SERIES OF PAPERS ON UCITA

ISSUES

           On July 29, 1999 the National Conference of Commissioners on Uniform State Laws (NCCUSL) by a vote of the states 43 to 6 promulgated the Uniform Computer Information Transactions Act (UCITA) for consideration by the various state legislatures for adoption.  UCITA was first presented to a state in the year 2000 and adopted in the first two states to consider it: Virginia and Maryland.

           Information technology accounts for huge share of the nation’s economy and is the most rapidly expanding component of our economy.  Until UCITA, there has been no contract law that provides clear, consistent uniform rules for the intangibles subject matter involved in computer information transactions in Internet and elsewhere and no uniform law developed to provide substantive guidance for these transactions.  UCITA will make it possible for states to provide a neutral and predictable legal framework for transactions in computer information in Internet and in other transactional contexts, and for states to provide greater legal certainty for millions of transactions occurring daily.

           UCITA has been discussed and debated during an eight year period in well-attended drafting meetings, website, and e-mail lists, and in many seminars and symposia.  During this time, a number of issues have been debated and redebated in depth.  Many important changes to the draft have been made responsive to those substantive discussions. UCITA with these changes was overwhelmingly endorsed by NCCUSL as appropriate for state adoption.  Some criticism persists without taking into account the responsive changes made.

           In UCITA discussions, a number of issues have been emphasized recurrently.  Thus, we have prepared a series of papers to provide responses to the various recurring questions.  The answers are based on UCITA as promulgated with the substantive changes made during the deliberative process over eight years.

CONTENTS

1.         Scope

2.         Opt-in

3.         Fair use/ Preemption

4.         Consumer Issues

5.         Warranties

6.         Published Information Content

7.         Perfect Tender

8.         E-Commerce

9.         Assent rules - general

10.       Mass-market Licenses

11.       Shrinkwrap licenses

12.       Electronic self-help

13.       Duration of license

14.       Transferability of license

15.       Choice of Law

16.       Choice of forum

Scope .  Scope;

            ·             What is “computer information?   In today’s technology it is digital information, but UCITA will continue to apply even if new forms of computers are created. The computer information industries are the fastest growing in country and the U.S. is the world leader.  UCITA provides a uniform and fair, contract law backbone for these industries.

            ·             What does UCITA cover? UCITA covers contracts in “computer information.” It applies only if the agreement is to create, modify, transfer, or license computer information. If a contract involves both computer information and something else, UCITA applies only to the part of the deal that involves computer information, except where the other subject matter is not goods and obtaining the computer information is the primary purpose of the deal.

            ·             What does that mean, give me some examples?   UCITA covers contracts to license or buy software, contracts to create a computer program, contracts for multimedia products, contracts for computer games, contracts for online access to databases, contracts to distribute information on the Internet, contracts to develop websites, and the like. UCITA does not cover television sets, stereos, automobiles, toasters, airplanes, baseball bats or traditional books.

            ·             Does UCITA really apply any time I give information to someone? No.   UCITA only deals with contracts.  There are many times we give information to other people that have nothing to do with a contract for information.  UCITA does not apply even if we agree to exchange information about the contract by E-mail or if I simply decide to deliver on a computer diskette the information I promised you.

            ·             Does UCITA cover computers, televisions, or a toaster?   No. UCITA does not apply to goods, except the “diskette” that contains a computer program.  The law of goods is in Article 2 or Article 2A of the UCC. UCITA does not change that.  It deals only with computer information.

            ·             What if the toaster I buy has software in it, does UCITA apply?   No.   UCITA does not apply to software embedded in goods other than a computer or a computer peripheral unless a main purpose of the transaction is to get the software.  You bought a toaster, not software, and UCITA does not apply.

           ·             Does UCITA cover sales of books, newspapers or magazines?   No.  These do not involve computer information.  UCITA covers online books, online databases, and the like, but not sales of print books, magazines or newspapers. Why the difference? There is existing law for traditional books. Digital and online products have no uniform rules, but are covered by varying and under-developed common law.  UCITA will provide uniform contract formation and “default” rules for transactions in these products.

            ·             Does UCITA cover traditional movies, television, records or cable?   No.   These industries each have long-standing customs and practices that are unique and hard to cover in one set of uniform rules.  However, if people in those industries want to have the benefits of UCITA, they can by agreement have UCITA apply to their transactions.  UCITA does, however, motion pictures, cable, and broadcast distributed in digital form in the mass market.  This coverage is, of course, subject to any state or federal regulations of these subject matters.   

            ·             Does UCITA cover banking, insurance or telephone services?   No.  UCITA expressly excludes insurance services contracts and financial services contracts.  These and regulated telecommunications services are governed by their own, established body of law and involve extensive regulation.  UCITA does not alter their current law.

            ·             Does UCTA create property rights in information that don’t exist today?  No.   UCITA is a contract law statute.  It does not change, modify or create property rights.  As one respected judge said, the difference between contract and property is that contracts are between two people, but property rights are “good against the world.” UCITA deals with contracts, not property.  In fact, UCITA makes very clear in Section 105(a) and Section 114(a) that it does not alter existing federal property rights law or state property rights law such as trade secret law.

Opt-In or Out

                ·             Does UCITA really let people choose what law applies to their contract?  Yes, with restrictions.   This is the normal U.S. statutory and common law rule for contract laws. The same rule is true in Article 2 by implication.

