ALI Principles of the Law of Software Contracts

Last month, I posted a call for proposals for a program and print symposium on the recently-approved Principles of the Law of Software Contracts. Here's an overview and remarks from Reporter Bob Hillman for the benefit of those who have not already read them on Concurring Opinions or ContractsProf.

Maureen O’Rourke, the Associate Reporter on the Principles of the Law of Software Contracts, and I are posting the following to acquaint readers with the Principles and also to respond to some criticism of one section of the Principles that creates, under certain circumstances, an implied warranty of no known material hidden defects in the software.

On May 19, the membership of the American Law Institute unanimously approved the final draft of the Principles of the Law of Software Contracts. As the Introduction to the project states, the Principles “seek to clarify and unify the law of software transactions.” The Principles address issues including contract formation, the relationship between federal intellectual property law and private contracts governed by state law, the enforcement of contract terms governing quality and remedies, the meaning of breach, indemnification against infringement, automated disablement, and contract interpretation.

The Introduction to the Principles explains further that “[b]ecause of its burgeoning importance, perhaps no other commercial subject matter is in greater need of harmonization and clarification. . . . [T]he law governing the transfer of hard goods is inadequate to govern software transactions because, unlike hard goods, software is characterized by novel speed, copying, and storage capabilities, and new inspection, monitoring, and quality challenges.” Many of the rules of Article 2 of the UCC therefore apply poorly to software transactions or not at all, and the Principles are intended to fill the void.

The Principles are not “law,” of course, unless a court adopts a provision. Courts can also apply the Principles as a “gloss” on the common law, UCC Article 2, or other statutes. Nor do the Principles attempt to set forth the law for all aspects of a transaction, but instead rely on sources external to the Principles in many areas.

The Principles apply to agreements for the transfer of software or access to software for a consideration, i.e., software contracts. These include licenses, sales, leases, and access agreements. The project does not apply to the exchange of digital media or digital databases. It applies a predominant purpose test to determine applicability to transactions involving embedded software or software combined in one transfer with digital media, digital databases, and/or services.

We are the Reporter and Associate Reporter of the software principles. We have been greatly aided by our advisors, consultative group members, ALI Council members, liaisons from the National Commissioners on Uniform State Law, Business Software Alliance, and the American Bar Association, and many additional lawyers from industry and other groups who, over the last five and one-half years, have met with us, talked with us on the phone, and exchanged e-mails with us. We believe the project moved along smoothly largely because of the efforts of all of these groups and individuals.

Nevertheless, in the two weeks leading up to approval in May, we received communications from a few software providers evidencing concern largely with one section of the Principles. Section 3.05(b) creates a non-excludable implied warranty that the software “contains no material hidden defects of which the transferor was aware at the time of the transfer.” The section only applies if the transferor receives “money or a right to payment of a monetary obligation in exchange for the software.” Because the section may be the most controversial provision, we devote the rest of this post to the issue.

Despite concerns that section 3.05(b) creates “new law,” it simply memorializes contract law’s disclosure duties and tort’s fraudulent concealment law. The section makes clear that these rules apply to software transfers in order to allocate the risk to the party best able to accommodate or avoid the costs of materially defective software. Obviously this is the transferor in situations where only it knows of the material defect and the transferee cannot protect itself. The section requires that the transferor knows of the defect at the time of the transfer (negligence in not knowing is not enough to trigger liability), the defect is material, and it is hidden.

A few software providers have concerns that the concepts of “hidden,” and “material defect” are obtuse and will “increase litigation” or require a flood of “detailed notices” to prospective users. These concepts, however, are hardly unknown to the law. A comment to section 3.05(b) says that a “hidden” defect occurs if the “defect would not surface upon any testing that was or should have been performed by the transferee.” This is nothing new. See, e.g., UCC 2-316(3)(b) (“there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to [the buyer]”).

A few software providers also worry about the meaning of “material defect.” The comments to section 3.05(b) point out that the section simply captures the principle of material breach: Does the defect mean that the transferee will not get substantially what it bargained for and reasonably expected under the contract? The criticism that “materiality” is too vague, if accurate, would mean that contract law would have to abolish its material breach doctrine too.

Putting together the requirements of actual knowledge of the defect at the time of the transfer, that the transferee reasonably does not know of the defect, and that the defect constitutes a material breach means that a transferor would be insulated from liability in situations identified by the concerned software providers as problematic. These include where the transferor has received reports of problems but reasonably has not had time to investigate them, where the transferee’s problems are caused by uses of which the transferor is unaware, where the transferor learns of problems only after the transfer, and where the problems are benign or require reasonable workarounds to achieve functionality. The best example of when section 3.05(b) would apply is, as comment b to the section says, where the transferor already knows at the time of the transfer that the software will require “major workarounds . . . and cause[] long periods of downtime or never [will] achieve[] promised functionality,” the transferee cannot discover this for itself, and the transferor chooses not to disclose the defect.

As we have already said, the section simply memorializes existing law. Under the common law, a contracting party must disclose material facts if they are under the party’s control and the other party cannot reasonably be expected to learn of the facts. Failure to disclose in such circumstances may amount to a representation that the facts do not exist and may be fraudulent. See, e.g., Shapiro v. Sutherland, 76 Cal. Rptr. 2d 101, 107 (Cal. Ct. App. 1998) (“Generally, where one party to a transaction has sole knowledge or access to material facts and knows that such facts are not known or reasonably discoverable by the other party, then a duty to disclose exists.”); Hill v. Jones, 725 P.2d 1115, 1118-19 (Ariz. Ct. App. 1986) (“[U]nder certain circumstances there may be a ‘duty to speak.’ . . . [N]ondisclosure of a fact known to one party may be equivalent to the assertion that the fact does not exist. . . . Thus, nondisclosure may be equated with and given the same legal effect as fraud and misrepresentation.”). The Restatement (Second) of Contracts section 161(b) states that “[a] person’s non-disclosure of a fact known to him is equivalent to an assertion that the fact does not exist . . . where he knows that disclosure of the fact would correct a mistake of the other party as to a basic assumption on which that party is making the contract and if non-disclosure of the fact amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.” Section 161, comment d of the Restatement (Second) adds “In many situations, if one party knows that the other is mistaken as to a basic assumption, he is expected to disclose the fact that would correct the mistake. A seller of real or personal property is, for example, ordinarily expected to disclose a known latent defect of quality or title that is of such character as would probably prevent the buyer from buying at the contract price.”

One concern of a commentator is that fraudulent concealment is a tort, implying that it has no place in the Principles. But the principle appears prominently in the Restatement (Second) of Contracts section 161. And why not memorialize a principle that discourages a party in a contract setting from hiding material facts that the other party reasonably does not know? The commentator notes that fraudulent concealment requires intent to deceive, but wouldn’t that be the usual inference if a transferor licenses software it knows is materially defective and knows the transferee cannot discover it?

A few organizations also are concerned that section 3.05(b) cannot be disclaimed. But there are plenty of cases that do not allow a party to contract away liability for concealment. One critic wonders why a statement such as “I am not giving any assurances about there being no defects in this software,” should not insulate a transferor from liability. A reasonable licensee, assuming the good faith of the licensor, would believe that this licensor does not intend to make any express warranties or implied warranties of merchantability or fitness, not that the licensor knows that the software is materially defective so that the software will be largely worthless to the licensee. A transferor playing this game is surely in bad faith and, frankly, engaging in reprehensible conduct. But there is a way to ensure no liability under this section, namely to disclose material hidden defects. In effect, disclosure is the disclaimer.

