Digital Commerce Coalition
114 E. Maple Street
Alexandria, VA 22301
October 11, 2000
New Jersey Law Review Commission
153 Halsey Street
7th Floor
Newark, NJ 07101
Re:
Uniform Computer Information Transactions Act
Staff Memorandum dated 9/5/00
Staff Draft Tentative Report dated 9/1/00
Dear Commissioners:
The Digital Commerce Coalition (“DCC”) 1 submits these comments in response to the
amendments proposed by the staff of the New Jersey Law Review Commission (“Staff”) to
Uniform Computer Information Transactions Act (“UCITA”) as set forth in the above materials.
DCC strongly opposes the suggestions made by staff, since they not only will upset the careful
balance that the National Conference of Commissioners on Uniform State Laws (“NCCUSL”)
created, but also tread dangerously into areas of federal law or other commercial law statutes that
would threaten the viability of UCITA.
The amendments suggested by the Staff create a product that goes far beyond crafting
limited changes to UCITA to conform with New Jersey variances in commercial or consumer
law. If accepted, the staff amendments would force fundamental changes in current and
sanctioned market practices for computer information that would be detrimental to both
producers and consumers.
DCC believes the changes to the statute suggested by the Staff would create a situation
worse than the existing legal chaos in which computer information industries currently operate.
If adopted by the Commission, DCC would have no choice but to vigorously oppose them.
Unintended chaos is preferable to a law that intentionally creates harm and implements the
agenda of private constituencies seeking advantage – a situation that would come into effect in
New Jersey if the amendments suggested by Staff are adopted in law.
1
DCC members include: America Online, Inc.; American Electronics Association; Adobe
Systems; Autodesk, Inc.; Business Software Alliance; Intel; Information Technology Association
of America; Lotus/IBM; Microsoft; National Association of Securities Dealers; Novell; Reed
Elsevier Inc.; SilverPlatter, Inc.; Software & Information Industry Association; and Symantec.
New Jersey Law Review Commission
October ___, 2000
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DCC supports strongly the efforts of NCCUSL to create a uniform law governing
transactions for computer information. UCITA, including the new uniform amendments recently
approved by NCCUSL, accomplishes that task superbly. It is a uniform legal infrastructure that
recognizes the special nature of transactions for intangible computer information, that retains
traditional principles of freedom of contract and of commercial codes, and that appropriately
balances the interests of all parties.
Without UCITA, states and state courts would be forced to try and adapt concepts from
Article 2 of the Uniform Commercial Code (“UCC”) to today’s electronic commerce. UCC
Atricle 2 was written over 50 years ago for a fundamentally different subject matter (goods) and
before computer information even existed. While some concepts from that long-standing law are
adopted and referenced consistently throughout UCITA, without this new statute, there is no
uniform contract code for computer information transactions.
Like all commercial sectors, the computer information industries require uniformity in
law, so that greater stability and certainty can govern transactions in their products and services.
Currently, there are only sporadic and non-uniform court decisions that have sought to delineate
the types of default rules that UCITA provides in toto, and this disparate set of decisions leave in
limbo both producers and consumers – regardless of the size of their operation – when
commercial contract law issues arise for computer information transactions.
The Staff acknowledges that it focused its review on the objections raised by groups who
proposed changes to the statute and whose suggestions were often incorporated as compromise
language during the NCCUSL drafting process. Without benefit of participating in the debate
and therefore without knowledge of the general and specific compromises reached during the
drafting process, however, the Staff now rejects the balance struck in UCITA and proposes
substantive changes through the legislative process.
Unfortunately, the changes suggested by staff accept almost exclusively the view of those
parties whose fundamental stance has been, and to a large extent remains, opposing enactment of
UCITA. Moreover, in many instances, the changes are not only ones already rejected by
NCCUSL but would alter traditional principles of commercial law.
Attached you will find a copy of the lengthy comments submitted to the Commission by
DCC earlier this year. We urge again your careful consideration of that filing. For the purposes
of this letter, we will speak generally to the problems that would arise should the suggestions
made by Staff in its latest recommendations to the Commission become law.
1.
The Staff amendments destroy uniformity and the result is not UCITA. The
point of a uniform commercial code is uniformity. Practitioners, businesses, commerce and the
well-being of consumers is enhanced when contracting rules are clear and uniform in all 50
states. Industries flourish, costs are decreased, consumers benefit from jobs and increased
competition, and economic progress for all is facilitated. That is the point of a commercial code
New Jersey Law Review Commission
October ___, 2000
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as expressed in UCC Article 1-102(2) and UCITA Section 106(a). The Staff’s amendments
would destroy that uniformity in regard to UCITA.
2.
The Staff's amendments do active harm to the computer information
industries and the economy. The Staff amendments are contrary to the very goal of UCITA:
namely to distinguish, where appropriate, the rules governing licenses of intangibles and those
for hard goods. For example, the amendment to Section 103 states that UCITA does not apply
when a transaction involves a good and computer information, and the information is not the
predominant purpose of the transaction. Thus if a consumer buys a computer (a good) and
receives a code to download tax return software, the software will not be governed by UCITA.
Why? Because the predominant purpose of the transaction is not for tax software that will be
used only once a year. The Staff prefers to treat the software under law written for goods. 2 This
is a position rejected more than ten years ago in the report by the American Bar Association that
led to the decade-long process of creating UCITA.
3.
The Staff believes state law is best written unilaterally and in conflict with
other uniform laws. Despite legal authorities and court decisions to the contrary, the Staff
concludes that Article 2 applies to computer information and amends UCITA to preserve that
alleged status quo. The Staff fails to mention the disparity among cases in several states
applying Article 2, and does not acknowledge that Article 2 is itself being revised by NCCUSL
and the American Law Institute (“ALI”) to make it crystal clear that goods do not include
general intangibles such as computer information. Article 2 is also being revised to make it
clear that Article 2's "predominant purpose" test should not be applied to bring computer
information in transactions involving both goods and information. Similarly, Article 9 of the
UCC regarding secured financing has already been revised to make clear that computer
information is not a good and numerous states have adopted revised Article 9. The ALI also
approved the revisions to Article 9.
4.
The Staff accepts the balances built into UCITA and then unbalances them.
As mentioned previously and by other commentators before the Commission, UCITA is the
result of years of debate and compromise. As with all deliberative bodies, NCCUSL could
satisfy no one completely so it sought to keep all parties in rough balance, sometimes by
including innovative concepts based in traditional commercial law but adapted to the computer
information marketplace. While acknowledging that balances were achieved, the Staff
nevertheless suggests additional changes that will more than tip the scales against the interests of
computer information providers.
2
See e.g., Brennan, Lorin, Why Article 2 Cannot Apply to Software Transactions, 38 DUQ. L. REV. -(2000)(explaining the errors made by courts that have concluded that Article 2 applies to software, explaining that in
many cases litigants or courts have simply assumed coverage of Article 2 or have effectively opted into coverage,
and explaining that use of Article 2 as a comprehensive code for software is virtually impossible if only because of
the number of contrary rules in federal copyright law).
New Jersey Law Review Commission
October ___, 2000
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Example: an innovation of UCITA is its creation of consumer protections for all
businesses, particularly small businesses, through the concept of "mass-market transaction."
Any mass-market licensee, business or consumer, is given special protections. Federal and state
consumer and other laws, including the UCC, overwhelmingly do not provide consumer
protections to businesses and do not use a mass-market concept. The Staff accepts UCITA's
“mass-market” extension of consumer protection to businesses and then takes it to the extreme.
In several amendments, the Staff takes the protections intentionally and traditionally confined to
"consumers" and broadens it to apply to the "mass-market," a term in UCITA that can include
businesses. Every such change takes UCITA further from traditional law and significantly
increases – without any compensating balance – the risks and costs for licensors.
5.
Many of the Staff amendments confuse federal and state policy roles. The
Staff makes several recommendations that go far beyond the purpose of UCITA and tread
dangerously into the area of federal copyright law. NCCUSL determined early that there is a
clear linkage between licensing default rules under the provenance of the states and intellectual
property laws exclusively reserved for federal authority. UCITA notes the pre-eminence of such
federal law and states specifically that federal law preempts and that fundamental public policies
will override any contrary licensing terms and conditions.
The Staff's report contains three specific copyright-related amendments: that no uniform
contract law for computer information shall apply to libraries and archives; that contracts cannot
preclude “reverse engineering;” and that "first sales" under the Copyright Act (see amendment to
Section 501) apply to intangible computer information. These amendments tread dangerously
into an area of law that the Constitution and Congress have reserved for federal authority. For
example, several sections of the Copyright Act of 1976 specifically reference the ability and
need to conclude licensing agreements, even when such agreements may alter some of the fair
use exceptions to the copyright rights established under that law. The Act now allows for a very
limited use of reverse engineering in relation to tests for compatibility, and many federal courts
have heard and determined the extent to which the first sale doctrine applies to computer
information.
6.
The Staff amendments alter and extend consumer protections far beyond
current practice to the particular detriment of small computer information providers The
Clinton administration has described the Internet as a place where a small business can become
the corner drugstore to the world. Under the Staff amendments, that corner store would find
electronic commerce both burdensome and expensive. For example, the Staff amendments
would force computer information providers – unlike any other business sector operating under
current commercial law – to comply with all laws affecting consumers in every country of the
world and in each of the 50 states, even if those laws may be varied by contract and even if those
transactions were business-to-business sales under the mass marketing concept. Such a rule
serves no one, including consumers, although it does provide an unjustified and discriminatory
advantage to business licensees. It will instead decrease potential consumer choice in providers
and products. It may likely lead to increased costs for computer information, since those
providers who can afford to do so will have to anticipate and offset numerous potential liabilities.
New Jersey Law Review Commission
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UCITA takes a more even-handed approach: it allows that corner store to survive by contracting
in good faith with consumers and businesses for application to their contract of an appropriate
law. That contract term must be conscionable and may not violate a fundamental public policy
or a non-variable consumer protection established under state law.
Another example of altering current law is the Staff's amendment concerning choice of
forum clauses. The Staff disagrees with the Supreme Court of the United States and a long line
of cases that set the UCITA rule. The Staff dismisses such cases as pertaining only to maritime
law. They are not so limited. The Staff also seeks to overrule legislatively, a decision of the
New Jersey judiciary in Caspi v. The Microsoft Network L.L.C. Rather than allowing parties to
agree that all disputes will be heard in one forum and thereby making commerce practical for
small businesses (which constitute the majority of licensors) and affordable for consumers, the
Staff makes its own rule. That is bad for New Jersey commerce and consumers.
7.
The Staff ignores years of debate in and outside of UCITA. Notwithstanding
years of debate and testimony before the UCITA drafting committee and the drafting committee
for proposed revisions to Article 2, the Staff proposes rules that ignore that debate and the
considered solutions crafted by NCCUSL and/or the ALI.