            ·             Why is this normal?   Contract laws traditionally do not dictate to contracting parties what the contract shall be.  Instead, contract laws are “default rules” that govern only if the parties do not choose a different result.  Choosing to be governed by UCITA (or Article 2, or other law) is one way of doing that. One respected commentator explains it this way:  “No one questions the freedom of … individuals to contract in a manner that is not contrary to the [Uniform Commercial] code rules.  But are they also free to change the Code rules to suit their own purposes?  To put it bluntly, are they free to devise rules for themselves that might be quite different than the Code rule?  The answer to that question is yes.  Let it be said openly and plainly, lest there be any doubt.  What this means is that the Code opts for freedom of contract [even] permitting an alteration of its own basic rules.  That is exactly what [UCC] 1-102 (3) says.” [1]

            ·             If one law applies, why should parties be able to change it in UCITA?   Two reasons.  First, contract law only creates background rules.  We have a free-market, contract-choice economy. UCITA preserves that.  This means that parties can sell, buy or license (or not) and decide what terms are acceptable for their transaction.  Opting to let UCITA apply or not is one way of doing this.  Second, because UCITA and our information economy break new ground, UCITA was drafted with a relatively narrow scope.  There may be transactions where several different contract laws will apply.  This same thing happens under current contract law today.  In each case, if they so choose, the parties need to be able to resolve the issues by agreement.  They can do this by choosing UCITA as applicable law.

            ·             When would this be good? Give me some illustrations. Let’s say that a software company and a cable company agree to create a new business under a simple contract.  What law governs that contract?  The companies should be able to choose UCITA, common law, or Article 2.  By doing so, they reduce costs and risk and can create a coherent contract.   Next, let’s assume it’s not clear what law governs a contract between two people.  It might be UCTA or common law.  The parties want to know what law applies.  Under UCITA, they can agree on this and avoid costly uncertainty or litigation.

            ·             By choosing UCITA, can a licensor or seller avoid all restrictions that exist in law today?  No.   Choosing UCITA only affects contract law.  There is no change in the application of antitrust, advertising, tax, regulatory, consumer protection or similar laws.

            ·             Does UCITA let sellers avoid consumer protections?  No.   To the contrary, UCITA specifically says that all consumer protection laws continue to apply. (see Item 4) UCITA also creates new consumer protections.

            ·             Does UCITA really allow anyone and anything to opt in, e.g., does it let a seller make my real estate sale be governed by it?  No.   UCITA limits opting in under its provisions to transactions where information is a material part of the deal.  But other law in some states today does allow real estate contracts to be governed by any law the parties choose, such as Article 2 on goods.

            ·             Can opting into UCITA be used to change product liability law for goods?  No. UCITA does not alter product liability law.  The law of products liability is tort law, not contract.  The most recent national restatement of that tort law recognized that how it applies to information is not clear.  That restatement of tort law took no position on what should be the rule and neither does UCITA.

                ·             So, what’s the problem with the opt-in right?  There isn’t any. If a law prevents changing some rules of contract by agreement, opting in or out cannot alter this.

Federal Preemption and Fair Use

            ·             Why does UCITA specifically say that its provisions are preempted by applicable federal law?   Like any state law, UCITA is subject to federal law, including constitutional rights of free speech. Typically, state statutes do not even mention this because it is so obvious. [2]   Section 105 states the obvious. This is to allay concerns and point parties to the fact that UCITA is not the last word on the relationship between contracts and information policy. A large body of federal intellectual property law exists. Some interest groups claimed that UCITA was intended somehow to avoid that law and others claimed that some of UCITA is contrary to federal law. Section 105 resolves both issues.

            In fact, cases routinely hold that copyright does not generally preempt state contract law.  Hundreds of cases apply contract law to transactions in copyrighted material without even discussing preemption. To the extent the parties’ contract is preempted, if at all, that preemption limits the freedom to contract and this is recognized by UCITA.

                ·             Isn’t true that, today, under copyright law, you can’t license software, but only sell copies?   No.   If this were true, the most vibrant industry in this country would be based on illegal transactions.  In fact, copyright law distinguishes between sales and licenses. A publisher is free to choose to either license or sell copies.  A Federal Circuit Court of Appeals recently held that a license of software did not give the licensee ownership of the copy. [3] That is, it held that a transfer is not a sale if the license terms are not consistent with rights after a sale. The Seventh Circuit has held that copyright does not preempt a license of a copy of data.  Many cases have enforced licenses of software.  In fact, licensing transactions are common in all information industries.

            ·             Isn’t it true that a software license always takes rights away from a licensee?   No.   A license deals with what you can do with information. Sometimes, it gives less rights than a buyer would get in a sale of a copy.  Much more often, the license gives greater rights - e.g., the right to make copies for use by all people in a business, the right to make public displays, the right to distribute copies commercially, etc.  The software acquired by a law firm requires a license to allow the firm to use the software on a multi-user network; a mere buyer of a copy could not do so.  Of course, what rights are licensed relates to how much you pay.  The license defines the product. 

