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Presentation at the April 2000 seminar on the CISG in Vienna, sponsored by the International Bar Association (IBA) and the Willem C. Vis Moot Alumni Association (MAA). Reproduced with permission of 4 Vindobona Journal of International Commercial Law and Arbitration (2000) 3-29, see also [2000] Business Law International 359.

Chaos versus uniformity: the divergent views of software in the International Community

Trevor Cox [1]

I. Introduction

II. International Law
      A. Software on a disk
           1. Applicability of the CISG
           2. Limitations on the applicability of the CISG
      B. Electronic software
           1. Applicability of the CISG
           2. Limitations on the applicability of the CISG

III. E.U. Law
      A. E.U. member states
           1. United Kingdom
           2. Finland
           3. Germany
      B. The E.U. position
           1. International electronic deliveries
           2. E-commerce directive

IV. United States and UCITA
      A. Procedural history of UCITA
      B. Specific provisions of UCITA
           1. Scope of UCITA
           2. Interpretation and requirements of a license
           3. Private contract law in relation to intellectual property law
           4. Choice of law
           5. Electronic records and authentication
           6. Electronic agents
           7. Shrink wrap licenses and Internet transactions
           8. Warranties
                a. General warranties
                b. Implied warranty: Information content
                c. Implied warranty: System integration
                d. Correction and support agreements
           9. Ownership of information rights and a copy
           10. Inability to reject information
           11. Access contracts
           12. Automatic survival terms
           13. Self-help and technical restraints
      C. International relevance of UCITA

V. Conclusion


I. INTRODUCTION

The world is wired with computers, cell phones, and handheld organizers; all of which are connected to each other by the Internet. Businesses and consumers from every country are using the Internet to conduct international transactions and access information. The dissemination of information on the Internet is leading the world into a "second industrial revolution," in the form of the information industry. Software is one of the foundations for the information industry. Software resides in an intangible realm that was not acknowledged by society prior to its invention, depriving society of the words and concepts to understand the nature of software. Since the limits of our language are the limits of our world,[2] there is an ongoing struggle to understand how software fits into society's existing structures. The struggle to understand software also exists in the legal community. The existing contract laws generally categorize the world into either a contract for goods, or for services. While these two categories served the legal community over the years, software challenges the established legal categories, since software cannot easily be categorized as goods or services. Software can be delivered via the Internet ("electronic software"), mass-produced and delivered on a disk, or custom designed for a particular party. To recognize the unique nature of software, the legal community has modified the existing contract principles and has created new contract principles. Through this process, a new type of contract has emerged. These contracts are license agreements. The concept of licensing software has evolved from intellectual property rights and the means by which these intellectual property rights are conveyed to another party. While the distinction received little attention in the past, the legal community is beginning to acknowledge and consider the fact that the underlying intellectual property rights in software are not sold with most software transactions; instead, a software vendor grants a license to make certain uses of the software. For example, the license agreement accompanied with Microsoft Windows 98 states "The SOFTWARE PRODUCT is licensed, not sold." License agreements also contain other provisions intended to address the unique nature of software, which will be discussed in this article.

Even though the software industry has modified existing contract principles and has created new contract principles, the existing uniform contract laws do not recognize or address these developments. So, the legal community struggles to determine how to conceptualize software to fit into the existing legal structures. This struggle is most apparent with electronic software. Some of the issues being considered with electronic software include: (1) should all software be treated the same regardless of the means of delivery, (2) can electronic software fit into the definition of a good, or should electronic software be considered a service, and (3) should there be a new body of contract law for software?

The international community is debating the answer to these questions. As one of the fundamental goals of international law, the international community is striving for uniformity in the application of international contract law as it is expressed in the 1980 United Nations Convention on Contracts for International Sale of Goods ("CISG ").[3] Unfortunately, countries are not treating electronic software consistently. Depending on the jurisdiction, the same software is treated as the sale of goods, or the providing of services. To complicate matters even more, the United States is beginning to adopt a new body of contract law where software would no longer be treated as goods, or services. With these diverging approaches to software, there is an emerging state of chaos with contract law for software and the entire information industry.

This article examines the treatment of software contracts in international law, in the European Communities and the European Union ("E.U."), and in the United States of America ("U.S."). This article illustrates how these emerging legal structures are leading to legal uncertainty in the information industry. Section I examines the treatment of software under international law. Section II examines how the E.U. is treating software. While the E.U. is drafting directives to address electronic commerce and related issues, an examination of the laws of E.U. Member States ("Member States") is essential because the extent to which the E.U. will address contract law is uncertain. Section III examines the treatment of software in the U.S. This section will focus on a new body of law entitled the Uniform Commercial Information Transaction Act ("UCITA") to show how UCITA is specifically designed to address software and the Internet.[4]

II. INTERNATIONAL LAW

The CISG is the main body of international contract law. The CISG stands alone as the only body of international contract law that has been formally adopted by the international community. The goal of the CISG is to promote uniformity in international contract law so that there is certainty in the rules that govern transactions between parties.[5] The CISG applies to the sale of goods between parties whose places of business are in different States.[6] By its own terms, the CISG does not apply to service contracts.[7] When a contract is for services, the contracting parties must look to the applicable domestic law of the contracting parties where contracts can be subject to varying and sometimes inconsistent rules. The CISG is also silent on the issue and extent to which it applies to software contracts, because at the time of the drafting of the CISG, the countries could not have anticipated the impact of the software industry or the Internet. Since there is no international contract law specifically intended for software contracts, the issue is the extent to which the CISG applies to software contracts. This section discusses (1) whether the CISG applies to a software contract where the software is delivered on a disk, and (2) whether the CISG would apply to electronic software.

A. Software on a Disk

Software delivered on a disk looks similar to any other good subject to the CISG. A compact disk, a car, and a television all share the same basic characteristics as software on a disk. Nevertheless, software has caused a debate in the international community on whether software is a good.[8] Courts and commentators have looked at software from many different perspectives to determine whether the CISG should apply. Ultimately, the general consensus is that the CISG should apply to software on a disk.[9] This section begins with a discussion of the means by which courts and commentators have determined the applicability of the CISG to software on a disk. The second part discusses the limitations on generally applying the CISG to software on a disk.

