^{SECTION 2B-801. EFFECTIVE DATE OF THE ARTICLE.}

^{SECTION 2B-802. TRANSACTIONS COVERED.}

^{PART 1}

^{GENERAL PROVISIONS}

^{SECTION 2B-101. SHORT TITLE. This article may be cited as Uniform Commercial Code - Licenses.}

^{Uniform Law Source: UCC 2-102.}

^{Reporter's Note:}

^{The scope of Article 2B is defined in section 2B-103. While the scope covers more than licenses, the transaction that provides the base for this article involves licensing of information. The title follows Article 2 which is designated "sales" because that was the primary transaction format used to develop provisions for that Article, but actually scope covers all "transactions" in goods.}
 

^{SECTION 2B-102. DEFINITIONS.}

^{(a) In this article unless the context otherwise requires:}

^{(1) "Access contract" means a contract for electronic access to, or for electronic information from, an separate electronic information processing system. The term does not include a contract for physical access to a location, such as a theater.}

^{(2) "Attribution procedure" means a procedure established by law, or regulation, or established by agreement, or adopted by the parties, for the purpose of verifying that an electronic authentication, record, message, or performance is that of the respective party or is for detecting changes or errors in content.}

^{(3) "Authenticate" means to sign, or to execute or adopt a symbol or sound, or to encrypt or process a record in whole or in part, with intent by the authenticating party person to:}

^{(A) identify that partyperson;}

^{(B) adopt or accept a record or term that contains the authentication or to which a record containing the authentication refers; or}

^{(C) attest to the integrity of a record or term that contains the authentication or to which a record containing the authentication refers.}

^{(4) "Automated transaction" means a contract formed by electronic means or electronic messages in which the acts or messages of one or both parties will not be reviewed by an individual as an ordinary step in forming the contract.}

^{(5) "Cancellation" means the ending of a contract by a party because of breach by the other party. "Cancel" has a corresponding meaning.}

^{(6) "Computer program" means a set of statements or instructions to be used directly or indirectly in an information processing system in order to bring about a certain result. The term does not include informational content.}

^{(7) "Consequential damages" include compensation for losses resulting from a party's general or particular requirements and needs of which the other party at the time of contracting had reason to know, which losses could not reasonably be prevented by the aggrieved party, and from injury to person or property proximately resulting from any breach of warranty. The term does not include direct or incidental damages.}

^{(8) "Conspicuous", with reference to a term or clause, means so written, displayed or presented that a reasonable person against which it is to operate ought to have noticed it. In the case of an electronic record intended to evoke a response by an electronic agent, a term or clause is conspicuous if it is presented in a form that would enable a reasonably configured electronic agent to take it into account or react without review of the record by an individual. Conspicuous terms or clauses include but are not limited to the following:}

^{(A) with respect to a person:}

^{(i) a heading in capitals equal or greater in size to the surrounding text;}

^{(ii) language in a record or display in larger or other contrasting type or color than other language or set off from other language by symbols or other marks that call attention to the language; or}

^{(iii) a term or a clause prominently referenced in the body or text of an electronic record or display and which is readily accessible and reviewable from the record or display; and}

^{(B) with respect to a person or an electronic agent, a term or clause that is so positioned in a record or display that the person or electronic agent cannot proceed without taking some additional action taken with respect to the term or clause.}

^{(9) "Consumer" means an individual who is a licensee of information or informational property rights that at the time of the contracting was intended by the individual to be used primarily for personal, family, or household purposes. The term does not include an individual who is a licensee primarily for profit-making, professional, or commercial purposes, including agricultureral use, business management, and investment management, other than management of the individual's personal or family investments.}

^{(10) "Consumer transaction" means a transaction in which a consumer is the licensee.}

^{(11) "Contract fee" means the price, fee, rent, or royalty payable under a contract under this article.}

^{(12) "Contractual use restriction" means an enforceable limitation created by the contract on use of the licensed information or informational property rights, including an obligation of nondisclosure and confidentiality and a limitation on scope, manner, or method , or location of use.}

^{(13) "Copy" means information that is fixed on a temporary or permanent basis in a medium from which the information can be perceived, reproduced, used, or communicated, either directly or with the aid of a device. The term includes a phonorecord.}

^{(14) "Court" includes an arbitration or other dispute-resolution forumtribunal.}

^{(15) "Delivery", as to a contractual performance, means the voluntary physical or electronic transfer of possession or control of a copy.}

^{(16) "Direct damages" means includes compensation for losses consisting of the difference between the value of the performance actually received and the value of required performance, which shall not exceed as measured by the contract or by the market value of the required performance, and the value of the performance actually received, or in an appropriate case, compensation for losses in the nature of reliance or restitution. The term does not include consequential or incidental damages.}

^{(17) "Electronic" means of or relating to electrical, digital, magnetic, wireless, optical, or electromagnetic technology or any other technology that entails similar capabilities.}

^{(18) "Electronic agent" means a computer program or other electronic or automated means used, selected, or programmed by a person to initiate or respond on behalf of that person to electronic messages or performances without review by an individual.}

^{(19) "Electronic message" means an electronic record or display that is stored, generated, or transmitted by electronic means for purposes of communication to a person or electronic agent.}

^{(20) "Financier" means a person that provides a financial accommodation to a licensor or licensee under a security agreement or lease and obtains an interest in a license or related contract right of the party to which the financial accommodation is provided.}

^{(21) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing.}

^{(22) "Incidental damages:":}

^{(A) includes compensation for any commercially reasonable charge, expense, or commission incurred by an the aggrieved party after breach of contract:}

^{(i) in inspection, receipt, transportation, care, or custody of rightfully refused copies or information;}

^{(ii) in stopping delivery, shipment, or transmission;}

^{(iii) in effecting cover, mitigation, return, or retransfer of copies or information; or}

^{(iv) otherwise incident to the breach; and}

^{(B) does not include consequential or direct damages.}

^{(23) "Information" means data, text, images, sounds, mask works, or works of authorship.}

^{(24) "Information processing system" means a system or facility for generating, sending, receiving, storing, displaying, or processing electronic information.}

^{(25) "Informational content" means information that is intended to be communicated to or perceived by an individual in the ordinary use of the information, or the equivalent of such information. The term does not include data used merely to control the interaction of a computer program with other devices or other computer programs.}

^{(26) "Informational property rights" include all rights in information created under laws governing patents, copyrights, mask works, trade secrets, trademarks, publicity rights, or any other law that permits a party, independently of contract, to control or preclude another party's use or disclosure of information on the basiss of the owner's interest in the information.}

^{(27) "License" means a contract n agreement that authorizes or permits access to or use of information or of informational property rights if but the contract expressly limits the scope of the rights or permissions granted, expressly prohibits or controls uses, or affirmatively grants less than all informational property or other rights in the information. A contract may be a license , whether the information or informational property rights exist at the time of contract or are to be developed, created, or compiled thereafter pursuant to the contract, and whether or not the contract transfers title to a copy. The term includes an access contract and a consignment of copies of information. The term does not include a contract to the extent that the contract is : (A) an unconditional transfer of ownership of all informational property rights; or (B) a reservation or creation of a financier's interest.}

^{(28) "Licensee" means a person authorized to exercise rights or permissions in information or informational property rights in an agreement under this article, whether or not the agreement is a license.}

^{(29) "Licensor" means a transferor in an agreement under this article, whether or not the agreement is a license. The term includes a provider of services. In an access contract, as between a provider of access and a customer, the provider is the licensor, and, as between the provider of access and a provider of the content to be accessed, the provider of content is the licensor. If performance consists of an exchange of information, each party is a licensor with respect to the information or access it provides.}

^{(30) "Mass-market license" means a standard form that is prepared for and used in a mass-market transaction.}

^{(31) "Mass-market transaction" means a consumer transaction, or any other transaction in information or informational property rights directed to the general public as a whole under substantially the same terms for the same information with an end-user licensee. To constitute a mass-market transaction, if the licensee is not a consumer, the licensee must acquire the information or rights in a retail transaction under terms and in a quantity consistent with an ordinary transaction in that marketplace. Except for consumer transactions, the The term does not include:}

^{(A) a contract for redistribution;}

^{(B) a contract for public performance or public display of a copyrighted work;}

^{(C) a transaction in which the information is or becomes customized or otherwise specially prepared by the licensor for the licensee;}

^{(D) a site license; or}

^{(E) an access contract not involving a consumer.}

^{(32) "Merchant" means a person that deals in information or informational property rights of the kind or that otherwise by the person's occupation holds itself out as having knowledge or skill peculiar to the practices or information involved in the transaction, whether or not the person previously engaged in such transactions, or a person to which such knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that by its occupation holds itself out as having such knowledge or skill.}

^{(33) "Nonexclusive license" means a license that does not preclude the licensor from offering the same information, rights or permissions within the same scope to other licensees. The term includes a consignment of copies.}

^{(34) "Present value" means the valueamount as of a date certain, of one or more sums payable in the future, or the value of one or more performances due in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties in their agreement unless that rate was manifestly unreasonable when the transaction was entered into. Otherwise, the discount is determined by a commercially reasonable rate that takes into account the circumstances of each case when the transaction was entered into.}

^{(35) "Published informational content" means informational content prepared for or made available to recipients generally or a class of recipients in substantially the same form and not customized for a particular recipient by an individual or group of individuals acting on behalf of the licensor and using judgment and expertise. The term does not include informational content provided in a special relationship of reliance between the provider and the recipient.}

^{(36) "Reason to know," with respect to a fact, means that a person has knowledge of it or that, from all the facts and circumstances actually known to the person without investigation, the person should know that the fact exists. Whether reason to know is effective for a particular circumstance is determined under Section 1-201(27).} 

^{(376) "Receive" means that}

^{(A) a person takes delivery of a copy;}

^{(B) a notice or notification comes to a person's attention; or}

^{(C) a notice or notification is delivered to and available at a location designated by agreement for that purpose or, in the absence of an agreed location:}

^{(i) is delivered at the individual's residence, or the person's place of business through which the contract was made, or at any other place held out by the person as a place for receipt of such communications, or}

^{(ii) in the case of an electronic notification, comes into existence in an information processing system in a form capable of being processed by or perceived from a system of that type, and the recipient uses, or otherwise has designated and holds out, that system as a place for the receipt of such notices or notifications.}

^{(387) "Record" means information inscribed on a tangible medium or stored in an electronic or other medium and retrievable in perceivable form.}

^{(398) "Refund", with respect to a rejected record or term, means:}

^{(A) reimbursement of any contract fee paid from the person to whom it was paid or from another person who offers to reimburse the fee, and a right to stop any payment, on proof of purchase and return of the product and all copies to which the record applies within a reasonable time after delivery; or}

^{(B) with respect to multiple products integrated into a bundled whole and transferred for one bundled price:}

^{(i) if the record is material to the bundled product and is rejected before or during the initial use of the bundled product and the bundled product is returned without further use, reimbursement of the entire bundled price, on proof of purchase and return of the entire bundled product and all copies within a reasonable time after delivery; or}

^{(ii) in all other cases, reimbursement of the fee paid for the rejected record or, if no fee is separately stated, an allocation of the fee attributable to information to which the rejected record applies that which is reasonable with respect to the licensor and the rejecting party in light of the circumstances, on proof of purchase and return of all copies to which the rejected record applies within a reasonable time after delivery.}

^{(4039) "Release" means an agreement not to object to, or exercise legal or equitable remedies against, the use of information or of informational property rights, which agreement requires no affirmative acts by the party giving the release to enable or support the other party's use. The term includes a waiver of informational property rights.}

^{(410) "Scope", with respect to a license, means terms of the license that define:}

^{(A) the licensed copies or information, and the informational property rights involved;}

^{(B) the uses authorized, prohibited, or controlled;}

^{(C) the geographic area, market, or location in which the license applies; and}

^{(D) the duration of the license.}

^{(421) "Send" means to deposit in the mail or with a commercially reasonable carrier or otherwise to deliver for, or take all necessary steps that initiate, transmission to or creation within another location or system by any usual means of communication with any costs provided for and properly addressed or directed as reasonable under the circumstances or as otherwise agreed. With respect to an electronic message, the term means to initiate operations that in the ordinary course will cause the record to come into existence in an information processing system in a form capable of being processed by or perceived from a system of that type, and the recipient uses or by agreement or otherwise has designated or held out that system as a place for the receipt of such communications. Actual receipt within the time in which it would have arrived if properly sent has the effect of a proper sending.}

^{(432) "Software" means a computer program, any informational content included in the program, and any supporting information provided by a licensor as part of the transaction.}

^{(443) "Software contract" means a sale of a copy of software, a license of software, or a transfer of ownership of informational property rights in software, whether the software exists or is to be developed pursuant to the contract. The term includes a contract to develop software as a work for hire.}

^{(454) "Standard form" means a record, or a group of linked records, containing contractual terms that were prepared for general and repeated use in transactions and are so used without negotiation of or changes in most of the terms except for negotiation or customization of price, quantity, method of payment, selection among standard performance options, or time or method of delivery does not preclude a record from being a standard form.}

^{(465) "Termination" means the ending of a contract under a power created by agreement or law for a reason other than its breach. "Terminate" has a corresponding meaning.}

^{(b) Article 1 contains general definitions and principles of construction which apply throughout this article. In addition, the following definitions in other articles of [the Uniform Commercial Code] apply to this article:}

^{"Financial asset" Section 8-102(a)(9)}

^{"Funds transfer" Section 4A-104 (as applied to credit orders)}

^{"Identification" to the contract Section 2-501}

^{"Instrument" Section 3-305}

^{"Item" Section 4-104}

^{"Letter of credit" Section 5-102}

^{"Negotiable instrument" Section 3-104}

^{"Payment order" Section 4A-103 (as applied to credit orders)}

^{"Investment property" Section 9-115(f)}

^{"Sale" Section 2-106}

^{Committee Votes:}

^{1. Authenticate:}

^{a. Adopted the term "authentication" to replace "signed" by a consensus without a formal vote.}

^{b. Voted to retain the use of "authentication." Vote: 5 - 3 (November, 1997)}

^{2. Consequential damages.}

^{a. Voted to move references to particular types of damages from definition of consequential damages to the comments except for personal injury. Vote: 8-5 (Feb. 1997)}

^{b. In Article 2, NCCUSL Annual Meeting defeated a motion to delete the disproportionate loss test.}

^{c. Consensus to move speculative damage issue to substantive section. (Feb. 1998)}

^{3. Information.}

^{a. Rejected a motion to delete "intellectual property rights" from the definition of "information." Vote: 3-5 (Feb. 1997)}

^{b. Adopted a motion to delete informational property rights from this definition and add that term to the definition of "license." Vote: 12-0 (Feb. 1998)}

^{4. Consequential damages.}

^{a. Deleted reference to mitigation or otherwise without substantive change. Vote: 7 - 4 (Feb. 1998).}

^{5. Conspicuous.}

^{a. NCCUSL sense of the house that the terminology conspicuous should be the same in the three articles and that definition should retain safe harbor language. (Annual Meeting 1997)}

^{b. Sense of the house that conspicuousness should be a decision by court. (Annual Meeting 1997)}

^{c. Committee reviewed without a motion on safe harbor use. (Nov. 1997)}

^{6. Direct damages.}

^{a. Adopted the term "direct" rather than "general" damages. Vote: 8 - 1 (Feb. 1998).}

^{7. Good Faith.}

^{a. NCCUSL voted to expand concept to cover consumer obligations of fair dealing. (July, 1997)}

^{8. Mass Market:}

^{a. Adopted a motion to retain the limitation to retail transactions. Vote: 7 - 4 (Feb. 1998)}

^{b. Rejected a motion to delete "in a quantity consistent". Vote: 4 - 8 (Feb. 1998)}

^{c. Voted to retain the concept of "mass market" licenses, subject to consideration of use in specific sections as contrasted to use of the term "consumer." Vote: 13-0 (September, 1996)}

^{d. Voted that definition of "mass market license" should refer to a market involving the general public and small retail transactions, excluding special business transactions. (December, 1996)}

^{e. Voted 10-2 to retain the mass market concept pending consideration of its application. (Feb. 1997)}

^{f. Voted to delete explicit coverage of all consumer transactions. Vote: 8-4 (Feb. 1997)}

^{g. Voted to use a dollar limitation to cap the risk under definition of mass market. Vote: 10-3. (Feb. 1997)}

^{h. Rejected a motion to delete any reference to "consumer" in the act. Vote: 4 - 8 (Nov. 1997)}

^{i. Deleted one reference to "retail market" but retained another reference. Vote: 7 - 5}

^{j. Agreed to retain current approach and not an adhesion contract definition. Vote: 11 - 0 (Nov. 1997)}

^{k. Rejected a motion to rely solely on a dollar limitation. Vote: 3 - 10 (Nov. 1997)}

^{l. Rejected a motion to delete the reference to "the general public as a whole." Vote: 2- 10. (Nov. 1997)}

^{m. Rejected a motion to delete the language of "as a whole". Vote: 5 - 5. (Nov. 1997)}

^{n. Deleted the dollar cap on the understanding that applications of the concept would be reviewed in light of this change. Vote: 6 - 3. (Nov. 1997)}

^{o. Rejected a motion to delete the concept. Vote: 1 - 8. (Nov. 1997)}

^{9. Merchant.}

^{a. Adopted language that merchant need not previously have engaged in the type of transaction. Vote: 6-4 (Feb. 1998)}

^{10. Record.}

^{a. Rejected a motion to require that it be more than transitory. Vote: 0 - 10 (Feb. 1998).}

^{Reporter's Notes:}

^{1. "Access contract." Access contracts are agreements that authorize electronic access to a facility or that allow obtaining information from a facility controlled by the licensor or another party. The contract does not depend on informational property rights, but on control of an information processing system. A party's right to preclude unauthorized access to a computer is recognized in most states and in federal law. The system may be an Internet web site, a computer containing a database, or any other electronic information processing system. The term also includes contracts for the use of remote data processing, including third party E-mail systems, as well as situations where a database in the licensee's information processing system is automatically updated either by an aspect of the program in the licensee's system automatically accessing the remote system, or the remote system automatically accessing the local database and adding updated material to it.}

^{Access contracts are a major method of information distribution. Digital technology enables a shift from distribution in physical copies to merely making information available at a remote location. The contracts often entail what some describe a "pull technology" whereby a licensee reaches into the information processing system to obtain or use relevant information or processing. An access contract requires electronic access. The term does not cover grants of a right physically to enter, for example, a building in which information is displayed or made available in books.}

^{The definition also does not refer to chips or systems enabling access within a product such as a smart card or programs resident in the same computer. It applies to arrangements that grant permission to access remote data, processing or similar resources.}

^{Often, the provider of access also provides contractual rights in the information systems that are accessed by the licensee. In some cases, the information is that of the access licensor, while in others, the transaction involves a three party framework. In the three-party relationship, one person provides access, while another party (the information provider) licenses information to the customer. This three party transaction involves two and, in some cases, three separate contracts. The first is between the content provider and the access provider. This may be an ordinary license to the information or an access contract itself. The second is between the access provider and the end user. This is an access contract. The third occurs if the content provider contracts directly with the end user or client. Typically, the contracts are independent.}

^{2. "Attribution procedure." The concept of an attribution procedure derives from Article 4A and the use in that article of automated systems described there as a "security procedure." To be an attribution procedure, the procedure must be adopted by the parties or by law for the type of use involved. The effect of an attribution procedure is discussed in Sections 2B-114 to 2B-117. The benefits resulting from use of an attribution procedure only pertain to procedures that are commercially reasonable.}

^{3. "Authenticate." The term "authenticate" replaces "signature" or "signed" in this article. It expands the traditional concept of signature. Any adoption or execution of a symbol with the intent to sign or authenticate that would be a signature under prior law, is an authentication under Article 2B. This includes, for example, use of identifiers such as a PIN number, if used with the requisite intent. In addition, however, the definition expands prior law and expressly includes acts and sounds as a means of authentication. These are potentially important in electronic commerce. Encryption and other technologically enabled acts are today used to achieve the effects associated with a traditional, written signature. The critical factor lies in the objective intent with which the party making the authentication acts.}

^{The definition is technologically neutral. Statutes in some states give special recognition to "digital signatures" that rely on a specific encryption technology and a certification or licensing system. The procedures set out in those statutes qualify as authentication for Article 2B. The Article 2B concept is broader, however, and recognizes that technology and commercial practice constantly change and provide many different ways of achieving an authentication. This technology neutral approach is endorsed by federal government reports on electronic commerce.}

^{Authentication can be intended to have various effects. Which effect is intended relates to a party's intent as expressed or inferred from the circumstances of use of the authentication. Absent circumstances indicating a different intent, an authentication contemplates all three of the effects listed (see Section 2B-119).}

^{4. "Automated transaction" refers to relationships formed and effective as a contract even though one or both of the parties are represented by automated devices, such as electronic agents. This type of contracting became common with the advent of automated ordering devices using voice systems; it is widely used in electronic commerce, including in cases where sophisticated computer systems seek out resources and make transactions with other systems holding those resources, all without the direct guidance of an individual reviewing the choices made. While law could adopt a fiction that attributes to these automated activities the intent of the person selecting and using them, this Article directly recognizes that these interactions involve operations of automated systems and that they can create binding legal obligations for those who use them.}

^{5. "Cancellation" corresponds to existing Section 2-106.}

^{6. "Computer program" parallels the U.S. Copyright Act (17 U.S.C. § 101), but differs from that definition in that it adds language to implement a distinction between programs as operating instructions on the one hand, and "informational content" as information communicated to people on the other hand. In this article, "computer program" refers to the functional aspects of software, while "informational content" refers to output intended to communicate to a human being. That there is overlap in terms is inevitable. However, in cases where questions arise about what aspect of a software system provides the basic qualitative and other conditions for performance of the program, the answer lies in whether the issue address functional operations and the effect of any malfunction in those operations (program) or errors or inadequacies in communicated content (informational content). In situations where a program is provided in source code form, the fact that the source code can be read by a human does not change the fact that the transaction involves a computer program and applicable merchantability or other warranties pertaining to the functioning of that program apply.}

^{7. "Consequential damages" corresponds to existing Article 2 but provides that consequential damages may be recovered by either party. This follows common law and acknowledges the mutuality of risk characteristic of many transactions in information and informational property rights.}

^{The losses must be an ordinary and predictable result of the breach. See Restatement (Second) of Contracts § 351(2). In the case of economic and similar losses, they must be foreseeable or, in the case of personal injury or property damage, must proximately result from the breach. This means that, in order to recover compensation for losses resulting from the special circumstances of the aggrieved party, the party in breach must have had actual notice of those circumstances at the time of contracting. Often this means that such particular needs and circumstances must be made known at the time of contracting. In contrast, losses resulting from ordinary general requirements can often be presumed to have been within the contemplation of the other party. The determination of foreseeability requires consideration of the contractual circumstances in light of ordinary standards of damage computation.}

^{The burden of proving loss is on the party claiming damages. As in Article 2, this Article does not require proof with absolute certainty or mathematical precision. The premise that there be a liberal administration of the remedies of this Act requires that remedies be administered in a reasonable manner. However, this does not permit recovery of losses that are speculative or highly uncertain and therefore unproven. See Section 2B-707 and Restatement (Second) of Contracts 352 ("Damages are not recoverable for loss beyond the amount that the evidence permits to be established with reasonable certainty."). No change in law on this issue is intended. See Freund v. Washington Square Press, Inc., 34 N.Y.2d 379, 357 N.Y.S.2d 857, 314 N.E.2d 419 (1974) ("[Plaintiff's] expectancy interest in the royalties . was speculative.").}

^{Consequential damages do not include "direct" or "incidental" damages. Consequential loss lies in damages beyond the difference in value of the performance received and the performance promised. It deals with loss of benefits anticipated as a result of the performance or detriments or with costs caused by breach and not incident to the breach itself. Thus, consequential damages include lost profits or opportunity that might result from use of information, damages to reputation, damages in the lost value of a trade secret dues to wrongful disclosure or use, damages for loss of privacy associated with a contract breach, and damages from loss of data as a result of an operational defect.}

^{Recovery of consequential damages, of course, is limited by other principles in this Article, in common law, and by contract limits. This definition does not specifically refer to the concept of mitigation, but that concept applies under Section 2B-707(c). No change in law is intended by the deletion of "cover" from the former Article 2 definition.}

^{8. "Conspicuous." This definition follows existing Article 2, but adds new concepts for electronic commerce. Whether a term is conspicuous is determined by the court. See Section 2B-106.}

^{With reference to persons, the basic standard is that a term is conspicuous if it is so positioned or presented that the attention of a reasonable person can reasonably be expected to be called to it. In modern commerce, however, many transactions are automated using of electronic agents capable of independent action. These agents require a different idea of what is conspicuous; programs and devices do not "notice" text, but respond operationally. In an automated environment, presentation in a form designed to invoke or permit a response from a "reasonably configured" electronic agent suffices.}

^{Current UCC § 1-201(10) lists four illustrations of conspicuous terms These play an important role in commercial practice. The Article 2B definition carries forward that approach. The purpose of requiring that a term be conspicuous and defining that concept with some detail blends a notice function (the term ought to be noticed) and a planning function (giving certainty to the party relying on the term). The illustrations establish safe harbors that avoid uncertainty and litigation. Absent exceptional circumstances, a term that conforms to a safe harbor is conspicuous. The illustrations in (A) and (B), however, are not exclusive. In other cases, a court should apply the general standard.}

^{Subsection (A) carries forward existing law and adds additional terms relevant to modern commerce. However, Article 2B rejects the rule that all terms in a "telegram" are conspicuous. A "telegram" includes "any mechanical method of transmission, or the like" and could include E-Mail, facsimile, and similar communications. No per se rule is justified.}

^{Subsection (A)(ii) contemplates setting the term or its label off by symbols which can be reliably transferred in electronic commerce. Thus, for example, a term that provides *** Disclaimer *** is conspicuous, as is a term that provides <<< Disclaimer >>>.}

^{Subsection (A)(iii) deals with hyperlink and related Internet technologies. It contemplates a case in which a computer screen displays a term or image and the party using the screen, by taking an action with reference to that term or image, is transferred to a different file or location wherein the relevant contract term is available. To be conspicuous, the image must be prominent and its use must readily enable review of the term itself. The access must be from the screen or display and not through other actions such as a telephone call or physically going to another location. When the term is accessed, it must be in a form that can be readily reviewed. The term must be referenced, not simply the contract.}

^{Subsection (B) recognizes a procedure by which, without taking action with respect to the term, the party cannot proceed further in reference to the file or location. Thus, for example, a screen which states: "There are no warranties of accuracy with respect to the information on this site" that is displayed in a form that precludes the user from moving further in the system without expressing assent to this condition, suffices under this concept.}

^{9. "Consumer." This definition adapts language from Article 9 which defines "consumer goods." A "consumer" is a person who obtains something for personal, household, or family purposes. Whether a party is a consumer is determined at the time of contracting. Even in an on-going relationship, changes in purpose or use after a contract becomes enforceable do not alter the standards applicable to the contract.}

^{In information transactions, many "personal" uses are not consumer uses (e.g., a stock broker using software to personally monitor client investments). Thus, distinguishing business and consumer uses requires a more refined concept than does the Article 9 theme. The definition here distinguishes profit making, professional or business use, from non-business personal or family use. It includes as consumer use ordinary asset management for a family. This resolves an issue that has arisen in many areas where making a distinction between consumer and non-consumer "personal" use has proven difficult and subject to litigation. For example, a number of decisions focus on whether or when a purchase of stocks or limited partnership assets for investment is a consumer purchase since it is for "personal" purposes. See, e.g., Thomas v. Sundance Properties, 726 F.2d 1417 (9th Cir. 1984); In re Manning, 126 B.R. 984 (M. D. Tenn. 1991) (Article 9 definition "not especially helpful"). Some courts emphasize the difference between acquisition for consumption (consumer) and acquisition or use "for profit-making" (not consumer). The Truth in Lending Act, for example, uses a definition much like Article 9 but contains an express exemption for business transactions. The "profit-making" test has been applied in bankruptcy cases. The Fifth Circuit commented that "[The] test for determining whether a debt should be classified as a business debt, rather than a debt acquired for personal, family or household purposes is whether it was incurred with an eye toward profit." In re Booth, 858 F.2d 1051 (5th Cir. 1988). See also In re Circle Five, Inc., 75 B.R. 686 (Bankr. D. Idaho 1987) ("Debt used to produce income is not consumer debt primarily for a personal, family or household purposes.").}

^{10. "Contract fee" recognizes the various forms and methods of monetary compensation encountered in information transactions. The term refers to essentially any money payment under a contract.}

^{11. "Contractual use restriction." This term includes any enforceable restriction on use or disclosure of the information or informational property rights dealt with by a contract and created in that contract. It does not include limitations imposed by property or regulatory law, such as copyright or patent law, without contract terms. The adjective "enforceable" is intended to means that the term does not include terms invalidated under this Article or other law, including federal intellectual property law and state laws which may preclude enforcement of some restrictions on use of knowledge or information. Thus, for example, if applicable trade secret law would preclude enforcement of a particular non-disclosure term, that term is not a contractual use restriction as used in this Article to the extent of such preclusion. Similarly, state law that restricts the enforceability of a non-competition clause in a contract applies to any contract within Article 2B. This definition makes clear that a restriction that would not be enforceable under such law is not a "contractual use restriction."}

^{12. "Copy." The definition corresponds to copyright law but does not deal with issues under that law about when a brief reproduction in computer memory is a copy for purposes of infringement law. See MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Lewis Galoob Toys, Inc. v. Nintendo of America, 964 F.2d 965 (9th Cir. 1992). In Article 2B, the term refers to particular performance questions associated with contractual events such as delivery, tender, and enabling use. For these purposes, the reproduction of the information can be either on a temporary or permanent basis.}