            ·             Does UCITA really make enforceable "sweeping contract restrictions on quotation and fair comment?"   No.  Nothing could be further from the truth.  First, nothing in UCITA alters the ability of parties to contract about quoting or commenting about something.  In many trade secret licenses, for example, it may be important to agree that the information cannot be disclosed and such terms are enforced.  In other cases, public policy should preclude such contract terms.  Second, to make this clear, UCITA creates a unique statutory rule that fundamental public policy, such as free speech and fair comment, control when they outweigh policies favoring enforcement of contracts. That rule does not exist today expressly in any uniform law statute, including Article 2. [4]   The comments to Section 105 require courts to consider and balance applicable laws and public policies. They adapt protective themes from the Restatement even though these themes have not been adopted by courts in all states. [5]

            ·             Does UCITA prevent reverse engineering?   No.   Some claim that UCITA limits reverse engineering.  Contracts may or may not be able to do so, but UCITA does not alter that existing law. If reverse engineering can be precluded by contract before UCITA, that same rule continues after UCITA.  This issue precedes UCITA: reverse engineering of software has been debated internationally and among national governments for years.  Reverse engineering is a trade secret law concept that allows a buyer to discover and use any secrets contained in a product that it buys. UCITA expressly provides that it does not displace trade secret law.  The rules remain the same.  Also, reverse engineering of a copyrighted work is governed by federal law which is not changed by UCTA.  Further, the Section 105 comments were written to make a specific reference to a 1999 amendment to the Copyright Act on this subject at the request of the Digital Futures Coalition and ACIS. These groups now request more: a statutory rule that was rejected by Congress.  State law cannot solve this intellectual property law issue which has been fought not only in Congress, but internationally.

            ·             Isn’t it true that UCITA circumvents the Copyright Act?   No. There has always been a supportive relationship between contract and property law (e.g., copyright).  Contracts distribute, facilitate or withhold rights to use property (among other things).  UCITA does not change that relationship - it could not change rights conferred by federal copyright, trademark or other laws conferring intellectual property rights.  Many who allege that UCITA tries to change that relationship seem to believe that federal copyright preempts all contract law and contracts relating to information.  However, that is not true and no cases have held that to be true.  There many cases holding to the contrary.

            ·             But some people say that end-users will give up all of their “fair use” rights if UCITA passes – is that true?    No.  First, “fair use” is a defense to copyright infringement: if you are sued for infringement and your use was limited, you can raise the defense of “fair use” which, if accepted by a court, means that there was no infringement. [6] Fair use means that you have copied a work, but that federal law insulates your copying from infringement liability. Second, under current law you may contract with respect to fair use rights if you choose to do so --- nothing in UCITA requires it. Third, if we are talking about quotation, criticism, reverse engineering, rather than general fair use, what we have said above applies. Terms contrary to fundamental public policy are unenforceable under UCITA.

            ·             But isn’t it true that UCITA will destroy public libraries?    Certainly Not.  Libraries today often acquire digital information by licensing it, such as for online services, word processing, and other works.  Indeed, a national library association has a model license agreement that it recommends its members seek to use.  Federal copyright law gives libraries certain privileges under copyright law, but specifically says that these privileges do not disturb contracts entered into by libraries.  UCITA does not change the fact that libraries will frequently make and be expected to perform contracts with information suppliers and publishers.

Consumer Issues

            ·             UCITA slams consumers, doesn’t it?   No.   UCITA preserves existing state consumer protection statutes and regulations and does not alter federal consumer law.  It applies new rules only where change is needed to facilitate electronic commerce.  UCITA preserves or extends to information the consumer protections that exist under UCC Article 2 for the sale of goods and adds new protections.  A consumer is better off under UCITA than under existing Article 2 law for the sale of goods or current law for sale of services.

            ·             So what consumer protections are in UCITA?   UCITA keeps all consumer protections from existing Article 2 and extends them to many new transactions.  It prevents a choice of law contract from changing any mandatory consumer rule, requires clearer language to disclaim a warranty, gives consumers a right to avoid consequences of errors on-line, prevents shortening the statute of limitations for consumers, and creates a right to a cost free refund if a consumer rejects license terms it did not see until after it received the software.

            ·             So why did Consumer’s Union oppose UCITA?   It depends on your view of consumers.   All consumers benefit from a vibrant and competitive economy, which for over 50 years has depended on the contract choice and flexibility that the UCC codified and UCITA preserves.  But attorneys who represent some consumer organizations believe that contract law should outlaw contract terms or practices and not rely on traditional doctrines such as unconscionability, good faith enforcement, estoppel, fraud, misrepresentation, waiver and the like to protect parties.  UCITA follows traditional contract law which does not create a long list of detailed restrictions.  The traditional view of general contract law such as UCITA, and the UCC, is that such restrictions are better left to individual state consumer protection laws which UCITA expressly provides override UCITA provisions. This is a philosophical difference that cannot be resolved short of pervasive and fundamental changes to the UCC, U.S. common law, and UCITA.  That is not the task set for UCITA. 

Most existing state consumer protections do not seem to be failing of their goals in computer information transactions. 

            ·             Does UCITA really remove software from existing consumer laws on goods?   No . Existing consumer laws have their own scope.  Some apply to databases, some apply to services, some apply to software, some do not.  UCITA changes none of this.  Each state must make their own choices as they have done for many years.  UCITA specifically says that it does not alter the scope or substantive terms of existing consumer protection rules.

            ·             Does UCITA eliminate a consumer’s warranty of merchantability?   No.  UCITA adopts the implied warranty of merchantability essentially as it exists in existing Article 2.  But that warranty is not present today in many transactions currently governed by common law.  Common law has no warranty of merchantability. UCITA increases the scope of coverage of that warranty.

            ·             Does UCITA take away a consumer’s right to inspect before accepting goods?   No.   UCITA retains that right for consumers and for anyone else who acquires computer information.  The inspection right in UCITA follows the right given under Article 2.

            ·             Does UCITA take away a consumer’s right to reject goods?   No. UCITA follows the current law of goods on this issue .

Warranties

            ·             Does UCITA reduce the warranties that are given to licensees?  No.   In fact, UCITA creates several new warranties, and adopts existing warranties from Article 2, thus expanding the scope of their coverage to some cases in which they would not apply today.