Bob Hillman and Maureen O’Rourke
June 2, 2009

The Concurring Opinions post -- which Bob asked me to re-post, with the blessings of the Concurring Opinions folks -- has provoked several comments and has been the subject of a follow-up post by David Hoffman, one of Concurring Opinions's regular contributors. Dave's post has generated its own comments. While we here at Commercial Law might have a vested interest in generating site traffic, it may be more efficient to funnel feedback through a single conduit. Because Concurring Opinions got the ball rolling, feel free to comment, or to respond to existing comments, there.

Mid-Year Legislative Update

With most state legislatures having concluded their business for the year, here is the 2009 mid-year legislative update.

Revised Article 1

As of January 1, 2009, Revised Article 1 was in effect in thirty-four states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, and West Virginia.

Notwithstanding my suggestion elsewhere that the promulgation of a substitute § R1-301 might “grease the skids” for additional enactments, 2009 has turned out to be a relatively quiet legislative year for Revised Article 1, with only three enactments – down from five in 2008, and seven in 2007. While the most noteworthy nonuniformity among the thirty-seven enactments remains the definition of “good faith” – with 26 states having adopted the uniform § R1-201(b)(20) definition and 11 having retained the pre-revised definition that imposes a different good faith standard on merchants and non-merchants – all three 2009 enactments adopt the uniform definition and one of the eleven states (Indiana) that retained the pre-revised definition has amended its version of Revised Article 1 to adopt the uniform definition effective July 1, 2010.

As of June 26, Alaska (HB 102), Maine (LD 1403), and Oregon (SB 558) have enacted Revised Article 1 thus far this year. The Alaska and Oregon enactments take effect on January 1, 2010, with Maine’s following on February 15, 2010.

The Washington legislature failed to act on SB 5155 before adjourning sine die on April 26. (That’s probably just as well, because the introduced version of SB 5155 appeared to be drawn directly from the language of official Revised Article 1 circa 2001 and included the no-longer-official version of Revised 1-301 that all 37 enacting states have declined to adopt).

It is possible that the Massachusetts legislature will consider a Revised Article 1 bill sometime this year; however, having waited months for HD 89 to be assigned a bill number, and given the failure of four prior bills to garner a floor vote in either chamber, I would be surprised to see definitive action anytime soon.

Article 2 and 2A Amendments

As of June 26, 2009, only three state legislatures (Kansas, Nevada, and Oklahoma) had considered bills proposing to enact the 2003 amendments to UCC Articles 2 and 2A. In 2005, Oklahoma amended Sections 2-105 and 2A-103 of its Commercial Code to add that the definition of “goods” for purposes of Articles 2 and 2A, respectively, “does not include information,” see 12A Okla. Stat. Ann. §§ 2-105(1) & 2A-103(1)(h) (West Supp. 2008), and amended its Section 2-106 to add that “contract for sale” for purposes of Article 2 “does not include a license of information,” see id. § 2-106(1). The net effect is similar to having enacted Amended §§ 2-103(k) & 2A-103(1)(n), both of which exclude information from the meaning of “goods” for purposes of Article 2 and 2A, respectively. Otherwise, no state has enacted the 2003 amendments.

Article 3 and 4 Amendments

As of January 1, 2009, the 2002 amendments to Articles 3 and 4 were in effect in six states: Arkansas, Kentucky, Minnesota, Nevada, South Carolina, and Texas. However, by July 1, 2010, that number will increase by at least 50%.

As of June 26, Indiana (SB 501), New Mexico (SB 74), and Oklahoma (SB 991) have enacted the 2002 amendments to Articles 3 and 4 thus far this year. Oklahoma SB 991 will take effect on November 1, 2009; New Mexico SB 74 will take effect on January 1, 2010; and Indiana SB 501 will take effect on July 1, 2010.

In addition to enacting the 2002 amendments to Articles 3 and 4 and the usual conforming amendments, Indiana SB 501 also revises the definition of “good faith” in Ind. Code § 26-1-1-201(19) – Indiana’s counterpart to UCC § 1-201(b)(20) – to require all parties to act honestly and to observe reasonable commercial standards of fair dealing. At present, Ind. Code § 26-1-1-201(19) requires only “honesty in fact.”

Revised Article 7

As of January 1, 2009, Revised UCC Article 7 was in effect in thirty-one states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Virginia, and West Virginia. As of July 1, Revised Article 7 will be in effect in South Dakota, as well.

This has been a relatively active legislative year for Revised Article 7. In addition to South Dakota SB 89, which will be in effect by the time you read this, Alaska (HB 102), Maine (LD 1405), and Oregon (SB 558) have already enacted Revised Article 7 in 2009, and Louisiana HB 403 lacks only Governor Bobby Jindal's signature (or pocket veto). Alaska HB 102 and Oregon SB 558 will take effect on January 1, 2010, as will Louisiana HB 403 (if enacted). Maine LD 1405 will take effect on February 15, 2010.

Georgia HB 451 made significant progress toward adoption. First introduced on February 18, the Georgia House unanimously passed the House Judiciary Committee’s substitute version on March 12, and the Senate Judiciary Committee recommended passage on March 26. However, the legislature adjourned on April 3 without a third reading and final action in the senate.

Washington SB 5154 stalled, like its Revised Article 1 counterpart, but without as compelling a reason.

UETA

While the Georgia legislature did not pass HB 451 prior to adjourning, it did pass the Uniform Electronic Transactions Act (HB 126), to which Governor Sonny Perdue affixed his signature on May 5. As a result, effective July 1, 2009, Illinois, New York, and Washington will be the only states in which UETA is not in effect.

Containing the Crisis and Promoting Economic Recovery

Federal Reserve Governor Elizabeth A. Duke spoke on June 15, 2009 at the Women in Housing and Finance Annual Meeting in Washington, D.C. on whether the government's actions so far in the economic crisis have been effective. Although Governor Duke believes that the programs have been "broadly successful in relieving stresses in the key credit markets," the job is not complete. Governor Duke concluded:

In the past, economic downturns were deepened or prolonged by the premature withdrawal of monetary or fiscal stimulus. To the extent that the severity of the current downturn has thus far been mitigated by extraordinary credit support, a significantly weaker path of lending--and thereby economic activity--could very likely occur if policy support for the financial sector is withdrawn too soon. In this case, stigmatization of support tools such as liquidity programs, direct lending programs, or government capital injections that make participants unwilling to use such programs will have the same effect as a direct policy withdrawal of the programs. And while the path of credit in this cycle compared with others is encouraging, the downturn in credit evident in the most recent quarter provides a reminder that conditions are still far from normal.

Others seem to agree with Governor Duke. For instance, the OECD is reporting the economy is "fragile" but recovery is in sight. The IMF's John Lipsky has also given indications that the economic downturn is bottoming out, but is beginning recovery. (See Lipsky remarks "Moving Beyond the Crisis"). All indications are, though, that recovery will take some time. See also, Fed Sees Signs of Hope. Moreover, substantial changes to the business and financial environments will need to change.

- JSM

Congrats to LSU for winning the College World Series

So the tag line is not commercial, but so that the content isn't completely irrelevant, here is an interesting story that was on MSNBC about LSU fans spending money (helping the economy) in Omaha. Now that that's out of the way — Congratulations to my alma mater the No. 1 LSU Tigers for Beating TEXAS for the College Baseball National Championship. Geaux Tigers!

