Copyright 2001. All Rights Reserved.

By: Nicholas G. Karambelas, Esq.

[PUBLISHED IN DECEMBER 2001 ISSUE OF WASHINGTON LAWYER MAGAZINE]

[Vol. 16 No. 4]

UCITA IN PERSPECTIVE 

The Uniform Computer Information Transactions Act (UCITA) is the latest development in the tradition of law merchant. Law merchant is a body of law consisting of the customs and practices of persons engaged in the business of buying and selling goods that have developed since time immemorial. Many principles of law merchant were ultimately codified in the Uniform Sales Act in 1906 which was replaced by Article 2 of the Uniform Commercial Code (UCC-2) in 1953. UCITA was promulgated for fundamentally the same reason for which UCC-2 was promulgated. Just as the common law contracts principles developed in an agricultural economy were deemed inadequate for transactions in the industrial manufacturing-based economy at the beginning of the 20th Century, UCC-2 has been deemed inadequate for transactions in the digital, information-based economy at the beginning of the 21st Century. UCITA sets forth a uniform system of concepts and default rules for transactions in computer information in the same way that UCC-2 provides such a system for sales of goods. UCITA was drafted by the National Conference of Commissioners on Uniform State Laws (referred to as NCCUSL). It was originally being drafted as Article 2B to the UCC-2 until the drafters determined that due to the subject matter, it could not be integrated into the framework of UCC-2. Article 2B was renamed UCITA and approved by NCCUSL and recommended to the states for approval on July 29, 1999.

As of October 1, 2001, among the area jurisdictions, Virginia enacted UCITA and it took effect on July 1, 2001 (Va. Code Ann. §59.1-501 et seq.), Maryland enacted UCITA and it took effect on October 1, 2000 (Md. Code Ann. §22-101 et seq.), in the District of Columbia UCITA was introduced as Bill 14-155 and in Delaware UCITA was introduced as Senate Bill 307. Oklahoma has passed but not enacted UCITA and UCITA has been introduced in about 10 other jurisdictions.

UCITA is highly controversial. Reportedly, attorneys general over 25 states oppose enactment of UCITA primarily due to concerns about adequate consumer protections. As a measure of its controversy, Iowa has not only rejected UCITA but has also enacted legislation that prohibits any party from enforcing any contract under UCITA against any Iowa citizen or business.

THE CONTRACTING ISSUES ADDRESSED BY UCITA

The fundamental contracting issues involving computer information transactions that UCC-2 and common law contract principles were deemed inadequate to address were (I) whether a computer information transaction is the sale of a good and (II) whether or not it is the sale of a good, the point in the relationship at which the transaction is a legally binding and enforceable contract.

I. Computer Information Transactions As Sales of Goods Under UCC -2

As sales of computer software grew in the 1980s and early 1990s, the courts increasingly confronted the issue of whether the sale of software was the sale of a good within the scope of UCC-2. Decisions went both ways. At least one federal appeals court found that once a computer program had been reduced to a tangible form such as a floppy disc, it became tangible, unmovable and available in the marketplace and, therefore, within the scope of UCC Article 2, Advent Systems Ltd. v. Unisys Corp., 925 F.2d 670 (3rd.Cir 1991). The problem with the Advent decision is that it ignores the actual nature of the transaction underlying the sale of software. Obviously, the item of value that is the subject of the bargained for exchange is not the tangible floppy disc but rather the information contained in the floppy disc. UCC -2 is designed for transactions in which legal title to goods passes from seller to buyer. Therefore, many of the UCC-2 provisions are simply irrelevant to computer information transactions.

