ContractsProf Blog

AALS Program and Print Symposium on the Principles of the Law of Software Contracts

The AALS Section on Commercial and Related Consumer Law invites you to attend our Annual Meeting program on The Principles of the Law of Software Contracts: A Phoenix Rising from the Ashes of Article 2B and UCITA? and solicits additional proposals for a companion symposium issue to be published in the Tulane Law Review.

The Topic: On May 19, 2009, the ALI approved the Principles of the Law of Software Contracts, which undertake to weave the currently divergent threads of law governing software contracts into a coherent whole that will guide parties in drafting, performing, and enforcing software contracts, assist courts and other arbiters in resolving disputes involving software contracts, and, perhaps, inform future legislation addressing software contracts. Do the Principles clarify the law of software contracts? Will they successfully unify the law of software contracts? Are they consistent with current best practices in software contracting? Will they encourage desirable future developments in the law and practice of software contracts? These are among the questions our program speakers will address.

The Program: The Commercial and Related Consumer Law Section's annual meeting program, scheduled for Saturday, January 9, 10:30 AM to 12:15 PM, in the Magnolia Room, Third Floor, Hilton New Orleans Riverside, will feature Principles Reporter Bob Hillman (Cornell) and Associate Reporter Maureen O’Rourke (Boston U.), who will offer their unique insights on the drafting process, key substantive provisions, and their legal and practical implications; Amy Boss (Drexel), who will add her insights about the failures of the UCC Article 2B project and UCITA and the prospects for the Principles’ success; Juliet Moringiello (Widener), who will discuss her and co-author Bill Reynolds's (Maryland) paper "What's Software Got to Do With It?," offering their perspectives on the Principles process, largely ignoring past efforts and debates, and addressing some of the assumptions underlying the Principles and how they address those assumptions; and Florencia Marotta-Wurgler (NYU), who will discuss her and co-author Yannis Bakos's (NYU Stern School of Business) paper "How Much Does Disclosure Matter?," which delves deeper into the value of disclosure -- an important assumption underlying the Principles and a subject the Principles tackle substantively -- and augments the conceptual discussion with empirical analysis.

The Symposium Issue: The Tulane Law Review will publish a print symposium issue including papers from most of our presenters, papers selected from among those who responded to our initial call for proposals as well as others from whom we solicited contributions, and some shorter responses and replies. We can accommodate a limited number of additional papers, responses, and replies in the symposium issue, which is scheduled to go to press in late summer 2010.

How to Submit a Paper or Proposal: If you would like to contribute to the print symposium, and want your proposal to receive full consideration, please e-mail an abstract, précis, or draft by Monday, December 14, 2009 to Professor Keith A. Rowley, Chair of the AALS Section on Commercial and Related Consumer Law. E-mail: keith.rowley@unlv.edu. We may consider submissions received after December 14 on a space-available basis. Executive Committee members and the Tulane Law Review's symposium editors will review all timely submissions and notify no later than Monday, January 11, 2010 those authors we would like to contribute to the print symposium.

[Keith A. Rowley]

Mid-Year Legislative Update

With most state legislatures having concluded their business for the year, here is the 2009 mid-year legislative update.

Revised Article 1

As of January 1, 2009, Revised Article 1 was in effect in thirty-four states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, and West Virginia.

Notwithstanding my suggestion elsewhere that the substitute § R1-301 NCCUSL and the ALI promulgated last year might “grease the skids” for additional enactments this year, 2009 has turned out to be a relatively quiet legislative year for Revised Article 1, with only three enactments -- down from five in 2008, and seven in 2007. While the most noteworthy nonuniformity among the thirty-seven enactments remains the definition of “good faith” -- with 26 states having adopted the uniform § R1-201(b)(20) definition and 11 having retained the pre-revised definition that imposes a different good faith standard on merchants and non-merchants -- all three 2009 enactments adopt the uniform definition and one of the eleven states (Indiana) that retained the pre-revised definition has amended its version of Revised Article 1 to adopt the uniform definition effective July 1, 2010.

As of June 30, Alaska (HB 102), Maine (LD 1403), and Oregon (SB 558) have enacted Revised Article 1 thus far this year. The Alaska and Oregon enactments take effect on January 1, 2010, with Maine’s following on February 15, 2010.

The Washington legislature failed to act on SB 5155 before adjourning sine die on April 26. (That’s probably just as well, because the introduced version of SB 5155 appeared to be drawn directly from the language of official Revised Article 1 circa 2001 and included the no-longer-official version of Revised 1-301 that all 37 enacting states have declined to adopt).

It is possible that the Massachusetts legislature will consider a Revised Article 1 bill sometime this year; however, having waited months for HD 89 to be assigned a bill number, and given the failure of four prior bills to garner a floor vote in either chamber, I would be surprised to see definitive action anytime soon.

Article 2 and 2A Amendments

As of June 30, 2009, only three state legislatures (Kansas, Nevada, and Oklahoma) had considered bills proposing to enact the 2003 amendments to UCC Articles 2 and 2A. In 2005, Oklahoma amended Sections 2-105 and 2A-103 of its Commercial Code to add that the definition of “goods” for purposes of Articles 2 and 2A, respectively, “does not include information,” see 12A Okla. Stat. Ann. §§ 2-105(1) & 2A-103(1)(h) (West Supp. 2008), and amended its Section 2-106 to add that “contract for sale” for purposes of Article 2 “does not include a license of information,” see id. § 2-106(1). The net effect is similar to having enacted Amended §§ 2-103(k) & 2A-103(1)(n), both of which exclude information from the meaning of “goods” for purposes of Article 2 and 2A, respectively. Otherwise, no state has enacted the 2003 amendments.

Article 3 and 4 Amendments

As of January 1, 2009, the 2002 amendments to Articles 3 and 4 were in effect in six states: Arkansas, Kentucky, Minnesota, Nevada, South Carolina, and Texas. By July 1, 2010, that number will increase by at least 50%.

As of June 30, 2009, Indiana (SB 501), New Mexico (SB 74), and Oklahoma (SB 991) have enacted the 2002 amendments to Articles 3 and 4. Oklahoma SB 991 will take effect on November 1, 2009; New Mexico SB 74 will take effect on January 1, 2010; and Indiana SB 501 will take effect on July 1, 2010.

In addition to enacting the 2002 amendments to Articles 3 and 4 and the usual conforming amendments, Indiana SB 501 also revises the definition of “good faith” in Ind. Code § 26-1-1-201(19) to require all parties to act honestly and to observe reasonable commercial standards of fair dealing. At present, Ind. Code § 26-1-1-201(19) requires only “honesty in fact.” Like the rest of SB 501, this change will take effect July 1, 2010, and further tip the balance among enacting states in favor of the unitary good faith definition in uniform § R1-201(b)(20).