Picture from ESPN front page.

Marc (MLR)

President Obama Announces Financial Regulation Reform

A couple of days late, but better than never! Obama hits all from consumer and financial institution overreaching to the lack of proper regulatory oversight. Obviously, leading to the current financial crisis. Where to go from this mess? Overhaul the financial regulatory system, of course. The biggest challenge is Obama's concept of encouraging innovation while guarding against risk. Easier said than done. We've found ourselves relatively effective at addressing past and current crises. The greater challenge, though, is foreseeing the next crisis around the corner. Particularly any crisis that threatens the "forest" as Obama refers to the financial system as a whole. The increased authority proposed for the Federal Reserve is sure to meet some industry resistance at a time when banks are attempting to escape government oversight by repaying TARP funds (see repayments by JP Morgan, American Express, Goldman Sachs, State Street). The elimination of the Office of Thrift Supervision in exchange for direct Federal Reserve involvement is sure to raise the ire of banking groups (see Financial Services Forum "Lobbyists Dig In As Obama Pushes Financial Overhaul").

Importantly, Obama plans the creation of a consumer watchdog. Long overdue, but we will need to wait to see the details. The authority granted this agency will be key to its effectiveness in a government system with established players . . . and established lobbyists. As a concept, I am all for it.

-JSM

$1.9 Million Verdict for Illegal Music Downloads

Friday's news saw the announcement of a $1.9 million verdict against Jammie Thomas-Rasset, a Minnesota mother of four, for illegal music downloads. The woman swapped songs on the Kazaa Internet network. Vivendi S.A. and other music vendors brought the case over 24 specific songs. The federal jury awarded $80,000 per song, for songs including “Iris” by the Goo Goo Dolls and “Welcome to the Jungle” by Guns ‘n Roses. The music companies claim that sales have declined not just because of bootleg CD's, but also due to illegal downloads. Apparently, the jury agreed. The Thomas-Rasset is the first of many similar cases to go to trial. The first trial in the Thomas-Rasset resulted in a verdict of $220,000, but was retried due to faulty jury instructions. The size of the second verdict is sure to be a contentious issue.

Does this case have longer term implications for music sharers? Does this send a message to people who think that they will not get caught? The Recording Industry Association of America is concerned not only with illegal downloading, but also with protection of intellectual property worldwide. The Congressional International Anti-Piracy Caucus put together a 2009 Caucus "Watch List" of countries with serious copyright piracy that includes China, Russia, Canada, Spain and Mexico. Surely, in tough economic times, all business sectors are more apt to "circle the wagons" to protect their income stream to the greatest extent possible. Copyright violations have been a hot spot for some time now, with many believing that it is not stealing at or at least not bad stealing.

There seem to be two possible outcomes. First, lack of protection may stifle creativity and innovation resulting in fewer works because there is not sufficient money to be made. That is, artists may just decide to do something else. Second, the cost paid for copyrighted materials by those who pay rather than download at "no cost" may increase to subsidize the "free riders" such as Thomas-Rasset. Like any regulatory system, there must be a sufficient enforcement mechanism to catch those who violate the rules or least substantially violate the rules. So long as consumers believe that there is no likely penalty for illegal downloads and piracy, the RIAA will have a busy time litigating.

-JSM

The Credit Card Fair Fee Bill is Back

Having tackled the cardholder side of the credit card business last month by enacting the Credit Card Holders Bill of Rights, Congress has gone back to its other piece of unfinished card legislation, the Fair Fee Act. This bill deals with the fees that merchants pay to accept credit cards.

Last August, the House Judiciary Committee approved a version of this bill, but like the consumer-oriented bill of rights, the merchant-fee legislation got lost in the financial crisis shuffle. It is now front and certain again. Inexplicably to me, however, the new version, like last year's, advances the notion that credit card merchant fees can be controlled by giving merchants a "seat at the table" and putting a Department of Justice, Antitrust Division, lawyer there as well. I am quite skeptical about whether this approach would be successful. To be sure, merchants complain that inter-change fees are currently non-negotiable. They are presented to merchants by the Visa and MasterCard systems on a take it or leave it basis. Of course, merchants have always been free to "leave it," and the card systems have had to take that possibility into account in setting the fees. Giving the merchants a seat at the table will not change the dynamic. The merchants sole bargaining chip will remain the right to refuse to accept the card. But if card systems know now that merchants cannot say no, it is hard to image how merchants will be able to convince them otherwise just because they have a seat at the table.

The legislation does provide for antitrust immunity to both card issuers and merchants that negotiate collectively. It would thereby bless the long standing practice of issuers in the Visa and MasterCard systems of collectively imposing their merchant fees. For someone who believes as I do that the remedy for anticompetitive interchange fees is more competition, explicitly permitting collective fee setting seems like a very bad idea. And for the merchants' part, although collective negotiations might enable them to more credibly threaten not to accept a particular card brand, the legislation exempts group boycotts from the scope of the antitrust immunity. Would a group of merchants in a negotiation under the proposed act engage in an unlawful group boycott if they collectively threatened to stop accepting Visa? The legislation does not make this clear, but it is hard to see how such a collective threat would not constitute a boycott.

Another way in which the legislation might be thought to help merchants is that it mandates that all merchants participating in a negotiation are entitled to the same fee rate regardless of the merchant category in which the card system had previously placed those merchants. One might image a negotiation including Walmart and many smaller retailers in which the small retailers would end up with the same rate as Walmart. But what incentive would Walmart have to join such a negotiation? Walmart already has enough clout to force the card systems to give it a reduced fee, and that fee constitutes a competitive advantage over other retailers that Walmart would be loath to give up.

The legislation originally proposed by Congressman Conyers in the spring 2008 would have set up an interchange court to set fees if the merchant/card system negotiation reached an impasse. The fee court was stripped from the legislation passed by the House Committee last summer to attract sufficient votes for committee passage, and it has remained out of the House bill that Conyers introduced in early June.

Senator Durbin, however, has now introduced a new Senate Bill that brings back the idea of a fee court to set interchange fees when merchants and card systems fail to agree. The process would resemble an arbitration proceeding before a panel of judges appointed by antitrust enforcers at the DOJ and FTC. If the merchants and card systems could not reach agreement, a hearing would be held at which both sides could present evidence and argument about a fair fee level. The panel would then set the fee, which would remain fixed for three years.

One could reasonably oppose the fee court on at least two grounds. First, the court would have insufficient information and expertise to set appropriate fees, and second, it would likely be subject to undue influence by the regulated parties just like the rate setting bodies of old. But at least the threat of an imposed fee might lead the card systems to try to reach agreement with the merchants.

The bill is likely to face fierce lobbying opposition from card systems and issuers, large and small. Credit Union National Association Senior Vice President of Legislative Affairs John Magill summed up the issuers argument this way: "The merchants' effort to avoid paying their fair share of electronic transactions threatens the integrity of the payment processing system."

