Nim Ring M101000 by rnrj9uO

VIEWS: 2 PAGES: 15

									                                    October 10, 2000


TO:            New Jersey Law Revision Commission

FROM:          Raymond Nimmer, Connie Ring

RE:            UNIFORM COMPTER INFORMATION TRANSACTIONS ACT
(UCITA)

        This memorandum addresses aspects of the proposals submitted by Commission
Staff in September, 2000, concerning UCITA. We have addressed only selected issues,
but this should not be treated as agreement with points not discussed. Overall, the
proposals generally reflect inadequate consideration of proposals for change in existing
law, and in UCITA, that with some exceptions should be rejected.

       For an extended treatment of the issues not addressed here, we refer the
Commission to the over ten years of discussion, drafts, position papers and votes that
occurred in the development of UCITA.

I.      Scope (Section 103)

       A.        Goods and Information.

        The Staff memorandum proposes a fundamental revision of the scope of UCITA
as contrasted to Article 2 on goods. The proposals should be rejected. They reflect
wrong policy. Furthermore, they are not only inconsistent with the treatment of this
relationship in UCITA, they are inconsistent and in conflict with current revisions of
UCC Article 2.

       The Staff proposal affects three scope issues relating to goods: 1) treatment of
computer information “in the form of goods,” 2) treatment of computer information
“embedded” in goods, and 3) treatment of other mixed transactions in which computer
information and goods are both included.

        One of these proposals (the idea dealing with embedded goods) touches on a
subject that was actively debated on revisions of Articles 2, 2A, and 9 of the UCC and the
development of UCITA, but does so in a manner that ignores that debate and its
resolution in those contexts, including in pending revisions of Article 2.

        The other two ideas propose fundamental changes in UCITA that conflict with
positions consistently taken by two separate drafting committees for revised Article 2, by
the Article 9 drafting committee, by the UCITA drafting committee, by annual meeting
votes of NCCUSL, by the American Law Institute, by committees of the American Bar




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Association, by legislatures in Virginia and Maryland, and, with increasing frequency, by
courts that deal with contract law issues pertaining to computer information transactions.

        The stated policy (see cover letter) of the Staff proposals is to treat most digital
information as Article 2 goods and exclude most information from UCITA. In contrast,
the current draft of revised Article 2 excludes computer information from its scope
(except for some “smart” goods). Article 9, as promulgated and as enacted in New
Jersey, distinguishes between software and goods (and also distinguishes other types of
computer information and goods). Article 9 expressly states that software is not “goods.”

        The Staff proposals thus run against the consistent, considered judgment of
numerous skilled and committed lawyers and public servants reached after thousands of
hours of discussion in context of three different drafting projects. They should be
rejected.

         a.         Information “in the form of goods”

       Staff invents a new phrase: information “in the form of goods.” Staff then
proposes that information in this form be treated as goods.

        What this would do to the law is not clear. The proposed language is vague. It is
not certain what this phrase connotes or how it would be applied by courts were it ever to
become law. For example, would one apply Article 2 to the text of a novel simply
because that text is in a book (a form of goods) or on a computer diskette? Would
Article 2 govern a publishing contract because the manuscript is submitted on paper
(goods) or a diskette? Would Article 2 warranties apply to gauge the quality required for
a motion picture simply because it is distributed on celluloid film (a form of goods) or on
a digital medium?

        In contrast, current law is clear. Current law does not apply Article 2 warranties
or similar rules to information content simply because of how it is distributed. Consistent
rulings in various states recognize that the content and character of information content
and contractual rights in it are not Article 2 issues. They reach that judgment because the
issues, the subject matter, and the public policy questions involved in information
transactions are quite different from those in a transaction to purchase a toaster, a lawn
mower, or a pocket knife. The ALI Restatement on products liability, for example,
expressly recognizes that information (however distributed) is not a product (e.g., is not
equivalent to goods). That judgment is followed in UCITA as drafted, but rejected by
Staff.