1. Applicability of the CISG

The obvious place to begin is with the definition of a good. Since CISG does not define a good, commentators have focused on, but have found little guidance in, looking at different translations of the term "good " into various languages to find its essential meaning and scope.[10] Based on this analysis, commentators have concluded that goods under the CISG are essentially movable and identifiable separate objects.[11] Software meets this criteria, because a particular software program can be placed on a disk and transferred to a different location.

Even though software is movable and identifiable, the question has been raised whether the CISG should apply to intangible property that can be separated from the tangible good in order to be used. With software, the underlying intangible property is usually separated from the good after delivery. When the buyer receives the software, the buyer usually does not use the software contained from the disk. Instead, the buyer usually loads the software onto a computer. So, the good and the copy of the software contained on the good are mere conduits for the ultimate use by the buyer.

There is some support for the idea that certain types of intangible property are not covered by the CISG.[12] A German court noted that a market study does not constitute a good under the CISG, because a market study is intangible property.[13] Commentary has also noted that other intangible property rights, such as know-how, are not goods under the CISG.[14] Based on this analysis, if software were considered a separable intangible property that exists independently of the disk, then the CISG would not apply to software.[15] Even though there is some support for the idea that intangible property should be excluded from the CISG, the majority of courts and commentators have generally dismissed this idea.[16] The general view is that software is a good because the software is incorporated into a tangible good.[17] Software should not be treated differently from any other goods that have intangible properties incorporated in them. Since items such as compact disks, video tapes, and books are considered goods, software on a disk should also be considered a good.

This approach is also consistent with the need to promote uniformity in international trade. If software was not treated as a good under the CISG, then a large segment of international trade would be without a uniform body of contract law. Thus, the general view is that software on a disk is a good and that the CISG applies to this software.[18]

2. Limitations on the Applicability of the CISG

When looking at the need for uniformity in international law, the international community should consider the potential limitations of the CISG with software. There are two noteworthy limitations on the extent to which the CISG applies to software contracts. First, courts and commentators have acknowledged that custom software does not fall under the CISG.[19] For software that is custom designed according to specifications, the contract is generally considered to be a service contract.[20] Without a uniform body of international contract law for services, there is still a limitation on the goal of uniformity in international law. So, the parties must look to the applicable domestic law as it applies to custom software.

Secondly, consumer contracts are excluded from the CISG.[21] With software delivered on a disk, this limitation is less relevant because software vendors usually distribute software through resellers and distributors located in the country where the consumer is located. However, this limitation should be noted as another factor limiting the CISG, especially in light of the need to treat software uniformly.

While there are some limitations of the application of the CISG to software, the goal of uniformity in international law can be accomplished with software on a disk. There is currently no real controversy in international contract law that the CISG applies to software delivered on a disk. The CISG is sufficient to address the basic issues involved with software on a disk. However, another question is emerging in international contract law, which is the extent to which the CISG should apply to the same software delivered by different means. The goal of uniformity will not be accomplished if the same software is treated differently based on the means of delivery.

A. Electronic Software

Even though the issue has been around for years, electronic software has received little attention in the international community. The CISG provides little guidance on whether the CISG applies to electronic software. Since the CISG is silent on the issue, courts and commentators have searched for a means to conceptualize how electronic software should be treated. This section begins by discussing the applicability of the CISG to electronic software. The second part discusses the limitations on applying the CISG to electronic software.

1. Applicability of the CISG

The essential difference between software on a disk and electronic software is that electronic software is not delivered embedded in a tangible good. Electronic software is transmitted electronically. This difference distinguishes electronic software from the reasoning associated with the CISG's application to software on a disk. Courts and commentators argue that software is a good, even though it is an intangible property, because software is embedded in a good similar to compact disks and video games.[22] Since this reasoning does not apply to electronic software, another rationale must be applied to include electronic software in the CISG.

One means used to assess whether the CISG applies to electronic software is to look at other exclusions from the CISG in order to shed some light on the intended scope of the CISG. For example, electricity is specifically excluded from the CISG.[23] Some commentators have analogized to this exclusion to argue that electronic software should be excluded from the CISG. However, this analogy is problematic, because the CISG Commentary explains that the exclusion of electricity was due to unique problems with electricity which were not present with typical international sales of goods.[24]

As another analysis of the issue, other commentators have suggested that the CISG should apply to electronic software, arguing that the means of transmission is irrelevant.[25] The argument is that the same software should not be treated differently based on whether the software is delivered on a disk or transmitted electronically, since the buyer's intent is the same. Commentators bolster this argument by asserting that the goal of uniformity in international law dictates that the definition of a "good" should be broadly defined to include electronic software.[26]

Beyond theoretical arguments and analogies, the CISG must be able to adequately address the basic contract issues related to electronic software. One of the advantages of the CISG is the broad scope of its application. When originally drafted, the CISG had to be broad enough to meet the various legal requirements in each country. This broad scope easily lends itself to addressing many of the legal issues relating to electronic software and the Internet. For example, a contract under the CISG is not subject to any formal requirements to evidence its validity,[27] including the need for a tangible "written document " or a signature. So, there are valid arguments for the CISG applying to electronic software.

2. Limitations on the Applicability of the CISG

The CISG has certain limitations that effectively limit its ability to be the unifying body of international contract law for electronic software. The limitations relate to the CISG's ability to address the unique issues with electronic software and the express limitations in the CISG's scope.

The CISG does not specifically address emerging contract issues unique to electronic software and the Internet. For example, the CISG does not address: (1) conclusion of contracts between electronic agents, (2) the validity of contract terms posted on an Internet site, and (3) the relationship between ownership of a copy of software and the underlying intellectual property rights. These issues and other related issues will be addressed in section 3. While the CISG may be stretched to address some of these issues, the international community may need to recognize that these unanswered questions may result in different rules applying in different jurisdictions as courts begin to interpret the CISG.

The CISG also excludes consumer contracts, which severely limits its applicability to electronic software and the Internet.[28] With the Internet, software can be delivered instantaneously to a consumer or a business anywhere in the world. International contract law is no longer simply a business endeavor as was the case when the CISG was drafted. Consumers are conducting international transactions on a daily basis. Software vendors no longer need to rely on distributors and resellers in the country where the consumer is located. However, with both consumers and businesses purchasing software electronically, software vendors will have a significant problem determining which law will apply to a transaction, and may choose to exclude application of the CISG to contracts to avoid this dilemma.

