Legally enforceable? Discuss in the comments…
Articles by Tim Lee 
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I made the point last week that freedom of contract includes the right not to be party to contracts without your consent, and that consent has to involve some sort of affirmative action. Shrink-wrap contracts that are presented only after a sale is complete don’t cut it in my view. If the contract wasn’t available for review at the point of sale, then I don’t care what might be in the box. You didn’t consent to the contract.
Now, some people might (and in the comments to previous posts, did) claim that this is just nitpicking, and that the really important thing is to promote economic efficiency by making contract formation easier. On this theory, contract negotiations are a transaction cost, and it’s economically beneficial to lower transaction costs as much as possible. So even if you haven’t technically agreed to the shrink-wrap EULA before you leave Best Buy, some people might argue that you “should have known” there would be a EULA in the box, and therefore it’s economically efficient to bind you to the contract unless you return the product to the store.
The problem with this argument is that it focuses myopically on the costs of contract negotiation to the exclusion of other costs that in many cases are much more important. It should be remembered that every contract signed is a prelude to possible state coercion if the contract is broken. Like all other kinds of coercion, the possibility of contract-related litigation creates uncertainty and other deadweight costs. In addition, the act of offering contracts imposes a deadweight cost. Every time I’m presented with a contract, I have to at least skim through it to make sure that the terms are acceptable. A society in which contract formation is extremely cheap for one party will be a society in which other people have to spend a lot of time scrutinizing the contracts they offer. Finally, contracts impose costs on the court system. A legal system that makes contracts to cheap to create will lead to too much taxpayer money being wasted on contract litigation.
All of which is to say that economic efficiency is not promoted by making contract formation as cheap as possible. Rather, the goal should be to align incentives so that a party only offers a contract if its benefits to all parties outweigh its expected costs. One thing that we should particularly try to avoid is a situation in which offering contracts is almost costless to one party, but reviewing them is expensive for the other party. Because then the offering party will offer inefficiently many contracts favorable to itself, and its counterparties will accept inefficiently many contracts because the costs of scrutinizing them individually is too high.
In contrast, if things are structured so that each party bears roughly half the costs of contract negotiation, then each party is only going to propose a formal, written contract if he believes that the benefits of doing so will outweigh the costs to both parties. This is one of the good things about paper contract negotiations between flesh-and-blood people: If you give me a long contract to sign, you’re going to have to stand there and wait while I read the contract and decide if I want to sign it. Since standing around is a waste of your time, you’re only going to do that if you believe the transaction can’t happen without it. And you’re going to try to make the contract as short as possible so you don’t have to stand around too long.
In the vast majority of business transactions, the default UCC terms work just fine. Grocery stores don’t try to attach contracts to the items they sell because it would slow down the checkout line too much if customers had to stand around reading their Banana Licensing Agreements before they were allowed to take their groceries home.
The reason shrinkwrap licenses on software are more popular than supermarket checkout contracts is not because software sales are some kind of exotic financial transaction that require special contractual terms. The UCC defaults can and do work just fine for software. Rather, the reason software firms make extensive use of EULAs is because they’ve found a clever gimmick that allows them to use copyright law as a way to bypass the ordinary rules of contract law and foist almost all the costs of contract negotiation onto the customer.
If a grocery store checkout clerk slipped a Banana Licensing Agreement into your grocery bag, no court of law would regard that as an enforceable contract. But software vendors have been pushing the legal fiction that software is licensed rather than sold. And if software is licensed rather than sold, then using software without accepting the license agreement is copyright infringement, which operates under an entirely different set of rules than ordinary contract law.
This claim is pretty clearly contrary to copyright’s First Sale Doctrine, and some courts have explicitly rejected it in some cases, but other courts have upheld it, and software vendors find the ability to skirt the ordinary rules of contract law so convenient that they keep trying.
But as a policy matter, there isn’t any good reason to let them get away with it. It would be bad policy to allow grocery stores to attach Banana License Agreements to their customers’ banana purchases by putting a BLA in each grocery bag, and it’s equally bad policy to allow software vendors to bind their customers to contracts they’re not able to review until after a sale is made. If software vendors want the software they sell to come with particular contractual restrictions, they should have the clerk at Best Buy provide the customer with a copy of the license agreement and require her to sign it before she can leave the store. If software vendors aren’t willing to put their customers through that hassle (and I’d bet money that they’re not) then it’s obviously not that important to them for their products to come with contractual restrictions attached, in which case the right outcome is for the software to be sold without special contractual restrictions, the same way that movies, music, books, and other creative works do.
Alex’s excellent post on the enforceability of shrink-wrap contracts produced a lively debate that’s worth checking out. In particular, my friend Wilson mounts a spirited defense of the proposition that if a customer has a reasonable expectation that a Gateway computer will arrive with a contract attached, and if Gateway offers to pay for return shipping if the customer does not wish to be bound by the contract, then it’s reasonable to consider the the customer bound by the contract if he does not return the computer to Gateway.
I think there are several reasons to be skeptical of this position, but rather than re-hash the arguments I made in the comments to Alex’s post, I think it’s worthwhile to step back and consider the broader principle at stake here. Libertarians are, of course, in favor of freedom of contract, but it’s important to understand what freedom of contract means. Some libertarians seem to think that being in pro-freedom of contract means being pro-contract in the sense that the government should make contract formation as easy as possible and should enforce as many contracts as possible. For example, a few weeks back I criticized an article by F. Scott Kieff that seemed to take this kind of view with respect to patent law.