Revised Article 7

As of January 1, 2009, Revised UCC Article 7 was in effect in thirty-one states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Virginia, and West Virginia. As of July 1, Revised Article 7 will be in effect in South Dakota, as well.

This has been a relatively active legislative year for Revised Article 7. In addition to South Dakota SB 89, which takes effect on July 1, Alaska (HB 102), Maine (LD 1405), and Oregon (SB 558) have already enacted Revised Article 7 in 2009, and Louisiana HB 403 lacks only Governor Bobby Jindal's signature (or pocket veto). Alaska HB 102 and Oregon SB 558 will take effect on January 1, 2010, as will Louisiana HB 403 (if enacted). Maine LD 1405 will take effect on February 15, 2010.

Georgia HB 451 made significant progress toward adoption. First introduced on February 18, the Georgia House unanimously passed the House Judiciary Committee’s substitute version on March 12, and the Senate Judiciary Committee recommended passage on March 26. However, the legislature adjourned on April 3 without a third reading and final action in the senate.

Washington SB 5154 stalled, like its Revised Article 1 counterpart, but without as compelling a reason.

UETA

Although the Georgia legislature did not pass HB 451 prior to adjourning, it did pass the Uniform Electronic Transactions Act (HB 126), to which Governor Sonny Perdue affixed his signature on May 5. As a result, effective July 1, 2009, Illinois, New York, and Washington will be the only states in which UETA is not in effect.

[Keith A. Rowley]

ALI Principles of the Law of Software Contracts

Speaking of the recently-approved Principles of the Law of Software Contracts (the subject of our sister section's call for proposals below), here's an overview and remarks from Reporter Bob Hillman for the benefit of those who have not already read them on Concurring Opinions:

Maureen O’Rourke, the Associate Reporter on the Principles of the Law of Software Contracts, and I are posting the following to acquaint readers with the Principles and also to respond to some criticism of one section of the Principles that creates, under certain circumstances, an implied warranty of no known material hidden defects in the software.

On May 19, the membership of the American Law Institute unanimously approved the final draft of the Principles of the Law of Software Contracts. As the Introduction to the project states, the Principles “seek to clarify and unify the law of software transactions.” The Principles address issues including contract formation, the relationship between federal intellectual property law and private contracts governed by state law, the enforcement of contract terms governing quality and remedies, the meaning of breach, indemnification against infringement, automated disablement, and contract interpretation.

The Introduction to the Principles explains further that “[b]ecause of its burgeoning importance, perhaps no other commercial subject matter is in greater need of harmonization and clarification. . . . [T]he law governing the transfer of hard goods is inadequate to govern software transactions because, unlike hard goods, software is characterized by novel speed, copying, and storage capabilities, and new inspection, monitoring, and quality challenges.” Many of the rules of Article 2 of the UCC therefore apply poorly to software transactions or not at all, and the Principles are intended to fill the void.

The Principles are not “law,” of course, unless a court adopts a provision. Courts can also apply the Principles as a “gloss” on the common law, UCC Article 2, or other statutes. Nor do the Principles attempt to set forth the law for all aspects of a transaction, but instead rely on sources external to the Principles in many areas.

The Principles apply to agreements for the transfer of software or access to software for a consideration, i.e., software contracts. These include licenses, sales, leases, and access agreements. The project does not apply to the exchange of digital media or digital databases. It applies a predominant purpose test to determine applicability to transactions involving embedded software or software combined in one transfer with digital media, digital databases, and/or services.

We are the Reporter and Associate Reporter of the software principles. We have been greatly aided by our advisors, consultative group members, ALI Council members, liaisons from the National Commissioners on Uniform State Law, Business Software Alliance, and the American Bar Association, and many additional lawyers from industry and other groups who, over the last five and one-half years, have met with us, talked with us on the phone, and exchanged e-mails with us. We believe the project moved along smoothly largely because of the efforts of all of these groups and individuals.

Nevertheless, in the two weeks leading up to approval in May, we received communications from a few software providers evidencing concern largely with one section of the Principles. Section 3.05(b) creates a non-excludable implied warranty that the software “contains no material hidden defects of which the transferor was aware at the time of the transfer.” The section only applies if the transferor receives “money or a right to payment of a monetary obligation in exchange for the software.” Because the section may be the most controversial provision, we devote the rest of this post to the issue.

Despite concerns that section 3.05(b) creates “new law,” it simply memorializes contract law’s disclosure duties and tort’s fraudulent concealment law. The section makes clear that these rules apply to software transfers in order to allocate the risk to the party best able to accommodate or avoid the costs of materially defective software. Obviously this is the transferor in situations where only it knows of the material defect and the transferee cannot protect itself. The section requires that the transferor knows of the defect at the time of the transfer (negligence in not knowing is not enough to trigger liability), the defect is material, and it is hidden.

A few software providers have concerns that the concepts of “hidden,” and “material defect” are obtuse and will “increase litigation” or require a flood of “detailed notices” to prospective users. These concepts, however, are hardly unknown to the law. A comment to section 3.05(b) says that a “hidden” defect occurs if the “defect would not surface upon any testing that was or should have been performed by the transferee.” This is nothing new. See, e.g., UCC 2-316(3)(b) (”there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to [the buyer]“).

A few software providers also worry about the meaning of “material defect.” The comments to section 3.05(b) point out that the section simply captures the principle of material breach: Does the defect mean that the transferee will not get substantially what it bargained for and reasonably expected under the contract? The criticism that “materiality” is too vague, if accurate, would mean that contract law would have to abolish its material breach doctrine too.

Putting together the requirements of actual knowledge of the defect at the time of the transfer, that the transferee reasonably does not know of the defect, and that the defect constitutes a material breach means that a transferor would be insulated from liability in situations identified by the concerned software providers as problematic. These include where the transferor has received reports of problems but reasonably has not hadtime to investigate them, where the transferee’s problems are caused by uses of which the transferor is unaware, where the transferor learns of problems only after the transfer, and where the problems are benign or require reasonable workarounds to achieve functionality. The best example of when section 3.05(b) would apply is, as comment b to the section says, where the transferor already knows at the time of the transfer that the software will require “major workarounds . . . and cause[] long periods of downtime or never [will] achieve[] promised functionality,” the transferee cannot discover this for itself, and the transferor chooses not to disclose the defect.

