I. INTRODUCTION

During the height of the cold war our government believed the survival of the nation depended on the ability to win war fought on two fronts. History could have shown that at the end of the 20^th century one of those fronts is the Middle East. However, that the other would be Redmond, Washington, the home of Bill Gates's Microsoft, seems to have caught the other Washington by complete surprise.(1) After Mr. Gates testimony before the Senate Judiciary Committee, and the more recent Justice Department accusations of monopolistic behavior,(2) it is clear that politics has finally entered the digital age. However, high technology companies, Silicon Valley venture capitalists, and law makers on Capitol Hill have not fallen into each other's arms like long lost lovers.

This "clash of cultures" is a battle fought between two powerful interests. Legislators and lobbyists are interested in filling their campaign coffers, while those in high tech industries are repelled by the slow pace of politics, Democratic tax-and-spend policies and Republican social conservatism.(3) Nonetheless, after high tech loses in Washington regarding encryption, and the now defunct Communications Decency Act, industry leaders have increased their lobbying efforts, recognizing that Silicon Valley is now under the legislative microscope.(4)

Outside of Washington, D.C., another battle is being fought between software developers and lawmakers. Though the drafting of a new article of the Uniform Commercial Code is a political process, it is much different than the battles fought in the nation's capitol. "Article 2B-Licenses" will govern all transactions regarding the licensing of information, including software licensing.(5) The drafters of Article 2B-Licenses are not elected legislators but, rather, they are members of the bar including practitioners and academicians. They are not driven by the motivations of the politicians in Washington, and the drafting process has been opened to both representatives of the software industry and consumer rights advocates.

Included in every version of Draft Article 2B has been a provision that grants software licensors the right to engage in self-help repossession.(6) While this appears to be in accordance with current practices in commercial law, Article 2B extends the right to include the use of electronic means.(7) This power gives the licensor the right to engage in self-help activity without regard to the licensee's protests. This is contrary to well-established law that provides that a debtor's protest forces the creditor to reduce its claim to judgment.(8) Furthermore, the licensee's ability to negotiate is threatened, and its ability to force the licensor into contractual compliance is greatly decreased. If Article 2B does not prohibit electronic self-help repossession, it should provide for its use only under a narrow set of circumstances and under strict procedural rules.

The software industry is relying on its technical advantage, unity, and the Copyright Act to advocate a draft that will protect its interests by recognizing standard form contracts and "shrinkwrap" licenses, limit their liability for damages, and provide for broad discretionary powers in cases of breach. Consumer advocates argue that licensees need protection from unconscionable clauses placed in standard form contracts. They are aided by the fact that most of America's largest, wealthiest, and most influential corporations are consumers in this context.(9)

If the software industry wins the battle over Article 2B they will surely use the law to consolidate their information monopoly. Their revenues and influence will increase, and it is likely that licensees will be faced with both paying high prices and agreeing to unfavorable contractual terms. If the licensees win it is quite possible that providers will lose a major incentive to innovate, as they fear that software piracy will continue unabated. However, most likely, the result will be higher prices for software to offset the costs licensors perceive they will suffer.

Part II of this note will discuss the current Uniform Commercial Code, and why the changes in Article 2B are so important to the law and the economy. Part III will address the scope and terms of Article 2B to explain in context how electronic self-help is inequitable. Part IV will discuss the current state of self-help law and show that the current law is more limited than the licensor's proposal. Part V will present the legal faults of section 2B-716 in the current draft, which purports to grant wide latitude to licensors in the use of self-help. Finally, Part VI will present several policy considerations the drafters should carefully weigh in their deliberations, and then conclude with a suggestion of what section 2B-716 should include.

2. THE CHANGING COMMERCIAL LANDSCAPE

While reports of the death of the Uniform Commercial Code ("UCC") may be premature, it is unquestionable that our information economy requires a new legal approach. The current UCC is a body of law relating to commercial transactions that is common throughout the 50 states.(10) More specifically, the UCC is a set of default rules in cases where the parties did not specify in their contract what rules to follow for a particular situation. Most, but not all, of the provisions in the UCC may be changed or addressed in the contract.(11) It reflects a 1950's economy where clear distinctions could be made between goods and services.(12) However, the UCC provides frustratingly little guidance with regard to the types of intangible property that have become the foundation of the information age. The goal of UCC Article 2B is to create a uniform body of law governing software and information licenses and service contracts.(13)

The Drafting Committee for Article 2B includes representatives from the American law Institute ("ALI"), commissioners from the National Conference of Commissioners on Uniform State Laws ("NCCUSL"), and Prof. Ray Nimmer who is serving as the Reporter and is drafting the text.(14) Beginning in March 1994, members of the Drafting Committee began meeting with over thirty different organizations representing government, legal, business, and consumer positions.(15)

The first draft was completed in December 1995 and the Drafting Committee has held meetings about six times a year since January 1996.(16) These meetings are held in different cities across the country and are attended by the various representatives of the ALI, NCCUSL, and other parties representing the interests of both the software industry and consumers.

The final draft must be approved by both the ALI and the NCCUSL,(17) after which the final approved draft will be presented to the individual state legislatures for debate and ratification or modification. No doubt, a draft will not be proposed as final until parties strike an equitable balance between the rights of consumers and the rights of software developers.

The goal of the UCC is to create commercial laws that are common to all 50 states. This promotes efficient contracting and ensures clarity of the law. Each article is under constant review and revision in order to ensure that the laws keep pace the business innovation and to ensure equity. If the final draft of Article 2B is too controversial-too unbalanced-it is likely that each state will seek to make modifications before adopting it or rejecting it in its entirety.

