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. Letter from Society for Information Management (SIM) to NCCUSL Opposing UCC 2B

October 8, 1998

 

Carlyle C. Ring, Jr.
Chairman NCCUSL Article 2B Drafting Committee
Ober, Kaler, Grimes & Shriver
1401 H Street NW - Fifth Floor
Washington, DC 20005
FAX (202)408-0640
ccring@ober.com

 

Dear Mr. Ring:

For several years, SIM representatives and individuals from its member companies have attended the UCC 2B Drafting Committee meetings as observers. During this period we have tried to work within the process, adding to the public discussion our perspective of standard industry practices, informed by real-world experience in the marketplace, as large business licensees of software. In the early years we were one of the few organizations to speak for the rights of licensees at the Drafting Committee meetings.

We have offered numerous compromises aimed at restoring balance to the Draft, which from its inception and continuing today has reflected the goals of software vendors. A couple of our suggestions have been adopted, mostly in watered-down form, but by and large the Draft remains biased in favor of the software companies. As compared to current law and current practice, the proposed Article 2B would skew the playing field, forcing licensees to fight uphill just to hold their ground. It is easy enough to cite examples of this pro-vendor tilt and the attached SIM White Paper documents many, but it is important to understand that this licensor bias permeates the Draft via nuances and omissions, as well as black-letter law.

This view is not limited just to large business users of software. Consumers Union, in its June 24, 1998 letter to NCCUSL concluded, ". . . we respectfully suggest that the Conference reject the Article 2B draft as unbalanced in favor of licensors."

Like any other market, the software market consists of buyers and sellers. In addressing the needs of the software marketplace, the 2B drafting process has elicited ample input from both halves. Yet, both large and small users of software agree that the resultant Draft does not fairly take into account the "buyer" half. This is not a recipe for good law.

SIM's list of recommended changes to the current Draft contains some new issues, recently brought to light, along with many positions which SIM considers essential for fairness, but which the Committee has rejected. At this point it is our assessment that the prospect for fundamental change in the tone and substance of 2B is dim. Therefore, despite the hard and sincere work of many interested parties, reluctantly we must conclude that SIM will not be able to support 2B in its current form. We will continue for the time being to participate in the proceedings in the hope that the Drafting Committee will recognize the growing concern of the licensee community. Additionally, we will encourage our members, many of whom are large industrial employers in the various states, to begin to work with local officials to educate them as to the potential effects of 2B on their state's economy.

Sincerely,

 

John Stevenson

 

cc:    National Conference of Commissioners on Uniform State Laws
        c/o ellyce Anapolski,
        211 e. Ontario St., Suite 1300
        Chicago, IL 60611
        FAX (312)915-0686
        nccusl@nccusl.org

        Ray Nimmer, Reporter
        FAX (713)743-2082
        rnimmer@uh.edu


SUMMARY OF KeY PROBLeMS WITH UCC ARTICLe 2B FOR BUSINeSS USeRS OF SOFTWARe

(August 1998 Draft)

 

Business licensees are very concerned about certain provisions of the current draft for UCC Article 2B. Although our concerns are numerous and pertain to themes woven throughout the draft, some of the key areas are listed below.

Before summarizing these concerns, it is helpful to describe briefly the major components of the software marketplace. The most familiar and visible component is the "shrinkwrap" market, in which businesses and consumers both acquire essentially similar and often identical commodity products. The shrinkwrap market is characterized by relatively low prices ($50 to $200 per typical transaction), many transactions, multiple distribution channels, and in-kind competition. Typically, roughly half of the software purchased by large businesses is shrinkwrap software, and it is usually acquired by simply issuing a purchase order to a reseller rather than by negotiating a license agreement with the licensor.

equally significant is the market for mainframe and midrange system software, which is used by business, government and institutions and is characterized by niche products at high prices (typically $100,000 to many millions per transaction), few transactions, direct negotiation with the licensor, little or no competition, and, more often than not, a "mission critical" application such as corporate payroll, tax accounting, claims payment, or safety, health and environmental systems.

