144 Of 174 documents

Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

Supp. To CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

1-3 Corbin on Contracts Supp. to § 3.36

Supp. to § 3.36 Power to Accept an Offer Is Terminated by a Counter-Offer or Conditional Acceptance

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(A) The following case is noteworthy:

(1) In re Investment Co. of the Southwest, Inc., 2007 Bankr. LEXIS 1668 (D.N.M. 2007) . Pursuing a settlement agreement, counsel for the parties exchanged e-mails. The response to an offer of settlement stated, ''I think we have a deal''... ''subject to making a deal'' with a third party. The response ended with, ''I think we should proceed with a more formal memorialization of our agreement.'' The offeror claimed that no contract existed because the purported acceptance was conditional. The offeree argued that he did not intend to include an additional term, but was merely providing information to the offeror. The court held that, while the offeree may have not have intended to make a counteroffer, the purported acceptance included a condition and, no matter how unlikely it was that such a condition would occur, it was not insignificant with respect to the conclusion of a contract. The court found a violation of the classic ''mirror image'' rule requiring the acceptance to match the terms of the offer. It held that the response was a counteroffer and quoted § 39 of the Restatement (Second) of Contracts stating the common law rule that the normal effect of a counteroffer is to terminate the offeree's power of acceptance. There was no enforceable agreement.

145 Of 174 documents

Corbin on Contracts

Copyright 2007, Matthew Bender & Company, Inc., a member of the LexisNexis Group.

PART I FORMATION OF CONTRACTS

TOPIC A OFFER AND ACCEPTANCE

Supp. To CHAPTER 3 ACCEPTANCE AND REJECTION OF OFFER

1-3 Corbin on Contracts Supp. to § 3.37

Supp. to § 3.37 Conditional Acceptance and Counter-Offers Under the Uniform Commercial Code and the United Nations Convention

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(A) The following cases are noteworthy:

(1) Northrop Corp. v. Litronic Industries, 29 F.3d 1173 (7th Cir. 1994) . A typical battle of the forms: an offer containing a warranty for a limited time and an acceptance containing a warranty for unlimited time, but which did not make acceptance to that different/additional term expressly conditional.

Judge Posner recounted three lines of authority dealing with treatment of different or additional terms in acceptances under U.C.C. § 2-207. The majority view holds that ''the discrepant terms fall out and are replaced by a suitable UCC gap-filler.'' Id. at 9 . The ''leading minority view,'' according to Posner, holds that the ''discrepant terms in the acceptance are to be ignored.'' Id. Finally, Posner announced that ''Our own preferred view-the view that assimilates 'different' to 'additional,' so that the terms in the offer prevail over the different terms in the acceptance only if the latter are materially different, has as yet been adopted by only one state, California.'' Id. Under both these latter views, the contract contained the warranty term for a limited time, under the leading minority view because the discrepant terms in the acceptance drop out, and under the ''preferred view'' because the warranty term in the acceptance was ''materially different.'' Id. at 9-10 .

Despite this ''preferred view,'' Posner was constrained to forecast how the Illinois courts would resolve this problem. Because Illinois courts tend to adopt majority rules in UCC cases, Posner started with the presumption that Illinois would follow the majority and decided the presumption was not rebutted. As a result, the warranty term was to be supplied by reference to gap-filling rules in the UCC, according to Posner, ''courtesy the court.'' Consequently, the contract contained a term providing warranty for a ''reasonable time'' under 2-207(2).

Judge Ripple concurred but declined ''to express, by way of an opinion of this court, a view on whether the majority interpretation of 2-207 is preferable to the other interpretations.'' Taking care to emphasize Erie constraints, Judge Ripple observed that the federal courts must respect the ''constitutional prerogative of the states to determine the course of their jurisprudence'' which in turn requires that the court ''refrain from taking an institutional position as a court on such matters.'' Id. at 13 .

In Richardson v. Union Carbide Indus. Gases, Inc., 347 N.J. Super. 524, 790 A.2d 962 (App. Div. 2002) , the parties exchanged forms evidencing a contract for the purchase and sale of systems and parts of an industrial furnace which exploded. The forms contained conflicting indemnification provisions requiring an analysis of section 2-207 of the Uniform Commercial Code-the ''battle of the forms'' section. While section 2-207(1) recognizes an acceptance of an offer containing either ''different'' or ''additional'' terms, section 2-207(2) refers only to ''additional'' terms, leaving courts to decide what to do with ''different'' terms. The court recognized the controversy over this question and the different views. The court pursued the prevailing ''knockout'' view that excises ''different'' (conflicting) terms expressed in the exchanged writings. Thus, neither indemnification clause in the exchanged forms was operative.

In Reilly Foam Corp. v. Rubbermaid Corp., 206 F. Supp. 2d 643 (E.D. Pa. 2002) , the court predicted that the Pennsylvania Supreme Court would also apply the ''knockout'' view where the letters exchanged by the buyer and seller of sponges contained ''different'' (conflicting) terms. While the typical ''battle of the forms'' case involves standardized (printed) terms (see comment 1 to section 2-207), the writings exchanged in this case were letters, the terms of which parties are more likely to consider consciously. The court, however, analyzed this exchange as a ''battle of the forms'' case to which section 2-207 applies. While section 2-207 is not limited to printed (standardized) forms, where the parties express different or additional terms in writings that are more likely to be read and consciously considered, a court may find no application of section 2-207 since the response to the offer is a clear, common law counteroffer. See, e.g., United Foods, Inc. v. Hadley-Peoples Mfg. Co., 1994 Tenn. App. LEXIS 277 (May 20, 1994) , where the court found no application of section 2-207 because the price terms were different. See also Koehring Co. v. Glowacki, 77 Wis. 2d 497, 253 N.W.2d 64 (1977) (telegrams with different terms).

The Reilly court's prediction was verified in Flender Corp. v. Tippins International, Inc., 830 A.2d 1279 (Pa. Super. Ct. 2003) , appeal denied, 844 A.2d 553 (Pa. 2004) . Tippins offered to purchase gear drive assemblies from Flender. Tippins's purchase order contained a clause requiring disputes to be submitted to arbitration under the rule of the International Chamber of Commerce. It also required an attached acknowledgment form to be signed and returned to form a contract. Flender neither signed nor returned the form, but shipped the equipment along with an invoice stating that the enclosed terms and conditions would govern the contract. The invoice terms contained a clause requiring all disputes to be adjudicated in federal or state courts in Chicago, Illinois. The gear drives were installed. When Tippins failed to pay the balance due, Flender brought an action in the Pennsylvania Court of Common Pleas. Tippins filed preliminary objections on the footing that any dispute must be submitted to arbitration in accordance with the provision in its purchase order. The trial court held that the parties had formed a contract under U.C.C. Section 2-207 and the conflicting dispute resolution terms in the purchase order and invoice were ''knocked out,'' with the result that the action was permitted to be brought in an appropriate state court. On appeal, the instant court agreed that under U.C.C. Section 2-207(1), the Flender response to the Tippins purchase order was a definite and seasonable expression of acceptance though it contained different or additional terms. The court then confronted the question of the proper construction of U.C.C. Section 2-207(2) that expressly refers only to ''additional'' terms but fails to mention ''different'' terms though Section 2-207(1) recognizes an acceptance with either ''additional'' or ''different'' terms. Recognizing the fact that the statute provides little or no guidance on this omission and the fact that there is a division among contracts scholars over the proper construction of that subsection, the court reviewed case law in other jurisdictions, which, by a large majority, favors the ''knockout'' rule: where the exchanged forms contain expressly conflicting terms as in this case, both clauses are ''knocked out,'' i.e., they are mutually excised. Relying on Pennsylvania precedent holding that where a statute specifically designates certain things, omissions should be understood as exclusions, the court held that the omission of ''different'' in Section 2-207(2) should be understood as an exclusion of different terms from that subsection. The court, therefore, joined the great majority of other jurisdictions that have adopted the ''knockout'' rule and affirmed the refusal of the trial court to compel arbitration. In Selas Fluid Processing Corp. v. Ultra-Cast, Inc., 2004 U.S. Dist. LEXIS 13906 (E.D. Pa. July 19, 2004) , the plaintiff sent purchase orders that contained arbitration clauses along with acknowledgment copies to be signed by the defendant. The defendant signed the acknowledgments. When a later dispute developed, the plaintiff sought to compel arbitration. Inter alia, the defendant claimed that the ''knockout'' rule applied to the arbitration provision under the authority of the Flender opinion. The court rejected this argument and explained that the ''knockout'' rule applies only where the parties' communications contain expressly conflicting terms. No such evidence was presented in this case.

(2) Architectural Metal Systems, Inc. v. Consolidated Systems, Inc. 58 F.3d 1227 (7th Cir. 1995) (applying Illinois law). A subcontractor sought price quotations from a fabricator which submitted them with a clause requiring approval from its headquarters. The general revised its plans and invited the sub to resubmit its bid. The sub sought revised bids from the fabricator and another party. The fabricator submitted another bid, which was less than half that of the other party's bid and which did not contain the headquarters approval clause. After some further discussion not concerning price, the fabricator faxed a note to the sub saying ''We look forward to working with you.'' The sub submitted a purchase order but the fabricator then responded with a revised bid 73% higher than its previous bid, saying it had made a mistake. The sub rejected the revised bid, used another supplier, and sued for the difference between the fabricator's bid and what it had paid the other supplier. The district court granted the fabricator's motion for summary judgment. This court, drawing on Northrop Corp. v. Litronic Indus. (summarized above in paragraph 1), and per Judge Posner, reversed and remanded, finding that under U.C.C. § 2-207 it was premature for the court to decide that no contract had been formed.

(3) White Consolidated Industries, Inc. v. McGill Manufacturing Co., 165 F.3d 1185 (8th Cir. 1999) (applying Minnesota law). Seller sent buyer an offer, disguised as a price quotation, which limited seller's warranty obligations to repayment of the purchase price or replacement of the returned products. Seller accompanied the offer with some samples for buyer to try. It did. They needed improvement, which, in turn, led to agreement on a higher price. Buyer then sent a purchase order for 30 improved widgets, which included express warranties of merchantability and fitness for a particular purpose, and the unimproved price. It also included the following muscular language:

1. ACCEPTANCE. This Purchase Order is to be accepted in writing by Seller by signing and returning promptly to Buyer the Acknowledgment Copy, but if for any reason Seller should fail to sign and return to Buyer the Acknowledgment Copy, the commencement of any work or performance of any services hereunder by Seller shall constitute acceptance by Seller of this Purchase Order and all its terms and conditions. Acceptance of this Purchase Order is hereby expressly limited to the terms hereof. Any terms proposed by Seller which add to, vary from, or conflict with the terms herein shall be void and the terms hereof shall govern if this Purchase Order has been issued by Buyer in response to an offer the terms of which are additional to or different from any of the provisions hereof, then the issuance of this Purchase Order by Buyer shall constitute an acceptance of such offer subject to the express condition that the Seller assent that this Purchase Order constitutes the entire agreement between Buyer and Seller with respect to the subject matter hereof and the subject matter of such offer.

In response, seller sent a computer-generated acknowledgment, which included terms similar to those on the original price quotation, but included additional limitations and exclusions of warranties. Seller then changed the price on the buyer's purchase order to reflect the improvement to the widgets, signed the form, returned it to the buyer, and shipped.

