MEMORANDUM NEW JERSEY LAW REVISION COMMISSION UCITA; CHOICE OF LAW; CONFLICTS OF LAW

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1 MEMORANDUM TO: FROM: RE: NEW JERSEY LAW REVISION COMMISSION STAFF UCITA; CHOICE OF LAW; CONFLICTS OF LAW DATED: FEBRUARY 14, 2000 Choice of law and conflicts of law are dealt with in 109 of UCITA, as follows: (a) The parties in their agreement may choose the applicable law. However, the choice is not enforceable in a consumer contract to the extent it would vary a rule that may not be varied by agreement under the law of the jurisdiction whose law would apply under subsections (b) and (c) in the absence of the agreement. (b) In the absence of an enforceable agreement on choice of law, the following rules determine what jurisdiction s law governs in all respects for purposes of contract law: (1) An access contract or a contract providing for electronic delivery of a copy is governed by the law of the jurisdiction in which the licensor is located when the agreement is made. (2) A consumer contract that requires delivery of a copy on a tangible medium is governed by the law of the jurisdiction in which the copy is or should have been delivered to the consumer. (3) In all other cases, the contract is governed by the law of the jurisdiction having the most significant relationship to the transaction. (c) In cases governed by subsection (b), if the jurisdiction whose law governs is outside the United States, the law of that jurisdiction governs only if it provides substantially similar protections and rights to a party not located in that jurisdiction as are provided under this [Act]. Otherwise, the law of the State that has the most significant relationship to the transaction governs. (d) For purposes of this section, a party is located at its place of business if it has one place of business, at its chief executive office if it has more than one place of business, or at its place of incorporation or primary registration if it does not have a physical place of business. Otherwise, a party is located at its primary residence. The polestar of 109 is party autonomy: the agreement of the parties on choice of law will control, subject to certain limitations in consumer contracts and in agreements 1

2 which stipulate the law of a non-u.s. jurisdiction. There is no requirement that the chosen law bear any relationship to the transaction. If the law of a non-u.s. jurisdiction is specified, that choice is not enforceable unless the chosen jurisdiction provides substantially similar protections and rights to a non-local party as are provided under UCITA. In a consumer transaction, a contractual provision on choice of law cannot displace the consumer law of the jurisdiction stipulated in the default rules, which apply in the absence of an agreement between the parties. In addition to the specific limitations for consumer transactions and choice of non-u.s. law, the parties choice of law is also subject to UCITA s general limiting principles in 105 (fundamental public policy) and 111 (unconscionability). Where no choice of law is specified in the contract, three default rules are provided: 1. the law of the licensor s location applies in access contracts (e.g., a contract with an Internet service provider or an information services provider such as America Online or Microsoft Network) and in contracts providing for electronic delivery of a copy ; 2. in a consumer contract in which the a copy on a tangible medium...is or should have been delivered to the consumer, the law of the jurisdiction where the copy is or should have been delivered applies; 3. in all other cases, the applicable law is that of the jurisdiction having the most significant relationship to the transaction. There is some textual ambiguity in UCITA 109 with respect to the scope of the parties ability to choose applicable law. Subsection (a) validates the agreement of parties as to the applicable law. In the absence of an enforceable agreement, subsection (b) provides default rules for determining what jurisdiction s law governs in all respects for purposes of contract law. On its face, subsection (a) is broader than subsection (b), permitting parties to choose all applicable law, not just the contract law. In this respect UCITA 109 represents a radical departure from existing law, in this jurisdiction as well as elsewhere, and raises numerous questions of interpretation. Here s how the UCITA choice of law provisions work: * Non-consumer transactions **Where a choice of law has been made: The law of the chosen jurisdiction applies, regardless of whether the jurisdiction has any relationship to the transaction, even if it is a mass market transaction. Thus, a licensor in the United States (or anywhere else) can choose the law of Iran or the law of Illinois in a contract with a licensee in the United States (or anywhere else). If the law of a jurisdiction outside the U.S. is chosen, there is no requirement that the law of that jurisdiction provide rights and protections similar to UCITA. 2