Nowhere in the current UCC is the issue of the licensing of intangible goods addressed.(18) Article 2, which addresses the sale of tangible goods is inappropriate;(19) likewise Article 2A which covers leases of real property cannot be applied to the rights of software licensors and licensees. The need for a UCC response to "informational" licensing is increasingly important because fundamental changes in the forces that run our personal and business enterprises are occurring at a phenomenal pace.

For example, over 25% of American households had a personal computer in 1994, and by the end of 1997 the number was expected to be near 40%.(20) More astonishing is the growth of the World Wide Web from 1.5 million users in June 1995 to over 125 million users by the year 2000.(21) Thus, the need to create laws applicable to electronic commerce, contracts, and information licensing is obvious. In fact, Article 2B represents recognition of two important conditions. First, software and information technologies currently account for 6% of the current Gross National Product,(22) and the figure is growing. Secondly, the copyright regime, of which software transactions are a part, creates a unique set of property rights for both the licensor and the licensee.(23)

Thus, Article 2B is to cover all transactions in software and all licenses of other "information."(25)

III. SCOPE AND TERMS OF ARTICLE 2B

Article 2B addresses issues of software licensing and electronic contract formation. A license is a contractual, non-exclusive right to access or use information that may be owned by another party.(26) It is fundamentally different from a sale because the licensor retains certain rights.(27) Article 2B would apply to licenses ranging from the tens of dollars to hundreds of millions of dollars. One of the most controversial aspects of Article 2B is section 2B-716, which describes the self-help remedy available to licensors.(28) Article 2B-716 would allow licensors to excise licensed software by either entering the licensee's computer and removing the source code or by other electronic means. The controversy surrounds the very nature of the bargain.

According to the Draft, a licensor may exercise its 2B-716 rights in any case of material breach, and the licensor may define material breach as it chooses in any standard form contract. Therefore, a licensor is likely to reserve broad powers it can exercise in any case of payment default as well as any time it believes that the licensee has violated or will violate the contract. The licensor can retain these powers because it knows that the licensee cannot prevent electronic self-help without major disruptions to the operations of their business. The Draft fails to provide meaningful opportunity for the licensee to "breach the peace."(29) While it is true that this power could be useful to stop bad faith violators and piracy, it is also a power that could be easily abused to the great detriment of licensees.

The rest of 2B-716 is fairly straightforward. Electronic self-help may only be used if the licensee consents to a conspicuous term in the contract.(30) This is novel because the licensee has no virtually no way to prevent electronic self-help. Thus, Article 2B allows licensees to effectively waive their right to prevent forced entries by the licensor. Current applications of Article 9 would find such contracts unconscionable.(31)

The licensor must provide a minimum of ten business days notice before using electronic self help,(32) and that notice must be given only to certain designated persons.(33) After notice is given the licensee has a right to "an expedited hearing;"(34) however, this turns current law on its head. Current law encourages debtors to reduce their claims to judgment if they cannot exercise self-help in the absence of any contemporaneous protest made by the licensee, especially for any property located within a business or home. Under 2B-716 the licensor would never reduce their claim to judgment; instead, they would exercise self-help which could damage an innocent licensee's computer and cripple the licensee's business. The courts would be flooded with much more complex, expensive litigation.

According to Article 2B the license contract may be entered through negotiation or by the licensee's acceptance of a "standard form" contract.(35) The use of standard form contracts has become very popular throughout our economy because they are economically efficient; they are addressed in the Restatement Second of Contracts.(36) More pointedly, Article 2B specifically addresses the use of "mass market licensing."(37) In 2B-208, Article 2B effectively validates the legality of "shrinkwrap"(38) or "bootscreen"(39) licenses. Even though these licenses are not new, few courts have addressed the issue of "shrinkwrap" licenses.(40) Courts were initially reluctant to enforce these licenses, but in 1996 Seventh Circuit ruled that such licenses were enforceable so long as the terms were not objectionable, unreasonable, or unconscionable.(41) It becomes clear that while both courts and consumers are slowly coming to terms with the idea of legally enforceable shrinkwrap licenses, there is still great confusion. A consumer purchasing software in a store is likely to believe she owns the software like she owns her stereo or television. The average consumer is not likely to realize that the copyright holder can limit the purchaser's rights to merely those necessary for the purchaser to use the program.

The use of standard form contracts has many benefits and Article 2B is correct to recognize their legality. However, the very fact that one party has the power to unilaterally form the terms of the contract should "red flag" possible instances of inequity and unfairness.(42) Courts will generally enforce a contract of adhesion unless the contract, or its terms, "does not fall within the reasonable expectations of the . . . `adhering' party."(43) A second limit to the enforceability of standard form contracts is the presence of terms that are "unduly oppressive or `unconscionable.'"(44)

This momentary digression is important because the right to use electronic self-help will be reserved in a contract of adhesion. Thus, it is important to examine both the "reasonable expectations" of the licensee, as well as the rules of contract formation expressly contained within Article 2B. Earlier drafts of Article 2B would have rendered unenforceable any contract term that the proposing party "should know would cause an ordinary and reasonable person . . . to refuse the license if that party knew that the license contained the particular term."(45) This language has since been removed and, instead, the focus is upon whether the adopting party "manifests assent."(46) A manifestation of assent occurs if, with knowledge of the terms or after an opportunity to review the terms, a party "authenticates the record or term, or engages in other affirmative conduct or operation that the record conspicuously provides" which clearly indicates acceptance.(47) The focus is on the accepting party's ability to review the terms and their affirmative act.(48)

While this approach seems equitable on its face, it assumes a certain level of legal sophistication which may not exist in mass-market transactions. Of course, a party should not be held to the terms of a contract which it did not have opportunity to review or accept; however, the idea that mass market consumers will actually read through the fine print of a license, likely a morass of legal terms, waivers, and requirements, is suspect. It is particularly troubling because Article 2B proposes a policy that allows the proposing party, usually the licensor, wide discretion in the formation of a contract that is not legally "unconscionable" based on its express terms. This policy makes electronic self-help attractive to the licensor, and grossly inequitable with respect to the licensee

There are several other Article 2B provisions which follow current law, and appear unobjectionable, that, when combined with the right of electronic self-help, should be considered unconscionable. For example, 2B-703(d) allows consequential and incidental damages to be "excluded or limited" in any agreement.(49) This means that if the use of electronic self-help damaged the licensee's hardware or computer system, the licensor could be shielded from liability. In addition, recovery for any expenses incidental to any negotiation for restoration of service or judicial solution would also be denied.