Example: the Staff's amendment to Section 201 eliminate the statute of frauds. Some of
the early drafts of revised Article 2 also eliminated it. But after years of debate, NCCUSL and
ALI reinserted the statute of frauds into revised Article 2. NCCUSL also incorporated the statue
of frauds into UCITA. The Staff justifies its proposed elimination of the statute of frauds by the
Staff’s sustained study, which would appear to conflict with the almost 10 years of debate and
consideration of the issue by both NCCUSL and ALI. Again, their determination was to include
the statute of frauds in both revised Article 2 and UCITA – taking into consideration the needs
and views of all states, including New Jersey.
8.
Some of the amendments appear misguided. The Staff’s recommends
removing UCITA's electronic contracting provisions on the basis that they either parallel the
federal Electronic Signatures in Global and National Commerce Act (“E-SIGN”) or the Uniform
Electronic Transactions Act (“UETA”). This change would be unfortunate and counterproductive, in that it would create several gaps. For example, the federal statute does not apply
to intrastate commerce; UCITA does. Moreover, UETA states that its provisions do not apply to
UCITA transactions. If the Staff removes the UCITA electronic contracting provisions, then
those provisions would have to be addressed elsewhere in New Jersey law, most likely through
amendment of UETA, which may cause further problems because of the provisions of the ESIGN bill which favor strongly uniformity.
Another example of a flawed analysis is provided by the Staff's proposed deletion of
Section 216 regarding idea submissions. The Staff concludes that the only reason for inclusion
of Section 216 in UCITA is to benefit the movie industry. That section was included in
numerous drafts of UCITA and was supported by numerous industries, among them the motion
picture industry. NCCUSL voted in 1999 to remove that section because of a misperception that
New Jersey Law Review Commission
October ___, 2000
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the section was only relevant to the movie industry, which at that time vigorously opposed the
law. That misperception and the illogic of not addressing idea submission issues was corrected
and NCCUSL adopted Section 216 this past July. UCITA now adopts a rule that is important to
all of the computer information industries and that is reflected in cases from New York and a
majority of other states.
9.
Some of the Staff's amendments create harm to the very persons the Staff
seeks to favor. The Staff has eliminated Section 816 regarding self-help. DCC members sit on
both sides of the Section 816 fence. As licensors, we welcome the staff’s deletion because
Section 816 creates harsh penalties for exercising self-help that do not exist under current law
and that discriminate against licensors. For example, a secured lender, or a lessor or goods seller
(but not a licensor) may now exercise self-help free of all restrictions in Section 816 except for
the requirement to avoid breach of the peace. A lender or lessor may do this simply by turning
off the software in computers or on an assembly line.
However, as licensees we favor retaining Section 816 for the same reason that the Federal
Reserve Bank of New York supported Section 816 during the NCCUSL drafting process. It
provides protections to licensees that do not exist in current law and that most licensees could not
achieve through negotiations. As licensees of computer information, we feel that the Staff's
amendment will do us harm in terms of the licenses we negotiate. Elimination of Section 816
would be even more detrimental to small businesses that do not negotiate licenses and to
consumers. The recent uniform amendments approved by NCCUSL state clearly, for example,
that self-help cannot be employed in mass-market transactions. Striking Section 816 from
UCITA would give no guarantees to consumers that computer information providers could not
use self-help to cure contract disputes.
10.
The Staff provides an incomplete picture. The Staff sets great store by the fact
that the American Law Institute allegedly would not have approved UCITA. In fact, many
members of the ALI actively support UCITA. The official announcement made by the ALI
regarding promulgation of UCITA as a uniform act does not support the statements made by the
Staff. A copy of that announcement can be found at the website referenced in our attached April
letter to the Commission.
It is true that several vocal members of the ALI do not support UCITA, just as it is true
that several vocal members of NCCUSL do support it. It is also true that the ALI has taken
official action in recent years to support legislation that seeks to change fundamental concepts of
commercial law, even in such established areas of the law as Article 2. It is inappropriate to
characterize the views of some ALI members as the view of the ALI generally, just as it is
inappropriate to characterize the apparent difference in views between the ALI and NCCUSL
over the future of commercial law as something that is unique to UCITA or that reflects badly
upon it. That debate can be seen in many arenas and cannot be solved in UCITA.
11.
The Staff prefers federal legislation. The Staff correctly notes that computer
information transactions are heavily influenced by federal intellectual property laws. That is one
New Jersey Law Review Commission
October ___, 2000
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of the reasons NCCUSL wrote UCITA – no other state contract code takes into account the
requirements of intellectual property laws. This intellectual property impact leads the Staff to
conclude, however, that Congress is the only appropriate vehicle for creating uniform contract
law. However, as noted above, the federal Copyright Act already anticipates and sanctions
licensing for computer information, as have several federal courts. The intersection between the
general protections granted under federal copyright law and state contract law governing
agreements between private parties is not only a long-standing principle of U.S. law, it is
preserved in UCITA.
However, the federal government has been reluctant to craft laws that interfere in
traditional areas of state authority. It is unclear whether Congress may feel the need to intervene
in order to assure effective and uniform electronic commerce rules, if the states cannot
accomplish the task. That is, however, precisely the reason why Congress recently enacted the
Electronic Signatures in Global and National Commerce Act: when the states started making
non-uniform amendments to NCCUSL's Uniform Electronic Transactions Act, the federal
government stepped in to halt the unilateral harm being created by states.
Contract law has traditionally been the province of state law and we believe that before
states cede this critical area of commerce to the federal government, they should first give careful
consideration to UCITA. As a product of almost 10 years of work by NCCUSL, UCITA is a fine
and balanced product worthy of support not only as an intellectual matter, but also as a matter of
preserving states rights.
Conclusion
As reported by the Staff, the Commission concluded that any significant alteration of the
"core" provisions of UCITA would result in a product so inconsistent with the official version of
UCITA that it could not be regarded as a "uniform" enactment. We agree. That is precisely
what the Staff amendments do and precisely why they should be rejected by the Commission.
The Staff has concluded that every state need not provide a uniform legal structure that
supports computer information transactions. We disagree most strongly and urge that the
Commission reject the Staff recommendations.
Respectfully submitted,
Daniel C. Duncan
Executive Director
DIGITAL COMMERCE COALITION
Attachment
April 26, 2000
Commissioners
New Jersey Law Revision Commission
153 Halsey Street
7th Floor
Newark, NJ 07101
Email: NJLRC@ECLIPSE.NET
Dear Commissioner:
The undersigned organizations, known as the Digital Commerce Coalition, are pleased to
comment on the memoranda written by the staff of the New Jersey Law Revision Commission
(“Staff”) regarding the Uniform Computer Information Transactions Act (“UCITA” or “the
Act”). We are both producers and users of computer information, which includes software and
electronic data products and services. Many of us have been involved for a number of years in
the debate over UCITA through the various meetings of the Drafting Committee established by
the National Conference of Commissioners on Uniform State Laws (“NCCUSL”), as well as the
debates about UCITA at both NCCUSL and the American Law Institute (“ALI”). Our position
as producers and users of computer information has led us to help craft and strongly endorse the
many compromises contained in the statute that are to the benefit of all parties involved in the
many forms of transactions for the production and use of computer information. It is in that
spirit of experience and compromise that we offer comments on the opinions expressed thus far
by the Staff.
The Staff effort is considerable in the scope of the subject matter covered, analyzing to
some degree many of the numerous legal disciplines that converge in computer information
transactions. Indeed, enactment of UCITA is essential precisely because so many legal concepts
need to be addressed comprehensively for commercial law to accommodate successfully the
production and use of computer information.
In short, we agree with the Staff’s conclusion stated in its memorandum of March 13,
2000, namely that UCITA is an integrated product and that New Jersey should adopt UCITA in
its entirety or with only modest amendments of the type adopted in Virginia.
UCITA is a uniform act in the finest tradition of NCCUSL and of the Uniform
Commercial Code. It reflects and adapts the guiding principles of the UCC and common law,
respects the freedom to contract, and avoids unnecessary "top-down" regulation. Adapting these
traditional principles to the new world of electronic commerce (“e-commerce”) has been the
subject of vigorous debate and thorough consideration over many years of both the UCITA
drafting project and the NCCUSL project to revise Article 2. The result is a carefully balanced
Act that not only will enhance electronic commerce but also will provide new protections to
consumers and others in computer information transactions.
Enclosed is a detailed memorandum addressing some of the specific observations made
by the Staff for the Commission, as well as other questions on which the Commission has
requested input. In addition, we offer the following general observations:
1.
All Staff concerns enumerated in the memoranda to the Commission have already
been fully debated and considered during the UCITA drafting process. None of the issues
selected by the Staff for review is new: each was thoroughly and publicly debated over a period
of almost 10 years with input from all affected constituencies, including representatives of
national consumer groups and all the individual commenters cited in the Staff memoranda.
Even those who continue to criticize UCITA acknowledge that the meetings of the
NCCUSL Drafting Committee were extraordinarily open. The Chair and the Reporter for the
Drafting Committee were unusually interested in reaching out to potentially interested parties
and generous in offering all attendees the opportunity to comment at length on every proposed
provision. Indeed, several of the issues raised by the Staff are among those that the Drafting
Committee debated, sometimes for hours and over the course of several meetings. As with all
legislation, however, there must come a conclusion to the debate and preparation for enactment,
and UCITA represents the typical series of compromises and policy choices that characterizes
any innovative and crucial statute. By definition, not all will agree with the compromises
reached – and both computer information producers and users have expressed dissatisfaction
with certain choices made by the Drafting Committee and endorsed overwhelmingly by
NCCUSL.
Nevertheless, continued dissent does not mean that the choices contained in the statute
are inappropriate or that they do not improve the law immensely. Indeed, when considering
UCITA, the Commission may wish to recall the words of Karl Lewellyn, the author of Article 2
of the Uniform Commercial Code, when characterizing the final version of that law sent by
NCCUSL to the states for enactment:
A wide body of opinion has worked the law into some sort of compromise after
debate and after exhaustive work. However, when you compare it with anything
that there is, it is an infinite improvement.
We are writing at this juncture precisely because we are concerned that nearly any of the
changes suggested by the Staff in its various memoranda would destroy the careful balance
created in UCITA through almost 10 years of effort.
To cite just one example, in its December 6, 1999, memorandum, the Staff accepts the
"mass market transaction" concept that, uniquely in UCITA, extends some consumer protections
to businesses. Although the Staff applauds this provision as an advance over current UCC
Article 2, the memorandum does not point out that this very concept was rejected by the
NCCUSL committee that is revising Article 2, since that committee thought the mass-market
concept created too great of a divergence with traditional commercial law (which generally does
not extend any consumer protections to businesses). Based on the staff analysis, it might seem
reasonable to accept the memorandum’s suggestion that the New Jersey version of UCITA be
amended to broaden application of the mass market concept. A more logical alternative – one
2
consistent with commercial law today and one that would take into account the marketplace
reality that most computer information licensors are small companies – would be to eliminate the
mass-market concept entirely.