Finally, the CISG may be conceptualized out of existence with electronic software, because of the emerging treatment of electronic software under domestic laws. As will be discussed in the next section, the E.U. is treating electronic software and other Internet transactions as a service. If the E.U. treats electronic software as a service under domestic laws, court and commentators in the E.U. will have a difficult time justifying treating electronic software as a good under the CISG. While the underlying goal of the CISG is to avoid interpretation based on domestic laws, the reality is that certain fundamental differences cannot be logically avoided.

Based on the limitations in the applicability of the CISG to electronic software, the international legal community is going to have a difficult time deciding how to address electronic software. The international community may need to consider adopting a new body of law applicable to all software, electronic software and/or all Internet transactions.

III. E.U. LAW

The E.U. produces 33 per cent of the world's software, and has been active in creating the contract rules for software.[29] The general consensus in the Member States is that the sale of software on a disk is the sale of a good.[30] The Member States also generally recognize that custom designed software is a service.[31] However, there is some uncertainty related to the treatment of electronic software.[32] The Member States have taken different positions on the issue of electronic software and have even used different reasoning to reach the same conclusion. While the E.U. is considering harmonizing certain rules for Internet transactions, the E.U. position on electronic software and contract law is unclear.

This section begins with a brief look at how three Member States currently treat electronic software under their domestic laws. These three Member States show the different conclusions and reasoning behind the treatment of electronic software. The second section discusses the emerging position on the E.U. level with the E-Commerce Directive.

A. E.U. Member States

1. United Kingdom

In the United Kingdom ("U.K."), St Albans City and District Council v. International Computer Ltd ("St Albans") is the first case to address the issue of electronic software.[33] Sir Iain Glidewell in the St Albans case discusses whether electronic software constitutes a good under the Sale of Goods Act of 1979. Sir Glidewell focuses on the definition of a good, which is "all personal chattels other than things in action and money,"[34] to conclude that software without a disk is not a good. In the St Albans case, an employee of the software vendor went to the premises of the other party and installed software on a computer system. Based on the act of the employee personally installing the software rather than delivering the software on a disk, Sir Glidewell concludes that the software contract is not the sale of a good.[35]

Based on the St Albans case, commentators conclude that electronic software, including downloading of software from the Internet, is a contract for the supply of a service and is not a contract for the sale of a good.[36] The conclusion of Sir Glidewell and the commentators are premised on the definition of a good under the English Sale of Goods Act of 1979. While this is certainly one means of addressing the issue, it leaves open the question of whether a contract law for goods or for services is adequate to address electronic software.

2. Finland

In Finland, there is no legislation related to electronic software.[37] The case law in Finland has also declined to address electronic software. The Finish legislature and courts have apparently decided to wait for direction from the E.U. before deciding any issues related to electronic software.[38] However, the commentary has suggested that electronic software is not a good for the purposes of contract law for two reasons. First, a software vendor is not selling anything with electronic software. The software vendor is simply granting a license to make certain uses of the software. Without a disk being sold in which the software is embedded, there is no sale in the transaction. Secondly, there is no good involved with electronic software because the software is delivered electronically and is not delivered on a tangible disk.[39]

The distinction drawn in Finland is in part based on how the software is delivered. If the software is on a disk, then the software vendor is selling a good. If the software is delivered via the Internet, then the software vendor is providing a service. This approach raises the question of whether software should be treated differently based on how it is delivered. The focus is no longer on what is being acquired, which is software. Instead, the focus has moved to the means of delivery.

3. Germany

The consensus under German law currently is that electronic software is considered a good and falls under section 90 of the German Civil Code.[40] The German Federal Supreme Court (BGH) indirectly reached this conclusion based on the intention of the party acquiring the software. The BGH starts from the premise that the sale of software on a disk is the sale of a good. Since the lack of a disk does not change the intentions of the parties for obtaining the software, electronic software should be considered the same as software on a disk. The BGH also pointed out that electronic software delivered to a hard drive can easily be transferred to a disk.[41]

German commentators have also reached the conclusion that electronic software is a good. Commentators argue that software should not be treated differently based on the means of delivery.[42] Other German commentators have reached the same conclusion reasoning that all software is a tangible good because the software is fixed in a hard drive.[43] By implication, electronic software is a tangible good, because the electronic software is also fixed in the hard drive of the computer. So, the current position of German courts and commentators is that the contract laws for the sale of goods applies to electronic software.

B. The E.U. Position

The E.U. has a difficult task in harmonizing the rules for electronic software because the positions of the Member States are divergent. Nevertheless, the E.U. has impliedly concluded that electronic software is a service. In fact, the E.U. has proposed that the international legal community should treat all transactions where the item being contracted for is delivered electronically via the Internet ("electronic deliveries") as a service. However, the E.U. has not taken a clear position on the extent to which this position affects the Member States' contract laws. This section will discuss the E.U.'s position at the international level on the treatment of electronic deliveries, and by implication, electronic software. This section continues by discussing the draft European Parliament and Counsel Directive on certain legal aspects of electronic commerce in the Internal Market ("E-Commerce Directive") to determine the extent to which the E- Commerce Directive affects the Member States' contract laws.[44]

1. International Electronic Deliveries

The E.U. submitted its position on Internet transactions at the World Trade Organization Ministerial Conference in 1999.[45] The E.U. expressed the view that Internet transactions should be treated differently depending on the means of transmission. The E.U. position is that items purchased on the Internet, but delivered in a tangible form, fall within the scope of the General Agreement on Tariffs and Trade with Goods ("GATT"). On the other hand, a transaction where the item is delivered electronically is deemed a service, and would then fall within the scope of General Agreement on Trade in Services ("GATS").[46] The E.U. position on electronic delivery has serious implications for the international community. If the international community was to adopt this position for electronic deliveries, then courts and commentators would have a difficult time justifying including electronic software under the CISG. They would inevitably have to conclude electronic software is a service. As there is no body of international contract law for services, the goal of uniformity would be seriously undermined.

