204 mat has heen an imped digital product transactions the Age ofthe ‘Information Economy: to achieving balanced law. Chapter 9 Contract, not Regulation: UCITA and High-Tech Consumers Meet Their Consumer Protection Critics Richard A. Epstein! University of Chicago and Hoover Institution 1c has been the subject of protracted disputes for many years now e effort to apply and extend the principles of Anicle 2 of the Uniform ymmercial Code to the novel sitution of digital consumer transactions, | first issue some years ago when I was hired as a consultant to orm Computer Information Technology Act (UCITA) regarding Warranty Protection for High-Tech Products and Serv mented on various issues conceming UCITA in two letters that I wrote in my in defense of UCITA when the issue came before the American The question { addressed then—and the one I address is: to what extent do the rules found in Arti (UCC) carry over to the world of transactions products? oods. At other times, it acknowledges that the adverse impact of these unsound rules is not disastrous to commercial success when confined tothe sale of goods.Contract, not Regulation 207 shan in the Age of the ‘Informatie 206 Consumer Pri However, my analysis then ex the approach which seems to be able to decide that some given terms should be accepted on grounds of fairness. without any particular 12 of why or how it advances the welfare of the parties to it. To be sure, there are some settings of specific terms that might make sense, at which point they are likely to be adopted. But there are others where the confusion that is introduced on one side of the market more than offsets the gains on the other. No ymas Hobbes said about a just price years ago—it is what the parties are ied to give—applies to terms as well. These depend on the “appetites” of the contracting parties.‘ There is no independent mantra of faimess that can override the voluntary acceptance or rejection of certain business forms. To the AFFECT or any other body opposes UCITA or its variants on these a inds, then so much the worse for their position. high-tech products. For these purposes, social welfare is defined as the sum of consumer and producer surplus—that 1s, the total gain that all parties obtain the realization of voluntary transactions. This social welfare standard is correct measure of the effects of contractual practices and the regulations that them, their employees, suppl ide and a gain to is impossible to itor oF second-guess. The key element ofthese transactions lies, therefore, not ‘in the cash transfer but in the gains that result from the vigorous production and family inheri prompt dissemination of the programs, databases, and the like found in high-tech markets pr are able to rely, often to free: terms that make for suecessful cor of scandal or abt warranty practices jurisdictions matters to the oppesi is basic analysis of freedom of contract contrasts sharply the next. Likewise, consumers also occupy multiple roles, as employees supplier,‘users are by now well familiar The current set of legal rules has unleashed an unprecedented wave of new firms and products in the computer information industry. The greatest boon for ‘economy. The basic message is clear enough: the basic set of open market rules. Contract, not Regulation 209 single book could be read by one person or by five. A single computer databaseproducts th is lef una Part One: The Basic Framewor From the ex ante perspect ting practices and consumer warranties werk best in an between the supplier and the taser of high-tech sofware and other consumer information products? How does the demand for the mass marketing of computer software and ‘information froducts influence the selection of legal rules goveming the licensing of eensumer products? What sort of protection should be provided to users of software and information products inthe event of product failure? In dealing with these three questions, it ‘eed for constant adjustment and trade-off amor templation that must be avoided warranty or dischimer solely by that a software user may reco supplied to consumers and mix of products av ‘constraint necessarily implies that the only source of funding for product warranty Contract, not Regulation an and damage claims arising out of licenses of information products isthe revenue that those licenses generate. rom the ex ante perspective. No that product are suficient to cover sr recovery in the event of product falure and the overall success of nduct of their ess reputable co-ienants,less experienced ct they are cushioned party insurance guard against sudden changes in firm wealth from catastrophic Contrect, not Regulation 213, Warranties, conditions, and disclaimers give only partial information about sess of any computer product in the marketplace. ‘of any information product gives rise to a wide range of so long as it