^{13. "Court" includes officers of non-judicial forums such as arbitration.}

^{14. "Delivery" in electronic technology can occur either through a change of possession of a tangible copy or through electronic transfer. For determining whether delivery has occurred, the methodology does not alter the result.}

^{15. "Direct damages." Direct damages are losses associated with lost value as to the contracted for performance itself, as contrasted to losses caused by intended uses of the performance or its results. Direct damages are measured by the formulae in this Article, including Section 2B-707(a) which allows the court to determine these damages in any reasonable manner.}

^{The definition rejects cases that treat as direct damages losses that relate to anticipated advantages from the use of the information. These are consequential damages. Thus, if software is purchased for $1,000 and, if perfect, would yield profits of $10,000, but it is totally defective, "direct" damages are $1,000.}

^{The definition also includes reliance and restitution damages in an appropriate case. When damages of this type are appropriate is determined by general law. However, to be direct damages, the recoveries must fall within the general concept of direct as contrasted to consequential or incidental damages.}

^{16. "Electronic." While most modern information systems entail electrical technologies, the term here is open-ended. It encompasses other forms of information processing technology as may be developed in the future.}

^{17. "Electronic agent." This includes a computer program used for the stated purposes, but is not limited to that particular technology. The term recognizes that many aspects of commerce are characterized by automated responses. The agency created here, however, is not equivalent to common law agency concepts since the "agent" is not a human actor, but an automated system. To be an electronic agent, the automated system must have been affirmatively selected, used or programmed for that purpose. This is important because a party may be bound by the operations of its agent.}

^{18. "Electronic Message." This term parallels the UNCITRAL Model Law on Electronic Commerce. A message is distinguished from the broader term "record" by the fact that it is to be communicated to another. In many systems, communication to another person does not require that the message be transmitted or sent to any new location; the recipient and the person creating the message may share a common E-mail system or other resource and the message can be "stored" for purposes of communicating to another as indicated in the definition.}

^{19. "Financier." This term includes both secured parties and lessors. This Article does not deal with financing informational property rights. That topic is governed under Article 9 and federal or state law pertaining to those rights. The financing arrangements here involve financing of contractual rights.}

^{20. "Good Faith." The definition extends the duty of good faith and fair dealing to consumers. It follows revised Article 3.}

^{21. "Incidental damages." This definition integrates the two definitions of incidental damages found in current Article 2. Incidental damages include costs of seeking or arranging cover or other mitigation, but do not extend to the actual expenditure for the mitigation itself. Thus, if a licensee must obtain a different computer program because of a breach in the contractual delivery, the telephone calls and related expenses in arranging for the cover are incidental damages. The cost of the new program license is considered in computing direct damages.}

^{22. "Information." This definition establishes a broad construction of information. The term, "work of authorship" comes from the Copyright Act and is to be interpreted as in that statute. It includes literary works, computer programs, motion pictures, compilations, and the like. In this Article, information is the broad term; in appropriate situations more specific reference is made to particular types of information, such as computer programs and informational content.}

^{23. "Informational content." This term refers to information whose ordinary use entails communicating the information to a human being. This is the information we read, see, hear and otherwise experience. For example, in an electronic database of images the entire information package may include the images and a program enabling display or access to the images. The functional aspects of the program are not informational content. The images are informational content. Similarly, when a licensee uses the Westlaw search program to obtain a case, the program is not informational content, but the text is.}

^{24. "Information processing system." This definition corresponds to the UNCITRAL Model Law on Electronic Commerce.}

^{25. "Informational property rights." This term includes, but is not limited to "intellectual property" rights. It refers to any law that gives a person a right to control another's use of information independent of contract. This Article does not create property rights; the definition here references other law to determine when such rights exist. The rights referenced here are established in other law with respect to a particular subject matter, but need not be comprehensive or exclusive as to all other persons. The term includes the areas of law in which new forms of property are being created by legislatures and courts, but does not create any rights itself. Informational property rights do not include the right to sue for defamation.}

^{26. "License." A license is a limited or conditional transfer of information or rights in information. The limitations must be express in the contract and not merely implied in law. Most transactions involving acquisition of a copy of a copyrighted work are subject to property rights retained by the copyright owner, but a license exists only if the limitations are express in the contract itself. In an unrestricted sale of a copy, the buyer receives ownership of the copy, but if copyright law applies to the information, the ownership is subject to restrictions on use of the information derived from intellectual property law. These restrictions do not create a license.}

^{On the other hand, the presence or absence of a license is not affected by whether or not there has been a sale of a copy of a work such as a computer program. A license pertains to rights to use information and, if it involves the tangible copy, that tangible copy is the conduit, not the focus. A license deals with control of the information, while title to the goods deals simply with that - title to the goods.}

^{27. "Licensor" and "Licensee." These terms refer to the transferee and transferor in any contract covered by this article, whether or not the contract is a license.}

^{28. "Mass-market license" and "Mass-market transaction." "Mass market" implements an expansion of protections for consumers into a consumer marketplace standard even though a particular transaction does not involve a consumer licensee. As a new framework, the definition must be applied in light of its intended function. That function is to identify relatively small dollar value, routine or anonymous transactions that occur in a retail market available to the general public. The term includes all consumer transactions and some transactions involving businesses. It does not apply to ordinary commercial transactions that occur in a marketplace characterized primarily by transactions between business entities that deal directly with each other or through ordinary commercial methods of ordering and transferring commercial information.}

^{The definition contemplates a retail marketplace where information is made available in pre-packaged form under generally similar terms to the general public. It applies only to information that is aimed at the general public as a whole, including consumers, and does not cover products directed at a limited subgroup of the general public or to information products restricted to members of an organization or to persons with a separate relationship to the information provider. Where the line will be drawn in determining the size or scope of subgroup that would qualify as a distribution directed to the general public cannot be answered in the abstract, but courts making that judgment should do so in light of the purpose of the definition itself. The intent is that the products covered here do not include specialty software, information directed to specially targeted limited audiences, purely commercial software distributed in non-retail transactions, or professional use software, but to materials that are acquired by consumers or that appeal and intend to appeal to a general public audience as a whole, including consumers, where the identity of the eventual licensee is irrelevant to the licensor.}

^{The prototypical retail market is a department store, grocery store, gas station, shopping center, or the like. These locations are open to, and in fact attract the general public as a whole. They are also characterized by the fact that, while the retail merchants may make sales or other transactions to other businesses, the predominant transaction involves consumers. In a retail market, the vast majority of the transactions also involve relatively small quantities of particular products, non-negotiated contractual terms, and transactions to an end user rather than a purchaser who intends to resell the acquired product. The products are available to anyone who enters the retail location and can pay the applicable price.}

^{The definition contains several exclusion that do not apply to consumer licensees, but to transactions in a retail market where the person acquiring the information is a commercial entity. A transaction for redistribution or a license for public display or performance of a copyrighted work are never mass market transactions because they involve none of the attributes of the retail marketplace. Similarly, where the information product is customized for the licensee and that licensee is not a consumer, the transaction lacks the anonymous, non-negotiated character of the mass market.}

^{A bifurcated treatment of access (Internet) transactions occurs. Consumer transactions on Internet are mass market transactions. However, the term does not include online transactions not involving a consumer. In this new transactional environment, it is important to not regulate transactions beyond consumer issues. This gives industry room to develop while preserving consumer protections. It is consistent with the 1997 White House paper on electronic commerce.}

^{29. "Merchant." This term comes from existing Article 2-104. The definition clarifies that a person that holds itself out as experienced in particular subject matter need not have actually engaged in prior transactions of the type involved to qualify as a merchant.}

^{The definition otherwise follows the definition of existing Article 2. As indicated in comments to Article 2, the definition applies differently in terms of the degree of specialized expertise required to qualify for merchant status depending on the transactional issues to which a particular use of the term applies. In Article 2B, the term is used primarily as a reference to businesses with generalized knowledge of business practices, rather than solely to experts in a specific field. Section 2B-307, 2B-401 and 2B-403, however deal with liability and transactional issues where the terms should be understood to require a more focused expertise in the particular type of information involved.}

^{30. "Non-exclusive license." This is the most common commercial license. It is characterized by the fact that the licensor grants very limited rights and does not foreclose itself from making additional licenses involving the same subject matter and general scope.}

^{31. "Present value." This term corresponds to Article 2A-103. It contains a modification applicable to present valuation of values other than future payment obligations.}

^{32. "Published informational content." This definition identifies an important type of informational content. It is the information most closely associated with First Amendment and related public policy concerns. This is the material of newspapers, books, motions pictures and the like, which is distributed to the public and intended to communicate knowledge, sounds, or other experiences to a human being, rather than simply to operate a machine. The term includes interactive content products since, in those products, all of the information is generally available and the end user selects from the available information. This is like the reader of a newspaper focusing on part, but not all of the newspaper.}

^{32a. "Reason to know." This definition refers to a term that is used in six sections of Article 2B. While Article 1 current defines notice and knowledge, it does not define reason to know. The definition adopted here is consistent with the usage of the term, which refers to knowledge and inferences from information actually known to the person. No constructive knowledge or duty to investigate exists under this concept.}

^{33. "Receive." This definition, as to performances, corresponds to Article 2-103. As to notices, it updates Section 1-201(26) to reflect issues in electronic commerce and the use of electronic systems to give and receive notice.}

^{34. "Record." This definition broadens the traditional term, "writing", and incorporates electronic records. It does not require permanent storage or anything beyond temporary recordation. The analogy is to the idea of a copy under copyright law. Fixation can be fleeting and perception can be either directly or indirectly with the aid of a machine.}

^{35. "Refund." A refund consists of a reimbursement of fees paid on return of all copies of the information. Whether or when a refund right exists depends on the contract and the provisions of this Article. Refund is not a remedy for breach or a right of rescission. It is a right that arises when a party refuses a proffered license and has previously committed to, or paid, the contract fee. Making a refund available in such cases is essentially to allow the party presented with the license a true opportunity to accept or reject that license.}

^{In some cases, a refund right must exist in order to obtain a manifestation of assent. See Sections 2B-111 and 2B-112. The right to refund expires if the party agrees to the license, including by manifesting assent to it. Of course, if a party accepts a license and the information is defective, the aggrieved party may have a right to restitution of the contract fee as direct damages.}

^{Refund must be sought within a reasonable time. If a party fails to seek refund within a reasonable time, it will not be entitled to refund under this Article, but expiration of a refund right does not result in assent to the license. Affirmative agreement or assent is still required. What constitutes a reasonable time depends on the facts. However, a purchaser cannot wait several years before seeking a refund.}

^{The definition deals with the difficult problem of administering a refund right in "bundled" products, that is products which include numerous separate items of information transferred as a whole for a single fee. If the products are subject to separate licenses, the difficulty arises in administering a refund right where one license is refused, but others are not. A refund in such situations consists of the entire bundled product in return for the entire price if the refund is sought early. Otherwise, a refund consists of an allocated portion of the overall price as is fairly or contractually attributable to the particular, returned product.}

^{36. "Release." A release is a waiver or permission not accompanied by other commercial attributes, such as an on-going obligation to pay or an obligation to provide the means to implement use of the information.}

^{37. "Scope." This term refers to contract provisions that define an integral part of a license. Scope provisions in a license are equivalent to defining the product. In sales or leases of goods, products are self-defining: an offered car is either a Ford or Chevrolet, it is not necessary to read use and other provisions of a contract to determine that. That is not the case for the information and services industries: In many situations in the information industries, the license and its scope is the product. The same information has entirely different characteristics as a commercial subject matter depending on what scope of rights are granted with reference to that information. For example, a license that allows use of a motion picture in a single theatre is not the same product as a license to distribute the motion picture throughout the United States. Neither license transfers the same product as a license to use a copy of the motion picture for three days in one's home. The license scope provisions define the product.}

^{38. "Send." This definition adapts Article 2-201(38) by providing criteria relevant to electronic notices.}

^{39. "Standard form." The definition refers to forms, not standard terms. See Restatement (Second) of Contracts 211 (referring to but not defining standard forms).}

^{A form consists of a group of terms prepared for frequent use as a contract. Use of standard forms in modern commerce is not only widespread, but virtually ubiquitous. The definition does not cover a tailored contract comprised of "terms" selected from many different prior agreements. The record, which is a composite of terms, must itself have been prepared for repeated use. Further, the record must have been so used: if a standard form is offered but then heavily negotiated or changed, the resulting contract is not a standard form contract.}

^{40. "Terminate." This definition conforms to Article 2-106.}
 

^{SECTION 2B-103. SCOPE.}

^{(a) Except as otherwise provided in Section 2B-104 on excluded transactions, Tthis article applies to:}

⁽¹⁾ licenses and any transaction that creates a software contracts, access contract, or license; and 

⁽²⁾ also to agreements to provide support for, maintain, or modify software information related to a software contract covered by that is included in this article.

^{(b) Except as otherwise provided in subsection (c), this article does not apply: (1) to the subject matter or related rights and remedies governed by the another article of the [Uniform Commercial Code], except to the extent that this article deals with financiersal accommodation contracts.}

^{; or (2) to the extent that an agreement: (A) is a license or software contract that is merely incidental to subject matter not governed by this article;}

^{(B) is a license of a trademark, trade name, trade dress, patent, or related know-how not associated with a license that is otherwise within this article;}

^{(C) is a sale or lease of a product that has a computer program , embedded in it, but this article applies if the product is:}

^{(i) merely a copy of the program;}

^{(ii) a computer ;}

^{(iii) another information processing system and a primary purpose of the transaction is to give access to or use of the program.}

^{(D) provides access to, use, transfer, clearance, settlement, or processing of a:}

^{(i) deposit, loan, funds or monetary value represented in electronic form and stored or capable of storage electronically and retrievable and transferable electronically, or other right to payment to or from a person;}

^{(ii) instrument or other item;}

^{(iii) payment order, credit card transaction, debit card transaction, or a funds transfer, automated clearing house transfer, or similar wholesale or retail transfer of funds;}

^{(iv) letter of credit, document of title, financial asset, investment property or similar asset held in a fiduciary capacity; or}

^{(v) related identifying, authenticating, access enabling, authorizing, or monitoring information; or}

^{(E) is for personal or entertainment services by an individual or group, other than a contract of an independent contractor to develop, support, modify or maintain software .}

^{(c) If this article governs part of a transaction and other contract law governs part of the transaction, the following rules apply:}

^{(1) This article applies to contract issues regarding the information, informational property rights, information, and the copies of media that contains the information, its packaging, and its documentation, but Article 2 or 2A governs as to the other goods in the transaction and to including subject matter excluded under subsection (bc)(32).}

^{(2) The contract formation rules of this article apply to the entire transaction if:}

^{(A) the contract includes services that are not within this article, but the information subject matter that is within this article is the predominant purpose of the transaction[; or}

^{(B) the parties agree to be bound by the contract formation rules of this article.]}

^{(3) [Except in a consumer transaction,] the parties by their agreement may elect to have this article or other applicable law govern contractual rights and remedies for the entire transaction.}

^{(d) In a transaction excluded from this article by Section 2B-104, the parties may agree to have this article govern contractual rights and remedies for the entire transaction or any part thereof.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-201."Computer program": Section 2B-102. "Consumer": Section 2B-102. "Contract": Section 2B-102. "Copy": Section 2B-102. "Document of title": Section 1-201. "Information": Section 2B-102. "Information processing system": Section 2B-102. "License": Section 2B-102. "Money": Section 1-201. "Party": Section 1-201. "Person": Section 1-201. "Rights": Section 1-201. "Sale": Section 2B-102. "Software contract": Section 2B-102.}

^{Committee Votes:}

^{a. Rejected a motion to limit scope to "coded", "digital", "electronic" or similar concept. Vote:10 - 3.}

^{b. Adopted a motion to limit scope to licenses of all information and software contracts. Vote: 10 - 0.}

^{c. Rejected a motion to include all patent and trademark licenses in the Article. Vote: 9 - 3.}

^{d. Rejected a motion to include all patent licenses. Vote: 8 - 4 (Feb. 1997)}

^{e. Rejected a motion to delete exclusion of trademark and patent licenses. Vote: 7 - 4. (Feb. 1997)}

^{f. Adopted the financial process exclusion in principle. Vote: 8 - 0 (Nov. 1997)}

^{g. Accepted subsection (c)(3) by consensus. (Feb. 1998)}

^{h. Consensus that financial exclusion not generally cover software provided for that purpose (Feb. 1998)}

^{Reporter's Notes:}

^{1. General Premise. This article deals with licenses and software contracts in the copyright and information industries. It does not cover sales of books, newspapers, or magazines, or personal or entertainment services contracts; these are not licenses. The transactions with which the article deals involve value that lies in the intangibles and the rights to use them. However, this is a contract statute. It deals with contractual relationships. This Article does not concern, and does not alter any law creating or limiting intellectual property rights or privileges in information.}

^{The Article does not deal with all licensing transactions in industries, but focuses on a limited, but important subset of transactions. These deal primarily with software and multi-media contracts, access contracts involving on-line and Internet transactions, and transactions involving licenses of data, text, images, and related information.}

^{The scope of this Article is defined by the provisions of this Section and the exclusions stated in Section 2B-103A. Because of the rapidly converging nature of technology and commercial practice in the information area, the scope has been implemented by promulgation of a broad focus in subsection (a), coupled with the specification of a number of exclusions in Section 2B-103A. This parallels the approach taken in Article 9. See Section 9-102; 9-104 (listing 13 exclusions from the that Article).}

^{2. Basic Scope. Subsection (a) states the basic scope of Article 2B. That scope is subject to the limitations in Subsection (b) and Section 2B-103A. Subsection (c) deals with mixed transactions and the parties' right to opt in to Article 2B. Subsection (d) confirms an opt-in rule for excluded transactions.}

^{a. License. Article 2B applies to licenses. A "license" is a contract for conditional rights, privileges, or permissions to use information, an information processing resource, or an informational property right. A license exists only if the contract expressly conditions the rights or permissions conveyed or expressly grants less than all rights in the information. Section 2B-102. Except for computer software, this Article thus does not deal with unrestricted sales of copies of information even though sales of copies are subject to restrictions under copyright or patent law. However, a license can coexist with a sale of a copy of the information. See Applied Information Management, Inc. v. Icart, 1997 WL 535813 (E.D.N.Y. March 3, 1997).}

^{b. Software Contracts. A "software contract" is a (1) license of software, (2) a sale of a copy of software, or (3) a contract to develop software. For computer software, rather than a focus on express contract terms, the more important focus is the nature of software. Except for some software contained or embedded in another product, all software contracts are included.}

^{c. Incidental Licenses. Article 2B adopts a gravamen of the action test which recognizes that different bodies of contract law may apply to different aspects of a transaction. This also seems to be the test as between Article 2 and Article 2A. Under Section 2B-104(1), however, notwithstanding that basic principle, this Article does not apply if the information is merely incidental to a services contract or otherwise excluded transaction. See discussion in notes to Section 2B-103A.}

^{3. UCC Articles. As a general principle, Article 2B does not apply to the subject matter, rights and remedies, covered in other articles of the UCC. This principle would be implicit, but has been made explicit in Subsection (b) to avoid unnecessary uncertainty. There are two primary exceptions. One deals with the limited treatment in this Article of the relationship of financier interests and contracts to the subject matter of this Article, licenses and software contracts. See, e.g., Section 2B-503. In these contexts, Article 2B provisions control over other articles of the UCC that would otherwise be applicable. Secondly, as stated in Section 2B-103(c)(1), this Article applies to goods that comprise copies of covered information or related documentation.}

^{5. Transactions Covered / Transactions Excluded. Because of the convergence of information technologies and diverse range of modern commercial uses of information, implementing the scope of this Article inevitably involves some areas in which the applicability of coverage will be uncertain. This has also been true, of course, with respect to the scope of application of Article 2 where the scope-defining term "transactions in goods" has created extensive litigation and numerous reported decisions.}

^{a. Computer Programs. This Article applies to computer software transactions, whether the programs are sold or licensed. This Article covers both software that is provided as a separate and independent product (e.g., word processing software acquired in the mass market or specially developed for a licensee) as well as software provided in a transaction in which the program is part of a multi-faceted product. The vast majority of all software contracts do not occur in the mass market. The Article covers those transactions and also information licensed for inclusion in software (e.g., images or text for digital inclusion).}

^{In mixed transactions, in allocating among the aspects of contract law that might apply, Article 2B adopts two rules. First, as a general principle, other law (e.g., Article 2 and Article 2A) applies to the goods involved in a transaction. See Section 2B-103(b). Article 2B applies to the program and the materials that comprise the copy of the program. Section 2B-103(c). This adopts a gravamen of the action test holding that, in the case of a dispute, a court must determine in reference to which aspect of the mixed deal the issue arise. Thus, Article 2B applies to software provided in a transaction in which the purchaser also leases a computer (Article 2A property).}

^{Second, the scope rules deal with use of computer programs or chips to create more "intelligent products." In this context, Article 2B applies to a program that is part of a computer system or peripheral, but only applies to programs contained in other products if giving the purchaser access to the program's capabilities is a "primary purpose" of the transaction and the program is not merely incidental to the product. Section 2B-103A(1)&(3)(C). Thus, Article 2B does not apply to the computer program that operates the brakes in a motor vehicle and is sold along with the automobile. While the brakes are important to the vehicle, the purchaser acquires a motor vehicle and not the processing power of the program. This is entirely an Article 2 transaction. On the other hand, further up the manufacturing system, the transaction by which a vendor develops and provides the brake software to the manufacturer is an Article 2B transaction. Similarly, while a home air conditioning system has some functions that may be operated by a computer program, the program if any is either merely incidental to the overall system or, as an embedded program, is not included because acquiring it was not a primary purpose of the transaction for the purchaser. The transaction is within Article 2. The upstream development or supply contract for the program, however, is an Article 2B transaction.}

^{b. Books, Newspapers, Magazine, Videos and Records. Article 2B does not apply to ordinary transactions in the mass market by which users acquire books, videos, and records. Except with respect to computer software, the coverage of the Article is limited to licenses. Licenses are contracts that expressly restrict or limit information use, rather than transactions that make an unrestricted distribution of the information, but the distribution is implicitly subject to retained intellectual property rights. The Article does not alter the contract law principles that apply to mass distribution of these traditional works. In addition to being outside the affirmative scope of Section 2B-103(a), traditional videos and records (CD's and tapes) are excluded by Section 2B-103A(6).}

^{Works similar to these, however, are increasingly made available through Internet and similar on-line systems. While Article 2B does not apply to broadcasts of information, it does cover on-line access contracts such as interactive systems and other systems where the information is made available at a time and place of the licensee's choosing. See Section 2B-102(a)(1). Transactions involving electronic newspapers and texts, access to which is provided in this manner, are included in Article 2B.}

^{Modern technology has enabled the development of interactive products providing information of a type found in a less interactive manner previously in books and magazines. These multimedia products include, for example, a digital encyclopedia or a baseball dictionary that shows text, images and gives access to online updates of performance. These multi-faceted products are software products with the software-created capabilities and information central to the product; they are in Article 2B. Article 2B applies to the transactions that bring information (e.g., text and images) into these products, that provide for their development, and that deal with their distribution.}

^{c. Patent and Trademark Licenses. This Article does not apply to most licenses of a patent or a trademark not associated with an access contract or a software contract. See Section 2B-103A(2). Thus, for example, a license of a biotechnology patent and associated know how, or a license of a trademark as part of a franchise agreement for a popular food store are not Article 2B transactions. In the case of the patent, the basic judgment is that the areas of general patent licensing do not involve the same commercial law concerns that are central to transactions covered in Article 2B. In fact, many pure patent licenses are primarily intended to settle or avoid litigation. In reference to trademarks, licenses often fall under state and federal franchise laws and are covered by principles unrelated to the commercial issues treated here.}

^{Access and software contracts, however, also involve licenses of a trademark or a patent. These are included in Article 2B. Thus, a license of Windows 98 will include not only a copyright license, but also a right to practice the various technologies covered by a patent held by the software provider. The entire license is covered under Article 2B.}

^{d. Access Contracts and Broadcasts. Article 2B applies to access contracts. This term includes Internet and on-line services. Thus, for example, a contract with an information provider such as Westlaw is within this Article, as are the various specific access events that occur pursuant to the contract. Also included are cases where information is available for a fee at a Website and obtained by contractual access to the information electronically. Of course, however, since this is a contract statute, it does not cover situations where information is simply made available and no contract is involved, even when this occurs on Internet.}

^{While Article 2B applies to access contracts, the term is limited to electronic access. Thus, for example, a contract giving a person a right to enter and use a physical library facility, or a motion picture theater, is not within Article 2B. What law applies to such contracts is not clear.}

^{Similarly, Article 2B does not apply to regularly scheduled broadcast or cable programs or contracts related to access to such programming. These regulated activities involve long-established contracting practices. Differentiating between this type of information distribution and on-line systems is based on both the regulated status of the broadcast and cable industries and the fact that they provide regularly scheduled programs, while on-line systems make information available at a time and place of a user's choosing. This latter differentiation is used in regulatory definitions and in an international copyright treaty.}

^{While the access contracts are covered, the subject matter of the contract may not be within Article 2B. For example, if through an access contract a customer purchases a new television set, the access contract is within Article 2B, but the characteristics of the purchase are an Article 2 transaction. See Section 2B-103(b). Similarly, while an access contract is in Article 2B, use to order a transfer of cash deposit to pay a utility bill involves subject matter excluded from the Article. The access conduit is in Article 2B; the excluded transaction is not.}

^{5. Formation Rules. Subsection (c)(2) addresses an effect created by Article 2B contract formation rules and the fact that Article 2B validates electronic commerce practices that may not be effective under common law or under current Article 2 or 2A. The subsection applies Article 2B formation rules to the entire transaction if Article 2B subject matter constitutes the predominant purpose of the transaction itself. This allows maximum scope to the contract formation rules and electronic commerce.}

^{6. Opt-In Rules. Subsection (c)(3) allows the parties in a mixed transactions to elect full coverage under either Article 2B or other applicable law. This states a rule that would most likely be applicable in any event under general contract law principles. Similarly, subsection (d) provides for a comprehensive right of opt in related to transactions excluded by other provisions of this article.}

^{SECTION 2B-103A. TRANSACTIONS EXCLUDED FROM ARTICLE. This article does not apply to the extent that an agreement:} 

^{(1) is a license or software contract that is merely incidental to subject matter not governed by this article;}

^{(2) is a license of a trademark, trade name, trade dress, patent, or related know-how not associated with a license or software contract that is otherwise covered by this article;}

^{(3) is a sale or lease of a copy of a computer program that is contained in goods that are sold or leased unless:}

^{(A) the goods are merely a copy of the program;}

^{(B) the goods are a computer or computer peripheral; or}

^{(C) a primary purpose of the transaction is to give the purchaser of the goods access to or use of the computer program;} 

^{(4) provides access to, use, transfer, clearance, settlement, or processing of:}

^{(A) a deposit, loan, funds or monetary value represented in electronic form and stored or capable of storage electronically and retrievable and transferable electronically, or other right to payment to or from a person;} 

^{(B) an instrument or other item;} 

^{(C) a payment order, credit card transaction, debit card transaction, or a funds transfer, automated clearing house transfer, or similar wholesale or retail transfer of funds;} 

^{(D) a letter of credit, document of title, financial asset, investment property, or similar asset held in a fiduciary or agency capacity; or} 

^{(E) related identifying, verifying, access-enabling, authorizing, or monitoring information;} 

^{(5) is a contract for personal or entertainment services by an individual or group, other than a contract of an independent contractor to develop, support, modify, or maintain software;}

^{(6) is a license of a linear motion picture or sound recording or of information to be included therein, except in connection with an access contract covered by this article; or}

^{(7) is a license for regularly scheduled audio or video programming by broadcast or cable as defined in the Federal Communications Act as that Act existed on January 1, 1998, or any similar regularly scheduled programming service; or}

^{(8) is a compulsory license under federal or state law.}
 

^{Notes to this Draft: This Section was created from material formerly in Section 2B-103(b). It was moved to a separate section for clarity and in conformance with the style followed in Article 9. The sections have been edited to fit this format. Subsections (6)(7) and (8) are new and implement the Committee's vote at the March, 1998 meeting. Subsection (3) has been revised to reflect extensive debate.}

^{Notes to this Section.}

^{1. General Approach. This Section brings together various exclusions from the scope of Article 2B. The rationale and scope of the exclusions differ. They reflect, however, a judgment that the various policy and structural decisions made in developing Article 2B may not be appropriate in the listed situations. As with existing Article 9, the fundamental scope of coverage of conditional transactions in information as a commercial activity extends to many relationships in the modern economy. Since article 2B allows most provisions to be altered by agreement, this extension has little effects in the many situations where customs of trade, course of dealing, or formal contracts define the relationship. In those contexts, Article 2B provisions defer to the agreements. Nonetheless, specific exclusions have been considered important in some cases to clarify that other law governs, including regulatory laws where applicable.}

^{2. Incidental Licenses. Article 2B uses a gravamen of the action test which recognizes that different bodies of contract law may apply to different aspects of a transaction. Under this subsection, however, notwithstanding that basic principle, this Article does not apply if the information is merely minor part of or merely incidental to a services contract or otherwise excluded transaction.}

^{The exclusion covers situations where the information transfer is merely inherent incident of the excluded services. Thus, a services contract to provide legal advice to a client may result in the delivery of a memorandum or other document containing information whose use may be restricted by contract. The information aspect of the transaction does not fall within this Article; the services are not within the scope of the Article and the information is a mere incident of that services relationship. Of course, as various personal service provides engage in related, but broader activities, Article 2B applies. Similarly, where the services are those of an independent contractor hired to develop software, Article 2B governs the transaction since it directly applies to software contract even though the software is to be created as part of the contractual relationship.}