As we have already said, the section simply memorializes existing law. Under the common law, a contracting party must disclose material facts if they are under the party’s control and the other party cannot reasonably be expected to learn of the facts. Failure to disclose in such circumstances may amount to a representation that the facts do not exist and may be fraudulent. See, e.g., Shapiro v. Sutherland, 76 Cal. Rptr. 2d 101, 107 (Cal. Ct. App. 1998) (”Generally, where one party to a transaction has sole knowledge or access to material facts and knows that such facts are not known or reasonably discoverable by the other party, then a duty to disclose exists.”); Hill v. Jones, 725 P.2d 1115, 1118-19 (Ariz. Ct. App. 1986) (”[U]nder certain circumstances there may be a ‘duty to speak.’ . . .  [N]ondisclosure of a fact known to one party may be equivalent to the assertion that the fact does not exist. . . . Thus, nondisclosure may be equated with and given the same legal effect as fraud and misrepresentation.”). The Restatement (Second) of Contracts section 161(b) states that “[a] person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist . . . where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.” Section 161, comment d of the Restatement (Second) adds “In many situations, if one party knows that the other is mistaken as to a basic assumption, he is expected to disclose the fact that would correct the mistake. A seller of real or personal property is, for example, ordinarily expected to disclose a known latent defect of quality or title that is of such character as would probably prevent the buyer from buying at the contract price.”

One concern of a commentator is that fraudulent concealment is a tort, implying that it has no place in the Principles. But the principle appears prominently in the Restatement (Second) of Contracts section 161. And why not memorialize a principle that discourages a party in a contract setting from hiding material facts that the other party reasonably does not know? The commentator notes that fraudulent concealment requires intent to deceive, but wouldn’t that be the usual inference if a transferor licenses software it knows is materially defective and knows the transferee cannot discover it?

A few organizations also are concerned that section 3.05(b) cannot be disclaimed. But there are plenty of cases that do not allow a party to contract away liability for concealment. One critic wonders why a statement such as “I am not giving any assurances about there being no defects in this software,” should not insulate a transferor from liability. A reasonable licensee, assuming the good faith of the licensor, would believe that this licensor does not intend to make any express warranties or implied warranties of merchantability or fitness, not that the licensor knows that the software is materially defective so that the software will be largely worthless to the licensee. A transferor playing this game is surely in bad faith and, frankly, engaging in reprehensible conduct. But there is a way to ensure no liability under this section, namely to disclose material hidden defects. In effect, disclosure is the disclaimer.

Bob Hillman and Maureen O’Rourke
June 2, 2009

The Concurring Opinions post -- which Bob asked me to re-post, with the blessings of the Concurring Opinions folks -- has provoked several comments and has been the subject of a follow-up post by David Hoffman, one of Concurring Opinions's thirteen regular contributors.  Dave's post has generated its own comments.  While we here at ContractsProf might have a vested interest in generating site traffic, it may be more efficient to funnel feedback through a single conduit.  Because Concurring Opinions got the ball rolling, feel free to comment, or to respond to existing comments, there.

[Keith A. Rowley]

A Take on Clickwrap?

Well, not really, but this piece from the Onion does speak volumes about the Internets:

CHINO, CA—In an unprecedented and historic event Monday, the "I Am Under 18" button, an Internet security device which if selected restricts access to websites featuring adult content, was clicked for the first time ever. "I knew I could simply claim to be over 18 and continue onto my desired destination, but I also realized that I would have to live with that lie for the rest of my life," said local resident Garrett Kinley, 17. "I admit, I was curious to see what type of material I would find on www.juggworld.com, but that button was clearly placed there for a reason, and let's face it: 17 and three-quarters is not 18. I plan to return to the site three months from now, when I will be mature enough to handle its content." Moments later, Kinley's friend Dave Gerrard, 17, pushed Kinley aside and clicked the "I Am Over 18" button himself, at which point a tactical police unit broke down his bedroom door and arrested him.

[Meredith R. Miller]

Court Addresses Modification of Clickwrap Agreement

The U.S. District Court for the District of Maryland (Titus, J.) recently had occasion to address the modification of a clickwrap agreement. Plaintiffs, real estate appraisers, used defendant FNC’s internet-based service, “Appraisal Port.” Plaintiffs brought a class action against FNC, alleging that FNC falsely claimed that information entered in Appraisal Port would be kept private and would be transmitted securely. FNC moved to stay the proceedings pending arbitration of plaintiffs’ claims, pointing to an arbitration provision contained in the user agreements that plaintiffs acknowledged when joining the service.

Plaintiffs argued that they were not parties to a valid arbitration agreement because FNC amended their user agreements during their memberships, replacing them with a new agreement that did not include any arbitration clause. FNC recognized that it “attempted” to so amend the user agreements but argued that its attempt “failed” because plaintiffs did not acknowledge the changes. Based on the language of the original clickwrap agreement, which included a clause about modification, the court concluded that the modification was effective and, thus, plaintiffs were not bound to arbitrate. The court denied the motion to stay.

(Note the interesting posture here. Usually, the party seeking arbitration is arguing effective unilateral modification to include arbitration terms; here, it is the parties opposing arbitration that point to a unilateral modification as effective, because the modification did not include arbitration terms).

(The court's reasoning is after the jump).

The court reasoned:

FNC argues that any modification to the prior user agreements was ineffective because it neither (1) complied with specific provisions in the prior agreement governing such modifications nor (2) complied with general principles of law governing the formation of contracts, including notice to the existing users. In considering these arguments, the Court should first clarify that, while parties may agree in advance to a method for modifying an agreement, such method is not exclusive, and the parties are free to choose another method of modification, thereby waiving the originally agreed provisions for modification. See 17A C.J. S. Contracts § 409. As explained herein, the Court concludes that FNC's modification through issuance of the 2005 Agreement either complied with the explicit provisions of the 2000 and 2002 Agreements, or, alternatively, such provisions were otherwise waived by the Arbitration Plaintiffs. 
 (a) Compliance with Modification Provisions

Both the 2000 and 2002 Agreements contain the following provision permitting FNC to modify the agreements unilaterally under certain conditions:

This User Agreement may be modified at any time. Whenever changes are made, the revised agreement will be posted at this location. New terms will be effective 30 days after the changes are posted. You will be asked to acknowledge your acceptance of the changes the first time you log in after the changes have been made.

(Emphasis added.) Under the plain terms of the first sentence, therefore, the 2000 and 2002 Agreements purport to give FNC the unilateral right to modify them at any time. FNC argues that the second, third, and fourth sentences in the modification paragraph create mandatory conditions that must be satisfied before a modification is valid. As discussed above, it is undisputed that FNC did not ask previously registered users to acknowledge the 2005 Agreement the first time they logged in after it was introduced or, for that matter, at any time they logged in. For this reason, FNC contends, its attempted modification was ineffective.


