I.                Introduction

Computer technology is less than 50 years old, and has been available to the general public for just over 20 years.[1]  Yet software and database products, along with information and online services, will fuel the economic engine of the new millennium.[2]  Cyber-time, it seems, moves more quickly than does industrial time.

 

 

The Uniform Computer Information Transactions Act (“UCITA” or the “Act”) purports to be “a statute for our time.”[3]  A close examination of the Act, however, reveals that the provisions dealing with mass-market transactions of computer information are already obsolete and harmful to consumers. 

 

 

In this paper I will examine the Uniform Computer Information Transactions Act.  First, I will explain what UCITA is.  Next I will examine mass-market licenses.  After that, I explore the most dangerous UCITA provisions.  Finally I will conclude that states and other jurisdictions should not enact UCITA.

II.           Background

UCITA “is a proposed state contract law developed to regulate commercial transactions involving intangible goods such as computer software, online databases and other information products in digital form.”[4]  Although today UCITA is a stand-alone uniform act, it was originally envisioned as an addition to Article 2 (Sale of Goods) of the Uniform Commercial Code (“UCC”).[5]  In order to understand why UCITA is no longer useful, one must first examine the background of the Act. 

 

 

A.               In the Beginning

 

 

The Uniform Commercial Code is a collection “of various statutes relating to commercial transactions including sales, leases, negotiable instruments, bank deposits and collections, funds transfers, letters of credit, bulk sales, documents of title, investment securities and secured transactions.”[6]  Almost every jurisdiction in America has enacted the UCC, with only minor variations.[7]  Because commercial transactions often involve companies in different jurisdictions, a uniform commercial statute facilitates commerce.[8]  Therefore, changes to the UCC are significant, and jurisdictions are likely to adopt them quickly.

 

 

In 1987 the Permanent Editorial Board (“PEB”) of the Uniform Commercial Code conducted a preliminary assessment of UCC Article 2.[9]  Relying upon that assessment, the PEB and the American Law Institute (“ALI”) along with the National Conference of Commissioners on Uniform State Laws ("NCCUSL" or the "Conference") decided to appoint a study group “to identify major problems of practical importance in the interpretation and application of Article 2 and to recommend possible revisions.”[10]

 

 

After numerous meetings, a Preliminary Report, and evaluating approximately 40 comments on the Preliminary Report by interested parties,[11] the PEB issued its recommendations in a Final Report.[12]  Based on its study, the group recommended that UCC Article 2 be revised.[13]  One of the “good” reasons the PEB cited for revising Article 2 was “[t]echnological development and innovation such as electronic data interchange.”[14]  Thereafter, in 1991, the PEB appointed a drafting committee and a reporter to implement its recommendations.[15]

B.               The Drafting Process

 

 

The UCC is drafted independently of any governmental agency and voluntarily adopted by individual jurisdictions.[16]  In this section, I will describe the organizations responsible for drafting the UCC and other uniform and model laws.  Then I will discuss the drafting process used to promulgate what became UCITA.

 

 

1.                Organizations

 

 

The Uniform Commercial Code “is generally viewed as one of the most important developments in American law.”[17]  For more than 50 years, two organizations have worked in tandem developing and monitoring the UCC: the National Conference of Commissioners on Uniform State Laws and the American Law Institute.[18]

 

 

i.                   The NCCUSL

 

 

The National Conference of Commissioners on Uniform State Laws is a 109-year-old organization working for the uniformity of state laws.[19]  The Conference is made up of over 300 judges, lawyers, and law professors appointed by each state, the District of Columbia, the Commonwealth of Puerto Rico, and the U.S. Virgin Islands.[20]  Each jurisdiction is free to determine how many commissioners to appoint and how they are selected, although most commissioners are gubernatorial appointees.[21] 

 

 

The Conference has drafted hundreds of uniform laws “setting patterns for uniformity across the nation.”[22]  For example, the Conference has drafted the Uniform Anatomical Gift Act,[23] the Uniform Child Custody Jurisdiction Act,[24] the Uniform Electronic Transactions Act,[25] the Uniform Probate Code,[26] the Uniform Partnership Act,[27] and the Uniform Limited Partnership Act.[28]