3 ** Where a choice of law has not been made: The law of the licensor s jurisdiction applies in an access contract or a contract for electronic delivery of a copy. The law of the jurisdiction having the most significant relationship to the transaction applies in all other cases. If the application of these default rules results in the application of non-u.s. law (e.g., where the licensor in an access contract or an electronic delivery of a copy computer program is located in Iran, or where Iran has the most significant relationship to the transaction) then the law of Iran applies only if it provides substantially similar protections and rights to a party not located in that jurisdiction as are provided under this [Act]. * Consumer transactions ** Where a choice of law has been made: The law of the chosen jurisdiction applies, except that it is ineffective to displace consumer protection laws of the jurisdiction whose law would have applied under the default rules in the absence of a choice of law provision. Where the transaction involves a physical copy this is the jurisdiction where the copy is or should have been delivered (usually the licensee s jurisdiction). Where the transaction involves an access contract or a contract requiring electronic delivery of a copy, the law of the licensor s jurisdiction applies. If the chosen law is outside the United States, the chosen law must provide substantially similar protections and rights to a party not located in that jurisdiction as are provided under this [Act]. ** Where a choice of law has not been made: If no choice of law is made in a consumer contract the default rules apply, including the consumer protection laws of the default jurisdiction. Where there is a physical delivery of a copy (e.g., shrink-wrapped computer software) the default jurisdiction is the place where the copy is or should be delivered, which will often be the consumer s jurisdiction. In an access contract or a contract involving electronic delivery of a copy, the default jurisdiction is that of the licensor. If the application of the default rules results in the application of non-u.s. law, then that law applies only if it provides substantially similar protections and rights to a party not located in that jurisdiction as are provided under this [Act]. In all other cases, the law of the jurisdiction having the most significant relationship to the transaction applies. At the November meeting Carlyle Ring seemed to say that in all consumer transactions the consumer protection law of the licensee-consumer s jurisdiction is preserved, but he apparently misspoke, given our reading of the words of 109. What is preserved in all consumer transactions is the consumer protection law of the default jurisdiction. The default jurisdiction, in the case of delivery of a physical copy of a computer program is the place where the copy is or should have been delivered, which 3

4 usually will be the consumer s jurisdiction. The default jurisdiction in the case of an access contract or an electronic delivery of a copy, however, is the licensor s location. a. Arguments pro and con. The arguments in favor The comments to 109 of UCITA make the case for enforcing choice of law provisions with particular relevance to the software and information industry: The information economy accentuates [the importance of choice of law provisions] because it allows remote parties to enter and perform contracts using systems spanning multiple jurisdictions and operating in circumstances that do not depend on physical location of either party or the information. The rule in subsection (a) enables small entities actively to engage in multi-national business; if an agreement cannot designate applicable law, even the smallest business could be subject to the law of all fifty states and all countries in the world. That would impose substantial cost and uncertainty on an otherwise efficient system and raise barriers to entry. This section is critical to the electronic commerce rules in this Act. UCITA 109, Comment 1. The comments also justify rejecting the limiting principle embodied in Article 1 of the UCC, that the chosen jurisdiction have a reasonable relationship to the transaction, on the ground that such a limitation is inappropriate... in cyberspace transactions where physical locations are often irrelevant or not knowable. UCITA 109, Comment 2.a. The limitations on choice of law in consumer transactions are characterized as a new, additional limit on contractual choice: This rule will impose significant costs on Internet commerce, but the policy here is that the fundamental policy of freedom of contract should not permit overriding the consumer rule if a state, having addressed the cost and benefits, determines that the consumer rule is nonwaivable. UCITA 109, Comment 2.b. Attached to this memorandum are the comments to 109, as well as the sections of the materials provided by Carlyle Ring regarding consumer law and choice of law, which contain more extensive argument in support of this provision. The arguments opposed. Professor William Woodward, Jr., of Temple University has been a vocal critic of this provision throughout the drafting process. He criticizes the UCITA choice of law rules on numerous grounds. Eliminating the requirement that the jurisdiction whose law is chosen have some relationship to the transaction will make choice of law issues infinitely more complex, he argues, and therefore more difficult for transactional lawyers advising 4

5 clients, and will disadvantage licensees who may have no practical way of determining what the effect of a particular non-related choice may have on the legal rules applicable to a transaction. William J. Woodward, Jr., Where in the World is Your Contract Governed By? The Legal Intelligencer, Monday, April 12, 1999 (copy attached). He also criticizes the interplay between the choice of forum and choice of law provisions, which will permit licensors not only to impose a contractual choice of law, but also to select a forum that will enforce that choice of law. Professor Woodward is also critical of the scope of UCITA 109(a), which provides that the parties may agree on the applicable law. He moved the American Law Institute in 1998 to delete the predecessor to this provision on the ground that it represents a radical departure from existing law and a startling break with our fundamental federal traditions. Memorandum from Prof. William J. Woodward, Jr. to Members, American Law Institute (May 5, 1998). He suggests that the unlimited choice of law principle, if retained at all, be applicable only to large, negotiated transactions. Professor Woodward also points out that there are limits on the parties ability to choose the law applicable to their transactions in UCITA (unconscionability, fundamental public policy) that will raise questions as to exactly what bodies of law the parties may contract out of under UCITA: He comments: Europeans, who sometimes seem to espouse unlimited choice of law, take for granted that contractual choice of law doesn t extend to mandatory law, a category including an enormous range of regulatory law. Obviously, one can t contract out of criminal law, environmental law, or labor law. But what about restrictions on lending, like usury law? Or state rules requiring contractual obligations be in writing? Or that they be preceded by various kinds of disclosure? Or limits on contracting through adhesion contracts? Even if an agreement on the categories of mandatory law existed, exactly what each given category comprises would remain unclear. Id. b. Conflicts of law in the Uniform Commercial Code Section 105 of Article 1 of the UCC provides a general rule for conflicts of law:...when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties. Failing such agreement this Act applies to transactions bearing an appropriate relation to this state. Article 2 Sales of the UCC has no specific provision concerning conflicts of law, thus 105 applies to transactions involving the sale of goods. UCC 105 does not purport to permit parties to agree that all of the law of another jurisdiction controls their contractual agreement. Rather, this section has been 5