The Court disagrees for two reasons. First, the modification provisions of the 2000 and 2002 Agreements are, at the very least, ambiguous as to whether asking the user to “acknowledge” acceptance of the changes is truly a necessary condition to effect a modification. In a case cited by FNC, the Supreme Court of Mississippi ruled that “[a]mbiguities in a contract are to be construed against the party who drafted the contract.” Union Planters Bank, Nat'l Ass'n v. Rogers, 912 So.2d 116, 120 (Miss.2005)(citing Miss. Transp. Comm'n v. Ronald Adams Contractor, Inc. ., 753 So.2d 1077, 1084)). FNC cites Rogers, of course, because the Supreme Court there found that a bank customer's continued use of an account by itself was insufficient to effect a modification, at least where a prior mailing had stated that the customer's agreement would be effected by “signing a signature card and using your account.” 912 So.2d at 118-19. Critical to the result in Rogers, however, was the fact that it was the drafter of the modification provisions who sought to validate its own attempted modification, not invalidate it, as FNC seeks to do here. In stating the above-quoted passage as one of the bases of its decision, therefore, Rogers stands less for the strict construction of modification provisions in general, than it does for the strict construction of them against the drafter. (More on Rogers, infra.)

Turning to the facts of this case, the Court recognizes that all three sentences in the modification provision in the 2000 and 2002 Agreements include the phrase “will be.” Only one of those sentences, however, includes the effectiveness of the modification as being linked to the “will be” language. Specifically, while the second sentence states that the new terms “will be posted,” and the fourth sentence states that the user “will be asked to acknowledge,” only the third sentence purports to state explicitly the condition(s) under which the new, unilaterally imposed terms “will be effective.” By using the phrase “will be effective” in this manner, the third sentence creates an ambiguity because it is at least capable of being understood as stating that posting of the new terms for thirty days is not merely one in a series of necessary conditions but is, in fact, sufficient by itself to effect a modification. The implication of such a reading, of course, is that asking the user for acknowledgment is not necessary to effect a modification, but is rather mere “icing on the cake.”

The Court recognizes that FNC stated in the fourth sentence that it would “ask” prior users to acknowledge their acceptance of the changes the first time they log in after the new terms are posted. The question is: what are the consequences if it fails to do so? Nothing in the fourth sentence or in any other term explicitly indicates that asking for customer acknowledgment is a condition precedent to the effectiveness of FNC's unilateral modifications. The fourth sentence simply does not state that the revisions “will be effective” after they have been posted for thirty days and after users are asked to acknowledge their acceptance. And while such a requirement, as drafted, is capable of being read as a condition precedent to the effectiveness of a modification, such a reading is not clear in light of the explicit provision just before it that effectiveness “will” occur after the new terms are posted for thirty days. In sum, where it is ambiguous whether such an acknowledgment inquiry is a condition precedent to the effectiveness of a modification, and where FNC's legal position would benefit from its admitted failure to do so, the Court construes the language against FNC and concludes that the 2000 and 2002 Agreements permit modification by FNC at any time and that such modifications will be effective after they are posted for thirty days.

(footnotes omitted). Other interesting arguments were addressed in the opinion, including plaintiffs' argument that FNC should be precluded by the doctrines of estoppel and waiver from arguing that the 2005 Agreement does not apply.

Harold H. Huggins Realty, Inc. v. FNC, Inc., --- F.Supp.2d ----, 2008 WL 4135997
( D.Md. Aug. 28, 2008).

[Meredith R. Miller]

Court Addresses Class Action Waiver in Commercial Contract

Plaintiff advertisers commenced a class action suit against Yahoo!, alleging that Yahoo! breached its advertising agreement in numerous ways. For example, plaintiffs alleged that Yahoo! promised to place plaintiffs' advertisements in a way that targeted plaintiffs' likely customers but, instead, Yahoo! placed ads in an untargeted way.

Yahoo! moved for summary judgment, pointing to a class action waiver in its standard form advertising agreement. The plaintiffs argued that this class action waiver was unenforceable. Yahoo! argued that the Discover Bank line of cases did not apply because the advertisement agreement was not a consumer contract but, rather, between two commercial entities. The District Court for the Central District of California held that "although Discover Bank's holding addresses only consumer contracts, nothing in that decision forecloses the possibility that a class action in a commercial contract may be deemed unconscionable under certain circumstances." The court then denied Yahoo!'s motion for summary judgment, holding that genuine issues of material fact existed concerning the enforceability of the class action waiver.

In re Yahoo! Litigation, __ FRD __, 2008 WL 1882786 (C.D. Cal. 2008)

[Meredith R. Miller]

Open Source Software: Why the Difference between Conditions and Covenants Matters

Yesterday, on the Electronic Frontier Foundation’s Deeplinks Blog, Michael Kwun keenly asked and addressed the following questions:

Imagine that you write some code, and offer it to the public under an open source license that requires that if someone distributes modified versions of the code, the modified versions also be open sourced. Now assume someone distributes modified versions of your code, but fails to open source the modified code. Do you have a claim for breach of contract? Or for copyright infringement? Or both? And why should anyone other than a law professor care?

After noting the significant differences between copyright and contract law, he explains why the situation he raises is not so hypothetical:

[I]t is very close to the facts in Jacobsen v. Katzer, a case concerning open sourced code from the Java Model Railroad Interface group. Today, the Federal Circuit vacated a district court decision [PDF] that had held that only contract law was implicated by the defendants' alleged breach of the open source license applicable to the JMRI code.

The court concluded that the key question was whether the parts of the agreement the defendants allegedly breached were mere covenants (things the defendants agreed not to do when they accepted the license), or also conditions of the license (things that must be satisfied in order for the defendants to be licensed at all). Because the license at issue went out of its way to state that licensees' obligations were "conditions," the court concluded that if the defendants were in breach, the plaintiff could sue for copyright infringement. There are a lot of things in this opinion that the open source community should cheer. The opinion notes that open source software "can often be written and debugged faster and at lower cost than if the copyright holder were required to do all of the work independently," and points out that "[t]here are substantial benefits, including economic benefits, to the creation and distribution of copyrighted works under public licenses that range far beyond traditional license royalties." And the court emphatically concluded that "[c]opyright holders who engage in open source licensing have the right to control the modification and distribution of copyrighted material."

While we're pleased to see a panel of learned judges endorse the legal foundations of the open source software paradigm, the decision may also encourage proprietary software vendors who frequently fill their "end user license agreements" with restrictions that are denominated as "conditions" on the license. If violating a "condition" in a EULA results in copyright infringement liability, what's to stop a software vendor from imposing conditions that are unrelated to copyright law (e.g. an agreement not to disparage the copyright owner, or to wear pink bunny ears on Tuesdays), or even antithetical to copyright law (e.g. a waiver of fair use rights)?

