Competition and the Quality of Standard Form Contracts: The Case of Software License Agreements

• Published date: 01 September 2008
• DOI: http://doi.org/10.1111/j.1740-1461.2008.00130.x
• Date: 01 September 2008
• Author: Florencia Marotta‐Wurgler

Competition and the Quality of

Standard Form Contracts: The Case

of Software License Agreements

Florencia Marotta-Wurgler*

Standard form contracts are pervasive. Many legal academics believe that

they are unfair. Some scholars and some courts have argued that sellers

with market power or facing little competitive pressure may impose one-

sided standard form terms that limit their obligation to consumers. This

article uses a sample of 647 software license agreements drawn from many

distinct segments of the software industry to empirically investigate the

relationship between competitive conditions and the quality of standard

form contracts. I find little evidence for the concern that firms with market

power, as measured by market concentration or firm market share, require

consumers to accept particularly one-sided terms; that is, firms in both

concentrated and unconcentrated software market segments, and firms

with high and low market share, offer similar terms to consumers. The

results have implications for the judicial analysis of standard form contract

enforceability.

I. Introduction

Standard form contracts are pervasive in most consumer and business trans-

actions involving goods and services. Many academics and courts have

*New York University School of Law, 40 Washington Sq. S., New York, NY 10012; email:

wurglerf@juris.law.nyu.edu.

I am grateful to Barry Adler, Bill Allen, Jennifer Arlen, Yannis Bakos, Bernie Black, Jean

Braucher, Clay Gillette, Marcel Kahan, Lewis Kornhauser, Russell Pittman, Roberta Romano,

Robert Scott, Peter Siegelman, Jay Westbrook, Jeff Wurgler, Kathy Zeiler, two anonymous

referees, and participants at the Harvard-U. Texas Joint Conference on Commercial Realities,

Conference of Empirical Legal Studies, and AALS 2007 Meetings Section on Law and Econom-

ics for helpful suggestions, and to Leonard Lee, Christine Murphy, and Yuriy Prilutsky for

excellent research assistance.

Journal of Empirical Legal Studies

Volume 5, Issue 3, 447–475, September 2008

© 2008, Copyright the Author

Journal compilation © 2008, Cornell Law School and Wiley Periodicals, Inc.

447

suggested that standard form contracts are unfair. A particularly common

concern is that sellers with market power or in concentrated markets lack

sufficient competitive pressure to offer terms that buyers prefer, instead

choosing to impose one-sided terms that greatly limit their obligations to

buyers.1Indeed, courts invalidate provisions in standard form contracts

under the doctrine of unconscionability,2of which a factor is whether the

buyer is deprived of meaningful choice because the seller is a monopolist3or

has significant market share.4

The view that market power reduces the quality of standard terms is not

theoretically unambiguous, however. Some have argued that if consumers

prefer warranties instead of disclaimers, for example, and if they would be

willing to pay a premium for this protection, even a monopolist will offer

1Friedrich Kessler, Contracts of Adhesion—Some Thoughts About Freedom of Contract, 43

Colum. L. Rev. 629 (1943).

2U.C.C. § 2–302. Unconscionability has both a procedural and a substantive element. Proce-

dural unconscionability refers to oppression used in the process of making a contract, such as

defective disclosure of terms, or lack of alternatives for the adhering party. Substantive uncon-

scionability refers to oppressive or harsh content in a contract. Both factors alone are necessary

but not sufficient for a court to invalidate a contract under the unconscionability doctrine,

although this varies from jurisdiction to jurisdiction. See James J. White & Robert Summers,

Handbook of the Law Under the Uniform Commercial Code 128 (1972). Note that because

most modern transactions involve larger corporations and individual consumers (regardless of

competitive conditions), courts will generally refuse to consider unequal bargaining power as

the only factor in a finding of procedural unconscionability.

3See, e.g., Pack v. Damon Corp., 320 F. Supp. 2d 545, 556 (E.D. Mich. 2004) (finding no

procedural unconscionability because the “[p]laintiff has not shown that GRVC was his only

source for buying a new motor home, or that other potential sources required submitting

disputes to arbitration”); Lozada v. Dale Baker Oldsmobile, Inc., 91 F. Supp. 2d 1087, 1100 (D.

Mich. 2000) (noting that “[i]n order to determine whether a contract is procedurally uncon-

scionable, the court typically considers the relative bargaining power of the parties, their relative

economic strength, the alternative sources of supply”); Rozeboom v. Northwestern Bell Tel. Co.,

358 N.W.2d 241, 242, 242–45 (S.D. 1984) (finding a term unconscionable because the seller was

a monopoly and the buyer could not shop for alternatives).

4See, e.g., Flores v. Transamerica HomeFirst, Inc., 93 Cal. App. 4th 846, 853 (Cal. Ct. App.

2001); Arnold v. United Cos. Lending Corp., 204 W. Va. 229, 511 S.E.2d 854, 861 (1998)

(“The relative positions of the parties, a national corporate lender on one side and elderly,

unsophisticated consumers on the other, were ‘grossly unequal.’”); A & M Produce Co. v.

FMC Corp., 135 Cal. App. 3d 473, 186 Cal. Rptr. 114, 125 (1982) (finding procedural uncon-

scionability because FMC had substantially more sales than A&M and thus much more

bargaining power).

448 Marotta-Wurgler