Warranties, Limitations, and Remedies Michael O’Connor BUS 297D Dr. Malos December 03, 2011

Warranties, Limitations, and Remedies: UCC, Magnuson-Moss Warranty Act Shrink-Wrap and Click-Wrap Licenses The 1999 Uniform Computer Information Transactions Act Strategic Alliances and the Importance of Alternate Dispute Resolution

Uniform Commercial Code –Simplify, Clarify Policies Governing Commercial Transactions. –Article 2. Magnuson-Ross Act –Requirements of Written Warranties. –FTC.

Express Warranties –Any affirmation of fact or promise made by the seller! Implied Warranties –Goods will be merchantable, fit for a particular purpose!

Any affirmation of FACT or PROMISE made by the seller to the buyer that relates to the goods and becomes part of the basis of the bargain. Any DESCRIPTION of the goods that is made a part of the basis of the bargain. Any SAMPLE or MODEL that is made a part of the basis of the bargain.

Typically incorporated in the written sales agreement or provided in writing with the goods. UCC: A company does not have to formally declare that a promise is a warranty to serve as one. Oral allegations made by salespersons that are more definitive than mere opinions.

Descriptions in promotional literature. Demonstrations of units at trade shows or in showrooms.

Control and Limit: –Training. –Constraint. –Entire Agreement Clause: Integrated Contract! “This contract constitutes the complete and exclusive statement...”

Goods Will Be Merchantable! –Fit for the ordinary purposes. –Adequately contained and packaged. –Conform to any promises made on the packaging.

Goods Will Be Merchantable! –Meet standards expected from the way the merchant or industry ordinarily deals with its products.

Goods are fit for a particular need or purpose!

Conspicuous Exclusion: –UCC: Disclaimer of the implied warranty of merchantability must actually mention the word MERCHANTABILITY. “To the extent allowed by law, seller hereby disclaims all implied warranties, including, but not limited to, the implied warranties of merchantability and fitness for a particular purpose.”

Compensatory Damages. Consequential Damages.

Compensatory Damages. –UCC Section 719 –Return and Repayment –Repair and Replacement –Satisfy the buyer in a reasonable fashion!

Consequential Damages. –Losses resulting from needs of the buyer about which the seller had reason to know and which could not be reasonably prevented by the buyer. –Injuries to persons or property which the seller knew or reasonably should have known.

Limited if Not Unconscionable. –Unconscionable: Not Defined. –Socially Reprehensible Behavior. –Contract of Adhesion: Take-It-Or-Leave-It! –Substantive Content: Shocks the Conscience!

Considerations. –Business Sophistication of Buyer –Buyer Had Opportunity To Read Limitation And Could Understand Ramifications –How Much Bargaining Power The Buyer Had To Negotiate For Changes In The Contract.

General Principles Regarding Standardized Forms. Shrink-Wrap Licenses: Standardized Forms in the Consumer Context. Click-Wrap Licenses

General Principles: Standardized Forms. Objective Of Contract Law: –Allow people to depend on the promises that others make to them. –Allow parties the freedom to determine the terms of their arrangement using the methods that they desire. Business To Business Contracts Often Use Standardized Forms. Shrink-wrap And Click-wrap: Extensions Of A Trend.

Shrink-Wrap Licenses. –Enforceable –Unless Terms Are Objectionable –Procedure to Obtain Unconscionable.

Unconscionable! –How Conspicuous Is The Notice? –How Conspicuous Are The Terms Of The License? –Are The Terms Contrary To Other Agreements: Unexpected? –How Sophisticated Is The Customer? –Does The Customer Have Any Bargaining Power? –Contract Of Adhesion?

ABA’s 15 Strategies: Procedurally Sound. In Other Words: –Customers know about the existence of the license terms. –They are able to read and understood those terms. –They have positively accepted those terms. –They have had an opportunity to withdraw from their transactions if they made a mistake.

Overriding Issue: Reasonable under the circumstances!

The 1999 Uniform Computer Information Transactions Act

Old and Less Effective! Initially based on Goods and Services. UCC Article 2B: Not!

Digital World: –Intangible Properties. –Licensed Rights. Electronic Commerce Issues –Proof By Records - Digital Paper! –Digital Signatures: »Electronic Signatures in Global and National Commerce Act (E-SIGN)

Mass-Market Licenses: –Restrictive Provisions –Reverse Engineering Clauses –Procedural Requirements Warranties: The Same but More! Choice of Law and Forum

Strategic Alliances –Many Benefits: »Acquisition of Technology, Shared Manufacturing Capacity, Risk and Cost sharing.

Strategic Alliances –Many Benefits: »Acquisition of Technology, Shared Manufacturing Capacity, Risk and Cost sharing. –Liability and IP Risk

Alternative Dispute Resolution –Mediation. –Minitrial. –Binding Arbitration.

FIRACT: Birdsong v. Apple Inc United States Court Of Appeals Ninth Circuit December 30, 2009

Facts Apple's iPod is an electronic device which stores and plays digital audio files. Each iPod comes with a set of detachable “earbud” headphones. The iPod can be used without its earbud headphones to play music through different headphones or speakers. iPods have the capability of producing sounds as loud as 115 decibels.

Facts Apple includes a disclaimer with each iPod that states: Warning: Permanent hearing loss may occur if earphones or headphones are used at high volume. You can adapt over time to a higher volume of sound, which may sound normal but can be damaging to your hearing. Set your iPod's volume to a safe level before that happens. If you experience ringing in your ears, reduce the volume or discontinue use of your iPod. Apple also provides this same disclaimer on its website.

Facts Joseph Birdsong, a Louisiana resident, bought an Apple iPod in May 2005 and another one in October Bruce Waggoner, a California resident, bought an Apple iPod in January 2005 and, six months later, a set of noise- cancelling headphones to be used with his iPod.

Issue Can a consumer claim a breach in expressed or implied warranty if they have not actually suffered an injury or experienced a loss of property or money?

Rule of Law California's Unfair Competition Law (Cal. Bus. & Prof. Code §§ ) prohibits unfair competition by means of any unlawful, unfair or fraudulent business practice. To have standing under California's UCL plaintiffs must establish that they (1) suffered a distinct and palpable injury as a result of unlawful or unfair conduct and (2) lost money or property as a result of the unfair competition.

Analysis The plaintiffs did not claim that they suffered injury or hearing loss from their iPod use. Nor did they claim that they used their iPods in a way that could have exposed them to a risk of hearing loss. At most, they plead that there exists a potential risk of hearing loss not to themselves, but to other unidentified iPod users who might choose to use their iPods in an unsafe manner.

Analysis Although Apple has sold more than 100 million iPods, they do not claim that they, or anyone else, has suffered or are substantially certain to suffer hearing loss from using an iPod. To the contrary, they merely assert that some iPods have the “capability” of producing unsafe levels of sound and that consumers “may” listen to their iPods at unsafe levels combined with an “ability” to listen for long periods of time.

Conclusion The Court Ruled that the risk of injury the plaintiffs allege was not concrete and particularized to them. An injury must affect a plaintiff in a personal and individual way and a plaintiff still must allege a distinct and palpable injury to himself, even if it is an injury shared by a large class of other possible litigants.

Take Home Message The existence of a potentially unsafe use of a device does not inherently create a breach of warranty. While the potential for injury to a user of the iPod earbuds exists if that user uses the earbuds in an unsafe manner, there is a reasonable remedy built into the iPod that a sensible user could use to protect themselves from injury: the volume control.

Take Home Message An injury must be an injury and not hypothetical. An economic loss must be a loss in fact!