Back | WP 5.1 Version | PDF Version |
ASCII Text Version

This Draft contains revisions based on the April Meeting and on-going discussion and communication with consumer and other groups. There are no fundamental changes not contained in prior drafts. However, this Draft presents two important themes that should focus discussion.

The first deals with several issues on which the Committee has not yet taken a position. These are discussed in Part A of these notes. They include ideas presented earlier to which no substantive objection has been made and a new submission regarding scope that should be considered.

The second theme involves maintaining a focus on the entire draft, as contrasted to the details of individual sections and the overall balance of various interests. As the political process unfolds, various positions have been suggested and publicized that, understandably, focus on narrow aspects of the Draft. It is important that a broader perspective also be retained. This is outlined in Part B of these notes.

While the Drafting Committee resolved a number of issues at the April Meeting, several broad themes remain to be considered. These include:

1. Treatment of Informational Content Submissions.

The January Draft proposed a solution to one problem involved in applying Article 2 concepts of tender, rejection and revocation to information industries. Unlike the general rules in common law and the Restatement, the Article 2 model contains a very explicit focus on a particular transactional framework. If applied to entertainment and publishing sectors at the upstream level, this model would introduce new and often undesirable standards in the manuscript, script and other aspects of the information content industries. The proposed solution, which has not been reviewed by the Committee, lies in the concept of "information submissions" that applies to cases involving contracts where the submission is reviewed in terms of aesthetics and market suitability.

The insight that supports separate treatment for these cases is that it is a mistake to assume that submission of a manuscript is equivalent to tender of delivery of a product. It is not. Rather than requiring or anticipating immediate acceptance or rejection, submissions of content initiate a process of review and revision leading to a later decision to accept or reject the submission. Section 2B-602 reflects that reality; it places these transactional situations entirely outside of the tender-acceptance rules, relying heavily on common law themes (as implemented in Article 2B) and trade practice to define the rights of the parties.

One consequence is that, in idea or information submission contexts, acceptance does not occur unless there is an express indication of acceptance (or rejection) by the licensee. This corresponds to commercial practice in this context.

2. Treatment of "Performed on Receipt" Transactions.

A second setting in which Article 2 concepts of tender, inspection etc. create an uneasy fit with practice in information industries arises with respect to transactions in which, by merely viewing information, the licensee receives all the value of the transaction and because of the nature of the performance, that value cannot be returned in the sense that a defective toaster can be returned. This might involve, for example, a Dun and Bradstreet report on a company, a license of a formula for Coca Cola, a credit report, or a screening at home of a pay per view motion picture. In these cases, the idea of a right to reject is not relevant. What is relevant is ensuring that the recipient can recover if the received performance was not consistent with the contract.

Forcing an Article 2 framework on these transactions creates a dysfunctional change from common law principles, especially in the Article 2 right to inspect before payment. Inspection in such cases in effect transfers the value and the licensee cannot return (a basic requirement of rejection) the value even if it desires to do so.

Section 2B-608 proposes an treatment of such transactions that exists outside the sale of goods framework on tender, inspection and rejection. It places the transaction under the general rules of 2B-601 which parallel common law; the law currently applicable to such transactions. The common law principle does not describe a right of rejection, but allows one to avoid paying anything for performance that constitutes a material breach or to recover back the full payment previously made and allows recovery of damages for lesser breaches.

3. Mass Market License.

During the December meeting, the Drafting Committee and observers extensively discussed the definition and application of the concept of "mass market" with respect to this Article. Being a new, relatively innovative concept, much of the discussion focused on identifying the basic theme and structure of how the definition should be approached.

As a result of this discussion, the Committee voted to adopt an approach to defining the idea of a mass market in a structure centering on standard forms used in relatively small transactions directed to the general public. In light of the risk allocation issues involved and new nature of the undertaking, the agreed goal was to focus the definition on relatively small transactions in a retail marketplace. This Draft contains a definition implementing that decision. For non-consumer transactions (e.g., transactions between two businesses in a retail market), the definition combines a reference to retail and general public audiences with a monetary cap to achieve the intended focus.

The critical issue in the idea of a mass market license deals with how the concept is applied. As discussed in prior memoranda, the two general approaches to using this concept are: 1) treating the marketplace definition as a surrogate for consumer protection and thereby extending consumer protections to business transactions, or 2) using the concept primarily as a marketplace identifier which keys into various expectations about the nature of transactions in that market. In theory, the differentiation between consumer and mass market constructs as to when they should apply turns on whether the goal is to protect individuals who lack the expertise to understand contract issues (e.g., consumer) and cases where the goal is to identify a marketplace by reflecting presumed assumptions applicable in that marketplace. During the February Meeting, the Committee opted to apply the concept of "mass market" as the operative theme in all but a few sections in which the issue arises. The following applications of the two concepts exist in the current Draft:

"CONSUMER" APPLICATIONS:

2B-106 (choice of law): default rule

2B-107 (choice of forum): contract choice

2B-303 (limiting effect of no-oral modification clause): contract method

2B-618 (hell and high water clauses): effectiveness of clause

"Mass Market" Applications:

2B-105 (opt in to Article 2B): barred in mass market, rather than just consumer

2B-304 (modification of continuing contracts): withdrawal right required in mass market

2B-308 (notice of terms): terms unenforceable in mass market, rather than just consumer

2B-313 (viruses) effect of disclaimer limited in mass market, rather than just consumer

2B-403 (implied warranty of quality): merchantability in mass market

2B-406 (disclaimer of warranty): conspicuous required in mass market

2B-502 (transferability of license): mass market presumed transferable

2B-504 (security interest without consent): allowed in mass market

2B-601 (perfect tender): required in mass market, rather than just consumer

2B-607 (perfect tender): required in mass market, rather than just consumer

2B-610 (refusal for imperfect tender): allowed in mass market rather than just consumer

Perhaps the most important of these applications from the standpoint of causing increased risk to businesses who provide information pursuant to Article 2B are the provisions of Section 2B-308(b). The refusal term concept adopted in that section creates a potentially significant degree of uncertainty about what terms are and are not enforceable in a standard license and the degree of risk is directly associated with the scope of application of that section (e.g., consumer transactions or any business transaction occurring in what the draft defines as a mass market). At the April Meeting, the Committee narrowly voted to not adopt a reconstruction of that section which was suggested by a consumer advocate and would have narrowed the risk element significantly, while still protecting consumer interests.

4. Consumer Issues.

At several points, questions have been raised about the relationship between consumer law and Article 2B. As a general rule, the approach taken in Article 2B has been to not detract from existing law under Article 2 unless a significant difference exists between Article 2B subject matter and the transactions in goods that have served as the basis for traditional consumer rules. In some cases, this results in transporting Article 2 protections into a previously common law realm to which consumer protection law has not previously extended.

In some situations, such as with respect to the treatment of viruses and the ability to exclude from consumer contracts some terms of a standard form that, while conscionable, have other characteristics that suggest exclusion, Article 2B has enhanced consumer rights as compared to rights under current law in UCC Article 2.

As a general rule, Article 2B leaves unaffected state laws that give consumer protections in reference to the subject matter covered. The sole exception to that occurs in reference to the electronic contracting rules and is outlined in 2B-104(b).

Implicit in this is a judgment that Article 2B is not intended as a consumer protection code, but a commercial code.

A chart is attached reflecting a comparison between existing Article 2 law and Article 2B provisions.

5. Scope: The Role of Banks.

A Commissioner, representing Citibank, has communicated a proposal that the scope of Article 2B be adjusted to exclude, in essence, any transaction involving a bank as the licensor. The argument for this position is stated in the letter from Citibank that was distributed at the last meeting of the Committee. There are at least three issues presented by this proposal.

The first deals with whether Article 2B should cover information transactions where the subject matter (e.g., the information) represents funds or funds transfers regulated by other articles of the U.C.C. and by federal and state banking regulation. This Draft has consistently excluded materials covered by these other articles and contains a clarified exclusion about information representing money or monetary equivalents. Importantly, in implementing this exclusion, the Committee should recognize that modern developments in digital cash and similar systems place many institutions other than banks in this commercial environment. Regulations, such as Regulation E regarding funds transfer, do not apply solely to banks, but to any holder of a depository account and, depending of on-going regulatory activity, non-banks entities ill be included (e.g., a digital account created on a "smart card" for use to purchase a total of $100 of coffee from a coffee shop, a card containing frequent flier mileage for airline use).

The second issue deals with ho-Z this article deals with compliance with compliance to state or federal regulations about disclosure. The Citibank proposal suggests that a reason for exclusion lies in the inability to conform to both federal regulated disclosures and Article 2B disclosure requirements. This issue has been raised many times in discussion, but has not been resolved by the Committee. One response lies in the definition of "conspicuous" terms, the idea of manifesting assent and the idea of refusal terms. As redrafted, 2B-308 provides that a term disclosed in compliance with state or federal disclosure regulations is not a refusal term. A similar approach could be taken in reference to the other mentioned issues.

The third issue is fundamental to this Article. It involves drawing a line between regulated and excluded (if the Committee so chooses) banking activities, and information or access licensing identical to that engaged in by Netscape, Westlaw, Home Shopping, Microsoft Network, America On-Line, and others. As the information industries experience convergence where motions pictures and software tend to be increasingly the same, so too is the banking industry converging into fields identical to that of the information industries. Banking entry into these fields is regulated - a bank must obtain approval under Regulation Y to do so. But this is scope regulation, not content regulation. A review of bank websites, for example, reveals that some deal only with on-line banking, while others do not. The Wells Fargo site, for example, offers a general shopping mall, a link to purchase software and various other information services.

+ reduces uncertainty and non-uniformity of software and online contract law

+ provides contract law roadmap for converging industries with differing traditions

+ confirms and reinforces contract freedom in commercial transactions

+ innovates concept of mass market transaction that extends U.C.C. consumer protections to some businesses

+ establishes strong protection encouraging dissemination of published informational content in contractual relationships

+ expressly recognizes layered contract formation occurring over time

+ clarifies enforceability of standard forms in commercial deals subject to procedural requirements

+ proposes solution for battle of forms context

+ applies "material breach" concept corresponding to common law

+ sets standards relating to access and internet contracts

+ establishes contract framework for idea and content submission

+ adjusts statute of frauds to information transactions

+ provides ownership rules for outsourcing and development contracts

+ creates understandable implied warranty for commercial deals

+ outlines relationship between retailer, publisher and customer

+ refines standards for enforcement of liquidated damages rule

+ allows parties to contract for specific performance

+ provides standard interpretations for often litigated grant terms

+ workable choice of law rules for internet

+ fully enforceable choice of forum clause in commercial contracts

+ establishes guidance for enforceable attribution procedure in electronic contracts

+ validates mass market license subject to refusal term concept

+ creates method for contracting in Internet and similar contexts

+ establishes guidance on the meaning of grants

+ recognizes licensor control of transferability of the license

+ deals with effect on warranty of modification of code in a copy of a program

+ limits infringement warranty to knowledge but expands it to cover use

+ codifies contractual treatment of electronic limiting or management devices

+ reconciles inspection concepts with presence of vulnerable confidential material

+ establishes guidance on procedures to modify on-going contracts

+ defines exceeding a license as a breach of contract

+ establishes standard on connection of remedy and consequential damages limits

+ excludes consequential damages for published informational content

+ broadens financing options for licensee interest in a non-exclusive license

+ creates refund right and procedural steps that give a real option to withdraw as a precondition for creating a contract in mass market

+ gives courts the right to invalidate undisclosed refusal terms in standard form mass market transactions for both consumers and businesses

+ gives licensee a right of quiet enjoyment in the license

+ codifies that advertising can create an express warranty

+ creates a warranty for accuracy of non-published information content

+ creates implied system integration warranty

+ extends infringement warranty to a warranty that use does not infringe

+ requires that disclaimers of implied warranties be in a record (writing)

+ expressly recognizes implied licenses

+ creates broad scope presumptions

+ makes mass market licenses presumptively transferable

+ uses perfect tender rule for mass market transactions which does not exist in current law except for goods

+ requires affirmative acts of assent to a record

+ creates direct contract with remote publisher in mass market

+ increases class of people to whom warranty runs for all types of damage

+ creates right to demand a cure for accepted imperfect tender in commercial contracts

+ enforceability of releases without consideration

+ enforceability of term providing license cannot be canceled

+ creates warranties and rights against retailer independent of publisher license

+ places substantial limitations on electronic self-help

+ presumes perpetual term in single payment software license

+ prohibits choice of forum that unfairly disadvantages consumer

Art 2: Rules Relating to ConsumersArt. 2B: Rules Relating to Consumers

GENERAL RULES

Consumer protections extend to businesses via mass market conceptdoes not provide for thisimplicit in "mass market" for most consumer-related rules

Non-UCC consumer rules; relationship to UCCno provisionexpressly retains and defers to consumer rules outside U.C.C., except for electronic contract formation issues

Mass Market Standard Forms: invalidate some terms even though the terms are not unconscionableno protection; Restatement adopted in less than 10 states; case law generally sustains enforcement of forms in the absence of special legislation and except in battle of forms which seldom affects consumersexcludes "refusal" terms where there was no knowledge and assent to the term; requires procedures and refund opportunity; applies modified Restatement rule (2B-308)Standard forms: require affirmative act to be boundnot dealt with; cases often allow enforcement without affirmative act; see Gatewaycontract not enforceable unless consumer agrees or affirmatively manifests assent to the form (2B-308)Refund right: if terms of form contract are not acceptableno rule; case law does not require a refund rightrequired if license refused; source of refund may be either the remote publisher or the retailer (2B-113) Effect of remote manufacturer (publisher) contract terms on obligations of retailernot dealt with; case law varies, but often makes the two independentspecifies that retailer is not bound by and does not receive the benefits of the remote party's contractual terms (2B-606)

Parol evidence

no special rule for consumerssame (2B-301) Modification: bar oral modifysignature makes clause enforceablemanifest assent makes clause enforceable (2B-303)Unconscionable clause invalidtraditional rule same (2B-109)Unconscionable: clause or contract can be invalidated for unconscionable inducementleft to other lawsame (2B-109)LAW AND FORUM CHOICE

Choice of forum: enforceability of contract term dealing with the issueno rule; common law includes Supreme Court decision enforcing against a consumercontract choice not enforced against consumer unless no "unfair disadvantage;" also subject to common law limits (2B-107)Choice of law: in the absence of a contract term dealing with the issueno rule; Art. 1 or common law rules applyon-line contracts: licensor location; for tangible items involving consumers: delivery place; otherwise Restatement (2d) rules (2B-106)Choice of law: enforceability of contract term dealing with the issue no rule; Art. 1 requires that the contract choice have a reasonable relationship to the transactionallows contract choice except where precluded by consumer statute or judicial rule which are not affected by Article 2B

WARRANTIESWarranty: title or authoritygood title warrantyauthority warranty (2B-401)

Warranty: infringementwarranty that merchant will deliver free of infringement, but warranty does not apply to the use of the information and the premise that use does not infringe; warranty creates liability without knowledgewarranty that merchant will deliver information free of infringement claims and that the use of the information by the licensee does not infringe; warranty is that there is no knowledge (2B-401)Warranty: quiet enjoyment

no warrantywarranty (2B-401)

Implied Warranty: merchantability of productgiven to buyer by merchant sellersame (2B-403)Implied Warranty: accuracy of informational contentno warranty warranty except for published informational content (2B-404)Implied Warranty: fitness

given to buyer for product only same (2B-405)Implied Warranty: System components will work in integrationno warrantywarranty (2B-405)Viruses: Contractual Obligationno warranty; could be implicit in the disclaimable merchantability warranty, but no current case law on pointobligation to use reasonable care to avoid required and this obligation cannot be disclaimed in mass market with respect to tangible products (2B-313)Express warrantyany affirmations or promises that become part of basis of bargain; except pufferysame (2B-402)Express warranties: created by advertisingno specific rule; case law variescodifies that advertising can create an express warranty (2B-402)DISCLAIMERS

Title & infringement: is the warranty disclaimable?yes; through specific language or circumstancessame (2B-401)Express warranties: is the warranty disclaimable?in most cases cannot be disclaimed; requires that disclaimer and warranty be read as consistent or, if that is not possible, that disclaimer not effectivesame (2B-406)Merchantability warranty: is the warranty disclaimable?yes same (2B-406) >merchantability - how disclaim?mention merchantability; no record required, but conspicuous if a record is usedplain language disclaimer along the lines provided in text or mention the word merchantability; requires that disclaimer be in a record and conspicuous (2B-406)Fitness warranty: is the warranty disclaimable?yes same (2B-406)

>fitness: how disclaim?say "no warranties beyond this"

plain language (2B-406)Disclaimer: "as is"

works for all warranties but the warranty of good title

same (2B-406)THIRD PARTY LIABILITY

Third party liability majority version: extend to householdyessame (2B-409)Third Party majority version: damages that are coveredpersonal injury only; may disclaim basic warrantypersonal injury and economic loss; may disclaim warranty (2B-409)ACCEPTANCE AND REJECTION

Acceptance of tendercan only occur after opportunity to inspectsame; except for services and informational content (2B-609)Acceptance: time to accept or rejectno specific time period specifiedsame (2B-612)Right to reject: single delivery"perfect tender"same (2B-610)Right to reject after defined time from delivery (e.g., 7 days)not givensame Right to reject: deliveries made in installmentsrequires substantial impairmentrequires material breach (2B-601)Revocation of Acceptance

requires substantial impairmentrequires material breach (2B-613)Seller/ Licensor right to cure in consumer casesallowed in some casesconsumer controls the issueDAMAGES AND REMEDIES

Damages presumed to include consequential damages unless contract indicates otherwise

same (2B-707, 709)Consequentials include personal injuryyes, if proximate causation existssame (2B-102)Damages: Contractual limitation on economic loss recoverycan limit damages if not unconscionablesame (2B-704)

Damages: Contractual limitation on personal injury loss recoverypresumed unconscionableno specific rule (2B-704)Modify Remedies

allowedsame (2B-704)Limiting damages to replace or repairallowedsame (2B-704)Effect of failure of limited remedy on contractual limitation of consequential damagesno clear rule; case law splitsthe two contract terms are independent unless contract provides otherwiseMinimum adequate remedy: does this over-ride contract termsnot as indicated in statute; comments imply that this is a consideration, but few states apply that theorynot as indicated in statuteStatute of limitationsfour years from date of breach in most cases; cannot be reduced below one yearfour years from date of breach, extended to maximum of five by discovery rule; cannot be reduced to less than one year

(2B-705) > Limitations: when warranty extends to future, from what date does limitation period run?cause of action for warranty breach accrues when breach was or should have been discoveredaccrues when the conduct occurs or should have occurred, but no later than the date the warranty expires (2B-705)Self Help Repossessionif seller retains title, Art. 9 applies and allows repossession for any defaultrequires material default and places other restrictions greater than in Art. 9 (2B-716)

SECTION 2B-709. LICENSEE'S DAMAGES.

SECTION 2B-710. RECOUPMENT.

SECTION 2B-716. LICENSOR'S RIGHT TO SELF-HELP.

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

SECTION 2B-102. DEFINITIONS.

(a) In this article:

(1) "Access contract" means a contract for electronic access to a resource containing information, resource for processing information, data system, or other similar facility of a licensor, licensee, or third party.

(2) "Authenticate" means to sign, or to execute or adopt a symbol, a digital identifier, or encrypt a record in whole or in part with present intent to identify the authenticating party, or to adopt or accept a record or term, or to establish the authenticity of or signify a party's acceptance of a record or term that contains the authentication or to which a record containing the authentication refers.

(3) "Cancellation" means an act by either party which ends a contract because of a breach by the other party.

(4) ""Computer program"" means a set of statements or instructions to be used directly or indirectly to operate in an information processing system in order to bring about a certain result, but does not include any informational content created or communicated as a result of the operation of the system.

(5) "Consequential damages" includes compensation for losses of a party resulting from its general or particular requirements and needs which at the time of contracting the other party had reason to know would probably result from a breach of contract and which are not unreasonably disproportionate to the risk assumed by the party in breach under the contract and could not have been prevented by the aggrieved party by reasonable measures. The term also includes losses resulting from injury to person or property proximately resulting from breach of warranty. The term does not include direct or incidental damages.

(6) "Conspicuous" means so displayed or presented that a reasonable individual against whom or whose principal it operates ought toshould have noticed it or, in the case of an electronic message intended to evoke a response without the need for review by an individual, in a form that would enable a reasonably configured electronic agent to take it into account or react to it without review of the message by an individual. A term is conspicuous if it is:terms include:

(A) a heading in all capitals (e.g., Non-Negotiable Bill of Lading) equal or greater in size to the surrounding text;

(B) language in the body or text of a record or display in larger or other contrasting type or color than other language;

(C) a term prominently referenced in the body or text of an electronic record or display that can be readily accessed from the record or display;

(D) language so positioned in a record or display that a party cannot proceed without taking some additional action with respect to the term or the reference thereto; or

(E) language readily distinguishable in another manner.

(7) "Consumer" means an individual who is a licensee of information primarily for personal, family, or household use. The term does not include a person that is a licensee of information primarily for profit making, professional, or commercial purposes, including agricultural, business management, and investment management, other than management of an ordinary person's personal or family assets. Whether or not an individual is a consumer is determined by the intent of the licensee at the time of contracting.

(8) "Contract fee" means the price, fee, or royalty payable under a contract under this article.

(9) "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 an information processing machine or similar device.

(9a) "Court" includes an arbitrator or other dispute resolution officer.

(10) "Delivery" means the transfer of physical possession, or the communication, of a copy to a recipient of the copy, to a facility controlled by the recipient or its intermediary, or to a bailee if the recipient has a right of access to the copy in the bailee's possession.

(11) "Direct [general] damages" means compensation for losses of a party consisting of the difference between the value of the expected performance as measured by the contract and the value of the performance actually received. The term does not include consequential damages and incidental damages.

(12) "Electronic" means electrical, digital, magnetic, optical, electromagnetic, or any other form of wave propagation, or by any other technology that entails capabilities similar to these technologies.

(13) "Electronic agent" means a computer program or other electronic or automated means used, selected, or programmed by a party to initiate or respond to electronic messages or performances in whole or in part without review by an individual.

(14) "Electronic message" means a record that, for purposes of communication to another person, is stored, generated, or transmitted by electronic, optical, or similar means. The term includes electronic data interchange, electronic or voice mail, facsimile, telex, telecopying, scanning, and similar communications.

(15) "Electronic transaction" means a transaction formed by electronic messages in which the messages of one or both parties will not be reviewed by an individual as an expectedroutine step in forming the contract.

(16) "Financier" means a person that pursuant to a security agreement or lease provides a financial accommodation to a licensor or licensee and obtains an interest in the rights under a license of the party to which the financial accommodation is provided. The term includes a person that becomes a licensee and then sublicenses or otherwise transfers the license to the financially accommodated party only if, before the licensor provides the information, the licensor receives notice of the intent that the financially accommodated party will be the end user of the information and the financially accommodated party agrees to the terms of the license as a condition to the financial accommodation.

(17) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing.

(18) (A) "Incidental damages" includes compensation for any commercially reasonable charge, expense, and commission incurred after breach by the other party in:

(i) inspection, receipt, transportation, care, or custody of property;

(ii) stopping shipment, delivery, or transmission;

(iii) effecting cover or return of copies or information;

(iv) reasonable efforts to mitigate the consequences of breach; and

(v) actions otherwise incidental to the breach.

(B) The term does not include compensation for consequential or [direct] [general] damages.

(19) "Information" means data, text, images, sounds, computer programs, databases, literary works, audiovisual works, motion pictures, mask works, or the like, and any intellectual property or other rights in information.

(20) "Informational content" means information which data, text, images, sounds, or similar information is intended to be communicated to or perceived by a person in the ordinary use of the information.

(21) "[Intellectual] [Information] property rights" includes all rights in information created under laws governing patents, copyrights, trade secrets, trademarks, publicity rights, or any similar law that permits a party independent of contract to control or preclude another party's use or disclosure of information because of the rights owner's interest in the information.

(22) "License" means a contract that expressly authorizes, prohibits or controls grants permission to access to or use of information, if the contract expressly conditions, withholds, or limits the scope of the rights granted, grants only nonexclusive rights, or affirmatively grants less than all rights in the information, whether or not the contract transfers title to a copy of the information. The term includes an access contract and a consignment of copies of information. The term does not include an assignment or other a contract that transfers ownership of intellectual property rights, that reserves or creates a financier's interest, or that makes a transfer by will or operation of law.

(23) "Licensee" means a transferee or any other person designated in, or authorized to exercise rights as a licensee in a contract under this article whether or not the contract constitutes a license.

(24) "Licensor" means a transferor in a contract under this article whether or not the contract constitutes a license. The term includes a provider of services. In an access contract, as between a provider of services and a customer, the provider of services is the licensor, and as between the provider of services and a provider of content for the service, the content provider is the licensor. If performance consists in whole or in part of an exchange of transfers of information, each party making a transfer is a licensor with respect to the information it providestransfers.

(25) "Mass market license" means a standard form that is prepared for and used in a mass market transaction.

(26) "Mass market transaction" means a transaction in a retail market for information involving information, directed to the general public as a whole under substantially the same terms for the same information, and involving an end user licensee that is an end user and acquired the information in a transaction under terms and in a quantity consistent with an ordinary transaction in the general retail distribution. The term does not include:

(A) a transaction between parties neither of which is a consumer in which either the total consideration for the particular item of information or the reasonably expected fees for the first year of an access contract exceeds [ ];

(B) a transaction in which the information is customized or otherwise specially prepared for the licensee;

(C) a license of the right to publicly perform or publicly display a copyrighted work; or

(D) a commercial site license or an access contract between two businessesparties neither or which is a consumer with respect to the particular transaction.

(27) "Merchant" means a person that deals in information of the type involved in the particular transaction, a person that by occupation purports to have knowledge or skill peculiar to the practices or information involved in the transaction, or a person to which knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that by its occupation purports to have the knowledge or skill.

(28) "Nonexclusive license" means a license in which the licensor or other person authorized to make a transfer or license is not prohibited from licensing the same rights in information within the same scope to other licensees or having and has not previously done so in a license the remains in force at the time of the contract. The term includes a consignment of copies.

(29) "Published informational content" means informational content that is prepared for, distributed, or made available to all recipients or any class of recipients in substantially the same form and not provided as customized advice tailored for the particular licensee by an individual acting on behalf of the licensor using judgment and expertise. The term does not include informational content provided within a special relationship of reliance between the provider and the recipient.

(30) "Receive" means to take delivery of a copy of information. An electronic record is received when it enters an information processing system in a form capable of being processed by a system of that type and the recipient uses or has designated that system for the purpose of receiving such records or information. "Receipt" has an analogous meaning.

(31) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

(32) "Release" means an agreement not to object to, or exercise legal or equitable remedies against, the use of information if the party granting the release is not required to act affirmatively enable or support the other party's use of the information by providing copies of the information, access, or otherwise. The term includes a waiver of intellectual property rights or a covenant not to sue.

(33) "Sale" means the passing of title to a copy of information for consideration.

(34) "Scope", with respect to a license, means the terms of the license that define the licensed subject matter or copies, the uses authorized, permitted, prohibited, or otherwise controlled, the geographic area, market, or location in which the license applies, and the duration of the license.

(35) "Software" means a computer program including any informational content included or to be included as part of a program and any supporting material such as data, program description, media, or documentation provided by a licensor as part of the transaction.

(36) "Software contract" means a contract that licenses software or that conveys ownership of software, including a contract to develop software as a work for hire, whether or not the contract transfers ownership of a copy of the software.

(37) "Standard form" means a record, or a group of linked records presented as a whole, prepared by one party for general and repeated use and consisting of multiple contractual terms used in a transaction without negotiation of or changes in most of the terms. Negotiation or customization of price, quantity, method of payment, standard performance options, or time or method of delivery does not preclude a record from being a standard form.

(38) "Substantial performance" means performance of an obligation in a manner that does not constitute a material breach of contract.

(39) "Terminate" means to end a contract or a part thereof by an act by a party under a power created by agreement or law, or by operation of the terms of the agreement for a reason other than for breach by the other party .

(40) "[Transfer] [Activation] of rights" means an initial grant of a contractual right or privilege as between the parties for the transferee to have access to, modify, disclose, distribute, purchase, lease, copy, use, process, display, perform, or otherwise take action with respect to information, coupled with any actions initially necessary to enable the transferee to begin to exercise the right or privilege.

(b) In addition, Article 1 contains general definitions and principles of construction that apply to this article.

Committee Votes:

1. Adopted the term "authentication" to replace "signed" by a consensus without a formal vote.

2. Voted to retain the concept of "mass market" licenses as in prior drafts, subject to revision of the definition of this term and consideration of its use in specific sections as contrasted to use of the term "consumer." Vote: 13-0 (September, 1996)

3. Voted to adopt a definition of "mass market license" that utilizes a reference to a market involving the general public and that centers on small retail transactions including most consumers and excluding special primarily business transactions. (December, 1996)

4. Voted to move references in definition of consequential damages to the comments except for the personal injury reference. Vote: 8-5 (Feb. 1997)

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

6. Voted 10-2 to retain the mass market concept pending consideration of its application in the Article. (Feb. 1997)

7. Voted to delete the language in mass market definition that provided explicit coverage of all consumer transactions. Vote: 8-4 (Feb. 1997)

8. Voted to utilize a dollar limitation to cap the risk factor created under the definition of mass market, Vote: 10- 3. (Feb. 1997)

Reporter's Notes:

1. Access contract includes the relationship that arises when there is a single access to the resource (e.g., web site) if, under ordinary contract law principles, access creates a contract . The relationships include contracts for use of E-Mail systems, EDI services by a provider, as well as web site contracts. The term refers solely to electronic access situations and does not cover attending movie theaters or the like. The term includes situations where a database in the possession of a licensee automatically updates by accessing or being accessed by a remote facility as in the following situation: Lexis provides an integrated environment where the software first queries an on-site copy of a CD-ROM then checks a local network update and obtains the latest information in a seamless internet or dial-up updating.

As outlined in the definition of "licensor", the model followed in three party access transactions, such as where the content provider makes content available through a third party access provider, entails two separate agreement and, in some cases, three separate contracts. The first is between the content provider and the on-line provider. This license may be an ordinary license to use the information or an access contract in itself. The second is between the on-line provider and the end user or other client. This is an access contract. The content provider is not necessarily party to or beneficiary of the contract. The third possible contract occurs when the content provider additionally contracts directly with or establishes terms with the end user or client.

2. Authenticate. This article replaces the traditional idea of "signature" or "signed " with a term that incorporates modern electronic systems, including all forms of encryption or digital symbol systems. Basically, the fact of authentication can be proved in any manner including proof of a process that necessarily resulted in authentication. Use of an "attribution procedure" agreed to by the parties per se establishes that a symbol or act constitutes an authentication.

Authentication differs from manifesting assent in this article. Authentication (signing) always constitutes manifesting assent, but the reverse is not true. For example, tearing open a package or clicking on an icon indicating assent may manifest assent, but does not constitute a signature.

3. Computer program. This definition parallels the federal Copyright Act.

4. Consequential damages. This article follows existing Article 2. Personal injury and property damage are a form of consequential damages; all other requirements being met. This section makes clear that, as under current law, property damage and personal injury damages are treated under a standard of proximate causation, rather than simply foreseeability.

The basic premise of consequential loss other than for personal injury and property damage is that it is attributable to a breaching party only if some level of foreseeability can be proven. Beyond that, the basic test for whether a type of loss falls within direct or consequential damage as a measure lies in the degree to which the loss is directly associated with a reduction in the value received through contract performance as contrasted to what was anticipated as measured by the values assigned to events under the contract itself. Thus, consequential damages include damages in the form of lost profit or opportunity, damages to reputation, lost value in confidential information because of wrongful disclosure or misuse, damages for loss of privacy interests associated with the contract, loss of data as a result of the operational defect, and like damages.

Most commercial contracts deal with exclusion or inclusion of consequential loss in practice and that negotiation process should be supported by a delineation, insofar as possible, of what falls into this category and what does not. The illustrations suggested above cover many relevant situations providing clarity for negotiation. The theme here is that consequential losses go outside the principle that the performance itself was less in quality than was agreed to by the parties.

This draft follows draft revisions of Article 2 on disproportionality. Draft Article 2 allows a court to reduce consequential damages if unreasonably disproportionate to the risk assumed by the breaching party. A motion to delete that phrase was defeated on the floor of the Conference.

5. Conspicuous. This definition follows existing law and adds new themes to deal with electronic contracting. As under current law, under Section 2B-115 whether a term is conspicuous is a question of law.

Current law in UCC ' 1-201(10) contains three safe harbors for making a clause conspicuous; these have been part of law for over fifty years. They serve a critical role in planning and drafting documents. As a general rule, a term that conforms to a "safe harbor" provision is held to be conspicuous. Many cases hold that failure to conform to a safe harbor may invalidate any claims to being conspicuous.

The idea of being conspicuous in a message to an electronic agent the reference is to whether the agent has the ability to act on the term; the term must be in a form that can be processed and understood by the computer. It need not be otherwise separated out. Computers do not respond differently to capital letters or lower case. The electronic message suffices if it is designed to invoke such a response from a "reasonably configured" electronic agent, a concept that will be spelled out in the commentary to indicate that it intends an analogous construct that parallels the reasonable man standard used for the general concept of conspicuous.

Revisions of Article 2 propose abolition of the safe harbor concepts present in current law. Article 2B follows existing law. The theme of conspicuousness blends both a notice function and a planning function giving certainty to the party preparing and using the term. It is equally important to ensure that the recipient of a record receives notice of the contents and that the party who reasonably desires to rely on the terms of the record can do so. Taking out all safe harbor language eliminates the second objective and jeopardizes the first.

6. Consumer: Existing Article 2 does not define "consumer." Article 9 focuses on persons acquiring property primarily for personal or household uses. European law uses a different approach and defines a "consumer" as one entering into a contract outside her business or profession.

This Draft focuses on the time of contracting to define the status of a party. The term "consumer" triggers restrictions on contracting. While most often, intent does not change from the time of contract to the time of delivery, when changes occur, a time of delivery focus would retroactively change the rules. The issue is important in Article 2B since many contracts in Article 2B are on-going relationships; a delivery concept might provide different characterizations of the same transaction at different points in time.

The Article 9 definition provides a template for this Draft. The Article 9 definition creates serious interpretation issues when used for transactions that are not security interests that have been encountered in case law outside Article 9. This Draft clarifies the focus and resolves some of those problems. Some personal uses are not consumer uses (see, e.g., a stock broker using database software to "personally" track billion dollar investments). Distinguishing these personal business uses and truly consumer uses holds great importance in Article 2B because software and other information can be used "personally" in traditional business contexts. The exclusions in the definition apply to profit-making, profession, or business use. In the modern economy where individuals can and often do engage in seriously significant commercial enterprises without the overlay of a large corporation, the personal use idea needs to respect and reflect the modern practice, especially in this area. The proposed definition distinguishes between persons using information in profit making and business uses and personal or family uses such as ordinary asset management for an ordinary family.

This issue has been considered in many areas of law that have evolved since the original definition of Article 9. The issues have proven to be difficult and subject to litigation under the Article 9 concept in lending, bankruptcy and other contexts. For example, a number of reported decisions focus on whether or when a purchase of stocks or limited partnership assets for investment purposes would be considered a consumer purchase since it might fall within the general reference to "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) (UCC definition "not especially helpful on its face"). Some courts emphasize the difference between acquisition for "consumption (consumer)" and acquisition or use "for profit-making". This approach comes in part from the Truth in Lending Act which uses a definition of consumer debt much like the definition in Article 9 of consumer but additionally contains an express exemption for business transactions. The "profit-making" test has been applied in bankruptcy cases interpreting a Bankruptcy Code provision identical to the standard UCC definition. For example, 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) ("The farm operation is a business for the production of income. Debt used to produce income is not consumer debt "primarily for a personal, family or household purposes.").

7. Copy: This definition was designed to correspond to copyright law. In the Copyright Act, cases hold that a copy does not require permanence, but cannot be purely transitory, such as an image on a screen. Moving information into a computer memory makes a copy of that information.

8. Court: This definition extends the power to make choices to officers of non-judicial forums.

9. Direct damages: The Draft defines "direct damages" to provide guidance on the distinction critical to commercial practice that differentiates types of damages for disclaimer and other contract language. Direct damages are losses associated with a reduction of value or loss of value as to the contracted for performance itself, as contrasted to losses caused by intended uses of the performance or use of the results of the performance by the recipient outside the contract. Direct damages are measured in the damages formulae in this Article.

The definition rejects cases where courts treat as direct damages losses that relate to anticipated advantages outside the contract that were to flow from the use of the product. These are consequential damages. Thus, one case held that defects in a system under a contract that disclaimed consequential damages included all the lost benefits that the party expected from the deal (a total far in excess of the purchase price and incorporating what would ordinarily be consequential loss). The issue is: if we have software purchased for $1,000 which, if perfect, would give profits of $10,000 and the thing is totally defective, should the "value" of the software be considered to be "$10,000 or $1,000 as "general" damages? The answer here is $1,000. Similarly, if a virus in a program causes a $10,000 loss, but the program otherwise fully performs, should that $10,000 be direct or consequential loss? The draft adopts the view of most courts and treats this as consequential loss.

10. Electronic Agent: An electronic agent is a program designed to act on behalf of the party without the need for human review. As a general rule, a party adopting use of such agents is bound by (attributable for) their performance and messages. The term plays an important role in shaping responsibilities and how parties comply with various conditions, such as an obligation to make terms conspicuous. Courts may ultimately conclude that an electronic agent is equivalent in all respects to a human agent, but this Draft does not go so far, making specific provisions relating to electronic agents when needed. In this respect, the Draft is consistent with Article 4A as well as with modern practice. The accountability of a party for actions of a computer program may hinge on different issues than accountability for a human agent.

11. Electronic Message: This term has been broadened to parallel a definition used in the draft UNCITRAL Model Law and to expressly include reference to fax, telex and similar electronic transactions. The expansion serves an important purpose in reference to issues about when a contract is formed through electronic messages. The new terms, however, refer to qualitatively different subject matter in that pure electronic messages assume that a human will eventually read or react to the transmission. The expansion creates ambiguity in reference to defining whether contracts are formed when a human interacts with a computer or two computers interact with each other in the absence of human direct guidance.

The definition does not refer to a transfer from one system to another. In many cases, host computers handle data (e.g., email files) for both parties, and the message moves within the computer from one file to another. That type of transmission engages no policy issues different from the case of an actual communication of digital information from one location to another.

12. Financier: This definition provides the basis for the proposed integrated treatment of financing arrangements in this article. The definition covers both security interests and leases. The definition sets out coverage of what in other contexts are described as finance leases where the lessor, for purposes of financial accommodation, acquired a license which it then leases down to a licensee. Qualifying for finance treatment requires, under this definition, both notice to the licensor and actual agreement or assent by the licensee to the licensee. These requirements protect both the licensor and licensee's interests.

The exclusion in the second sentence deals with a circumstance unique to some finance leasing: the case in which the license is given to the financier and then transferred down to the financed party (licensee). This transaction will often violate the terms of transferability in a license. In this case, to qualify for coverage under the financier language, the party must give notice to the licensor of and financier status depends on making the financial accommodation conditional on the licensee's assent to the license terms. This protects both the licensor and the licensee.

13. Good Faith: The definition follows current Article 2 law and also extends the duty of good faith and fair dealing to consumers.

14. Informational content: This definition is intended to cover materials (facts, images) whose ordinary use communicates knowledge to a human being or organization. Thus, for example, in a database of images contained on a CD- ROM along with a program to allow display of those images, the program is not information content, but the images are. Similarly, when one accesses Westlaw and uses its search program to obtain a copy of a case, the search program is not content, but the text is within the definition. The reference here is to the effect of the information in its normal use.

15. Intellectual Property Rights: The definition is to be inclusive and capable of responding to new developments in national and international law, such as possible non-copyright database protections. With each area of law referenced here, the relevant law itself defines what rights are and are not covered. Whether this affects contract limitations pertaining to the information has been debated, but subject to misuse and other regulatory concepts that go beyond this statute, the general approach in courts is that a property right need not exist in order to have an enforceable contractual limitation. The concept covers rights created under any body of law, including federal law, state law, and the law of other countries. The definition of intellectual property rights does not include the right to sue for defamation or similar tort claims.

16. License: The essence of this definition lies in the conditional or limited nature of the contract rights. At least some conditions must be express, rather than implied. The distinction between an unrestricted sale of a copy and a license revolves around the terms of the contract as expressed, rather than on implied conditions. In an unrestricted sale of a copy, the transferee receives ownership of the copy, but if intellectual property rights apply to the information on the copy, is subject to implicit restrictions on use of the information derived from intellectual property law. In a license, whether or not ownership of the copy is transferred, the transferee is subject to express contract restrictions or receives a contract grant that expressly gives less than all rights in the information.