2. E-Commerce Directive

The E-Commerce Directive sheds more light on the E.U. position that electronic deliveries are a service. The E-Commerce Directive treats electronic deliveries as an Information Society Service, which is a concept that was introduced in past directives. E-Commerce Directive Article 2 defines Information Society Services as "services" as defined in Article 1(2) of the E.U. Directive related to information and technical standards ("Technical Standards Directive").[47] "Service" is defined as "any Information Society service, that is to say, any service normally provided for remuneration, at a distance, by electronic means and at the individual request of a recipient of services."[48] So, the fundamental requirements of an Information Society Service are: (1) a service; (2) at a distance; (3) by electronic means, and (4) at the individual recipient's request.

In order to provide guidance, the Technical Standards Directive and E-Commerce Directive provide specific examples of what is and what is not considered an Information Society Service. Appendix V of the Technical Standards Directive provides numerous examples of services that are not Information Society Services.[49] The E-Commerce Directive also lists specific activities that are not Information Society Services. These activities include: (1) "delivery of goods," (2) off-line services, (3) radio broadcasting, (4) personal e-mails, and (5) a contract between an employer and an employee.[50]

Beyond examples, the E-Commerce Directive also carves out specific fields of activities that are not Information Society Services. The fields of activities that are exempted include (1) requirements applicable to the goods as such, (2) requirements applicable to the sale of goods, and (3) requirements applicable to services not provided by electronic means.[51]

Finally, the E-Commerce Directive lists examples of activities that are Information Society Services. These activities include contracts where the service provider is: (1) providing on-line information, (2) the means to research and retrieve data from the Internet, and (3) point to point transactions, including video on demand, and commercial communications by e-mail.[52]

Based on the definition of Information Society Services and the various examples, electronic software is an Information Society Service. However, delivery of software on a disk would not be considered an Information Society Service. The E.U. is leaving to the Member States to decide the rules applicable to software on a disk. Since the Member States treat software as a good, this exemption is likely to have little impact on uniform treatment of software in the Member States.

After establishing that electronic software is an Information Society Service, the next issue is to determine the rules established by the E-Commerce Directive for electronic software. The E-Commerce Directive does not address basic contract law issues such as performance, breach of contract, damages, and other basic contract issues. Instead, the E-Commerce Directive addresses consumer protection issues, and basic issues related to validating Internet contracts, including:

(1) general information that service providers must make generally available on the Internet,[53]

(2) the information which must be contained within a commercial communication from a service provider,[54]

(3) rules for spam e-mails and other unsolicited commercial communications,[55]

(4) recognition of the validity and legal effectiveness of contracts concluded by electronic means, including electronic signatures,[56]

(5) information from the service provider on the procedures for concluding a contract, including changing personal information and the language of the contract, and

(6) procedures for acknowledging receipt of orders and when the orders are deemed received.[57]

Even though the E-Commerce Directive is more focused on protecting and providing information to the end user than establishing rules for contract law, the underlying conclusion is that electronic software and all electronic deliveries are Information Society Services. Courts and commentators will logically be forced to conclude that a transaction for electronic software is a service contract. Since the E-Commerce Directive is not trying to create a uniform body of contract law for electronic software, or the Internet in general, the international community will have to watch the development of contract law in the Member States to determine how the Member States will treat electronic software. The Member States could develop principles for electronic software under the laws for service contracts, or could decide to establish entirely new bodies of contract law for software, electronic software and/or Internet transactions.

IV. UNITED STATES AND UCITA

Almost fifty per cent of the world's software is created in the United States.[58] With software being such a large part of the United States economy, the courts have addressed whether software is a good or a service. Under the current laws, the courts and commentators in the United States have concluded that software on a disk is a good and that custom software is a service.[59] The issue of electronic software has received little attention because of the discussions surrounding UCITA. However, based on the current reasoning of the courts, Uniform Commercial Code ("UCC") Article 2 governing the sale of goods would apply to electronic software.[60] Courts have reasoned that the term "goods" must be liberally construed to encompass all personal property that is transferable and identifiable except for the items expressly excluded from UCC Article 2.[61]

Contract law in the United States is in the process of undergoing a fundamental change. With UCITA, the U.S. will have a body of contract law designed specifically for software, the information industry and the Internet. UCITA ends the debate surrounding whether software is a good or service. Instead, UCITA creates a third conceptual category called "computer information." UCITA also ends the debate related to whether software is sold or licensed. UCITA applies to a computer information contract regardless of whether the owner of the computer information specifically licenses the computer information or whether the owner is silent on the scope of the license and simply "sells" the copy of the computer information. However, to protect the computer information owner, UCITA clearly establishes the relationship between selling a copy of computer information, and retaining the underlying intellectual property rights in the computer information. Over a nine-year process, the arguments related to the need for UCITA have been refined.

Initially, the arguments surrounding UCITA were whether software was a good or a service, and whether a body of law applicable to the sale of goods could apply to software. Over time, the arguments have evolved into a discussion of whether a new body of contract law is necessary for computer information, the information industry, and the Internet. The question is whether the information age and computer information have so fundamentally changed our concept of the world that laws designed for the manufacturing industry are insufficient to address the new legal issues.[62]

The first part of this section begins with a brief discussion of the procedural background of UCITA. The second part discusses some of the provision in UCITA that address the unique issues with computer information and the Internet. Finally, this section discusses the international relevance of UCITA.

A. Procedural History of UCITA

UCITA was adopted on July 29, 1999 by the National Conference of Commissioners on Uniform State Laws (NCCUSL). NCCUSL has submitted UCITA for consideration and adoption by the legislatures in the fifty states of the United States as well as Puerto Rico, the District of Columbia, and the U.S. Virgin Islands.

Although UCITA was previously entitled UCC Article 2B ("Article 2B"), certain procedural limitations prevented UCITA from becoming part of the UCC along with UCC Article 2 related to the sales of goods, and UCC Article 2A related to the lease of goods. In order to be part of the UCC, the NCCUSL and the American Law Institute (ALI) must jointly approve a proposed uniform law. Since the ALI decided that it was not ready to adopt UCC Article 2B until Spring 2000 or even later, the NCCUSL decided to proceed by changing the name and adopting UCITA at the NCCUSL annual meeting in July 1999 without the approval of the ALI. The NCCUSL's stated reason for bypassing the UCC process was that NCCUSL expressed a desire to deviate from the constraints of harmonizing UCC Article 2B with the rest of the UCC.[63] However, critics argue that NCCUSL proceeded without the ALI, because the ALI was ultimately not going to adopt Article 2B.[64]

At present, UCITA has been adopted by the states of Virginia and Maryland. Other states are considering adoption of UCITA including Hawaii, Illinois, and Oklahoma. While the major software producing states, including California, Washington, New York, Texas, and Massachusetts are not currently considering adoption of UCITA in the legislature, the software industry in these states will likely push for UCITA's adoption in the near future. The adoption of UCITA is going to be a state by state battle. Many groups oppose UCITA, basing their opposition on a misunderstanding of the nature of UCITA and contract law.