I continue to wonder why Congress does not simply require the largest card issuers to negotiate their own interchange fees. That is, force Citi, Chase, Capital One, and a few of the other large issuers to set their own fees. Merchants could then much more credibly threaten to drop a card, because they could single out one issuer as opposed to dropping out of Visa or MasterCard, entirely. To be sure, this approach would differentiate among issuers by allowing some to set fees collectively through Visa and MasterCard, while others would have to compete individually. But the discrimination makes sense in that the large issuers create the market power in Visa and MasterCard that has allowed them to increase merchant fees so dramatically in the past. If the largest issuers were stripped out, Visa and MasterCard could continue to set merchant fees for their many small issuers without the sort of anticompetitive clout that they now wield. Moreover, the House Bill exempts small issuers from the mandatory negotiation proceedings, thus recognizing that it is appropriate to treat small and large card issuers differently.

Virtual Payment Systems

The Financial Times is reporting that Facebook will unveil soon its Facebook currency. Here is a link to the article.  Of course Facebook is not alone in creating its own currency.  Second life has used Lindens, which can be exchanged on an open market for U.S. Dollars.  There was also in 2007 the Liberty Currency featuring the Ron Paul Dollar.  In 2007 the FBI raided the Liberty Dollar Currency office and gathered as evidence all of the Gold and Silver from the Liberty Office.  

Call for Proposals

Call for Proposals
AALS Section on Commercial and Related Consumer Law

“The Principles of the Law of Software Contracts:
A Phoenix Rising from the Ashes of Article 2B and UCITA?”

2010 AALS Annual Meeting, New Orleans, Louisiana

The Executive Committee of the AALS Section on Commercial and Related Consumer Law invites proposals for the Section’s 2010 AALS Annual Meeting program and a print symposium to follow on the topic “The Principles of the Law of Software Contracts: A Phoenix Rising from the Ashes of Article 2B and UCITA?”

The Topic: Contracts concerning computer software have presented difficult legal issues for many years. Although software is often bought and sold like goods, software contracts do not fit easily into the sale of goods rubric of Uniform Commercial Code Article 2. In the 1990s, the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Laws (NCCUSL) sought to address special issues concerning software contracts by developing a new UCC Article 2B. This effort failed because of fundamental disagreements about the substance of important rules. NCCUSL (now known as the Uniform Law Commission, or ULC) then carried forward the project on its own and, in 1999, promulgated the Uniform Computer Information Transactions Act (UCITA), providing a comprehensive (and controversial) set of rules for licensing computer information. To date, only Maryland and Virginia have enacted UCITA, and the ULC has ceased promoting additional enactments.

A new software contracts project has emerged in Article 2B’s and UCITA’s wake: the Principles of the Law of Software Contracts. On May 19, the ALI approved the Principles, which undertake to weave the currently divergent threads of law governing software contracts into a coherent whole that will guide parties in drafting, performing, and enforcing software contracts, assist courts and other arbiters in resolving disputes involving software contracts, and, perhaps, inform future legislation addressing software contracts. Do the Principles clarify the law of software contracts? Will they successfully unify the law of software contracts? Are they consistent with current best practices in software contracting? Will they encourage desirable future developments in the law and practice of software contracts? These are among the questions we hope our program speakers and symposium contributors will address.

The Program: Principles Reporter Bob Hillman (Cornell) and Associate Reporter Maureen O’Rourke (Boston U.) will offer their unique insights on the Principles’ drafting, key substantive provisions, and their legal and practical implications. Amy Boss (Drexel), who was intimately involved with both Article 2B and UCITA and has been an adviser on the Principles, will add her own insights about the prior efforts’ failures and the prospects for the Principles’ success. We seek one or more additional speakers who will offer their perspectives on the Principles, the economic, historical, policy, and political forces that motivated and shaped them, and their likely impact on the law and practice of software transactions.

The Symposium: We are working to identify a law review that will provide the best outlet in the which to publish papers from our presenters as well as a number of additional papers from those who respond to this call for proposals and others from whom we are soliciting contributions. In addition to contributions from a broader cross-section of legal scholars than we can offer the opportunity to speak at the annual meeting, we hope that the print symposium will also include articles from interested judges, practitioners, and others. We currently anticipate that finished papers would be due in late spring or summer 2010 for publication in late 2010 or early 2011.

How to Submit a Proposal: If you would like to present or contribute, please e-mail an abstract, précis, or draft by August 29, 2009 to Professor Keith A. Rowley, Chair of the AALS Section on Commercial and Related Consumer Law. E-mail: keith.rowley@unlv.edu. The Executive Committee will review all submissions and notify by October 1, 2009 those we would like to present their topics at the annual meeting and those additional authors we would like to contribute to the print symposium.

Small business in action!

I wanted to share this "fun" commercial picture of a small businessman in action in Moscow, Russia. This kiosk is right near Red Square, but most of the kiosks were only lightly filled with shoppers. Tourism is certainly down in Moscow with hotels reporting occupancy down around 50%. That will make it a tough summer for small sellers. This kiosk owner did manage to relieve us of about 800 RUB for some nesting dolls for my children!

-JSM

New Investments to the IMF

The IMF has been busy helping countries respond to the economic crisis through financing. Lending commitments are at a record $157 billion. One of the changes, though, has been an easing of the loan conditions that often went along with IMF aid. The IMF has often encouraged political policy changes in exchange for money. Is this a good thing? The tension here is that the countries need the loan money without delay. The IMF is wise to respond quickly to the crisis. That does not mean that the IMF and the borrowing countries, though, are not missing "opportunties" to promote better business and other practices that enhance competitiveness in the longer term. In the end, the borowing countries may still need changes in local laws and governmental frameworks to be competitive. Perhaps now, though, is not the best time to impose such changes given the instability in the borrowing countries already.

Moreover, the IMF's focus may be changing due to the financial crisis with more efforts toward the donor countries. Not only do the larger countries have to keep markets active with developing countries, but they must support the IMF's loan efforts. There does seem to be some action in that respect. Russia, for instance, just announced a new $10 billion commitment to the IMF. Brazil, China (up to $40 billion) and India are also making new investments in the IMF. The additional investments may lead to these countries having a greater say in the business of the IMF and global monetary policy generally. Of course, new commitments are necessary in order for the IMF to continue the financial arrangements with the borrowing countries. The U.S. Senate recently rejected a proposal to eliminate a $180 billion in loan commitments to the IMF. The funding is still pending, though, but has the backing of the White House.

-JSM

Unauthorized Credit Card Charges - Out of Country

As some of you know, I am teaching Transactions in Emerging Markets as part of the University of San Diego Moscow Program. Of course, paying for things in Moscow is a fun matter! The currency exchange rate for Rubles right now is $1:33.334 RUB. With the less than stellar exchange rate, the company renting me a flat priced the rental in dollars. Since counterfeiting is also commonplace, with one paper claiming that 50% of dollars in Russia are not genuine, Bank of America kindly provided crisp newer issue money! The currency traders in Moscow have been less picky thankfully.

While I've paid for most things in cash, I used my Mastercard at a Кофе Хауз (Coffee House). I checked my online transactions to verify charges and found that I was charged once for our lunch, but again for a slightly larger amount later that day (perhaps someone else's lunch)! The second charge is not mine, an unauthorized charge for sure, but the vender clearly had my card number as we'd been at the shop earlier in the day. I've promptly reported the mistaken charge to the credit card company, but am interested to see how this plays out. As an aside, most banks are now charging 1-3% on transactions for card usage abroad (New Fees For Card Usage Abroad).