It would naturally be to the advantage of computer information producers to insist that
UCITA be amended by the various states to retain this strong dichotomy between consumers and
businesses; however, in the spirit of compromise, we are abiding by the text endorsed by
NCCUSL. Again, UCITA is a balanced measure, and the mass market concept is just one of the
many points hotly debated and eventually reconciled in the statute. To now re-open that debate
only on certain provisions where some participants in the Drafting Committee process did not
prevail would undermine the innovative compromise that this important legislation represents.
2.
There is a need for UCITA, even if it is not felt in New Jersey. Article 2 of
the UCC cannot serve as a coherent legal infrastructure for a computer information economy.
That simple fact was recognized over a decade ago by NCCUSL and ALI. The need for a new
uniform law for computer information has become even more apparent as courts across the
country have acted inconsistently when considering whether to apply Article 2 to such
transactions. Some courts have chosen to apply it. Many others have recognized the vast
differences between goods transactions and computer information transactions and have refused
to apply it. The proposed revisions to Article 2 highlight these problems. One commentator has
expressed the problems created by attempting to apply Article 2 to computer information
transactions as follows:
The Courts apply Article 2 by analogy to the licensing of information because no
suitable alternative paradigms exist. The concepts of Article 2 are adapted to
information contracts through “legal fictions.” Judges must ‘pretend’ that a law
constructed for the sale of tangibles also accommodates the licensing of
information…. The courts’ strained efforts of applying the law of sales to the
licensing of intangibles is like the television commercial in which two mechanics
are trying to fit an oversized automobile battery into a car too small to
accommodate it. The car owner looks on with horror as the mechanics hit the
battery with mallets, trying to drive it into place.3
The Staff memoranda reflect a viewpoint with this comment and complete comfort with applying
Article 2, which was written for sales of goods at a time when computer information did not even
exist. In the attached memorandum, we supply further information regarding the problems with
applying Article 2 to computer information transactions.
Approximately ten years ago NCCUSL and ALI formally charged a study group with
examining whether Article 2 was inadequate to apply to computer information transactions. The
answer was yes. UCITA is the result of the ensuing decade-long debate to define and adapt
Article 2 and the common law to account for the differences between sales of goods and
computer information and should not be easily dismissed as ill-considered and untimely.
Rustad, Michael L., “Commercial Law Infrastructure For The Age of Information,” MARSHALL J. COMPUTER &
INFO. L. 255 at 270 (1997).
3
3
3.
ALI has not taken a position in opposition to UCITA. In early 1999, the ALI
Council decided that ALI would withdraw from the effort to promulgate what was then known as
UCC Article 2B. There was no vote on this action by the full ALI membership (such actions are
within the authority of the Council) and thus it is not possible to know whether it would have
been supported by the membership.
NCCUSL, which continued to strongly believe that there was an urgent need for a law to
govern computer information transactions, decided to continue with the project as a uniform act
and entitled it “UCITA.” A joint press release was issued by NCCUSL and ALI regarding the
new structure – in that release, which is the only official statement issued by ALI, the Institute
did not object to proceeding with the project as a uniform act (see:
http://www.nccusl.org/pressreleases/pr4-7-99.htm).
Moreover, NCCUSL has made unusual efforts to maintain a close working relationship
with ALI on UCITA. Several meetings of the Drafting Committee were held following the ALI
withdrawal and the Drafting Committee continued to address all issues, including several which
had been raised by ALI representatives or the Council. As often happens in such cases, a
handful of vociferous opponents who happen to be ALI members have rushed in to fill the void
created by ALI’s official silence, and often have left the impression that their personal views
reflect the views of the organization as a whole. Of course, this is not true, and while these
critics clearly are entitled to express their opinions, their collective voice does not equate to that
of ALI.
In this regard, it is only fair to state that many individual ALI members do support
UCITA, including notably several NCCUSL commissioners who were members of the UCITA
Drafting Committee and who enthusiastically support the Committee’s work product. Their
views should not be given any less weight than those of critics who also happen to be members
of ALI.
UCITA reflects the traditional principles and policy choices of commercial law. In the
eyes of those who seek fundamental changes in commercial law or who seek to alter federal
precepts of intellectual property protection under the guise of state contract law, UCITA misses
the mark. That does not mean, however, that it is not a worthy product. It does mean that there
are differences in views regarding the proper role of commercial law in our society, and we
believe from reading the various Staff memoranda that the Staff shares the views of those who
seek to change significantly the traditions and practices of US commercial law.
Conclusion
The Staff papers tend to reveal a view of the law that clearly is sincere but which
is not typical for commercial law. To the contrary, if New Jersey has adopted the
uniform version of UCC Article 2, then the Staff views do not reflect existing legislative
polices of New Jersey. UCITA, however, does reflect those traditional commercial law
policies, as adapted for computer information transactions.
4
We agree, then, with the Staff's conclusion that New Jersey should either adopt
UCITA in its entirety or not adopt it at all. We hope that New Jersey will adopt UCITA
in its entirety, for it will aid both businesses and consumers in the state as an effective
means of furthering e-commerce in particular. In any case, however, we appreciate the
Staff's recognition of the fact that material amendment of a uniform act would be a
disservice to the uniform law process.
Sincerely,
America Online, inc.
American Electronics Association
Adobe Systems
Autodesk, Inc.
Business Software Alliance
Intel
Information Technology Association of America
Lotus/IBM
Microsoft
National Association of Securities Dealers
Reed Elsevier Inc.
SilverPlatter, Inc.
Software & Information Industry Association
Symantec
Enclosure
cc: Commission Staff
5
MEMOR
ANDUM
TO:
New Jersey Law Revision Commission
FROM:
Dan Duncan, Executive Director, Digital Commerce Coalition
DATE:
April 26, 2000
SUBJE
CT:
Uniform Computer Information Transactions Act
This memorandum addresses issues raised in memoranda prepared by the Staff of the
New Jersey Law Revision Commission (“Staff”) regarding the Uniform Computer Information
Transactions Act (“UCITA”), as well as additional questions about which the Staff seeks input.
1. Why is there a need for UCITA? Several factors create a need for UCITA.
Among these are the need: (a) to apply to computer information transactions law that
contemplates that subject matter; (b) to enable electronic commerce as a substantive as well as a
procedural matter; and (c) to establish a uniform law governing Internet access contracts.
Taking these in inverse order, the need for uniform rules for Internet access contracts is
explained, by analogy, as follows:
The unique nature of the Internet highlights the likelihood that a single actor
might be subject to haphazard, uncoordinated, and even outright inconsistent
regulation by states…. Typically, states’ jurisdictional limits are related to
geography; geography, however, is a virtually meaningless construct on the
Internet. The menace of inconsistent state regulation invites analysis under the
Commerce Clause of the Constitution, because that clause represented the
framers’ reaction to overreaching by the individual states that might jeopardize
the growth of the nation – of communications and trade – as a whole.
. . . the Internet is one of those areas of commerce that must be marked off
as a national preserve to protect users from inconsistent legislation that, taken to
its most extreme, could paralyze development of the Internet altogether.4
The need with respect to electronic commerce is explained in a government white paper:
The law dealing with electronic commerce is not clear -- especially for totally
paperless transactions. On-line contracting and licensing raise a number of
concerns about the validity and enforceability of such transactions. The NII
[National Information Infrastructure] will not be used to its fullest commercial
4
American Libraries Association v. Pataki, 969 F.Supp. 160, 168-69, (S.D. N.Y., 1997).
potential if providers and consumers cannot be confident that their electronic
agreements are valid and enforceable.
. . . [A] threshold question is whether an electronic message or offer or acceptance
or the simple use of the "accept" or "return" key in response to a provider's offer
or consumer's request is assent.
. . . [Another] issue involves writing and signature requirements for certain
contracts. In the NII, where transactions may be entirely paperless, it may be
unclear whether electronic messages are written and what will be considered an
adequate signature.5
Finally, the need for a comprehensive body of laws contemplating information instead of goods,
i.e., the need for a uniform contract law other than Article 2 of the UCC, has been explained in
other contexts:
Applying the present libel laws to cyberspace or computer networks
entails rewriting statutes that were written to manage physical, printed objects, not
computer networks or services. . . . A uniform system . . . is needed to cope with
the impact of the information age. It is the responsibility of the legislature to
manage this technology and to change or amend the statutes as needed.6
This need to rewrite law to reflect new economies is an old problem. Karl Llewellyn, the
author of UCC Article 2, described the need at that time to “unhorse” a sales law that was based
on economies existing before the mercantile or industrial ages, i.e., the need to divorce sales law
from laws written for real estate, horses and haystacks.7 Llewellyn noted that thinking in terms
of real estate law developed in judges a rigid attitude that could lead to “pretty awful results.”
Lewlellyn also believed that all sales law could not be lumped into a single class and that sales of
mercantile goods needed to be thought of and treated differently from sales of farms and horses.
The same problem arises with respect to the differences between information and goods.
For the very reason that Llewellyn believed mercantile sales should not be thrown into a “single
intellectual bin,” licenses of information should not be thrown into a single intellectual bin with
sales of goods. Llewellyn also believed that courts should be encouraged to understand the
purposes and reasons behind statutes to allow construction in light of that purpose. He thus
wrote lengthy comments to each provision of Article 2. UCITA proceeds on the same premises
and provides thorough comments to explain the workings of, and the policy choices behind, the
black-letter provisions. In a world of converging legal disciplines, this will be particularly
helpful to practitioners and courts.
Lawyers and courts used to a world of goods think in images of goods instead of images
of contract rights or information, and this leads to wrong results:
5
See Bruce A. Lehman, Intellectual Property and the National Information Infrastructure, The Report of the Working
Group on Intellectual Property Rights at 54-55.
6
It’s In The Cards inc. v. Fuschetto, 535 N.W.2d 11 at 14-15 (1995).
7
See generally, Llewellyn, Karl, The First Struggle To Unhorse Sales, 52 Harvard law Review 873 and 875 (1939).
2
Assume that Licensee acquires a copy of copyrighted word processing software
subject to a license from Licensor. The license permits Licensee to copy the
software into its network and to use the software so long as there are not more
than ten simultaneous users. The license prohibits any transfer of the licensed
software without Licensor’s written permission and provides that the license will
terminate if any of its provisions are breached. Despite the terms of the contract,
Licensee transfers the software to X for $10,000. The relevant question for our
purposes is whether this transfer of the licensed software is valid.
Under current law, the answer . . .is likely to be controlled by federal law, which
prohibits a transfer of a non-exclusive license without the consent of the licensor.
Putting the preemption issues aside . . . [O]ne way of addressing the problem
reflects a sale of goods model, while the other refers to a model centered on the
information (the software) and the attempted transfer of a contract right to use that
software. The sale of goods approach yields an image that the key transfer is a
transfer of the disk containing the software and that the enforceability of a
restriction on this transfer faces up against ‘traditional’ doctrines against restraints
on alienation, precluding the enforcement of an anti-transfer clause in the sale of
an item of goods. This doctrine, as applied to personal property, argues that a
seller cannot sell an item to a buyer and also restrict the buyer’s ability to resell it.