 

 

In order for an act to be approved by the Conference, it must first withstand years of extensive consideration by drafting committees.[29]  Only after the drafting committees are satisfied with a tentative draft is it presented to the entire Conference at an annual meeting for initial debate.[30]  The Act is reviewed “section by section, at no less than two annual meetings by all commissioners sitting as a Committee of the Whole.”[31] 

 

 

If the Committee of the Whole approves an act, the membership votes on its acceptance.[32]  Each state is allowed only one vote.  “A majority of the states present, and no less than 20 states, must approve an act before it can be officially adopted as a Uniform or Model Act.”[33]  Only after this process is completed is it presented to legislatures in each jurisdiction to be considered.[34]  Thereafter, the Conference members act as advocates for the proposed law in their home jurisdiction.[35]

 

 

ii.                 The ALI

 

 

 In 1923 a group of Judges, Lawyers and law professors conducted a study known as "The Committee on the Establishment of a Permanent Organization for the Improvement of the Law."[36]  That study found “two chief defects in American law, its uncertainty and its complexity.”[37]   In order to correct these defects, the Committee recommended that an organization be formed.[38]  Thus, the American Law Institute was born.[39]

 

 

ALI’s charter declares that its purpose is “to promote the clarification and simplification of the law and its better adaptation to social needs, to secure the better administration of justice, and to encourage and carry on scholarly and scientific legal work."[40]  Today, ALI is authorized to have as many as 3000 elected members.[41]  Members are selected based on “professional achievement and demonstrated interest in the improvement of the law.”[42] 

 

 

Soon after the ALI was formed, the organization focused on correcting the uncertainty in the law by developing restatements of basic legal subjects.[43]  For example, the organization completed the first Restatements of the Law for Agency, Conflict of Laws, Contracts, Judgments, Property, Restitution, Security, Torts, and Trusts between 1923 and 1944.[44]  Since then, the ALI has updated the original Restatements and added additional areas of law.[45]

 

 

In addition to the Restatements, the ALI has focused on correcting the complexity in the law by developing model statutory formulations such as, the Model Penal Code, a Model Code of Pre-Arraignment Procedure, the Model Code of Evidence, and a Model Land Development Code.[46]

 

 

In order for a Restatement or codification project to gain ALI approval it must first withstand an arduous process.[47]  First, once the Officers and Council approve a project, a Reporter is appointed to prepare an Initial Draft.[48]  The Reporter must be an expert in the field of law being considered, “usually a legal scholar.”[49]   Second, the Initial Draft is submitted to a small group of advisors.  The advisors make suggestions and revisions to the Initial Draft.[50] 

 

 

Third, the revised draft is submitted to the Council of the Institute (the “Council”) for further analysis and consideration.[51]  The Council is made up of “some sixty prominent judges, practicing lawyers, and law teachers.”[52]   The Council may send the revised draft back to the Reporter, or to the Annual Meeting for membership review as a Tentative Draft.[53] 

 

 

If the Tentative Draft is presented to the membership at an Annual Meeting it is discussed, debated and released to the public.[54]  After that, the membership can approve the Tentative Draft, subject to any modifications, or send it back to the Reporter and Advisers for further revisions.[55]   After a Final Draft has been prepared, it is submitted to the Council and the membership for final approval.[56]  “When the project has been approved by both, the official text of The American Law Institute is prepared for publication.”[57]

 

 

2.                Drafting UCITA

 

 

 As pointed out earlier in this paper, the UCC Permanent Editorial Board appointed a drafting committee and a reporter to begin the long process of drafting the revisions to Article 2 of the UCC in 1991.  In 1993, after many meetings, the drafting committee adopted a policy of bringing licenses, leases, and service contracts “into Article 2 through a ‘hub and spoke’ configuration.”[58]  They reasoned that, by analogy, Article 2 already governed the transactions represented by the spokes.[59]  Therefore, a revised Article 2 ought to account for these transactions directly.[60]

 

 