can ample just given, anywhere between off than they were Wwithoot Tegal compulsion it is in the interest of ied watranties, because from the ex ance perspective, e parties are perfectly aligned. Hence, when the numbers cut in with the above warranty provision, which costs $250, but yields in benefits—neither the licensor nor the licensee has any interest in strong incentive to have every incer that in fact yield urged that consumers and producers do not have imate these costs or benefits. Mistakes of that sort will ‘operate under system: ike mistakes than t Strengths and weakness of the product design and the 's intended market. It can select or draft contract ‘erms. Government cannot.mm Economy” 214 Consumer Protection inthe Age of the ‘Info can publish product evaluations igths and weaknesses of finished products after develop lasting the GNU Lesser ofal h market. This market is populated deep familiarity with software and other consumer ny market that is unlikely to be subject to systematic information it. The cost of disseminating information is low, reat ., once individual needed sources of {information could quickly dry upto the detriment of a Part Two: Offer and Acceptance in the Context of Software and Other Computer Informatien Products {tis important to show how the general theoretical considerations set out in the first section of the paper play out in concrete cases. One vital question 1 been frequently raised in case law and academic literature concerns the proper rules of contract formation. As a general matter, the common law adopted the principle that contracts were most commonly formed by offer and acceptance. The Contract, not Regulation 25 ts as the offerce. Indeed. in many cases third parties propose ich are then accepted by both sides, creating in effect a offeror and who c the relevant terms, s the requisite agreement, ies of contract formation become more manifest when the een the parties take place ata distance. In these settings, the two ted above may noi be respondence, multiple oral communications, and an exchange o! between the aris (ofien known a “the bate of the forms"). As a establish when the contract (if any) was formed, and, ‘When played out against the rapid movement of small differences in subsidiary contract provisions were, mirror image rule, sometimes allowed to defeat acknowledgment. The wore frustrated by nit-p s that were drafted in response to this “Even though one oF miore 2-207, was also introduced to address hhead on the problem raised in Poe/. However, unlike § 2-204(3), it has no A second, and related, provision, UCC § analogue anywhere else inthe law. That section provides:Contracs not Regulation ction between oflers and invitations wo te 2-207 in sales of ordinary consumer products. done by phone assume tht a customer asks fora specific prodact that as the original offeror. Cleary, firms have strong to use magic words 10 avoid this problem, but qual ind highly particulanstic disputes are likely to follow. ly what product he wishes to acquire ofthat the product desired is out of ‘opened the shrinkwrap and used the product—subject to the terms and conditions contained inthe written documentation.er Provection in the Age of the ‘Information Economy" Contract, not Regulation 219 and upsets the shared understandings of the overwhelming pattem of behavior lets everyone know unacceptable, and should be weated of the goods, subject to some modest unc:the erms contained inthe package.” There seems to be no re and consumers to take the time and suffer the uncertainty of rest ‘again what everyone in practice already understands or rea understand: the warranties, conditions. and disclaimers contained in the original package are essential portions of any contract between the parties. The FTC could help consumers of high-tech products in this regard by making i that reasonable consumer benefits flow from the fact to the terms and conditions found inthe package tha i ‘etum. Afterall, tat is how manufactures of goods communicate ‘0 consumers. Contract, not Regulation 22 wat had parted company with Judge ‘ews. In part these views rest on the proposition that shrinkwrap finding the optimal contract. Where the consumer can do this more cheaply than the producer, any costs saving in competitive markets are passed through in the form of lower prices. that the section applies to initial oral ‘only underscores the need to repeal When Kiocek says possible for the vendor to be the offeror,” it acknowledges the possibility that the vendor may also be the offeree, so that itisoF exclusion is The UCC does 1 and exelusions on consequential hhas tong been a standard presumption of not give any clear account as to what damages are unconscionable. rules set by the UCC do not have agreed upon if the matter wee placed squrelybefore them. That result might be justified on the ground that it