UCITA: TO SUPPORT OR NOT TO SUPPORT; THAT IS THE QUESTION^[1]

The Uniform Computer Information Transactions Act (UCITA), formerly designated as proposed Article 2B of the Uniform Commercial Code, was resoundingly approved by the National Council of Commissioners on Uniform State Laws (NCCUSL) at its annual meeting at the end of July, 1999. The proposed law, with the approval and support of NCCUSL, will now be presented to the legislatures of each of the 50 states for adoption as a free-standing uniform act.

UCITA has been over six years in drafting. The process as been extraordinarily open, with representatives of a wide variety of interests attending drafting meetings and commenting on proposed provisions. What is the result, and is it deserving of support?

In deciding whether to support UCITA, the only question is: will those who provide computer software and other computer information and those who use it, and the public at large, be better served by having UCITA in place than being without it? The answer is: we are better off with it than without it.

UCITA is, first and foremost, a contracting statute. When revisions to Article 2 of the Uniform Commercial Code were first being proposed, it was anticipated that software and information transactions would be included in Article 2 - Sale of Goods. Software and information transactions have, however, for their short history of existence, primarily used contractual arrangements in the form of licensing agreements to grant rights to use software and computer information. The licensing framework has worked well. In the past two decades, the computer information industry has grown from tiny to over $100 billion a year.^[2]

Such explosive growth and technical change in an industry is unprecedented. The licensing model has worked well because it offers maximum flexibility in an industry in which change is rapid and constant. It became apparent to those involved in the legislative drafting process that Article 2, dealing with sales of goods, was ill-suited to transactions in software, and that a separate set of provisions based on the licensing model and confirming the basic outlines of existing law and practices regarding these transactions, would be better suited to the continuing, rapid expansion of the affected industries, their suppliers and their customers and clients. Accordingly, UCITA accepts the basic proposition that the licensing model deserves recognition in our statutory law.

UCITA also recognizes that technology is changing rapidly, and that a maximally flexible legal framework with uniform rules regarding recognition of the underlying legal framework is essential to its continued growth, and that any attempt to provide specific solutions to specific problems is not only contrary to freedom of contract principles, but in the context of such rapid technological change, risks becoming obsolete by the time the statute is adopted. Thus, UCITA sets forth guiding principles and default rules, and thereby addresses the needs of digital commerce by adapting long-standing principles of contract law to the needs of the digital marketplace.

In addition to confirming the licensing model, adopting UCITA will provide some uniform rules and standards regarding contract formation in this area and establish balanced default rules regarding a variety of issues, e.g. choice of law and remedies. Beneficial results will include increased certainty in contracting and should include a resulting decrease in litigation.

UCITA has been criticized because it allegedly pre-empts federal law (especially federal copyright law), because it fails to prohibit “outrageous” and “inappropriate” terms in license agreements, and because it fails to mandate granting broader rights and broader, non-disclaimable warranties to users. Various specific provisions have also been criticized. Most of these criticisms reflect an incomplete understanding of the proposed provisions. For example, the provision on self-help has criticized as permitting undisclosed “pinging” -- a process by which a given program examines all software on a system to determine whether that system is running unlicensed copies of that program. As indicated below, the provision does not prevent “pinging” but does require that inclusion of such a self-help mechanism be timely disclosed and consented to by the licensee.

The first criticism, alleged pre-emption of federal law, is simply erroneous. State law cannot supersede federal law, and UCITA does not even purport to do so. UCITA is a contracting statute. Federal copyright law will continue to cover computer software, which is, by statute, a “literary work”^[3] in which copyrights inhere from the moment of inception. In fact, the licensing model is supported by, and supports, copyrights. Copyright law does not preempt making contractual arrangements in connection with copyrighted material. Quite the reverse. Copyright permits the licensing of copyrighted materials, in this case, computer information, and the use of a license can expand the rights of the licensee beyond those which ownership of a copy would provide, while protecting the rights of the licensor. For example, a license might grant a licensee permission to copy a software program onto three machines, or the right to incorporate a program into the licensee’s software and redistribute that program to third parties. In the absence of such permission, either use would probably constitute copyright infringement. If discovered, the infringer might be liable for damages. If undiscovered for a long period, the program might be deemed to have passed into the public domain, and the copyright owner might lose its copyrights. The licensing model enables the licensor to grant expanded rights without losing the ability to exploit its creation for commercial gain, and enables the licensee to use the program in a wider variety of ways than the copyright laws permit, with confidence that such use will not give rise to accusations of infringement.

