For software and information technology vendors and users, the legislature is in session! A drafting committee sponsored by the National Conference of Commissioners of Uniform State Laws and the American Law Institute is nearing completion of its work: the creation of America’s first comprehensive national law for software and information. The Uniform Commercial Code ("UCC"), until now, while law in 49 states, has governed only transactions in goods. It has not governed licensing of information and has had only limited application to transactions in software.

For most purposes, the drafting committee is the legislature. Once it concludes its work, chances are that its work, if adopted, will be little changed from that final draft.

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A large share of the transactions in the information technology industry will be subject to proposed Article 2B. Members may receive software or information as customer or they may license these as producers. While Article 2B is supposed to codify existing business practices, in some instances it may change these or may prefer one of several different practices. In general, Article 2B is supposed to provide only default rules, i.e., rules for use whenever there is no agreement on specific terms. In some instances, Article 2B may limit the ability of parties to agree to particular terms or may require that the parties take certain steps be taken to make certain terms enforceable. Article 2B will have a number of rules that will be of importance to ITAA’s members in their businesses. Just a few of the key issues for the Drafting Committee:

Are shrink-wrap licenses to be permitted? Article 2B would formally approve the use of so-called shrink-wrap licenses. The shrink-wrap license is critical to producers who wish to restrict their customers’ use of their products while still maintaining mass market distribution. The present draft upholds shrink-wrap licenses.

Are shrink-wrap license terms to be controlled? Consumer critics say that the drafting committee should regulate the terms that producers may include in shrink-wrap licenses and even should exclude some terms altogether. Others, it should at least required be placed in conspicuous type on the face of the package. So far, the Committee has imposed few limitations on the terms that producers may include in shrink-wrap licenses. The most important limitation: terms may not be unconscionable. As a result or a permissive shrink-wrap policy, not only consumers, but business customers as might well might confront obligations that they find unacceptable:

• Limitations of liability. The software bought to back-up the customer’s hard drive instead erases it. Thanks to a shrink-wrap license, the customer might be able only get its purchase price back.
• Choice of arbitration. When the customer seeks to sue, the shrink-wrap license requires arbitration before a panel sponsored by a software producers’ group.
• Choice of forum. The shrink-wrap license requires that the arbitration take place in Europe.

If you use a shrink-wrap license, must you pay for returns? The drafting committee has considered an ABA proposal to lessen the hardship for shrink-wrap licenses by giving customers extensive return rights, including requiring vendors to pay the costs of return.

Are use restrictions to be permitted? Licenses of information and software often limit tightly how many people may use licensed products, how long customers may use them, to whom customers may disclose them, whether customers may "reverse-engineer" products, and so on. The drafting committee has rejected proposals that would have said that license restrictions can not be more onerous than copyright law’s fair-use doctrine would permit. Some critics have suggested that this could lead to a nightmare scenario where all information would be licensed subject to restrictions and free sales would disappear.

What warranties would there be? UCC Article 2 provides that all goods sold automatically come with an implied warranty of merchantability. The proposed Article 2B recognizes that in the field of information, such a requirement would cause an unacceptable and unwise disruption of the free flow of information. Other than in transactions in so-called published information content, will be implied warranties will continue to exist, as will express warranties. It is the drafting committee’s job to determine the content and application of these warranties.

Who pays when a virus enters your system? So far, the drafting committee has been unable to agree on answers to this one. It looks as if it will leave the answer to this question to case-law development.

When transactions fall apart, what happens? Should the user have backed up its system? When can the producer put a self-help protection mechanism into its product? These are questions that the draft seeks to answer.

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The Drafting Committee has been at work since 1995. The public is invited to attend its drafting sessions, which are held on weekends every few months. Representatives of industry regularly attend and their suggestions are frequently adopted by the Committee. The Committee, including its chair, Carlyle C. Ring, Jr., and its reporter and principal draftsman, Raymond T. Nimmer, also welcome comments and discussion between drafting sessions.

The Drafting Committee has vigorously debated each of these and many other questions. Moreover, the debate on these issues is not over. Until the final draft is presented to the legislatures, the actual provisions of Article 2B can change. Each time the committee convenes, it can change the draft. Each of the sponsoring organizations can request changes in the draft.

Article 2B includes extensive provisions regarding how contracts can be reached electronically where we no longer have parties meeting face-to-face. A separate group, chaired by one of the members of the Article 2B Drafting Committee, is working on a uniform act that would apply new rules to electronic transactions of all types, whether for information, software, goods or services. That committee is working to coordinate its efforts with the Article 2B committee so as to avoid conflicts. It is not expect to finish its work until 1999, a year after the Article 2B drafting group hopes to conclude its work.

Current Schedule for Adoption of Article 2B

The Drafting Committee hopes to conclude its work in only one or two more drafting sessions, one to be held March 27 to 29 in San Diego and other, possibly May 1 to 3 in a place to be determined. If the Committee has its way, the sponsoring organizations would approve the draft at their respective annual meetings in May and in July and then in the fall present the draft to the state legislatures for their adoption beginning next year.

Now, while the Committee is still drafting and before the sponsoring organizations consider the draft, is the moment for ITAA’s members to give their input. If the draft is not adopted this Spring and Summer by the sponsoring organizations, it may never become law. If it is approved this year by the sponsoring organizations, there will be little opportunity to affect the final text. The states are likely either all to accept the draft with little change or to reject it.

The devil is always in the detail. Each company should look at the current draft from the perspective of its particular business to see whether any specific provisions are likely to interfere with how it does business. No company can assume that another company will pick up on its particular concerns. If, upon review of the draft, a company has particular concerns about a particular section, it should provide comments directly to the Reporter, Ray Nimmer, or should attend the next drafting session – especially if the particular issue is on the agenda.

The official home page for Uniform State Laws is http://www.law.upenn.edu/library/ulc/ulc.htm. The February 1998 draft of Article 2B can be linked directly at: http://www.law.upenn.edu/library/ulc/ucc2/2bfeb98.htm. The draft is prefaced by an explanatory memorandum. There is also a private UCC website that contains references for further information: http://www.SoftwareIndustry.org/issues/guide/. The official site for the UCC 2B Conference at UC Berkeley is: http://www.law.berkeley.edu/bclt/events/ucc2b/ucc2b.html.

The Information Technology Association of America (ITAA) Western Region Office was opened in late 1997 to increase member services and to extend our leadership role on the West Coast. The office will serve members on various levels, through public policy, membership relations, public relations, new business development and through increased marketing and programs. A number of events and programs will be held on the West Coast in the next six months, which we hope you might avail yourself.

Public Policy – ITAA’s Western Region office will serve as liaison between member companies and Members of the Congress from the Western Region to coordinate meetings, hearings, and events on the West Coast. We will also sponsor a series of critical issue public policy events in Silicon Valley, which will include ITAA member companies, industry experts and Members of Congress. Some upcoming programs will include: