A Response to Why Software Quality Professionals Should Actively Oppose the Uniform Computer Information Transactions Act

September 1999
Volume 1 • Number 4

Contents

A response to
Why Software Quality Professionals Should Actively Oppose the Uniform Computer Information Transactions Act

by Lorin Brennan and Glenn A. Barber

INTRODUCTION

Standards are essential for Internet commerce. Unfortunately, legal standards are decades behind. Current laws were not drafted for an on-line, global economy. Basic questions still remain unanswered or subject to conflicting local rules.

The Uniform Computer Information Transactions Act (UCITA) has been proposed to resolve these problems. It will bring clarity and uniformity to the law of computer information transactions, provide modern and innovative rules for e-commerce, adapt and expand traditional customer protections, and reduce the costs and uncertainty of current law.

WHY A NEW COMMERCIAL LAW IS NEEDED

A typical software transaction has two components: 1) license to use intangible intellectual property rights in the software, such as copyright, patent, trademark, or trade secret; and 2) a transfer of tangible deliverables, such as a CD. Imprecise use of language can confuse this point. For example, people talk about “buying” a ticket to a movie, but they are not paying for a little piece of paper; they are paying for the right to enter the theater and watch the movie. It is the same for software. Customers do not pay hundreds of dollars for a CD. They pay for the right to use the intellectual property rights in the software, such as copying sample code into new programs or posting on the Web. Talking about buying software misses the point. The transaction is not merely a sale of goods. This is why software lawyers say “software is licensed, not sold.”

Using this definition, when software is assessed as having higher testability, it means that incorrect output will likely occur if a defect exists. To understand why faults hide during testing, one must know the sequence of events that must occur in order to observe incorrect output:

UCITA is a commercial code, not a regulatory code. It provides default rules that operate unless the parties agree otherwise. Think of it as a statutory form contract. Parties can make a license on basic terms, such as scope of use and license fee, leaving other terms, such as warranties, to the statutory default rules. Or they can override the defaults and adopt their own rules. It is their choice. A few rules cannot be changed, such as the obligation to act in good faith and consumer protection rules, but the basic principle is freedom of contract.

The drafting process for UCITA has been the most open and well attended in the history of any uniform law. There have been hundreds of participants representing both large and small software developers, publishers, licensees, and consumer interests. While many are lawyers, a significant number of nonlawyer software professionals have also been present. Attendance is open and participation encouraged. The drafting committee has no agenda other than to draft a uniform law that reflects commercial practices. Obviously, there are differences of opinion, but this does not mean that all points of view have not been considered or the result is unbalanced.

SPECIFIC PROVISIONS IN UCITA

A companion article lists concerns about specific provisions in UCITA. All of these points have been extensively discussed by the UCITA drafting committee meetings. In each case, we believe that UCITA either reflects existing law or makes reasonable improvements because of different characteristics of software. Here is our view on these points.

Customer Support: Enhancing Choice

The real cost of software is in the support. That is why quality controls during development have large payoffs after deployment. But there are tradeoffs between “good enough” software today and perfect software whenever and between the license fee paid today and support costs paid over time. The real question is: Who should decide what the tradeoffs are? Consider the following three cases:

  • Vendors that have released software with serious known defects.
  • Vendors that release software with known defects that are not thought to be serious. Windows 95 reportedly had thousands of known defects, but Microsoft deferred fixing them prior to release, because Microsoft did not think users would find them objectionable. As it turned out, the product was still successful.
  • Products released with no support but at a very low price. Linux is an example. Because it is free, it has no support. One must pay extra for support from a third party.

So what should be the legal rule regarding support? A law that prohibits releasing any product with known defects, or that requires unlimited free support, would certainly take care of the first case, but could eliminate the other two. UCITA therefore follows current law and lets the parties decide the quality, price, and support tradeoff that they want. It trusts to software professionals, press coverage, and severe business sanctions from providing defective software to control the first case. UCITA also says that if one does not like the terms of the license for packaged software, then the product can be returned for a full refund. While this may not be a perfect result, given that tradeoffs are inevitable, UCITA lets software professionals and their customers decide what the tradeoffs should be.