 

General Comments on the effect of 2B on Businesses:

It has been suggested that large businesses do not need protection in Article 2B because they have the negotiating strength to include provisions in their agreements that will override the provisions of Article 2B or provide protections that 2B does not provide. In reality, other market forces often work against licensees, large and small alike. There are numerous examples of software licensors who dominate entire market segments, and simply will not negotiate the terms of their license agreements. Often, particularly in niche applications and in large system software, there is only one viable candidate. Further, even a large corporate licensee may not enjoy the clout of repeat business with a licensor, because a single license (seen by the licensor as a one-time sale) may be leveraged across the needs of the whole corporation, as with a mainframe, corporate-wide EDI system, for example. It is therefore untrue that large corporate licensees necessarily have great negotiating strength.

The argument that freedom of contract can take care of all problems in 2B for large licensees is also flawed because a large portion of the licenses currently governing software used by large companies are not negotiated agreements, but rather are shrinkwrap or clickwrap licenses for off-the-shelf software. If businesses were forced to start negotiating all license agreements to overcome potential problems with the provisions of Article 2B, the additional time, effort and resources required would be very significant. This additional cost, of course, would likely be passed on to customers of the business.

Another way in which 2B will have an effect even on negotiated agreements is that provisions in 2B that are favorable to vendors will be used by vendors to argue that their position is supported by black-letter law, and therefore it is the licensee who is being unreasonable by asking for something different.

Finally, the notion that large licensees, due to their bargaining power, should be unconcerned about what 2B says is belied simply by the fact that licensees are participating in the Drafting Committee meetings. If business licensees in fact had such great bargaining power that they need not be concerned about 2B, they would not be investing the time and resources to participate in the Drafting Committee process. Businesses usually do not invest resources in activities that are only of abstract interest.

Specific Comments on Certain Provisions of the August 1998 Draft:

2B-102 (a) (31)

The "mass market" concept purports to extend to certain business licensees some of the same protections currently available to everyone under existing Article 2 and retained under 2B with respect to consumers. (Note that this issue pertains to the shrinkwrap market.) In the current Draft, however, only a very narrow slice of the business market will qualify as "mass market" transactions. The definition has been crafted to exclude the distribution channels favored by most businesses, via a requirement that the quantity be consistent with ordinary retail transactions. This quantity restriction can be construed to mean a single copy per transaction. If the "mass market" concept is to be retained, the quantity restriction and reference to retail should be removed; alternatively, existing Article 2 protections should continue to prevail without discrimination as to market segment.

Recommendation: Delete "and in a quantity" from the second sentence

2B-207

This section would dramatically change current law by validating and making enforceable shrinkwrap and clickwrap license "agreements". These contracts of adhesion, rarely read by anyone, have been considered unenforceable by most courts, although there has been some recent authority to the contrary. Although business licensees certainly understand that it is not economically efficient to negotiate all license agreements, and that there is some economic necessity to having enforceable non-negotiated licenses, Article 2B goes too far by validating these unilateral "agreements" without imposing meaningful restrictions on the types of provisions that the licensor may include in the license. Presumably, the unconscionability limitation set forth in Section 2B-110 would apply to business licensees, although this may be called into question by the fact that there is no mention of this limitation in Section 2B-207 as there is in Section 2B-208 (the latter dealing with "mass market" licenses). However, as those in the legal community know, "unconsionability" is an extremely high threshhold to meet, and does not in reality constitute much of a limitation.

If Article 2B is to validate shrinkwrap and similar licenses, it should impose minimum standards on what will be considered enforceable in such a license. For example, some shrinkwrap licenses include a provision prohibiting the licensee from disclosing adverse information about the performance of the software. Licensors should not be able to include such provisions (which restrict a licensee's free speech rights) in their shrinkwrap licenses and have them be enforceable. If Article 2B is passed in its current form, licensees will have to guess whether a court would determine such a provision to be unconscionable, and this will have a chilling effect on licensees' free speech rights. It would be better for Article 2B to specifically state that such provisions will not be enforceable.