-JSM

Obama Signs Credit Card Holders Bill of Rights

After years of legislative wrangling, President Obama has signed a credit cardholders' bill of rights that was passed overwhelmingly by both houses. Last September, the House passed a similar bill that died in the Senate. Last December, the Federal Reserve issued a series of regulations that would have imposed many of the requirements in the new legislation, but not until January or July 2010, depending on the provision. The heightened recent legislative activity had been attributed to a desire to trigger the Federal Reserve regulations more quickly. The final bill, however, calls for implementation 12 months from enactment, meaning that the rules will go into effect only about 1 month sooner than the FED's regulations. The legislation, however, goes beyond the regs in some areas. This post provides a summary of the key points in the legislation. I'll summarize the comments and reaction, and speculate about the effects, in a future post.

Summary of Key Provisions:

Notice: Requires card issuers to provide at least 45 days notice prior to any rate increases or other significant changes, and the notice must include a statement that the cardholder may cancel the card.

Increasing Interest Rates on Outstanding Balances: Limits the ability to increase the interest rate on existing balances to specific situations, including a failure to make the minimum payment for 60 days.

Double Cycling Billing: Prohibits reaching back and assessing interest on balances from the prior billing cycle if the cardholder fails to pay the balance in full. Average daily balance accounting, in which interest is assessed to the entire balance, rather than just the portion left unpaid, is not prohibited.

Allocation of Payment: requires that any payment beyond the minimum be allocated first to debt accruing the highest rate of interest. This provision is substantially tougher than the FED regulation, which would have allowed the banks to allocate payments proportionally among balances of varying interest rates.

Timely Payment: Requires statements to be issue 21 days before the due date, and prohibits assessing late fees when the due date is a day on which mail is not delivered (or not accepted) and the payment is received by mail the next business day.

Over-the-Limit Fees: Requires that the cardholder opt-in to a system in which charges over the limit are permitted with a late fee and limits these fees to once per billing cycle. This provision is also more consumer friendly than the FED regulations, which had left open the possibility of an opt-out scheme.

Minors & College Students: Prohibits the issuance of credit cards to unemancipated minors, unless a parent is designated as the primary account holder, and places strict limits tied to annual income on the credit limit for cards issued to college students.

Means-of-Payment Fees: Prohibits fees for using non-standard payment methods, except for expedited payments by phone on the due date or the proceeding day.

Warning: Requires solicitations to provide a warning of the adverse effects of excessive credit inquiries.

Falling Behind on Your Mortgage?

For those wondering how exactly did all these people fall behind on their mortgages, take a look at a pretty honest personal story in the New York Times. The author, like many, bought a home he couldn't afford, tried to compensate with credit cards and refinancing and had a spouse lose a job. There are tough times for many who bought into the traditional model of rapid real estate value increases and living beyond their means. Reading the piece, it is easy to see how people fall into the trap.

A surprising little aside is that the banks have not had time to foreclose on his home or do a loan modification even though his last payment was eight months ago!
- JSM

Bank Stress Test Skit on SNL

In case you missed it:

- JSM

Merchants Lobbying Congress for Interchange Fee Limits

Credit card interchange fees continue to be a hot topic. These fees, which credit card companies charge to merchants for the right to accept cards, have been controversial for decades. Visa and MasterCard set these fees for their issuers, and as a result, banks such as Citibank, Bank of America, and JP Morgan Chase do not compete on merchant fees. Merchants also claim that even American Express and Discover do not effectively compete.

Although a massive multi-district class action challenging the fees on antitrust grounds has been chugging along for several years, many merchants apparently believe that Congress may prove to be a more fruitful avenue. A coalition of U.S. merchants calling themselves the Merchants Payment Coalition ("MPC") has launched an aggressive advertising campaign seeking to influence the process.

Last July, the House Judiciary Committee approved the Credit Card Fair Fee Act, which would have permitted merchants to negotiate the fees that they pay credit card companies as a group and created some government oversight if negotiations failed. That legislation got lost in the flurry of activity last fall. But the issue has not been forgotten. Staffers in both houses have indicated to me that Congress plans to address the issue, although no consensus has emerged as to the proper course.

The MPC supported the Fair Fee Act bill last summer, but it is currently refraining from backing any specific proposal. Instead, it has lined up a series of meetings with committee members to express its views.

A number of proposals have been made for increasing merchant fee competition. I have proposed requiring the largest Visa and MasterCard banks to set their own fees. Adam Levitan has called for permitting merchants to surcharge credit card transactions, and Allan Frankel has suggested multi-network cards that permit the merchant to choose the processing network. Regulators in Australia and other countries have sought to limit merchant fees to the amount necessary to cover only certain identifiable costs. As Congress generally moves back into the business of regulating financial markets, it will be interesting to see how it approaches credit cards.

Chairman Ben S. Bernanke on Financial Innovation and Consumer Protection!

Since I've been busy for a few weeks with exams and all, there is much to catch up on. Chairman Bernanke spoke on April 17, 2009 at the Federal Reserve System's Sixth Biennial Community Affairs Research Conference, Washington, D.C. Bernanke commented "financial innovation, it seems, has fallen on hard times" in that it is often now seen as the problem (for a transcript, see the Federal Reserve website). Bernanke made some important points about the potential link between complexity of financial products and the potential for "unfair and deceptive" practices. That is, even a diligent consumer may not be fully aware of the whole host of potential fees associated with each credit card they have. The complexity of financial products can reduce transparency either because the terms are hard to deduce or perhaps to understand.

When turning to the problems faced by the Federal Reserve in drafting regulations to enhance consumer education, Bernanke placed great emphasis on the benefits of consumer testing. The caution to testing, though, is that disclosure does not always lead to consumer understanding. Therefore, sometimes the Federal Reserve must prohibit certain practices, such as double-cycle billing. I couldn't agree more with some of these observations. Transparency cannot solve all ills in the financial industry. It is not enough to say that consumers should find another provider if all providers use the same practices or consumers do not fully understand the practices. In the end, the Federal Reserve must address both complexity and transparency.

- JSM

Seton Hall Call for Papers

Seton Hall Law Review Symposium

October 30, 2009
Seton Hall Law School
Newark, NJ

Securities Regulation and the Global Economic Crisis: What Does the Future Hold?

CALL FOR PAPERS

The Seton Hall Law Review will be hosting a Symposium on October 30, 2009, at Seton Hall Law School in Newark, NJ, to address the role of securities regulation in the current global financial crisis. Specifically, this event will examine the origins and genesis of the crisis, address the future of securities regulation domestically and internationally, and attempt to anticipate the role of government agencies, self-regulatory organizations, and private market participants in shaping and effectuating regulation. This Symposium will bring together experts from both public and private sectors, as well as from the legal and academic communities, to explain, debate, and assess the challenges and opportunities presented by the current and prospective landscape of global securities regulation.

Persons interested in participating as a speaker and/or in publishing a piece in the special Symposium issue of the Seton Hall Law Review should submit a CV and a 200-word abstract of their presentation to Laura Fant, Symposium Editor, by May 15, 2009. Laura Fant may be reached at (617) 480-7428 / Laura.Fant@student.shu.edu. Prospective speakers or panelists should indicate whether they would be interested in submitting a paper based on their presentation for publication. Contributions are welcome from scholars and practitioners in all disciplines.

