UCITA Briefing Paper

UCITA-Uniform Computer Information Transactions ACT

Briefing Paper for the National Conference of State Legislatures
Prepared for Presentation at Spring Meeting, Costa Mesa, CA, March 2001

By Jean Braucher
Roger Henderson Professor of Law, University of Arziona
Direct Comments and Questions to: Braucher@nt.law.arizona.edu

Overview

The Uniform Computer Information Transactions Act (UCITA) is a highly complex and controversial commercial statute covering transactions in digital products and services. Its scope includes transactions in software, electronic books and information in digital form (such as on a CD-ROM or in an electronic file), and contracts for access to Internet services and on-line databases.

UCITA is loosely based on Article 2 of the Uniform Commercial Code (UCC Article 2), dealing with sales of goods, but has significant differences. Two core differences have caused most of the controversy surrounding it. These are that UCITA:

(1) Adopts contract rules that validate "shrinkwrap" or "clickwrap" terms held back until after customers have paid and received the product. These terms may take away from reasonable expectations, but to shop for better terms business or consumer customers would have to engage in repeated purchases and returns. ("Shrinkwrap" refers to terms inside a box that the customer purportedly assents to by opening shrinkwrap packaging around a diskette. "Clickwrap" refers to terms that pop-up on the computer screen during installation or loading and that must be clicked on to "agree" before the customer is permitted to access a computer program or information.)
(2) Broadly legitimizes mass-market end-user license agreements (EULAs), which producers employ as a means to try to limit customers’ rights to transfer and use digital products and services.

Combined, these two features allow software and internet companies to use standard forms to write their own intellectual property law, expanding their rights vis a vis those of their customers and reducing information in the public domain. Courts may find aspects of UCITA preempted by federal intellectual property law, but it will take years of litigation to sort out the issues.

The official text of UCITA, with a prefatory note and extensive comments, runs to more than 200 pages. The statute is divided into eight parts, covering the following topics:

Part 1. General provisions (including definitions and sections dealing with scope, mixed transactions, relation to federal law and other state law, electronic contracting, choice of law and choice of forum).

Part 2. Formation and terms.

Part 3. Construction (including of what uses are permitted).

Part 4. Warranties.

Part 5. Transfer.

Part 6. Performance (including automatic restraints to enforce use restrictions).

Part 7. Breach.

Part 8. Remedies (including electronic self-help).

NCCUSL/ALI Split on Project

UCITA was originally conceived as a part of the Uniform Commercial Code, which is jointly drafted by the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL). The project was initially part of the revision of UCC Article 2 (on sales of goods) and then was broken out as a separate proposed UCC Article 2B on licenses of information products. The ALI withdrew from the project in April 1999, after two years of controversy within the organization over the two core points outlined above as well as concern about the technical soundness of the draft. This split between ALI and NCCUSL is unprecedented in the half century history of the UCC. The two organizations have both abandoned UCC drafting projects in the past, but they have never before parted ways. NCCUSL decided to proceed despite the concerns of the ALI’s governing Council and its membership, renaming the project UCITA and making it a free-standing proposed uniform state law.

Responses to Arguments for UCITA

1. UCITA will not bring uniformity and certainty to the law of software and other computer information.

Proponents argue that UCITA will bring uniformity and clarity to the law of software licensing and other "computer information" transactions. To the contrary, however, disinterested commercial law experts view UCITA as poorly drafted, premature in a era of rapidly changing technology and business practices, and likely to lead to a great deal of litigation before its meaning becomes clear. UCITA’s terminology, structure and drafting style are hard to penetrate, and reliance on lengthy comments adds to its difficulty. Different state courts are likely to interpret it differently. Even the scope of UCITA is unclear, particularly under odd exceptions and a provision permitting parties to "opt in" or "opt out" of UCITA, subject to complex qualifications. See Sections 103 and 104. "Smart" goods (with embedded software) could be opted into UCITA, making it the law of cars, appliances, and industrial equipment.