B. Specific Provisions of UCITA

1. Scope of UCITA

UCITA applies to computer information transactions. In order to understand the meaning of what constitutes a computer information transaction, it is necessary to look at the building block definitions of "information" and "computer information."

Information is defined as "data, text, images, sounds, mask works, or computer programs, including collections and compilations of them."[65] Information would include books, music, movies, video games, software, pictures, and other forms of information. After understanding the definition of information, the next step is to understand how the definition of computer information further narrows the scope of UCITA. Computer information is defined as "information in electronic form which is obtained from or through the use of a computer or which is in a form capable of being processed by a computer."[66] So, computer information must be information that is in electronic form with the assistance of a computer. Based on this definition, books in a tangible form, painting on a mural, and other information that does not involve a computer are eliminated from the scope of UCITA.

After understanding the definitions of information and computer information, a computer information transaction is simply defined as "an agreement or the performance of it to create, modify, transfer, or license computer information or informational rights in computer information."[67] So, for example, UCITA would apply to all software, online publications and other online text, digital multimedia works, access contracts to information on the Internet, and other similar transactions where the information is in electronic form and requires the assistance of a computer. Generally, information on the Internet would be included in UCITA since by the nature of the Internet, the information is in electronic form and requires a computer to access the information. However, there are specific exceptions to the scope of UCITA. Some of the exceptions include:

(1) financial services transactions;[68]
(2) audio or visual programming that is provided by broadcast, satellite, or cable;[69]
(3) motion pictures;[70]
(4) sound recordings, and other musical works;[71]
(5) employment contracts;[72] and
(6) contracts where the computer information is incidental to the sale of a good, including computer information embedded in a car, or airplane.[73]

The most notable exceptions to the scope of UCITA include motion pictures and sound recordings. These exceptions were demanded by the movie and music industries, and will certainly leave a large portion of Internet transactions to develop under a separate body of contract law. Presumably, the music and movie industries are going to apply laws applicable to the sale of goods to contracts via the Internet.

Unfortunately, UCITA is too limited to achieve its original objective of applying to all Internet transactions. However, this limitation was due to many industries trying to be excluded from UCITA, including the book industry, movie, and music industry. These industries have shown a general fear and a lack of initiative with the Internet. Throughout the development of the Internet, these industries have fought innovation. Nevertheless, over time, it is possible that these industries will see the need for and the reasoning behind UCITA.

2. Interpretation and Requirements of a License

To understand UCITA, it is necessary to understand the nature of the rights granted by the government in computer information, and the means by which the possessor of these rights allow others to exercise these rights. When information is created, the government grants certain rights to protect the economic value and moral rights in the information. Under UCITA, these rights are generally referred to as information rights. Information rights include "all rights in information created under laws governing patents, copyrights, mask works, trade secrets, trademarks, publicity rights, or any other law that gives a person, independently of contract, a right to control or preclude another person's use of or access to the information on the basis of the rights holder's interest in the information."[74] The owner of these information rights can exercise certain control over the information rights. For example, in the United States, the copyright laws grant a copyright holder six basic rights in copyrighted information, including the right to (1) reproduce the copyrighted information, (2) prepare derivative works of the copyrighted information, (3) distribute copies to the public, (4) publicly perform the copyrighted information, (5) display the copyrighted information publicly, and (6) for sound recordings, publicly perform the copyrighted information by means of a digital audio transmission.

The possessor of information rights may grant to another person the right to exercise one or all of these rights.[75] The means by which these rights are granted to another party is a license. UCITA defines a license as "a contract that authorizes access to, or use, distribution, performance, modification, or reproduction of information or informational rights, but expressly limits the access or uses authorized or expressly grants fewer than all rights in the information, whether or not the transferee has title to a licensed copy."[76] In the situation where a right holder is granting something less than all of the rights to information, the right holder is licensing the information.

Prior to the software industry and the Internet, information rights and the means by which these rights were transferred did not receive a great amount of attention in the legal community or in the general public. This lack of attention can be attributed to reliance on the general exceptions to information rights carved out by the government. With copyright laws, some of the exceptions include the first sale doctrine to distribute individual copies, and fair use for educational and for other purposes.[77]

With the emergence of the software industry and the Internet, there has been a focus on information rights. The extent of information rights has become increasingly important and obvious to the general public, because the nature of the Internet allows for instantaneous access, copying and distribution of software to potentially millions of people. For example, a licensor must decide whether to allow licensees to freely distribute copies of a software program via the Internet, or to download or print the information. UCITA is the first attempt to create a uniform contract law related to licensing of information rights. UCITA recognizes and attempts to codify the practices established in the software industry and extends these principles to the developing practices on the Internet.

3. Private Contract Law in Relation to Intellectual Property Law

UCITA recognizes the tension in the United States between license agreements and intellectual property law.[78] The issue is the extent to which a licensor can use contract law to extend the licensor's control over computer information. UCITA makes it clear that the principles of private contract law cannot override the balance established by the government between an information right holder and the general public.[79] If the intellectual property law creates a specific exemption to the informational rights granted to a information right holder, then the licensor will likely not be able to circumvent this exemption by private contract law. For example, under the recently amended U.S. Copyright Act, a licensor cannot prevent a licensee from reverse engineering software for the purposes of achieving interoperability.

On an international level, this limitation could be extended to apply to the intellectual property laws in other countries. A court may find that the same principles apply to provisions of the E.U. Computer Program Directive which allow for reverse engineering in certain circumstances. The balance of information rights granted by the E.U. will likely prevail over the terms of a private contract.

4. Choice of Law

UCITA allows the parties to determine the applicable law in both business contracts and consumer contracts.[80] However, with consumer contracts, the choice of law is not enforceable to the extent that the laws where the consumer resides do not allow for the modification of the rules applicable to consumer contracts. So, UCITA allows for jurisdictions to protect consumers by providing for specific consumer protection laws that cannot be varied by contract.[81] This approach provides a level of comfort for jurisdictions that fear consumer protection will be lost on the Internet.