        As a stated reason for rejecting the accumulated judgment of various groups and
for rewriting the scope of UCITA, Staff cite several cases holding software to be within
Article 2.1 Undoubtedly, other cases could be cited.2 Staff correctly refer to Professor


1
 We note that, despite its reliance on some case law here, in many other places in its report, the staff
consistently reject UCITA rules that adopt the current consensus of case law, opting instead for positions


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Nimmer’s treatise which compiles many cases, including cases where there was a
decision to reject application of Article 2. As a matter of fact, however, most decisions
that place software within Article 2 are cases in which the basic issue was whether
uncertain common law or codified Article 2 should govern and cases in which a court
concludes that goods were the predominant purpose of the particular transaction.3 The
decisions are explicable in terms of convenience and clarity: while common law is
uncertain and hard to discern, Article 2 is a statutory structure. Even in such cases,
however, there is no indication that Article 2 governs all contract issues. Many issues
remain under general, often uncertain common law.

        More importantly, contract law and interpretation moves on and reflects the
changing economy. As information (in computer form or otherwise) increasingly comes
to dominate our economy, courts are increasingly sensitive to the differences in subject
matter. Indeed, in a large number of cases involving computer software licenses decided
during the past ten years, no consideration has been given to Article 2 application. In a
number of other cases, Article 2 has been considered and its applicability rejected.

        One recent illustration is particularly telling. In it a leading federal Court of
Appeals on intellectual property law expressly rejected a rule that the staff now suggest
that the Commission propose as New Jersey law. In DSC Communications Corp. v.
Pulse Communications, Inc.4 the Court of Appeals for the Federal Circuit held that a
licensee of a copy of a computer program it obtained pursuant to a standard form license
was not the owner of the copy and that, therefore, reverse engineering conducted in
violation of the license was not protected from being treated as infringement under
copyright law. The court was presented with the argument that, under Article 2, delivery
of a copy transfers title to the copy of the program and that this rule should especially
apply when the license was a single payment for a perpetual term. The Court of Appeals
rejected that argument and refused to apply Article 2 to this software transaction.
Instead, it held that a licensee is not the owner of a copy if the license places restrictions
on its use that are materially inconsistent with ownership. This rule is consistent with
UCITA (e.g., UCITA provides that, in a license, title to a copy depends on the
agreement) and is in direct conflict with rules proposed later in the staff memorandum.




that would rewrite New Jersey and national law adverse to this one industry (see, e.g., discussion of choice
of law and forum).
2                                                                 th
  Interestingly, Staff cite ProCD v. Zeidenberg, 86 F.3d 1447 (7 Cir. 1996) as supporting that Article 2 is
the appropriate body of law for software transactions. In fact, that issue was not considered by that court
and the quotation cited is out of context. The court there was affirming the basic rule that state contract law
applies to contracts involving information products. Staff, having cited this observation favorably, later
disingenuously question that very premise, hinting that contract law in this field is displaced by copyright
law, a rule that has never been followed by any reported court decision.
3
  The staff make the incorrect observation that many cases hold that “mass-market” software is goods for
purposes of Article 2. In fact, assuming that the staff mean by this to use the phrase innovated in UCITA
(“mass-market transaction”), very few reported decisions deal with mass-market transactions.
4
  DSC Communications Corp. v. Pulse Communications, Inc., 170 F.3d 1354 (Fed. Cir. 1999).


                                                      3
        Other courts follow similar analyses and decline to apply Article 2 to determine
when or whether a licensee is the owner of a copy.5 The Article 2 rule is that delivery of
goods transfers title in the goods to the transferee. That rule is appropriate for
transactions in ordinary goods, but it has never been applied to a license of computer
software. The courts correctly understand that the issues presented by a license are quite
different than those in a sale.

      Besides rejecting the simple truth that the issues are different, Staff proposes that
the Commission ignore:

            that the world of computer information and how it is delivered has changed
             and continues to change, moving ever further from a backwards-looking
             parallel to the old economy that attempts to treat information as equivalent to
             goods, and
            that even cases that have applied Article 2 to some issues did not deal with the
             issue of, as between two codified commercial contract law regimes, which
             should apply (the cases dealt with whether an ill-suited and uncertain common
             law or a codified contract law should apply).

