The National Conference of Commissioners on Uniform State Laws ("NCCUSL") approved in July a new uniform act governing commercial agreements to create, modify, transfer or distribute computer software and various online information transactions. The act is called the Uniform Computer Information Transactions Act(fn1) ("UCITA") and, in the midst of much controversy and continuing opposition, NCCUSL promulgated the act and recommended it to the states for enactment. Representatives from at least three states(fn2) have announced plans to sponsor the act in their respective state legislatures. Passage of UCITA in the home states of major software publishers could have far-reaching effects for their customers in every state with the Act’s confirmation of enforceable choice of law provisions in such "computer information transactions."(fn3)

The underlying premise for UCITA is the contention that "computer information transactions"(fn4) are not sales of goods, nor are they purely licenses of intellectual property rights. To apply UCC Article 2 for sale of goods to such transactions is akin to forcing the proverbial square peg into a round hole. Similarly, existing intellectual property law does not provide for issues of contract law addressed by the UCC. UCITA is a comprehensive blending of existing contract law (modeled after the UCC Article 2), selective deference to intellectual property law (largely by federal preemption), and "gap filler" default rules reflecting current industry practice.

The significance of UCITA for corporate clients is two-fold. First, UCITA’s enforcement of choice of law provisions means that enactment in even one state will likely affect agreements, or, at least the negotiations for such agreements, in every state, particularly if UCITA is enacted in the home state of a major software publisher such as Microsoft or Oracle. Second, UCITA has the potential to subtly alter the balance of current computer information transaction negotiations. Until now, technology professionals have been conducting negotiations for such computer transactions in the midst of much unsettled law: Under what circumstances are "shrink-wrap" and "click-wrap" licenses enforceable? Can a software publisher use an electronic restraint to shut down software without liability? Is posting of contract modifications on a web site sufficient notice to enforce the new terms?

UCITA provides a baseline set of default rules to answer these questions, while in most instances allowing the parties to vary those rules by agreement. With a handful of exceptions, UCITA offers optional provisions so that parties can negotiate whether or not UCITA will govern their transaction at all.(fn5)

Through UCITA’s establishment of a common basis from which to negotiate, corporate clients, software developers, publishers, and licensees alike may find that their negotiating leverage has been altered. Some terms not at issue in the past will now need to be negotiated, while others might be safely ignored by relying on gap fillers. On the whole, however, the most serious danger to corporate clients resides in unawareness of UCITA’s provisions. Effective negotiations in any transaction rest on knowing what the starting position is, and UCITA’s baseline could become the universal starting point for parties on both sides of the table.

UCITA, if enacted by the state legislatures, will be a contract law statute governing computer information transactions, meaning agreements and the performance of agreements to create, modify, transfer, license or distribute computer information or informational rights in computer information. The subject matter governed by UCITA would include:

• Computer software

• Multimedia interactive products

• Computer data and databases

Internet and online information(fn6)

For example, all software licenses, whether negotiated, "shrink-wrap" or "click-wrap," software development contracts, and contracts for on-line access to data bases such as Internet services or legal research data bases ("access contracts"(fn7)), would be affected by the enactment of UCITA.

Much of the controversy throughout the five-year history of UCITA has been focused on the scope of coverage. Various industry groups concerned with potential conflicts between UCITA and existing bodies of law have been at the heart of the controversy. In order to focus UCITA on true computer / online transactions, certain subject matter that could otherwise fall within the definition of "computer information transaction" (the key UCITA term defining scope) has been specifically exempted, including:

• Computer goods (e.g., hardware)

• Financial services transactions

• Audio or visual programming provided by broadcast, satellite, or cable

• Motion pictures, sound recordings, musical works, digital musical recordings, or phonorecords

• Compulsory licenses

• Employment contracts(fn8)

UCITA also has provisions for mixed transactions that include subject matter from both exempt and non-exempt categories.(fn9)

UCITA expands traditional contract formation rules by broadening the concept of a writing to include electronic "records," and by allowing "authentication" to substitute for signatures. A "Record" is defined by UCITA as "information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form."(fn10) To "Authenticate" means "to sign, or otherwise to execute or adopt an electronic symbol, sound, or process attached to, included in, or logically associated or linked with, a record or term, with the intent to sign the record or a record to which it refers."(fn11) Combined with rules governing attribution procedures, these provisions validate the enforceability of "shrink-wrap" and "click-wrap" agreements. UCITA’s contract formation rules otherwise largely follow UCC Article 2 (with exceptions noted below), but attain special significance when viewed through the lens of electronic formation.