Rejection for Defects: Encouraging Repairs

To “reject” a product means to tell the vendor to take it back and return the customer’s money. Both current sales law and UCITA allow vendors to ask the reason for rejection so they can try to fix the problem. The goal is to avoid needless litigation and encourage timely repairs. It makes no sense for the customer to wait until the eve of trial to tell the vendor “The real reason I rejected was X” when the problem could have been fixed in a few minutes if the vendor had known about it up front. Thus, the rule is if people have a reason to reject, speak up now or forever hold their peace. This rule, however, does not apply to defects that could not have been fixed, that the customer did not know about, or that the customer could not find by a reasonable inspection at the time. And, it only applies to rejections at the start of the contract, not to defects found while using the product.

Support Contracts: Follows Industry Standards

Under UCITA support must always be “consistent with the express terms of the agreement.” If the publisher promises to fix all defects, then the publisher must do so. If something is not spelled out, however, the default rule is that support must be “in a manner that is reasonable in light of ordinary standards of the business, trade, or industry.” Where support is provided by a third party, UCITA presumes ordinary industry standards do not require fixing all defects. This makes sense, since a third party may not know all undocumented features. This limiting presumption, however, does not apply to support contracts by a licenser.

Self-Help: A Workable Compromise

“Electronic self-help” refers to time bombs that allow developers to turn off the software in case of a dispute. Appropriate rules have been difficult to draft. On one hand, some licensees have legitimate concerns about indiscriminate use of self-help, such as shutting down a critical-care unit over a minor spat. On the other hand, small licensers worry that appropriate self-help can be the only cost-effective way to secure payment from intransigent “litigate you to death” corporate behemoths. Some of the largest nonsoftware companies in the country are determined to prohibit self-help altogether, so they find any compromise “unbalanced.” UCITA allows self-help, but with significant restrictions. It forbids self-help that could cause injury to public health or safety. In business situations, it requires a separate agreement to self-help terms and imposes exacting notice and cooling-off periods before it can be used.

Maintenance Rights: Follows Current Law

UCITA follows current law in allowing parties to negotiate their maintenance rights. In the 1998 Digital Millennium Copyright Act, Congress allowed companies to make copies of a program for the purpose of maintenance and repair without incurring infringement liability. UCITA expressly defers to preemptive federal law.

Contract Terms: Modernized for On-Line Commerce

The Internet has enabled a diverse set of business models for e-commerce. The legal question is: How can people make contracts in this new electronic environment? There are several possibilities.

One method is the shrink-wrap or click-on license. A dialog box contains the license terms, and the software will not load unless the user agrees to them by clicking on an “I Agree” icon. Mass marketing the product in this way reduces negotiating overhead, allowing the vendor to cut costs. The disadvantage is that the product comes on a “take it or leave it” basis. Sales law has been in conflict whether these licenses are enforceable, although the modern trend endorses their use. UCITA says they work but only if certain procedures are followed to ensure the customer has a chance to understand the deal. Basically, the customer must “manifest assent” after having an “opportunity to review.” Manifesting assent means the customer engages in intentional conduct with reason to know it will be taken as an assent, such as signing (a digital signature) or clicking on the “I Agree” icon. “Opportunity to review” occurs only if the user has a reasonable chance to review the entire license. If license terms are hidden there is no opportunity to review and hence no agreement. Again, UCITA only tells parties how to make a contract, not what the terms should be.

Another method involves phone-order sales. Gateway is an example. It does substantial business over the phone or on line. The computer or software arrives with a contract describing the deal terms with a right of return if the recipient objects. Consumers have the convenience of reading the terms at home. As Professor Hal S. Scott of Harvard Law School put it: “If the staff at the other end of the phone for direct-sales operations such as Gateway�s had to read the four-page statement of terms before taking the buyer�s credit card number, the droning voice would anesthetize rather than enlighten many potential buyers.” Under current sales law, this business method has also been challenged, and some lawyers would like to prohibit it altogether. UCITA allows the practice, but again with procedural rules to ensure customer understanding. It says contract terms that come after initial payment are only effective if the customer was told up front they were coming, and the customer can have a full refund if the terms are objectionable in any way. In a mass-market transaction, which includes consumers and small businesses, the right of return includes shipping and deinstallation costs. Hidden terms are never enforceable.

A final method involves bargaining through electronic agents. In the near future, customers will be able to create their own “click-on” contracts, encode them in dedicated electronic agents, and send these agents over the Web to bargain for them. The MIT Media Lab already has a working prototype of this type of site (maker.media.mit.edu/). Sales law does not allow this type of dealing, but UCITA does.

The real issue is one’s attitude about the Internet. Traditional lawyers prefer traditional face-to-face negotiations. They understand those rules very well, and it does place a certain premium on their lawyering skills. There is nothing wrong with this attitude, but the Internet allows new methods for on-line and automated bargaining. Implementing them requires a new set of skills that software professionals can provide. The law should allow both methods of contracting. Current sales law does not, but UCITA does.

Warranty Disclaimers: Follows Current Law

Like current sales law, UCITA allows parties to disavow implied warranties. The words used under sales law are: “as is.” The words UCITA uses are: “as is.” In a mass-market transaction, a written or electronic disclaimer must be conspicuous. If it is hidden it is ineffective. A customer who does not like a disclaimer can return the software for a full refund.

Warranty Rights: Extended to an On-Line Environment

UCITA does not decide whether a software transaction is a license. The parties do that. Software publishers can, if they want, only sell copies of their software (Nintendo and Sega do that). But there is no reason why they must and good reason why they do not. Consider a client-server database. The same software may run both single-user and 1000-user versions. The only difference may be the license. There is no need for the publisher to provide 1000 CDs when a single copy with a site license does just as well. UCITA acknowledges this obvious practice. In so doing, it does not eliminate consumer warranty rights. It specifically preserves all substantive consumer protection laws. It also contains warranties of merchantability and fitness for computer programs. The federal Magnuson-Moss Warranty Improvement Act only applies to tangible consumer products that are sold. It is questionable how this applies to licensed software downloaded over the Internet. This issue was created by technology, not UCITA. But UCITA deals with it for the first time in a modern law.

Perfect Tender Rule: Modernized for Custom Software

When it comes to deliverables, sales law uses a “perfect-tender” rule. This does not mean a seller must deliver a perfect product. It means the goods must perfectly conform to their contract description. If one orders 100 black bowling balls, a delivery of 99 black and one blue bowling balls is deficient. The rule allows a buyer to walk away from the deal even for minor contract deviations.

UCITA continues this rule for mass-market software, but it makes no sense for custom software. A customer who licenses a $1 million database program for delivery on a CD is not paying $1 million for the CD; he or she is paying for the license. Applying the perfect-tender rule would allow the customer to cancel the deal for a trivial defect in the deliverables, such as sending a DVD rather than a CD, even if it is fully compatible with the licensee’s system. UCITA says that for custom software, the vendor has both the right and the obligation to cure defects in the deliverables if it can be done in a timely manner, paying for the delay. Of course, business customers can, if they want, provide that mislabeling a diskette or omitting a page from a manual is an incurable “failure of perfect tender.” UCITA just presumes this is not the default rule most reasonable commercial people would want to use.

Remedies for Breach: A Full Palette

Under UCITA, an injured licenser or licensee has the following available remedies: actual damages (incidental, direct, or consequential); liquidated damages; specific performance; recoupment and set-off; and any other remedy in the contract that is not unconscionable. Actual damages include incidentals (costs of shipping, caring for rejected copies, and the like), direct (basically, contract price less expenses saved), and consequentials (lost profits). All noncontractual remedies, such as for fraud, are preserved. Under UCITA, parties may agree to limit their remedies, as they can under current law, but this means that there are no remedies. UCITA also says that if an exclusive remedy fails of its essential purpose, then the injured has any other remedy allowed under UCITA.

Waiver of Liability: Allowed With Appropriate Understanding

Many software publishers routinely disavow liability for consequential damages (such as lost profits). Here is a good example why. The December 1998 issue of The California Lawyer magazine recently complained about a disclaimer in Internet Explorer that Java is not fault tolerant and should not be used for air-traffic-control systems. The magazine said that if someone nonetheless used Java to design such a system, then Microsoft should be liable despite the license because it did not post a sign at the retail outlet saying it was “not responsible for plane crashes.” Many lawyers do not get it where software issues are concerned. It is hard to imagine that Sun would be willing or able to provide Java for free if the click-on license it used to disavow this type of liability was legally ineffective.