For a view of the dark side of "conditions" imposed in proprietary software licenses, consider the "thou shalt not run software we don't like" terms that Blizzard imposes on those who purchase World of Warcraft software, terms that recently were upheld in court despite a very astute amicus brief by Public Knowledge.

He promises this issue is likely to arise again in the future, so we’ll have to stay tuned.

[Meredith R. Miller]

Blame it on the Lawyers: NDA for iPhone Application Developers

iPhone enthusiasts may have noticed that many of the applications available in Apple's much-hyped "app store" fall short. Many of the applications are buggy and have stability and crashing issues. Blame it on the lawyers!

Many application developers would tell you the reason is a Non-Disclosure Agreement ("NDA") that Apple required developers to agree to before they could download and use the iPhone software development kit (SDK). SDK is the only sanctioned way to develop applications for the iPhone and iTouch. Apple is treating the contents of the development kit as "confidential information," and the NDA prohibits discussion of any "confidential information." To say the least, the NDA has application developers frustrated and angry.
While the NDA might have made sense when SDK was in its "beta period," most developers would now say that the utility of the NDA has run its course, and is actually doing more harm than good. Developers are accustomed to collaborating in various ways (online forums, blogs, mailing lists), all of which is prohibited by the NDA. It also prevents new developers from learning code from other, more seasoned developers. Likewise, the NDA silences authors and publishers of programming books about SDK. There is even talk that a conference for SDK developers is threatened by the NDA.

The NDA eliminates collaboration, which threatens the quality of the applications developed. It also threatens the reputation of Apple and the social norm of collaboration among developers:

Unfortunately for student Jeffrey Long, his experience learning to develop for the iPhone "has been like no other experience I've had with computers," he wrote. "It’s been a much, much lonelier one." Certainly, this is not the reputation Apple wants among developers for its hot new mobile platform

.

[Meredith R. Miller]

We Don't Need No Stinkin' Lawyers!

Who says we don't?  Business 2.0 Magazine, that's who!  In it's August 2007 issue, Business 2.0  features the "29 Best Business Ideas in the World," and the very best idea of all -- that's right, #1 -- is "let's get rid of the lawyers." 

Ah, you say, but that idea is at least as old as Shakespeare,
True enough, says Spanish startup, Negotiation, but it nonetheless has launched "Tractis," a web platform that, according to Business 2.0 "lets users create, manage, and execute contracts online -- no lawyers required." 

The article in Business 2.0 goes on to quote Negotiation CEO David Blanco as follows: "The biggest problem with online contracts now is enforcement.  If you reach an agreement with another person and something goes wrong, how do you enforce the contract and in which jurisdiction?  How do you know the true identity of someone calling himself snake69@hotmail.com?  Tractis' proposed solution is "a comprehensive range of trust and verification systems." 

Hmmm.  I wonder if Mr. Blanco has identified the biggest problem or only the initial problem.  What happens once you identify snake69 and you want to sue him?  Don't you need a stinkin' lawyer for that?  And what if snake69 has a stinkin' lawyer and a contract that he knows will favor him because his stinkin' lawyer told him which one to choose on the Tractis database?

Hat tip: James Saqui

[Jeremy Telman]

Changing One's Mind

An interesting story via Australia, that (yes) involves eBay:

An Australian court ordered a man to hand over a vintage plane worth about $215,000 after he tried to back out of an eBay auction, a newspaper reported Friday.

The New South Wales state Supreme Court ordered Vin Thomas to complete the deal after he changed his mind about selling the 1946 World War II Wirraway plane he had placed on the Internet auction site last year, the Sydney Morning Herald reported.

Peter Smythe, a Australian warplane enthusiast, was the only person to bid on the item, matching the $128,640 reserve price just moments before the auction ended in August last year.

But Thomas had already agreed to sell the plane to someone else for $85,800 more than Smythe's offer, and backed out of the sale, the newspaper said.

Smythe took Thomas to court, hoping a judge would force him to follow through with the deal.

Judge Nigel Rein agreed, saying the eBay auction formed "a binding contract between the plaintiff and the defendant and ... should be specifically enforced."

[Miriam Cherry / Hat tip: Beth Winston (Catholic)]

Google's Adwords Contract Upheld--Feldman v. Google

[cross posted to Technology & Marketing Law Blog]

Feldman v. Google, Inc., 2007 WL 966011 (E.D. Pa. March 29, 2007)

A law firm advertised via Google AdWords and allegedly was click frauded.  The lawyer then sued (on behalf of his law firm) Google for click fraud in Pennsylvania.  Google defended based on its AdWords contract, which has a mandatory venue provision specifying that all lawsuits shall be brought in California.  We saw virtually identical facts in the initial Person v. Google case, which also involved the AdWords contract (though that lawsuit was brought in NY).  The result was the same in both cases--each time, the court upheld the AdWords contract's mandatory venue clause and transferred the case to California.

Mechanically, Google's contract formation process is bullet-proof.  As the court describes:

To open an AdWords account, an advertiser had to have gone through a series of steps in an online sign-up process. (Hsu Decl. ¶ 3.) To activate the AdWords account, the advertiser had to have visited his account page, where he was shown the AdWords contract. (Hsu Decl. ¶ 4.)

Toward the top of the page displaying the AdWords contract, a notice in bold print appeared and stated, “Carefully read the following terms and conditions. If you agree with these terms, indicate your assent below.” (Hsu Decl. ¶ 4.) The terms and conditions were offered in a window, with a scroll bar that allowed the advertiser to scroll down and read the entire contract. The contract itself included the pre-amble and seven paragraphs, in twelve-point font. The contract's pre-amble, the first paragraph, and part of the second paragraph were clearly visible before scrolling down to read the rest of the contract. The preamble, visible at first impression, stated that consent to the terms listed in the Agreement constituted a binding agreement with Google. A link to a printer-friendly version of the contract was offered at the top of the contract window for the advertiser who would rather read the contract printed on paper or view it on a full-screen instead of scrolling down the window. (Hsu Decl. ¶ 5.)

At the bottom of the webpage, viewable without scrolling down, was a box and the words, “Yes, I agree to the above terms and conditions.” (Hsu Decl. ¶ 4.) The advertiser had to have clicked on this box in order to proceed to the next step. (Hsu Decl. ¶ 6.) If the advertiser did not click on “Yes, I agree ...” and instead tried to click the “Continue” button at the bottom of the webpage, the advertiser would have been returned to the same page and could not advance to the next step. If the advertiser did not agree to the AdWords contract, he could not activate his account, place any ads, or incur any charges. Plaintiff had an account activated. He placed ads and charges were incurred.

