The new economy is continually ushering in new challenges and issues that cause people to rethink the way our laws should be shaped and enforced. It is crucial to remain up to date with the nuances of these new laws so that you are as informed as possible when negotiating your contracts.
A new body of law dealing with how software transactions, online contracts, and licensing contracts are governed is likely making its way to or through a statehouse near you, if it has not already left the desk of your Governor as a signed body of law. The new body of law is called the Uniform Computer Information Transactions Act (UCITA). It would be beneficial to understand the background and meaning of UCITA before entering into any contract for the purchase of software or information technology. What follows is a background on where UCITA came from, what it means, where it is headed, and why it is crucial to be aware of it.
Some of the major provisions of UCITA are highlighted in this article as well as some background on its important components. This law is still very much a work in progress, and in the end many of the provisions may not be enacted by the states. Even if all of the provisions are not enacted, it is important to get a holistic understanding of the Act as it is the most comprehensive attempt to date to bring uniformity to the law of computer information transactions. It was drafted by lawyers, academics, and industry representatives who have been following developments in the law and the economy in regards to computer information transactions. While it may not be enacted in full by all the states, it provides an excellent guide as to what the law could become in this area.
History of UCITA
In July 1999, the National Conference of Commissioners on Uniform State Laws (NCCUSL) approved and recommended that UCITA be enacted in all 50 states. UCITA has evolved over the past 10 years, out of a joint effort by NCCUSL and the American Law Institute ("ALI"), to amend and update Article 2 of the Uniform Commercial Code ("UCC"). A look at the history of this act will bring to light the concerns some people have with the UCITA.
Many people felt that Article 2 of the UCC did not adequately cover transactions involving software and information. Software contracts typically differ from contracts involving ordinary goods in two important ways: (1) software contracts transfer intangible goods; and (2) software contracts often entail a license of right to use rather than a sale.
The UCC was developed in the 1940s and 1950s to standardize laws affecting commercial transactions across the country and Article 2 governed the sale of goods. With commercial transactions being done much differently back then, no one could have foreseen the developments that have taken place in recent years with regard to software and hardware development and sales. Since the development of the UCC, the American economy has shifted dramatically from a goods to a service-based economy with a major new commercial and consumer intangible product -- software -- playing a major role in this new market. Information technology accounts for more than one-third of the nation's economic growth and is the most rapidly expanding component of the U.S. economy.
The NCCUSL is attempting to address these drastic changes. Whether its effort will be successful remains to be seen.
From 1995 to the spring of 1999, UCITA was slated to become a new Article of the UCC, Article 2B. As the drafting process neared its end significant schisms began to develop in the process and ALI dropped out of the effort. Article 2B evoked a great amount of comment and criticism from many different interest groups. As a result, ALI withdrew its support of the legislation in April 1999. Without ALI's support, UCITA was promulgated as a proposed uniform law to be passed in all 50 states. UCITA is no longer being proposed as a new Article of the UCC, but separately as UCITA.
Purpose and Scope
The four purposes of UCITA as listed by the NCCUSL are to:
- Support and facilitate the realization of the full potential of computer information transactions in cyberspace.
- Clarify the law governing computer information transactions.
- Enable expanding commercial practice in computer information transactions by commercial usage and agreement of the parties.
- Make the law uniform among the various jurisdictions.
- General Provisions;
- Formation and Terms
- Transfer of Interests and Rights
- Breach of Contract
- Miscellaneous Provisions
If a contract involves both computer information and other subject matter, UCITA applies only to the part of the agreement that involves computer information, except when the computer information is the primary subject matter. UCITA does not apply to software embedded in goods, other than a computer or computer peripheral, unless the main purpose of the transaction is to obtain the software.
Supporters of UCITA argue that it brings uniformity to an otherwise ambiguous body of law. They also argue that UCITA offers many warranty protections to licensees, and that it contains common law and statutory consumer protections. The most prevalent of these protections involve good faith and unconscionability. The Act mandates that the parties act in good faith.
Opt-In or Out
UCITA permits parties to fully "opt-in" to its regime and thereby designate one set of rules to govern a mixed transaction, as long as the transaction materially involves computer information. Parties are also allowed to opt-in to UCITA for transactions involving information in a medium otherwise excluded from within the parameters of the act. UCITA also permits parties to "opt-out" of its terms, pursuant to certain protective limits for mass-market transactions.
Federal Preemption and Fair Use
Some critics of UCITA have suggested that it was intended to avoid the large body of federal intellectual property law that exists. One of the major questions critics have posed is whether federal copyright law does (or should) preempt private information contracts governed by UCITA.
If you are dealing with a contract that is governed by the terms of UCITA it is crucial to determine, to the best possible degree, which law will apply (e.g., federal copyright law or state contract law) in the event of a conflict.
Some critics have contended that UCITA undermines one of the basic tenets of contract formation: a "meeting of the minds" in order to form a contract. With many contracts being secured in cyberspace in a mass-market environment, UCITA attempts to bring some uniformity to contract formation.
UCITA adopts the idea of "manifesting assent" described in the Restatement (Second) of Contracts and applies it to computer information transactions. Like the common law, UCITA construes any conduct as a binding manifestation of assent if the party had reason to know its acts would be treated as assent to the terms. However, UCITA explicitly adds the requirement that the licensee have an "opportunity to review" the terms prior to assenting and that she/he reaffirm assent for electronic transactions. A person has an "opportunity to review" a term only if the term is "made available in a manner that ought to call it to the attention of a reasonable person and permit review." UCITA recognizes an "opportunity to review" the terms after a person becomes obligated to pay or begin performance under certain circumstances, even for mass-market licenses.