Without the parties choosing the applicable law, the default rule varies depending on the type of contract. For access contracts and electronic delivery of computer information, the laws where the licensor is located are applicable. For consumer contracts where delivery is required by a tangible medium, the law where the consumer is located is applicable. For all other contracts, the jurisdiction with the most significant relationship to the transaction controls. However, for the default rule to apply, the applicable jurisdiction must provide substantially similar protections and rights as are provided under UCITA.[82] The extent and application of this provision will likely be sorted out in the courts. The phrase "substantially similar protections and rights" could be broadly or narrowly interpreted. It is unclear whether the potentially applicable law must (1) recognize the enforceability of shrink wrap licenses, (2) recognize contracts between electronic agents, (3) recognize the enforceability of pre-transaction disclosures, (4) recognize that confidentiality or noncompetition clauses survive termination of a contract, or (5) recognize the validity of self-help. All of these concepts are discussed below.

5. Electronic Records and Authentication

UCITA introduces the concept of a record, which is an extension of the concept of a written document, to include storing the terms of a contract in electronic form.[83] UCITA also introduces the concept of authentication, which simply recognizes the concepts of digital and electronic signatures.[84] Without going into great detail, UCITA simply states that a record and authentication are not denied legal effect or enforceability simply because of a contract's electronic nature.[85]

6. Electronic Agents

UCITA recognizes that electronic agents can conclude and perform contracts.[86] Electronic agent is defined as "a computer program, or electronic or other automated means, used by a person to initiate an action, or to respond to electronic messages or performances, on the person's behalf without review or action by an individual at the time of the action, or response to a message or performance."[87] UCITA specifically recognizes that human interaction, or human review of the contract terms are not necessary to form a contract.

7. Shrink Wrap Licenses and Internet Transactions

UCITA recognizes two particular situations in which a licensee may enter into a contract beyond the traditional means of manifesting assent to the terms. UCITA recognizes and validates shrink-wrap licenses.[88] Shrink wrap licenses have been described as "unsigned license agreements included in the packaging, which state that the user accepts the terms of the license if he/she opens the packaging containing the software, uses the software, or take some other specified action."[89] In order for a shrink wrap license to be valid under UCITA, the licensor must provide the licensee with the right to a refund if the terms of the license are not available for review until after the information is purchased or until after performance by the licensee.[90]

UCITA also validates a standard type of Internet transaction where the terms are simply posted on the Internet site.[91] The typical situation involves a licensor placing a hyperlink to the terms of use for an Internet site on its home page. For these agreements to be valid, UCITA requires that the terms of use be displayed prominently so that the licensee is aware of the terms.[92] The courts will have to sort out what prominently displaying a hyperlink actually means.

8. Warranties

UCITA extends traditional warranties to computer information and also creates new warranties that address issues in the software industry. This section highlights some of the warranty provisions and limitations on warranties found in UCITA.

a. General Warranties. Unless specifically disclaimed, a licensor makes certain general warranties for computer information. The general warranties include:

(1) the computer information will not infringe any third-party rights or be misappropriated, unless the licensor created the information according to the licensee's specifications;[93]

(2) licensor will not grant during the term of the license any rights in the computer information that would interfere with licensee's enjoyment of the informational rights granted in the computer information;[94] and

(3) a licensor's grant of exclusivity is valid and exclusive to the extent that such exclusivity is valid under the applicable laws.[95]

b. Implied Warranty: Information Content. UCITA creates an implied warranty that there is no inaccuracy in information content caused by the licensor where the information content is supplied by the licensor and in which the licensee is in a special relationship of reliance. A special relationship arises when the information is specifically tailored for the licensee and when the information is not published.[96]

c. Implied Warranty: System Integration. UCITA expands the traditional warranty of fitness for a particular purpose to include an implied warranty that particular hardware and software components will effectively integrate together as a system.[97]

d. Correction and Support Agreements. UCITA recognizes the practice in the software industry to provide maintenance and support agreements along with computer information. With software, there may be certain improvements or bug fixes that are necessary for computer information that would not constitute breach of the performance requirements of computer information.[98]

9. Ownership of Information Rights and a Copy

UCITA has numerous sections addressing the distinction between a copy of computer information and the information rights contained in the computer information. UCITA makes it clear that licensor may retain or grant title to the disk and that title to the disk does not change the extent to which information rights are granted to the licensee.[99] UCITA also makes it clear that selling of a copy of computer information does not transfer ownership in the informational rights.[100] In situations where a licensee is entitled to make copies of the information, UCITA makes it clear that the licensor retains title in copies produced.[101] Finally, UCITA recognizes that a licensee can refuse performance based on a defect in the disk while still retaining the contractual right to receive the computer information.[102]

10. Inability to Reject Information

UCITA contemplates situations in which a licensee should be prevented from inspecting or rejecting computer information. The first situation arises when a licensee immediately receives the value of the information by having access to the information. In this situation, a licensee may not inspect the information prior to acceptance or rejection, because the licensee would have already obtained the benefit. However, the licensee may seek other remedies for breach of contract.[103]

The second situation arises when computer information is commingled with a computer system where removal of the software is impossible. In this situation, a licensee is prevented from rejecting the computer information, because the computer information cannot be returned to the licensor.[104]

11. Access Contracts

UCITA recognizes access contracts and provides the general rules for access contracts.[105]

An access contract is "a contract to obtain by electronic means access to, or information from, an information processing system of another person, or the equivalent of such access."[106] Some of the rules for access contracts include:

(1) The party providing the information must provide updates to the information as necessary to keep the information current;

(2) Access to the information must be provided in the a manner consistent with business, trade or industry practices, and

(3) The party providing the information is not liable for occasional down time on a system consistent with business, trade or industry practices including occasional computer failures and general maintenance.[107]

12. Automatic Survival Terms

UCITA provides for certain terms of a license that survive its termination. The provisions include: (1) confidentiality non-disclosure, and non-competition clauses; (2) right to have all copies of the information returned or destroyed; (3) the right to obtain a copy of the source code from an escrow agent; (4) indemnity, warranties, or their disclaimer; (5) payments obligations and accounting rights to verify payment; and (6) other provisions.[108]