Another problem is the elimination of the "perfect tender" rule for non-mass-market transactions.(50) In contracts requiring on-going performance, such as access contracts, a party's duty to perform is dependent on the absence of a "material breach."(51) Material breach may be defined by contract(52) and may include a breach that causes substantial harm to the aggrieved party or deprive that party of a benefit it reasonably expected under the contract.(53) Since payment default is usually considered material breach, it is useful to show how the requirement of "material breach" for any electronic self-help remedy can be easily manipulated. Barney R. Kantar, Software Purchasing Manager for DuPont Company points to two possible scenarios that would be unfair to licensees.(54) The first is when a genuine issue of dispute arises concerning the interpretation of either the definitions, grant language, and use permits of the contract.(55) The licensee may be acting in good faith, even legally; however, under this draft a licensor could use electronic self-help to repossess the software, and still not be liable for consequential damages if a court later found that the licensee's use was not a breach.

Mr. Kantar also points to the obvious distinction between a licensee that withholds payment because its licensed software contains defects that may have been known to the licensor before the contract, and a financially strapped licensee that willfully defaults on his obligations in order to pay another creditor.(56) There is an obvious need to limit the licensor's ability to use electronic self-help against the first party while preserving more severe remedies for use against the second party. By allowing the licensor to draft the terms of the contract, escape the demands of "perfect tender" and consequential damages, and also unilaterally determine whether a breach is material for purposes of using electronic self-help repossession, the draft confers too great a benefit on software developers.

It is also important to think about what self-help means in the context of multimillion-dollar transactions between sophisticated parties. U.S. companies currently spend about $250 billion annually on computer technology.(57) Yet, according to one survey, 50% of all technology projects fail to meet chief executives' expectations.(58) "Megaprojects . . . are disappointing their sponsors at a dizzying rate. They often fall victim to a deadly combination: a fast-changing business landscape, an increasingly complex array of software, and technology boosters' can-do mentality, even when they can't."(59)

Consider these examples. First, Fox-Meyer Drug Co. which spent $65 million on a new computer project, only to find that its new software could not handle the huge volume of orders it received, and continued to break down.(60) Executives said this played a significant role in the company's decision to seek bankruptcy protection. While licensors may not be responsible for changing business practices, it must take some responsibility for ensuring that software it promises to develop meets its users needs. If a company cannot conduct its daily business because the software is not required to meet the perfect tender rule, it should not be additionally threatened by the fact that the licensor can completely shut down the business if full payment is not rendered.

Pacific Gas & Electric Co. will spend well over $200 million by the time that its new computer system is completed in 2001.(61) The system will keep track of the start and stop of service for more than three million customers, signal power outages, measure use, generate 230,000 bills a day, and calculate company revenue.(62) Draft § 2B-716 would permit the licensor to reserve the right to enter Pacific Gas's computer and excise this software, at will, based on the licensor's determination of breach. What if the software licensor promised more than it could deliver? What if the system, when completed, can only generate 150,000 bills a day? What if its measurements are less precise then promised? While the licensor argues that it has conformed to the "substantial performance" requirement (63), the licensee must make payment in full or risk having the licensor engage in self-help actions that the licensee has no means to prevent. If the licensee is obligated to perform, and must seek judicial action for financial satisfaction for imperfectly tendered software, then the licensor must have that same burden before taking actions that could seriously damage the licensee. Even more troubling is the potential effects on three million customers.

Perhaps the most accessible illustration of these issues is the plight of Howard Selland, president of Aeroquip Corp, an automotive supplier.(64) The full cost of upgrading a 50-person research lab from Windows 3.1 to Windows 95 was $20,000 a person, or $1 million.(65) Costs of even the most basic software can escalate very quickly; furthermore, Windows 95 is infamous for its breakdowns and wavering reliability. Yet, under 2B-716, if a licensee failed to meet its payments, Mr. Gates could personally close the "windows" and draw the blinds on Mr. Selland's lab.

Finally, even if software licensees were stuck with all of the aforementioned provisions, the current draft does not provide for sufficient notice to be granted by the licensor before the use of electronic self-help. Section 2B-716(b)(2)(B)(ii) requires the licensor to give "notice in record not less than ten business days prior to utilizing . . . electronic means." Since "record" is defined in 2B-102(35) to include e-mail messages, one group of licensee's rights advocates have argued that 2B-716(b)(2) creates a loophole because most people do not read their e-mail frequently or will delete messages from unfamiliar sources.(66) Though this argument sounds desperate, these advocates note the real issue is that 2B-716(b)(2) provides the licensee only ten days from the time notice is sent to seek an injunction prohibiting the use of electronic self-help repossession. That is an inadequate amount of warning for such a severe remedy. Also, 2B-716 requires notice of when electronic self-help may be used, but no requirement of notification why service is being discontinued and the license is being terminated.

IV. SELF-HELP REPOSSESSION IN APPLICATION

The drafters of Article 2B correctly state that current law includes the right of self-help repossession; however, they overstate its application to the issue of licenses.(67) Both UCC Article 2A and Article 9 allow self-help unless it causes a "breach of the peace."(68) A breach of the peace occurs when the party in possession makes any form of protest against the repossession of the goods.(69) Yet, it is nearly impossible to meaningfully protest any form of remote or electronic repossession. Most kinds of collateral subject to self-help repossession are items kept outdoors such as cars, boats, and other large pieces of equipment.