Some would argue that imposing minimum standards would constitute a "regulatory" approach, and that this is not the normal approach of the UCC. Business licensees would argue, however, that any validation of unilaterally imposed license terms requires a regulatory approach - whether in the UCC or elsewhere. If the UCC is not the place for it, then the UCC should not validate these types of licenses.

It should further be noted that most businesses -- even those with sophisticated software purchasing and legal departments -- normally do not review the terms of shrinkwrap or similar licenses prior to purchasing this type of software. If Article 2B validates these types of licenses without imposing minimum standards, businesses may be forced to hire additional staff and expend large amounts of time and money to review these licenses, all of which will add to the cost of doing business and to the ultimate cost of products and services to consumers.

Recommendation: Re-write Article 2B to either (a) avoid validating shrinkwrap and similar licenses, or (b) validate them but impose minimum standards. The business community would welcome the opportunity to participate in drafting such standards.

2B-307 (c)

Prior drafts of this section provided that if a license is silent as to number of users, then only one user is permitted at a time. The current Draft at least broadens this to a reasonable number of users, but still misses the point. Throughout the history of software licensing and continuing today, countless licenses have been negotiated in which the right to use is limited to a geographic site, certain entities, specific computers, or other mutually agreeable basis, with no reference at all as to number of users. A site license, for example, is widely understood to include an unlimited number of users. Consistent with current practice, the default should be an unlimited number of users, unless otherwise stated in the license.

Recommendation: Reword subsection (c) as follows: "A software license permits an unlimited number of users unless the license specifies otherwise."

2B-308 (2) (A)

The proposed rule here is that if a software license is silent as to its duration, the license is perpetual if the license provides for delivery of a copy for a "fee the total amount of which is fixed at or before the time of delivery of the copy." If the UCC is to reflect current commercial practice, then it should recognize that the vast majority of software licenses are perpetual, and that perpetual licenses frequently provide for payment of the license fee in installments (e.g., one-third upon execution of the license agreement, one-third upon delivery of the software, and one-third after the software has passed acceptance testing). Although the Reporter stated at the March 1998 meeting that a "single fee fixed at the beginning of the contract" (the language used in an earlier draft and not substantially different from the current language) does not preclude payment in installments, many people reading this section might conclude otherwise. The current phrase, like the earlier language, is likely to engender needless litigation. Since licensors who want the duration to be less than perpetual can easily make this clear by specifying a shorter term, the rule should be that the license duration is perpetual unless otherwise stated in the license.

Recommendation: Re-word subsection (2)(A) as follows: "the license is a software license that does not specify a shorter duration; or".

2B-310(c)

The current draft contains language that permits a licensor to use an electronic restraint that affirmatively prevents a licensee from accessing its own information without use of the licensed software, provided there is a term authorizing this in the license agreement. There is no justification for the use of such a restraint, regardless of whether the licensor manages to get such a term included in the license agreement, where it could be buried in a sea of type.

Recommendation: Re-word subsection (c) to read: "A licensor may not use a restraint that affirmatively prevents a licensee's access to its own information without use of the licensor's information or informational property rights. A license term that purports to authorize such a restraint is not enforceable." Also, add this provision to the Section 2B-106 list of provisions that the parties may not vary by their agreement.

2B-310 (e)

This subsection states: "This section does not preclude electronic replacement or disabling of an earlier copy of information by the licensor in connection with delivery of a new copy or version under an agreement to electronically replace or upgrade the earlier copy with an upgrade or other new information." A large percentage of business software is under a maintenance agreement with the licensor. In such agreements the licensor, in exchange for payment of an annual maintenance fee, agrees to provide updates, enhancements and new releases of the software as they become available. In some cases, the new versions may be sent to the licensee electronically. Such an agreement would fall within the description of "an agreement with the licensee to electronically replace or upgrade the earlier copy," and therefore this subsection would permit the licensor to disable the installed copy upon electronic delivery of an upgrade. In many cases when a business licensee receives an upgrade under a maintenance agreement, the licensee chooses not to install the upgrade. Upgrading frequently can involve significant time and effort on the part of a licensee's personnel, and businesses therefore should not be obligated to install an upgrade each time one is received. Allowing the licensor to disable the installed version of the software as soon as it electronically delivers an upgrade would have that effect.

