the seller has an obligation to the remote purchaser that:

    1. the goods will conform to the affirmation of fact, promise, or description unless a reasonable person in the position of the remote purchaser would not believe that the affirmation of fact, promise, or description created an obligation; and

    2. the seller will perform the remedial promise.
I'll clarify what this statute means by "remote purchaser". In a chain of distribution, the manufacturer is a seller. Anyone who purchases directly from the manufacturer is an "immediate buyer". The "immediate buyer" may be (and often is) a distributor. Any other buyers in the chain of distribution, for instance retailers or consumers, are "remote purchasers". A retailer might be an immediate buyer if the retailer purchases direct from the manufacturer. Indeed, a consumer might be an immediate buyer if the consumer buys direct from the manufacturer. But in a typical retail transaction, as we have in ProCD, the consumer is a remote purchaser. So when interpreting this section, in typical retail transactions, "seller" can be thought of as "manufacturer" and "remote purchaser" can be thought of as "consumer".

The important thing about this section of the UCC is that it tells us what role the manufacturer plays in subsequent sales further down the chain of distribution. It says that the manufacturer can be obligated to make good on any promises they make to the consumer in statements that are packaged with or accompanying the product. Primarily, this is intended to provide a measure of enforceability to warranty claims, or any other claims in or on the packaging. But this also implies some very important and pertinent things about the intent of the UCC:
  1. A manufacturer is not a party to a contract for sale in a typical retail setting. The purpose of section 2-313A is to establish that a manufacturer has obligations to consumers. If the UCC intended that a manufacturer was considered a party to a retail contract for sale, then this would already be established. Obviously, as a party to the contract, the manufacturer would have obligations to the consumer. There would be no reason for Section 2-313A to spell this out. Furthermore, 2-313A would not need to make the distinction between "remote purchasers" and just regular buyers, since a consumer would not be a "remote purchaser" if the manufacturer was directly involved in the contract.

  2. Notices, from the manufacturer, in or on the product packaging cannot obligate the buyer. If they could, why would Section 2-313A expressly state that such notices obligate only the manufacturer? If they could create an obligation in either direction, wouldn't it be simpler to just say that including notices in the packaging is a valid way of adding terms to the contract?

  3. Notices included in or on the product packaging are not part of the contract for sale. If they were, then as part of the contract, the manufacturer would obviously have an obligation to perform according to those terms and, again, there would be no need for Section 2-313A to spell that out.
In short, section 2-313A exists for the express purpose of creating an obligation that would otherwise not have existed. That is to say, without section 2-313A, manufacturers would have zero obligation to consumers. This implies that, with the exception of the specific terms outlined in section 2-313A, the manufacturer has no part in "remote" contracts for sale. And this is certainly reasonable, since otherwise the manufacturer would have absolutely no control about how many contracts it enters into or with whom it enters into those contracts, as well as not being privy to any additional terms of those contracts.

Applied to the ProCD case, this means that ProCD is not the seller as far as the UCC is concerned. The seller was a retailer (Best Buy by Mr. Zeidenberg's recollection). As the seller, Best Buy had the ability to determine what the terms of the contract were. ProCD's ability to enter into the equation is strictly limited to the role that Section 2-313A gives them. The clickwrap agreement was obviously added by ProCD, not Best Buy. I think this fact alone pretty well puts the key question to rest. The correct answer is "no", clickwrap contracts cannot be construed as being part of the contract for sale. A manufacturer is not a party to retail contracts for sale which they are not directly involved in. Therefore, the manufacturer has no ability to add terms to the contract for sale.

In the interest of thoroughness, we won't stop with that. There are still plenty of points that the court raised in ProCD which, for a detailed review, must be addressed. Let's continue by taking a look at how the court reasoned that the clickwrap license was part of the contract for sale. They start with this:
But one of the terms to which Zeidenberg agreed by purchasing the software is that the transaction was subject to a license.
If this was indeed a term of the contract for sale, that his use of the software was subject to a license, then that term in the contract is without question unconscionable. The reason is that a sale necessarily involves the transfer of ownership -- UCC 2-401(2) tells us this. Saying that his use of the software is subject to a license is equivalent to saying that he does not obtain ownership of the copy of software. Indeed, this is the raison d'ĂȘtre for the infamous phrase "licensed, not sold". Since the fundamental purpose in a contract for sale is to obtain ownership in the product being purchased, there can be no term more unconscionable than one that says "ownership in the product being sold does not transfer to the buyer". Better yet, "this sale is not a really a sale". But telling Zeidenberg that the sale is subject to a license is effectively saying both of these things. Nevertheless, the court insists that Zeidenberg did agree to such a term. Conversely, if Zeidenberg truly obtained ownership in his copy of software, as he must since the court agreed that this was a sale governed by the UCC, then Section 117 of the Copyright Act expressly gives Zeidenberg the right to use his copy of software. ProCD's statement that he must first obtain ProCD's permission before he may use the software is simply false.

