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UNIFORM COMMERCIAL CODE
ARTICLE 2B
LICENSES
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
September 25, 1997
Draft
UNIFORM COMMERCIAL CODE
ARTICLE 2B
LICENSES
With Notes
COPYRIGHT 1997
BY
THE AMERICAN LAW INSTITUTE
AND
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
PREFACE
INTRODUCTION
Article 2B deals with transactions in information; it focuses on transactions relating to the "copyright industries." This project lies at the heart of maintaining the U.C.C. at the center of commercial contract law.1 The significance of Article 2B has been recognized. See Intellectual Property and the National Information Infrastructure, The Report of the Working Group on Intellectual Property Rights, at 58. ([the] challenge for commercial law . . . is to adapt to the reality of the NII by providing clear guidance as to the rights and responsibilities of those using the NII. Without certainty in electronic contracting, the NII will not fulfill its commercial potential."). That report endorsed the Article 2B project. Subsequent statements by the White House embody the assumption that private contract, rather than regulation should guide the new economy and that the basis for this lies in the development of a "commercial code" for electronic and other information contracts, both within the United States and internationally.
Article 2B deals largely with transactions and subject matter that have never been directly covered by the U.C.C. Of the transactions covered, only software contracts have been considered within the U.C.C. Even for computer software, coverage under the U.C.C. is limited. But Article 2B is not just a software contract statute. The other subject matter for which licensing contracts are used are today governed not by the U.C.C. but by common law, federal property law, and some regulation. Part of the project involves accommodating the various legal traditions.
Yet, in the modern digital economy, these industries and subject matter are rapidly converging around the digital technology that dominates the information industry and, even, much of the goods sector. The lines of demarcation will, and already have, become less and less significant while businesses converge into a multi-faceted industry with common concerns.2Motion pictures, books and records are now often digital in content and provided through various digitally enabled systems, such as Internet access. Thus, for example, a recently successful motion picture ("Toy Story") was in effect a lengthy computer program, entirely digital in development and presentation. Various publishers, such as the New York Times, the Wall Street Journal, and West Publishing, provide their basic information resources on-line as well as in paper form. They do business in the same environment in which Oracle Software provides its commercial software products to end users.
That converged industry far exceeds in importance the goods manufacturing sector in our economy. Unlike manufacture of goods, the information industry is growing rapidly and commands large portions of the national economic product. The copyright industries and information transactions affected by Article 2B involve subject matter entirely unlike the traditional transactional framework which focuses on transactions in goods. In Article 2B transactions, the value of the subject matter lies in the intangibles, the information and associated rights to use that information.
This Article is being developed by consultation among many groups. When completed, Article 2B will provide a framework for contractual relationships among industries at the forefront of the information era and permeate the global economy. The test of the project lies in its ability to accommodate the parties involved and the practices that are driving this vital part of the economy. Evaluating the balance achieved hinges on one's perspective, yet, as the following indicates, the Draft distributes benefits among the various parties.
Benefits and Positions in
Draft Article 2B by Party
General Benefits
+ reduces uncertainty and non-uniformity of software and online contract law
+ provides contract law roadmap for converging industries with differing traditions
+ confirms contract freedom in commercial transactions
+ innovates concept of mass market transaction that extends U.C.C. consumer protections to businesses
+ establishes strong protection encouraging dissemination of published informational content
+ recognizes layered contract formation occurring over time
+ clarifies enforceability of standard forms in commercial deals
+ proposes solution for battle of forms
+ applies "material breach" concept corresponding to common law
+ sets standards relating to access and Internet contracts
+ establishes contract default rules 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 end user
+ refines standards for enforcement of liquidated damages rule
+ allows parties to contract for specific performance
+ provides standard interpretations for often litigated grant terms
Licensor Benefits
+ 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
+ settles enforceability of mass market licenses subject to refusal term concept
+ creates method for contracting in Internet and similar contexts
+ excludes consequential damages for published informational content
+ establishes guidance on the meaning of license grants
+ establishes control and protections for licensors on transferability of a 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
+ confirms that exceeding a license as a breach of contract