        As software and other computer information transactions increasingly involve on-
line transfer of files to a licensee, would the backwards-looking approach proposed here
treat electronic impulses as information “in the form of goods”? One hopes not, but this
type of distribution is one direction in which various information industries and one we
already see in many areas of commerce. The judgment in UCITA and in many other fora
is that modern contract law should reflect modern commerce and not enact artificial
distinctions based on old commerce.6

        b.          Information “embedded in goods”

        Staff suggest that their version of UCITA not apply to information “embedded” in
goods. The treatment of software embedded in ordinary goods has been the subject of
extensive discussion for over five years by the UCITA committee, two separate
committees engaged in revision of Article 2, and the Article 9 revision committee. It is
difficult to estimate the number of open-meeting and other hours devoted to this
question. We wonder whether Staff was aware of that debate.

       Staff propose a rule that has been expressly rejected in all these contexts. They
suggest that coverage depend on whether information is “embedded” in goods, but when
or whether a computer program is “embedded” has no accepted meaning. Staff would
also exclude from UCITA any program “embedded” in a computer. That position has

5
  See, e.g., MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Adobe Systems Inc. v.
One Stop Micro, Inc., 84 F. Supp.2d 1086 (N.D. Cal. 2000).
6
  Interestingly, on page 5 of the memorandum, Staff assert that UCITA is codifying old ways of doing
business when formats are changing. But that is not true of UCITA. It is true of Staff proposals which
lock-in rules and styles that precede the information era and that would constrain the both the economy and
law’s response to it to forms grounded in a far different world of hard goods.


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been directly rejected in every context that has considered it for purposes of contract law.
The Staff proposal suggests that, even if the sole function of the goods is to provide
access to the program, Article 2 or common law applies, rather than UCITA. On the
other hand, the proposal implies that, if the program is delivered in a different manner
(e.g., downloaded after purchase), UCITA might apply. Distinctions based on that
difference are inappropriate.

         It does not surprise us that, not having had the benefit of the lengthy debates on
this issue (or, indeed, of any public discussion at all), Staff made an unworkable
proposal. It would surprise us that a body with the reputation of the Commission would
adopt that proposal.

        The basic debate about what this issue centers on allocating scope between
UCITA and Article 2 where a copy of a computer program is contained in goods and sold
along with the goods.7 This involves distinguishing between cases where the copy of the
program merely augments the ordinary performance of the goods and cases where the
program is, itself, a primary purpose of the transaction. The staff mention, but fail to
appreciate, that this is the meaning of the debate that occurred in ALI and in the two
committees about “smart goods” or that the solution should seek some meaningful way of
distinguishing the contexts. For example, UCITA excludes a computer program that
operates the brake system of a car, but includes the software that provides modem
communications, Internet access, or e-mail services even if the software is contained in a
computer as delivered to the transferee.

        The staff idea if adopted would make the applicable contract law hinge on how
one chooses to distribute software and on uncertain judgments by courts after the fact
abut the meaning of terms such as “embedded,” rather than on what is the essential
character of the subject matter involved in the deal. That is bad law and was rejected
throughout the law revision process.

         c.         Predominant purpose

       Staff propose that UCITA should not apply to a “mixed transaction” involving
goods and information if the goods are the predominant purpose of the transaction.

       The predominant purpose test is currently used by many state courts to deal with
cases where a transaction involves both goods and services. Even in that context, it has
the consistent effect of requiring that a court apply the wrong law to at least part of a
mixed transaction. In part because of this, both Article 2 committees and the separate
UCITA drafting committee rejected application of the predominant purpose rule to cases
involving goods and computer information. The Article 2 committee also rejected a
proposal to codify the rule in revised Article 2 with respect to goods and services.

7
 Among the many differences between the staff proposal and the more fully considered language in
UCITA and in revisions of Article 2 is the fact that the staff includes all computer information in its
concept, while UCITA and revised Article 2 focus solely on “computer programs.” There has been no
debate that other forms of computer information are within UCITA and not within Article 2.


