UCITA Spells Controversy...But Should It?

Date: October 23, 2001
Immediately upon signing Maryland’s version of the Uniform Computer Information Transaction Act (UCITA) into law this past April, Governor Parris Glendening declared that this Act, among another dozen or so recently passed bills, would make Maryland a national leader in e-commerce. The Governor then hopped a plane bound for Silicon Valley to draw further attention to this claim. But perhaps the only claim that anyone can make with any certainty about both UCITA and Maryland’s version of the model act (MCITA), Md. Code Ann., Comm. Law, §21-101 et. seq., is that they spell C-O-N-T-R-O-V-E-R-S-Y. UCITA has been the subject of debate in a number of organizations, including the American Bar Association and the American Law Institute, for well over ten years, eventually landing on the doorstep of the National Conference of Commissioners on Uniform State Laws (NCCUSL) for drafting. Although the drafting process began in response to compelling cries from both software developers and consumers that the lack of uniform laws relating to the licensure of software led to uncertainty and unfairness (for example, should software be considered a good, thus invoking the implied warranties set forth in the UCC?), competing interests soon turned the process into a political one, invoking criticisms from every corner. These critics include the National Consumer Law Center, and the Federal Trade Commission, as well as a number of business leaders and library associations. Closer to home, formal letters opposing UCITA were penned by distinguished law school professors from across the country, including the Universities of Baltimore and Maryland, as well as by a group of twenty-four Attorneys General, including Maryland’s Joseph Curran. On the other hand, under the something-is-better-than-nothing approach, proponents of UCITA included the nation’s largest software publishers, such as the Business Software Alliance, and other businesses with sizeable economic and political clout, including the 800 pound gorillas Microsoft and AOL. Despite the fact that the model act appeared to displease many, UCITA quickly (and somewhat surprisingly) became a tool for legislators in both Virginia and Maryland to employ in claiming a political prize in the race to be perceived as the most progressive state in the technology stakes. Not to be outdone by Virginia, which was the first state to adopt UCITA, but, out of an abundance of caution, chose to delay enactment until July 2001, Maryland adopted MCITA, making it effective as of October 1, 2000. In doing so, the legislature disregarded the advice of the Governor’s Task Force on e-commerce that MCITA be further studied and, more importantly, the self-evident truth that it is technology, creativity and funds which bring about progress, not necessarily lawyers. However, while Virginia adopted UCITA without making any changes to the model law, Maryland’s legislature adopted significant changes that supporters applauded as addressing some (although certainly not all) of the concerns voiced by consumer groups and other critics. What does MCITA actually say? The philosophy that allegedly underlies MCITA is that the primary function of a commercial code is not to dictate the rights and obligations of parties, but to provide clear and uniform rules for creating enforceable agreements (although some would certainly argue with its effectiveness in meeting these goals). Thus, MCITA is primarily designed to be a “gap filler” in the area of electronic contracting and is not designed to supplant any law or custom which conflicts with its provisions. Indeed, MCITA specifically provides that its provisions will be unenforceable to the extent they are preempted by Federal law, or would vary a statute, rule, regulation or procedure under Federal Copyright law. §21-105. Likewise, if any provision of MCITA violates fundamental public policy or conflicts with a consumer protection statute or regulation, MCITA’s provisions will not apply. Beyond all the political puffery, the first question that must be addressed is what types of transactions does the 82-page MCITA bill actually govern? In general, MCITA applies to so-called “computer information transactions,” which are defined as agreements to create, modify, transfer or license computer information or informational rights in computer information. §21-102(11). In other words, MCITA is the UCC-equivalent for contracts to sell, lease, license or otherwise provide information in electronic form, such as software applications and databases, whether those items are delivered via diskette, CD-Rom or the Internet. In transactions that include both computer information and goods, MCITA applies only to the computer information portion of the transaction. §21-103(B). Although MCITA is not designed to apply to computer information embedded in or leased as a part of goods, if the goods are computers or computer peripherals, or the primary purpose of the contract is to obtain access to software, then its provisions will apply. §21-103(B). There are various other exclusions to the applicability of MCITA, including transactions relating to financial and insurance services, as well as computer information transactions relating to motion pictures, sound recordings and cable television. §21-103(D). MCITA also permits parties in certain cases to opt-in or out of some or all of its scope. §21-104. For example, parties may agree that the