^{The exclusion also covers information that is only a very minor part of a transaction. What is meant here is not simply that personal services or goods predominate, but that the licensed information is so small a part of the transaction that it would be cumbersome, confusing and awkward to apply Article 2B to that small part of the transaction.}

^{3. Patent and Trademark Licenses. Subsection (2) excludes patent and trademark licenses not associated with the other subject matter of the Article. The basic principle is that, if the only basis for bringing a transaction under Article 2B lies in the existence of a trademark or patent license, the transaction is not under this Article. The rationale lies in the differences between copyright and digital licensing and practices in unrelated areas of patent law. Patent licensing relating to biotech, mechanical and other industries entails many different assumptions and standard practices that are not incorporated in this Article. This is also true for trademark licensing. As to trademark licensing, there is the additional consideration of coverage of aspects of that industry under federal and state franchising laws}

^{4. Embedded Programs. Subsection (3) excludes computer programs that are part of goods and sold as such. This excludes programs such as airplane navigation or operation software, software in automobile brake systems, and the like. Issues about this type of software are governed by the law governing the transaction in the entire product (e.g., Article 2 or Article 2A).}

^{The exclusion does not apply if the program is in goods that are merely a copy of the program (e.g., a diskette) or in a computer (e.g., embedded operating system software). This, Article 2B does not apply to cars, toasters, washing machines and other traditional goods, even if part of the goods consists of software. On the other hand, Article 2B does apply to copies of programs and to software within a computer system. Even then, of course, Article 2B does not apply to the product, but merely to the program.}

^{The term "computer" is not defined in this Article, but has been defined in many other situations as referring to a machine or system that has the capability of performing arithmatic, logical or processing functions on data. Clearly, the scope of the term and its application will change as modern products become increasingly "intelligent - reliant of information processing and manipulation capabilities. As this occurs, the issue will center on establishing the relative distribution of coverage between this Article and Article 2 or 2A. In discussing this, however, it is important to recognize that, in the mass market, where the issues will be most significant, Article 2B contract principles are generally consistent with existing Article 2 and Article 2A. In many instances, the choice of applicable law does not alter the substantive standards.}

^{Sub-part (C) sets out the general standard that a court should gauge scope of coverage of Article 2B as to computer programs within the inevitable gray areas by applying Article 2B to the embedded software if contained in a product whose primary purpose is to provide access to the functional or other attributes of the program, as contrasted to performing other activities. Thus, while a television set in modern practice is increasingly driven by computer programs, it remains a television set whose purpose is to provide television program reception unless or until the system evolves into something more or different in which a primary purpose is to offer software processing capability.}

^{6. Core Financial Functions. Subsection (4) excludes core banking, payment and financial services activities. Article 2B does not cover transactions governed under other UCC law (e.g., Article 4A, Article 4). It is preempted to the extent of specific controls under federal or state banking regulation.}

^{This is not an exclusion of banks or financial institutions per se. Modern developments in digital cash and similar systems place many companies other than traditional banks in the same situation. Regulations, such as Regulation E on funds transfer, do not apply solely to banks, but to any holder of a depository account and, depending on regulatory decisions, non-bank entities will be included (e.g., a digital account on a "smart card" for use to purchase a total of $100 of coffee from a coffee shop). However, modern banks engage in many activities identical to licensing practice and online systems clearly within Article 2B, such as Netscape, Westlaw, Home Shopping, Microsoft Network, America On-Line, and others. As the information industries converge, so too is the banking industry converging into fields identical to that of the information industries. Bank entry into these fields is regulated, but this is scope regulation, not content regulation. These activities are covered by Article 2B.}

^{The exclusion applies to the extent that the agreement gives access to performs the listed activities. Software provided by entities covered by entities involved in activities within the exclusion is not in itself an excluded transaction. When used to access the listed assets or conduct the listed transactions, however, liability and other issues are governed entirely by law applicable to that other subject matter.}

^{7. Personal Services. Subsection (5) deals with services contracts. The excluded cases involve personal services; the law governing employment and other personal service activities entails different default rules and business practices than apply here. The entertainment services exclusion covers both direct contracts with individuals and various structures under which a party hires services of an individual or group through a loan contract with a legal entity with whom the individual or group is employed.}

^{The exclusion does not cover situations where automation creates a digital replacement for activities previously characterized as personal services. Also, it does not remove from this Article the various forms of software development contracts, many of which today are characterized by an individual (or group) contracting to design and develop software for a client. Inclusion of these contracts in Article 2B reflects one of the primary early reasons for the Article itself since, in the absence of that inclusion, courts are wildly split in terms of whether such contracts fall within Article 2 (sales) or common law (services). Article 2B resolves that issue by bringing the contracts into a coherent framework that does not hinge on this often arbitrary classification issue.}

^{8. Broadcast, Movies and Cable. Subsections (6) and (7) propose exclusions of traditional licensing in the motion picture, broadcast and cable industries. The exclusion reflects various considerations, including both some regulatory overlay (cable and broadcast) and the different nature of liability and other concerns involved. The exclusion is limited to traditional activities in these areas and, as with reference to financial systems, is not an exclusion of the industry. As companies move into on-line systems, software, multi-media and similar licensing, Article 2B applies.}
 

^{SECTION 2B-104. TRANSACTIONS SUBJECT TO OTHER LAW.}

^{(a) Subject to subsection (b), in the case of a conflict between this article and a statute or regulation of this State as judicially construed and in effect on the effective date of this article, the conflicting statute or regulation controls if it:}

^{(1) establishes a right of access to or use of information or informational property rights by compulsory licensing or public access or a similar law;}

^{(2) regulates the purchase or license of rights in motion pictures by exhibitors; or}

^{(23) establishes a consumer protection.}

^{(b) If a law of this State in effect on the effective date of this article applies to a transaction governed by this article, the following rules apply:}

^{(1) A requirement that a contractual obligation, waiver, notice, or disclaimer be in writing is satisfied by a record.}

^{(2) A requirement that a record or a contractual term be signed is satisfied by an authentication.}

^{(3) A requirement that a contractual term be conspicuous or the like is satisfied by a term that is conspicuous in accordance with this article.}

^{(4) A requirement of consent or agreement to a contractual term is satisfied by an action that manifests assent to a term in accordance with this article.}

^{(c) A statute authorizing electronic or digital signatures in effect on the effective date of this article is not affected by this article, but in the case of a conflict this article controls.}

^{(d) Failure to comply with a statute or regulation referred to in subsection (a) has only the effect specified therein.}

^{[Legislative Note: The state should review the statutes affected by subsection (b) to determine if that effect should not apply to some of those statutes.]}

^{Sources: Section 9-104(1)(a); 2A-104(1)}

^{Definitional Cross Reference:}

^{"Agreement": "Conspicuous": Section 2B-102. "Consumer": Section 2B-102. "Court": Section 2B-102. "Electronic": Section 2B-102. "Information": Section 2B-102. "License": Section 2B-102. "Notice": Section 1-201. "Purchase": Section 1-201. "Record": Section 2B-102. "Rights": Section 1-201. "Signed": Section 1-201. "Term": Section 1-201. "Writing": Section 1-201.}

^{Committee Votes:}

^{a. Voted 11-1 to approve the section. (September, 1996)}

^{b. Reviewed without substantive change. (February, 1997); (Nov. 1997); (Feb. 1998).}

^{Reporter's Notes:}

^{1. General Principles. Many contracts that are governed as to contract law principles by Article 2B are also governed by other state statutes, regulations and common law principles. In most instances, the other legal principles are parallel or deal with different subject matter than Article 2B or the U.C.C. generally. This is especially true with respect to regulatory rules that mandate some conduct in a specific industry or market. These mandatory rules coexist with contract law since, as in Article 2B, the contract law focuses on general formation principles and background rules that are subject to contrary agreement or mandate. Of course, when the common law does conflict with Article 2B, the later-enacted, uniform statutory treatment of the UCC (Article 2B) controls.}

^{Subsection (a) describes three types of statutes or regulations to which this Article defers in the case of conflict if they are in existence at the time of adoption of Article 2B. The reference is to the laws of "this" state. Since these are substantive rules, in multistate transactions, that reference relates to the state whose substantive law applies under choice of law principles. The conflict is measured as of the effective date of this article. Subsequent regulations and statutes on any topic will contain their own provisions as to their impact on pre-existing law which, in the case of subsequent enactment would of course include Article 2B.}

^{There are many other laws that are not altered or over-ridden by Article 2B, of course, because Article 2B does not deal with the same topic. For these, the differences in subject matter and focus are sufficiently clear that it was not necessary to list the particular law. Thus, Article 2B does not deal with property rights or privacy law. It deals with contract law. State law concerning trade secrecy are outside the scope and unaffected by this Article except as they interact with contracts. While these rights may be licensed by a contract within this article, Article 2B applies to the license but not the underlying right. For example, a state law might provide that an individual controls use of data concerning that person, but can contract away that right. The creation of the right and its scope, including the extent it can be waived are not considered in Article 2B.}

^{2. Mandated Disclosure Laws. Conflicting statutes or regulations that compel disclosure or other access to information prevail over any Article 2B rule in the event of conflict. In some situations, the relationships that develop because of the mandated disclosure may have contractual overtones, but equally often, they arise by operation of law. A relationship that arises by operation of law does not fall within this Article. Furthermore, the relevant terms and conditions of the statutorily mandated relationship override this Article and its default rules even if the relationship also involves a license.}

^{3. Relationship to Consumer Law. Article 2B does not generally alter state consumer protection statutes as enacted and judicially interpreted as of the effective date of enactment of Article 2B. This deference to consumer protection law acknowledges the role of state consumer protection statutes as a complement to the UCC. Consistent with the stated purpose of the UCC, Article 2B deals with general contract law and commercial contract law principles. It does not promulgate a body of consumer protection laws, although it does contain consumer protections. Historically, consumer protection issues have been resolved on a state-by-state basis with often radically different outcomes. While the results differ, consumer protection statutes reflect extensive policy review about the appropriate relationship between protection and contract freedom in each state. Article 2B, as a general, commercial contract statute, does not address or override these judgments.}

^{With the exception of the electronic commerce rules in subsection (b), a state's consumer protection statutes or regulations, as judicially construed trump the general contract law provisions of this Article. Thus, for example, a consumer protection statute that precludes disclaimer of warranty in a particular type of transaction with a consumer controls over the provisions of this Article dealing with disclaimer of warranty. A state law that mandates disclosure of local service outlets or the location of the licensor's main business office in a consumer transaction is not affected by any provision of Article 2B.}

^{In addition, of course, Article 2B contains a number of consumer protection rules. These arise as a result of a specific reference to a consumer transaction in a provision of this Article, or by reference to particular transactions involving mass market licenses, a category that includes all consumer transactions. The provisions that fall into these categories augment existing consumer protection statutes in a state. However, to the extent they conflict with existing consumer statutes in that state, the existing protections control. A conflict, for this purpose, would be an Article 2B rule that provides lesser protection for the consumer than does the consumer protection regulation. The provisions of this Article that deal with consumer protection in specific terms referenced to the mass market or to consumer transactions include: 2B-107 (choice of law), 2B-118 (electronic error); 2B-208 (limitation on mass market license; right to refund); 2B-303 (limitation on no-oral modification clause); 2B-304 (limitation on modification of continuing contracts); 2B-406 (disclaimer must be conspicuous); 2B-609 (perfect tender required); 2B-619 (limitation on hell and high water clauses).}

^{4. Laws on Computer Viruses. Article 2B does not deal with computer viruses and does not alter existing criminal or tort law on that subject, if any. In general, a "virus" consists of computer code entered into a software or other system with the intended effect of disrupting the system or altering or destroying information within that system. Law in most states and federal law makes the knowing or intentional introduction of a computer virus a criminal act. See, e.g., Raymond Nimmer, Information Law ¶ 9.04 (1997). The statutes reflect an increasing public perception that a computer virus "problem" exists. The fact that most state law and enforcement concerning viruses falls under criminal law correctly suggests that most virus risks result from acts of third parties not in a contractual relationship with the victim.}

^{Acts that cause loss through the creation or distribution of a computer virus might also give rise to liability in tort. Article 2B does not deal with this issue. The cause of action may involve damage to property or trespass, or it may be grounded in general concepts of negligence and reasonable care. While few civil actions have been brought, the liability of a wrongdoer for actions that harm a third party involve issues other than under contract law.}

^{As to contractual issues, virus problems typically arise between two, ordinarily innocent, contracting parties. In licensing law under Article 2B, they are handled as is any other type of contract risk. A virus present in information provided pursuant to a contract may cause the information to fail to perform within contract requirements. Any remedy, in contract, is determined by the general rules of this Article. The remedy under tort law or the sanction under criminal law are determined by the rules of those particular bodies of law.}

^{5. Electronic Commerce Issues. Subsection (b) states a general principle related to Article 2B rules on electronic commerce. The principle is that Article 2B overrides contrary state law requiring a "writing", a "signature" or a "conspicuous" term to the extent that it provides alternative electronic commerce compatible rules on issues such as authentication and the like. This premise, of course, operates only within the scope of this Article. The rule is necessary to ensure optimal impact for the modernization themes developed with reference to electronic commerce.}

^{There are hundreds of potentially relevant statutes that may affect electronic commerce. For transactions governed by Article 2B, the rules of this Article ordinarily supplant the other law as to contractual issues in full and the express preemption stated in this section is not necessary. That is not true for consumer transactions. In the consumer area, the four stated themes implement a limited effort that balances the modernization theme and the desire not to alter existing patterns of protection. The Article 2B rule is very limited. It implements a balance between the modernization themes in Article 2B relating to electronic commerce and existing law on consumer contracts. The limited approach, adopted here, contrasts to non-uniform digital signature statutes enacted in several states which replace or amend all signature and writing requirements, including consumer law mandates.}

^{The historical policy debates that led in the past to requiring a "writing" were conducted without considering digital alternatives. Article 2B expands the idea of a writing and a signature to include, respectively, a record and an authentication. Conspicuous is defined to deal with electronic contexts and expanded by an enhanced concept of manifestation of assent. In these respects, electronic concepts that were not at issue when existing consumer law developed, require adjustments appropriate to promote uniformity and certainty in commerce that is national and international in nature, while preserving the intent of the regulations. There is no change in the substantive content of statutes or regulations, such as whether a disclaimer can ever be made, what language must be used, and like issues.}

^{The balance adopted here preserves the important policies (e.g., the principle of general non-reversal of consumer statutes and regulations), but extends the innovations in electronic contracting.}

^{An additional issue entails coordination between Article 2B and any existing electronic or digital signature statute. Digital signature statutes that predate Article 2B are not repealed or affected by Article 2BIn current statutes on this subject, no conflict exists. The statutes create a procedure consistent with and parallel the more general Article 2B idea of attribution procedure.}
 

^{SECTION 2B-105. RELATIONSHIP TO FEDERAL LAW. A provision of this article which is preempted by federal law is unenforceable to the extent of such preemption.}

^{Source: None}

^{Votes and Action:}

^{a. At the 1997 ALI Annual Meeting, the general membership after a brief debate and by a narrow vote, approved a motion that the section on mass market licenses be amended to provide that a term inconsistent with federal copyright law does not become part of a contract under Section 2B-308.}

^{b. At the 1997 NCCUSL Annual Meeting, the Conference adopted by a substantial majority a motion that Article 2B should not deal with federal preemption but should be neutral.}

^{c. Rejected a motion to delete the section and remove it to comments. 9 -3 (September, 1997)}

^{d. Rejected a motion to provide that the Article does not change state common law or competition law rules because Article 2B simply does not deal with these issues. Vote: 2 - 8 (Feb. 1998)}

^{Reporter's Note:}

^{1. General Principle. Article 2B deals with contract law, not federal intellectual property law, competition law, or regulation. The relationship between federal law and state contract law is complex. Ultimately, however, if federal law invalidates a particular contract law rule or its application in a given contract, federal law controls. If federal law precludes a particular contract provision (or its enforcement) in a particular setting, that federal law rule controls. Nothing in Article 2B alters the balance between federal mandates and contract principles.}

^{The basic principle is that federal law controls if it applies and preempts state contract law. When or whether this occurs is not an issue of state law. State law, including the UCC, cannot alter the federal policy result and the balance it may entail and does not intend to do so. Thus, a federal rule that a specific form for disclosure creates an enforceable term cannot be altered by state law. Similarly, a limit on contract liability mandated by federal law cannot be abridged by state contract law expanding that liability. A requirement in federal law that there be a signed writing to transfer a copyright cannot be altered by abolishing a state statute of frauds. A rule that precludes transfer of a licensee's rights under a non-exclusive license without the licensor's consent as a matter of federal law precludes a contrary state law rule.}

^{With the transition from print to digital media, disputes have developed concerning what amounts to a reallocation of rights in light of the fact that the media of distribution allows many different and potentially valuable (for users or authors) uses of information and informational property rights. The difficulty of balancing fundamental rights in this context is demonstrated by the fact that disputes about underlying social policy have been debated and left unresolved in numerous contexts in the U.S. and internationally. These questions are beyond the scope of this Article. State law that conflicts with the resolution of those questions in federal law may be preempted if that is the policy choice made in federal law. Indeed, currently pending in Congress are proposals dealing with these questions specifically as a matter of federal policy.}

^{The approach of Article 2B has been to correspond state law to clear rules of federal law where appropriate and to take no position regarding controversial or context-determined rules whose application cannot be predicted and must of necessity await determinations by individual courts in particular cases or by congress as a general federal policy question.}

^{2. Sources of Preemption. There are many potential sources of preemption. Some preemption questions stem from the fact that many of the property rights that underlie some of the transactions in this area come from federal property rights sources, rather than simply from state property rights law. In copyright, for example, Section 301 of the Copyright Act expressly preempts any state law that creates rights equivalent to copyright. As a matter of fact, this principle is seldom applied to contract terms since a contract deals with the relationship between two parties to an agreement, while property rights contained in the Copyright Act deal with questions of property interests good against persons with whom the property owner has not dealt. In addition to the statutory provision, in some cases, a preemption claim may arise under general constitutional law concepts of the Supremacy Clause or other aspects of the federal constitution. Of course, however, it is important to recognize that Article 2B is not simply an intellectual property rights licensing statute. Many Article 2B transactions do not involve the distribution of intellectual property rights.}

^{Beyond intellectual property law, many situations involving disclosure, access, and transfer of information are subject to federal regulations, such as in Regulation E, the Electronic Communications Privacy Act, the Communications Act of 1996, the Freedom of Information Act, the Food and Drug Administration Act, and various other regulations or statutes. An enumeration of these regulations would be futile and the list would change over time.}

^{The basic theme of preemption is supplemented in licensing law by the fact that federal competition, antitrust, and intellectual property rules also serve to monitor and exclude some contract terms or practices in licensing (i.e., use of particular terms in particular settings can be viewed as abusive). These policies involve questions of federal law and policy that go beyond state law. Article 2B takes no position on the competition, social policy and other issues present here. Indeed, state contract law cannot alter those policy determinations. Article 2B sets out contract principles governing the contractual relationship in information transactions. It governs the contract relationship; federal law and policy determines whether a particular contract in a particular setting is barred by federal law.}

^{3. Nature of the Issues. In determining when such preclusive policies apply, courts accept that contract law generally prevails, but ask whether a particular contract clause in a particular setting conflicts with federal policies when balanced against the general role of contracts in the economy and legal system. How far the federal policies reach is uncertain in many respects. Article 2B approaches the issue from a posture of aggressive neutrality. As with contract law today, Article 2B sets out underlying contract law principles and leaves federal policy determinations to federal courts and federal law.}

^{Not surprisingly, in light of digital technology, defining the proper scope of rights under federal property law has been controversial; it remains unresolved. Some issues deal with reverse engineering copyrighted, but unpatented technology, while others deal with the scope of educational or scientific fair use of digital works. These are questions of federal policy. They must be resolved by courts and Congress, rather than state legislation.}

^{As applied to particular contexts or issues involving contractual relationships, there are two levels of determination in such contexts. One involves whether a contractual term exists and is enforceable as a matter of contract law. The second involves whether that contract term is enforceable under federal law. Article 2B takes no position on the latter question, whether the issue arises under antitrust law, intellectual property law, or other federal source. Article 2B merely provides a contract law framework.}

^{Thus, for example, copyright case law holds that, in certain circumstances, making intermediate copies of copyrighted technology for the purpose of "reverse engineering" and understanding that technology constitutes fair use. See Sega Enterprises Ltd. v. Accolade, Inc., 977 F2d 1510 (9th Cir. 1992); Atari Games Corp. v. Nintendo of Am., Inc., 975 F2d 832 (Fed. Cir. 1992). The scope of fair use here is not clear and it is also unclear to what extent a contract term alters the analysis. Other doctrines may also apply. For example, the Fifth Circuit has suggested that a reverse engineering clause that in effect attempts to monopolize a different product market constitutes copyright misuse in that particular context. DSC Communications Corp. v. DGI Technologies, Inc., 81 F.3d 597 (5th Cir. 1996). Article 2B does not change the federal policy analysis which applies on a case-by-case basis.}

^{Similarly, there is federal case law (and statutory provisions) which establishes a federal interest in the broad dissemination and use of ideas and concepts that have been distributed to the public. The issues stemming from that policy point in various directions, including concepts of fair use in copyright law and simple but fundamental ideas of free speech. See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989). On the other hand, however, it is quite clear that the federal policy on dissemination of information co-exists with concepts about the ability of parties to make confidential disclosures and deal with information that is to be kept secret. See Computer Assoc. Int'l, Inc. v. Altai, Inc., 982 F2d 693 (2d Cir. 1992). Exactly where and how these themes interface and what limits they may place on particular contractual relationships is clearly a question of federal policy, rather than state contract law.}

^{On these issues, Article 2B does not alter the relevant policy equation. For example, what would be the result if a term in a widely distributed consumer magazine that purports to prevent a reader of the magazine from using a factual summary or a brief quotation were structured to create a contract? That contract would (in addition to market place resistance) present serious questions of enforceability under copyright and constitutional free speech considerations. By analogy, some case law supports the view that, in some situations involving mass distribution of the information in a generally unrestricted form, such a contractual provision would be unenforceable. See Consumers Union v. General Signal Corp., 724 F.2d 1044 (1983). On the other hand, in other situations, modern law clearly allows the creation of enforceable contract restrictions on the ability of a recipient to reproduce or publicly redistribute confidential information. See Restatement (Third) Unfair Competition.}

^{4. Nature of Contract. Contracts already control most distribution of information. The contract law regime is not created by Article 2B. In most cases and with respect to most issues, contracts control as the method by which parties obtain value from information. While, as stated in the Copyright Act, federal property law precludes state law that creates rights equivalent to the property rights created under copyright, both as a practical and conceptual matter, copyright (or patent) do not generally preclude or preempt contract law. Indeed, contracts are essential to use one's own property, even when the property is tangible, let alone when it is intangible. A contract defines rights between parties to the contract, while a property right creates rights against all the world. They are not equivalent.}
 

^{SECTION 2B-106. EFFECT OF AGREEMENT; RULES OF CONSTRUCTION; ISSUES DECIDED BY COURTAS A MATTER OF LAW.}

^{(a) Except as otherwise expressly provided in this article or in Article 1, the effect of any provision of this article, including allocation of risk or imposition of a burden, may be varied by agreement of the parties. However, except to the extent stated in the following sections, the agreement may not vary:}

^{(1) the limitations on choice of law in Section 2B-107;}

^{(2) the limitations on choice of forum in Section 2B-108;}

^{(3) the right to relief from an unconscionable contract or clause in Section 2B-110;}

^{(4) the definitions of manifest assent and opportunity to review in Sections 2B-111 and 2B-112;}

^{(5) the rights to correct electronic errors in Section 2B-118;}

^{(6) the limitations on enforceability in Section 2B-201;}

^{(7) the rights under in Section 2B-208;}

^{(8) the limitations on disclaimer of warranties in Section 2B-406;}

^{(9) the limitations on contractual transfer restrictions Section 2B-5023(b) and 2B-5034;}

^{(10) the limitations on dispensing with excluding notice in Section 2B-626;}

^{(11) the limitations on liquidated damages in Section 2B-704(a);}

^{(12) the restrictions on the statute of limitations in Section 2B-705(a); or}

^{(13) the limitations on self-help repossession in Section 2B-716.}

^{(b) In applying this article, the following rules apply:}

^{(1) Except as otherwise provided in subsection (a), the The use of mandatory language or the absence of a phrase such as "unless otherwise agreed" in a provision of this article does not preclude the parties from varying the effect of the provision by agreement except as provided in subsection (a).}

^{(2) The fact that a provision of this article states a precondition for a result does not of itself imply that the absence of that precondition yields the opposite result.}

^{(3) Unless this article requires a term to be conspicuous or negotiated or that there be manifest assent or express agreement to the term, or makes a term that fails to meet any of these requirements unenforceable, these requirements are not a prerequisite to enforceability of the term.}

^{(c) Whether a term is conspicuous or is excluded under Section 2B-208(a) is a question to be determined by the court.}

^{Uniform Law Source: None.}

^{Definitional Cross Reference:}

^{"Agreement". Section 1-201. "Conspicuous". Section 2B-102. "Contract". Section 2B-102. "Court". Section 2B-102. "Notice". Section 1-201. "Reason to know": Section 2B-102. "Rights". Section 1-201. "Term". Section 1-201.}

^{Committee Actions:}

^{a. Reviewed without substantive change at three meeting.}

^{b. Rejected a motion to delete subsection (b)(2). Vote: 2 - 7 (Feb. 1998)}

^{Reporter's Notes:}

^{1. Basic Principle. Article 2B adopts the basic commercial law principle of contractual freedom. Contract choices control unless there are direct, tangible and over-riding policy considerations that mandate direct restraints on contract choice. The parties are free, by agreement, to alter the effect of any provision of this Article except for the few mandatory rules provided in Article 1 or referenced in this section, subject, of course, to the basic contract law restraint that contracts and their terms must not be unconscionable.}

^{The parties' ability to exercise their right to alter the effect of provisions of this Article by agreement does not require a formal, written contract and express terms to achieve that result. That may occur as the result of course of dealing, trade use or other circumstances; the idea of "agreement" encompasses the entire bargain of the parties in fact.}

^{2. Drafting Style. The dominance of agreed terms over statutory rules characterizes all U.C.C. transactional articles. It is especially important to state the principle here because of the drafting style used in this Article. Article 2B was drafted without use of the phrase "unless otherwise agreed" and frequently use mandatory language, such as "shall" or "must." These do not change the basic principle that the contract controls. Subsection (a) makes that clear. The style preference does not alter the basic policy. All Article 2B provisions can be altered by agreement unless otherwise indicated. This section expressly rejects decisions such as Suburban Trust and Savings Bank v. The University of Delaware, 910 F. Supp. 1009 (D. Del. 1995) (terms of Article 9 provision superseded the contract choice principle in UCC § 1-102).}

^{Subsection (a) provides a cross reference to the limited number of contexts in Article 2B where a contract cannot alter mandatory rules. In addition, of course, term are some similar limitations in Article 1 and in some state regulations of contracting practice.}

^{3. Rules of Construction. Subsection (b) deals with several concerns that also arise from the drafting style. Subsection (b)(2) resolves interpretation questions about the existence of a so-called negative pregnant in many of the rules in this article. Thus, if a section states that "If the originator of a message requests acknowledgment, then the following rules apply: ---" that does not indicate what rules apply in the absence of that request; in itself, it does not bar a court from adopting some or all of the same rules in the absence of a request, but merely states the affirmative proposition. If a more exclusionary result is intended, it is either made express or can be inferred from the context or the associated policies. Similarly, subsection (b)(3) states the premise that, for purposes of this Article, requirements of conspicuousness, assent or the like exist only when expressly imposed with respect to a particular term.}

^{4. Issues as a Matter of Law. Subsection (c) provides that whether a term is conspicuous is a matter of law and applies that principle to related issues under 2B-208. This follows current law.}
 

^{SECTION 2B-107. CHOICE OF LAW.}

^{(a) The parties in their agreement may choose the applicable law. However, in a consumer transaction, the choice is not enforceable to the extent it varies a rule that cannot be varied by agreement under the law of the jurisdiction whose law would apply in the absence of the agreement.}

^{(b) Except as otherwise provided by an enforceable choice-of-law term, the following rules apply:}

^{(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 is entered into between the parties.}

^{(2) A consumer transaction that requires delivery of a copy on a physical medium to the consumer is governed by the law of the jurisdiction in which the copy is delivered or, in the event of nondelivery, the jurisdiction in which delivery was to have occurred.}

^{(3) In all other cases, the contract is governed by the law of the jurisdiction with the most significant relationship to the contract.}

^{(c) If the jurisdiction whose law governs under subsection (b) is outside the United States, the laws of that jurisdiction govern only if they provide substantially similar protections and rights to a party not located in that jurisdiction as are provided under this article. Otherwise, the law of the jurisdiction in the United States which has the most significant relationship to the transaction governs.}

^{(d) 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.}

^{Uniform Law Source: Restatement (Second) of Conflicts 188; U.C.C. §§ 1-105; 9-103.}

^{Definitional Cross Reference:}

^{"Access contract". Section 2B-102. "Agreement". Section 1-201. "Consumer". Section 2B-102. "Contract". Section 2B-102. "Copy". Section 2B-102. "Delivery". Section 2B-102. "Electronic". Section 2B-102. "Licensor". Section 2B-201. "Party". Section 1-201. "Rights". Section 1-201. "Term". Section 1-201.}

^{Committee Votes and Actions:}

^{a. Voted 9-1 to use consumer, rather than mass market.}

^{b. Voted 8-5 to validate contract choice of law. (Feb. 1997)}

^{c. Voted 11-0 to adopt significant relationship test as back-up rule. (Feb. 1997)}

^{d. Voted 10-0 to make contract ineffective to alter mandatory consumer protections (Nov. 1997)}