+ establishes standard on connection of remedy and consequential damages limits
+ creates duty of reasonable care to avoid viruses in copies that cannot be waived in mass market
+ enables financing licensee interest in a non-exclusive license without licensor consent
+ creates refund right from two sources and procedural steps to give real option to withdraw as a precondition for creating a contract in mass market
+ gives licensee a right of quiet enjoyment
+ codifies that advertising can create an express warranty
+ creates a warranty for accuracy of non-published informational content
+ creates implied system integration warranty
+ extends infringement warranty to a warranty that use does not infringe
+ requires disclaimers of implied warranties be in a record (e.g., writing)
+ expressly recognizes implied licenses
+ creates broad scope presumptions
+ makes mass market licenses presumptively transferable
+ perfect tender rule for mass market transactions which does not exist in current law except for goods
+ right to demand a cure for accepted imperfect tender in commercial contracts
+ requires affirmative acts of assent to a record instead of mere passive retention
+ creates direct contract with remote publisher in mass market
+ increases class of people to whom warranty runs for all types of damage
+ enforces releases without consideration
+ enforces term providing that a license cannot be canceled
+ creates warranties and rights against retailer independent of publisher license
+ places substantial limitations on electronic self-help for consumers and businesses
+ presumes perpetual term in single payment software license
+ prohibits choices of forum that unfairly disadvantages a consumer
PART 1
CONTEXT: LAW REFORM AND THE UCC
Modern Economy and Law Reform
The current UCC affects contract practice and law throughout the economy, but it was based primarily on transactions in "goods" and a financing structure that refers to that model. It reflects a 1950's economy. Then, clear distinctions between goods, intangibles and services in commercial relationships were clear and sharply differentiated. Sales of goods dominated then. They no longer do so. In addition, today, computerization blurs the models. "The distinction that used to be drawn between "goods" and "services" is meaningless, because so much of the value provided by the successful enterprise ... entails services [and information]." 3 Robert Reich, The Work of Nations 85-86 (1991).
The 1990's witnessed a shift in the source of value and value production in the economy. The service sector now dominates. 4 See Karl P. Sauvant, International Transactions in Services: The Politics of Transborder Data Flows (Westview Press 1986). The information industry exceeds most manufacturing sectors in size. The entertainment industry was the first post war international industry in the United States. The on-line industry is the most recent. The software industry, which provides the basic fuel for the information age, did not exist in the 1950's. Today, its products challenge traditional law in international trade, tax, intellectual property, and contract.
Contracts involving information are not equivalent to transactions in goods. 5 Many court decisions place software licensing in Article 2 even though software is licensed and not sold and even though the focus of the transaction from the standpoint of both parties centers not on the acquisition of tangible property, but on transfer of capability and rights intangibles. See Advent Systems Ltd v. Unisys Corp., 925 F.2d 670 (3d Cir. 1991); RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543 (9th Cir. 1985); Triangle Underwriters, Inc. v. Honeywell, Inc., 604 F.2d 737 (2d Cir. 1979); In re Amica, 135 Bankr. 534 (B.R. ND Ill. 1992). Cases excluding software and data processing from Article 2 include: Data Processing Services, Inc. v. LH Smith Oil Corp., 492 N.E.2d 1329, 1 UCC Rep. Serv.2d 29 (Ind. Ct. App. 1986) (software development); Micro-Managers, Inc. v. Gregory, 147 Wis.2d 500, 434 N.W.2d 97 (Wis. Ct. App. 1988) (development contract). The contracts emphasize different issues and call into play a much different social policy structure concerning when and to what extent liability risk ought to be created and imposed against the provider of the subject matter of the contract.
Project History
Although it today involves participation by motion picture, publishing, banking, and online industries, Article 2B began with a focus on the contract issues associated with computer software licensing as many of those transactions were brought within the scope of Article 2, a statute dealing with sales of goods.
Under modern copyright law, software and most other digital products are governed by an intellectual property rights regime under which the copyright owner holds the exclusive right to authorize or make additional copies of the work, distribute the work in copies, engage in public display or performance of the work, and make modifications of the work (a so-called derivative works). This copyright regime (along with other intellectual property rights) creates property law much different from that associated with goods and places importance on the contractual terms relating to a grant conveyance or restriction of rights in the intangible subject matter. In this regard, software and other digital products are treated in law more like manuscripts and motion pictures, than television sets and cars. Even though a purchaser acquires a copy of the work, the producer retains rights and control with respect to various uses of the copy, including uses that make additional copies or alterations.