The widgets broke, and buyer sued for breach of contract, and breach of implied and express warranties. The trial judge tried the case on the theory that buyer's purchase order was a conditional acceptance of seller's price quotation offer. The governing statute, U.C.C. § 2-207(1), provides:

A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

While the buyer's language (''the issuance of this Purchase Order by Buyer shall constitute an acceptance of such offer subject to the express condition that the Seller assent that this Purchase Order constitutes the entire agreement between Buyer and Seller'') does not track the statute (it should), the trial judge correctly avoided requiring the UCC's exact language. The trial judge concluded that when the seller corrected the price term on the buyer's purchase order, the seller was rejecting the express condition the buyer placed on acceptance: assent to each and every term in the purchase order. Hence, when seller shipped and buyer accepted the widgets the parties were forming a contract by their conduct pursuant to U.C.C. § 207(3), whose terms were those on which the parties' forms agreed and otherwise statutory fillers, but not, unfortunately for the buyer, its warranty of fitness for a particular purpose.

On appeal, the Eighth Circuit agreed.

(4) Wulf v. Adaptive Motion Control Sys., 2003 U.S. Dist. LEXIS 1085, 49 U.C.C. Rep. Serv. 2d 737 (D. Neb. Jan. 24, 2003) . The plaintiff was injured while in the employ of Tenneco using a machine purchased by Tenneco from the defendant, Adaptive. The plaintiff brought an action against Adaptive and also named Tenneco as a defendant to secure Tenneco's reimbursement under the Nebraska Workmen's Compensation statute. Adaptive claimed that the machine was purchased by Tenneco pursuant to an Adaptive quote which contained a clause requiring Tenneco to indemnify Adaptive for the type of injury suffered by the plaintiff. Tenneco claimed that, subsequent to the quote, it sent a purchase order containing an indemnification clause that required Adaptive to indemnify Tenneco for such an injury. The court understood Tenneco's argument to suggest that the Adaptive quote was not the offer in this transaction, Tenneco's purchase order was the offer. The court, however, found that Tenneco had not presented evidence that its purchase order was the offer. If Adaptive's quote was the offer, Tenneco's purchase order would be an acceptance of that offer with a materially different term that would be excised under Uniform Commercial Code § 2-207(2)(b) and Adaptive's quote (offer) with its indemnity provision would prevail in the ''battle of the forms.'' Since the briefs before the court neglected this issue, the court required further evidence from the parties before it could determine whether either of the indemnity provisions should be included in the contract under § 2-207.

(5) Standard Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440 (3d Cir. 2003) . After preliminary negotiations, the Pennsylvania buyer, Standard, offered to purchase a glass fabricating system from the seller, Glassrobots, a Finnish company. The offer contained the buyer's terms and conditions and directed the seller to sign the order and return it. The seller's response did not refer to the buyer's letter. Instead, it sent its sales agreement together with an invoice and a cover letter stating that the enclosed form contained the seller's sales agreement containing its usual terms and directing the buyer to ''read it through'' and suggest any changes. The letter also referred to the enclosure of an appendix containing industry guidelines (Orgalime S92) including a binding arbitration clause. These terms were incorporated into the sales agreement by three references. The buyer would later deny receiving this appendix though it did receive the Orgalime S92 terms prior to any dispute. The sales agreement also stated that any dispute over the completion date of the contract would be subject to arbitration. Absent any changes, the seller stated that it would send signed originals to the buyer. The buyer faxed a return letter containing modest changes to the seller's terms which did not relate to the terms of Orgalime S92 or to arbitration. The buyer's letter directed the seller to call the buyer if the terms were not agreeable. Two days later, the buyer made a wire transfer of a down payment on the $1.1 million purchase price. The following day, the seller sent a revised sales agreement to the buyer incorporating most of the modest changes suggested in the buyer's earlier letter and requesting the buyer to sign one of the copies and return it. The buyer neither signed nor returned it. The system, however, was installed and the parties signed an agreement stating that the test of the installed equipment complied with the terms of the sales agreement. Three months later, the buyer made the final payment. Later, problems with the equipment caused the buyer to bring an action in state court that was removed to federal court.

The seller moved to compel arbitration under the incorporated Orgalime S92 clause. The district court granted the seller's motion. The instant court recognized that contracts for the sale of goods between nations that have adopted the United Nations Convention on Contracts for the International Sale of Goods (CISG) are subject to that Convention rather than domestic law. While both the United States and Finland have adopted CISG, Finland is not a signatory to Part II of CISG under Article 92, which precludes the application of CISG contract formation principles. Moreover, the parties did not raise the applicability of CISG to this dispute. The court, therefore, applied domestic law according to the place of contract performance, Pennsylvania. In response to the buyer's claim that no contract was ever formed since the buyer had never signed the seller's sales agreement, the court found that the buyer's initial offer to purchase the system had been rejected by the seller's counter offer containing the cover letter, sales agreement and invoice. By manifesting a definite and seasonable expression of acceptance to the seller's counter offer terms notwithstanding submission of certain changes in those terms, the buyer had accepted the seller's counter offer under U.C.C. Section 2-207(1). Whether all of the buyer's changes should have been incorporated into the final agreement was not at issue in this case. The issue was whether the Orgalime S92 terms, particularly the arbitration clause, became a part of the contract. The court held that terms incorporated by reference are binding where the underlying contract makes clear reference to a separate document that may be ascertained and such incorporation does not result in surprise or hardship. While such incorporation may be ineffective as applied to a non-merchant, in cases involving seasoned merchants it facilitates efficient business transactions. There was no surprise or hardship to the buyer since the Orgalime S92 terms reflected industry norms frequently used in international trade and the buyer's president averred that he had extensive experience in international trade. Even if the arbitration clause had not been incorporated by reference, the court noted that it would have become part of the contract since it did not involve surprise or hardship and did not, therefore, constitute a material alteration under U.C.C. Section 2-207(2)(b). Between merchants, such an immaterial alteration becomes part of the contract. Finally, the court recognized that arbitration provisions in international commercial agreements are governed by the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (CREFAA), which requires the arbitration agreement to be in writing. The court held that the CREFAA requirement was met through the exchange of signed letters that incorporated the arbitration clause.

(6) Crossley Constr. Corp. v. NCI Building Systems, L.P., (6th Cir. 2005) . In need of roofing materials for a construction project, the plaintiff sent a purchase order that included delivery schedules and a ''time is of the essence clause'' to the defendant. The defendant replied that the defendant would contract only on its own standard terms. On February 4, the defendant sent its standard form contract to the plaintiff who inserted a handwritten note thereon stating that the terms of the plaintiff's purchase order were part of the contract. Upon receipt, the defendant again emphasized that the defendant would contract only on its own terms and sent another copy of its standard contract to the plaintiff who signed and returned it on February 10. Subsequently, the plaintiff alleged delays in the shipments that violated the terms of its purchase order. The district court held for the defendant, finding a contract formed on February 10 that did not include the terms of the purchase order. On appeal, the plaintiff claimed that a contract had been formed when the defendant sent its standard form which the plaintiff signed and returned with its handwritten note incorporating the plaintiff's purchase order terms on February 4. The plaintiff claimed that this response was a definite and seasonable expression of acceptance under U.C.C. § 2-207(1) notwithstanding any different or additional terms incorporated by the plaintiff's incorporation of the purchase order terms. The court found that there was substantial evidence that the defendant did not treat the plaintiff's return of the standard form with the purchase order terms as a definite expression of acceptance. Not only was the plaintiff forewarned of the defendant's insistence on its own terms, but when the defendant received its standard form containing the plaintiff's handwritten addition, the defendant immediately objected and insisted on the plaintiff signing the defendant's form dehors any different or additional terms. The court held that, even if the February 4 response was an acceptance, the additional handwritten terms would be excised via the defendant's notification of objection to them under U.C.C. § 2-207(2)(c)

(B) The ''shrink wrap license'' has produced a cottage industry of litigation going back at least to Step-Saver v. Wyse Technology, 939 F.2d 91 (3d Cir. 1991) (Wisdom, J.) (applying Pennsylvania and Georgia law), and jurisdictions have split on how to treat it. '' 'The shrinkwrap license','' wrote Judge Easterbrook in ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) , ''gets its name from the fact that retail software packages are covered in plastic or cellophane 'shrink wrap,' and some vendors ...have written licenses that become effective as soon as the customer tears the wrapping from the package.'' 86 F.3d at 1449 . Of course, the contract at issue need not be a license; the same legal issues afflict any writing accompanying a package that claims to govern the legal relationship of the parties, whether it be a license or a sale.

(1) Step-Saver sets up the problem. Step-Saver was in the business of developing and marketing a ''multi-user'' computer system, in which multiple user terminals are attached by cable to a single, main computer. Step-Saver selected a terminal produced by Wyse Technology, and, to run the system, a program produced by The Software Link (''TSL''), called Multilink Advanced.

Step-Saver purchased copies of the program, typically twenty at a time, by telephoning TSL and placing an order. TSL accepted the orders on the phone, promising to ship promptly. Then TSL would send a purchase order, specifying the items, their price, and shipping and payment terms. TSL would then ship, together with an invoice containing terms ''essentially identical'' with the price, quantity, shipping and payment terms on Step-Saver's purchase order. Both the phone conversations and the documents papering the transactions were silent on any disclaimer by Step-Saver of warranties. That popped up for the first time in a ''box-top license,'' form language printed on each package of the program, which disclaimed all express and implied warranties except for a warranty that the disks contained in the box are free from defects. The box-top license also sported an integration clause, stating that the license is the final and complete expression of the terms of the parties' agreement. To seal the deal, the license stated:

Opening this package indicates your acceptance of these terms and conditions. If you do not agree with them, you should promptly return the package unopened to the person from whom you purchased it within fifteen days from date of purchase and your money will be refunded to you by that person.

Step-Saver sold 142 systems, mostly to law and medical offices, and began receiving complaints from them almost immediately. Twelve of the purchasers sued Step-Saver, which in turn filed suit against Wyse and TSL, for damages for breach of warranties and for intentional misrepresentations by TSL (an initial action for a declaratory judgment seeking indemnity from either Wyse or TSL had been dismissed earlier for lack of ripeness).

The district court agreed with TSL that the box-top license was the complete and exclusive agreement between Step-Saver and TSL under § 2-202 of the Uniform Commercial Code (the UCC's parol evidence rule-the parties agreed that the terminals and the program are ''goods'' within the meaning of U.C.C. §§ 2-102 and 2-105, so that Article 2 of the UCC applies). Holding as a matter of law that the box-top license was the final and complete expression of the terms of the parties' agreement and that it effectively disclaimed all express and implied warranties otherwise made by TSL (under U.C.C. § 2-316), the court granted TSL's motion in limine to exclude all evidence of the earlier oral and written express warranties made by TSL, and ultimately directed a verdict in its favor. Step-Saver appealed.

Step-Saver focused attention on the telephone conversations. It argued that a contract for each copy of the program was formed when TSL orally agreed to ship. (Of course, the contracts didn't become enforceable until the parties papered them afterwards-each order was for more than $500, triggering the UCC's statute of frauds, § 2-201; but the moment in which a contract becomes enforceable need not be the same as the moment in which it is formed.) If, indeed, the parties entered into a contractual relationship during their conversation, the box-top license was a proposal for a ''material alteration'' under § 2-207(2)(b), which did not become part of the parties' agreement. Or, Step-Saver argued, the parties did not intend the box-top license as a final and complete expression of the terms of their agreement, and so the parol evidence rule of U.C.C. § 2-202 did not apply.