6 interpreted to permit parties to agree on the jurisdiction whose law will control the contract issues. Matters outside the contract are not within the scope of this section. See, e.g., Ryder Industrial Packaging Products Co. v. Fort Pitt Packaging Intern, Inc., 399 Pa. 643, 161 S.2d 19 (1960) (agreement under UCC and performance thereof governed by clause choosing New York law; rights of creditors in property of one of the contracting parties governed by Pennsylvania law because otherwise it would be possible for two parties to render nugatory as to third parties an act of Assembly passed for the benefits of such third parties. ); Truck Lines, Inc. v Goren Equipment Co., Inc. 576 F. Supp (D. Ga. 1983) (questions of interest and attorney fees not controlled by agreement on choice of law); In re Wathen s Elevators, Inc., 32 Bankruptcy Reporter 912 (Ky. 1983) (stipulation in security agreement regarding applicability of Illinois law controlling only for disputes between parties to agreement not ancillary disputes such as those involving rights of third parties). Note that Article 4A Funds Transfers, adopted in this State in 1994, see L.1994, c. 114 contains choice of law rules which eliminate both the reasonable relation requirement and the limitation of fundamental policy of a State in this very specific species of banking transactions. N.J.S. 12A:4A-507, see Comment 3. to UCC 4A-507. Article 5 Letters of Credit contains similar choice of law provisions. See N.J.S. 12A: c. Conflicts of law under current New Jersey law. (1) Judicial choice of law The classical conflicts of law rule in contracts followed by New Jersey courts was that in cases involving the essential validity of a contract, the court applies the law of the jurisdiction in which the contract was made. E.g., Colozzi v. Bevko, 17 N.J. 194 (1955). The adoption of the Uniform Commercial Code changed the classical rule in sales of goods cases. See UCC 105 and New Jersey Study Comment to N.J.S. 12A-105 (West 1962)(preference in UCC 1-105(1) for application of UCC to transactions bearing an appropriate relation to this state changes then-existing New Jersey rule). In contracts cases not involving the sale of goods New Jersey courts now apply the law of the jurisdiction having the most significant relationship to the contract. See McCabe v. Great Pacific Co., 222 N.J. Super. 397 (App. Div. 1988) This is similar to the test set forth in the Restatement (Second) of Conflicts of Law 188. See also State Farm Mutual Automobile Insurance Co. v. Estate of Simmons, 84 N.J. 28, 37 (1980) ( law of the place of the contract ordinarily governs choice of law, but rule should not be applied without considering Restatement 188 most significant relationship test). As in the case of choice of forum clauses, New Jersey courts have treated conflicts of law issues i n insurance cases categorically. See, e.g., Gilbert Spruance Co. v. Pennsylvania Manufacturers Association Insurance Co., 134 N.J. 96 (1993) (insurance coverage in environmental tort case); and see Symeon C. Symeonides et al., Conflict of 6

