MEMORANDUM

TO: NEW JERSEY LAW REVISION COMMISSION

FROM: STAFF

DATED: NOVEMBER 6, 2000

RE: RESPONSE TO OCTOBER NIMMER/RING MEMORANDUM

This memorandum is organized in two parts.

The first part of this memorandum is an issue-by-issue response to most of the substantive points raised in the October Memorandum from Raymond Nimmer and Carlyle Ring ("the October Nimmer/Ring memorandum").

The second part of the memorandum responds point by point to some of the statements in the October Nimmer/Ring memorandum. It is to some extent duplicative of the first part, but there were some specific points made in the Nimmer/Ring memorandum in support of the general points as to which a more specific response should be memorialized. Please note that the entirety of the Nimmer/Ring memorandum is not repeated in this response, only certain passages from it. The entire Nimmer/Ring memorandum is being distributed with this mailing and is also available on the Commission's web site. It should be read in its entirety.

This memorandum will not attempt to respond to the non-substantive assertions in the Nimmer/Ring Memorandum except as follows. The Commission's deliberations are criticized on the general point that neither Commissioners nor Staff members were involved in the lengthy UCC 2B/UCITA drafting process and thus did not have the benefit of the discussions which took place in that process. This suggests that those who were not involved in the process are foreclosed from scrutinizing its product. This would not be consistent with the Commission's prior practice, however, nor with the directive in the Commission's enabling statute that "it shall be the duty of the commission to ... receive and consider suggestions and recommendations from the American Law Institute, the National Conference of Commissioners on Uniform State Laws...." N.J.S. 1:12A-8(c).

The Commission, of course, has neither the personnel resources nor the budget to support the regular attendance of Staff members at the numerous NCCUSL drafting committee meetings which take place throughout the country. In lieu of attendance, the Staff members have consulted the voluminous materials that have been generated in the UCC2B/UCITA process, as well as the voluminous materials that have been submitted directly to the Commission for its consideration, materials that are both "pro" and "con" with respect to UCITA.

As has been discussed at Commission meetings, a large portion of the material which Staff consulted regarding the UCC2B/UCITA drafting project has been highly critical of both its process and its product. While a good deal of that critical commentary has been generated by "interest groups," a significant body of critical comment, both substantive and procedural, has come from individuals who were involved in the drafting process either as official participants or as participating observers. Those individuals include one of the NCCUSL members of the UCC 2B Drafting Committee, Stephen Y. Chow, an intellectual property lawyer (he remains on the UCITA Drafting Committee), and all three of the ALI representatives to the UCC 2B Drafting Committee. Other critical comment has come from bodies which do not fit the category of "interest groups," such as the Committee on Copyright and Literary Property of the Association of the Bar of the City of New York, and from numerous scholars.

UCITA is presented to the Commission as the product of a process which resulted in a consensus regarding the legal rules which should apply to the digital economy. Indeed, it has the benefit of an impressive array of supporters, including numerous software and technology companies and organizations. In evaluating whether UCITA represents a consensus, however, it is impossible to ignore the equally impressive array of opponents, the critical commentary referenced above and the fact that the years-long drafting process resulted in a product which comes to the Commission without ALI approval.[1]

Ultimately, UCITA's legal rules embody a series of policy choices. Whether the policy choices embodied in UCITA can be supported and recommended for enactment by this Commission is a question that can only be answered by the Commissioners themselves, individually and collectively.

I. Scope

The October Nimmer/Ring memorandum objects to the proposed amendments to UCITA Section 103 Scope. The proposed amendments would remove from the scope of UCITA what may loosely be described for purposes of general discussion as "goods-type" transactions. The Nimmer/Ring memorandum is responding to the September version of the proposed amendments:

UCITA 103 SCOPE

(a) This [Act] applies to computer information transactions.

(b) Except for subject matter excluded in subsection (d) and as otherwise provided in Section 104, if a computer information transaction includes subject matter other than computer information or subject matter excluded under subsection (d), the following rules apply:

....

(1) If a computer information transaction involves computer information that is either in the form of goods or is embedded in goods, this Act does not apply to the transaction. If a computer information transaction involves both goods and computer information that is not either in the form of goods or embedded in goods, this Act does not apply to the transaction if the goods are the predominant aspect of the transaction.

....

The October version of the proposed amendment removes this language from subsection 103(a) of Section 103 and moves it to a new subsection at the end of Section 103:

(d) This [Act] does not apply to:

[subsection (d)(1) through (d)(8) omitted]

(9) A transaction with a library or archives that is (A) open to the public, or (B) available not only to researchers affiliated with the library or archives or with the institution of which it is a part, but also to the other persons doing research in a specialized field.

(10) A mass-market transaction:

(i) in which computer information is distributed in tangible form; or

(ii) in which computer information is contained in and sold or leased as part of goods; or

(iii) which involves computer information and goods, and the goods are the predominant aspect of the transaction.

As the Commission is aware, the scope provision is one with which we have struggled. The Nimmer/Ring memorandum objects both to the language of our suggested amendment (specifically, to the September version) and to its substance. We note in passing here, and at greater length below, that this is an issue with which the ALI and NCCUSL currently are struggling in the context of the Article 2 Revision project, and it is one which vexed the Article 2B/UCITA drafting committee.

It may be helpful in addressing this issue to identify the Commission's underlying operative view with respect to the issue of scope as it presently appears. Prior to the September meeting, the consensus view appeared to be that all "goods-type" transactions should be excluded from the scope of UCITA. At the September meeting, the consensus view shifted and Staff was directed to draft a scope provision that excluded only "goods-type" transactions that were either consumer transactions or mass-market transactions (however "mass-market" is defined, see below). The thought behind the consensus view was that in transactions involving computer information which is sold "in the form of goods" or "embedded in goods," current law ought to be preserved. The discussion in September reflected the view that transactions involving the purchase of a book, a music CD or cassette, or boxed computer software by the same purchaser in the same store should be governed by the same legal regime, as is the case under current law. Preserving the applicability of current law means, from the perspective of this project, removing "goods-type" transactions from the scope of UCITA.