Two cases serve to illustrate how courts have addressed the issue of electronic self-help repossession.(70) In American Computer Trusty Leasing v. Jack Farrell Implement Co., the court upheld the use of remote deactivation in a case where the software license expressly warned that failure to meet payment obligations would lead to such a result.(71) However, Defendant did not pay because it had legitimate complaints about the software's performance.(72) Plaintiff gave Defendant over one week's notice that they would deactivate the software if Defendant did not cure its breach.(73) The court states that Plaintiff had "a legal right" to deactivate the software.(74) The implication is that the court assumed that the licensor had bargained for the right of electronic self-help. Defendant filed an unsuccessful counterclaim against Plaintiff for damages caused to Defendant's accounting and inventory records when Plaintiff used electronic self-help.(75) The contract in American Computer included both hardware rental and a software license.(76) Also, this was a contract negotiated between the two parties; it was neither a mass market nor a "shrinkwrap" license.

In Art Stone, the New York Supreme Court reversed Defendant's summary judgement.(77) Here, Defendant licensor removed the source code from Plaintiff's software without Plaintiff's knowledge or consent.(78) The court ruled that Plaintiff could sue for damages caused by the removal of the source code without notice which disrupted Plaintiff's business.(79) Again, this was a negotiated contract, and apparently there was no express provision regarding licensor self-help.

The current law is clearly not as generous to licensors as the drafters of Article 2B. Self-help repossession is without question a tradition in this country, even though it is considered "barbaric" or draconian in other countries.(80) However, the right to an extra-judicial remedy must be balanced by the right to protest it. I f a licensor has the option of electronic self-help there is no opportunity for the licensee to make that protest. In both American Computer and Art Stone the contracts were negotiated by the parties. Article 2B would allow a licensor to insert the right of self-help repossession in any mass-market license (81) as well as any standard form contract.(82) Draft 2B-716 would allow the licensor to use electronic self-help upon "material" default in any such contract.

Given the opportunity, software licensors will reserve the right to use self-help to the fullest extent allowed by law. Furthermore, any standard form contract is likely to exclude the licensee's right to consequential or incidental damages.(83) Thus, according to the current draft a licensor can use electronic means to deactivate a licensee's software, cause damage to the other systems on the computer,(84) and effectively shut down the licensee's business (85) without judicial determination of the degree of the licensee's default. Consumers have no way to protect themselves in a standard form contract because they are denied the opportunity to negotiate its terms.

V. ARTICLE 2B SHOULD FOLLOW CURRENT LEGAL PRACTICES

The purpose of the Uniform Commercial Code is to create a set of default rules that take effect when a contract is silent on an issue. Parties are free to form contract terms that differ from the UCC, and courts are most often likely to abide by the contract. Thus, it is important that the UCC reflect an equitable balance between the interests of a software licensor, including rights conferred by the Copyright Act of 1976, and a software licensee's right to receive the product for which they contracted.

It is difficult to make a legal argument that self-help repossession should be prohibited in Article 2B because self-help has been codified in Article 2A and Article 9, there has been no legislative move to curb its use, and courts have consistently upheld the right. A stronger argument can be made for excluding the right to use electronic self-help; however, it seems clear, even after the March 1998 Drafting Committee Meeting, that Article 2B will extend the right to use self-help to include electronic means.(86) Nonetheless, before a final draft of Article 2B is presented to the individual state legislatures for ratification critical limitations on the right to use self-help must be included in the statute.

First, it is important to understand how courts have enforced the right. The traditional limit is that the creditor, or in Article 2B, the licensor, may use self-help so long as there is no breach of the peace.(87) Though this may appear to be a substantial threshold inquiry, most courts have ruled that a breach of the peace can occur simply by a debtor telling the repossessor that he may not take the collateral.(88) Importantly, if the collateral is in an enclosed area the creditor must obtain consent from the debtor if it wants to take the property, otherwise the creditor must resort to judicial process.(89)

In 2B-716 the drafters confer much greater deference to a software licensor. Electronic self-help clearly allows the licensor to "enter" the building in which the licensee's computer is located and remove the software without any judicial process. The property right retained in a license is not sufficiently different than the rights protected in Articles 2A or 9 to upset the careful balance that has already been achieved. The notion that computer users will be forced to lower the barriers that protect their computers, and the information stored on them, without a judicial determination of default is a daunting one in the digital age.

Article 2B goes well beyond even the most creditor-friendly contractual provisions upheld by courts. For instance, under 9-503 a security agreement may require that on default a debtor must assemble the collateral at a specified place, at a time reasonable to both parties.(90) Though courts interpret such provisions as an indication of the parties' intent to provide access to the secured party in case of default, the secured party may still be forced to seek judicial enforcement of the contract.(91) Similarly, a secured party may be entitled to render equipment unusable, by removing a necessary part or, as in Article 2B, by removing the source code of licensed software. However, in such cases the secured party must still observe the breach of the peace doctrine and proceed in a "commercially reasonable manner."(92) It is clear that under current commercial law secured parties are held to strict standards of behavior; however, Article 2B, especially in regard to 2B-716, proposes no such standards to regulate the behavior of licensors in cases of alleged default.

Consider the kinds of information stored in a personal or a business computer. Individuals may use their computer for to track personal finance, to keep a schedule, and to store personal or work related documents. Businesses use computers to process many types of information including billing, payroll, and accounts receivable to name only a few. These types of information have historically been stored either inside a home or a business, and stored in notebooks, safes, file cabinets, and desk drawers. Electronic self-help is tantamount to allowing an aggrieved client or creditor the legal right to enter a home or office and rifle through the cabinets with disregard in search of property to satisfy an alleged debt. In current commercial law the breach of the peace doctrine is used to protect a debtor from just such an invasion, and it would be imprudent to provide licensors a legal right to disturb this balance.

