The Uniform Computer Information Transactions Act – Recent Amendments May Stem the Crisis of Confidence
 
December 13, 2002
 
Jocelyn Brittin- Northern Virginia

In an effort to give new life to a controversial computer software and information licensing act known as the Uniform Computer Information Transactions Act (UCITA), the National Conference of Commissioners on Uniform State Laws (NCCUSL) has emerged with amendments aimed at assuaging the Act's critics and foes. UCITA is the first uniform contract law designed to deal specifically with the Internet and information economy by clarifying and harmonizing the various and conflicting states laws applicable to computer information transactions such as software and database licensing. Ironically, much like the Internet and information economy it is intended to support, UCITA has been beset by troubles and doubts.

On August 1, 2002, NCCUSL approved 38 amendments to UCITA to deal with those troubles, roughly six of which resulted in substantive changes that are discussed briefly in this article. To put the amendments into perspective, some background on UCITA is helpful. UCITA was adopted in July 1999, but its origins trace back to the early 1990s when the Internet and information technology industries started to become a significant force in the national and international economy. Then, industry representatives and law makers alike increasingly viewed the common law and statutory laws applicable to the sale of goods, such as televisions, stereos, automobiles and toasters to be inadequate for transactions involving the licensing of software and information and for dealing with the questions presented by the Internet, including, for example, whether online contracts are valid, which law governs an Internet-based transaction, and which forum has jurisdiction over disputes arising from those transactions.

As a result, NCCUSL sought to modernize the Uniform Commercial Code (UCC), the umbrella for commercial law in the United States, by updating its Article 2 (governing the sale of goods and leases) and adding a new article for intangibles that would provide consistent and uniform rules for software and information transactions both online and offline. That effort ultimately led to the birth of the UCITA.

A variety of consumer and business groups oppose UCITA, arguing that it dramatically shifts the balance of contract law in favor of software licensors and against the businesses and customers who buy and use that software. Additionally, roughly 32 U.S. state attorneys general, the Federal Trade Commission, and the American Bar Association (ABA) have sharply criticized UCITA. Indeed, in a January 31, 2002, report by the ABA Working Group on UCITA, the group described UCITA as “extremely difficult to understand” and “daunting for even knowledgeable lawyers to understand and apply.” It further warned that if UCITA is not redrafted, the result would be “considerable controversy and litigation over what its various 'rules' really mean.”

The problems with UCITA are further highlighted by its dismal track record among state legislatures. Only two states, Virginia and Maryland, have enacted UCITA. The District of Columbia and the U.S. Virgin Islands have introduced bills to enact UCITA, which remain pending. Still other states, specifically Iowa, North Carolina and West Virginia, have rejected UCITA and introduced what is referred to as “bomb shelter legislation,” which is designed to limit the reach of UCITA and its rules governing choice of law and choice of forum if one of the parties to a transaction is a resident of one of those states.

Responding to pressures from a number of fronts and with looming questions about the viability of the statute, NCCUSL approved a number of changes to UCITA, most of which were aimed to clarify the Act, and others to make substantive changes. Among the substantive amendments are the following:

Electronic Self-Help Banned. As adopted in 1999, UCITA permitted licensors to engage in “electronic self help” when a license was cancelled for any reason. Electronic self-help involves the use of electronic means either to (1) take possession of the copies of the licensed information in the possession or control of the licensee and any other materials pertaining to that information, which by contract were to be returned or delivered by the licensee to the licensor, or (2) prevent the continued use of the licensed information under the license.

Consumer and business groups opposed the electronic self-help provision, on the theory that it allowed software licensors to shut down mission-critical software remotely without court approval and without incurring liability for the foreseeable harm caused. The amendment to UCITA prohibits a licensor of digital information, including software, from disabling the use of that information by electronic means if there is a breach of an information contract. In place of self-help, UCITA provides licensors with an expedited judicial remedy for a material breach of contract.

Reverse-Engineering for Interoperability Expressly Authorized. Critics of UCITA argued that it failed to address certain user privileges, including reverse-engineering. Section 117 of the Copyright Act permits copying and adaptation of software in certain instances by the owner of a copy of software, and UCITA was silent with respect to licensors’ rights to prohibit such activities. The UCITA drafters took the position that any conflict between UCITA and the Copyright Act was addressed by the provision in UCITA that allowed federal laws to preempt UCITA. Critics argued that the scope of preemption is uncertain, and that under many licenses the licensee does not own a copy of the software, and therefore is not entitled to the rights granted owners under Section 117 of the Copyright Act.

