UCITA Project Memorandum September 5, 2000 Page 1

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UCITA Project


Memorandum September 5, 2000


Page
1

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Memorandum


To:


Commissioners

From:


Staff

Dated:


September 5, 2000

Re:


Uniform Computer Information Transactions Act


The Commissioners requested that the UCITA presentation for the September
meeting be in the form of a draft Tentative Report. This ha
s presented something of a
challenge to staff, given that the Commission has taken formal votes on only a few of the
many UCITA issues that have been discussed. Preparation of a Tentative Report has
necessitated the choice of specific language in those pro
visions which are to be
recommended for change, and a rationale for the proposed language.


The approach that staff has taken in the draft Tentative Report that follows is to
try to capture the general sense of the discussion at Commission meetings (or at
least
staff's opinion of the general sense of the discussion). The Introduction set forth below is
captioned as a "preliminary draft"; it is intended to provide a starting point for discussion
on both the Introduction itself as well as the general tone of
the entire Report.


It should be noted that the amendments to UCITA that were included in the
materials sent to the Commissioners for the July meeting were passed, and the amended
provisions are those which will be referenced.


Choice of law and choice of

forum
-

UCITA 109 and 110


Since the Commission's last consideration of these issues, staff became aware of
the most current draft of Revised UCC Article 1, which contains the choice of law
provision which applies generally to the UCC and in particular to

Article 2 Sales.
Although the Article 1 revision process is incomplete and the draft is subject to change,
staff considered that the current draft Article 1 provision appeared to meet the concerns
expressed by Commissioners regarding this subject. In brie
f, proposed UCC 1
-
301
(August 2000) increases the autonomy of parties generally with respect to choice of law
by eliminating the requirement that the chosen jurisdiction bear a significant relationship
to the transaction, but it places significant constrai
nts upon those choices in consumer
transactions and in all transactions in which the choice of law is that of a country other
than the United States.

The choice of law provision set forth below adopts subsections (a) through (d) of
UCC Article 1 draft Sect
ion 1
-
301 (August 2000), but applies its limitations to all mass
-
market transactions rather than consumer transactions. In addition, subsection (e) has
been added, which derives from the non
-
uniform enactment of UCITA in Virginia.
Proposed subsection (e) p
rovides that in the absence of an enforceable agreement on
choice of law, the law of the State of New Jersey applies.


UCITA Project


Memorandum September 5, 2000


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A new subsection has been added to UCITA 110 dealing with choice of forum. It
simply states that a choice of forum term is not enforceable

in a mass
-
market transaction.
It seemed appropriate to make the constraints proposed in UCITA 110 consistent with
those proposed in UCITA 109.



PRELIMINARY DRAFT

Introduction

The Uniform Computer Information Transactions Act is the product of almost a
de
cade of effort by the National Conference of Commissioners on Uniform State Laws
(NCCUSL) to propose a uniform law governing transactions in information. Although
UCITA is the ultimate product of that effort, the project did not begin as a purely
NCCUSL ef
fort, nor was its scope limited to computer information transactions.
Approximately a decade ago efforts commenced to produce a new Article of the Uniform
Commercial Code to cover the subject of "licenses," a category of transactions that were
generally re
garded as being outside the scope of Article 2 of the UCC. The effort to
produce a new Article 2B of the Uniform Commercial Code was a joint project of
NCCUSL and the American Law Institute (ALI), traditional partners in the development
and maintenance of
the entire UCC.

As the Article 2B project progressed from a new Article on "licenses" to one on
"computer information," disagreements developed between NCCUSL and the ALI over
the treatment of many of the difficult core issues presented by this area of the

law. It
became apparent in the late 1998 and 1999 that the then current draft of Article 2B would
not receive the approval of the ALI, a pre
-
requisite to its promulgation as a new Article
of the Uniform Commercial Code. The leadership of NCCUSL took the u
nprecedented
step of removing the project from the joint aegis of NCCUSL and the ALI and proposed
it to the NCCUSL membership for adoption as a freestanding Uniform Act. This
effectively circumvented the objections of the ALI, which has no role in NCCUSL's

non
-
UCC uniform law process. The text of proposed Article 2B was re
-
formulated as the
Uniform Computer Information Transactions Act and was approved by the NCCUSL
membership at its Annual Meeting in July 1999.

The disagreements between the American Law In
stitute and the National
Conference over the provisions of proposed Article 2B are mirrored in the division of
opinion on the part of many parties and interest groups concerned with the project.
Generally, proposed Article 2B of the UCC, now UCITA, was vig
orously supported by
the computer software industry. It was opposed by consumer advocates, half of the
country's State Attorneys General, the motion picture and music industries, libraries and
law professors. A compilation of the opinions received by this
Commission, both in
support and in opposition, is included in the Appendix to this Report. Some of the
opposition to former proposed Article 2B, now UCITA, has been muted by amendments

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which have excepted entire industries from the scope of its provisions.

Most significantly,
the motion picture and music industries have negotiated broad exceptions from UCITA,
in return for which they have dropped their opposition to its enactment.

The manner in which UCITA has come to be proposed by NCCUSL for
enactment has

presented this Commission with a situation different from that presented
by most Uniform Commercial Code proposals. Almost all Uniform Law projects,
including those for revision of the UCC, involve the resolution of complex issues on
which interested part
ies disagree. The presentation of a new Article of the UCC, or
amendments to an existing Article, has the benefit of a process in which NCCUSL and
the ALI working together have been able to resolve these differences sufficiently to gain
general support in
favor any compromises embodied in their proposal. Although this
Commission has from time to time recommended changes in joint NCCUSL
-
ALI
proposals regarding the Uniform Commercial Code, these recommended changes are
typically relatively small. The resoluti
on of differences between these two prestigious
institutions and their joint support for change in these vitally important statutes is a
powerful argument in favor of this Commission's reliance on the ultimate product of their
process.