TSL focused attention instead on Step-Saver's receipt and opening of the program packaging. It argued that the contract between TSL and Step-Saver was formed when Step-Saver opened the program packaging, and thus accepted TSL's offer according to its terms. TSL maintained that the telephone conversation with Step-Saver omitted too many material terms for it to have established a contract. TSL also maintained that its acceptance of Step-Saver's ''offer'' over the telephone was conditioned on Step-Saver's acceptance of the terms of the box-top license. Thus, TSL did not accept Step-Saver's offer, but made a counteroffer instead-the terms of the box-top license-which Step-Saver accepted when it opened each package. Finally, TSL argued that however the contract was formed, Step-Saver was aware of the disclaimer, and that by continuing to order and accept the product Step-Saver assented to it.

Judge Wisdom, sitting by designation, took a third course. Rather than sort through the parties' ''various actions to decide exactly when the parties formed a contract,'' he held that the parties' performance demonstrates the existence of a contract. After all, TSL shipped the product, and Step-Saver accepted and paid for it.

The dispute is, therefore, not over the existence of a contract, but the nature of its terms. When the parties' conduct establishes a contract, but the parties have failed to adopt expressly a particular writing as the terms of their agreement, and the writings exchanged by the parties do not agree, U.C.C. § 2-207 determines the terms of the contract.

Judge Wisdom is referring, in particular, to subsection 3 of § 2-207:

Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of the Act.

TSL's attack on Judge Wisdom's position was the standard attack one comes to expect when the claim is that a contract has been concluded by performance: Certain essential terms were not discussed or dealt with in the initial forms, and these terms were essential to creating a sufficiently definite contract. Judge Wisdom disagreed, pointing to U.C.C. § 2-204(3):

Even though one or more terms are left open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

During the conversations Step-Saver and TSL did agree upon the specific goods involved, the quantity and the price. But they did not agree, argued TSL, whether the transaction was a sale or license and what warranties there were, if any. Judge Wisdom's response was two-fold. First of all, the rights of the parties under federal copyright law are ''nearly identical,'' whether the transaction is characterized as a sale or a license. Second, the UCC provides gap-filler warranties when the seller fails to disclaim. These gap-fillers became part of the contracts. Hence, the contracts formed by performance were sufficiently definite without the terms provided in the box-top license.

TSL also made a second argument that, while unpersuasive in its own terms, does point to a weakness in Judge Wisdom's opinion, which we'll explore at the very end of this annotation (and which will be vindicated by the case that immediately follows it). It argued that its box-top license should be considered a conditional acceptance under U.C.C. § 2-207(1):

A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

TSL claimed that the express language of the box-top license, including an integration clause and a statement that ''opening this product indicates your acceptance of these terms,'' made TSL's acceptance ''expressly conditional on assent to the additional or different terms.'' Also, TSL argued that permitting return of the software within fifteen days if the purchaser doesn't agree to the terms in the license confirms that TSL's acceptance was conditioned on Step-Saver's assent to the terms.

Assuming without deciding that a conditional acceptance analysis is appropriate when a contract is established by performance, Judge Wisdom turned to TSL's arguments. But first he had to pick a test for determining whether a writing constitutes a conditional acceptance, because neither Georgia nor Pennsylvania, whose law he was applying, had. Courts have used three different ones.

The first, much despised in the literature and in judicial commentary, finds an offeree's response to be a conditional acceptance to the extent that it states a term ''materially altering the contractual obligations solely to the disadvantage of the offeror.'' Daitom, Inc. v. Pennwalt Corp., 741 F.2d 1569, 1576 (10th Cir. 1984) ; see also Roto-Lith Ltd. v. F.P. Bartlett & Co., 297 F.2d 497 (1st Cir. 1962) . The phrase ''materially altering'' comes from subsection 2 of § 2-207, which provides that the ''additional terms'' mentioned in subsection 1 are to be considered proposals for addition to the contract unless, amongst other things, ''they materially alter it.'' The infamous Roto-Lith test (subsequently abolished in the First Circuit) obviously defeats much of the purpose of § 2-207, which was to abolish the mirror-image rule of common law and to allow business people to conclude transactions without coming to exact agreement on inessential terms that can be filled by Article 2 default provisions.

The second test is a classic ''magic words'' test: An acceptance is conditional when the offeree uses certain key words or phrases. Best, of course, is to track the language of U.C.C. § 2-207(1): ''Acceptance is expressly conditional on assent to the additional or different terms herein.'' But alternative formulations, such as the one Judge Wisdom suggests, will do: ''a written confirmation stating that the terms of the confirmation are 'the only ones upon which we will accept orders'.'' As Judge Wisdom points out in a footnote,

even though an acceptance contains the key phrase, and is conditional, these courts typically avoid finding a contract on the terms of the counteroffer by requiring the offeree/counterofferor to establish that the offeror assented to the terms of the counteroffer. Generally, acceptance of the goods, alone, is not sufficient to establish assent by the offeror to the terms of the counteroffer. ... If the sole evidence of assent to the terms of the counteroffer is from the conduct of the parties in proceeding with the transaction, then the courts generally define the terms of the parties's [sic] agreement under § 2-207(3).

The third approach looks to the intent of the offeree, requiring the offeree ''to demonstrate an unwillingness to proceed with the transaction unless the additional or different terms are included in the contract.'' Confessing uncertainty that the last two approaches would generate different answers, Judge Wisdom adopted the third approach,

because it best reflects the understanding of commercial transactions developed in the UCC. Section 2-207 attempts to distinguish between: (1) those standard terms in a form confirmation, which the party would like a court to incorporate into the contract in the event of a dispute; and (2) the actual terms the parties understand to govern their agreement. The third test properly places the burden on the party asking a court to enforce its form to demonstrate that a particular term is a part of the parties's [sic] commercial bargain.

Using the third approach, Judge Wisdom found that the integration clause and the ''consent by opening'' language in the box-top license was insufficient to render TSL's acceptance conditional. ''other courts have recognized, this type of language provides no real indication that the party is willing to forego the transaction if the additional language is not included in the contract.'' Judge Wisdom found the second provision in the box-top license, stating that TSL will refund the purchase price if the purchaser does not agree to the terms of the license, more compelling. He, nevertheless, rejected it as well:

Even with such a refund term, however, the offeree/counterofferor may be relying on the purchaser's investment in time and energy in reaching this point in the transaction to prevent the purchaser from returning the item. Because a purchaser has made a decision to buy a particular product and has actually obtained the product, the purchaser may use it despite the refund offer, regardless of the additional terms specified after the contract formed. But we need not decide whether such a refund offer could ever amount to a conditional acceptance; the undisputed evidence in this case demonstrates that the terms of the license were not sufficiently important that TSL would forego its sales to Step-Saver if TSL could not obtain Step-Saver's consent to those terms.

Indeed, a Step-Saver official testified that TSL had assured him that the box-top license did not apply to Step-Saver, since Step-Saver was not the end user of the program. Also, TSL asked Step-Saver on two occasions to sign agreements containing the warranty disclaimer and limitation of remedy terms similar to those in the box-top license, and Step-Saver refused. Nonetheless, TSL continued to sell copies of the program to Step-Saver.

TSL also argued that because Step-Saver placed multiple orders for the program with notice of the terms of the box-top license, Step-Saver is bound by them. In other words, the parties' ''course of dealing'' incorporates the terms of the box-top license in all of the parties' contracts subsequent to the first. Judge Wisdom rejected this argument as well. He pointed out that ordinarily a ''course of dealing'' or ''course of performance'' analysis ''focuses on the actions of the parties with respect to a particular issue.'' Here, the parties took no actions respecting the matters addressed by the disclaimer and limitation of liability terms of the license. The only action has been the repeated sending of a form by TSL. Only one court, Judge Wisdom says, ''has concluded that terms repeated in a number of written confirmations eventually become part of the contract even though neither party ever takes any action with respect tot he issue addressed by those terms.'' See Schulze & Burch Biscuit Co. v. Tree Top, Inc., 831 F.2d 709, 714-15 (7th Cir. 1987) . Most other courts have rejected that reasoning. Judge Wisdom thus held ''that the repeated sending of a writing which contains certain standard terms, without any action with respect to the issues addressed by those terms, cannot constitute a course of dealing which would incorporate a term of the writing otherwise excluded under § 2-207.

In response to the public policy argument that refusal to enforce a box-top license would harm the software industry, Judge Wisdom said that the court was not persuaded, ''that requiring software companies to stand behind representations concerning their products will inevitably destroy the software industry. We emphasize, however, that we are following the well-established distinction between conspicuous disclaimers made available before the contract is formed and disclaimers made available only after the contract is formed. [note omitted] When a disclaimer is not expressed until after the contract is formed, U.C.C. § 2-207 governs the interpretation of the contract, and, between merchants, such disclaimers, to the extent they materially alter the parties's [sic] agreement, are not incorporated into the parties's [sic] agreement.''

Judge Wisdom noted that at least two states, Louisiana and Illinois, have enacted statutes that modify the applicable contract rules for software licenses.

Judge Wisdom found as a matter of law that on the facts of this case adding the disclaimer of warranty and limitation of remedies provisions from the box-top license would materially alter the distribution of risk between Step-Saver and TSL. Hence, the disclaimer and the limitation terms did not become a part of the parties' agreement. The court remanded to the district court for further consideration the express and implied warranty claims against TSL.

Now the possible weakness in Judge Wisdom's analysis. Recall that Judge Wisdom avoided deciding whether a conditional acceptance analysis is appropriate when a contract is established by performance, because he found that the integration clause and the ''consent by opening'' language in the box-top license was insufficient to render TSL's acceptance conditional. He therefore concluded that the parties had formed a contract by performance without having to analyze the effect of Step-Saver's acceptance of the package including the box-top license. He failed to analyze, however, the effect of Step-Saver's purchase order, which triggered TSL's shipping the software, and TSL's invoice, which accompanied the box-top license.

Presumably Judge Wisdom would agree that the parties did not form a contract during the telephone conversations; otherwise, he would not have found a contract formed by performance. Of course, it may not simply be assumed that the parties did not form a contract during the conversations. (Whether they did form a contract would require a complex analysis of fact and law.) They might well have, relying on their own discussion of quantity and price and the UCC gap-fillers. If so, then it is quite clear that any subsequent writings-including the purchase order, the invoice and the box-top license-were confirmations, and the additional terms in the box-top license are easily disposed of as ''materially altering'' the terms of the contract formed during the conversation. If, however, we agree with Judge Wisdom that the parties did not form a contract during the conversations, then the purchase order that Step-Saver sent to TSL constituted an offer. TSL's shipment of the programs, together with an invoice and the box-top license, constituted ''a definite and seasonable expression of acceptance'' forming a contract on the terms of Step-Saver's purchase order (or, if one follows the ''knock-out'' rule, on the basis of agreeing terms plus the UCC gap-fillers). Either way, TSL has not effectively disclaimed the warranties or limited its liability.