Yet, it is highly unlikely that Licensor would be concerned about Licensee’s
transfer of the disk (the goods) electronically cleansed of the software. Licensor
is concerned, instead, about the transfer of the right to use the software . . . .
Thus, the alternative view of the transaction is that it entailed a transfer of
information (the software) subject to a contractual license, and that the transaction
deals with the information, not primarily the diskette. As to restrictions on the
transfer of copyrighted information and of contract rights, the common law
applies a much different approach than with respect to resale of goods. This
different approach is described in part in the Restatement (Second) of Contracts:
In the absence of a statute or other contrary public policy, the
parties to a contract have power to limit the rights created by their
agreement. The policy against restraints on the alienation of
property has limited application to contractual rights . . . . A term
in a contract prohibiting assignment of the rights created may
resolve doubts as to whether assignment would materially change
the obligor’s duty or whether he has a substantial interest in
personal performance by the obligee; or it may serve to protect the
obligor against conflicting claims and the hazard of double
liability.
3
. . . In this case, then, failing to shed an inappropriate sale-of-goods centered
model yields a wrong analysis or, at least, an analysis that misstates the
underlying principles pertinent to a contractual transfer of a license agreement.8
The Staff memorandum of January 18, 2000, illustrates the above point that thinking in
images of “goods” can lead to wrong results for other subject matter. For example, at page 9 the
Staff assumes that, per Article 2 and under a sales-of-goods analysis, the “very essence of the
transaction is the passage of title from the seller to the buyer.” Of course that is wrong in a
computer information transaction. Software and electronic database publishers never pass title to
their copyright when licensing use of their information, nor do they typically pass title to the
copy. This does not affect the “essence” of the transaction because as explained in the quotation.
The essence of a computer information transaction is the ability to use the computer information,
not the title and not the tangible copy.
Finally, the concept that Article 2 is not the proper legal model for computer information
transactions has been validated independently by a study committee appointed by the National
Conference of Commissioners on Uniform State Laws (“NCCUSL”) and the American Law
Institute (“ALI”), which concluded over 10 years ago that a separate law was needed for
computer information transactions. Proposed revisions to Article 2 are consistent with that
conclusion.
2. Why is information licensed instead of sold? Computer information and copies of
it typically are licensed, not sold. An informative discussion of why licenses are used in the
production and distribution of information for the benefit of both licensors and licensees, can be
found at http://www.publishers.org/home/abouta/copy/plicens.htm (see “Contractual Licensing,
Technological Measures and Copyright Law (Association of American Publishers, Inc). It is
important to note that licensing is used by all members of the computer information community,
not just commercial publishers. For example, the open source code community uses license
contracts to ensure that source code will remain open and warranty free so that all may adapt and
use it without inappropriate liability:
When we speak of free software, we are referring to freedom of use, not price.
Our General Public Licenses are designed to make sure that you have the freedom
to distribute copies of free software (and charge for this service if you wish); that
you receive source code or can get it if you want it; that you can change the
software and use pieces of it in new free programs; and that you are informed that
you can do these things.
To protect your rights, we need to make restrictions that forbid distributors to
deny you these rights or to ask you to surrender these rights. These restrictions
translate to certain responsibilities for you if you distribute copies of the library or
if you modify it.
8
Raymond T. Nimmer, Images and Contract Law—What Law Applies to Transactions In Information, 36 HOUS. L.
REV. 1, 22-23 (1999).
4
For example, if you distribute copies of the library, whether gratis or for a fee,
you must give the recipients all the rights that we gave you. You must make sure
that they, too, receive or can get the source code. If you link other code with the
library, you must provide complete object files to the recipients, so that they can
relink them with the library after making changes to the library and recompiling
it. And you must show them these terms so they know their rights.
We protect your rights with a two-step method: (1) we copyright the library, and
(2) we offer you this license, which gives you legal permission to copy, distribute
and/or modify the library.
To protect each distributor, we want to make it very clear that there is no
warranty for the free library.
See GNU Lesser General Public License, http://www.gnu.org/copyleft/lesser.es.html#SEC2>.
Another explanation of why software publishers have tended to use licenses is provided
by counsel to a small developer in her response to criticism of UCITA (f/k/a “Article 2B”) made
by Cem Kaner, one of the critics cited by the Staff. This discussion is also helpful in
understanding some of the differences between computer information and goods (the Staff
assumes in its December 6, 1999, memorandum that computer information is no different than a
book – the quotation addresses some of the actual differences):
Copyright law forbids copying a literary work without permission, except for "fair
use," which permits limited copying, as for example, copying limited portions of a
book as part of a book review. Because software must be copied in order to be
useful (computers copy software in order to use it), permission to copy must be
granted in order to commercialize literary works in the form of software. In some
cases, e.g. commercial software code libraries, meaningful commercialization
requires that the literary work be copied many times.
Early developers who wished to commercialize their software were, therefore,
faced with the challenge of making it possible to permit people to use the software
without requiring the developer to give up his copyrights. Developers (whether
they undertook to publish and distribute their own software or arranged to have a
publisher distribute it for a royalty or on some other basis) were aware that
copying software is inexpensive and easy. Reprinting an entire book may well
cost more than purchasing a second copy from the author or publisher. Not so
software. Making a copy takes little time, and is substantially less trouble and less
costly than licensing another copy. Mass market license agreements advise the
licensee of the circumstances under which copying is unauthorized, and therefore
"unfair" because unauthorized copying violates the licensee’s obligations to the
licensor.
5
Developers were also aware (if only after talking with their lawyers) that if they
did not make some effort to limit copying, their software might become "public
domain." If this occurred, commercial potential would be destroyed.
Developers wanted to be able to provide their creations to a mass market. To do
so, developers had to enable their customers to use the applications the developers
created, while assuring the developers’ ability to obtain income from their
creative efforts. In other words, the developers’ challenge was to find a way
6
to facilitate intended use of software applications without sacrificing the
possibility of commercial gain. The solution which the industry devised was
licensing. The use of a contract between developer (whether directly, or through a
publisher who would undertake to distribute the software for the developer) made
it possible to tailor arrangements to particular applications, and to make changes
quickly - an important element in the rapidly developing world of technology.9
See also, Gomulkiewicz and Williamson, A Brief Defense of Mass Market Software License
Agreements, 22 Rutgers Computer & Tech. L.J. 335 (1996) (explanation of why contracts are
necessary to information licensing).
3.
Why isn’t UCITA a federal statute? Contract law both traditionally and
constitutionally has been within the province of state governments, not the federal government.
This is a simple issue of federalism. It may be unconstitutional for federal law to try to regulate
contracts in detail. Contract law issues involve question about warranties, how an agreement is
created, what state law applies, how deliveries are made, what performance is required, what
uses are permitted or restricted, what risk of loss exists, and a wide variety of other issues that
have always been central to state governance. The fact that UCITA deals with intangible
property does not change that. There is no reason why UCITA should be federal law any more
than there was reason for Congress to consider or enact UCC Article 2 regarding sales of goods,
UCC Article 2A regarding leasing of goods or UCC Article 9 regarding security agreements.
In contrast, intellectual property concerns cited by Staff are traditionally and
constitutionally the province of federal law. Unfortunately, critics of UCITA who are not
satisfied with the panoply of rights and exceptions provided under federal law have seized on
modifying UCITA as an opportunity to attain what they have not been able to achieve through
federal legislation. This, of course, is not legally appropriate within the context of a state contract
law. While there may be more need to debate federal copyright, patent and trademark protections
beyond the numerous considerations Congress has given to these issues in the last decade, the
place for those arguments is properly the halls of Congress, not the New Jersey legislature.
4.
Why is UCITA’s “mass-market transaction” concept not broadly defined
and is it accurate to say that UCITA “narrows” the definition of consumer? In its
December 6, 1999, memorandum, the Staff criticizes UCITA for not using a broader definition
of mass-market transaction and for not extending certain consumer protections to mass-market
customers in addition to consumers. In order to understand the policy choices of UCITA, it
helps to step back and look at the place from which the UCITA Drafting Committee started:
traditional commercial law. Under traditional commercial law, no “consumer-like” protections
are afforded to businesses. The choice of the UCITA Drafting Committee to extend any
“consumer-like” protections to businesses under UCITA’s mass-market concept is unique and a
major benefit of UCITA to business customers. The same protections are not afforded to
business customers under UCC Article 2.
9
Micalyn S. Harris, Is Article 2B Really Anti-Competitive? 3 CYBERSPACE LAWYER No. 8, Nov., 1998 (footnotes
omitted) (http://www.winpro.com/articles/anti-competitive.htm).
7
To illustrate, consider Federal Regulation Z, which implements the federal Truth in
Lending Act, a consumer protection statute. Its protections only apply to consumers, natural
persons who obtain credit primarily for personal, family or household purposes.10 It does not
apply to corporations or other businesses,11 and expressly excludes credit extended “primarily for
a business, commercial or agricultural purpose” or to government agencies or instrumentalities.
As do many consumer statutes, it also excludes high-dollar transactions.12
UCITA parallels this typical definition of consumer but also expands it in two respects.
First, UCITA does not limit the dollar amount of a consumer contract. Second, it expands the
definition to include management of the individual’s personal or family investments. Both of
these expansions significantly broaden the traditional definition of consumer used in consumer
protection statutes.
The Staff discussion of “consumer” statutes ignores this traditional definition and
erroneously states that UCITA narrows the definition. While we are not familiar with all aspects
of New Jersey law, the statutes cited by Staff would appear to be statutes in which “consumer” is
used as a synonym for “customer,” such as an unfair acts and practices statute. While such
statutes exist in many states, they are not usually considered to be “consumer protection”
statutes: what is usually meant by such a reference is a statute that affords special protections to
consumers that are not afforded to non-consumers, i.e., businesses.
To understand the typical application of consumer protection statutes, consider two
transactions by an accountant who purchases, on installment, credit from a retailer, (1) a
computer and telephone for an office in the accountant’s home, and (2) the same thing for the
family room. Both items are also commonly used by the accountant’s children, although the
10
12 C.F.R. § 226.2 (11) and (12) (1999).
See 12 C.F.R. § 226.3(a) (1999) (this regulation does not apply to business, commercial, agricultural or
organizational credit or an extension of credit to other than a natural person, including credit to government agencies
or instrumentalities). See also 12 C.F.R. 213.2(e)(1) (1999) (Regulation M, consumer leases) and UCC Article 2A§
103(1)(e) (consumer leases), both of which exclude entities or businesses from their definition of “consumer”;
Uniform Consumer Credit Code § 2.104 (the UCC covers consumer credit sales which are defined to protect only
buyers who are not organizations and who purchase primarily for personal or family purposes; agricultural purposes
are also protected) (copy available, Consumer Credit Guide at ¶ 5044 (Commerce Clearing House Inc.); FTC
Telemarketing Sales Rule, 16 C.F.R. § 310.6(g) (1999) (although this telemarketing sales rule literally applies to all
“customers” of telemarketers, exempted from the rule are telephone calls between a telemarketer and any business,
except calls involving the retail sale of certain cleaning supplies). There are a few minor exceptions: see 12 C.F.R. §
226.12(a) and (c) (1999) (extending the protection of selected credit card issuance and liability rules to businesses);
and see federal Magnuson-Moss Warranty Act, 15 U.S.C. § 2301et.seq. (1994) (protecting all buyers as to certain
aspects of the statute, but only if the buyer purchases a consumer product). “Consumer products” means any
“tangible personal property which is distributed in commerce and which is normally used for personal, family, or
household purposes.” Id. at (1).