            ·             What warranties does UCITA provide?

-           Express warranties: Express commitments that are part of the basis of bargain are warranties under the same standard as Article 2, except UCITA benefits licensees by explicitly indicating that an express warranty can be created by advertising.  It also retains current law as to published informational content. Section 402.

-           “Implied” warranty of non-infringement. A warranty of non-infringement paralleling Article 2 or 2A, but gives greater protection to a licensee who provides specifications to the licensor.  There is no warranty of good title since, with information products, licensors often do not have title (since they may be also licensees) and because in computer information transactions, the warranty of non-infringement is its equivalent. Section 401.

-           Implied warranty of quiet enjoyment.  A new warranty consistent with Article 2A on leases that licensor will not interfere with enjoyment of the license.  Article 2 parties do not give this warranty. Section 401.

-           Implied warranty of merchantability. An implied obligation that a computer program will be fit for the ordinary purposes for which it is used. UCITA makes this warranty applicable to all computer programs, thus expanding the scope to software currently governed by common law which does not have this warranty. Section 403.

-           Implied warranty of fitness for a purpose.   Implied obligation that the product will meet the licensee’s known needs.  UCITA applies the same rule as existing Article 2 except for cases that involve services contract obligations. Section 405.

-           Implied warranty of system integration. New warranty. Implied obligation that group of elements will function as a system.  Neither Article 2, nor Article 2A have this warranty.  Section 405.

-           Implied warranty of data accuracy.   New warranty for information products that does not exist under current law.  Section 404. 

            ·             Is it true that UCITA allows infringement warranties to be disclaimed but that Article 2 does not?   No.   The disclaimer of implied warranties follows existing Articles 2 and 2A for sales and leases of goods.

            ·             Is it true that UCITA eliminates a consumer’s implied warranty of merchantability?   No.  Section 403 parallels the implied warranty of merchantability in Article 2, applying it to software instead of goods (e.g., grain, toasters and the myriad different products) to which Article 2 applies. Common law has no implied warranty of merchantability. UCITA thus expands beyond common law to provide for such warranties.

            ·             Is it true that UCITA makes it easier to disclaim warranties?   No.   Actually, UCITA requires more informative language of disclaimer than does current Article 2.  As in Article 2, if the disclaimer is in a writing, it must be conspicuous.

            ·             Is it true that UCITA takes away protections that I have under current law where the licensor knows that the software contains serious defects?   No.   Under Article 2, common law, and UCITA, that problem, when it exists, is a question of whether the licensor committed fraud.  UCITA has the same rules as Article 2 on this issue.  The law of fraud is not changed by UCITA.

Published Information Content

                ·             What is “published information content”?   This is the information we read, listen to, enjoy and communicate. It is the content of digital newsletters, multimedia encyclopedias, and on-line databases.  This is the material of the First Amendment.  It is published and made available generally, in contrast to the type of information that a consultant or lawyer provides for its specific client.

            ·             Why does UCITA deal with this type of information?   This type of information is an important feature of the “information age.”  Digital systems and changes in our economy have made this information a focus of significant commercial activity.  Courts have recognized that digital information deserves protection just like traditional newspapers and magazines. [7] UCITA ensures that First Amendment concepts protecting distribution of such information are recognized in contract law.

            ·             So, what does UCITA do about this information, does it give me a right to sue if the information is wrong?    UCITA recognizes that excessive liability risk would stifle and harmfully chill the vibrant expansion of  this type of commercial information service.  UCITA adapts a rule that has been followed in most states under the Restatement (Second) of Torts § 552. This does not give members of the public a right to sue simply because information is incorrect. Think about the liability of your favorite newspaper or author if the result were otherwise.  Liability for errors in informational content only occurs if the content provider is in a special relationship of reliance with its client.  UCITA expresses this in a rule which says that there is no warranty of accuracy of data for published information content.

                ·             So, does this mean that I have no rights whenever I buy or license published informational content? No.   You have the same rights that you have today. It means that there is no implied warranty for published informational content and that digital information is treated just like published print information in this respect. If a publisher promises to give you information about the sale price of race horses, but the information is actually about cars, it has breached its contract.

                ·             What does UCITA do with other types of informational content?  UCITA creates a new implied warranty for information provided in a special relationship of reliance.  The implied warranty is that there are no errors in data caused by failure of the information provider to use reasonable care.  This parallels how many states deal with the liability of consultants and how the Restatement (Second) of Torts § 552 treats information providers under tort law.  In contract law, it is a new warranty that benefits licensees.

Perfect Tender/ Material Breach of Substantial Performance

            ·             How does UCITA determine when a person can refuse a performance by the other party?   Generally, UCITA uses the same standard used in the Restatement (Second) of Contracts, in common law, and in international law. That rule says that you can refuse the performance and cancel the contract if the performance is a material breach of the contract or if your agreement allows you to do so. [8]   Another way courts say this is that you cannot cancel a contract if the other person’s conduct was a substantial performance of its contract.  If the breach is not material, you can collect damages, but cannot cancel and entirely refuse to pay or perform.  Article 2 and Article 2A dealing with tangible goods and contracts that generally involve a one-time performance are alone using a different rule, but do so only in some cases.  Even so, UCITA uses the Article 2 standard in mass market transactions.

            ·             Doesn’t current law give a licensee a right to insist on a perfect product, but UCITA takes that away?   No.   In most contracts, the material breach rule already applies.  More important, there is no law that requires a product to be literally perfect. That’s impossible for complex products. 