Act will govern a particular transaction, or that another law will govern, where a material part of the subject matter of the transaction is computer information or informational rights. Id. The parties may not, however, vary the applicability of a consumer protection statute, the doctrine of unconscionability, or the provisions applicable to self-help. Shrink-Wrap, Click-Wrap and Mass Market Transactions For years, the laws of Maryland and other states have been unclear as to the enforceability of license “agreements” which were either printed on paper and shrink-wrapped within the same packaging as the software media, or made available in electronic form on the program or in connection with a download of, or access to, the application. Software licensors claim that such licenses are the only way to both deliver non-customized software at the retail level in an efficient manner, and to protect the licensors’ intellectual property rights. Consumer advocates, however, have long argued that such shrink-wrap and click-wrap agreements are merely one-sided and overreaching, having the primary purpose of unfairly limiting the licensor’s liability and risk by disclaiming all liability, imposing foreign and inconvenient forums for dispute resolution, and limiting remedies. Moreover, consumer advocates wonder how contract terms not available to the user until after the exchange of consideration can be enforceable since the user can not have “knowingly” assented to the terms. MCITA addresses the shrink-wrap and click-wrap dilemma much like the Seventh Circuit did in the oft-cited cases ProCD Inc. v. Zeidenberg (7th Cir. 1996) and Hill v. Gateway 2000, Inc. (7th Cir. 1997). Specifically, MCITA expressly recognizes the validity and enforceability of such contracts, as long as the user both: (a) has a reasonable opportunity to review the contract’s terms; and (b) either authenticates the contract with an intent to adopt or accept the terms, or intentionally engages in conduct with a reason to know that the other party may infer assent from that conduct. §21-112(A). MCITA further provides that the opportunity to review the contract may occur after the user is obligated to pay or perform. §21-209(B). Thus, software licensors are allowed to continue delivering applications according to the terms and conditions set forth in shrink-wrap and click-wrap licenses, but licensees are not bound by those terms unless they assent to those terms as indicated by express agreement or by conduct. MCITA imposes much stricter standards (even stricter than UCITA) in connection with “mass market licenses,” which are standard forms used in connection with licenses directed to consumers or the general public as a whole where information is standard or generic, such as Microsoft Word or any other, non-customized off-the-shelf software applications. §21-102(44). Specifically, any term in a mass market license is not enforceable if it is: (a) unconscionable; (b) in violation of a fundamental public policy, including those concerning competition or innovation; (c) in conflict with a term expressly agreed upon by the parties; or (d) not available before or after assent in either a printed or electronic license. §21-209(A). Furthermore, if a mass market license is not available for review before a licensee must pay, and the licensee does not assent to the terms after having the opportunity to review the license, MCITA entitles the licensee to: (a) return the application; (b) be reimbursed certain expenses in returning or destroying the computer information; and (c) in certain cases, be compensated for the reasonable and foreseeable costs of restoring the licensee’s information processing system. §21-209(B). Finally, MCITA also adds to UCITA the requirement that a term in a mass-market license that limits the duration of the license be conspicuous. §21-209(D). Importantly, MCITA expressly excludes Internet Service Provider (ISP) and other access contracts from the definition of “mass market license.” Thus, as pointed out by several critics, the strongest protections afforded by MCITA to consumers are generally not available in connection with one of the most prevalent types of standard license forms directed to the general public. New Implied Warranties In addition to imposing the implied warranties of merchantability and fitness for a particular purpose of UCC fame, §§21-403 and 21-405(A), MCITA also creates certain new implied warranties unique to computer information transactions. For example, MCITA mandates that any licensor of information warrants that no competing claims exist in the informational rights of the computer information so as to interfere with the licensee’s quiet enjoyment of the information or to cause the licensee to be liable for infringement. §21-401. If, however, the licensee furnishes detailed specifications to the licensor, the licensee will be required to hold the licensor harmless against any claim arising out of compliance with such specifications. MCITA also creates an implied warranty of information content which provides that a merchant who, in a special relationship of reliance with a licensee, collects, compiles, processes, provides or transmits informational content, warrants to that licensee that there is no inaccuracy in the content caused by the merchant’s failure to perform with reasonable care. §21-404. Thus, licensees of databases and other informational content may now have a cause of action against a licensor who, through