Islamic Banking Surges

ASSETS held by the world's 100 biggest Islamic banks grew 66 per cent in 2008 from the previous year despite the financial turmoil that clobbered mainstream lenders, a report said on Friday. The top 100 Islamic banks held assets totalling US$580 billion (S$836 billion) last year, up from US$350 billion in 2007, according to an annual report by The Asian Banker, a magazine for financial professionals.

A financial storm sparked by a crisis in the US housing market swept across the world late last year. Its impact spilled over into the general economy and sent several countries into recession. Prominent US investment bank Lehman Brothers collapsed into bankruptcy, while several other major Western banks suffered massive losses.

'Despite the financial turmoil in late 2008 that crippled so many large Western institutions, Islamic banks have continued to grow in prominence and size,' the magazine said in a press statement. Emmanuel Daniel, the magazine's president and chief executive, added: 'Islamic finance has seen an incredible surge in popularity, based on stronger regulatory regimes and a better international understanding of its dynamics.'

Obama Sticks with Bernanke

Not surprising, but President Obama reappointed Federal Reserve Chair Ben Bernanke to another term yesterday (see Obama to Nominate Bernanke). Although Bernanke is a Republican, his style of aggressive action seems to pair well with the White House. Change at this point would have been usual as the economic indicators are showing some positive signs. Even though there will be questions at his confirmation, there is no reason to expect too much trouble.

- JSM

Bernanke Sees Progress on Economic Recovery

Reasons for cheer on the economy? While Chairman Bernanke speaks more often theses days then we might see in growth times, the markets were up on Friday after his speech at the Federal Reserve Bank of Kansas City's Annual Economic Symposium, Jackson Hole, Wyoming (text of speech). Bernanke reported both on the toll of the economic crisis and the gains made since. Bernanke clearly credits government intervention worldwide for easing the panic that hit the markets last October. Bernanke does believe that the world is "beginning to emerge" from the financial crisis, though he does not specify how long recovery might take. Bernanke does believe, however, that positive growth will return in the "near term." Just a bit of positive flavor seems to be enough to help the markets these days.

Is this just Bernanke or is there something more? Unemployment claims are still high with most states seeing their jobless claims rising last month (see Jobless Claims Post Increase). And, the deficit over the next ten years is expected to be 2 trillion more than expected (see Deficit Expected to Widen). While none of this is positive, the numbers for sales of existing homes was up 7.2% from June (see Housing Lifts Recovery Hopes). Despite the mixed news, the housing market has played a big role in the financial crisis, so good news in that sector is important. Just simply that buyers are back purchasing homes.

No matter how mixed or hopeful an assessment of the current economic state we might cast, we might heed Bernanke's warning (one he has given already):

"Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again."

The temptation to fight the current economic crisis through government programs like Cash for Clunkers and home buyer tax credits should not give way to a failure to address the problems that led us to the crisis. Not surprisingly, we seem to be spending much time on cure right now. What about prevention of future problems (See Is Financial Regulation Overhaul Stumbling? and Doubts Slow Financial Regulation Overhaul)? The coming months will tell whether the politicians can come to some arrangements for overhauling financial regulation. It is easy to have doubts when we are contemplating curtailing the authority of some governmental agencies (Office of Thrift Supervision)and enhancing others (Federal Reserve). Will a stronger Federal Reserve be the best vehicle to protect consumer rights, for instance? I have my doubts about how this will resolve.

Financial regulation changes may ultimately appear less comprehensive and more piecemeal. There is language floating currently to tackle the derivatives that went unregulated (see New Milestone). The Supreme Court is going to hear a case on executive pay. What's in this for consumers? One of the controversial cornerstones to the overhaul is the creation of a Consumer Financial Protection Agency. President Obama's argument that protections are needed as part of a financial overhaul package are persuasive, as consumers clearly played a role in the crisis.

Over the coming months we will see more pieces to the financial regulation puzzle. I would like to see some changes in consumer rights. The current framework makes it difficult for initiatives to move forward as it may require action of several federal agencies (see How your $4 Cup of Coffee Can Cost You $35 or More). To the extent we want to blame consumers for their role in the real estate and credit crisis in particular, it is easy to argue that transparency in financial services dealings with consumers would be enhanced with a single watchdog agency.