Recommendation: Delete subsection (e).

2B-401 (a)

This section requires a licensee who "furnishes specifications to the licensor" to hold the licensor harmless against any claim of infringement that arises out compliance with the specifications. Unlike specifications for goods, specifications with respect to software are often nothing more than functional specifications or high level business requirements that must be further refined by the developer. The developer usually selects the method for meeting these requirements. The hold harmless obligation should apply only to a "licensee that furnishes detailed technical specifications to the licensor and selects the method for meeting those specifications". (At one point, the draft of this section had been modified to use the phrase "technical specifications", which was at least an improvement over "specifications", but now even that improvement has disappeared from the draft.)

In addition, this subsection should be revised to state that the hold harmless obligation does not apply if the licensee had no reason to know that compliance with the specifications would result in infringement, but the licensor did have reason to know and failed to inform the licensee.

Recommendation: Re-word the last part of subsection (a) to read: "but a licensee that furnishes detailed technical specifications to the licensor and selects the method for meeting those specifications must hold the licensor harmless against any such claim that arises out of compliance with the specifications. The licensee's obligation to hold the licensor harmless does not apply: (1) to claims that result from the failure of the licensor to adopt a noninfringing alternative that was available to the licensor; or (2) if the licensee had no reason to know that compliance with the specifications would result in infringement, but the licensor did have reason to know."

2B-401 (c) (2)

The implied warranty of noninfringement applies only to U.S. rights, even if the license grant allows use of the software in countries outside the U.S. The only way to obtain a warranty that protects against infringement claims originating in other countries is through an express warranty. Most mainframe and midrange system software licenses are worldwide in geographic scope of use and currently benefit from the unlimited implied warranty of noninfringement under existing Article 2. The existing Article 2 unlimited implied warranty should be retained.

Recommendation: Delete subsection (c)(2) to conform to current law. Alternatively, at a minimum, re-word (c)(2) to read "The obligations under subsections (a) and (b)(2) apply to rights arising under the information property laws of any jurisdiction included in the geographic scope of use permitted by the license."

2B-401 (d)

This subsection tells a licensor how it can disclaim the implied warranty of noninfringement under Section 401(a), but does not provide any means for a licensee to avoid its "hold-harmless" infringement obligation under Section 401(a).

Recommendation: This provision should be revised either to make the infringement obligations non-avoidable by both parties, or to provide a means for both parties to avoid their respective infringement obligations.

2B-402 (a) (1)

Subsection (a)(1) now provides that a statement or promise made by a licensor in any manner which relates to the information creates an express warranty, but only if it "becomes part of the basis of the bargain". If this means there is no warranty of conformance to documentation in the event that the user does not see the documentation until after paying the license fee, then this is a flawed rule, since the user almost never sees the documentation before paying the fee and yet expects that the software will conform to the documentation. (Because the current draft no longer contains any implied warranty of conformance to documentation, the existence of an express warranty becomes even more important.) The Reporter's notes acknowledge that there has been some dispute about the meaning of the "basis of the bargain" standard. Rather than leaving it to the courts to decide how the "basis of the bargain" language should be applied to product documentation, this section should be revised to avoid any questions on this issue.

Recommendation: Add the following sentence at the end of subsection (a)(1): "An affirmation of fact or promise made by the licensor in the documentation it provides with a licensed product is part of the basis of the bargain for that product even if the licensee does not have access to that documentation before paying the license fee."

2B-406 (d)

Software is sometimes provided to prospective licensees for a free trial or evaluation period of typically thirty to ninety days, with no obligation to take a subsequent license. This section provides that "there is no implied warranty... with respect to a defect . . . that would have been discovered by the licensee if it had made use of a reasonable opportunity provided to it before entering into the contract . . .". It is questionable how a licensee in a limited time period could be expected to discover defects, the warranty for which is routinely disclaimed by licensors who have the knowledge, resources, and a much longer time to correct.