2. UCITA is not needed for software and internet service companies to succeed.

Supporters say that the technology industries need UCITA to thrive. However, software and internet service companies boomed in the 1990s under existing law. The argument that tech industries need UCITA to thrive is about as valid as a possible opposing argument that the tech industries are in decline because UCITA was passed in two states in 2000. Rather, UCITA is of little importance to the overall health of the high tech sector, which depends on more fundamental economic factors. UCITA involves a more subtle change–a shift in the balance in contract law in favor of producers, at the expense of users of computer information. It is about who bears certain risks and costs, and not about the fundamental health of tech industries.

There is no shortage of law to govern these transactions. In the absence of UCITA, state and federal courts have usually applied UCC Article 2 to answer questions about contract formation, quality warranties and remedies in mass-market software transactions, while using the common law of services to address similar issues in development and access contracts. Questions about use and transfer of copies of copyrighted software have been dealt with primarily under federal intellectual property law, supplemented by the law of contracts. The federal courts have exclusive jurisdiction to enforce copyright and patent law. See 28 U.S.C. section 1338(a). UCITA would put state courts in the business of enforcing contracts that deal with issues formerly thought of as matters of federal intellectual property law. State courts have limited expertise for this task.

The law is now relatively settled and working well, but software and internet service companies want UCITA enacted to destabilize the situation and allow them to shift risks and costs to customers. Because UCITA would shift the balance in many aspects of the law in favor of digital producers, all user sectors oppose it, including business users, consumer officials and advocates, and library organizations.

3. Copies of software are tangible, functional products, like other goods.

Some argue that the law of goods doesn’t work well for software because software is easily copied and is inherently buggy. While it is true that digital material can be easily copied, federal intellectual property law already deals forcefully with unauthorized copying. Willful infringement is a crime, subject to criminal fines and up to five years in prison for a first offense. See 17 U.S.C. section 506(a); 18 U.S.C. section 2319. A commercial contracting statute is not likely to add much deterrence against parties willing to risk criminal sanctions.

UCC Article 2 has worked well for most issues in software disputes because copies of software are like other goods in being functional products. The value of many other products is also in intangible inputs such as design, patented or not, and workmanship, rather than in raw materials. For example, the raw materials in a car represent a tiny fraction of its value. A copy of software has to be tangible to be read by a computer. Federal copyright law treats copies of software as tangible when it defines copies to include "material objects ... from which the work can be perceived ... with the aid of a machine." If copies of software were not material objects, making unauthorized copies of them would not be barred by copyright law.

Software now is often buggy, but this may be more a result of producers’ choices to rush products to market than anything inherent. Domestic law that facilitates shoddy engineering may lead to long-term competitive disadvantage in the world market.

4. UCITA fails to distinguish legitimate and illegitimate uses of licensing.

Supporters of UCITA say that because software and on-line services companies license their products rather than selling them, these licensing transactions require different law.

However, perpetual licenses of software are functionally like sales, except for efforts to restrict transfer and use. A primary reason for employing end-user licenses is to change intellectual property rights provided by federal law when copies are sold.

Probably the major legitimate reason for licensing of digital products is to implement price discrimination. Price discrimination means charging customers based on their willingness to pay, and it is legal when not accompanied by efforts to undermine competitors. By pricing according to number of users, licensors can charge large companies more than small ones and individuals. Number of users works as a rough proxy for the product’s value to the customer.

Economists note that price discrimination benefits licensors by allowing them to capture more of the consumer surplus, but it is not all bad for users, by any means. For example, price discrimination benefits small users who would not be willing to pay the single price that would otherwise be charged to recoup investment. Price discrimination reduces the deadweight loss of foregone consumer surplus that occurs in a one-price regime.

At least some transfer restrictions are necessary to maintain price discrimination and prevent arbitrage by favored customers (for example, transfer from a customer who acquires for personal use at a low price to a company with many users). However, enhanced property rights of producers, created by contract and used to enforce price discrimination, could have undesirable side-effects if not carefully defined.

These potential harmful side-effects of licensing include reduced access to expression and information now obtained on the second-hand market (for example, in used book stores), in the public domain, and by shared use through libraries and educational institutions. The switch from books and journals to e-books and electronic databases should not be an occasion to reduce public access to information, negatively affecting second generation creation.