7 Laws: American, Comparative, International 346 (West Group 1998) (insurance cases are rather sui generis in that they possess characteristics of both contract and tort and their resolution is likely to have ramifications on third parties, such as those injured by the insured, and, to some extent, society at large. ). (2) Contractual choice of law With respect to the parties contractual choice of law, New Jersey follows the general rule of the Restatement (Second) of Conflicts of Law, which permits parties to agree that the law of a particular jurisdiction will apply to a transaction. See, e.g., Instructional Systems, Inc. v. Computer Curriculum Corp., 130 N.J. 324, (1992). That is merely the general rule, however. The parties agreement will not be enforced if the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties choice, or if the application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which... would be the state of the applicable law in the absence of an effective choice of law by the parties. Id. at 342, citing Restatement (Second) of Conflicts of Law 187 (1969). Fundamental policy of a state is further elaborated in Comment g. to Restatement (Second) of Conflicts of Law 187: a fundamental policy may be embodied in a statute which makes one or more kinds of contracts illegal or which is designed to protect a person against the oppressive use of superior bargaining power. The Supreme Court of New Jersey has commented that the public policy of a state, while usually found in its legislative enactments, may also be found in the State s decisional law. State Farm Mutual Automobile Insurance Co. v. 84 N.J. 28, (1980) In this State, considerations of policy, however denominated, have been used to invalidate parties choice of law in a number of types of contractual relationships. As in the case of choice of forum issues, the franchisor-franchisee relationship is treated categorically. The New Jersey Supreme Court held in Instructional Systems, supra, that New Jersey s strong policy in favor of protection its franchisees justified voiding a contract stipulation that the law of another state would govern the contractual relationship between an out of state franchisor and a franchisee whose principal place of business was in New Jersey, even though the franchisee had numerous business locations outside of New Jersey. Id. at ; see also Winer Motors, Inc., supra (rejecting parties choice of New Jersey law to govern franchise agreement with Connecticut franchisee where Connecticut had overriding interest in fair treatment of its franchisees). Choice of law provisions have also been voided in standard form contracts between debtor and creditor (characterized as contracts of adhesion ), as violative of New Jersey s fundamental policy concerning lawful rates of interest in consumer credit transactions, Turner v. Aldens, Inc., 179 N.J. Super. 596 (App. Div. 1981)(applying New Jersey Retail Installment Sales Act to a revolving charge account held by a New Jersey 7

8 resident); see also Oxford Consumer Discount Company of North Philadelphia v. Stefanelli, 102 N.J. Super. 549 (App. Div. 1968), modified 104 N.J. Super. 512 (App. Div. 1969), modified 55 N.J. 489 (1970), app. dism 400 U.S. 808 (1970)(applying New Jersey Secondary Mortgage Loan Act to mortgage loan given on New Jersey residence, but executed in Pennsylvania, on grounds of legislative intent to cover extraterritorial transactions involving New Jersey residential property) and in contingency fee agreements between attorney and client, Bernick v. Frost, 210 N.J. Super. 397 (App. Div. 1986), certif. denied 105 N.J. 511 (1986)(applying New Jersey court rule limiting contingency fees, where agreement that New York rule would apply was unclear, because we cannot overlook the strong public interest of our State... in regulating the economic relationship between New Jersey attorneys and their clients in tort cases. ). Choice of law clauses have also been invalidated on other grounds. In Fairfield Leasing v. Techni-Graphics, Inc., 256 N.J. Super. 538 (Law Div. 1992) the court held that a waiver of the right to a jury trial in a standard form contract is unenforceable as against public policy because the waiver was not negotiated. The court also refused to enforce the contractual choice of New York law (under which, it was argued, the non-negotiated jury trial waiver was valid) because the contractual choice of law provision was not conspicuous. The court commented on the importance of contractual choice of law provisions: Although the [Uniform Commercial Code] does not expressly require that choice of law provisions be conspicuous, it seems to be that a contractual choice of law provision raises a unique problem in contract law. The meaning of the contract may be gleaned simply by careful reading. However, the incorporation in a contract of another state s entire body of law affecting the rights and liabilities of the parties may have serious consequences which are essentially unknowable to the layman. It is surely a minimal imposition, if any, on the freedom of contract to construe the Code so as to require that choice of law provisions be conspicuous as that concept is defined in N.J.S.A. 12A:1-201(10). Id. at 545; see also Winer Motors, Inc. v. Jaguar Rover Triumph, Inc., 308 N.J. Super. 666 (App. Div. 1986) (if choice of law provisions are routinely enforced, large franchisor... could with a stroke of a pen remove the beneficial effect of the franchisee s state s remedial legislation ). d. Approaches to the choice of law issue (1) Choice of law principles in sales of goods (Article 2) and UCITA. The UCITA choice of law principles are different from those in Article 1, which apply to sales of goods in Article 2. The Commission may wish to consider whether it is appropriate to fashion different rules on choice of law in transactions which are so similar. (2) Party autonomy in choice of law Party autonomy in non-negotiated transactions 8