^{e. Reviewed without substantive change. (Feb. 1998)}

^{Reporter's Notes:}

^{1. Contractual Choice of Law: General Rule. This section addresses two questions. The first concerns the enforceability of contract terms choosing the applicable law. Choice of law clauses are routine in commercial licenses and are important in how parties structure commercial deals. The information economy accentuates that importance through expanded communications capabilities and, with respect to transactions in information, the fact that remote parties frequently engage in contract formation and performance through remote systems spanning two or more jurisdictions and not dependent on the physical location of either party or of the information itself.}

^{In light of the commercial importance of the practice, Article 2B adopts a contract choice position validating choice of law agreements. A rule that validates choice of law agreements states an important policy in a context where an increasing number of modern information transactions occur in cyberspace, rather than in fixed locations. Because many transactions in information are not related to tangible locations, the ability to choose an applicable law provides an important commercial premise. In the absence of that right, even the smallest business entity on the Internet is subject to the law of all fifty states and all countries in the world. Because that risk would have long term adverse effects on electronic commerce, this Section is one of the most important contributions of Article 2B to development of electronic commerce.}

^{Common law generally enforces contractual choice of law in transactions in information. See Finch v. Hughes Aircraft Co., 57 Md. App. 190, 469 A.2d 867, 887, cert den 298 Md. 310, 469 A.2d 864 (1984), reh. den. 471 U.S. 1049 (1985); Medtronic Inc. v. Janss, 729 F.2d 1395 (11th Cir. 1984); Universal Gym Equipment, Inc. v. Atlantic Health & Fitness Products, 229 U.S.P.Q. 335 (D. Md. 1985); Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607 (1st Cir. 1993). The major exception is if the choice contradicts a fundamental, mandatory policy of the state that would otherwise have its law apply; the reported cases applying this theory are typically consumer protection cases.}

^{The Restatement allows contract terms to govern in any case where the issue could be resolved by contract. In addition, even if contract rules might not otherwise govern, under the Restatement, the contract choice is presumed to be valid, subject to limited exceptions. Restatement (Second) of Conflict of Laws 187 (may be invalid if not resolvable by contract and either there was no "reasonable basis" for the choice of that state's law, or "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.").}

^{2. Contract Choice: Consumer Contracts. In an information economy, there are strong reasons to allow contract choice; those reasons include the reasons that led to the Restatement position years ago, but go further because of the increasing nationalization and internationalization of commerce. Despite strong reasons for enforcing all contract choices, Article 2B takes the position that the contract cannot override mandatory consumer protections that otherwise apply. A mandatory rule is a rule that, under applicable law, cannot be altered by agreement. Such rules exist in most states, but their content varies widely. The reference to consumer protections includes under both the UCC and non-UCC law (see 2B-104(a)(3)). Within Article 2B, it includes mandatory consumer protection rules whether phrased in terms of consumer or "mass-market" rules.}

^{3. Contract Choice: Rejected Limitations. Article 2B rejects current Section 1-105 which allows choice of law only if the chosen state has a "reasonable relationship" to the transaction. This rule is more restrictive than the Restatement and the law of most states outside Section 1-105. It reflects law that existed when the UCC was adopted five decades ago, but that has little merit in modern electronic transactions and does not fit with modern scholarship about choice of law as reflected in the Restatement (Second) and elsewhere.}

^{It also rejects Article 2A-106 which, for consumer leases, restricts the contract choice to the jurisdiction in which the lessee resides on or within thirty days after the contract becomes enforceable. That rule is inappropriate for the intangible property and would create a situation in which an on-line provider would be subject to the law in all fifty states even though the states themselves have not designated their particular rules as mandatory. That would be true even though no discernible consumer protection interest justifies the contractual choice limitation. The residence rule does not exist under Article 2, Article 1 or the Restatement. As a consumer protection, it assumes that the domicile is more protective than any other state law. As a matter of logic, that cannot be true in all cases. In an information marketplace and especially in cyberspace transactions, the residence rule harms the consumer as often at it helps the consumer. In cyberspace environments, it frustrates goals of providing uniformity and being able to control the number of divergent laws with which a contract must comply.}

^{4. Default rule: no contract provision. The second issue in this Section involves choice of law in the absence of contract terms and is covered in subsection (b). The purpose of stating choice of law rules is to enhance certainty against which the parties can bargain if they so choose and a basis for planning transactions with a reasonable understanding of the applicable risk. Under current general law, choice of law principles are often driven by litigation concerns and refer to questions about "reasonable relationship", "most substantial contacts", and "governmental interest." In the online environment, this does not support commercial development and creates substantial uncertainty. While Article 2B adopts the modern Restatement (Second) of Conflicts as a general rule, it provides two specific, commercially useful and discernable rules that supersede the general background concept.}

^{5. Default rule: Internet Transactions. The most important rule is in subsection (b)(1). It deals with electronic transactional environments and creates a presumptive choice of law based on the location of the licensor. Where an on-line vendor automatically provides direct marketing to the world through Internet, any other formulation would require the vendor to comply with the law of fifty states and 170 countries since it will often not be clear where the information is being sent. Some states or countries mandate such compliance through local laws, such as for example, recent amendments to California warranty law applicable to the sale of goods. Opting for a more stable and identifiable choice of law is an important in facilitating electronic commerce in digital products.}

^{In this section, the licensor's location refers to its chief executive office (as in Article 9), rather than the location of the computer that contains or provides the information. Unlike other choices (such as the licensee's location, the location of the data), this choice provides a single, routinely identifiable background for commerce. 6. Default Rule: Consumer Deliverables. Subsection (b)(2) creates a consumer rule for cases of physical delivery of tangible copies (not involving online contracts). The rule focuses on the location where the copy is received. In most, but not all cases, this will be the state in which the consumer resides. That location would typically be chosen under any choice of law regime, but this section makes the choice clear. Thus, for example, a consumer acquiring software in Chicago will be subject to the law of Illinois in the absence of contract terms. That rule is consistent with concerns about the "place of performance" and similar considerations under current law. It is also followed in many European consumer protection rules relating to contract choice of law involving sales of goods and services. This rule deals with situations in which the licensor will know where delivery will occur because it delivers a physical copy and is not engaged in an electronic communication. This allows electronic transactions to be governed by a choice of law rule that enables commercial decision-making based on an identifiable body of law and does not impose costs on the transaction by requiring that the electronic vendor determine what physical location corresponds to an electronic location.}

^{The Section, of course, only deals with contract issues. It does not affect tax or similar concerns. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992) the Supreme Court held that no adequate nexus for tax purposes was established where the only contact of an entity with a state was advertising and delivery through common carrier. This Article, of course, deals only with contract issues.}

^{7. Default Rule: Restatement Concept. The residual rule adopts the Restatement (Second) test and case interpreting it. The Restatement (Second) of Conflicts uses a "most significant relationship" standard to be judged by considering a variety of factors that include: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicile, residence, nationality, place of incorporation and place of business of the parties. (f) the needs of the interstate and international systems, (g) the relevant policies of the forum, (h) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (i) the protection of justified expectations, (j) the basic policies underlying the particular field of law, (k) certainty, predictability and uniformity of result, and (l) ease in the determination and application of the law to be applied. Restatement (Second) §§ 6, 188.}

^{This rule is not uniformly accepted in current practice. Many states use principles from the Restatement (First) or theories evolved by academic authors. Indeed, one text states: "[C]hoice-of-law theory today is in considerable disarray - and has been for some time. [It] is marked by eclecticism and even eccentricity. No consensus exists among scholars.. [Like] revolutionaries who can unite only to eliminate the existing government, they cannot agree on the establishment of a new one. The disarray in the courts may be worse. Four or five theories are in vogue among the various states, with many decisions using - openly or covertly - more than one theory." William Richman & William Reynolds, Understanding Conflict of Laws 241 (2d ed. 1992). The disarray argues for giving guidance for contracts in cyberspace.}

^{8. Default Rule: Foreign Jurisdictions. Subsection (c) provides a rule in cases of foreign choices of law where the effect of using the licensors location would be to place the choice of law in a harsh, under-developed, or otherwise inappropriate location. This is intended to protect against conscious selections of location designed to disadvantage the other party and forum shopping by U.S. companies who have virtually free choice as to where to locate. It is especially important in context of the global Internet context.}
 

^{SECTION 2B-108. CONTRACTUAL CHOICE OF FORUM.}

^{(a) The parties in their agreement may choose an exclusive judicial forum unless the choice is unreasonable and unjust.}

^{(b) A choice-of-forum term is not exclusive unless the agreement expressly provides that the chosen forum is exclusive.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-202. "Term": Section 1-202.}

^{Committee Votes:}

^{a. Rejected a motion to delete the section. Vote 4 - 9 (February, 1997).}

^{b. Voted to adopt the term consumer and not "mass market" Vote: 8-5 (February, 1997)}

^{c. Consensus that Draft should deal separately with arbitration clauses if at all. (February, 1997)}

^{d. Rejected a motion to delete the section Vote: 10 -2 (Nov. 1997)}

^{e. Applied the limitation on enforcement to all contracts. Vote: 7 - 3 (Nov. 1997)}

^{f. Rejected motion to preclude choice if small claims jurisdiction applies. Vote: 2-7 (Feb. 1998)}

^{Reporter's Notes:}

^{1. General Rule. This section deals with choice of an exclusive judicial forum. It does not cover contract terms that permit litigation to be brought in a designated jurisdiction, but do not require that result. Permissive forum clauses are governed by general contract law. The Section deals only with judicial forum choices. Choices by contract of arbitration or other non-judicial forums are governed by other law and the provisions of this Section do not alter that pre-existing law.}

^{This Section adopts the modern view of the enforceability of choice of forum clauses. That view was first stated in Bremen v. Zapata Offshore Co., 407 U.S. 1, 10 (1972) (choice of forum clauses are "prima facie valid"). Subsequent case law, both in the United States Supreme Court and in state courts, increasingly conforms to the presumptive enforceability of choice of forum clauses, whether in customized agreements or in standard forms.}

^{2. Fairness Limitation. Concerns about fairness and notice may limit enforcement of the clause. This Section adopts the approach to such questions established in the Breman decision and followed in most modern decisions. Breman indicated that the contract term could be rejected if it was "unreasonable and unjust." See Perkins v. CCH Computax, Inc., 106 N.C. App. 210, 415 S.E.2d 755 (1992); Lauro Lines v. Chasser, 490 U.S. 495 (1989); Sterling Forest Assocs., Ltd. v. Barnett-Range Corp., 840 F.2d 249 (4th Cir. 1988). While some later courts phrase this in the disjunctive, the difference in terminology does not alter the general support for such clauses unless the primary or sole purpose is to obtain a grossly unfair advantage or to deny the other party its day in court without reason for the choice itself.}

^{This section adopts the limiting language that has become the dominant theme in the case law. "Unjust and unreasonable" has become the dominant standard as many courts suggest that choice of forum clauses are presumptively enforceable. The intent in this section is to conform to Supreme Court and other holdings in reference to what type of limits on choice of forum are appropriate.}

^{The section precludes clauses that choose an exclusive forum solely for the purpose of preventing a other party from being able to contest disputes that may arise under the transaction. Such choices may be unreasonable and their impact is unjust. On the other hand, clauses that serve valid commercial purposes are not invalidated simply because they adversely effect the other party to the agreement; this is true because the term to be a contract term must have been part of the contract itself.}

^{3. Internet and Cyberspace. The importance of choice of forum provisions is recognized in general commerce, but is heightened in transactions in cyberspace as reflected by a line of contentious and inconsistent personal jurisdiction ruling. The cases on personal jurisdiction in this environment are split between those requiring active involvement in a state in order to find jurisdiction from Internet activity and those that hold a passive Internet use sufficient to confirm jurisdiction on all states to which Internet reaches. In this context, the importance of being able to delineate by contract the scope of exposure is commercially crucial. This was emphasized in a 1997 White House Report on Global Electronic Commerce.}

^{In Internet transactions, choice of forum rules are ordinarily enforceable. The Supreme Court enforced a choice of forum in a standard form contract even though the choice effectively denied a consumer the ability to defend the contract and the choice was contained in a non-negotiated form and not presented to the consumer until after the tickets had been purchased. See Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991). The Court's comments have relevance to Internet contracting:}

^{[It would] be entirely unreasonable to assume that a cruise passenger would or could negotiate the terms of a forum clause in a routine commercial cruise ticket form. Nevertheless, including a reasonable forum clause in such a form well may be permissible for several reasons. Because it is not unlikely that a mishap in a cruise could subject a cruise line to litigation in several different fora, the line has a special interest in limiting such fora. Moreover, a clause establishing [the forum] has the salutary effect of dispelling confusion as to where suits may be brought.. Furthermore, it is likely that passengers purchasing tickets containing a forum clause . benefit in the form of reduced fares reflecting the savings that the cruise line enjoys..}

^{In an Internet transaction, the context suggests that choice of forum will often be justified on the basis of the international risk that would otherwise exist and, certainly, choice of forum at a party's location is reasonable.}
 

^{SECTION 2B-109. BREACH OF CONTRACT; MATERIAL BREACH.}

^{(a) Whether a party is in breach of contract is determined by the contract. Breach of contract includes a party's failure to perform an obligation in a timely manner, repudiation of a contract, or exceeding a contractual use restriction. A breach of contract, whether or not material, entitles the aggrieved party to its remedies.}

^{(b) A breach of contract is a material breach if the contact so provides or the breach is a failure to perform an agreed term that is an essential element of the agreement. Otherwise, the following rules apply:}

^{(1) A breach is material if the circumstances, including the language of the agreement, the reasonable expectations of the parties, the standards and practices of the trade or industry, or the character of the breach, indicate that:}

^{(A) the breach caused or reasonably may cause substantial harm to the aggrieved party, such as costs or losses that significantly exceed the contract value; or}

^{(B) the breach substantially deprived or is likely to substantially deprive the aggrieved party of a substantial benefit it reasonably expected under the contract.}

^{(2) A breach of contract is material if the cumulative effect of nonmaterial breaches is material.}

^{Uniform Law Source: Restatement (Second) Contracts § 241.}

^{Definitional Cross Reference:}

^{"Aggrieved party": Section 1-201. "Agreement": Section 1-201. "Contract": Section 2B-102. "Information": Section 2B-102. "Party": Section 1-201. "Term": Section 1-201.}

^{Committee Votes:}

^{a. Approved a motion to delete a list of acts that are material. Vote: 11 - 0 (Feb. 1997)}

^{b. Rejected a motion to delete the definition of material other than by contract and to point to common law rules. Vote: 5 - 6 (Feb. 1998).}

^{c. Approved reference to terms that are an essential element of agreement. Vote: 6-5 (Feb. 1998)}

^{Reporter's Notes:}

^{1. Nature of a Breach. A party must conform to its contract. A breach of contract occurs whenever a party acts or fails to act in a manner required by the contract. Encompassed in this term are failures to make timely performance, breach of warranty, late delivery, repudiation, non-delivery, and exceeding contractual limitations, etc. What is and is not a breach is determined by the contract and, in the absence of contract terms, by this Article.}

^{2. Breach Related to What Remedies Apply. For purposes of remedies, Article 2B distinguishes between immaterial and material breaches. A similar distinction exists in Article 2 and Article 2A except for acceptance or rejection of a single delivery of a product. The concept also corresponds to common law and the Restatement (Second) of Contracts. A similar standard exists in international law. See Convention on the International Sale of Goods (CISG) Art. 25 ("A breach ... is fundamental if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person ... would not have foreseen such a result."); UNIDROIT Principles of International Commercial Law art. 7.3.1 ( "A party may terminate the contract where the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance.").}

^{If one party fails to conform to the contract, the aggrieved party is entitled to remedies for breach. The aggrieved party's right to cancel the contract and refuse to perform its further obligations, however, hinges on whether the breach was material. A party may not cancel the contract for a non-material breach. For immaterial breaches, the remedy is an action for damages. If the breach is material, however, it may cancel. Restatement (Second) of Contracts § 237 expresses the rule as follows: "[It] is a condition of each party's remaining duties to render performances ... under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time." See 2B-601. Under Article 2B, as in Article 2, an intermediate remedy lies in the right of a party whose expectations of future performance are reasonably impaired by the other's acts or words, to suspend performance and demand adequate assurance of future performance by the other party.}

^{The basic policy is that, while parties are entitled to the contract performance for which they bargained, some breaches are sufficiently immaterial that they do not justify forfeiture of the entire bargain. This does not contemplate a right to not perform, but a rule that prevents forfeiture for minor flaws. For example, a one day delay in payment may or may not be material. A failure to fully meet general, advertised claims of handling 10,000 files may not be material where the licensee's needs never exceed 4,000 if the system handles 9,999 and the contract did not expressly require 10,000 files}

^{The material breach concept, which permeates U.S. and international law, rests on the common law belief that it is better to preserve a contract despite minor problems and the related belief that allowing one party to cancel for minor defects may cause unwarranted forfeiture and encourage unfair opportunism. Materiality relates to the aggrieved party's perspective and the benefits it expected from full performance of the contract. The distinction between material and non-material breach applies to performance of both parties.}

^{3. Contract Terms. The materiality concept provides a flexible standard. That flexibility, however, creates uncertainty. It is important, therefore, that materiality hinge on the terms of the contract. The contract defines what is material. That can happen in three ways. The first two involve either expressly providing a remedy for a particular breach (e.g., failure to meet "X" test permits cancellation of the contract) or expressly defining a particular breach per se material. In either case, there is no reason to ignore what the parties have stated to be important to their bargain. The third involves what, under common law, is described as "express conditions." These are express contract terms conformance to which is a precondition to the performance of the other party. Here, the express agreement conditions the remedy.}

^{Illustration 1. In a development contract, the parties agree that the final product must meet 10 specifications before it is acceptable. One condition provides for operation at no less than 150,000 rev. per second. The product fails to meet that standard, falling short by a relatively small amount. Meeting that conditions was an express standard; failure to perform is justifies refusal of the product.}

^{Illustration 2. In a contract for a database for use as a mailing list assume that no specific delivery date is specified. The product is delivered somewhat later than expected. Whether the breach is material hinges on the effect of the delay on the value of the contract.}

^{Illustration 3. A contract requires delivery of a database program but does not expressly describe the characteristics required of the program. The database fails to function in a manner comparable to other similar programs. Materiality hinges on whether the defect causes substantial harm to the licensee.}

^{4. What constitutes a material breach? A statute cannot define materiality in detail any more than one can define concepts such as negligence, reasonable care, merchantability, or the like. The key lies in defining an appropriate reference point. Subsection (b) emphasizes two elements: contract terms and the extent to which breach causes significant harm to the aggrieved party. See Rano v. Sipa Press, 987 F.2d 580 (9th Cir. 1993); Otto Preminger Films, Ltd. v. Quintex Entertainment, Ltd., 950 F.2d 1492 (9th Cir. 1991) ("breach . is material if it is so substantial as to defeat the purpose of the transaction or so severe as to justify the other party's suspension of performance").}

^{The Restatement (Second) of Contracts lists five significant circumstances: 1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected; 2) the extent to which the injured party can be adequately compensated for the benefit of which he will be deprived; 3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; 4) the likelihood that the party failing to perform or to offer to perform will cure the failure, taking into account all the circumstances, including any reasonable assurances; and 5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. Restatement (Second) of Contracts § 241 (1981).}

^{The factors in subsection (b) are not exclusive. Courts should draw on common law cases. For example, the concept incorporates questions about the motivation of the breaching party. A series of minor breaches may constitute a material breach where the motivation for this conduct involves a bad faith effort to reduce the value of the deal to the other party or to force that party into a position from which it will be forced to relinquish either the entire deal or, through re-negotiation, aspects of the deal that are otherwise important to it.}
 

^{SECTION 2B-110. UNCONSCIONABLE CONTRACT OR CLAUSE.}

^{(a) If a court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.}

^{(b) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.}

^{Uniform Law Source: Section 2-302; 2A-108. Conforms to 2-302.}

^{Definitional Cross Reference:}

^{"Contract": Section 2B-102. "Court": Section 2B-102. "Term": Section 1-201.}

^{Conference and Committee Action:}

^{1. At the 1997 NCCUSL Annual Meeting, the Conference adopted a motion that the three transactional articles should follow a consistent "core" definition.}

^{Reporter's Note:}

^{1. Current law and derivation. Article 2B follows current Article 2. Since many of the transactions covered by Article 2B are not now within the UCC, it thus expands the ability of courts to monitor transactions beyond the law that current governs. The intent is to adopt modern decisions on unconscionable contracts and terms. In addition, of course, courts should consider the nature of the subject matter and types of transactions covered by this Article in continuing to evolve concepts of what constitutes an unconscionable term.}

^{2. Inducement. Article 2B does not allow a court to invalidate a contract or a term based on unconscionable inducement. Traditional theories of fraud, duress and the like continue to apply, but the inducement concept is law only in Article 2A, where it is limited to consumer leases. While it may have a proper role in that context, there is no case law developing or suggesting the contours or limits of the theory and its applicability to general transactional environments is not established. In this article, of course, many situations where inducement may be an issue are dealt with by the concept of manifesting assent and opportunity to review. Other situations fall within concepts of fraud in the inducement and the like in common law.}

^{SECTION 2B-111. MANIFESTING ASSENT.}

^{(a) A person or electronic agent manifests assent to a record or term if, acting with knowledge of, or after having an opportunity to review, the record or term, it:}

^{(1) authenticates the record or term; or}

^{(2) engages in affirmative conduct or operations that the record conspicuously provides, or the circumstances including the terms of the record clearly indicate, will constitute acceptance, and the person or electronic agent had an opportunity to decline to engage in the conduct or operations.}

^{(b) Mere retention of information or a record without objection is not a manifestation of assent.}

^{(c) If this article requires assent to a particular term, a person or electronic agent does not manifest assent to that term unless there was an opportunity to review the term and the manifestation of assent relates specifically to the term.}

^{(d) A manifestation of assent may be proved in any manner, including by a showing that a procedure existed by which a person or an electronic agent must have engaged in conduct or operations that manifested assent to the record or term in order to proceed further in the use it made of the information or informational property rights.}

^{Uniform Law Source: Restatement (Second) of Contracts § 211.}

^{Definitional Cross Reference.}

^{"Authenticate". Section 2B-102. "Conspicuous". Section 2B-102. "Contract". Section 2B-102. "Electronic agent". Section 2B-102. "Information". Section 2B-102. "Party". Section 1-201. "Record". Section 2B-102. "Term". Section 1-201.}

^{Committee Actions:}

^{1. Reviewed without substantive changes}

^{Reporter's Notes:}

^{1. Indicia of Agreement. Manifesting assent has several distinct functions, depending on the context. One function is as an indicia of agreement to or acceptance of a contractual relationship. Assent to a record frequently indicates not only assent to the record, but also an intent to accept the agreement itself. That is implicit in general contract law. The fact that Article 2B identifies additional functions of the concept of manifest assent, that is the concept of being bound by objective indications of assent through conduct or signature, does not alter this underlying tradition. Manifesting assent is one, but not the only way to indicate acceptance of, or agreement to a contractual relationship.}

^{2. Adopting a Record. Beyond this, in this Article and in general law, manifest assent also has a role in determining whether or when a party adopts the terms of a record as defining the terms of the contractual relationship. The term is used in the Restatement (Second) of Contracts § 211 and in the UNIDROIT Principles of International Commercial Contract Law in this sense. It defines when a party is bound to the terms of a standard form record. In these other bodies of law, the term is used, but not defined. In Article 2B, it is used in the same way, as one method of indicating assent to a record as defining the contract, but this Section and Section 2B-112 provide important procedural and substantive standards indicating when assent can be said to have been given to a record. The effect of assenting to, or otherwise accepting, a record is spelled out in Section 2B-207 and Section 2B-208.}

^{The recognition of objective manifestations of assent is especially important in electronic commerce. In that environment, direct contact between individuals is less common; information providers must rely on actions as confirming the existence or non-existence of a contract, and the acceptance or rejection of contract terms.}

^{3. Enforceability of Some Terms. This Article also uses the concept of manifest assent with respect to the enforceability of some particular terms of a record. Here, by requiring affirmative conduct (or signature) oriented to the particular term, manifesting assent creates an enhanced standard of protection as compared to more traditional standards of conspicuousness. Manifesting assent is the higher standard; it requires both that the term be called out and that there be affirmative conduct referring to the term itself. A conspicuous term binds a party so long as the person ought to have noticed the term. In both cases, the calling it to the attention function focuses on whether the term would or ought to be noticed by a reasonable person.}

^{4. Objective Indicia of Assent. "Manifesting assent" entails objective indicia of assent to, or adoption of an agreement, a record, or a term in a record. Objective manifestations of assent bind a party to the record if there was an opportunity to review the record and an affirmative act indicating assent. In this Article, however, three elements are required before the objective manifestation constitutes assent.}

^{a. Authority to Act. The person manifesting assent must be one that can bind the party being charged with the benefits or restrictions of the agreement or the record. This Article does not generally address questions of agency law. See § 1-103. If a party proposing a record desires to bind the other party, it must establish that the person who acted for the entity to be bound had authority to do so or, at least, that the conduct of that entity accepted the benefits of the contract and, thus, ratified the conduct of the individual. Of course, however, if the person who acted did not have authority to contract and the contract was not ratified or otherwise adopted , there may be no license. Often, if this is the case, use of the information infringes a copyright.}

^{Assent by an unauthorized party is not assent as to the supposed principal unless concepts of apparent authority apply. Additionally, there must be a link between the person who has the opportunity to review the terms and one whose acts constitute assent. Thus, an email sent to the company at large, or to the company's computer, does not trigger assent to the email unless it comes to the attention of one who can and does act to commit the company to a binding assent to terms under rules of attribution or estoppel. Of course, a party with authority to act can delegate that authority to another. Thus, a CEO may implicitly authorize her secretary to agree to a license when she instructs the secretary to sign up for Westlaw online or to install a newly acquired program that is subject to a screen license.}

^{Questions of this sort lie in agency law as augmented in this Article. In appropriate cases, Article 2B rules regarding attribution play a role in resolving the issue of whether the ultimate party is bound to the contract terms. Section 2B-115 spells out questions of when, in an electronic environment, a party is bound to records purporting to have come from that party.}

^{b. Affirmative Conduct. There must be an affirmative act to constitute assent. This requirement flows from the concept that manifestations of assent refer to objective indicia of assent. A signature or other authentication, of course, manifests assent, initials attached to a particular contract term assent to that term. So too, in the electronic world would an affirmative act figuratively pressing (e.g., clicking) a displayed button indicated as indicating assent and acceptance of a particular term or an entire record. Assent does not require a formal event, although notarization or other formalities certainly qualify.}

^{This Article rejects the idea, suggested in some reported decisions, that a mere failure to object constitutes assent to a record. Objective indicia of assent under this Article requires an affirmative act that the circumstances or the record clearly indicate will have that effect. A failure to object is not assent, but affirmative use of the information or access to it can be assent if that act was defined as sufficient in the circumstances.}

^{c. Opportunity to Review. Assent must follow an opportunity to review. Assent requires proof that the party actually read the terms to which it assents. "Opportunity to review" is a defined in Section 2B-112. It requires that the record be called to the party's attention and be available for review. The terms need not all be in a single record, so long as their location enables review if the assenting party so desires. Thus, a hyper-link reference to a license actually contained in a different record would, all other conditions being met, satisfy the concept. However, the concept excludes devices or schemes designed to misled or conceal, rather than to obtain assent}

^{Illustration 1: In its pre-registration information screen, NYT on-line states: "Please read the license. Click here to review the License. If you agree to the license, indicate your agreement by clicking the "I agree" button. If you do not agree to the License, click the "I decline" button." The underlined text is a hypertext link which, if selected, displays the license.}

^{Here, a party who indicates "I agree" manifests assent to the license. Its conduct in going forward to use the information also indicates it accepted the contract and adopted the terms of the license.}

^{5. Assent to Terms or Records. The section distinguishes assent to a record and, if required by other provisions of this article, assent to particular terms. Assent to a record involves procedures generally with respect to the record, while assent to a particular term, if such is needed, occurs only if the actions relate to that particular term. One act, however, may relate both if the record conspicuously so provides:}

^{Illustration 2: A license, which is available and readable on the outside of the envelope containing the diskette, provides:}

^{OPENING THE ENVELOPE CONTAINING THE DISKETTE WILL CONSTITUTE YOUR AGREEMENT TO THE LICENSE WHICH IS CONTAINED ON THE OUTSIDE OF THE ENVELOPE.}

^{WE CALL YOUR ATTENTION SPECIFICALLY TO:}

^{Contract Term No. 5, Precluding use at home, and}

^{Contract Term No. 16, Imposing a $100 annual fee if you choose to use the help line.}

^{In this case, manifesting assent is an enhanced form of conspicuousness in that it requires an affirmative act with respect to a clause or term.}

^{6. Other Means of Assent. Manifestation of assent is not the only way in which parties define the terms of their deal. This Article does not preclude or alter traditional recognition of other methods of assent or agreement.}

^{Clear indications that a product has specific characteristics can become part of an agreement even without a formal manifestation of assent; they define the bargain itself. A party can license a database of names and addresses of intellectual property attorneys and rely on the fact that the product need only contain intellectual property attorneys since this is a basic term of the bargain without its obtaining manifest assent to that part of the deal. The nature of the product defines the deal itself in many cases if the party has notice of the terms, the terms are part of the bargain, or other methods are used to call attention to the term and the party accepts it.}

^{Illustration 3: A copyrighted software package states: "THIS PRODUCT IS LICENSED FOR CONSUMER USE ONLY." It does not specify that opening the product or using it accepts this term. The circumstances here clearly indicate that the product is licensed solely for consumer use. The terms are effective as an inherent part of the agreement, without requiring pro forma language in a record or conduct accepting that record.}