-JSM

NY Times Takes on Debit Card Overdraft Fees

Was it a coincidence that the same day the first of the new credit card regulations went into effect, the N.Y. Times lead editorial called out the banks for charging high overdraft fees, one of the same issues addressed in the new credit card legislation? (For those unfamiliar with the Credit Card Act here's a guide.) Probably not. This issue has been banging around for more than two years. Several sources have published horror stories in recent weeks about banks permiting customers to compete transactions with debit cards and then imposing overdraft fees that are grossly disproportionate to the overage. It is bad enough to be charged a $25 fee for going over ones credit limit when making a $200 credit card purchase. But a $35 fee for a $2 cup of coffee bought with a debit card somehow seems even more offensive. The Times described a college student who bought $16.55 in school supplies and coffee through several separate debit card purchases and was charged over $200 in fees. Another report described a $35 overdraft fee when a store made an 8 cent adjustment to a prior charge after an account had been closed. The new credit card act requires that cardholders opt in to any system paying over the limit charges while imposing a fee and limits over-the-limit fees to one per billing cycle. Consumer groups have argued that the same opt-in procedures should be required for both credit and debit. The N.Y. Times argues that banks should be required to develop the technology to allow consumers to choose whether to overdraft their accounts on a purchase by purchase basis.

Coverage Visitor at Tulane, Spring 2010

Posted on behalf of Mark Wessman, Tulane Law School:

Because of the sudden and tragic death of our colleague, Brooke Overby, Tulane Law School is seeking a coverage visitor for the spring 2010 semester. Our most pressing need is for someone who can teach Contracts II, which, at Tulane, is an Article 2 Sales course taught to first-year students. The second course is negotiable, but would ideally be either Real Estate Transactions or Payment Systems (in that order of preference). Self-nominations are welcome, but, as it is late, so are suggestions of others who might be available.

Please reply directly to Prof. Wessman at his contact information listed below.

Mark B. Wessman
Thomas J. Andre Professor of Law
Tulane Law School
6329 Freret Street
New Orleans, LA 70118
Phone: (504) 865-5989
FAX: (504) 862-8815
mwessman@tulane.edu

Ruminations on Blueberries and the Code

As some of you know, I am visiting this year at University of Oregon School of Law in Eugene, Oregon. Classes start next week, but today my two young sons and I were out at the Greene Hill Aire Blueberry Farms picking locally grown blueberries. My youngest son ate more than he contributed, but we did mange to fill up a bucket. At the bottom of the hill, we gave the farm owners $15.00 in exchange for the blueberries (now in a plastic bag). So, I spent some time today baking blueberry muffins, blueberry crisp and a blueberry pie is now in the oven! Being the contract and UCC nerd that I am, though, my thoughts went happily to the code. Well, class does start next week after all! There are sure to be hypotheticals about the blueberries in my student's future.

Of course, blueberries are a good in that they are movable. While I am sure the farmer-owners never thought about Article 2, it applies nevertheless. That is, after all, why I like it so much. The simplicity of something that fills in for all that would never be said in on a u-pick blueberry farm. No contracts, no receipts, and no paper at all. Sure, there will be a student who might suggest that I took my sons there for entertainment, rather than for the purchase of blueberries. But, I did do all this baking and some freezing (and fully intended to at the time of purchase). Some students might also inquire about whether the farmers are merchants and whether it matters. Of course, Article 2 applies anyway, but students sometimes get caught up on the merchant nuance in terms of deciding which law applies. The merchant classification does matter when it comes to warranties on the blueberries (i.e. merchantability).

Happy thoughts to all UCCers contemplating new hypos for Fall 2009. Time to pull the pie out of the oven!

-JSM

Brooke Overby, 1960-2009

I just received word that our fellow blogger, and my fellow AALS Commercial and Related Consumer Law executive committee member, Brooke Overby died suddenly yesterday evening in Fort Walton Beach, Florida. (Thanks to Brooke's colleague Mark Wessman for passing along the news.) I'll provide more details when they become available.

UPDATE: Elizabeth Nowicki, Brooke's colleague at Tulane, posted her personal tribute on the Concurring Opinions blog. It has attracted additional remembrances from some of Brooke's former professors, classmates, students, other Tulane colleagues, and fellow commercial law professors and scholars.

UPDATE: Tulane Law School posted this memorial today (Aug. 12th). The school is planning a service on Sept. 10th.

Does the way we transfer money indicate a turn in the economy?

Since 1987, the volume of transactions on FEDWIRE have consistently exceeded the volume of transactions on CHIPS. This is not necessarily unexpected. FEDWIRE handles, according to the Comptroller's Handbook one-third of its volume as federal funds transactions and one-fourth of its activities as securities transactions. Another significant source of transfers are those between Federal Reserve Banks, which would naturally include certain mortgage funds. Naturally, the volume of these transactions probably should be higher. On the other hand, CHIPS primarily deals with foreign-exchange transactions (nearly 1/2 of the dollar value. Another 1/3 of the dollar value is Eurodollar placements.

See Chart showing Number of Transfers

However, over time, the value of these transactions has changed. Consider that in 1987, the amount transferred on Fedwire was slightly higher than that transferred via Chips.