- JSM

Bankruptcy Commercials

Lawyer advertising has always received a bad rap. Its hard enough to tell whether lawyers are capitalizing on people's misfortunes when charging clients to sort out their problems (I don't have a problem with charging clients, but I do recognize the perception outside of business circles that lawyers make money on the heels of tragedy). That being said, I don't know how you produce a "classy" commercial. If you use empathy, it just looks shallow -- i.e. the single mom at a table with a stack of bills at 2:00 in the morning and the voice over of someone that sounds like a televangelist talking about no hope, and "there's a way out." If you try a business approach, you just look like a non-caring SOB that is going to get paid -- i.e. two attorneys posing, usually in front of bookshelves, sitting 3/4's on a desk, or some other office setting, and telling you "you have rights," (by the way that we will convert into dollars in our pocket). I point this out because I am not really sure what to do with this one. Is it anger, comedy, both or neither?



Here is another.


Marc (MLR)

iPhones, Kindles, and Digital Rights Management -- When the Sale of Things are not the only things that matter

So I have been thinking of how to talk about (shamelessly plug) my recent work on Apple's iPhone warranty. The article argues that Apple might be better off not litigating its intellectual property rights against consumers and instead using their warranties as a bait to convince consumers to act with good behavior to the iPhone (i.e. not hack it and therefore avoid the service arrangement Apple receives comensation through with AT&T). Last week I wrote a column for the Los Angeles Daily Review in which I said that gateway sales were possibly more important to certain vendors of high end consumer products than the thing itself:

In the high-tech consumer arena, device sales often are the gateway to other profits beyond the sale. Apple receives monthly compensation from AT&T for every iPhone that reaches the AT&T network. X-Box, Sony, and Nintendo reap profits from pay-to-play online gamer services like X-Box Live, Nintendo DSi, and Playstation Network, in addition to the stand alone games they sell in stores. Sony Blueray sells DVD Players -- but is far more interested in selling consumers DVD's from the Sony library. And the recent Amazon Kindle is poised to make a significant dent in the book seller market. Post-sale profits have become such a large factor that some manufacturers value those profits more than those made on the device itself. If those post-sale profits don't materialize, the potential loss for companies like Apple is enourmous -- conservatively between $3 million and $18 million per month for iPhones that never reach the AT&T network.

So how do you entice consumers to act better with their products. One means of doing so has been to "brick" the device so that the cnsumer has no more functional use (or desired use from the product). Hackers use the term brick because to them, the device obtains the value of a brick. Microsoft has been successful in "bricking" users from their x-Box Live accounts for invalid use, by banning user accounts for 7992 years (or until 12/31/9999). And Amazon, most recently terminated a user account for "frequent returns" effectively blocking the user from using his Kindle. Amazon ultimately relented, but the warning was served.

The problem with "bricking" is that it is only a temporary solution until consumers (or another third party) catch up technologically to offer a better use. In fact, the reality is that there are consumers that actually do buy the product to have the product. Consumers that have been bricked will eventually grow weary of paying for new accounts, buying new devices or whatever means the manufacturer has used to keep the user out. Then, those bricks will eventually form cities/ communities of disgruntled dwellers that have the technological knowledge and incentive to find alternative uses for their product, particularly in ways that do not benefit the manufacturer.

The solution I have offered, in both the Duke Law and Technology piece and the L.A. Daily Review, is that manufacturers should reevaluate how they approach these consumers. Indeed, Manufacturers may find better profits by approaching consumers on a negotiated terms basis utilizing things like warranties as enticements. By enticing the consumer to be better stewards of the product, they can probably avoid most hackers (except for those that do so for the pure sport of it).

Over the next few weeks I will say more about the longer piece including the Behavioral Economics Aspect of the article and some other commercial solutions for a not entirely commercial problem.

Marc (MLR)

2009 AALS Workshop on Transactional Law

Workshop on Transactional Law
Why Attend

"Transactional law" refers to the various substantive legal rules that influence
or constrain planning, negotiating, and document drafting in connection with business transactions, as well as the "law of the deal" (i.e., the negotiated contracts)produced by the parties to those transactions. Traditionally, the law school curriculum has emphasized litigation over transactional law. However, many modern lawyers serve corporate clients, and a significant percentage of lawyers engage in some form of transactional practice. Hence, law schools must place greater emphasis on training law students to be transactional lawyers, and should support law faculty engaged in scholarship focused on transactional law. To this end, in 1994, the AALS held a workshop on the transactional approach to law, which sparked experimentation and innovation in teaching and scholarship related to transactional law. Since that time, there have been significant developments in transactional law. This Workshop not only will take stock of those developments, but also will enable participants to gain some in-depth perspective regarding the relative benefits and drawbacks of those developments.

Law schools have attempted to respond to the demand for increased transactional training in a variety of ways, from integrating transactional law into traditional law school courses to developing stand alone "Deals" or "Business Planning" courses. A number of law schools have developed innovative programs in transactional law. This Workshop will enable participants to discuss specific methods of teaching transactional skills with an eye towards ferreting out best practices. Should professors interested in teaching transactional law focus on substantive law, "transactional skills," (i.e., planning, negotiating, and drafting), economic or other theories of business transactions, or all of the above? Should transactional skills be taught in separate courses or integrated into substantive courses? If taught in separate courses, should such courses be part of the first-year curriculum, integrated throughout the three years, or focused on the upper-level curriculum? How do you modify or supplement the traditional case method to teach students useful transactional skills?

The Workshop also will explore the challenges and benefits that arise for those who write or would like to write transactional scholarship. An as initial matter, the Workshop will address how best to define "transactional scholarship" in a way that accurately captures the potential breadth and depth of transactional law, and how transactional scholarship differs from traditional legal scholarship. The Workshop also will explore best practices for writing scholarship in this area, including methodologies for researching the legal, financial and practical effects of various corporate transactions.The Workshop will feature concurrent works-in-progress sessions, enabling participants to exchange ideas and insights regarding new scholarship related to transactional law.

One important goal of the Workshop is to bring together faculty from different doctrinal areas of law, including faculty who teach in the clinical setting. Transactional law touches many substantive areas of law, and it is closely identified with bankruptcy, business associations, contracts, commercial law, intellectual property, labor and employment law, securities regulation, and taxation. The Workshop will provide a unique opportunity for faculty members to make connections between their primary fields and transactional law, and thus should appeal to a broad spectrum of scholars and teachers.

Early Bird Deadline: Wednesday, May 20

— JSM

Children as Payment Devices??!!

Photo by M.ADA.
The depths to which overwhelming debt will push some people are vividly illustrated by a story covered by CNN this weekend.The headline zeroed in on the public-interest and human-rights angle, decrying a Saudi judge's ruling refusing to annul an arranged marriage of an 8-year-old girl to a 47-year-old man. The part most interesting to me was a passing comment on the reason why this girl's father had arranged the marriage of his young daughter: to settle his debts with the 47-year-old man, "a close friend" of his. Whatever one might think about arranged marriages, child marriages, or marriage in general, using this institution as a means of settling debts doesn't strike me as consonant with the ideas behind the institution in any religious tradition. Using children as payment devices can't be consistent with what either G*d or the Prophet had in mind . . .

Teaching Real Estate Wearing Commercial Law Glasses

When I was a new professor, eager to meet any and all institutional needs, I agreed to teach Real Estate Transactions, a common law class in a civil law state. It really is a property course properly within the property curriculum, but inadequate staffing there (apparently few property profs want to teach real property these days, the rage being IP) pushed it my direction as the junior person. And that is how I became a real estate teacher. I run hot and cold on the course, but teaching it this semester has been wildly fun with the economic/mortgage crisis. When I am left to the traditional commercial law curriculum, the time is rare when the subject for the day is all over the papers and television, nearly every day. Now I know how my Con Law colleagues feel, talking about this new development or that new case.