The "hub" was to consist of general contracting standards common to all “transfers of personal property," such as good faith and reasonableness, as well as specific rules that were shared by each spoke.[61]  The “spokes,” on the other hand, were to represent principles unique to the sale of goods, licenses, leases, services and other commercial deals.[62]  In addition, this flexible approach would permit future unforeseen transactions to be easily incorporated into Article 2.[63]

 

 

 In July 1995 the Drafting Committee abandoned the hub and spoke architecture after the NCCUSL concluded that the concept was unworkable.[64]  Instead, a new drafting committee was appointed.[65]  The new committee was to draft a separate Article, designated Proposed Article 2B.[66]

 

 

From 1995 through 1999 the Article 2B Drafting Committee met many times.[67]  Early on, it was apparent that the Committee was going to have a difficult time reaching agreement.[68]  In 1997, the ALI formally objected to Article 2B's approach to intellectual property.[69]  The Drafting Committee did not change course.[70] 

 

 

In 1998, the ALI called for “fundamental revision” to Proposed Article 2B’s contracting scheme because its “approach was far removed from traditional notions of contracting.”[71]  Again, the Drafting Committee did not make the revisions requested.[72]  Finally, in 1999 the ALI withdrew its participation in the Drafting Process after the ALI Council refused to submit the Tentative Draft to its members for consideration.[73]  Without ALI’s participation, Article 2B could not become a stand alone Article of the UCC.[74]

 

 

The Conference, however, chose to proceed alone, renaming Proposed Article 2B the Uniform Computer Information Transactions Act.[75]  Thereafter, on Thursday, July 29, 1999 at their annual conference in Denver, Colorado NCCUSL’s members formally adopted UCITA.[76]

 

 

C.               Overview

 

 

UCITA has been introduced in a number of jurisdictions.[77]  Two states, Maryland and Virginia, have passed the Act with some alterations.[78]  Before judging the usefulness of the Act, we must first look at the Act’s overall makeup 

 

 

1.                Structure

 

 

Because UCITA began as part of the UCC, it follows that UCITA is patterned after UCC Articles.[79]  And, like the UCC, UCITA is “based upon the principle of freedom of contract,” most provisions are merely “default rules, applicable only if the parties do not specify some other rule.”[80]  In addition, similar to the UCC, UCITA claims to be a statute that is “not regulatory, but [is] intended to facilitate and support commercial practice and to support its evolution through agreement and trade practices.”[81] 

 

 

UCITA is made up of 9 parts: (1) General Provisions, (2) Formation and Terms, (3) Construction, (4) Warranties, (5) Transfer of Interests and Rights, (6) Performance, (7) Breach of Contract, (8) Remedies, and (9) Miscellaneous Provisions.[82]  Each part is divided further into sub-parts and sections.[83]  In all, in addition to the 9 parts, the Act has 21 sub-parts,[84] 108 sections,[85] and spans more than 340 pages (including the Official Comments).[86]

 

 

2.                Purpose

 

 

The Conference promulgated UCITA because they saw a need to “support and facilitate the realization of the full potential of computer information transactions.”[87]  Furthermore, the Conference wanted to “clarify the law”[88] and “expand[] commercial practice in computer information transactions by commercial usage and agreement of the parties.”[89]  The Conference hopes that the UCITA will “promote uniformity of the law with respect to [computer information transactions] among States that enact it.”[90]

 

 

3.                Scope

 

 

UCITA is “[a] commercial contract code for the computer information transactions.”[91]  Computer information transactions (“CIT”) are defined as "an agreement ... to create, modify, transfer, or license computer information or information rights in computer information.... A transaction is not included merely because the parties' agreement includes that their communications about the transaction will be in the form of computer information."[92]  UCITA “does not apply to ‘information,’ but to contracts and agreements regarding computer information.”[93]

 

 

Computer information (“CI”) is broadly defined as "information in electronic form which is obtained from or through the use of a computer or which is in a form capable of being processed by a computer. The term includes a copy of the information and any documentation or packaging associated with the copy."[94]  Furthermore, the term “information” includes “data, text, images, sounds, mask works, or computer programs, including collections and compilations of them.”[95] 

 

 

The Act regulates all software transactions, whether on the web or prepackaged.  In addition, the Act covers license agreements to assess news sites, electronic information services and databases, contracts with Internet Service Providers, and agreements for web hosting services.  If the Act governs a transaction, it removes the transaction from UCC Article 2 because the Act defines the transaction as a “license”[96] rather than a “sale”.[97]  In addition, the scope of the Act is broad enough to encompass other transactions that may not otherwise come under UCITA. 