                                                     5
        Yet, Staff propose this for New Jersey statutory law. We believe that the views
adopted by NCCUSL, ALI, three national drafting committees, and various bar
association groups are preferable. A predominant purpose test may be appropriate for the
relationship between goods and services, but it is not appropriate where the other subject
matter is information.

       B.         Library Exclusion.

       Staff propose excluding from UCITA any transaction with a library or archive.

        There have been intense discussions with library representatives and others about
the relationship between contract law and library handling of information. These
discussions have occurred in UCITA deliberations. They have also occurred and been
central to major national and international debates about federal and international
copyright law. The issues here are difficult and involve a heavy over-lay of federal
copyright law.

         The Staff proposal relies on a definition of library that is ambiguous and
potentially overly broad. For example, the library of a law firm or a major corporation
would be covered by the exclusion since in most cases, those libraries can be used by
other researchers. A for-profit business is also within the exclusion if it designates itself
as a library and allows (for a fee) use by the public or researchers in a special field.
Indeed, it is difficult to conceive of an entity that would not be within the exclusion.

        Staff here misrepresent UCITA to support their suggestion. They allege that this
proposed exclusion takes the same approach as exclusions approved in NCCUSL on
other issues. That is simply not true. The Staff proposal would mark the only time an
industry has been specifically exempted from a general contract law statute. The vague
rationales set out in the staff notes for that unique result are both misleading and
disingenuous.

       Why should there be an exclusion for all transactions involving real libraries, let
alone under the boundless terms recommended by Staff?

      The issue is not whether libraries are affected by contract law: Nor is the issue
whether libraries engage in license contracts.

           Copyright Act § 108, which gives libraries various rights in the context of
            infringement claims, expressly provides that these rights do not affect, alter or
            preclude enforcing contractual obligations of the library.
           All libraries engage in contracts with publishers every day. Most of these are
            based on standard form agreements.
           All modern libraries have license agreements with online and other digital
            information providers for access to online databases, use of word processing
            and other information, and for providing information to others.


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           All research and archive libraries have license agreements with donors who
            allow the library to hold copies of materials subject to restrictions (licenses)
            on to whom those archives can be made available.
           Indeed, the prevalence of modern licensing arrangement regarding library
            materials is such that the national library association has developed a standard
            form license agreement that it encourages libraries to use in acquiring digital
            information resources.

        The issue debated internationally and in congress is to what extent non-profit
libraries should be exempt from property rights and contract limitations in the digital era.
States cannot resolve this issue - it is a federal and an international law question. To
date, although library exemptions have been proposed in Congress, no special
exemptions for digital information have been enacted beyond those contained in Section
108.

        In reference to a state law question, the issue is what state contract law applies to
library transactions involving digital information transactions.8 The choices are simple:
common law, Article 2, or UCITA. However, as we have already said, Article 2 does not
apply to informational content. There are many reasons why UCITA is the better choice.
We will not list all of them, but if library contracts are under common law contract, rather
than UCITA, the following results occur for a library:

           There is no restriction on the licensor’s right to use electronic self-help.
           There is no statutory invalidation of terms that violate public policy.
           There is no requirement that a library have an opportunity to review a contract
            before assenting to it.
           There is no rule that a mass-market contract cannot alter the express
            agreement.
           There is no rule giving the licensee-library an implied license of all rights
            necessary to achieve the express license grant.
           There is no rule that the license be interpreted in light of commercial context
            (e.g., library license), rather than to protect the property rights of the licensor.
           There is no rule that a software license is presumed to give perpetual rights in
            some cases.
           There is no rule that a New Jersey library, as a licensor online, can rely on the
            application of New Jersey law to its contracts.

UCITA gives libraries (and other licensees) all of these. There are other effects. We
wonder whether the Staff considered any or all of them.

II.     Opt-in and Opt-out Rules (Section 104).
8
  The Staff discussion blurs this by suggesting that copyright law controls on contract issues, but
Section 108 makes clear that this is not true and, to the extent that copyright law has a direct role,
if merely deals with what property rights defenses arise when a person acquires a copy of
information by buying at a sale of the copy. But an owner need not sell it property (it can lease a
copy or license rights).