            Article 2 (and 2A), unlike any other law, in some cases allows a buyer to refuse a product if the product does not “conform to the contract.”  That is actually the rule that some call the “perfect” tender rule. [9]   But remember, a contract is interpreted in light of trade use (e.g., what’s normal in the business) and the warranty of merchantability only requires products that fit the ordinary meaning of their description.  The rule is also hemmed in by other rules in Article 2. The authors of a leading treatise on Article 2 state they are aware of no cases in which a court actually allowed rejection for minor defects.  

            ·             What does the substantial performance rule mean?   Basically, this is a rule that prevents one party from ending a contract for minor problems. Think about a debtor who is one day late in a payment or a delivery company that delivers one hour late. Common law says that small problems should not be a basis for ending a contract. On the other hand, if the breach is material in that it eliminates a significant part of the value of the performance, refusing the performance and ending the contract are permitted.  The fact that a computer cannot communicate to its hard disk is material, but the fact that a drill press is delivered to a factory with a small scratch on the outside of the press, is not. What is material depends on the context - a scratch in an expensive painting would most likely be material.  UCITA says: a breach is material if the “breach substantially deprived or is likely substantially to deprive the aggrieved party of a significant benefit it reasonably expected under the contract.”  Courts have been applying this standard for years and seldom get it wrong, using it as a way to protect the injured party, but to avoid unwarranted forfeitures.

            ·       Why does UCITA adopt the substantial performance standard? Licenses traditionally have been governed by the common law, which uses this standard.  Also, the standard has been adopted in international law and even applies in Article 2 where more than a single delivery is contemplated.  It applies in all services contracts.  Many UCITA transactions are currently governed by it. Article 2 and 2A stand essentially alone in modern law in requiring so-called 'perfect tender,' in reference to a single fact situation only: a single delivery of goods. The substantial performance standard is, in short, the generally applicable rule because it is generally the best rule.

            The rule also reflects that the complexity of software products makes them inherently imperfect. [10] In fact, the idea of perfect software is a goal or aspiration not presently attainable, at least not without exorbitant costs that would drive many thousands of small companies out of the business. That last point is critical.  By far, most software companies are small companies who simply cannot afford the cost to produce a “perfect” software product and do not have the resources to do so. [11]    In the late 1990’s, a popular program for small computers used by both consumers and commercial licensees contained over ten million lines of code or instructions.  In the computer these instructions interact with each other and with other programs. This contrasts with a popular commercial airliner that contained approximately six million parts, many of which had no interactive function.  Typical consumer goods contain fewer than one hundred parts.  A typical book has fewer than one hundred fifty thousand words.

            Finally, this rule prevents unwarranted forfeiture.  For example, assume that you agree to develop software or a database using specified pictures. You spend several thousand hours over six months and deliver your work, but it has an minor nonconformity.  The other party says there’s no “perfect” tender and cancels the contract, refusing to pay anything.  Under common law and UCITA, your breach would have to be material for the other party to do that:  it can obtain damages from you for the breach, but it cannot terminate the entire contract and leave you with nothing.

            ·             If you have to accept substantial performance, how are you made whole for the difference between “substantial” and “perfect” performance?   You have a right to damages and to off-set the amount you lose against the amount you owe.  Much more often, of course, you expect and receive a cure of the problem.

            ·             Does UCITA deprive consumers and other mass market licensees of the perfect tender rule?   No.   Despite the valid reasons for not using a perfect tender rule, UCITA takes the “perfect tender” rule from Article 2 and applies it to mass market contracts, including consumer and retail business licensees.

Electronic Commerce Rules

            ·             What is the relationship between UCITA and the federal E-Signature Act?  with the Federal Act.  In fact, several of the provisions of that Act originated in UCITA.  The Federal Act invalidates any state law that requires a writing or a written signature, most often modifying those rules to require either a writing or an electronic record or signature. UCITA as a matter of state contract law never requires a writing.  In some cases (e.g., the statute of frauds) UCITA expressly provides that it can be satisfied by either a writing or an electronic record (or signature).  The federal Act also deals with state consumer disclosure rules.  UCITA does not affect those rules.

            ·             What is the relationship between UCITA and UETA?   Basically, they are consistent statutes. The committees worked hard to maintain consistency, with both acts taking ideas from the other.

            ·             OK, on what topics are they fully consistent?

§          Both recognize the equivalency of electronic records and writings

§          Both recognize the validity of electronic signatures

§          Both recognize that contracts can be formed by electronic agents

§          Both recognize that contracts can be formed by interaction of an electronic agent and a human being

§          Both say a person is attributed with an electronic act if the other person can prove that the act was the result of the person or its agent

§          Both make it clear that they do not require parties to use electronic commerce

            ·             How do UETA and UCITA differ?   UCITA and UETA have different scope and purposes.  UETA deals with all electronic “transactions”, which it defines very broadly, but within that scope it is a procedural statute. UCITA focuses on contracts involving computer information, and within that scope is a substantive contract law statute. Differences in rules result from those differences.

• UETA does not apply unless the parties agree to use electronic commerce as to that transaction.  UCITA applies to all agreements within its scope.
• UETA deals with electronic records and signatures in various administrative and other setting to which UCITA does not apply.
• UCITA contains many substantive contract law rules for computer information transactions that UETA does not discuss. 
• UCITA addresses electronic commerce issues that UETA, as a procedural statute, does not: how terms of an electronic contract are established, what does conspicuous mean in this context, when is an on-screen click adequate to establish a contract, what state’s law applies to an electronic contract, what is the effect of a choice of forum clause, what warranties attach to published information, what are default rules for information obtained by contract online, what are the rules for performing on-line, how are changes in on-going contracts made, how are contract terms decided as between electronic agents, what remedies are available contracts, etc.