II. Contract Formation in Computer Information Transactions

Even if transfers of computer information are sales of goods under UCC Article 2, the courts disagree as to when the contract is formed under the UCC. In a case involving the “battle of the forms” the court ruled that the contract of sale was formed when the buyer submitted a purchase order and the seller shipped software in response to that purchase order. The only terms to which the buyer was bound were those terms that were communicated to the buyer by seller at the time purchase order was submitted. Terms set forth in a written agreement that was contained in the software package (shrinkwrap agreement) that was delivered to the buyer but which varied from those terms of which buyer was aware when the purchase order was submitted were unenforceable. The contract was formed when the purchase order was submitted. The buyer had not manifested assent to the terms contained in the shrinkwrap agreement, Step-Saver Data System, Inc. v. Wyse Tech, 939 F.2d 91 (3d Cir.1991). By contrast, in a case where the same written shrinkwrap agreement that was in the software package also appeared on the computer screen every time the buyer opened the program, another court found that by using the software every time after the shrinkwrap agreement appeared, the buyer agreed to the terms of the shrinkwrap agreement each time the buyer opened and used the program, ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996). In a case where a computer was the subject of the sale and a shrinkwrap agreement was contained in the computer package, the buyer was bound by the terms of the shrinkwrap agreement primarily because that agreement enabled the buyer to unconditionally return the computer within 30 days, Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.1997).

A similar issue arises where the written agreement is contained only in the software and not in a written hard copy in the package of the software (clickwrap agreements). The courts have generally applied the reasoning of the shrinkwrap cases to clickwrap cases so that where the buyer has the opportunity to view the agreement before using the software or has the opportunity to rescind or avoid the contract after use, the clickwrap agreement will be enforced even though the buyer was unaware of the terms of the clickwrap agreement when the buyer purchased the software, CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir.1996); Mortensen Co. v. Timberline Software Corp., 998 P.2d 305 (Wash.Sup.Ct., 2000). However, where the software reconfigures the buyer’s computer before the buyer has had an opportunity to view the clickwrap agreement, the terms of the clickwrap agreement are unenforceable, Williams et al. v. America Online, 2001 WL 1358225 (Mass. Super. Ct., February 8, 2001). .

FUNDAMENTALS OF UCITA

I. License of Information As Opposed To Passing Title

While UCITA is functionally similar to UCC-2, UCC-2 and UCITA contemplate fundamentally different types of transactions. UCC- 2 contemplates transactions in which tangible goods are delivered by seller to buyer and legal title to those goods passes from seller to buyer. The legal relationship underlying the transaction ends as soon as title passes. UCITA contemplates transactions in which a license or the right to use information is granted by the owner of the information to the user so that legal title to the information does not commonly pass. The legal relationship underlying the transaction continues for so long as the license or right to use is in effect.

II. Default Statute - Freedom of Contract

UCITA preserves the common law contract principle of freedom of contract. More than 70% of the provisions of UCITA are default provisions. As a default statute, UCITA governs a transaction that is within the scope of UCITA unless the parties to that transaction agree that UCITA shall not govern, (§104). Certain enumerated types of agreements that are not within the scope of UCITA may be governed by UCITA if the parties affirmatively agree that UCITA shall govern.

III. Mass Market Transactions and Negotiated Transactions

UCITA applies to transactions that consists of computer information sold by mass producers, such as Microsoft, to the consuming public on a volume basis. In these mass market transactions, the buyer does not typically negotiate with the producer or licensor over the terms of the agreement. UCITA also applies to transactions in which a producer or licensor and the buyer negotiate terms of the agreement from relatively equal bargaining positions.

IV. Terminology

UCITA contains over 100 defined terms in the Definitions section (§102) but not all definitions are contained in the Definitions section. As in any statute, terms that are defined in a statute have the meaning accorded to them by the statutory definition even though that meaning may differ from the plain meaning or common usage of any such term. It is essential to understand and continually refer to the statutory definitions in applying UCITA.

SCOPE OF UCITA

The scope of UCITA can only be understood by understanding the terms that UCITA uses to describe the scope of UCITA. The terms can only be understood by understanding how UCITA defines the terms.

I. Application

UCITA applies to “Computer Information Transactions”, (§103(a)).

1. “Computer” means an electronic device that accepts information in digital or similar forms and manipulates that information for a specific result based on instructions. It does not include a television or radio or other device that may contain a microprocessor, (§102(10)).
2. “Computer Information” means data, text, images, sounds or computer programs in electronic form that is obtained from, accessible with or usable by a computer. It does not mean information in printed or non-electronic form, i.e., books and magazines, (§102, (11), (37)).
3. C. “Computer Information Transaction” means an agreement and the performance of that agreement to create, modify, transfer or license computer information or informational rights where the computer information or informational rights are the subject matter of the bargained for exchange. The agreement contemplated under this definition is broader than just the contract between the parties and encompasses the entire bargain between the parties whether manifested in the contract or implied in their course of dealing or by custom in the industry. The term does not include electronic communications that form a contract where the subject matter of the contract is not computer information, i.e., e-mails about the sales of goods, electronic airline tickets, (§102(4), (12)).