The result is the same as Judge Wisdom's, but locates the case in U.C.C. § 2-207(1) rather than § 2-207(3), and has the virtue of not courting the difficult question that Judge Wisdom avoided addressing.

(2) Arizona Retail Systems, Inc. v. The Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993) (applying Georgia law). Arizona Retail Systems differs from Step-Saver in two key respects. First, in Arizona Retail Systems TSL, in its first transaction with ARS, sent ARS an ''evaluative copy'' of the program (PC-MOS) which accompanied a live copy of the program. The materials TSL sent included a statement that ARS could return the materials after a specified time period if ARS was not satisfied. The live copy was shrink wrapped, upon which was affixed a Limited Use License Agreement. The license agreement stated that the purchaser accepted the license upon opening the package. Second, ARS, unlike Step-Saver, contended that TSL employees assured it that the software would be compatible with DOS operated programs and that some problems with the earlier version of PC-MOS had been corrected. In Step-Saver there were no representations.

In the first transaction, ARS's system manager opened the shrink wrap, read the license agreement, but thought that it was unenforceable and incapable of overriding the specific representations of the TSL employees. ARS purchased many copies of PC-MOS over the next year. ARS would telephone TSL. During the conversations the parties agreed on quantity and price, and TSL would ship together with an invoice. No one discussed warranty disclaimers or liability limitations-terms in the shrink wrap license-during the calls or on the invoices.

Problems with PC-MOS compatibility cropped up in the multi-user systems ARS sold to clients. ARS sued for breach of warranty, and moved for partial summary judgment on the issue of whether TSL effectively disclaimed implied warranties and the alleged oral representations through the shrink wrap license (TSL made a counter-motion).

Though neither party made the distinction, Judge Broomfield evaluated ARS's initial purchase, where ARS received an evaluation disk along with the live disk, differently than the subsequent purchases, where ARS, having already ''evaluated'' the program, ordered and received the live disk alone. The court held that,

if ARS requested an evaluation diskette and then, by keeping the live disk, agreed to purchase the copy of PC-MOS that accompanied the evaluation diskette after evaluating PC-MOS, the license agreement applies to the initial transaction. Under such facts, the contract was not formed when TSL shipped the goods but rather only after ARS opened the shrink wrap on the live version of PC-MOS which ARS had notice would result in a contract being formed.

Judge Broomfield noted that his decision was not inconsistent with Step-Saver, in which the court analyzed a situation,

in which a contract had been formed by the conduct of the parties-i.e., through the ordering and shipping of the agreed-upon goods-but the goods arrived with the license agreement affixed. In such cases, the contract is formed before the purchaser becomes aware of the seller's insistence on certain terms.

Judge Broomfield found an offer when TSL included the live copy of the program along with the evaluation disk. ARS accepted TSL's offer when one of its agents did exactly what the statement on the outside of the envelope in which the live disk had been sealed said one does in order to accept the offer: open the envelope.

The subsequent transactions were different. Indeed, as Judge Broomfield pointed out, they were very similar to the transactions in Step-Saver: TSL sent no ''evaluation disk'' along with the live disk, so ARS's order was effectively concluded over the phone. Though Judge Broomfield reached the same result as Judge Wisdom did in Step-Saver-the terms of a license shipped along with the program do not bind the parties-he took a different road to reach it, and it is Judge Broomfield's approach that formed the basis of our quarrel with Judge Wisdom's reasoning at the end of the analysis of Step-Saver.

Judge Broomfield found that TSL had already accepted ARS's offer before TSL presented ARS with the license agreement. By agreeing to ship the good to ARS (in the telephone conversation in which ARS ordered the goods), or at the latest by shipping the goods (pursuant to U.C.C. § 2-206, acceptance by performance), TSL entered into a contract with ARS. (Nevertheless, because the parties hadn't discussed the applicability of § 2-206, the court did not rest its decision on that provision.) Presenting the license agreement was thus a proposal (pursuant to U.C.C. § 2-209) to modify the contract that the parties had entered prior to the arrival of the programs at ARS and prior to their packages having been torn open by their agents. ARS, just like Step-Saver, had not expressly assented to the modification, and Judge Broomfield, just like Judge Wisdom in Step-Saver, held that merely continuing with a contract does not constitute assent. (The only difference between the cases is that in Step-Saver the purchaser continued in response to a conditional acceptance of its offer, whereas in Arizona Retail Systems the purchaser continued in response to the seller's offer to modify an existing contract.)

Because the parties had entered into a contract prior to the arrival and opening of each program package, Judge Broomfield was able to avoid TSL's claim that it had accepted offers made by ARS during telephone conversations only once it shipped the programs together with the shrink wrap license agreement, and that acceptance according to the language of the license agreement was a conditional acceptance. The court also rejected TSL's claim that the license agreement constituted a written confirmation pursuant to U.C.C. § 2-207(1), on the ground that the license agreement cannot reasonably be described as an attempt to embody the agreement between the parties. Moreover, to the extent the license agreement was a written confirmation, it would be treated as such, rather than as a conditional acceptance.

Despite the fact that he rejected TSL's characterization of the license agreement as a conditional acceptance, Judge Broomfield did tackle as dicta the question that Judge Wisdom left open in Step-Saver, whether a conditional acceptance is possible in cases in which a contract has been formed, at the latest, by performance, but where the goods arrive with conditions attached. He noted that Judge Wisdom based his assumption that it is possible in such a case on the language of an official comment to § 2-207:

2. Under this Article a proposed deal which in commercial understanding has in fact been closed is recognized as a contract. Therefore, any additional matter contained in the confirmation or in the acceptance falls within subsection (2) and must be regarded as a proposal for an added term unless the acceptance is made conditional on the acceptance of the additional or different terms.

That language sounds supportive of Judge Wisdom's assumption. But Judge Broomfield disagreed:

This court concludes that the ... comment simply means that if the actual acceptance in the case is made conditional, then subsection (2), which governs situations in which forms have been exchanged that do not agree, does not apply. The comment does not state that a conditional acceptance analysis should be applied in cases in which acceptance was by performance and a later writing seeks to add terms to the agreement.

In supporting this conclusion, Judge Broomfield cited a reluctance, in light of the purposes underlying § 2-207 to interpret it in a way that a package disclaimer constitutes a conditional acceptance even though the disclaimer arrives after the parties have concluded an agreement for the sale of goods. It is much more consistent with those policies, said the judge, to assume that package disclaimers that arrive after parties have reached agreement under § 2-207 constitute proposals to modify the agreement:

Section 2-207 was drafted to ensure neutrality between contracting parties-i.e., to ensure that a party, usually the selling party, does not gain an advantage merely by being the last one to send a form. [citation omitted] To accept TSL's argument in this case would allow TSL to profit by sending a last ''form,'' the terms of which could have been included in any original agreement between the parties. [citation omitted] Moreover, to accept TSL's argument would allow TSL and other sellers to take advantage of the fact that purchasers often invest considerable time and money before ordering goods, and, therefore, are somewhat less likely to return goods once they arrive. Cf. Step-Saver, 939 F.2d at 102 (stating that this might be true). In addition, the realities of the workplace sometimes might be used unfairly against purchasers if TSL's argument were accepted. In some cases ordered goods might never even be seen by the particular department or employee charged with ordering the goods or the goods might be needed as soon as they arrive. Requiring the seller to discuss terms it considers essential before the seller ships the goods is not unfair; the seller can protect itself by not shipping until it obtains assent to those terms it considers essential. [citation omitted] Finally, to the extent that the court's decision results in important terms such as warranties being implied by the Code, no harm to public policy is done because the implied terms of the code are presumably equitable.

The editors of this supplement agree with Judge Broomfield's analysis in its entirety.

(3) ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996) (applying Wisconsin law) (Easterbrook, J.). Instead of a box-top license, the subject of Step-Saver and Arizona Retail Systems, ProCD involved a license placed inside the box of software, with notice on the box-top that a license is inside. ProCD sold SelectPhone, a database of information compiled from more than 3,000 telephone directories, which it copyrighted. It actually sold two versions of SelectPhone, one for the general public for non-commercial use, and one to the trade for a higher price. The only distinction between the two was the license-the one for consumers limited use of the program and the listings to non-commercial purposes. The license was encoded on the CD-ROM disks, printed in the manual, and appeared on a user's screen every time the software runs. Zeidenberg purchased a consumer version and used it for commercial purposes, posting the program on a website and selling listings to the general public for a price much lower than ProCD was charging.

ProCD sued for copyright violations, seeking an injunction against further dissemination that exceeds the rights specified in the license. The district court held that the license didn't bind Zeidenberg, because its terms did not appear on the outside of the package, and placing the package of software on the shelf is an ''offer,'' which Zeidenberg accepted by paying the price. A contract includes only the terms to which the parties have agreed, the district judge reasoned, and parties cannot agree to hidden terms.

''So far so good,'' said Judge Easterbrook on appeal,

but one of the terms to which Zeidenberg agreed by purchasing the software is that the transaction was subject to a license. Zeidenberg's position therefore must be that the printed terms on the outside of a box are the parties' contract-except for printed terms that refer to or incorporate other terms. But why would Wisconsin fetter the parties' choice in this way? Vendors can put the entire terms of a contract on the outside of a box only by using microscopic type, removing other information that buyers might find more useful (such as what the software does, and on which computers it works), or both. The ''Read Me'' file included with most software, describing system requirements and potential incompatibilities, may be equivalent to ten pages of type; warranties and license restrictions take still more space. Notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike.

To aid argument, Judge Easterbrook marshaled a series of transactions ''in which the exchange of money precedes the communication of detailed terms'': the purchase of insurance through an agent, often with a ''binder'' so that the insurance takes effect immediately; the purchase of an airline ticket over the telephone; the purchase of a ticket to a concert, of electronic goods from a store, of packages of drugs with a list of ingredients on the outside and an insert on the inside. Not to mention the software industry itself, where many transactions take place over the phone in response to a catalog or on the Internet, where delivery is over the wire rather than in a box. ''According to the district court,'' Judge Easterbrook writes, ''the UCC does not countenance the sequence of money now, terms later.''

Judge Easterbrook is at pains to distinguish ProCD from Step-Saver and Arizona Retail Systems: ''As their titles suggest, these are not consumer transactions. Step-Saver is a battle-of-the-forms case, in which the parties exchange incompatible forms and a court must decide which prevails. ... Our case has only form; U.C.C. § 2-207 is irrelevant.''

The section of the UCC that Judge Easterbrook found relevant is § 2-204(1): A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.'' ''A vendor,'' he wrote,

as master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance. And that is what happened. ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure. This Zeidenberg did. He had no choice, because the software splashed the license on the screen and would not let him proceed without indicating acceptance. So although the district judge was right to say that a contract can be, and often is, formed simply by paying the price and walking out of the store, the UCC permits contracts to be formed in other ways. ProCD proposed such a different way, and without protest Zeidenberg agreed. Ours is not a case in which a consumer opens a package to find an insert saying ''you owe us an extra $10,000'' and the seller files suit to collect. Any buyer finding such a demand can prevent formation of the contract by returning the package, as can any consumer who concludes that the terms of the license make the software worth less than the purchase price. Nothing in the UCC requires a seller to maximize the buyer's net gains.