Interestingly, I have found that the class, and the task of mastering real estate law, have broadened significantly my perspective on general commercial law. First, you realize what a truly grand and amazing achievement the UCC in fact is. Property law is scattered all over the place--radical disuniformity at the common law, disparate state perspectives and approaches, periodic interventions of federalization, but there is nothing, no statutory supplement or code, that you can pick up and wave with any sort of authority and state "this is the law you must know." The students love this, as you might imagine. Nearly every NCCUSL foray into real property areas has crashed and burned, which makes me less uptight--and almost pragmatic--about the impending failure of the Revised Article 2 project. I have spent the last couple of weeks on state statutory redemption and anti-deficiency laws, and the chaos in that area of mortgage law elevates Grant Gilmore from "Great" to "Bodhisattva who walked among us once" in my pantheon of Commercial Law idols. Mucking through the mess that is real property secured transactions law, you can truly appreciate the amazing accomplishment that is Article 9.

Another interesting thing about a tour of duty in Real Estate is that you see how the doctrine of good faith purchase permeates all of commercial law. You see it with transfers of deeds, foreclosure sales, recording acts. No property casebook does this doctrine to my satisfaction, and I always end up rephrasing things to put them into my Article 3/4 framework. I now see holder in due course less as an Article 3 anachronism to be viewed in isolation, but rather as simply the UCC's play on a comprehensive commercial law doctrine that extends throughout all of transactional law.

In semesters such as these where I am doing a Code class and Real Estate the same day, there is an exciting juxtaposition. In the mornings there is the precision and clarity of the UCC for my Article 2 class, followed up by the chaos and indeterminacy of mortgage law. I would like to say that each legal approach makes me appreciate the other more, but I have to admit that each foray into the regulation of real estate makes me admire and understand the whole enterprise that is the UCC just a bit more.

Geithner on Face the Nation

Today, Treasury Secretary Timothy Geithner appeared on CBS' Face the Nation in an interview with Bob Schieffer. Schieffer had plenty of questions for Geithner, including whether the government was trying to force General Motors into a managed bankruptcy. Interestingly, Geithner did not deny it, but focused on the place that a strong General Motors will hold when it is stronger. When asked about whether the government was giving the banking executives a pass, while being harder on the auto industry execs (as we've suggested here, see Wagoner Steps Down) Geithner responded that the government has changed leadership in some companies such as AIG. Geithner said that banks needing "exceptional" assistance might also find themselves with changes in leadership as well.

Geithner was pretty coy about what "exceptional" assistance might be, perhaps for good reason. Certainly, removal of GM's Wagoner is unprecedented, but these are unusual times. Yet, removal of company management is a drastic step with ramifications in the markets. Geithner was wise to not suggest that the government will in fact affect management, even if that ultimately happens. It certainly seems advisable to leave the door open on this issue as the stress testing of banks is just beginning. In the event that banks (perhaps CitiGroup and Bank of America) still require exceptional assistance, management changes might follow. Traditional lenders and creditors do affect management and management decisions. The government, in this case, is operating less like the government as regulator and more as the government as lender and stabilizer. Will we see more management changes?

Watch CBS Videos Online

— JSM

EC Decides Not to Challenge MasterCard's Cross-Border Fees, For Now, and Then Issues a Statement of Objections to Visa

Update: Within days of its tentative deal withMasterCard, the EC issued a statement of objections to Visa, stating the Commission's tentative conclusion that Visa's unilaterally set multi-lateral interchange fees restrain competition without providing technological or economic benefits to consumers.

EU Competition Commissioner Neelie Kroes announced that the EC will not pursue MasterCard for failing to comply with a 2007 Commission decision that the card network's cross-border multilateral interchange fees constituted a restrictive business practice.

After repealing its cross border fees in June 2008, MasterCard increased other fees in October of that year, raising the Commission's concerns. Recently, however, MasterCard has agreed to implement a new fee methodology that is expected to substantially reduce average weighted cross-border interchange fee levels compared with those that the EC previously found to be in breach of EU antitrust rules.

Although Commissioner Kroes hailed the new methodology, arguing that "[t]his will mean lower charges for retailers accepting payment cards, which should in turn be passed on to consumers," some merchant representatives characterized the compromise as "appauling."

MasterCard's agreement was conditioned on the EC's decision not to pursue fines against it for failure to comply with the Commission's earlier decision. MasterCard also maintained that these lower fees are actually too low to support sustainable competition, and thus should be viewed as temporary while it continues to pursue its appeal of the Commission's 2007 decision in the European Court of First Instance.

For its part, the Commission cautioned that the EC will continue to monitor the implementation of the new methodology to ensure that it has the anticipated fee reducing effect. Commissioner Kroes also emphasized that the Commission would continue to investigate Visa, which currently has fees that are twice the level of MasterCard's new fees. "I have no intention," Kroes explained, of "allow[ing] Visa to benefit at the expense of MasterCard."

Interestingly, the Commission seems to be more interested in fee levels than it does with ensuring that fees are set competitively. Despite lowering their fees recently, MasterCard and Visa have maintained the long standing percentage based fee structure. EuroCommerce lobbiest Xavier Durieu contends that a truly competitive interchange fee could be less than a fixed €0.05 per transaction, substantially less than even MasterCard's new fees for all but the smallest transactions.

It will be interesting to see how, if at all, the EC's approach is cited in the on-going multi-district interchange fee litigation in the U.S.

Revised Article 2 Finally Adopted!

Today's news included an announcement that all states have finally agreed to adopt the Revised Article 2, which many thought to be pretty much a dead letter at this point. As you might expect, consumer groups are thrilled and the Business Roundtable is irked commenting:

"While the Roundtable supports uniform drafting efforts, clearly this is
the result of mischief. This will put market opportunities and innovation
on hold. The benefits will not outweigh the cost."

The Obama administration announced, though, that "we cannot afford half measures" and suggested that the drafters instead return to the bargaining table to get the thing done for real.

For those of us who just finished writing Professor Doug Whaley's co-authored competition, we are thrilled! The problem involved rewriting the section of Doug Whaley's Sales text on statute of limitations presuming that revised Article 2 was in force. Of course, under today's announcement, the new statute of limitations goes into effect immediately. Revised Article 2 retained the basic 4 year limitations period but has some gems in the accrual rules meant to tackle some of the more troubling portions of prior Article 2. Particularly important to the Revised 2-725's exceptions on accruals is a rule whereby sellers cannot reduce the limitations period on consumer contracts.

Happily, I will now go through my home looking for broken items that failed way before they should have.

— JSM

Ford says no to auto bailout

In an interesting twist, Ford executive Mark Fields went on American Morning to say that they have been restructuring for three years now and are making progress. And, no bailout needed or expected. Fields said that consumer confidence is the biggest issue facing Ford. Ford is announcing an "Advantage Plan" whereby new Ford purchasers will have Ford pick up twelve months of car payments if the customer loses their job.