As a practical matter, UCITA applies to contracts to create computer programs and websites, contracts for software development, contracts to access websites and create digital multimedia works and data processing contracts.

II. Exclusions

UCITA does not apply to contracts or agreements in which the subject matter is, (§103(d)):

1. Sales or leases of goods
2. Personal services and employment
3. Financial services
4. Motion pictures, sound recordings or musical works
5. Insurance services
6. Regulated telecommunications services
7. Sales of books, newspapers, magazines but if they are transferred in electronic form, then UCITA applies
8. Transactions covered by the UCC
9. E-mail messages that are only about the agreement
10. Compulsory licenses under the copyright laws

In a transaction that involves computer information as well as items that are not computer information, UCITA governs only that portion of the transaction in which the subject matter is computer information, (§103(b), ©)). In a transaction in which computer information is embedded in a good other than a computer or a computer peripheral, UCITA does not apply, (§103(b)(1)(A). UCITA does not apply to sales of cars or televisions simply because such goods may contain a computer or software.

III. Agreement of the Parties (§104)

If the subject matter of the contract is not computer information or computer information is de minimus in the contract, then the parties cannot agree that UCITA will govern and UCITA shall not govern under any circumstances. If the subject matter of the contract is computer information, then the parties can agree either that UCITA will govern, that UCITA will not govern or that parts of UCITA will govern and other parts will not govern. If the parties do not manifest any such agreement, then UCITA governs. If the subject matter of the contract is or includes financial services, telecommunications services, motion pictures, sound recordings or musical works, even though such contracts are otherwise excluded from UCITA, the parties may agree that UCITA or any specified provisions of UCITA will govern. If the parties do not manifest any agreement, then UCITA does not govern.

IV. Opt-Out of UCITA (§104)

If the parties agree that UCITA does not govern in whole or in part a transaction that is within the scope of UCITA, such agreement is subject to the following, (§104(2)(A)-(B)):

1. The agreement cannot eliminate the UCITA rules on electronic errors and consumer defenses to electronic errors. (§214).
2. The agreement cannot eliminate the UCITA limitations on the right of electronic self help, (§816).
3. In mass market transaction, the agreement cannot eliminate the obligation of good faith or the doctrines of unconscionability and fundamental public policy.
4. In a mass market transaction, any term of the agreement that changes the governance of UCITA must be conspicuous.

In determining whether or not the parties have manifested an agreement on whether UCITA shall govern in whole or in part, the Official Comments say that a court should use the contract formation rules of UCITA to make that determination. Since the statute does not contain any such mandate it is arguable that the agreement will be governed by general contract principles as they apply in the relevant jurisdiction, i.e. common law of contracts or any codification of contract common law such as New York’s General Obligations Law.

V. Opt-In To -UCITA (§104)

Parties to a contract for financial services, motion pictures, sound recordings, musical works, or telecommunications services may agree that UCITA governs. That agreement does not alter the applicability of any other statute or rule that cannot be varied by agreement of the parties including any consumer protection laws.

VI. Federal and State Preemption (§105)

If federal law preempts any provision of UCITA, then the UCITA provision is unenforceable, (§105(a)). Federal intellectual property laws such as federal copyright and patent laws control over UCITA. If any provision of UCITA conflicts with any state consumer protection law, then the state law governs except that the UCITA concepts that govern the definitions of a writing, a signature, conspicuous notice and manifestation of assent shall govern, (§105(c)(d)).

VII. Public Policy Invalidation (§105(b))

A court may invalidate a term of a contract if the term violates a fundamental public policy and the court finds that the public interest against enforcement outweighs the private interest in favor of enforcement.

VIII. Legal Recognition of Contract in Electronic Form (§107)

A contract that is in electronic form has the same legal effect as a contract that is in paper hard copy form.