Federal copyright law is not the only federal law which may be relevant to computer information. Patents have been granted on computer information, and therefore, where invoked, patent laws (and case law) may also cover computer information. Federal anti-trust laws and unfair competition laws, including laws against false, deceptive and misleading advertising (e.g. Section 43 of the Lanham Act and Section 5 of the Clayton Act) are currently being used to challenge a number of Microsoft’s commercial practices, and these laws will continue to provide avenues of redress for false advertising and misleading claims regarding computer information transactions. Similarly, federal consumer protection statutes (e.g. the Magnusson-Moss Act) will continue to apply in appropriate circumstances. UCITA will also leave state anti-trust, “little FTC” and consumer protection laws intact, and applicable to computer information transactions in appropriate circumstances.

The allegation that UCITA will enable computer information providers to enforce “outrageous” or even “inappropriate” terms is also without foundation. UCITA requires computer information transactions to meet the time-tested, common law standards applicable to contracts by expressly providing that contract terms which are “unconscionable” or against public policy are unenforceable. A term which is “outrageous” is more formally described as a term which “shocks the conscience of the court”, i.e., is unconscionable. A term which is “inappropriate” is, under basic principles of common law, unenforceable if it is inappropriate for society as a whole, that is, contrary to public policy. Thus, contentions that providers of computer software and other computer information will somehow be able to enforce outrageous or inappropriate terms are unsupported and unsupportable.

UCITA has been criticized because it does not mandate granting broader rights and warranties which cannot be disclaimed. In many cases, such criticisms are attempts to achieve through legislation what cannot be achieved in the marketplace because the cost of broader rights and warranties is greater than the benefit for which users are willing to pay.

The NCCUSL Drafting Committee considered suggestions that UCITA mandate broader rights and undisclaimable warranties. They also considered second-level consequences. Broadening rights and warranties by statute would require that computer information be sold at higher prices to cover the cost of the increased risk of making good on warranties which cannot be disclaimed. One foreseeable result is that some applications and other computer information will not be offered because small developers will not be willing to take the additional risk of warranties which cannot be disclaimed. Another foreseeable result is that some applications and other information will not be sold at higher prices in sufficient quantities to be commercially viable, and therefore will not be offered. Providing mass market software would become more costly and riskier, thus making it more difficult for small developers to compete with larger “deep pocket” providers. Reducing the number of small developers who offer mass market computer information will make the industry as a whole less competitive. Thus, mandating broader rights and undisclaimable warranties will result in higher prices, less variety and choice of available software applications and other computer information, and less competition in the computer information industry - all undesirable results for providers, users, and society as a whole. The Drafting Committee’s decision to have UCITA remain neutral, rather than mandating broader rights and undisclaimable warranties, is entirely appropriate, even wise, given the foreseeable unintended results of the alternatives.

Permitting any kind of self-help has been criticized as unfair to licensees. Self-help provisions were extensively considered and debated during the NCCUSL drafting process and the result was to permit electronic means to prevent a licensee from using licensed computer information under highly limited circumstances. These include the right to discontinue access^[4] or otherwise prevent use^[5] on rightful cancellation of a license if the self-help can be achieved without breach of the peace or personal injury and provided the licensee has separately manifested assent to a contractual provision authorizing the use of self-help.^[6]

Such notice to licensees is not required under current law, which leaves it to “word of mouth” and the free market to advise licensees that a licensor has included self-help mechanisms in a computer information transaction.