For example, enforceability is merely contingent upon the acceptor manifesting assent, in any number of ways, after having the "opportunity to review" the terms of the license or contract.(fn12)

The "opportunity to review" can be satisfied in virtually any way that a reasonable person would have had such an opportunity called to their attention.(fn13) So, for example, in an electronic context, an icon presented on-screen prior to downloading the software that allows access to the terms of the contract and would be noticed by a reasonable person is sufficient. It is not necessary to display actual terms. Failure to make terms available for review will not necessarily void the contract in non-mass market transactions, but will affect what terms govern the contract.(fn14)

UCITA also provides that an electronic message signifying acceptance (assent) is effective upon receipt whether or not any human being is aware that such a message has been received.(fn15) This provision is in direct contravention of the mailbox rule (i.e., acceptance is effective upon dispatch), but has the same effect as the mailbox rule because of the speed of "delivery" via electronic mail.

In a mass-market transaction (any consumer transaction, or small-scale, non-negotiated business transaction conducted at the retail level), failure to provide opportunity to review gives the consumer a right of return with full reimbursement including defined expenses and costs to restore the licensee’s information processing system to its former state under defined conditions.(fn16)

UCITA also validates the enforceability of contracts formed by electronic agents without human intervention, and further defines specific rules for attribution.(fn17)

A key deviation from current UCC Article 2 contract formation rules relates to all software licenses. Whereas current UCC rules governing contracts for the sale of goods state that disagreement on a material term does not prevent contract formation, UCITA states that disagreement on a material term, such as the scope of the license grant, prevents contract formation "in the absence of conduct or performance by both parties to the contrary." (fn18)

In corporate practice, particular attention must be given during any software negotiations to a thorough meeting of the minds on issues such as the precise usage intended for the software (the extent of the license grant), or the parties can find themselves without a contract.

Finally, UCITA validates electronic records which adhere to defined attribution rules as sufficient to satisfy any requirement for a writing,(fn19) and defines a Statute of Frauds equivalent rule for transactions over $5,000 and licenses exceeding one year.(fn20)

UCITA forges new ground with the establishment of rules for the attribution of "electronic events" to a person. Attribution rules serve as the foundation for electronic contract formation, since electronic offers and acceptances must ultimately be attributable to a human being, even if indirectly through an electronic agent.

UCITA leaves broad discretion to legislatures and contracting parties to establish procedures for attribution with the sole limitation that such procedures meet the test for commercial reasonableness.(fn21) While the burden of proving attribution is upon the party relying on it, such proof can be inferred by demonstrating that the procedure used is effective.(fn22)

For example, assume that Company A and Company B have agreed that e-mail messages will be accepted as valid purchase orders and acceptances. Subsequently, there is a contract dispute, and A wishes to prove that B sent an e-mail accepting A’s purchase order offer for the sale of widgets. A does not need to prove that B (or B’s electronic agent) actually sent the e-mail if A can prove instead that B’s internal computer security procedures provide an effective method of preventing anyone but B from sending B’s e-mails. In other words, B’s act of sending the e-mail can be inferred by proving the efficacy of the attribution procedure.

Finally, UCITA allocates risks arising from attribution errors in two circumstances. First, when a party has failed to conform to an agreed-upon error-detection procedure, and, second, when a consumer sends an unintentional electronic message. In the former situation, a conforming party can avoid the effects of the error.(fn23) In the latter, the consumer can avoid being bound by taking prescribed actions.(fn24)

In general, UCITA follows UCC Article 2 rules for identifying what terms become a part of the contract once formed. Of particular interest is the UCITA provision relating to successive performance contracts. UCITA validates the enforceability of terms in a contract which permit one party to modify unilaterally the terms of the contract as they relate to future performance by notifying the other party.(fn25) The notice requirement can be satisfied by, for example, posting new terms on a web site.

Under UCITA, a software publisher could offer software via a web site having an icon directing the prospective licensee to the location of contract terms. If the licensee does not review the terms, but nevertheless "clicks" to accept the software, that licensee is now bound by those terms. This is no different than signing a paper contract without first reading it. However, if the software publisher has reserved the right to unilaterally modify the contract by posting changes on a web site, then the act of "signing without first reading" becomes equivalent to signing a blank document and letting the licensor fill in the terms later. Such a provision will be enforceable for future performances and the licensee will have to monitor continuously the indicated web site in order to understand what contract terms are governing the relationship at any given time.

For practical purposes, these provisions will create an imperative for corporate clients having a decentralized software acquisition process absent legal review (for example, by individual departments acquiring desktop software) to reconsider such acquisition policies under UCITA.