Further, § 2-606(1)(b) defines ''acceptance of goods'' as occurring when a buyer, after an opportunity to inspect, fails to make an effective rejection under § 2-602(1). ProCD gave Zeidenberg an opportunity to reject, which, after inspection of the package, he did not do.

Judge Easterbrook did point out that ''[s]ome portions of the UCC impose additional requirements on the way parties agree on terms.'' But not here:

In the end, the terms of the license are conceptually identical to the contents of the package. Just as no court would dream of saying the SelectPhone (trademark) must contain 3,100 phone books rather than 3,000, or must have data no more than 30 days old, or must sell for $100 rather than $150-although any of these changes would be welcomed by the customer, if all other things were held constant-so, we believe, Wisconsin would not let the buyer pick and choose among terms. Terms of use are no less a part of ''the product'' than are the size of the database and the speed with which the software compiles listings. Competition among vendors, not judicial revision of a package's contents, is how consumers are protected in a market economy.

Judge Easterbrook thus held that ''the terms inside a box of software bind consumers who use the software after an opportunity to read the terms and to reject them by returning the product.''

We shall have more to say about Judge Easterbrook's approach in the next case annotated. For now, it suffices to note that Judge Easterbrook's position in ProCD, that U.C.C. § 2-207 is irrelevant because there was only one form, not an exchange of forms as in the typical § 2-207 case, is surely wrong. Section 2-207 says nothing about applying only to cases where the parties exchange forms. It speaks generally about a ''definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time.'' The ''expression of acceptance'' or the ''written confirmation'' can surely be in response to an oral offer or oral agreement. Nothing in the statute indicates that the ''expression of acceptance'' or ''written confirmation'' must be in response to a written offer or written agreement in order for § 2-207 to apply. Even Official Comment 1, which comes closest to saying that § 2-207 applies only to an exchange of forms, cites it simply as a ''frequent example.''

(4) Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997) , cert. denied, 522 U.S. 808, 118 S. Ct. 47, 139 L. Ed. 2d 13 (1997) (applying Illinois and South Dakota law). In Hill the Seventh Circuit, per Judge Easterbrook, extended the holding of ProCD from software to computers ordered over the phone, with terms inside the box in which the computer was shipped that were said to govern unless the customer returns the computer within 30 days. At issue was an arbitration clause, which Gateway asked the district court to enforce. The trial judge refused, writing that ''[t]he present record is insufficient to support a finding of a valid arbitration agreement between the parties or that the plaintiffs were given adequate notice of the arbitration clause.'' Gateway immediately appealed as of right, and the Seventh Circuit reversed and remanded with instructions to compel the Hills to submit their claims to arbitration.

The Hills sought to limit ProCD to software. ''[B]ut where's the sense in that?'' responded Judge Easterbrook:

ProCD is about the law of contract, not the law of software. Payment preceding the revelation of full terms is common for air transportation, insurance, and many other endeavors. Practical considerations support allowing vendors to enclose the full legal terms with their products. Cashiers cannot be expected to read legal documents to customers before ringing up sales. If the staff at the other end of the phone for direct-sales operations such as Gateway's had to read the four-page statement of terms before taking the buyer's credit card number, the droning voice would anesthetize rather than enlighten many potential buyers. Others would hang up in a rage over the waste of their time. And oral recitation would not avoid customers' assertions (whether true or feigned) that the clerk did not read term X to them, or that they did not remember or understand it. Writing provides benefits for both sides of commercial transactions. Customers as a group are better off when vendors skip costly and ineffectual steps such as telephonic recitation, and use instead a simple approve-or-return device. Competent adults are bound by such documents, read or unread.

The Hills made several other arguments, all of which Judge Easterbrook easily swatted down. They claimed that ProCD should be applied only to executory contracts, and so does not apply because their's with Gateway was not executory. But it was. For instance, Gateway had the executory obligation to stand by its warranty; Gateway promised to help customers use their products, etc. The Hills also argued that ProCD did not apply to them because Zeidenberg was a merchant, and they are not. According to § 2-207(2) of the UCC ''additional terms [following acceptance of an offer] are to be construed as proposals for addition to a contract. Between merchants such terms become part of the contract unless. ...'' But ProCD made it very clear that resolution of that dispute had absolutely nothing to do with § 2-207, which does not apply, Judge Easterbrook held, when there is only one form. Zeidenberg, at any rate, was not a merchant for the purposes of his transaction with ProCD. The Hills also tried to argue that the box containing ProCD's software sported a notice that additional terms were within, while the box containing Gateway's computer did not. ''The difference,'' Judge Easterbrook responded,

is functional, not legal. Consumers browsing the aisles of a store can look at the box, and if they are unwilling to deal with the prospect of additional terms can leave the box alone, avoiding the transactions costs of returning the package after reviewing its contents. Gateway's box, by contract, is just a shipping carton; it is not on display anywhere. Its function is to protect the product during transit, and the information on its sides is for the use of handlers rather than would-be purchasers.

Perhaps the Hills would have had a better argument if they were first alerted to the bundling of hardware-and legal-ware after opening the box and wanted to return the computer in order to avoid disagreeable terms, but were dissuaded by the expense of shipping. What the remedy would be in such a case-could it exceed the shipping charges?-is an interesting question, but one that need not detain us because the Hills knew before they ordered the computer that the carton would include some important terms, and they did not seek to discover these in advance. Gateway's ads state that their products come with limited warranties and lifetime support. How limited was the warranty-30 days, with service contingent on shipping the computer back, or five years, with free onsite service? What sort of support was offered? Shoppers have three principal ways to discover these things. First, they can ask the vendor to send a copy before deciding whether to buy. The Magnuson-Moss Warranty Act requires firms to distribute their warranty terms on request, 15 U.S.C. § 2302(b)(1)(A); the Hills do not contend that Gateway would have refused to enclose the remaining terms too. Concealment would be bad for business, scaring some customers away and leading to excess returns from others. Second, shoppers can consult public sources (computer magazines, the websites of vendors) that may contain this information. Third, they may inspect the documents after the products delivery. Like Zeidenberg, the Hills took the third option. By keeping the computer beyond 30 days, the Hills accepted Gateway's offer, including the arbitration clause.

But surely the Hills were on to something when they argued that ProCD should be limited to software. At some point the expense and difficulty of returning a product ought to matter; returning a small package of software is much less expensive and heartbreaking than returning a new computer. Perhaps Judge Broomfield's admonition in Arizona Retail Systems ought to be remembered here: ''to accept TSL's argument would allow TSL and other sellers to take advantage of the fact that purchasers often invest considerable time and money before ordering goods, and, therefore, are somewhat less likely to return goods once they arrive.'' Even if the consumer can get information about terms by investing time in searching for it, why should the burden be on them? Gateway can summarize key terms that consumers might care about in its advertisements. It can advise customers over the phone that they may hear a summary of the terms or a recitation of the terms in full, and can route customers to an electronic recording without wasting a minute of salesperson time. A recording would have the added advantages of shielding Gateway from accusations that the salesperson forgot a term and not requiring Gateway to front the money for postage. So the burdens on Gateway would be much less than Judge Easterbrook thinks.

(5) Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569 (1st Dep't 1998) . Brower is virtually identical to Hill-a class action against Gateway, which sought dismissal on the ground that Gateway and its customers had entered into valid agreements to arbitrate-and the First Department bought the analysis in Hill in its entirety: no contract was formed until the purchaser retained the merchandise for more than 30 days, as Gateway, master of the offer, had provided in materials accompanying shipment of the merchandise.

Nevertheless, the court found substantively unconscionable pursuant to U.C.C. § 2-302 a provision in the arbitration clause requiring arbitration to be conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce, whose cost was disproportionate to the amount of the typical consumer claim involved (the court did not find unconscionable a provision requiring arbitration to be in Chicago).

This case is also noted in § 5.15 of this supplement.

(6) M.A. Mortenson Co. v. Timberline Software Corp., 140 Wash. 2d 568, 998 P.2d 305 (2000) . Timberline's Bid Analysis software was supposed to help contractors prepare their bids. Mortenson wanted to purchase it in order to replace an old bid analysis program that was incompatible with a new computer system. It went about its purchase in the following manner. First, Mortenson called Software, Timberline's local authorized dealer, for a price quote. After price was settled, Mortenson sent Software a purchase order that had all sorts of terms, but none about consequential damages and no integration clause. Timberline software is distributed under license. The license terms were set forth on the outside of each diskette pouch and on the inside cover of the instruction manuals. The license terms included a robust limitation on consequential damages in favor of Timberline and Software. They also included a statement that ''use of the programs indicates your acknowledgment that you have read this license, understand it, and agree to be bound by its terms and conditions.'' A Software official personally delivered the software to Mortenson, and returned later for installation. The parties disputed what happened next (whether the Software official opened the packages or Mortenson did), but it was clear that the Software official installed the software, initiated and ran the program.

Mortenson used the software to prepare a bid. The software malfunctioned several times, and the bid Mortenson submitted was $1.95 million lower than intended. As contractors usually do in such cases, Mortenson got the job, and sued Timberline and Softworks. Timberline moved for summary judgment, arguing that the limitation on consequential damages in the license barred Mortenson's recovery. Mortenson took the position that its entire contract with Timberline consisted of the purchase order and it never saw or agreed to the provisions in the license. The trial judge found for Timberline and Software, and Mortenson appealed. The Court of Appeals affirmed, holding that (1) the purchase order was not an integrated contract; (2) the license terms were part of the contract; and (3) the limitation of remedies clause was not unconscionable and, therefore, enforceable. Mortenson petitioned the Supreme Court of Washington for review, and the Supreme Court affirmed.

The language of the purchase order, said the court, made it clear that the parties did not intend it to be an integrated contract, even assuming that it qualifies as a contract under U.C.C. § 2-204(1). The purchase order set an hourly rate for Timberline's provision of ''software support,'' but did not say how many hours of support Timberline would provide. The purchase order also stated that ''[a]t some future date should Timberline upgrade 'Bid Day' to a windows version, M.A. Mortenson would be able to upgrade to this system with Timberline crediting existing software purchase toward that upgrade on a pro-rated basis to be determined later.'' The purchase order did not contain an integration clause.

Mortenson argued that even if the purchase order was not an integrated contract, Timberline's delivery of the license terms merely constituted a request pursuant to U.C.C. § 2-207(2) to add additional or different terms that were ''material alterations'' to which the parties never agreed. The court agreed with Timberline that this is a case about contract formation pursuant to U.C.C. § 2-204, and not a case about contract alteration pursuant to U.C.C. § 2-207.

Mortenson insisted that Step-Saver was controlling, for just as in Step-Saver the seller shipped software that had been ordered by phone and followed by a confirming purchase order, together with a license agreement printed on the packaging. The Third Circuit, recall, applied U.C.C. § 2-207, holding that the warranty disclaimer and limitation of remedies terms in the license were not part of the parties' agreement because they were material alterations. Nevertheless, the court distinguished Step-Saver on two grounds. First, Step-Saver involved the applicability of a license agreement to a middleman, a value added retailer, not its enforceability against an end user. The seller, TSL, had assured the buyer, Step-Saver, that the license did not apply to it. Mortenson was the end user, and Timberline had never assured Mortenson that the license did not apply. Second, TSL twice asked Step-Saver to sign an agreement similar to the disputed license agreement. Step-Saver refused both times, yet TSL continued to make the software available to Step-Saver. Mortenson and Timberline, in contrast, had used license agreements throughout their relationship, including prior versions of the software that Mortenson had purchased in the past.