 

 

i.                   Excluded

 

 

When determining what transactions fall within the Act’s scope, it is logical to begin with what is definitely excluded.  First, contracts dealing only with tangible “goods,” that is “all things that are movable at the time relevant to the computer information transaction”[98] are not covered by the Act.[99]  Furthermore, the Act specifically excludes contacts dealing with financial services,[100] insurance services,[101] traditional movies, television, records or cable,[102] compulsory licenses,[103] employment contracts,[104] transactions where CI is “de minimus,”[105] telecommunications,[106] and transactions specifically covered by sections of the UCC even if these contracts would otherwise fall under the UCITA.[107]

 

 

ii.                 Mixed Transactions

 

 

When “a transaction includes computer information and goods” UCITA applies “to the part of the transaction involving computer information.”[108]  Mixed transactions involve goods with embedded software.  For example, if a consumer buys a television that includes a software component, the Act applies to the software component, but not to the other television parts.[109] 

 

 

The Act applies to all transactions where “giving the buyer or lessee of the goods access to or use of the program is ordinarily a material purpose of transactions in goods of the type sold or leased” [emphasis added].[110]  For example, if a consumer purchases a computer, preloaded with software, the sale of the computer and the software fall within the Act.  Just what is a “material purpose” is left undefined.

iii.               Distinct Transactions

 

 

Distinct Transactions are those transactions that are part computer information and part other subject matter.  For example, a customer may purchase software along with other office products.  The Act explicitly applies to the part of the transaction that involves computer information.[111]  In our example, the Act would apply to the software, but not necessarily to the paper, pens, chairs, blank computer disks, etc.  “[T]he general rule is that the rules of the Uniform Commercial Code apply to their subject matter and [UCITA] applies to its subject matter.”[112]

 

 

Although the Act spells out when UCITA applies and when it does not, the parties are free to elect which scheme governs an agreement (i.e. UCC, UCITA, Common Law, Foreign Law, etc.).[113]  The general rule is “that parties can agree to have [UCITA] apply to an entire transaction, part of a transaction, or none of a transaction.”[114]  Therefore, transactions that may not otherwise fall within the Act’s scope may still be subject to it, as long as “a material part of the subject matter to which the agreement applies is computer information” and the parties agree to it.[115]

 

 

As a practical matter, sellers of a variety of consumer goods that embed minimal software within, such as televisions, cameras and VCRs, could opt-in to UCITA, thereby exempting those sales from the UCC and other laws.[116]  In addition, if a customer purchases a variety of goods (as in the office supply example above) the vendor can opt-in to UCITA and bring the entire transaction under the Acts’ domain. 

III.      Mass-market Licenses

The most far-reaching provisions of UCITA are the provisions dealing with mass-market Licenses (MML).[117]  The Act defines a MML as “a standard form used in a mass-market transaction.”[118]  Further, a mass-market transaction is defined as “a consumer contract,”[119] and includes most other retail computer information transactions “with an end-user licensee.”[120]  The definition is intended “to avoid artificial distinctions among business and consumer transferees in an ordinary retail market.”[121]  Online contracts, however, are distinguished between business and consumer transferees.[122]  “Business acquisition of software through online access and other non-retail transactions are outside of the definition.”[123]

A.               Mass-market Overview

 

 

Computer information Vendors have relied on mass-market licenses since the earliest days of the computer age.[124]  They originated because copyright and patent law lagged behind technology.[125]  In the 1970s and early 1980s courts had not yet decided if copyright and/or patent laws applied to software.[126]  As a result, software publishers sought to protect their products through trade secrets law.[127] 

 

 