This underlying difference coupled with the ease of copying involved in modern digital products causes sharp differences in contracting practices. The differences are only enhanced with the development of the Internet and online services as an important feature of contemporary commerce since these systems allow for transfer of information without the intermediation of tangible objects. Indeed, in the modern marketplace for information, a major conflict looms between systems in which the end user has in its own machine the software and other information assets needs for its business as compared to systems that use rapid communications and Internet capabilities to enable that end user to seamlessly employ software and other information assets located hundreds or thousands of miles away in "cyberspace."
Over several years, committees of NCCUSL, the ABA and other groups examined the consequences of what appeared to many to be a mismatch in concept between contract law aimed at defining relationships relating to the sale of goods (article 2) and contract relationships in which information (or more generally, intangibles) were the centerpiece of the transaction and the contractual format most often involves a license, rather than a sale. The conclusion reached by these committees and by representatives of the information industries entails two basic observations:
1. Distinct From Sales. Information transactions and, especially, transactions involving licensing of digital information, differ substantively from transactions involving the sale or lease of goods. The differences are manifested in both the conditional nature of the transaction and that the value obtained or conveyed lies not in the tangible property, but in the information and rights that are severable from the tangibles. Indeed, it will continue to be increasingly the case that no tangible items are needed to convey information on-line or in electronic transactions. Because of the differences, a body of law tailored to transactions whose purpose is to pass title to tangible property can not be simply applied to transactions whose purpose was to convey rights in intangible property and information. A separate treatment of this commercially important class of transactions was needed.
2. Commercial Significance. The commercial importance, both currently and in the future, of the information industry is obvious. Software and related information technologies currently account for in excess of 6% of the gross national product and the size of the industry continues to grow. Adding in the other industries (publishing, motion pictures, on-line systems) swells the figure to a huge share of the economy The treatment of digital information, both in intellectual property law and in contract law, has become a major focus of contemporary debate. These industries and the transactions they engage in are major factors in the commercial landscape more than sufficient to justify coverage in a commercial code.
Deliberative Process
These conclusions were reached through a process of deliberation involving several committees of the National Conference of Commissioners on Uniform State Laws (NCCUSL), discussions in the context of the American Bar Association, and review by numerous other groups.
This project began at the recommendation of an ABA Study Committee that consideration be given to developing uniform law treatment of software contracts, either in or outside the UCC. A subsequent study committee of NCCUSL agreed and proposed a separate article of the UCC for software and related contracts. Shortly after that, however, the software industry objected. A second study committee was appointed. After extensive consultation and review, a Special Committee on Software Contracts was created to work parallel to the Drafting Committee on Article 2 Sales. This Special Committee was later folded into the Article 2 Committee.
The Article 2 Drafting Committee concluded that an appropriate approach would be to develop a "hub and spoke" configuration for Article 2 under which licensing and sales would be treated in separate chapters of revised Article 2, both chapters being subject to general contract law principles stated in the "hub" of the revised article.
During this period, information industry groups reversed their position in light of developments in the online and other areas, and the increasing gap between contracts dealing with this subject matter and contracts that deal with goods (either by lease or sale). They concluded that treatment of the contracts affecting their industries within the UCC was appropriate and desirable as a means of standardizing practice and providing a roadmap for the areas of contracting that are springing up in the modern information economy. The industry, however, advocated a separate UCC article on licensing because of their belief that the unique character of such transactions merited separate treatment and that such separation would make the process of moving forward.
In July, 1995, the Executive Committee of NCCUSL concluded that the appropriate approach for moving forward was to develop an article of the UCC dealing with licensing and other transactions involving information. This decision and the events that preceded it reflect an awakening to the fact that the modern economy and commerce within it no longer depends solely or primarily on sales of goods. Additionally, the decision involves a recognition of the fact that information and other license contracts entail far different commercial and practical considerations than can be addressed within a sale of goods model.