The court thus followed the general lines of analysis laid down in ProCD, Hill and Brower. The court concluded that because U.C.C. § 2-204 allows a contract to be formed '' 'in any manner sufficient to show agreement ... even though the moment of its making is undetermined,' it allows the formation of 'layered contracts' similar to those envisioned by ProCD, Hill, and Brower.'' The court noted that the Uniform Computer Information Transactions Act, covering agreements to ''create, modify, transfer, or license computer information or informational rights in computer information,'' which was approved and recommended for enactment by states in July 1999, ''embraces the theory of 'layered contracting,' which acknowledges while 'some contracts are formed and their terms fully defined at a single point in time, many transactions involve a rolling or layered process. An agreement exists, but terms are clarified or created over time'.'' The court thus held that the terms of the license were part of the contract between Mortenson and Timberline, and that Mortenson's use of the software constituted its assent to the license agreement.

In a well-reasoned dissent, Justice Sanders wrote:

[T]he majority abandons traditional contract principles governing offer and acceptance and relies on distinguishable cases with blind deference to software manufacturers' preferred method of conducting business. Instead of creating a new standard of contract formation-the majority's nebulous theory of 'layered contracting'-I would look to the accepted principles of the Uniform Commercial Code (UCC) And the common law to determine whether Timberline's licensing agreement is enforceable against Mortenson. Because the parties entered a binding and enforceable contract prior to the delivery of the software, I would treat Timberline's license agreement as a proposal to modify the contract requiring either express assent or conduct manifesting assent to those terms.

Justice Sanders rejected the majority's distinction of Step-Saver: ''While I agree these are notable factual distinctions, the majority does not explain why these distinctions warrant the outright dismissal of Step-Saver's logic given the strong similarities between the contract formation there and in the instant case.'' Moreover, he noted that the majority does not even mention Arizona Retail Systems, a case whose reasoning we have heartily commended.

In Puget Sound Fin., L.L.C. v. Unisearch, Inc., 146 Wash. 2d 428, 47 P.3d 940 (2002) , the plaintiff orally contracted with the defendant to provide the service of searching Uniform Commercial Code filings to determine whether the plaintiff should make loans. Upon the completion of an individual search, the defendant sent an invoice for its service. The invoice contained a clause limiting liability to the price of the service for an individual search, i.e., $25. After 47 searches, the defendant performed another search, reporting no outstanding UCC filings. The plaintiff made a loan to the searched party, which later defaulted. The plaintiff then discovered a UCC filing under a plural name of the debtor, which the defendant had not discovered. The plaintiff brought an action for damages against the defendant, which raised the limitation of liability clause of its invoice in defense.

Quoting the Restatement (Second) of Contracts, § 222, the court held that the trade usage in the industry clearly evidenced the practice of the defendant since parties such as the plaintiff require quick searches that do not allow for negotiated terms. Similarly, the course of dealing (Restatement (Second) of Contracts, § 223) between the parties established the invoice limitation of liability as a term of the contract. While the court was not convinced by the plaintiff's claim that such course of dealing had been established after the first transaction, it had no doubt that after 47 transactions, the term had been established through course of dealing. [Cf. the definition of ''agreement'' in U.C.C. § 1-201(3), which incorporates trade usage and course of dealing terms.]

The court also found independent support to include the term under its own analysis in M.A. Mortenson Co. v. Timberline Software Corp., 140 Wash. 2d 568, 998 P.2d 305 (2000) , which applied the ''layered'' or ''rolling'' contract theory to shrink-wrapped licenses, recognizing terms of which the purchaser only became aware after receiving and/or using the software as enforceable. Thus, the limitation of liability term in the invoice could be treated as the final ''layer'' of the contract including terms that had not been previously discussed, much less assented to, but were binding, nonetheless, if they were not unconscionable. The court found that the limitation of liability term in the invoice before the court was not unconscionable because it did not suggest unfair surprise and was not buried in a maze of fine print.

[Editor's Note: The court's conclusion that course of dealing may be established simply by the sending and receipt of printed terms which had never been previously consciously considered or acted upon is contrary to analyses by other courts. See, e.g., Step-Saver Data Sys., Inc. v. Wyse Tech., 939 F.2d 91 (3d Cir. 1991) , and cases cited at p. 104, n. 43 of that opinion. In addition, the ''layered'' or ''rolling'' contract theory which this court had previously adopted in the Mortenson case remains controversial, though several other courts have adopted this view.]

(7) Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332 (D. Kan. 2000) (applying Kansas and Missouri law). Just like Hill, except the drop-dead date was 5 days, not 30. Klocek brought a pro se claim both individually and as representative of a class again Gateway, alleging that it induced him and others to purchase computers and special support packages by making false promises of technical support. Klocek also claimed breach of contract and breach of warranty, specifically a warranty that its computer would be compatible with standard peripherals and Internet services. Gateway moved to dismiss, pointing to the dispute resolution clause in the Standard Terms enclosed in the box in which it shipped Klocek his computer and to the Federal Arbitration Act, which ensures that written arbitration agreements in maritime transactions and transactions involving interstate commerce are ''valid, irrevocable, and enforceable.'' Gateway thus had the burden of demonstrating that the parties had a written agreement to arbitrate.

Gateway urged the court to follow the Seventh Circuit's decision in Hill (the state courts of neither Kansas nor Missouri-the two most likely jurisdictions for choice of law purposes-had not decided whether terms received with a product become part of the parties' agreement). Noting academic criticism of the results in Hill and ProCD, the court was not persuaded that either Kansas or Missouri would follow the Seventh Circuit's reasoning. First, the court criticized Judge Easterbrook's assumption that UCC § 2-207 was irrelevant because the cases involved only one written form. As we explained in our comment on ProCD, nothing in § 2-207 confines it to an exchange of forms. Second, the court noted that the Seventh Circuit provided no explanation for its conclusion that the vendor is the master of the offer, i.e., that Gateway or ProCD were necessarily the offerors and could therefore control the terms of the customers' receipt of the merchandise. In Klocek, in the absence of evidence to the contrary and for the purpose of the motion to dismiss, the court assumed that Klocek, not Gateway, made the offer, and that, pursuant to U.C.C. § 2-206(b), Gateway accepted the offer either by completing the sales transaction in person or by agreeing to ship and/or shipping the computer to Klocek. Gateway's shipment of the Standard Terms could qualify as a counter-offer only if Gateway expressly made its acceptance conditional on Klocek's assent to the additional or different terms, and Gateway did not. Furthermore, because Klocek was not a merchant, the additional or different terms became part of the parties' agreement only if Klocek expressly agreed to them, and he did not.

The court in Lively v. IJAM, Inc., 114 P.3d 487 (Ok. Ct. App. 2005) , agreed with the Klocek analysis. The plaintiff operated a small business and, by telephone, ordered a computer from the defendant. When the computer failed to operate, he returned it for repairs. The defendant refused to repair it. The plaintiff brought this action in an Oklahoma court. The defendant moved to dismiss the action for lack of jurisdiction based on a forum selection clause in an invoice delivered with the computer. Though the court did not mention the ProCD analysis, it expressly followed the Klocek analysis. Recognizing that there was a question as to whether the plaintiff was a merchant, the court concluded that, under UCC § 2-207(2), if the plaintiff was not a merchant, the additional forum selection term in the invoice would be a mere proposal for addition to the contract that would be binding only if the plaintiff had expressly agreed to that term and no such agreement was found. If the plaintiff was not a merchant, the additional term would not become part of the contract because the forum selection clause was a material alteration of the offer which did not become part of the contract under § 2-207(2)(b).

In a subsequent case involving contracts to purchase computers, Rogers v. Dell Computer Corp., 2005 Ok. 51 (2005) , the Supreme Court of Oklahoma recognized the holding in the Lively case and the split of authority generated by the ProCD and contrary Step-Saver analyses concerning the incorporation of additional terms that were allegedly found in invoices and acknowledgments as well as within the product package. The term at issue was an arbitration clause. While there was no doubt that the parties had formed contracts for the sale of computers, the record in this case did not reveal whether the computers were ordered by mail, the internet or by telephone. Nor was there evidence of any discussions or conversations between the plaintiffs and defendant at the time of ordering. Focusing upon UCC § 2-206, the court recognized the buyers as offerors and held that, if the language and circumstances indicated that the contracts were formed at the time the orders were placed, the subsequently delivered additional terms would not be part of the contract. They would simply be proposals for addition to the contract under UCC § 2-207(2) since the buyers were not merchants. If the contracts were not formed until after the plaintiffs received the terms and conditions, they would be included as terms of the contract. The trial court had denied the application to compel arbitration and the intermediate court of appeals affirmed that holding. To determine when the contract had been formed, the supreme court reversed the holding of the trial court and vacated the court of appeals decision while remanding the case to ascertain when the contracts were formed. While the court's analysis does not expressly reject the ProCD analysis, its suggestion that the buyer is the offeror, its focus on the time of contract formation as governed by UCC § 2-206 and its recognition of the possible application of § 2-207 suggests such a rejection. In similar situations, ProCD and its progeny simply conclude, without explanation, that the seller is the offeror and, again without explanation, they studiously avoid any mention of Section 2-206 while erroneously assuming that Section 2-207 has no application where only one form (the seller's) is found. It is, however, interesting to note that the instant court's discussion of § 2-206(1)(b) is edited as follows: ''Unless otherwise unambiguously indicated by the language or the circumstances ...an order or other offer to buy goods for prompt or current shipment shall be construed as inviting acceptance ...by a prompt promise to ship... .'' Conspicuously missing from this quotation is the language, ''or by the prompt or current shipment of conforming or nonconforming goods.'' This is consistent with the court's discussion that appears to recognize only a contract formed at the time of ordering that would require proof of the defendant's promise to ship at that time. If, however, the computers were ordered by mail, internet or telephone, even in the absence of the defendant's express promise to ship in response to such an order, the defendant's shipment of the computers would constitute an acceptance of the buyers' offers, thereby forming a contract prior to the receipt of additional terms delivered later. Moreover, an internet or mail offer would constitute a ''form'' used by the buyer. Together with the seller's form, an application of § 2-207 would be appropriate even under the ProCD analysis that recognizes the ''battle of the forms'' only where there are two forms. If the order was by telephone, in the absence of the defendant's express promise to ship during the telephone discussion, the court's analysis augurs a return to the traditional Section 2-207 analysis based upon the language of 2-207 as well as precedent that clearly applies where only one form, the seller's form, is in evidence. Such an analysis treats material terms and conditions appearing with the shipped goods as additional terms subject to excision as materially altering terms under Section 2-207(2)(b).

See the analysis at § 3.37(e) in the main volume.

