Set in stone? Change and innovation in consumer standard-form contracts

New York University Law Review

Volumn 88, Issue 1, 2013, Pages 240-285

  Marotta Wurgler, Florencia ^a   Taylor, Robert ^b  

^a NEW YORK UNIVERSITY SCHOOL OF LAW   (United States)

^b Kirkland and Ellis LLP ^*  (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 84883178568     PISSN: 00287881     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Note

References (86)

1. See generally Florencia Marotta-Wurgler, What's in a Standard Form Contract? An Empirical Analysis of Software License Agreements, 4 J. Empirical Legal Stud. 677 (2007).
2. Benjamin Kaplan, Prefatory Note, "The Class Action-A Symposium, " 10 B.C. Indus. & Com. L. Rev. 497, 497 (1969) (expressing the views of the Advisory Committee's Reporter).
3. See Mitu Gulati & Robert E. Scott, The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design 33-44 (2013) (exploring theories of what makes contract terms "sticky").
4. Benjamin Kaplan, Prefatory Note, "The Class Action-A Symposium, " 10 B.C. Indus. & Com. L. Rev. 497, 497 (1969) (expressing the views of the Advisory Committee's Reporter).
5. See, e.g., Stephen J. Choi & G. Mitu Gulati, An Empirical Study of Securities Disclosure Practice, 80 Tul. L. Rev. 1023 (2006) [hereinafter Choi & Gulati, Securities Disclosure] (comparing attorneys' disclosure of changes as a result of reinterpretation as opposed to modification of actual contract language).
6. Frame & White review the existing empirical literature on financial innovation and find only twenty-three studies since 1998. Just a handful of these involve contract terms. See W. Scott Frame & Lawrence J. White, Empirical Studies of Financial Innovation: Lots of Talk, Little Action?, 42 J. Econ. Literature 116, 135 (2004).
7. Kevin E. Davis, Contracts as Technology, 88 N.Y.U. L. Rev. 83, 97 (2013).
8. See, e.g., Yannis Bakos, Florencia Marotta-Wurgler & David R. Trossen, Does Anyone Read the Fine Print? Testing a Law and Economics Approach to Standard Form Contracts 3 (NET Institute, Working Paper No. 09-04, 2009), available at http://ideas.repec. org/p/net/wpaper/0904.html (surveying the actual shopping behavior of over 45,000 Internet users and finding that only about 0.01% read standard terms).
9. e.g., Clayton P. Gillette, Rolling Contracts as an Agency Problem, 2004 Wis. L. Rev. 679 (noting that those who read form contracts can act as agents for those who do not).
10. Am. Law Inst., Principles of the Law of Software Contracts (2010).
11. One of the reasons behind contractual change in firms is that the development of new products calls for a new bundle of license terms to govern product use. While products might evolve naturally over time, we control for this by collecting the contracts of the same products over time-albeit a current version of said product in some instances.
12. Benjamin Kaplan, Prefatory Note, "The Class Action-A Symposium, " 10 B.C. Indus. & Com. L. Rev. 497, 497 (1969) (expressing the views of the Advisory Committee's Reporter).
13. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
14. Avery Wiener Katz, Standard Form Contracts, in 3 The New Palgrave Dictionary of Economics and the Law 502 (Peter Newman ed., 1998) (discussing network effects).
15. See generally Omri Ben-Shahar & John A.E. Pottow, On the Stickiness of Default Rules, 33 Fla. St. U. L. Rev. 651, 655-60 (2006) (reviewing literature).
16. See also Robert Brendan Taylor, Consumer-Driven Changes to Online Form Contracts, 67 N.Y.U. Ann. Surv. Am. L. 371, 394-98 (2011) (finding that negative press may lead firms to change contractual terms).
17. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
18. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
19. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
20. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
21. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
22. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
23. Stewart Macaulay observed in 1966 that in-house counsel drafted the fine print of contracts used by large corporations, while the fine print in small firms' contracts had come from trade associations or by copying the terms used by other firms. See Stewart Macaulay, Private Legislation and the Duty to Read-Business by IBM Machine, the Law of Contracts and Credit Cards, 19 Vand. L. Rev. 1051 (1966).
24. User-generated innovation resulting from collaborative processes has become increasingly prominent. See Yochai Benkler, The Wealth of Networks: How Social Production Transforms Markets and Freedom 1-2 (2006) (noting the "greater scope for individual and cooperative nonmarket production" in the modern information economy).
25. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
26. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
27. See Josh Lerner, The New Financial Thing: The Origin of Financial Innovation, 79 J. Fin. Econ. 223, 235-36 (2006) (observing that smaller financial services firms are more likely to innovate than their larger counterparts).
28. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
29. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
30. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
31. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
32. Nat'l Conference of Comm'rs on Unif. State Laws, Uniform Computer Information Transactions Act (Proposed Official Draft 2002), available at http://www. uniformlaws.org/shared/docs/computer_information_transactions/ucita_final_02.pdf.
33. We understand that the sample of firms we study might be biased because it only includes firms that were not acquired, remained in business, and continued their signature products. We kept the data of the firms that went out of business and collected and scored the EULAs of the acquired firms. Almost all acquired firms adopted the EULA of the acquirer. We excluded these because we wanted to document revisions to existing documents.
34. For a description of the taxonomy, see Florencia Marotta-Wurgler, "Unfair" Dispute Resolution Clauses: Much Ado About Nothing?, in Boilerplate: Foundations of Market Contracts 45 (Omri Ben-Shahar ed., 2007).
35. To put these figures in context, FTC merger guidelines suggest that an "unconcentrated" industry is one with a Herfindahl-Hirschman Index (HHI) of less than 0.15. Markets with an HHI between 0.15 and 0.25 are defined as "moderately concentrated, " while markets with an HHI above 0.25 are deemed "highly concentrated. " U.S. Dep't of Justice & Fed. Trade Comm'n, Horizontal Merger Guidelines 18-19 (2010), available at http://www.ftc.gov/os/2010/08/100819hmg.pdf.
36. For a detailed account of these variables and the methodology used, see Florencia Marotta-Wurgler, Competition and the Quality of Standard Form Contracts, 5 J. Empirical Legal Stud. 447, 457-67 (2008).
37. This is because these software contracts generally govern low-priced products and the probability that many of these terms will ever be invoked is small.
38. We obtained this estimate by taking the average number of words of ten pages randomly selected from Volume 86 of the New York University Law Review.
39. See William H. DuBay, The Principles of Readability 23 (2004), available at http://www.impact-information.com/impactinfo/readability02.pdf.
40. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
41. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
42. For a thorough analysis of this clause, its enforceability, and a review of the literature, see Oren Bar-Gill & Kevin Davis, Empty Promises, 84 S. Cal. L. Rev. 1 (2010).
43. Peter A. Alces & Michael M. Greenfield, They Can Do What!? Limitations on the Use of Change-of-Terms Clauses, 26 Ga. St. U. L. Rev. 1099 (2010).
44. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
45. For a more detailed explanation of third-party software bundling, see Edward Desautels, U.S. Computer Emergency Readiness Team, Software License Agreements: Ignore at Your Own Risk 5 (2008), http://www.us-cert.gov/reading_ room/EULA.pdf.
46. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
47. There has been heated debate among intellectual property scholars as to whether producers of information goods, such as software, should be entitled to circumvent these laws through mass-market, standard-form contracts. See, e.g., Christina Bohannan, Copyright Preemption of Contracts, 67 Md. L. Rev. 616 (2008) (arguing that copyright law should not categorically preempt contracts).
48. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
49. We thank Ryan Bubb for this point.
50. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
51. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
52. Benjamin Kaplan, Prefatory Note, "The Class Action-A Symposium, " 10 B.C. Indus. & Com. L. Rev. 497, 497 (1969) (expressing the views of the Advisory Committee's Reporter).
53. We thank Oren Bar-Gill for this point.
54. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
55. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
56. Cf., e.g., Nicolas Geoffray et al., A Lazy Developer Approach: Building a JVM with Third Party Software, 2008 Proc. Int'l Conf. on Principles & Prac. Programming Java (building a Java Virtual Machine almost entirely out of third-party software), available at http://llvm.org/pubs/2008-09-LadyVM.pdf.