^{Similarly, in many cases, copyright or other intellectual property notices or restrictions may be effective restrictions on the rights to use a product, regardless of whether there is a manifestation of assent as provided for under this Section. For example, common practice in video rental arrangements places a notice on screen of the limitations imposed on the customer's use of the video under applicable copyright and criminal law, such as by precluding commercial public performances. The enforceability of such notices does not depend on compliance with the assent provisions of this Article.}

^{7. Proof of Terms. Of course, it will be necessary for the party, if it relies on the terms of linked text or other electronic records, to prove the content of the text at the time of the licensee's assent. One way of doing so is to retain records of the content at all periods of time or maintaining a changes occurred in particular records.. The issues of proof, while potentially difficult, are matters of evidence law and reflect ordinary problems encountered in dealing with proof of electronic records.}

^{SECTION 2B-112. OPPORTUNITY TO REVIEW; REFUND.}

^{(a) A person or electronic agent has an opportunity to review only if the record or term is made available in a manner that:}

^{(1) would call it to the attention of a reasonable person and permit review,: or}

^{(2) in the case of an electronic agent, would enable a reasonably configured electronic agent to react.}

^{(b) Except as otherwise provided in subsection (c), Iif a record or term is available for review only after a person becomes obligated to pay, the person has an opportunity to review only if the person has a right to a refund if it rejects the record or term.}

^{(c) If a the record or term is a proposal to modify a contract or is governed by Section 2B-207(a)(2) and is not a mass market license, a refund is not required.}

^{Committee Action: Reviewed without changes.}

^{Definitional Cross Reference.}

^{"Contract". Section 2B-102. "Electronic agent". Section 2B-102. "Information". Section 2B-102. "Licensee". Section 2B-102. "Party". Section 1-201. "Record". Section 2B-102. "Term". Section 1-201.}

^{Reporter's Notes:}

^{1. General Concept. "Opportunity to review" is a precondition to manifesting assent. Unless a party had a prior opportunity to review, actions purportedly manifesting assent to a record are ineffective.}

^{What constitutes an opportunity to review may differ depending on whether one deals with a paper record or electronic terms. If access to the record is exceptionally cumbersome and difficult to achieve, there may be no opportunity to review.}

^{On the other hand, the mere fact that a person chooses to forego or ignore the opportunity and proceed with a transaction does not mean that there was no opportunity to review. Thus, for example, contract terms presented to the party during an over the counter transaction or conspicuously made available in a binder as required for some transactions under federal law give an opportunity for review even if the party does not avail itself of that opportunity. This is not changed by the fact that the party may desire to hurry through and complete the transaction unless, of course, the other party uses undue pressure to cause that hurry or to force the party to not review the record.}

^{2. Refund. The opportunity to review can come at or after payment. If it follows payment, there is no opportunity to review for purposes of this Article unless the party can return the product an receive a refund if it declines the terms of the record. This refund right does not exist in current law as a condition to the enforceability of records presented after payment. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991); Hill v. Gateway 2000, Inc., 1997 WL 2809 (7th Cir. 1997). It creates important protection for the licensee and, in effect, requires that the party be placed back into the position it would have been in had the record been presented prior to payment.}

^{Illustration: Sam acquires a copy of a movie from Blockbuster on a three day rental. When Same places the copy on screen, a statement appears that the copy is for home and personal use only, and not for display to an audience for a fee. Sam is bound as a matter of contract by this limitation if he had a right to return the copy for a refund without viewing the movie because he rejected the terms. The restriction may also be effective as a matter of direct copyright law.}

^{While this section does not create an obligation to make a refund, this Article conditions the creation of terms of contract between the licensor and the licensee that arise on the existence of that opportunity. Failure to provide a refund is not a breach of contract, but results in failure of the terms to become part of the bargain. Under Section 2B-617, a retailer is required to refund the price paid if an end user declines the publisher's license. That right to a refund, if and when it occurs, fulfills the refund option stated here.}

^{3. Modifications. Ideas of a refund opportunity associated with the opportunity to review do not alter law relating to the modification of an agreement of the provisions in Section 2B-207 dealing with commercial contracts where parties begin performance in the expectation that a record containing the contract terms will be presented later and adopted. In these cases, general contract law principles protect the party presented with the record.}

^{4. First User. Typically, the refund is present only for the first user of the information, although the rights owner may also seek contractual relationships of this type with subsequent parties. In general, subsequent parties are bound by the terms of the first contract without assent to it in the sense that they are not authorized to exceed the limitations of the first agreement. If they do so, however, unless they assumed the obligations of the first contract, the remedy is a claim for infringement.}

^{Illustration: Producer transfers a copy of a musical work to User, subject to a license that restricts use to home use only. The license terms are presented after delivery of the copy. User can either assent to the license or obtain a refund. It assents. User later transfers the copy to Jones. Jones need not receive a refund right. If Jones uses the music in a commercial context, the license is breached. Producer has contract recourse against User. Producer may also have a copyright claim for use (performance) that was unauthorized.}
 

^{SECTION 2B-113. LEGAL RECOGNITION OF ELECTRONIC RECORDS AND AUTHENTICATIONS. A record or authentication may not be denied legal effect, validity, or enforceability solely on the ground that it is in electronic form.}

^{Committee Action:}

^{a. Reviewed without substantive change. (Nov. 1997)}

^{Definitional Cross References:}

^{"Authentication". Section 2B-102. "Electronic". Section 2B-102. "Record." Section 2B-102.}

^{Reporter's Notes:}

^{This section states a fundamental principle of electronic commerce. It derives from digital signature and electronic signature law in several states. The mere fact that a message or record is electronic does not alter or reduce its legal impact. Of course, this principle is restricted to the scope of Article 2B. It does not deal with instruments, documents of title, or similar applications of electronic commerce. Under Section 2B-103, the subject matter of those other areas is excluded from Article 2B.}
 

^{SECTION 2B-114. COMMERCIAL REASONABLENESS OF ATTRIBUTION PROCEDURE. (a) The commercial reasonableness of an attribution procedure is determined by the court. (b) In making thisa determination about the commercial reasonableness of an attribution procedure, the following rules apply:}

^{(1) An attribution procedure established by law or regulation is commercially reasonable for the purposes for which it was established.}

^{(2) Except as otherwise provided in paragraph (1), commercial reasonableness is determined in light of the purposes of the procedure and the commercial circumstances at the time the parties agree to or adopt the procedure.}

^{(3) A commercially reasonable attribution procedure may require the use of any security devices that are reasonable under the circumstances.}

^{Uniform Law Source: Article 4A-201; 202.}

^{Definitional Cross References:}

^{Attribution procedure, Section 2B-102; Person, Section 2-102.}

^{Reporter's Note:}

^{1. Purpose and Effect of a Commercially Reasonable Attribution Procedure. Attribution procedures are relevant to authentication of electronic records, attributing performance to a party, and allocating risk in reference to alleged errors or changes in a record or message.. If a commercially reasonable attribution procedure is established between persons and followed, enhanced legal recognition is accorded to a message or performance. Conforming to a commercially reasonable attribution procedure for that purpose results in an authentication as a matter of law. In other contexts, if there is a question of who sent the message or performance, compliance with a commercially reasonable attribution procedure to identify a party makes the alleged originator of the message attributable for the message or performance. On the other hand, failure to use a commercially reasonable authentication procedure does not indicate that there is no authentication or that the purported sender is not responsible for the message or performance.}

^{2. Agreement or Adoption. This Article does not dictate the form of a commercially reasonable attribution procedure. Evolving technology and commercial practice make it impractical to attempt to predict future developments and unwise to preclude these developments by a statutory mandate. Instead, the Article relies on the parties to select a procedure. An attribution procedure must be established by agreement or adopted by both parties. A procedure of which one party is not aware, does not qualify. On the other hand, agreement or adoption need not precede the transaction. Parties dealing for the first time may adopt a procedure for authentication of messages. The adopted procedure would have the full force of an attribution procedure if it is commercially reasonable.}

^{3. Commercially Reasonable. Use of an attribution procedure establishes presumptions concerning the authentication, record or message to which the procedure was applied only if the procedures is commercially reasonable. This requirement buffers against over-reaching and protects parties who lack knowledge of technology. The cost of requiring that this standard be met lies in a degree of uncertainty that the parties cannot control by agreement. Yet, it is an important protection for users of these systems. Consider the following:}

^{Illustration: General Motors creates a procedure with franchisees that requires merely that a message contain the franchisee's E-mail address as an identifier. A bad guy uses that system and causes loss of $100,000 in the name of the franchisee. If the contract controls, the franchisee is liable for the loss unless the procedure is commercially unreasonable. It would most likely be unreasonable in this case.}

^{What is a commercially reasonable procedure must take into account the cost relative to value of transactions. This is implicit in the idea of commercial reasonableness. How one gauges commercial reasonableness obviously depends on a variety of factors, including the agreement, the then current technology, the types of transactions affected by the procedure and other variables.}

^{The procedure may include various approaches, including algorithms, codes, identifying words or numbers, encryption, callback procedures or any other reasonable security device.}
 

^{SECTION 2B-115. EFFECT OF REQUIRING A COMMERCIALLY UNREASONABLE ATTRIBUTION PROCEDURE.}

^{(a) Subject to subsection (b) and Section 2B-116, as between parties to an attribution procedure, a party that requires use of an attribution procedure that is not commercially reasonable is responsible for losses caused by reasonable reliance on the procedure in a transaction for which the procedure was required.}

^{(b) The responsibility of the a party that requires use of the commercially unreasonable procedure is limited to losses in the nature of reliance or restitution. The party's responsibility does not allow a double recovery for the same loss and does not extend to:}

^{(1) loss of expected benefit, including consequential damages;}

^{(2) losses that could have been prevented by the exercise of reasonable care by the other party; or}

^{(3) a loss, the risk of which was assumed by the other party.}

^{(c) A person does not require a procedure under subsection (a) if it makes commercially reasonable alternative procedures available to the other person.}

^{Reporter's Notes:}

^{Notes to this Draft:}

^{This Section was revised after consultation with the Electronic Transactions Act (ETA) Reporter and Committee chair and in light of the discussion at the February 1998 meeting. The ETA draft presents an alternative approach:}

^{"(a) If a person requires, as a condition of entering into a transaction with another person, that the parties use a security procedure that is not commercially reasonable, the following rules apply:}

^{(1) If the other party reasonably relies to its detriment on an electronic record or electronic signature purporting to be that of the requiring party, the requiring party is estopped to deny the source or informational integrity of the electronic record or authenticity of the electronic signature to which the procedure was applied.}

^{(2) If the requiring party receives an electronic record or electronic signature purporting to be that of the other party, the requiring party is not entitled to the benefit of any presumption that may arise under [other sections].}

^{(b) A person does not require a security procedure under subsection (a) if it makes commercially reasonable alternative security procedures available to the other party."}

^{General Notes:}

^{1. General Policy and Scope. This section deals with allocation of loss in cases where one party (either the licensor or the licensee) requires use of an attribution procedure that is commercially unreasonable and use of that procedure causes a loss either because of undetected errors in transmissions or records or because of third party activity in the nature of fraud or otherwise. The Section does not cover all cases in which such loss might occur, but deals only with circumstances in which a party is in a position to and does in fact require use of the commercially unreasonable procedure. A procedure negotiated or jointly selected by the parties, selected from among alternatives that include a commercially reasonable option, or mutually designed, does not fall within this Section. Responsibility for loss in such cases lies outside this article.}

^{a. Reliance Loss. The basic premise is that, all things being otherwise equal, loss in the nature of reliance or restitution should fall on the party that required use of the procedure that caused the loss. This is a contract statute, not a general regulatory or tort liability statute and, thus, the losses to which it applies are limited to situations in which loss results from use of the procedure in a transaction to which the requirement applies.}

^{b. Transactions Not Affected. Additionally, since this entire article deals with licensing and related transactions, the losses are confined to such transactions. The Section does not apply to credit card, funds transfer or other types of transactions in which attribution procedures are used, but which fall outside the scope of Article 2B and, in many cases, are at least partially regulated by federal or other state laws. Thus, for example, use of an identifying code for a credit card payment is not governed by this section. However, if a contracting party requires that the other party use a credit card number as an attribution procedure, credit card law applies as to the payment transaction, but as to the contractual relationship, Section 2B-115 applies if the procedure is regarded as commercially reasonable and this Section applies if the procedure was "required" and is commercially unreasonable.}

^{c. Relationship to Reasonable Procedures. The loss allocation principle expressed in this Section contrasts to the principles stated in Section 2B-116 and 2B-117. Those sections provide the parties with presumptions about the authenticity and accuracy of the electronic records to which the procedures are applied. The presumptions are potentially significant in litigation and planning transactions. As expressed there, the presumptions arise only if the procedure is commercially reasonable. Thus, a commercially reasonable procedure vitiates the presumption, leaving the parties to general proof of content and source of the record. In addition, if the procedure comes within this section, the use of an unreasonable procedure may have an impact on loss allocation.}

^{2. Party Responsible. The section refers to the person that required the procedure as being responsible for the loss. In modern commerce, the person making such requirement is in some cases the licensor and in some cases the licensee. The principle used here applies in either direction. The procedure must, however, be one that the parties have agreed to or adopted. That elements is implicit in the definition of what constitutes an "attribution procedure."}

^{The Section does not necessarily create an affirmative right of recovery. In some cases, the Section merely denies the relying party an ability to recover from the other person. Thus, for example, a licensor acting pursuant to a commercially unreasonable attribution procedure, might ship information product to a third party that used the inadequacies of the procedure to dupe the licensor into believing that the party requesting shipment was the named licensee. If the licensor had required the procedure and the licensee had agreed to it for transactions of this type, this Section allows the licensee to resist any effort by the licensor to charge the licensee for the loss or the contract price. The licensor remains responsible. On the other hand, if the licensee had required the procedure and the licensor agreed to it, the licensor may recover against the licensee for the losses in the nature of reliance. It cannot, of course, in this case seek recovery under contract theory since the licensee did not make the purchase request..}

^{3. Type of Loss, The loss to which this Section applies is limited in several ways.}

^{The loss must, initially, come from use of the procedure. This excludes losses that flow from other, perhaps parallel causes. Thus, if an identifier is unreasonable, but the party actually did engage in the transaction, but suffered loss due to a breach of contract, this section does not apply. The losses addressed here are in the nature of loss from misattribution of who sent a message, tampering with the content of a message, or errors caused by transmission or other factors.}

^{Second, the Section only applies to losses incurred in transactions to which the requirement and use of the procedure between the parties applies. It does not address the difficult problem of liability for the situation where a third party wrongdoer obtains social security or other important identifies of an innocent third party and uses them to fraudulently obtain goods and services from numerous vendors. That issue lies in the realm of tort law, criminal law, and other forms of regulation that are just now beginning to develop. Of course, to the extent that these other sources of law preempt or preclude operation of this section, ordinary preemption rules apply.}

^{Third, the losses do not include lost benefits of the transactional relationship. They are limited to reliance and restitution recovery. In some cases, however, the existence and non-performance of a contractual relationship may allow expectations recovery. The basic premise here, however, is limited to avoiding a shift of losses through a required procedure that fails to protect the interests of the parties.}

^{The emphasis on reliance recovery, of course, places further limitations on the recovery. These are stated in subsection (b)(2) based on a lack of reasonable care and an assumption of risk.}

^{4. Illustrations. The following suggest some applications of this Section.}

^{a. False Identity Cases: No Contract. In many cases where a loss is suffered by a party because a third party fraudulently used an attribution identifier and order information claiming to the appropriate party, this Section produces results that are parallel to the results that could be inferred under other attribution rules of this Article.}

^{Illustration 1. S (the vendor) required and M agreed to a procedure for identifying M in placing orders with S. Thief misuses this procedure and, purporting to be M, obtains a $10,000 electronic encyclopedia from S. S, believing that M placed the order, seeks the license fee from M. Under the general attribution sections, if the procedure is not commercially reasonable, there is no presumption that the sender was M and, since M can prove it was not the sender, it has no liability. Under this section, the required attribution procedure caused a loss, but S is responsible for that loss. It cannot shift loss to M.}

^{In some false identity cases, however, the party demanding the use of the attribution procedure may be responsible for affirmative losses.}

^{Illustration 2. M (the purchaser) requires L to use a procedure under which M identifies itself when placing orders with L. Thief uses the procedure to fraudulently obtain a $10,000 software system from L. Under this Section, since M required use of the procedure and it was commercially unreasonable, the loss suffered may be recovered from M. The amount of loss is measured by reliance, not lost profit. In essence, the recovery is the cost (not license price) of the software shipped to the thief plus related expenses.}

^{b. True Contract: Errors in Performance. In cases where an actual contract exists between the parties and the error or fraud allowed by the unreasonable attribution procedure relates to performance, it will often be the case that contract remedies provide the primary recovery and, under the principle that precludes double recovery, the reliance loss allocation of this does not create affirmative recovery. It nevertheless confirms the placement of ultimate losses in such cases.}

^{Illustration 3. L (licensor) and M (licensee) agree to a $10,000 commercial software license. L requires M to agree to a procedure for sending instructions as to where to transmit the software. M pays the license fee. A third party causes misdirection of the copy. M demands its software. Under this Section, L bears responsibility for reliance or restitution loss. M can recover the fee it paid. M can enforce the unperformed contract and, in the event of breach, can recover damages as appropriate.}

^{Illustration 4. In the Illustration 3, assume that M did in fact direct the transmission of the software, but now denies that it did so. If the procedure had been reasonable, L would have the advantage of a presumption of attribution of the message. Since it was not, L must prove that M did send the message without the benefit of a presumption. If it can do so, it can enforce the contract. Under this section, M suffered no loss due to the attribution procedure.}

^{c. Errors in the Offer and Acceptance. The problem of garbled, misrecorded or otherwise mistaken offers and acceptances is one of long-standing in commercial practice. This Section provides a method of allocating loss in such cases based on the reasonableness of the required procedure and independent of asking arcane questions about what terms were accepted and when,.}

^{Illustration 4. M requires that L use an unreasonable attribution procedure for transmitting orders and acceptances. L agrees and adopts the procedure. It places an order for ten software widgets. Because the procedure is flawed, the message arrives at M requesting 100 software widgets. M ships on that basis. L desires to ship the ninety excess widgets back to M and not pay. One could argue that no contract exists because of mistake. Alternatively, a contract might be formed on the offer as sent or as received. Case law support exists for either result. This section, however, focuses on reliance loss. Either L or M could be said to suffer loss because of reliance on the procedure. Since M required it, M bears responsibility for the loss. It cannot demand the price for the ninety widgets unless, of course, L decides to accept and retain them. If L had required the use of the procedure, it would be responsible for reliance losses and restitution.}
 

^{SECTION 2B-116. DETERMINING TO WHOM AN ELECTRONIC AUTHENTICATION, MESSAGE, RECORD, OR PERFORMANCE IS SHOULD BE ATTRIBUTED.}

^{(a) Subject to subsection (b), an electronic authentication, message, record, or performance is attributable to a person if:}

^{(1) it was in fact the action of that person, a person authorized by it, or the person's electronic agent; or}

^{(2) the other person, in accordance with a commercially reasonable attribution procedure for identifying a person, in good faith reasonably concluded that it was an act of the other person, a person authorized by it, or the person's electronic agent.}

^{(b) Attribution under subsection (a) (2) has the effect provided for by the law, regulation, or agreement regarding the attribution procedure and, in the absence of terms about such the effect, creates a presumption that the authentication, message, record, or performance was that of the person to which it is attributed.}

^{(c) A person is liable for losses in the nature of reliance, if the losses occur because:}

^{(1) the person failed to exercise reasonable care;}

^{(2) the relying person reasonably relied on the belief that the other person was the source of an electronic authentication, message, record, or performance;}

^{(3) that reliance resulted from acts of a third person that obtained access numbers, codes, computer programs, or the like from a source under the control of the person that failed to exercise reasonable care; and}

^{(4) the use of the access numbers, codes, computer programs, or the like created the appearance that it came from that person.}

^{Uniform Law Source: 4A-202; 4A-205; UNCITRAL Model Law.}

^{Definitional Cross Reference.}

^{"Computer program". Section 2B-102. "Electronic agent". Section 2B-102. "Electronic message". Section 2B-102. "Good faith". Section 2B-102. "Party". Section 1-201. "Person". Section 1-201. "Presumption". Section 1-201. "Record". Section 2B-102.}

^{Committee Votes:}

^{a. Reasonable care standard in (a)(3) selected by consensus.}

^{b. Reviewed without change. (Nov. 1997).}

^{Reporter's Notes:}

^{1. Attribution to a Person. Attribution to a person means that the electronic record is treated in law as having come from that person. The section thus deals with risk allocation highly relevant to the anonymous nature of electronic commerce. The section balances goals of enabling electronic commerce in an open environment (as contrasted to the closed systems such as funds transfer and credit card transactions), while stating reasonable standards to apportion risk in that open system. The rules here do not apply to funds transfers, bank accounts, credit card liability, or other subject matter outside Article 2B.}

^{2. Act of the Person or Electronic Agent. There are three circumstances under which a message or action is attributed to a party. The first (subsection (a)(1)) simply makes a person responsible for the record or performance if the person or its agent actually performed or actually created the record. General agency law applies where the issues deal with human agents. In addition, a person is responsible for the actions of its electronic agent. An "electronic agent" is an automated system that responds to or initiates actions without human review and is selected or adopted by a person for that purpose. Having opted to use an automated system, the person is held responsible for its operations. The idea of an electronic agent does not exist under current law, but has importance in electronic contracting for information because of the increasing use of preprogrammed software to acquire information assets. The principle underlying this concept is that a person who created and set out the automated system has responsibility for its conduct. The rules here parallel the UNCITRAL Model Law. Article 13 provides that as between the parties, a message is deemed that of the originator if sent "by an information system program by or on behalf of the originator to operate automatically."}

^{3. Use of Attribution Procedure. Subsection (a)(2) focuses on attribution procedures for authentication. It makes a message attributable to a person if the other party used the procedure and reached the conclusion that it came from the other person because of that use. This establishes a level of certainty when the parties adopt a commercially reasonable system of identification. Attribution in this form creates a presumption that it was the party identified who in fact sent the message, created the record, or engaged in the performance or authentication. The presumption is rebuttable.}

^{4. Duty of Care. Subsection (c) deals with when can a person be held accountable for messages not sent by it and not within an attribution procedure, but on which the other party relied. The underlying loss allocation principle recognizes a limited concept of protected reliance where the cause of the reliance lies in a lack of reasonable care by the person to whom the message is attributed. Since this is reliance-based liability, if the message, performance or context clearly indicates that the indicated source is incorrect or gives reason to doubt the source, reliance may not be protected. Where the reliance is reasonable, the receiving party has a protected right under this article if a lack of reasonable care lies at the heart of the actions that caused the reliance..}

^{Current law uses several different approaches to analogous problems: 1) in the telephone system, a person is responsible for any charges incurred for long distance calls from its equipment and using its number; fault and authorization are irrelevant; 2) credit card and electronic funds regulations limit liability for a consumer for unauthorized use of its card or number; 3) in commercial funds transfers, the presence or absence of a "security procedure" conditions risk; 4) in check collections, an absolute liability rule is imposed on many recipients of fraudulent instruments unless the party whose signature was forged negligently contributed to the fraud.}

^{The Drafting Committee elected the intermediate position reflected in this Draft. The position draws a balance between limiting the risk exposure of alleged senders and protecting reliance interests of recipients of messages. Unlike in credit card and funds transfer systems, one cannot safely predict the relative nature of the sending and receiving parties, their economic strength, or technological sophistication. Individuals with limited resources are as likely to be on either side of a transaction in electronic commerce as are large corporations. Because of this, the rule creating a dollar cap for consumer risk for credit cards and funds transfers is not viable in this open system, heterogeneous environment. In cases where the electronic process involves transactions between large businesses and consumers, allocation of the risk of fraud or false attribution developed in a way that responds to the better ability of the system operator to spread loss than the consumer. Our context requires a more general structure that goes beyond consumer issues; the problems will not routinely entail consumer protection questions or, even, a licensor with better ability to spread loss. Nor can the loss be placed on the operator of the system as a means of spreading loss since unlike in some other context, the messages here entail in a publicly run system.}

^{One alternative would use communications law rules for allocation of risk. In telephone systems, the proprietor of a system (telephone) is responsible for all calls using that number, even if produced by a hacker engaged in entirely illegal and unauthorized access. The loss allocation there, of course, is between the owner of the system and the system operator. Here, however, it is between two other parties.}
 

^{SECTION 2B-117. ATTRIBUTION PROCEDURE FOR DETECTION OF CHANGES AND ERRORS:; EFFECT OF USE. If the parties use a commercially reasonable attribution procedure to detect errors or changes in the content of an electronic record, as between the parties, the following rules apply:}

^{(1) An electronic authentication, message, record, or performance that the attribution procedure shows to have been unaltered since a point in time is presumed to have been unaltered since that time.}

^{(2) An electronic authentication, message, record, or performance created or sent pursuant to the attribution procedure is presumed to have the content intended by the person creating or sending it as to portions to which the procedure applies.}

^{(3) If the sender complied with the attribution procedure, but the other party did not, and the change or error would have been detected had the other party also complied, the sender is not bound by the error or change.}

^{Definitional Cross Reference.}

^{"Consumer". Section 2B-102. "Electronic message". Section 2B-102. "Good faith". Section 2B-102. "Information". Section 2B-102. "Information processing system". Section 2B-102. "Notifies". Section 1-201. "Party". Section 1-201. "Person". Section 1-201. "Presumed." Section 1-201. "Receive". Section 2B-102. "Record". Section 2B-102. "Value". Section 1-201.}

^{Committee Action:}

^{a. Reviewed without change. (Nov. 1997); (Feb. 1998)}

^{Reporter's Notes:}

^{1. This Section deals with the effect of commercially reasonable attribution procedures dealing with the detection of error or of changes in the content of electronic records. Use of such procedures creates a presumption regarding the accuracy or unchanged nature of the record.. Other presumptions may be appropriate depending on the nature of the procedure and this section does not foreclose their development by courts. The underlying principle is that, if the parties agree to or adopt a commercially reasonable procedure, records created or transferred in compliance with that procedure are entitled to enhanced legal recognition. The presumption is rebuttable and is conditioned on the procedure used qualifying as a commercially reasonable attribution procedure. This means not only that the procedure was commercially reasonable, but that the procedure was agreed to or adopted by the parties.. The language here comes largely from pending Illinois Digital Signature statute which contains more detailed provisions regarding secure electronic records. Since the principle enacted here hinges on agreement and general considerations of commercial reasonableness, the concept is technologically neutral.}

^{2. The presumptions are limited to issues to which the error detection procedure applies. Proof or disproof of alleged errors in other aspects of an electronic transaction are, with the exception of consumer cases, left to law outside this Article. The common law of mistake obviously applies as does the case law developed for dealing with the legal consequences of garbled transmissions or records that have been allegedly tampered with.}

^{3. The presumptions here not only reflect a deference to the choices of the parties, if commercially reasonable, but the greater certainty available to parties through a commercially reasonable procedure also provides an incentive for commercially reasonable procedures to be developed and deployed in commerce. The development of Internet and similar technology for commerce will occur through numerous, private commercial choices that establish a viable marketplace. The provisions of this Section provide at least limited support for that development.}

^{4. Subsection (a)(3) deals in a limited way with the effect of a failure of one party to conform to an existing attribution procedure that is commercially reasonable (the effect of a failure to comply with a procedure that is not commercially reasonable is treated in Section 2B-114). Where the sender complies, but the recipient does not, the sender is absolved from any liability under contract law for an error that would have been detected through compliance.}
 

^{SECTION 2B-118. ELECTRONIC ERROR: CONSUMER DEFENSES.}

^{(a) In this section, "electronic error" means an error created by an information processing system, by electronic transmission, or by a consumer in an electronic system that did not reasonably allow for correction or avoidance of such errors.}

^{(b) In an automated transaction for providing information to a consumer, the consumer is not responsible for an electronic message that the consumer did not intend and which was caused by an electronic error if the consumer:}

^{(1) promptly on the earlier of learning of error or of the other party's reliance on the message:}

^{(A) in good faith notifies the other party of the electronic error and that the consumer did not intend the original message; and}

^{(B) delivers all copies of any information it receives to the other party or delivers or destroys all copies pursuant to any reasonable instructions received from the other party; and}

^{(2) has not used or received a benefit from the information or informational property rights or caused the information or benefit to be made available to a third party.}

^{Prior Uniform Law: None.}

^{Committee Action:}

^{Adopted the section. Vote: 10 - 0 (Feb. 1998).}

^{Definitional Cross Reference.}

^{"Copy". Section 2B-102. "Electronic agent". Section 2B-102. "Good Faith": Section 2B-102. "Information". Section 2B-102. "Notify": Section 2B-201. "Party": Section 1-201. "Record". Section 2B-102.}

^{Reporter's Notes:}

^{1. Nature of the Issue. Some observers of developing electronic commerce express concern about the capability of errors occurring in the automated systems to impose unexpected losses on persons who are not sophisticated in their operation. In contract creation and performance, common law principles about mistakes provide the basic framework and fundamental principles against which such problems will be resolved. This Section provides a specific application of those principles to establish a major new protection for consumers tailored for automated transactions. The defense to contract formation created here provides a simple method for a consumer to contest errors in his or her transmissions to a third party. Under common law, in many instances, in a unilateral mistake, the party making that error is liable for its consequences. This Section enables a consumer to avoid the consequences of a unilateral mistake by acting promptly to return copies and correct the mistake without receiving value from the other party's reliance on the error.}