forces the party that does the drafting to make ele jons, and thus operate 8 a penahydeult rule." Unfortunately, however, any strategy that relies, Contract, not Regulation 23 Part Three: The Warranty Doctrines of Magnuson-Moss Should Not Be Extended (o High-Tech Warranties mon feature of standard warranty prac in the high-tech industry is to ‘compounded in the high-tech markets. The ease of comparative ping, the sophistication of consumers, and (as will be shown in the next strong intemal logic of the system of disclaimers and warranties work after a large number of is by no means sure that igh-tech industry that requires analogous pi fraud rules come ata high price insofar as they slow down the content of ordinary market transactions. In their nature, the pace and these prophylactic rules are always overbroad so that itis an empirical question whether they do more to prevent fraud or to in ‘Whatever the answer to that quesi ystematic abuse in the high 1¢ drag from Magnuson-Moss 1e nowhere to be found. Any extension ofthat section |advised Part Four: The Various Objections Raised to Standard Industry Practice Should Be Rejected as Groundless high-tech warranties. 1 will show that the underlying practices. Thus, the objections, if implemented, would likely hurt the ones they are designed to help.224 Conswmer Protection inthe Age of the ‘Information Economy’ (Consnmer Expectations Support. Not Undermine, Standard Marketing Practices ‘One possible attack on the marketing of computer software products is that the companies adopt practices that are systematically inconsistent with consumer inkwrap (or clickwrap, for electronic 1 agreements that permit the use of line more than a claim that consumers are duped by a form of bait and switch in which they are promised more than they receive.” a the information supplied by (0 regulatory proceedings are of (some) law professors and consumer advocates, Rather. these expectauons are shaped by the standard types of consumer ‘transactions. It is impossible to argue that consumers who engage in repeat ‘consumer expectations should not be transformed into a paean to invincible ‘consumer ignorance The basic concem with overall consumer expectations is, moreover, largely ‘explicit contract provisions that are made known 10 consumers in the course of business. To elevate some unarticulated set of consumer expect these undeserved heights witl only block the orderly evolution of contractual terms, Comeract, not Regulation 25 In a related vein, Professor Jean Braucher has suggested that the standard industry practices deviate from consumer expectations because the bbe argued that these licenses make no sense because they from the traditional patterns whereby various cl 1 sell the bocks. Yet, given the tudents who intend to keep the book cannot obtain a lower price.226 Consumer Protection in the Age of the Information Economy: the rapid changes in produet lines jurisdictions. It may well be that firms wi Contract, not Regulation 27 clutches of § 2.207 or the kindeed disputes over offer and thing for an outsider to have a “good idea” about how 10 another thing to be confident enough in one's knowledge firms within an industry adopt her approach without ‘4 clear command of the complex technical and operational issues involved. Where Web based communication of terms is efficient, firms have every incentive to thout regulation. Professor Braucher may prove persuasive as & but not as legislator, administrator. or judge. So long as there are no perceived defects in the current methods of “ship now. read later.” the method should not be forced to overcome any judicial or legislative hurdles. Finally, it that most consumers--of whom I am terms anyhow: we know what they say on egy of “rational ignorance” to economize Tthas sometimes been urged thatthe use of standard forms inhibits the competition hetween suppliers of computer software and similar products in the market for ‘warranties and other terms. But once again. the charge seems to be groundless. ge of terms that are shrinkwrap of clickwrap wansactions is about the same as the range of terms that are found in any other setting. Thus, an examination of a number of as to whether the these transactions closely track those which are used in the icensing of other product lines. ight of these conditions, it is hardly necessary to regulate warranty ns in order fo cope with some imaginary form provisions cari ware and computer industry. Bankruptcy of individual firms is often aConsumer Protection in the Age of the “Information Economy" ine grester progress made by others. The ever-changing cast of relevan f products make asphalting) that in small geographical markets. The market for software and after comput characteristics. It ig workwide in scope, and, whil Finally its commonly observed that computer systems are often subject to value of given