UCITA also provides a default rule for the duration of software licenses as "perpetual" subject to cancellation only for breach of contract.(fn26) Software publishers will need to attend closely to this provision and ensure clear language specifying the duration of any license grant in order to avoid inadvertent surrender of perpetual duration of those rights defined by the grant. If technical support is included in the license agreement without a clear limitation for the duration period for those services, this UCITA default provision could be interpreted to obligate the software publisher to provide perpetual support.

Terms required to be conspicuous (ex: warranty disclaimers) satisfy this requirement under UCITA by adhering to UCC Article 2 rules. UCITA, however, adds safe harbor provisions relating to the visual appearance of the printed or displayed text. (fn27)

The UCC Article 2 non-infringement warranty is substantially retained by UCITA, with a carve-out for situations in which the licensee provides the licensor with "detailed specifications" for the development of the software.(fn28) The licensor can disclaim the warranty. Between merchants, the warranty can be disclaimed by a "quitclaim" statement, essentially limiting the grant of the license to whatever rights the licensor might hold, subject to any third-party infringement claims.(fn29) UCC Article 2 warranties of merchantability and fitness for a particular purpose are substantially retained with similar provisions for disclaiming. UCITA adds new safe harbor language to existing UCC "magic word" disclaimers.(fn30) Further, implied warranties can be waived by a refusal to examine the subject matter of the contract, including computer software.(fn31)

UCITA’s validation of implied warranty disclaimers is in direct opposition to provisions of the consumer protection Magnuson-Moss Act.(fn32) Whether or not Magnuson-Moss will therefore preempt UCITA implied warranty disclaimer provisions in consumer computer information transactions will turn on whether or not the sale of a consumer product as defined by Magnuson-Moss encompasses computer information transactions, particularly computer software licenses. This point is unsettled under current law, and the Federal Trade Commission has refrained from taking a position on the issue.(fn33)

UCITA rejects the "perfect tender" rule of UCC Article 2 for a softer standard. In commercial contracts (i.e., non mass-market transactions), performance can be rejected and the contract canceled only for a material breach. In mass-market transactions, the standard is "conforming tender."(fn34)

UCITA acknowledges the unique blend of contract and federal intellectual property law in the context of software licensing on the issue of transferability of software contracts. Contractual restrictions on transferability are fully enforceable. Absent any such contractual terms, a party’s interest in the contract can be transferred unless: a) a material alteration of duties would result, or, b) the transfer is prohibited by "other law."(fn35)

By deferring to "other law," UCITA invokes federal intellectual property law prohibiting the transfer of intellectual property licenses without the consent of the licensor.(fn36)

For practical purposes, most software licenses will not be transferable under UCITA absent an express grant of transferability by the licensor provided the software program is protected by copyright or patent.

Electronic restraints include "key codes," "license codes," "time bombs," and "access codes," and are know by these and other nomenclatures in industry circles.

UCITA distinguishes between "passive" and "active" electronic restraints wherein: a "passive" restraint merely prevents unauthorized access or usage beyond the permitted scope of the license grant, and an "active" restraint will cause an electronic event, such as the deletion of files, or blocking access to previously retrievable data.(fn37)

UCITA permits use of passive devices in all cases provided that they are used to enforce the scope of the license grant. Active devices are permitted, with notice, upon the termination of a license for reasons other than a breach.(fn38) Use of these restraints in accord with these UCITA provisions will shield the licensor from any potential liability arising from such use.

Electronic self-help provisions (i.e., the use of electronic restraints for cancellation of the license because of breach) are somewhat stricter and require manifest assent by the licensee to a contractual term authorizing their use.(fn39) Electronic restraints may be used without any prior court order provided that notice is given to the licensee, and their use is in accord with the terms of the contract. The licensee’s recourse in the face of these provisions is to seek an injunction based on the imminent irreparable harm that would occur if they are allowed to proceed.(fn40) The UCITA provisions for "Electronic Self-Help," contained in Section 816, cannot be waived or altered by an agreement of the parties, nor can they be waived by opting out of the UCITA provisions altogether.(fn41) The parties can negotiate terms which detail processes to effect self-help or which increase the licensee’s rights.

The drafters of NCCUSL have attempted not to alter the balance between state contract law and federal intellectual property law. Two areas of potential overlap have already been introduced above, namely transferability of computer information contracts and contract formation.

Contract formation under UCITA warrants additional comment. UCITA creates an added opportunity for contract formation through electronic agents by validation of "shrink-wrap" and "click-wrap" licenses as well as an increased opportunity for failure of contract formation by preventing formation in the event of a disagreement on a material term. This latter circumstance will result in increased instances where federal intellectual property law will be the default rather than state contract law.