— JSM

Pawnshops and iPods

Last year, while living in Tulsa my wife and I were broken into and my iPod was stolen. About three months ago, I received a letter from Tulsa PD that my iPod was identified. Pawn shops in Oklahoma have to register all items into a centralized database by serial number (if available); when my iPod's serial number was entered it triggerd a stolen item report to the Tulsa PD. We executed the various affidavits and designated a former student to recover the property. She had to go to court to get an order to recover the property and this is what she said about the process:

Apparently Tulsa releases stolen property once a month. There were about 12 people there wanting to recover. The judge called each name individually…asked if they were there to pick up “x” (mostly GPS’s by the way), whether there was anyone there from “x” pawn shop or if the individual who pawned it was there (there wasn’t for anyone), then said she’d sign the order and to sit down. This took about 15 minutes. Then we were instructed to go to the hallway while we waited for our paperwork. That took about 5 minutes. Then off to the pawn shop (apparently Tulsa does it this way because there’s no room in their property room). The pawn shop, as you know, was in north Tulsa. It was pouring down rain that day so it “wasn’t very busy” (apparently pawn shops are local hangouts). The manager took my paperwork then went looking for it…this took about 30 minutes! I was worried that he had sold it since he kept saying he couldn’t find it. But, after enough searching he found it. It was all wrapped up in cellophane with a City of Tulsa sticker on it stating it was stolen property. He checked my ID and I was on my way. Apparently, if it was a gun that was stolen they have to verify that you can legally be in possession of a fire arm before they can release it.

Pretty much uneventful, but interesting nonetheless.

1-201's Buyer in the Ordinary Course exclusion rule in action! Kudos to Sandy Cooper for braving the pawn shop and the courts to recover my iPod. I am curious what music, if any, is left after sixteen months....

Update Sandy also noted that the pawn broker checked the serial number on the pleadings meticulously, which caused me to remember how we came across the serial number. We contacted Apple Inc. who had the serial number. Even though Apple was more than willing to give us the serial number, they were not willing to let us know who reregistered the iPod. I suppose I can imagine why Apple might not be willing to police its stolen merchandise.

Wagoner Steps Down and Obama Grants GM/Chrysler More Time

Over the weekend, the announcement came that Rick Wagoner, CEO of General Motors, was stepping down amid government pressure. Apparently, Washington wasn't too thrilled with the reorganization plans for either GM or Chrysler. President Obama spoke regarding the restructuring plans for the companies that fell short of expectations:

And so today I'm announcing that my administration will offer GM and Chrysler a limited additional period of time to work with creditors, unions, and other stakeholders to fundamentally restructure in a way that would justify an investment of additional taxpayer dollars. During this period they must produce plans that would give the American people confidence in their long-term prospects for success.

Obama's speech:

So, do we know what is really needed to save the U.S. auto industry? Clearly, Obama is committed to companies standing on their own, "not as wards of the State." I am all for forcing companies to make difficult decisions. But, there is a bit of a double standard here that we've noted here before (Power of the Sequel: TARP II). My larger concern is not the ousting of Wagoner, perhaps that is overdue and new leadership may help push change forward. But, wouldn't the same be true over at some of the banks? Edward Liddy assumed the helm over at troubled AIG at the request of former Treasury Secretary Hank Paulson, but there has not been much movement in management over at the banks that are in the worst trouble. The same accountability to which Wagoner is held should mandate changes in management at some (though clearly not all) of the banks that took TARP monies.

Thankfully, President Obama noted that some of the trouble in the auto industry is the economy as a whole. People just aren't buying cars right now. Even if the auto industry was in better shape, it would be hurting due to the poor economy overall. Auto sales for the first two weeks of March 2009 were down a whopping 40%! As Obama noted, he cannot promise that there is not "more difficulty to come." GM seems most likely headed toward bankruptcy unless something changes (not sure what that would be). Whether the government will pitch in for Chrysler seems to depend on whether a "marriage" can be made with Fiat. The government is certainly looking for dramatic changes from the auto sector. Modest reform will not be enough. While how that is accomplished is unknown, it is hard to disagree that substantial change is in order.

— JSM

Money for Madoff Victims?

So, now that Madoff is off to prison, what happens to the victims of the fraud? Apparently, there is about $2.6 billion in assets so far recovered by the trustee, Irving Picard. The losses in the ponzi scheme are estimated at about $65 billion. Picard recently commented “I have confidence there is sufficient money at SIPC to satisfy all claims.” SIPC, the Securities Insurance Protection Corporation, created under the Securities Investor Protection Act, is a fund that broker members contribute to in order to cover insolvency, but not fraud. The Madoff ponzi included both, so it would be protected under SIPC. So, how could SIPC have enough money when the amount of the assets recovered is far eclipsed by the losses? The SIPC coverage is limited, up to $100,000 is covered for cash investments and up to $500,000 for actual securities invested. Since there is not much evidence that Madoff bought securities the ceiling may be at issue for some clients. Moreover, "clawbacks" may result in some investors owing money if they make a SPIC claim. For instance, if an investor withdrew more over time then they initially invested originally, they could end up owing money back.

While Picard has paid 12 claims thus far at the $500,000 limit, the potential for clawbacks and the clearly limited pool of assets will lead to disappointed expectations for investors. For now, most seem to be waiting to see how Picard will distribute the assets for the SIPC. Investor claims were due March 4, 2009, but claims will also be considered up to July 2, 2009 for customers. Undoubtedly, there is also more to come about the failure of the SEC to investigate Madoff's business as contributing to increasing losses. Updated claims information is available at the Madoff Trustee website.

For a short primer on the SIPC:

— JSM

Southpark's Theological View of the Economic Crisis

Trey Parker and Matt Stone have created a theological view of the economic crisis. Bravo!

Click here to watch SouthPark in a new window.

Marc (MLR)

Subscribe to the NYT Online? Another Fun Mixed Goods Case

Another lively case from the forthcoming ABA Sales Survey is Wall Street Network, Ltd. V. New York Times Co., 66 U.C.C. Rep. Serv. 2d. (West) 261 (Cal. Ct. Appeals 2008). The court considered a breach of contract claim arising out of an Internet marketing agreement between New York Times Co. (NYT) and Click2Boost, Inc. (C2B). Under the agreement, C2B was to solicit subscriptions to the New York Times by means of “pop up” advertisements on web sites. The pop up ads would ask the user for their zip code and, if suitable for home delivery of the newspaper, would prompt the user to subscribe. NYT agreed to pay C2B for each subscription. After NYT terminated the agreement two weeks early due to believed deficiencies in the subscription submissions, C2B’s assignee, Wall Street Network, Ltd., brought suit.

Was the subscription agreement governed by Article 2? The court ruled that the contract between NYT and C2B was not a sale of “goods” because the agreement was “for the placement of advertising.” Sure, the newspaper is a good, but that is not the determining fact. The newspaper as the good is more of a distraction here. What is really being sold? The court observed that even though C2B was paid a fee for each submission, C2B was not selling the names and addresses of the potential subscribers, but rather to place advertisements for the New York Times in designated locations and to forward to NYT the responses to the advertisements. Since advertising is not a good, Article 2 did not apply.

— JSM

Signs of a Troubled Airline

I am on the road this week looking for houses in Southern California, and one thing struck me on the plane ride. U.S. Air sold advertising space to Zicam on its fold down tables -- ALL OF THEM. Little billboards under your drink as you fly.  Is this just a smart allocation of space or signs of an Airline in trouble? Also slightly troubling, U.S. Air is now charging for WATER, soda, snacks, and of course spirits. I did not see a pay slot for the restroom but perhaps that innovation is not too far away. Are these things signs of desperation that might make you think twice about flying with that airline or is the airline efficiently using its assets.

Marc (MLR)