Working Drafts
From the outset, the Article 2B process has reached out for the widest range of input and commentary possible. To a greater extent than in any other recent UCC project, this has led to an active engagement of the views of many different groups and individuals. During the period of from March, 1994 through today, the Reporter and various members of the Committee have met with representatives or members of a wide range of groups to review provisions of various interim drafts. More than thirty organizations have had representatives at Drafting Committee meetings including:
ABA Business Law Section
ABA Section on Intellectual Property
ABA Section of Science and Technology
ABA Law Practice Management Section
American Film Marketing Association
American Intellectual Property Law Association
Association of American Publishers
American Electronics Association
Association of Scientific, Technical and Medical Publishers
Commercial Law League of America
Consumer Project on Technology
Consumers Union
CBEMA
Equipment Leasing Association
Federal Reserve System
ITAA
Information Industry Association
Licensing Executives Society
Information Technology Council
Interactive Digital Software Association
Software Publishers' Association
Business Software Alliance
Silicon Valley Software Industry Coalition
Society of Information Management
Motion Picture Association of America
California Bar Association
Association of the Bar of the City of New York
Chicago Bar Association
Texas State Bar Association
Recording Industry Association of America
Drafting Committee meetings are routinely attended by a large number of practicing lawyers not affiliated with associations and by representatives of various companies. Drafts of Article 2B have been discussed at over 150 seminars and public meetings; a large number of individual attorneys have provided written commentary on draft provisions.
A paradigmatic transaction involves a license, rather than a sale.
"License" means a contract that grants permission to access or use information if the contract expressly conditions, withholds, or limits the scope of the rights granted, grants only non-exclusive rights, or affirmatively grants less than all rights in the information, whether or not the contract transfers title to a copy of the information.6UCC 2B-102.
The transaction is characterized by 1) the conditional nature of the rights or privileges conveyed, and 2) the focus on information, rather than tangible property.
A license is not a lease or a sale. Both of those terms apply to transfers in goods, rather than rights in intangibles. The Supreme Court described a patent license as "a mere waiver of the right to sue."7General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175, 181 (1938) The Federal Circuit Court of Appeals stated:
[A] patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee. . . . Even if couched in terms of "[L]icensee is given the right to make, use, or sell X," the agreement cannot convey that absolute right because not even the patentee of X is given that right. His right is merely one to exclude others from making, using or selling X. 8 Spindelfabrik Suessen-Schurr v. Schubert & Salzer, 829 F.2d 1075, 1081 (Fed.Cir.1987), cert. denied, 484 U.S. 1063 (1988). See also Cohen v. Paramount Pictures Corp., 845 F.2d 851 (9th Cir 1988).
These descriptions refer to a "pure license" in which the licensor does nothing more than simply grant the licensee a privilege to use patented technology or copyrighted expression without additional commitments or steps to make that use possible.
Many licenses regulate rights in intellectual property. There are many situations, however, in which a license occurs in the absence of intellectual property. A license also exists in situations in which one party receives permission to enter the physical premises or computer of another or where property owned by the licensor is made available to the licensee. 9 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 N.E.2d 517 (Ill. Ct. App. 1992).
That model exists in the digital world in reference to the many transactions in which parties are licensed to use computer or other information resources of a licensor. In this Draft, that model is encompassed in the concept of an "access contract" which, as to rights to access a facility, is treated in current law and this draft as generally analogous to is a more complete transfer of property rights. Section 2B-102 defines such contracts as:
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.
These are contracts for online access and services. The focus centers on licensed access to a resource or facility. This relationship creates a variety of ongoing obligations of the parties (e.g., the obligation to pay for access, the obligation to maintain accessibility) not present in other licenses.
Licenses are common commercial transactions. The key fact is that the value resides in the intangibles, rather than goods. One does not purchase a book to admire the paper (goods), but to use the information. One does not acquire software to enjoy the diskette, but to use the program, encyclopedia or other content.
Licensing is a dominant means of commerce in digital information and in commercial information transactions. In distributing information products, as with goods, several different transactional options exist, licensing is a primary option, especially in digital information industries. Typically, as a simple matter of contract law, license restrictions are enforceable even though their terms do not mirror the "exclusive rights" in copyright or patent law. Indeed, while many courts use Article 2 to resolve contract disputes relating to themes covered by that article, Article 2 has never been applied to determine the effectiveness of use restrictions. Courts consistently apply licensing law paradigms to issues involving software and online contracts where the issues involve enforcing restrictions on use of information.
Courts generally enforce contract terms unless a specific term in a particular context conflicts with federal antitrust or related doctrines of patent or copyright misuse. Thus, courts have enforced license restrictions precluding non-commercial use of a mass market digital database, limiting a right to access by barring the making of a copy of software, limiting use to a specific computer, limiting use to internal operations of the licensee, restricting redistribution to a particular grouping of software and hardware, precluding modification of a computer game, and various other contract limitations. In these and other cases, the license accompanied distribution or delivery of a copy that enabled the licensee to use the licensed information.
Article 2B does not change the balance between contract and federal law. It could not do so even if that were the intent. Article 2B does not create contract law here - contracts have long been used to control distributions. Article 2B merely provides a more coherent and workable basis for contract issues.
Commercial Practice
As in transactions in goods, licensing spans a wide range of commercial practices. Article 2B focuses on many of the most commercially important transactions in modern commerce.10As discussed below, the Draft excludes most trademark and patent licensing.
For purposes of illustration, it is useful to distinguish various types of licensing. One factor differentiates between licenses that relate to information physically transferred to a licensee, as contrasted to licenses that enable a licensee to access a location (i.e. a computer) in which information resides. The latter access contract is used widely in modern Internet and online transactions. What is licensed is a right to have access to an environment that the licensor owns or controls.
In transactions in which information is made available on diskette or otherwise to a licensee subject to licensed conditions, a variety of transactional formats exist. In some, a licensor deals directly with the end user. In others, a chain of distribution intervenes and the copyright owner does not deal directly with the end user. In each case, the basis of the license transaction resides in either the existence of intellectual property rights in the information or, more simply, the fact that the licensor has control over a source of the information that the licensee desires to utilize.
In areas covered by Article 2B, copyright law is a dominant source of intellectual property rights. It gives the copyright owner the exclusive right to make copies of its work, to distribute copies, to make derivative works, to publicly display or perform the work, and other rights. A basic commercial choice made by a copyright owner is whether to license or to sell a copy of its work. In book publishing and most records, in current practice in the mass market, copies are sold. In the motion picture industry, licensing is the common approach in reference to theaters who publicly perform the movies, while in the consumer market, copies are either sold or leased (with a license that precludes public performance) for a brief time. Software is typically licensed, although computer game distribution frequently involves sales of copies.
One method of distribution occurs when the copyright owner (or its agent) contracts directly with the licensee. This is common in markets involving software for large or complex computer systems and databases with significant commercial value and cost per use. It is also characteristic of licensing in the publishing and entertainment industries. In the software industry, direct licenses (commonly in standard form agreements) may transfer of a copy of the software to the licensee subject to express contractual restrictions on use. Increasingly, rather than on a disk, copies are moved to the licensee's site electronically. In the near future, an additional licensing format will involve not delivery of software, but licensed access to and use of elements of software for brief periods as needed. Even today, in many license relationships, data is transferred from the licensee to the licensor, who utilizes its own software and systems for processing, examining and otherwise handling the licensee's data.
Common, but not necessarily uniform contract terms limit use to a designated system, for specific purposes (e.g., internal use only), subject to confidentiality conditions, transferability limitations, and similar restrictions applicable to the commercial deal. A central element of this distribution method is to recognize that cases uniformly hold that loading software into a computer and, even, moving it automatically from one part of memory to another part, constitutes making a copy of the software that falls within the copyright owner's exclusive rights.
Direct licensing also involves many contractual relationships in which information (software, text, movies) is developed for the licensee. Here, it is common for smaller companies or individuals to be licensors with large corporate licensees. This, of course, illustrates an important point in the overall mix of rights and contract issues. While large software providers are important factors as licensors, the overall software industry consists of large numbers of small licensors. This is equally clear in entertainment and publishing venues.
As in other areas, commercial licensing also occurs in context of broader distribution and utilizes distribution chains. These are not analogous to distribution chains employed in the sale of goods marketplace because of the intangible subject matter and the overlay of intellectual property rights which include the exclusive right to distribute copies. While it greatly over-simplifies the matter, it is useful to discuss two distinct frameworks.
The first involves use of a master copy and is common in the movie industry and in software contracts. Under this framework, a "distributor" receives access to a single master copy of the information work and a license to make an distribute additional copies or to make and publicly perform a copy. For example, Correl Software may license a distributor to allow its software to be loaded into the distributor's computers or video games. The contract will contain a number of terms. Correl may limit the distributor to no more than 1,000 to be distributed only in the computers and only if subject to an end user license. Since both the making of copies and the distribution of copies are within the scope of the owner's copyright, acts that go outside the contractual limitations are infringements as well as contractual breaches.
An alternative methodology uses actual copies of the software. Here, for example, Quicken may license a distributor to distribute its accounting software in packages provided to the distributor by Quicken. A license is used in the software industry here, although some other industries may sell copies to the distributor for resale. In the license, the distributor may be allowed to distribute copies to retailers, provided that certain conditions are met, such as terms of payment, retention of the original packaging, and making the eventual end user distribution occur subject to an end user license. Since the distribution right is an exclusive right in copyright law, distributions outside the license infringe the copyright.