(8) Continuing developments in case law pursuing the ProCD v. Zeidenberg and Hill v. Gateway 2000 ''layered'' or ''rolling'' contract formation theories indicate further support for the enforceability of standardized terms ''inside the box.'' In Bischoff v. DirecTV, Inc., 180 F. Supp. 2d 1097 (C.D. Cal. 2002) , the court upheld an arbitration clause that was presented only after the defendant's service had begun. The court stated that the ''controlling issue is the economic and practical considerations involved in selling services to mass consumers which make it acceptable for terms and conditions to follow the initial transaction.'' In Licitra v. Gateway, Inc., 189 Misc. 2d 721, 734 N.Y.S.2d 389 (Civ. Ct. 2001) , however, while the court paid lip service to the ProCD line of cases, where an individual consumer (as contrasted with a class action in Brower v. Gateway 2000, Inc., 246 A.2d 246, 676 N.Y.S.2d 569 (1st Dep't 1998) sought relief from an arbitration clause on a sheet of terms that were inside the box containing the computer, the court was extremely critical of the ProCD analysis and refused to grant a motion by Gateway to compel arbitration essentially because such an ''additional'' term would create heavier burdens for a consumer seeking relief under the proposed arbitration process than the relief available under New York state law in a small claims court. The court, however, is generally critical of the analysis that makes ''inside-the-box'' terms (sometimes more recently referred to as ''pizza box'' terms, an instance of terminology which the court derides) enforceable if they are not objected to within 30 days. Moreover, the court suggests a U.C.C. § 2-207 analysis, rejected by the ProCD cases, and ends that discussion by citing Klocek v. Gateway, Inc., 104 F. Supp. 2d 1332 (D. Kan. 2000) , which expressly refused to follow the ProCD analysis. In O'Quin v. Verizon Wireless, 256 F. Supp. 2d 512 (M.D. La. 2003) , however, the court adopted the Seventh Circuit's ProCD and Hill v. Gateway 2000 analyses, supra, in holding that terms and conditions (including an arbitration clause) inside a box containing the defendant's telephone handsets were enforceable against a buyer who purchased them from a retail store.

(9) I. Lan Sys. v. NetScout Serv. Level Corp., 183 F. Supp. 2d 328 (D. Mass. 2002) , enforces a ''clickwrap'' license where the user must click a button manifesting assent before the software can be run. The court embraces the theory of ProCD because U.C.C. § 1-102 directs the pursuit of the Code's underlying purposes and policies, which include ''the continued expansion of commercial practices.'' The ''money now, terms later'' practice, especially with software, ''is a practical way to form contracts.'' Though ProCD attempted to distinguish Step-Saver, this court recognizes that ''Step-Saver once was the leading case on shrinkwrap agreements. Today, that distinction goes to ... ProCD, Inc. v. Zeidenberg,'' which is obviously contra to Step-Saver, notwithstanding the efforts by the Seventh Circuit to distinguish it.

(10) The inevitable issues concerning mutual assent via the Internet are illustrated by Specht v. Netscape Communications Corp., 150 F. Supp. 2d 585 (S.D.N.Y. 2001) . The defendants moved to compel arbitration pursuant to an End User License Agreement (EULA) presented on a computer screen that contained an arbitration clause. The court distinguished shrinkwrap, clickwrap and ''browsewrap'' licenses, holding that shrinkwrap licenses such as the license in ProCD and clickwrap (clicking an ''I agree'' or similar button on the computer screen) licenses are sufficient manifestations of assent to make the terms enforceable. A ''browsewrap'' license, however, simply refers to license terms that may be viewed but does not require any manifestation of assent to such terms before the user downloads the information or uses it. The court held that browsewrap license terms are not enforceable because ''[m]utual assent is the bedrock of any agreement to which the law will give force. The defendant's position, if accepted, would so expand the definition of assent as to render it meaningless.'' The plaintiff did not assent to the browsewrap license agreement and was not subject to the arbitration clause.

In affirming the decision of the District Court, Specht v. Netscape Communications Corp., 306 F.3d 17 (2d Cir. 2002) , emphasized that, whether governed by the common law or by Article 2 of the Uniform Commercial Code, a contract requires a manifestation of agreement between the parties. Quoting Restatement (Second) of Contracts, § 19, the court recognized that a party's conduct is not effective as a manifestation of assent unless the party intends to engage in the conduct and knows or has reason to know that the other party may infer such assent from such conduct. Reasonably conspicuous notice of the existence of contract terms and unambiguous manifestation of assent to such terms by consumers are essential to the integrity of electronic bargaining. Prior to acting on the invitation to download, a reasonably prudent offeree in the plaintiff's position would not have known or learned of the reference to the license terms hidden below the ''Download'' button the next screen. The web page screen was printed in such a manner that it tended to conceal Netscape's intent to bind the user to Netscape's terms. The court distinguished cases such as ProCD v. Zeidenberg, which involved terms splashed on a computer screen or in print, albeit provided with the product, since the terms in such cases were clearly set forth. Neither did cases involving online transactions assist the defendant since they involved much clearer notice that a user's act would manifest assent to contract terms. Though the parties did not refer to it, the court took notice of the California consumer fraud statute that requires consumers to have relevant information before they can be bound. Similarly, while the Uniform Computer Information Transaction Act was enacted only in Maryland and Virginia, it recognizes the importance of conspicuous notice and unambiguous manifestation of assent in online sales and licensing of computer information.

Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004) , distinguishes the Specht case, where a legend restricting the use of the data on the plaintiff's website did not appear until after the defendant had requested and received the data. Unlike the Specht case, which involved a single use of the website where the user would only discover the license terms by scrolling down the computer screen, the defendant in the instant case was a daily user of the plaintiff's website and was well aware of the conditions imposed on the receipt of this benefit. It was, therefore, bound to these conditions. This case is fully discussed in § 3.17 of this supplement.

See also Defontes v. Dell Computers Corp., 52 U.C.C. Rep. Serv. 2d 795, 2004 R.I. Super. LEXIS 32 (R.I. Super. Ct. 2004) . The plaintiffs were representatives of a class of buyers who purchased Dell computers. They claimed that Dell was overcharging customers by imposing a tax on service contracts and transportation costs. Dell moved to stay the proceeding and compel arbitration. The standard terms of the Dell contract contained an arbitration clause which customers could view on a hyperlink at the bottom of Dell's website. Dell also enclosed a copy of the terms with the shipped computer. The court recognized that questions of the validity of the contract are for the arbitrator, but citing the Specht case, the court emphasized that arbitration may not be compelled until the court has resolved the very existence of the contract. With regard to the terms available through Dell's hyperlink, the court found that this constituted a ''browsewrap'' agreement which, as in Specht, would not bind the parties since they could not be bound to terms to which they are not properly notified. While shrinkwrap agreements enclosed with the product have been held sufficient to bind the parties (citing ProCD v. Zeidenberg, Hill v. Gateway 2000, supra), the present case was distinguishable since the Dell terms did not include an express statement that if the buyer did not agree to the terms, the buyer could reject the terms simply by returning the product. The court found that Dell's ''total satisfaction'' policy was not equivalent to such a statement. Absent an express statement concerning the buyer's option to reject the terms by returning the product, the court held that the buyers did not knowingly consent to the terms inside the box. Since the arbitration clause bound only the buyer and not Dell to arbitrate disputes and also permitted Dell to modify the provision at any time, the court found that Dell's promise was illusory. Because of the absence of the opportunity of knowing consent and because of the illusory nature of Dell's promise, the court denied Dell's motions to stay the proceedings and compel arbitration.

(11) SoftMan Prods. Co. v. Adobe Sys. Inc., 171 F. Supp. 2d 1075 (C.D. Cal. 2001) , found that SoftMan had distributed Adobe software but did not download it. It had not, therefore, assented to Adobe's EULA terms, which an end-user would see when the software was downloaded. A notice on the outside of the box of terms inside was insufficient to find assent by SoftMan. This deviates from ProCD, which announces that a notice on the outside makes terms on the inside enforceable, notwithstanding the physically inconspicuous notice in ProCD. The same court (7th Circuit), however, did not require any notice on the outside of the box in Hill v. Gateway 2000 where the only notice on the outside of the box was ''fragile.''

(12) Paul v. Timco, Inc., 356 N.J. Super. 180, 811 A.2d 948 (2002) . The plaintiff purchased an automobile under a contract that included an extended warranty. The terms of the extended warranty were not specified, but a salesperson stated that it would cover motor and transmission repairs for five years or 100,000 miles, whichever came first. Three years later, the plaintiff received a service contract pursuant to the extended warranty that contained an arbitration clause. A month before she received this document, the transmission had to be replaced. The defendant refused to pay for the costs of replacement and the plaintiff brought an action that was dismissed and referred to arbitration. The trial court held that the plaintiff was bound by the arbitration clause regardless of when she received the document. The court of appeals reversed, holding that the only document the plaintiff had signed contained no mention of arbitration. At most, the defendant's later submission of the arbitration provision was an offer to modify the contract which the plaintiff did not accept. The court reversed the order dismissing the plaintiff's complaint.

(13) Mattingly v. Hughes Elecs. Corp., 147 Md. App. 624, 810 A.2d 498 (Ct. Spec. App. 2002) . Mattingly subscribed to the service of defendant DIRECTV (a subsidiary of Hughes Electronics Corp.) under a contract that permitted the defendant to change its terms and conditions, subject to sending a written notice describing the change and its effective date so as to allow a subscriber to cancel the service. Less than a month later, Mattingly received a new agreement that included an arbitration clause. Mattingly claimed that it was not bound by the arbitration clause. The trial court dismissed Mattingly's action. The defendant argued that by subscribing to the original agreement that allowed the defendant to change the terms and conditions, Mattingly had constructively accepted the arbitration clause. While recognizing that the fairness and wisdom of the ''constructive acceptance'' method of amending consumer contracts has been the subject of considerable judicial, legislative and scholarly debate, the court found it unnecessary to enter that debate because the original contract required the defendant to send Mattingly a written notice describing the change. The defendant's mailing containing the new agreement and arbitration provision was sent along with a standard monthly invoice that did not alert Mattingly to the changes in the agreement. The arbitration clause appeared as clause 23 of the new agreement in the same print as the other clauses. By its original commitment to send a written notice describing the change, the defendant obligated itself to provide sufficient information to allow Mattingly to make an informed decision. If the arbitration clause and its description had been sent separately or otherwise alerted Mattingly to its import, the defendant would have met its obligation. The method it used, however, breached that obligation. The court distinguished cases involving the delivery of an arbitration term with the goods, such as Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.) , cert. denied, 522 U.S. 808, 118 S. Ct. 47, 139 L. Ed. 2d 13 (1997) , or the enforceability of an arbitration clause in the original customer agreement, as in Bischoff v. DirecTV, 180 F. Supp. 2d 1097, 1103-04 (C.D. Cal. 2002) . These cases did not involve the subsequent addition of an arbitration clause through constructive acceptance. The court held that Mattingly had not constructively accepted the arbitration clause and the judgment dismissing claims against DirecTV, Inc., was vacated.

Supplement to Notes in Main Volume

12. Litton Microwave Cooking Prods. v. Leviton Mfg. Co., 15 F.3d 790 (8th Cir. 1994) (price letters and catalogs are not offers to form contract); Gulf States Utilities Co. v. NEI Peebles Elec. Products, Inc., 819 F. Supp. 538 (M.D. La. 1993) (same).

16. Ind.- Kittle v. Newell Coach Corp., 830 F. Supp. 1209 (S.D. Ind. 1993) (''clarification'' in acceptance changed the material terms of the offer regarding the time and means of payment and therefore was not an acceptance).