computer highly: part rovsions and network arrangemé he players face serious obstacles ‘in trying to achieve profit maximization by degrading their warranty provisions At the very east they must deal with the customer dissatisfaction and product ‘management issues alluded to above the moment that they introduce two (or more) classes of product warranty. Those additional costs could easi had, once a network stats to disintegrate, mass exodus becomes the low- ‘probability, but nghimarsh, alternative that every computer information product licensor has to fer. The safer way to make money is to supply better computer infomation and io charge for its use rather than depreciate the product licensed for some ephemera stor-erm gain, Contract, not Regulation 229 The Contractual Terms Found in Standard Form Contracts Are provisions work st these contacts are finally formed. The chief theme ofall these pro fold. They reduce the administrative and transaction costs of doing business, and they prevent any destructive cross-subsidization between user groups. These two the four major threads of the argument: the use of licenses and not earlier work that I have done om this subject. Licenses Not Sales have to raise its prices across the board. The net effect is that honest consumers‘Information Economy Contract, not Regaation mu to prevent the cycle of ever greater cross: exploited ther io users who are schemes have exploited both their the tain of ‘The process has no obvious ending ‘empirical question of how much of policy-a result that would be a market disaster. Yet By the same token, 1 reason why they should be regarded as disfavored clauses either. Consequential Damages Clauses that limit the recovery for consequential damages in the event of product failure ce other breach are also essential components of any sensible marketing ropam. The reasons for such clauses track those that are relevant for restrictionsrot yet complete, Because sor should di the want of competition. It simply shows ias on product laggards. calls for the arbitration of disputes in lew of is provision makes perfectly goods see. usts matters t0 juries that may 0% Jnnical issues, and who may be sul er and cheaper. It often takes place be f jon process. The we s, and thus helps mpact cuts in the same di n of eross-subsides: the cont icensee; and the reduced Co Contract, not Regulation 3 rrative costs of the system. Ths foun swe “ Measured agai UCITA come in a measure of expects ves the innocent party as well off after breach as he is wi al makes good sense in those cases, for example, in which the product seller or licensor refuses to er because he can sell or license that product at a iy. The expectation damage rule only requires the se nsor to disgorge that it has received from a related transuetion, But the rule makes far less sases of consequential damages in which licensor only has the that could far exceed has to adjust upward in a ‘not necessary in the resale situation. Higher prices, with heavier overload, can only reduce the sum of consumer and producer Stated otherwise, the use of high damages in this context does not fare well it Second, it opens up a the possession of the consumer or re could take place weeks or months whether any such failu ie. These products are of product failure, ‘That cut to apply on a case-by-case basis. ‘courses of action are reasonable and which are not. ser conduct gives product licensors and sellers ir end for cheaper precautions atthe consumer end, And ing high-price litigation over extensive unliquidated losses, it increases the235 Contract, not Regulation efforts to reduce Th set of marketing ices are efficient, which is why every firm ina competitive market adopts an industry defense is thatthe standard firm adopts them. How could the industry prosper if nobody knows how to conduct busines transactions except the people who never engage in them? Notes | Many thanks to David Standness, Stanford University Law Schoo! Class of 2007, for hs excelent research assistance 2 The text of UCITA can be found at The National Conference of Commissioners 00 Uniform Site Laws, Drafts of Uniform and Model Acts, available at an offer and aceeptance, contact formed in any manner is confiemed by aConsumer Protection in the Age ofthe Information Economy: 2% Contract, not Regulation 27 such as by manifesting assem, fo a conditional ofer that is effective under paragraph (1) [Monts the terms of the offer under Section 208 or 209, except a erm that conflicts with ncapressly agreed term reparding pce or quantity.” merchants, the proposed adcitional term es nonce of objection before, or within areas Proposed ies ~ LATA § 205. °C ned on agreement by the oth vise provided inContract, mot Regulation a0 28S Consumer Prowection the Ase af the Information Bcomomy” Step Saver 939 F 24a 96 ‘Zeidenberg, 86 F 3d 1447, 1449.80 (Tih Ci, 1996),