Under current law, the scope of usage permitted by a software license is a matter of state law interpretation. The law is unsettled on whether or not exceeding the express grant of the license is a breach of contract (i.e., whether an express grant implies restrictions on all other rights not expressly granted). UCITA settles this area of law in favor of the implied restrictions, with the caveat that use beyond the express grant is not a breach if the use would be permitted under other applicable law.(fn42)

Under current law, for example, a licensee who reverse-engineers a software program without an express grant to do so will either be in breach of contract or not, depending on whether or not the controlling state’s contract law recognizes implied negative restrictions of a license grant. Under UCITA, however, there are two possible alternative results. First, the contract may fail for lack of agreement on a material term (i.e., scope of license grant) or, second, under UCITA Section 307, the conduct will constitute a breach unless it is permitted by other law. Under either scenario, state contract law is preempted by federal intellectual property law. In the above example, the issue for a copyrighted software program would turn on whether or not the reverse-engineering conducted met the standards of the Fair Use Doctrine. If the conduct necessary to reverse-engineer complied with the Fair Use Doctrine, for example, and such reverse-engineering was not expressly prohibited by the license agreement, under UCITA such an activity would be permitted by "other law" and therefore not a breach of the implied negative restriction of the license grant. The significance of the UCITA provision, however, is not in the deference to federal intellectual property law. Such federal preemption exists in any case. The significance of this UCITA provision is in the validation of implied negative restrictions in license grants where, under pre-existing state law, none may have previously existed. This shifts the burden to the licensee to prove that the conduct is permitted under other law such as the Fair Use Doctrine, and has raised concerns over potential chilling effects on research and development.

UCITA provisions draw the line between financial accommodation contracts and secured transactions, with the former governed by UCITA and the latter by UCC Article 9.

Under UCITA, financiers who are also licensors have all remedies available to licensors including electronic self-help.(fn43) Contractual terms that make the licensee’s obligations (i.e., payment obligations) independent and irrevocable are enforceable.(fn44) For example, the financier’s right to payment would not be subject to the personal defenses of the licensee.

UCITA validates contractual choice of law provisions, with limited restrictions applicable to consumer transactions.(fn45) Choice of forum provisions are valid provided they are just and reasonable. The choice of forum, however, is only exclusive if the contractual term explicitly states it is exclusive.(fn46)

UCITA defines the statute of limitations for breach of contract as "the later of four years after the right of action accrues or one year after the breach was or should have been discovered, but not later than five years after the right of action accrues."(fn47) This can be reduced by agreement of the parties to some period "not less than" one year, but cannot be extended.

Public policy concerns related to information have generated controversy over the formation of UCITA. Because UCITA provisions encompass both "Information"(fn48) and "Informational content,"(fn49) they necessarily encroach upon sensitive areas of First Amendment free speech rights, and the delicate balance maintained by federal intellectual property law between protection and fair use.

Early drafts tried to address these concerns by proposing strong language related to ownership rights of informational content and liability provisions for inaccurate data. The version of UCITA approved by NCCUSL attempts to allay these concerns in a number of provisions. UCITA establishes the right of a court to refuse to enforce any contract or contractual term contrary to "fundamental public policy"(fn50) and expressly states the fundamental concept of preemption by federal law.(fn51) While UCITA provides for implied warranties of accuracy in informational content in limited circumstances, these warranties do not apply to "published informational content,"(fn52) nor are any warranties for published informational content extended to third parties.(fn53) Finally, consequential damages arising from published informational content are prohibited by UCITA except by express agreement of the parties.(fn54)

NCCUSL has approved UCITA and recommended it to the states for enactment. Any state which adopts UCITA and is the controlling forum for a transaction governed by its provisions will impact parties regardless of where they reside, are incorporated, or do business. Being aware of this potential shift will allow parties on both sides of a transaction to use UCITA to their respective advantage.

(fn1) UCITA was originally drafted as the proposed Draft Article 2B to the Uniform Commercial Code ("UCC") which was sponsored jointly by NCCUSL and the American Law Institute ("ALI"). As a result of major opposition to 2B within ALI, ALI withdrew support. In order to proceed independently, NCCUSL was forced to convert the draft legislation into a stand-alone uniform act.

(fn2) Washington, Virginia, and Delaware

(fn3) For example, if the State of Washington were to adopt UCITA, all of Microsoft’s future software licenses could be governed by its provisions.