                                                  7
        Staff propose that the Commission adopt a rule that prohibits commercial entities
from choosing what law within a state governs their relationships in cases involving 1)
information in the form of goods, 2) information embedded in goods, and 3) information
in a transaction where the goods predominate.

        The Staff note supporting this change cryptically states that this is consistent with
the changes proposed in the scope of their UCITA. Yet, of course, that is simply not
true. Section 104 deals with an entirely different issue than does the scope provision.
Section 104 recognizes that, where contract law does not make certain rules mandatory,
the parties can modify the effect of those rules by their contract, including by specifying
which body of state law applies to the transaction.

         Rather than being merely consistent with the scope proposals, we have here the
first of many illustrations of the Staff’s belief that, even in fully commercial contracts,
state law should regulate contract choices and preclude the parties from formulating their
own agreements. The Staff apparently conceive of contract law as regulatory law,
restricting rather than supporting contracts and commerce. The far better approach is to
recognize as do UCC Article 2 and UCITA that the basis of our economy consists of
contractual choice and contract freedom except as regulation is needed to prevent
demonstrable abuse.

       There are many reasons why parties to a contract would prefer to specify a single
body of state law applicable to their deal - this could avoid uncertainty, it could eliminate
potentially inconsistent rules, it could simply implement terms to which the parties are
otherwise free to agree. There is simply no sustainable rationale to preclude this, nor do
Staff suggest one.

III.        Fundamental Public Policy (Section 105).

        Staff make three proposals regarding the treatment of fundamental public policy
issues in UCITA. Each proposal reflects an incomplete assessment of issues that have
been heavily debated and closely negotiated in the development of UCITA.

       a.        Delete “fundamental”

        UCITA is the first uniform state law that expressly recognizes the right of a court
to invalidate a contract term if it conflicts with fundamental state law policy. The
purpose of this rule, as spelled out in the comments, is to give courts the ability to police
contracts to avoid abuse of fundamental interests, such as those involved in free speech
and the like.

        Despite the pioneering nature of this UCITA rule, Staff propose that the rule be
altered to permit invalidation for any conflict with any state law policy, whether
fundamental or not. The sole rationale for this is that the word “fundamental” is not
present in the black letter text of a seldom used Restatement rule.




                                              8
        In fact, even accepting the Staff’s selective use of Restatement policy which Staff
in other contexts reject, the comments to the relevant Restatement rule make it clear that
the relevant policy must be a fundamental one that outweighs the fundamental policy
favoring enforcement of contracts. The difference between a seldom-followed
Restatement rule and a state statute on such issues are potentially immense.

       It is not appropriate policy to delegate to state courts the right to set aside contract
terms based on any policy they discern in a particular state, even when that policy is not a
fundamental one. Yet, the risk of that occurring is precisely what the Staff casually
propose.

       That change should be rejected.

       b.        Reverse Engineering

        Staff propose that the Commission adopt a rule that prohibits contract terms
banning reverse engineering for “interoperability or academic research.” The rationale is
that the language is supported by one interest group and that reverse engineering is
generally considered “fair use.”

       This proposal should be rejected.

       Staff misstate existing case law, which does not abrogate the enforceability of
contract terms and does not treat all reverse engineering as fair use and therefore exempt
from copyright infringement claims. Rather, the existing copyright cases have not widely
addressed the effect of contract terms. Furthermore, the cases hold that reverse
engineering of a copyrighted product sold to the general public is fair use only if the
reverse engineering was necessary to obtain the interoperability information. Thus, while
some reverse engineering is fair use, other such activity in other contexts may not be fair
use.

       The staff proposal here asks that the Commission enter into a major international
debate without even a semblance of offering full vent to the various competing interests.
The interest group proposal suggested here has been present to Congress and rejected, it
has been presented in international copyright treaty negotiation and rejected, it has been
presented in Maryland and Virginia debates and rejected, and it has been extensively
debated in UCITA deliberations and rejected.

        UCITA approaches this reverse engineering issue in an appropriate, flexible
manner under the “fundamental public policy” rule noted above. The Drafters choose to
do so because the issues and the context are important in evaluating the propriety of
reverse engineering. For example, consider a case where a motion picture publisher
makes an agreement with a licensee to provide highly sensitive trade secret encryption
software to the licensee. The agreement, in order to protect the secret, precludes the
licensee from reverse engineering the software. The Staff proposal would make that fully
negotiated and highly important contract term unenforceable. UCITA, as drafted, would



                                               9
allow a court to reach the sensible conclusion that in this context the contract term
violates no public policy at all, while in some other cases a similar term may infringe
public policy.

       c.        Electronic Commerce Issues.

        Here and in other places in their draft UCITA, Staff propose striking electronic
commerce enabling language, citing the recent passage of federal authorizing legislation
as sufficient and UETA as a back-up. These proposals should also be rejected. (see
discussion in point VIII below).

      d.       Consumer rules.
      Staff propose that their UCITA be made subordinate to “any other” New Jersey
consumer law.

        We are not able to comment on this because we do not have direct awareness of
this other consumer law. Of course, however, that is the problem with the proposal.
There is no indication in the Staff notes that it has surveyed and analyzed all other
consumer rules in New Jersey. Some may be appropriate for online information
commerce, but others might not. A blanket rule serves to virtually ensure that some
errors will be made.

IV.    Legal Recognition of Electronics (Section 107).

        Here and in other places in their draft UCITA, Staff propose striking electronic
commerce enabling language, citing the recent passage of federal authorizing legislation
as sufficient and UETA as a back-up. These proposals should also be rejected. (see
discussion in point VIII below).

V.     Choice of Law (Section 109)

        Staff propose a total rewriting of the rules regarding choice of law in computer
information transactions. As discussed in our cover letter, this proposal has no precedent
in any law or in any currently pending proposal. While Staff purport that the proposal
follows an idea floated in a draft of revisions of Article 1, their proposal actually and
admittedly deviates substantially even from that idea.

       The proposal should be rejected.

       While we find it difficult to understand the proposed rules, to our best
understanding, they constitute a substantial revision of state choice of law rules. Most
importantly, the proposal would invalidate any contract term making a choice of law in a
mass-market transaction unless the choice is of the purchaser’s residence or where the
information is to be received.




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        That rule would reject New Jersey law as it current stands. It would reject New
Jersey and national law in a context where the ability to make a choice by contract is
important to control costs and risks. Thus, under this proposal, a small online New Jersey
provider of information would have to comply with the contract law of all states and
potentially all countries. The cost of having to do so will put many small businesses out
of the marketplace. Even large companies would be required to incur huge costs or risks
that would affect the cost of the information services they provide.

        UCITA provides a balanced approach that reduces costs. It allows the contract to
control except where the contract infringes fundamental public policy or alters a rule that
cannot be altered under the otherwise applicable mandatory consumer law.

        Nor is the Staff idea validated by any concept of consumer protection. By
definition, in some cases, the consumer law of the purchaser’s residence will be superior
in protection while in other cases, other law is superior.

        Furthermore, the invalidating rule is not limited to consumer transactions, but
includes business-business transactions in the mass-market. Putting aside the drafting
question of where a business “resides” for purposes of this rule, this invalidation rule is
yet another illustration of the goal of regulating contracts, rather than supporting them. In
the absence of proof that there is abuse of such contract provisions that is not prevented
under original UCITA by rules against unconscionability, against violating fundamental
public policy, and against altering mandatory consumer rules, this further intrusion into
contract choice is unwarranted.

VI.        Contract Choice of Forum (Section 110)

       We have discussed this proposal before. It should be rejected.

        In this Section of its proposed UCITA, Staff propose to rewrite existing New
Jersey law, to ignore the rules of the Restatement which in other cases they support, to
reject a long line of decisions across the country, including by the U.S. Supreme Court,
and to enact another regulatory restriction on contracts. They propose to do this in
consumer contracts and in reference to many contracts involving businesses.