9 As noted above, party autonomy is the polestar of UCITA 109. Subsection (a), which permits the parties to agree on the applicable law is described as critical to the electronic commerce rules in this Act. UCITA 109, Comment 2. It must always be remembered in evaluating UCITA s transactional rules, that the agreement of the parties includes not only truly negotiated contracts made between peers, but also mass-market transactions, including retail consumer transactions. UCITA validates the use of shrinkwrap and click-through agreements, including those in which essential terms of the contract are not available until after the transaction is consummated. It also validates transactions in which essential terms are subject to change after the transaction is deemed to be binding. Referring to the terms of such transactions as agreements is a fiction, as the Commission itself has previously said. See Final Report relating to Standard Form Contracts (October 1998)( The formation of standard form contracts is not based on consent and does not result from bargaining. ). Accord Leflar, American Conflicts Law 302 (3d ed. 1977) (actual intent of both parties to transaction, if any, not reflected in choice of law clause in adhesion contract), cited in Fairfield Leasing, 256 N.J. Super. at 544. As a practical matter, the agreement of the parties on choice of law will in reality be the unilateral choice of the licensor except in large, negotiated transactions. New Jersey courts traditionally have scrutinized the provisions of non-negotiated transactions very closely. See, e.g., Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, (1960). In particular, as noted above, New Jersey courts have invalidated agreements of parties on choice of law, not only in the classic consumer adhesion contract transactions (Turner v. Aldens and Oxford Consumer Discount, supra) but also in business to business transactions (Instructional Systems and Fairfield Leasing, supra). The court in Fairfield Leasing took a particularly dim view of the non-negotiated choice of law provision in that case, on the ground that such clauses give rise to a unique problem in contract law because the incorporation in a contract of another state s entire body of law may have serious consequences which are essentially unknowable to the laymen. 256 N.J. Super. at 544. The Commission may wish to consider fashioning some limitation on the choice of law in non-negotiated transactions, beyond the current limitations in UCITA 109 for consumer transactions. Party autonomy and fundamental public policy The parties freedom to choose the applicable law, UCITA 109(a) is subject to the general limit in UCITA for fundamental public policy. UCITA 105(b). 9

10 Section 105(b) of UCITA provides: If a term of a contract violates a fundamental public policy, the court may refuse to enforce the contract, enforce the remainder of the contract without the impermissible term, or limit the application of the impermissible term so as to avoid a result contrary to public policy, in each case to the extent that the interest in enforcement is clearly outweighed by a public policy against enforcement of the term. Comment 3 to UCITA 105(b) consists of a lengthy exegesis on the subject of public policy exceptions to the enforcement of contracts. The Restatement (Second) of Contracts 178, as well as the common law, are cited as authority for this section. It should be noted that 178 does not require a public policy to be fundamental in order to justify non-enforcement of a contract term. 1 According to the Comment, this principle is a particular application of UCITA Section 114, which preserves principles of law and equity, including, for example, the law merchant and the common law of the State relative to capacity to contract, principal and agent, estoppel, and the like, unless displaced by the Act. The purpose of UCITA 105(b), according to Comment 3, is to clarify the nature of the policies that have particular relevance to the subject matter governed by this Act. Other than adding modifying and limiting language to the Restatement and general common law rule, however, the text of UCITA itself offers no insight into the nature of the particular policies that are deemed relevant to the Act s subject matter. The Comment, however, goes into the subject matter in great depth, and announces numerous principles to be followed in applying this section, most of those principles aimed at narrowing the application of the section. First, the Comment states that fundamental state policies are most commonly stated by the legislature, therefore in the absence of a legislative declaration of a particular policy, courts should be reluctant to override a contract term. Where the parties have negotiated a particular term, courts should be even more reluctant to set aside the terms of the contract. The statement is also made that because of the national and international integration of the digital environment, courts should be reluctant to invalidate terms based on purely local policies.. The public policies which are recognized in the comment as most likely to be applicable to transactions within UCITA, are those relating to innovation, competition, and fair comment. All of these public policies are resolved in favor of contract provisions: In practice, enforcing private contracts is most often consistent with these policies. 1 Note that UCITA conflates the public policy principles of 188 the Restatement (Second) of Conflicts of Law with those of 178 of the Restatement (Second) of Contracts, by referencing the public policy exception to the enforcement of contracts as a source for UCITA 105(b), and cross-referencing UCITA 109 conflicts of law principles to the public policy exception in 105(b). In fact, these are two different lines of authority. Compare Caribe Hilton Hotel v. Toland, 63 N.J. 301, 303 (1973) (citing Restatement (Second) of Conflicts of Laws 188 with Saxon Construction v. Masterclean, 273 N.J. Super. 231 (App. Div. 1994), citing Restatement (Second) of Contracts