            ·             Does UCITA adopt liability rules for fraud that are the same as rules for credit cards?   No , but credit card rules are not changed by UCITA since they are federal law.  UCITA as a contract law statute does not alter or address rules for liability for fraud. 

                        The credit card rules place risk of unauthorized use of a card on the card issuer (who passes it to the merchant, who passes it on to all its customers in pricing). The rule works well in controlled systems run by large entities. Internet commerce is not controlled and those using it include both large and very small entities.  In looking at a similar issue, the Federal Reserve Board concluded after a year’s study, that it would be premature to apply the “credit card” rules. [12] The Clinton Administration echoes this approach and cautions against imposing a single model that would prevent the market from testing different possible approaches and that would restrict growth. [13]

            ·             What are UCITA’s rules for when I am bound by an electronic message?   UCITA provides that you are bound if it is proven that the message came from you or your agent.  In addition, you are bound if you have agreed to be bound (e.g., if I agree with Westlaw that I am liable for any use of my access code).

            ·             Does UCITA alter a state’s digital or electronic signature statutes?  No.   Those statutes and their effect remain unchanged under UCITA.  Some of those statutes, however, have been altered or preempted by the Federal E-Signature Act.

Assent & Opportunity to Review .

            ·             Why does UCITA create this new idea of “manifesting assent”?   Actually, its not a new idea.  It comes from the Restatement (Second) of Contracts § 19, which was written in 1971. The UCITA section on this concept essentially follows the Restatement idea, adding some important procedural concepts to it.

            ·             If it’s in the Restatement, why repeat it in UCITA?   Several reasons.  First, like all Restatement rules, this term has not been adopted as a statute.  The concepts are generally applied, but the cases are non-uniform.  Putting the concept in a uniform statute help everyone understand it and thus promotes commerce.  Second, UCITA adds some procedural concepts that clarify manifesting assent in important ways.  For example, there must be a clear “opportunity to review” the contract before assenting.  Also, the UCITA section on assent gives guidance on how to safely obtain assent on-line by using an extra step confirming the initial indication of assent.

            ·             Since the Restatement does not use any software illustrations of manifesting assent, doesn’t UCITA wrongly apply this idea to software?   Certainly not.  The Restatement was published in 1971 and, at that time, commercial software was no more than a glimmer in anyone’s eye.  More to the point, the Restatement does not try to cite cases for all areas of contract - if it did so, it would be hopelessly long.  The concept of assent by conduct is quite clearly part of contract law and as applicable to software licenses as to other contracts.

            ·             What does “manifesting assent” mean?    There have always been many ways to make a contract:  parties can orally agree, they may do something that indicates agreement, or a party may sign an agreement.  Section 19 of the Restatement (Second) of Contracts uses the term “manifestation of assent” to describe some of these methods that involve conduct and UCITA follows that approach. 

                        In UCITA, you “manifest assent” to a contract when, having had an opportunity to review the written terms, you act or fail to act and you have reason to know that the other party will infer from your conduct or lack of conduct that you agree to the contract.  For example, let’s say that I offer to sell you my television for $500.  I give you the television and the terms of a contract.  Without saying that you agree, you take the television home and begin to use it.  You had reason to know that I would think that you had agreed to the contract and your actions manifested assent to the agreement.

            ·             What is an opportunity to review?    An “opportunity to review” essentially means that you’ve had a chance to look at the contract before you assent to it.  When you don’t see the contract until after you’ve paid for your order, you aren’t deemed to have had an opportunity to review unless you have reason to know terms will follow and you are offered a right of return after you have a chance to read the license. In other words, you don’t have to keep the item if you don’t like the contract terms once you see them.  In UCITA, manifest assent rules address procedural criticisms often made about adhesion contracts.

                ·             What if I don’t read the contract, am I still bound by it?   Yes.   UCITA and common law both require only that you have a chance to read the contract, not that you actually read it.  Many of us sign and accept contracts without reading them in full.  This is not good practice, but it does not mean that this failure by one party can change the terms that the other party is relying on.

Mass Market Licenses

            ·             What is a mass market license?   A mass market license (MML) is a standard form contract used for transactions with the general public in a retail setting where the information is generic and the customer can be anyone.  A license for “W-Perfection” is an example: it can be purchased by anyone at a retail store and the license and software is the same for every customer, i.e., an accountant or your retired mother.  The term “MML” also includes all consumer contracts.

            ·             Is the concept revolutionary?   Yes. This is a concept created in UCITA that recognizes that the retail market is a context unto itself and one in which both consumers and businesses (especially small businesses) routinely participate as purchasers.  Although this pattern also exists in transactions in goods, Article 2 does not use this concept.  In UCITA, MML provisions protect consumers, but those protections also extend to businesses, no matter how large, that make retail purchases.  This is a radical departure from existing law, which typically limits consumer protections to consumers. [14]

            ·             Why should we permit MMLs?   The idea that you can contract with standard forms in the mass market is not new.  You make contracts when you rent a car, buy a car, lease furniture, or purchase an airplane ticket. In information transactions, the contracts are even more important because they deal with intellectual property rights and rights of access to information. If you access AOL’s computer system without a contract, in most states, you are committing a crime. If you use a clip art program to make public displays of the clips without a license, you are probably infringing a copyright. If you copy a word processing program for your house, your office, and your laptop computer without a license, you are infringing.  The license is important to convey rights to the licensee and to allow publishers to create and market the variety of products that characterize the information industry today.  