I always tell my students that the very best online contracts are "mandatory non-leaky clickthrough" agreements.  Like this one.

To get around this, the lawyer claims he was ignorant of the mandatory venue clause because he didn't read the contract.  Not a very persuasive argument.  Every lawyer learns very, very early in their first year Contracts course that a party is bound to contract terms they assent to, even if they chose not to read the terms. 

The court also rejects the plaintiff's other attacks on the contract:
* the contract didn't contain a definite price.  However, the contract contained the exact formula for computing the price.
* procedural unconscionability.  The court rejects this because the "Plaintiff was a sophisticated purchaser, was not in any way pressured to agree to the AdWords Agreement, was capable of understanding the Agreement's terms, consented to them, and could have rejected the Agreement with impunity."
* substantive unconscionability.  The court finds many of the contract terms reasonable.

This case is a nice win for Google for two reasons.  First, by upholding the mandatory venue clause, it should inhibit AdWords advertisers from suing Google all over the country.  Therefore, all lawsuits will have to be in Google's home court, which raises the costs of lawsuits for most plaintiffs and gives Google some other home-court advantages.  Second, by holding that this plaintiff is bound by the AdWords contract and those terms aren't substantively unconscionable, Google can now invoke its risk management clauses (like the warranty disclaimers, limits of liability, etc.) to cut the economic heart out of the click fraud claim.

[Eric Goldman]

Will the Virtual World Yield Real Law Suits?

The BBC recently reported on a case in which a Chinese online gamer killed a friend by stabbing him in the chest with a real knife after learning that the friend had sold for real money a virtual sword that the accused had won in an online game and then loaned to the victim. 

In Virtual Worlds, Real Damages, Jason Archinaco speculates on the value of a virtual horse, Amercian Hero, "deactivated" by Virtual Sports, Inc. after setting a virtual world record for the distance of 1 1/4 miles.  Apparently, Virtual Sports thought it wasn't fair to the other virtual horses to have one really, really good one.  Virtual Sports also noted that "the owner is being compensated."

This suggests that the virtual world is already governed by real law and that disputes arising in the virtual world will be a source of employment for real lawyers, including contracts lawyers.  Woohoo!  Indeed, the Chinese stabbing could have been prevented if Chinese law recognized rights in virtual property. 

Props to my good friend, Rebecca Spang (Indiana University, Department of History).  Rebecca passed Jason Archinaco's article on to me after discovering it while working on the syllabus for her new course on the history of money. 

[Jeremy Telman]

Cool Gadgets: Don't Bother Shopping Around

In this time of frenzied holiday shopping, this Slate.com article by Sean Cooper explains why there is no price variation among retailers selling Ipods. First, Cooper explains that price variation is the norm of online retailers, and an intentional marketing strategy:

Hal Varian, an economist at U.C. Berkeley and co-author of Information Rules: A Strategic Guide to the Network Economy, argues that sellers offer the same products at vastly different prices as an intentional marketing strategy. (This phenomenon is what economists call price dispersion.) Imagine that everybody sold 42-inch Philips plasma-screen TVs for the same price. There would be no reason to comparison shop, consumers would always buy from the same places, and e-tailers' profits would stagnate. According to Varian, retailers who vary their prices over time—increasing them one week, then discounting the next—create the kind of price instability that encourages consumers to shop around. The end result is that shoppers visit several sites before making a purchase, which is exactly what retailers want us to do.

Research supports Varian's view. In 2003, a group of economists led by Michael Baye of Indiana University compared prices for 36 consumer electronics products purchased online. Another study by the same team analyzed millions of price points for hundreds of products over an eight-month period. Both studies found significant price variation, regardless of how many retailers sold the product in question. What's more, they found that the site offering the lowest price for any given product was in constant flux, meaning that e-tailers were raising and lowering their prices at will. As a result, Baye's team came to the conclusion that price dispersion on the Internet is an "equilibrium phenomenon"—the natural state of a competitive market.

Then, why is it that, wherever you look, the 8 gig Ipod has the same price tag? It is all about MAP, Cooper explains:

No, the answer isn't that Apple illegally manages prices. In reality, Steve Jobs and Co. use an accepted, if controversial, tactic, a retail strategy called minimum advertised price, to discourage resellers from discounting. The minimum advertised price, or MAP, is the absolute lowest price retailers are allowed to advertise a product for. (If you've ever shopped at a site that won't reveal a product's price until you add it to your shopping cart, MAP is the reason.) MAP is usually enforced through marketing subsidies offered by a manufacturer to its resellers. If a retailer keeps prices at or above the minimum advertised price, then a manufacturer like Apple will give them money to help advertise. If a store's price dips too low, on the other hand, the manufacturer can withdraw these advertising subsidies.

MAP helps smaller retailers compete, since it aids in reducing the kind of cutthroat price competition from big-box stores that can put them out of business. But what's in it for a company like Apple? Stable prices are important to the company, because it's a manufacturer and a retailer (both online and through its chain of Apple Stores). If Apple resellers dropped prices on iPods and iMacs—selling at or below cost to get customers in the door, or as a way to cross-sell stuff like software or iPod skins—they could squeeze the Apple Stores out of their own markets.

There is a downside to all that stability, however. By limiting how low sellers can go, MAP keeps prices artificially high (or at least higher than they might otherwise be with unfettered price competition). In 2000, the Federal Trade Commission forced the five major record labels to suspend MAP policies that it deemed excessively restrictive. MAP benefits manufacturers and, to a lesser extent, retailers, but not necessarily consumers.

Use of MAP in some form is fairly common in the gadget world, though few companies seem to pursue it with the rigor of Apple or Sony (both of whom operate retail stores). Shawn DuBravac of the Consumer Electronics Association believes most gadget manufacturers prefer to let the market determine price, and the dispersion described by Varian and Baye suggests he's probably right. (None of the companies I contacted for this story would discuss their pricing strategies with me.) That means good deals for shoppers willing to search them out.

[Meredith R. Miller]

Hell.com: hot address?

This past Friday, the domain name Hell.com went up for sale.  Before the auction, the W$J reported (subscription required):

Hell.com is scheduled to be offered in a live auction organizers predict will draw bids of more than $1 million. The hot market for domain names, the addresses people often type in for Web sites, is being fueled by the surge in Internet advertising and the ease with which domain owners can make money from ads brokered by the likes of Google Inc. and Yahoo Inc.

Sex.com sold for about $12 million earlier this year and Diamond.com changed hands for $7.5 million. The big-money domain-name sales echo an earlier boom, when Business.com fetched $7.5 million in 1999. Today's live auction of 300 names, by Seevast Corp.'s Moniker unit, includes more than a handful it predicts will generate bids of more than $1 million, including Iran.com, Auction.com and Elections.com.

The company that owns Hell.com marketed the sale as "the opportunity to redefine what hell means, at least on the Internet."  The company's founder set the reserve price at $2.3 million; but a domain-name appraiser put Hell.com's value at $625,000 -- based (of course?) on comparison to the revenue from advertisements on Heaven.com.

Yesterday, the W$J reported: "Hell.com failed to sell during a live auction of Internet domain names on Friday, as no bidders met the $2.3 million reserve price set by its seller."

[Meredith R. Miller]

Online Clickthrough Agreements Upheld

In my Cyberlaw course, I argue to my students that the best way to form a valid online agreement is through a "mandatory non-leaky clickthrough" agreement.  By this, I mean that, to reach their destination, every user must go through a mandatory process that requires the user to affirmatively click that they are agreeing to the contract terms.  These contracts generally have fared well when considered by courts--at least, from a formation standpoint.  (See my list of online contract formation cases here).

For a textbook example of how the courts evaluate mandatory non-leaky clickthrough agreements, consider ESL Worldwide.com, Inc. v. Interland, Inc., 06-CV-2503 (S.D.N.Y. June 21, 2006).  In that case, a disgruntled customer sued a web host because the hosted website was allegedly offline for 7 months.  The web host moved to dismiss based on the forum selection clause in its contract.  The court says:

First, Shin may not remember click the icon, but Defendants' records reveal that he did, in fact, so click...Furthermore, because of the manner in which the website is organized, without having clicked "Accept," Shin would not have been allowed to access certain other sections of the site, and it is uncontested that Shin did enter those sections...Finally, the text above the "Accept" icon clearly states that by clicking "Accept," a user is bound to the new Terms of Services, and such terms, which include the forum selection clause, are easily accessed by clicking on the accompanying link.

As you can see, an airtight formation process makes it easy for the court.  Case dismissed.

Google recently won a similar outcome in Person v. Google, where Google successfully moved to change venues based on the venue selection clause in its mandatory clickthrough AdWords contract.  Person v. Google Inc., 2006 WL 2884444 (S.D.N.Y. Oct. 11, 2006).

[Eric Goldman]

E-mail and the Statute of Frauds

Those who teach Bazak Int'l v. Mast Indus., on the UCC's merchant exception to the Statute of Frauds, might be interested in a more recent case also involving Bazak and the Statute of Frauds, Bazak Int'l v. Tarrant Apparel Group.* 

In Bazak v. Tarrant, the S.D.N.Y. held that an e-mail sent between merchants could serve as a confirmation of an earlier agreement pursuant to the UCC's "merchant exception to the Statute of Frauds (Section 2-201(2)). 

The case is significant in two respects.  First, Bazak is two-for-two on this issue.  Second, it addresses the tricky question of whether e-mails can serve as confirmations.  The difficulties with the UCC's "merchant exception" are manifest in the New York Court of Appeals' 4-3 decision in Bazak v. Mast Indus.  Those difficulties are compounded in Bazak v. Tarrant, because the recipient of the allegedly confirmatory e-mail claims never to have opened the e-mail or its attachment. The District Court nonetheless denied Tarrant's motion to dismiss based on the Statute of Frauds, as material issues of fact regarding the existence of an agreement remained for resolution.

*Thanks to my student who, in violation of my policy on laptop use, found this case for me using Google during class earlier this week

[Jeremy Telman]

eBay User Agreement Enforced (Twice!)

The eBay user agreement has to be one of the most widely read/entered-into contracts of all time.  eBay claims nearly 200 million registered users, all of whom putatively entered into the agreement.  Yet, despite this ubiquity, surprisingly few court cases have addressed its validity.  Until very recently, I knew of only three: Bergraft (an unpublished NJ state trial court opinion), Ploharski (an unpublished ruling from ND Ga), and Grace (a CA appellate court case that was subsequently depublished by the CA Supreme Court).

Then, in the last 10 days, two cases addressing eBay's user agreement showed up in Westlaw, including what I think is the first binding appellate court precedent (now that the Grace case is depublished).  Both cases efficiently, and without much fuss, upheld the formation and terms of the eBay user agreement.

In Nazaruk v. eBay, 2006 WL 2666429 (D. Utah Sept. 14, 2006), the plaintiff sued over feedback left in eBay's feedback forum.  eBay moved to dismiss based on (among other things) improper venue due to the mandatory venue clause in the user agreement.  The court agreed.  This must be particularly satisfying for eBay because a previous case, Comb v. PayPal, had deemed its mandatory arbitration clause unconscionable (the case interpreted PayPal's agreement, not eBay's, but they were virtually identical at the time).

In Durick v. eBay, 2006 WL 2672795 (Oho Ct. App. Sept. 11, 2006), the plaintiff tried to sell some items that were putatively prohibited by eBay's user agreement.  eBay suspended the plaintiff, who then sued eBay claiming that it was in breach of contract for suspending him.  The court found that eBay's user agreement was binding on the plaintiff, it clearly prohibited the items, and thus eBay didn't breach the agreement by suspending him. 

Among other interesting aspects, the actual terms restricting the items in question were located in two policies that were incorporated by reference into eBay's general prohibited items policy, which in turn was incorporated by reference into eBay's user agreement.  Thus, like the user interaction process in the Specht case, the restrictions were two links away from the page where the user clicked "I agree."  The court didn't seem fazed at all by this multiple-level incorporation by reference; it was not even acknowledged expressly.

[Eric Goldman]

EULAs in English

Virtually every human being who has ever used a computer has a contract with Microsoft Corp.  The contract is the End User License Agreement that comes with Windows software.  The EULA is a formidable piece of legal drafting, but (rather like the software it covers) it's not the most user-friendly thing around.

The folks at LINUX Advocate -- whose goal in life seems to be turning MS Windows into a 21st century Betamax -- have come up with an English translation of the EULA.  Interestingly, the language in the license agreement for LINUX is somewhat more understandable than Microsoft's, but you wind up getting much the same remedies:

. . . THERE IS NO WARRANTY FOR THE PROGRAM, TO THE EXTENT PERMITTED BY APPLICABLE LAW. EXCEPT WHEN OTHERWISE STATED IN WRITING THE COPYRIGHT HOLDERS AND/OR OTHER PARTIES PROVIDE THE PROGRAM "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE PROGRAM IS WITH YOU. SHOULD THE PROGRAM PROVE DEFECTIVE, YOU ASSUME THE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION.