11 Agreed contract terms should be presumed to be valid and a heavy burden of proof should be imposed on the party seeking to escape the terms of the agreement. These principles are extended to mass market transactions that involve the use of standard form agreements. Judging from the comments to 109, the UCITA view of fundamental public policy, as outlined above, is narrower than the approach of New Jersey courts in cases such as Turner v. Aldens, Instructional Systems and Fairfield Leasing, supra, where nonnegotiated choice of law provisions (and other provisions) were critically evaluated and the choice of law of the parties was disregarded in favor of avowedly local policy provisions. It is also narrower than the public policy principle applied by New Jersey courts generally to the enforcement of contracts. The Commission may wish to consider some language clarifying the nature of the policies which should prevail over a choice of law clause. (3) Certainty in the applicable law Comment 3. to UCITA 109 makes the point that conflicts of law theories are in considerable disarray. So are the judicial opinions, on any fair reading of them. Thus, UCITA s attempt to bring some consistency to this issue by the adoption of clear rules is both understandable and laudable. The question is, however, whether the rules that are chosen the best ones to accomplish that purpose, and whether the UCITA rules simply increase the complexity inherent in conflicts of law issues. UCITA 109 adopts a basic approach which favors the licensor, both by validating contract choice of law provisions (which will almost always be non-negotiated standard terms proffered by the licensor) and by favoring the licensor s jurisdiction in its default rules. The justification for the seller-favorable rules is that any other choice of law rule would require the information provider (small or large) comply with the law of all states and all countries since it may not be clear or even knowable where the contract is formed or the information sent. Comment 3, UCITA 109. Neither of these justifications for favoring the jurisdiction of the licensor survives close analysis. With the respect to the potential applicability of the law of numerous jurisdictions, the U.S. economy has been both national and global for many years. Producers of nonsoftware products who distribute their goods nationally and internationally have dealt with the potential applicability of 50 state laws, as well as international law. And courts routinely deal with conflicts of law issues in extremely complex multi-jurisdictional cases. The multi-state character of computer information transactions does not distinguish them from other commercial transactions nor does it justify adopting a different set of rules to avoid the application of multi-jurisdictional law. The confusion in the law in this area is due in no small part to the inherent complexity of multi-jurisdictional transactions taking place in a federal system. Professor Woodward comments: 11

12 It appears that the intent [of 109] is to address a core problem of state commercial law in the United States -- local control and the resulting conflicts among state regulatory and mandatory rules that results. Interstate banks, insurance companies, mail order houses, and corporations of all kinds are subject to multiple state laws and regulations and have staffs of lawyers constantly addressing compliance issues. Where compliance becomes too difficult or impossible, the usual solution, pursued by National Banks and other national enterprises is to seek preemptive federal legislation. The problem of multiple state regulation that our interstate businesses must confront is a product of our Constitution and our penchant for state rather than federal commercial legislation. Truly uniform state commercial law has been elusive but it is our only solution short of federal legislation. Unlimited choice of law by contract is not an answer to this essentially political and Constitutional problem. Woodward, Memorandum to American Law Institute (May 5, 1998). Moreover, as Professor Woodward also points out, UCITA does not relieve licensors from the potential applicability of all multi-jurisdictional laws. If, under UCITA 105 the fundamental policy of the a State other than the chosen State will apply to a UCITA transaction notwithstanding the parties contractual choice, neither courts nor parties will be completely relieved of the task of determining the jurisdiction with the most significant relationship to the transaction. With respect to the argument that the location where a contract is formed may be unclear or unknowable, under modern Restatement conflicts principles the location where a contract is formed is not determinative of the applicable law, nor is the location of any one of the parties. To the extent that location is relevant to a transaction, one author (writing on the issue of jurisdiction) debunks the view that it is difficult to determine the location of parties to a cyberspace transaction: However, cyberspace does not lack physical location any more than does the telephone system. For example, information on the Internet still travels through communications lines and hardware, each with fixed locations around the world. The web sites and information are not stored in cyberspace, but on tangible computer storage media. Further, users have physical locations from which they connect to the Internet and interact with others. The Internet is basically a technologically advanced communications network and the courts should treat it similarly to other communications systems in their personal jurisdiction analysis. Ryan Yagura, 38 IDEA: J.L. & Tech. 301 (1998), visited February 3,

13 Moreover, to the extent that it is difficult to determine where the party to a transaction is physically located, or where information is sent, Comment 3. UCITA 109, it is often equally difficult for licensors and licensees to determine location. In fact, to some extent it may be easier for licensors to determine the location of a licensee as an incident of receiving payment for the transaction. Thus, to the extent that determining location is difficult, it does not justify a preference for the law of the licensor s jurisdiction over that of the licensee. Professor Woodward s solution to this particular problem is a requirement that parties truthfully divulge their domicile or chief executive office or be saddled with the other party s legal regime. Woodward, Where in the World is Your Contract Governed By?, supra. There does not appear to be any easy way out of these complex conflicts of law issues which are an incident of our federal system. That is not to say, however, that no attempt to simplify should be made. One simplifying approach would be to eliminate 109 and rely on the current rule in UCC Article 1. This approach would eliminate the inconsistency that would arise in conflicts of law rules between UCC Article 2 sales of goods transactions and UCITA transactions. Another simplifying approach would be to reverse the default rule which applies the law of the licensor s jurisdiction, and apply the law of the licensee s jurisdiction. This would replicate whatever virtue-of-simplicity is embodied in the current default rule, but provide an incentive for licensors to determine the identity of those with whom they do business electronically. (4) Consumer issues Who is a consumer? The language in 109 of UCITA which concerns choice of law in consumer contracts is problematic for a number of reasons. First, it is not clear just what New Jersey laws are covered by the language of UCITA 109 which invalidates the parties choice of law in a consumer contract, to the extent that it would vary a rule that may not be varied by agreement under the law of the [default] jurisdiction. UCITA 102 defines the term consumer narrowly, as an individual who is acquiring informational rights that the individual at the time of contracting intended to be used primarily for personal, family or household purposes. UCITA 102(15). The definition excludes an individual who is a licensee primarily for professional or commercial purposes, including agriculture, business management, and investment management other than management of the individual s personal or family investments. Id. Many New Jersey consumer statutes either expressly define the term consumer more broadly than the UCITA definition, or otherwise cover a broader category of beneficiaries. By way of example, under the motor vehicle lemon law, the term 13