UCITA does not come
to this Commission as a product of this joint institutional
process. Nevertheless, the importance of UCITA is not lessened by the fact that it is
proposed as a freestanding Uniform Act and not as a new Article of the Uniform
Commercial Code. It is intended

by its proponents to occupy the same space in the law
that Article 2B was intended to occupy, directly aside the existing articles of the UCC,
and in fact appropriating some of their territory, and it must be considered in that light.

This Commission has

spent a great deal of time scrutinizing the provisions of
UCITA. Numerous public meetings have been held, several devoted entirely to
consideration of UCITA. Voluminous comments have been received from parties and
interest groups, both supporting and oppo
sed. The Commission has struggled to achieve
an understanding of exactly how UCITA would operate, as it is a complex proposal
which uses unfamiliar language intended to convey new conceptions of transactions that
will be increasingly important to the econo
my over time. Because of the inability of ALI
and NCCUSL to come to agreement on the desirability of the proposal, the Commission
has felt obliged to scrutinize UCITA with particular attention to the concerns which
caused the ALI to withhold its support an
d which are raised by its opponents.

It should be kept well in mind that although UCITA's title and expressed scope is
"computer information transactions," this language encompasses an extremely large
category of transactions that do not involve a "compute
r" in the ordinary sense of the
word. UCITA defines the term "computer" so broadly that it includes not only devices
that fall within the common, ordinary understanding of the term (a mainframe computer,
a desktop PC) but also communication devices as a ce
ll phone or a beeper, household
appliances such as televisions and other consumer electronics, or any device which
processes electronic or digital signals. Together with the equally broad definitions of the
operative terms "computer information" and "trans
action," UCITA brings within its scope
not only computer software but virtually all transactions in which any kind of digital or

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electronic "information" is accessed or transmitted, including databases, music, audio
-
video works and any kind of electronic c
ommunication. The result is a proposal which
offers the same set transactional rules to govern business and consumer computer
software, consumer audio
-
visual products, contracts for computer consulting services,
access to the Internet, access to on
-
line in
formation services such as American Online
and the Microsoft Network, and access to all kinds of messaging services, from telephone
service to electronic mail. The full extent of UCITA's application is not completely
understood even by its drafters.
1

The C
ommission's approach to this complex proposal has been several
-
fold. First
the Commission has looked particularly closely at provisions in UCITA which have been
identified by various groups as impacting on the interests of consumers and ordinary end
-
users
of computer information products such as software. In those cases where the
Commission concluded that the application of a UCITA provisions would have an undue
negative impact on the legitimate interests of such parties, amendments have been
proposed to mi
tigate the effect of those provisions. In some cases the proposed
amendments apply to consumers or consumer transactions, in others the amendments
apply to the somewhat broader category of mass
-
market transactions. In particular, the
Commission has propose
d amendments to UCITA provisions which in their current form
would have the effect of lessening the applicability of New Jersey laws which protect
consumers and end
-
users of products.

Second, the Commission concluded that existing law governing computer
in
formation transactions and goods should be preserved, and amendments have been
proposed to keep those kinds of transactions firmly within the familiar rules of UCC
Article 2. The Commission believes that there is no justification for having one set of
tran
sactional rules apply to goods which contain "computer information" (e.g., software
sold in the form of goods) and a different set of transactional rules which apply to other
kinds of goods which contain intellectual property (e.g., books, audio and video
products).

Third, the Commission has examined provisions to which substantive objections
have been raised by various parties. The Commission has recommended changes in the
provisions regarding self
-
help and submission of ideas, and it has recommended that
libraries be exempted entirely from the provisions of UCITA.

In making its recommendations for amendment of various UCITA provisions, the
Commission has stopped short of recommending a complete revision of UCITA's
transactional rules as they apply to comme
rcial parties. Although the Commission agrees
with the general approach in UCITA in its greater acceptance of the use of standard form
agreements, its members have serious doubts about the wisdom of many other aspects of
the proposal. Consideration was giv
en to proposing a revision of the UCITA text to be



1

See Official Comment 7. to UCITA 102 Definitions: "The definition of 'computer' ... does not include a
traditional television set, radio o
r toaster even though such goods may include a microprocessor chip. It
might

include new generations of machines that combine computation, word processing, Internet access,
and traditional broadcast reception. The definition should be applied by courts wit
h common sense"
(emphasis added).


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consistent with this Commission's Final Report relating to Standard Form Contracts
(October 1998), but this approach was ultimately abandoned. The Commission concluded
that any significant alteration of th
e "core" provisions of UCITA would result in a
product so inconsistent with the official version of UCITA that it could not be regarded
as a "uniform" enactment.

Even with the amendments it is proposing, the Commission cannot at this time
support the enact
ment of UCITA as its flaws are numerous and pervasive. The interface
of UCITA with federal intellectual property law is unclear, and resolution of the issues it
raises in that respect are likely to require years of complex federal court litigation to
resol
ve. It can well be argued that to the extent that computer information transactions are
primarily transactions in intellectual property and are particularly likely to be global in
character (a position strongly argued by the proponents of UCITA), achieving

more
thoroughgoing uniformity in the law should probably take place at the federal level.
UCITA attempts to harden down transactional law in a field in which transactional
models are rapidly evolving and significant change is certain to occur in a very sh
ort
period of time. Allowing the law to develop further within the existing framework of both
federal and State statutes and common law rules is probably the most desirable approach
to this subject matter at the present time. This approach is consistent wi
th the traditional
approach to UCC subject matter as a codification of generally accepted transactional
principles.