Some suggest that "implied licenses" should be included. These arise, for example, where a court holds that, to make the transaction reasonable in light of the parties' expectations, some rights or limitations not express should be inferred. Many such transactions are within this Article, including a transaction where some rights are implied in any otherwise conditional transaction. On the other hand, the Article does not include implied in law licenses such as under first sale rules in copyright. As noted by the Federal Circuit Court of Appeals, a sale can be made conditional on intellectual property rights (e.g., patent in that case) and, similarly, while a sale of a copy transfers some copyright rights under federal law, the licensor retains control of a great deal of the copyright law's exclusive rights even as to that copy. A license deals with control of rights of use and the like with reference to the information, while title to the goods deals simply with that - title to the goods.

17. Licensor and Licensee: These are generic terms. The terms refer to the transferee and transferor in a contract covered by this article. Obviously, the transferee in a license is not the employee itself, but the company that acquired contractual rights under the agreement. In the definition of licensor, several specific illustrations are used to avoid confusion in cases where more than one party transfers information, that is, where the parties exchange information or performance.

18. Mass-market transaction. This definition distinguishes between a mass market transaction and a mass market license, reflecting the fact that some mass market transactions covered by this Article may not involve a standard form contract. Since the decision was made to use the mass market concept in lieu of the concept of consumer in a number of situations where a form may not be involved, the broader term "transaction" was necessary to avoid excluding these transactions from various consumer protections.

19. Mass-Market License: This definition and the immediately prior definition distinguish between a mass market transaction and a mass market license, reflecting the fact that some mass market transactions covered by this Article may not involve a standard form contract.

The definition contemplates a retail marketplace where information is made available in pre-packaged form under generally similar terms. It applies to information that is aimed at the general public as a whole, including consumers. It would not cover products directed at a limited subgroup of the general public, such as members of a club or persons whose income exceeds a specified level. Where the line will be drawn in determining the size of the subgroup that would qualify for a general public distribution cannot be answered absent judicial consideration of specific cases. However, the intent is that the products covered here do not include specialty software, information directed to specially targeted limited audiences, or professional use software, but materials that appeal and intend to appeal to a general public audience as a whole where the identity and status of the eventual licensee is irrelevant

This captures most of a true retail setting, such as transactions in department stores or the like. Article 2B will be the first UCC article to extend consumer-like protections to business transactions in any form and the first to tailor at least some default rules based on that concept. The goal is to do this in a limited manner, reflecting the innovative nature of the concept, while confining the risk created by focusing on small transactions for information oriented toward the broad general public.

The dollar limit should be selected based on empirical evidence relating to the pricing structure of modern software transactions. In a review of several sources, few items of consumer software exceed $200. The price curve is downward, rather than increasing. A $500 limit would far exceed the average cost of retail business software. As of the date that this Draft was prepared, the Committee had not voted on the dollar amount.

The definition excludes any non-consumer transaction that exceed the dollar limit as to the particular item. In a situation where items of software are bundled together and with hardware, the dollar limitation applies to each item separately. In this bundled transaction respect, however, it should be noted that the decision in Article 2 to not utilize a mass market theory creates a potential anomaly: The items of software will most likely be mass market and subject to the provisions of 2B-308, while unless the purchaser is a consumer, the hardware would not be subject to the analogous provision in Article 2.

The other business exceptions identify situations involving site licenses, typical performance licenses (e.g., ASCAP, Broadcast Music) and situations where the licensor provides customization of the product, rather than transferring it essentially of the shelf.

This Draft proposes a bifurcated treatment of on-line (Internet) transactions. Most consumer transactions on Internet fall within the definition and a vast number of consumer transactions occur on Internet. It is especially important however, with this new transactional environment, to not regulate business transactions.. The approach in this Draft is to exclude from the definition of mass market any online transaction not involving a consumer. This gives the online industry room for expansion and growth not subject to unintentional regulations, while preserving consumer protections in that environment.

20. Receive: This definition covers receipt of messages and performance in an information contract. Electronically, the occurrence of receipt hinges on sending the electronic record or information to a designated system in a form capable of being processed by that system. The draft places the burden of determining what format is appropriate for that system on the person sending the message or performance. One Commissioner suggested that this should be reversed to place the burden on the recipient to designate the form and, failing that, to allow receipt even if not capable of being processed by the system. Consider: I order a copy of Lotus Notes from IBM and direct them to transfer the copy electronically to my computer which is a Compaq, but I forget to mention that fact. They do so, but the software is in Apple format. Have I received performance?

21. Sale: With respect to information, a distinction is made between title to the copy and title to the intellectual property rights. Title to information essentially means that the transfer is free of any restrictions, express or implied, on the use, reproduction or modification of the information.

22. Standard form: Standard forms are a major part of consumer and commercial practice. As to questions about the enforceability of particular terms and questions of assent to the overall form, standard form issues are expressly dealt with in the Restatement (Second) and in the UNIDROIT Principles. Existing Article 2 does not contain any express treatment of forms. In the revision process, initially both Article 2 and 2B contained provisions dealing with when a party assents to a form. Subsequently, the Article 2 committee deleted the concept. Subsequently, ALI Council recommended that this decision be reversed. Article 2B has contained provisions dealing with standard forms since the beginning of the drafting process.

The reference in this definition is to forms (e.g., groupings of standard terms) whose use in modern commerce is not only widespread, but virtually ubiquitous. The idea expressed does not hold that a record that contains language previously used in other transactions falls within the term and it does not focus on individual "standard terms." The record, which contains a composite of terms, must have been prepared for repeated use is a standard form whose legal significance is judged accordingly.

SECTION 2B-103. SCOPE.

(a) This article applies to licenses of information and software contracts whether or not the information exists at the time of the contract or is to be developed or created in accordance with the contract. The article also applies to any agreement related to a license or software contract in which a party is to provide support for, maintain, or modify information.

(b) Except as otherwise provided in subsections (c) and (d), if another article of this [Act] applies to a transaction, this article does not apply to the part of the transaction involving the subject matter governed by the other article except to the extent that this article deals with financial accommodation contracts.

(c) If a transaction involves both information and goods, this article applies to the information and to the physical mediummedia containing the information, its packaging, and its documentation, but Article 2 or 2A governs standards of performance of goods other than the copies, packaging, or documentation pertaining to the information. If a transaction includes information covered by this article and services outside this article or transactions excluded from this article under subsection (d)(1) and (2), this article applies to the information, physical medium media containing the information, its packaging and documentation. A transaction excluded from this article by subsection (d)(3) is governed by Article 2 or 2A.

(d) This article does not apply to:

(1) a contract of employment of an individual who is not an independent contractor, a contract for performance of entertainment services by an individual or group, or a contract for performance of professional services by a member of a regulated profession with respect to services commonly associated with regulated aspects of that profession;

(2) a license of a trademark, trade name, or trade dress, or of a patent and know-how related to the patent unless the license is or is part of a software contract, a license of a motion picture license, an access contract, or database contract;

[(3) a transaction the subject matter of which is information that represents money or deposit accounts;] or

(3) a sale or lease of a copy of a computer program that was not developed specifically for a particular transaction and that is embedded in goods other than a copy of the program or an information processing machine, if the program was not the subject of a separate license with the buyer or lessee.

Committee Votes:

a. Voted 10-3 to reject a proposal to limit the scope of the article to "coded", "digital", "electronic" or similar concept.

b. After initially rejecting the motion, on reconsideration, the Committee voted 10-0 to limit scope to licenses of all information and software contracts.

c. Voted 9-3 to reject a motion to include all patent and trademark licenses in the Article.

d. Voted 8-4 to reject a motion to include all patent licenses. (Feb. 1997)

e. Voted 7-4 to reject a motion to delete (d)(2). (Feb. 1997)

[This draft contains two changes responding to a letter received from Citibank regarding scope. The first defers on subject matter, rather than coverage, to the other articles of the UCC. The second is in the bracketed language in proposed new subsection (d)(3) which excludes coverage of money and deposit accounts. Under this exclusion, if software is licensed to allow access to bank or other funds on deposit under a depository agreement, the software license is in Article 2B, but the transactions regarding the funds in the account and the terms of the despoit account itself are not covered. Under current law, the funds-depositor relationship is regulated, while the software contract is not. The Committee should also note proposed changes in 2B-308 dealing with the effect of disclosures that conform to state or federal disclosure rules and allowing that disclosure to exclude application of the refusal term concept in 2B-308(b).]

Reporter's Notes:

1. This article deals with transactions involving the copyright industries. These industries play a major role in the modern information age. The article does not cover all contracts in these industries, but focuses on licenses and emphasizes transactions in those industries whose current or future direction deals with digital products. The article does not deal with sales of books, newspapers or traditional print media sold over the counter since, except for transactions involving computer software, the scope of the article is limited to licenses. Article 2B-102 defines a license as a transaction that expressly conditions or limits the rights conveyed. Implied conditions, which are present because of copyright law, in any sale of a copyrighted product, are not in themselves adequate to fall within the scope of the article.

2. As in every context in which digital and other modern information technologies have had significant impact, they create difficult problems of placing the new technologies and technology products within existing legal and social categories. That issue affects tax law, communications law, intellectual property law, and many other fields. It affects the delineation of Article 2B scope. This article reflects extensive discussion by the Committee. The Committee rejected proposals to limit the scope to digital information. Modern convergence of information technologies makes reference to digital or a similar term an unworkable scope definition and its linkage to a specific technology makes the long term viability of such a focus suspect. The Committee opted to focus on licensing and software contracts. Common to these transactions is that the focus concerns information (rather than goods), even if transferred in a tangible copy (e.g., newspaper, diskette, book/manual) and that there are conditions on use or access in the transaction.

3. For transactions in information other than software, this article distinguishes between a license and a sale of a copy. Exclusion of sales of copies of information leaves undisturbed major segments of the traditional information industry, such as contracts involving a sale of a copy of a book or a newspaper. The distinction between a license and a sale of a copy in the information industry is as explicit as the distinction between a sale and a lease in goods. This section uses a transaction characterization consistent with practices in those industries.

For computer software, the more important factor involves the nature of the product. With the exception of some limited types of software products, all transactions whether licenses or sales are subject to either express or implied limitations on the use, distribution, modification and copying of the software. These limitations are commercially important because (unlike in reference to newspapers and books) the technology makes copying, modification and other uses easy to achieve and essential to even permitted uses of the software. Bringing all transactions involving this subject matter into Article 2B reflects the functional commercial similarity of the transactions and the need for a responsive and focused body of law applicable to these types of products. In addition, as a relatively new form of information transaction involving products with distinctive and unique characteristics, no common law exists on many of the important questions with reference to publisher and end user contracts regardless of whether a transaction constitutes a license or a sale of a copy.

4. Subsection (b) discusses interface issues. For transactions governed within the trio of UCC transactional articles (2, 2A and 2B), the primary rule applies each to its particular subject matter. This is the "gravamin of the action" test followed in some states under Article 2 in making distinctions between transactions in goods and transactions in services. It rejects the "predominant purpose" test for this issue. The primary exception occurs in reference to software embedded as discussed in (d)(3). Subsection (b) allocates coverage for mixed transactions where the non-covered aspects are not goods. In all cases, this Article covers the information issues within its scope, while other law governs for other aspects of the transaction. No predominant purpose test is intended even with reference to transactions part of which fall entirely outside the UCC.

5. Based on a suggestion from the floor of the annual meeting, comments will make it clear that manuals delivered in connection with software are covered under Article 2B.

6. The exclusion in subsection (d)(1) deals with employment contracts and with services agreements related to entertainment (e.g., actor, musical group performance, producer, etc.). The excluded cases involve personal services contracts and require much different default rules than here. The entertainment services exclusion covers both direct contracts with individuals and the 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. This subsection also excludes professional services to avoid confusion between and the regulatory standards of regulated professions. The exclusion only pertains to regulated services and not to other contracts or services (e.g., law firm web site where legal advice is not given is treated the same as any other web site).

The motion picture and publishing industries have suggested that the Committee consider exclusion of talent and author contracts generally (e.g., the upstream portion of the industry).

7. Subsection (d)(2) excludes patent and some other pure intellectual property licenses. The rationale for exclusion 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 contemplated by this draft. The article concentrates on a more focused area of commerce. In practice, however, one can anticipate that courts will apply by analogy aspects of this Article to other fields of licensing. The comments will discuss the role of application by analogy of this Article in context of the history of reasoning by analogy in other contexts. See, e.g., the discussion of applying Article 2A to leases of other personal property.

8. Subsection (d)(3) excludes computer programs such as airplane navigation or operation software, software that operates automobile brake systems, and the like. Transactional issue relating to this type of software are governed by the law governing the transaction in the entire product (e.g., Article 2 or Article 2A).

SECTION 2B-104. TRANSACTIONS SUBJECT TO OTHER LAW.

(a) Subject to subsection (b), the conflicting law governs in the case of a conflict between this article and:

(1) a law of this State establishing a right of access to or use of information by compulsory licensing or public access or a similar law;

(2) a law of this State regulating purchase or license of rights in motion pictures by exhibitors; or

(3) a consumer protection law of this State.

(b) If a law referred to in subsection (a) existing 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.

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

Committee Votes:

a. The Committee voted 11-1 to approve the section subject to adjustments of section (b)(4) which have subsequently been made. (September, 1996)

Reporter's Notes:

1. Subsection (a) reflects the diversity of statutory and common law regulation of aspects of law relating to information assets. This article centers on contractual arrangements and does not affect property rights. It does not disturb regulations that compel disclosure or other access to the materials. This Article leaves undisturbed the law relating to privacy and personality rights. While these rights may be the subject of a license within this article, the underlying property right is not affected. For example, a state may hold that individuals have rights to control use of data concerning them. A licensee of a database of addresses would have to deal with the fact that each individual may be the required licensor. This article would not affect those rights, but deals with contract terms and remedies. While privacy and public access laws are especially relevant for the increasing commercial use of information, this article deals with contract law, not property rights and, thus, leaves to these other contexts the development of appropriate rules on information as property. As recommended by a bar association group, the comments to this section will contain illustrations suggesting the type of statutes referred to in subsection (a)(1). Given the functions of subsection (a), the draft should perhaps include in comments of text a reference to professional regulations in a transaction involving a lawyer or medical professional within this Article.

Subsection (a)(3) excludes preemption by Article 2B of the various state laws that regulate so-called blind bidding and other practices specifically relevant to the motion picture industry. As with consumer legislation, these statutes were developed through extensive discussion and policy making and they should not be disrupted or affected by Article 2B. This section reflects that, as to consumer law, the preservation of rules covers both statutory and case law. This brings Article 2B into conformity with Article 2A and draft Article 2.

2. The Article is also subject to preemptive federal law. Federal intellectual property law contains some contract rules, but does not generally preempt state contract law. Instead, licensing law has traditionally been largely relegated to state law. When this is not true, of course, federal law controls. This draft does not refer to the preemptive effect of federal law for reasons of style, since the principle of preemption is clear.

3. Subsection (b) deals with the balance between the modernization themes developed in Article 2B relating to electronic contracting and existing law regulating of contract law in consumer or similar restrictions. The balance must preserve important policies and diversity (thus, the principle of general non-reversal) of these laws, but should extend the effectiveness of innovations in electronic contracting. The approach here sets out a presumption that the other law controls, but identifies aspects of other law where it is appropriate to reverse that presumption as to particular rules based on a legislative judgment that the electronic contract provisions of this Article are appropriate state policy. Digital signature laws adopted in Washington, Utah, and as proposed in other states, adopt a similar reconciliation approach, defining acts that comply with their requirements broadly to comply with writing, signature and similar requirements in all state laws. This Draft is more limited in impact, narrowing the changes to center on manageable and identified parameters of existing law without attempting to alter the entire world of signatures, assent and the like.

4. The goal is to facilitate electronic commerce and to implement concepts concerning electronic trade. 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 truly national in nature, while preserving the intent of the regulations. There is no effort to alter content terms, such as whether a disclaimer can be made, what language must be used, and like issues.

5. Subsection (b)(4) does not cover cases where state law requires negotiation of a term. Negotiation requirements entail a mandate that a party actually dicker over a term with there being an actual and direct exchange and alteration of positions, the concept of manifesting assent does not meet this.

6. In final form, the structure of Article 2B must reflect some state's constitutional and other laws that preclude general revision without specific authorization, of laws outside the particular enactment. This can be achieved through a legislative note.

SECTION 2B-105. APPLICATION TO OTHER TRANSACTIONS.

(a) Except in a mass market transaction, in an agreement represented by a record:

(1) Pparties to a transaction not governed by this article may elect by agreement to have all or part of this article apply to the transaction; and

(2) if the agreement is in a record that is not a mass-market license. if part of a transaction is governed by this article and part is governed by other law, the parties may provide that the transaction is to be governed entirely by this article or by the other law.

(b) The agreement is effective to the extent that it deals with issues that the parties could resolve by agreement.

Committee Vote:

a. Voted 7-4 to replace consumer contract with mass market contract.

[Note to this Draft: The section was restructured for clarity. Language in (a)(2) was added to deal with an issue raised by several observers where transactions involve mixed law and permits an opt in/ opt out option where the parties may desire to be entirely governed by one or the other body of law. The language in (a)(2) has not yet been reviewed by the Drafting Committee.]

Selected Issue:

a. Should there be provision in an on-line environment to allow opt-in to Article 2B by manifesting assent to the opt in term based on suggestions by a White House study group that there be an opportunity to elect into a uniform law tailored to electronic environments?

Reporter's Notes:

1. This section expresses an approach generally assumed to be current law based on the theory of party autonomy in contracting. A contractual election to apply this article is analogous to a choice of law term selecting the law of a particular state. By agreement, parties can determine, for example, that the warranty rules of this article are more appropriate in a contract involving services than are common law or Article 2 warranties. If there are no fundamental policy barriers precluding use of these rules, the choice of law made by contract governs.

2. In addition to validating party autonomy, however, this section exempts out mass market contracts from the reach of the ability to contract into this UCC section. The exclusion, which was originally restricted to consumer contracts, assumed that the party to a mass market agreement is not likely to understand differences in law. In most states under current law, a similar theory does not apply in cases where a consumer contract makes a choice of law unless fundamental policies of the state are circumvented by the choice. This section thus implements a form of extended consumer protection and applies it to both consumers and businesses operating in the mass market. Restrictions of this type, if appropriate for consumers, are not typically expanded to business parties under current U.S. or European law.

SECTION 2B-106. LAW IN MULTI-JURISDICTIONAL TRANSACTIONS.

(a) A choice-of-law term in an agreement is enforceable.

(b) If an agreement does not have an enforceable choice-of-law term, the following rules apply:

(1) In an access contract or a contract providing for delivery of a copy by electronic communication, the contract is governed by the law of the jurisdiction in which the licensor is located when the contract becomes enforceable between the parties[transfer] [activation] of rights occurred or was to have occurred.

(2) A consumer contract not governed by subsection (b)(1) which requires delivery of a copy on a physical medium to the consumer is governed as to the contractual rights and obligations of the parties by the law of the jurisdiction in which the copy is located when the licensee receives possession of the copy or, in the event of nondelivery, the jurisdiction in which receipt was to have occurred.

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

(c) If the jurisdiction whose law applies as determined under subsection (b) is outside the United States, subsection (b) applies only if the laws of that jurisdiction provide substantially similar protections and rights to the party not located in that jurisdiction as are provided under this article. Otherwise, the rights and duties of the parties are governed by :

(1) the law of the jurisdiction in the United States or in the country in which the licensor does business and has the most substantial relationship toconnection with the transaction.; or

(2) if no such jurisdiction exists, the law of the jurisdiction in the United States in which the licensee is located.

(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; Section 1-105; Section 9-103.

Committee Votes:

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

b. Voted 8-5 to adopt alternative A of subsection (a) validating contract choice of law. (Feb. 1997)

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

[Notes to this Draft: Most of the changes in this Draft involve mere editorial clean-up. Language in (b)(2), however, was added to clarify that this Draft does not alter or affect the treatment of tax liabilities. 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. An alternative form of avoiding confusion would simply be to state that this does not relate to tax collection issues.]

Reporter's Notes:

1. There are two questions addressed in this section. The first deals with enforceability of contract provisions choosing the applicable law for a contract and the second deals with choice of law in the absence of a contract term dealing with the question.

2. Choice of law clauses are routine in commercial licenses. They select what state's law applies. Subsection (a) validates choice of law agreements, thus adopting a strong, contract choice position. Law outside this statute might restrict the ability of commercial parties to choose their law if the choice infringes fundamental policy of the forum state. This Article does not alter that policy or the applicable over-riding law. But few of the cases discussing this deal with anything other than a consumer transaction. A prior Section of this Article makes clear that those consumer policies and rules are not disturbed by Article 2B.

A rule that validates choice of law agreements states an important policy choice in a context where an increasing number of modern information transactions occur in cyberspace, rather than in fixed environments. Because many transactions in this field are not easily related to tangible locations, the ability to fix an appropriate choice of law provides an important contract drafting premise. The Committee in January, 1996 expressed strong support for this premise and, indeed, it reflects the clear trend of modern law. The rule enhances certainty of contract on choice of law rules in Article 2B under the principle of freedom of contract. It was strongly supported by ABA representatives.

Subsection (a) makes the clause enforceable, subject, implicitly, to concepts of unfair surprise, conscionability, duress, and other general law theories. Except in Article 2A and cases of consumer regulatory statutes, no current uniform law in the U.S. precludes enforcement of contract choice of law on issues that a contract could control. Neither the Restatement, current Article 1 or Article 2, nor revised Article 2 place special restrictions on choice of law.

3. Common law generally enforces contractual choice of law in transactions involving intangibles. 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) (patent license); 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 occurs where the choice contradicts the basic policy of the state that would otherwise have its law apply, but reported cases outside of consumer or other regulated contracts often go relatively far to avoid finding such fundamental policies. Shipley Co., Inc. v. Clark, 728 F. Supp. 818, 826 (D. Mass. 1990). The Restatement (Second) allows choice of law terms to govern in any case (including consumer contract) 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."

4. Article 1-105 currently allows a choice of law clause only if the chosen state has a "reasonable relationship" to the transaction. This rule is more restrictive than the Restatement and the other 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. That rule is anomalous applied to transactions involving general commercial behavior. Article 2A provides a limited rule for consumer leases, restricting the choice of law to the jurisdiction in which the lessee resides on or within thirty days after the contract becomes enforceable. ' 2A-106. That rule is inappropriate for the intangible property involved in the subject matter of this article. It would create a situation in which an on-line provider would be subject to the law in all fifty states and unable to resolve this even by contract. That would be true even if no discernible consumer protection interest justified 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 her. I Internet environments, it clearly frustrates goals of providing uniformity and being able to control the number of divergent laws with which a contract must comply.

Illustration 1: AOL provides on-line services throughout the United States and has its chief offices in Virginia. Under the proposed draft, in a contract with a consumer who resides in Oklahoma, the contract may choose the law of Virginia (licensor location) or Oklahoma (licensee residence). If it purports to choose Alaska law, that choice of law is enforceable except to the extent that it denies the licensee fundamental protections that would be available to it under Virginia or Oklahoma law outside this Article.

5. The second issue 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 for different terms if they so choose. Under 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.

6. The most important rule is in (b)(1). It deals with electronic transactional environments and creates a presumptive choice of law based on the location of the licensor. This concept has been extensively discussed in reference to online environments. 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. By opting for a more stable, identifiable source of underlying law is an important step toward facilitating electronic commerce in digital products. As described 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.

7. Subsections (b)(2) and (b)(3) deal with more traditional environments. Subsection (b)(2) creates a consumer rule for cases of physical delivery of copies (not involving online contracts). The rule chosen focuses on the location where the copy is received. In most, but not all cases, of course, 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 like 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.

Subsection (b)(3) states the residual rule, applicable to consumer cases where no copy is delivered and the deal is not an online performance, and to commercial contracts where no choice of law clause was agreed to by the parties. The section adopts the Restatement (Second) test. 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 theme is not the universal rule in choice of law. Many states continue to use principles from the Restatement (First) and theories evolved by academic authors. One text describes the situation as follows: "[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 wide-ranging disarray approaches argues for providing guidance in this contractual environment for contract drafting and planning in cyberspace.

8. 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-107. CHOICE OF FORUM. The parties may choose an exclusive judicial forum. However, [other than in an access contract for informational content or services,] in a consumer contract the choice is not enforceable if the chosen jurisdiction would not otherwise have jurisdiction over the consumer and the choice [unfairly disadvantages] the consumer. A choice of forum in a term of an agreement is not exclusive unless the agreement expressly so provides.

Uniform Law Source: Section 2A-106.

Committee Votes:

1. Rejected a motion to delete the section. VOTE 4 - 9 (February, 1997).

2. Voted to adopt the term consumer and not "mass market" VOTE: 8-5 (February, 1997)

3. Consensus that Draft should deal separately with arbitration clauses if at all. (February, 1997)

[The bracketed language relating to unfair disadvantage retains an issue that will be addressed over the summer. The intent is to conform to Supreme Court holdings in reference to what type of limits on choice of forum are appropriate. Language from Cruise Lines and other decisions will be examined for what term should be used and for the elements of fairness that are considered The bracketed language relating to access contracts refines a concept that was discussed without objection by the Committee in February, 1997, but was left out inadvertently in the March Draft.].

Selected Issue:

a. Should the choice of forum be validated in Internet transactions, independent of the consumer or other issue under the rationale in Cruise Lines?

Reporter's Notes:

1. 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. Although earlier case law viewed forum choices with some disfavor, the trend of modern case law enforces choice of forum clauses, even if in standard form contracts, so long as enforcement does not unreasonably disadvantage a party. Since 1972, courts have shown an increasing willingness to enforce this type of contract provision, subject to due process restrictions. See Bremen v. Zapata Offshore Co., 407 U.S. 1, 10 (1972) (choice of forum clauses are "prima facie valid"). This case law does not differentiate between standard form and nonstandard contracts. See Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991). However, constitutional concerns about fairness and notice may provide a limiting role. Thus, the US Supreme Court held that a choice of arbitration under New York law in a standard form contract could not be enforced to apply New York law prohibiting punitive damage awards in arbitration where that substantive effect was not highlighted or brought to the affected party's attention. Similarly, some courts hold such clauses to be unenforceable where they impinge on concepts of fundamental unfairness. See also 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).

2. The importance of choice of forum provisions in transactions in modern cyberspace was highlighted by a series of cases involving jurisdictional issues on Internet and related online environments. See, e.g., CompuServe v. Patterson, 89 F.3d 927 (6th Cir. 1996). (allowing jurisdiction of Texas provider in Ohio because of contract contacts with Ohio online provider). 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, a major issue in Article 2B:

[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.

3. This section provides separate protection for consumers where the risk of over-reaching is more severe. Protection of this sort may already exist in applicable state consumer protection law. The purpose of the exception is to protect the individual, not to deal with a market place or transactional issue. This is especially important as information commerce goes more and more online. If online transactions in the internet are generally equated to mass market transactions, using that term here would seriously affect the ability of providers to control risk in world wide distribution.

4. Article 2A restricts the validity of choice of forum in consumer cases. ' 2A-106. Neither Article 2, nor Article 1 deal with choice of forum contracts.

5. The term "unfairly disadvantage" is adopted here on a tentative basis, pending further research in applicable case law. The intent is to track modern case law on choice of forum clauses based on due process, unfairness and other grounds.

6. Comments to this section will make it clear that the section does not deal with arbitration or other alternative dispute resolution clauses. The law regarding that field is characterized by substantial federal preemption and specific, existing state law rules that should not be disturbed here. The Drafting Committee instructed the Reporter to prepare a separate provision dealing with arbitration clauses.

SECTION 2B-108. BREACH OF CONTRACT.

(a) Whether a party is in breach of contract is determined by the terms of the agreement and by this article. Breach occurs if a party fails to perform an obligation timely or exceeds a contractual limitation on use of licensed information.

(b) A breach of contract is material if the contact so provides. In the absence of express contractual terms, a breach is material if the circumstances, including the language of the agreement, reasonable expectations of the parties, the standards and practices of the trade or industry, and character of the breach, indicate that:

(1) the breach caused or may cause substantial harm to the aggrieved party including imposing costs that significantly exceed the contract value;

(2) the injured party will be substantially deprived of the benefit it reasonably expected under the contract: or

(3) the breach meets the conditions of subsection (c).

(c) A material breach of contract occurs if the cumulative effect of nonmaterial breaches by the same party satisfies the standards for materiality.

(d) If there is a breach of contract, whether or not material, the aggrieved party is entitled to the remedies provided for in the agreement and this article.

Uniform Law Source: Restatement (Second) Contracts ' 241.

Committee Votes:

a. Adopted a motion to delete list of events that are material. Vote: 11 - 0 (Feb. 1997)

Reporter's Notes:

1. This Article distinguishes between ordinary (insubstantial) breaches and material breach. The objective is to correspond the treatment of this issue with the treatment of materiality under current common law, including the Restatement (Second) of Contracts. In contrast, Article 2 revisions use a reference to "substantial impairment" presumably to avoid common law concepts about material breach.

2. Subsection (a) defines breach. The definition is intended to be inclusive. Breach occurs whenever a party acts or fails to act in a manner required by the contract. Encompassed within 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.

3. Subsection (b) defines material breach. "Material breach" parallels the idea of substantial performance; the two phrases are interchangeable.(See Section 2B-102 which defines substantial performance as "performance of a contractual obligation in a manner that does not constitute a material breach of that contract.") The general common law concept of materiality engages a combination of factors oriented toward determining the significance of the breach in context of the actual relationship of the parties. The factors listed in subsection (b) are not exclusive. Courts should be free to draw on common law cases as well as their view of the circumstances in light of the purpose of distinguishing between material and non-material breach. 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.

4. Material breach and substantial performance rules apply under current law to all transactions not governed by the Article 2. 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) ("a breach of a contract 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"; this was met where there was an accounting failure and failure to complete colorization of movies); Compuware Corp. v. J.R. Blank & Associates, Inc., 1990 WL 208,604 (N.D. Ill. 1990) (Materiality hinges on the cause and the effect of the breach; it involves the assumption the allegedly injured party performed properly to enable the other's full performance.).

5. Common law distinguishes between material and a non-material breach. The basic theme lies in the fact 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. For example, a one day delay in payment may or may not be material. A reasonable failure to fully meet advertised performance expectations of handling 10,000 files may not be material where the licensee's needs never exceed 4,000 if the system handles 9,999.

6. Materiality does not affect whether a party has a remedy, but what remedies are available. Breach entitles the injured party to remedies provided in this article or in the contract. What remedies are available depends on whether the breach is material or nonmaterial. The material breach concept rests on the common law belief that it is better to preserve a contract relationship in the face of minor performance problems and the related belief that allowing one party to cancel the contract for minor defects may cause unwarranted forfeiture and unfair opportunism. Materiality relates to the injured party's perspective and to the value that it expected from performance. Faced with only a nonmaterial breach, the injured party can recover for damages that arise in the ordinary course as a consequence of the breach, but cannot cancel the contract or reject the tender of rights unless the contract expressly permits that remedy. Faced with a material breach, a wider panoply of remedies is available to the injured party, including the right to cancel the contract. This Article carries the distinction throughout and with respect to both parties to a contract, except that a different standard applies to mass market transactions involving a refusal of a single delivery of software where the Article follows existing Article 2 and, rather than inquiring whether the breach is material, in that case asks merely whether the product conformed to the contract.

7. One cannot define materiality in absolute terms any more than one can define concepts such as negligence, reasonable care, merchantability, or the like. The concept is contextual. The key lies in defining an appropriate reference point. Subsection (b) emphasizes two elements: the contract terms and the extent to which the breach causes significant harm to the aggrieved party. The Restatement (Second) of Contracts lists five circumstances as significant in whether a breach of contract is material: 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).

8. Materiality as a standard here parallels international law. Modern international laws use the term "fundamental breach" to describe the same concept. The Convention on the International Sale of Goods (CISG) states: "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." CISG Art. 25. UNIDROIT Principles of International Commercial Law state: "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." UNIDROIT art. 7.3.1(1). Article 2 and Article 2A stand alone in requiring "perfect tender", but do so only in reference to a single situation: delivery of goods not part of an installment contract. Outside that context, use of materiality is unanimous. An ABA Software Contract Task Force recommended that the perfect tender rule be abolished with respect to software contracts because of the complexity of the software product and the fact that minor flaws ("bugs") are common in virtually all software.

7. Because of the contextual nature of the problem, some situations arise in commercial practice where more precise guidance is desirable. One source of greater precision lies in the contract. Subsection (b) acknowledges the right of parties to agree to the remedy caused by certain types of breaches and makes the express contractual terms binding. The eventual comments to this section will discuss illustrations of breaches relevant to the licensing field to provide further guidance.

Illustration 1. The licensee provides specifications that the parties accept as part of the contract for development of a new word processing program. The standards require a dictionary with no less than 5 million words. The actual dictionary has 4.99 million. The developer fails to meet the standard within the agreed period of time. The failure to meet the express standards constitutes a material breach. The licensee need make no payments for any of the work and can refuse the product.

Illustration 2. A contract requires delivery of a database program. The contract involves a mass market transaction. The database program meets its own specifications, but because of faulty design, substantially fails to in a manner comparable to other similar type programs. Whether there is a breach hinges on what express (description) warranties exist and what implied warranty and whether the design and performance fall outside of these. If there is a breach, materiality hinges on whether the defect causes substantial harm to the licensee's interests under subsection (b).

Illustration 3. In Illustration 1, the software meets all specifications, but is delivered one day after the scheduled completion date. This raises a question of whether a brief time delay should be treated as material without looking at the entire context. A similar question arises with late payment of fees. One view holds that the delay itself is material, even if the context indicates that no harm was caused to the other party. The other view holds that timing may be material, but that a contextual analysis should apply before allowing one party to forfeit its entire rights under the contract.

The Restatement (Second) of Contracts ' 242 states:

In determining the time after which a party's uncured material failure to render performance ... discharges the other party's remaining duties ... the following ... are significant:

****

(c) the extent to which the agreement provides for performance without delay, but a material failure to perform ... on a stated day does not of itself discharge the other party's remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important.

This is designed to deal with boilerplate "time is of the essence" clauses that are not related to the realities of the deal but might be used to justify a forfeiture even where the day late has no consequence. Restatement (Second) of Contracts ' 242, comment d.

SECTION 2B-109. UNCONSCIONABLE CONTRACT OR TERM.

(a) If a court finds as a matter of law that a contract or any term thereof was unconscionable at the time it was made, the court may refuse to enforce the contract, enforce the remainder of the contract without the term, or so limit the application of the term as to avoid the unconscionable result.

(b) Before making a finding of unconscionability under subsection (a), the court, on motion of a party or on its own motion, shall afford the parties a reasonable opportunity to present evidence as to the setting, purpose, and effect of the contract or term thereof or of the conduct.

Uniform Law Source: Section 2-302; 2A-108. Revised.

Committee Votes:

a. In Article 2 at the 1996 Annual Meeting, a motion to delete language allowing invalidation based on unconscionable inducement of a contract was defeated.

b. At the same meeting, a motion to delete the requirement that unconscionable is a matter of law for the court was defeated.

Reporter's Note:

This draft follows current law in Article 2. Draft Article 2 contains language regarding unconscionable inducement of a contract. The inducement concept does not exist in current law in any context other than in Article 2A. In Article 2A, the inducement concept is expressly limited to consumer leases and does not apply to mass market or other commercial contracts. The argument for extending the scope of any inducement language beyond consumer contracts is not clear. In this article, many of the situations where inducement may be an issue are dealt with by the new concepts of manifesting assent, opportunity to review and statutory creation of a right to exclude surprising terms. An ABA observer group voted that the inducement provision not be adopted in Article 2B.

SECTION 2B-110. ATTRIBUTION PROCEDURE.

(a) An attribution procedure is a procedure established by agreement or mutually adopted by the parties for the purpose of verifying that electronic records, messages, or performances are those of the respective parties or for detecting errors in the transmission or informational content of an electronic message, record, or performance, if the procedure is commercially reasonable.

(b) The commercial reasonableness of an attribution procedure is a question of law to be determined by the court in light of the purposes of the procedure and the commercial circumstances at the time of the agreement[, including the nature of the transaction, sophistication of the parties, volume of similar transactions engaged in by either or both of the parties, availability of alternatives offered to but rejected by the party, cost of alternative procedures, and procedures in general use for similar types of transactions]. An attribution procedure may require the use of algorithms or other codes, identifying words or numbers, encryption, callback procedures, key escrow, or any security devices that are reasonable under the circumstances.

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

Reporter's Note:

1. The existence of and compliance with an attribution procedure is relevant to signature requirements and on the question of attributing performance to a party. If an attribution procedure is established and followed, enhanced level of legal reliability is attributed to the message or performance. In signature requirements, following an attribution procedure results in a signature as a matter of law. In other contexts, if there is a question of who sent the message or performance, compliance with an attribution procedure makes the alleged originator of the message attributable as a matter of law. On the other hand, failure to use an authentication procedure does not indicate that there is no signature or that the purported sender is not responsible for the message or performance. It merely places attribution issues under the general attribution sections.

2. An attribution procedure derives from agreement. The procedure must be established by agreement or adopted by both parties. A procedure of which one party is not aware, but which is routinely used by the other would not qualify. On the other hand, agreement or adoption need not precede the transaction involved. Parties dealing for the first time adopt a procedure for verification and authentication of the messages and performances exchanged. That adopted procedure would have the full force of an attribution procedure if it is commercially reasonable.

3. Some have argued that the Draft should eliminate the requirement of commercial reasonableness. That requirement was adapted from Article 4A and provides a buffer against over-reaching and a means of protecting parties who do not have equal knowledge of technology. Viewed as used here as an enhanced assurance of reliability, the requirement of commercial reasonableness serves to encourage the development of reasonable attribution procedures. This section regulates the procedures as in Article 4A. The cost of course, lies in creating a degree of uncertainty that the parties cannot control by agreement. Yet, it may be an important safety valve 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.

4. In subsection (b), the concept of commercially reasonable procedure must take into account the cost relative to value of transactions such as the comments to 4A-203 suggest. This is implicit in the idea of commercial reasonableness, but could be added to the text if appropriate language can be developed. 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 impact of conforming to a procedure that is not reasonable is outlined in the next section.

SECTION 2B-111. ATTRIBUTION OF ELECTRONIC RECORD, MESSAGE, OR PERFORMANCE.

(a) As between the parties, an electronic message, record, or performance received by a party is attributable to the party indicated as the sender if:

(1) it was sent by that party, its agent, or its electronic agent;

(2) the receiving party, in good faith and in compliance with an attribution procedure concluded that it was sent by the other party; or

(3) subject to subsection (b), the message or performance:

(A) resulted from acts of a person that obtained access to access numbers, codes, computer programs, or the like from a source under the control of the alleged sender creating the appearance that it came from the alleged sender;

(B) the access occurred under circumstances constituting a failure to exercise reasonable care by the alleged sender; and

(C) the receiving party reasonably relied to its detriment on the apparent source of the message or performance.

(b) In a case governed by subsection (a)(3), the following rules apply:

(1) The receiving party has the burden of proving reasonable reliance, and the alleged sender has the burden of proving reasonable care.

(2) Reliance on an electronic record or performance that does not comply with an agreed authentication procedure is not reasonable unless authorized by an individual representing the alleged sender.

(c) If an electronic message was transmitted pursuant to an attribution procedure for the detection of error and the message contained an error the following rules apply:

(1) If the sender complied with the attribution procedure and the error would have been detected had the receiving party also complied with the attribution procedure, the sender is not bound if the error relatespertains to a material element of the message or performance.

(2) If the sender receives a notice required by the attribution procedure of the content of the message or performance as received, the sender has a duty to in a commercially reasonable manner review the notice and report any error detected by it.

(d) Except as otherwise provided in subsection (a)(1) and (c), if a loss occurs because a party complies with a procedure for attribution that was not commercially reasonable, the party that required use of the procedure bears the loss unless it disclosed the nature of the risk to the other party or offered commercially reasonable alternatives that the party rejected. The party's liability under this section is limited to losses that could not have been prevented by the exercise of reasonable care by the other party.

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

Committee Votes:

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

Reporter's Notes:

[Subsection c(2) was rewritten to clarify that it is a default rule dealing with the obligations of a sender in the context of an attribution procedure that entails return of notice containing content as received. The section does not provide a basis for allocating between two parties each of whom is at fault, leaving that issue to courts based on a consideration of ordinary causation and comparative fault concepts.]

1. This section states risk allocation rules pertinent to the potentially anonymous nature of electronic commerce regarding information assets and applicable to both the creation of an enforceable relationship and acceptance of or reliance on performance. The policy is to balance interests in making electronic commerce possible in an open environment (as contrasted to the relatively closed structures of funds transfer and EDI transactions), while reasonably apportioning risk. It should be noted here that the risk allocation rules do not apply to handling of funds, bank accounts, or other transactional subject matter that falls outside of the scope of Article 2B.