In short, licensing that facilitates price discrimination has the potential to, as a side effect, transform in a negative way access to expression and information. The information economy depends on access to information, and we should not kill the goose that laid the golden egg. Sophisticated and disinterested law reform that protects the public interest is needed if we are to avoid that fate. UCITA does not fit that bill. It is risky special interest legislation.

If there is to be new law on licensing (not clearly necessary), instead of UCITA, we need a law that distinguishes legitimate and illegitimate license restrictions. This could be done by a much simpler law than UCITA. It would make more sense to apply most of UCC Article 2 to most mass-market licenses and have a subpart to deal with transfer and use restrictions. This subpart should permit transfers within the same category of user. For example, a consumer should be able to make a transfer to another consumer or to a second-hand dealer who sells to consumers. This would preserve the second-hand market for e-books and software. Similarly, allowing businesses to transfer their mass-market software when the business is sold would avoid counterproductive restraints on alienation and windfalls of new fees for producers.

Certain uses of software and electronic materials, now protected under federal intellectual property law when digital works are sold, need to be specifically protected when the transaction is instead called a "license." There should be protection for what federal law calls "fair use"–to comment, quote, and criticize–and also to engage in pro-competitive invention by reverse engineering (for example, figuring out how a product works in order to make other products that work with it). Shared use through libraries also needs protection.

Strong Opposition to UCITA

A remarkable coalition of businesses, consumers and libraries is now actively opposing UCITA in the states, tracking and even anticipating introductions and letting concerns be known. In general, opponents are concerned that UCITA is too complicated and too weighted towards a few large software and internet service companies (such as Microsoft and AOL) and that consumers and libraries and their patrons are not adequately protected.

The opposition coalition is named AFFECT (Americans for Fair Electronic Commerce Transactions, formerly 4CITE). The business members include such manufacturing companies as Boeing, Caterpillar and Deere & Co., and many insurance companies (USAA, Prudential, and Nationwide, among others). The Society for Information Management, made up of information technology executives, also opposes UCITA and is part of the AFFECT coalition. Consumer groups that belong include the National Consumer Law Center and the Consumer Project on Technology. The American Library Association and many other library groups belong as well.

See the AFFECT web site http://www.4cite.org for a full list of AFFECT members.

In addition, many consumer officials have expressed concerns and opposition, including 24 attorneys general and the senior staff of the Federal Trade Commission, with the approval of the commission itself. Consumers Union also opposes UCITA.

UCITA was quickly passed in two states, Maryland and Virginia, in 2000. Both states made amendments, and Virginia has enacted another amendments package in 2001 (awaiting the governor’s signature as of this writing) after a state commission issued a 90-page report. See http://jcots.state.va.us/documents/00-01/00AC5FinalReport.PDF

The NCCUSL executive committee approved a few limited amendments in early 2001. See http://www.ucitaonline.com/docs/0101a.htm

The opposition organized more effectively in recent months and has so far successfully resisted further enactments in 2001. Prospects for widespread enactment are low, at least without more significant amendments. NCCUSL has clearly failed to produce consensus legislation.

Lead proponents of UCITA, such as Microsoft and AOL, have initiated negotiations with opponents to attempt to come up with amendments to remove opposition. While these efforts may eventually produce compromises, UCITA is a poor piece of drafting from which to begin this process. Also, it may be easier to satisfy the concerns of consumer protection officials and libraries than those of business users, because UCITA is more pervasively objectionable to them. Ideally a new, simpler and better crafted piece of legislation should be attempted. It is to be hoped that the NCCUSL/ALI split can be mended and a more balanced and expert drafting job done in the future, with licensing provisions ultimately placed in the UCC as originally planned.

Main Areas of Concern

1. For Business Users

The model of contracting in UCITA is troubling to business users. (State governments should have the same concerns as other large computer information users, something state legislators should take into account.) UCITA’s contract formation provisions are very complex and unclear, but they appear to permit shrinkwrap and clickwrap terms first disclosed after payment and delivery to override even negotiated licenses. See sections 208, 209, 301, 303, and 112. Under UCITA, business users will have to worry that an employee who obtains a product at an office supply store and installs it, clicking on a license in the process, will wipe out terms carefully negotiated to fit the business’s use.