Immediately following the above statement, the court continues:
Zeidenberg's position therefore must be that the printed terms on the outside of a box are the parties' contract--except for printed terms that refer to or incorporate other terms.
Actually, Zeidenberg's position could also have been that none of the terms on the outside of the box are the parties' contract. After all, the terms on the box were added by ProCD, not by Best Buy. Even if we ignore section 2-313A, or if we assert that Best Buy implicitly added ProCD's terms to the contract, any term stating that the sale was subject to a license would be excluded not because it refers to terms inside the box, but because it is an unconscionable term. Also, if we assume that Best Buy did implicitly add ProCD's terms to the contract, then the contract was still between Best Buy and Zeidenberg, and ProCD had no standing to bring suit.

Next the court sympathizes with ProCD's inability to include the entire license agreement on the outside of the packaging:
Vendors can put the entire terms of a contract on the outside of a box only by using microscopic type, removing other information that buyers might find more useful (such as what the software does, and on which computers it works), or both.
Let's be very clear about this: the verbose license terms existed only because ProCD wanted them to, not because the UCC required them. Just because ProCD wishes to complicate an otherwise simple transaction, this by no means provides them with an excuse as to why they may attempt to exempt themselves from the rules imposed by the UCC (that there can be no hidden terms). How can ProCD complain that the terms won't fit on the outside of the box, when it is ProCD themselves who insist that these terms be included in the first place? This is no excuse and the court's use of this rationale is somewhat of a red herring.

Along similar lines, the court continues:
The "Read Me" file included with most software, describing system requirements and potential incompatibilities, may be equivalent to ten pages of type; warranties and license restrictions take still more space. Notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike.
First, the "Read Me" file is not a "term on the inside". Surely the court doesn't suggest that the contents of the "Read Me" file are part of the contract for sale? Of course that is not the case. The "Read Me" file is simply part of the product. That would more accurately be described as "product on the inside", which I'm sure is great for the consumer. As for the warranty, it is expressly covered by the now familiar section 2-313A. Again, this doesn't constitute "terms [of the contract] on the inside", since 2-313A makes a special case for this type of notice on or in the packaging.

Next, the court attempts to justify "money now, terms later" by using other types of familiar transactions. Examples used include: insurance, airline travel, and concert admissions. First, none of these are sales of goods, they're all contracts for services. It's doubtful if the UCC even applies to these transactions. You might be able to argue that tickets (to an airline or a concert) are a "good", but the contract for sale would then only cover the ticket itself, not the services provided later. Any contract covering the services would be separate from the contract for sale (indeed, the Carnival Lines case cited by the court supports this position).

Following on the heels of the above examples of contracts for services, the court attempts to cite a couple of examples where "money now, terms later" is commonplace for actual consumer goods:
Someone who wants to buy a radio set visits a store, pays, and walks out with a box. Inside the box is a leaflet containing some terms, the most important of which usually is the warranty, read for the first time in the comfort of home. By Zeidenberg's lights, the warranty in the box is irrelevant; every consumer gets the standard warranty implied by the UCC in the event the contract is silent; yet so far as we are aware no state disregards warranties furnished with consumer products.
Here the court has repeated their earlier warranty mistake. Again, section 2-313A expressly states that a warranty of this type can be established by including a notice inside the box.

The other example they give of "money now, terms later" in the context of an actual consumer good goes:
Drugs come with a list of ingredients on the outside and an elaborate package insert on the inside. The package insert describes drug interactions, contraindications, and other vital information--but, if Zeidenberg is right, the purchaser need not read the package insert, because it is not part of the contract.
"Take two tablets every six hours, not to exceed six tablets in a 24-hour period." The court expects us to believe that a statement such as this is somehow part of the contract for sale? Surely that's not the case. The package insert is no more a part of the contract for sale than are instructions for assembly included with cheap furniture.