Recommendation: Delete subsection (d).

2B-609

This Section retains the perfect tender rule only for the "mass market" (which excludes most of business by definition). Other users may refuse only on material breach. This is another example of decreased rights for business licensees versus Article 2.

Recommendation: Delete subsection (d), and delete "In a mass-market license" from subsection (b).

2B-703 (d)

The current draft contains new bracketed language that includes a statement that "limitation of damages where the loss is commercial is not" unconscionable. This appears to create a blanket rule that applies even to limitation of direct damages. The courts should not be straitjacketed with such a rule which may prevent them from doing justice when the circumstances so require.

Recommendation: Delete "but limitation of damages where the loss is commercial is not", but adopt remainder of bracketed language. At a very minimum, the word "consequential" should be inserted before "damages" if the phrase relating to commercial loss is not deleted.

2B-703

This section permits the parties to contractually limit their liability, but does not provide that such a limitation cannot be used to limit a party's liability for infringement indemnification. It is widespread industry practice to "carve out" infringement indemnification obligations from a contractual limitation of liability. Software licensors routinely agree to such a provision, recognizing that it is only fair. Section 703 should be revised to reflect this fundamental fairness and industry practice, and to avoid a trap for unwary licensees who may not have considered the need to include an express carve-out for infringement indemnification.

Recommendation: Add a new subsection (e) as follows: "A contractual limitation of liability shall not apply to limit either party's obligations to the other for infringement indemnification." In addition, add this provision to the Section 2B-106 list of provisions that the parties cannot vary by agreement.

2B-715

This Section ("Right to Possession and Prevent Use") permits self-help repossession or forced discontinuance of the use of software (by electronic means or otherwise), upon the licensor's unilateral cancellation of a license for breach by the licensee. In earlier drafts, Section 715 was supplemented by a Section 2B-716 which put certain restrictions on a licensor's use of electronic means for such self-help. This provision was controversial, in that licensees felt the so-called "protections" against licensor abuse in Section 716 were illusory and needed to be strengthened. As a result of the failure of licensors and licensees to agree on wording for Section 716, the committee decided to simply drop Section 716. However, in doing so and leaving Section 715 intact, the committee has (perhaps inadvertently) given licensors carte blanche to use electronic self-help with virtually no restrictions and no consequences.

[Note: Section 715(b) authorizes a licensor use self-help to prevent continued use of the software "if this can be done ... (1) without a breach of the peace; and (2) without foreseeable risk of personal injury or damage to information or property other than the licensed information." Because electronic self-help can always be done without a breach of the peace, the only limitation on the use of electronic self-help in Section 715 is that there must be no "foreseeable risk of personal injury or damage to information or property other than the licensed information."]

Licensors argue that a provision allowing electronic self-help is necessary to protect them from a licensee's nonpayment. In practice, a purported breach is not likely to involve something as clear-cut as nonpayment. More typically, disputes between licensors and licensees arise over issues such as permitted uses of the software.

For example, a licensee may use the licensed software to process data for its corporate affiliates, which are distinct legal entities. There arises a dispute concerning whether such use is permitted under the license. This involves disagreement about how various definitions and the license grant language should be interpreted, and about the degree of the licensee's control of the corporate affiliates. Both parties have arguable positions and each feels it is acting in good faith. Contrast this with a case in which a financially strapped lessee of equipment willfully elects to default on its lease payments in order to pay another creditor. Should the licensor in the first example be entitled to the same self-help remedy as the lessor in the second example? It is inappropriate to apply in the licensing context the remedies of other commercial transactions in which timely payment is usually the only issue.

electronic self-help is of particular concern to licensees in mainframe and midrange software applications, which are likely to be "mission critical" and apply to an entire corporation, such as corporate payroll, tax accounting, customer claims processing, or safety, health, and environmental systems. Furthermore, replacement software is often either unavailable or very costly and impractical to implement without major business disruption. The balance of harm to be done via exercise of electronic self-help is so overwhelmingly against the licensee that the mere threat of its use puts the licensee in an unfair position. The Draconian remedy of electronic self-help provides the licensor undue leverage in a dispute even if the remedy is not used. Faced with a crippling and possibly even fatal disruption of its business, a licensee could be intimidated into relinquishing license rights and setting up precedents for its further disadvantage. This is because the threat to the licensee is costly, certain and immediate upon exercise of the self-help remedy, while the risk to the licensor that it will be held to have acted improperly is distant, indefinite and discountable.

