December 7, 1998

Gene N. LeBrun, President
National Conference of Commissioners on Uniform State Laws
211 E. Ontario Street, Suite 1300
Chicago, IL 60611

Geoffrey Hazard, Jr., Director
American Law Institute
4025 Chestnut Street
Philadelphia, PA 19104-3099

Connie Ring, Jr., Chairman
NCCUSL Article 2B Drafting Committee
Ober, Kaler, Grimes & Shriver
1401 H Street NW – Fifth Floor
Washington, DC 20005

Gentlemen,

        On behalf of our respective trade associations and member companies, we are writing to inform you of our continued opposition to proposed Article 2B because we strongly believe the latest draft fails to cure the serious infirmities that caused us to oppose previous drafts. Apart from the numerous substantive concerns that have been previously raised and are still not addressed, including the troublesome fact that the Reporter's Notes are often inconsistent with the text, we continue to have grave general concerns.

        First, the draft continues to violate two of the most fundamental underlying purposes of the Uniform Commercial Code: the simplification and clarification of existing law. §1-102(2)(a). Contrary to this express mandate, the application of proposed Article 2B to our industries will result in confusion, uncertainty and the risk of extensive litigation.

        Second, the ever-changing scope section suffers from the same deficiencies found in prior iterations. For example:

• §2B-104(2) fails in its effort to exclude "core activities of the entertainment industry." Those activities, as well as the activities of the other signatories, to this letter involve substantial multi-media and interactive applications. We strongly oppose an illusory exclusion that fails to address multi-media and interactive applications as well as current and future means of distribution and transmission that are an ever increasingly critical component of our businesses. This section is also an example of where the Reporter's Notes do not appear consistent with the text.
• The new concept of "computer information" as defined in §2B-102(a)(8) is overly broad and does little to limit proposed Article 2B's scope, despite the explicit reference to §2B-104(2)'s purported exclusion. Read with the definition of information in §2B-102(a)(25), "computer information" includes "data, text, images and sounds" that are "capable of being processed or used by, or obtained from or through a computer." §2B-102(a)(8). Viewed in the context of current technological capabilities, this definition captures virtually all of the information that each of our core businesses is directly involved in the "creation or development of" on the upstream side and that we "provide access to, transfer, use, license, modify or distribute" on the downstream side. §2B-102(a)(9). Accordingly, this change to scope is merely cosmetic and does not create a meaningful distinction between the software industries on the one hand, and entertainment industries and the publishing industries on the other.
• Instead of effectively limiting the reach of proposed Article 2B, the purported exclusion creates a substantial number of mixed transactions, which will detrimentally affect the conduct of our businesses in further violation of §1-102(2). One significant example is contract formation, where varying sets of rules will be applied to the same business behavior -- and often the very same transactions -- creating inevitable uncertainty and confusion.
• The Reporter's Notes to §2B-104 correctly state that "the different nature of liability and other issues involved in the entertainment industries as contrasted to the software and data industries leads to transactional formats that are different." The prevalence of mixed transactions will invariably lead to the application of inappropriate rules to numerous transactions, thus creating unintended results.
• §2B-104(2)(a) continues to refer to definitions of broadcast, satellite and cable in the Communications Act of 1934, as amended, that are either inapposite or simply do not exist. Even if these terms were properly defined for proposed Article 2B purposes, the draft still fails adequately to account for the different and evolving forms of distribution and exhibition media that are or may soon be used for "audio and visual programming." This failure will compound the uncertainty surrounding proposed Article 2B's scope and exacerbate the mixed transaction problem.
• Traditional print industries, particularly newspapers and magazines, are increasingly embracing the Internet and other digital technologies. The current draft would establish different rules for these industries, determined solely by the means of distribution chosen to make their products available. We see no benefit whatsoever flowing from this distinction and believe that it will prove to be extremely disruptive and confusing in the marketplace.
• There remains no understandable way to determine which transactions involving embedded computer systems will fall within the scope of proposed Article 2B.

        Another concern arises from the fact that proposed Article 2B lacks the generic product-neutral nature of the existing UCC. For example, Article 2A "applies to any transaction, regardless of form, that creates a lease." §2A-102. Similarly, Article 2 generally governs the sale of goods and does not differentiate among different types of goods. Apples, autos and aardvarks fall within the same general framework. To address product differences, the UCC relies on trade usage and similar concepts. By contrast, proposed Article 2B departs from this sound model by providing highly specialized default rules based on practices advocated by only one segment of a much broader and more diverse group of licensing industries. We suggest this project would be more consistent with the architecture of the existing Code, substantially shorter and much less controversial if it contained only generic licensing rules and relied on trade usage and similar concepts to address product differentiation.

       A related concern is the impact that proposed Article 2B's software model would have on future harmonization efforts. As we have previously stated, using Article 2 as the basis for a licensing statute is inappropriate and many of the problems in proposed Article 2B can be traced to that effort. If proposed Article 2B were enacted, it would likely exert the same improper influence on future licensing statutes.

       Another concern is the application of proposed Article 2B by analogy. Courts often apply UCC concepts outside of its designated scope. For example, in Pollard v. Saxe & Yolles Dev. Co., 12 C.3d 374 (1974), the California Supreme Court applied the implied warranty provisions of §2-314 and the notice provisions of §2-607 to a real estate transaction. Similarly, we believe that the controversial software licensing paradigm established by proposed Article 2B will likely be applied by analogy to licensing transactions in our industries. Although the notes to §2B-104 state that the "principles set out in this article should not be applied" to "the entertainment industry," we do not believe that a proposed statute, much less the Reporter's Notes, will restrict the manner in which a court reasons. Even if it could, our industries encompass far more than "entertainment." They include newspapers, magazines and other content providers.

        Finally, we urge everyone involved in the Article 2B process to consider seriously the broad-based opposition to the proposed law. Many groups including consumers, academics, commercial licensees and even the Federal Trade Commission have heavily criticized proposed Article 2B. We understand that when previous major additions to or revisions of the Uniform Commercial Code were made it was with substantial support from affected parties, not over their strong objection. It is fundamentally unfair and unwise to enact a new UCC Article, which enters vital new legal territory, in the face of such significant opposition.

        For these reasons we strenuously object to the current draft and direction of proposed Article 2B and will be forced to actively oppose its enactment.

Sincerely,

/s/
Eddie Fritts
President & CEO
National Association
of Broadcasters

/s/
Hilary Rosen
President & CEO
Recording Industry
Association of America

/s/
Don Kummerfeld
President & CEO
Magazine Publishers
of America

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