IN NO EVENT UNLESS REQUIRED BY APPLICABLE LAW OR AGREED TO IN WRITING WILL ANY COPYRIGHT HOLDER, OR ANY OTHER PARTY WHO MAY MODIFY AND/OR REDISTRIBUTE THE PROGRAM AS PERMITTED ABOVE, BE LIABLE TO YOU FOR DAMAGES, INCLUDING ANY GENERAL, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITY TO USE THE PROGRAM (INCLUDING BUT NOT LIMITED TO LOSS OF DATA OR DATA BEING RENDERED INACCURATE OR LOSSES SUSTAINED BY YOU OR THIRD PARTIES OR A FAILURE OF THE PROGRAM TO OPERATE WITH ANY OTHER PROGRAMS), EVEN IF SUCH HOLDER OR OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

[Frank Snyder -- hat tip to InfoWorld]

Contract: Saved from Death by Consumer Fraud Statute?

The Seventh Circuit (Easterbrook, Rovner, Evans) recently held that a hotel guest's allegation that the hotel's website misrepresented the room rate was not actionable as consumer fraud but, rather, sounded in breach of contract.

Using the hyatt.com website, Britt Shaw made a reservation for a 3-night hotel stay at the Ararat Park Hyatt in Moscow, Russia. The website established a nightly room rate of $502.  However, the website cautioned that the conversion represented an approximate price based on the recent exchange rates, and that "the price paid at the time of hotel checkout will be of the currency initially quoted and displayed."

Shaw stayed at the hotel for three nights and, upon checkout, his bill was provided in Russian rubles. Shaw paid the bill using his American Express card, which charged him a roughly 3182 rubles for the room, taxes, and other amenities. Shaw’s hotel bill reflected a hotel exchange rate of 32 Russian rubles per United States dollar, whereas the official exchange rate set by the Central Bank of Russia on the date of check-out was 28.01 Russian rubles per dollar. The result: Shaw paid approximately 14% more for his room in U.S. dollars than the rate promised by the website.

Shaw pursued a class action against Hyatt, alleging unjust enrichment and violation of the Illinois Consumer Fraud Act.*  Shaw did not allege breach of contract, maintaining throughout the proceedings that there was no contract between him and Hyatt.  The trial court granted Hyatt's motion to dismiss both claims, and the Seventh Circuit affirmed.

The Seventh Circuit held that there was an express contract between Shaw and Hyatt, and that ultimately resolved both of his claims.  The court held that a breach of a contractual promise, without more, is not actionable under the Consumer Fraud Act.The court wrote:

What plaintiff calls "consumer fraud" or "deception" is simply defendants' failure to fulfill their contractual obligations. Were our courts to accept plaintiff's assertion that promises that go unfulfilled are actionable under the Consumer Fraud Act, consumer plaintiffs could convert any suit for breach of contract into a consumer fraud action. However, it is settled that the Consumer Fraud Act was not intended to apply to every contract dispute or to supplement every breach of contract claim with a redundant remedy. [citation omitted] We believe that a "deceptive act or practice" involves more than the mere fact that a defendant promised something and then failed to do it. That type of "misrepresentation" occurs every time a defendant breaches a contract.

Here's a link to the oral argument, with an enlightening set of questioning concerning why Plaintiff did not allege that Hyatt.com breached an express contract to provide the room at the rate promised on the website.

[*Apparently, the website specified that any disputes would be governed by Illinois law.  Shaw booked the Moscow hotel room while on the internet in London; the parties disputed whether Shaw had established the requisite nexus of contact with Illinois to form a basis for the application of the Consumer Fraud Act to the transaction.]

Shaw v. Hyatt Int'l Corp, __ F.3d __, 2006 WL 2473417 (7th Cir. Aug. 30, 2006). 

[Meredith R. Miller]

Does Contract or Tort Law Protect an Agent/Lessee's Electronic Data?

Under New York law, is a claim of conversion cognizable for electronic data? Yesterday, the Second Circuit Court of Appeals held that it isn’t clear under New York law, and certified the question to New York's highest court. The Second Circuit also held that no rational trier of fact could conclude that an insurance company owed a contractual obligation to a former agent not to seize policyholder information a computer that the agent leased from the company.

Plaintiff Louis Thyroff was associated with Nationwide Mutual Insurance Company (“Nationwide”) as an insurance agent for 21 years.  When the relationship began in 1988, Thyroff and Nationwide entered into an Agent’s Agreement, which provided a non-compete clause that allowed competition only if certain enumerated requirements were met. Thryoff was also required to lease an agency-automation system, which consisted of hardware and software from Nationwide. Thyroff relied on this system to keep track of customer data.

In September of 2000, Nationwide sent Thyroff a letter canceling the Agent’s Agreement. The following day, without notice, Nationwide denied Thryoff access to the agency-automation system, and all his client files contained therein.

Thryoff sued Nationwide for (1) conversion of the personal and business data contained on the computer and (2) breach of contract for depriving him of access to business information necessary to compete once the Agency’s Agreement expired. In an unpublished opinion, the District Court dismissed the conversion claim and granted Nationwide summary judgment on the breach of contract claim. Thyroff appealed to the Second Circuit. 

In what is perhaps the most interesting aspect of the case (and has much less to do with contract law), the Second Circuit has certified the following question to the New York Court of Appeals: Is a claim of conversion cognizable for electronic data?

In addition, the Second Circuit affirmed the grant of summary judgment to Nationwide on Thyroff’s breach of contract claim. Thryoff asserted that Nationwide owed a contractual obligation not to seize policyholder information from the leased computer without first providing Thyroff with an opportunity to duplicate it. Thryoff attempted to cobble together this duty by pointing to (1) a section of his Agent’s Agreement that allowed him to compete if certain requirements were met and (2) the implied covenant of good faith and fair dealing. The Second Circuit interpreted the non-compete provision to allow Thryoff to compete in certain situations, but did not interpret it as requiring Nationwide to provide Thryoff with a means to compete. The court determined that “despite Thyroff’s evidence that Nationwide may have acted in bad faith in the manner in which it removed the policyholder information from Thryoff’s possession, no rational trier of fact could conclude that in so doing Nationwide violated any provision of the contract." The court held that the Agent’s Agreement, coupled with the implied covenant of good faith, could not be read to impose any affirmative obligation on Nationwide. 

Thryoff v. Nationwide Mutual Ins. Co., __ F.3d __ (2d Cir. Aug. 21, 2006).

[Meredith R. Miller]