some failure to perform with reasonable care, provides inaccurate information. MCITA provides that these newly-created implied warranties (except for the implied warranty of non-infringement) may be disclaimed, if done so in a conspicuous place and specified language is used. However, such disclaimers will be ineffective when used in a consumer contract (i.e., a contract between a merchant licensor and an individual who licenses the information or informational rights with the intent to use such information and/or rights primarily for personal, family or household purposes). §21-406. Electronic Self-Help One of the most disputed issues addressed by MCITA involves the use of electronic self-help, which refers to the use of electronic means to prevent the continued exercise of contractual and informational rights in licensed information. MCITA permits the exercise of electronic self-help measures only under conditions specified by MCITA, and prohibits the use of electronic self-help measures in a mass-market transaction. §21-816(B). For all other transactions, self-help must be separately agreed upon by both parties. §21-816(E). If self-help is to be utilized, the licensor must first provide the licensee with thirty days’ notice that it intends to utilize electronic self-help if the alleged breach is not cured. Such notice must contain certain precise information, including the nature of the claimed breach, and the contact information of a person with whom to communicate. §21-816(F). This requirement is dramatically different from UCITA, which only requires a fifteen-day notice and does not prohibit the use of self-help measures in a mass-market transaction. Choice of Law and Forum Since the Internet has in many ways destroyed traditional notions of state and country boundaries, MCITA’s choice of law, §21-109, and choice of forum, §21-110, provisions are critical. For example, MCITA provides that parties to an agreement may choose the applicable law, even in mass-market transactions. §21-209(A). Effectively, this means that the licensor will choose the law that applies in a mass-market transaction. In the absence of an enforceable agreement on the choice of law, the law of the jurisdiction having the most significant relationship to the transaction will apply, except in the cases of: (a) access contracts; and (b) mass market transactions, in which case Maryland law will apply. §21-109(B)(3). MCITA also permits the parties to a computer information transaction to choose an exclusive forum for resolving disputes, unless the choice is unreasonable or unjust, §21-110(A), but provides that a chosen forum is not exclusive unless the agreement expressly so provides. §21-110(B). However, if such a provision is included in a mass market transaction, the enforceability of the provision shall be decided by a Maryland court. Of course, time will tell as to whether courts in other states will even provide a Maryland court with the opportunity to make such a decision in an action brought by a licensor pursuant to a choice of forum provision. Contract Modification One area of concern identified by the twenty-four Attorneys General concerning UCITA that was not addressed by Maryland’s General Assembly in adopting MCITA is the issue of contract modification. Section 304 permits licensees to unilaterally make enforceable modifications to contracts involving continuing performance, requiring only “reasonable” notice as a condition for doing so. In such cases, a remedy made available in mass market transactions persons against whom such modifications would operate is cancellation. §21-304(B)(2). The value of this remedy is diluted by the fact that it is not statutorily made available to parties in access contracts with ISPs and online information service providers, which contracts may comprise the largest class of contracts subject to such modifications. The criticism from the Attorneys General primarily revolves around the issue of what constitutes reasonable notice. Although the Act provides that a court may reject a certain notice procedure if manifestly unreasonable in light of the commercial circumstances, the reporter’s notes in UCITA concerning this issue imply that a contract modification can be provided to the customers simply by posting the modification to a web site. § 304(c). Such a procedure places the burden of discovering a proposed modification on the offeree, rather than the offeror. Although the Attorneys General’s criticisms are indeed justified given the language of both UCITA and MCITA, perhaps Maryland’s courts will clarify that “reasonable” notice means “actual” notice. Stay tuned. What Now? MCITA governs a wide array of other substantive provisions applicable to computer information transactions, but which are too numerous to address fully here. For example, concepts such the statutes of fraud and limitations, express warranties and assent are all addressed. Accordingly, all lawyers would be wise to carefully review MCITA in its entirety, especially to reach an independent decision as to whether the statute offers vice or virtue, or a bit of both. Perhaps all of the controversy swirling about MCITA is an indication that it is just what the doctor ordered? After all, if it is equally hated by parties on both sides, perhaps it is well-balanced. Only time will tell, however, whether MCITA will be one of the pillars in the construction of the most e-friendly state in the nation, or merely a full employment act for lawyers.