^{2. Policy of the Defense. The defense is grounded in equity principles that allow a party to avoid the adverse consequences of its error if the error causes no detrimental effect on another party and does not produce a benefit for the person making the mistake. Of course, there will be unavoidable detrimental effects on the party who receives an erroneous message (e.g., costs of filling, handling and delivering erroneous orders), so courts should apply this rule with care even though the consumer pays the costs of returning the mistakenly ordered product. The basic assumption that there is no detrimental effect on the person who did not cause the error is particularly suspect if manufacturing, production, or other costs are significant. Also, a vendor who fills erroneous orders in a just-in-time inventory system can incur considerable costs for products such as computers or cars; where the product is information, the premise is that the lesser cost of manufacturing justifies the rule.}

^{This section does not create a right to rescind a contract after agreed to performance is received because a consumer changes its mind regarding whether it desires that performance. The section deals solely with errors in the creation of a contract. It is not sufficient to establish the defense that the consumer reconsidered its order. Rather, the standard requires that there was no intent to make the order or, at least, to order under the terms transmitted in error, and that an electronic error be the cause of the problem.}

^{The Section creates an error resolution system, allowing immediate return to place the other party in the position of having to establish that there was no electronic error.}

^{Illustration 1: Consumer intends to order ten copies of a video game from Jones. In fact, the information processing system records 110. The electronic agent maintaining Jones' site disburses 110 copies. The next morning, Consumer notices the mistake. He sends an E-Mail to Jones describing the problem, offering to immediately return or destroy copies; he does not use the games. Under this section, performing on these offers means that there is no presumption that the contract was for 110 copies. If it desires to enforce the apparent contract, Jones must prove that there was no error.}

^{Illustration 2: Same facts, except that Jones' system before shipping sends a confirmation, asking Consumer to confirm that it ordered 110 games. Consumer confirms 110 copies. This section no longer applies. If Consumer sees the confirmation request and does not respond, the section also does not apply. In either case, the system reasonably allowed for correction of the error.}
 

^{SECTION 2B-119. AUTHENTICATION PROOF; ELECTRONIC AGENT OPERATIONS.}

^{(a) Operations of an electronic agent constitute the authentication or manifestation of assent of a party if the party used, selected, or programmed the electronic agent for the purpose of achieving results of that type.}

^{(b) Compliance with a commercially reasonable attribution procedure for authenticating a record authenticates the record as a matter of law. Otherwise, authentication may be proven in any manner, including by showing that a procedure existed by which a party or an electronic agent must have engaged in conduct or operations that authenticated the record or term in order to proceed further in the use it made of the information or informational property rights.}

^{(c) Unless the circumstances indicate otherwise, authentication is deemed to have been done with the intent to establish the party's identity, its adoption or acceptance of the record or term, and acceptance of the contract, and the integrity of the records or terms as of the time of the authentication.}

^{Definitional Cross Reference.}

^{"Contract". Section 1-201. "Electronic agent". Section 2B-102. "Electronic message". Section 2B-102. "Information". Section 2B-102. "Notice". Section 1-201. "Party." Section 1-201. "Receive". Section 2B-102.}

^{Reporter's Notes:}

^{1. Subsection (a) contains a specific application of the general principle that actions of an electronic agent bind the party that selected and deployed the agent for that purpose. An electronic agent is an automated system of response or originating messages or performances. A party that intend to use such systems is bound by its operations. This includes where the operations yield authentication of a record.}

^{2. Under subsection (b), compliance with an attribution procedure for that purpose removes fact questions about whether an authentication occurred. The procedure exists and is used because of an affirmative choice by the party. In addition, the stated effect occurs only if the procedure is commercially reasonable Section 2B-102. Commercial reasonableness is an element of the definition of an authentication procedure.}

^{3. In the absence of use of an authentication procedure, proof of an authentication can occur in any manner. Included in the methods of proving authentication is proof that shows that a process exists that required an authentication in order to enable an automated system to proceed further in use or other operations. This rule reflect on-line and on-screen methodologies that are increasingly common and removes doubt about whether that type of proof is sufficient.}
 

^{SECTION 2B-120. ELECTRONIC MESSAGES: TIMING OF CONTRACT; EFFECTIVENESS OF MESSAGE; ACKNOWLEDGING MESSAGES.}

^{(a) Except as otherwise provided in subsection (b), an electronic message is effective when received even if no individual is aware of its receipt. If an electronic message initiated by a party or an electronic agent evokes an electronic message in response, a contract exists:}

^{(1) when a response signifying acceptance is received; or}

^{(2) if the response consists of furnishing the information or access to the information, when the information or notice of access is received or use is enabled, unless the originating message required acceptance in a different manner.}

^{(b) If the originator of an electronic message requests or has agreed with the addressee that receipt be acknowledged electronically, the following rules apply:}

^{(1) A message expressly conditioned on receipt of an acknowledgment does not bind the originator until acknowledgment is received and the message is no longer effective if acknowledgment is not received within a reasonable time after the message was sent.}

^{(2) If the message was not expressly conditioned on acknowledgment and acknowledgment is not received within the time specified for receipt or, in the absence of a specified time, within a reasonable time after the message was sent, the originator on notice to the other party may:}

^{(A) treat the message as no longer effective; or}

^{(B) specify a further time for acknowledgment and, if acknowledgment is not received within that time, treat the message as expired and ineffective.}

^{(c) Receipt of acknowledgment creates a presumption that the message was received but does not in itself establish that the content sent corresponds to the content received.}

^{Committee Vote:}

^{a. Approved current subsection (a) in principle.}

^{b. Rejected motion to delete section containing current subsection (b). Vote: 5-6. (February, 1997)}

^{c. Reviewed without substantive change. (April, 1997) (November, 1997)}

^{Reporter's Notes:}

^{1. Subsection (a) adopts a time of receipt rule; rejecting the mail box rule for electronic messages. This rule is also followed in Article 4A (§§ 4A-406, 104(a)).}

^{2. This section does not deal with attribution or liability questions. Questions of attribution are treated in Sections 2B-111-118. For example: if a "response" purports to be from ABC Corp., the message, while effective at a given point in time under this section, does not bind ABC unless the message can be attributed to it under agency law or attribution rules in this Article or common law.}

^{3. In Article 2B, a contract can exist even if no human being reviews or reacts to the electronic message or the information delivered. This adapts traditional theories of consent and agreement to electronic commerce. In electronic transactions, automated systems can send and react to messages without human intervention; when parties choose to use these systems, there is no reason not to allow contract formation. A contract rule that demands direct human assent would inject an inefficient and error prone element in the modern electronic format.}

^{4. Subsection (b) and (c) deal with electronic acknowledgments, providing default rules on the meaning of requiring or requesting acknowledgment. The default rules are limited to acknowledgment of electronic messages. There, the effect of a request for acknowledgment depends on whether the request made the message conditional on acknowledgment or merely requested acknowledge. As a basic principle, the message sender can control the legal effect of its messages if it does so expressly. Acknowledgment, of course, is not necessarily an acceptance; although an acceptance can and often will serve as sufficient recognition of the message to also as acknowledgment. Acknowledgment confirms receipt. In modern electronic systems, this often occurs automatically on receipt of the electronic message in the recipient's system.}

^{5. This section deals with functional acknowledgments. It does not create presumptions other than that an acknowledgment indicates that the message was received. Questions about accuracy of the received message and about time of receipt, content and other issues are not treated. Of course, by agreement the parties can extend this concept to cover such issues.}
 

^{PART 2}

^{FORMATION AND TERMS}

^{SECTION 2B-201. FORMAL REQUIREMENTS.}

^{(a) Except as otherwise provided in this section, an agreement is not enforceable by way of action or defense unless:}

^{(1) there is a record authenticated by the party against which enforcement is sought sufficient to indicate that a contract has been made and reasonably to identify the copies or subject matter of the agreement; or}

^{(2) the agreement:}

^{(A) requires no or nominal consideration for the rights acquired;}

^{(B) requires payment of less than [$20,000], excluding payments for options to renew or buy; or}

^{(C) is a license for an agreed duration of less than [90 days][one year].}

^{(b) A record is sufficient under subsection (a)(2) even if it omits or incorrectly states a term, but the contract is not enforceable beyond the copies or subject matter shown in the record.}

^{(c) An agreement that does not satisfy the requirements of subsection (a), but which is valid and enforceable in all other respects, is enforceable to the extent that:}

^{(1) a performance has been tendered or the information has been made available by one party and was accepted or accessed by the other; or}

^{(2) the party against which enforcement is sought admits in its pleading or testimony or otherwise in court that a contract was made, but the agreement is not enforceable under this provision beyond the copies or subject matter admitted.}

^{(d) Between merchants, if within a reasonable time a record in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, the record satisfies the requirements of subsection (a) against the party receiving it unless notice of objection to its contents is given in a record within 10 days after the confirming record is received.}

^{(e) The rules in Section 2B-307 may not be varied except by a record that is:}

^{(1) sufficient to indicate that a contract has been made; and}

^{(2) authenticated, or prepared and delivered to the other party, by the party against which enforcement is sought.}

^{(f) The parties may waive the requirements of this section as to future transactions by an agreement that is enforceable under this section.}

^{Uniform Law Source: Section 2A-201. Revised.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-201. "Authenticate": Section 2B-102. "Contract": Section 2B-102. "Court": Section 2B-102. "License": Section 2B-102. "Party": Section 1-201. "Record": Section 2B-102. "Rights": Section 1-201. "Term": Section 1-201. "Value": Section 1-201.}

^{Reporter's Notes:}

^{This section was redrafted in light of Committee discussion and a memorandum from a subgroup of the committee. As drafted, it proposed a $20,000 dollar figure, based on a reference to the index-increased estimate of the Article 1 statute of frauds referenced in the subgroup report. It proposes a 90 day short term license exclusion. The Draft does not recommend adopting the idea of a "mass market access" contract because the concept adds significant complexity without clear justification in policy. An attempt was made to draft an exception for information put into a product but, to the extent this is not covered already by (c)(1), no such provision was recommended since, unlike other exceptions, that exception would become effective on the unilateral action of the person arguing that a contract exists and would gut the fraud-prevention role of the statute.}

^{Committee Votes:}

^{1. In Article 2 at the Annual Meeting, repeal of the statute of frauds sustained by a narrow vote (65-52). Subsequently, the Article 2 drafting committee voted to include a statute of frauds.}

^{2. Voted to retain a statute of frauds. Vote: 10 -4 (September, 1996)}

^{3. Rejected a motion to remove the dollar limitation in then subsection (e)(1). Vote: 5 - 8 (September, 1996)}

^{4. Rejected motion to exclude mass market licenses from statute of frauds. (September, 1996)}

^{5. Consensus to move former (f) on enforceability without filing into another section in part 5.}

^{6. At the 1997 Annual Meeting, the sense of the house motion passed to harmonize the three articles with respect to the judicial denial requirement. Passed}

^{7. At the 1997 Annual Meeting, a sense of the house motion to harmonize by deleting the "denial of agreement" exception was rejected.}

^{8. After extended discussion, the Committee did not include a requirement that the party asserting the statute plead the non-existence of a contract. (September, 1997)}

^{9. Deleted rule allowing manifest assent to satisfy statute of frauds. Vote: 10 - 0 (Feb. 1998)}

^{10. Adopted a motion to reset dollar limit and expand length exclusion to one year. Vote: 6- 4.}

^{Reporter's Notes:}

^{1. General Policy and Background. A statute of frauds provides important protections in commerce focused on intangible subject matter. This is true because of the character of the subject matter, the threat of infringement, and the split interests involved in a license with ownership of intellectual property rights in one party while rights or privileges to use or to possess a copy vest in another party. These considerations augment arguments that propose that providing some protection against fraudulent practices and unfounded claims justify the cost of the statute.}

^{Current law imposes a statute of frauds in all Article 2 and 2A transactions as well as under the law of forty-seven states for transactions outside the UCC. Restatement (Second) of Contracts ch. 5, Statutory Note, at 282 (1979). The rules for compliance and scope vary. Copyright law requires a writing for an enforceable transfer of a copyright. 17 U.S.C. § 204. A similar rule applies for patents. 35 U.S.C. § 261. A transfer of property rights occurs when there is an "assignment" or an "exclusive license." The federal writing requirement does not apply to rights in data or to non-exclusive licenses. However, in copyright law, a nonexclusive license that is not in writing may lose priority to a subsequent transfer of the copyright.}

^{2. Basic Rule: Subject Matter and Value. The requirements of the statute must be tailored to the subject matter and transactions involved. Article 2B focuses on a core requirement that the record, when required, must reasonably describe the subject matter and copies involved in the contract. This leaves significant elements of scope of a license not required in the required documentation. Disputes about these other elements of scope, however, may indicate that no contract exists. See Section 2B-202. Obviously, if not contained in the record and not subject to dispute, the remaining elements of scope must be proven by parol evidence, as must other terms of the agreement.}

^{3. Basic Rule: Transactions Covered. A record is required only if the transaction requires payments in excess of $20,000 and is a license whose duration exceed ninety days.}

^{The dollar figure applies to required or fixed payments, not to potential payments. The $20,000 amount excludes from coverage the large number of small value transactions which in ordinary practice frequently do not entail contractual formalities and do not present the same level of risk in the event a fraudulent claim is made. It compares to the $5000 limitation in current Article 1, a $500 limit in current Article 2, and a $1,000 limit in Article 2A.}

^{Illustration 1: Booker acquires releases from various parties to enable completion and publication of its books. The releases are often not acquired for any payments to the releasing party. This section allows enforcement without a record because total payments were less than $20,000, i.e., no payments.}

^{In addition to the dollar limitation, a contract is enforceable if the license has a duration of less than ninety days [or one year]. This is a partial reflection of the general "one year" rule found in common law rules about the statute of frauds. In context of information transfers of the various types encountered in Article 2B, a one year provision is too long and the ninety day rule is the preferred alternative to cover truly short term licenses.}

^{In reference to both the $20,000 and the ninety day rules, the reference is to what the contract specifically requires. Thus, an indefinite term contract which can be terminated at will does not require a writing since the term is not in excess of 90 days [one year]. A contract calling for royalty payments whose value entirely hinges on the success of a product does not exceed the $20,000 amount.}

^{4. Basic Rule: Record and Assent. There is no requirement that the record be retained. Obviously, on questions of proof, retaining a record of a contract is good practice, but this Act merely requires that the record exist at one point in time. In electronic systems, a "record" requires that information be in a form from which it can be perceived. This section does not take a position on how long the information must be in this form. In copyright law, the cases do not impose a minimum time period, but do distinguish between a copy and an ephemeral manifestation of information. That distinction carries forward into Article 2B.}

^{The record must be authenticated by the party to be bound. The basic theme of a statute of frauds is that there be a record that documents the existence of a contract. A party can prove prior existence of an authenticated record by showing that a procedure exists by which an authenticated record must necessarily have been made in order for the party to have proceeded in use of the information or another activity.}

^{5. Transactional Exceptions: Performance and Admissions. There are several circumstances in which the requirements of subsection (a) are moot because of other events in the transaction or the litigation. Two are described in subsection (c). The first, which is a variation of current Article 2, obviates the requirements of the statute of frauds to the extent that performance has been offered and accepted. This event adequately documents the existence of the contract to the extent of the performance and the minimal record required under the statute is not necessary. The second, also derived from Article 2, supplants the statutory requirements to the extent a person admits the existence of the contract in a sworn statement in connection with litigation. Here, again, the statement confirms the existence of the contract and supplants the writing requirement.}

^{6. Transactional Exceptions: Confirming Memoranda. As in Article 2, this Section provides that, as between merchants, confirming memoranda satisfy the statute if the receiving party does not object within ten days after their receipt. This validates practice in a number of industries where the volume of transactions make it impossible to prepare and receive assent to records as part of making the initial agreement. The confirming memorandum can be in various forms, but it serves to place the other party on notice that a contract has apparently been formed. This memorandum has a validating effect only as between merchants.}

^{7. Transactional Exceptions: Other Agreements. Subsection (f) makes clear that trading partner or similar agreements are enforceable to alter the statute of frauds issue. The parties can agree to conduct their further business without there being a need for additional, authenticated writings. That prior agreement satisfies the statute and the policies of requiring that there be some indication that a contract was formed.}

^{8. Other Rules. The statute of fraud provisions here supplant all other existing statute of fraud provisions pertaining to Article 2B subject matter. Thus, the one year of performance rule found in many state common law rules does not apply to Article 2B transactions.}
 

^{SECTION 2B-202. FORMATION IN GENERAL.}

^{(a) A contract may be made in any manner sufficient to show agreement, including by conduct by both parties or operations of an electronic agent which recognize the existence of a contract.}

^{(b) An agreement sufficient to constitute a contract may be found, even if the time that the agreement was made cannot be determined.}

^{(c) Even if one or more terms are left open or to be agreed upon, or one party reserves the right to modify terms, a contract does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.}

^{(d) Subject to Section 2B-203, in the absence of conduct or performance by both parties to the contrary, no a contract is not formed if there is a material disagreement about a material term, such as scope.}

^{(e) If a term is to be fixed by later agreement and the parties intend not to be bound unless the term is fixed or agreed, a contract is not formed if the term is not fixed or agreed. In that case, each party shall return or, with the consent of the other party, destroy all copies of information and other materials already received. The licensor shall return any portion of the contract fee paid for which performance has not been received and retained by the licensee. The parties remain bound with respect to any obligation of confidentiality or other contractual use restriction.}

^{Uniform Law Source: Section 2-204; 2-305(4); 2A-204.}

^{Definitional Cross Reference:}

^{"Agreement". Section 1-201. "Contract". Section 2B-102. "Contract fee". Section 2B-102. "Electronic agent". Section 2B-102. "Information". Section 2B-102. "Licensee". Section 2B-102. "Licensor". Section 2B-102. "Party". Section 1-201. "Reason to know": Section 2B-102. "Receive". Section 2B-102. "Remedy". Section 1-201. "Term". Section 1-201.}

^{Committee Votes:}

^{a. Committee voted unanimously to adopt the section in principle. (September, 1996)}

^{b. Reviewed in November, 1997 and February 1998.}

^{Reporter's Note:}

^{1. Basic Rule. Subsection (a) conforms to current Article 2 and continues without change the basic policy of recognizing any manner of expression of agreement, oral, written, electronic, or otherwise. It follows the language of current Article 2, but adds an express reference to the operations of electronic agents as a form of establishing or showing agreement.}

^{This Article separates two issues. One deals with whether a contract was formed. The second concerns what terms govern that contract. That issue is discussed in reference to records in Section 2B-207, 2B-208, and 2B-209. In many cases, the creation of a contract and its terms are simultaneous. But in modern commerce, the two are partially separable processes. That is true, for example, where the parties exchange conflicting forms and subsequently perform in a manner that creates a contract.}

^{2. Electronic Agents. Article 2B clarifies that a contract can be formed by the operations of electronic agents. An electronic agent is an automated system selected or used by a person for purposes of achieving contract-related effects such as offer, acceptance, performance, and the like without review by a human being. The fact that the operations of an electronic agent are attributable to a party that selected the agent is confirmed in Section 2B-116.}

^{Giving this effect to an electronic agent can be explained in several ways. One would observe simply that it gives force to a choice made by the party. That is, the party selected and deployed the automated system for a particular purpose and this Article acknowledges and enforces that purpose. Alternatively, it could be described as giving force to a form of indirect acceptance of a contractual relationship. The agent is in effect a mere extension of the person utilizing it and its actions constitute the actions of the individual. Under either approach, the basic theme is that the automated agent's operations bind the agent's creator or user. In article 2B, reference is simply made to the operations of agents as having specified effects in law and as being attributable in law under particular circumstances to a particular party.}

^{3. Open Terms and Layered Transactions. Although recognizing a broad range of indicia of agreement, the standards adopted here require distinguishing preliminary negotiations or incomplete efforts to make a deal that do not create a contract and actions or statements that manifest an intent to be bound even though terms are left open or the time of formation cannot be determined. Ultimately, the distinction here as under current Article 2 from which these rules derive, often requires consideration of all of the circumstances relating to the alleged agreement.}

^{As made clear in subsection (b), the distinction among these situations lies in the question of the existence of an intent to contract as manifested by the language, conduct or operations of the parties or their agents. Given an intent to contract and agreement on terms or performance that gives an adequate basis to grant a remedy, a contract can be formed despite the existence of terms remaining to be agreed and terms that are left open, that is, not addressed by the parties. In the latter case, this Article, general expectations of the trade, and general intellectual property law often provide background rules that flesh out the details of the relationship.}

^{The background rules will not apply if the parties in fact disagree about the term. While disagreement may not always bar creation of a contract, it often indicates no agreement.}

^{The rules of this Section provide the foundation for recognition here, as in existing Article 2, of a layered process of contracting which typifies many areas of commerce and many major contractual relationships. There is no requirement that agreement to all terms occur at one point. Rather, contracts are often formed over a period of time, and contract terms are very often developed and adopted during performance, rather than at the outset. In some cases, these later adopted terms might conceptually be viewed as a modification of an agreement, but it is often the case that the parties expect to arrive a terms and adopt records later in the deal. Rather than a modification, these are more aptly described as a fulfillment of prior expectations or normal practice. This Section recognizes that phenomenon; Section 2B-207 and 2B-208 provide some guidance on its operation with respect to the adoption of terms. If the parties do not intend to be bound unless later terms are agreed to, subsection (e) gives guidance for unwinding the relationship.}

^{4. Material Terms and Scope of a License. Subsection (d) clarifies an obvious principle. It provides simply that a material disagreement about an important (material) term indicates that no intent to enter a contract exists at that time. This rule is important in reference to general formation concepts in an environment where open terms and to be agreed terms are permitted. It is also important in the treatment of an exchange of purported offers and acceptances that contain varying terms. As described in Section 2B-203, a contract can be formed by an acceptance that varies the terms of the offer. Yet, it is clear that not all variances indicate an intent to contract. See White & Summers, The Uniform Commercial Code (1995) (discussion of battle of forms).}

^{In information commerce, the most significant terms of a contract deal with the scope of the license. Scope is a defined term. See Section 2B-102. It goes to the fundamentals of the transaction and what the licensor intends to transfer and what the licensee expects to receive. Indeed, in many respects, in this field of commerce, the contract is the product and scope is the basic product description. Disagreements about this fundamental issue are like ordering a Corvette and confirming purchase of a Volkswagon. They indicate fundamental disagreement about the nature of the contract and its subject matter.}

^{This Section does not require complete and detailed agreement about scope in order to form a contract. It does confirm, however, that material disagreement about scope indicates a lack of an agreement sufficient to form a contract.}
 

^{SECTION 2B-203. OFFER AND ACCEPTANCE; VARYING TERMS; CONDITIONAL OFFERS.}

^{(a) Unless otherwise unambiguously indicated by the language of the offer or the circumstances:}

^{(1) An offer to make a contract invites acceptance in any manner and by any medium reasonable under the circumstances.}

^{(2) An order or other offer for prompt or current delivery invites acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming copies, but a shipment of non-conforming copies is not an acceptance if the party that provides the shipment seasonably notifies the transferee that the shipment is offered only as an accommodation to the other party.}

^{(3) If the beginning of a requested affirmative performance is a reasonable mode of acceptance, an offeror that is not notified of acceptance and has not received the performance within a reasonable time may treat the offer as having lapsed without acceptance.}

^{(b) Except as otherwise provided in subsection (c), a definite and seasonable expression of acceptance may a record may create a binding obligation, even if the acceptance contains terms that vary the terms of the offer. If the offer and acceptance are in records that contain varying terms, the following rules apply:}

^{(1) If the acceptance materially conflicts with a material term of the offer or otherwise materially alters the offer, a no contract is not formed by the purported acceptance unless from all the other circumstances, including the conduct of the parties, it appears that an agreement existed. If a contract is formed under this subsection, the terms of the contract are determined:}

^{(A) under Section 2B-207 or 2B-208, if one party agrees, by manifesting assent or otherwise, to the other party's terms other than by the acceptance that contained the varying terms;}

^{(B) under Section 2B-209 if subparagraph (A) does not apply and the contract is formed by conduct.}

^{(2) If a contract is formed and there is no conflict or alteration to which subsection (b)(1) does not apply,ies, the terms of the contract are those of the offer. Nonmaterial additional terms contained in the acceptance are treated as proposals for additional terms. Between merchants, the proposed nonmaterial additional terms and become part of the contract unless notification of objection to them has already been given or the only if they are not objected to by the offeror gives notice of objection to them within a reasonable time after it receives notice of the proposed termsthem is received.}

^{(c) An offer or acceptance that because of the circumstances or the language is conditional on agreement by the other party to the terms of the offer or acceptance precludes contract formation unless the party agrees, by manifesting assent or otherwise, to its terms. However, if the offer and acceptance are contained in standard forms and one or both are conditional on acceptance of their terms, in this case, the following rules apply:}

^{(1) A party may waive the conditional language in its offer or acceptance by its conduct or otherwise. Such cConditional language in a standard term of the standard form precludes the formation of a contract only if the party proposing the form containing the conditional language acts in a manner consistent with that language, such as by refusing to perform, refusing to permit performance, or refusing to accept the benefits of the contract until the proposed terms are accepted.}

^{(2) If a party agrees, by manifesting assent or otherwise, to an effective conditional offer in a record, it adopts the terms of that offer under Section 2B-207 or 2B-208, as applicable, except as excluded under the law of mistake, fraud or the like because they conflict with the express agreement of the parties.}

^{Uniform Law Source: Section 2A-206; Section 2-206.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-201. "Contract". Section 2B-102. "Information". Section 2B-102. "Notifies". Section 1-201. "Party". Section 1-201. "Receive". Section 2B-102. "Record". Section 2B-102. "Standard form". Section 2B-102. "Term". Section 1-201.}

^{Notes to this Draft:}

^{This Draft was rewritten based on the committee discussion. Because of the confusion about the relationship between sentence 1 and sentence 2 of c(1), the draft proposes deletion of the first sentence. If rewritten along the lines of the committee vote, it would read: "Conditional language in an offer or acceptance may be made ineffective by a party's conduct or otherwise." That would cure confusion some saw as to whether the concept was waiver or estoppel. However, by making that cure, the implication is that the preclusion can be found by conduct other than conduct inconsistent with the condition (inference from the second sentence). That would make a clear change in current law leaving a large amount of uncertainty on a topic in reference to which there is no showing that current decisions create a problem. On balance, it is best to leave the first issue untouched.} 

^{The second sentence of c(1) was edited to make clear that the rule making a conditional term ineffective is limited to terms contained in the boiler plate of the standard form.}

^{Section (c) was also edited to focus the subsections on the battle of forms context, leaving unaffected how courts interpret and enforce conditional offers and acceptances in all other settings.}

^{Committee Vote:}

^{a. Approved in principle. (September, 1996).}

^{b. Delete the reference to standard form in c. Vote: 10 - 0 (March, 1998)}

^{c. Retain the waiver language in c. Vote: 4 - 6 (March, 1998)}

^{d. Provide that conditional language in an offer or acceptance may be rendered ineffective by such party's conduct or otherwise. Vote 8 - 3 (March, 1998)}

^{e. Reconsider the first standard form deletion: adopted 10 -1 (March, 1998)}

^{f. Reinsert standard form language: adopted 6 - 4 (March, 1998)}

^{Reporter's Notes:}

^{1. Basic Premise and Coverage. This Section deals with three recurrent issues involving offer and acceptance in the creation of a contract: general methods of indicating acceptance, acceptances that vary the terms of the offer, and condition offers or acceptances. While the Section provides guidance on determining the terms of a contract if one is formed, this Section must be read in connection with Section 2B-207, 2B-208and 2B-209 for that purpose.}

^{2. Methods of Acceptance and Formation. Subsection (a) conforms to Article 2-206(1). It allows acceptance of an offer by a variety of means, including the exchange of conflicting standard forms and behavior, but also recognizes the right of the offeror to control the terms and nature of the acceptance if it does so unambiguously in the offer itself.}

^{3. Acceptance that Varies the Terms of an Offer. Subsection (b) follows Article 2-207 and rejects the mirror image rule which would permit a binding contract only if the acceptance fully matches the offer. This allows contract formation by offer and acceptance even though the acceptance varies the terms of the offer. That recognition corresponds to commercial practice throughout all areas of commerce. As in Article 2, the varying acceptance must be an acceptance; no contract is formed by a counteroffer unless that counteroffer is accepted.}

^{Contract formation by an acceptances that varies the terms of an offer creates several conceptual and practical issues. The problems are not that the parties have paid inadequate attention to their contract, but that legal concepts must be fitted to a setting in which commercial practice does not necessarily focus on the details of conformance between an offer and an acceptance. In such unstructured settings, the purpose of the rules of contract formation and the rules that determine the terms of an agreement is to provide fair guidance that corresponds to the type of commercial issues that must be resolved in this open or unstructured environment.}

^{3. Varying Terms: Material Variance. One issue, addressed in subsection (b), concerns how courts distinguish cases of a contract formed by a varying acceptance and cases where the variance indicates that no contract can reasonably be said to be formed by the offer and acceptance alone. Consistent with Section 2B-202, material variance, either a conflict with a material term or a material modification of the offer, precludes formation based on the purported acceptance. This reflects the basic policy that a contract requires a meeting of the minds; it is an underlying premise of existing Article 2 rules, although not specifically stated in that statute. The rule protects both parties in that it precludes the formation of a contract when a material disagreement about terms exists. What constitutes a material term or a material alteration of the offer depends on the context, including what the parties might reasonably expect to find in contracts in light of applicable trade use and course of dealing. Comments to Section 2-207 contains a list of what the drafters then thought would be material, but that list may or may not be applicable in modern commerce. In licensing, however, scope is always a material term since it defines the focus of the contract itself.}

