ULC

Computer Information Transactions Act Summary

The National Conference of Commissioners on Uniform State Laws promulgated the Uniform Computer Information Transactions Act (UCITA) in 1999. In 2000 and 2002, this Act was also Amended. This summary incorporates all amendments through 2002. UCITA provides a comprehensive set of rules for licensing computer information, whether computer software or other clearly identified forms of computer information. Computerized databases and computerized music are other examples of computer information that would be subject to UCITA. It would also govern access contracts to sites containing computer information, whether on or off the Internet. UCITA would also apply to storage devices, such as disks and CDs that exist only to hold computer information. UCITA would not govern contracts, even though they may be licensing contracts, for the traditional distribution of movies, books, periodicals, newspapers, or the like. Also, a transaction for the creation of a motion picture or a transaction with a freelance contractor for news reporting, even though computer information is dominantly involved, is not governed by UCITA. Professional services by a member of a regulated profession (doctor, lawyer, accountant, for example) are not within UCITA even though communications about the transaction will be in the form of computer information.

UCITA, also, does not provide any rules governing so-called mixed transactions, in which computer information is part of a transaction also involving goods or services. At this point in time, no statutory rules, even as default rules, can adequately determine which law should apply in such a mixed transaction. Common law development must first occur and UCITA leaves this issue to the common law.

Why is there a need for licensing contracts, rather than sale contracts for computer information? Computer information is peculiarly vulnerable to dissipation of its value by copying. The genius of computers is their ability to retain and copy information. Copies of information look just like their originals. In fact, everything is a copy. There are no true originals. Copies can be duplicated in huge numbers and disseminated to millions of users in times measured in less than seconds. Therefore, those who invest capital, intellectual effort and labor into the creation of valuable computer information may lose the economic value of their products in seconds. Without the ability to control copying and dissemination of computer information, vendors risk losing everything. UCITA works as an effective set of contract rules in conjunction with intellectual property law to make it possible to control unauthorized copying.

The term "copy" is, in fact, defined in UCITA as the "medium on which information is fixed on a temporary or permanent basis and from which it can be perceived, reproduced, used, or communicated, either directly or with the aid of a machine or device." Transfer of a copy is the basis of a licensing transaction. UCITA clearly separates transfer of a copy from transfer of ownership of computer information or informational rights. A licensee’s rights are not dependent upon transfer of title to computer information or informational rights, although a license contract may expressly transfer title to computer information or informational rights and/or title to a copy.

A licensing contract involves transferring a copy of computer information, such as software to use in a computer, from a vendor (called licensor) to a recipient (called licensee). A license may also grant informational rights to the licensee. Informational rights include any intellectual property rights derived from copyright, patents and the like, but also all other rights in information that any other law provides to a person that allows control of the information or restriction on the use of the information by other persons. The difference between a licensing contract and a sale contract is that the license generally contains restrictions on use and transfer of the computer information by the licensee during the life of the contract. A breach of express restrictions on use and transfer in the contract provides a remedy to the licensor.

Licensing of information is the standard of the computer information business today. The huge bulk of vendors license their computer information products. UCITA, therefore, does not originate licensing contracts. UCITA was developed to provide basic, recognizable default rules for the existing licensing activity that goes on and that expands as commerce in computer information expands. That expansion is the primary source of economic development in the United States and is projected to be the economic mainstay of the United States for the foreseeable future. UCITA, therefore, is responding to existing economic activity and a mode of contract upon which effective commerce in computer information industry relies.

Firming the underlying law and establishing certainty with respect to the rules that apply, and that apply uniformly, is the modest goal of UCITA. It is not a radical, destabilizing proposal. It is familiar law adapted to ongoing economic activity that can use stable, predictable law that otherwise does not now exist.

For the most part, the rules governing computer information contracts in UCITA are default rules. This means that they may be waived or varied by contract, and that in almost all cases the terms of a contract will prevail over a contrary rule in UCITA. Rules generally relating to fairness of the contract process are not default rules, and cannot be disclaimed by contract. Included in the rules that may not be disclaimed are the obligation of good faith, diligence, and reasonableness; limitations on enforcement imposed by unconscionability and fundamental public policy; and any standard of care prescribed in UCITA. Express rules for consumers, also, may not generally be disclaimed.

UCITA’s rules govern licensing of contracts for computer information and informational rights from formation through final performance, including remedies if there is a breach of contract. Licensors and licensees both have remedies. Included in UCITA are rules for warranties, both implied and express, and rules pertaining to risk of loss in a computer information transaction. Most of the rules in UCITA are the traditional and familiar rules of contract from the law of sales and from the common law, but adapted to the special nature of computer information licensing contracts.

Freedom of contract is a dominating underlying policy for UCITA, exactly as that principle is the foundation for the law of commercial transactions, generally, and exactly as that law has served all commercial transactions in the United States and has contributed to the economic growth and health of the United States.

Although a license under UCITA may transfer informational rights, UCITA is not fundamentally rooted in intellectual property law. A license under UCITA is simply a commercial contract, dependent wholly on the parties’ ability to enter into a normal, commercial contract, just as a contract of sale or lease is simply and wholly a commercial contract. However, UCITA may not be used to vary or extend intellectual property rights, and expressly recognizes preemption by copyright, patent, or other federal intellectual property law.

