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.