^{The rule does not preclude formation of a contract other than through the offer and purported acceptance. It allows contract formation by conduct or through a showing of other circumstances indicating agreement, even if the formal offer and acceptance materially diverge. This is spelled out in subsection (b)(1). The circumstances adequate to show agreement despite material conflict in the records exchanged by the parties as a purported offer and acceptance correspond to the broad concept of contract formation outlined in Section 2B-202. The relevant standard contemplates an inclusive, rather than limited consideration of relevant circumstances.}

^{If a contract is formed based on the circumstances, the important issues center on what terms are applicable to the contract. By hypothesis, the records exchanged as an offer and acceptance materially diverge. Subsection (b)(1) contemplates two distinct approaches to determining the terms of the contract. The first arises if one party agreed to the terms of the other. In that case, the terms, if in a record, are adopted pursuant to and subject to the limitations in Section 2B-207 and 2B-208. The agreement to these terms can be manifested in any manner that is relevant except that it cannot be found solely in the "acceptance" that contains a materially varying term. thus, for example, if the parties exchange records that contain a material conflict, but one calls the other and agrees to either the other party's form or to otherwise delineated terms, the contract forms around those terms.}

^{The second circumstance is where the exchanged offer and acceptance materially conflict, but a contract is formed by conduct. This places the relationship under Section 2B-209. That Section requires a court to apply general interpretation rules to discerning the terms that are part of the contract, unless the cases involves conflicting standard forms. In that latter situation, Section 2B-209 applies a "knock out" rule modeled on current Section 2B-209.}

^{4. Varying Terms: Non-Material Variance. If the offer and acceptance do not materially vary, they form a contract. Subsection (b)(2) indicates that, as under general contract law and current Article 2, the terms of the contract are the terms of the accepted offer. Subsection (b)(2), however, also allows for the introduction of non-material additional terms from the acceptance unless the offeror timely objects to those terms. This rule is taken from existing Article 2. It does not apply to terms that provide conflicting treatment of the same subject matter. Where the offer and acceptance conflict on a term and the conflict or term is not material, the contract is governed by the terms of the accepted offer.}

^{5. Conditional Offers and Acceptances. As recognized in subsection (c), as a matter of general contract law, a person has a right to state preconditions for its offer or its acceptance. The most common conditional offer or acceptance is one that conditions its effect on adherence to its own contractual terms. In effect, read literally, these conditional offers or acceptances state: "there is no contract except on the terms and conditions that I propose." There is no principle in contract law that would generally preclude a party from engaging is such conditional offers or acceptances and being able to rely on the conditional terms.}

^{Subsection (c) recognizes that these conditional statements are entitled to recognition. Subsection (c)(2) provides the necessary corollary to this proposition. Agreement to the terms of a conditional offer or acceptance by the other party creates a contract based on the terms of that conditional offer or acceptance.}

^{While language of condition should generally be acknowledged and enforced by courts, use of conditional language in standard form offers and acceptances creates special problems. The typical scenario occurs in a traditional "battle of forms" transaction in which either or both parties make the acceptance or offer expressly conditional on adherence to its specific contractual terms, but nevertheless proceed to engage in performance recognizing a contract irrespective of any acceptance of the terms of condition. Subsection (c) treats this as a question involving the effectiveness of the conditional language. There are three scenarios where forms are exchanged that contain varying terms and one or both contains conditional language limiting their legal effect in forming a contract to the condition that the other party accept all of the stated terms.}

^{In the first, the party receiving the conditional form is contacted by the other party and assents to the conditions. Under these circumstances, the terms of the agreed to form govern the contract that was created.}

^{In the second, nothing more happens other than the exchange of forms (e.g., no performance and no acceptance of a form by the other party), no contract exists. Since there is no performance, the behavior of the party stating the condition is consistent with that condition and the standard form cannot form a contract unless it is accepted by the other. No contract exists.}

^{In the third, both parties proceed to perform recognizing the existence of a contract. Under current Article 2 law, it is not clear how this situation would be examined in the case where one of the parties' forms was conditional. Some would argue that the performance of the one accepts the conditional terms of the other. Other courts reject that analysis. Under subsection (c)(2), the fact that the person tendering the conditional form performed as it there were an agreement renders the conditional language ineffective. To be effective language of condition in a standard form, the party's behavior must be consistent with the conditions. Thus, the situation is shifted to a simple exchange of forms containing varying terms.}

^{Illustration 1. Purchaser sends a standard order form indicating that its order is conditional on the Licensor's assent to terms on the form. Licensor ships with an invoice conditioning the contract on assent to its terms. Purchaser accepts shipment. Here, neither party acted consistent with the language of condition. A contract exists, however, based on conduct (e.g., shipment and acceptance). The terms are governed by 2B-209; the conflicting terms drop out.}

^{Illustration 2. In Illustration 1, assume that Licensor refuses to ship, but informs Purchaser of the conditions of shipment. It does not ship until Purchaser agrees to terms. Until that occurs, there is no contract. If it occurs, the contract exists based on terms actually agreed to (e.g., the Licensor's terms). See 2B-209 regarding the superseding effect of actually conditional offers.}

^{Illustration 3. In Illustration 1, assume Licensor ships pursuant to a "conditional" form, but when the shipment arrives, Purchaser refuses it because its original conditional terms are changed. In a telephone conversation, Licensor agrees to Purchaser's terms. Until that agreement, there is no contract; Purchaser acted in a manner consistent with its conditional language. When agreement occurred, that agreement sets the terms of the contract (e.g., the Purchaser's terms) the conflicting forms no longer purport to state the contract of the parties.}

^{SECTION 2B-204. OFFER AND ACCEPTANCE; ELECTRONIC AGENTS. In an automated transaction, the following rules apply:}

^{(1) A contract may be formed by the interaction of electronic agents. A contract is formed if the interaction results in the electronic agents engaging in operations that confirm or indicate the existence of a contract or indicate agreement. The terms of the contract are determined under Section 2B-209(b).}

^{(2) A contract may be formed by the interaction of an electronic agent and an individual if the individual has reason to know that the individual is dealing with an electronic agent and the individual takes actions that:}

^{(A) the individual knows or should know will cause the agent to perform, provide benefits, or permit use of the information, the informational property rights, or the access that is the subject of the contract; or}

^{(B) are clearly indicated as constituting acceptance regardless of other expressions or actions by the individual to which the electronic agent cannot react.}

^{(3) The terms of a contract formed under paragraph (2) are determined under Section 2B-207 or 2B-208, as applicable, but do not include terms provided by the individual in a manner to which the electronic agent could not react.}

^{(4) A party is bound by the operations of its electronic agent even if no individual was aware of or reviewed the agent's actions or their results.}

^{Definitional Cross Reference:}

^{"Agreement". Section 1-201. "Automated transaction". Section 2B-102. "Contract". Section 2B-102. "Electronic agent". Section 2B-102. "Information". Section 2B-102. "Party". Section 1-201. "Record". Section 2B-102. "Term". Section 1-201.}

^{Committee Vote:}

^{a. Approved in principle. (September, 1996). Reviewed without change. (Nov. 1997)}

^{Reporter's Notes:}

^{1. Subsection (a) deals with two contexts: 1) interaction between a human and an electronic agent, and 2) an interaction between two electronic agents without human intervention. In both, electronic methodology is in widespread use, but there are questions of under what circumstances agreement is inferred from behavior and of to what terms an electronic agent can agree. The following illustrations, although not within Article 2B scope, illustrate one aspect of the issue:}

^{Illustration 1. Tootie is an electronic system for placing orders for Home Shopping Network. When you dial the number, a voice comes on line instructing you to indicate your card number, the item number you will purchase, the quantity, your location, and other items. You indicate this by striking keys and numbers on your telephone. Tootie automatically orders shipment. Ray calls Tootie and, after entering his card number, verbally states to Tootie that he will only accept the software being order if there is a 120 day no questions return policy. Otherwise: "I don't want the damn things." Tootie orders shipment.}

^{There is a contract. The verbal addition or condition is ineffective. Stating conditions clearly outside the capability of the electronic agent to make a reaction does not eliminate the agreement reached by taking the steps needed to initiate the shipment. Similarly, the verbal terms should be ineffective to alter the agreement since the Tootie system could not respond to the verbal condition.}

^{Illustration 2. User dials the ATT information system. A computerized voice states: "If you would like us to dial your number, strike "1", there will be an additional charge of $1.00. If you would like to dial yourself, strike "2". User states into the phone that he will not pay the $1.00 additional charge, but would pay .50. Having stated his conditions, User strikes "1". The computerized voice asks User to state the name of the recipient of the call. User states "Jane Smith". The ATT computer dials Jane Smith's number, having located it in the database.}

^{Under the circumstances, User's "counter offer" is ineffective; it could not be reacted to by the ATT computer. The charge for the use should include the additional $1.00.}

^{2. As between electronic agents operations that signify a contract form an enforceable contract. The automated agents were selected or used by the parties to achieve these results and Article 2B acknowledges the efficacy of the choice in law. See discussion in notes to Section 2B-202. The agents act within parameters set by their programming and selected by their principals. The terms of the contract are determined as indicated, allowing for prior agreement, terms reflecting "consensus" of the two agents, and default rules. Terms in one agent's system that are not capable of being reacted to by the other are not part of the contract.}
 

^{SECTION 2B-205. FIRM OFFERS. An offer by a merchant to enter into a contract made in an authenticated record that by its terms gives assurance that the offer will be held open is not revocable for lack of consideration during the time stated. If a time is not stated, the offer is irrevocable for a reasonable time not exceeding 90 days. A term providing assurance that the offer will be held open which is contained in a standard form supplied by the party receiving the offer and used by the party making the offer is ineffective unless the party making the offer authenticates the term.}

^{Uniform Law Source: Section 2A-205; Section 2-205.}

^{Definitional Cross Reference:}

^{"Authenticate". Section 2B-102. "Contract". Section 2B-102. "Merchant". Section 2B-102. "Party". Section 1-201. "Record". Section 2B-102. "Standard form". Section 2B-102. "Term". Section 1-201.}

^{Committee Actions:}

^{a. Committee voted unanimously to approve this in principle. (September, 1996)}

^{b. Agreed to use 90 days as a standard in lieu of three months. (September, 1996)}

^{c. Reviewed in April 1997 with no substantive changes.}

^{Reporter's Note: This Section adopts existing Article 2 clarifying language on terms contained in a form supplied by the offeree..}
 

^{SECTION 2B-206. RELEASES; CONTRACTS FOR IDEAS.}

^{(a) The following rules apply to releases of informational property rights:}

^{(1) A release in whole or in part is effective without consideration if:}

^{(A) it is contained in a record to which the releasing party agreed, by manifest ed assent or otherwise, and which identifies the informational property rights released; or}

^{(B) it is enforceable under other law, including estoppel, implied license, and other rules allowing enforcement of a release.}

^{(2) A release continues for the duration of the informational property rights released if the agreement does not specify its duration and does not require on-going affirmative performance:}

^{(A) by the party granting the release; or}

^{(B) by the party receiving the release, except for minor acts.}

^{(b) The following rules apply to submissions of information or an idea for the creation, development, or enhancement of information:}

^{(1) If the submission is other than under a preexisting agreement for such submission:}

^{(A) a contract or obligation does not arise and is not implied from the mere receipt of an unsolicited disclosure;}

^{(B) engaging in a trade or industry that by custom or conduct regularly acquires ideas for the creation, development, or enhancement of information does not in itself constitute an express or implied solicitation of such information; and}

^{(C) if the recipient notifies the person making the submission that it maintains a procedure to receive and review such submissions, a contract is not created unless:}

^{(i) the information or idea is submitted and accepted pursuant to that procedure; or}

^{(ii) the recipient expressly agrees to a contract ual terms concerning the submission.}

^{(2) An agreement to disclose an idea does not create an enforceable contract unless if the idea is not confidential, concrete, or and novel to the trade or industry.}

^{Definitional Cross Reference:}

^{"Agreement". Section 1-201. "Information". Section 2B-102. "Informational property rights". Section 2B-102. "License". Section 2B-102. "Party". Section 1-201. "Record". Section 2B-102. "Release". Section 2B-102. "Rights". Section 1-201.}

^{Committee Action: Reviewed without substantive revision.}

^{Reporter's Note:}

^{1. General Scope and Rationale: Releases. Informational property releases are important aspects of practice in all of the information industries. They are a form of a license, but are ordinarily less formally negotiated or established and frequently obtained with little or no consideration paid over to the releasing party. While a release is a license it is a simple agreement not to sue, rather than a commercial transaction involving the elements present in a commercial license. The term "release" is defined in Section 1-102.}

^{The release does not relate to claims based on breach of contract, but refers to releases of intellectual property and similar rights.}

^{2. Enforceability. Subsection (a)(1) adopts the view that a release is enforceable without consideration, but places a limitation on that concept as an affirmative premise by focusing on a release contained in a record to which the releasing party manifested assent. The section clarifies existing law. It provides that a release of informational property rights in a certain form is enforceable, but does not alter other existing law with respect to when releases are enforceable.}

^{This section applies to releases that occur in common "chat room" and "list service" systems in Internet. In these situations, it is common to indicate that participation in the service gives permission for the use of materials submitted. Arguably, these relationships are supported by consideration; this section makes clear that releases in such situations are enforceable based on assent to the record.}

^{Illustration 1. West operates an on-line chat room. It uses comments of users in its monthly newsletter. The first time an individual joins the chat room, the screen stated that: "By participating in this on-line conversation, you grant West the right to use your comments as edited in subsequent publications in any medium." By joining the conversation, the participant releases its rights in its copyright comments for the purposes stated. Subsection (a) eliminates the need for consideration. The act of participating constitutes manifesting assent if the release language was prominent and called the party's attention.}

^{While the section refers to assent to a record, it does not preclude modern means of recording assent, such as by filming assent by the participant as part of the "record" itself. In this case, the film itself serves as the record. The filmed assent is in effect no different from signing a writing. In both cases, the included act or signing authenticates the record.}

^{3. Duration. Subsection (a)(2) is a specific application of rules in Section 2B-308, creating presumption that some single or no-payment contracts create rights for the duration of the underlying information property right if no definite term is specified. This deals with issues common to industries where parties develop products in part on reliance on general releases or waivers that do not contain specific duration terms. Leaving those cases to the general "reasonable time" standard in Section 2B-308 would create unwarranted and costly uncertainty.}

^{The "minor acts" in this section include giving acknowledgments or credits in subsequent uses of the information or providing a small number of copies of works utilizing the released information.}

^{4. Idea Submissions. Subsection (b) deals in a limited way with a problem that exists in all of the industries to which this Article applies: submission of informational content not pursuant to an agreement. It provides that, if a procedure exists for receipt and review of such submissions to which the submitting party is referred, no contract exists unless the submission was pursuant to that procedure or compliance with the procedure was waived by the licensee. This leaves undisturbed a vast array of doctrines dealing with adequacy of consideration, equitable remedies, and the like, but clarifies the legal effect of the submission in contractual doctrine.}
 

^{SECTION 2B-207. ADOPTING TERMS OF RECORDS.}
 

^{(a) Except as otherwise provided in Section 2B-208, a party adopts the terms of a record, including a standard form, if the party agrees, by manifesting assent or otherwise, to the record:}

^{(1) before or in connection with the initial performance or use of or access to the information or informational property rights; or}

^{(2) at any time after the party has had an opportunity to review the record, if the parties agreed to be bound or commenced performance or use with the expectation that the agreement would be represented in whole or in part by a record that the party did not have an opportunity to review or that had not been completed at that time.}

^{(b) Except as otherwise provided in Section 2B-208, Iif a party adopts the terms of a record, including a record that is a standard form, the terms of the record become terms of the contract without regard to the party's knowledge or understanding of individual terms in the record. However, a term that is unenforceable for failure to satisfy a requirement of this article or other applicable law, such as a requirement for conspicuous language, is not enforceable.}

^{Uniform Law Sources: Common law decisions; Restatement (Second) of Contracts 211.}

^{Definitional Cross Reference:}

^{"Agreement". Section 1-201. "Conspicuous". Section 2B-102. "Contract". Section 2B-102. "Opportunity to review." Section 2B-112. "Manifest assent." Section 2B-111 "Party". Section 1-201. "Record". Section 2B-102. "Standard form". Section 2B-102. "Term". Section 1-201.}

^{Committee Votes:}

^{a. Rejected a motion to add retention of benefits as manifesting assent.}

^{b. Rejected a motion to make specific reference to excluding terms that are unconscionable in addition to general exclusion under section 2B-109. (September, 1996)}

^{c. Consensus to expand section to cover all records, rather than merely standard forms, provided that it be made clear that standard forms are covered. (September, 1996)}

^{d. Reviewed without substantive change. (April, 1997)}

^{e. Rejected a motion to subsume both 207 and 208 into one section. Vote: 3 - 7 (March, 1998).}

^{Reporter's Notes:}

^{1. General Structure: Terms of Contract. This Section deals with adoption by a party of the terms of a record, including a standard form, in non-mass-market transactions.}

^{Article 2B deals with the terms of a contract, records that document those terms, and with standard forms in three sections. Section 2B-207 and 2B-208 deal with "single form" or single record cases. Section 2B-209 deals with cases where records are exchanged that do not create a contract on their face, but a contract nevertheless exists because conduct of both parties indicates agreement.}

^{These three sections do not address formation issues. If no contract is formed under other rule in this Article, the sections are inapplicable. What these sections address is: given a contract, what are the terms? The distinction between formation and term delineation concepts is modeled after the Restatement (Second) of Contracts. Of course, however, in many situations, the actions that adopt a record also reflect the formation of an agreement.}

^{2. Adopting Terms: Enforceability. Subsection (b) states the simple principle that when a party agrees or assents to a record, whether a standard form or not, this act adopts the terms of the record as part of the contract. This does not alter traditional UCC limitations on enforceability of terms, such as the doctrine of unconscionability.}

^{The adoption of a record includes a standard forms. The effect is to reject in commercial deals the rule in some states that a term that is not unconscionable and was not induced by fraud or other active misconduct may still be excluded by a judge viewing the transaction in retrospect. This confirms an important aspect of commercial law and commercial practice expectations. The enforceability principle adopted here is followed in the vast majority of modern case law. It flows from the belief that in the absence of unconscionability or fraud or similar conduct, commercial parties are bound by the records to which they assent and cannot later claim surprise or a failure to read the language presented to them.}

^{3. Adopting Terms: Knowledge. Adoption of the terms of a record does not require that the adopting party actually read, understand, or negotiate the terms. This reflects virtually universal law in the United States. In many situations, parties do not closely review or dicker about each term of a record. Subsection (b) recognizes that fact. Equally important, the Section provides that the defense that "I did not read" the contract does not enable a party to avoid the effect of the terms of a record it adopted.}

^{4. Modes of Assent. A party is bound by a record only if it agrees to the record, by manifesting assent or otherwise. There are three general methods of establishing adoption of a record.}

^{The definition of manifesting assent identifies two of these. One involves authenticating (signing) the record. This is a traditional means of adopting the terms of a record, but has never been the sole method of doing so. An authentication of a record often serves not only to adopt the terms of the record, but also to accept the contract offered by or through the record.}

^{Authentication is one way of "manifesting assent." In the absence of an authentication, this Section follows common law and expressly recognizes that conduct can indicate assent to a record or a contract. This concept, as defined in Section 2B-111, focuses on objective manifestations of assent and adopts procedural safeguards requiring that the party to be bound by the standard form or other record have a fair an opportunity to review the terms before assenting and to reject the agreement if the terms are not acceptable. See Section 2B-112. A party cannot manifest assent to a form or other record unless it has had an opportunity to review that form before reacting. Except in contract modifications, an opportunity to review does not occur unless the party has a right to return the subject matter, refuse the contract, and obtain a refund of fees already paid (if any).}

^{These two structured options are inadequate to cover the full range of situations in which it can be fairly said that a party agreed to a record. This Section accommodates the breadth and diversity that exits in modern practice by allowing a court to find that a record was adopted when or if a party agreed to that record. This general standard is more subjective and deals with the entire context.}

^{5. Rolling or Layered Term Adoption. A basic theme in Article 2B is that, while some contracts are formed and their terms delineated at a single point in time, in many modern transactions a rolling or layering process occurs. An agreement exists and terms are provided, clarified or introduced over a period of time point. Contract formation and term definition is a process, rather than a single event. This theme was introduced in current Article 2; enacted in contract formation rules that acknowledge the creation of a contract even if terms are left open or to be specified in the future. It is amplified here}

^{Subsection (a) implements that theme and rejects the idea that a contract and all of its terms must be formed at a single point in time. Case law adopts a more fluid conception of the process of contracting, where parties define the agreement over a period of time that is not constrained to an instantaneous "closing" in most cases. See, e.g., Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991); Hill v. Gateway 2000, Inc., 1997 WL 2809 (7th Cir. 1997). This rolling contract concept reflects that, in many agreements, terms are considered at two different points in time (some at the initial discussion and others when the products arrives), while in still others, terms may continue to be created and modified over time.}

^{Terms can and often are created in modern commerce by assent after beginning performance. Thus, in the entertainment industry and in many development contracts, contract terms are developed and drafted while performance occurs, not before performance begins. Each party anticipates an enforceable record will be created and agreed to, but neither waits on performance until one is fully drafted. This section accommodates that process as well as the common practice of providing terms for assent at some point prior to the initial performance, even if not at the first step in the agreement process.}
 

^{SECTION 2B-208. MASS-MARKET LICENSES.}
 

^{(a) A party adopts the terms of a mass-market license for purposes of Section 2B-207 only if the party agrees to the license, by manifesting assent or otherwise, before or in connection with the initial performance or use of or access to the information or informational property rights. However, a term does not become part of the contract:}

^{(1) if it is unconscionable; or}

^{(2) subject to Section 2B-301 with regard to parol or extrinsic evidence, if it conflicts with terms to which the parties to the license expressly agreed.}

^{(b) If a party does not have an opportunity to review a mass-market license before becoming obligated to pay for the information and does not agree, by manifesting assent or otherwise, to the license after having that opportunity, the party is entitled to receive from the licensor on delivering returning all copies of the information dealt with by the license or destroying such the copies pursuant to the licensor's instructions, the party has a right to:}

^{(1) a refund;}

^{(2) reimbursement of any reasonable expenses of obtaining the refund and incurred in complying with any instructions of the licensor other party for return or destruction of the information or, in the absence of such instructions, reasonable expenses in connection with return of the information; and}

^{(3) compensation for any foreseeable loss caused by the installation of the information, including any reasonable expenses incurred in restoring the particular information processing system to its condition before the required installation, if:}

^{(A) the information must be installed in an information processing system to enable review of the license; and}

^{(B) the installation alters that information processing system or information contained in the system but does not return the system or information to its original condition when the installed information is removed.}

^{Uniform Law Source: Restatement (Second) of Contracts § 211.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-201. "Contract": Section 2B-102. "Information": Section 2B-102. "Information processing system": Section 2B-102. "License": Section 2B-102. "Licensor": Section 2B-102. "Manifest assent: Section 2B-111. "Mass-market license": Section 2B-102. "Party": Section 1-201. "Refund": Section 2B-102. "Term": Section 1-201.}

^{Committee and other Votes:}

^{a. During Article 2 discussion at the 1996 annual meeting, a motion to delete exclusion of terms in consumer contracts was defeated based on Committee assurance that Article 2 would use an objective test.}

^{b. Deleted reference to allowing terms consistent with "customary industry practice." Vote: 11-1}

^{c. Deleted reference to allow terms giving no rights no less than under a first sale. (12-0)}

^{d. Voted 12-0 to support an approach to refusal terms that focuses on the perspective of the party proposing the form.}

^{e. Rejected a motion to substitute refusal term concept with an expanded refund right. Vote: 2- 6 (April, 1997)}

^{f. Did not adopt a motion to add the expanded refund right and restrict the refusal term concept to consumers. Vote: 5 - 5 (April, 1997)}

^{g. Rejected a motion to limit the section to consumer licenses. Vote: 2 - 8 (April, 1997).}

^{h. Adopted a motion to delete refusal term concept and use refund right proposed by an ABA committee. Vote: 10 - 2 (Sept. 1997).}

^{Reporter's Notes:}

^{1. General Structure and Approach. This section deals with standard forms in a mass market (retail) context. It places significant procedural and substantive restrictions on the use of forms in the mass market. Those restrictions entail a general rule that applies to all mass market forms in a retail setting and additional, special protections in cases where the form involves an undertaking proposed by a remote third party that was not a party to the retail transaction, but requires terms.}

^{This Section must be read in connection with Section 2B-207. Adoption of the terms of a mass market license occurs only when the limitations stated in 2B-207 and the restrictions stated here are met. As is true generally, while this section deals specifically with the adoption of the terms of a record, in many situations the same acts adopt the terms and constitute agreement to the contract itself.}

^{The Section provides express protections against use of hidden terms in forms to alter the basics of the actual bargain of the parties to a license. These are outlined in subsection (a) and the concept of "manifest assent." The Section does not adopt Restatement (Second) of Contracts § 211 which allows a court to invalidate terms that are not unconscionable if the court later concludes that they are not within presumed expectations of a party. The section does respond to the policies that underlie that Restatement concept which are to prevent bizarre and oppressive terms (unconscionable terms) or terms that vitiate the basic deal of the parties. In the more than twenty years since it was proposed, the Restatement approach has been adopted in less than ten states for general transactions. It creates significant uncertainty based on criteria that are not well-defined.}

^{2. Scope: Mass Market. This Section is not limited to consumer transactions or to transactions involving so-called "shrink wrap" licenses. Compare Section 2-206 (Proposed Revision Draft, July 1997). Subsection (a) deals with all transactions in the retail market.}

^{In the retail mass market, and in many non-retail transactions, most modern transactions are standardized. An information provider defines the terms under which its information products are made available to the retail market place and end users in that marketplace elect to either acquire or not acquire the information on these terms. The transactions are anonymous in that the information provider does not restrict those to whom the information is given except based on the licensee's willingness to agree to terms and to pay the applicable license fee. This standardized contracting characterizes the vast majority of all mass market and non-mass-market transactions. It is a vital part of commerce and a broadly enforced method of contracting.}

^{The section is not limited to "shrink wrap" licenses. In common parlance, these are contracts that are entered into after an initial transaction in a retail or other context. Often, especially in the retail mass market, licenses of this type involve creating a relationship between a remote information publisher and an end user who acquires a copy of information from a retailer.}

^{The section also applies to all consumer transactions.}

^{3. Records Presented Prior to Payment. Where the terms of a mass-market license are presented before a price is paid, the contract presents relatively few unique issues and involves questions that have been presented to courts for years. Courts generally enforce the terms of the record if the party manifests assents to that form. The fact that the terms are non-negotiable or may even rise to the level of a "contract of adhesion" does not invalidate the contract terms. It may suggest a need for close scrutiny of terms under general standards of unconscionability. Section 208(a)(1) forces this scrutiny as a uniform matter.}

^{In this setting, as in many other contract formats, ideas of assent and agreement reflect the position of both parties (or all three parties in most retail licenses). In a typical non-negotiated transaction in the mass market, the information provider does not assent or agree to license under any terms other than those set out in its license, while the other party assents to the terms or is free to forego the transaction. So long as there is an opportunity to review the contract, a lack of fraud, and no unconscionable terms, contract law principles do not vitiate the deal proposed and adopted (subject, of course, to terms required by this Article). An information provider (or other vendor) may choose the terms under which it provides its product and the terms that define the product itself.}

^{This section provides enhanced procedural protections for mass market licensees in the form of a requirement of an opportunity to review the terms of the form and a requirement that assent be in the form of an affirmative act indicating agreement to the license.}

^{4. General Rules. Subsection (a) sets out general rules for when the terms of a mass market license become the terms of the contract. These apply to both records presented for review prior to committing to the transaction with the retailer, and records presented at or before the first use of the information.}

^{a. Assent and Agreement. As explained in Section 2B-207, a party becomes bound to the terms of a record if it agrees to the record. Agreement can be shown in various ways. One of these under subsection (a) is by manifesting assent to the record. This term derives from the Restatement (Second) of Contracts. The idea of manifesting assent is that the party adopts the record by taking some action that objectively indicates agreement to the record. Unlike in the Restatement, the term in Article 2B-111 is defined to include significant procedural protections. These restrictions ensure that the record be available for review and that the assenting party make some affirmative indication of assent.}

^{This rejects cases such as Hill v. Gateway 2000, Inc., 1997 WL 2809 (7th Cir. 1997) to the extent that they hold that a mere failure to object adequately adopts the terms of the record. The issue in any disputed case is whether there is indicia of assent in the parties conduct with reference to the license or the information. In addition, as spelled out in Section 2B-111, a party cannot manifest assent unless it has had an opportunity to review the record. This requires an opportunity in the sense that the record be reasonably available. It does not require, however, that the party actually read the record.}

^{b. Unconscionability. Even if a party adopts the terms of a record, subsection (a) makes clear that this does not adopt terms that are unconscionable. The general UCC policy disallowing enforcement of unconscionable terms controls. While this is true in any event, the specific reference here makes clear that the policy is important in mass market contracting.}

^{The well-established doctrine that disallows unconscionable terms provides a basis to avoid bizarre and oppressive results in standard form contracting. How that theory evolves in modern markets for information and licenses of informational property rights remains to be determined and ultimately requires judicial decisions applicable to particular cases. This Section expressly carries forward existing UCC concepts to this modern market. Traditionally, unconscionability doctrine blends questions about the contracting process (procedural) with questions about the substantive character of the terms (substantive). It prevents abuse and unfair surprise in standard form contracts. In an non-bargained market where purchasers make choices mainly about price and about whether or not to enter into a transaction, this doctrine provides an important safeguard against over-reaching.}