I think this is a mistaken conception of what freedom of contract is all about. At its heart, freedom of contract is about peoples’ freedom to enter or not enter contractual relationships, and to be confident that the government will enforce valid contract in a predictable manner. The “or not enter” part is important. It violates freedom of contract for the state to fail to enforce a contract to which both parties have consented. But it’s no less a violation of freedom of contract to enforce a contract to which one of the parties did not consent.
And I think we should be extremely skeptical of inferring an affirmative obligation based on someone’s failure to take some action demanded by another party. Complying with such a demand always has costs (I might live far from the nearest post office and not have a car, for example), and I shouldn’t have to bear costs simply to avoid being a party to a contract I never indicated interest in being party to in the first place. And no, the fact that computers often come with attached EULAs doesn’t mean that I “should have known” that there would be a EULA in the box. Courts can’t read minds; the enforceability of contracts needs to be about peoples’ actions, not speculation about what they did or should have known.
Funny stuff:
Precocious Youngster Sells Cookies To Buy Attack Ad
This is, of course, a wildly implausible story. Here in the real world, McCain-Feingold doesn’t allow little girls—or other private citizens—to run television ads criticizing federal candidates in the month before an election. Which, come to think of it, isn’t funny at all.
Slashdot linked to this post purporting to demonstrate that it’s ridiculous to consider the next version of Windows Windows 7. They offer several lists of past releases, all of which have at least 7 elements.
Obviously, the evolution of Windows has been sufficiently tortured that reasonable people can disagree about exactly how many generations there have been. In particular, the parallel development of the 3.1/95/98/ME and NT/2000 lines makes things unusually messy. But I think it’s entirely plausible to say that there have been the following 6 generations of Windows operating systems:
1. Windows
2. Windows 2
3. Windows 3/3.1 (NT 3)
4. Windows 95/98/ME (NT4)
5. Windows XP (Windows 2000)
6. Windows Vista
Windows 98/ME were clearly incremental upgrades of Windows 95. NT3, NT4, and Win2k were business/server operating systems that were released in parallel with the consumer products. It seems pretty reasonable to say that there have been 6 major releases of Windows, and that the one they’re working on now will be the seventh.
Over at Ars Technica I have an article I’m particularly excited about: the second installment of my series on self-driving car technology. In the first installment, I surveyed the current state of technology and addressed some of the technical challenges that stood between us and fully self-driving cars. Today I assume that those technical hurdles can be overcome and speculate about what the world will look like when we get there. Some benefits of self-driving cars are obvious—less time spent behind the wheel and fewer accidents—but the consequences are likely to be much broader than that. Among the most intriguing are much greater use of taxis, more widespread use of smaller, more energy-efficient cars, the virtual elimination of parking lots, and a dramatic transformation of the retail sector. Please check it out.
Meanwhile, over at BloggingHeads, my friend Will Wilkinson interviews my advisor Ed Felten about his work. I haven’t had a chance to watch the whole thing yet, but Will and Ed are two of the smartest and most interesting people I know, so it’s bound to be a great conversation.
Like a lot of people, I was surprised by the choice of Paul Krugman for the Nobel Prize in economics, but upon further reflections I agree with Tyler Cowen and Will Wilkinson that the award is well-deserved even if the timing is unfortunate. Krugman’s now-decade-old column in defense of free trade is my all-time favorite Krugman writing and among my favorite examples of popular writing on economics by any author. Recently Krugman’s columns have gotten a little too partisan and strident for my taste, but contra my esteemed co-blogger, Krugman is indisputably a first-rate economist who has done important theoretical work. There’s just no comparison to generic left-wing pundits.
Amanda got to go to the debate and has a report:
On my way through the security checkpoint, I asked the Secret Service officer if I should remove my belt before passing through the metal detector. He responded, very pleasantly: “Ma’am, this isn’t an airport.” We all got to keep our shoes, too.
Don Marti has one of those posts I can’t resist reprinting in its entirety:
The New York Times columnists have gone to the well for reasonable pro-bailout arguments and come up dry. Time to fall back to name-calling.
People who don’t favor handing over $700 billion to known financial failures are “nihilists”, “madmen”, and “idiots”.
Look, Rep. Pete Stark, as a former bank founder and CEO, has more bank knowledge than the bailout cheerleaders, and he has come out against it. Rep. Stark is a Democrat, but this bailout issue isn’t the Republicans against the Democrats, or the free-marketers against the statists. It’s common sense against One-Big-Project-Can-Solve-Everything-ism.
Let’s bulldoze a neighborhood for One Big Freeway, and put the people in One Big Tower. Let’s put a huge percentage of the federal budget into One Big Airplane for the USAF. Let’s all read One Big Newspaper. Or let’s do One Big Bailout.
Come on, people. That never works. If there are bailouts needed, make them small, and focus them on the people who need them. Borrowers who are paying on deceptively sold mortgages? Municipalities that need bond underwriting? Fine, dig up some of the many good ideas floating around economics departments, and use them. Local and regional banks, which didn’t post the paper winnings of the big ones, are ready to take on a bigger role. Losing gamblers, and the East Coast Media Elite that wants to throw good money after bad? Let them fail.
And, he might have added, the One Big Operating System doesn’t work so good either.
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