Margaret Harvey is a partner in Shaw Pittman’s London officeand a member of the firm’s international technology group.
A recent law in the United States may soon begin to affect the way in whichsoftware is licensed and distributed in the rest of the world. The UniformComputer Information Transactions Act (UCITA) introduces significant protectionsfor software owners. Given the fact that much of the world’s software iseither owned or licensed by United States companies, or is distributed in theUS, the effect of UCITA may be to change the terms under which all software –whether or not owned and licensed by a US company – is licensed.
What is UCITA?
UCITA is based on Article 2(b) of the Uniform Commercial Code – the USequivalent of the UK Sale of Goods Act. UCC Article 2(b) deals primarily withthe sale of tangible goods. UCITA is intended to cover the licensing ofintangible goods such as information and software which, at the moment, is dealtwith under a range of disparate state laws.
It is important to realise that UCITA is a uniform code. It is not itselflegally binding in any state until that state has formally adopted UCITA intoits laws. Companies located in a particular state – or companies sellingsoftware in a particular state – will be affected only as and when thatstate’s legislature has approved and adopted UCITA. Obviously, adoption in keystates such as New York and California will heavily influence the practice ofmajor national software vendors. If adopted across the entire country, UCITAwill provide a large degree of uniformity in software licensing laws in theUnited States. UCITA was approved by the national body responsible forgenerating it on 30 July 1999. US state legislatures are expected to implementthe Act in states across the US over the next 12 months.
Although the Bill initially faced strong opposition from many of the states(a total of 25 state attorneys general opposed the bill), it was eventuallypassed in a vote of 43 to 6, with two states abstaining. UCITA was primarilybacked by software publishers, and was widely opposed by software developers,consumer advocacy organisations, software buyers, librarians and newspaper andmagazine publishers. The American Computer Society came out strongly against theBill, as did the US Federal Trade Commission which considers it to be anunnecessary risk for consumers engaging in e-commerce.
Key Provisions
UCITA will introduce into US law a range of rights and restrictions that arealien to English contract law. These include:
- the express right for software owners to disable their software remotely (eg by using ‘time bombs’) if they believe a breach of contract has occurred
- the ability for software owners legally to disclaim their statutorily implied warranty to sell products that function properly
- the right for software owners to prevent the transfer of software sold under ‘shrink-wrap’ or ‘click-wrap’ licences
- a provision in UCITA allows software owners to enforce ‘shrink-wrap’ or ‘click-wrap’ licences as soon as a user unwraps a piece of software or clicks the ‘I accept’ button – regardless of whether the terms have been read.
Perhaps not surprisingly, UCITA has been heavily influenced by the strong USsoftware vendor lobby. The Consumers Union in the US opposes UCITA because itbelieves that the Act authorises software owners to use and enforce unfaircontract terms and practices. Some software user organisations have proclaimedUCITA a ‘parade of horrors’. They say it marks a shift away from policies toprotect software transfer, competition and innovation. Large software customershave voiced their opinion firmly against the ability of vendors, under UCITA, toshut down user software remotely, without a court order. Several largecorporations are believed to have rejected shrink-wrap products based purely ontheir licensing terms, due to the spectre of UCITA .
Application of the Act in the UK
UCITA’s broad scope, covering all ‘information transactions’, meansthat its potentially harmful reach extends beyond software licensing. Itincludes access to databases and electronic works such as books as well ascompiled information – all of which are the bedrock of e-commerce.
UCITA will apply in all cases where the law of any US state applies(obviously, only if that state has adopted UCITA) if the contract between anowner and a licensee is silent on any point covered by the Act. So, althoughcontracts can be negotiated to exclude the UCITA-approved provisions (byexpressly stating provisions to the contrary), if the contract is silent UCITAwill apply as a matter of course.
Any users of US-sourced software are potentially at risk. This isparticularly the case in transatlantic deals where either English or US lawcould potentially apply, and in e-commerce transactions when customers generallypay less attention to terms and conditions because they believe that there islittle or no chance of negotiating with a vendor to deviate from their standardterm contracts.
Costs to Customers and Vendors
The cost of enforcing the new law and educating users is likely to besignificant.
The provisions setting out the scope of the Act, limitations onenforceability and the ability to override or exclude operation of the Act arecomplex and little guidance has been given on how they might apply. UCITA will,therefore, increase procurement costs as lawyers will need to be engaged toscrutinise shrink-wrap licences bought on a large scale as well as bespokearrangements.
Some pundits argue that legal uniformity and certainty is necessary fore-commerce to prosper, and UCITA promotes neither. To start with, it establishesa bargaining position favoring the licensor, which is contrary to concertedefforts in most jurisdictions to enhance protection for consumers in electronictransactions. It also leaves many questions unanswered: for example, it isstated to apply to ‘computer information transactions’, but it is notaltogether clear what this means.
The Act creates further uncertainty because, although its scope at firstappears to be wide, there are actually several common types of e-commercetransactions that are specifically excluded. These include financial servicestransactions and contracts dealing with audio or visual programming, motionpictures, sound recordings and musical works. The inconsistent treatment ofthese transactions may impact heavily on the finance and entertainmentindustries that are currently investing millions in the burgeoning push to maketheir products ‘go digital’.
Recommendations
In order to be certain to avoid the application of UCITA, software licenseesshould ensure that contracts are concluded under English law. This may be easierin a negotiated deal between parties that are familiar with multinationaltransactions. It will be more difficult where standard form contracts are usedwithout being amended, or where transactions are concluded via the Internetusing standard form or shrink-wrap style licences.
In bespoke agreements that must be governed by a US state law, the partiesmust expressly state that certain clauses are at variance to UCITA. For example,a contract may say: ‘Notwithstanding any contrary provision in UCITA or anyother law or regulation governing software licensing or other computerinformation transactions, the parties agree… ’.
Software owners in the UK who license their software in the United Statesneed to be aware of the effects of UCITA and, potentially, to take itsprovisions into account in their contracts. They should also consider the use ofremote disablement devices in their software distributed in the US since,presumably, the use of such devices may become more common in the light of UCITA.