Secondly, the drafters must address the enforceability of contracts. As discussed earlier, courts will enforce standard form contracts provided they are not unconscionable. Article 2B provides too many protections for a licensor to allow the licensor the right to take extra-judicial actions that could have damaging effects on an unwitting licensee. The licensor sets the terms of the contract. In addition, the licensor can limit consequential damages to almost nothing,(93) tender an imperfect product,(94) and unilaterally determine that the licensee's breach was material. These are significant protections; adding the right of electronic self-help is legally indefensible because it is unlikely that a reasonable licensee would agree to these terms if given the opportunity to negotiate the terms.

One argument in support of self-help is the risk of software piracy. Electronic self-help may be one of the most effective ways of stopping the illegal copying and distribution of unlicensed software. One might consider allowing electronic self-help in standard form license agreements under a predetermined dollar amount. This would limit the damage done to the innocent party if either breaches. However, this does not address the more fundamental issue of keeping unwanted intrusions out of computer systems.

Finally, Barney R. Kantar points to a fundamental flaw with the structure of 2B-716. "It is an oversimplification," he says, "to state that the most common licensee default is payment default."(95) Kantar notes that while some payment defaults occur because the licensee simply does not have the money to pay the user license fees there are many other situations in which the default arises out of more complex scenarios. Article 2B should consider conflicts that arise out of contract interpretations as well as those that arise when the licensed software does not function as promised.(96) A licensee has no bargaining position if the licensor can simply excise the software from the licensor's computer without regard to its own default.

Material issues may arise from contract interpretation, tender, performance, and unsubstantiated allegations. In such cases the Article 2B should provide equal protection to both parties while these issues are resolved. If the licensor has the unfettered ability to disable the software it can engage in coercive practices. Instead, Article 2B should be crafted to prevent either party from engaging in extra-judicial activities which may exacerbate the situation.

Electronic self-help would also be difficult to reconcile with bankruptcy law. First, if electronic self-help causes serious harm to a business's computer, severely disrupting operations, it could directly lead to a firm's insolvency. Secondly, the Bankruptcy Code provides for an automatic stay on all creditor attempts to seek redress from the filing party.(97) In addition, the bankruptcy trustee has broad powers to avoid actions that occurred within statutorily defined periods.(98) A state right that provides the licensor the ability to unilaterally engage in self-help, without regard to these federal laws, would be unenforceable.

Note that these are fundamentally different situations than those contemplated in Article 2A or Article 9. In Article 9, for example, default is not so complex; a creditor has enabled the debtor to purchase an item, or fund an inventory, and in the case of a payment default the creditor should be entitled to claim the collateral. There is much less risk of error because the law is well defined and the possible harm is far less.

VI. ELECTRONIC SELF-HELP IS BAD PUBLIC POLICY

Default rules are most effective if they represent accepted business practices.(99) Because there is little consensus about what acceptable practices are or should become, the policy debate over licensor self-help has been fierce, and neither side has offered any serious compromise on their position. During the March 1998 Drafting Committee Meeting a sub-committee was appointed to attempt to craft an acceptable compromise.(100) Thus, it is important that Article 2B represents a balance of the interests of both consumers and licensors. If the final version fails to strike an equitable balance each state legislature will attempt to modify Article 2B and it will lose its power and uniformity. Only a final version that equally protects the interests of both parties will succeed as a uniform law.(101)

The most formidable arguments against 2B-716 are those that recognize the success and failures of self-help as it exists, and the particular problems associated with electronic self-help. Self-help has been largely successful in other areas of commercial law, but there are certain weaknesses that should be addressed. Likewise, America's major corporations are run now by computers. A 1996 poll showed that 51% of businesses in California are "wired."(102) The ability to maintain complete dominion over what goes into, comes out of, and is processed by these machines is critical to the continued success of businesses across the country. Even "superhighways" have their reckless drivers, and thus traffic stops and enforced boundaries become imperative to continued order.

In the 1980's a number of lender liability suits involved alleged oral promises by lenders to continue discretionary, long-term financing of debtors.(103) In a surprising number of these cases juries ruled that the creditor was liable for damages to the creditor in cases where the creditor refused to loan additional money because of the creditor's poor financial state. The debtor, after filing for bankruptcy as the creditor predicted, sued the creditor causing the bankruptcy. For example, in Walker v. First Commercial Bank an Arkansas jury awarded debtors $22.5 million in compensatory and punitive damages in a case where the plaintiff contended that the bank promised to provide long term financing but failed to do so.(104) The trial took five and one half weeks; the jury deliberated for only three hours.(105) California responded by amending its Statute of Frauds to make contracts to lend over $100,000 in credit for business purposes invalid unless in writing.(106)

The lesson is that juries may be punitive. A jury will likely sympathize with an individual plaintiff who claims she was driven out of business because powerful and wealthy bank allegedly refused to lend promised money. In cases regarding 2B-716 it will be the Plaintiff large corporation that claims it has suffered harm caused by a theoretically smaller, and less powerful, software licensor. A jury may be as likely to find for the defendant, especially if the licensor argues that the plaintiff owed it money, assuming the corporation can shoulder losses for which it should be rightly compensated. Article 2B must be drafted in a way that limits litigation that will unfairly prejudice one party.