           ·            What are the rules for creating a MML?   The mass market license rules follow general contract law.  A MML is effective only if the licensee manifests assent to it, after having an opportunity to review the terms of the contract (special rules apply to shrinkwrap licenses, not discussed here).  Even if you agree to the license, however, the terms of the license are limited by the following rules:

            (i)            Unconscionable terms are unenforceable

            (ii)            Terms that violate a fundamental public policy are unenforceable.

            (iii)            Terms that conflict with the actual agreement of the parties are unenforceable (e.g., you are promised a 90 day refund right, but the license only provides 30 days).

            ·             When does UCITA use this concept?   The following indicates the provisions where this concept (“MML”) or a consumer concept (“CON”) is used to limit the contract.

MML                   CON                  AGREEMENT THAT ACT GOVERNS; OPT-IN OR OPT-OUT OF UCITA.

                CON                TRANSACTIONS SUBJECT TO                OTHER STATE LAW.

                CON                APPLICABLE LAW; CONTRACTUAL CHOICE OF LAW.

MML                      ADOPTING TERMS OF MASS-MARKET LICENSES.

                CON                ELECTRONIC ERRORS: CONSUMER DEFENSES.

                CON                MODIFICATION AND RESCISSION.

MML                      CONTINUING CONTRACTUAL TERMS.

                CON                THIRD-PARTY BENEFICIARIES OF WARRANTY.

MML                      EFFECT OF NO TRANSFER CLAUSE.

                CON                FINANCING ARRANGEMENTS: OBLIGATIONS IRREVOCABLE.

MML                      COPY: REFUSAL OF DEFECTIVE TENDER.

                CON                CONTRACTUAL MODIFICATION OF REMEDY.

                CON                STATUTE OF LIMITATIONS.

MML                      LIMITATIONS ON SELF-HELP REPOSSESSION

Shrinkwrap Licenses

·             What is a “shrinkwrap?   The term “shrinkwrap” refers to a contract that you do not see until after you initially agree to acquire a product and receive it. [15]   You might order a product over the phone or by mail:  once it is delivered and you open the box, a contract might be contained in the box or in the start-up screen for the software.  You are asked to agree to the contract by taking some act such as clicking on an “I accept” screen. In retail software licenses, a shrinkwrap is ordinarily a contract between the software publisher and the end user; the retail vendor is not involved.  In goods transactions, a similar transaction occurs with “in the box” terms that are normally read only after opening the box.

            ·             Isn’t it true that the only reason for UCITA is to validate shrinkwraps?   No.   UCITA deals primarily with a wide range of other commercial contract issues that, prior to UCITA, have never been codified or clarified by law that is relevant to the actual type of contracts that are involved.  This includes computer information transactions on the Internet.  By far, the largest part of the computer information industry does not involve shrinkwrap contracts.

            ·             Isn’t it true that shrinkwraps are always adverse to the licensee?   No.   While a shrinkwrap often disclaims warranties in return for a limited express warranty, without it, the customer ordinarily has no contract rights against the software publisher at all. More important, most shrinkwrap licenses give rights to the licensee that it does not get if it buys a copy without a license.  Often, if the license with the software publisher is unenforceable, the customer’s use of the software is unauthorized and copyright infringement. [16]

·            But isn’t it true that shrinkwrap licenses are unenforceable under current law, and UCITA will enforce them?  No.   Most courts hold that shrinkwraps are enforceable or simply enforce their terms without any contest of their enforceability. [17] Some courts have invalidated such contracts where the deal was clearly closed before the shrinkwrap was presented and was not an agreed modification. [18] However, shrinkwrap contracting is a standard method of doing business in both software and various types of hard goods.  Billions of dollars of commerce rely on it. UCITA adopts, as uniform law, the position of the majority of the cases and adds procedural and substantive protections for the licensee that might be inferred, but are not made explicit in the decisions.

·             But doesn’t UCITA allow shrinkwraps?   Yes, but only with limits. A mass-market shrinkwrap license is unenforceable unless: (1) you had reason to know that more terms would be coming; (2) you are given a right to return the product if you don’t like the terms; (3) your right of return is cost-free, and (4) you are reimbursed any reasonable costs of restoring your system if it was altered when you tried to read the license terms.  Even then, under UCITA, the shrinkwrap cannot alter terms to which the parties actually agreed.

            UCITA does give guidance on when and how these contracts are enforceable.  However, one critic has alleged that UCITA adopts the least protective approach with respect to these contracts.  In fact, it uniformly enacts greater restrictions on these contracts than case law or current Article 2.

           ·                  Why would law want to allow such contracts?   That’s easy.  This is an efficient means of doing business that benefits both parties and is used in billions of dollars of transactions.  

                             A number of leading contract law scholars have written in support of similar practices in criticizing proposals in Article 2 revisions.  Professor Randy Barnett, Boston University School of Law, explained why when commenting on a proposal that would have invalidated this distribution method:

Though the idea of consumers paying for goods before they examine all the terms of the agreement has spooked some academics, their concerns [do not result from] any real impairment of contractual consent. [I] speak here not only as a contracts professor who has written extensively on the importance of contractual consent, but as a frequent consumer of such goods as electronics and software.  It is not a bother in the slightest to pay for a good in a store, or on-line, and then examine the terms in the comfort of my own home provided that I can return the good should I reject the terms.  To the contrary, I cannot imagine anything other than an aesthetic objection to this practice.  True, consumers who dislike a term in the agreement are put to some inconvenience when they must return a good, as they would in returning any good with which they are not completely satisfied upon inspection, though even they benefit from the lower prices and more specifically tailored terms that result from the practice.  But this minor inconvenience in no way warrants a frontal attack on this form of contracting on the grounds of lack of assent.  There is certainly assent, though it happens after initial payment.  There need no be law against that.