Like the law of sales and leases, in general, the right to contract is constrained by principles of unconscionability, good faith and fair dealing, UCITA has an additional restraint, an express power for a court to deny enforcement of a provision in a licensing contract that violates fundamental public policy. This public policy defense is unique in UCITA. An essential purpose of this defense is to give courts some latitude in reconciling commercial licensing law with the principles of intellectual property law. Most intellectual property law is federal, and UCITA expressly recognizes the preemptive effect of that federal law. But the public policy defense gives courts an additional power to consider intellectual property principles purely within the context of commercial law.

These are some highlights of UCITA:

1. Mass market license. Traditionally, contract formation contemplates some negotiation and arms-length give and take between contracting parties. Commercial contract law has long-since abandoned this image of contracting activity as the only image. Article 2 of the Uniform Commercial Code has long had rules governing contracts that do not form in the traditional image, and has legitimized form contracts for sales of goods for nearly half-a-century. The mass-market license is an electronic form contract for computer information licensing, exactly as there have been form contracts for the sales of goods for a very long time. The difference is that a mass-market license is often presented with the package for the computer information found in retail stores, and, more importantly as electronic commerce grows, as part of the transfer of computer information, electronically, from computer to computer. Whether called "shrink-wrap" or "click-wrap," these are mass-market licenses.

UCITA treats mass-market licenses differently from negotiated licenses. A term is not part of a mass-market license unless the term is readily available to the licensee and until the licensee has had a appropriate time to review it. This means that the term must be immediately available to the licensee either in nonelectronic form or in electronic form that the licensee can print or store electronically.

If, upon review, the licensee does not like the license contract or any part of it, the copy of the computer information may be returned to the vendor for a refund, plus reasonable expenses for making a rightful return and compensation for damages to a processing system by the removal of the information from that system. This right of return may not be waived or disclaimed in a contract. Nowhere else in the commercial law is there such a no-fault return policy for rejecting or repudiating a contract.

2. Warranties of license are incorporated into UCITA, based on the warranty provisions for sale of goods under Article 2 of the Uniform Commercial Code. But computer information requires special implied warranties. One is the warranty of compatibility of computer systems under Section 405(b). The licensor is subject to an implied warranty, if the licensee is relying upon the licensor for skill and judgment in selecting components of a computer system, that the components will function together as a system.

Implied warranties may be disclaimed. Disclaimers in mass-market contracts must be conspicuous. Any affirmation of fact or promise made by a licensor as part of the basis of the bargain, becomes an express warranty of the licensor.

Freeware, so-called, has no implied warranties, at all. Warranties apply in a license contract only if the licensor intends to make a profit from distribution of the computer information covered by the license.

3. There are special rules for communication of computer information in electronic form. Since these transactions are almost all electronic, and faceless, it is necessary to have rules governing the attribution of electronic signatures, and the accuracy of electronic messages. Part 2, Subpart B is largely devoted to these communications rules. The term "authenticate" is the basis for these rules. A signature or its electronic equivalent is the basic means of authentication under UCITA. That "authentication" is attributed to the person whose intentional act that "authentication" is. A party relying upon that authentication has the burden of establishing attribution, which may be shown in any manner, including evidence of the efficacy of any "attribution procedure" used in the communication. An "attribution procedure" is any procedure that provides greater assurance than a simple transmission of information that the "authentication" is that of the party to which it is attributed. There are both simple and complex attribution procedures available for identifying the person who sends an electronic communication, and persons may choose the procedures that suit their particular transactions.

Attribution procedures may have impact on message content in an electronic communication. If a procedure is in place to detect errors or changes in the message communicated, a party that conforms to the procedure is not bound by an error or change that results because the other party does not conform to the procedure. There is a special rule for consumers. Consumers who make errors while entering automated transactions are not bound by the unintended erroneous message, so long as the consumer notifies the other party of the error promptly after it is identified, properly returns the computer information received and has not obtained value or benefit from using the information.

4. An "access contract" is a contract to enter the information system (read computer) of another to obtain information, or use that information system for specific purposes. Most current computer users have access contracts, if for no other reason than to use the Internet. UCITA governs these contracts with special rules relating to rights of access in Section 611.

UCITA also governs support contracts, and service contracts for the correction of performance problems. No licensor of information is required to provide such contracts (computer software support services are common), but if it does, it is subject to the express terms of the contract, or if silent, to what is "reasonable in light of ordinary standards of the business, trade, or industry..." 

5. There is a special rule for restricting "reverse engineering" in license contracts. Reverse engineering occurs when a recipient of a product, in this case computer information, takes it apart to see how it is made and how it works. Many license contracts prohibit reverse engineering of computer information. Under UCITA such restrictions are allowed, but a contract cannot restrict reverse engineering that a licensee does for the purpose of making computer programs interoperable. Licensees may solve interoperability problems without breaching license contract.

These are some of the provisions in the Uniform Computer Information Transactions Act. It is a comprehensive act, so that the above-cited provisions are merely highlights. This Act is a very important contribution to computer information law, and should receive serious attention in every state.