It should be emphasized, as we detail below, that suggesting that "goods-type" transactions be removed from the scope of UCITA does not necessarily equate with suggesting that they be governed in all respects and in all circumstances by UCC Article 2. Nor does it equate with a statement that "computer information is goods."

In July Staff presented a scope provision to the Commission which would have removed transactions from the scope of UCITA by placing them within the scope of UCC Article 2. (See July 2000 memorandum.) We restructured the September draft, and similarly, the October draft, to remove reference to UCC Article 2 as applying in place of UCITA. Being mindful of the ongoing debate on the redrafting of UCC Article 2, the more appropriate approach seemed to be to remove these transactions from the scope of UCITA, leaving UCC Article 2 to apply (or not) to the excluded transactions, either as it is currently enacted or as it may be revised. In general, current UCC Article 2 would apply, under the current state of the law in this jurisdiction. If the Revised Article 2 project results in the promulgation of a scope provision that is narrower than the scope that the Commission would prefer, then a recommendation could be made at the time of its consideration for a local amendment of the Scope provision of Revised Article 2, to recoup into it the transactions which are excluded from UCITA, but not included in the official version of Revised Article 2.

Just what will be the scope of Revised Article 2 is discussed below.

(1) Current law

The October Nimmer/Ring memorandum takes issue with the presentation of current law in the September Staff memorandum. The September Staff memorandum reiterates prior materials sent to the Commission on this point, that UCC Article 2 currently applies to computer software in many circumstances. Other Articles of the UCC may apply to aspects of a transaction involving computer software, as well as common law (the common law limitation on the enforcement of contract terms which are against public policy, see below) and other bodies of statute law, both federal (e.g., federal intellectual property law, the Magnusson-Moss Warranty Act) and state consumer laws which govern various issues which may arise in a transaction.

The determination that subject matter of a transaction is a "good" for purposes of applying UCC Article 2 does not mean that the subject matter will be treated the same as other goods for all purposes under other bodies of law. For example, although books are treated as a good for purposes of UCC Article 2, courts have been careful to distinguish the goods and non-goods aspects of books where appropriate. For example, the informational content of a book is not considered a "product" for purposes of tort liability. See, e.g., Winter v. G.P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991)(publisher of book about mushrooms not liable for injuries to readers who became ill from eating mushrooms). (This point is developed further below with respect to computer software.)

As has been previously discussed, many courts have dealt with the issue of UCC Article 2 applicability to computer software. Most of the cases found in our research involved the sale of computer hardware together with computer software. Often, the software was custom-designed, or there was some other significant services component included in the transaction. In those cases, the entire transaction was often found to be governed by UCC Article 2, under the same type of analysis that brings other combined goods and services transactions under UCC Article 2. In this State, see, e.g., Quality Guaranteed Roofing, Inc. v. Hoffmann-La Roche, Inc., 302 N.J. Super. 163 (App. Div. 1997)(if sales aspect predominates UCC Art.2 applies; if services predominate UCC Art.2 inapplicable).

The primary example of a combined hardware/software case in the Third Circuit Court of Appeals is the opinion in Advent Systems Limited v. Unisys Corp., 925 F.2d 670 (3d Cir. 1991)(diversity case applying Pennsylvania law), in which the court applied UCC Article 2 to a transaction which involved a "document management system" including both software and hardware. In this State, a similar opinion issued in Drier Co., Inc. v. Unitronix Corp., 218 N. J. Super. 260 (App. Div. 1986), which involved the sale of computer hardware along with custom-programmed software. The court concluded that "most authorities agree that the sale of a computer system involving both hardware and software is a 'sale of goods' notwithstanding the incidental services aspects of the sale," citing, e.g., Chatlos Systems v. National Cash Register Corp., 479 F. Supp. 738, 742 (D.N.J. 1979).

In cases such as Drier, Chatlos and Advent, the transactions involved the sale of a system which included both hardware and software. None of these cases involved the sale of software alone. Nevertheless, the Third Circuit in Advent stated that a computer program "once in the form of a floppy disc or other medium" is a good for purposes of UCC Article 2. Other courts, including ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996), have applied UCC Article 2 to disputes involving non-custom software alone. Although it is frequently stated that the application of UCC Article 2 to software is inappropriate, the existence of these precedents and their application to transactions do not appear to have resulted in significant harm to the market.

We have not attempted an exhaustive analysis of all of the cases which bear on this issue, but there are recent cases consistent with the Advent and and ProCD on this point, and also cases inconsistent with them. We will prepare a thorough examination of all the cases that we can locate if the Commission wishes a more thorough review of this point.


(2) Revised Article 2

The October Ring/Memorandum asserts in several places that the Commission's proposed amendments to the UCITA scope provision are inconsistent with current drafts of Revised Article 2. This is true to some extent, but how true it is not clear. As has been pointed out to the Commission on numerous occasions, both with respect to UCITA and otherwise, Revised Article 2 is a moving target. The staff memorandum to the Commission dated July 10, 2000, set out the status of the Revised Article 2 project, in particular the scope provisions of Article 2 versus the scope provisions of UCITA. NCCUSL, the ALI and the Permanent Editorial Board of the UCC had not as of that date come to agreement on the scope provisions of the respective projects. Nor, to the best of our knowledge, has agreement been reached to this date. At issue in particular between the two bodies is whether UCITA or UCC Article 2 will apply to certain "goods-type" transactions.