^{The doctrine might apply to invalidate terms that are bizarre and oppressive and that are hidden in boilerplate language. For example, a contract term buried in a mass market license that provides that default on the mass market contract involving a $50 software results in a cross default on all other negotiated, multi-million dollar licenses between two companies may be unconscionable in setting where there was no reason to suspect that the linkage of the small and the larger licenses. Similarly, a clause abrogating all responsibility for intentional wrongful acts buried in a license form violates public policy in most states and, in addition to being unenforceable on that basis, might also be unconscionable.}

^{Unconscionability doctrine requires a contextual analysis to avoid abuse by the licensor or the licensee. It is not possible to fully describe the various situations in which it may apply. The doctrine is sufficiently flexible that, in information transactions, it can encompass a consideration of underlying public policies and protection of public interests in free flow of ideas. Article 2B takes a neutral position relating to the difficult federal policy issues that arise in reference to federal law preemption, intellectual property fair use and misuse and federal competition law. Within that approach, issues about the relationship between a contract clause and underlying principles of free speech, free idea flow, and the like in a mass market are appropriate elements in an unconscionability analysis. Thus, for example, a contract term purporting to prevent the buyer of a publicly distributed magazine from quoting the magazine's observations about consumer products might in context be unconscionable.}

^{In practice, however, the primary standards under which clauses dealing with this subject matter are measured comes from the federal law concepts themselves. The fact that the contract itself is generally enforceable under Article 2B does not alter the application of these broader federal law concepts. See Section 2B-105.}

^{c. Agreed Terms. Subsection (a) adopts a new premise that a mass market form in itself cannot alter the terms agreed to between the parties to the license. This deals with an issue discussed in the Restatement (Second) of Contracts § 211, but does so in terms that do not create an open-ended right of a litigant and a court to rewrite a contract adopted by the parties.}

^{The basic concept holds that the form cannot alter agreed-to terms in the mass market. The concept treats such terms as current Article 2 treats express warranties. As with express warranties, it is subject to the application of parol evidence concepts. The basic theme is that a form in this marketplace cannot vitiate the terms of the agreement between the parties.}

^{Illustration 1: The librarian of University Libraries orders a copy of Zen Software's multimedia product for University's public network and agrees on a price for network use. The software is delivered for the agreed fee, but a mass market license limits use to a single user . University assents to the license without reading the clause. The single user term of the license is not part of the contract under (a) if the parties agreed to a network license.}

^{This concept corresponds to comments to Restatement (Second) § 211 which refer to invalidating "bizarre and oppressive" (unconscionable) terms and terms that vitiate the basic agreement of the parties.}

^{The concept is especially important in mass market information transactions in that the importance of the contract is far greater than in sales of goods. The contract defines the product (e.g., what rights are conveyed and which are withheld). This concept is, of course, subject to the parole evidence rule.}

^{4. Case Law. In single form cases, no appellate case law rejects the enforceability of mass market licenses and recent cases expressly support it. See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); Arizona Retail Systems, Inc. v. Software Link Inc., 831 F. Supp. 759 (Ariz. 1993). Compare Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th 1988) (lower court held contract invalid as contract of adhesion; appellate court did not address contract issue). Cases are less clear in reference to cases of conflicting forms (battle of forms) where differing terms create questions about assent to either form. See Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir.1991); Arizona Retail Systems, Inc. v. Software Link Inc., 831 F. Supp. 759 (Ariz. 1993). The cases in this field do not contest the enforceability of standard forms. See Douglas G. Baird & Robert Weisberg, Rules, Standards, and the Battle of the Forms: A Reassessment of § 2-207, 68 Va. L.Rev. 1217, 1227-31 (1982).}

^{5. Forms presented after payment. In modern commerce, licenses are often presented after a price is paid or committed to be paid to a retailer. These licenses often entail a three party transaction: the license is between the remote publisher (informational property rights holder) and the end user, while the retail purchase was between the end user and the retailer. While these relationships create many benefits for the end user and establish a direct contractual privity between the publisher (who controls the intellectual property rights) and the end user, they also present issues about treating the end user in a fair manner.}

^{a. Distribution and Intellectual Property Rights. Distribution channels in licensed information are not identical to those in the sale of goods. The differences lie in the existence of intellectual property rights in the publisher and the choices by the rights owner (publisher) to provide grants of those rights beyond and different than the uses created if it simply sold products to a distributor for resale to an end user. In many (most) cases, the license ultimately gives benefits to the end user that are not conveyed in the contract with the retailer (who does not own the informational property rights). The fact that this is a three party structure is also dealt with in Section 2B-616.}

^{In most transactions where a license is presented to the end user after it acquires a copy from a retailer, the license is between the copyright owner and the end user, rather than between the end user and the retailer. In this three-party setting (end user, retailer, copyright owner), the enforceability of the post-payment license is important to the end user. The form establishes for the first time a relationship between the copyright owner and the end user that may be central to the end user's right to use the information.}

^{In establishing a distribution system for the mass market, an informational property rights owner may elect to establish a transaction in which it gives its distributors either (1) ownership of a copy and a right to sell copies of its work to others, or (2) a license (permission) to the distributor to license copies to others. Copyright and other intellectual property law supports either choice. It also provides that, if a license is created and the distributor exceeds the license, the eventual transferee (even if in good faith) is not protected under bona fide purchaser concepts. See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (ED NY 1994); Major League Baseball Promotion v. Colour-Tex, 729 F. Supp. 1035 (D. N.J. 1990); Microsoft Corp. v. Grey Computer, 910 F. Supp. 1077 (D. Md. 1995); Marshall v. New Kids on the Block, 780 F. Supp. 1005 (S.D.N.Y. 1991).}

^{The end user is often benefited by a license rather than a sale transaction. A sale creating ownership of a copy of a work (book, computer program or other work) does not give the owner a number of rights that it may desire. It does not give the right to make multiple copies, to make a public display of the work, to make derivative works from the copy, or to do other significant things. Licenses in the mass market and otherwise typically create rights that go beyond the rights that arise in the event of mere sales of copies.}

^{A common licensing distribution situation in information is:}

^{1) copyright owner permits distributor to distribute, but not sell, copies, and only subject to a license (copyright gives owner the exclusive right to "distribute" copies and, thus, this limit is consistent with copyright law);}

^{2) distributor (retailer) transfers copies to end users, but this is not an authorized "first sale" since the rights holder did not authorize a sale;}

^{3) end user has possession, but an uncertain status under copyright (or patent) law until is assents to a license with the rights owner; and}

^{4) license with the publisher (rights holder) creates affirmative rights of use if assented to by the end user, but the rights do not exist if the license is rejected.}

^{In this setting, both the remote publisher and the end user have an interest in the license being enforceable. If the license is not enforceable, the end user receives few if any rights to use the acquired information and has no rights against the remote publisher in warranty or otherwise in the absence of rules that vitiate all concepts of privity. The end user contracted solely with the retailer. On the other hand, the publisher that chooses this distribution method has an interest in the enforceability of the license because that license defines the product that it allowed into the market.}

^{The "post-payment" license in these transactions is the first and often the only contract between the end user and the copyright owner. It is the only setting in which the end user can obtain rights that exceed rights to a first sale buyer of a copy and the first setting in which it obtains any rights under a distribution system that does not authorize mere sales of copies to end users.}

^{b. Refund Rights. In post-retail purchase licenses, two issues are important. One involves dealing with prevention of bizarre and oppressive terms. That issue is identical to that presented in pre-retail purchase transactions. The second issue involves ensuring that the licensee (end user) has a real opportunity to review and accept or reject the license with the remote publisher.}

^{Subsection (b) deals with this second issue. It creates a robust refund and reimbursement right whose intent is to place the retail end user in a situation whereby it can exercise a meaningful choice on a post-retail purchase license. To be meaningful, the end user must be given a cost free right to say no to the proposed license. This does not mean that the end user can reject the license and use the information. What is created is a right to be in a situation equivalent to what would exist if the license were presented for adoption before the retail acquisition of the copy. If there is no assent to the contract, the end user can return itself to the place that it was in before acquiring the copy and reviewing the license.}

^{Illustration 2: Two end users desire information under a mass market license. End user #1 goes to a web site and, after reviewing the license terms, provides his credit card number and downloads the information. Subsection (b) does not apply because opportunity to review the license contract existed before payment. End user #2 places a telephone order and provides his credit card, but the license is not available for review until the information arrives in the mail. Subsection (b) applies.}

^{Illustration 3: In the above example, End user #2 opens the package and finds a license on an envelope that contains a copy of the information. The envelope clearly states that opening the envelope constitutes consent to the license. The user reads the license and rejects it, deciding not to open the envelope. Subsections (b)(i) and (ii) entitle him to return the information with return costs covered by the licensor. Subsection (b)(iii) does not apply; it was not necessary to install the license in order to read it.}

^{Illustration 4: In the same circumstances, end user tests the information to see if he likes it. Subsection (b) does not apply; the end user assented to the license. Any right to test is governed by the inspection rules of Article 2B which assume the existence of a contract and focus on determining and providing a remedy for breach if the product is defective.}

^{6. Intellectual Property Issues. Important federal policy issues can arise about distribution of information in a mass market and the relationship between contractual restrictions on the one hand and federal policy on the other. Article 2B adopts a neutral position on these issues. Nothing in this section should be understood to alter decisions about under what circumstances contractual provisions might be precluded as a result of federal law mandatory policies. In general, these federal policies, which include ideas of free speech and concepts of copyright (or patent) misuse, apply to particular clauses in contractual relationships. The fact that the contract is enforceable does not alter decisions that as a matter of federal policy are invalid.}

^{Modern copyright cases hold that, in certain circumstances, making intermediate copies of copyrighted technology for the purpose of "reverse engineering" and understanding that technology constitutes fair use. See Sega Enterprises Ltd. v. Accolade, Inc., 977 F2d 1510 (9th Cir. 1992); Atari Games Corp. v. Nintendo of Am., Inc., 975 F2d 832 (Fed. Cir. 1992). In some contexts contractual bars on reverse engineering are clearly enforceable in that they create confidential or other requisite relationships. In others, they may not be enforceable as a matter of federal policy. In the mass market, the issue is in dispute. It involves a decision about federal policy, rather than contract law. That federal policy if applicable, is not affected by this Article.}

^{Similarly, federal case law (and statutory provisions) establish a federal interest in the broad distribution and use of ideas and concepts that have been distributed to the public. See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989). On the other hand, it is clear that federal policy on dissemination of information co-exists with the ability of parties to make confidential disclosures and deal with information to be kept secret. See Computer Assoc. Int'l, Inc. v. Altai, Inc., 982 F2d 693 (2d Cir. 1992). Some case law supports the view that, in some situations of mass distribution of the information in an unrestricted form, the provision is unenforceable. See Consumers Union v. General Signal Corp., 724 F.2d 1044 (1983).}

^{Exactly where and how these themes interface and what limits they may place on particular contractual relationships is clearly a question of federal policy, rather than state contract law. With the transition from print to digital media as a main method of conveying information, major policy disputes have erupted concerning the redistribution of rights in light of the fact that the media of distribution allows many different and potentially valuable (for users or authors) uses of information products. The difficulty of balancing policies in this context is demonstrated by the fact that disputes about underlying social policy have erupted and been left unresolved in numerous contexts in the U.S. and internationally. State law that conflicts with the resolution of those questions in federal law may be preempted if that is the policy choice made in federal law. Indeed, currently pending in Congress are proposals dealing with these questions specifically as a matter of federal policy.}
 

^{SECTION 2B-209. TERMS WHEN CONTRACT CREATED BY CONDUCT.}

^{(a) Except as otherwise provided in subsections (b) and (d), if the records of the parties do not establish a contract but a contract is formed by conduct of the parties, in the court shall determininge the terms of the contract the court shall consider ing the commercial context, including any applicable trade use or course of dealing, the conduct of the parties, the terms on which the parties expressly agreed, the information or informational property rights involved, the supplementary terms provided by any other provision of [the Uniform Commercial Code] that apply to the transaction, and all other relevant circumstances.}

^{(b) If a contract is formed by conduct and the only material records exchanged were standard forms purporting to state the terms of an offer or acceptance, the terms of the contract are:}

^{(1) terms expressly agreed to by the parties;}

^{(2) terms with respect to which the forms do not conflict;}

^{(3) terms supplied by use of trade or course of dealing applicable to the transaction;}

⁽⁴⁾ supplementary terms incorporated under any other provisions of [the Uniform Commercial Code] that apply to the transaction.

^{(c) In a case governed by subsection (b), the following rules apply:}

^{(1) Terms stated in subsection (b) rank in priority in the order listed.}

^{(2) If a standard form of one party deals with a subject, the fact that the other standard form does not deal with the subject does not create a conflicting term unless the term materially alters the contract otherwise established. In determining whether a term materially alters an agreement, a court shall consider the extent to which the term is consistent with expressly agreed terms, the approach to similar issues in the record that is silent on the issue, the course of dealing of the parties, and the ordinary customs and practices of the applicable trade or industry for transactions of the type.}

^{(d) Notwithstanding any other provision of this section, if after consideration of all the circumstances, including any applicable course of dealing and use of trade, it appears that the parties and the records containing the offer and acceptance did not agree on an element of scope, the elements of scope on which the parties did not agree are determined by the licensor's record.if the parties have not expressly agreed on scope and records exchanged by the parties conflict on scope, the terms of the licensor's record governs the scope.}

^{(e) This section does not apply if the parties authenticate there is an authenticated a record of the agreement, a party accepts adopts the record of the other party, or there was an effective conditional offer under Section 2B-203(c) to which the party to be bound agreed, by manifesting assent or otherwise. In any of these cases, the contractual terms of the contract are determined under Section 2B-207 or 2B-208, as applicable.}

^{Uniform Law Source: Section 2-207. Substantially revised.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-201. "Authenticate": Section 2B-102. "Contract": Section 2B-102. "Court": Section 2B-102. "License": Section 2B-102. "Licensor": Section 2B-102. "Party": Section 1-201. "Record": Section 2B-102. "Scope": Section 2B-102. "Standard form": Section 2B-102. "Term": Section 1-201.}

^{Committee Votes:}

^{a. Consensus to rewrite former current (d) to deal with terms basic to defining the product.}

^{b. Failed to adopt a motion that in the battle of forms the presumption should be no consequential damages. (4 - 4) (April, 1997)}

^{c. Voted to clarify that the language in d is the last step and even then if it does not conflict with the agreement as a whole. Vote 8 - 2 (March, 1998)}

^{d. Rejected motion that knock out rule not apply to consequential damages clause. Vote 5 - 6 (March, 1998)}

^{Reporter's Note:}

^{1. Scope and General Effect. This Section deals with cases where no contract is formed by records exchanged by the parties, but a contract is formed by conduct. Given that limitation. It assumes that a contract exists and provides guidance on determining what terms apply to the contract. Article 2 describes this situation in Section 2-207(c). In transactions governed by law other than Article 2, common law themes apply general interpretation concepts to the circumstance of conduct-based contracts.}

^{The section distinguishes between the general circumstance of contracts created by conduct (subsection a) and cases where a battle of forms occurred and neither party accepted the form of the other, but conduct created a contract. Subsection (b) adopts current Article 2-207(c) for this variation of the battle of forms. Article 2-207 is not limited to standard forms, but the cases and literature concentrate on the problem of the exchange of forms that disagree on important matters.}

^{If the exchanged forms create a contract or one party agrees to the terms proposed by the other in a record or otherwise, this section does not apply. Under 2B-203, a contract forms around the terms of the offer. Subsection (d) confirms that result. This is also true where a party accepts an offer in a setting where records are not used. The Section only applies in cases where the existence of a contract is premised solely on conduct of the parties. See 2B-202.}

^{2. General Rule: Interpret based on Context. Subsection (a) states the general rule. It directs attention to the entire context including terms of exchanged records and the nature of the intellectual property rights held by the licensor or licensee. This conforms to common law concepts and the basic UCC theme of building enforceable terms based on practical construction of the relationship. The interpretation approach requires considering terms of all records and other circumstances. See Abram & Tracy, Inc. v. Smith, 88 Ohio App.3d 253, 623 N.E.2d 704, 708 (1993) ("a writing should be interpreted as a whole and all the writings that are part of the same transaction should be interpreted together."); Restatement (Second) of Contracts § 202(1) (2) (1981); 2 Farnsworth, Contracts § 7.10 (1990).}

^{In the variety of transactional conditions in which conduct, rather than records or acceptance of a particular offer, a priori or formalistic rules cannot control; they cannot account for the diversity and contextual nuances that exist in a rich environment of transactional practice. Subsection (a) thus rejects any general application of a "knock-out" rule which requires that a court apply a set formula rejecting any terms in one record that are not matched in another without consideration of the overall context. Any such rigid rule needlessly places restraints that preclude a court's focus on more generally determining the intent of the parties.}

^{Article 2B deals with transactions the vast majority of which are not now governed by the U.C.C., this rule allows courts to continue existing practice, rather than enforcing a new and inappropriate legal regime on the contract interpretation process.}

^{3. Battle of Forms and Behavior. Subsection (b) creates an exception to the general interpretation rule. The exception focuses on the battle of forms. The battle of forms has, in sales of goods, created significant controversy and uncertain results. Subsection (b) adopts current Article 2-207(c) with a special provision in reference to scope terms that have significance in Article 2B transactions.}

^{Under subsection (b), if the standard forms of the parties do not establish a contract (e.g., due to a material conflict or due to conflicting conditional offers), but conduct creates a contract, this section adopts a "knock-out" rule. Neither form controls.}

^{The battle of standard forms deals with a case where the parties exchange forms, but ignore those forms in determining to perform or not. Where this is true, the subsection states simply that, except with respect to scope of the license, if the parties did not do so, law will not retroactively create a rule in which the standard forms of one party have greater significance than suggested by their behavior. Discussing UCC § 2-207, the Third Circuit Court of Appeals noted:}

^{The insight behind [Article 2] is that it would be unfair to bind [a party to the standard terms of the other party] when neither party cared sufficiently to establish expressly the terms of their agreement, simply because [one party] sent the last form.}

^{The rule in subsection (b) excludes conflicting terms regardless of which form was the first received or sent.}

^{Illustration 1: In response to a standard form from DuPont, Developer ships software subject to a standard form invoice. The two forms disagree on warranties. Neither party insists in fact on their own terms. Both warranty terms drop out; default rules apply.}

^{Illustration 2: Developer sends a letter, rejecting the DuPont warranty terms, but ships without obtaining assent to its terms or precluding use of the product without such assent. Determining what terms govern poses a difficult, but ordinary contract interpretation issue about the intent of the parties. Subsection (a) governs.}

^{4. Battle of Forms: Integrated Result. To fall within this Section, the records of the parties must not establish a contract. Thus, understanding the overall impact of this Section on battle of forms and other conflicting term transactions requires consideration of this Section and of Section 2B-203. There are two different scenarios to be considered.}

^{a. Varying Terms. The first situation involves a case in which forms are exchanged, but neither form is made expressly conditional on acceptance of its terms in full. Under these conditions, Section 2B-203 applies and Section 2B-209 provides a back-up. The contract analysis involves answering several questions.}

^{1). Ask first: do the terms of the offer and acceptance vary? If not, a contract is formed based on the records.}

^{2). If there is a variance, is the variance material? Section 2B-203(b) permits contract formed by an offer and acceptance with varying terms unless the variance is material. If it is not material, a contract is formed based on the offer and non-material additional terms in the acceptance.}

^{3). If there is a material variance, a contract based on the records is still possible if one party "accepted" the terms of the other party's offer.}

^{4). If there is a material variance and no acceptance, a contract is formed only by conduct. Section 2B-209 determines its terms based either on a general assessment of the context or on the "knock-out" rule in subsection (b).}

^{b. Varying Terms: Conditional Offers. If the terms of the offer or acceptance vary and one or both are conditional on acceptance of their terms, a different analysis applies. The basic premise is that a party has a right to condition its offer or acceptance and that the conditions are enforced unless waived.}

^{1). Ask first: are either or both the offer or acceptance made conditional on assent to their own terms? If yes, Section 2B-203(c) applies.}

^{2). Under 2B-203(c), ask whether the conditions are effective or whether they have been waived. Waiver can be inferred on any basis, but in standard form settings, waiver is assumed if the party does not act in a manner that is consistent with its own conditions.}

^{3). If the conditions were waived, analysis reverts to the general analysis of conflicting terms: a) is the conflict material; b) if yes, did conduct create a contract?}

^{4). If the conditions are effective (e.g., not waived), ask: did the other party accept the conditional offer? If yes, the contract is formed based on the conditional terms.}

^{5). If there was no acceptance of the conditional offer, no contract is formed based on the records. If a contract is formed based on conduct, Section 2B-209 applies.}

^{5. Conditional Offers or Acceptances. If a party conditions its agreement to a contract on the other party's assent to its terms, that condition should be enforced. Contract law does not impose a contract on unwilling parties nor does it prevent a party from conditioning the terms on which it will do business. This Section recognizes that, where an effective condition was asserted and agreed to by the other party, the terms of that conditional offer or counter offer, when accepted, override the provisions of this section. Simply stated, the contract was formed on one party's terms and courts or this statute should not disturb that result.}

^{6. Signed or Authenticated Records. Subsection (e) clarifies that the rules of this section are inapplicable if a party signs and thus accepts a record of the other. This Section applies only where the contract is based merely on conduct; and provides guidance on what terms of the contract apply. Where by signature or otherwise, a party adopts a proposal from the other party, that set of proposed terms governs.}

^{Authentication (signature) of a record supersedes other records, subject of course to parole evidence issues. An executed agreement better indicates intent and throws the case outside the knock out rule. Clearly, it would be a major change in law to regard a signed writing as being no different in substance that unsigned and conflicting forms. Consistent with this section courts should use general concepts of contract interpretation to discern the meaning of the contract incorporated in a signed record.}

^{7. Scope of License. In information products, the contract terms relating to scope of use define the product. Being licensed. The same subject matter (e.g., a copy of a motion picture) has entirely different value and substance depending on what rights in that subject matter are granted. Thus, the "subject matter" is different if the copy is licensed solely for personal use as compared to being licensed for distribution in theaters throughout Latin America. In this environment, the license, especially its scope, is the product.}

^{That being true, this section gives special deference to the provider's definition of scope in cases where not express agreement occurs with reference to that issue. In the absence of contrary agreement, the information provider can define what it is providing. More relevant, the other party cannot resort to a court to obtain that product which it failed to obtain from the licensor by negotiation.}

^{"Scope" is a defined term that refers to contract terms restricting field of use, duration and similar terms that in effect define the nature of the information product being licensed. The scope of a license in effect defines the "product" or "focus" of the deal. The mere fact that one form disagrees with the licensor's form on issues of scope cannot be held to throw the case back on general default rules. A vendor who provides a consumer version of software cannot be forced to have given an unlimited, license in the software for development and other use simply because a competing form stated terms that conflict with the consumer restriction. Unlike warranty and similar terms, scope terms define the product being sold (e.g., multi-user or single user license). Additionally, it is only the licensor who is aware of what can be granted (e.g., it holds rights to a screen play only for use in television). In cases where forms disagree on basic points, the true issue is whether a contract exists (that is, was there agreement) notwithstanding the records exchanged or the conduct of the parties. In many cases, without an agreement about the fundamental scope of the license, no agreement to a contract exists.}
 

^{PART 3}

^CONSTRUCTION

^{[A. General]}

^{SECTION 2B-301. PAROL OR EXTRINSIC EVIDENCE. Terms with respect to which confirmatory records of the parties agree or which are otherwise set forth in a record intended by the parties as a final expression of their agreement with respect to such terms as are included therein may not be contradicted by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or supplemented by:}

^{(1) course of performance, course of dealing, or usage of trade; and}

^{(2) evidence of consistent additional terms unless the court finds the record to have been intended as a complete and exclusive statement of the terms of the agreement.}

^{Uniform Law Source: Section 2A-202; Section 2-202.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-201. "Court": Section 2B-102. "Record": Section 2B-102. "Term": Section 1-201.}

^{Committee Votes and Action:}

^{a. Voted 11-0 to strike suggested presumption re merger clauses and return to current Article 2 rule.}

^{b. Reviewed in April 1997 without substantive comment.}

^{c. At 1997 Annual Meeting, a sense of the house motion adopted to harmonize parol evidence rules in the three articles.}

^{Reporter's Notes: Follows current Article 2.}
 

^{SECTION 2B-302. COURSE OF PERFORMANCE OR PRACTICAL CONSTRUCTION.}

^{(a) Where the contract involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement.}

^{(b) The express terms of an agreement and any such course of performance, as well as any course of dealing and usage of trade, shall be construed whenever reasonable as consistent with each other, but when such construction is unreasonable express terms control course of performance, course of dealing and usage of trade; course of performance controls both course of dealing and usage of trade; and course of dealing controls usage of trade.}

^{(c) Subject to Section 2B-303 and 2B-606, course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance.}

^{Uniform Law Source: Section 2A-207; Section 2-208; Section 1-205. Revised.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-201. "Contract": Section 2B-102. "Party": Section 1-201. "Term": Section 1-201.}

^{Committee Vote:}

^{a. The Committee voted unanimously to adopt this section. (September, 1996)}

^{b. Reviewed without substantive comment. (April, 1997).}

^{Reporter's Note: Conforms to Article 2.}
 

^{SECTION 2B-303. MODIFICATION AND RESCISSION.}

^{(a) An agreement modifying a contract within this article needs no consideration to be binding.}

^{(b) An authenticated record that precludes modification or rescission except by an authenticated record cannot otherwise be modified or rescinded. However, in a standard form supplied by a merchant to a consumer, a term requiring an authenticated record for modification of the contract is not enforceable unless the consumer manifests assent to the term.}

^{(c) The requirements of Section 2B-201 must be satisfied if the contract as modified is within its provisions.}

^{(d) An attempt at modification or rescission which does not satisfy the requirements of subsection (b) or (c) can operate as a waiver under Section 2B-606.}

^{Uniform Law Source: Section 2A-208; Section 2-209.}

^{Definitional Cross Reference:}

^{"Agreement". Section 1-201. "Authenticate". Section 2B-102. "Consumer". Section 2B-102. "Contract". Section 2B-102. "Merchant". Section 2B-102. "Record". Section 2B-102. "Standard form". Section 2B-102. "Term". Section 1-201.}

^{Committee Votes:}

^{a. Voted 12-1 to approve the section and the use of manifest assent.}

^{b. Voted to retain reference to consumer, rather than mass market. (11-1) (Feb. 1997).}

^{c. Voted to reject a motion to make a "no oral modification" clause unenforceable in a consumer transaction. (1-10) (April, 1997).}

^{Reporter's Notes:}

^{This Section follows existing Article 2-209 except for the use of "manifest assent" regarding the use of a no modification term in a consumer contract. The content of Section 2-209(5) is included in Section 2B-806 on waiver. In subsection (b), Article 2 and Article 2A require no oral modification terms to be signed by the consumer; that concept appears here in the form of a requirement of manifestation of assent to the term, rather than signature. This allows the concept to operate in electronic environments if authentication is not feasible, while still protecting the consumer.}

^{If the agreement of the parties limits enforceability to modifications that are in a record, that agreement will be enforced. The rule is especially important in the on-going relationships in many commercial licenses and development contracts.}
 

^{SECTION 2B-304. CONTINUING CONTRACTUAL TERMS.}

^{(a) Terms of a contract involving successive performances apply to all later performances unless the terms are modified in accordance with this article or the contract, even if the terms are not subsequently displayed or otherwise brought to the attention of the parties.}

^{(b) Subject to Section 2B-303(b), Iif a contract provides that it may be modified as to future performances by compliance with a described procedure, a change proposed in good-faith pursuant to that procedure is effective as a modification if:}

^{(1) the procedure reasonably notifies the other party of the change; and}

^{(2) in a mass-market license, the procedure permits the other party to terminate the contract as to future performance if the modification deals with a material term and the party in good faith determines that the modification is unacceptable.}

^{(c) The parties by agreement may determine the standards for reasonable notice unless the agreed standards are manifestly unreasonable in light of the commercial circumstances.}

^{Definitional Cross Reference:}

^{"Agreement": Section 1-201. "Contract": Section 2B-102. "Electronic agent": Section 2B-102. "Good faith": Section 2B-102. "Mass-market license": Section 2B-102. "Notifies": Section 1-201. "Party": Section 1-201. "Term": Section 1-201. "Termination": Section 2B-102.}

^{Committee Action:}

^{a. Vote to extend (b)(2) to mass market, rather than only consumers.}

^{b. Deleted limitation that change be "materially adverse" to licensee and substituted "unacceptable in good faith." (7-5) (April, 1997)}

^{Reporter's Notes:}

^{1. Continuing Terms. Subsection (a) states the simple principle that contract terms, if enforceable, cover all contractual performance. In the language of the section, terms are continuing and need not be restated for each performance or use of a system. This principle is not limited to cases where the agreement requires future performances. It applies in any case where the subsequent performances are covered by the prior agreement. Terms of a purchase of information do not necessarily carry forward if the first agreement only pertains to the first performance. However, if the first agreement does apply to the first and to any subsequent purchases, the rule of this Section applies.}

^{2. Modifications of Continuing Contracts: General Issue. Subsection (b) addresses a common practice in online or other continuing service contracts, such as outsourcing arrangements. In these contracts, frequent changes occur in the terms of service and separate discussion or negotiation of each change is often not feasible or desired by the parties. Common practice entails posting changes in service conditions in a particular location or file and providing that the posted changes are effective when posted or at a later point in time.}

^{Subsection (b) specifies a fair method for changes in on-going relationships without disturbing other law or circumstances that might provide additional methods. See Section 2B-115(c). For example, a signed modification is effective. Similarly, Section 2B-303 states that modifications of contract do not require consideration. General common law, principles of waiver (see, e.g., Section 2B-606) and provisions on course of performance (Section 2B-302) among other sources of law also deal with enforceability of modifications of on-going contracts. Thus, some changes do not require the procedures described here.}