The concern held by licensees is not theoretical. Using the threat of electronic self-help, licensees already have been subjected to substantial claims for highly dubious alleged breaches, where the amount sought by the licensor is calculated to induce a settlement, versus the cost and risk of litigation.

For the above reasons, Section 715 should provide an outright prohibition on electronic self-help, rather than authorizing it. The current Draft gives carte blanche to the most egregious licensor over-reaching and has huge implications for harm to innocent third parties and the economy.

However, as it has become apparent that the Committee may not consider including such a prohibition in 2B, business licensees might consider supporting a compromise provision permitting electronic self-help under limited circumstances. The compromise provision would have to ensure:

that the licensor would bear full responsibility for the consequences of an improper exercise of electronic self-help. that the licensee would be given effective notice and a realistic opportunity to seek judicial intervention prior to the licensor's exercise of electronic self-help in any given instance; and that electronic self-help would be prohibited unless the licensee had specifically consented to an authorizing provision in the license.

The current draft of Section 715 ensures none of these. Specifically:

  1. Under the current draft, a licensor's exposure to damages for improperly exercising electronic self-help may be totally eliminated by a contractual exclusion of consequential damages, or may be limited to a small dollar amount by a contractual cap on damages.
  2. The current draft does not require the licensor to give any notice whatsoever to the licensee before using electronic self-help.
  3. There is no language in the current draft that requires any authorizing provision in the license to ensure consent by the licensee to this Draconian remedy.

 

Licensor exposure to Damages for Improper Use of electronic Self-Help

It is not only licensees who believe a licensor must be held fully responsible for the consequences of an improper exercise of electronic self-help. A recent letter to NCCUSL from the Ieee-USA (a prestigious national organization of electronics and computer engineers), included the following statement: "Self help protection can adversely affect the health and safety of people and property, and can endanger lives whether intentionally, unintentionally, or improperly activated. Those who embed self help protection in their software must be responsible for its operation, whether inadvertent or intentional and should not be disclaimable. That responsibility should not be limited by privity of contract but should extend to those persons who lawfully obtain the software or reasonably may be foreseen to be users of the software directly or indirectly."

electronic self-help is such a drastic and potentially harmful remedy that if Article 2B is not going to prohibit it, 2B should at least force licensors to think long and hard before using it. If licensors want to act without judicial process and electronically disable software that may be performing critical functions, they should have to be very sure that their claim of material breach by the licensee is meritorious. They should also know they will be held fully responsible for the consequences of their actions if the claim of breach is later determined to be without merit, or if proper procedures are not followed.

Almost all of the damages that a licensee or anyone else would suffer as a result of an improper exercise of electronic self-help would be consequential damages. The vast majority of standard form software licenses contain a provision excluding all liability (of the licensor but not the licensee) for consequential damages. Many also limit the licensor's total liability for damages of any kind to a fairly low dollar amount, often equal to the amount of the license fee. Unless 2B says otherwise, or a creative court finds a way to invalidate the limitation/exclusion, these clauses will exclude or narrowly limit a licensor's liability for improper electronic self-help.

If a licensor can contractually exclude or limit its liability for an improper exercise of electronic self-help, licensors will be able to use electronic self-help with impunity even if the claim of breach by the licensee is meritless. This is why it is so crucial to ensure that a licensor cannot take advantage of contractual limitations or exclusions in this situation. The attached draft provides language addressing this issue.