12
See e.g., 12 CFR § 226.3(b) (Regulation Z exempts credit over $25,000 unless secured by real property or a
dwelling). $25,000 is also the limit under NCCUSL’s Uniform Consumer Credit Code. See also UCCC at § 2.104.
Under both acts, the financing of high-priced products, like an airplane, is not covered even if purchased by a
consumer. Similarly, the definition of “consumer lease” in UCC Article 2A-103(e) contains an option for states to
impose a dollar limit, and a dollar limit is imposed in federal Regulation M regarding leasing (“consumer lease” is
defined as not exceeding $25,000). 12 C.F.R. § 213.2(e)(1) (1999). Under federal Regulation Z, the Federal
Reserve Board is further empowered essentially to eliminate consumer protections for individuals who have net
assets in excess of $1,000,000 or an annual income of more than $200,000. See 15 U.S.C. 1604(g)(1) (1996).
11
8
primary purpose of the first purchase is to equip the home office. Do the consumer protection
provisions of federal and state laws, including usury laws, apply to both transactions? No.
To implement the dividing line between consumer protections laws and commercial laws,
and to confine consumer protections to consumers, the home office transaction is viewed as a
business transaction and the accountant is expected, in the pursuit of her business or commercial
goals, to conduct herself as a businessperson. The purchases she made for the family room were
consumer transactions under existing consumer protection laws, i.e., they were primarily for
personal, family or household purposes, and her creditor would have to comply the Truth in
Lending Act with respect to the credit extended for those purchases. In sharp contrast, the
purchases for the home office are viewed as business transactions and the Truth in Lending Act
does not apply to those purchases.
Article 2 intentionally makes this same distinction:
Llewellyn believed the policies and considerations involved in a mercantile
situation differed from those in a nonmercantile situation, and that a unitary
approach to sales rules would inevitably muddle policies and rationales. This
result would jeopardize the predictability he so wanted to create for businessmen.
Under a single rule, governing both businessmen and nonbusinessmen, a court
trying to protect Aunt Tilly might manipulate, distort, or misconstrue the rule,
making uncertain its later interpretation or application to Tilly, Inc. Rules
fashioned specifically for a commercial setting, and insulated from nonmercantile
considerations, would thus protect the rules’ predictability for businessmen. One
set of sales rules for businessmen and another for Aunt Tilly would eliminate the
possibility of undermining the commercial rule to do justice to Aunt Tilly.13
Accordingly, Llewellyn classified certain Article 2 rules by a party’s status as a merchant or
nonmerchant. There is no indication that U.S. law will generally shift away from this traditional
dividing line between business and consumer transactions:
In seeking to protect consumers online, we will keep in mind the distinctions
between business-to-business and business-to-consumer transaction[s] in
discussions at both domestic and international levels.14
UCITA does make such a shift, however, to deal with certain market characteristics.15 Even
though this shift is limited, i.e., only a limited range of consumer protections are extended to
businesses, any application of consumer protections to businesses represents a dramatic shift in
commercial law.
See Ingrid Michelsen Hillinger, The Article 2 Merchant Rules: Karl Llewellyn’s Attempt to Achieve The Good,
The True, The Beautiful in Commercial Law, 73 GEO. L.J. 1141, 1148-49 (1985) (footnotes omitted).
14
See U.S. Government Working Group on Electronic Commerce First Annual Report at 27 (Nov. 1998) .
15
The mass market concept is used in two ways: (1) to treat the marketplace as a surrogate for consumer protection,
thereby extending consumer protections to business transactions, or (2) to use the concept as a marketplace identifier
which allows definition of various expectations about the nature of transactions in that market. Preface to Article
2B, Nov. 1, 1997 draft at 17.
13
9
This shift is not countenanced by all bodies that are examining commercial law. As
noted in our cover letter, the Drafting Committee for proposed revisions to UCC Article 2
rejected the extension of “consumer” protections to certain business when it chose not to include
mass-market concept in the current Proposed Revisions of Article 2. Presumably, it feared what
Lewellyn feared and what opponents of the concept in UCITA feared: if the same rules apply to
Aunt Tilly and a Fortune 500 company, courts may be tempted to manipulate, distort, or
misconstrue the rules in order to provide protections to Aunt Tilly that are not necessary for, nor
traditionally applied to, the Fortune 500 company (because of the merchant/non-merchant
distinction).
In short, the mass-market concept recreates the same problems that were solved by the
party-status rules created in original Article 2 and later-developed consumer protection laws, the
substance of which are preserved in UCITA.16 Licensor critics of the concept also objected to
the disparity inherent in it: large businesses are afforded protections as licensees that may harm
the smaller licensor,17 even though one of the assumptions of the mass-market concept is that
limited extension of protection to small businesses is desirable or at least not harmful. To avoid
these kinds of problems licensors argued for elimination of the mass-market concept from
UCITA.
They did not prevail, however, and the mass-market concept remains. The concept has
been carefully crafted, however, to attempt to balance all of the competing needs while extending
16
See Hillinger, supra at 1184 (arguing that the proliferation of consumer legislation in the 1980s indicated “the
perceived need to create different rules for different classes of people”). Professor Hillinger also notes that the
original UCC was criticized for not containing more consumer protection rules. See id. at 1184 & n.271. Given the
proliferation of state and federal consumer protection laws after the UCC’s passage, the same issue is not present
today. See id. at 1184 (noting a “proliferation” in federal consumer protection statutes). UCITA leaves all of those
consumer protection statutes in place except for a few aspects of electronic commerce, such as writing requirements.
See UCITA §105. For a discussion of the treatment of consumers under the UCC or UCITA, see Mary Jo Howard
Dively & Donald A. Cohn, Treatment of Consumers Under Proposed U.C.C. Article 2B Licenses, 16 J. MARSHALL
J. COMPUTER & INFO. L. 315 (1997) (concluding that Article 2B has treated consumers fairly); Gail Hillebrand, The
Uniform Commercial Code Drafting Process: Will Articles 2, 2B and 9 be Fair to Consumers?, 75 WASH. U. L.Q.
69, 73 (1997) (summarizing Article 2B and the Revised Articles 2 and 9 drafts and arguing that the drafters “have a
special responsibility to weigh the fairness of uniform law drafts on consumers”); Fred H. Miller, Consumers and
the Code: The Search for the Proper Formula, 75 WASH. U. L.Q. 187 (1997) (describing the tensions, problems, and
incentives created through inclusion of consumer protections in a commercial code). For a debate regarding requests
made by an attorney for Consumers Union, see generally Gail Hillebrand & Holly K. Towle, A Debate on Proposed
Article 2B’s Effect on Consumers (pt. 1), UCC BULL., Sept. 1997, at 1; and Gail Hillebrand & Holly K. Towle, A
Debate on Proposed Article 2B’s Effect on Consumers (pt. 2), UCC BULL., Oct. 1997, at 1.
17
In the information industry, the licensor or vendor is more often than not smaller than the licensee or buyer and, as
with information law generally, it is dangerous to premise laws on inaccurate images, such as an image that all
buyers are smaller than all sellers. See Raymond T. Nimmer, Images and Contract LawWhat Law Applies To
Transactions in Information, 36 HOUS. L. REV. 1 (1999):
an image of routinely subservient purchasers (licensees or buyers) does not
accurately reflect practice. The nature of the information marketplace
accentuates the degree to which the inaccuracy exists. Most vendors of
information who provide works to publishers are individual authors dealing with
relatively large corporate purchasers. Although there are large companies in the
modern computer software industry, the average size of a computer software
provider is fewer than twelve employees. These small companies routinely deal
with large corporate clients (purchasers). For example, Walt Disney Corp. is
seldom the … unsophisticated party, especially in the many contracts in which it
acquires services from small software development companies.
Id. at 25 (citations omitted).
10
more protection to businesses than is typically extended. The Staff would like a further
extension. Others will argue for a complete elimination of the mass-market concept, if the
subject is re-opened. UCITA appropriately creates a balance that should not be disturbed.
5.
Warranties.
A. Federal Magnuson-Moss Warranty Act. In its memorandum dated February 14,
2000, the Staff notes that no court has held that the Magnuson-Moss Warranty Act (“Act”)
applies to licenses of software. As noted by the Staff, there is good reason for this: that Act
expressly applies only to tangible consumer products that are sold. Thus not only is it unclear
whether the Act applies, it is very likely that it does not. What is unclear from the Staff’s
discussion is why the answer matters to UCITA: § 105(a) of UCITA expressly states that any
provision of UCITA which is preempted by federal law is unenforceable to the extent of the
preemption. Thus if a court ever concludes that the Magnuson-Moss Act does apply to any
computer information transaction, then the federal Act will control as appropriate. Answering
that question is not within the province of UCITA or state legislatures.
Lest we have missed the point of the Staff’s discussion, correction of a few omissions
from that discussion may be helpful. The Staff notes that the Act affords protections to
commercial parties purchasing consumer products, but neglects to note two important
qualifications to that coverage. First, the products must be consumer products, i.e., they must
normally be used for consumer purposes and thus do not include products that are not normally
used by consumers, i.e., commercial products. While that point is not relevant to the Staff’s
discussion of the Act, it is relevant to the Staff’s conclusion in the December 6, 1999,
memorandum that the definition of “mass-market transaction” should be expanded to include
commercial products regardless of whether they are normally used by consumers. Even the one
federal consumer protection statute that does afford consumer protections to businesses does not
go that far, i.e., it only affords protection as to consumer, not business, products. Second, the
Staff’s discussion of the Act’s presale disclosure of warranty terms omits the fact that such
disclosures do not apply to business customers and that for purposes of those disclosures,
“consumer product” is redefined expressly to exclude commercial products. 16 CFR § 702.1(b).
The fact that the federal Act might or might not apply to UCITA does not mean that any
change should be made to UCITA. Common law does not provide that software manufacturers
give implied warranties. Such warranties are a creature of Article 2 of the UCC, which also
allows disclaimer of them. A parallel structure is employed in UCITA: because UCITA
deviates from the common law by imposing implied warranties (as Article 2 did when it first
imposed implied warranties in connection with sales of goods), it also must clarify whether and
how they can be disclaimed (as Article 2 is); that is the province of state law. This is important
regardless of the federal Act, which as acknowledged by the Staff, only applies, if at all, to a
subset of transactions covered by state law.