Proponents of electronic self-help argue that they need protection because the nature of software is such that it can be illegally copied and illegally distributed with great ease.(107) According to one report "of the 523 million new business software applications used globally during 1996, 225 million units - nearly one in every two - were pirated."(108) Licensors argue that one-third of all business software applications used in the U.S. are pirated copies.(109) Furthermore, they argue that on-line software merchants experience fraud rates of 20% or higher.(110) Licensors believe that the absence of a right to use electronic self-help will encourage software piracy,(111) "There is no reasonable justification for broad-based disallowing of the ONLY mechanism available to software licensors to avoid unauthorized use of their software."(112)

While software piracy is clearly one of the biggest threats to the software industry, the prevention of unauthorized use of copyrighted works is the province of federal copyright law.(113) In addition, in 1997 there were an estimated 20,000 software patents in force in the United States, with several thousand more issued each year.(114) If the software industry is concerned about piracy then its concern is with federal intellectual property law. Certainly state law should not facilitate violations, but it must also work in harmony with existing law by promoting the same balance between consumer and licensor rights.

Article 2B is designed to function as state contract law regarding the licensing of software. The software industry argues that limiting self-help remedies will serve to encourage piracy;(115) however, if copyright and patent law does not serve as a deterrent it is unlikely that the UCC will stop determined infringers. Instead, the threat of electronic self-help will seriously reduce the bargaining power of licensees believing they are in compliance.(116)

Furthermore, electronic self-help would allow licensors to avoid seeking a preliminary injunction against an alleged copyright violator because they could enforce their judgment unilaterally. Federal law would require the licensor to seek a preliminary injunction, which may not be granted, but with electronic self-help the licensor could rely on state law to enforce desires without any ruling from a court of law. This is terribly unfair to a licensee that relies on the continued use of the software for their business, or suffers damage to other programs as a result of the licensor's actions. The Society for Information Management, representing business licensees, warns:

The balance of harm, an important consideration in a preliminary injunction hearing, is overwhelmingly against the licensee because it could suffer a broad range of immediate damages-from a costly disruption of business to a life-threatening deprivation of health or safety software.(119) The licensor would have to prove a likelihood of success on the merits to get a preliminary injunction, but Article 2B would allow them a full remedy regardless of the evidential support of its accusations. Article 2B should not provide licensors the ability to circumvent accepted federal intellectual property law and the judicial protections it affords licensees.

Section 301 of the Copyright Act, which addresses federal preemption, must be considered in regard to any state law relating to intellectual property. A state cause of action is preempted if: (1) the work at issue is within the subject matter of copyright as defined in §§ 102(120) and 103(121) of the Copyright Act, and (2) the state law created right is equivalent to any of the exclusive rights within the general scope of copyright as specified in § 106.(122)(123)

Consider National Car Rental System, Inc. v. Computer Associates International, Inc.(124) Here, CA sued National for breach of contract when it learned that CA had used licensed software to process data for two of its subsidiaries, which CA claimed was in violation of the license.(125) The district court dismissed CA's claim because of federal preemption, finding that the software was within the subject matter of copyright, and CA's claim that National distributed the software to its subsidiaries fell under the scope of § 106.(126)

The Eighth Circuit reversed finding that the software was within the subject matter of copyright, but CA's claim that National permitted unlicensed third parties "use" of the software is not necessarily an allegation of actual distribution of a copy per § 106. The court used the extra element test in determining that § 301 preempts only those state law rights that "may be abridged by an act which, in and of itself, would infringe one of the exclusive rights-provided by federal copyright law."(127) Here, the extra element was the contractual restriction on National's use of the licensed program.(128)

While it seems that state law would survive federal preemption in breach of contract cases, it is still unclear if federal preemption would permit licensor's to exercise private remedies for alleged federal violations. Thus, a contract may include a clause prohibiting the licensee from engaging in certain behaviors that are in violation of the Copyright Act; however, in case of an alleged breach may the licensor invoke self-help if there is no determination of guilt? One commentator has noted that the extra element test is a failure because it has been implemented against congressional intent.(129)

The balance of the current law is controversial. It appears that federal courts are allowing state courts to address copyright claims related to existing contracts. However, it is dubious that Congress intended to disallow federal preemption in cases which would allow the licensor to seek remedies based in copyright claims without providing any judicial hearing for the accused, which is clearly a policy protected by the Copyright Act.

Section 2B-716 authorizes the licensor to exercise its right to possession without judicial process if it can be done without a breach of the peace.(131) In most cases, to determine whether a breach of the peace has occurred a court will inquire into: (1) whether there was entry by the creditor upon the debtor's premises; and (2) whether the debtor or one acting on its behalf consented to the entry and repossession.(132) "The debtor's consent, freely given, legitimates any entry; conversely, the debtor's physical objection bars repossession even from a public street."(133)

Article 9 states that a secured party has the right to take possession on default.(134) A secured party may proceed without judicial process if it can be done without breach of the peace.(135) The secured creditor's right to self-help repossession is limited by this "breach of the peace" doctrine. Any physical protest made by a debtor forces the creditor to proceed with judicial action in order to retake possession.

For real property this is a significant barrier. Article 9 debtors are provided meaningful opportunity to make an objection to self-help repossession. For property outside a home or business the debtor a simple oral protest is sufficient;(136) for property located inside the debtor must affirmatively grant permission to enter to the party seeking to repossess the collateral.(137) However, for intellectual property, especially in the context of software licenses like Article 2B, there is no opportunity to make any effective protest and, therefore, no opportunity to force the licensor to proceed by judicial means.

Section 2B-715 grants the right of possession to the licensor in the event of a breach.(138) Section 2B-716 sets the guidelines for the proper use of self-help, including self-help by electronic means. In this sense, the drafters attempt to effectuate the same balance as appears in other sections of the UCC.(139) In fact, proponents of licensor self-help rely on the existence of self-help in other areas of commercial law as de facto proof of their right to its inclusion in Article 2B.(140) However, under Article 2B licensors seek to use the licensee's manifestation of assent to the use of electronic self-help, made at the time of contracting, to serve as permission to enter the computer and remove its software.(141) Under the current law repossessors need contemporaneous permission to enter any part of the home.