For this reason, UCITA allows parties to agree to waive liability if they want. It requires that the waiving party have an opportunity to review the terms of the waiver, to have the ability to say “no,” and to demonstrate acceptance by affirmative conduct, such as signing or clicking on an “I agree” icon. UCITA does not mandate that everybody must be liable to everyone anytime for anything if they want to agree otherwise.

Choice of Law: Essential for E-Commerce

In on-line transactions, one party rarely knows where the other is located. This can cause legal problems. For example, under U. S. law, sales tax may be shown separate from the price and usually is. In Europe, VAT tax must be included in the price and not shown separately. Obviously, a vendor cannot comply with both. Knowing what law applies to a transaction benefits everyone.

UCITA has two default rules for finding the proper law. In a contract for access or electronic delivery, the law where the licenser is located applies. In a contract for physical delivery to a consumer, the law where the delivery occurs applies. UCITA lets parties change these rules by agreement, but not in a way that undoes consumer protection law. UCITA also adopts the U.S. Supreme Court rule that parties can choose an exclusive forum for resolving disputes provided the choice is not unreasonable and unjust.

Criticisms and Disclosures: Defers to Other Law

UCITA says that “contractual use restrictions” include enforceable restrictions on disclosures. This is because software can be protected by trade secret, and trade-secret law requires a restriction on disclosure for the trade secret to remain intact. UCITA does not determine what an enforceable restriction may be. Trade-secret law does that.

The same is true for criticisms. UCITA says how to make a contract, not what the terms should be. Laws regulating content remain intact. For example, parties may engage in on-line gambling, but it does not make the transaction legal if local gambling laws say otherwise. Similarly, if federal law or public policies prohibit restrictions on criticizing software, then those are effective. UCITA specifically says so. What UCITA does provide is a one-size-fits-all blanket prohibition. In some situations restrictions may be appropriate. For example, there are legitimate concerns about parties running benchmarks on beta versions and then using the results for comparison against the release versions of other products without informing users. Reverse engineering is in the same category. There are some parties who want UCITA to endorse any type of reverse engineering regardless of the situation. Case law, however, has addressed reverse engineering as a question of copyright infringement under federal law. Congress has already adopted specific rules on the issue, including in the 1998 Digital Millennium Copyright Act. UCITA leaves this issue to Congress, where it belongs.

CONCLUSION

The computer information industries are now the engine of growth in our economy. Legal rules governing them urgently need updating. We need a law that will endorse Web-based e-commerce in computer information, authorize bargaining through electronic agents, update warranty rights, and allow consumers to contract to protect their privacy on-line. Current sales law fails at these tasks. It also does not deal with new developments happening on the Web, such as automated bargaining, contracting through electronic agents, access contracts, and a host of others. Software developers are building tools to enable these technologies. Customers want them. But it will do little good if legal rules do not auth-orize their use. Many lawyers are instinctively (and often unconsciously) concerned about these developments because they reduce the traditional role of lawyers in the bargaining process. But this is what technology is all about–finding more efficient ways to do old things so there is more time to do new things.

We need a new step into the information age. UCITA is that step. It is a visionary law that anticipates the future rather than reacting to the past. Where do you want to live?

Sidebar: ASQ Position Statement

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BIOGRAPHIES

Lorin Brennan is an attorney who specializes in international copyright licensing. Brennan is past president of the Independent Producers Association, where he represented nonstudio independent producers and distributors. He has been a consistent participant at the meetings of the UCITA Drafting Committee. He can be reached by e-mail at LEBrennan@email.msn.com.

Glenn A. Barber is a software developer and educator who teaches advanced software development at UCLA Extension. Barber was the founder and CEO of GABA, Inc., an IBM business partner and software publisher. He is a past president of the International Oracle Users Group.
Brennan and Barber have worked together for years on database programs for licensing of intellectual property rights, primarily motion pictures. They have recently formed a company to develop software for electronic contracting and automated bargaining tools.

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