CONTRACT FORMATION AND TERMS

I. Terminology

The UCITA follows the principles of offer and acceptance contained in UCC- 2. Applying these principles in a contract governed by UCITA requires an understanding of the UCITA definitions.

1. “Record” means information that is inscribed on a tangible medium or stored in an electronic medium and retrievable in perceivable form, (§102(58)). A record is the functional equivalent of a writing under UCC-2.
2. “Authenticate” means to sign or to execute by adopting an electronic symbol, sound or process logically associated with a record with the intent of signing the record, (§§102(6), 108). An authentication is the functional equivalent of a signature under UCC-2.
3. “Electronic Agent” means a computer program or other electronic means used independently to initiate action or respond to an electronic message without review or action by an individual, i.e., a human agent, at the time of the action or response, (§102(28)). It refers to any automated means for making or performing contracts.

II. Formation of the Contract

A contract can be formed in any manner including conduct that manifests offer and acceptance and even if certain terms are left open, (§202). A definite and seasonable acceptance that is different from the offer is still an effective acceptance unless the acceptance materially alters the offer. A material alteration is one that contains terms that materially conflict with or varies the terms of the offer or adds terms not contained in the offer, (§204).

Offers or acceptances that by conduct or language are conditioned upon the agreement of the other party to the terms contained in the offer or acceptance can form a contract only if the party to whom the offer or acceptance is directed agrees to the exact terms, (§205). However, if the terms are contained in a standard form, then the party conditioning the offer or acceptance on the exact terms must act consistent with those terms by refusing to perform or accept any benefit until the other party acts consistent with the exact terms.

A person manifests assent to a record if the person acts knowingly or after an opportunity to review either authenticates the record or acts in a way that the other party or its electronic agent can infer assent, (§112(a)). A person or an electronic agent has an opportunity to review when the record is made reasonably available to review or to react, (§112(e)). Actual review is not required. If a record becomes available for review or reaction only after it has become binding, the purported obligor can avoid the obligation, (§112(e)(3)). The party that is bound under the contract is the party who manifested assent, (§213).

III. Terms of the Contract

The UCITA does not mandate that any particular terms be included in the contract except that, as a practical matter, there must be terms sufficient from which to determine the agreement if enforcement is sought. Terms of the contract can be inferred from the conduct or actions of the parties, (§209, 211).

Parol evidence is not admissible at all if the record is found to a complete and exclusive record, i.e., an integrated “writing”. If it is not a complete and exclusive record then parol evidence may be introduced to explain or supplement terms but not to contradict any terms of the record, (§301).

A license contains implied rights. A license grants those contractual rights that are expressly described in the contract as well as certain informational rights, though not express, which are controlled by the licensor and which are necessary in the ordinary course to exercise the expressly described rights, (§307(a)).

A license contains implied limitations. If a license expressly limits the use of information rights then a use in any other manner is a breach of the license even though those breaching uses are not expressly limited in the license, (§307(b)). A licensee is not automatically entitled to new improvements or new versions unless the licensor is expressly required to provide them under the license, (§307(d)).

IV. Valid and Enforceable Contract - “Statute of Frauds” (§201)

A contract that is not in writing or for which there is no authenticated record is not enforceable by action or defense if:

1. The contract requires a payment of $5,000 or more, or
2. If the contract is a license or access contract, the agreed term of use is for 1 year or less or the party against whom the contract is asserted can terminate the contract at will, (§201).
3. A contract that is otherwise unenforceable under this section will nevertheless be enforced if a party accepted performance or accessed information, i.e., a party accepted the benefit of the bargain, or, in the course of a judicial proceeding, a party admits the existence of a contract or admits facts from which a contract can be inferred.

The foregoing limitations control over any other statute of frauds in state law.

V. Choice of Law

The parties may choose the law that governs the contract except in a consumer contract in a state which specifies the law that governs a consumer contract, (§109(a)). The choice should be stated to be exclusive. If the parties do not choose a law, then (§109(b)),

1. In an access contract or contract providing for electronic delivery of copy such as downloading, the contract is governed by the law of the jurisdiction of the licensor.
2. B. If the contract contemplates that information in a tangible form will be physically delivered to a consumer, then the law of the jurisdiction in which the place of delivery governs.
3. In all other contracts, the law of state with the most significant relationship to the contract will govern.