The problem arose: how can a publisher claim trade secrets status for software that is widely distributed?[128]  Publishers solved the problem through the “legal fiction that they were really licensing rather than selling their software.  Because the ‘license’ contained provisions that required customers to keep the software confidential, the trade secrets contained therein could be protected.”[129]

 

 

1.                Defining Forms of Mass-market Licenses

 

 

In a mass-market scenario, software vendors seek to bind consumers to the terms of their form licensing agreement by attempting to create a “reverse unilateral contract."[130]  In other words, vendors ask the customers to purchase software, then, in addition, ask them to undertake performance (use the software) if the customer agrees to the license terms assessable only after the purchase.  Generally, vendors rely on three different forms of license agreements to accomplish this purpose: shrink-wrap, click-wrap, and browse-wrap licenses.

 

 

i.                   Shrink-wrap

 

 

The term “shrink-wrap license” originated from the earliest prepackaged software sales.  The most basic example involves a “single piece of paper containing license terms which has been wrapped in transparent plastic along with one or more computer disks.”[131]  The publisher intends for the customer to read the license terms before opening the package.[132]  Once having read the contract, the customer may decide to agree to all terms by breaking the shrink-wrap and using the software (manifesting assent), or may decline by returning the unopened package to the dealer for a refund.

 

 

Quite often, the license agreement is not located on the outside of the product where the customer can read it, but located inside the box or inside a user manual.  In those instances, the computer disks are sealed in an envelop, a customer manifests his or her assent by breaking the seal on the envelop, using the software, and not returning it to the dealer for a refund.

 

 

Of course, the idea that the customer has read the agreement, understood its terms, and consciously assented to them may be fiction.  But, no matter, the shrink-wrap was broken and the customer’s assent obtained.

 

 

ii.                 Click-wrap

 

 

The next generation license is the “click-wrap license.”  Combining the act of “clicking” a computer mouse and the name “shrink-wrap” arrives at the term “click-wrap.”[133]  Upon installing purchased software, a customer is presented with a message on his or her computer screen asking for assent to the agreement.  The customer must manifest his or her assent to the terms of the contract by clicking on an “I agree” icon.[134]  The software will not allow a customer to proceed to installation “unless and until the icon is clicked.”[135]

 

 

In a prepackaged software sale, a click-wrap license presents the terms of the license before the customer uses the software, but after he or she has paid for it.  The click-wrap license improves upon the shrink-wrap in that the customer must see the license before using the software and commit some act, even if he or she doesn’t read the agreement.  Often, a click-wrap license is combined with a shrink-wrap license.

 

 

A variation of the click-wrap license is the “web-wrap” license.[136]  The difference is the platform of commerce.  Web-Wrap Agreements are click-wrap agreements presented to a potential customer in an online environment.[137]  In addition to selling software online, a web-wrap license may also be used to allow a customer access to online content.[138]  For example, a newspaper site may require registration before allowing web surfers to read stories.[139]  After registering, a reader is presented with an agreement stating terms of the license for using the information contained therein.[140]  Only after the visitor manifests assent by clicking the “I agree” icon may the visitor access the content of the web site.

 

 

iii.               Browse-wrap

 

 

A third license form is a “browse-wrap” license.[141]   A browse-wrap license is similar to the click-wrap license.[142]  However, instead of being presented with the terms of the contract before a customer can proceed to access material online or install or download software, the customer is merely offered an opportunity to read the contract by clicking on an icon.[143]  If a customer clicks on the icon, he or she is presented with the full text of the license agreement.[144]  The customer, however, is not presented with the agreement automatically before gaining access to the software or online content and the only act that manifests his or her assent to the agreement is the act of assessing the content, or downloading or installing the software.[145]  

 

 

For example, a web site may post a “Terms of Use Agreement” somewhere within their site with a link to the terms referenced on the site.  The site operator intends that all site visitors be bound by the Agreement, whether or not the agreement is ever displayed, accessed or actually made known to the visitor.  The visitor manifests his or her assent to the agreement simply by assessing the site. 

 

 

2.                Enforcing Mass-market Licenses Without UCITA

 

 

In order to appreciate the significance of the changes that the UCITA mass-market license provisions would bring on, one must first study the present state of MML enforceability in the courts.  Over time, the courts’ view on MML has evolved. 