The UCITA amendments specifically address reverse-engineering, by permitting the licensee to undertake reverse engineering when needed for interoperability (if otherwise not prohibited by other law), despite contrary contract terms. Reverse-engineering is permitted only when needed to achieve interoperability (i.e. the ability of computer programs to exchange information, and of such programs mutually to use the information that has been exchanged) and only if the needed elements have not previously been made available to the licensee by the licensor.

State's Consumer Protection Law Trumps UCITA. As originally adopted in 1999, §105 of UCITA provided that consumer protection statutes were superior to any provisions of UCITA unless displaced by the Act. This provision raised the concern that courts that had applied consumer protection statutes for the sale of goods to computer information transactions before the advent of UCITA would end that practice, which would potentially result in fewer protections to consumers.

In response, NCCUSL amended UCITA to state that UCITA would not limit, modify or supersede any consumer protection laws, including laws on the requirements of conspicuous disclosure, unfair or deceptive trade practices laws, and laws relating to electronic signatures and records. The applicability of a consumer protection law is determined by that law and not by UCITA. Notably, even with the amendment to UCITA, if a state consumer protection law is not specifically made applicable to the computer information transaction, then the rules under UCITA would apply if the state has adopted UCITA.

Right to Criticize Protected. Software and data licenses generally include confidentiality provisions aimed at protecting the trade secrets and proprietary information disclosed. In some instances, however, the provisions are drafted broadly enough to effectively block the end-user from making any disparaging comments concerning the product. Language that prevents disclosure of the results of benchmark tests, competitive advantages and disadvantages, test results and the like, regardless of whether any trade secret is involved, is not uncommon in license provisions. In response to criticism by consumer groups that provisions of this type would “gag” public comment, the proposed amendments expressly invalidate contract terms that limit criticism rights if (1) the copy of the computer information is in its final form and generally made available in commerce, and (2) the licensee is an end user engaging in otherwise lawful discussion of the quality of performance of the computer software or data. The licensor's rights under trade secret, trademark, defamation, commercial disparagement and other laws are expressly retained.

Remedies for Known Material Defect Preserved. The 1999 version of UCITA contained provisions designed to coordinate UCITA with other laws, such as tort law or state statutes that protect the public from certain abuses in commerce, including fraud or the failure to disclose defects. However, the Act also contained an additional provision stating that UCITA would not displace the law of fraud or unfair and deceptive trade practices as they relate to the intentional failure to disclose defects that are known to be material. The existence of the additional language arguably implied that UCITA displaced tort law dealing with the negligent misrepresentation or stated unfair and deceptive acts that are not qualified by intent, knowledge or materiality.

To alleviate that concern, NCCUSL amended UCITA to identify laws that it would not displace, namely, trade secret laws, unfair competition laws and the law of fraud, misrepresentation, and unfair and deceptive practices, including application of such laws “as they may deal with failure to disclose defects.”

Special, Open-Source Software Provisions. “Shareware” software and open-source software have a special provision relating to implied warranties under the amendments. Open-source software is software for which the source code is distributed or accessible via the Internet without charge. Examples include Linux, Apache Web Server and even the Netscape Communicator Web browser.

The UCITA amendments include a new § 410, which specifically addresses “free software,” defined by the Act as “a computer program with respect to which the licensor does not intend to make a profit from the distribution of the copy of the program and does not act generally for commercial gain derived from controlling use of the program or making, modifying, or redistributing copies of the program.” The Act specifically exempts free software licenses from any of the implied warranties created under §§401 and 403. These sections create implied warranties of noninfringement and of merchantability in computer information licenses, unless otherwise disclaimed by the license terms. The drafters felt that noncommercial transactions should not give rise to certain implied warranties that could otherwise subject the licensor to liability, notwithstanding the fact that the software is provided without charge.

Not surprisingly, UCITA’s opponents view the amendments as not going far enough to change their basic anti-UCITA position. UCITA supporters, on the other hand, view the amendments as a positive and good-faith attempt to satisfy the concerns of UCITA's critics. The effect of the amendments remains to be seen. NCCUSL plans to again offer an amended UCITA to state legislatures and then wait and see whether significant adoptions are made in the upcoming state legislative year. If more states do not enact UCITA, NCCUSL may be faced with scrapping UCITA altogether and going back to the drafting board.

For more information, contact Jocelyn Brittin, toll free, at 888-688-8500.