B. Warranty of Merchantability. In its March 13, 2000, memorandum, the Staff states
that it has been suggested that “common law concepts of implied warranties of merchantabilty”
do not address the peculiarities of software which has some problems in operation. The Staff
questions whether UCITA should have provided both a new standard designed to be appropriate
11
for software products and guidance as to whether a program with the “ordinary number of bugs”
is merchantable.
There are two problems with the Staff’s analysis. First, as discussed above, there is no
common law concept of an implied warranty of merchantability. That concept is unique to
Article 2 regarding sales of goods; under the common law, no warranties are implied by law. In
states which do not apply Article 2 to software, UCITA will accomplish a major change which is
beneficial to licensees: the imposition of an implied warranty of merchantability on licenses of
computer information.
Second, the Staff erroneously assumes that no effort was made in UCITA to adapt the
implied warranty used in Article 2 to computer information. In fact, extreme efforts were made
and many drafts had one of two other versions that were better tailored to computer programs.
But those versions were opposed by licensee representatives who preferred an adaptation of the
Article 2 formulation, including some consumer representatives. In short, the merchantability
warranty is a result of lengthy public debates and compromises and is the best that anyone,
including New Jersey, likely can do given all of the competing interests.
As for the Staff’s question whether a computer program with “the ordinary number of
bugs” is merchantable, the answer is clearly yes under existing New Jersey law (if one looks to
Article 2 by analogy) and under UCITA. Article 2-314 requires products to meet the middle
range of quality – it does not require them to be perfect. If a computer program contains the
“ordinary number of bugs,” then by definition it meets the ordinary or middle range of quality.
C. Other Warranties. In addition to the Implied Warranty of Merchantability, UCITA
provides licensees with three other implied warranties: (i) the Implied Warranty of
Noninfringement, Exclusivity and Enjoyment; (ii) the Implied Warranty of Informational
Content; and (iii) the Implied Warranty of Fitness for Licensee’s Purpose and System
Integration. All of these provide new benefits to licensees of computer information not afforded
to them by the common law. Some of these warranties, such as the system integration warranty,
do not exist under Article 2; no implied warranties exist under the common law.
12
6. Choice of Law. One of the most critical issues in modern commerce is what law
applies to a given transaction:
In order to protect consumers online, the global community must address complex
issues involving choice of law and jurisdiction – how to decide where a virtual
transaction takes place and what consumer protection laws apply.
U.S. Government Working Group on Electronic Commerce, First Annual Report, 27 (Nov. 1998)
<http://www.doc.gov/ecommerce/E-comm.pdf >.
Yet choice-of-law jurisprudence is chaotic. While the Staff suggests in its memorandum
dated February 14, 2000, that this issue can simply be left to Article 1 of the UCC, that
suggestion ignores the failure of Article 1 to provide clear guidance in this area. One
commentator provides an illustration of this failure:
Determining what law applies in a given situation is a problem that anyone
can understand but only a lawyer can solve. Suppose, for example, the buyer
lives in state A, the seller in state B, and the goods are destined for delivery in
state C . . . The basic Code rule . . . provides that ‘when a transaction bears a
reasonable relationship to this state and also to another state or nation, the parties
may agree that the law either of this state or of such other state or nation shall
govern. . . .
So the parties can pick and choose the law they prefer. . . . That is the
general idea.
But suppose they opt for the law of state D? It happens. A recent
illustration of that occurred in New Hampshire. Result: The agreement as to the
law of state D failed to work.
. . . Now what? That was easy to decide, too, since the Code goes on to
provide that ‘failing such agreement this Act applies to transactions bearing an
appropriate relation to this state.’ Meaning what? Meaning that since the case
was being tried in New Hampshire and since New Hampshire was “reasonably
related” to the transaction, the law of New Hampshire applied.
But a number of other states were also “reasonably related” to the
transaction. True enough . . . . Anyone for a quiet game of Russian roulette?18
Thomas Quinn, QUINN’S UNIFORM COMMERCIAL CODE COMMENTARY AND LAW DIGEST at 1-16 and 1-17 (2nd
ed. 1991). Also, compare, for example, the varying rules (and cases interpreting them) in UCC Article 1-105
(“when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree
that the law either of this state or of such other state or nation shall govern their rights and duties”) with revised
UCC Article 5-116 (parties may choose applicable law or letter of credit may state it, and it “need not bear any
relation to the transaction”) and RESTATEMENT (SECOND) CONFLICT OF LAWS § 187 (1971) (parties may contract
for the law to govern their contractual rights and duties without restriction if the issue can be resolved by contract; if
it cannot, the contractual choice will nevertheless be honored unless either (1) the chosen state has no substantial
relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or
(2) application of the chosen law would be contrary to a fundamental policy of a state with a materially greater
interest ) (emphasis added).
18
13
Why would parties choose “state D’s” law to apply? Assume parties in Sweden and California:
each does not know the other’s law but they do know that law in New York is well-developed
regarding the subject matter of their contract. Accordingly, they choose New York law. In the
alternative, assume that the same parties know nothing about New York law but seek a generally
respected jurisdiction in which neither party will have a knowledge advantage. This kind of
compromise, which involves choosing a law with which neither party is fully familiar but which
puts both parties on an equal footing, will become increasingly necessary in a global economy.
Choice-of-law clauses are enforced more often than not, including in standard form
contracts.19 UCITA Section 109(a) makes a very important contribution by stating a clear rule for
contracts between commercial parties: they may agree on the applicable law, subject, of course,
to UCITA Section 105 which allows invalidation of unconscionable terms or terms that violate a
fundamental public policy, and UCITA Section 114, which imposes on every contract a duty of
good faith and fair dealing.
UCITA separates and protects consumer contracts from this general rule. For consumer
contracts, a choice of law clause is not enforceable to the extent it would vary a rule that is nonvariable under the law of the jurisdiction whose law would apply under the default rules (which
apply in the absence of an agreement). This is a beneficial consumer rule, but one that at least
one federal authority, the U.S. Comptroller of the Currency, would view as too protective of the
consumer.20 There is merit to the Comptroller’s view, especially when balanced against the
competing policy of maintaining the Internet as a place where small companies may compete
with large companies on a level playing field. As explained by the Clinton Administration:
In this emerging digital marketplace, anyone with a good idea and a little software
can set up shop, and become the corner store for the entire planet. This capability
promises to unleash a revolution in entrepreneurship and innovation – a cascade
of new products and services that today we can scarcely imagine. 21
19
See, e.g., RESTATEMENT (SECOND) CONFLICT OF LAWS, §187 cmt. b (1971). Standard form contracts can
sometimes fall into the category of “adhesion” contracts. In discussing adhesion contracts, the Restatement
comment notes: “Choice-of-law provisions contained in such contracts are usually respected. Nevertheless, the
forum will scrutinize such contracts with care . . . .” .
20
See e.g., OCC Letter dated 1/12/98 re Operating Subsidiary Application by Zions First National Bank, Salt Lake
City, Utah, Application Control N. 97-WO-08-0006, signed by Julie Williams, Chief Counsel. Utah is one of the
few states that licenses certification authorities to issue certificates regarding digital signatures that require and rely
on public-private key encryption technology. The letter recognizes the “new risks that arise from a new use of
technology,” and as does UCITA, the Comptroller recognizes that settling the question of what law will apply to a
contract is critical for handling these new risks. The Comptroller included as one of the “legal devices to control
and limit [the subsidiary’s] risk of liability,” use by the subsidiary of a choice of Utah law in all of its contracts.
While most of the initial contracts were to be between commercial parties, the Comptroller recognized that the
subsidiary would eventually do business with consumers and required inclusion of choice-of-law provisions in the
consumer contracts as well. The Comptroller acknowledges the uncertainty of existing law regarding the
enforceability of choice-of-law clauses, but takes the position that choice-of-law provisions have long been enforced
by state courts even as to consumer issues as important as usury. See OCC Letter dated 2/17/98 to Jeremy T.
Rosenblum (regarding the ability of interstate national bank to charge the rate of interest allowed in the bank’s home
state under federal and state law).
21
U.S. Government Working Group on Electronic Commerce, First Annual Report at i (Nov. 1998)
<http://www.doc.gov/ecommerce/E-comm.pdf>. In keeping with this insight, the Clinton Administration has
14
In contrast to the arguments made by the Staff for an even more restrictive consumer rule, a good
argument can be made that the UCITA consumer rule may prove to be too protective in terms of
the compliance costs it will add to the provision of computer information and services, or its
adverse impact on small businesses and, ultimately consumers. While acceptance of the UCITA
policy decision is reasonable, changes to that decision are not.
7. Choice of forum. UCITA allows parties to choose an exclusive judicial forum unless
the choice is unreasonable and unjust. This is the same rule adopted by the U.S. Supreme Court
in a series of decisions, one of which is Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 111
S.Ct. 1522, 113 L.Ed. 2d 622 (1991). There, the Court considered a claim by a Washington
resident that the choice of a Florida forum in a standard form cruise contract should not be
enforced. The Court’s comments are instructive as to that contract and also address questions
raised by the Staff in its January 18, 2000, memorandum. First, the Staff asked why a licensor
should not simply be required always to bring suit in the licensee’s jurisdiction. The Carnival
case explains (emphasis added):
[It would] be entirely unreasonable to assume that a cruise passenger would or
could negotiate the terms of a forum clause in a routine commercial cruise ticket
form. Nevertheless, including a reasonable forum clause in such a form well may
be permissible for several reasons. Because it is not unlikely that a mishap in a
cruise could subject a cruise line to litigation in several different fora, the line has
a special interest in limiting such fora. Moreover, a clause establishing [the
forum] has the salutary effect of dispelling confusion as to where suits may be
brought…. Furthermore, it is likely that passengers purchasing tickets containing
a forum clause … benefit in the form of reduced fares reflecting the savings that
the cruise line enjoys….
Second, the Staff concluded that New Jersey courts appear to have never directly considered the
issue of whether New Jersey would follow Carnival if presented with an individual action, as
opposed to a class action. In fact, New Jersey courts have already determined that question:
Generally, forum selection clauses are prima facie valid and enforceable in New
Jersey. [citations omitted]. . . .
[The lower court judge] correctly discerned that New Jersey follows the logic of
the United States Supreme Court decision in Carnival Cruise Lines v. Shute . . . .
Caspi v. Microsoft Network, L.L.C., 732 A.2d 528 (N.J. Super. 1999). That determination was
made in a class action, but the proclamation that New Jersey follows Carnival, a case involving
an individual action, was not qualified in any manner that would support the interpretation
suggested by the Staff.
While the Staff would appear to prefer to alter both Carnival and Caspi legislatively, it is
doubtful that legislative action by New Jersey will be successful in altering the Supreme Court
included in its five issues for focus in 1999, “facilitating small business and entrepreneurial use of the Internet and
electronic commerce.” Id. at v.