2. Subsection (a) describes three circumstances under which one party is held to be bound by a message. Subsection (a)(1) relies on general agency rules, but also adds the idea of an electronic agent. "Electronic agent" is a defined term, covering a computer program programmed to respond or initiate without human review and selected by the party for that purpose. Some observers have commented that this definition needs to be made more flexible to accommodate developments in technology. The general approach, however, calls into play a concept that, to be bound by purely electronic activity, a party must have affirmatively created the agency. That concept then carries through by virtue of the attribution concept to the offer and acceptance and other electronic contracting provisions of the article. Having selected and opted to rely on an electronic device or system, the party becomes responsible for its actions. The idea of an electronic agent does not exist under current law, but has importance in the context of electronic contracting for information because of the increasing use of preprogrammed software to acquire and conclude agreements for information assets. The principle here is that the individual or company who created and set out the program undertakes responsibility for its conduct. That result could be reached by common law courts under agency theory, but the goal is to eliminate uncertainty on this point. This treatment parallels that adopted in 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." That Model Act also separately lists attribution principles including that the party sent the message and that it was sent by an authorized agent.

3. Subsection (a)(2) focuses on agreed procedures for authentication and makes a message attributable to one party if the other used the procedures and reached that conclusion. This would cover, for example, the case in which a party obtained a PIN or other identifier and used it without authorization. Liability in the form of being bound by the message occurs without regard to fault so long as the agreed procedure was used by the recipient party. As defined, "attribution procedure" deals with a procedure adopted by the parties to verify source or detect errors. In earlier versions of this section, the substantive treatment here was limited to the verification or attribution of source issue. Bracketed language in this draft generally follows Article 4A in reference to error detection in messages (not contract performance), leaving to common law the treatment of other situations under general law of mistake.

4. Paragraph (a)(3) deals with a form of fault and attributes the message to one party if the means of making the identification occurred by way of an intrusion into a source controlled by the "sender" and enabled by the sender's lack of reasonable care. This form of attribution occurs only if the receiving party reasonably relied. Thus, for example, if the nature of the message or performance clearly indicates or gives reason to doubt the source, reliance that causes harm may not be protected, but where the reliance is reasonable, the receiving party has a protected right under this article. The Drafting Committee previously discussed whether liability under (a)(iii) should exist without proof of negligence or any other fault. This needs to be evaluated in terms of drawing a balance between the interests of senders and the reliance interests of recipients of messages. In other contexts, it has been argued that use of a new system can be encouraged by liability limitations. The draft principle was modeled on provisions of the UNCITRAL Model Law. The UNCITRAL Model Law originally provided that as between the parties, the recipient is entitled to treat the message as that of the originator if the parties applied a procedure agreed to for this purpose or the message "resulted from the actions of a person whose relationship with the originator enabled that person to gain access to a method used by the originator to identify the data message as its own." Apparently, this latter provision was deleted in the final draft.

5. Under other law, in cases where the electronic process involves transactions between large businesses and consumers, allocation of the risk of error, fraud or false attribution developed in a way that responds to the better ability of the system operator to spread and prevent loss than the individual consumer can achieve. This occurred in reference to electronic funds transfer systems under federal law. Our context requires a more general structure that goes beyond consumer issues because the problems addressed will not routinely be consumer protection questions. An individual, for example, may be an injured party or the wrongdoer. The transactions will often involve two businesses. Often, the transaction will be between two individuals. Also, in many cases, the transactions will occur in a public network, not owned, operated or controlled by a single operator. Also, unlike in cases involving electronic funds transfers (which are dealt with under federal law), the messages referred to here involve the creation or performance of contracts and the risk of financial loss without reciprocal value will typically be less. Here, one may be inclined to look to communications law and the allocation of risk there. In reference to 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. This Article adopts an intermediate position, keyed to use of attribution systems and reasonable care.

5. New subsection (c) deals with errors in electronic messages, rather than attribution of source. It does not deal with errors in performance since obligations in that respect are the subject matter of the general contract terms and default rules in this Article. The approach in subsection (c) follows that used in Article 4A (4A-205). The basic theme is that a party has a right to rely on an authentication procedure, but that neither party can fail to exercise reasonable care to protect against loss to the other.

6. Subsection (d) provides for allocation of loss caused by the situation in which one party insists on a procedure for attribution, but that procedure is not commercial reasonable. The loss for use of the procedure falls on the party insisting on its adoption. The loss encompasses expectation, rather than merely reliance.

Illustration: Jones insists that, in dealing with its software vendor, the vendor electronically ship software whenever it receives an E-Mail request using Jones' name. An impostor places an order for software with a $1,000 retail price. The vendor ships. Jones would be responsible for the $1,000 loss if the procedure were commercially unreasonable.

The alternative would limit loss to reliance damages which, here, might be the actual out of pocket loss (e.g., cost of the copy).

SECTION 2B-112. MANIFESTING ASSENT.

(a) A party or electronic agent manifests assent to a record or term in a record if, with actual knowledge of the terms or after having an opportunity to review the record or term under Section 2B-113, it:

(1) authenticates the record or term, or engages in other affirmative conduct or operations that the record conspicuously provides or the circumstances, including the terms of the record, clearly indicate will constitute acceptance of the record or term; and

(2) had an opportunity to decline to authenticate the record or term or engage in the conduct.

(b) Merely retaining information or a record without objection is not a manifestation of assent.

(c) If assent to a particular term in addition to assent to a record is required, conduct does not manifest assent to that term unless there was an opportunity to review the term and the authentication or conduct relates specifically to the term.

(d) Manifestation of assent may be proved in any manner, including by a showing that a procedure existed by which a party must have engaged in conduct that manifests assent to the contract or the term in order to proceed further in the use it made of the information.

Uniform Law Sources: Restatement (Second) of Contracts ' 211.

Reporter's Notes:

1. Sections 2B-112 and 113 create a procedural background for when manifestation of assent occurs that provides protection against inadvertent and unknowing assent. The concept of manifesting assent is used throughout this article. It has three distinct functions, depending on the context.

First: In some contexts, it refers to when a party assents to a record. In this sense, the phrase "manifesting assent" is used in the Restatement (Second) and in the UNIDROIT Principles to define when a party is bound to the terms of a standard form contract and , indeed, to any record. Similar themes are found in judicial rulings. See, e.g., Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991) (cruise line ticket containing contract terms). In the Restatement, the term is used, but not defined.

Second: in other cases, the concept is utilized with respect to particular terms of a record. In this setting, it provides an enhanced standard in lieu of requiring that a term in a form be conspicuous. Manifesting assent here is the higher standard in that it requires both that the term be called out and that there be affirmative conduct referring to that term itself.

Third: in one or two cases in this Draft (e.g., statute of frauds and no oral modification clauses), the concept allows affirmative conduct to supplant a signature. This is especially important in electronic commerce where actual signatures are not always required or feasible.

2. "Manifesting assent" differs substantively from concepts of contract offer and acceptance. Offer and acceptance create a contract. While manifesting assent will also often indicate acceptance of a contract, acceptance is the broader concept. Acceptance does not require satisfying the procedural detail outlined here.

In contrast to accepting an offer, manifesting assent focuses on assent to the terms of a record. It deals with what are the terms of the contract. The concept of manifesting assent creates procedural protections to ensure fairness. The basic theme is that objective manifestations of assent bind a party to a term or to the terms of a record if procedurally there was an opportunity to review the record and the manifestation of assent entails an affirmative act or conduct by the party.

3. Three elements are required for manifestation of assent.

First, the party manifesting assent must, of course, be one that can bind the party being charged with the benefits or limitations of the terms of the record and, where, assent equates with acceptance, the contract itself. This Article does not deal with questions of agency law. See ' 1-103. If a party proposing a record seeks to bind the other party, it must of course establish that the party who acted for the corporation had authority to do so. Of course, however, if the one who acted did not have authority to create the contract, there may be no license and uses of the information may infringe copyright interest. On the other hand, in appropriate cases, Article 2B rules regarding attribution may also play a role.

Second, there must be an affirmative act. A signature, of course, manifests assent to a record; initials attached to a particular clause manifest assent to that clause. So too, in the electronic world would an affirmative act of clicking on a displayed button in response to an on-screen description that this act constitutes acceptance of a particular term or an entire contract. The idea of assent does not require a formal event, although notorization or other formalities certainly qualify. Mere failure to object is not assent, but affirmative use of the information or access to it can be assent if that action was clearly defined as sufficient in the circumstances.

Third, the assent must come after a party had an opportunity to review the record or term. Assent requires proof that the party actually read the terms to which it assents. "Opportunity to review" is a defined term that requires that the term or record be called to the party's attention before the actions occur. The terms need not all be in a single record, so long as the location creates an opportunity to review and the requirement of explicit consent are met. Thus, a hyper-link reference to a license actually contained in a different record would, all other conditions being met, satisfy the concept. Of course, it will be necessary for the licensor, if it relies on the terms of the linked text, to show what was the content of the hyper-linked text at the time of the licensee's assent. One way of attempting to do so is to retain records of the content at all periods of time. The issues of proof here, while potentially difficult, are primarily matters of evidence law and reflect ordinary problems encountered in dealing with proof of electronic records.

Illustration 1: In its pre-registration file, the New York Times on-line provides: "Please read the license. Click here to read the License. If you agree to the terms of the license, indicate your agreement by clicking the "I agree" button. If you do not agree to the License, click on the "I decline" button." The underlined text is a hypertext link which, if selected, displays the license.

I Agree I Decline

In this sequence, a party who indicates "I agree" manifests assent to the license. Its conduct, by moving forward to use the information resource also indicates that it accepted the offer for a contract and that, therefore, a contract was formed.

4. The section makes a distinction between assent to a record and, when required by other provisions of this article, assent to particular terms. Assent to a record involves meeting the 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 to the record and particular terms if the terms if the record conspicuously so provides:

Illustration 2: In a shrink wrap license, which license is available and readable on the outside of the envelope containing the diskette, the license 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, and others where manifestation of assent to a term occurs, manifesting assent is an enhanced form of conspicuousness in that it requires an affirmative act with respect to a clause or term.

5. Manifestation of assent is not the only manner in which the parties define the terms and limits of their deal. For example, clear indications that the product has specific characteristics and limitations become part of a bargain even if there is no specific, formal manifestation of assent, simply because they in effect define the bargain itself. A party can license a database of intellectual property attorneys to an end user and rely on the fact that the product need only contain intellectual property attorneys as a basic term of the deal without obtaining a manifestation of assent in formal terms to that aspect of the deal. The nature of the product would, in that case, presumably be part of the deal itself. The comments will make clear that the standard is met if the party has actual notice of the terms, the terms are actually part of the bargain of the parties, or other methods are used to call attention to the term and the party accepts it.

Illustration 3: A copyrighted software package states in terms: "THIS PRODUCT IS LICENSED FOR CONSUMER USE ONLY." It does not go on to 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, not requiring additional pro forma language in a record or conduct accepting the record.

6. Manifestation of assent assumes that the party can be held attributable with the assenting conduct under agency rules. Additionally, of course, there must be a link between the person who has the opportunity to review the terms and one who takes the steps that constitute assent. Thus, an email sent to the company at large, or to the company's computer, does not trigger assent to the terms of that 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 transfer that authority to another party. 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 the realm of agency law augmented in this Article by provisions regarding attribution and, in general, produce common sense results.

7. Manifesting assent hinges on the opportunity to review the contract or term; the record must be called to the party's attention before assent is obtained. This excludes devices to create or modify a contract designed to misled or conceal, rather than to obtain assent. For example, a notation on the back of a check stating elaborate license terms and sent to the cashier's office of a company would not create terms when the check is cashed. The cashier lacks authority and the terms have not been called to the attention of the company.

. SECTION 2B-113. OPPORTUNITY TO REVIEW; REFUND.

(a) A party or electronic agent has an opportunity to review a record or term if it is made available in a manner designed to call it to the attention of the party and to permit review of its terms or to enable the electronic agent to react to the record or term:

(1) before the acquisition of a copy of the information;

(2) before the [transfer] [activation] of rights; or

(3) in the normal course of initial use or preparation to use the information or to receive the [transfer] [activation] of rights.

(b) Except for a proposal to modify a contract, if a record is available for review only after athe contract fee is paid, a party has an opportunity to review only if it has a right to a refund of any contract fees paid or to stop any payment already initiated if it refuses the terms, discontinues use and returns all copies. For multiple products transferred for a single, bundled price:

(1) if the party whose terms are refusedrejected is the transferorsupplier of the bundled product, the refund must be the entire bundled price on return of the entire bundled product, unless the licensee agrees to an allocation of the total price attributable to the rejected license; and

(2) if the party whose terms are refusedrejected was not the transferorsupplier of the entire bundled product, the refund must be for the contract fee paid for the rejected license or, if not separately stated, a reasonable allocation of the total fee attributable to the license.

Uniform Law Source: None

Selected Issues:

a. How should opportunity for review and manifesting assent be coordinated with applicable regulations concerning disclosure under consumer or other law?

b. How should we deal with restrictive notices (e.g., on a rented video) which are not presented as a matter for review and assent, but rather as defining the terms of use?

Reporter's Notes:

1. "Opportunity to review" is a necessary precondition to manifesting assent. Unless a party had a prior opportunity to review, actions purportedly manifesting assent to a record are ineffective.

2. Under this section, the opportunity to review can come at or before payment, or later. If the opportunity follows payment, there is no opportunity to review 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. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991); Hill v. Gateway 2000, Inc., 1997 WL 2809 (7th Cir. 1997). It provides 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 and rejected prior to payment.

Illustration: Sam acquires a copy of the latest James Bond movie from Blockbuster on a three day rental agreement. 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. Looking around the room at his paying customers, Sam would be bound as a matter of contract by this limitation if he had a right to return the copy for a refund. Under current law, the restriction may also be effective as a matter of direct copyright law.

3. The concept of an opportunity to review contains an inherent element of reasonableness or fairness in that there must be a real opportunity to examine the record. What this requires may differ depending on whether one deals with a paper record or hypertext linked terms. If access to the terms becomes 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 bypass or ignore the opportunity and go forward with the transaction does not mean that there was no opportunity to review. Thus, for example, contract terms presented over the counter or conspicuously made available in a binder as required for some transactions under federal law involve an opportunity for review even if the party does not avail itself of that opportunity.

4. In subsection (b) the prefatory language is intended to make clear that the ideas of refund associated with the opportunity to review are not intended to alter ordinary law relating to the modification of an agreement in which the parties are already performing, but are only directed to the initial contract formation. In contract modification the addition of standard form terms would be dealt with under general contract law concepts about adoption of those terms which, in the UCC, can occur without additional consideration.

5. While this section does not create an obligation to make a refund, it conditions the creation of terms of contract between the licensor and the licensee that arise after payment on that opportunity. The 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-616, 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.

Typically, this refund option will be 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 copyrighted 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 of the fee. It assents. User later transfers the copy to Jones. Jones need not have any 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 against Jones for use (performance) that was not authorized. Producer has a contract claim against Jones only if Jones took an assignment of the license or assented to a license from Producer.

6. Subsection (b)(1) and (2) deal with bundled products. For the supplier, the refund relates to the entire bundled package unless the licensee agrees to an allocation of the price based on the proportionality of cost measured by the vendor's cost for the product bundle or the rejected licensor did not supply the entire bundle. Thus, if the particular software being refused was attributable for 5% of the total cost of the bundled products for the vendor, the refund must be of 5% of the price of the bundle to the licensee. The bundled products here can include both goods and information products, but the principle remains the same. Based on comments by a licensee attorney, several consumer advocates, and others, this draft does not reduce the refund for "value received." We are dealing here with an up-front contract creation and deductions would seldom be merited in any event.

. SECTION 2B-114. AUTHENTICATION EFFECT AND PROOF; ELECTRONIC AGENT AUTHENTICATIONPROOF OF AUTHENTICATION..

(a) An authentication is intended to establish the party's identity, its adoption and acceptance of a record or a term, and the authenticity of the record or term.

(b) Operations of Actions by an electronic agent constitute the authentication of a party if the party designed, programmed, or selected the electronic agent for the purpose of achieving results of that type.

(cb) A record or message is authenticated as a matter of law if party complied with an attribution procedure for authentication. Otherwise, authentication may be proven in any manner including by showing that a procedure existed by which a party necessarily must have executed or adopted a symbol in order to proceed further in the use or processing of the information.

Reporter's Notes:

[A new subsection (a) has been added to deal with the multi-purpose effect of an authentication and to state the presumption that ordinarily applies when a record is authenticated (signed). The presumption is that authentication serves all three of the primary purposes unless the authenticating party indicates that only one or two of the purposes are intended. This, it is believed, is the effect of signing under current law.]

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.

2. Subsection (b) states that compliance with an agreed attribution procedure, if followed, removes factual questions about whether an authentication (signature) occurred. This happens, of course, only if the procedure was commercially reasonable since commercial reasonableness is part of the statutory definition of an authentication procedure. The second concept in subsection (b) allows proof of an authentication in any manner, but specifically allows proof gauged by showing that a process exists that required this result in order to proceed further. This responds to on-line and on-screen methodologies that are increasingly common and removes doubt about whether that type of proof is sufficient.

3. This section is neutral as to the nature of the systems adopted for these purposes. Current law in some states links so-called "digital signatures" to the use of specific types of encryption technology. That is inappropriate in a general law such as being developed here. Fingerprint, voice recognition, encryption and other technologies as they evolve are equally acceptable.

SECTION 2B-115. EFFECT OF AGREEMENT.

(a) Whenever this article allocates a risk or imposes a burden as between the parties, an agreement may shift the allocation and apportion the risk or burden.

(b) Except as expressly provided in The effect of this article or in Article 1 of this [Act], any provision of this article may be varied by agreement of the parties. , but except as expressly provided in this article or Article 1 of this [Act], t The agreement may not vary:

(1) the obligation of good faith;

(2) the right to relief from an unconscionable contract or clause;

(2) the effect of Section 2B-406 on limitation or disclaimer of express warranties;

(3) the limits in Section 2B-716 on waiver of self-help protections;

(4) the unenforceable terms described in Section 2B-503(b) on contractual transfer restrictions;

(5) the limitations on excluding notice in Section 2B-627;

(6) the limitation stated in Section 2B-625(e) on excuse by unexpected events;

(7) the restrictions stated in Section 2B-705(a) on the statute of limitations;

(8) the limits on inclusion of refusal terms in Section 2B-308(b);

(9) the limits on choice of forum in consumer contracts in 2B-107; or

[other provisions to be added]

(c) The absence of a phrase such as "unless otherwise agreed" in a provision of this article does not by itself preclude the parties from varying the provision by agreement. 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.

(d) Unless this article requires a term to be conspicuous, or that there be manifest assent to the term, neither requirement is a prerequisite to enforceability of the term.

(e) Whether a term is conspicuous or constitutes an excluded term under Section 2B-308(b)(1) is a question of law to be determined by the court.

[(f) The statement of a rule in this article that is variable by agreement does not imply that the rule is necessarily suitable or a standard for all transactions in all circumstances. An agreement that varies such a rule must be interpreted with recognition of this principle and in light of the ordinary practices of the applicable trade or industry, consistent with the purposes of this [Act].]

Uniform Law Source: None.

[New language in subsection (c) was added to deal with concerns of several observers about the existence of a so-called negative pregnant in many of the rules in this article. Thus, for example, if a section indicates that "If the originator of a message requests acknowledgment, then the following rules apply: ---" 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. Of course, in many cases, the other and more exclusionary result is intended. This can ordinarily be inferred from the context of the section or the associated policies. Proposed subsection (f) is provided to suggest the relationship between statutory rules and interpretations of contract terms varying those rules.]

Reporter's Notes:

1. This section implements the basic policy that all of the provisions of this Article are subject to contrary agreement with the exception of listed sections or rules that are not subject to contractual modification. It deals with an important issue created by virtue of the drafting approach applied here. As a general rule, sections in Article 2B (and Article 2) are drafted in apparently mandatory terms as rules of law. This is subject to the over-riding principle, described in subsection (b), that all of the terms of the article can be altered by agreement. The difficulty rests in the fact that this general principle is, itself, subject to important limitations. The difficulty thus created is how to provide guidance to persons drafting or planning a transaction who are not aware of all of the nuances of when or whether a particular statutory term can be varied and, indeed, even what one means by varying the statutory terms by agreement.

2. The section reverses decisions such as Suburban Trust and Savings Bank v. The University of Delaware, 910 F. Supp. 1009 (D. Del. 1995) which applied the "plain meaning" of an Article 9 provision and held that the specific terms of Article 9 rule supersede the general terms of UCC ' 1-102 (permitting contractual variation of statutory rules).

3. While the feasibility of listing exceptions in a single section has been questioned, it is the only alternative to the prior practice in UCC articles of stating "unless otherwise agreed" in the sections where the rule can be modified by agreement. In the absence of one or the other approach specifically in the statute, courts may misread the mandatory sounding language that arises as a result of the drafting decision to eliminate use of "unless otherwise agreed."

4. Subsection (d) holds that conspicuousness is a matter of law. This follows current law.

SECTION 2B-201. FORMAL REQUIREMENTS.

(a) Except as otherwise provided in this section, a contract is not enforceable by way of action or defense unless there is a record authenticated by the party against which enforcement is sought or to which the party manifested assent sufficient to indicate that a contract has been made between the parties and describing the subject matter or copies. Any description of the subject matter or copies , whether or not it is specific, satisfies this subsection if it reasonably identifies what is described. However, a contract is not enforceable beyond the description of the subject matter or copies shown in the record.

(b) A grant or limitation governed by Section 2B-310 or 2B-502 may not vary the terms of those sections except by a record authenticated or employed by a party against which enforcement of the contractual term is sought.

(c) A description of subject matter is sufficient under this section if it reasonably identifies the information or the copy to which the contract pertains. A contract is not enforceable under subsection (a) beyond the subject matter shown in the record.

(d) An agreement that does not satisfy the requirements of subsection (a), but which is valid in other respects, is enforceable:

(1) if the agreement contemplates no or merely nominal consideration for the rights acquired, or the total value of anythe payments to be made and any other affirmative obligations incurred, excluding payments for options to renew or buy, is less than $20,000;

(2) the agreement involves a release of intellectual property rights, or permission to use those rights; or

(3) to the extent that a person authorized by the holder of intellectual property rights deliveredtransferred copies of the information or access materials to the licensee; or that performance has been otherwise tendered by one party and accepted by the other; or

(3) to the extent that the party against which enforcement is sought admits in its pleading, testimony or otherwise in court that a contract was made..

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

(e) For agreements within this article, this section and the remainder of this article state the only formal requirements for enforceability under the laws of this state.

Uniform Law Source: Section 2A-201. Revised.

Votes:

1. In debate on Article 2 at the Annual Meeting, repeal of the statute of frauds in that Article was sustained by a relatively narrow vote (65-52). Subsequently, the Article 2 drafting committee has voted to include a statute of frauds in that article.

2. By a vote of 10-4, the Drafting Committee voted to retain a statute of frauds generally as expressed in Alternative B of the September Draft. (September, 1996)

3. By a vote of 5-8, the Drafting Committee rejected a motion to remove the dollar limitation in the exception contained in subsection (e)(1). (September, 1996)

4. By a vote of 3-11, the Drafting Committee voted to reject a motion to exclude mass market licenses from the statute of frauds requirement. (September, 1996)

5. By consensus, the Committee agreed to move former (f) on enforceability without filing into another section in part 5.

[Former subsection (c)(3) was moved to the section on releases. New subsection (c)(3) was added at the request of several committee members to restore a principle of judicial admissions recognized under current Article 2. Subsection (e) was added to avoid confusion about the continued applicability of other, non-UCC statutes of frauds.]

Reporter's Notes:

1. The statute of frauds has been controversial. In sales law, the statute of frauds serves a limited purpose in that it applies only to protecting against fraud in cases involving goods that have not yet been delivered. Reliance on litigation and on evidence rules to regulate fraud there makes sense so long as a statute of frauds causes any significant detriment to modern transaction formats. Neither British contract law nor the Convention on International Sales of Goods (CISG) require a record. Yet, the need for statute of frauds protection is greater in information contracts than in the sale of goods, however. This is true because of the intangible character of the subject matter, the threat of infringement, and the split interests involved in a license with ownership of intellectual property rights vesting in one party while rights to use or possess a copy of the intangible may vest in another party. These considerations buttress other arguments against repeal which include primarily the idea that the fraudulent practices and unfounded claims that this rule prevents justify the cost and that the statute codifies and encourages what might be regarded as desirable business practice.

There has been little or no support outside academic contexts for repeal of the statute of frauds in reference to information transactions. This relates primarily to questions about the intangible nature of the subject matter and the ease of copying as diminishing the reliability of other indicia of agreement to circumvent fraudulent claims. The Drafting Committee voted to adopt a statute of frauds rules with a relative large dollar cut-off. The dollar figure positions the statute in reference to relatively large transactions and excludes most mass market deals. In larger transactions, the risk is sufficiently large and the statutory safeguard is relevant.

2. This Draft opts for a subject matter as the key statutory concept. There are several reasons for this. Chief among these is that, unlike in transactions in goods, questions about quantity are often not a chief consideration in intangibles. Rather, the major focus of a license deals with questions about the scope of the license. As defined in 2B-102, scope refers to five aspects of the contract: subject matter, rights granted, location, duration and the uses allowed. One could argue for a statute that requires that all five elements be in a record, but practices in the industries covered by this article do not support such a position. The subject matter (or information covered) was selected as a reasonable compromise.

3. This section does not require that a record be retained. As in current law, one can prove the prior existence of a 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. In electronic environments, 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. Significant litigation has occurred in copyright law on this question. The cases there do not impose a minimum time period; a "copy" occurs when information is placed in a different part of memory in a computer than the one in which it was stored. Copyright law, on the other hand, does distinguish a copy and a ephemeral manifestation of information. Presumably, an ephemeral copy is not a record in this Article.

4.. Subsection (b) follows the basic principle that use questions are significant and that some basic default principles should not be altered except by a record. Section 2B-310 incorporates the primary default rules on scope in this draft: single user, no right to modifications, and implied right to uses necessary to expressly granted uses. These three facets of the default rule provisions include both licensor and licensee protections.

5. Subsection (c) contains of number of exceptions to the statute of frauds rule. The $20,000 limit was chosen to exclude coverage the large number of small value transactions that do not require formalities. Focusing on dollar amount is too narrow here; the draft uses a "value" standard instead. The exception covers transactions involving no payment, but which are otherwise enforceable contract because there is other consideration present; these are excluded from the statute if the dollar amount or obligations created are less than $20,000. Subsection (c)(2) reflects entertainment industry practice.

Illustration 1: ABP Corp. licenses movies for one and two week showings by thousands of theaters. For each, it delivers a copy of the motion picture to enable the showing. Regardless of the dollar value of the license and any renewals, the license is excepted from the requirement of a record because a copy was delivered to the licensee and subsection (c)(3) applies. The terms of the license are determined by the actual agreement, the customs of the business, and default rules of this Article.

Illustration 2: 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 sSection 2B- 207 allows enforcement without consideration and this section excludes the application of the statute of frauds based on both subsection (c)(2) and (c)(1) (the latter being applicable because the total payments were less than $20,000, i.e., no payments).

6. Subsection (d) makes clear that trading partner or similar agreements are enforceable to alter the statute of frauds issue. The parties can clearly agree to conduct their further business without there being a need for additional, authenticated writings.

7. Current law: The common law statute of frauds is contained in statutes in 47 states. Restatement (Second) of Contracts ch. 5, Statutory Note, at 282 (1979). State law rules differ. In the final version of this draft, legislative notes must cover the partial revision/ repeal of existing statute of frauds rules to achieve the result noted in subsection (e) of this Draft.

Article 2A employs a statute of frauds for leases based in part on the separation of possession and title in a lease, the content of which requires documentation that goes beyond the mere transfer of possession of the goods. If the distinction based on a separation of ownership and possession is accepted as a reason for different treatment in the U.C.C. for sales and leases, a similar reason for not repealing the statute of frauds exists in intangibles.

Copyright law requires a written agreement 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 rules do not apply to transfers of rights in data. For discussion of the difference between data and copyright in data compilations, see Feist Publications, Inc. v. Rural Telephone Service Co., 111 S. Ct. 1282 (1991). Federal rules do not apply to nonexclusive licenses since a nonexclusive license is not a "transfer" of copyright ownership. However, in copyright law, a nonexclusive license that is not in writing may lose priority to a "subsequent" transfer of the copyright.

SECTION 2B-202. FORMATION IN GENERAL.

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

(b) If the parties intended an agreement, an agreement sufficient to constitute a contract may be found even if the time that the agreement was made cannot be determined, one or more terms are left open or to be agreed upon, one party reserves the right to modify terms, or the standard forms of the parties contain varying terms. However, no contract is formed if the parties disagree about scope. If records exchanged by the parties conflict on the scope of a license, an agreement exists only if and to the extent that from all the other circumstances it appears that an agreement, including with respect to scope, existed.

(c) Even if one or more terms are left open, a contract does not fail for indefiniteness if the parties intended to form a contract and there is a reasonably certain basis for giving an appropriate remedy.

Uniform Law Source: Section 2-204, modifies (b).

Committee Votes:

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

Reporter's Note:

1. Subsection (a) generally conforms to current law. Under these standards, courts correctly hold that preliminary negotiations do not create a contract unless and until the parties manifest an intent to be bound. The clearest illustration of that, of course, is by executing a contract in record. In addition, in essentially all industries, it is often the case that performance begins under some form of preliminary understanding or indication of intent to contract (letter of intent) and this performance creates obligations but not necessarily a commitment to the overall or long term arrangement. Sorting between cases such as that and the so-called layering situations where terms are layered on over time even though the parties have clearly agreed to the entire contract with details to be filled in is inevitably a question of fact for a court or the parties to sort through. Whether a more definitive standard can be provided here or in any other setting is doubtful.

2. Parts of subsection (b) were added to deal with the fact that issues about scope go to fundamental aspects of a license; they in effect define the product being licensed. Disagreement in records (often standard forms) about this fundamental issue are like an exchange of forms ordering a Corvette and confirming purchase of a Volkswagon, they indicate potentially fundamental disagreement in respect to the nature of the contract and its subject matter. This does not disallow the existence of a contract, but requires that a court look elsewhere than in the exchanged records for indicia of agreement.

SECTION 2B-203. OFFER AND ACCEPTANCE.

(a) Unless otherwise unambiguously indicated by the language of the offer or the circumstances, an offer to make a contract invites acceptance in any manner and by any medium reasonable under the circumstances., including a definite expression of acceptance in a standard form containing standard terms that vary from the terms of the offer.

(b) An order or other offer to buy, license, or acquire information for prompt or current performancetransfer invites acceptance either by a prompt promise to performtransfer or by prompt or current performancetransfer. However, a performancetransfer involving nonconforming information is not an acceptance if the party who provides the information transferor seasonably notifies the transferee that the informationthe transfer is offered only as an accommodation.

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

(d) Subject to Section 2B-202, a definite expression of acceptance may create a binding obligation even though it is in a standard form that contains terms that vary from the terms of the offer. Language in a standard form that makes an offer or acceptance expressly conditional on assent by the other party to the varying terms is enforceable and precludes a contract in the absence of agreement to those terms if the party proposing the form acts in a manner consistent with the stated conditions, such as by refusing to perform until its terms are accepted. The terms of a contract formed by records with varying terms are determined under Section 2B-309 if applicable and under general law if that section does not apply.

(e) Subject to subsection (f), operations of actions taken by one or more electronic agents which confirm the existence of an agreement contract are effective to form an agreement contract even if no individual representing either party was aware of or reviewed the action or it results.

(f) In an electronic transaction, the following rules apply:

(1) An agreement contract is formed by the interaction of two electronic agents if the interaction results in both agents each engaging in further operationsactions that signify agreement contract, such as by engaging in performing the agreement, ordering or instructing performance, accepting performance, or making a record of the existence of an agreement contract.;

(2) aAn agreement contract may be is formed by the interaction of an electronic agent and an individual. An agreement is formed if an individual who has reason to know that the individual is dealing with an electronic agent and performs actions the person who should know will cause the agent to perform or to permit further use, or that are clearly indicated as constituting acceptance regardless of other contemporaneous expressions by the individual to which the electronic agent cannot react.; and

(3) Tthe terms of the contract include terms on which the parties have previously agreed, terms which the electronic agents could take into account, and, to the extent not covered by the foregoing, terms provided by this article or other law.

Uniform Law Source: Section 2A-206; Section 2-206.

Committee Vote:

a. Approved in principle. (September, 1996).

[Subsections (a) and (d) were reorganized for clarity without intending substantive changes. Subsection (b) was edited to remove the focus on sale of goods language and make the section generic. Subsection (f) was edited to clarify the general formation rules without substantive change.]

Reporter's Notes:

1. Article 2B separates the issue of whether an agreement exists from the issue of what terms govern that agreement. This Section allows formation of a contract through a variety of means, including the exchange of conflicting standard forms if the parties behave as if a contract exists. The materials in subsection (a) through (c) are consistent with current law.

2. This general approach leaves open the question of what is the effect of a truly conditional offer. The subsection seeks to deal with one part of the "battle of forms", that is the question of whether a contract is exists. The general rule is in (a), which allows acceptance by any means and in the first sentence of subsection (d) which allows for the expression of assent in the form of a standard form that contains varying terms. The second sentence of subsection (d) sets out the idea that terms of condition are enforceable even if in a standard form if the party's behavior is consistent with those terms, insofar as the issue concerns whether the parties have a contract. Subsection (d) coordinates with current law and with the battle of forms treatment in 2B-309. The third sentence of the subsection creates an important reference, clarifying that the creation of the agreement does not necessarily mean that one party's form controls. Determining what terms are included falls to either 2B-309 or to general contract interpretation law in the case where the communications were not in conflicting standard forms.

The approach validates conditional offers if the conditioning language is followed with actual behavior sustaining its conditional nature. Thus, if a party ships pursuant to an allegedly conditional form and its behaviors manifests the existence of a contract, a contract exists despite the language of condition. If, however, a party conditions its form and refuses to ship until the conditions are accepted, that conditioning language and activity preclude the formation of a contract. Section 2B-309 allows the conditional terms of a form to govern if the parties execute an authenticated record containing the terms. In either case, the condition is actual and enforceable.

Illustration 1. Purchaser sends a standard order form indicating that its order is conditional on the Licensor's assent to terms contained on the reverse side of the form. Licensor ships pursuant to a standard form invoice conditioning the contract on assent to its terms. Purchaser accepts the shipment. Under these circumstances, neither party acted in a way that was consistent with the language of condition. There exists, however, sufficient indicia to indicate that a contract was formed (e.g., shipment and acceptance). The terms of the contract are governed by 2B-309 and general interpretation law, including the actual terms of any affirmative agreement the parties may have had. If 2B-309 applies, the primary rule is a knock-out rule where conflicting terms in both forms drop out.

Illustration 2. In Illustration 1, assume that Licensor does not ship, but telephones Purchaser and informs it of the conditions of shipment. It does not ship until Purchaser agrees to those terms. Until that agreement occurs, there is no contract. If the agreement occurs, the contract exists based, under ordinary contract interpretation rules, on the terms actually agreed to (e.g., the Licensor's terms) since, given that actual agreement, the conflicting forms no longer purport to state the contract of the parties.

Illustration 3. In Illustration 1, assume that Licensor ships pursuant to its "conditional" form, but then when the shipment arrives, Purchaser does not accept it because the original conditional offer terms are now changed. In a telephone conversation, Licensor agrees to Purchaser's terms. Until that agreement, there is no contract since the Purchaser acted in a manner consistent with its conditional language. When that agreement occurred, that agreement sets the terms of the contract (e.g., the Purchaser's terms) since, given that actual agreement, the conflicting forms no longer purport to state the contract of the parties.

3. Subsection (f) deals with two contexts relevant in the electronic world: 1) interaction between a human and an electronic agent, and 2) an interaction between two electronic agents without human intervention. In both situations, 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 4. 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 dresses 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 5. 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.

4. As between electronic agents a form of presumed intent within the programming of the electronic agents is sufficient for a contract. The idea here is that, even if the agents "negotiate", they are acting within parameters set by their party's and, if an "agreement" occurs within those parameters signified by performance, ordering performance, or instructing performance to occur, that suffices. The terms of the contract would be 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-204. ELECTRONIC TRANSACTIONS AND MESSAGES: TIMING OF CONTRACT AND EFFECTIVENESS OF MESSAGE.

(a) If an electronic message initiated by a party or an electronic agent evokes an electronic message in response and the messages reflect an or can be attributed with the intent to be bound, a contract exists when:

(1) the response signifying acceptance is received; or

(2) , if the response consists of electronically furnishing the requested information or notice of access to the information when the information or notice is received and unless the originating message did not prohibited that form of response.; or

(2) the sender of the originating message receives an electronic message signifying acceptance.

(b) Subject to Section 2B-205, an electronic message is effective when received, even if no individual is aware of its receipt.

Uniform Law Source: Section 2A-206; Section 2-206.

Committee Vote:

a. Approved in principle.

Reporter's Notes:

[Edited for clarity with no substantive change.]

1. Subsection (a) deals with timing of a contract when electronic messages are used to complete the transaction. It rejects the mail box rule, and times acceptance or effectiveness of a message to when the message is received. This same approach is followed in Article 4A ('' 4A-406, 104(a)). This section adopts the same rule (time of receipt) for all electronic responses. It contrasts to Section 2B-202, which creates a time of performance rule for non-electronic performance.

As in all other sections, questions of attribution of the messages also apply. These are resolved under the section on attribution. If, for example, the "response" purports to be from ABC Corp., but is not, a contract exists as to ABC only if the message can be attributed to it under rules of agency, attribution procedures, or the other attribution concepts contained in this Article or in common law.

2. The principal application of this section lies in the growing realm of electronic commerce. Read in combination with Section 2B-203, the principal contribution is that that a contract exists even if no human being reviews or reacts to the electronic message of the other or the information delivered. This represents an adaptation of traditional norms of consent and agreement. In electronic transactions, preprogrammed information processing systems can send and react to messages without human intervention and, when the parties choose to do so, there is no reason not to allow contract formation. A contract principle that requires human assent would inject what might often be an inefficient and error prone element in a modern format. The principle stated here, however, needs further development and coordination with the various other affected sections.

SECTION 2B-205. ACKNOWLEDGMENT OF ELECTRONIC MESSAGE.

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

(1) If the originator indicated in the message or otherwise that the message was conditional on receipt of an acknowledgment, the message does not bind the originator until acknowledgment is received and lapses if acknowledgment is not received in a reasonable time.

(2) If the originator requested acknowledgment but did not state that the message was conditional on acknowledgment and acknowledgment has not been received within an reasonable time after the message was sent, on notice to the other party, the originator may either retract the message or specify a further reasonable time within which acknowledgment must be received or the message will be treated as not having binding effect. If acknowledgment is not received within that additional time, the originator may treat the message as not having binding effect.

(3) If the originator requested acknowledgment and specified a time for receipt of acknowledgment, the originator may exercise the options in subsection (a)(2) if receipt does not occur within that time.

(b) Receipt of If the originator timely receives acknowledgment establishes of receipt, the acknowledgment creates a presumption that the message was received by the addressee but does not in itself establish imply that the content of the message sent corresponds to the content of the message received.

Committee Vote and Action:

a. Motion to delete the section was rejected. Vote: 5-6. (February, 1997)

Reporter's Note:

1. This section sets out default rules interpreting the meaning in electronic commerce of requiring or requesting electronic acknowledgment. Under subsection (a), the impact of the request depends on whether the request made the message conditional on acknowledgment or merely requested acknowledge. As a basic principle, the contents of the section recognize the right of the message sender to control the legal effectiveness and required response to its messages.

2. Acknowledgment, of course, is not necessarily acceptance in cases where the original message was an offer for a contract. Rather, the basic theme is that the acknowledgment gives assurance of receipt. In modern communications systems, this will often occur automatically and immediately on receipt of the electronic message in the recipient's system. See comments to ABA Model Contract; UNCITRAL Model Law.

3. This section deals with functional acknowledgments and, as outlined in subsection (b), 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.

SECTION 2B-206. 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 of assurance that the offer will be held open that is contained in a standard form supplied by the party receiving the offer offeree is ineffective unless the party making the offerofferor manifests assent to thate term.

Uniform Law Source: Section 2A-205; Section 2-205.

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.

[The third sentence was edited for clarity with no substantive change.]

SECTION 2B-207. RELEASES.

(a) A release or waiver of intellectual property rights inor a permission to use information whole or in part is effective without consideration if it is:

(1) contained in a record to which authenticated by the party giving the release or waiver or to which that party manifested assent, and which identifies the rights released or waived; or

(2) enforceable under other law including estoppel, implied license or other rules allowing enforcement of a release.