(fn4) UCITA Section 102(a)(12) (Final Act August 4, 1999). "Computer information transaction" is defined by UCITA as "an agreement and the performance of that agreement to create, modify, transfer, or license computer information or informational rights in computer information."

(fn5) In the following review, any UCITA provisions described are variable by mutual agreement of the parties unless otherwise noted.

(fn6) UCITA Prefatory Note (Draft July 1999). (Reporter’s notes are subject to revision and, while not incorporated into the enacted law, are given great deference by courts.)

(fn7) UCITA Section 102(a)(1) (Final Act August 4, 1999)

(fn8) UCITA Section 103 (Final Act August 4, 1999)

(fn9) UCITA Section 103(c) (Final Act August 4, 1999)

(fn10) UCITA Section 102(a)(58) (Final Act August 4, 1999)

(fn11) UCITA Section 102(a)(6) (Final Act August 4, 1999)

(fn12) UCITA Section 112(a) (Final Act August 4, 1999)

(fn13) UCITA Section 112(e) (Final Act August 4, 1999)

(fn14) UCITA Section 112(e)(3) and Section 211 (Final Act August 4, 1999)

(fn15) UCITA Section 217(a) (Final Act August 4, 1999)

(fn16) UCITA Section 210(b) (Final Act August 4, 1999). Right of return in mass-market transactions cannot be waived.

(fn17) UCITA Sections 112 and 213 through 216 (Final Act August 4, 1999)

(fn18) UCITA Section 202(d) (Final Act August 4, 1999)

(fn19) UCITA Section 107 (Final Act August 4, 1999)

(fn20) UCITA Section 201 (Final Act August 4, 1999). Statute of Frauds equivalent is not variable by agreement.

(fn21) UCITA Section 213(1) and (2) (Final Act August 4, 1999)

(fn22) UCITA Section 214(b) (Final Act August 4, 1999)

(fn23) UCITA Section 215 (Final Act August 4, 1999)

(fn24) UCITA Section 216 (Final Act August 4, 1999)

(fn25) UCITA Section 304 (Final Act August 4, 1999); UCITA Section 304 Reporter’s Note #3 (Draft July 1999)

(fn26) UCITA Section 308(2) (Final Act August 4, 1999)

(fn27) UCITA Section 102(15)(A) (Final Act August 4, 1999)

(fn28) UCITA Section 401(a) (Final Act August 4, 1999)

(fn29) UCITA Section 401(e) (Final Act August 4, 1999)

(fn30) UCITA Section 406(b) (Final Act August 4, 1999)

(fn31) UCITA Section 406(d) (Final Act August 4, 1999)

(fn32) 15 U.S.C. Section 2301(1) Magnuson-Moss prohibits the disclaimer of implied warranties when a written warranty is given in the sale of a consumer product.

(fn33) Letter from the Federal Trade Commission to the NCCUSL Article 2B Drafting Committee Chairman Carlyle C. Ring, Jr. and the Director of the American Law Institute, Professor Geoffrey Hazard, Jr., dated October 30, 1998, Footnote #7.

(fn34) UCITA Section 601 (Final Act August 4, 1999); UCITA Section 601 Reporter’s Note #3 (Draft July 1999)

(fn35) UCITA Section 503(1) (Final Act August 4, 1999)

(fn36) 17 U.S.C.A. 109(b)(1); Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996); Harris v. Emus Records Corp., 734 F.2d 1329 (9^th Cir. 1984); Unarco Indus., Inc. v. Kelley Co., Inc., 465 F.2d 1303 (7^th cir. 1972); In re Patient Education Media, Inc.,, 210 B.R. 237 (Bankr. S.D.N.Y. 1997); In re Alltech Plastics, Inc., 71 Bankr. 686 (Bankr. W.D. Tenn. 1987).

(fn37) UCITA Section 605 Reporter’s Notes (Draft July 1999)

(fn38) UCITA Section 605 (Final Act August 4, 1999)

(fn39) UCITA Section 816(c) (Final Act August 4, 1999)

(fn40) UCITA Section 816(g) (Final Act August 4, 1999)

(fn41) UCITA Section 816(h) and Section 103(e)(2) (Final Act August 4, 1999)

(fn42) UCITA Section 307(b) (Final Act August 4, 1999)

(fn43) UCITA Section 510 (Final Act August 4, 1999)

(fn44) UCITA Section 509 (Final Act August 4, 1999)

(fn45) UCITA Section 109 (Final Act August 4, 1999)

(fn46) UCITA Section 110 (Final Act August 4, 1999)

(fn47) UCITA Section 805(a) (Final Act August 4, 1999