As suggested by the Ieee, Section 715 should also provide that privity of contract will not be a bar to third parties seeking to hold a licensor liable for damages suffered by them as a foreseeable result of an improper exercise of electronic self-help. The attached draft includes language addressing this issue as well.

ensuring effective Notice and Opportunity to Seek Judicial Intervention

A key problem with the current draft is the failure to require any notice at all, much less effective notice and a timely opportunity to seek judicial intervention. There should be a provision for notice to be received by the appropriate person representing the licensee in an appropriate and timely manner and stating the grounds the licensor believes it has for claiming that the licensee has breached the license agreement before exercise of self-help. Moreover, Section 715 should require compliance with notice provisions regardless of the outcome of the merits of the claim of breach. Further, if the licensee promptly cures its breach upon being notified, the licensor should not be able to proceed with electronic self-help, but should be required to use the normal channels of judicial process. These critical omissions must be corrected if any electronic self-help is authorized by 2B. All of them are addressed in the attached proposed draft of Section 715.

Contractual Term Authorizing Self-Help

The current draft does not require that a provision authorizing self help be included in the contract. Minimally, such a contract provision should be a prerequisite to any use of electronic self-help, and there should be a requirement that the provision be conspicuous and separately authenticated by the licensee.

Other Problems With Section 715

 

  • The word "significant" in subsection (b)(2) should be deleted. A foreseeable risk of damage should be the standard, whether or not the licensor predicts the damage to be significant. This word only invites debate and litigation, and encourages licensors to act when they should hesitate.
  • Section 715 does not make it clear that the licensor has no right to possession or to prevent use (and thus cannot exercise self-help) in connection with software programs as to which no breach has occurred. For example, a company may license several software programs under a single license agreement. The license grant for one program may be a site license and the other may be CPU-based. If the licensee violates the agreement by using the CPU-licensed program on an unlicensed CPU, the licensor should have rights under Sections 715 only with respect to the CPU-licensed program and not with respect to the site-licensed program. The attached proposed draft of Section 715 contains language addressing this issue.

    Summary of Section 715:

    The current draft provides carte blanche for licensors to use electronic self-help and provides virtually no protection for licensees against licensor abuse. Adoption of the attached proposed draft of Section 715 would help resolve the problems discussed above and help prevent abuse of this drastic remedy by licensors.

     

    Conclusion

    Taken as a whole, Article 2B does little more than subtract from the protections available to licensees under the current state of the law. On the other hand, Article 2B provides many advantages to licensors over current law, one of the most significant of which is a uniform law validating shrinkwrap licenses. If Article 2B has any chance of being considered balanced, it must at a minimum correct the significant shortcomings addressed in this statement.

     


SECTION 2B-715. RIGHT TO POSSeSSION AND TO PReVeNT USe.

 

(a) Upon cancellation of a license, the licensor has the right:

    (1) to possession of all 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; and

    (2) to prevent the continued exercise of contractual and informational rights in the licensed information under the license.

(b) A licensor may exercise its rights to possession and to prevent use under subsection (a) without judicial process only if this can be done:

    (1) without a breach of the peace;

    (2) without a foreseeable risk of personal injury or damage to information or property other than the licensed information; and

    (3) when applicable, in compliance with subsection (c).

(c) If the licensed information is not informational content, but is rightfully used in, and is material to, the business of the party in breach, the licensor may use electronic means to exercise its rights under subsection (a) only if:

    (1) the licensor obtains physical possession of a copy without a breach of the peace and the electronic means are used with respect to that copy; or

    (2) the following conditions are met:

     

      (A) a license term that is conspicuous and which is separately authenticated by the licensee authorizes use of electronic means;

      (B) the licensor gives notice of the specific grounds for claiming a material breach by the licensee and of its intent to use the electronic means, and the notice is:

       

        (i) given in a record other than an electronic message;

        (ii) directed to a person designated by the licensee in the license for this purpose or, in the absence of a designation, to a senior information systems officer in the case of a corporate licensee, or to the managing partner or managing agent in the case of a non-corporate licensee; and

        (iii) given in a manner reasonably calculated to provide timely, actual notice to the licensee; and

        (iv) received by the licensee not less than 10 business days before the electronic means are utilized;

      (C) the licensor complies with license terms that specify a particular manner of giving notice that complies with subsection (c)(2)(B)(iii) or a longer time period than that in subsection (c)(2)(B)(iv); and

      (D) the licensor acts without knowledge that the licensee has cured its breach.