(b) A release cntinues for the duration of the rights released if the agreement does not specify its term and does not require:

(1) on-going affirmative performance by the party granting the release, or

(2) on-going payments or other affirmative performance by the party receiving the release except minor acts such as in complying with any agreement to give acknowledgments or credits in subsequent use of the information or provide copies of any new works.

Selected Issues:

a. Is the definition of a release sufficient distinct from the general idea of a license to permit the two special rules contained in this section: that is, the absence of an authenticated record requirement and the presumption of a perpetual term, neither of which rule is appropriate for licenses in general?

Reporter's Note:

[Subsection (a) was moved here from Section 2B-201. Ssubsection (bc) represents a specific application of a rule previously expressed in Section 2B-311,creating a presumption that single payment (or arguably, no-payment) contracts create perpetual rights if no term is specified. The broader rule was abandoned in this draft based on extensive discussion during the April, 1997 meeting, but this specific application was developed to deal with issues common in software, publishing and other industries in cases where parties develop information products based in part on reliance on general releases or waivers that do not contain specific terms as to duration. Leaving those cases to coverage under the general "reasonable time" standard provided in revised Section 2B-311 would create unwarranted and potentially costly uncertainty]

1. This section provides that ordinarily an authenticated record is not required to enforce a release. This distinguishes releases from material otherwise covered by 2B-201 on the statute of frauds. While a release is a form of a license it is characterized by being a simple agreement not to sue, rather than a commercial transaction involving the variety of elements that are present in a commercial license, including any provision for taking steps by the licensor to make the information available to the licensee. The term "release" is defined in Section 1-102.

2. Subsection (b) relates to practices important in the entertainment and multimedia industries involving acquisitions of rights clearances relating to properties used in new works. The release or waiver does not relate to claims based on breach of contract, but refers to releases of intellectual property and similar rights. The section clarifies existing law concerning the enforceability of releases in fully executed form. This section provides that release of rights in a certain form is enforceable, but does not alter other existing law with respect to when releases are enforceable.

Illustration 1. Film Co. is engaged in filming street scenes in New York City for inclusion in its newest video game. As is common practice, it posts conspicuous signs on the sidewalk informing people that the filming is occurring and indicating that, if they are filmed, their voluntary participation constitutes a release of intellectual property rights in the use of the film (e.g., rights of publicity). The effectiveness of this release is governed by this Section in that the conduct of voluntary participation manifests assent to the record (the sign). As clarified in the text, this section also does not preclude enforceability under other law such as estoppel or, even, traditional offer and acceptance theory.

Illustration 2. Goods operates a website. The first page of the site states that the user can download and use a copy of the art work by printing it. Wilson charges for access to the website, but not for downloading. Is the release or grant effective? There would be two analyses that would yield an enforceable waiver or grant of a right here. One could conclude that the term giving the right to download was an agreed part of the access contract, although there was no procedure for manifesting assent to the term. Alternatively, under this section, the release of the right to control the making of copies is enforceable since the screen is a record to which the provider manifested assent by making available to other parties, or other law supports enforceability (e.g., estoppel).

3. 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.

4. This section applies to releases that occur in common "chat room" and "list service" activities on the Internet. In these situations, it is common to indicate that participation in the service implicitly 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 the existence of assent to the record containing the release terms.

Illustration 3. West operates an on-line chat room. It uses some of the comments placed on line in its monthly newsletter. The first time an individual joins the chat room, the screen displays a legend stating that: "By participating in this on-line conversation, you grant West the right to use your comments as edited in subsequent publications in any media. By joining the conversation, under this section, the participant releases its rights in its copyright comments for the purposes stated. Subsection (b) eliminates the need for consideration if the release is in arecord agreed or manifested assent to by the party. Here, the act of participating constitutes manifesting assent if the release language was prominent and called the the party's attention.

SECTION 2B-301. PAROL OR EXTRINSIC EVIDENCE. Terms with respect to which confirmatory records of the parties agree or that are otherwise set forth in a record intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of any previous agreement or of a contemporaneous oral agreement. However, the terms may be explained or supplemented by evidence of:

(1) course of performance, course of dealing, or usage of trade; and

(2) consistent additional terms unless the court finds that the record was intended by both parties as a complete and exclusive expression of the terms of the agreement.

Uniform Law Source: Section 2A-202; Section 2-202.

Committee Votes and Action:

a. The Committee voted 11-0 to adopt a motion to strike provisions suggesting presumptions in reference to merger clauses and, in effect, return to the Article 2 rule under current law, but not the proposed revision.

b. Reviewed in April 1997 without substantive comment.

Reporter's Notes:

1. This Draft generally corresponds to current Article 2.

2. UNIDROIT Principles of International Commercial Contract Law provide that a: "contract in writing which contains a clause indicating that the writing completely embodies the terms on which the parties have agreed cannot be contradicted or supplemented by evidence of prior statements or agreements. However, such statements or agreements may be used to interpret the writing." Art. 2.17.

SECTION 2B-302. COURSE OF PERFORMANCE OR PRACTICAL CONSTRUCTION.

(a) If an agreement involves repeated performances by either party with knowledge of the nature of the performance and opportunity for objection to it by the other party, a course of performance accepted or acquiesced in without objection is relevant in determining the meaning of the agreement.

(b) Express terms of an agreement, course of performance, course of dealing, and usage of trade must be construed whenever reasonable as consistent with each other. However, if that construction is unreasonable:

(1) express terms control over course of performance, course of dealing, and usage of trade;

(2) course of performance controls over course of dealing and usage of trade; and

(3) course of dealing controls over usage of trade.

(c) Subject to Section 2B-303, course of performance is relevant to show a waiver or modification of a term inconsistent with the course of performance.

Uniform Law Source: Section 2A-207; Section 2-208; Section 1-205. Revised.

Committee Vote:

a. The Committee voted unanimously to adopt this section. (September, 1996)

b. Reviewed without substantive comment in April, 1997.

SECTION 2B-303. MODIFICATION AND RESCISSION.

(a) An agreement modifying a contract is binding without consideration.

(b) An agreement that contains a term that excludes modification or rescission except by a record authenticated by the party to be bound may not otherwise be modified or rescinded. However, in a consumer contract represented 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) An attempted modification or rescission that does not satisfy the requirements of subsection (b) may operate as a waiver.

Uniform Law Source: Section 2A-208; Section 2-209.

Committee Vote:

a. The Committee voted 12-1 to approve the section and the use of manifest assent.

b. The Committee voted to retain the reference to consumer, rather than mass market. (11-1) (Feb. 1997).

c. The Committee rejected a motion to make a "no oral modification" clause unenforceable in a consumer transaction. (1-10) (April, 1997).

Reporter's Notes:

1. The Section generally parallels current law. 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 where signatures / authentication is not feasible, while still providing protection in the form of binding the consumer only to terms where the consumer affirmatively and specifically adopted.

2. This section does not, of course, create a statute of frauds rule. Rather, it confirms that, 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 that characterize many commercial licenses and development contracts.

SECTION 2B-304. CONTINUING CONTRACTUAL TERMS.

(a) Terms of an agreement involving repeated performances apply to all later performances of the parties, their agents, or their designees unless modified pursuant to this article, even if the terms are not subsequently displayed or otherwise brought to the attention of the parties or electronic agents in the context of the later performance.

(b) A modification in good faith of a continuing contract made pursuant to If a term in a contract involving repeated performances providinges that the contract may be modified as to future performances by compliance with a described contractual procedure , a modification made in good faith pursuant to that procedure is effective if:

(1) compliance with the procedure reasonably notifies the other party of the change a reasonable time before the change becomes effective; and

(2) in a mass-market license, the procedure permits the licensee to terminatewithdraw from the contract if the modified term is material and are in good faith unacceptable and constitute a material change adverse to the licensee.

(c) A contractual term that specifies standards for reasonable notification is enforceable unless the standards are manifestly unreasonable in light of the commercial circumstances.

Uniform Law Source: None

Committee Action:

a. Voted 11-2 to extend protections to the mass market, rather than only to consumers.

b. Voted to delete limitation in former (b)(2) that the change in fact be materially adverse to the mass market licensee and substitute "unacceptable in good faith." (7-5) (April, 1997)

Reporter's Notes:

[Subsection (b)(1) was modified to allow a court to decide what is reasonable timing of notification to accommodate potential emergency or other situations where prior notice is neither necessary nor possible. See 12 CFR 205.8(a)(2) as an example. In mass market transactions, for changes in material terms, there must be an option to withdraw if the party in good faith views the change as unacceptable. On this point, the Committee voted to delete language requiring that the change in fact be materially adverse to the withdrawing party in lieu of a rule focused on good faith.]

1. Subsection (a) deals with a simple principle that contract terms, if enforceable, cover all forms of contractual performance. In the language of the section, they are continuing in nature and need not be repeated on each use of a system. This does not refer solely to cases where the agreement requires future performances. The principle stated here is applicable in any case where the subsequent performances are covered by the prior agreement. Thus, for example, a purchase of an item of information pursuant to an agreement at one time would not mean that the terms flow to subsequent performances. However, if the first agreement specifies that it applies to the first and to all or any subsequent purchases, this rule applies and that provision is effective.

2. Subsection (b) addresses a common practice in online or other continuing service contracts in which changes in service conditions occur by posting on the service from time to time. Subsection (b) provides one method for contractual modification procedures. It serves as a safe harbor, indicating that methods that comply with this are enforceable, without indicating that other methods are not available. See Section 2B-115 (c). The general idea of modification of a contract is noted in Section 2B-303 and the related common law and U.C.C. developments with respect to modifications. For example, under 2B-303, consideration is not required to modify an existing contract. What constitutes an effective modification may generally hinge on concepts of agreement and assent. Thus, for example, a signed modification would be effective. Similarly, some types of changes may not require even the procedural protections indicated here. For example, even in a fixed term loan and mortgage that are not subject to termination federal law allows unilateral changes in consumer contracts if the changes meet any of several criteria, including that they unequivocally benefit the consumer or make an "insignificant change" to the contract terms. FRB Regulation Z, 12 CFR ' 226.5b. The contracts covered here which often involve contracts subject to termination at will present a clearer case to allow non-material modifications.

3. The safe harbor in subsection (b) requires a contractual authorization of a modification procedure and that the procedure entail notification of the other party. In addition, in mass market transactions, for changes in material terms, there must be an option to withdraw if the party in good faith views the change as unacceptable. On this point, the Committee voted to delete a concept of requiring that the change in fact be materially adverse to the withdrawing party in lieu of a rule focused on good faith.

4. This subsection deals with changes in contract terms and does not cover changes in the content made available under an access contract, such as a mulifaceted database. Under subsection 2B-614(a), an access contract grants rights of access to materials as changed and modified by the licensor over time. Thus, unless an express contract term provides otherwise, a decision to add, modify, or delete an element of the databases made available does not modify the contract, but merely constitutes performance by the licensor and is not within this subsection.

5. What constitutes notification varies depending on the circumstances. In many cases, reasonable notification requires notification before the change is effect, but in some emergency situations, notice that coincides with the change or follows the change would be sufficient (e.g., a block of access to a virus infected site, or a change in the length or nature of the access codes required for access). The standard requires that the part be notified of the change. A procedure for the posting of changes in an accessible location of which the other party is aware will ordinarily satisfy the terms of this section. In consumer contracts, a further protection involves the requirement that the consumer be allowed to withdraw from the contract (e.g., terminate it) if it in good faith disagrees with the changed terms. Withdrawal is without penalty, but the mass market licensee must, of course, perform the contract to the date of withdrawal (e.g., pay all sums due at that time).

SECTION 2B-305. OPEN TERMS.

(a) An agreement otherwise sufficiently definite to be a contract is enforceable even if it leaves particulars of performance open, to be specified by one of the parties, or to be fixed by agreement.

(b) If the performance required of a party is not fixed or determinable from the terms of the agreement or this article, the agreement requires performance that is reasonable in light of the commercial circumstances.

(c) If a term of an agreement is to be specified by a party, the following rules apply:

(1) Specification must be made in good faith.

(2) If a specification to be made by one party materially affects the other party's performance but is not seasonably made, the other party:

(A) is excused for any resulting delay in its performance; and

(B) may perform, suspend performance, or treat the failure to specify as a breach of contract.

(d) An agreement that provides that the performance of one party be to the satisfaction or approval of the other requires performance sufficient to satisfy a reasonable person in the position of the party who must be satisfiedwhose satisfaction must be met. However, the agreement requires performance to the subjective satisfaction of the other party to the extent:

(1) the performance is the creation or delivery of informational content in a context in which content is evaluated in reference to aesthetics, marketability, appeal, suitability to taste, or similar characteristics; or

(2) the agreement expressly provides that the performance is to be judged in the "sole discretion" of the party, or words of similar import.

(e) If a term is to be fixed by agreement and the parties intend not to be bound unless the term is fixed or agreed to, a contract is not formed if the term is not fixed or agreed to. 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 or, if unable to do so, pay the to the other party compensation for the benefit received from information that cannot be returned or destroyed. The licensor shall return any portion of the contract fee paid on account for which performance has not been received and retained by the licensee. The parties remain bound with respect to any obligation of confidentiality, or similar obligations, to which the parties have agreed.

Uniform Law Source: Section 2-305; Section 2-311. Revised.

Reporter's Notes:

1. Subsection (a) through (c) bring together several rules relating to open terms under current law.

2. Subsection (d) pulls out cases where performance is to be to the satisfaction of the other party. Here, two different approaches reflect different traditions and case law in the industries affected by Article 2B and differences in qualitative standards that are appropriate to the commercial relationships. The factor that distinguishes these industries is that many of the information products that they obtain entail judgments about aesthetics and marketability, leaving it important that the judgment of the licensee be unfettered. Here, to the satisfaction clauses create a subjective standard, rather than one defined by reference to a reasonable person test. The converse rule is more appropriate in cases involving the development of computer programs and the like.

4. Restatement (Second) of Contracts ' 228 "prefers" a reasonable man approach if the context permits objective standards for determining satisfaction. This leaves too much uncertainty for the information industries affected here. The Restatement cites an entertainment industry example as one in which no reasonable standard of satisfaction is possible. The language in (d) attempts to provide guidance for determining when the subjective standard is appropriate for informational content performances.

5. Subsection (d) provides safe harbor language.

6. Subsection (e) deals with situations in which the parties agreement contains an element requiring further agreement to a term. This section derives from 2-305. The relevant policy is that, in the case of a failed agreement, the parties must be placed into the same position as that would have been without the tentative steps toward agreement having occurred and that no party should retain a benefit for which it has not paid. Subsection (e) permits destruction of copies of the information and other materials in lieu of returning them. In the context of goods, return of the tangible items is essential to place the parties back into the position that they were before the tentative agreement. In reference to information, in most cases at least, the party having transferred the information retains copies of it. The option of destroying the copies is subject to the consent of the other party to cover the case in which recovery of the information by the original transferor would be difficult or costly.

SECTION 2B-306. OUTPUT, REQUIREMENTS, AND EXCLUSIVE DEALING.

(a) A contractual term that measures quantity or volume of use by the output of the licensor or the requirements of the licensee means actual output or requirements that may occur in good faith. A party may not offer or demand a quantity or volume of use unreasonably disproportionate to a stated estimate or, in the absence of a stated estimate, to any normal or otherwise comparable previous output or requirements unless there are no outputs or requirements in good faith.

(b) An agreement for exclusive dealing imposes an obligation on a licensor that is the exclusive supplier to use good faith reasonable commercial efforts to supply, and on a licensee that is the exclusive distributor to use good faithreasonable commercial efforts to promote, the information or product commercially.

Uniform Statutory Source: Section 2-306.

Committee Vote:

1. Voted unanimously to approve the section in principle, but to consider changes in the idea of best efforts, either in definition or by shifting to a "reasonable commercial efforts" standard. (Oct. 1996)

Reporter's Notes:

[After extended discussion of the standard to be used in subsection (b), no clear resolution was reached combining the various industry approaches. The basic choice was between reasonable commercial efforts and good faith. As indicated during the April meeting, the Reporter reviewed the possibility of employing a business judgment standard, but that was rejected for several reasons, including questions about with reference to which business and about how corporate law decisions deal with conflicting interests arising from having two products of similar type. The approach suggested here relies on a good faith standard - honesty in fact and adherence to commercial standards of fair dealing.]

1. Licenses do not involve issues about "quantity" in the same way that sales (or leases) entail that issue. A prime characteristic of information as a subject matter of a transaction lies in the fact that the intangibles are subject to reproduction and use in relatively unlimited numbers; the goods on which they may be copied are often the least significant aspect of a commercial deal. Rather than supply needs or sell output, the typical approach would be to license the commercial user to use the information subject to an obligation to pay royalties based on the volume or other measurable quantity figure.

2. Subsection (b) accommodates the various bodies of law that pertain to exclusive dealing relationships in information. Unlike for goods, the typical case here does not necessarily entail production and delivery of copies for resale by the other party. Article 2 and case law dealing with patent licensing create a best efforts default rule. That rule, however, is not the law in other fields governed by Article 2B and, in any event, uses a standard that has been difficult if not impossible to define with reliability. The standard here is more consistent with publishing and similar industries: it allows courts to draw appropriate balances in light of the commercial context and the existing traditions of that context in the atypical case where the contract is silent on the issue.

SECTION 2B-307. ADOPTING TERMS OF RECORDS.

(a) Except as otherwise provided in Sections 2B-308 and 2B-309, If 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.

(b) Except as otherwise provided in Sections 2B-308 and 2B-309, a party adopts the terms of a record if the party agrees, including by manifesting to or manifests assent, to the record before or in connection with the initial performance, use of or access to the information. If agreement or assent does not occur by that time but If the parties commence performance or use the information with the expectation that their agreement will be represented in whole or in part by a record that the party has not yet had an opportunity to review or that has not yet been completed, a party adopts the terms of the later record if the party agrees to or manifests assent to that record.

(cb) A term adopted under subsection (ba) becomes part of the contract without regard to the knowledge or understanding of the individual term by the party adopting the record and whether or not the party read the record.

(dc) A term of a record which is unenforceable for failure to satisfy a requirement of another provision of this article, such as a provision that expressly requires use of conspicuous language or manifested assent to the term, is not part of the contract.

Uniform Law Sources: Restatement (Second) of Contracts 211.

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 the section to cover all records, rather than merely standard forms, provided that it be made clear that standard forms are covered. (September, 1996)

Reporter's Notes:

[Rewritten for clarity on the distinction between adopting a record and creating a contract, but no substantive changes have been made.]

1. Article 2B deals with standard form records in three separate sections. This Section and 2B-308 deal with standard forms in "single form" cases. Section 2B-309 deals with cases involving an exchange of conflicting forms. These sections do not address whether a contract exists. If no contract is formed under other provisions of this Article, the sections are not applicable. What is addressed here is, given an agreement, what are the relevant terms.

2. In single form cases, a balance is implemented involving two elements. The first, contained in this section, solidifies the enforceability of standard forms in commercial deals. This confirms an important aspect of commercial law. The principle, already followed in the vast majority of modern commercial case law, flows from the belief that in the absence of fraud, unconscionable or similar conduct, commercial parties are bound by the writings to which they assent, without being able to later claim surprise or a failure to read the language presented to them. Assent is not conditional on the party actually reading the terms. The second is that, in consumer or mass market transactions, protections can be created altering the idea that a party is bound by the entire form to which it assents in a way the accommodates the possibility of unfair surprise. This counterbalance arises in 2B-308 with reference to mass market contracts. That Section adopts the approach of the Restatement (Second) of Contracts ' 211, which creates a limited basis to argue that a term in a record to which the party assents may have been so surprising that it should not be enforced unless called to that person's attention. The Restatement rule is seldom applied to commercial contracts not involving insurance policies, and has been adopted fewer than ten states. Other states use concepts of fraud, unconscionability, bad faith and similar devices to police, in a limited way to preclude serious cases of abuse.

3. This section applies the principle of enforceability to all commercial records. A party is bound by a record if it agrees to the record or if it manifests assent to the record. Given the definition of manifesting assent, this gives three ways of establishing that a record is binding. The most restrictive is "manifested assent." This concept focuses on objective manifestations of assent and adopts procedural safeguards allowing the party bound by the standard form an opportunity to review terms and to reject the contract if the terms are not acceptable. The two safeguards are in the concept of "opportunity to review" (see 2B-114) and "manifests assent" (see 2B-113). A party cannot manifest assent to a form or a provision of a form unless it has had an opportunity to review that form before being asked to react. 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). The second theme involves signing the record (authentication). Historically, this has been sufficient to show assent. Third, there is the possibility of "agreement to the record." This is more subjective and deals with the entire context. A party in a context covered by this section would generally prefer to construct its transaction to fall within the either of the other provisions.

4. Subsection (b) 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). As a consequence, terms can be created by agreement or 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.

5. Subsection (d) simply clarifies that assent or agreement do not over-ride statutory requirements that a term be conspicuous or that there be assent to the particular term.

SECTION 2B-308. MASS-MARKET LICENSES.

(a) Except as otherwise provided in this section and Section 2B-309, a party adopts the terms of a mass-market license if the party agrees, including by manifesting or manifests assent, to the mass-market license before or in connection with the initial performance, use of or access to the information.

(b) Terms adopted under subsection (a) include all of the terms of the license without regard to the knowledge or understanding of individual terms by the party assenting to the form. However, except as otherwise provided in this section, a term [for which there was no opportunity to review before payment of the contract fee is not adopted and] does not become part of the contract if the term creates an obligation or imposes a limitation that:

(1) the party proposing the form should know would cause an ordinary reasonable person acquiring this type of information in the mass market to refuse the license if that party knew that the license contained the particular term; or

(2) conflicts with the negotiated terms of agreement.

(c) A term described under subsection (b) is part of the contract if the party that did not prepare the form manifests assent to the term.

(d) Subsection (b)(1) does not apply to a term that:

(1) states a limit on the licensee's use of the information that would exist under intellectual property law in the absence of the contractual term;

(2) was disclosed in compliance with any federal or state regulation; or

(3) becomes part of the contract under other provisions of this article.

(e) A term of a mass-market license which is unenforceable for failure to satisfy a requirement of another provision of this article, such as a provision that expressly requires use of conspicuous language or manifested assent to the term, is not part of the contract.

(f) In a mass-market transaction, unless otherwise agreed, an obligation or limitation that was reasonably disclosed, on the product packaging or otherwise, before payment of the license fee, or that was part of the product description, becomes part of the contract without manifestation of assent to a license or to a term containing the obligation or limitation.

(g) A mass-market license must be interpreted whenever reasonable as treating in a similar manner all parties situated similarly without regard to their knowledge or understanding of the terms of the record.

Uniform Law Source: Restatement (Second) of Contracts ' 211.

Votes:

a. During Article 2 discussion at the annual meeting in 1996, a motion to delete special treatment there for consumer was defeated based in part on Article 2 Drafting Committee assurances that Article 2 would use an objective test.

b. The Drafting Committee adopted by a vote of 10-1 a motion to delete the reference to terms consistent with "customary industry practice."

c. The Drafting Committee adopted by a vote of 12-0 a motion to delete a safe harbor for terms giving no less rights than under a first sale.

d. The Drafting Committee voted 12-0 to support an approach (b) that focuses on the perspective of the party proposing the form.

e. The Committee rejected a motion to adopt ABA proposal to substitute refusal term concept with an affirmative, expanded refund right that covers cost of return and return of system to original state. Vote: 2- 6 (April, 1997)

f. The Committee failed to adopt a motion to add the expanded refund right and restrict the refusal term concept to consumer transactions. Vote: 5 - 5 (April, 1997)

g. The Committee rejected a motion to limit the section to consumer licenses. Vote: 2 - 8 (April, 1997).

Selected Issue:

a. Should the Committee reconsider the question of restricting the refusal term concept to consumers with a refund provision for others where contract reached after payment?

Reporter's Notes:

[Subsection (d)(2) was added to respond to an issue raised by the letter from Citibank regarding scope. It provides that compliance with applicable state or federal regulation is adequate to avoid treatment as a refusal term under (b)(1). Where a specific decision is made by regulators to mandate and enable particular disclosure rules, the general standards of this section should not create an entirely separate compliance regime.]

1. This Section deals with mass market licenses and states an exception to the general rule of validation found in Section 2B-307. The exception, described primarily in subsection (b), invalidates some terms in a mass market form if there was no manifestation of assent to the form or if the terms are such that the party proposing the form should know would cause a refusal of the license by the licensee.

In modern practice, mass market licenses occur in several different formats which differ in part based on the extent to which the licensor (typically the publisher of the software) deals directly with the licensee (end user). In some cases, there is direct contact and the license represents no more than a particular application of general standard form practice. In other cases, the license arise on-line in an access contract where the initial screens presented to the licensee request assent to the license before use of the resource. Again, except for the automated nature of the contracting, this up-front use of a form is analogous to ordinary contracting. An additional framework involves forms presented after the licensee obtains the software from a retailer. In that case, the form establishes a relationship between the publisher and the end user. That relationship, which may be central to the licensee's right to use the software, did not arise in the retail transaction. Under this Article, the post-payment terms cannot be made enforceable unless the licensee has a right to a refund if it rejects the proposed agreement. This format include so-called "shrink-wrap" licenses.

This section will typically not apply to transactions involving information provided in separate units pursuant to an overall agreement between the licensor and the licensee. Such agreements are not part of a retail marketplace and, thus, would not fall within the definition of mass market transaction. They would be governed under the general rules of this Article.

2. Subsection (a) states the principle announced in the Restatement (Second) and followed in 2B-307 that by authenticating or manifesting assent to a standard form record, a party adopts the terms of that record. Unlike common law which leaves the idea of assent undefined, this Article places significant restrictions procedurally on the idea of manifesting assent. These restrictions ensure that the record be available for review and that the assenting party make some affirmative indication of assent. Compare Hill v. Gateway 2000, Inc., 1997 WL 2809 (7th Cir. 1997) (assent to a form based on failure to object within thirty days sufficient to allow enforcement of arbitration clause contained in that form). See also Proposed Revisions of Article 2, 2-404 (remote party warranties and disclaimers are enforceable if included in package or on label). In light of the nature of mass market transactions, the timing in which the form can be made effective is limited to no later than the initial use of the information.

3. Subsection (a) requires manifestation of assent to the form. It impact is limited by subsection (b). It is also shaped by the existence of other mechanisms that create terms in an agreement. One of these is described in subsection (g). That subsection clarifies that information about a product disclosed on packaging or otherwise or part of the product description itself, become part of the deal in a mass market transaction without there being a need to obtain manifested assent to a standard form. This clarifies the point that the standard form and the manifesting assent requirements are not the exclusive methods of defining the agreement in this marketplace, or indeed, in any other market.

3. This section deals with single-form cases. In that situation, case law generally affirms the enforceability of forms. With respect to single form cases, no appellate case law rejects the contract-based enforceability of the forms and recent cases support it. See Hill v. Gateway 2000, Inc., 1997 WL 2809 (7th Cir. 1997); 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) (applying a preemption analysis to statute validating a particular term after the lower court held otherwise the contract was invalid as a contract of adhesion; the appellate court did not address the contractual enforceability issue). Case law is less clear in the conflicting forms setting where, as in Section 2B-309 of this article, the presence of differing terms creates 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). These cases do not contest the underlying enforceability of standard forms, but deal with conflicting terms. 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).

4. Subsection (b) places two general restrictions on the enforceability of terms in the mass market license. These are, of course, in addition to the generally applicable UCC rules regarding unconscionable contracts and the requirement of good faith. Both statutory restrictions aim at preventing the creation of terms that contradict the basics of the agreement without giving the licensee fair notice of their inclusion. The bracketed language in (b) raises a question about whether the exclusionary terms should be limited to cases where the form was not made available to the licensee until after it paid the purchase price. This would be the "classic" shrink wrap case where, unlike in the case of forms assented to at the outset of the transaction, some arguments can be made about the equities in allowing terms to arise after the initial retail acquisition. In most shrink wrap cases, of course, the license is not an amendment of the agreement between the retailer and the end user, but the creation of a relationship between the end user and the publisher or copyright owner. In this Article, under Section 2B-616, the retailer's contract is independent of the terms of the publisher's contract with the end user (including disclaimers and the like). Article 2 revisions deal with this third party relationship by validating so-called "warranties in a box" regardless of assent by the consumer and independent of exclusion of refusal terms.

5. Subsection (b)(2) disallows terms in the license that conflict with prior, negotiated terms of the agreement.

6. Subsection (b)(1) invalidates "refusal" terms unless, pursuant to subsection (c), those terms are called out to the attention of the end user and assented to by that party. "Refusal terms" are terms that the proposing party has reason to know would cause a refusal of the license if the licensee were aware of the terms. This subsection creates what, in most states, is a significant expansion of protection for consumers and, for businesses who make contracts in the "mass market." The section in part adopts principles of the Restatement (Second) of Contracts ' 211. Since the Restatement test has been adopted in relatively few states for transactions that do not involve insurance agreements, this substantially expands licensee protection as contrasted to current law.

7. Subsection (b) parallels the Restatement, but does not adopt the broad interpretation that some courts have placed on that rule. Some courts have confused the Restatement approach with a general authorization to review the terms of a standard form to determine whether, in the view of the court, the contract term was within the reasonable expectations of the recipient of the form and, ultimately, whether the term was appropriate in the context of the deal as viewed by the court. This, in effect, allows a court to rewrite the deal of the parties by excluding terms it thinks are not reasonable. This broad approach reflects case law in a number of states dealing with insurance contracts, but is neither appropriate in this commercial context, nor consistent with the language of the Restatement, the apparent intent of the developers of the Restatement, or the language of this section. As applied outside of the arena of insurance contracts and divorced from the insurance law concepts that influence the test in that setting, a broad "reasonable expectations" test finds little support and is rejected here.

The Restatement comments indicate that a recipient of a form does not adhere to terms if the form provider had reason to believe that the recipient would not accept the agreement if it knew the term was present. While this monitors against unexpected terms that are outside reasonable expectations, it only does so from the perspective of the proposing party. The comments also say that:

Reason to believe may be inferred from the fact that the term is bizarre or oppressive, from the fact that it eviscerates the nonstandard terms explicitly agreed to, or from the fact that it eliminates the dominant purpose of the transaction. The inference is reinforced if the adhering party never had a opportunity to read the term, or if it is illegible or otherwise hidden from view. Comment f.

In addition to these themes, some cases emphasize that a term hidden in a form can be invalidated if it takes away or contradicts affirmative expectations created by the vendor in a deal that are basic to the value of the bargain for the other party.

It is in the more narrow, refusal term sense that the test is meant.

8. Subsection (b) (1) modifies the Restatement approach in several ways. A major difference is that, in light of the mass market context, this Draft focuses on the perspective of the party proposing the form with respect to an ordinary user of the information. The Restatement permits a reference to the perception of the party proposing the form as to the reactions of the recipient, and courts applying the test conflict in their treatment of this issue. In the mass market, the assumption of a one to one relationship creating an individualized perception would be unrealistic.

Subsection (b)(1) expressly connects the nature of the term to the refusal of the entire deal. The issue presented is not whether a term would fall within general expectation, but whether the vendor has reason to know that the term would be a "deal breaker" in that it would so contradict the terms of the transaction or create oppressive conditions that would cause refusal of the proposed deal itself and in full.

As in the Restatement, subsection (b)(1) refers to the perspective of the party proposing the form, not to whether the form is within the expectations of the individual recipient. A review of reported cases on this point under the Restatement indicates that the insurance law concepts have affected judicial treatment of the Restatement and that not all courts concentrate on the form provider's reason to know. The test as proposed here does not adopt the reasoning of those cases.

9. Subsection (c) allows terms that would otherwise be excluded to become part of the contract if the party manifests assent to the term. At the heart of the Restatement test and of the approach adopted here is the idea that unknown terms require some closer monitoring to avoid surprising and oppressive terms. If the party is made aware of and assents to the term, there is no room for argument about whether the term was unknown to it. This does not create a mere formality, but rebuts a basic element of the exclusionary standard. By disallowing "refusal terms" the intent is not to invalidate terms known and assented to by the licensee. Subsection (c) allows the proposing party to call the terms to the licensee's attention explicitly and, thereby, eliminate the argument that a term was an unknown refusal term. Basically, if a party desires to use terms in its mass market forms that are possibly within the exclusion, and does not wish to risk unenforceability, that licensor must structure the transaction to obtain assent by the licensee to the particular term. This requires that the term be called to the licensee's attention and assent obtained by signing or an action related to that term. The structure adopted here not only attempts to balance the interests of licensor and licensee, it also attempts to create a structure in which transactions can occur. This is not a litigation standard, but an approach that says to the licensor: if you wish to impose a bizarre term, the only safe procedure you can adopt entails one in which that term is brought to the licensee's attention and assented to by the licensee.

Illustration 1: Assume that party A accesses the front "page" of party B's online database of periodicals dealing with television shows and is confronted with a legend stating that "These materials are provided subject to an agreement relating to their use and reproduction that can be reviewed by clicking on the "license" icon. By striking the [return] key you assent to all of the terms of that license agreement, including the price to be charged for access rights." Assume that this is a mass market license. A has an opportunity to review the license (assuming that if A reviewed the license it could leave without charge) and is provided with an instruction that a particular action constitutes acceptance of the license. By doing so, A adopts the license even if it did not review its terms.

Illustration 2: ABC Industries agrees with Software Co. to acquire a word processing program. It does not contain reference to warranties. When the package is opened and placed into a computer, the first screens state: "This software is subject to a license agreement. To review the agreement, click [here]. If you agree to be bound by the license agreement, click below on the icon stating your agreement. If you do not agree, click on the icon stating your non-agreement and return this product and all copies you have. We will give you a full refund. " Assume that by clicking to review the agreement, the entire license is available on screen. Also assume that the licensee cannot proceed to load the software without indicating its agreement. Does this license generally define the agreement if the licensee clicks acceptance. Yes. The licensee had an opportunity to review before taking steps defined as assent. The opportunity to review includes, as it must, a chance to read the license, an opportunity to decline it, and a right to a refund if the licensee declines. By clicking acceptance, it assents to the form. The fact that there was a prior agreement is not material since the license did not contradict negotiated terms.

Illustration 3: In the foregoing transaction, assume that the license provides that the licensee indemnifies the licensor for any claims based on the licensor's infringement of third party copyrights. Is this clause included in the agreement for the word processing program? No. This indemnity would be unusual and most likely a refusal condition in the mass market although, in some commercial markets, it may be an ordinary clause.

10. Subsection (d) describes situations in which the exclusionary test of subsection (b) does not apply. The first states that a term stating limits that would exist under intellectual property law are not refusal terms and do not fall within the provisions of subsection (b)(1). The section does not validate specific terms or go outside the scope of what rights the licensor would have under copyright and patent (including any limitations on those rights under federal law or policy). The intent is to validate contract terms that merely implement a copyright owner's exclusive rights and reflect conditions already established by federal property law. The second exception is also present in some drafts of revised Article 2 and applies to a term which comes into the contract under other provisions of the Article. The primary application of this lies in use of conspicuous terms. A conspicuous disclaimer that conforms to rules on disclaimers cannot be avoided under this section as a refusal term, nor could a conspicuous term limiting damages. The more specific treatment governs. Disclaimers and ordinary remedy limitations, of course, would not be refusal terms pursuant to the standards of this section in any event.

11. Subsection (e) states the obvious corollary to the fact that terms conforming to this article are not to be excluded under (b). It indicates that terms that do not comply with other provisions of this article are not part of the terms adopted by the assenting party.

SECTION 2B-309. CONFLICTING TERMS.

(a) If an the parties to an agreement is formed, and the parties exchange standard forms before or after the agreement that purport to contain terms of the agreement and the forms contain varying standard terms, the following rules apply:

(1) If a party proposes a standard form containing language that conditions assent on agreement to its terms and states that the party does not intend to be bound unless the other party agrees to the terms in its form and the conduct of the party proposing the conditions are al form is enforceable under Section 2B-205, consistent with the stated conditions, the terms of that form govern if the other party by language or conduct agrees to the form.

(2) In all other cases, terms on which the forms coincideagree become part of the contract, but conflicting standard terms are not part of the contract unless the party claiming inclusion establishes that the other party manifested assent to the term or the records of both parties agree in substance with respect to the term.

(3) If a standard form of one party deals with a term, silence of the other standard form on the subject is not a conflicting term. If the standard forms of the parties agree in part, but disagree in part on a subject matter [the terms are in conflict as to the entire subject] [the terms are in conflict only as to the point of disagreement].

(b) Subject to subsections (c) and (d), in cases governed by subsection (a)(2), the terms of the contract are:

(1) terms agreed to by the parties;

(2) terms included under subsection (a)(2);

(3) terms of the licensor's standard form governing scope of a license; and

(4) supplementary terms included under this article.

(c) In the case of a conflict between terms included under subsection (b):

(1) terms under subsection (b)(1) govern as to all other terms;

(2) terms included under subsection (b)(2) govern terms under subsection (b)(3) or (b)(4); and

(3) terms under subsection (b)(3) govern terms under (b)(4).

(d) Contractual tTerms in a record authenticated by the party to be bound supersede the inclusion or exclusion of terms under subsection (a) or (b).

Uniform Law Source: Section 2-207. Substantially revised.

Committee Votes:

a. Consensus to strike or rewrite former subsection (c) (rewritten as subsection (b)(2)) to deal more effectively with terms that are basic to defining the product and, thus, not subject to the knock out rule.

b. Failed to adopt a motion that in the battle of forms the presumption should be no consequential damages apply. (4 - 4) (April, 1997)

Reporter's Note:

[Subsection (a)(1) was redrafted for clarity and for coordination with Section 2B-202 on contract formation. Note that, if behavior is consistent with the conditional form, the condition is enforceable and there may be no contract formed. Subsection (a)(2), which has not yet been reviewed by the Committee, proposes solutions for two problems involved in the idea of conflicting terms. The first sentence holds that silence in one form is not a conflict that triggers the knock out rule. The second proposes alternatives to solve cases of partial conflict. It would apply, for example, where one form provides "no consequential damages for either party" and the second form provides "no consequential damages for either party, except with respect to breach of confidentiality provisions." In one view, this is a complete conflict and both terms drop out (creating the unique result that both parties fail to exclude consequential damages for most risks. The other approach allows the point of agreement to be part of the contract, but creates a knock out rule with respect to confidentiality damages in that hypothetical.]

1. This section deals with a limited, but significant problem: the limited case of two or more conflicting standard forms exchanged by the parties, the problem with which current UCC ' 2-207 deals. Broader interpretation problems involving exchanges of letters, E-mails and other communications are left to general contract law. This Draft assumes that a knock-out rule of interpretation is appropriate for an exchange of forms. This leaves those complex situations to ordinary contract interpretation rules.

2. The battle of forms deals with a situation where the parties exchange forms, but undertake a contract regardless of whether the forms agree. Where this is true, the section states simply that, if the parties did not negotiate or limit their conduct to reflect the form, law will not retroactively create a rule in which the standard form terms have greater significance for either party than was suggested by their behavior. In that respect, the section applies a "knock-out" rule; the parties are governed by the supplementary principles of this Act to the extent that their forms disagree. Discussing current 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.

3. This Section adopts a "knock out" rule which essentially excludes conflicting terms in the forms, regardless of which form was the first received or sent. The sole question here deals with what are the terms of the contract in the battle of forms. The creation of the contract comes under 2B-202 and 203.

Illustration 1: In response to a standard order form from DuPont, Developer ships software subject to a form. The two forms disagree on warranty terms. Under this rule, both warranty terms drop out. If Developer sends an E-mail or a letter objecting to the warranty terms, but goes ahead and ships without obtaining assent from DuPont to any change, determining what terms govern the contract poses a difficult, but ordinary contract interpretation issue inquiring into the intent of the parties, rather than an automatic knock-out rule. If Developer states its refusal to ship unless DuPont agrees to its warranty terms and in fact refuses to do so until DuPont agrees, the provisions of (a)(1) apply. If Developer sends a form conditioning shipment on acceptance of its terms, but nevertheless ships, subsection (a)(2) governs; the conflicting terms drop out.

4. In cases of two conflicting records, this section controls over the prior two sections on standard forms and mass market licenses which deal with cases involving only one standard form. Varying or conflicting terms are excluded unless a party manifests assent to a particular term. A party does not manifest assent by mere silence or retention of a record. Assent requires an affirmative act that reflects agreement to terms that the party had an opportunity to review and reject.

Illustration 2: Licensor and licensee exchange standard forms relating to an acquisition of software. The terms conflict with respect to warranty. The conflicting terms drop out. The licensee does not obtain its term (full warranties) unless the other party assents to that term. Suppose that the Licensee form states that, by shipping this package, you consent to all of my terms and specifically to term 12 on warranties. Does shipping the package assent to the term? No. The conduct does not relate to that term. The licensee would have to require initials on the term, telephone assent to the term, or other act clearly connected to the fact that the licensor knew of and assented to the term itself.