See Chart showing Amount of Transfers

From 1987 until 1998, the amount of money transferred via Chips exceeded that on Fedwire by a maximum of 28.51% difference in 1994. Beginning in 1995, however, the amount of money transferred on Fedwire began inching closer to that on Chips, and in 1998 exceeded the amount of money transferred on Chips. After 1998, the amount of money transferred on Fedwire has exponentially grown reaching a high in 2008 of a 32.61% differential; the only two years in which the growth pattern was not consistent was 2006 and 2007, and even then, the differentials were the third highest differential (2006) and the seventh highest (2007) of the years between 1988-2008.

See Chart showing Differential of amounts

As we look at the numbers, I can't help but notice the date similarities to the current economic crisis. For example, consider the following graph provided by Planet Money on the economic crisis charting debt from 1999-2008:

From 2000 to 2003, government borrowing steadily rose, followed by a short decline through 2008, when it suddenly spiked. During that same period, Business lending acted inversely: declining from 2000 to 2003; rising from 2003 to 2007; and suddenly nose-diving in 2008. In fact, in their post titled Charting Debt, the planet money guys point out that early in 2008, Americans simply stopped borrowing.

In another chart, in their post titled Chart: Inflation, not the flu, we see other similarities:

Between 2004 and 2007, we see a drastic drop in inflation. However, beginning again in 2008 and through 2009, we see a drastic rise.

This is what I am wondering. Can we make conclusions about the future of our economy by the way we transfer money now. That is, are the types of transactions reflected on Fedwire and Chips the types of transactions that give us a barometer of the economy. Moreover, is there a healthy balance of reciprocal relationship between the two -- does a substantial amount of transference on one wire service lead to high chances of inflation and higher government spending, with lower consumer activity. A few unknowns in this quest:

1. Are there funds that in certain years appear on Chips that in the last few years have appeared on Fedwire because of the type of transaction. One category of these transactions might be if foreign investment shifted from currency exchange to securities. If so, this might suggest that the way we invest foreign money does matter for the way the economy functions.

2. Are there institutional issues that have resulted in the changes and can we segregate the institutional issues from the non-institutional issues in the rise and drop of value transactions between the two wire services. For example, we know that the institutional controls for lending were significantly more lax between 2000 and 2007. This might explain a high proportion of funds on Fedwire during that period of time.

I am curious for other thoughts -- institutional or economic that might show a correlation between the current economy and the future economy.

Marc (MLR)

Call for Papers--Debtor-Creditor Law Broadly Understood

Call for Papers—AALS Section on Creditors’ and Debtors’ Rights

The Future of Debtor-Creditor Scholarship

Both domestically and internationally, for both well-known businesses and anonymous consumers, world events lately have thrust issues of debt, creditor rights, and debtor protection into the spotlight. The field of debtor-creditor scholarship has perhaps never been as fertile as it is today. Its future will ultimately become the responsibility of those having entered the academy during this most robust period. This year’s program is designed to highlight the contributions of those who have just begun to toil in this field, to reveal for the section the newest ideas from recent newcomers, to give these developing scholars an opportunity to present their thoughts and receive feedback in a friendly and receptive forum, and to give more experienced section members a chance to mold and inspire these developing producers—and the future of our section—with constructive questions and comments.

The Section on Creditors’ and Debtors’ Rights thus issues a call for papers on the topic of debtor-creditor scholarship, most broadly understood, for presentation at the AALS Annual Meeting in New Orleans in January 2010. Proposals are welcome from a wide array of perspectives with a connection to creditors’ rights and debtor protection. Proposals may be in any stage of production, from early-stage idea to mid-stage working draft to polished paper, though work that will not be published by January 2010 will be strongly preferred. The section does not plan to publish the papers in a symposium, so presenters are free to seek publication elsewhere. Strong preference will be given to proposals from those who will not yet have been awarded tenure by January 2010 and to those whose work is not already well known within the section. We would anticipate three presentations of 15-20 minutes, each followed by 10-15 minutes of questions and comments from the audience. The Section’s brief business meeting will conclude the program.

Deadline for submission is Monday, August 31, 2009. Please email proposals to section chair, Jason Kilborn, at jkilborn-at-jmls-dot-edu. Selections will be made by late September by the Executive Committee of the Section (chair Jason Kilborn, chair-elect Katie Porter, secretary/treasurer Rafael Pardo, executive committee members Michelle Arnopol Cecil and Alan White, and immediate past chair Jean Braucher). Pursuant to AALS policy, presenters will have to cover their own travel expenses and registration fee for the annual meeting (typically with support from their home institutions), as the Section is prohibited from reimbursing for such expenses.

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