57. We report least-squares regression results. Tobit models that explicitly account for the limited dependent variables in (4) and (5) are available upon request.
58. We ran separate regressions when we included lawyers due to limited data on this variable.
59. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
60. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
61. George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. Legal Stud. 1 (1984).
62. George Priest, Measuring Legal Change, 3 J.L. Econ. & Org. 193, 203 (1987) ("[A] change in a legal rule will lead to a shift in the nature of the cases that parties find problematic and, thus, litigible. ").
63. Under some scenarios, our methodology could introduce bias toward finding a relationship where none exists. Specifically, we consider the case where trends in enforcement in a given period might not be captured by our methodology. For example, consider a scenario where the majority of cases in a given period uphold a particular clause, but enforcement occurs early in the period and non-enforcement occurs later in the same period. We checked for such trends and did not find any. We thank William Hubbard for this point.
64. Michael Heise, The Past, Present and Future of Empirical Legal Scholarship: Judicial Decision Making and the New Empiricism, 2002 U. Ill. L. Rev. 819, 844.
65. 320 F.3d 1317 (Fed. Cir. 2003).
66. The case has been widely cited in court documents, discussed at length in law school textbooks and legal scholarship, and noted in various trade publications. See, e.g., Robert W. Gomulkiewicz, Fostering the Business of Innovation: The Untold Story of Bowers v. Baystate Technologies, 7 Wash. J.L. Tech. & Arts 445, 446 (2012) (citing various references and noting that "[p]erhaps the law review literature does not need another article on the Federal Circuit's Bowers v. Baystate Technologies, Inc. case").
67. E.g., Mark A. Lemley et al., Software and Internet Law (3d ed. 2006).
68. Note that we cannot do this for term 14 in Table 4, as it is only litigated in the first period and not the next. We are unable to make any inferences about changes in the enforceability over time for this term. We thus drop it from the analysis.
69. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
70. We also focus only on published opinions. Other legal developments aside from court decisions might have had an effect on EULA terms, but their impact is more attenuated. In 2000, Maryland and Virginia became the only two states to adopt the Uniform Computer Information Transactions Act (UCITA), a body of law designed to govern transactions in information goods such as software. Md. Code Ann., Com. Law § 22-101 (LexisNexis 2000).
71. These regressions are available upon request from the New York University Law Review.
72. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
73. See, e.g., Sony Computer Entm't, Inc. v. Connectix Corp., 203 F.3d 596 (9th Cir. 2000) (holding that use of copyrighted computer work to gain understanding of unprotected functional elements was fair use).
74. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
75. 86 F.3d 1447 (7th Cir. 1996).
76. Benjamin Kaplan, Prefatory Note, "The Class Action-A Symposium, " 10 B.C. Indus. & Com. L. Rev. 497, 497 (1969) (expressing the views of the Advisory Committee's Reporter).
77. Benjamin Kaplan, Prefatory Note, "The Class Action-A Symposium, " 10 B.C. Indus. & Com. L. Rev. 497, 497 (1969) (expressing the views of the Advisory Committee's Reporter).
78. Benjamin Kaplan, Prefatory Note, "The Class Action-A Symposium, " 10 B.C. Indus. & Com. L. Rev. 497, 497 (1969) (expressing the views of the Advisory Committee's Reporter).
79. See Mark A. Lemley, Terms of Use, 91 Minn. L. Rev. 459, 468 (2006) (noting that until ProCD, every court considering the validity of shrinkwrap licenses held them unenforceable).
80. See, e.g., Vault v. Quaid, 847 F.2d 255 (5th Cir. 1988) (refusing on preemption grounds to enforce a restriction on reverse engineering in a shrinkwrap EULA).
81. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
82. 334 F. Supp. 2d 1164 (E.D. Mo. 2004).
83. See, e.g., Kenneth Hwang, Note, Blizzard Versus Bnetd: A Looming Ice Age for Free Software Development?, 92 Cornell L. Rev. 1043 (2007) (arguing that the case was wrongly decided).
84. Stephen C. Yeazell, Brown, The Civil Rights Movement, and the Silent Litigation Revolution, 57 Vand. L. Rev. 1975, 1977-85 (2004).
85. See Florencia Marotta-Wurgler, Does Contract Disclosure Matter?, 168 J. Institutional & Theoretical Econ. 94 (2012).
86. See, e.g., Fla. Stat. § 627.4145 (LexisNexis 2003) (mandating a minimum Flesch-Kincaid score of forty-five for insurance policies in this plain-language statute).