5. This section identifies three cases where a knock-out rule would be inappropriate even though the parties exchanged standard forms. The first involves a case (subsection (a)(1) where one party, by conduct and by its form, conditions its agreement to a contract on the other party's assent to its forms. Although a naked exchange of forms gives neither party priority, conditional offers or acceptances must be recognized and enforced when appropriate, even if made by a standard form. By matching the form with the behavior as required in subsection (a)(1), a party expressly takes the transaction outside the battle of forms by actually conditioning participation in the contract on agreement to the terms of its form. Often, when this occurs, there is no agreement between the parties unless the other party assents to the conditional offer. See 2B-202.

6. A second situation that takes the case out of the knock-out rule occurs when the parties execute an authenticated record. Authentication (signature) of a record supersedes the standard forms issue. The authenticated record can come before or after the exchange of forms. The basic theme is that 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. The third situation occurs when the forms conflict about the scope of the license. Scope is a defined term in 2B-102 that refers to terms restricting field of use, duration and similar terms that in effect define the nature of the information product being licensed. 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). A knock-out rule would expose intellectual property to the vagaries of conflicting forms.

Taken together with the provisions on contract formation, the rule contemplated here involves inquiry about three issues in cases of conflicts on scope:

(1) Did the parties actually reach an agreement or was one purchasing a Corvette while the other was selling a Ford? Under the general formation rules, disagreement about scope means that there is no contract. Thus, in this section, the reference to the licensor's scope provisions becomes an issue only if there was no disagreement about scope.

(2) If an agreement exists, did the parties agree on scope and, if so, what agreement was reached? If there is an affirmative agreement on scope terms, that affirmative agreement governs and, pursuant to this section, the agreed terms take precedence over any terms in the forms of either party.

(3) If a specific scope was not agreed to by the parties, what terms on scope are contained in the licensor's form? As this indicates, rather than giving dominance to the licensor's form per se, this treats the issue of scope as a central aspect of the relationship and uses the licensor's terms only after concluding that an agreement exists and that there was no specific understanding about scope. If the parties agreed on scope, that agreement prevails over the forms of either party.

Illustration 4. Vendor offers two versions of its copyrighted directory and commentary relating to restaurants. One is a license for consumer use only at a price of $50.00. The second, containing the same data and software is for commercial use, including the right to make commentary available in commercial publications. It is priced at $10,000. Licensee sends a standard form which contains the provision that the software must be available for all uses, including commercial use. It orders one copy of the restaurant software. Vendor ships, using a standard form limiting use to consumer purposes. The vendor's scope limitation controls since there was no contrary negotiated term.

Disagreement on scope of the license often indicates a lack of agreement on what is being purchased. In this section, terms of a form that conflict with a negotiated agreement on scope do not control; the licensor's terms only control as against other non-negotiated terms.

(a) A license grants all rights expressly described and all rights within the licensor's control during the duration of the license which are necessary to use the rights expressly granted in the ordinary course in the manner anticipated by the parties at the time of the agreement. A license contains an implied limitation that the licensee will not exceed the scope of the grant. Use of the information in a manner that was not expressly granted or expressly withheld exceeds this implied limitation unless if the use was not necessary to the granted uses orand would not otherwise be legally permitted in the absence of the implied limitation.

(b) A license concerning digital information which does not specify the number of simultaneous users permitted only authorizes grants a right for use by one party at any one time. However, if the license authorizes display or performance of the information, it permits participation in or viewing by any number of persons, but only offor a single display or performance or display at any one time.

(c) Neither the licensor nor the licensee is entitled to any rights in improvements or modifications made by the other party after the license becomes enforceable[transfer] [activation] of rights, or to receive source code, object code, schematics, master copy, or other design material, or other information used by the other party in creating, developing, or implementing the information. A licensor's agreement to provide updates to or new versions of information requires that the licensor provide only such updates or new versions that are developed by the licensor from time to time for use by third parties and made generally available unless the agreement otherwise expressly provides.

(d) In interpreting language of a license grant, the following rules apply:

(1) A grant without qualification of "all possible rights and media" in information, "all rights and media now known or later devised", or a grant in similar terms, includes all rights then existing or created by law in the future and all uses, media, modes of transmission, and methods of distribution or exhibition in all technologies or applications then existing or developed in the future, whether or not anticipated at the time of the grant.

(2) A grant of "all possible rights", "all rights now known or later devised", or similar terms, includes all rights then existing or created by law in the future, whether or not anticipated at the time of the grant.

(3) A grant of "all possible media", "all media now known or later devised", or similar terms, includes use in all media, modes of transmission, and methods of distribution in all technologies or applications then existing or developed in the future, whether or not anticipated at the time of the grant.

(42) In a contract between merchants, a grant of a "quitclaim" of rights, or a grant in similar terms, is a contract without implied warranties as to infringement or the rights actually possessed and transferred by the grantor.

(53) A grant that states that it is of an "exclusive license", or usesa grant in similar terms, conveys to the licensee exclusive rights in the information as against the licensor and all other persons to exercise the rights granted within the scope of the license and affirms that the licensor will not grant rights in the same information within the same scope to any other party and has not previously done so in a license that is in force at the time of the contract.

Reporter's Notes:

1. This section reflects a significant reduction of the default rules contained in prior drafts.

2. The first sentence in subsection (a) covers a classic implied license dealing with rights necessary to achieve the purposes of the grant and with rights that may not have been expressly granted. For example, a license to use a film clip in a CD ROM product impliedly conveys the right to crop or modify the size of the clip to fit the media unless that is expressly excluded. A grant of a license in software conveys the right to use functions provided in the software in the ordinary course to make modified versions of that software. The implied license relates to rights transferred and to materials provided to the party; it does not require a transfer of additional materials (such as source code), unless that transfer was agreed to by the parties. Additionally, express contract terms precluding this treatment are effective.

4. The second and third sentences in subsection (a) deal with a highly important interpretation issue that is accentuated as information transactions become more common outside areas expert in intellectual property rules. Unless dealt with here, the interpretation issue creates a trap for unwary draftsmen. Under current law, it is clear that uses of licensed information outside the express scope of a license are breaches of contract if the scope is defined in terms of "this use only" or otherwise expressly precludes the use. If the word "only" does not appear, the cases are less clear and some case law suggests that the omission of the word in formal grant language vitiates the contract claim. This concept is not universally followed and some federal policy holds that the proper interpretation is that any use not expressly granted is withheld.

Under the second and third sentences of (a), an affirmative grant of less than all rights impliedly excludes other uses that exceed the grant. The implied limitation, however, is not as strong as an express limitation. The implied limitation does not preclude acts that are necessary to achieve the uses contemplated in the express grant. Additionally, the implied limitation is not exceeded if the use would have been permitted by law in the absence of the implied limitation. Thus, a consumer (personal) use of a commercial license might be permitted if it would be a fair use (if it does not adversely impact the market for the work) and was not expressly precluded by the contract. However, if a grant is for use of a motion picture in one location but did not use the magic word "only" and the licensee uses the motion picture copy to make and distribute multiple copies for sale to home uses, that activity would violate the copyright (as a non-fair use) and breach the contract. The position that no implied limits are present creates a trap for the unwary licensor in that it contradicts normal contract interpretation ideals of viewing a contract in light of its commercial purpose. A grant to use software or a motion picture in Peoria implies the lack of a contract right to do so in Detroit.

Illustration 1: Disney licenses to Acme Theater the right "to show the movie Snow White during a six month period in Kansas." Acme, enamored with the musical score of the movie, digitally separates the music into a separate copy and uses it during that six month period in the Acme lobby. This infringes the copyright. Whether it breaches the contract depends on whether the grant creates an implied limitation that precludes other uses of the work and derivative copies. Under section (b), the implied limitation exists unless the use was a fair use without that limitation or was necessary to the primary grant. Neither condition is met here. The fact that Disney forgot to add the word "only" to its grant language does not create a different result than would be explicit in the presence of that language.

Illustration 2: Licensor grants the "right to use its software in motion pictures." The licensee uses the software to develop and distribute an animated movie. Later, it uses the software to develop and distribute a television series. Assume that a television program is not within the idea of a motion picture. When sued for breach, if the rule is that uses outside the grant are not breaches of contract, the grant terms are inadequate to give the licensor rights in this case. If there is an implied limitation as proposed here, the issue is whether television use "exceeds" the grant. It should, under an appropriate test.

Illustration 3: Same as illustration 2, except that the license grant states that it grants "the right to use its software solely in motion pictures." Under this framework, use in television violates and express condition of the license and is a breach. Whether such difference in result should flow from the addition or omission of the word "solely" is at issue. Requiring that word may be a trap for less well-counseled parties.

Illustration 4: Same as illustration 2, except that the license provides in addition to the grant that "all uses not expressly granted are expressly reserved to the licensor." This is the same as Illustration 3.

Illustration 5. EXL licenses software to Dangerfield. The license is silent regarding reverse engineering and consumer use, but expressly gives Dangerfield the right to use the software in the 1000 person network Dangerfield operates for its employees. Dangerfield reverse engineers the software to discover its interface with Digital Computer systems for purposes of making a new system. Also, a Dangerfield employee uses the software for personal (consumer) purposes. Under subsection (b), the consumer use is clearly authorized since it would be a fair use if the implied limitation were not present. The reverse engineering would also most likely be authorized under case law allowing reverse engineering if necessary to discover interoperablity requirements.

4. Subsection (b) states the presumption that, for copyrighted or patented material, an agreement restricts the licensee to a single simultaneous use. This is consistent with a basic principle that allows retention by a copyright owner of rights not expressly granted; it also covers practices in the general mass market context. While many commercial licenses involve site or multiple user licenses, this entails an express agreement that over-rides the default rule. The second sentence, however, recognizes that contracts for or involving display or performance rights center on the simultaneous number of performances, rather than on the number of users. Thus, for example, a transfer of a Nintendo computer game does not allow the making and simultaneous copying of multiple copies, but implicitly allows involvement by more than one person in reference to the performance.

5. The first clause of subsection (c) comes from prior 2B-311(d) which the Committee approved. The second clause comes from prior 2B-316 which was also approved. The basic principle is that no right to subsequent modifications made by the other party is presumed., nor is access to typically confidential material. Arrangements for improvements and source code or designs constitute a separate valuable part of the relationship handled by express contract terms, rather than presumed away from their owner by the simple fact of creating a contract.

Illustration 6: Word Company licenses B to use Word's robotics software. The license is a four-year contract. Three months after the license is granted, Word develops an improved version of the software. Party B has no right to receive rights in this improved version unless the agreement expressly so provides.

Illustration 7: In the Word license, two years after the license is established, Party B's software engineers discover several modifications that greatly enhance its performance. Word is not entitled to rights in these modifications unless the license expressly so provides. However, the modifications may create a derivative work under copyright law and a question also exists about whether the license granted the right to make such a derivative work.

The second sentence of subsection (c) is from former 2B-613 and provides a standard interpretation of an update agreement.

6. Subsection (d) (1) provides guidance for whether (when) a license grants rights only in existing media or methods of use of an intangible or whether it extends to future uses. The draft adopts the majority approach in a number of recent cases. Ultimately, interpretation of a grant in reference to whether it covers future technologies is a fact sensitive interpretation issue. But the intent of the parties may not be ascertainable. In such cases, use of language that implies a broad scope for the grant without qualification should be sufficient to cover any and all future uses. This is subject to the other default rules in this chapter, including for example, the premise that the licensee does not receive any rights in enhancements made by the licensor unless the contract expressly so provides.

7. Subsection (d)(2) deals with how, in a commercial context, parties can transfer information without giving assurances about rights. The concept of a quitclaim of rights is most common in entertainment contexts, but like the idea of a quitclaim in real estate, it is essentially a grant only of whatever rights the grantor holds.

8. Subsection (d)(3) deals with the effect of language of exclusivity in a grant. The case law and treatises on this issue are in conflict. The issue focuses on two distinct elements: a looking forward and looking backward issue about exclusivity as to other persons, and the issue of whether the exclusivity also applies to actions of the licensor. The Committee has not yet discussed this provision.

SECTION 2B-311. DURATION OF CONTRACT. If an agreement is indefinite in duration, the following rules apply:

(1) Except as provided in subsection (2), the duration is a reasonable time determined in light of the commercial circumstances unless this article or other law provides for a different term.

(2) If the agreement provides for the sale or physical delivery of a tangible copy and neither party is required to render on-going affirmative performances to the other party after delivery, the duration of a license as to that copy is perpetual subject to cancellation for breach.

(3) In an agreement governed by paragraph (1) in which a party is required to render on-going affirmative performances to the other party, the agreement may be terminated at will on reasonable notice by either party.

Uniform Law Source: Section 2-309(1)(2).

Committee Votes:

1. The Committee voted to approve this section in principle.

Reporter's Note:

[This section was substantially redrafted in light of extensive discussion during the April Meeting. The redrafting returns the section toward current law under Article 2 and the common law, and returns to the general approach approved by the Committee at a prior meeting. It avoids the attempt in the March Draft to accommodate the various special rules on termination and duration that exist in different branches of intellectual property law. The reference in subsection (1) to other law incorporates and carries that disparite law forward and some of the major non-UCC themes will be discussed in comments. The language has also been clarified to indicate what is meant by "successive performances" under current Article 2 as applied in the context of licensing.]

1. Subsection (1) follows current law and provides that in the absence of provisions in the agreement referring to the duration of the contract, the term is presumed to be a "reasonable" time. This rule follows both existing Article 2 and general common law. It makes explicit, however, that what is to be considered a reasonable time is gauged by reference to the commercial context.

In applying this and the remainder of the Section, it must be understood what type of contract comes within the section. The reference is to an agreement that does not specify its duration. This requires that there be an agreement. In some cases, a failure to agree on duration will, like failure to agree on any other scope provision in a license, indicate that no contract exists. This principle is implicit n the provisions of this Article on offer and acceptance, formation.

In addition, the precondition for this section is not met simply because the record that documents the agreement is silent. An agreement refers to the entire bargain of the parties. This includes oral agreements, trade use considerations, and the entire commercial setting. This section applies only if the total of all of the circumstances defining the bargain yield no understanding about duration of the contract. Thus, for example, a license reached in an industry setting where, for the particular information, licenses are typically for hourly, daily, weekly, or monthly terms, would typically not fall within this section because the ordinary term for licenses of the type would supply the unstated duration.

The Section does not deal with contracts that contain provisions defining their term. Thus, for example, a contract providing that a license continues for "the life of the edition" or "for so long as the work remains in print" defines the term of the license in the same manner as does a contract term of, for example, ten years. These contract provisions control.

On the other hand, decisions interpreting the analogous Article 2 rule for cases where there are commitments to "lifetime" service or "perpetual" maintenance, would provide guidance on whether language of that sort provides a definite term that takes the contract out of this section. The basic policy in such cases is that the person making an open-ended commitment should be held to performance over a time that is reasonable in light of the payment and the type of commercial setting, but would typically not be placed in aposition of perpetual servitude without a very clear indication that should be the case.

2. Subsection (1) refers to other law as providing other terms for a contract. In this field, there are various federal policy considerations that impinge on the duration of licenses and which may have an impact here. An effort in the prior Draft to capture some or all of these in the blaalck letter of Article 2B revealed the complexity of the enterprise and counsels against continuing that effort. Instead, these other law principles are allowed to govern. This can occur either through direct application of the other law or by its influence on determining what is a reasonable time. Thus, for example, a patent license that does not state its term can reasonably be presumed (at least in many cases) as extending for the life and validity of the patent. A similar premise exists with reference to an indefinite copyright license term. This interpretation would also allow a court to take into account the patent law premise that invalidity of a patent invalidates royalty obligations as to that patent.

3. Subsection (2) differs from existing Article 2 and general common law in presuming a perpetual term for a license associated with the sale or delivery of a tangible copy. This rule corresponds to licensing practice in general. It applies, as redrafted, to cases where neither party has an obligation to deliver on-going affirmative performances to the other party. This language is intended to clarify what, under current Article 2 is a reference to a contract that does (does not) entail "successive performances."

A rule analogous to that in Subsection (2) is applied to intellectual property releases, but is stated in Section 2B-207 on releases.

4. Subsection (3) restates and limits the rule in Article 2 and common law on termination of indefinite contracts. See Zimco Restaurants, Inc. v. Bartenders & Culinary Workers' Union, Local 340, 165 Cal. App. 2d 235, 331 P.2d 789 (1958); Ticketron Ltd. Partnership v. Flip Side, Inc., No. 92 C 0911, 1993 WESTLAW 214164 (ND Ill. June 17, 1993); Soderholm v. Chicago Nat'l League Ball Club, 587 N.E.2d 517 (Ill. Ct. App. 1992). This assumes a contract of indefinite duration.

This rule is limited to cases where a party has on-going, affirmative performance obligations to be rendered to the other party. These obligations may include payment obligations (e.g., royalties) or affirmative conduct (e.g., repair or maintenance). The premise here is identical to that in current Article 2.

SECTION 2B-312. INFORMATION RIGHTS IN ORIGINATING PARTY.

(a) If an agreement requires one party to deliver commercial, technical, or scientific information to the other for its use in performing its obligations under the contract or obligates one party to handle or process proprietary commercial data, including customer accounts and lists, and the receiving party has reason to know that the information is confidential and not intended for republication, the following rules apply:

(1) As between the parties, tThe information and any summaries or tabulations based on the information remain the property of the party delivering the information, or in the case of commercial data the party to whose commercial activities the information relates, and may be used by the other party only in a manner and for the purposes authorized by the agreement.

(2) The party, including its agents, receiving, processing, or handling the information shall use reasonable care to hold the information in confidence and make it available to be destroyed or returned to the delivering party according to the agreement or the instructions of the delivering party.

(b) If technical or scientific information is developed during the performance of the agreement, as between the parties, the following rules apply:

(1) If information is developed jointly by the parties, rights in the information are held jointly by both parties subject to the obligation of each to handle the information in a manner consistent with protection of the reasonable expectations of the other respecting confidentiality.

(2) If the information is developed by one of the parties, the information is the property of that party.

(c) This section does not apply to transactional data or to information intended by the parties to be published by the licensee.

Uniform Law Source: None.

Committee Votes:

1. Voted unanimously to approve the section in principle.

Reporter's Note:

1. Subsection (a) states the principle that, unless agreed to the contrary, the delivering party or the person about whose business the commercial data relates maintains ownership of the data. This deals with an important issue in modern commerce relating to cases in which one party transfers data to another in the course of the transaction. The default rule applies to cases involving information that has not been released to the public and that the recipient knows is unlikely to be released. The default presumption is that the information is received in a confidential manner and remains the property of the party who delivers it to the transferee. In effect, the circumstances themselves establish a presumption of retained ownership.

Illustration 1: Staten Hospital contracts to have Computer Company provide a computer program and data processing for Staten's records relating to treatment and billing services. Staten data are transferred electronically to Computer and processed in Computer's system. This section provides that Staten remains the owner of its data. Data held by Computer are owned by Staten because the records are not released to the public. There is an obligation to return the data at the end of the contract.

See Hospital Computer Sys., Inc. v. Staten Island Hosp., 788 F. Supp. 1351 (D.N.J. 1992) (respecting a contract dispute over a data processing contract in which Staten had a right to return of its information at the end of the contract; case assumed to be controlled by Article 2).

2. The remedies for breach of the obligations described in this section are for breach of contract and ordinary contract remedies apply. So also do ordinary contract remedies limitations.

SECTION 2B-313. ELECTRONIC VIRUSES.

(a) In this section "virus" means computer instructions intended to disrupt, damage, destroy, or interfere with use of a communications facility or a computer without the consent or permission of the owner.

(b) Unless the circumstances clearly indicate that a duty of care could not be expected, a party shall exercise reasonable care to ensure that its performance or message when completed by it does not contain an undisclosed virus that may be reasonably expected to damage or interfere with the use of data, software, systems, or operations of the other party.

(c) The duty described in subsection (b) is owed solely to the other party to the contract and is satisfied if:

(1) the party exercised reasonable care; or

(2) except with respect to a mass-market license involving delivery of a copy of information on a physical medium by a merchant dealing in information of the kind, language in a contract statesing that no action was taken to ensure exclusion of a virus or that a risk exists that viruses have not been excluded.

(d) A party is not liable under this section if the virus was introduced by a third party after the party completed its performance or if the party injured by the virus failed to exercise reasonable care to prevent or avoid loss.

(e) In determining whether reasonable care has been exercised under this section, the court shall consider the nature of the party, type and value of the transaction, consideration exchanged, circumstances of the transaction, language on packaging or in a display, and general standards of practice prevailing among persons of a similar type for similar transactions at the time of the performance or message. A party is deemed to have exercised reasonable care if it or its agent searches for known viruses using any commercially reasonable virus checking software at or before the time the licensor completes its performance or, as to the licensee, the time the licensee first uses the information.

(fe) A party's obligations with respect to the existence of a virus are determined by this section and the express terms of the contract and not implied warranty.

Uniform Law Source: None.

Committee votes:

a. Voted to delete former (e) giving language of disclaimer 10-0.

b. Consensus that across the board general disclaimer is not appropriate.

c. Motion to delete former (b)(2) allowing obligation to be satisfied by language and circumstances giving reason to know of risk, rejected: 5-6.

d. Voted to use "mass market" rather than consumer in this section. Vote: 11-0 (Feb. 1997).

e. Rejected a motion to delete the section. Vote: 4 -6 (April, 1997)

f. Rejected a motion to adopt a duty of reasonable care with a statutory safe harbor provision. Vote: 4 - 6 (April, 1997)

g. Rejected a motion to adopt a disclaimable warranty specific to viruses in what had been alternative (b). Vote: 4 - 7 (April, 1997)

h. Rejected a motion to adopt in the mass market a duty of care that cannot be disclaimed in a standard form. Vote: 4 - 6 (April, 1997).

Reporter's Notes:

1. This section describes a default rule that apportions contractual obligations for excluding electronic viruses. Under current law, the contractual basis for liability pertaining to viruses, if any, is unclear. In cases of delivered diskettes or computers, virus claims against a vendor would fall within the implied warranty of merchantability. The warranty of merchantability requires that a court ask two questions. The first deals with whether the "extraneous code" falls within normal expectations regarding the particular type of software or performance. If its does not, there may be a breach of warranty. Perhaps, courts faced with the issue would refer by analogy to cases dealing with food products for standards. The second issue would ask whether the implied warranty was disclaimed. In most transactions, merchantability is disclaimed. Disclaimers are effective in both the mass market and the commercial marketplace. While a disclaimer would be required to mention merchantability, it need not refer specifically to a virus risk.

In cases outside Article 2 (e.g., on-line systems), the basic standards would be under common law. In some (but not all) states, that obligation engages a duty to exercise reasonable and workmanlike care in performance. That standard has never been litigated with respect to a virus.

This Article does not deal with criminal law risks. In most states, criminal law proscribes "knowing" introduction of viruses that damage the computer system of another person. Article 2B does not alter the criminal and related civil liability issues there, but merely sets out contract risk allocation.

2. This Section creates a mutual obligation to exercise reasonable care to exclude viruses in all electronic performances and messages. The obligation is not a warranty, but a contractual obligation. The obligation applies to both the licensee and the licensor. Indeed, virus problems in a contractual relationship as often result from acts of the licensee as from acts of the licensor. The section expands the obligation of the performing party as compared to current law where the contractual obligation is entirely disclaimable. Subsection (a) provides a definition of the core concept for this section. The intent is not to cover elements of a program that are poorly designed, but to deal with instructions that are intended to cause damage.

3. Reasonable care does not create absolute liability. It creates a flexible standard that gauges the party's conduct against a variety of contextual considerations. No requirement exists that a party take extraordinary steps to preclude viruses in all cases. Thus, for example, in a situation where the rate of new virus discovered is large and exceeds any reasonable testing or preventative developments, compliance with reasonable activities suffices even if it fails to discover all viruses. What the section requires is reasonable care, not superhuman effort. Similarly, the standard varies depending on the party to whom it applies. A producer that makes no effort to screen a virus from its packaged products would not be acting in a reasonable manner. A retailer that receives pre-packaged software for distribution cannot be expected to examine the diskettes in the boxes and, while it has a duty of care, that duty does not require the impossible. It may simply require warnings if the retailer becomes aware that viruses are contained in products it is providing. On the other hand, a private individual with no expertise may be acting reasonably even though it takes protective steps that are far below what would be reasonable for a publisher.

4. Under subsection (c), in the mass market the reasonable care obligation cannot be satisfied by a merchant in the particular type of information merely by inclusion of language in a contract or in packaging. That language may have an effect on determining the nature of the obligation in context, but cannot be a complete disclaimer. This covers all mass market transactions and many other commercial deals. It does not, however, apply to transactions on the Internet or in other on-line media (access contracts) where it was thought that the need to satisfy the obligation by conspicuous warnings was important to allow for multi-layered development of this new distribution methodology. A party who is not a merchant can satisfy the obligation by conspicuous warnings as can an Internet provider.

Illustration 1: Jane is a licensee in an access contract with AL. Jane posts data to an AL bulletin board, but the data contains a virus. A DuPont employee downloads the data and the virus. Damage is caused to the AL system and DuPont system. Jane is liable to AL if she failed to exercise reasonable care to exclude the virus. AL might be liable on the same basis to DuPont. The degree of care required varies based on the nature of the parties and the like.

Illustration 2: The University of Houston creates a website at which parties can for a fee download digital copies of faculty articles and books. Because it lacks staff, Houston cannot make assurances about virus protection. It must conspicuously indicate that no precautions are taken. If it does not, the duty of care to which it is required to conform relates to the nature of the circumstances, including general standard on the web.

Illustration 3: James, a college student, sets up a web site to distribute information for a fee about policies at Union. He does not concern himself about viruses. When the national political party downloads data from the site and pays its fee, the data includes a virus placed there by a user of the system. Whether James is liable for the resulting damages depends on the standard of care for a person such as James. James could avoid liability by providing on his initial screens that he has made no effort to exclude viruses.

Illustration 4: Vendor distributes an art database in a retail market through the licensing diskettes to the general public. Arthur obtains a copy of the database which has a virus. Vendor's license disclaimed any duty of care and any liability for viruses. The disclaimer is ineffective; Vendor's liability hinges on whether the virus came from or before its performance and whether it exercised what would be a relatively high standard of care for the retail market. For the retailer, the fact that the product was packaged and inaccessible indicates that the duty of care that it may have could not include actively searching for viruses in the software and that, therefore, it has no liability unless the facts indicate awareness of the risk and a failure to warn the purchaser.

5. Subsection (d) limits the obligation to reasonable care in the party's performance and not to control of subsequent activities. The following illustration captures the issue:

Illustration 5: Novell transfers software to Distributor who is licensed to integrate the software into a system with other software and hardware and then distribute the system on the retail market. During the integration, a virus is introduced by an employee of Distributor. The system is acquired by Thomas Inc. and the virus causes damage to Thomas. Novell is not liable under this section since the virus was not a result of its performance and came after it completed its role. Distributor is liable if it failed to exercise reasonable care.

Subsection (d) also states a concept of fault based on exercise of care to avoid loss. As with the primary obligation, the nature of the reasonable care duty varies with the party and the type of transaction. IBM may have a high duty to screen viruses in major software licenses it acquires, while a consumer may have no obligation in acquiring software in a retail package over the counter.

6. Subsection (e) has two functions. The first clarifies that the duty of care must be assessed against various background variables relating to the parties and the context. The last sentence of the subsection attempts to provide a more specific, safe harbor guidance for both parties. It indicates that commercially reasonable software employed by a party or its agent satisfies the obligation if applied on or before a particular point in time. The timing variable benefits both parties by giving guidance in when actions are to be taken. In the world of virus protection, new viruses are discovered continuously and this should not be taken as creating a continuous, never capable of being satisfied obligation for either party.

7. Subsection (f) clarifies that liability for a virus is to be determined by this section and the express contract terms, indicating that the issue does not come within implied warranty theory. The rationale is that this is the more specific section and sets out the balanced deemed appropriate in contrast to the absolute liability risk that exists in an implied warranty.

SECTION 2B-314. ELECTRONIC REGULATION OF PERFORMANCE.

(a) A party entitled to enforce a limitation or restriction may include in the information and utilize a program, code, or device that restricts use in a manner consistent with the agreement if:

(1) a term in the contract authorizes use of the program, code, or a device;

(24) the program, code, or device merely prevents uses of the information that are not other than in a manner consistent with the agreementlicense but does not destroy or alter the information; or

(35) the program, code, or device merely prevents uses of the information that are not in a manner inconsistent with a licensor's rights under copyright or patent law and that were not granted to the licensee but does not destroy or alter the information.

(4) the information is obtained for a stated period of time not more than 30 days or for a stated number of uses and the program, code, or device merely enforces that time or use limitation; or

(5) the program, code, or device prevents further use at the expiration of the term of the license and the program, code or device or the licensor givesprovides reasonable notice to the licensee before preventing further use is prevented.

(b) Operation of a program, code, or device that restricts use consistent with the agreement is not a breach of contract, and the party that included the program, code, or device is not liable for any loss created by its operation. Operation of a program, code, or device that prevents use permitted by the agreement is a breach of contract.

(c) This section does not preclude electronic replacement or disabling of an earlier version of information by the licensor with a new version of the information pursuant to an agreement with the licensee.

(d) A program, code or device included in information pursuant to this section or as authorized under other law does not constitute a virus for purposes of Section 2B-313.

Uniform Law Source: None

Reporter's Notes:

[The subsections were reorganized and partially rewritten for clarity.]

1. This section deals with electronic limitations on use that involve enforcement of contract terms by preventing breach. It does not involve electronic devices used to make a repossession or force discontinuation of use in the event of breach. Those are covered in Section 2B-716. The electronic restrictions discussed here all derive from and enforce contract terms; they limit use consistent with contract terms or terminate a license at its natural end. The few reported cases that deal with electronic devices support use of electronic devices even in the case of breach if disclosed to the licensee; the cases have not considered the less controversial use of restrictive devices not associated with enforcing claims of breach of contract.

2. The basic principle is that a contract can be enforced. Where the contract places time or other limits on a party's use of licensed information, electronic devices that merely enforce those limitations are appropriate. This reflects an important new capability created by digital information systems. The section does not state exclusive rules. Federal or other law (including other sources of contract law) may also allow limiting devices designed to enforce copyright and copyright management information. In effect, this section contains an affirmative statement of when such limiting devices are enforceable under contract law, without limiting the enforceability of other methods.

3. Subsection (a) distinguishes between active and passive electronic devices. An active device terminates the ability to make any further use of the information. Since this section deals only with cases where no breach of contract occurs, the contractual right to do this arises only in the event of termination pursuant to contractual terms. Subsections (a)(4) and (a)(5) state the basic principle in such cases. Creation and use of the electronic means to terminate a contract (end it other than for breach) requires either a contractual term that permits the action (a)(1), or reasonable notice before termination which notice subsection (a)(5) which can come from the program, code or device itself or directly from the licensor.

The exception to the notice rule focuses on short term agreements, such as shareware or trial copies, or the new Java-based software modules whose use is limited to a brief period of time or to a stated number of uses. The argument for requiring consent or notice in longer term agreements deals with avoiding problems due to stale information. In the brief contracts, that is not an issue. The subsection dealing with this issue employs thirty days as the cut-off based on the fact that this is a common period in so-called shareware or limited use demonstration systems. This provision would also apply to various pay per view and similar systems, since it reflects the ability to enforce short term limitations on service or use through electronic devices without specific or special notice other than that inherent in the contract itself.

Some argue that enforcing a contractual right not associated with breach should not require notice in any case. Ending the ability to use after the term merely enforces the agreement. Although that position has strength, the choice here establishes additional licensee protection and limits the right to enforce contract termination on the argument that a licensee might be disadvantaged by being forced to strictly stay within contract limits in the absence of a contract term indicating the enforcement tool was present. Notice may occur either in the terms of the contract itself or in actions of the licensor or the electronic system giving notice to the licensee before precluding further use. Code that precludes further use of a program after one year would be effective under this section if either the contract provides for electronic enforcement of the one year term or the code itself displays notice of the impending termination a reasonable time before implementing it (e.g., five days before the end of the term).

Illustration 1. A software license requires monthly payments of $1,000 due on the first of the month and covers a one year term with a right to renew based on written notice before the expiration of the term. Licensee makes a payment five days late because of accounting problems. Licensor uses an electronic device to turn off the software. That action is not authorized under this section since it enforces a breach of contract. The section on self-help applies and the action may be appropriate if the breach was material.

Illustration 2. In Illustration 1, there was no late payment, but the licensee fails to give notice of renewal within the contractual time period. Licensor turns off the software. This action is covered by this section. The termination electronically is valid if either the contract contained a term authorizing that action, or the licensor or the device gave prior, reasonable notice of termination to the licensee.

4. Special notice is not required if the electronics merely restrict use without otherwise disabling the information. This authorizes use of passive electronic devices to enforce use limitations under subsection (a)(2) and subsection (a)(3). This is especially important for smaller suppliers whose ability to enforce contracts against often larger licensees is limited by costs of monitoring and judicial enforcement. The limitations, for example, might entail a counter which can be used to monitor the number of simultaneous uses or restrict use to a pre-agreed system. Although no notice is required, the agreement must support the electronic limitation. The licensee is protected by the fact that a limitation inconsistent with the agreement constitutes a breach of contract and that it has contracted for the substantive limitation itself, while the device merely prevents breach.

Illustration 3: The license provides that no more than five users may employ the word processing software at any one time. An electronic counter is embedded in the software and, if a sixth user attempt to sign on for simultaneous use, that sixth user is denied access until another user discontinues use. This limiting device is effective without prior notice or contractual authorization.

Illustration 4: The same situation as in Illustration 3, except that the limiting device permanently disables the software if a sixth user attempts access. This device is not authorized by the this section since it involves a cancellation for breach. Section 2B-711 applies.

Illustration 5. ABC Publishing includes an anti-copying device in a CD-ROM version of its novel, "Gone with the Sea" which it licenses subject to express terms precluding making additional copies of the work. The device allows normal loading into memory and use relating to a computer system, but prevents making an additional copy. No separate contract term is required to authorize the device since it merely enforces a limitation in the contract and does not otherwise disable the data.

5. Subsection (a)(3) allows use of passive devices that merely preclude going beyond the contract to make or distribute copies or take other actions that are not within the transferee's prerogatives under the agreement and involve intellectual property rights reserved to the licensor. Merely preventing the act does not require contract or other notice.

6. Subsection (b) states the obvious premise that actions consistent with a contract are not a breach and do not give rise to liability under this Article or the contract.

SECTION 2B-401. WARRANTY AND OBLIGATIONS CONCERNING AUTHORITY AND NONINFRINGEMENT.

(a) A licensor warrants that:

(1) the licensor has authority to make the transfer;

(2) the licensor and any person holding a claim or interest created by an act of the licensor or to which the licensor is subject will not interfere with the licensee's enjoyment of its rights under the contract, except that this warranty does not relate to claims by way of infringement;

(3) in if the information is transferred under an exclusive license for redistribution by the licensee, the intellectual property rights that are the subject of the license are valid and exclusive to the licensor within the scope of the license for the information delivered as a whole; and

(1) The warranty under subsection (a)(4) does not apply to a license of a patent accomplished without any agreement by the licensor to provide to the licensee property or services to enable the licensee to use the patented exercise the rights.

(2) If intellectual property rights are subject to a right of public use, collective administration, or compulsory licensing, the warranty is subject to those rights. transferred or to a compulsory or other license required by law or collective management arrangement.

(3) If the license includes territories outside this country, the warranties under (a)(4) and (a)(5) extend only to countries that, at the time of the contract, have entered into a treaty or other binding international obligation granting foreign nationals protection under the applicable intellectual property law.

(c) A licensee that furnishes specifications to a licensor or a financier shall indemnify and hold the licensor and the financier harmless against any claim by way of infringement which the licensee had reason to know would arise out of compliance with the specifications.

(d) A warranty under this section may be disclaimed or modified only by express language or by circumstances giving the licensee reason to know that the licensor does not warrant that competing claims do not exist or that the licensor purports to transfer only the rights that it has. In an electronic transaction that does not involve review of the record by an individual, language is sufficient if conspicuous. Otherwise, language in a record is sufficient if it states "There is no warranty of title or authority" or "There is no warranty that the [information] [computer program] does not infringe the rights of others", or words of similar import.

Uniform Law Source: Section 2A-211; Section 2-312. Revised.

Committee Votes:

a. Voted to adopt a "reason to know" standard in lieu of "knowledge."

b. Rejected a motion to bar disclaimer in "mass market" contracts.

Selected Issue:

a. Should the warranty of authority also be made by the licensee outside the mass market as suggested by the motion picture industry?

Reporter's Notes:

[The new language added to (a)(2) corresponds this draft to Article 2A. The infringement claims are dealt with in subsection (a)(4). Language was added to (b) to reflect suggestions of entertainment lawyers regarding international scope licenses.]

1. This section creates a warranty of quiet enjoyment and right to continue in possession of property over the term of a contract; this extends the warranty rights creates under Article 2 in current law, which center solely on the initial delivery of the property.

2. Subsection (a) contains the affirmative warranties. Subsections (a)(1) and (a)(2) deal with issues other than intellectual property infringement. First, the licensor represents it has authority to make the transfer. Authority here would refer to possible defects in the chain of title or authorization. For example, if a licensee holds information under a non-transferable license, a transfer to another licensee occurs without authority and, thus, breaches this warranty. Second, the licensor warrants that it will not interfere with the licensee's exercise of rights under the contract. The combination of these two subsections takes language from Article 2 (authority) and 2A (interference and enjoyment), making the resulting warranty broader than either of the other two articles. Authority and non-interference represent the essence of the contract. See General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, 181 (1938); Spindelfabrik Suessen-Schurr v. Schubert & Salzer, 829 F.2d 1075, 1081 (Fed.Cir.1987), cert. den. 484 U.S. 1063 (1988).

3. Subsections (a)(3) and (a)(4) deal with intellectual property risks. In current law, the idea of title has several different connotations. The issues can be broken down into three parts:

public domain risk: Whether enforceable rights exist in the technology that is transferred. In essence, this asks whether the information is in the public domain and thus useable by anyone with access to it..

exclusivity risk: Whether the transferor has the sole right to transfer the technology or whether that right is also held by third parties by way of prior assignment, joint invention or coauthorship.

infringement risk: Whether the transferor can convey the rights defined in the contract in a way that enables the transferee to exercise those rights without infringing third party rights in the technology.

4. Subsection (a)(3) deals with the first two of these. Subsection (a)(3) refers to validity and exclusivity and limits those warranties to situations in which the transfer purports to convey exclusive rights in the information. If the transferee relies on the rights transferred to create a product for third parties, affirmations about validity define an important aspect of the deal since the converse of validity is that the information is in the public domain. M. Nimmer & D. Nimmer, The Law of Copyright ' 10.13[A]. See M&A Assoc. v. VCX, 657 F.Supp. 454 (E.D. Mich. 1987), aff'd, 856 F.2d 195 (licensor's failure to place appropriate copyright notices on motion picture violated warranty of title). Validity (including public domain) is typically not relevant to the ordinary end user license. The subsection also deals with exclusivity. The title risk includes that a portion of the rights may be vested in another person. Coequal rights exist where co-authors or co- inventors were involved. Alternatively, the transferor may have executed a prior license to a third party. In either case, while a transfer may convey rights, it may be no more than equal to rights vested in and available for conveyance by the third party co-author. Depending on the underlying deal, the existence of coequal rights in other parties may have no relevance to the transferee or it may be a critical limit on the licensee's ability to recoup investment. Subsection (a)(3) reflects practice in motion picture and publishing industries and states what may be an appropriate warranty for those settings. Exclusivity is an important issue where a licensee undertakes significant investment on the assumption that its rights are exclusive as to other competitors. As to end users and non-exclusive licenses, the question of whether intellectual property rights are exclusive in the licensor is seldom significant because exclusivity does not alter the end user's ability to continue to use the licensed rights without challenge from third parties.

5. The subsection (a)(4) warranty relating to infringement risk goes beyond the substantive scope of current Article 2 and 2A in terms of what is warranted, but uses a reason to know standard of liability, rather than an absolute liability standard. Current UCC ' 2-312 provides that every sale contains an implied warranty that the seller has "good title" to the property conveyed. This does not establish a warranty that use will not violate a patent held by a third party. Motorola, Inc. v. Varo, Inc., 656 F. Supp. 716 (N.D. Tex. 1986). The warranty applies to the condition of the goods when delivered, not the use of the product. Section 2A-211 speaks not in terms of good title, but of an implied warranty that for lessors who are merchants in the particular type of property, "the goods are delivered free of the rightful claim of any person by way of infringement or the like." In Article 2B, the warranty of noninfringement covers not only the information as delivered, but the information as used. The expansion gives the licensee greater protection against process patents and against the fact that "copies" made during ordinary use of software in a machine may infringe a copyright. Neither of these assurances exists in current law.