(d) A party has a right to an expedited judicial hearing on prejudgment relief to enforce or protect its rights under this section. In a judicial proceeding, a court may enjoin a licensee in breach of contract from continued use of the information and the informational rights and may order that the licensor or a judicial officer take the steps described in Section 2B-627.

(e) An action that violates subsection (b) or (c) of this section is a breach of contract by the licensor taking that action. Damages recoverable for such a breach shall not be subject to any limitation or exclusion contained in the license. In addition, the licensor is liable to third parties for injury or loss resulting from such a breach if the injury or loss was reasonably foreseeable by the licensor at the time the electronic means was used.

(f) The licensee cannot waive or agree to limit the protections of this section except with respect to a particular breach of the license after that breach is alleged to have been committed by the licensee. Any such waiver or agreement must be in a record authenticated by the licensee.

(g) The right to possession under subsection (a) is not available to the extent that the information, before breach of the license and in the ordinary course of performance under the license, was so altered or commingled that the information is no longer reasonably identifiable or separable from other information.

(h) When separate items of information are included under a single license, the rights to possession and to prevent use under subsection (a) do not include those items of information as to which no breach has occurred.

(i) A licensee that provides information to a licensor subject to contractual restrictions on the use of that information has the rights and is subject to the limitations of a licensor under this section with respect to the information it provided, and the licensor shall be treated as a licensee with respect to that information.


UCITA Pages On
James S. Huggins' Refrigerator Door

UCITA: Uniform Computer Information Transactions Act 
(This is the primary UCITA page.)
 
Home Box Office
Memo Spring 1998 (?)
 
45 Professors of Contracts and Commercial Law Letter 16.Jul.1999
 
Motion Picture Association of America Letter 10.Sep.1998
 
50 Intellectual Property Law Professors Letter 17.Nov.1998
 
Motion Picture Association of America Letter 09.Nov.1998
 
American Bar Association Letter 10.Jun.1999 
 
Motion Picture Association of America Letter 07.Dec.1998
 
American Committee on Interoperable Systems Letter 13.Jul.1998
 
Motion Picture Association of America Letter 10.May.1999
 
American Committee on Interoperable Systems Letter 07.Oct.1998
 
Movie, Publishing and Broadcasting Industry Letter 10.Sep.1999
 
American Committee on Interoperable Systems Letter 21.Jun.1999
 
National Music Publishers Association Letter 21.Jan.1999
 
American Committee on Interoperable Systems email 15.Jul.1999
 

Opposition Summary 
 
American Law Institute Letter 26.Mar.1999
 
 
Pamela Samuelson Letter 09.Jul.1999
 
Association of the Bar of the City of New York Report 21.Jun.1999
 
Principal Financial - Introduction to UCITA
 
 
Attorneys General Letter 23.Jul.1999
 
Principal Financial - Summary of UCITA
 
 
Attorneys General Letter 28.Jul.1999
 
Recording Industry Association of America Letter 09.Oct.1998
 

Attorneys General Letter 23.Jul.1999 
 
 
Sample Letter 


Caterpillar Statement 1999
 
 
Security Mutual Insurance Letter 26.May.1999
 

Consumer Groups Letter 10.Nov.1998 
 
Society for Information Management Letter 23.Mar.1998
 
 
Consumers Union Letter 08.Oct.1998
 
 
Society for Information Management Letter 08.Oct.1998
 
 
Consumers Union Letter 21.Jun.1999
 
Software engineering Institute Letter 01.Jun.1999
 
Digital Future Coalition Letter 23.Jun.1999
 
 
swtest-discuss Letter 20.Nov.1998
 

Digital Future Coalition Page Fall 1999
 


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