In addition, according to AFFECT, at least half of business software is acquired off the shelf, without negotiation. The default terms in UCITA are not acceptable to business users. For example, where there is no use restriction stated in the license, UCITA limits use to a "reasonable" number of users, a highly uncertain provision. A comment makes things worse: "In some cases, especially a mass market license, a single user limit would be assumed." Section 307 and comment 4. So, for example, a small businessperson with one employee would potentially be an infringer if both the owner and employee used the software on the company’s single computer.

Furthermore, UCITA makes shrinkwrap and clickwrap terms enforceable, and if there is a use or transfer restriction in these terms, it is enforceable. Sections 307(b) and 503(2). So, for example, if a license has a transfer prohibition, the licensor would be able to extract a full new license fee when the business is sold, whereas today acquiring businesses usually pay nothing or negotiate a modest fee.

Business users are also opposed to the enabling provisions for electronic self-help in Sections 815 and 816. They fear that these sections will add legitimacy to the idea of remote electronic disabling as leverage in contract disputes. They also believe that self-help-ready software will have security weaknesses that will cause problems even where self-help is not authorized in a particular transaction.

2. For Consumers

Federal and state consumer protection officials believe that the contract model in UCITA is at odds with the fundamental consumer protection principle that consumers should be informed about material features of deals before they are consummated. In other words, compliance with UCITA can still constitute a violation of the FTC Act and state consumer protection acts prohibiting unfair and deceptive acts and practices. Attorneys general have pressed for changes to UCITA to make clear that consumer protection laws trump its provisions, so that UCITA does not protect licensors from consumer protection enforcement actions in cases of delayed disclosure of important or surprising terms. In both Maryland and Virginia, the attorneys general have successfully pressed for amendments to their consumer protection acts to make clear that they apply to licenses of information to consumers.

Proponents of UCITA claim its right of return is a "new" consumer protection. See Section 112(e)(3). It is not. The right of return only applies if the mass-market customer does not access the product and returns it without opening or installing it. If the customer could see the terms before paying, the customer would not have to return the product to reject terms. The customer could simply avoid entering into the transaction and look for a better deal. Thus, UCITA takes away from customers’ rights under a traditional model of contracting in which terms are presented before a customer pays and takes delivery. It thus burdens shopping and competition.

Consumer advocates have been concerned with other aspects of UCITA, as well. AOL now attempts through a form contract term to force all consumer litigation to occur in Virginia. It has recently lost cases in Massachusetts and California attempting to enforce this term. UCITA would make forum selection clauses such as AOL’s enforceable. Section 110.

UCITA’s opt-in provision for smart goods with embedded software could make it the law of cars and other consumer products, potentially expanding the reach of its rules to authorize use of automatic restraints under week-to-week payment plans. See sections 104 (opt in) and 605 (automatic restraints), even as NCCUSL’s executive committee has approved amending it, and compare to Article 9, Section 9-503 or Revised Section 9-609, and Article 2A, Section 2A-525(2) (authorizing disabling of equipment but not consumer goods in secured transactions and leases).

3. For Libraries

Libraries are concerned that UCITA allows publishers to write their own intellectual property law by "licensing" use of a copy, with restrictions on that use as part of standard form terms first presented after payment and delivery. When libraries buy copies of books or of electronic material, they get one deal that they understand well. They can lend, preserve and participate in interlibrary loan arrangements. When they "license" a copy under UCITA, however, the nature of the deal depends either on costly negotiations or on belatedly delivered fine print, and there is a huge variety in fine print terms. Complying with these terms is an administrative nightmare, and in some cases the terms (such as no use except by the licensee) are inconsistent with the mission of libraries to share material and make it available to the public. UCITA provides a vague restriction on license terms contrary to "fundamental public policy." Section 105(b). It will take years of expensive litigation to know what use and transfer restrictions this provision permits and does not permit. Protection of library functions needs to be explicit.

Conclusion

States should not rush to adopt UCITA. Current law is working well, including contract law, UCC Article 2 and federal intellectual property law. UCITA is an attempt to shift the balance of the law in favor of producers, at the expense of users. States should at a minimum await efforts at compromise, redrafting and simplification. UCITA is a beta version of the law of software and information licensing.

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