Balancing against this, the warranty establishes a "no reason to know" standard. This does not impose a duty of inquiry, but relates only to facts actually known to the party. The choice between a "reason to know" and an absolute liability warranty requires a balancing of the interests of the licensor and licensee in an ordinary case where infringement claims may arise without fault of either party. Both in copyright and patent infringement claims, the complexity of the technology, the diverse sources from which it arises and character of modern infringement claims that do not admit of good faith purchase and do not require knowledge of infringement all create significant risk in the modern commercial environment. The choice made here places knowing misconduct risk on the licensor, but in cases where neither party had knowledge that an infringement would ensue, to allows loss to stay with the licensee if it is the party sued unless the contract reverses that allocation. No knowledge warranties are common in modern licensing. Note that this does not alter current intellectual property law which recognizes neither a concept of bona fide purchaser defense to infringement, nor a lack of knowledge defense. Thus, in the case of a merchant who does not know about the infringement, either the licensee or the licensor may have infringement liability and this warranty will not redistribute the loss. Redistribution if it occurs, requires an express warranty.

Part of the difficulty involves the fact that patents are not knowable or readily checked by the myriad of small producers in this market place and that, therefore, an absolute warranty would place liability exposure on them without an effective means of protection.

Illustration 1: Sunspot Software develops a multi-terminal operating system for Citibank. After installation of the system, a patent issues to Lansing which patent reads on the process created by the Sunspot program. If the warranty refers to "reason to know", Citibank bears the loss since an unissued patent could not be known. If the warranty applies without knowledge, Sunspot bears the loss so long as the warranty extends to uses of the software.

7. The issue is especially important in on-line systems where the licensor may be providing a service that includes allowing the posting and subsequent downloading of material from third parties. Case law under copyright indicate that, in some cases, the vendor may be liable for infringement, but that this liability does not exist in all cases. The issue here is whether a reason to know standard best serves in our context.

Illustration 2: Adam opens an Internet website providing access for a fee to photographs of football players for three cents a piece, not restricting the use of the photographs by its licensees. The photographs are supplied by third parties in digital form to Adam. Alumni Magazine acquires a photograph of Jones and uses it in its May issue, distributed to 10,000 subscribers. Jones and the photographer, who never consented to Adam's use, sue Magazine which in return sues Adam for $100,000. Should Adam be liable for breach of contract and consequential damages in addition to any liability for copyright infringement?

8. Alternative B to the warranty of infringement was included at the suggestion of various observers indicating that the warranty in practice is often converted to an indemnity obligation. The difference lies in the scope of the obligation and in the consequences of there being an infringement. The indemnity requires coverage of losses caused by the infringement, but the mere fact of infringement itself does not breach the license under this Alternative. Breach would occur only if the indemnity were not performed.

SECTION 2B-402. EXPRESS WARRANTIES.

(a) Except with respect to published informational content, a licensor creates an express warranty as follows:

(1) An affirmation of fact, promise, or description of information made by the licensor to its licensee [in any manner, including in a medium for communication to the public such as advertising,] which relates to the information and becomes part of the basis of the bargain creates an express warranty that the information and any services required under the agreement will conform to the affirmation, promise, or description.

(2) A sample, model, or demonstration of a final product which is made part of the basis of the bargain creates an express warranty that the performance of the information will reasonably conform to the performance illustrated by the model, sample, or demonstration, taking into account such differences between the sample, model, or demonstration and the information as it would be used as would be apparent to a reasonable person in the position of the licensee.

(b) The licensor need not use formal words, such as "warrant" or "guarantee", or state a specific intention to make a warranty. However, a mere affirmation or prediction of the value of the information, a display of a portion of the information to illustrate the aesthetics or market appeal of informational content, or a statement purporting to be the licensor's opinion or commendation of the information does not create a warranty.

Uniform Law Source: Section 2A-210. Section 2-313.

Committee Votes:

a. Deleted former subsection (b) that warranties are limited to the time of transfer based on the argument that this merely restates current law.

b. Motion to limit this section to the immediate parties, allow other parties to be included if courts decide to do so. Rejected: 4-5

c. Motion to amend by adding "except for published informational content" with the comments or the section to make it clear that it's neutral on the law development here. Adopted 7-3.

Reporter's Note:

1. This section adopts existing law in two crucial respects. It follows current Article 2 regarding express warranties in general and preserves current law relating to express warranty obligations in reference to published information content.

2. The introductory clause to subsection (a) preserves existing law for published informational content. While there are many reported cases dealing with express warranties in the context of goods and using the standards outlined here, no such case law exists with respect to warranties in reference to published information. This subject matter entails significant First Amendment interests and courts that deal with liability risk pertaining to that subject matter must balance contract themes with more general social policies. By excluding this type of information content from the coverage of this section, the intent is to leave undisturbed any existing law dealing with under what obligations can be created and how they are established with reference to published information. Courts may, if inclined to find liability for published information, do so under any general contract law theory. Merely adopting Article 2 concepts from sales of goods to this much different context would risk a large, and substantially uncontrollable over-reaching of liability in this sensitive area. The result does not to make information providers immune from liability, but allows first amendment case law to evolve.

3. The term, "published information content" focuses on information content not customized to particular end users. (see Section 2B-102) That concept adopts case law under the Restatement which does not impose liability on providers of information outside special relationships. The exclusion follows current law, requiring more than just general, undifferentiated statement for expanding liability in the public market of ideas and content. The basic assumption in current law is that liability for information content does not exist unless there is a special or direct relationship creating it. There are no cases using warranty theory for generally distributed information based on contract concepts and only a small number of cases under other theory.

3. A second use of current law involves retention of the "basis of the bargain" standard in current Article 2 and Article 2A. This allows courts to draw on an extensive body of prior case law for distinguishing express warranties from puffing and other, non-enforceable statements made during bargaining. See, e.g., Fargo Machine & Tool Co. v. Kearney & Trecker Corp., 428 F. Supp. 364 (E.D. Mich. 1977); Computerized Radiological Service v. Syntex, 595 F.Supp. 1495 (E.D.N.Y. 1984), rev'd on other grounds, 786 F.2d 72 (2d Cir. 1986); Management Sys. Assocs. v. McDonnell Douglas Corp., 762 F.2d 1161 (4th Cir. 1985); Consolidated Data Terminal v. Applied Digital Systems Inc., 708 F.2d 385 (9th Cir. 1983) ("the express statements warranting that the Regent 100's would perform at a 19,200 baud rate prevail over the general disclaimer."); Cricket Alley Corp. v. Data Terminal Systems, Inc., 240 Kan. 661, 732 P.2d 719 (Kan. 1987) (court enforced an express warranty that computerized cash registers would communicate with a remote computer; "capability to communicate with plaintiff's Wang computer was the prime consideration in selecting new cash registers."). By retaining current Article 2, Article 2B allows courts to use the full panoply of doctrines that they have evolved.

In Article 2 revisions, debate has focused on express warranties through advertising. The bracketed language in subsection (a) makes clear that advertising may create an express warranty. Even without that language, however, in appropriate cases, advertising would create a warranty. Article 2B does not change existing law on this point. Some cases acknowledge advertising warranties under Article 2; no conceptual barrier exists to a published statement becoming part of the bargain sufficient to constitute a warranty. Unless the bracketed language were adopted, however, this section does not adopt an express advertising warranty rule. In an area such as information contracts where the development of liability and warranty theory is less fully established than in goods and encounters first amendment and related restrictions, the draft adopts a cautious, rather than aggressive approach toward creating new forms of liability. Either advertising liability exists under current law and is carried forward, or it does not exist under current law and is not created.

4. Subsection (a)(2) deals with samples and the use of beta models. These are employed in testing developmental, not yet completed products. A beta model may include elements that are not carried into the final product and may include defects that are not cured in the final product. In either event, the parties both expect that the product being demonstrated or used is not representative of what will eventually be the product and the exclusion here is designed to protect against harm to either party as a result (e.g., licensee believes a defect will be cured, but it is not cured; licensor elects to delete an element in the test model when it produces the eventual product).

SECTION 2B-403. IMPLIED WARRANTY: QUALITY OF COMPUTER PROGRAM.

In a mass market transaction a A licensor that is a merchant that provides a computer program to a licensee with respect to a mass-market transaction providing a computer program warrants that the computer program and media are merchantable. To be merchantable, the computer program and any physical medium tangible media containing the program must:

(1) pass without objection in the trade under the contract description;

(2) be fit for the ordinary purposes for which it is distributed;

(3) substantially conform to promises or affirmations of fact made on the container, documentation, or label, if any;

(4) in the case of multiple copies, consist of copies that are, within the variations permitted by the agreement, of even kind, quality, and quantity, within each unit and among all units involved; and

(5) be adequately packaged and labeled as the agreement or circumstances may require.

(b) In cases not governed by subsection (a), a licensor that is a merchant with respect to computer programs of that kind and that delivers a program to a licensee warrants that any physical medium media on which the program is transferred isare merchantable and that the computer program will perform in substantial conformance with any promises or affirmations of fact contained in the documentation or specifications provided by the licensor at or before the delivery of the program. A mere affirmation of the value of the program or a statement of opinion or commendation does not create a warranty.

(c) A warranty under this section does not pertain to informational content in software, or to the quality, aesthetic appeal, marketability, accuracy, or other characteristics of the informational content.

Uniform Law Source: Section 2-314. Revised.

Selected Issues:

1. Should content and aesthetic appeal be subject to this warranty?

Committee Votes:

a. Rejected a motion to add language warranting that the program will not damage ordinary configured systems because no "ordinary system" exists in modern licensing and the general premise is covered under the language of existing Article 2 as brought forward here.

b. Voted 10-2 to use "mass market" in this section, rather than "consumer." (Feb. 1997)

Reporter's Notes:

1. Article 2B warranties blend three different legal traditions. One tradition stems from the UCC and focuses on obligations about the quality of the product. This tradition centers on the result delivered to the transferee: a product that meets ordinary standards of performance. The alternate tradition stems from common law, including case law relating to licenses, services contracts and information contracts. This tradition focuses on the manner in which a contract is performed, the process rather than the result. It assumes that the obligations of the transferor are to perform in a reasonably careful and workmanlike manner unless it expressly agrees to a greater burden. The third tradition comes from the area of contracts dealing with informational content and essentially disallows implied obligations of accuracy or otherwise in reference to information transferred outside of a special relationship of reliance. Under current law, these two traditions apply or not depending on characterizations about whether a transaction involves goods or not. That distinction is not reliable in information contracting, especially in light of the ability to transfer intangibles electronically without the use of any tangible property to carry the intangibles.

2. This section and the next following section seek to define the basis on which the different traditions apply, focusing on a distinction between "computer programs" and services or informational content. This expands the scope of the quality warranty here by including at least some cases where a court would otherwise conclude that the transaction is actually a services contract. See, e.g.,, Micro-Managers, Inc. v. Gregory, 147 Wis.2d 500, 434 N.W.2d 97 (Wisc. App. 1988); Data Processing Services, Inc. v. LH Smith Oil Corp., 492 N.E.2d 314 (Ind. Ct. App. 1986); Snyder v. ISC Alloys, Ltd, 772 F.Supp. 244 (W.D. Pa. 1991) (license of manufacturing process described as "services"). Compare Hospital Computer Systems, Inc. v. Staten Island Hospital, 788 F. Supp. 1351 (D.N.J. 1992); The Colonial Life Insurance Co. of Am. v. Electronic Data Systems Corp., 817 F. Supp. 235 (D. N.H. 1993)

3. The two implied warranties are not mutually exclusive and, in many cases, both will apply to the same transaction and the same digital product (e.g., an encyclopedia). In the final comments to the statute, notes will be developed containing illustrations indicating the manner in which the warranties work together.

Illustration 1: Party A contracts to transfer software to Party B that will allow B to process its accounts receivable. Whether the transfer is by diskette or by electronic conveyance into B's computer, the implied warranty in this section applies. Under current law, this would be a transaction in goods with an implied warranty attached to the performance of the product.

Illustration 2: Party A licenses Party B to use a copy of the Marvel Encyclopedia. This warranty applies to the computer program and diskette, while Section 2B-404 applies to the content of the encyclopedia. Under current law, this would be an information contract most likely involving no warranty about the accuracy of the information.

Illustration 3: Party A reaches a license with Party B. Party A will transfer its data to B's computer for processing there. B agrees to return various reports and summaries to A. The 2B-403 warranty does not apply since the contract did not deliver a computer program to A, but use of B's facility. Under current law, most cases hold that this is a services contract containing at most a warranty of workmanlike conduct; it is governed here under general standards of contract and by the implied warranty in Section 2B-404.

4. Merchantability sets the standard for computer programs in the mass market, where the idea of comparing a particular program to other mass market programs of similar type. This draft uses a substantial conformance to documentation standard for non-mass market software. That warranty is common in commercial licenses. The prevalence in commercial cases of disclaiming merchantability is such that virtually no software cases dealing with that warranty. The reliance on conformance to documentation reflects the wide range of variations involved in the non-mass market. The two standards both give assurances of quality, but focus on different reference points. Merchantability asks what are normal characteristics of ordinary products of this type, while the documentation warranty focuses on the manuals and contours of the particular product. Beside conforming to ordinary commercial practice (e.g., disclaim merchantability and give substantial conformance warranty), the substantive question here deals with whether merchantability is a relevant standard and at all protective in cases where software is often relatively unique. For example, assume a commercial computer program that provides data compression functions on an ABC computer with an XYZ operating system. Merchantability would ask whether that product passes without objection among all data compression products of all types (e.g., mass market, Windows-based, Apple systems, etc.) even though the particular environment, approach and capabilities of this product may be unique. How that standard protects the licensee is not clear and in fact it may set out standards well below what the documentation provides.

5. Most agreements disclaim merchantability; there are few reported commercial cases involving merchantability in any industry. Most licenses substitute a warranty of conformance to documentation. The section treats this as the presumed warranty, conforming to a commercial norm. This warranty measures performance by reference to what is said about the particular product. The argument in favor of retaining a merchantability warranty for transactions is that it would maintain a congruence between this article and Article 2 and 2A. This may be ephemeral and could be reversed: those articles should adapt to commercial practice. Merchantability measures performance obligations by reference to other like products, while the documentation warranty measures performance by what the licensor says about its product.

SECTION 2B-404. IMPLIED WARRANTY: INFORMATIONAL CONTENT AND SERVICES.

(a) Subject to subsections (b) and (c), a merchant that provides informational content in a special relationship of reliance or services in collecting, compiling, transcribing, processing or transmitting informational content, data processing, or the like, or informational content in a special relationship of reliance, warrants to its licensee that there is no inaccuracy, flaw, or other error in the informational content, caused by its failure to exercise reasonable care and workmanlike effort in its performance. in creating, collecting, compiling, or transcribing the information. The warranty is not breached merely because the performance does not yield a result consistent with the objectives of the licensee or because the informational content is not accurate or is incomplete.

(b) A warranty does not arise under subsection (a) for:

(1) the aesthetic value, commercial success, or market appeal of the content;

(2) published informational content;

(3) informational content in manuals, documentation, or the like, that is merely incidental to a [transfer] [activation] of rights and does not constitute a material portion of the value in the transaction; or

(4) informational content prepared or created by a third party, if the party distributing the information, acting as a conduit, provided only editorial services with respect to the content and made the informational content available in a form that identified it as being the work of the third party, except to the extent that the lack of care or workmanlike effort that caused the loss occurred in the party's performance in providing the content.

(c) The liability of a third party that provides the informational content under this section is not excluded by the use of a conduit described in subsection (b)(4) or by the fact that the conduit is not liable for errors under that subsection.

Uniform Law Source: Restatement (Second) of Torts ' 552.

Reporter's Notes:

1. This section creates a warranty applicable to consulting, data processing, information content, and similar contracts involving an information provider or processor dealing directly with a client and, with respect to content, where the provider tailors or customizes its information for the client's purposes or being in a special relationship of reliance with that client. The warranty reflects case law on information contracts. In Milau Associates v. North Avenue Development Corp., 42 N.Y.2d 482, 398 N.Y.S.2d 882, 368 N.E.2d 1247 (NY 1977), for example, the New York Court of Appeals rejected a UCC warranty of fitness for a purpose in a contract for the design and installation of a sprinkler system. "[Those] who hire experts for the predominant purpose of rendering services, relying on their special skills, cannot expect infallibility. Reasonable expectations, not perfect results in the face of any and all contingencies, will be ensured under a traditional negligence standard of conduct ... unless the parties have contractually bound themselves to a higher standard of performance..."

2. Restatement (Second) of Torts ' 552 regarding negligent misrepresentation provides a framework. It states that: "One who, in the cause of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance on the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information."

In most states, this liability does not exist in the absence of a "special relationship" between the parties justifying a duty of reasonable care. See Daniel v. Dow Jones & Co., Inc., 520 N.Y.S.2d 334 (NY City Ct. 1987) (electronic news service not liable to customer; distribution was more like a newspaper than consulting relationship); A.T. Kearney v. IBM, -- F.3d - (9th Cir. 1997). The obligation consists of a commitment that the content provided will not be wrong due to a failure by the provider to exercise reasonable care. Rosenstein v. Standard and Poor's Corp., 1993 WL 176532 (Ill. App. May 26, 1993) (license of index; liability for inaccurate number tested under Restatement concepts in light of contractual disclaimer; information, although handled in commercial deals is not a product taking it outside this Restatement approach). Under Restatement case law, the obligation is limited to cases involving a special or fiduciary relationship. Under subsection (a) the obligation does not center on delivering a correct result, but on care and effort in performing. A contracting party that provides inaccurate information does not breach unless the inaccuracy is attributable to fault on its part. See Milau Associates v. North Avenue Development Corp., 42 N.Y.2d 482, 398 N.Y.S.2d 882, 368 N.E.2d 1247 (N.Y. 1977); Micro- Managers, Inc. v. Gregory, 147 Wis.2d 500, 434 N.W.2d 97 (Wisc. App. 1988). Liability under the Restatement for inaccurate information exists only if the information was intended or designed to guide the business decisions of the other party. This section is not limited to cases involving business guidance.

3. The cases largely exclude liability for information distributed to the public. This concept is captured by the term "published informational content" in subsection (b)(2). "Published informational content" refers to information made available without being customized for a particular business situation of a particular licensee and where no "special relationship" of reliance exists between the parties. It is material made available in a standardized form to a public defined by the nature of the material involved. The information is not tailored to the client's needs. This definition and the liability exclusion reflects the vast majority of case law under the Restatement and modern values of not inhibiting the flow of content. The policy values supporting this stem in part from First Amendment considerations, but also from ingrained social norms about the value of information and of encouraging its distribution.

Illustration 1: Sam opens a website making available information on restaurants for a small monthly fee for subscribers. One item of information concerning Restaurant A is incorrect and a subscriber has a bad experience because of the error. Sam's website contains published informational content and creates no warranty or resulting liability. The same would be true of a restaurant review in the New York Times.

Illustration 2: Sam, an expert on restaurants, contracts with Able to provide advice about which restaurants should be included in Able's book on the "most profitable" Chicago restaurants. Sam makes a negligent error in providing a list of restaurants. Sam has liability under this warranty as to Able since the information is not "published informational content" but was tailored to the specific purposes of the specific client. When the book is published, however, no warranty exists for either provider since the book is published informational content.

4. Subsection (b) lists situations in which the warranty does not arise under current law. Subsection (b)(1) clarifies that this is not a warranty of aesthetic quality, but accuracy, an element present in current U.S. law and important in the publishing and entertainment industries affected by this Article. This point, although it could be inferred from the affirmative terms of the warranty, has substantial importance and language was added to this subsection based on suggestions from a licensee representative involved with entertainment issues.

5. Subsection (b)(4) states as a contract law principle case law that holds the publisher harmless from claims based on inaccuracies in third party materials that are merely distributed by it. In part, this case law stems from concerns about free speech and leaving commerce in information free from the encumbrance of liability where third parties develop the information. In cases of egregious conduct, ordinary principles of negligence apply. As a contractual matter, however, merely providing a conduit for third party data should not create an obligation to ensure the care exercised in reference to that data by the third party. See Winter v. G.P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991); Walter v. Bauer, 109 Misc 2d 189, 439 N.Y.S.2d 821 (S. Ct. 1981). Compare: Brockelsby v. United States, 767 F.2d 1288 (9th Cir. 1985) (liability for technical air charts where publisher designed product) (query whether this is a publicly distributed product).

6. The issue is important for information systems analogous to newspapers and are treated as such here for purposes of contract law. See Daniel v. Dow Jones & Co., Inc., 520 N.Y.S.2d 334 (NY City Ct. 1987) (electronic news service not liable to customer; distribution was more like a newspaper than consulting relationship). The District Court in Cubby, Inc. v. CompuServ, Inc., 3 CCH Computer Cases & 46,547 (S.D.N.Y. 1991) commented: "Technology is rapidly transforming the information industry. A computerized database is the functional equivalent of a more traditional news vendor, and the inconsistent application of a lower standard [enabling] liability [for] an electronic news distributor ... than that which is applied to a public library, book store, or newsstand would impose and undue burden on the free flow of information."

SECTION 2B-405. IMPLIED WARRANTY: EFFORT TO ACHIEVE PURPOSE.

(a) Except with respect to the aesthetic value, commercial success, or market appeal of informational content, if a licensor at the time of contracting has reason to know of any particular purpose for which [a computer program] [the information] is required and that the licensee is relying on the expertise of the licensor to select, develop, or furnish a suitable [program] [information]:

(1) if, from all the circumstances, it appears that the contract is for a price for performance that will not be paid if the end product is not suitable for the particular purpose, there is an implied warranty that the information will be fit for such purpose; but

(2) if, from all the circumstances, it appears that the licensor was to be paid for the amount of its time or effort regardless of the suitability of the end product, there is an implied warranty that the licensor will make a workmanlike effort to achieve the licensee's purpose.

(b) If an agreement requires a licensor to provide or select a single or integrated system consisting of components, and the licensor has reason to know that the licensee is relying on the expertise of the licensor to select the components, there is an implied warranty that the components selected will function together as a system.

Uniform Law Source: Section 2-315; 2A-213. Substantially revised.

Reporter's Note:

1. The section deals with development and design contracts. This section balances between the two results. This section incorporates the differences between results and efforts, but makes the distinction depend on judgments about payment expectations. The test here gives a better measure for courts to use to determine which implied obligation fits than does the current test involving whether the contract involves goods (article 2 fitness) or services.

2. Design contracts involving software are a setting in which litigation is common over whether the contract involves goods or services under current law. Those cases choose between a warranty of result and a warranty of effort based on whether the court viewed the transaction as involving goods (result) or services (effort). The reported cases split on this issue, often turning on the subjective view of the court, rather than on any differences in the actual transactions. Compare USM Corp. v. Arthur Little Systems, Inc., 28 Mass. App. Ct. 108, 546 N.E.2d 888 (1989) (goods); Neilson Business Equipment Center, Inc. v. Italo Monteleone, M.D., 524 A.2d 1172 (Del. 1987) (goods) with Micro-Managers, Inc. v. Gregory, 147 Wis.2d 500, 434 N.W.2d 97 (Wisc. App. 1988) (services); Wharton Management Group v. Sigma Consultants, Inc., 1990 WESTLAW 18360, aff'd 582 A.2d 936 (Del. 1990) (services contract); Data Processing Services, Inc. v. LH Smith Oil Corp., 492 N.E.2d 314 (Ind. Ct. App. 1986) (services).

2. Software development contracts are covered under Article 2B without regard to classification of the contract as involving services or goods. This is important in eliminating uncertainty and arbitrary factors determining outcome. Under current law, the distinction between goods and services affects the applicability of the implied warranty of fitness. Services contracts involving custom design do not call into play a warranty that the result of the services fits the licensee's purposes. This is because the focus is on the process of performance, rather than the outcome. See Micro- Managers, Inc. v. Gregory, 147 Wis.2d 500, 434 N.W.2d 97 (Wisc. App. 1988); Milau Associates v. North Avenue Development Corp., 42 N.Y.2d 482, 398 N.Y.S.2d 882, 368 N.E.2d 1247 (N.Y. 1977) (An implied warranty is inconsistent with the nature of the contract. Fitness of outcome can be contracted for only as an express warranty.). In contrast, custom contracts treated as sales of goods may create implied warranties of fitness pursuant to UCC 2-315 if the vendor's expertise is relied on by the vendee. See USM Corp. v. Arthur Little Systems, Inc., 28 Mass. App. Ct. 108, 546 N.E.2d 888 (1989).

3. Subsection (b) provides an implied warranty of system integration. This differs from the fitness concept, but is closely related to that concept. The obligation is that the selected components will actually function as a system. That is an additional step beyond the obvious fact that the components themselves must be separately functional in a manner consistent with the contract.

SECTION 2B-406. DISCLAIMER OR MODIFICATION OF WARRANTY.

(a) Language or conduct relevant to the creation of an express warranty and language or conduct tending to disclaim or modify an expressthe warranty must be construed wherever reasonable as consistent with each other. Subject to Section 2B-301 with regard to parol or extrinsic evidence, language or conduct disclaiming or modifying an express warranty is ineffective are inoperative to the extent that such a construction is unreasonable.

(b) Subject to subsection (c), to disclaim or to modify an implied warranty, the following rules apply:

(1) Except as otherwise provided in paragraphs (5) and (6), language of disclaimer or modification must be in a record.

(2) To disclaim or modify an implied warranty under Section 2B-403 or 2B-404, language that mentions "warranty of quality", "warranty of merchantability", "warranty of accuracy", or words of similar import, is sufficient. Language sufficient to disclaim one of the warranties is sufficient to disclaim the other. Language sufficient to disclaim the warranty of merchantability in a transaction governed by Article 2 is sufficient to disclaim the warranties under Sections 2B-403 and 2B-404.

(3) To disclaim or modify an implied warranty arising under Section 2B-405, it is sufficient to state, "There is no warranty that the subject of this transaction will fulfill any of your particular purposes or needs," or words of similar import. Language sufficient to disclaim a warranty of fitness under Article 2 is sufficient to disclaim the warranty under Section 2B-405.

(4) All implied warranties may be disclaimed or modified only by specific language complying with paragraphs (1) through (3) or other language that in common understanding calls the licensee's attention to the exclusion of all warranties. Language stating that the information is provided "as is" or "with all faults", or words of similar import excludes warranties under Sections 2B-403 and 2B-404 [and 2B-405].

(5) An implied warranty may be disclaimed or modified by course of performance or course of dealing.

(6) There is no implied warranty with respect to a defect that was known by, discovered by, or disclosed to the licensee before entering into the contract, or which would have been revealed to the licensee if it had not refused to make reasonable use of a reasonable n opportunity reasonably provided to it to examine, inspect, or test the information or a sample thereof made available before entering into the contract, unless the licensee was not aware of the defect after examination and the licensor knew that it existed at that time.

(c) In a mass-market license, language that disclaims or modifies an implied warranty must comply with subsection (b) and be conspicuous. To disclaim all implied warranties in a mass-market license, other than the warranty under Section 2B-401, language in a record is sufficient if it states: "Except for express warranties stated in this contract, if any, this [information] [computer program] is being provided with all faults, and the entire risk as to satisfactory quality, performance, accuracy, and effort is with the user," or words of similar import.

(d) If a contract requires ongoing performance or a series of performances by the licensor, language of disclaimer that complies with this section is effective with respect to all performance that occurs after the contract is formed.

(e) A contractual term disclaiming implied warranties which complies with this section is not subject to exclusion under Section 2B-308(b)(1).

(f) Remedies for breach of warranty may be limited in accordance with the provisions of this article on liquidation or limitation of damages and contractual modification of remedy.

Uniform Law Source: Section 2A-214. Revised.

Selected Issue:

1. Should (b)(6) be modified to conform to current law and revised Article 2 which provides: "If a buyer before entering into a contract has examined the goods, sample, or model as fully as desired or has declined to examine them, there is no implied warranty with regard to conditions that an examination in the circumstances would have revealed to it."

Committee Votes:

a. Voted to delete requirement of conspicuousness for non-mass market disclaimers.

b. Rejected a motion to delete conspicuousness for mass market contracts.

c. Rejected a motion to delete (b)(5) by a vote of 3 - 6.

d. Accepted a motion to delete (b)(6) by a vote of 6 -4 with the ability to rewrite to focus and clarify effects, perhaps in reference to known defects.

e. Adopted a motion to delete the reference to use of trade in (b)(5) by a vote of 8 - 2.

f. Adopted a motion to restrict the impact of the "as is" language to exclude coverage of 2B-405 because it deals with services like obligations. Vote was 6- 3.

g. Motion to adopt the idea of mass market, rather than the idea of consumer on disclaimers. Adopted 8- 2 (Dec. 1996)

h. Motion to adopt language from Article 2 precluding disclaimer of consequential damages relating to personal injury, rejected by a vote of 2-8.

i. Motion to delete subsection (e) and replace that section with provision indicating that a term that is conspicuous is not a refusal term under 2B-308. Accepted 9-1

j. Voted 7-6 to use mass market, rather than consumer in this section. (Feb. 1997).

Reporter's Note:

1. Subsection (a) restates current law.

2. Subsection (b) brings together provisions dealing with commercial disclaimers. Subsection (b)(1) requires that the disclaimer be in a record, thus not following the possibility in drafts of Article 2 that an oral disclaimer suffices Subsection (b)(2) sets out a safe harbor for the merchantability warranties and also allows an Article 2 disclaimer to be effective in reference to the two merchantability like warranties in Article 2B. The purpose of this latter rule is to avoid requiring that the guess about coverage of the two articles. Importantly, as in existing and revised Article 2, the specified language is not mandatory, but merely sets out a safe harbor. This language works, but other language may also work. (b)(3) provides a more common language disclaimer treatment than in current law.

3. Subsection (b)(6) deals with concerns expressed during the November meeting which deleted prior language taken directly from existing Article 2. The revised language emphasizes knowledge or opportunity to know of the defect and also expressly disallows a licensor's failure to disclose defects that it knows to be present. Equally important, by focusing on reasonable use and resulting disclosure, the redraft avoids the potential problem in which might disallow any implied warranty where inspection was as fully as the licensee "desired". In complex systems often provided through retail outlets, that standard is not workable.

3. Subsection (c) deals with mass market disclaimers. The subsection adds two requirements applicable to mass market transactions that do not apply for other transactions. First, the disclaimer must be conspicuous. That requirement does not apply to commercial transactions in Article 2B. Second, if the intent is to disclaim all warranties in a single sentence, the subsection sets out a common language disclaimer based on proposals by the software industry as a means of giving more disclosure to the consumer of what is disclaimed. That language is a safe harbor, rather than a required statement.

5. Subsection (e) exempts disclaimers that qualify under this section from further consideration under the "refusal terms" concepts outlined in Section 2B-308.

6. Subsection (f) was added to conform to current law and revised Article 2.

SECTION 2B-407. MODIFICATION OF COMPUTER PROGRAM. Modification of a computer program by a licensee voids any warranties, express or implied, regarding the performance of the modified copy of the program unless the licensor previously agreed that the modification would not void the warranty or the modification was made using capabilities of the program intended for that purpose in the ordinary course of operation of the program. A modification occurs if a licensee alters, deletes, or adds code to the computer program.

Uniform Law Source: None

Reporter's Notes:

1. This method of losing warranty protection applies only to warranties related to the performance or results of the software. It does not apply to title and non-infringement warranties. More importantly, the voiding of performance warranties extends only to the modified copy. If the defect existed in an unmodified copy, the modifications have no effect.

2. The basis for the provision lies in the fact that because of the complexity of software systems changes may cause unanticipated and uncertain results. This language follows common practice. It voids the warranties whether the modification is authorized or not unless the contract, or an agreement, indicates that modification does not alter performance warranties. The section covers cases where the licensee makes changes in the program that are not part of the program structure or options itself. Thus, if a user employs the built-in capacity of a word processing program to tailor a menu of options suited to the end user's use of the program, this section does not apply. If, on the other hand, the end user modifies code in a way not made available in the program options, that modification voids all performance warranties as to the altered copy.

SECTION 2B-408. CUMULATION AND CONFLICT OF WARRANTIES.

Warranties, whether express or implied, must be construed as consistent with each other and as cumulative. However, if that construction is unreasonable, the intent of the parties determines which warranty prevails. In ascertaining this intent, the following rules apply:

(1) Exact or technical specifications prevail over an inconsistent sample, model, demonstration, or general language of description.

(2) A sample, model, or demonstration prevails over inconsistent general language of description.

(3) An express warranty prevails over an inconsistent implied warranty other than the implied warranty of effort to achieve a purpose.

Uniform Law Source: ' 2-317.

Committee Action:

Approved in principle.

Reporter's Note:

This Section generally follows existing Article 2. A substantive difference exists between this Draft and the proposed revisions to Article 2 which indicate that an express warranty does not prevail over inconsistent implied warranties in a consumer contract. The apparent intent of this is to eliminate the ability to replace implied merchantability warranties with express warranty concepts.

SECTION 2B-409. THIRD-PARTY BENEFICIARIES OF WARRANTY.

(a) Except for information made available as published information content, a warranty made to a licensee extends to persons for whose benefit the licensor intends to supply the information, directly or indirectly, and that use the information in a transaction or application in which the licensor intends the information to be used.

(b) For purposes of this section, a licensor that provides the information to an individual as a licensee is deemed to have intended to supply the information to any other individual who is in the immediate family or household of the licensee if it was reasonable to expect that such individual would rightfully use the copy of the information delivered to the licensee.

(c) A disclaimer or modification of a warranty, or of rights and remedies, which is effective against the licensee is also effective against a beneficiary under this section. An expressed intent that limits or excludes third-party beneficiaries excludes any obligation or liability under the contract with respect to third parties excluded by the contract other than persons described in subsection (b).

Uniform Law Source: 2-318.

Committee Action:

a. Motion to adopt language precluding disclaimer of consequential damages relating to personal injury, rejected; vote of 2 - 8.

Reporter's Notes:

1. This section defines third party beneficiary concepts. It neither expands nor restricts tort concepts that might apply with reference to third party risks in reference to information. The field of products liability remains outside this Article; governed by tort law in each jurisdiction. In the absence of prior law creating product or other tort liability for the subject mater covered by this Article, Article 2B allows the development of that theme to common law courts.

2. The section deals with when a beneficiary status exists. For a discussion of beneficiary issues see Artwear, Inc. v. Hughes, 615 N.Y.S.2d 689 (1994). For a discussion of information liability to third parties, see Bily v. Arthur Young & Co., 3 Cal. 4th 370, 11 Cal. Rptr. 2d 51, 834 P2d 745 (1992) (adopts Restatement test; "By confining what might otherwise be unlimited liability to those persons whom the engagement is designed to benefit, the Restatement rule requires that the supplier of information receive notice of potential third party claims, thereby allowing it to ascertain the potential scope of its liability and make rational decisions regarding the undertaking.").

3. Subsection (a) derives from and should be interpreted in light of both the contract law concept of "intended beneficiary" and the concept in the Restatement (Second) of Torts ' 552. In both instances, for information, contract-based liability is restricted to intended third parties and those in a special relationship with the information provider. The scope of liability extends to transactions that the provider of information intended to influence. This Section incorporates those concepts. The section also must be considered in light of the scope of warranties under this Article which create no implied warranty of accuracy pertaining to published informational content.

Illustration 1: Clancey contracts for publication of his text on chemical interactions. Publisher obtains an express warranty that Clancey exercised reasonable care in researching the material. Publisher distribute the text to the general public. Some data is incorrect. Neither Publisher (which make to warranty on published information content), nor Clancey (excluded under (a) makes a warranty to a general buyer of the book.

4. Unlike in goods, the willingness of courts and legislatures to avoid privity and impose third party liability under tort or contract theory has been limited in information products. The Restatement (Third) on products liability recognizes this; it notes that informational content is not a product for purposes of that law. The only reported cases imposing products liability on information products all involve air craft charts. The cases analogized the technical charts to a compass or similar, physical instrument. These cases have not been followed in any other context. Most courts specifically decline to treat information content as a product, including the Ninth Circuit, which decided one of the air chart cases, but later commented that public policy accepts the idea that information content once placed in public moves freely and that the originator of the data does not own obligations to those remote parties who obtain it. See Winter v. G. P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991). See also Fairbanks, Morse & Co. v. Consolidated Fisheries Co., 190 F.2d 817, 824 (3rd Cir. 1951); Berkert v. Petrol Plus of Naugatuck, 216 Conn. 65, 579 A.2d 26 (Conn. 1990) ("[The] imposition of liability against a trademark licensor under [tort law] is appropriate only when the licensor is significantly involved in the manufacturing, marketing or distribution of the defective product...."); Porter v. LSB Industries, Inc., 1993 WL 264153 (N.Y.A.D. 4 Dept. 1993) (product liability cannot be imposed on a party that is outside the manufacturing, selling, or distribution chain); E.H. Harmon v. National Automotive Parts, 720 F. Supp. 79 (N. D. Miss. 1989) (strict liability cannot be imposed on one who neither manufactures nor sells the product); Snyder v. ISC Alloys, Ltd, 772 F Supp. 244 (W. D. Pa. 1991) (16 UCC Rep. Serv.2d 38); Jones v. Clark, 36 N. C. App. 327, 24 UCC Rep. Serv. 605, 244 S.E.2d 183 (N. C. App. 1978) (implied warranty cannot be imputed to one who simply allows its seal of inspection to be placed on a product manufactured by another; if some type of implied warranty were arguably applicable such a warranty could not meet privity requirements since sellers purchased unit from manufacturer and it was only the manufacturer which dealt directly with the laboratory).

While there may be a different policy dealing with software embedded in products, this Article does not deal with embedded products. Tort issues regarding, for example, the software that operates the brakes in an automobile falls within Article 2. No reported cases place products liability on software products that are not embedded in hardware products.

5. Restatement (Second) of Torts ' 552 establishes a limited third party liability structure for persons who provide information to guide others in business decisions. This Section is consistent with that Restatement which limits liability to pecuniary loss suffered by the person or one of a limited group of persons for whose benefit and guidance he intends to supply the information or knows that the recipient intends to supply it; and through reliance upon it in a transaction that he intends the information to influence or knows that the recipient so intends or in a substantially similar transaction." In most states, no liability arises under this theory of action unless there is a "special relationship" between the information provider and the injured party. Modern case law is increasingly oriented toward the terms of the Restatement. See Bily v. Arthur Young & Co., 3 Cal. 4th 370, 11 Cal. Rptr. 2d 51, 834 P2d 745 (1992). This is a contract law statute. To the extent that greater liability is desired, that should come from tort law development, rather than from an expanding notion of contract liability.

6. If the subject matter involves informational content, constitutional considerations and general considerations of policy often limit liability at least in respect of the liability of the publisher. See, e.g., Winter v. G. P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991) (publisher of encyclopedia of mushrooms has no duty of care respecting accuracy); Daniel v. Dow Jones & Co., Inc., 520 N.Y.S.2d 334 (NY City Ct. 1987) (electronic news service not liable to customer). Compare Brockelsby v. United States, 767 F.2d 1288 (9th Cir 1985); Saloomey v. Jeppeson & Co., 707 F.2d 671 (2d Cir 1983); Aetna Casualty & Surety Co. v. Jeppeson & Co., 642 F.2d 339 (9th Cir. 1981). Both of the latter cases deal with highly technical and highly specialized information products and impose liability on the author-publisher running to persons with no privity. They have not been followed with respect to any other information liability case.

7. Subsection (b) modifies beneficiary concepts to include the family of a licensee. This goes beyond the relevant alternative in current Article 2-318 which limits that extension to personal injury claims. The extension here covers both personal injury and economic losses.

8. Subsection (c) recognizes and flows from the fact that the basis of this section lies in beneficiary status, rather than product liability concepts. A disclaimer or a statement excluding intent to effect third partys excludes liability under this section. Thus, in Rosenstein v. Standard and Poor's Corp., 1993 WL 176532 (Ill. App. May 26, 1993), for example, the court treated a license agreement involving Standard and Poors (SP), which provided data and index figures for daily closing of options based on the SP index, as an information contract. When SP provided an inaccurate number because of an error in the price of one stock, the court applied concepts of negligence and effort, rather than UCC warranty rules to gauge potential liability. The court held that concepts of negligent misrepresentation applied to this form of information service. The third parties were barred from recovery, however, based on a disclaimer in the original license agreement.

SECTION 2B-501. OWNERSHIP OF TITLE TO RIGHTS AND TITLE TO COPIES.

(a) If an agreement transfers ownership oftitle to intellectual property rights and does not specify when ownershiptitle is to pass, ownershiptitle passes to the transferee:

(1) when the agreement becomes enforceable between the parties if the information is in existence at that time; and

(2) if the information is not in existence when the agreement becomes enforceable, when the information has been so far identified to the contract as to be distinguishable in fact from similar property even if it has not been fully completed and any required delivery has not yet occurred.