14 consumer is defined as a buyer or lessee, other than for purposes of resale or sublease, N.J.S. 56:12-30; the Consumer Protection Leasing Act applies to every lease, N.J.S. 56:12-62, excluding only fleet leases, N.J.S. 56: While these statutes would not apply to a UCITA transaction in any event, the overarching consumer law, the Consumer Fraud Act, N.J.S. 56:8-1 et seq., has been applied to transactions involving the sale of a computer system to a New Jersey corporation. The Dreier Co., Inc. v. Unitronix Corp., 218 N.J. Super. 260 (App. Div. 1986); Hundred East Credit Corp. v. Eric Schuster Corp., 212 N.J. Super. 350 (App. Div. 1986). In both cases the Appellate Division applied the plain language of N.J.S. 56:8-19, which affords a remedy under the act to any person (defined in N.J.S. 56:8-1(d) as including a corporation) who suffers damage from conduct which is unlawful under the Act. There is strong case law support for applying the Consumer Fraud Act to mass-market transactions generally. In Marascio v. Campanella, 298 N.J. Super. 491, 498 (App. Div. 1997) the Appellate Division applied the Act to a contract for services on a building owned by a corporation. In disposing of the argument that the Act did not apply, the court commented that a consumer transaction [under the Consumer Fraud Act] occurs when the transaction involves the sale of consumer goods regardless of who purchases those goods and for what purpose and further stated that so long as the disputed contract involves goods or services generally sold to the public at large, the mere fact that a corporation purchases the goods for use in its business does not preclude invocation of the Act and its regulations. 298 N.J. Super. at citing, e.g., Hundred East Credit Corp., supra. If the narrower UCITA definition of consumer is applied to this section, it might be construed to validate a choice of law in a non-consumer transaction that would escape the applicability of New Jersey consumer laws that would otherwise apply to a transaction with a New Jersey business entity. But it is not clear that this is what is intended in this section. UCITA 105 contains a provision that invalidates contract terms which violate fundamental public policy and provides that a consumer protection statute controls over a contrary UCITA rule, in a transaction which is controlled by UCITA. Comment 4 to UCITA 105 states that this Act does not alter the scope of coverage of any existing consumer statute since that scope is determined by the consumer protection statute itself. Thus, in a transaction to which UCITA applies, 105 appears to preserve the applicability of consumer protection statutes to the full extent of their existing scope. This is a comment only, however, and it appears to contradict the plain language of UCITA itself, which defines the term consumer more narrowly than it is defined in important New Jersey consumer protection laws that have been applied to business entities. The Commission may wish to consider a modification of the language of UCITA that would preserve the current applicability of New Jersey consumer law with respect to parties who would not be considered consumers under UCITA s definition.. 14

15 Consumer law as fundamental public policy The comments to UCITA 109 and the supporting memoranda that we have received suggest that consumer law is a subset of contract law. However, a survey of New Jersey consumer law statutes suggests that consumer law is not merely a species of contract law, but rather has features of tort law see Gennari v. Weichert Co. Realtors, 148 N.J. 582, (1997)(apportioning damages arising under the Consumer Fraud Act pursuant to the Comparative Negligence Act). Consumer law is also a form of regulatory law. For example, the Consumer Fraud Act provides civil remedies for aggrieved consumers, including treble damages, N.J.S. 56:8-19, and enforcement remedies reserved for the Attorney General, including injunctive relief and imposition of monetary penalties, N.J.S. 56:8-8, -13. See also N.J.S. 56:12-1 to -13 (consumer plain language law); N.J.S. 56:12-14 to -18 (Truth-in-Consumer Contract, Warranty and Notice Act). The comments to UCITA 109 suggest that the provisions preserving the applicability of consumer law are an innovation. This is true only to the extent that the preservation of consumer law is expressly stated in the proposed statute. In New Jersey and elsewhere consumer laws have been found to express public policy which may not be waived, either explicitly or by virtue of a choice of law provision. See Turner v. Aldens, supra, and discussion above. To some extent, UCITA 109 may be read as a limitation on the applicability of consumer laws, as compared to present law. As noted above, the narrower UCITA definition of consumer is susceptible to the construction that it is a limitation on the availability of consumer law remedies in a UCITA transaction to parties who are not UCITA consumers, i.e., individuals acquiring a product for personal, family or household purposes. The UCITA comments also suggest another limitation on the applicability of consumer laws. UCITA 109 provides that a choice of law provision in a consumer contract is not enforceable to the extent it would vary a rule that may not be varied by agreement under the law of the default jurisdiction. The materials provided by Carlyle Ring describe the consumer laws which fall under this language as those which are mandatory. This seems to suggest that the language of UCITA 109 may be interpreted to require that a consumer law be explicitly non-waivable in order to fall under the saving provision. Such an interpretation might result in an inappropriate bifurcation of consumer law into mandatory and non-mandatory, categories that are not currently recognized in New Jersey law. Some New Jersey consumer laws are explicitly non-waivable. See, e.g., N.J.S. 56:12-11 ( No consumer contract shall contain a waiver of any rights under [the plain language law] ); N.J.S. 56:12-16 ( No consumer contract, warranty, notice or sign...shall contain any provision by which the consumer waives his rights under [the Truth-in- Consumer Contract, Warranty and Notice Act]); N.J.S. N.J.S. 56:12-48 ( Any agreement entered into by a consumer for the purchase or lease of a new motor vehicle which waives, limits or disclaims the rights set forth in [the Lemon Law ] shall be void as contrary to public policy. ). Some equally important consumer laws are do not contain an express 15