15
rule. When an indirect attempt was made in proposed revisions to UCC Article 2 to avoid that
rule,22 Professor Barnett, Austin B. Fletcher Professor, Boston University School of Law,
commented as follows:23
As you well know . . . the Supreme Court in Carnival Cruise Lines, Inc. v. Shute,
499 U.S. 585 (1991), [has] spoken to these issues and, while some aspects of the
Carnival Cruise line case rubbed some professors the wrong way, surreptitious
Congressional action to reverse the forum selection portion of that case were
quickly reversed by a later Congress. See Compagno. v. Commodore Cruise Line,
Limited, 1994 WL 4629997 (E.D. La. 1994).24
As for the Caspi decision, the New Jersey court did not have any of the trouble that
seems to be reflected in the Staff’s discussion of forum selection clauses. This is what the New
Jersey appellate court said about an online contract that included an exclusive choice-of–forum
clause:
The clause enforced in Carnival was very similar in nature to the clause in
question here, the primary difference being that the Carnival clause was placed in
small print in a travel contract while the clause in the case sub judice was placed
on-line on scrolled computer screens.
The trial court opinion went on to analyze plaintiffs’ contentions:
. . . plaintiffs were not subject to overweening bargaining power in dealing
with Microsoft and MSN. The Supreme Court has held that a corporate vendor’s
inclusion of a forum selection clause in a consumer contract does not in itself
constitute overweening bargaining power. . . .plaintiffs and the class which they
purport to represent were given ample opportunity to affirmatively assent to the
forum selection clauses. Like Carnival, plaintiffs here “retained the option of
rejecting the contract with impunity.” [citation of Carnival omitted]. In such a
case, this court finds it impossible to perceive an overwhelming bargain situation.
[The lower court judge] opined that application of MSN’s forum selection
clause did not contravene public policy. . . . Finally, [he] held that enforcement of
the forum selection clause would not inconvenience a trial. . . .
22
Various drafts of proposed Article 2 contained various tests proposed for determining when a conscionable term
of a contract should nevertheless be made unenforceable. Proposed Section 2-206 contained one version of that test.
When asked at the February, 1999 Drafting Committee meeting for an example of egregious judicial decisions
Section 2-206 was intended to overrule or cure, the Drafting Committee could not provide any examples. However,
with respect to the kinds of clauses Section 2-206 was intended to prohibit, one member of the Committee gave two
examples, arbitration clauses and choice of forum clauses. Professor Barnett commented on that effort as set forth
in the text accompanying the next footnote.
23
See Letter from Professor Randy E. Barnett to Lawrence J. Bugge, Chairman, Article 2 Drafting Committee. Professor
Barnett, who was retained by Gateway 2000 to examine the 1999 of draft Sections 2-206 and 2-207(d) of revised Article 2,
stated: “I must say that, upon reading these two provisions, I was very pleased to have been given this opportunity to do so
since both are quite unwise.”
24
Id. Barnett letter at 2-3.
16
After reviewing the record . . . we are in substantial agreement with the
reasons for decision articulated by [the lower court judge]. . . .The meaning of the
clause is plain and its effect as a limiting provision is clear. Furthermore, New
Jersey’s interest in assuring consumer fraud protection will not be frustrated by
requiring plaintiffs to proceed with a lawsuit in Washington as prescribed by the
plain language of the forum selection clause.
. . . Also, it seems clear that there was nothing extraordinary about the size
or placement of the forum selection clause text. By every indication we have, the
clause was presented in exactly the same format as most other provisions of the
contract. . . .To conclude that plaintiffs are not bound by that clause would be
equivalent to holding that they were bound by no other clause either, since all
provisions were identically presented. Plaintiffs must be taken to have known
that they were entering into a contract; and no good purpose, consonant with the
dictates of reasonable reliability in commerce, would be served by permitting
them to disavow particular provisions or the contracts as a whole.
We do not doubt the sincerity of the Staff’s dislike of the U.S. Supreme Court rule, but
that does not mean that the rule is inappropriate in or out of UCITA. To the contrary, it also
reflects existing state laws25 and common practice. Indeed, even Consumers Union, a national
organization which exists for the purpose of protecting consumers, and whose representatives
strongly argued against including choice of law and forum provisions in UCITA, has chosen in
its membership agreement for Consumer Reports Online, as follows (emphasis added):
General.
This Agreement constitutes the entire agreement between you and CU with
respect to the Site and, if applicable, the Fee-Based Services and supersedes all
prior agreements between you and CU. Failure by CU to enforce any provision of
this agreement shall not be construed as a waiver of any provision or right.
Interpretation and enforcement of this agreement shall be governed by the laws of
the state of New York (excluding its choice of law rules). You consent irrevocably
to personal jurisdiction in the federal and state courts of New York County, New
York for any action arising out of or relating to your use of the Site or Fee-Based
Services. The federal and state courts of New York County, New York shall have
exclusive jurisdiction over all such actions. In any such action, the prevailing
party shall be entitled to recover all legal expenses incurred in connection with the
action . . . . 26
25
See e.g., Voicelink Data v. Datapulse, 937 P.2d 1158, 1160-61 (Wash. App. 1997) (Nevada, like Washington,
requires enforcement of forum selection clauses unless they are ‘unreasonable and unjust.’ . . . This is consistent
with the test set forth by the U.S. Supreme Court). See also Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472
n.14 (1985); M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 10 (1972) .
26
While the clause speaks in terms of exclusive jurisdiction, parties generally cannot deprive courts of jurisdiction
although they can contract that the forum of any action will be in a particular place; accordingly, it is presumed that
the quoted clause is intended to select New York as the exclusive forum. See Consumers Union User Agreement for
Consumer Reports Online, clause 21 <http://www.consumerreports.org/Subscribe/subtos.html> (visited 4/3/00).
17
Finally, it is important to note that UCITA does add protection desired by the Staff. In
the January 18th memorandum, the Staff cites the New Jersey Franchise Act as specifically
prohibiting forum designations in a motor vehicle franchise, and explains that such is a strong
public policy of New Jersey. UCITA § 105(b) allows a court to declare unenforceable contract
clauses that violate any fundamental public policy of New Jersey, including that franchise statute
(and the insurance contracts referenced by the Staff) if, indeed, they reflect such policies.
8.
Transferability of Licenses. The Staff memorandum dated December 6, 1999,
states that Section 503 of UCITA is one of the most criticized sections of UCITA because it
allows a contract to prohibit the transfer of a piece of software from one user to another, even if
the first user does not retain any copy of the software and even in a consumer transaction. The
Staff discussion omits several critical points:
A. Under the common law, contractual prohibitions on transfers of contract
rights are allowed:
In the absence of a statute or other contrary public policy, the parties to a contract
have power to limit the rights created by their agreement. The policy against
restraints on the alienation of property has limited application to contractual
rights . . . . A term in a contract prohibiting assignment of the rights created may
resolve doubts as to whether assignment would materially change the obligor’s
duty or whether he has a substantial interest in personal performance by the
obligee; or it may serve to protect the obligor against conflicting claims and the
hazard of double liability.27
An airline ticket, i.e. the contractual right to fly at a particular time, is illustrative — contract
restrictions preventing transfer are routine even though customers do not like them and see no
reason for them.
B. UCITA is more liberal about transfer than the common law and pushes
the envelope regarding federal law, by creating a default rule that allows transfer unless
the license provides otherwise. UCITA says:
A party’s contractual interest may be transferred unless the transfer:
(A)
is prohibited by other law; or
(B)
except as otherwise provided in paragraph (3), would materially
change the duty of the other party, materially increase the burden or risk imposed
on the other party, or materially impair the other party’s property or its likelihood
or expectation of obtaining return performance.
(2)
Except as otherwise provided in paragraph (3) and Section 508(a)(1)(B), a
term prohibiting transfer of a party’s contractual interest is enforceable, and a
transfer made in violation of that term is a breach of contract and is ineffective to
create contractual rights in the transferee against the nontransferring party, except
to the extent that . . . .
(1)
27
RESTATEMENT (SECOND) OF CONTRACTS § 322 cmt. a (1981) (emphasis added).
18
Subsection (1)(B) is standard UCC fare.28 The UCITA rule, however, i.e. that a party’s contract
rights may be transferred unless a contrary contract is made, does not reflect licensing law for
patents or copyright licenses:
Ownership is the sine qua non of the right to transfer, and the copyright
law distinguishes between exclusive and nonexclusive licenses . . . the licensee
under an exclusive license may freely transfer his rights . . . .
By contract, the nonexclusive license does not transfer any rights of
ownership; ownership remains in the licensor. . . . the nonexclusive licensee does
not acquire a property interest in the licensed rights . . . . Accordingly, the
nonexclusive license is personal to the transferee . . . and the licensee cannot
assign it to a third party without the consent of the copyright owner.29
The reason for this willingness to honor clauses restricting transfers stems from the protections
accorded innovators under intellectual property law:
Allowing free assignability – or, more accurately, allowing states to allow free
assignability – in a nonexclusive patent license would undermine the reward that
encourages invention because a party seeking to use the patented invention could
either seek a license from the patent holder or seek an assignment of an existing
patent license from a licensee. In essence, every licensee would become a
potential competitor with the licensor-patent holder in the market for licenses
under the patents. And while the patent holder could presumably control the
absolute number of licenses in existence under a free-assignability regime, it
would lose the very important ability to control the identity of its licensees. Thus,
any license a patent holder granted – even to the smallest firm in the product
market most remote from its own, - would be fraught with the danger that the
licensee would assign it to the patent holder’s most serious competitor, a party
whom the patent holder itself might be absolutely unwilling to license. As a
practical matter, free assignability of patent licenses might spell the end to paidup licenses such as the one involved in this case. Few patent holders would be
willing to grant a license in return for a one-time lump-sum payment, rather than
for per-use royalties, if the license could be assigned to a completely different
company which might make far greater use of the patented invention than could
the original licensee.
. . . Federal law holds a nonexclusive patent license to be personal and
nonassignable and therefore would excuse Cadtrak from accepting performance
from, or rendering it to, anyone other than CFLC.30
28
See, e.g., UCC §2-210.
In re Patient Educ. Media, Inc., 210 B.R. 237 240 (Bankr. S.D.N.Y. 1997). See also Everex Sys., Inc v. Cadtrak
Corp. (In re CFLC, Inc), 89 F.3d 673 (9th Cir.,1996).
30
Id..
29
19
The point that contractual rights, including nonexclusive licenses, are different from
property, and the point that federal intellectual property policy enforces prohibitions on transfer
notwithstanding contrary state law, was made in a California decision wherein a transfer in a
corporate reorganization of a non-exclusive license was treated as a breach of the contractual
prohibition on transfer:
SQL’s reliance on several California cases which allowed assignment
without invoking the Trubowitch test [see below] is similarly misplaced. These
cases all involve real estate leases [citations omitted]. Courts have recognized
that due to the strong presumption against restraints on alienation of property, real
estate leases constitute a discrete exception to the general rule that the passage of
a contractual right which occurs by operation of law is a transfer. [citations
omitted].
. . . Federal copyright law provides a bright line prohibition against
transfer of copyright license rights. By contrast, under California’s Trubowitch
rule, if a transfer of rights occurs through change in the legal form of a business,
such a transfer is permissible if it does not adversely impact the party benefited by
the prohibition against assignment.