(b) Transfer of title to or possession of a copy of information does not transfer ownership of intellectual property rights in the information.

(c) In a license, the following rules apply to copies of information:

(1) Title to a copy is determined by the agreement.

(2) A licensee's right to possession or control of a copy is governed by the contract and does not depend on title to the copy.

(2) Title to a copy is determined by the contract.

(3) In a If a license, includes a license of intellectual property rights of the licensor, reservation of title to a copy reserves title in that copy and any copies made by the licensee unless the license contemplates that the licensee will make and sell copies of the information to other parties, in which case reservation of title reserves title only to copies delivered to the licensee by the licensor.

(d) If the parties intend to transfer title to a copy and the contract does not specify when title transfers:

(1) physical delivery transfer of a tangible copy from the licensor transfers title to the copy on delivery to and acceptance by the licensee; and

(2) electronic delivery of a copy by electronic means to the licensee transfers title of the copy when if the transfer constitutes a first sale occurs under federal copyright law.

Uniform Law Source: Section 2-401; section 2A-302. Revised.

Committee Vote:

a. Voted 11-0 to delete a sentence restricting exercise of rights until it pays according to the terms of the contract. That concept can be transferred to comments in a form that also accommodates in kind and other value.

Reporter's Notes:

1. This section distinguishes title to the copy from ownership of the intellectual property rights, a point that is made explicit in subsection (b). This distinction flows from the Copyright Act and other law. It means that, while ownership of a copy may carry with it some rights with respect to that copy, it does not convey ownership of the underlying rights to the work of authorship or the patented technology. This represents a basic theme in differentiating intangibles and tangible objects. The media here is not the message, but the conduit.

2. Subsection (a) deals with intellectual property rights and when ownership of the rights transfers as a matter of state law. This deals with cases where there is an intent to transfer title to intellectual property rights (as compared to title to a copy). If federal law requires a writing to make this ownership transfer; state law is subject to that limit. The subsection solves the problem in In re Amica, 135 Bankr. 534 (Bankr. N.D. Ill. 1992) (court applied Article 2 theories of title transfer to goods to hold that title to an intangible (a computer program) being developed for a client could not pass until the program was fully completed and delivered.) The transfer of title hinges on completion to a sufficient level that separates the transferred property from other property of the transferor. See In re Bedford Computer, 62 Bankr. 555 (Bankr. D.N.H. 1986) (disallows transfer of title in software where "new" code could not be separately identified from old or pre-existing code.).

3. Under subsection (c), in a license, the right to the copy of information depends on the terms of the contract and not on the label one applies to handling underlying media. This is a default rule that applies regardless of the terms of the license contract. As in Article 2A, this draft does not spell out title transfer rules with reference to licenses. The question of whether title to a copy in fact transfers in a license may depend on the terms of the license and the marketplace in which the license transaction occurs. Especially in many commercial licenses, it is inappropriate to presume that title does pass to the licensee in the absence of contractual reservation. The typical presumption is that the transfer there is conditional as reflected in the license terms, rather than presumptively a sale of the copy. See United States v. Wise, 550 F.2d 1180 (9th Cir. 1977) (licenses transferred rights for exhibition or distribution and did not constitute first sales); Data Products Inc. v. Reppart, 18 U.S.P.Q.2d 1058 (D. Kan. 1990) (license not a sale). The circumstances may be different in the mass market even where purchasers are aware that a license agreement will be involved. As drafted, the section takes no position on that issue or how one distinguishes these cases. The mass market licensee receives protections under applicable default rules that are not based on title issues. If the issue were to become important in litigation and were not dealt with by contract, a court would presumably inquire about the intent of the parties as to title to the copy.

4. Subsection (d) deals with cases involving an intent to sell a copy and states various presumptions relating to when title passes to copies. The basic theme is that the contract controls. Absent contract terms, the draft distinguishes between tangible and electronic transfers. The rule for tangible transfers of a copy parallels Article 2 in current law. The electronic transfer approach defers to federal law on a potentially controversial issue. The White Paper on copyright in the Internet suggests and legislation is being considered to implement that the electronic delivery of a copy of a copyrighted work is not a first sale because it does not involve transfer of a copy from the licensor to the licensee. While state law could control questions of title to personal property, this draft suggests that the issue be left to federal policy.

SECTION 2B-502. TRANSFER OF PARTY'S INTEREST.

(a) Except as otherwise provided in subsection (b)this section, a party's rights under a contract may be transferred, including by an assignment or a financier's interest, unless the transfer would materially change the duty of the other party, materially increase the burden or risk imposed on the other party, causecreate a delegation of material performance, disclose or threaten to disclose trade secrets or confidential information of the other party, or materially impair the other party's likelihood or expectation of obtaining return performance.

Except as otherwise provided in Section 2B-504 with respect to the creation of a financier's interest, aA transfer of a licensee's may not transfer, voluntarily or involuntarily, contractual rights under a nonexclusive license that would be effective under subsection (a) without the consent of the licensorparty that holds intellectual property rights in the information is ineffective unless the transfer is subject to the terms of the license and:

(1) the contract is a mass-market license, the licensee received delivery of a copy of the information, and transfers the original copy and all other copies made by it; or

(2) the licensee received title to the copy of the information by a transfer authorized by from the party that holds intellectual property rights in the information, the license did not preclude transfer of the licensee's rights, and the transfer of the licensee's rights complies with applicable provisions of federal law for the owner of a copy to make the transfer.

(c) Subject to subsection (a), either party may transfer the right to receive payment from the other party.

(d) A transfer made in violation of this section is ineffective.

Uniform Law Source: Section 2A-303. Substantially revised.

Committee Vote:

a. Voted 7-1 to add a provision to allow transfer when the licensee owns the copy of the information.

b. Voted unanimously to use mass market, rather than consumer in this section.

Reporter's Notes:

1. The provisions of this Section apply in the absence of contractual restrictions. The effect of contract restrictions on alienation are treated elsewhere as is the enforceability of a security interest. "Transfer" is used in the sense of a conveyance of rights and duties under a contract and contrasts to the idea of merely delegating or sub-licensing performance where the delegator remains primarily responsible and in control of the contract performance. It contrasts to the idea of delegation or sublicense which involve a shift of the performance to a third party without transferring the contractual rights.

2. Subsection (a) states a general principle of transferability subject to that being disallowed in cases where the transfer jeopardizes significant interests of the other party to the license contract. This is consistent with general UCC themes, except that the subsections spell out additional protected interests that block transfer and that are important here, but not in reference to sales of goods. Included among those interests are transfers that create and actual disclosure or threaten a disclosure of confidential material. Whether this occurs must be viewed in context of the original transaction. The application of this concept would be limited to cases where actual trade secret or confidentiality relationships had been established with respect to some of the information that forms the subject matter of the contract.

3. Subsection (a) expressly refers to transfers that disclose or threaten to disclose trade secret or confidential material of the other party. Whether particular information is confidential or not will ordinarily be determined by other law, including common law contract and trade secret law. Application of this limitation on transfer hinges on the existence of such an interest. The restriction on transfer that results occurs only if the transfer increases the risk of confidentiality disclosure juxtaposed to the original transaction itself. Thus, for example, if arguable trade secrets are embedded in object code of a computer program, but the contract does not place confidentiality restrictions on the licensee, merely transferring the copy to another party, if that is otherwise permitted, does not jeopardize the secrets for purposes of subsection (b). With reference to both the transferor and transferee, in the absence of enforceable confidentiality restrictions in the contract or otherwise in law, discovery of the secret information may be appropriate and the degree of risk does not change for the secret owner. On the other hand, where confidential material is subject to restrictions or is directly disclosed as a result of the transfer, the limitation in (a) applies. Of course, even if the limitation grounded in confidentiality concepts does not apply, a non-exclusive license may be otherwise non-transferable under the other provisions of this section.

4. Subsection (b) follows current law which holds that a licensee cannot assign its rights in a nonexclusive license. For patents and copyrights, this represents federal policy. The fact that this federal policy overrides state law was restated and accepted by the Ninth Circuit in 1996. See Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996); Unarco Indus., Inc. v. Kelley Co., Inc., 465 F.2d 1303 (7th Cir. 1972). The non-transferability premise flows from the fact that a nonexclusive license is a personal, non-assignable contractual privilege, representing less than a property interest. See Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984) (copyright); In re Alltech Plastics, Inc., 71 B.R. 686 (Bankr. W. D. Tenn. 1987).

5. The Ninth Circuit explained the policy basis for this federal law rule in reference to patent licenses in the following terms:

Allowing free assignability - or, more accurately, allowing states to allow free assignability - of nonexclusive patent licenses would undermine the reward that encourages invention because a party seeking to use the patented invention could either seek a license from the patent holder or seek an assignment of an existing patent license from a licensee. In essence, every licensee would become a potential competitor with the licensor-patent holder in the market for licenses under the patents. And while the patent holder could presumably control the absolute number of licenses in existence under a free-assignability regime, it would lose the very important ability to control the identity of its licensees. Thus, any license a patent holder granted--even to the smallest firm in the product market most remote from its own--would be fraught with the danger that the licensee would assign it to the patent holder's most serious competitor, a party whom the patent holder itself might be absolutely unwilling to license. As a practical matter, free assignability of patent licenses might spell the end to paid-up licenses such as the one involved in this case. Few patent holders would be willing to grant a license in return for a one-time lump-sum payment, rather than for per-use royalties, if the license could be assigned to a completely different company which might make far greater use of the patented invention than could the original licensee. Thus federal law governs the assignability of patent licenses because of the conflict between federal patent policy and state laws, such as California's, that would allow assignability.

Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996). The approach to non-exclusive copyright licenses in federal law is the same. See Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984).

6. The two exceptions in subsection (b) to the non-transferability concept attempt to define situations in which the basis of this policy are not present or offended by a general rule allowing assignment. The first, mass market licenses, indicates the fact that in a mass market environment the licensor has essentially chosen not to be concerned about the identity of the particular licensee, but rather places the information out to the general public. In the second exception, federal law rules relating to first sales apply and allow the owner of a copy to distribute that copy, presumably along with the right to use/ copy that work in the case of computer software. See 17 USC ' 117.

7. Subsection (d) states a rule on the effectiveness or ineffectiveness of transfers of non-exclusive license rights by a licensee that makes the transfer ineffective unless authorized by this section. Given the carve outs for mass market and owned-copy transactions in subsection (b), this rule carries forward the federal policy and the underlying personal nature of the non-exclusive licensee's rights. Cases such as Everex indicate not only that the attempted assignment violates contract provisions, but that it is invalid without the licensor's consent. The Ninth Circuit in Everex indicated that federal law sets out a bright line test invalidating the transfer without consent and entirely independent of whether there was (or was not) actual impact on the licensor's interests. The predominant interest here focuses on the licensor's intellectual property rights and control of to whom the intellectual property is given. Article 2A, dealing with tangible property, makes the contrary assumption in 2A-303(5), but would generally enable a lessor to cancel the lease because of the transfer. Under the intellectual property regime that governs here, that additional step is not warranted and may be barred by existing case law. It is important to recognize, however, that the net effect of this section and the parallel rule in Section 2B-503 is to increase significantly the transferability of licensee rights.

SECTION 2B-503. CONTRACTUAL RESTRICTIONS ON TRANSFER.

(a) Except as otherwise provided in subsection (b), a contractual restriction or prohibition on transfer of an interest of a party to a contract or of a licensor's ownership of intellectual property rights in information that is the subject of a license is enforceable. A transfer made in breach of an enforceable contractual term that prohibits transfer is ineffective.

(b) With respect to a financier's interest, theThe following contractual restrictions are not effective to prevent creation of the interest, but a transfer or creation of an interest made in violation of the restriction constitutes a breachenforceable:

(1) a term that prohibits a party's transfer of its interest or creation or enforcement of a security interest in an account or in a general intangible for money due or to become due or which requires the other party's consent to such an transfer; and

(2) a term that prohibits a party's transfer of its interest or creation or enforcement of a financier's interest except to the extent that creation of the financier's interest or enforcement would be precluded in the absence of the term under Section 2B-502 or 2B-504.

(c) A transfer made in breach of an enforceable contractual term that prohibits transfer is ineffective.

Uniform Law Source: Section 2A-303(2)(3)(4)(6)(8).

Committee Vote:

a. Voted 8-0 to delete provision that invalidated a prohibition on transfer in a mass market license.

Reporter's Note:

This Section generally validates contractual restrictions on the transfer of a contractual interest. The primary exceptions to this policy relate to financing arrangements, the transfer of interests in a cash flow from a license and the creation of a financier's interest under this Article.

SECTION 2B-504. FINANCIER'S INTEREST IN A LICENSE.

(a) The creation, perfection, or enforcement of a financier's interest in a party's rights under a license without the consent of the other party to the license is effective if the creation a transfer of the interest would be effective under Section 2B-502 and 2B-503, but enforcement of a financier's interest thus created is effective only if enforcement would also be effective under Section 2B-502 and Section 2B-503 or if the other party to the license consents.

(b) If the creation, perfection, or enforcement of a financier's interest in a licensee's rights under a nonexclusive license is not effective under subsection (a):

(1) Ssubject to paragraph (b)(2), the creation , perfection, or enforcement is effective only to the extent that it does not result in an actual transfer or change of the use or possession of, or access to, the information, or a result not consistent with the limitations of Section 2B-502(a) delegation of a material performance or obligation of the licensee other than as to the obligation to make payments to the licensor; and

(2) in the event of a breach of contract by the licensee, as between the financier and the licensee, the financier has a right under Section 2B-715 to prohibit the licensee from using the information covered by the financier's interest and the financier may take possession of copies of the information or related materials covered by its interest only if the licensor consents or the conditions of Section 2B-502(a)subsection (a) are met.

(c) A financier that creates or enforces an interest and any transferee of the financier is subject to the terms and limitations of the license and to the licensor's intellectual property rights. The financier and may not use, sell, or otherwise transfer rights in the license or copies ofor the information or access to the information unless the conditions of subsection (a) are met as to enforcement of the interest.

(d) The creation or enforcement of a financier's interest imposes no obligations or duties on the licensor with respect to the financier.

Committee Action:

a. Consensus that Article 2B should allow creation of limited rights in licensee side of non-exclusive licenses, but not permit sale and the like without consent of the licensor.

Reporter's Notes:

[Changes were made to avoid a number of drafting problems that produced either unintelligible or inappropriate results based on prior Committee discussion. Changes here correspond to changes in 2B-502 and 2B-503. In subsection (a), for example, the changes avoid the apparent interpretation that "enforcement" (in any manner) would be allowed if "creation" would not violate the restrictions of 502 and 503. Enforcement, such as through sale, of course, involves very different considerations and, while creation might not improperly delegate rights, repossession and sale may very well do so. As redrafted, the creation and the attempted enforcement must each pass under the standards outlined in this Article.]

1. This section reflects the general approach of Article 2B of combined treatment of security interests and financing leases in an integrated treatment. The definition of "financier" covers both secured parties and lessors. See 2B-102.

2. As redrafted, subsection (a) makes clear that, in general, a financier's interest can be created in any contractual right that can be transferred and that, in all other cases, consent by the other party to the contract makes transfer possible, but that the act of creating a security interest and the act of enforcing that interest are separable events. Unlike in sales of goods, licenses create a situation where three parties have an interest in what happens to the property and the contractual rights associated with it: the lender, the debtor and the licensor. In many cases, the licensor's rights are dominant. Thus, a critical limit on enforcement and, except for non-possessory interests, creation of a financier's interest lies in 2B-502(a) which disallows transfers that impinge on licensor interests of the type described therein.

3. For non-exclusive licenses, the transferability of a licensee's rights is even further constrained in law by federal policy limitations that presume non-transferability without licensor consent. See 2B-502(b). This Article pushes the scope of secured lending in the absence of licensor consent as far are possible in light of that strong contrary and preemptive federal policy. It assumes that the license is non-assignable and personal for reasons noted in the cases cited in Section 2B-502 notes, but tailors a right to create a security interest without the licensor's consent in a manner that avoids preemption by satisfying the policy interests that underlie the basic non-assignability principle. Thus, while an interest can be created, it cannot, without the licensor's consent, result in an actual change of control, access or use or any sale. This preserves the licensor's protected interest under federal law in controlling the resale market and the identity of the licensee to whom it transfers rights in its intellectual property. See Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996).

4. The approach is modeled after Article 2A-303(3) which limits the enforceability of lease provisions restricting security interests in the lessee's interests. It applies here to both a contract clause and to a non-exclusive license that contains no such clause because, unlike in leases, the underlying law does not routinely allow assignment of the licensee's interest. The comments to Article 2A-303 state: "[The] lessor is entitled to protect its residual interest in the goods by prohibiting anyone other that the lessee from possessing or using them." Article 2A-303, Comment 3. As in Article 2A, the licensor (lessor) has a right to control who is in effective possession (including use and access) of the subject matter of the license. In many cases, this will preclude repossession or sale without the licensor's consent. It does not prevent repossession and sale if the licensed rights would be transferable under 2B-502 and 2B-503.

5. The provisions here allow creation of a security interest in many cases because mere creation does not make an actual change of possession, use, or access, nor does it delegate obligations. The argument against preemption is that "creating" a security interest does not "transfer" or assign the interest under the license. The Everex case indicated that one aspect of the federal policy was that the intellectual property rights holder has a protected interest in restricting the use of its intellectual property by persons other than those it specifically authorizes. The approach in this draft draws a balance that allows full pursuit of that federal policy, but gives substantial scope to the state law policy of allowing creation of security interests. The same would not be true, for example, with a rule that allows all assignment of rights under the other section of transferability, a rule that would be specifically subject to preemption.

6. The draft also parallels Article 2A in providing that the secured lender and any transferee take subject to the terms of the original license. The license is the dominant document in that it defines the licensee's rights. A lender does not have the ability to abrogate those rights and the limitations that are attached to the rights.

7. The result of the financing provisions allow creation of a security interest in any case where creation, in itself, alters none of the actual interests of the parties. When it comes to enforcement of the interest, however, the lender's rights are subordinate to actual interests of either party and to federal policies about transferability. The effect of the provisions is illustrated in the following examples.

Illustration 1. Financing a Licensor's Interest.

Creditor desires to finance the licensor's interest in a commercial license. To determine whether it can do this, the creditor must make the following determinations: a) under 2B-502(a) would creation of the interest make a change that impinges one or more of the interests listed there; b) if not, under Section 2B-503 is there an enforceable no transfer provision that precludes creation of the interest without consent; c) if not, then the interest can be created under 2B-504(a). However, if the transfer is precluded by either of the above, no security interest can be created.

If an interest can be created, the lender would make the same analysis in reference to enforcement (e.g., repossession or sale). The issues are different, of course, since repossession or sale precludes some further uses and changes the party in control in a way that may adversely impact the licensee. The result of the analysis would depend on the licensor's personal role in the on-going license. In cases of fully paid up, [perpetual licenses, enforcement would not be barred unless, for example, it threatens trade secret rights of the licensee.

Illustration 2. Financing the Licensee in a Commercial License.

Assume creditor desires to finance the licensee's interest in a commercial, non-exclusive license. It would ask the following questions: a) is the creation of the interest blocked by 2B-502(a) in that it would cause an inappropriate delegation, deny the return expected by the licensor, or otherwise adversely impact the interests listed there; b) if the interest is permitted under 2B-502(a), it is still prohibited under 2B-502(b) unless it falls into one of the exceptions there (mass market, or title without contract restriction); c) if it is not within an exception, the Creditor would not need to consult 2B-503, if it did so, however, and there was a contractual limitation on creation of an interest or on transfer, that contract terms is effective since creation of an interest is barred under 2B-502; d) if creation is barred under either 2B-502 or 2B-503, 2B-504(b)(1) still permits creation of an interest if this does not violate 2B-502(a) or change possession, use or control of the information.

In most cases, the net of these provisions allows creation of an interest in a non-exclusive license, but this does not permit the full panoply of enforcement. The analysis must be repeated for any effort to enforce the interest. Enforcement will involve different issues because it changes possession or use. The first stages of analysis are the same. If repossession or sale is barred under 2B-502 or 2B-503, which it will ordinarily be, 2B-504(b) may not alter that result as to enforcement. Under (b)(1) enforcement is not permitted if it changes possession or use. Section (b)(2) is an over-ride that allows taking possession (but not sale) and barring use, but only if these acts do not violate the rules of 2B-502(a). In effect, enforcement without licensor consent cannot occur if it adversely affects the licensor's interest, including an adverse effect by making the licensor's return less likely to be received. In end user softw3are, this will often allow a court order to prevent use under (b)(1), but may will not allow repossession. Section (b)(2) does not authorize enforcement by sale in a licensee situation in any case without the licensor's consent.

Illustration 3. Financing an Entertainment Licensee Interest.

Assume that the commercial license in Illustration 2 involves a distribution license for a motion picture. Under 2B-502(a), while creation of an interest in the licensee rights may not be barred, any enforcement of those rights without consent would typically be barred because it would change (increase) the risk of the licensor not receiving a return expected from the contract. This is true regardless of the presence or absence of contract provision. Under Section 2B-504, creation of the interest may be permitted under (b)(1), but typically, no enforcement would be permitted because enforcement (barring use, taking possession) would adversely effect the return and other interests of the licensor.

Illustration 4. Financing a Mass Market Licensee Interest.

The treatment of a mass market license parallels other non-exclusive licenses, except that the exception stated in 2B-502(b) shifts the presumptions and, at least if the definition of mass market focuses on anonymous, true retail transactions where the licensee identity is not relevant, the nature of the product will often eliminate a major limitation on transfer. Section 2B-504(a) requires analysis under 502 and 503. Under 2B-502 and 2B-503, a lender can create an interest in a mass market license if the creation of the interest does not result in a 502(a) injury to the licensor. Under these same sections, a lender can enforce the interest if a) enforcement does not violate 2B-502(a) and b) enforcement is not barred by a contract provision against enforcement or transfer. If either of these conditions preclude enforcement, the focus shifts to 2B-504(b). This section does not allow sale, but does allow creating an interest and enforcement that does not violate 502(a). In effect, in the true mass market the lender can create and enforce its interest unless the licensor contractually bars transfer, in which case, creation is still allowed. This solution works so long as the idea of mass market does not encroach too strongly into commercial transactions.

SECTION 2B-505. EFFECT OF TRANSFER OF CONTRACTUAL RIGHTS.

(a) A transfer of a party's rights under a contract is a transfer of contractual rights subject to the restrictions on use of the information contained in the contractagreement on the exercise of those rights and, unless the language or the circumstances indicate to the contrary, such as in a transfer limited to creating an financier's interest, the transfer is a delegation of duties by the transferor. Acceptance of the transfer constitutes a promise by the transferee to perform the duties of the transferor. The promise is enforceable by the transferor or any other party to the contract.

(b) A transfer of contractual rights does not relieve the transferor of any duty under the contract to pay or perform, or of liability for breach of contract, except to the extent the other party to the original contract agrees.

Uniform Law Source: 2-210; 2A-303.

Committee Action: Discussed in November, 1996, without substantial comment.

Reporter's Note:

1. This section implements a policy in current Article 2 and Article 2A. The recipient of a transfer is bound to the terms of the original contract and that obligation can be enforced either by the transferor or the other party to the original contract.

2. This section clarifies that an effective transfer (assignment or otherwise) of rights under a contract constitutes a transfer of those contract rights and, a delegation of duties if accepted by the transferee. This language follows Article 2 (which uses the word assignment) and Article 2A (which refers to transfers).

3. Subsection (b) also follows current law and provides that the transfer does not alter the transferor's obligations to the original contracting party in the absence of a consent to the novation.

SECTION 2B-506. DELEGATION OF PERFORMANCE; SUBCONTRACT.

(a) A party may delegate or subcontract to another person performance of its contractual obligations unless:

(1) transfer would be prohibited under Section 2B-503,

(2) the other party otherwise has a substantial interest in having the original promissor perform or directly supervise or control the performance, or

(3) the contract prohibits delegation or subcontracting.

(b) Delegation or subcontracting does not relieve the delegator or subcontractor of any duty under the contract to pay or perform, or of liability for breach of contract, except to the extent the other party to original contract agrees.

Committee Action:

Reviewed in November, 1996, without substantial comment except that adjustments should be made to clarify that the section is subject to restrictions on transfer.

Uniform Law Source: Section 2-210; Section 2A-303.

Reporter's Notes:

1. Delegation or subcontracting of performance refers to a party's ability to use a third party in making an affirmative performance under an information contract. It does not refer to authorization or other allowance of third party exercise of rights in licensed information. pursuant to in a contract is generally allowed. In both cases, while the performance may be made by the delegee, the original; party remains bound by the contract and responsible for any breach thereof. The ability to delegate performance must be read in contrast to the general limitations on transferability of non-exclusive licenses under in 2B-502. A delegation or subcontract works a transfer equivalent in substance to a transfer or assignment of

2. The ability to delegate is subject to contrary agreement. Thus, a contract that permits use of licensed information only by a named person or entity controls and precludes delegation. The result in such cases is determined by both the general principle that contract terms control and the more specific principle that the other party has, by the contract, expressed an interest limiting performance to the designated party.

3. In the absence of a contractual limitation, delegation can occur unless the circumstances come within one of three conditions are met. The first condition that prevents delegation arises if the transfer of an interest would be precluded under 2B-503. That section disallows transfers in cases where the contract prohibits such action. The second condition, arises if the contract is silent but the other party has a substantial interest in having performance rendered by the person with whom it contracted. Obviously, a party has a substantial interest in having the original party perform if the delegation triggers the restrictions outlined in 2B-502(a). On the other hand, neither of these provisions would deny a right to delegate or subcontract performance in a mass market transaction where, under Section 502, can be freely transferred by the licensee.

SECTION 2B-507. PRIORITY OF TRANSFER BY LICENSOR.

(a) A licensor's transfer of ownership of intellectual property rights, other than by the creation of a financier's interest, is subject to a previous nonexclusive license if that license was in a record authenticated and executed by the licensor before the transfer of ownership.

(b) A financier's security interest created by a licensor or a transfer of ownership of intellectual property rights under a financier'ssecurity interest in information or in copies of the information is subordinate to a nonexclusive license which was:

(1) authorized by the secured party;

(2) documented in a record authenticated executed by the licensor before the security interest was perfected; or

(3) transferred in the ordinary course of the licensor's business to a licensee that acquired the license in good faith and without knowledge that it was in violation of the security interest.

(c) For purposes of this section, a transfer of ownership or of a financier'ssecurity interest occurs when the transfer is effective between the parties, but, if applicable intellectual property law requires filing or a similar act to obtain priority against other transfers, the transfer does not occur until the date on which priority begins under that law after the filing or similar act occurs.

Uniform Law Source: Section 2A-304. Revised.

Selected Issues:

a. Should the Article provide a rule about transfer of intellectual property ownership that is subject to contrary federal intellectual property law when applicable as has been suggested?

Reporter's Note:

1. This is an area heavily influenced by federal copyright law as to copyright interests and the provisions here attempt to trace that influence while providing maximum state law recognition for traditional UCC priorities. As to transfers of ownership and, arguably, security interests, federal law may preempt state law in reference to federal intellectual property rights. There is no such preemption in reference to data, trade secrets and other non-federal rights. For security interests and their relationship in terms of priority to the rights created under an intangibles contract, the priority questions might be dealt with in this article as was done in Article 2A or they may be dealt with in Article 9. Subsection (a) deals with general priorities. Subsection (b) deals with the priority of a security interest in conflict with a non-exclusive license.

2. Under the Copyright Act, a prior non-exclusive license is subordinate to a later transfer of copyright ownership unless the license is in a signed writing. This rule, while awkward and somewhat inconsistent with modern trends, was made part of the Copyright Act in 1976; there are no indications of probable repeal. The restatement of that rule here alerts persons who engage in commercial transactions about a priority rule that may not otherwise be expected. This avoids traps for unwary licensees. Note, however, that by using the new terms "record" and "authentication" this section are not yet explicitly adopted in federal law.

Illustration 1: Computer Associates sells the copyright in its data compression program to Major Holdings Corp. Five days before that sale, Computer Associates entered a non-exclusive license with Boeing Corp. for a 100 user site license, which license was in an unsigned form. Three days after the sale, Computer Associates entered a non-exclusive site license with Standard Corp. Under subsection (b) and under federal law, the licensees' rights to copy (e.g., use) the software are subordinate to the copyright ownership of Major.

Illustration 2: Lotus enters into a non-exclusive distribution license with Distributor, allowing Distributor to make and distribute copies of 1-2-3 Spreadsheet in the mass market subject to a standard form license for end users. Later, Lotus sells the copyright in 1-2-3 to Taylor. After the sale, Distributor provides a copy of 1-2-3 to Smith, who assents to the license. If the distribution license was a signed writing, the distribution was authorized by the license which has seniority over Taylor. Smith has priority over Taylor because it took through the valid license. If the distribution license was not a signed writing, Taylor's purchase is senior to that license and Smith is not an authorized user.

3. Subsection (b) also presents a preemption problem under federal copyright law, but the case for preemption is less clear since the UCC generally controls priorities and other aspects of law relating to security interests and the federal concerns in the priority statute are more focused on title transfers. This section does not take a position on whether a security interest should be filed in federal or state records systems; it simply refers to perfection of the interest. It adopts priority rules for a security interest in conflict with a nonexclusive license that parallel priority positions in current Article 9. The goal is to facilitate use of secured lending related to intangibles by creating provisions that enable the licensor whose intangibles are encumbered to continue to do business in ordinary ways.

4. Article 2A deals with the priority conflicts that arise when the licensor or owner transfers to a third party an interest in the property that is subject to a lease. The focus in such cases is on relating the rights of the transferee to the rights of the lessee in the particular item. That situation does not arise in intangibles involving two nonexclusive licenses since intangibles can be licensed an infinite number of times and each licensee receives the same rights. In contrast, if there is a transfer of ownership of the information there may be a conflict between the transferee and the licensee. There are two types of priority conflicts in such cases and modern law lacks clear guidance or commercially viable solutions. One conflict is between two transferees of ownership. The other is dealt with in this section: conflicting claims of a nonexclusive licensee as against a transferee of ownership rights, including a secured party.

5. For rights not created by federal law, the priority issue raised is a question of state law. The same is apparently true for rights that arise under federal patent law. The Patent Act contains provisions that deal with the respective priority of transfers of patent ownership. A nonexclusive license is not a transfer of ownership and the relationship between the nonexclusive licensee and a transferee of a patent is not dealt with in current federal law. The situation is different in copyright law. Section 205(f) of the Copyright Act provides:

A nonexclusive license, whether recorded or not, prevails over a conflicting transfer of copyright ownership if the license is evidenced by a written instrument signed by the owner of the rights licensed or such owner's duly authorized agent, and if:

(1) the license was taken before execution of the transfer; or

(2) the license was taken in good faith before recordation of the transfer and without notice of it.

17 U.S.C. ' 205(f). There is no case law under this provision. Significantly, however, the provision does not allow a license made after recordation of the ownership transfer to attain priority under any conditions. Also, an unwritten license will lose even to a subsequent transfer of ownership if this section is regarded as a comprehensive priority rule.

6. Copyright Act ' 205(f) can be viewed as a comprehensive rule of priority (e.g., an unwritten license never superior to a transfer of ownership and the priority status of a written license entirely controlled by Section 205(f)). Alternatively, one might view it as a minimum condition for a particular result (e.g., that a written nonexclusive license has priority under specified circumstances, but not suggesting that these are the only conditions under which this is true). This draft adopts the view that the priority rule states a minimum and does not establish a comprehensive rule. Thus, as a matter of enacted federal policy, a nonexclusive license prevails in the listed situations, but a nonexclusive license in cases not covered by Section 205 is not controlled by federal law. A contrary interpretation would mean that all mass market licenses currently are subject to being overridden by any subsequent transfer of the underlying copyright since many of these transactions may not qualify as involving a writing signed by the owner of the copyright. Clearly, an assignee of the copyright to Word Perfect software should not be able to sue pre-existing Word Perfect licensees for continued use of the program without a license from the current owner. Even if this position is not correct, the priority rules here would apply to all intangibles other than copyrights, leaving a wide variety of important situations to be addressed here.

SECTION 2B-508. PRIORITY OF TRANSFERS BY LICENSEE.

(a) In a license, a creditor or other transferee of a licensee acquires no interest in information, copies, or rights held by the licensee unless the conditions for an effective transfer under this article and the license are satisfied, and if the transfer is effective, the creditor or other transferee takes subject to the terms of the license.

(b) Except for rights under trade secret law, a person that acquires information that is subject to the intellectual property rights of another person acquires only the rights that its transferor was authorized to transfer by the owner of the intellectual property rights or its agent as such rights were limited under the license.

Uniform Law Source: Section 2A-305

Committee Action: This section was considered in November, 1996, without substantial comment.

Reporter's Notes:

1. A license, previously created, governs rights in the information and in copies thereof. A transferee acquires only the rights that the license allows. As a general principle, a license does not create vested rights and is not generally susceptible to free transfer in the stream of commerce. Subsection (a) is generally consistent with Article 2A.

2. Subsection (b) states an important principle, mandated under current intellectual property law. The idea of entrustment, which plays a major role in dealing with goods, has less role in intangibles covered by patent or copyright law, since the value involved resides in the intangibles and the concept of possession being entrusted in a manner that creates the appearance of being able to reconvey the valuable property is not ordinarily a relevant concern. Intellectual property law does not recognize a buyer in the ordinary course (or other good faith purchaser) as taking greater rights than the information or copy than were authorized to be transferred. While copyright law allows for a concept of "first sale" which gives the owner of a copy various rights to use that copy, the first sale must be by a party authorized to make the sale under the terms provided to the buyer.

Illustration 1: Correll transfers copies of its software to DAC a distributor. DAC is licensed to transfer the software for educational uses only. DAC transfers a copy to Mobil Oil for use in a business application. Mobil has no knowledge of the Correll license restriction. DAC breached its contract and its distribution also constitutes copyright infringement. Mobil's copying (use) of the software is not authorized under copyright law since it did not receive an authorized distribution. The remaining question is whether Mobil should be subject to a contract action for violating the license in the DAC contract. This section takes no position on the issue.

3. Transfers in a chain of distribution that exceed a license or that otherwise are unlicensed and unauthorized by a patent or copyright owner create no rights of use in the transferee. A transferee that takes outside the chain of authorized distribution does not benefit from ideas of good faith purchase, but its use is likely to constitute infringement. As to software, this established principle was enforced by the court in Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (ED NY 1994). A retailer that obtained copies of software from third parties argued that the distribution was not a violation of copyright because it in good faith believed that it obtained the copies of the software through a first sale from an authorized party. The court held that there is no concept of good faith purchaser under copyright law and that the buyer cannot obtain any greater rights than the seller had. In the case where the seller is neither an owner of a copy or a person acting with authorization to sell copies to third parties, no first sale occurs and the "buyer" is subject to the license restrictions created under any license to the third party seller. In one instance, the defendant had purchased from a licensee who was authorized to transfer the Microsoft product in sales of its machines. In fact, however, it purported to sell the product as a stand alone. This clearly exceeded the license to it and the mere fact that the alleged buyer acted in good faith did not insulate it from copyright liability. "Entering a license agreement is not a "sale" for purposes of the first sale doctrine. Moreover, the only chain of distribution that Microsoft authorizes is one in which all possessors of Microsoft Products have only a license to use, rather than actual ownership of the Products." See also 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).

4. This section does, however, allow for a bona fide purchaser in reference to trade secret claims. The essential feature of a trade secret resides in enforcing confidentiality obligations. Where a party takes without notice of such restrictions, it is not bound by them and, in effect, is a good faith purchaser, free of any obligations regarding infringement except as such exist under copyright, patent and similar law.

5. Article 2A provides that a buyer from a lessee generally acquires only the "leasehold interest in the goods that the lessee had or had power to transfer, and takes subject to the existing lease." Section 2A-305(1). The exception to these principles in Article 2A occurs in the case of a buyer (or sublessee) from who acquires in the "ordinary course" of the lessor-seller's business. The buyer here takes free of the lease under theories of entrustment. For a buyer to acquire these rights, however, it must purchase from a "person in the business of selling goods of the kind." In effect, the goods were entrusted to a sales business. Also, the buyer must be in good faith and without knowledge that the sale violates the lease or ownership rights of the lessor.

SECTION 2B-601. PERFORMANCE OF CONTRACT.

(a) A party shall perform in a manner that conforms to the contract and, in the absence of contractual terms, in a manner and with a quality that is reasonable in light of the circumstances including the ordinary standards of the relevant business, trade or industry.

(b) A party's duty to perform, other than with respect to contractual use restrictions, is contingent on the absence of an uncured material breach by the other party of obligations or duties that precede in time the party's performance.

(c) In a mass-market transaction, if the performance consists of delivery of a copy on a physical medium which constitutes the initial [transfer] [activation] of rights, the licensee may refuse the performance if the performance does not conform to the contract.

(d) If a party is subject to contractual use restrictions or required to render other future or on-going performance, the party's rights to exercise its rights under the contract areis contingent on the absence of an uncured material breach of the obligations or duties of that party.

(e) If a party breaches its obligations or duties, including by failure to comply with a contractual use restrictions, the aggrieved party may:

(1) suspend its performance, other than compliance with contractual use restrictions, and demand assurance of future performance pursuant to Section 2B-621; or

(2) exercise its rights on breach of contract under this article or the terms of the agreement, but the aggrieved party must continue to comply with contractual use restrictions and may cancel only if the agreement so provides or the breach is material and has not been cured.

(f) "Contractual use restrictions" include obligations of nondisclosure and confidentiality and limitations on scope, manner, method, or location of use to the extent that those obligations or duties are created by the contract.

Uniform Law Source: Restatement (Second) of Contracts ' 237. Substantially revised.

Committee Vote:

a. Motion to make an exception to the material breach rule for mass market contracts on the issue covered by Article 2 (the right to reject a transfer of rights). Adopted 12-0

b. Voted 10-3 to use mass market license, rather than consumer in this section.

Reporter's Notes:

1. Subsection (a) states a generalized default rule which basically requires a court to look to reasonable commercial standards in any case not otherwise governed by the contract or by provisions of this Article as to default terms.

2. Subsection (b) adopts the theme of material breach (or substantial performance) as the measure of the right to cancel or refuse a performance except in reference to certain mass market transactions. As is described in the Restatement, that rule holds that a duty to perform is contingent on the prior performance by the other party without a material failure of performance. Restatement. Restatement (Second) of Contracts ' 237 states: "[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." This is also the common law rule. In subsection (b), it is made clear that the contingent relationship does not refer to situations involving contractual use restrictions. A breach of a license by the licensor does not give the licensee unfettered rights to act in derogation of the licensor's ownership rights in the intellectual property and the use restrictions that these support.

This section sets out basic default rules. The model treats the performance of the parties as being mutually conditional on the substantial performance of the other party. Other sections dealing with specific types of contract supplement these with more specific provisions that enhance and amplify the general rules, but displace them only if there is a conflict.

3. The decision to adopt a material breach concept places Article 2B parallel with common law and the modern international law of sales (except in the mass market which is kept in line with current Article 2 rules). The Convention on the International Sale of Goods (CISG) refers to "fundamental breach," which it defines as: "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." CISG Art. 25. The UNIDROIT Principles of International Commercial Law state: "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." UNIDROIT art. 7.3.1(1). Article 2 and Article 2A stand essentially alone in modern transactional law in requiring so-called "perfect tender." Even then, these statutes do so in reference to a single fact situation only: a single delivery of goods not part of an installment contract. Outside that single context, the use of materiality as a performance standard for when the reciprocal performance is not required is virtually unanimous.

Illustration 1: Tom Jones has agreed to develop systems software for DNY. DNY promises to pay the purchase price of $300,000 in three installments once every three months. Jones fails to complete stage 1 in month 2 and this failure is material. When the first payment is due, if the failure remains uncured, DNY is not required to pay. It can cancel the contract or seek assurances of performance. To alter this result would require an express agreement severing the obligation to pay from the performance of the deliveries.

5. The concept is simple: A minor defect in the transfer does not warrant rejection of performance or cancellation of a contract. Minor problems constitutes a breach of contract, but the remedy is compensation for the value lost. The objective is to avoid forfeiture based on small errors and to recognize that, especially if performance involves ongoing activity, fully perfect performance cannot be the expected norm. This is especially true in information contracts. Software often contains "bugs" or imperfections. Information services often entail small errors and incompleteness. The policy choice here adopts general law and allows a party whose performance has minor errors to expect performance by the other party; subject, in appropriate cases, to offsets and compensation for the problems.