 

 

i.                        Early Shrink-Wrap Enforceability

 

 

Early on, the enforceability of shrink-wrap or click-wrap license agreements was questionable.  Courts were reluctant to enforce one-sided contract terms where the customer’s “manifestation of assent” came after he or she had purchased the product.  One of the earliest cases deciding the enforceability of shrink-wrap licenses occurred in the Third Circuit Court of Appeals in 1991.  The case was Step-Saver Data Systems, Inc. v. Wyse Technology.[146] 

 

 

In Step-Saver, the customer purchased prepackaged software from a vendor after ordering the product over the telephone.[147]  The vendor delivered the software with a shrink-wrap license agreement that disclaimed all express and implied warranties, including an express warranty the vendor allegedly gave to the customer.[148] 

 

 

After the customer had difficulties with the software, the customer claimed that the vendor had breached its express warranty.[149]  The district court directed a verdict for the vendor holding that the “form language printed on each package containing the [software] was the complete and exclusive agreement between the parties.”[150]  Therefore, the vendor successfully disclaimed all warranties.[151]

 

 

The Third Circuit Court of Appeals reversed.[152]  Relying on the “battle of the forms” analysis of UCC §2-207,[153] the court reasoned that a contract was formed when the customer telephoned an order to the vendor and the vendor shipped the software.[154]  Thus, the terms of the contract were set when the vendor delivered the product.[155]  Subsequent terms contained in the shrink-wrap license were not part of the agreement.[156]  Consequently, the disclaimers located therein were not valid.[157]  

 

 

ii.                        Shrink-Wrap Enforceability Becomes Acceptable

 

 

Today, shrink-wrap license agreements are enforceable in many jurisdictions.[158]  Often their enforceability is not even questioned.[159]  The Seventh Circuit Court of Appeals has tried to clear up the ambiguity of the enforceability of shrink-wrap agreements with two important decisions: ProCD[160] and Hill.[161]

 

 

a.                ProCD, Inc. v. Zeidenberg

 

 

In 1996, the Seventh Circuit Court of Appeals upheld the enforceability of shrink-wrap agreements in ProCD, Inc. v. Zeidenberg.[162]  In ProCD, a customer purchased “information from more than 3,000 telephone directories” stored on a set of 5 CD-Roms.[163] [164]  The Vendor offered the directories to consumer markets and to commercial markets.[165]  The only differences in the offerings were the terms of the license agreements and the price.[166]  The customer in this case purchased the cheaper consumer version.[167]

 

 

The CD-Roms were packaged in a box that clearly said the information came with “restrictions stated in an enclosed license.”[168]  The license terms were  “encoded on the CD-ROM disks as well as printed in the manual, and which appear[ed] on a user's screen every time the software [ran].  The shrink-wrap license limited the use to ‘non-commercial.’”[169] 

 

 

The consumer offered the information on an Internet web site on a pay-to-view basis to third parties, violating the shrink-wrap license terms.[170]  The Vendor objected to the commercial use of their compilation without the consumer getting authorization.[171]  The District Court held that the terms of the contract were set when the vendor delivered the product.[172]   The District Court said “a purchaser does not agree to--and cannot be bound by--terms that were secret at the time of purchase.”[173]   Therefore, subsequent terms contained in the shrink-wrap license were not part of the agreement.[174]

 

 

In this case, unlike Step-Saver, the appellate court enforced the terms contained in the shrink-wrap agreement.[175]  The court determined that “[t]ransactions in which the exchange of money precedes the communication of detailed terms are common.”[176]  The court equated the transaction at issue in ProCD with purchasing insurance, an airline ticket, a concert ticket or a radio.[177]  In each case, a consumer buys a product or service and is presented with detailed terms after the purchase.[178]   Furthermore, in each case, courts have enforced those agreements.[179]

 

 

In ProCD, rather than a “battle of the forms” analysis conducted by the District Court, the court relied on UCC § 2-204(1).[180]  That section of the UCC states: “A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract."