Infotech and the Law

License Rule Limps To the Finish Line

Jonathan Cain

By Jonathan Cain

The drafting of Uniform Commercial Code Article 2B, which began in 1995, is struggling to an inconclusive end this spring as interest groups with widely divergent points of view try to leave their own marks on the final product.

Article 2B was envisioned originally as a vehicle to create uniform default rules in every state for contracts involving the licensing of computer software and multimedia products.

The drafting committee, appointed by the National Conference of Commissioners on Uniform State Laws, held its last scheduled meeting at the end of February. But many basic issues remain hotly disputed, and a number of interest groups that originally supported the project have bailed out.

The scope of the draft article expanded at one point to cover all electronic transmission of data, including books, films, stock quotes and databases. In the last year, as interest groups began boycotting the drafting process, a much less ambitious reach for the article has been under consideration.

As the drafting committee approached its final meeting Feb. 27, the scope of the article was still in debate. The resulting 2B draft will be submitted to the Uniform State Law Commissioners in July.

As proposed, the article applies to "computer information transactions," defined as an agreement designed to create or transfer the rights to information in an electronic form that is obtained from or through the use of a computer, or that is capable of being processed by a computer.

Critics have pointed out that the proposed scope of the article is, once again, extremely broad. It covers, for example, any writing that could be scanned by a computer and any copies created or transmitted in electronic form.

Then, in an effort to give parties of a transaction the ability to limit the statute's broad application, the article contains an "opt-out" provision, under which a contract's parties could agree not to be covered by the article.

If contracting parties are free to opt out of provisions of state law enacted to govern their contracts, then the obvious question is why have the law in the first place.

Proponents of the article say the law will cover so-called mass market transactions, where the buyer has no ability to negotiate effectively a license's terms.

At this point, consumer advocates respond that the article contains numerous terms adverse to consumer interests, and the entire debate over the correct scope of the article begins anew.

The use of so-called "electronic self-help" — the inclusion of disabling code in software — also remains a hotly debated topic. The debate has not been enlightened by any reliable information on the extent that electronic self-help is used in day-to-day commerce, so the debate is largely speculative and anecdotal.

Existing state laws vary widely on using self-help or repossession remedies without judicial involvement. Electronic self-help for violations of software licenses is closely akin to repossession or nonjudicial foreclosure. Also, it has been difficult to find a solution in the software and database licensing context that doesn't impinge on the public policies of one or more states.

The proposal requires that a licenser obtain the licensee's approval to include electronic self-help code in the software when the license is granted, and that the licenser give notice of the intent to exercise the self-help remedy before disabling the software. Contract terms that purported to waive these two key requirements would not be enforceable against the licensee.

Related to the topic of self-help is including provisions regarding collateral rights in software. In early drafts, the article did not cover provisions that would define the rights of a lessor or financier that took a security interest in the software or data licensed by another.

While there are cases where software financing is secured by liens on the software, many, if not most, software financing transactions are either unsecured or involve a license-sublicense structure. This is where the financier is the primary licensee, and the borrower is a sublicensee.

Secured transaction law does not deal with such circumstances, and the lack of a uniform legal structure for securing software financing increases the cost of software acquisition loans.

Including financing provisions in the article was suggested by software leasing companies and was well received. Licensers who reviewed the provisions were unhappy, claiming the proposals would result in a loss of their control over the distribution of software and information products.

The draft tries to find a middle ground, denying the financier the right to remarket software repossessed from a defaulting borrower without the licenser's consent, but giving the financier the right to terminate the license and repossess the software without liability to the borrower.

Jonathan Cain chairs the Technology Practice Group of Mays & Valentine LLP, McLean, Va. His e-mail address is

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