6. The substantial performance rule does not hold that substantial (but imperfect) performance of a contract is not a breach. Substantial (but imperfect) performance is a breach of contract. The significance of substantial performance lies in the remedy for the injured party. Substantial performance is sufficient to trigger the injured party's obligations to perform. Unless a breach is material, it cannot be used as an excuse to void or avoid the contract obligations. A licensee who receives substantial (but imperfect) performance from the licensor, cannot reject the initial tender or cancel the contract on that account, but it can obtain financial satisfaction for the less than complete performance.

7. This section creates a carve out of perfect tender in mass market transactions with respect to tender of deliver of a copy other than in an installment contract setting. This tender rule does not mean that the tendered information is in fact perfect, but that it meet the general contract description in light of ordinary expectations and trade use. As in Article 2, this rule applies only to tender of a copy and the resulting duty to accept or right to refuse the tender that is the single performance in the transaction (e.g., delivery of a television set, delivery of the diskette containing the software). As under current law, however, substantial performance rules apply in reference to on-going performance for both parties, services such as continuous access, and deliveries of a series of copies in an installment contract.

8. Article 2 applies a "perfect tender" rule to only one setting: the initial tender (transfer) of goods in a contract that does not involve installment sales. Article 2 does not allow the buyer to assert a failure of perfect tender in an installment contract (that is, a contract characterized by an ongoing relationship). Even in a single delivery context, the theory of perfect tender is hemmed in by a myriad of countervailing considerations. As a matter of practice, a commercial buyer cannot safely reject a tendered delivery for a minor defect without considering the rights of the vendor to cure the defect under the statute or under commercial trade use. White and Summers state: "[we found no case that] actually grants rejection on what could fairly be called an insubstantial non-conformity . . ." Indeed, in one case involving software, a court applied a substantial performance test to a UCC sales transaction. See D.P. Technology Corp. v. Sherwood Tool, Inc., 751 F. Supp. 1038 (D. Conn. 1990) (defect was slight delay in completion coupled with no proven economic loss).

9. Definitions in Section 2B-102 make "substantial performance" and "material breach" mirror image concepts. Material breach is defined in Section 2B-108 and is discussed in the Reporter's Notes to that Section. The definition largely adopts the definition in the Restatement (Second) of Contracts ' 241, adding some specificity related to this commercial context. This article rejects the less fully explored language used in Article 2A (and some parts of Article 2) which refers to breaches that "substantially impair" the value of a contract to the injured party. A material breach is a breach that significantly damages the injured party's receipt of the value it expected from the contract, but reliance on language that is common in general law and legal tradition enables this article to fall back on themes that courts are familiar with, rather than on language in other UCC articles that has not been well explored in case law.

SECTION 2B-602. SUBMISSIONS OF INFORMATIONAL CONTENT.

(a) If a party submits informational content to a licensee under an agreement that requires that the information be to the subjective satisfaction of the licensee, the following rules apply:

(1) Sections 2B-607 through 2B-613 and 2B-619 do not apply.

(2) If the informational content is not immediately satisfactory to the licensee, the parties may engage in efforts to correct the deficiencies over a period of time and in a manner consistent with the ordinary standards of the trade or industry.

(3) Neither refusal nor acceptance of the submitted informational content occurs unless the licensee makes an express, affirmative indication of refusal or acceptance of the submission to the licensor.

(4) Refusal of the submitted informational content terminates the agreement and does not constitute a breach of contract.

(b) If a person submits informational content or an idea other than pursuant to an agreement, the following rules apply:

(1) No contract or obligation arises or is implied from the mere receipt of an unsolicited disclosure of an idea for the creation, development or enhancement of information. 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.

(2) If and the recipient notifies the person making the submission that it maintains a procedure to receive and review such submissions, no contract is created unless the information or idea is submitted and accepted pursuant to that procedure or the recipient expressly agrees to contractual terms concerning the submission.

(c) Unless a term in the agreement expressly provides otherwise, an agreement to disclose an idea for the creation, development or enhancement of information does not create and enforceable if the idea is not confidential, concrete or novel to the trade or industry.

Prior Uniform Law: None.

Reporter's Notes:

Subsection (b) and (c) have been added to and expanded to deal with an issue of importance to all of the industries involved in this article. They set out standards for the formation of an enforceable agreement associated with the submission of ideas to a potential licensee. These sections will be moved to the 200 series of sections, but are left here to enable the Committee to review them prior to annual meeting. Subsection (b) adopts procedures to determine the basic creation of obligations around the submission of information and ideas. Subsection (c) resolves a national split of case law about when an idea disclosed creates an enforceable obligation. In the cases identified, the contract in essence fails for lack of consideration under the body of case law adopted here.]

1. This section deals with a problem that was raised recurrently during the discussion of the Committee concerning the carrying forward of Article 2 rules concerning tender, acceptance and rejection into situations involving the informational content industries where practices are much different that in traditional sales of goods. The Section solves that conflict by carving out content submissions from the circumstances involved in reference to tender of a required performance in other respects.

2. For transactions involving traditional book and publishing upstream agreements, the solution lies simply in recognizing that the submission of a manuscript, even pursuant to an agreement, does not represent a tender of performance analogous to that involving a delivery of goods that requires immediate acceptance or rejection. Rather, the delivery of informational content in this context triggers a process that typically centers around the fact that the licensee has the right to refuse if the content does not satisfy its expectations. Once that fact is recognized, the inapplicability of the various rules on acceptance and the like becomes apparent. The provisions of subsection (a) attempt to capture basic principles of content submission in such case, but need to be reviewed by members of the industry for relevance and desirability.

3. An important aspect of the difference in the two circumstances lies in subsection (a)(3) where it is made clear that only an explicit refusal or acceptance satisfies the standard of acceptance in this setting since, by presumption, the circumstances are keyed to the subjective satisfaction of the receiving party.

4. 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-603. [TRANSFER] [ACTIVATION] OF RIGHTS; LICENSOR'S OBLIGATIONS.

(a) Subject to Section 2B-601, the The licensor shall complete the initial [activation of rights.] [transfer of rights] The licensor completes is obligations with respect to the initial activiation of rights when it completes the activiationn of rights and gives its direct licensee licensee any notice reasonably necessary to make it aware of that occurrence in a commercially reasonable manner. [A transfer of rights] [An activation of rights] occurs when, pursuant to a contract, a licensor completes the acts required to make information available to a licensee and gives the licensee any notice reasonably necessary to make it aware of that occurrence.

(1) If applicable intellectual property law requires or allows the filing of a record to establish the priority of a transfer of ownership of intellectual property rights and a transfer of ownership is contemplated by the agreement, then on request by the licensee, the licensor shall deliver a record sufficient for such purpose.

(2) If no act is required to make information available, the [transfer of rights] [activation of rights] occurs when the contract becomes enforceable between the parties.

(b) If information is made available by delivery of a copy, the following rules apply:

(1) If the contract is silent as to delivery:

(A) except as provided in subsections (2) and (3), in a physical deliverytransfer of a tangible copy on a physical medium, the licensor shall make the copy available to the licensee at the licensor's place of business or, if it has none, its residence, but, if the copy is identified at the time of contracting and located elsewhere, the licensor shall make the copy available at that place; and

(B) in a deliverytransfer of a copy by electronic means, the licensor shall make the information available in an information processing system designated by the licensor and shall provide the licensee with authorization codes, addresses, acknowledgments, or any other materials necessary to obtain the information.

(2) If the contract requires or authorizes delivery of a copy held by a third party to be delivered without being moved, the licensor shall deliver any documents, authorizations, addresses, access codes, or other materials necessary for the licensee to obtain the copies.

(3) If the contract requires or authorizes the licensor to send a copy of the information to the licensee or a third party but does not expressly require the licensor to deliver it to a destination:

(A) in a physical deliverytransfer of a tangible copy on a physical medium, the licensor shall put the copy in the possession of a carrier, make such arrangements as are reasonable for transportation to the licensee or the third party with the expenses of the shipment to be borne by the licensee, and deliver any documents necessary to obtain the copies from the carrier; and

(B) in a deliverytransfer of a copy by electronic means, the licensor shall initiate an appropriate transmission of the information to the licensee or a third party.

(c) If [a transfer of rights] [an activation of rights] is to occur by making access available to a licensee or providing the licensee with access to a facility containing the information, the licensor shall complete such acts as are necessary to make access available, including providing the licensee with any documents, authorizations, addresses, access codes, acknowledgments, or other materials necessary for the licensee to obtain access.

(d) In an electronic transmission or delivery, information providedmust be made available in a manner consistent with the technological capabilities of the receiving party known to the licensor or the ordinary methods in the business, trade or industry for transfers of the particular kind.

Uniform Law Sources: 2-401, 509(a), 308

Reporter's Notes:

[Subsection (a) was edited to reflect the changed language reference to "activation" as contrasted to "transfer" of rights and to indicate that this is a timing issues. Language in (a)(1) was added at the suggestion of the motion picture industry to coordinate with federal intellectual property recording rules.]

1. This section brings together various rules defining the obligations of the licensor relating to completion of its obligation to activate the rights provided for under the contract. The section corresponds to Section 2B-606 which deals with tender of performance

2. The section corresponds to the treatment of title and delivery in Article 2. While title itself is not a key concept in article 2, the seller's obligations for delivery correlate to obligations relating to title transfer and risk of loss. In article 2B, title and delivery are less significant. The keys are transfers of rights which involve making information available to the transferee. The default rules here correspond to standards in Article 2 relating to delivery and title transfer, but they account for transactions involving access and electronic transfers.

3. These are default rules and are thus subject to contrary terms of agreement.

4. Subsection (b)(1) distinguishes between physical delivery and electronic delivery of a copy. In both cases, consistent with current law in Article 2, the obligation consists of making the copy or access to making a copy available to the transferee. In development or similar contexts, contrary agreement often occurs (e.g., by requiring installation or testing on site). Under Article 2, despite similar fact settings, current law chose an approach that effectively corresponds to so-called shipment contracts. Absent contrary agreement, the assumption is that the licensor (or seller in Article 2) is not obligated to transport without charge the material to the licensee's location.

SECTION 2B-604. PERFORMANCE AT SINGLE TIME. If it is commercially reasonable to render all of one party's performance at one time, the performance is due at one time and the other party's reciprocal performance is due only on tender of the entire performance.

Uniform Law Source: Section 2-307.

Committee Action: This section was reviewed in November without substantive comment.

Reporter's Note:

The section adopts an approach found in both ' 2-307 and common law as described in the Restatement (Second) with reference to the relationship between performance and payment in cases where performance can be rendered at a single time. It adds the qualification that the ability to so perform must be gauged against standards of commercial reasonableness. The section does not affect the treatment of contracts calling for delivery of systems in modular form or for contracts that extend performance out over time, such as in data processing arrangements. In each of these cases, the performance of the one party cannot be completed at one time.

SECTION 2B-605. WHEN PAYMENT DUE.

(a) If a party has the right to make or demand performance in part or over a period of time, payment, if it can be apportioned, may be demanded for each part performance.

(b) If payment cannot be apportioned or the agreement or circumstances indicate that payment may not be demanded for part performance, payment is due only on tender of completion of the entire performance.

Uniform Law Source: Restatement (Second) Contracts; Section 2-310.

Committee Action: Considered in November, 1996, without substantive comment.

Reporter's Note:

This Section follows current law in Article 2 and in the Restatement.

SECTION 2B-606. ACCEPTANCE: EFFECT.

(a) A party shall pay or render other performance required according to the contractual terms for any performance it accepts.

(b) The burden is on the party that accepted the performance to establish any breach of contract with respect to the performance accepted.

Uniform Law Source: Section 2-507.

Committee Action:

Considered in November, 1996, without substantive comment.

Reporter's Notes:

1. This section should be read in context of the right to revoke, the licensor's obligation to cure immaterial breaches, and the licensee's right to recoup from future payments even in the case of an immaterial breach where the amounts to be recouped are liquidated amounts. The additional language in new (b) is taken from current Article 2-607(4).

2. In the CISG, the remedies of the buyer do not depend on whether the buyer accepted the goods or not or whether revocation occurred. In cases of information content, the Committee should consider whether a similar model would be more appropriate. In cases of material breach, the licensee's right to recover what it paid or to avoid paying further should not hinge on questions of whether it has a right to revoke, but on a calibration of loss sustained compared to benefit received. Buyer remedies arise when the seller "fails to perform any of his obligations," Art. 45(1), and are preserved if proper notice is given. Art. 39(1). There is no rejection remedy in general and the buyer is obligated to pay the purchase price unless the contract can be avoided for "fundamental breach." Art. 25. This model more closely resembles the Restatement. The Article 2 Drafting Committee has considered and rejected use of this in lieu of the acceptance-rejection model on several occasions.

3. In cases of rejection, proposed Article 2 reflects this model in part by providing that "If the use of the goods is reasonable and is not an acceptance, the buyer on returning or disposing of the goods, shall pay the seller the reasonable value of the use to the buyer. This value must be deducted from the sum of the price paid to the seller and any damages " 2-605 (b)(2).

SECTION 2B-607. TENDER OF PERFORMANCE; RIGHT TO ACCEPTANCE.

(a) A tender of performance occurs when a party, with manifest present ability to do so, offers to complete the performance. If a performance by the other party is due before the tendered performance, the other party's performance is a condition to the first party's duty to complete the tendered performance.

(b) Tender of performance that substantially conforms to the contract entitles the party to acceptance of that performance. However, in a mass-market transaction, if the performance consists of the delivery of a copy which constitutes the initial activiationtransfer of rights, the licensee may refuse the performance if it does not conform to the contract.

(c) If performance entails delivery of a copy, is [a transfer of rights] [an activation of rights], a licensor shall tender first but need not complete the performance until the licensee pays and tenders other performance required at that time. Tender must be at a reasonable hour and requires that the licensor:

(1) notify the licensee that the information or copies of the information are available or have been shipped;

(2) tender any documents, authorizations, addresses, access codes, acknowledgments, or other materials necessary for the licensee to obtain access to, control over, or possession of the information; and

(3) hold the information, copies, and materials at the licensee's disposal for a period reasonably necessary to enable the licensee to obtain such access, control, or possession.

(d) Tender of payment is sufficient if made by any means or in any manner acceptable in the ordinary course of business unless the other party demands payment in money and gives any extension of time reasonably necessary to procure it.

Uniform Law Source: ' 2-510, 511(a)(b). Restatement (Second) of Contracts ' 238.

Committee Action:

a. Approved substantial performance rule in (b). (September, 1996)

Selected Issues:

a. Should full conformance to express performance standards or conditions by both parties be an exception to the substantial performance standard in (b)?

Reporter's Notes:

1. This section brings together various rules from existing Article 2.

2. Subsection (a) states a general principle of what constitutes tender. It is drawn from the Restatement. Unlike in Article 2, the performances here are not always actions relating to an offer to delivery goods and to pay for them. As a result, general language in (a) provides an important baseline.

3. Subsection (b) states the substantial performance rule and the mass-market exception. In contracts where the information must be to the satisfaction of the licensee, performance that is not satisfactory does not satisfy the condition stated in subsection (b) and creates no obligation to accept.

4. Subsection (c) chooses who goes first. Current law (2-511(1)) states that tender of payment is a precondition for the duty to tender or complete delivery. In this draft, the licensor, must tender first. The basic model is that tender of a performance means to offer to perform, and typically precedes actual performance. In reference to transfers of rights, Article 2B follows Article 2 by requiring tender, then payment, then completion. For tender, the circumstances must clearly indicate that performance is immediately forthcoming. This is the function of the references to shipment, tender of materials and the like.

5. As in the case of Article 2, the licensee's duty to accept typically hinges on its right to inspect the tendered copy as outlined in 2B-609 and elsewhere. In the case of development contracts, the common practice typically expands on the inspection right, creating a period of testing before acceptance. at the end of the contract. In such cases, the tender itself implies an opportunity to test and inspect the copy. The duty to accept conforming property comes afterwards.

Illustration 1. Jones contracts for the development of a system by Smith. Smith completes what it anticipates to be the full system and tenders a disk containing the software to Jones. Jones has a right to inspect the information before paying pursuant to an interaction of this section and the section on inspection. If the parties agreed to acceptance tests, those tests define the scope of the inspection right. If not, a reasonable inspection is required. Payment follows satisfactory inspection.

6. Subsection (d) is drawn from Article 2.

SECTION 2B-608. COMPLETED PERFORMANCES.

(a) If performance involves delivery of informational content, entertainment, or related artistic, personal or professional other services that because of their nature provide the licensee substantially with the value of the information and that value cannot be returned once delivery or performance is received by the licensee, Sections 2B-609 through 2B-613 and Section 2B-619 do not apply and the rights of the parties are determined under Section 2B-601 and the ordinary practices of the applicable trade or industry.

(b) In a contract governed by subsection (a), before payment, a party may inspect the media and label or packaging of a performance, but may not view or receive the performance unless the contract provides otherwise.

Reporter's Notes:

This section deals with a problem arising from the nature of the subject matter covered in this article. Some subject matter is, in effect, fully delivered when made available to or read by the transferee; theories of inspection, rejection and return as in Article 2 are not applicable. This is true, for example, in a pay per view arrangement for an entertainment event or other information. It is also the case where the subject matter of the contract involves informational content that, once seen, has in effect communicated its entire value. The parties should be left to general, common law remedies as described in section 2B-601. If the delivered performance constitutes a material breach, the receiving party can obtain its money back or sue for damages, but it cannot demand full performance prior to payment as would be the case with anything other than the limited inspection right described in subsection (b).

SECTION 2B-609. LICENSEE'S RIGHT TO INSPECT; PAYMENT BEFORE INSPECTION.

(a) If performance requires delivery of a copy, the following rules apply:

(1) Except as provided in this section, a licensee has a right before payment or acceptance to inspect the physical mediuma and the performance of the information and to obtain any related documentation at a reasonable place and time and in a reasonable manner in order to determine conformance to the agreement.

(2) Expenses of inspection must be borne by the licensee, but reasonable expenses may be recovered from the licensor if the performance is rightfully refused.

(3) A place, or method or standard of inspection, or a standard for inspection fixed by the parties, is presumed to be exclusive. However, unless otherwise expressly agreed, the fixing of a place, or method or standard of inspection does not postpone identification or shift the place for delivery or for passing the risk of loss. If compliance with the place or method becomes impossible, inspection must be made as provided in this section unless the place, method, or standard fixed by the parties was intended as an indispensable condition the failure of which avoids the contract.

(4) A licensee's right to inspect is subject to the confidentiality of the information. Unless the licensor otherwise agrees, the licensee may not inspect before payment in a manner that would disclose or jeopardize information designated by the licensor as a trade secret or confidential.

[(5) If inspection would provide the licensee substantially with the value of the information, access or performance before payment, the licensee does not have a right to inspect before payment.]

(b) If a right to inspect exists under subsection (a) and the agreed procedures for payment or the terms of the agreement are inconsistent with an opportunity to inspect before making payment, the licensee does not have a right to inspect before payment. Nonconformity in the tender does not excuse the licensee from making payment unless:

(1) the nonconformity appears without inspection and would justify refusal under Section 2B-610; or

(2) in a documentary transaction, despite tender of the required documents, the circumstances would justify injunction against honor.

(c) Payment pursuant to subsection (b) is not an acceptance of performance and does not impair a licensee's right to inspect or preclude other remedies of the licensee.

Uniform Law Source: Section 2-513; CISG art. 58(3); Section 2-508. Substantially revised.

Reporter's Note:

1. This section combines former 2B-607 and 2B-608 with new material relevant to the information industries.

2. Subsection (a)(4) deals with the relationship between confidentiality and the right to inspect. Absent contrary agreement, inspection prior to payment is not appropriate if the type of inspection involved would reveal designated trade secrets or confidential information. This does not bar any inspection, but merely indicates that a right to see trade secret information cannot be presumed. Also, the balance here is limited to situations where the licensor designates information as confidential or a trade secret.

3. Subsection (a)(5) concerns situations in which the nature of the information is such that inspection would effectively convey substantially all of the value to the licensee before payment. Thus, for example, in a transaction where the essence of the deal is to reveal discrete information known to one party (e.g., the profit record of a company for the past year), inspection would communicate the subject matter of the deal and that communication cannot effectively be taken back if payment does not follow. The parties can agree to this result if they so choose, but it is not appropriate for law to presume it. This rule would not apply, however, where merely inspecting information conveys it. Thus, an author's submission of a manuscript to a publisher would not trigger this rule since the publisher's does not obtain the value by merely examining the manuscript.

4. Subsection (b) follows the rules stated in current UCC ' 2-512.

SECTION 2B-610. REFUSAL OF DEFECTIVE TENDER.

(a) Subject to subsection (b), if a tender of performance or the tendering party's previous performance constitutes a material breach of contract, as to the particular tendered performance, the party to which it is tendered may:

(1) refuse the entire performance;

(2) accept the entire performance;

(3) accept any commercially reasonable units and refuse the rest; or

(4) permit an opportunity to cure the nonconformity.

(b) In a mass-market license, a licensee may refuse a performance that consists of the delivery of a copy which constitutes the initial activationtransfer of rights if the performance does not conform to the contract.

(c) Refusal is ineffective unless it is made within a reasonable time after the tender and the completion of any permitted effort to cure and before acceptance and the party whose performance is refused is notified within a reasonable time after the breach of contract was or should have been discovered.

Uniform Law Source: Combines ' 2-601, 2-602, 2A-509. Substantially revised.

Votes:

1. The Committee adopted a "perfect tender" carve out for cases involving the tender of delivery of a copy in circumstances equivalent to those where the perfect tender rule applies in Article 2.

Reporter's Note:

1. This section deals with refusal of tendered performance. The word "refuse" is used in lieu of the Article 2 term "reject" because the intent is to cover more broadly the circumstances under which a party can decline to accept a performance of any type, rather than merely to concentrate on cases of a refused (rejected) tender of delivery as the phrase is used in Article 2. Thus, for example, a party might refuse proffered services under a maintenance contract because of prior breach or of their failure to substantially conform to the contract. The right to refuse tendered performance hinges either on the substantial nonconformity of the particular performance or on the existence of an uncured, prior material breach by the tendering party.

2. This section and the section on cure give control of the situation to the licensee to whom improper performance is provided. In this Article, other than in the mass market, refusal or cancellation can occur only in the event of a material breach. This is unlike in Article 2 where even minor defects may allow rejection of a tender. Given the greater impact of the breach, the equities shift more clearly to the injured party and it is given a right to close out the transaction without waiting for cure. Cure cannot come after cancellation.

3. Subsection (b) implements the carve out for mass market transactions which are governed in this Article under standards that are consistent with Article 2 in the sale of goods.

SECTION 2B-611. DUTIES FOLLOWING RIGHTFUL REFUSAL. After refusal or revocation, the following rules apply:

(1) Any use or exercise of rights by a licensee with respect to of the information or copies, involved in the performance, or any disclosure of a trade secret or confidential information of the other party inconsistent with the agreement, constitutes a breach of contract. However, use or exercise of rights for a limited time solely to avoid or mitigate loss is not prohibited if the use is not inconsistent with the licensee's refusal of the performance or the terms of the agreement.

(2) A licensee in that takes possession of copies or documentation or that has made additional copies, shall return all copies and documentation to the licensor or hold them with reasonable care for disposal at the licensor's instructions for a reasonable time. If the licensee holds the materialsn this case, the following additional rules apply:

(A) If the licensee elects to hold the documentation or copies for the licensor's disposal, tThe licensee shall follow any reasonable instructions received from the licensor. However, instructions are not reasonable if the licensor does not arrange for payment of or reimbursement for the reasonable expenses of complying with the instructions.

(B) If the licensor does not give instructions within a reasonable time after being notified of refusal, the licensee may in a reasonable manner to avoid or mitigate loss store the documentation and copies for the licensor's account or ship them to the licensor with a right of reimbursement for reasonable costs of storage, shipment, and handling.

(3) A licensee has no further obligations with respect to information or related copies and documentation refused. However, both parties remain bound by any obligations of nondisclosure or confidentiality and any scope or other limitations or restrictions on use which would have been enforceable had the performance not been refused.

(4) In complying with this section, a licensee is held only to good faith and a standard of care that is reasonable in the circumstances. Conduct in good faith under this section does not constitute acceptance or conversion and is not the basis for an action for damages or equitable relief.

Uniform Law Source: Section 2-602(2), 2-603, 2-604.

Reporter's Note:

1. This section does not give the licensee a right to sell goods, documentation or copies related to the intangibles under any circumstance. The materials may be confidential and may be subject to the overriding influence of the proprietary rights held and retained by the licensor in the intangibles. As Comment 2 to current ' 2-603 states: "The buyer's duty to resell under [that] section arises from commercial necessity...." That necessity is not present in respect of information. The licensor's interests are focused on protection of confidentiality or control, not on optimal disposition of the goods that may contain a copy of the information.

2. Subsection (1) limits the revoking person's right to use the information in its possession. Uses inconsistent with the terms of this section or the contract constitute a breach by the party engaging in the misuse. The section does permit, however, limited uses for purposes of minimizing loss. That use does not extend to disclosure of confidential information or sale of the copies. It cannot be inconsistent with the refusal. This section asks courts to reach the balance discussed in Can-Key Industries v. Industrial Leasing Corp.,593 P.2d 1125 (Or. 1979) and Harrington v. Holiday Rambler Corp., 575 P.2d 578 (Mont. 1978) with respect to goods, but with an understanding of the nature of any intellectual property rights that may be involved here.

3. Subsection (3) makes clear that, following refusal or revocation, both parties remain bound by confidentiality obligations with respect to the information. Unlike in reference to sales of goods, iIt is not uncommon that each party have some such information of the other and a mutual, continuing restriction is appropriate.

4. The eventual comments to the Section will make clear that a wrongful refusal is not a refusal for purposes of this and other sections, but simply a breach of contract. That breach may or may not be material, but in either event, it triggers the sequence of remedies contained in the contract and this article, rather than the duties stated here.

SECTION 2B-612. WHAT CONSTITUTES ACCEPTANCE.

(a) Subject to subsections (b) and (c), acceptance of a performance occurs when the party receiving the performance:

(1) substantially obtains the value or access expected from the performance and, without objecting, retains the value or utilizes the access beyond a reasonable time to refuse the performance;

(2) signifies or acts with respect to the information in a manner that signifies to the other party that the performance was conforming or that the party will take or retain the performance in spite of the nonconformity;

(3) fails effectively to refuse performance under the terms of the agreement or Section 2B-610;

(4) acts in a manner that makes compliance with the licensee's duties on refusal impossible because of commingling[; or

(5) receives a substantial benefit or knowledge of valuable informational content from the performance and the benefit or knowledge cannot be returned.]

(b) Except in cases governed by subsection (a)(4) and (5), if a right to inspect exists under Section 2B-609 or the agreement, acceptance of performance that involves delivery of a copy occurs only when the party has a reasonable opportunity to inspect the copy and any document.

(c) If an agreement requires performance in stages to deliver a contracted for whole information product with respect to portions of the information or with respect to its capacity to perform, this section applies separately to each stage. Where the agreement contemplates delivery of a product in stages, rather than repeated separate performances pursuant to an overall agreement, aAcceptance of any stage is conditional until acceptance completion of the [transfer of rights] [activation of rights] in the completed information or all stages required under the agreement.

Uniform Law Source: Section 2A-515. Revised.

Reporter's Note:

Subsection (c) was edited to clarify the scope of application of the conditional acceptance concept. If does not apply, for example, in an access contract where there are a series of exercised accesses to information over a period of time. The application intends to focus on the case of, for example, the development of software or a manuscript which is delivered in parts in the expectation of the eventual delivery of the entire product.]

1. Acceptance is the opposite of refusal. As to its effect on remedies, see sections on waiver and general remedies sections.

2. Subsections (a)(2) and (3) conform to the language of Article 2A, clarifying as in Article 2A, that actions as well as communications can signify acceptance. This section does not adopt existing Article 2 provisions relating to actions inconsistent with the party's ownership since, as in Article 2A, there is a split between performance and retention of ownership in many cases. That split indicates that, as in 2A, the ownership standard is not relevant to use of information assets and other performance relevant here.

3. Subsection (a)(4) and (5) focus on two circumstances significant in reference to information and that raises issues different from cases involving goods. In (a)(4), the key fact is that it would be inequitable or impossible to reject the data or information having received and commingled the material. The receiving party can exercise rights in the event of breach, but rejection is simply not a helpful paradigm. Recall that a rejecting licensee must return or to keep the digital information available for return to the licensor. Commingling does not refer only to placing the information into a common mass from which they are indistinguishable; it also includes cases in which software is integrated into a complex system in a way that renders removal and return impossible or where they are integrated into a database or knowledge base that they cannot be separated from. Commingling is significant because it precludes return of the rejected property.

4. The second situation (a)(5) involves use or exploitation of the value of the material by the licensee. In information transactions, it is the case that in many instances merely being exposed to the factual or other material transfers the significant value. Also, often, use of the information does the same. Again, rejection is not a useful paradigm. The recipient of the information can sue for damages for breach and, when breach is material, either collect back its paid up price or avoid paying a price that would otherwise be due.

Illustration 1: Licensee receives a right to use a mailing list of names of customers of Macey's store. It notices that the list contains no names from a particular zip code, but goes ahead with an initial mailing. It then seeks to reject the performance. While this would not fit within subsection (a)(5), the section provides that the acceptance already occurred if substantial value was received. Licensee can collect damages for the error and, if the breach was material, avoid obligation for the price. But it cannot reject because of (a)(1).

Illustration 2: A contracts with B to obtain the formula to Coca Cola and information from B about how to mix the formula. B delivers the formula, but the mixing information is entirely inadequate. If the mixing information is not significant to the entire deal, A cannot reject because it received substantial performance. If the mixing information is significant, a right to reject may arise because of a material breach. However, subsection (a)(5) bars rejection if A received substantial value by obtaining knowledge of the formula and cannot return that knowledge. Even though it can return copies of the formula, knowledge would remain. A can sue for damages, but cannot reject after the formula is made known to it.

Illustration 3: Intel contracts with John for a right to use John's list of the ten largest users of Motorola chips in the Southwest. The price is $1 million. John supplies the list, but there are two names that, through negligence, are not correct. After reading the list, Intel desires to reject the performance and cancel the contract. Subsection (a)(5) would ask whether Intel received substantial valuable knowledge and, thus, cannot reject. If so, its remedies are for breach under applicable sections involving a recovery for the difference in promised and received value. If it can reject, it can recover the part of the price already paid, plus any relevant and provable loss under the methods described in this Article.

Subsection (a)(5) may be deleted if the Drafting Committee adopts the proposed section 2B-608 on performances complete when delivered.

5. This section must be read in relationship to the reduced importance of acceptance. Refusal and revocation both require material breach in order to avoid the obligation to pay according to the contract. This is unlike Article 2 which follows a perfect tender rule for rejection, but conditions revocation on substantial impairment. Acceptance does not waive a right to recover for deficiencies in the performance.

SECTION 2B-613. REVOCATION OF ACCEPTANCE.

(a) Subject to subsections (b) and (c), a A licensee may revoke acceptance of a commercial unit that is part of a performance by the licensor if the nonconformity of the commercial unit is a material breach of the contract and the party accepted the performance:

(1) on the reasonable assumption that the breach would be cured, and it has not been seasonably cured;

(2) during a period of continuing efforts at adjustment and cure, and the breach has not been seasonably cured; or

(3) without discovery of the breach and the acceptance was reasonably induced by the other party's assurances or by the difficulty of discovery before acceptance.

(b) Revocation is not effective until the revoking party sends notice of it to the other party and is barred if:

(1) the revocation does not occur within a reasonable time after the licensee discovers or should have discovered the ground for it;

(2) the revocation does not occur before any substantial change in condition or identifiability of the information not caused by the breach of contract; or

(3) the party attempting to revoke acceptance received a substantial benefit or knowledge of valuable informational content from the performance or access, and the benefit or knowledge cannot be returned.

(c) A party that justifiably revokes acceptance:

(1) has the same duties and is under the same restrictions with regard to the information and any documentation or copies as if the party had refused the performance; and

(2) is not obligated to pay the contract price for the performance as to which revocation occurred.

Uniform Law Source: Section 2A-516; 2-608.

Reporter's Note:

2. Acceptance obligates the licensee to the terms of the contract, including the payment of any purchase price. Often, of course, other performance will have already occurred. This section deals with revocation of acceptance as to any type of performance, not limited to the revoked acceptance of a tender of delivery that occupies the attention of article 2.

3. Subsection (a)(2) adds provisions to deal with an issue often encountered in litigation in software. It reduces the importance of when or whether acceptance occurs. In cases of continuing efforts to modify and adjust the intangibles to fit the licensee's needs, asking when an acceptance occurred raises unnecessary factual disputes. Both parties know that problems exist. The question is whether or not the licensee is obligated for the contract price, less a right to damages for breach by the licensor.

There has been substantial litigation in Article 2 on questions of whether or not an acceptance occurred (or can be revoked) in a situation in which the licensee participates with the licensor in an effort to modify, correct and make functional the software that is being provided. The issue has importance because acceptance obligates the licensee to the purchase price unless that acceptance can be revoked due to a substantial defect, while prior to acceptance the licensee can reject for a failure to provide "perfect" quality. National Cash Register Co. v. Adell Indus., Inc., 225 N.W.2d 785, 787 (Mich. App. 1975) ("Here, the malfunctioning was continuous. Whether the plaintiffs could have made it functional is not the issue. The machine's malfunctions continued after the plaintiff was given a reasonable opportunity to correct its defects. [The] warranty was breached."); Integrated Title Data Systems v. Dulaney, 800 S.W.2d 336 (Tex. App. 1990); Eaton Corp. v. Magnovox Co., 581 F. Supp. 1514 (E.D. Mich. 1984) (failure to object or give notice of a problem may constitute a waiver); St. Louis Home Insulators v. Burroughs Corp., 793 F.2d 954 (8th Cir. 1986) (limitations bar); The Drier Co. v. Unitronix Corp., 3 UCC Rep.Serv.3d (Callaghan) 1728 (NJ Super Ct. App. Civ. 1987); Computerized Radiological Service v. Syntex, 595 F. Supp. 1495, rev'd on other grounds, 786 F.2d 72 (2d Cir. 1986) (22 months use precludes rejection); Iten Leasing Co. v. Burroughs Corp., 684 F.2d 573 (8th Cir. 1982); Aubrey's R.V. Center, Inc. v. Tandy Corp., 46 Wash. App. 595, 731 P.2d 1124 (Wash. Ct. App. 1987) (nine month delay did not foreclose revocation); Triad Systems Corp. v. Alsip, 880 F.2d 247 (10th Cir. 1989) (buyer permitted to revoke over two years after the initial delivery of software and hardware system); Money Mortgage & Inv. Corp. v. CPT of South Fla., 537 So.2d 1015 (Fla. Dist. Ct. App. 1988) (18 month delay permitted); Softa Group v. Scarsdale Development, No. 1-91-1723, 1993 WL 94672 (Ill. App. March 31, 1993); David Cooper, Inc. v. Contemporary Computer Systems, Inc., 846 S.W.2d 777 (Mo App 1993); Hospital Computer Systems, Inc. v. Staten Island Hospital, 788 F. Supp. 1351 (D.N.J. 1992).

4. Revocation is a remedy for the licensee, but its role in the remedies scheme must be carefully understood. In effect, revocation reverses the effect of acceptance and places the licensee in a position like that of a party who rejected the transfer initially. The effects of acceptance that are most important here include: (i) the licensee must pay the licensee fee for the transfer and is obligated as to other contract duties respecting that transfer and (ii) the licensee essentially keeps the copies or other materials associated with the transfer but subject to contract terms. Revocation does not, however, serve as a precondition to suing for damages. In the context of information transactions, revocation is not appropriate where the value of the information cannot be returned and is significant. That principle is stated in subsection (b)(3).

5. In the CISG, the remedies of the buyer do not depend on whether the buyer accepted the goods or not or whether revocation occurred. In cases of information content, the Committee should consider whether a similar model would be more appropriate. In cases of material breach, the licensee's right to recover what it paid or to avoid paying further should not hinge on questions of whether it has a right to revoke, but on a calibration of loss sustained compared to benefit received.

SECTION 2B-614. ACCESS CONTRACT.

(a) An access contract grants rights of access to the information as is modified from time to time and made generally available by the licensor over the duration of the period of under the license. Changes in the content of the information to which access is provided do not constitute a breach unless they conflict with an express term of the agreement.

(b) Unless it is obtained subject to a license or other use restrictions relating to the information contained in the access contract or a record to which the licensee agreed, including by manifesting assent to the record, information obtained by a licensee in an access contract is free of any restriction by the licensor except restrictions resulting from the intellectual property rights of a licensor or other applicable law. The licensee may make a transitory copy for purposes of viewing or other agreed use the information only but may make a permanent copy of the information accessed only if authorized by the agreement.

(c) In an access contract, access must be available at times and in a manner consistent with:

(1) express terms of the agreement; and

(2) to the extent not dealt with by the terms of the agreement, in a manner and with a quality that is reasonable consistent with ordinary standards of the trade or industry for the particular type of agreement.

(d) In an access contract which, during agreed periods of time, affords the licensee a right of access at times substantially of its own choosing, intermittent and occasional failures to have access available do not constitute a breach of contract if they are consistent with:

(1) the express terms of the agreement;

(2) standards of the trade or industry for the particular type of agreement; or

(3) scheduled downtime, reasonable needs for maintenance, reasonable periods of equipment, software or communications failure, or events reasonably beyond the licensor's control.

Uniform Law Source: None

Reporter's Note:

[Subsections (a) and (b) have been modified based on consultation with various groups to reflect the variety of transactions encompassed by the idea of an access contract and the need for a capability to make continuing changes in the content and composition of the information provided for access. The language about restrictions in subsection (b) incorporates the possibility that the access contract is with a general information provider, but the content provider for a particular element of the overall spectrum of resources made available, places restrictions on use of its information.]

1. This section applies to a "access" transactions. In concept, access contracts are of two types. In one, the access and the contract creation or performance occur essentially at the same time and there is no on-going relationship between the parties. In the other, which some describe as a continuous access contract, the license contemplates that the licensee has a right to intermittent access at times of its own choosing within the time period of agreed availability. This latter type of relationship is characterized by on-line services such as Westlaw and Lexis. Access contracts of this latter type constitute an important application of an ongoing relationship rules involving information services. The transaction is not only that the transferee receives the functionality or the information made available , but that the subject matter be accessible to the transferee on a consistent or predictable basis. The transferee contracts for continuing availability of processing capacity or information and compliance with that contract expectation hinges not on any specific (installment), but on continuing rights and ability to access the system. The continuous access contract is unlike installment contracts under Article 2 which have more regimented tender-acceptance sequences. Often, the licensor here merely keeps the processing system on-line and available for the transferee to access when it chooses.

As outlined in the definition of "licensor", the model followed in three party access transactions, such as where the content provider makes content available through a third party access provider, entails two separate agreement and, in some cases, three separate contracts. The first is between the content provider and the on-line provider. This license may be an ordinary license to use the information or an access contract in itself. The second is between the on-line provider and the end user or other client. This is an access contract. The content provider is not necessarily party to or beneficiary of the contract. The third possible contract occurs when the content provider additionally contracts directly with or establishes terms with the end user or client.

2. Subsection (b) outlines two important default rules with respect to the treatment of information obtained through an access contract. The first is that, unless there are license terms dealing with the information obtained through access, information obtained by access is received on an unrestricted basis, subject only to whatever intellectual property rights apply. Thus, for example, if an access contract merely enables access to news articles, but does not further limit their use by the licensee, no limitation exists other than as applied under copyright law. In contrast, if the agreement contains license restrictions on use of the articles obtained by the access, those license terms would be governed under Article 2B and other law.

3. The second issue considered in subsection (b) concerns the making of copies. The default position here recognizes that access contracts will involve a wide variety of contexts, many of which do not contemplate that the license make and retain a copy of the information accessed (e.g., video on demand). The default rule assumes that transitory copies to enable viewing of the information are implicitly authorized. If, however, the agreement allows making a permanent copy, then a back up is authorized unless expressly excluded.

4. Access contracts are a form of license in the pure common law sense that they entail a grant of a right to have use of a facility or resource owned or controlled by the licensor. This involves less of a traditional intellectual property license and more of a modern application of traditional concepts of licensed use of physical resources. See Ticketron Ltd. Partnership v. Flip Side, Inc., No. 92-C-0911, 1993 WESTLAW 214164 (ND Ill. June 17, 1993); Soderholm v. Chicago Nat'l League Ball Club, 587 NE2d 517 (Ill. App. Ct. 1992) (license revocable at will). For a discussion of how one potential vendor handles these problems, see Proposed Rule Regarding Postal Electronic Commerce Service (39 C.F.R. ' 701.4(b)), 61 F.R. 42219, at 42221 (August 14, 1996) (proposed regulations and terms of use for Postal Service electronic commerce systems).

5. Under current law, these contracts are services or information contracts. The fault based warranties noted in the warranty sections apply insofar as one deals with the ac