VI. Choice of Forum

The parties may choose the judicial forum in which disputes shall be resolved as long as the choice is reasonable and just. The forum choice will be enforced as long as the party asserting it can articulate some connection between the forum and the contract taking into account the bargaining positions of the parties, (§110). Choices of arbitration or other non-judicial fora are not subject to UCITA and are governed by other laws applicable to arbitration. The choice of forum is not exclusive unless it is stated to be exclusive, (§110(b)).

VII. Mass Market Licenses

1. “Mass Market License” means a standard form that is prepared for and used in a mass market transaction, (§102(45)). Shrink wrap or click wrap licenses are mass market licenses.

2. “Mass Market Transaction’ means a consumer contract or any other transaction with an end user where the computer information is directed to the general public for retail upon substantially the same terms. It does not include a contract for redistribution, a contract for customized computer information, a site license or an access contract, (§102(46)).

3. A mass market license is not enforceable against the licensee unless the terms are readily available to the licensee and until the licensee has had an opportunity to review. After review, the licensee may return the computer information for a refund. These rights cannot be varied or waived by agreement, (§209).

VIII. Statute of Limitations

An action for breach of contract must be commenced within the later of 4 years after the right of action accrues or 1 year after the breach was or should have been discovered but not later than 5 years after the right of action accrues, (§805(a)). The parties may agree to reduce the limitations period as long the period is not less than 1 year and the contract is not a consumer contract, (§805(b)).

IX. Matters that Cannot be Varied by Agreement (§113)

Parties that do not opt-out of UCITA or parties that opt-in to UCITA may vary any provision of UCITA in their agreement except the following:

1. Obligations of good faith, diligence, reasonableness and care,
2. Principles of unconscionability and fundamental policy (§§111, 105(b))
3. Choice of law (§105(a))
4. Choice of forum (§110)
5. Requirements for manifesting assent and opportunity to review (§ 112)
6. Statute of Frauds (§201)
7. Limitations on mass market licensing (§209)
8. Consumer defense arising from electronic error (§214)
9. An enforceable term under §§ 303(b), 307(g), 406(b)©), 804(a)
10. Limitations on financier (§§ 505-511)
11. Restrictions on altering statute of limitations (§805(a)(b))
12. Limitations on self-help repossession (§§ 815(b), 816)
13. Usage of trade, course of dealing or course of performance are relevant to determine the existence and meaning of the agreement, (§113(b)).

WARRANTIES

I. Warranty of Non-Interference and Non-Infringement (§401)

A licensor who is a merchant warrants that no person other than licensor holds a rightful claim to the information that is the subject of the license that will interfere with the use and enjoyment of the information by the licensee. If, however, a licensee provides detailed specifications or method required for meeting specifications, the licensee holds the licensor harmless from any damage incurred by licensee as the result of compliance with those specifications unless licensor knew or should have known about a non-infringing alternative. This warranty may be disclaimed as long as the disclaimer uses language specifically disclaims this warranty or circumstances exist by which licensee should know that the warranty does not exist.

II. Express Warranties

An express warrant is a promise of configuration or performance communicated by the licensor through any medium including public advertising that induces the licensee to conclude the contract and is part of the bargained for exchange, (§402). An express warranty need not contain any particular words but a description of aesthetics or licensor’s opinion does not create express warranties, (§402(b)).

III. Implied Warranties

Implied warranties are deemed to apply to any contract subject to UCITA in which the licensor is a merchant whether the parties intended them to apply or not unless they are disclaimed. The UCITA sets forth the following implied warranties:

1. Warranty of Merchantability of Computer Program- the program is fit for ordinary purposes within the computer information industry and that the program conforms to any promises or affirmations of performance made on the container or label. (§403).
2. Warranty of Informational Content - the information made available to a licensee under a special relationship of reliance by the licensee has no inaccuracy caused by licensor’s failure to exercise due care. This warranty does not apply to published information content or to a person who is simply a conduit of the information. This warranty is conceptually similar to the warranty of fitness for a particular use or purpose under UCC Article 2, (§404).
3. Warranty of System Integration - the information that is intended to function as a system will function as a system, (§405).