Consider Girard v. Anderson.(142) In this Article 9 case the creditor repossessed collateral from the debtor's locked home in the debtor's absence.(143) Despite the creditor's contention that the contract explicitly authorized forcible entries, the court found the entry was a breach of the peace.(144) Clearly, then, the contractual right to use self-help remedies does not give the creditor the right to make unwanted intrusions into the debtor's property. Under the current law of self-help the repossessor must receive permission contemporaneous with its attempt to gain entry into a home or business, and it can be turned away by oral protest outside of those places.

Under the current draft of Article 2B the licensor would have to comply with the notice provision, but the licensee may be incapable of making a physical protest or stopping an attempt at electronic disablement without great expense. Remote self-help remedies deprive the licensee of the right to protest that is fundamental to current applications in Article 9. It is possible that expensive security programs would be needed and "mission critical" software would be disrupted.

Computers are kept inside buildings and contain important and sensitive information that could be damaged by the licensor's remote electronic trespass. Article 2B should be amended to make it more akin to the current law. The software licensee must be afforded the opportunity to meaningfully protest because their interest in a fully operable computer system is high. Current law upholds a policy of forcing the party seeking repossession to seek judicial means of enforcement and Article 2B should force the licensor to file in court to avoid erroneous or damaging electronic disablement. Instead, the current draft would demand that the licensee sue after the damage has already been done to their computers.

Article 2B must be crafted not only to exist comfortably beside current law, but it must also consider the place that computers take in our world-from industrial main-frame computers to portable personal ones. The law must look forward while relying on history for its framework. Approximately 38% of U.S. households-or 32 million homes-had a computer by 1997.(145) A Field Poll revealed that 42% of California voters had an e-mail address and almost two-thirds of all adults used a personal computer on a regular basis.(146) By the year 2000 it is estimated that there will be 125 million people using the World Wide Web for over 9 hours a week.(147) The software market in the U.S. alone is counted in tens of billions of dollars,(148) and the Web alone will account for $46 billion of market activity by 2000.(149) Hospitals rely on computers to keep people alive; businesses use them to run multimillion-dollar operations.

Computer sales and services businesses are gaining a reputation for the manner of their customer service and it is not necessarily a good one. In 1995 The Council of Better Business Bureaus received 4,041 complaints about computer sales and service businesses and ranked them eighth most complained about business by consumers.(150) This was a jump of twelve places from their 1994 position of 20.(151) In comparison, used car dealerships were ranked twelfth in 1995.(152) While Article 2B licensors attempt to portray themselves as weak and powerless,(153) consumers are justified in wariness that failing to limit self-help could have disastrous results to their home or business computers. Interactions between software licensors and licensees are becoming much more common and much more contentious. If the breach of the peace doctrine has any enforceability, there are 4,041 more reasons not to allow electronic self-help. Consumer outrage stemming from unwanted intrusions into their vital computer systems would only force franchised auto dealers and auto repair shops to make room at the top of the list of most complained about business.(154)

Article 2B should not set the precedent of allowing forced entry into an individual's or a corporation's computer system. These systems may be too fragile or vital to compel granting access to parties with little interest in their functioning at full capacity. At a minimum, Article 2B should regard the licensee's interest in a secure computer system as commensurate to any Article 2 or Article 9 property interest. To do so requires limiting licensor self-help to circumstances where the licensee has affirmatively granted permission to proceed and the licensor bears liability for consequential damages. It must also prevent self-help in instances where the licensee has expressed its desire that the licensor take more formal legal action.

VII. CONCLUSION

Licensors are correct. Article 2B should preserve the right to self-help remedies; however, the instances when such devices can be used should be limited in order to protect the licensee from harmful actions taken without judicial order. The March 1998 Draft correctly maintains the breach of the peace doctrine,(155) and requires that the licensee agree specifically to electronic self-help by requiring the term to be conspicuous in the contract.(156) Furthermore, it protects the licensee by maintaining that the licensee cannot waive its protections before breach.(157) But, Article 2B does not go far enough to protect licensees from harmful or careless attempts at self-help repossession.

First, Article 2B must address the implications of mass-market licenses and how they differ from the traditional freedom of contract model. Consumer groups, seeking to fight standard form contracts, have pointed to the need for face-to-face contracting to keep parties in equal bargaining positions.(158) However, face-to-face negotiating does not really effect the bargaining power of either party. For instance, the smaller licensor may be the only software developer with the technology to meet a much larger corporation's needs. The large licensee will be forced to either meet the price demanded by the licensor or walk away. Thus, in accepting standard form contracting, and mass-market licenses, it is implicitly recognized that contracts or licenses between parties with unequal bargaining power are enforced every day.

However, this does not mean that courts will enforce unconscionable clauses contained in these licenses. While giving legal sanction to "shrinkwrap" or other mass-market licenses, drafters must remember that this is a limited right that is easily abused. Article 2B cannot allow licensors the express right to include terms to which no reasonable person would agree. Section 2B-716, as written, does not provide the licensee adequate protection from damage caused by licensor actions taken without judicial sanction or determination of material breach. The requirement of "manifest assent"(159) does not provide any protection from the latitude provided to the licensor-requiring specific assent to a clause, within a standard form contract, provides no protection if Article 2B allows the terms of self-help to be patently unfair.

Article 2B should require perfect tender in all cases in which the licensor wants to use self-help and should not be limited to mass market licenses. Not only should notice be required per 2B-716(b)(2)(B), but licensees should be afforded a meaningful opportunity to protest according to the breach of the peace doctrine.