16 provision voiding any waiver, yet it is clear in context that they are intended to be mandatory. See, e.g., N.J.S. 56:12-60 to -70 (Consumer Protection Leasing Act). See also Turner v. Aldens, 179 N.J. Super. at 601. (application of non-new Jersey law would contravene fundamental policy of this State as it appears documented in [the Retail Installment Sales Act]... despite the election of the parties in this contract of adhesion... ). The Commission may wish to consider some clarifying language or comment to make it clear that consumer laws are preserved whether or not they are explicitly nonwaivable. Such a clarification would be consistent with current New Jersey cases which have applied New Jersey consumer laws which do not contain any express prohibition against waiver, despite a contrary choice of law in the parties contract. The consumer law of the default jurisdiction As noted above, Carlyle Ring seemed to say that the consumer law of the consumer s jurisdiction is always preserved under UCITA. However, the consumer law that is preserved by UCITA 109 is the consumer law of the default jurisdiction. The default jurisdiction in consumer contracts, in a transaction which requires delivery of a copy on a tangible medium, is the jurisdiction in which the copy is or should have been delivered to the consumer. In other words, the default jurisdiction is the one in which the consumer purchases the item, receives delivery of the item, or should have received delivery of the item. In the case of a New Jersey resident consumer, that jurisdiction will be New Jersey in the software is purchased or delivered (or should have been delivered) in New Jersey. If the consumer travels to another state to make a purchase or receives delivery in another state, under UCITA 109 the consumer law of the state where the purchase is made or the delivery is received will be preserved. In the case of an actual purchase in another jurisdiction, this rule parallels the result that would obtain in any ordinary transaction (the consumer law of the jurisdiction where the store in which the purchase is made applies) and probably is consistent with the expectation of the parties to such a transaction. The delivery rule does introduce an anomaly, however. If a consumer purchases software by mail order and has it delivered to her office in New York, e.g., rather than her home in New Jersey, the consumer law of New York is preserved. This may not make much sense if New York is merely the point of delivery for a New Jersey resident consumer, who may have completed the transaction from a computer located in New Jersey and paid the remote seller with a credit card indicating a New Jersey billing address. If the licensor is a company that operates on a nationwide basis, delivering software into every State, it would seem purely fortuitous to chose the consumer law of the place of delivery where all other indicia of the transaction on the consumer end suggest that the place of the consumer s domicile has far more significant contacts with the transaction than the place of delivery. 16

17 In the case of an access contract or a contract for the electronic delivery of software, the consumer law that is preserved is the law of the licensor s location, as defined in UCITA. Thus, the default consumer law in an access contract with American Online, which is located in Virginia, is the consumer law of Virginia. If the access contract is with a licensor not located in the U.S., the licensor s consumer law is preserved only if it provides substantially similar protections and rights to a party not located in that jurisdiction as are provided under this [Act]. Otherwise, the law of the State that has the most significant relationship to the transaction governs. In the case of a national, indeed international, information services provider such as America Online, there does not appear to be any policy reason in favor of protecting such an entity from the applicability of the consumer law of all of the 50 states. An expansive reading of 109, as applied to access contracts, might result in a limitation on the consumer protection jurisdiction of the Attorneys General of 49 of the 50 states, depending upon the location of the licensor. Such a result is unlikely to sit well with the State Attorneys General (including New Jersey s) who have collectively taken on America Online for its consumer practices on several occasions. 17