The court then embarks on a verbose argument about sales of software (portions omitted for brevity's sake):
Only a minority of sales take place over the counter, where there are boxes to peruse. ... Much software is ordered over the Internet by purchasers who have never seen a box. Increasingly software arrives by wire. There is no box; there is only a stream of electrons ... On Zeidenberg's arguments, these unboxed (sic) sales are unfettered by terms--so the seller has made a broad warranty and must pay consequential damages for any shortfalls in performance, two "promises" that if taken seriously would drive prices through the ceiling or return transactions to the horse-and-buggy age.
Suddenly, including terms in a contract apparently requires a box. I guess there isn't any technically feasible way for a seller to display a contract before transmitting this stream of electrons. And apparently that contract couldn't say anything like "sold AS IS" to disclaim the implied warranties of merchantability or fitness for a particular purpose. Honestly, I don't understand the fixation with boxes here. Why does the court impart such importance on the existence of boxes? It's as though they believe boxes are the only way to record a contract in a sale of goods, which is ironic because the court seems so intent on driving home the notion that these contracts can be formed in many varied and flexible ways.

The District Court, which ruled in favor of Zeidenberg the first time around (before the case was appealed), felt that the proposed addition of Article 2B to the UCC indicated that drafters of the UCC conceded that shrinkwrap licenses were invalid under the current law. This court disagreed with that stating:
One of the court's reasons--that by proposing as part of the draft Article 2B a new UCC sec. 2-2203 that would explicitly validate standard-form user licenses, the American Law Institute and the National Conference of Commissioners on Uniform Laws have conceded the invalidity of shrinkwrap licenses under current law, see 908 F. Supp. at 65566--depends on a faulty inference. To propose a change in a law's text is not necessarily to propose a change in the law's effect.
Changing a law to clarify it is one thing. But the plan with Article 2B (which eventually became UCITA) was to add a whole new class of transactions called "licenses". That's not exactly clarifying the law. That's creating a new law. If they felt that licenses should be valid under Article 2, they could very easily have added a single section to Article 2 clarifying that license agreements could be included on or in the packaging of goods, and that such licensing agreements are part of the contract for sale (just as the court is attempting to argue here). But instead, they felt they needed to add an entirely new Article, with dozens upon dozens of new sections to accommodate software licenses. This is incongruous with the court's inference that Article 2B was intended to be mere clarification of existing law. The District Court's argument seems to be rooted in the stronger inference.

Next we get to the issue of the formation of the contract:
A vendor, as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance. And that is what happened. ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure. This Zeidenberg did.
Again ProCD, the manufacturer, is being treated as though they are a party to the contract for sale, which simply isn't the case. Best Buy was the vendor. Therefore it was Best Buy that made the offer which Zeidenberg accepted. Best Buy essentially said, "We'll sell you a copy of SelectPhone if you give us $70". Zeidenberg accepted by forking over the money. This is the contract for sale within the meaning of the UCC. But the court would have us believe that the contract was ProCD saying, "We'll let you use our software if you promise to not do this, that or the other with it." That's not a contract for sale at all. There's no mention of anything in there that has anything to do with a sale. To the contrary, there was probably a line in there somewhere that said, "This software is licensed, not sold" which is quite the opposite of what would constitute a contract for sale.

Moving on, the court provides an apt description of the way Zeidenberg accepted ProCD's supposed offer to sell:
He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance.
"He had no choice." That is quite telling of the position that Zeidenberg was in. He was the owner of this copy of software, as UCC 2-401(2) tells us that he must be. Yet he has "no choice" but to accept the license. In other words, he is not free to exercise his Section 117 right to use his copy of software. He is forced to accept in order to exercise his right. That sounds very much like coercion to me. However, it is possible that Zeidenberg happily entered into the license agreement fully voluntarily, not feeling at all coerced. Without testimony from Zeidenberg as to how he felt about accepting the license agreement at the time he assented to it, it's not possible for us to know.

Next the court attempts to find justification within the UCC for putting terms of the contract inside the box, claiming:
Section 2-606, which defines "acceptance of goods", reinforces this understanding. A buyer accepts goods under sec. 2-606(1)(b) when, after an opportunity to inspect, he fails to make an effective rejection under sec. 2-602(1). ProCD extended an opportunity to reject if a buyer should find the license terms unsatisfactory; Zeidenberg inspected the package, tried out the software, learned of the license, and did not reject the goods.
Except that inspection of goods, and acceptance of the offer are two different things under the UCC. And the court recognizes this fact:
We refer to sec. 2-606 only to show that the opportunity to return goods can be important; acceptance of an offer differs from acceptance of goods after delivery
First off, it's not an "opportunity" to return. The seller has an obligation to allow the buyer to return. But I digress. The terms of use are not part of the product, and therefore are not covered by the inspection clause. The court even admits so much, recognizing that there is a difference between accepting the offer and accepting the product. This is no minor detail, since acceptance of the offer is what triggers the formation of the contract. At the end of the day, Section 2-606 is irrelevant to their argument and provides no reinforcement whatsoever.