IV. Disclaimers

An express warranty cannot be disclaimed. Any implied warranty can be disclaimed as long as the disclaimer is conspicuous and complies with UCITA standards which are similar to the standards in UCC-2, (§406). An implied warranty may be disclaimed by course of performance or usage of trade.

V. Third Party Beneficiaries

Any warranty extends to persons for whose benefit the licensor supplies the information. The licensor is deemed to have supplied the information to members of the family or of the household of the licensee if it is reasonable to expect that such a member would use the information, (§409).

RESTRAINT AND ELECTRONIC SELF-HELP

I. Restraints

A licensor may impede or restrain the use of computer information under certain conditions. “Restraint” means a program, code or physical limitation which is intended to restrict the use of information, (§605(a)). A licensor may use such a restraint even if the contract does not expressly enable the use of a restraint as follows (§605(b)):

1. To prevent a use that is inconsistent with the contract,
2. To prevent use after an express duration or number of uses,
3. To prevent use after expiration of the license upon reasonable prior notice from licensor to licensee.

The restraint cannot prevent access to the licensee’s own information that is in licensee’s possession or that can be accessed without using the licensor’s information. The restraint cannot be used to enforce remedies after a breach of contract so that the restraint presumably could not be used to force payment, (§605©), (f)).

II. Right to Possession and to Prevent Use (§815)

Upon cancellation of a license, a licensor has the right to re-possess all copies of the information or prevent use without judicial process as long as it can be done:

1. Without a breach of the peace,
2. Without foreseeable risk of personal injury, significant physical damage to information or property other than the licensed information, and
3. Using Electronic Self Help consistent with restrictions, see III, infra.

The right to possession is not available at all if, before the breach and in the ordinary course of performance under the license, the information was so altered or commingled that the information is no longer identifiable or separable, (§815(e)).

III. Electronic Self Help (§816)

A licensor may re-possess computer information after a license has been cancelled. “Electronic Self Help” means the use of electronic means by licensor to obtain possession of information or prevent use after the license is cancelled, (§816(a)). “Wrongful Use of Electronic Self Help” means the use of Electronic Self Help in a manner other than in compliance with A and B, infra. The use of electronic self help is prohibited unless:

1. The licensee specifically and separately manifested assent,
2. 15 days prior to using electronic self help, the licensor informs licensee that licensor intends to use electronic self help, the nature of the breach and a person with whom licensee can communicate about the notice.

Even if licensor complies with the restrictions on electronic self help, it cannot use self help if licensor has reason to know that using it would result in substantial injury or harm to the public health or safety or grave harm to the public interest. If the licensor uses wrongful electronic self help, the licensee may recover direct and incidental damages and even consequential damages under certain circumstances, (§816(e)).

CONCLUSION

An analysis of the policy disputes swirling around UCITA is beyond the scope of this Article. The policy disputes stem from the balance that UCITA attempts to draw between the interests of mass market licensors of computer information in the finality and binding effect of mass market transactions and the interests of the consumer in knowing the product and the legal obligations he or she has incurred. Probably the most fundamental flaw with UCITA is a lack of imagination. UCITA hews too closely to UCC-2 both in concept and language. UCC-2 was essentially a codification of decades, even centuries of case law, customs and practices that already defined the legal relationship between buyers and sellers. UCITA is essentially a statement of what the law governing computer information transactions should be masquerading as a codification of a body law that does not exist. There simply has not been enough case law or commercial experience to codify the law of computer information transactions. The result of self-consciously attempting to forge contracting issues of computer information transactions into the concepts and language of UCC-2 is often uncertain application. Nevertheless, because UCITA is a default statute, the practitioner must understand the provisions of UCITA so that he or she can advise the client as to those provisions that the client should avoid by opting-out.

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ENDNOTES

All citations are to the Uniform Computer Information Transactions Act with the 2000 and 2001 Amendments, effective August 23, 2001. UCITA with the Official Comments can be found at www.law.upenn.edu.