The court need not decide whether Oracle has been impacted adversely
because it finds that federal copyright law is applicable to the transfer of the
copyright license right which occurred in this case. State law is preempted by
federal law in question of copyright law or policy.31
C. Honoring restrictions on transfers is critical to the computer information
industries, even in mass market transactions. The quotation taken from In re Patient Educ.
Media, Inc. above explains why enforcement of transfer restrictions is critical to the computer
information industries. However, the Staff seems to argue that such restrictions should be ignored
at least for mass-market transactions. But even there such restrictions are important both to
licensors and licensees. It is true that some licensors do not care if a mass-market license is
transferred  that is why some mass-market licenses expressly allow transfer if no copy or
documentation is retained by the transferor. But a blanket legal rule to that effect would be
inappropriate for the reasons stated above and because any such rule would be inappropriately
simplistic. The UCITA comments to Section 503 provide a good example:
Mass market licenses present a different context. Transfer of the license will
frequently not materially increase the burden or risk imposed on the other party.
. . . In other cases, however, a transfer may impair the licensor’s interests. For
example, if a mass market license for income tax reporting software includes a
promise by the licensor to indemnify the licensee against IRS penalties incurred
because of defects in the software calculations, repeated transfers of the license
multiple times during a tax preparation season may increase the burden or risk.32
31
SQL Solutions, Inc. v. Oracle Corp., 1991 U.S.Dist. LEXIS 21097, at *10 (N.D. Cal. Dec. 18, 1991) (emphasis
added).
32
See
UCITA §503
cmt.
3
(Draft
Comments
to
UCITA
October
15,
1999)
<http://www.law.upenn.edu/bll/ulc/ulc_frame.htm>.
20
The harm to the licensor in the above example is obvious. The harm to the licensee would be
obvious if states such as New Jersey change the UCITA rule: in the example, the provider of the
tax software likely would not provide the indemnity for the tax return at all because the exposure
to the licensor would multiply as the number of transferees increased. Similarly, the provider
would not provide the software at as low a price because the pool of licensees would be reduced.
D. The “first sale doctrine” and other intellectual property issues are the
province of federal law. The Staff correctly notes that the question of tranferability is tied to
the federal “first sale” doctrine. However, in its December 6, 1999, memorandum and also in the
January 18th memorandum regarding the first sale doctrine, there is a failure to note that Section
105 of UCITA addresses this issue and related issues raised by librarians. That section provides
that federal law preempts UCITA and that any provision of a contract that violates a fundamental
public policy, can be stricken by a court as unenforceable. We invite you to read the extensive
comments to Section 105 which were agreed with an ALI liaison committee. Many of the issues
that are interwoven into the Staff memoranda have been debated endlessly and resolved in those
comments. To go further is to do exactly what the Staff seeks to avoid, i.e., to disturb the
balances created by federal law. In fairness, we note that in its March 13, 2000, memorandum,
the Staff appears to have attempted to correct its earlier analysis by noting that UCITA’s transfer
of ownership provisions actually are the subject of federal, not state, law and must be resolved by
Congress. We agree.
9. Standard form contracts. Many of the Staff’s comments reflect an apparent belief
that standard form contracts do not reflect the agreement of the parties and that their terms
should be regulated. This same debate raged in UCITA and in the proposed revisions to UCC
Article 2. But the debate was resolved as set forth in UCITA: the agreement of the parties will
be honored, including standard form agreements, unless a term is unconscionable or, in UCITA
but not in Article 2, violates a fundamental public policy. In addition, both parties must perform
in good faith. In addition, under UCITA a term of mass-market license (which is a standard
form by definition), cannot violate an express agreement of the parties.
The Staff’s views seem more akin to those expressed by some members of ALI in early
debates regarding proposed revisions to Article 2 and UCITA that were ultimately rejected.33
That proposed revision would have empowered courts to invalidate conscionable terms in
standard forms but the proposal was heavily criticized for inclusion in UCC Article 2 34 and was
not adopted. The revisions currently proposed for Article 2 do not contain the proposal – the
draft returns to the traditional doctrine of unconscionability, which should sufficiently protect
33
Various iterations of a proposed provision to regulate terms of standard forms were introduced during the course
of the drafting process to revise Article 2. See e.g., UCC § 2-206(a) (NCCUSL Draft March 21, 1997) (alternatives
A-C).
34
The change proposed for Article 2 was described by one commentator to be “as poor a job of statutory drafting as
one is likely to see. It is badly written and conceptually confused, and manages to be both vacuous in content and
probably pernicious in effect. The new Article 2 should omit it.” See Letter from Professor Alan Schwartz, Sterling
Professor of Law, Yale Law School, to Lawrence J. Bugge, Chairman, UCC Article 2 Drafting Committee (March
8, 1999); see letter at 5. In the letter, Professor Schwartz explains that he was retained by Gateway 2000 to review
and comment on the provision and an additional section that was later deleted from the draft.
21
consumers.35 In explaining why the proposal for revised Article 2 was not needed and why the
doctrine of unconscionability is sufficient, Professor Randy E. Barnett, Austin B. Fletcher
Professor, Boston University School of Law wrote:
Scholars and courts have wrestled with the general concept of
unconscionability at least since the adoption of Section 2-302 and have developed
a set of doctrines that are reasonably workable, if more restrictive than some
academics would like. . . . Rather than rest content with a generally favorable
situation, however, the drafters [of revised Article 2] have launched a new
initiative to expand the reach of the doctrine by seemingly heightening the
scrutiny attached to consumer sales contracts. There is absolutely no warrant for
this expansion. There is no great reservoir of problematic cases in which
consumers have been victimized in ways that are not currently redressed by 2302. I searched hard for such cases to include in my casebook . . . but to no avail.
The seas were relatively tranquil.
The new section 2-206 promises to disrupt that tranquility for no good
purpose. . . . .
It is an attempt to fix something that is not broken, with the effect of
harming both consumers and sellers in the process. A modest suggestion: let this
proposal be thoroughly aired in the law journals before it is recommended to the
legislators of forty-nine states. I very much doubt it will survive the scrutiny of
contract scholars.36
The Staff makes reference in its February 14, 2000, memorandum to a Commission Report on
Standard Form Contracts and a “Standard Form Contract Act.” We have not read the
Commission’s Report and do not know whether the referenced Act has actually been adopted as
New Jersey law. If so, and if that Act applies to transactions covered by Article 2 of the Uniform
Commercial Code, then it is difficult to see how New Jersey could purport to have a uniform
35
After July, 1999, the Drafting Committee for revisions to Article 2 was reconstituted. The first draft published
since July is available at <http://www.law.upenn.edu/bll/ulc/ulc_frame.htm>.. The Reporter’s note to Section 2-302
reads as follows: “[Reporter’s Note - With the exception of changing the word “clause” to “term” the text of this
section is consistent with current Article 2. However, it might be supplemented with a new comment along the
following lines . . . .”
36
See Letter from Professor Randy E. Barnett, Austin B. Fletcher Professor, Boston University School of Law supra
at 1 and 2. That the doctrine of unconscionability is alive and well can be seen in a recent case from New York,
Brower v. Gateway 2000, Inc., supra. The Gateway computer contract contained an arbitration clause requiring
arbitration in Chicago under International Chamber of Commerce (“ICC”) rules. The ICC rules were difficult to
obtain because the ICC is located in France, requires advance fees of $4,000 (more than the cost of the computer) of
which $2,000 was nonrefundable, and contains the English “loser pays” rule for attorneys fees. The court
specifically stated that the inconvenience of the chosen arbitration site (Chicago) was not unconscionable, but did
find that:
[T]he excessive cost factor that is necessarily entailed in arbitrating before the ICC is unreasonable
and surely serves to deter the individual consumer from invoking the process. . . . Barred from
resorting to the courts by the arbitration clause in the first instance, the designation of a financially
prohibitive forum effectively bars consumers from this forum as well; consumers are thus left with
no forum at all in which to resolve a dispute.
Id. at 574. The court also noted that Gateway had included a new arbitration clause in a newsletter, giving all of its
customers the option to choose an arbitrator from the AAA and to designate any location for the arbitration by
agreement of the parties, under which agreement Gateway would not unreasonably withhold its approval. The court
remanded so that the parties could seek appropriate substitution of an arbitrator.
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contract code for the sale of goods. Neither Article 2, nor the common law, treats standard form
contracts in the manner that the Staff suggests they be treated.
If the Standard Form Contract Act has not been enacted in New Jersey, then we would
expect that any attempt to enact it will generate the same criticism made in connection with the
proposed revisions to Article 2. If that criticism is a guide, those objections will come from all
industries and the debate likely will result in a return to the existing protections of commercial
law. UCITA retains and adds to those protections.
10.
Financing. The Staff described the financing provisions of UCITA in its March
13, 2000, memorandum. The discussion misunderstands the UCITA provisions and how they
interact with Article 9. The Staff’s conclusion is that UCITA makes no substantive change in
law and implies that, given Article 9, the UCITA provisions are of no value to financiers. The
opposite is true.
UCITA only applies when there is no secured party; if there is a security interest under
Article 9, then UCITA falls to Article 9. The utility of UCITA is to financiers who are not
secured parties. Instead of security, they obtain either: (1) an interest as a licensee which they
pass through to the financed licensee (the borrower and actual user of the computer information),
or (2) an interest as an unsecured lender who desires to finance the separate acquisition of
computer information by an end-user licensee. Under current law, such lenders are reluctant to
provide financing because, for example, the borrower-licensee has already pledged all of its
assets to secured lenders and is prohibited from granting security interests to new lenders, or the
borrower-licensee would like to obtain “lease financing” under UCC Article 2A but cannot do so
because lease financiers correctly question whether computer information qualifies as a “good”
under Article 2A (like UCC Article 2, Article 2A only applies to “goods” and, notwithstanding
the Staff’s comfort that computer information can be assumed to be a good, such lenders and
others do not agree). In short, UCITA provides a statutory means for these unsecured lenders to
provide, and for these borrower-licensees to obtain, financing. That is an exceedingly valuable
benefit of UCITA to licensees.
The Staff also appears to misunderstand the rationale for the Article 9 rules, and the
similar UCITA rules, that prohibit a financier or secured party from selling or using computer
information that is taken as collateral in Article 9 or whose use can be curtailed under a
financier’s loan contract in UCITA. These rules reflect the Copyright Act and the federal and
state laws restricting transfers of copyrighted works or contractual rights (see No. 8 of this
memorandum). The Staff assumes that rules for computer information are automatically the
same as rules for goods. As explained in No. 1, that view is simply wrong under existing state
and federal law, Article 9 and UCITA.
The Staff correctly notes that UCITA is easier to read than Article 9. We agree, but
respectfully suggest that most complex laws, including UCC Articles 9 and 2 and UCITA, are
difficult to read if only because they are complex. Beyond complexity, any fair reading of
UCITA will reveal that it is well-written and greatly improves existing law.
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