The court's next point is that the UCC implies that terms of the contract may be so inconspicuous as to be hidden from view, inside the box:
Some portions of the UCC impose additional requirements on the way parties agree on terms. A disclaimer of the implied warranty of merchantability must be "conspicuous." UCC sec. 2-316(2), incorporating UCC sec. 1-201(10). Promises to make firm offers, or to negate oral modifications, must be "separately signed." UCC secs. 2-205, 2-209(2). These special provisos reinforce the impression that, so far as the UCC is concerned, other terms may be as inconspicuous as the forum-selection clause on the back of the cruise ship ticket in Carnival Lines.
First, Carnival Lines is irrelevant as that was a contract to provide services and not governed by the UCC. There is no mention whatsoever of the UCC in the Carnival Lines decision. As for the conspicuousness requirement for disclaimers of warranties, it is clear that the intent of the UCC is that such disclaimers must be in writing and the buyer must be duly notified. This requirement is simply because the implied warranties are of much importance. After all, no one wants to unknowingly buy useless junk. It implies nothing that would indicate that a manufacturer, who is not present, may insert terms into a remote contract for sale.

As a final argument, the court tries to equates the license agreement to a "feature" of the product:
In the end, the terms of the license are conceptually identical to the contents of the package. Just as no court would dream of saying that SelectPhone (trademark) must contain 3,100 phone books rather than 3,000, or must have data no more than 30 days old, or must sell for $100 rather than $150 ... so, we believe, Wisconsin would not let the buyer pick and choose among terms. Terms of use are no less a part of "the product" than are the size of the database and the speed with which the software compiles listings.
As we already discussed, and the court admitted, acceptance of the offer and acceptance of the product are not the same thing. The court has already argued that the license agreement is part of the offer. It cannot also be part of the product. The court can't have it both ways. This is not a matter of a consumer picking among terms of a contract. It's a matter of a consumer ignoring false claims made by a manufacturer.

And that pretty much is the conclusion of their theory as to how the license became part of the contract for sale. I think it is pretty clear that there are a number of weaknesses in this theory that contradict that finding.
  • Section 2-313A shows that ProCD's role in the transaction is limited to the ability to make promises, guarantees, or warranties. ProCD was not a party to the contract. The contract was between Best Buy and Zeidenberg. ProCD had no standing to bring suit for breach of contract.

  • Any term that purports to subject a sale to a license is unconscionable on the grounds that it effectively turns the sale into a non-sale.

  • The court failed to demonstrate that "money now, terms later" is a normal course of dealing within the sale of consumer goods.

  • Acceptance of an offer and acceptance of a good are two different things. The license agreement is clearly not part of the product, therefore rejection of the license agreement is not equivalent to rejection of the product, nor is acceptance of the product acceptance of the license agreement.

One final thought: none of the above precludes a clickwrap license from becoming enforceable if the end-user genuinely voluntarily enters into it. The only thing we've established here is that the license agreement is not part of the contract for sale. But the license agreement could still stand on its own as an independent contract. And this might give some credit to the court's finding. If Zeidenberg entered into the license agreement contract purely voluntarily, then he could still be bound to it. However, this raises the question of whether ProCD failed to offer any consideration. After all, Zeidenberg already owned and could legally use the software, so what is ProCD offering in return? Whether, in this situation, the license is rendered invalid for lack of consideration is a topic for another day.


Anonymous said...

I would be interested to hear your thoughts on the claim made by the judge that: "(a right that the license expressly extends)"

I'm not aware of any rights that EULAs typically grant that the purchaser didn't already have.

Dan said...

If we accept the court's overall reasoning, then no contract had been formed until after Zeidenberg assented to the terms of the license agreement. So, if Zeidenberg had wanted to return the software instead of accepting the agreement, he would have been able to do so simply because there was no contract, not because the license agrement gave him any "right" to do so.

I too am unaware of any EULAs that actually give any rights to the end-user. Every EULA I've ever read (and I've read a fair share) only take rights away from the end-user.

Anonymous said...

as stated in ProCD, if the manufacturer allows consumers to return the content of contract, do you believe ProCD reasoning is reasonable?
as you might know the EULA, Microsoft EULA has a right to return. but i do not understand why I have to return the copy to the manufacturer not to the bestbuy which sold it to me

Anonymous said...

I would like to hear your thoughts on the Blizzard v MDY case.