In both sequences, the information product eventually reaches an end user. If it does so in an ordinary chain of distribution complying with the distribution licenses, the end user is in rightful possession of a copy. If the distribution involved sales of copies, nothing more is required. The end user is the owner of the copy. Copyright law spells out limited rights that flow to the owner of the copy (e.g., to distribute it, make a back-up if it is software, make some changes essential to use if its software). There is no direct contractual relationship between the copyright owner and the "end user."
If, however, the copyright owner elected a licensing framework, given the structure of the transactions, the end user's right to "use" (e.g., copy) the software depends on the end user license. Typically, this is characterized as a license from the producer to the end user. It creates a direct contractual relationship that would not otherwise exist and which, in light of concepts of privity, might not be implied as between these parties. The contract, then, at this point, jumps past the chain of distribution and creates a direct link to the producer by the end user. It is also, in this sequence, the only contract that enables the end user to make copies of the software in its own machine.
Nature of a Commercial Statute
The fundamental philosophy of Article 2B centers on supporting contractual choice and commercial expansion in information contracting. In addition, an important theme has increasing force as the technology revolution in Internet and similar contexts expands. That theme involves a need to create and preserve as broad as possible a field for expression and communication, commercially and otherwise, of ideas, images, and facts; material that this draft refers to as "informational content."
Informational Content
On this latter theme, the convergence of technology and the evolution of the information age in which we work entails a fundamental shift in our society and in how people interact, trade and establish commercial relationships. Information content has become important commercially, but that importance doe not diminish its political or social role. As contract rules evolve, the basic themes of First Amendment and other policies to encourage vibrant discourse on important subjects or, even, unimportant topics, must continue to be central to how law approaches issues in this new era. Even if informational content has become a significant commercial commodity (which it has), we must not forget that information content and its communication in a marketplace of ideas remains equally relevant to political and social norms in this country. The idea of a commodity or a product, when applied to information, does not transform important elements of this culture into mere business assets. What we do here affects not only the commercialization of information, but also the social values its distribution has always had in this society.
The thought that information content becomes something entirely different if the provider or author distributes it commercially can hardly be a premise. Commercialization (that is controlling who receives the information or charging a fee for its receipt) is not inconsistent with the role of information in political, social and other venues of modern culture. If it were, newspapers, books, television, motion pictures, video games, and other modern sources of information content for the general public or for specialized groups could not exist. What we do in Article 2B in creating (or avoiding) liability risk, in allowing (or precluding) author's to control distribution of their ideas, or in allowing (or denying) the right to contract for licenses of information has a significant impact on the future of information in new and in older systems of distribution.
These values argue strongly for an approach to contract law in this field that does not encumber, but supports incentives for distribution of information and its distribution. That theme permeates this Draft.
Freedom of Contract
The philosophy in UCC provisions on commercial law builds on two basic assumptions about commercial contract law. The first commercial law theme assumes that a role of contract law is to preserve freedom of contract. This permeates the UCC: "This article was greatly influenced by the fundamental tenet of the common law as it has developed with respect to leases of goods: freedom of the parties to contract. . . . . These principles include the ability of the parties to vary the effect of the provisions of Article 2A, subject to certain limitations including those that relate to the obligations of good faith, diligence, reasonableness and care." 11 UCC 2A-101, Comment.
The idea of contract flexibility is embedded in general contract law theory. The idea that parties are free to choose terms can be justified in a number of ways. 12 See Randy E. Barnett, The Sound of Silence: Default Rules and Contractual Consent, 78 Va. L. Rev. 821 (1992); Ian Ayres & Robert Gertner, Strategic Contractual Inefficiency and the Optimal Choice of Legal Rules, 101 Yale L.J. 729, 734 (1992). It leads to a preference for laws that provide background rules, playing a default or gap-filling function in a contract relationship. A default rule applies if the parties do not agree to the contrary. A default rule should mesh with expected or conventional practice in a manner that projects a favorable impact (as judged by relevant policy) on contracting and that can be varied by the contracting parties. This is in contrast with rules that dictate terms and regulate behavior. As a matter of practice, default rules are common in commercial contexts, while consumer law contains many fixed rules designed to protect the consumer against overreaching.
Default Rules
The second commercial law premise defines codification as a means to facilitate commercial practice. This is approached in this draft by an effort to identify existing patterns of commercial practice and to follow a presumption that the goal of the drafting is to identify, clarify and, where needed, validate existing patterns of contracting to the extent that these are not inconsistent with modern social policy. Grant Gilmore expressed this in the following terms:
The principal objects of draftsmen of general commercial legislation . . . are to be accurate and not to be original. Their intention is to assure that if a given transaction ... is initiated, it shall have a specified result; they attempt to state as a matter of law the conclusion which the business community apart from statute ... gives to the transaction in any case. But achievement of those modest goals is a task of considerable difficulty. 13 Grant Gilmore, On the Difficulties of Codifying Commercial Law, 57 Yale L. J. 1341 (1957).
To be accurate and not original refers to commercial practice as an appropriate standard for gauging appropriate contract law unless a clear countervailing policy indicates to the contrary or the contractual arrangement threatens injury to third-party interests which social policy desires to protect. Uniform contract laws do not regulate practice. They seek to sustain and facilitate it. The benefits of codification lie in defining principles consistent with commercial practice which, because of their codification and their relevance to actual practice, can be relied on and are readily discernible and understandable to commercial parties.
How one decides what rules will best facilitate contracting practice is a matter of dispute in literature. In this context, the best source of substantive default rules lies not in a theoretical model, but in reference to commercial and trade practice. This is not simple faith in empirical sources for commercial law. It stems from the reality that, even though we may not know how law interacts with contract practice, decisions about contract law will continue to be made. In those decisions, we should refer for guidance to the accumulation of practical choices made in actual transactions. The goal is a congruence between legal premise and commercial practice so that transactions adopted by commercial parties achieve commercially intended results. 14 Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interaction Between Express and Implied Contract Terms, 73 Cal. L. Rev. 261, 266 (1985). See also Randy E. Barnett, The Sound of Silence: Default Rules and Contractual Consent, 78 Va. L. Rev. 821, 822 (1992) ("default rules [that reflect the conventional or common sense in the relevant community] are likely to reflect the tacit ... agreement of the parties and thereby facilitate the social functions of consent."). Background rules tied to the ordinary, but actual commercial context tend both to provide a legal base that falls within the tacit expectations of the parties and to ameliorate problems from lack of knowledge by supplying common sense outcomes.
Yet, in Article 2, Article 2A, and Article 2B, a wide range of transactions exist and a variety of diverse industries are affected. The transactions range from a casual deal between two individuals at a garage sale to transactions between sophisticated businesses employing multiple lawyers and affecting billions of dollars of business. The approach needed is not to draft rules that an individual party would draft tailored to each case, but to select an intermediate or ordinary framework whose contours are appropriate, but whose terms will be altered in the more sophisticated environments. A UCC Article designs default rules that are acceptable in ordinary transactions where they can be frequently used without disruption or costly negotiation.
Intellectual Property Overlay
Many, but by no means all of the information that provides the subject matter in commercial exchanges receives protection under federal intellectual property law. In most cases, patent and copyright law do not affect contract law; they coexist with it. Article 2B does not create contract law as an option in this field. For many years, owners of intellectual property have contracted for selective distribution of their property and placed limits on contracted-for use. Licensing law reflects this broad and long-standing contract practice and generally allows contract options, subject only to specific restrictions in federal property law, to antitrust-related restrictions on some contracts in some settings, and in some limited types of claims or contexts, to over-riding mandatory federal policies.
As stated in the Copyright Act, federal property law precludes state law that creates rights equivalent to property rights created under copyright.15 17 U.S.C. 301.
But as both a practical and a conceptual matter, copyright (or patent) do not generally preclude or preempt contract law.16See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996);
Indeed, contracts are essential to use one's own property, even when the property is tangible, let alone when it is intangible. A contract defines rights between parties to the agreement, while a property right creates rights against all the world. They are not equivalent.
Important issues exist here. Federal intellectual property law, as well as other federal law and regulation, place some specific, existing, and recognized limits on contract. These include restrictions on transferability, recording requirements in some cases, a statute of frauds concept, and enforceability of property rights against good faith purchasers. A state law developed in context of these specific and existing rules cannot ignore them. While state commercial law themes might prefer a rule that a secured creditor can create and enforce a creditor's interest in a licensee's rights, federal law precludes any transfer of a licensee's rights in a non-exclusive license without the licensor's consent. A default rule that ignores this preemptive provision creates true traps for the unwary. In this draft, they are avoided insofar as possible, although in several situations, there are provisions that push against explicit federal rules insofar as reasonably possible.