Despite the widespread criticism of Roto-Lith, the federal district court in Massachusetts has reaffirmed it, erroneously failing to recognize Erie principles that would require the court to predict how Massachusetts state courts would decide the problem rather than how the First Circuit would decide the problem. Winter Panel Corp. v. Reichhold Chemicals, Inc., 823 F. Supp. 963 (D. Mass. 1993) .

20. U.S.- Goodyear Tire & Rubber Co. v. Dynamic Air, Inc., 2004 U.S. Dist. LEXIS 8972, 53 U.C.C. Rep. Serv. 2d 778 (D. Minn. 2004) . The plaintiff sent a request for proposal (RFP) to the defendant seeking a carbon black pneumatic conveyor system for one of the plaintiff's plants. The RFP contained a warranty clause but was silent concerning remedies. The defendant responded with a detailed proposal including its ''terms and conditions'' that excluded consequential damages. The plaintiff responded with its purchase order conspicuously stating that it was ''per your proposal to the extent that the conditions thereof are not in conflict with any terms or conditions noted on this purchase order.'' The same purchase order conspicuously stated, ''This purchase order is made subject to, and your acceptance is expressly limited to, the terms and conditions stated herein, including the terms and conditions stated on the reverse side hereof.'' Among the 21 conditions on the back page in smaller font, the Goodyear purchase order stated, ''All rights and remedies specifically set forth in this Purchase Order shall be cumulative and in addition to any other or further rights and remedies provided in law or equity.'' The defendant responded to the purchase order with a letter acknowledging receipt of the purchase order and accepting it ''conditioned upon your assent to the following additional or different terms.'' The letter then stated that the terms and conditions in the plaintiff's purchase order were ''superseded'' by the terms and conditions in the defendant's proposal that excluded consequential damages. Shortly after the pneumatic conveyor system was installed, a malfunction occurred, resulting in the necessity to scrap tires produced by the system, which further resulted in an alleged loss of $2 million. The plaintiff sought recovery of these consequential damages and the defendant moved for summary judgment. The court found that no contract had been formed by the exchange of writings between the parties, but a contract by conduct had been formed by the shipment and acceptance of the conveyor system. The case was, therefore, governed by § 2-207(3) of the Uniform Commercial Code (UCC), which recognizes such a contract by conduct including the terms of the conflicting forms that match. The non-matching terms (here the conflict between consequential damages terms) are excised, leaving a gap filled by the UCC default term that allows the buyer to recover consequential damages. The court, therefore, denied the defendant's motion for summary judgment concerning consequential damages.

While the result is unobjectionable, the court's analysis is confusing. The court relied on Ionics, Inc. v. Elmwood Sensors, Inc., 110 F.3d 184 (1st Cir.1997) , which is best known for overruling the generally criticized opinion in Roto-Lith, Ltd. v. F.P. Bartlett & Co., 297 F.2d 497 (1st Cir. 1962) . Ionics, however, involved a seller's counteroffer in its acknowledgment form. The instant court concluded that neither § 2-207(1) nor § 2-207(2) applied herein. Rather, it held that § 2-207(3) applied, but it based this holding on the earlier quoted language in the buyer's purchase order: ''This purchase order is made subject to, and your acceptance is expressly limited to, the terms and conditions stated herein ... .'' As the main text indicates, courts have rejected the ''subject to'' language as insufficient to track the statutory counteroffer language of § 2-207(1), ''unless acceptance is expressly made conditional on assent to the additional or different terms.'' The court does not indicate whether it viewed the purchase order as an offer or as a response to an offer (assuming the defendant's proposal was an offer). If the purchase order was an offer, the quoted language suggests the incorporation of § 2-207(2)(a), which allows an offeror to expressly limit acceptance to the terms of the offer. If the purchase order was a response to an offer by the seller, the ''subject to'' language would generally be rejected as counteroffer language. Such a response would, therefore, be an acceptance with expressly different terms. The defendant's letter response to the purchase order stating that it was ''conditioned upon your assent to the following additional or different terms'' clearly tracks the counteroffer proviso in § 2-207(1). Thus, assuming the purchase order was an offer, the response was a counteroffer. No contract was formed through the exchange of forms and § 2-207(3) applied in accordance with the holding. Absent the defendant's counteroffer reply, however, there would have been a contract containing expressly different terms to which the ''knockout'' view would have applied. The ''knockout'' view is premised on Comment 6 to § 2-207, which deals with confirming memoranda containing expressly conflicting terms. This conflict implies that the parties necessarily object to each other's terms, thereby satisfying the notice of objection under § 2-207(2)(c) that removes such terms from the resulting contract. The instant court relies on Comment 6, apparently forgetting that Comment 6 has no application where § 2-207(3) governs. Indeed, the court otherwise states that neither § 2-207(1) nor § 2-207(2) applies. In effect, the court appears to suggest that whenever there are expressly conflicting terms in the forms exchanged by the parties, no contract results from the exchange of the forms and the parties' subsequent contract by conduct is governed by § 2-207(3). Case law, however, clearly shows that parties may form a contract through an exchange of forms including expressly conflicting (''different'') terms. Under the clearly prevailing view, such expressly conflicting terms will be ''knocked out'' and the court will fill the gaps of the contract created by the exchange of forms with UCC implied or default terms. While the ''knockout'' view is highly reminiscent of the excision of non-matching terms under § 2-207(3), the difference is that an express term that conflicts with an implied term will be excised under § 2-207(3) while the ''knockout'' view applies only to expressly conflicting terms under a contract created by the exchange of forms.

N.M.-The Dorton case is also followed in Gardner Zemke Co. v. Dunham Bush, Inc., 115 N.M. 260, 850 P.2d 319 (1993) , which adds to the analysis the point that ''whether an acceptance is made expressly conditional on assent to different or additional terms is dependent on the commercial context of the transaction.''

24. Mecanique C.N.C., Inc. v. Durr Envtl., Inc., 304 F. Supp. 2d 971 (S.D. Ohio 2004) . In pursuit of its contract to construct a selective catalytic reduction system for G.E., the defendant, Durr, received a bid from the subcontractor-plaintiff (CNC) in the form of a letter (the ''August 3 letter'') to fabricate and install ductwork and related equipment as part of the system. Durr responded with a subcontract offer to which CNC added three handwritten additions: an attempt to incorporate the terms of the August 3 letter, an attempt to shift the obligation to supply tools from CNC to Durr, and an attempt to change the invoice terms concerning the calculation of payment. Durr's response was in the form of a revised subcontract that included only the invoice changes. Though it did not sign the revised subcontract, CNC began to perform the work. Disputes between the parties, however, resulted in the termination of CNC, which brought this action and claimed that the terms of the contract were found in the August 3 letter. Durr claimed that the revised subcontract governed the parties' rights and duties.

The court first determined that the agreement was a contract for the sale of goods to which the Uniform Commercial Code (UCC) applied since the compensation of CNC was based exclusively on the good produced. There was no separate compensation for installation services and CNC was not to be involved in any servicing of the product. After determining that the August 3 letter was a mere price quotation, the court found the offer in the initial subcontract from Durr. CNC's response to the offer was deemed to be a definite and seasonable expression of acceptance notwithstanding what the court characterized as ''additional'' terms (U.C.C. § 2-207(1)). While the opinion does not clearly indicate differences between CNC's August 3 letter and the terms of the initial subcontract offer, the CNC term shifting the obligation to supply tools from CNC to Durr appears to be an expressly ''different'' term; such a term would induce the application of the ''knockout'' rule under the prevailing view, which rejects the implication of ''different'' into § 2-207(2), since that subsection expressly applies only to ''additional'' terms. Under the prevailing view, therefore, § 2-207(2) would not apply. Characterizing CNC's terms as ''additional,'' the court held that they did not materially alter the terms of the offer and would, therefore, have become part of the contract under U.C.C. § 2-207(2)(b) except for Durr's response in the revised subcontract that included only one of the three ''additional'' terms. The response, therefore, was an implied objection to the other two additional terms under § 2-207(2)(c) that excluded such terms from this contract between merchants. Thus, the terms of the contract were found in the revised subcontract. The court granted Durr's request for partial summary judgment.

It is interesting to note that CNC had its principal place of business in Canada, where it performed the fabrication of the ductwork under the observation of Durr and G.E. Durr had its principal place of business in Michigan. Since the court held that this was a contract for the sale of goods, there is a noticeable absence of any mention of the United Nations Convention on Contracts for the International Sale of Goods (CISG) as the governing law which appears to apply to such a transaction between parties, each with principal places of business in CISG countries. There was no evidence that the parties had expressly agreed to exclude CISG as they are permitted to do under CISG Article 6. The parties argued only over whether the law of Michigan or Ohio should apply. The court concluded that there was no conflict between the laws of Michigan and Ohio for the purposes of this action. Had CISG applied, however, the analysis concerning different or additional terms would be substantially different under CISG Article 19, which would characterize a reply to an offer containing additions, limitations or other modifications to be a rejection and counter offer. If the ''additional or different terms'' are not material alterations, they become part of the contract unless the offeror objects to them. Article 19(3), however, suggests that additional or different terms relating, among other things, to price, payment, quality, quantity, place and time of delivery, extent of a party's liability or the settlement of disputes are necessarily material terms. The list makes it difficult to conceive of any meaningful term that would not be ''material.''

30. U.S.- M.K.C. Equip. Co. v. M.A.I.L. Code, Inc., 843 F. Supp. 679 (D. Kan. 1994) (on motion to dismiss for improper venue, forum selection clause held to be a material alteration).

33. U.S.-In Fleming Cos. v. Krist Oil Co., 324 F. Supp. 2d 933 (W.D. Wis. 2004) , the court addressed the issue of the meaning of ''supplementary terms'' in U.C.C. § 2-207(3). The plaintiff argued that the defendant's breach of contract claim was based on incidental services provided to the defendant that were not part of the contract. The defendant claimed that such services had become part of the contract via trade usage, past course of dealing and the Uniform Commercial Code generally. The court held that, while some courts limit supplementary terms to ''gap-filling'' terms such as the implied warranties of merchantability and fitness for a particular purpose to discern the terms of a contract by conduct under § 2-207(3), the court relied on Dresser Industries, Inc., Waukesha Engine Div. v. Gradall Co., 965 F.2d 1442, 1450-52 (7th Cir. 1992) , in holding that, under Wisconsin law, a court is not limited to standardized gap-fillers under Article 2 of the UCC, but may utilize any terms arising under the entire UCC. The court added the support of the Restatement (Second) of Contracts, § 223, concerning course of dealing evidence that can be introduced to give meaning to or supplement or qualify the parties' agreement.

Ariz.-The neutrality principle is also embraced in Arizona Retail Systems, Inc. v. Software Link, Inc., 831 F. Supp. 759 (D. Ariz. 1993) (section 2-207 intended ''to ensure that a party, usually the selling party, does not gain an advantage merely by being the last to send a form'').

37. In Brewster of Lynchburg, Inc. v. Dial Corp., 33 F.3d 355 (4th Cir. 1994) , the parties sent documents on the same day confirming a supply contract entered into orally in two prior telephone conversations. The confirmations contained different escape clauses. The court concluded that the conflicting term drops out, leaving the escape clause to which the parties agreed in their telephone conversations. This case is also noted in §§ 4.6, 568 and 577.