       The sole rationale for this revision of law and refusal to follow national trends as
captured in UCITA is a concern that some choice of forum clauses will cause unfairness
in some cases. However, as originally proposed, UCITA gives courts ample basis to
prevent abuse. Under UCITA as drafted, an exclusive choice of forum clause in a
contract is unenforceable if:

          The clause is unconscionable
          The clause violates fundamental public policy
          The clause conflicts with a mandatory consumer law rule, or
          The clause is unreasonable and unjust.



                                             11
         The staff proposal goes too far and invalidates terms in contracts which can work
to the benefit of all parties, reducing and shaping costs and risks in a manner that
facilitates commerce. In the absence of the ability to choose an applicable judicial forum,
small and large information providers are exposed to potential litigation in all states and
countries or to disputing that risk in court based on underlying jurisdiction law that, a few
years after the commercial development of the Internet has resulting in over 150 reported
decisions of mixed and unpredictable outcome. The U.S. Supreme Court has recognized
that choice of forum by contract offers great benefits as have New Jersey courts. The
Commission should not now propose that New Jersey reject that concept,

VII.   Formal Requirements (Section 201)

        Staff propose deletion of the statute of frauds. That proposal should be rejected.
It seemingly reflects the false analogy between goods and information that affects most
Staff proposals.

        Given the intangible nature of computer information and the role that contract
terms play in defining the rights conveyed, written or electronic records are especially
important in this field. In the world of sales of goods, possession of a physical item may
be sufficient to indicate that a contract existed and to give a basis for its terms - e.g.,
ownership of the goods. That is not true in information commerce.

        In this field, the contract defines how the information can be used (e.g., public
display, public performance, number of copies, context in which copies can be made,
etc.). After debate in both UCITA and Article 2 contexts, a decision was made to retain a
tailored statute of frauds to deal with the risk of fraud in this context. While the
Commission may favor eliminating the statute of frauds for sales of goods, that same step
is not warranted here.

VIII.      Electronic Commerce: Efficacy of Attribution Procedure (Section 212);
Determining Attribution (Section 213); Electronic Error (Section 214); Electronic
Message (Section 215)

        Here and in other places in their draft UCITA, Staff propose striking electronic
commerce enabling language, citing the recent passage of federal authorizing legislation
as sufficient and UETA as a back-up. These proposals should also be rejected.

       Staff do not mention that the federal legislation only applies if 1) state law
requires a writing, and 2) the transaction is one in interstate commerce.

        UCITA, as drafted, reflects a proposed state law rule that no writing is required in
certain cases since, as a matter of substantive law, either a writing or an electronic record
(or signature) satisfy state substantive law. These are two very different judgments and,
unlike federal law, UCITA also covers purely intrastate transactions.




                                             12
        Staff argue that UETA as enacted gives an adequate state law rule. Again,
however, UETA only applies if substantive law requires a writing. Also, UETA only
applies if the parties agree to conduct transactions electronically. When or whether that
agreement occurs is not clear, but the purpose of the requirement there was to buffer the
decision to allow electronics to over-ride a substantive state law policy judgment that a
writing should be required. UCITA, as proposed substantive contract law, works more
directly, by eliminating the requirement of a writing (as contrasted to electronics) itself.

       The uniform version of UETA excludes from its coverage transactions governed
by UCITA. That decision reflects the reasoned decision that the more tailored rules of
UCITA should apply to computer information transactions. Staff seek to reverse that
judgment without explaining why.

        Additionally, while we have not examined the terms of UETA as enacted in New
Jersey, unless the enacted version is identical to the version proposed by NCCUSL, the
statute may be preempted by the federal legislation. In such case, the purported back-up
state law rule does not exist in New Jersey.

IX.     Idea Submission (Section 216)

         Staff proposes deletion of Section 216 on submission of ideas. The explanation
for this step both misstates the effect of this section and how the section came to be in
UCITA. It gives no reasoned analysis of why a provision dealing with issues that are
central to all information industries should summarily be deleted from the Act.

       The proposed deletion should be rejected.