13. Self-Help and Technical Restraints

UCITA recognizes the right of a licensor on cancellation of a contract to prevent further use of the information by licensee.[109] This right is generally referred to as self-help and has been very controversial in the development of UCITA. The licensor can only exercise the right of self-help under certain restrictions, including licensor cannot breach the peace, and cannot cause personal or physical damages. With electronic self-help, a licensor must follow even more procedural safeguards, including providing a clause in the agreement for self-help, notice of intent to use self-help, a means for the licensee to contact the licensor, and other procedural safeguards.[110] UCITA also authorizes the use of automatic technical restraints against the unauthorized use of computer information provided that licensor complies with certain notice and procedural requirements.[111] UCITA also makes clear that a licensor cannot interfere with licensee's ability to access licensee's and a third party's information that does not require use of licensor's information.[112]

C. International Relevance of UCITAC

While UCITA is only being considered for adoption in the U.S., UCITA could have a significant impact on international software transactions, because almost half of the software in the world is from the US. With the dominance of U.S. companies in the software industry, UCITA could become the dominant body of contract law in the international community for software.

UCITA could also have a significant impact on international contract law, because the drafters envision UCITA as the first step towards a new body of international contract law. With the world interconnected by the Internet, there is going to be a need to harmonize the rules and principles of international contract law for all Internet transactions, including software. Within the next couple of years, the international legal community could determine that a new body of law is necessary. The principles and certain provisions of UCITA may be used as the starting point for such discussions.

V. CONCLUSION

The international treatment of software is in a state of chaos. The goal of uniformity is but a distant dream for the international community at a time when the Internet has created an unquestionable need for harmony in international contract law. The international legal community has a duty to remedy this state of chaos to promote uniformity and growth in international trade. The question is how should the international community remedy the situation. With the contrasting views in the EU and the US, there is a substantial challenge in finding a general consensus behind a particular approach.

The international community could simply advocate that the CISG should apply to all software contracts. This approach would not require the international community to draft and adopt an entirely new body of international contract law. However, this approach may not work with the new issues created by electronic software and the Internet. The CISG was never intended to address these issues. The international community would have to stretch the CISG beyond its literal language and intent to address these issues. The international community would be forced into relying on the case law to interpret the CISG with the potential of creating even more chaos in international contract law. Further, as a practical matter, using the CISG may be impossible, since the U.S. and the E.U. are already moving towards taking drastically different approaches to electronic software and Internet transactions in general. Since eighty-eight percent of the world's software is from the U.S. and the E.U., the international community would have to convince both the U.S. and E.U. to abandon their current approaches. Finally, the international community must consider that the CISG would not apply to consumer contracts without changing or ignoring the express language of the CISG.

The international community could adopt the E.U. position that software on a disk is a good while electronic delivery of software is a service. The E.U. approach lends itself to preserving the usefulness of the CISG in international law, because the CISG would still apply to all software on a disk. However, the E.U. approach does not eliminate the need for a new body of international contract law. The international community would still need to adopt a new body of contract law for electronic software and the Internet. The international community could adopt the UCITA approach. If the international community must adopt a new body of contract law, then expanding the scope to include the entire information industry may be the best approach. However, the UCITA approach does have its limitations. The rules of UCITA are complex and untested. Most countries have not considered or developed rules for licensing agreements or Internet transactions.

The UCITA approach may be too drastic for the international community. Further, to apply to all Internet transactions, the international community would have to expand the scope to music, movies on demand, video games, online newspapers, and all other information delivered via the Internet. Finally, countries may have difficulty adopting certain provisions related to UCITA such as electronic self-help.

Even with a unifying body of international contract law, most countries will likely be unwilling to leave consumer protection, taxation, and other issues to a unified system of international law. The rules in each country are too diverse to expect a change in the coming years. The unified world of the Internet will inevitably face the brutal reality that the countries will not give up sovereignty to international law. Countries will continue to sacrifice uniformity and the promotion of international trade in order to preserve their sovereignty. Nevertheless, the international community needs to continue to strive towards uniformity. International contract law is one area where the international community has been willing to concede a certain amount of sovereignty. Therefore, the international community should strive to build a consensus and determine the best means to address software and the Internet.


FOOTNOTES

1. Trevor Cox is a licensing and technology attorney in the Intellectual Property and Technology Group at Gray Cary Ware & Freidenrich LLP in San Francisco, California.

2. Ludwig Wittgenstein, Tactatus, Logico-Philiosophicus, section 5.6 (1922).

3. United Nations Convention on Contracts for International Sale of Goods ("CISG"), U.N. Doc.A/Conf.97/18, Annex I (1980).

4. Uniform Commercial Information Act ("UCITA ")adopted by the National Conference of Commissioners on Uniform State Laws on July 29, 1999. See also http://www.2BGuide.com/for more information on UCITA.

5. CISG, supra Note 2, Article 7.

6. CISG, supra Note 2, Article 1.

7. CISG, supra Note 2, Article 3(2).

8. Frank Diedrich, "Maintaining Uniformity in International Uniform Law Via Autonomous Interpretations: Software Contracts and the CISG," 8 Pace International L.Rev. (1996) 303-338, 336.

9. See generally, ibid.

10. Franco Ferrari, "Specific Topics in the Light of Judicial Application and Scholarly Writing," 15 Journal of Law and Commerce, 1-126 (1995).

11. See Diedrich, supra Note 7, citing L. Scott Primak, 331.

12. Ferrari, supra Note 9, 437.

13. ibid.

14. ibid.

15. ibid.

16. ibid.; Maximilian Endler and Jan Daub, Internationale Softwareueberlassungsvertraege und UN-Kaufrecht, Computer und Recht, 603 (1993). See also Diedrich, supra Note 7.

17. ibid.

18. ibid.

19. Id., Supra Note 2

20. Endler and Daub, supra Note 15, 606.

21. CISG, supra Note 2, Article 2(a).

22. Thomas Hoeren, Der Softwareuberlassungsvertag als Sachkauf Computer und Recht, 908, 911 (1988).

23. CISG, supra Note 2, Article 2(a).

24. CISG Commentary, Article 2.

25. Endler and Daub, supra Note 15, 605.

26. ibid., See also Diedrich, supra Note 7.