Professor Hal S. Scott, Harvard Law School, in a letter to the Article 2 committee, described this type of contracting as an “established retail practice of sending the full legal terms of a purchased product with the shipped product, after payment has already been made.  This practice is of great value to both sellers and buyers. [Invalidating or curtailing it would create] a costly and unworkable system of contract administration.  These costs will be passed on to consumers in the form of higher product costs.”

Self-help Repossession

UCITA Section 816 substantially limits licensor repossession of information, while Articles 2, 2A and 9 impose no limitations beyond trespass and breach of peace.  Yet this section of UCITA has been quite controversial.  What does it really say and how does it work?

·             What is electronic self-help?   This is the right that licensors had before UCITA to prevent a licensee who has breached its contract from continuing to use the licensed software and to do so electronically without having to wait for a court judgment.

            ·             Does UCITA really allow electronic self-help for mass-market licenses?   No.  Section 816 changes existing law and expressly prohibits electronic self-help in mass-market licenses.  

            ·             Does UCITA really allow self-help for any tiny default?   No.   Section 816 only applies on cancellation of a license.  Under Section 802, cancellation only occurs on a material breach of contract or a breach that the agreement makes sufficient to cancel the license. An Article 9 secured party, an Article 2 seller realizing on a retained security interest, and an Article 2A lessor, all are free to use their self-help rights upon any default, material or not. [19]

            ·             Is it true that UCITA provisions are greatly imbalanced against the licensee? No.  Both Citibank and the Federal Reserve Bank of New York, who have great concerns about any availability of a self-help alternative and who participated extensively in the UCITA debates, have expressed their belief that the Act fairly balances the interests of the parties.  In fact, UCITA creates protections for licensees that do not exist under current law and can seldom be negotiated.

            ·             Do any parties have self-help rights outside of UCITA?   Yes, and those rights are not subject to the many UCITA restrictions.  An Article 2A lessor may repossess the leased item (e.g., a computer loaded with software); an Article 9 secured party may repossess a computer and software that secures a loan.  In both of these statutes, the lessor (or secured party) can disable goods without notice.  In cases not governed by UCITA, it is likely that electronic methods to do this will become increasingly frequent.  Article 2 sellers who retain title obtain a security interest and thus have the same rights as a secured party.

            ·             Does UCITA create a right that does not exist under current law? No. Self-help is allowed by statute to non-UCITA parties, including licensors who retain a security interest, and no statute or court has held that it is prohibited.  The limited case law suggests that it can be done under current law, at least if the licensee had reason to know the remedy is available. [20]   In the ordinary case where software is copyrighted, the right to prevent copying is a copyright right; cases hold copying occurs when the software is used.  Recent amendments to the federal copyright act authorize, and prevent circumvention of, technological access controls, devices (programs) that limit access to copyrighted works. This is the ordinary method of electronic self help.

            ·             What new restrictions does UCITA impose on the self-help right that are not imposed on lenders, sellers and lessors?   UCITA offers extensive protections for the licensee that do not exist today and that could not be negotiated by most companies.  These include:

            •  There can be no self-help without an express assent by the licensee to the self-help clause (i.e., it cannot be buried in an agreement)

            •  It must provide for 15 days prior notice to a place and person that must be specifically designated by the licensee

            •  When given, the notice must state the nature of the breach

            •  The licensee may recover direct and incidental damages, and also consequential damages caused by improper use (disclaimers in the agreement cannot eliminate this) as long as the licensee notifies the licensor about the possibility of the damages (or the licensor has reason to know about them)

            •  No self-help may be used even under agreement, if the licensor has reason to know that there is substantial risk to public health or safety or grave harm to third parties

•  A court must give prompt consideration to an application for injunction against the self-help even if the licensee has agreed to its use.

            ·             Is it true that non-UCITA  vendors can't really exercise self-help effectively?   No. While the argument has emotional appeal, it simply is not true in light of modern product design.  Lenders are free to require borrowers to install "turn-off" software that will allow the lender to disable financed equipment in place and from a distance.  Vendors may do so as a form of product design choice.  Lessors may do so as part of readying their product for lease.  No restrictions are imposed under Article 9, Article 2 or Article 2A.

            ·             Why do any licensors care about self-help?   This right is of primary concern to small licensors.   Over half of all software companies employ fewer than 12 people, yet these companies often license software to much larger company licensees.  Given the greater financial resources of these licensees and their ability to sustain a long court battle, often the only practical way for a small developer to get paid or even get the attention of a licensee is to have a self-help remedy.

 

Duration of a license

            ·             Does UCITA make a license subject to termination “at will” even if the parties agreed to a license term?   Definitely no.   The duration of a license is whatever the parties agree to.  In the modern mass market, many software licenses are for a “perpetual term.”  UCITA enforces that agreement.  In other cases, especially on-line licenses, license terms are for different, specified periods.

            ·             Well, then, when does it say that a license can be terminated at will?   Only if the parties did not agree on how long it lasts.  UCITA follows current law (but adds new rules that benefit licensees).  As in UCITA, both Article 2 and the common law say that either party can terminate at will when no contract duration is agreed.