There are other provisions which give licensees rights they do not have under current law. For example, if license terms are not disclosed prior to delivery or imposition on the licensor of the obligation to deliver, a typical situation when programs are purchased in boxes from a retail store with the license inside, UCITA requires that the licensee be given the right to return the mass market software.^[7] UCITA also requires that any disclaimer of warranties be stated in clearer language than is required under current law.^[8] UCITA also gives licensees the right to avoid the results of errors on-line, requiring only that the licensee give prompt notice of the error.^[9] UCITA also expressly states that state consumer protection laws will take precedence where they conflict with UCITA. Thus, if UCITA provides for a shorter statute of limitations than state consumer protection laws, the longer statute of limitations in the state consumer protection laws will apply.^[10]

UCITA was conceived of, and remains, a contract statute. It follows time-tested principles of freedom of contract, and relies on traditional requirements of reasonableness, good faith and fair dealing, and traditional limitations on that freedom, e.g. unconscionability, fraud, and misrepresentation, to assure that contracts are enforced in a responsible manner. Its purpose is to facilitate commerce by codifying existing law, resolving conflicts in existing law where they currently occur, and establishing fair and uniform rules for computer information transactions, thereby increasing certainty in transactions involving computer information, including but not limited to computer programs (applications), access to proprietary databases and electronically-delivered services, and electronic commerce.

There is an inherent tension between freedom of contract and legislatively-imposed consumer protection contractual requirements. UCITA makes no attempt to resolve that tension. UCITA includes provisions designed to protect consumers, but it is first and foremost a contracting statute, not a consumer protection statute. As a philosophical matter, it leaves each state to establish consumer protection laws as it sees fit, and supports the decisions made by individual states in their consumer protection statutes by expressly providing that it does not override state consumer protection statutes.^[11]

No piece of legislation is perfect. To be adopted, and beneficial to society as a whole, legislation must consider a variety of interests. The goal of good legislation is not, therefore, perfection, but striking the right balance among competing views. UCITA is the result of a long and extraordinarily open drafting process. The NCCUSL Drafting Committee has crafted a carefully-considered and well-balanced statute. It strikes a fair and workable balance among a wide range of interests, it can reasonably be expected to reduce litigation by providing uniform guidelines, and it will support the continuing growth of the computer information industry and expansion of electronic commerce which hold great promise for our country’s future growth.

For these reasons, it appears that on balance, providers and users of computer information, and society as a whole, are more likely to be helped than hurt by adoption of UCITA, and therefore, it is worthy of support.^[12]

FOOTNOTES

1 Copyright 1999, Micalyn S. Harris, All Rights Reserved. Ms. Harris is Vice President, Secretary and General Counsel of Winpro, Inc., a software consulting, design and development company, with offices in Ridgewood, NJ, and New York City’s “Silicon Alley.” This paper is based on an article which first appeared in the October, 1999 issue of The Metropolitan Corporate Counsel.

2 According to the United State Department of Commerce, the world packaged software market was $109.3 billion in 1996, of which $50.4 billion was in the U. S. The world packaged software market is expected to exceed $125 billion in 1997. U. S. Industrial Trade Outlook ’98. United States Department of Commerce, 1998. Note that these figures reflect only packaged software. The scope of UCITA is not limited to packaged software, and therefore, UCITA would impact an even larger market.

3 See 17 U. S. C. 101 et seq.

4 Section 814.

5 Section 815.

6 Section 816.

7 Section 209.

8 Section 406.

9 Section 214.

10 Section 105.

11 Section 105.

12 The text of the proposed legislation (and drafts of all uniform laws) can be accessed at www.nccusl@nccusl.org or NCCUSL's web site at the University of Pennsylvania, www.upenn.edu. Additional reference materials may be found at www.2BGuide.com, and a forum regarding information on the more limited but related Electronic Transactions Act may be found at www.webcom/legaled/ETAForum.