        The idea submission section had been part of UCITA since the earliest drafts of
the Act. It was included because of the importance in the industries of dealing with when
or whether an idea presented to one party (licensee) by another (licensor) creates a
binding contract. Nationally, the case law is diverse, but generally falls either with a
general set of rules arising under California state case law or a different set of rules
arising under New York case law.

        UCITA resolves the conflict and uncertainty by adopting the general rule
followed by New York decisions. In Internet information commerce, it is important that
a single underlying set of rules apply and Section 216 achieves that in a fair manner
reflecting the treatment of the issue in a major state.

        The predecessor to Section 216 was deleted by a narrow vote in July, 1999. In
July, 2000, it was reinserted in UCITA by an overwhelming vote of the states.

        Contrary to the comments of Staff, this did not occur in context of a decision
excluding various entertainment industry transactions from UCITA. Quite the contrary.
In July, 1999, these transactions were excluded. In July, 2000, a major revision of
UCITA occurred the effect of which is to include under UCITA various entertainment



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industry transactions that concern entertainment subject matter in the form of computer
information.

        Treatment of this issue is an important contract law concept and adoption of a
single, uniform approach nationally will greatly serve commerce in information.

X.        Title to Copy (Section 502)

        Staff propose two rules here. The first indirectly provides that title to a copy
passes to the licensee in any transaction where the license is for a single fee and an
unlimited term. The second argues that a limitation on the duration of a license must be
conspicuous and provided before the person (licensee) begins performance. Both
proposals should be rejected.

          a.        Title to a copy.

         The first proposal asks that the Commission endorse a rule that was expressly
rejected by the only federal courts of appeals to consider it. As discussed in our cover
letter, the Court of Appeals in DSC Communications Corp. v. Pulse Communications,
Inc.,9 considered this exact rule and held that the appropriate rule is that title passes only
if the license agreement does not place restrictions on the licensee inconsistent with the
idea of transferring title of the copy to it. Staff, once again, seek to have the
Commission reverse a rule that sensibly addresses the nature of commerce in information
largely because they simply disagree with it.

         A decision putting New Jersey in conflict with this sensible, agreement-based rule
about title would be unfortunate and would create an awkward uncertainty in law. In
many cases, the type of transfer that the Staff appear to single out may well involve a
transfer of title to a copy, but in other cases the agreement does not. The issue should be
left to a fair reading of the agreement in individual cases.

          b.        Duration.

         The second rule change the Staff proposes, places procedural and other
restrictions on any agreement to limit the duration of certain licenses.

        Besides being substantively inappropriate, we are unable to understand what rule
is intended here. Proposed rule (A) refers to transactions where a license is a single fee
for an unlimited duration. Proposed rule (B) refers to a term in such licenses that restricts
the duration. However, if the agreement is for a restricted term, then rule A does not
apply and the transaction is itself outside the scope of either (A) or (B).

       The Staff seems to be concerned about surprising limitations of duration in some
cases. In mass-market and consumer transactions, UCITA already deals with this by
providing that the terms of a mass-market license cannot alter the prior express
9
    DSC Communications Corp. v. Pulse Communications, Inc., 170 F.3d 1354 (Fed. Cir. 1999).


                                               14
agreement between the parties. The proposed procedural rules are, however, not limited
to the mass-market and would seem to place sharp limitations on purely commercial
transactions. This is, therefore, another illustration of a desire to regulate business
commerce even in the absence of any showing of abuse.

XI.     Self-Help Repossession (Sections 815/ 816)

        Staff proposes deletion of references in these two sections that place sharp
limitations on the use of electronic self-help to enforce remedies in the event of breach of
a license. Arguing that the issue should be left to common law.

       That proposal should be rejected.

        While the self-help limitations have been controversial, UCITA provides for
important and stringent limitations on the use of electronic self-help that are not present
in the common law or other existing statutes. The proposal to delete these restrictions
will not create a balance, but will disrupt one established under the terms of UCITA as
drafted.

         In Article 9 and in Article 2A as adopted in New Jersey, self-help is permitted
with little or no substantive restriction other than that it cannot breach the peace. UCITA
goes well beyond this to place tighter restrictions on the licensor than do either of these
other laws. Stepping back from this protection would be a serious mistake.




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