27. CISG Commentary, Article 11.

28. CISG, supra Note 2, Article 2(a).

29. U.S. Industry &Trade Outlook 1999, The McGraw-Hill Companies, US Department of Commerce/ International Trade Administration, Chapter, 28.

30. Diedrich, supra Note 7; Email from Mikko Sundstoem L.L.M., Hedman Attorneys at Law, 1/20/00 (summarizing Finish Law); German Federal Supreme Court(BGH), Ruling (Beschluss) 2/5/1985-1 ZB 8/84-CR 1986, 130; BGH Case Decision (Urteil) 4/11/87-VIII ZR 314/86.

31. ibid.

32. ibid.; BGH Case Decision (Urteil)of 10/18/89-VIII ZR 325/88.

33. St Albans City and District Council v. International Computer Ltd. 4 All E.R. 481, 95 L.G.R. 592, 15 Tr.L. 444 (1996).

34. ibid.(quoting the Sale of Good Act 1979 and Supply of Goods and Services Act 1982.

35. ibid.

36. Anthony Burke, Software Licensing (unpublished article) (Anthony Burke is a Partner at Mason Hayes & Curran Solicitors).

37. Sundstroem, supra Note 29.

38. ibid.

39. ibid.

40. BGH, supra Note 29.

41. ibid.

42. Endler and Daub, supra Note 15, 604-605.

43. Michael Koenig, Die Qualifizierung von Computerprogrammen als Sachen im Sinne des Sec. 90 BGB Neue Juristische Wochenschrift, 2604, 2605 (1989).

44. Draft European Parliament and Council Directive on certain legal aspects of electronic commerce in the Internal Market, ECO 363, CONSOM 67, CODEC 654 (11/12/99).

45. Communication from the European Communities and Their Member States, Work Programme on Electronic Commerce, Scope and Classification Issues, Presented to the World Trade Organization Council for Trade in Services, (12/9/98).

46. ibid.

47. E-Commerce Directive, supra Note 43, Article 2.

48. E.U. Directive related to information and technical standards 98/34 as amended by Directive 98/23. For the purposes of this definition:

An indicative list of services not covered by this definition is set out in Annex V.
This Directive shall not apply to:

49. Technical Standards Directive, Annex V:

Indicative list of services not covered by the second subparagraph of point 2 of Article 1

1. Services not provided "at a distance." Services provided in the physical presence of the provider and the recipient, even if they involve the use of electronic devices: (a) medical examinations or treatment at a doctor's surgery using electronic equipment where the patient is physically present; (b) consultation of an electronic catalogue in a shop with the customer on site; (c) plane ticket reservation at a travel agency in the physical presence of the customer by means of a network of computers; (d) electronic games made available in a video-arcade where the customer is physically present.

2. Services not provided "by electronic means" -- Services having material content even though provided via electronic devices: (a) automatic cash or ticket dispensing machines (banknotes, rail tickets); (b) access to road networks, car parks, etc., charging for use, even if there are electronic devices at the entrance/exit controlling access and/or ensuring correct payment is made, Off-line services: distribution of CD roms or software on diskettes,

  • Services which are not provided via electronic processing/inventory systems: (a) voice telephony services; (b) telefax/telex services; (c) services provided via voice telephony or fax; (d) telephone/telefax consultation of a doctor; (e) telephone/telefax consultation of a lawyer; (f) telephone/telefax direct marketing.
  • 3. Services not supplied "at the individual request of a recipient of services." Services provided by transmitting data without individual demand for simultaneous reception by an unlimited number of individual receivers (point to multipoint transmission): (a) television broadcasting services (including near-video on-demand services), covered by point (a)of Article 1 of Directive 89/525; (b) radio broadcasting services; (c) (televised) teletext.

    50. E-Commerce Directive, supra Note 43, Recital (3).

    51. ibid., Article 2 "Coordinated Field."

    52. ibid., Recital (3).

    53. ibid., Article 5.

    54. ibid., Article 6.

    55. ibid., Article 7.

    56. ibid., Article 8.

    57. ibid., Article 11.

    58. Outlook 1999, supra Note 28.

    59. Diedrich, supra Note 7, 328-333.

    60. ibid. (discussing Advent Systems Ltd v. Unisys Corporation (925 F.2d 670 (3rd Cir. 1991)).

    61. ibid.

    62. Raymond T. Nimmer, UCC Revision: Information Age in Contracts, 490 PLI/PAT 309 (1997).

    63. Press Release from the ALI and NCCUSL, ALI and NCCUSL Announce that Legal Rules for Computer Information Will Not Be Part of UCC (4/7/99), http://www.2BGuide.com/docs/040799pr.html.

    64. Ed Foster, "Yikes! Don't look now, but Article 2B has transmuted into yet another creature," Info World Electric , Volume 21, Issue 16 (4/19/99).

    65. UCITA, supra Note 3, Section 102.

    66. ibid.

    67. ibid.

    68. ibid., section 103(d).

    69. ibid.

    70. ibid.

    71. ibid.

    72. ibid.

    73. ibid., section 103(b).

    74. ibid., section 102.

    75. ibid., section 307.

    76. ibid., section 102.

    77. See 17 U.S.C.A.

    78. UCITA, supra Note 3, section 105.

    79. ibid.

    80. ibid., section 109.

    81. ibid.

    82. ibid.

    83. ibid., section 107.

    84. ibid.

    85. ibid.

    86. ibid., section 206.

    87. ibid., section 102.

    88. ibid., section 112 (e)(3).

    89. Michael D. Scott, Protecting Software Transactions On-Line: The Use of "Clickwrap" Licenses , 482 PLI/PAT. 101, 103 (1997).

    90. UCITA, supra Note 3, Section 112.

    91. ibid., section 211.

    92. ibid.

    93. ibid., section 401.

    94. ibid.

    95. ibid.

    96. Id., Section 404.

    97. Id., Section 405.

    98. Id., Section 612.

    99. Id., Section 502.

    100. ibid., section 501.

    101. ibid., section 502.

    102. ibid., section 705.

    103. ibid., section 604.

    104. ibid., section 609.

    105. ibid., section 611.

    106. ibid., section 102.

    107. ibid., section 611.

    108. ibid., section 616.

    109. ibid., sections 615, 616.

    110. ibid.

    111. ibid., section 605.

    112. ibid.


    © Pace Law School Institute of International Commercial Law - Last updated July 5, 2001


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