Upgrading business rules for e-commerce

As meetings wind down to make the sprawling code underlying all commercial transactions compatible with the emerging electronic marketplace, unresolved issues remain that could profoundly affect its future.

With only three contentious meetings left, lobbyists and commissioners still have to reconcile differences that have divided industries and consumers for years, such as the basis for when a contract has been breached or what warranties come with software.

Though arcane, the Uniform Commercial Code (UCC) wields tremendous influence on commerce in the United States. It promises to have an equally strong effect on electronic commerce, which analysts predict will explode within the next five years.

First drafted in the 1950s, the UCC governs transactions in areas as diverse as banking and the leasing of personal property. Such matters are generally the domain of state legislators, which could potentially pass laws that are incompatible with those of neighboring states. The UCC is designed to unify commercial law so that contracts between parties in different states are binding.

But as the licensing of software has grown to a billion-dollar industry and as more and more companies peddle their goods over the Internet, the UCC has become outdated. That's because while its provisions cover the sales of physical goods, the document ignores the licensing of merchandise. What's more, the UCC deals specifically with physical goods, such as ballpoint pens and bicycles. It doesn't easily translate to intangible goods such as software and information from databases.

"A lot of the rules [in the UCC] don't work very well for software transactions," said Mark Nebergall, vice president of finance and tax policy with the Software Publishers Association.

To compensate for the shortcoming, the National Conference of Commissioners on Uniform State Law, which oversees the UCC, has proposed a new article, dubbed 2B. After the three upcoming meetings, a draft of Article 2B must be submitted to state legislators nationwide, where lawmakers must either accept or reject the 200-page document.

"[Article 2B] will give us some certainty the general licensing methodology [used in transactions of software] is valid," added Nebergall.

J.D. Marple, a legislative policy manager at the Business Software Alliance, agrees, pointing out that as industries adapt to an electronic marketplace, current law becomes obsolete.

"As the industries converge and you have CD-ROMs that a company is putting software and entertainment on, Article 2B melds these traditions and provides a uniform way to contract for intellectual property," he said. "It establishes the default rules for idea and content submissions."

Even the Clinton administration has signaled its belief that the UCC needs to be updated to embrace electronic commerce. Its white paper on electronic commerce, released in early July, recommends that "the U.S. government should support the development of both a domestic and global uniform commercial legal framework" (See related story)

Friday's drafting committee meeting is one of a dozen that have taken place so far across the country. The meetings, where lobbyists debate adding and dropping specific language, are open to anyone and are generally attended by representatives from the software, banking, motion picture, and book publishing industries, as well as consumer advocates, librarians, and others.

There will be only two drafting committee meetings after this Friday's in Minneapolis: one in Tampa, Florida, and the other in Redwood City, California. After that, the language of the draft is written in stone. The two groups that have oversight over new UCC laws are expected to approve the draft by the summer of 1998.

From there, it will be shipped off to state legislators, who will either sign off on the proposal or reject it outright. It could go into effect as early as late 1998, depending on how quickly individual state legislatures act. Yet based on the record, states are likely to overwhelmingly approve the measure. With only a handful of exceptions, states have approved all UCC measures brought before them.

That has left lobbyists representing customers and consumes of software worried. "The word 'outrageous' is the most common phrase that I've heard, and it's the one that I personally use when summarizing my opinion of Article 2B," said Cem Kaner, an attorney and former software programmer who has been attending the meetings since they began some two years ago.

"My main concerns are consumer-protections related," he added. "I believe, as a software quality expert, that the effect [of Article 2B] on engineering will be that it will eliminate incentives to develop high-quality programs and that it will result in lower-quality American software."

Kaner, who has written extensively about Article 2B, is joined by other consumer advocates, who argue that the terms of Article 2B are stacked in favor of software firms. Under the article, software companies will be able to shirk responsibility for bugs and for harmful viruses spread through their software, according to Kaner and other advocates.

They also claim that users will have a significantly harder time seeking redress for defective software and that software companies will be free to place all kinds of restrictions on users, such as prohibiting them from writing product reviews on the Internet or from decompiling the software to make it compatible with other products.

Worst of all, these critics say, most of the terms software publishers impose on licensees won't be disclosed until after the product has been downloaded or removed from the package. The mere act of clicking an "I accept" button, or inserting a floppy disk into a computer would constitute a user's agreement to the entire terms.

"Article 2B, to a large extent, will say that whatever the software maker puts in the license will be acceptable," said Gail Hillebrand, senior attorney at the Consumers Union. "It takes a drafter-wins approach that is grounded in the idea that the license is a contract and is always what both parties want." She explains that software companies are likely to automatically include the licenses with every purchase, leaving people who need Microsoft's Word, for example, no option but to agree to the terms if they want to have software that is compatible with that their coworkers.

Susan Nycum, an attorney at Baker & McKenzie who represents large licensors such as DuPont, American Airlines, and SmithKline Beecham, said that software and information users will expose themselves to significant risks and will have to invest time and money learning the new landscape created by Article 2B.

"The way this is written, there's an awful lot that's left to the courts," she noted. "That's not in my judgment what we want to do. We want to limit litigation, not turn this into a lawyer assistance and relief act."

But software companies are quick to point out that Article 2B opens them up to unprecedented exposure as well, and that consumer advocates' criticisms are overblown.

The software industry has made considerable concessions, the Business Software Alliance's Marple said, including the following: allowing large corporations to qualify as "mass-market" users; signing off on provisions guaranteeing the accuracy of all nonpublished information contained in the product; permitting licenses to be transferred from one user to another; and by agreeing to limits on so-called "self-help remedies," such as devices that disable a product if the user doesn't comply with the license terms. All of the concessions would be unprecedented, according to Marple.

The BSA and the Software Publishers Association also say Article 2B would for the first time recognize a software company's duty to check for viruses, and that language limiting their liability for viruses that pass through their screening process are necessary for companies to remain competitive in the global market.

Mark Lemley, an assistant professor specializing in Internet and software law at the University of Texas, said that Article 2B ultimately will favor software companies and information providers over the users of those products, because the provisions protecting them can easily be undone by using mass-produced standard form contracts.

"If you're a software vendor and you have a good contract lawyer, you can get just about anything you want out of the other side," he explained.

Still, he added, Article 2B will likely be adopted by an overwhelming majority of states. "We clearly need some statutory reform to take care of electronic commerce. The concept of uniformity has pull [with state legislators]. The strong implication is, 'You should adopt what everybody else is going to adopt, especially when it's this arcane.'"