In accordance to current law, licensors should be allowed to reserve the right to use self-help remedies; however, under current law there is no right to use self-help against a debtor or lessee's will. The licensee's right to require the licensor to reduce their determination of breach to judgment must be preserved. The absolute right to use self-help remedies has never existed in our law, and Article 2B should not create it.

Furthermore, 2B-716 should not provide licensors the ability to contract out of liability for any damages that they cause to the licensee through the exercise of any self-help remedy, including electronic means.(160) The Society for Information Management, advocates for licensee rights, proposes including an additional term in 2B-716: "A contractual limitation or exclusion of damages will not apply to damages recoverable for a violation of this section."(161) Licensees would be unlikely to accept any proposal that allows licensors to limit their damages in the manner allowed by the current draft, and consumer advocate groups would descend upon state legislatures, resulting in great delays. The confusion would quite possibly lead to a state common law approach to licenses.

Finally, Article 2B must work in concert with existing federal intellectual property law. Lawmakers, at both the state and federal levels, cannot continue to create, amend, and pass legislation regarding intellectual property without pausing to consider how these laws work together. If Congress intends to maintain federal dominion over certain aspects of copyright and patent law, including the provinces of enforcement and damages, it must clarify the rules of federal preemption. Furthermore, it must reconcile the conflicting patent and copyright rights granted to a licensor and provide that the licensor is not so insulated from liability that it has no fear of its capricious actions.

5/ See U.C.C. Draft Article 2B, Part 2: Basic Themes. Drafts of U.C.C. Article 2B are available at <http://www.law.uh.edu/ucc2b/>.

9/ In contrast, in California alone there are 6,633 software companies with an average of 16 employees each. Letter from 161 Software Companies and 3 Software Organizations representing 1,818 companies to the ALI Council and Executive Committee Members (December 3, 1997) <http://www.SoftwareIndustry.org/issues/guide/docs/ALILtrSDev.html/>.

10/ See Software Industry: The 2B Guide (visited Feb. 1998) <http://www.SoftwareIndustry.org/issues/guide/bkgd/>.

20/ Diane W. Savage, The Impact of Proposed Article 2B of the Uniform Commercial Code on Consumer Contracts for Information and Computer Software (September 22, 1997) (visited Feb. 1998) <http://www.cooley.com/scripts/article.ixe?id=ar_092297a/>.

40/ abid hussain and Lisa Emerson, Note, Shrinkwrap Licenses Shrink Consumers' Rights: Big Problems with UCC Article 2B ) (1997) <http://darkwing.uoregon.edu/~nebula/shrinkwrap.html/>.

54/ Letter from Barney R. Kantar, Software Purchasing Manager, DuPont Company, to Carlyle Ring, Chair of the Committee on the UCC, NCCUSL (May 8, 1997) <http://www.SoftwareIndustry.org/issues/guide/docs/kan.html/>.

66/ Letter from Elaine M. McDonald, Counsel, and Randy J. Roth, Assistant Director Information Services, Principal Financing Group to Geoffrey C. Hazard, Jr., American Law Institute (November 25, 1997) <http://www.webcom.com/software/issues/guide/docs/em.html/>.

86/ See Letter from Elaine McDonald, Counsel, Principal Financial Group to UCC Article 2B Drafting Committee (March 16, 1998) <http://www.SoftwareIndustry.org/issues/guide/docs/716memo.html/>.

99/ See Joseph P. Verdon, Article 2B: Transaction in Software and "Information," N.Y. L.J., Aug. 13, 1997 (visited Feb. 1998) <http://www.ljx.com/internet/0813ucc2b.html>.

100/ March 27-29, 1998 Drafting Committee Report (visited April 1998) <http://www.SoftwareIndustry.org/issues/guide/mar98rpt.html>. "[L]icensees . . . argue that it does not provide them with sufficient protection against a draconian remedy. Small software developers argue that they need self-help and their ability to prevent software from being used after a license has been cancelled should not be unfairly hampered." Id.

101/ Background, The Process (visited Mar. 1998) <http://www.SoftwareIndustry.org/issues/guide/bkgd.html>.

108/ Letter from Kaye K. Caldwell, President and Policy Director, Silicon Valley Software Industry Coalition to Article 2B Drafting Committee (Dec. 21, 1997) (visited Feb. 1997) <http://www.SoftwareIndustry.org/coalition/article2bmemo12-97.html>.

112/ Letter from Kaye Caldwell to Geoffrey Hazard and ALI Executive Committee and Council Members (Dec. 4, 1997) (visited Mar. 1998) <http://www.SoftwareIndustry.org/issues/guide/docs/ALILtrSVSIC.html>.

115/ See Letter from Northern California Independent Computer Consultants Association Software Forum to NCCUSL UCC 2B Drafting Committee (March 25, 1998) (visited April 1998) <http://www.SoftwareIndustry.org/issues/guide/docs/ssdshfinal.html>.

116/ See Letter from Society for Information Management to Carlyle C. Ring, Jr., Chair, Article 2B Drafting Committee (Mar. 23, 1998) (visited April 1998) <http://www.SoftwareIndustry.org/issues/guide/docs/simposit.html>.

150/ Council of Better Business Bureaus, Inc., Better Business Bureaus Release 1995 Data: Work At Home Companies And Roofing Services Tops in Inquiries; Computer Sales/Services Hit Top 10 Complaint List For First Time (Sep. 20, 1996) (visited April 1998) <http://www.bbb.org/alerts/inquiry.html>.

153/ See Letter from 161 Software Companies, supra note 9; see also Letter from Business Software Alliance to National Conference of Uniform Law Commissioners (July 17, 1997) (visited Feb. 1998) <http://www.SoftwareIndustry.org/issues/guide/docs/dsacun.html/>.

updated