Furthermore, the UCITA also includes "default" or "gap-filler" rules that apply only in the absence of contrary agreement or meanings supplied by trade usage, or course or performance or dealing. In reviewing contracts covered by UCITA, you will want to become familiar with the default rules of the act, which contracts carefully to read where they are silent, and then explicitly cover points in the contract where you do not want the default rules to apply.
Provisions Relating to License Grants
UCITA contains a number of provisions that apply to license grants to familiarize oneself with prior to reviewing a license agreement to which UCITA applies. Section 307 is of particular interest as it provides rules for interpretation and scope of the license grant, the number of users, new versions and improvements, and source codes.
Mass-Market Licenses/Shrink-wrap Licenses
Mass-market transactions include all consumer contracts as well as transactions involving other end-users if the transaction is directed to the general public or conducted under terms consistent with the ordinary retail transaction. Under UCITA, mass-market licenses are typically enforceable only if the licensee manifests assent to the contract after having an opportunity to review its terms. These terms are limited by unconscionability, fundamental public policy, and express agreements between the parties.
Shrink-wrap licenses are a special type of mass-market license. They are not revealed until after an initial agreement to acquire a product; in other words there is no opportunity to review the terms before payment. One of the central issues prompting the drafting of UCITA was the enforceability of shrink-wrap software licenses under state law. Case authority exists on both sides for the enforceability of shrink-wrap licenses under current state contract law, but more recent cases have validated such licenses. In ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1452-53 (7th Cir. 1996), the Seventh Circuit Court of Appeals held shrink-wrap terms enforceable for software purchased from a retail store. The court characterized the shrink-wrap license as an "offer" that the buyer "accepted" by using the software without objection after having an opportunity to review the terms.
One of the main criticisms of UCITA deals with the enforcement of these shrink-wrapped licenses. Critics argue that UCITA will encourage the software industry to place important restrictions in "shrink-wrap" or "click wrap" software licenses to the detriment of software users. The concern is that the contract terms are generally not revealed to the buyer until after the purchase is made and the buyer removes the "shrink-wrap". Not until this point does the buyer get the contract on paper and may not read the text of the contract until they are running the software.
UCITA validates shrink-wrap licenses if three criteria are met:
- The licensee must have reason to know that additional contract terms will be proposed after the initial agreement.
- The licensee must be given the right to return the products at the licensor's cost.
- The licensee must be compensated for reasonable costs of restoring the system if it is altered by the installation of license terms for review.
UCITA has three rules that govern which law will apply to a particular contract or transaction in the absence of an agreement to the contrary:
- In an Internet transaction for electronic transfer of information, the transaction is governed by the law where the licensor is located.
- In a transaction for physical delivery of a tangible copy to a consumer, the governing law is the law of the state where the delivery was to be made.
- In all other cases, UCITA adopts the rule of Restatement (Second) of Conflict of Law: a transaction is governed by the law of the state with the most significant relationship to it. UCITA allows choice of an exclusive judicial forum, but only if the choice is not "unreasonable and unjust."
At its annual meeting in August 2000 the NCCUSL backed off from one of the more controversial measures in the law -- a so-called self-help provision that allows vendors to remotely disable the software they sell to users. An agreement was made to end the self-help provision for mass-market software sold via retail channels. However, the provision remains in effect for other types of software such as customizable applications that are purchased by companies.
UCITA in the States
So far, UCITA has attracted much controversy. The development of the Act has sparked intense disagreements. Legislative and public relations battles are being waged all across the country regarding its passage in the states. UCITA was signed into law this year in Maryland and Virginia, but has yet to take effect in either state. Virginia has delayed putting the law into effect until July 2001, while legislators consider additional consumer protections. In Maryland, UCITA is scheduled to take effect October 1. The Maryland legislation contained a number of amendments and provisions.
UCITA has been introduced in Delaware and the District of Columbia. It was introduced but killed in Hawaii, Oklahoma, Illinois, and it is under study in New Jersey. Iowa approved legislation that prevents any state that has adopted UCITA from enforcing its provisions in Iowa for a period of time. Legislation is likely headed for Texas, Pennsylvania, Minnesota, Ohio, and Washington in the near future. UCITA, in one form or another, is likely headed to your state. Even if it is not actually introduced in your state, its passage will influence contracts you enter into in other states.
The attorney generals from numerous states including California, Florida, New Jersey, Pennsylvania and the staff of Federal Trade Commission have voiced their opposition to many of the provisions of the UCITA arguing that many of the provisions limit valuable consumer protections. Numerous other organizations and individuals have also voiced their opposition to provisions of UCITA.
You now have some background on the development of UCITA and the highlights of some of its major provisions. All of the provisions of the UCITA have not been addressed. It is important to be cognizant of UCITA's existence and major provisions. UCITA represents the most current attempt to develop a uniform body of law for states to adopt regarding software and computer information transactions. It is too early to tell whether the Act will gain widespread acceptance or whether it will be a complete failure. To its advantage it was drafted by people who have been monitoring the status of the law in this area and who have a fairly good sense of where the law is headed in this regard. There are a number of valuable resources on the Internet which discuss UCITA in more detail.
Daniel W. Uhlfelder is the director of Business and Regulatory Affairs at HigherMarkets, where he is responsible for business development and running the legal department. He is also the editor of Law Watch and has worked in all branches of the federal government, including as staff aide and law clerk in White House. He may be reached at [email protected]