This interaction of state law and specific federal yields default rules that, in some cases, do not correspond to the treatment of analogous issues in other parts of the UCC. This is true, for example, with respect to the transferability of a licensee's interest in a non-exclusive license. Federal law reflected in a series of cases holds that the licensee's interest is not transferable without the licensor's consent.17See Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996).
The rationale for this rule is discussed in relevant notes in this draft, but the principle, which contradicts some state law assumptions about transferability, is followed in the Draft. Similarly, in patent and copyright law, no concept of good faith purchase exists against a claim of infringement and this principle limits the ability of a party taking outside of the terms of a license to claim insulation from infringement and other property claims based on making or retaining unauthorized copies or uses.18See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (ED NY 1994).
The Draft corresponds to this federal law approach. Also, copyright law precludes a transfer of ownership of copyright in the absence of a writing conveying ownership. In discussing development contracts, this Draft reflects that limitation, but attempts to ensure that the agreement of the parties is enforced to the extent possible within that federal law constraint.
These provisions reflect a policy of correspondence of rules in addition to simple recognition that federal law preempts contrary state law. There are other situations where federal law and policy shapes contract law and practice, but the nature of that role is less clear and typically more controversial. The Draft adopts a position of neutrality on such issues, leaving determinations about their content to be determined under federal law, the appropriate venue for such discussion.
This occurs primarily in respect to federal policies managing competition under antitrust and similar theories of intellectual property misuse and to the application of federal policy about the availability of publicly distributed information for fair use and public domain applications. Typically, in determining whether or when such policies apply, courts accept that contract law generally prevails, but ask whether a particular contract clause in a particular setting conflicts with federal policies when balanced against the general role of contracts in the economy and legal system. How far the federal policies reach remains in dispute. Not surprisingly, in light of the transformations and economic shifts yielded by digital information technology, defining the proper scope of rights as a matter of federal property law has been controversial; it remains unresolved despite extensive periods of negotiation and political discussion. Two disputed settings deal with reverse engineering of copyrighted, but unpatented technology and with the scope of educational or scientific fair use of digital works. The issues are questions of federal law and policy. They must be resolved by courts and Congress, rather than through state legislation. Article 2B takes no position on these policy questions, but merely provides a generic contract law framework to augment and bring to modern form the existing complex network of common law, code and general industry practice.
THEMES IN THE DRAFT
The fundamental theme entails a recognition of the differences in goods and information as subjects of commercial transactions. In the world of goods, the goal of the purchaser involves acquisition and use of specific, tangible property. That focus yields a number of transactional principles in article 2 and 2A and also shapes the nature of the remedies developed in those articles. It yields a focus on the manner and condition of delivery and, in the case of breach, on the disposition of the particular items or their replacement. In the world of goods, while many replications of a particular product are placed on a mass market, each product provides and constitutes the unit of exchange. In the world of information, that is no longer true. Many resulting principles and remedial provisions differ as a result.
In the world of information, the goal is to acquire the knowledge, technology, or other intangibles along with the right to use the intangibles. Unlike in goods, information cannot always be returned, nor need the same copy be transferred in order to establish the harm caused by breach. Thus, remedies differ from those for goods. Also, because of its intangible character, information can be transferred in many different ways: a telephone call, a electronic message, a delivery of a diskette. Article 2B seeks transfer method irrelevance. How a transfer occurs should not alter the applicability of the article or, in general, what substantive rules apply. Some information transactions involve remote access to a computer, while others occur by delivery of a diskette or a book. This does not place one transaction within the UCC, while the other is under common law. In some cases, the method of transfer and the market in which the transfer occurs affects what default rules apply, but this should only be true if the commercial practices are different or if there are substantive policy concerns that indicate a different result is proper.
Beyond this, important concepts emerge around 1) the scope of the Article; 2) the electronic contracting rules; 3) the concept of mass market licenses; 4) the treatment of standard forms; 5) the use of a substantial performance standard other than in mass market transactions; 6) the tailored warranties for programs and informational content; 7) the treatment of transferability; and 8) the handling of remedies.
Scope: Licenses and Information
In every context in which modern information technologies have 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 definition of Article 2B scope. The Draft reflects extensive discussion by the Committee and in other forums relating to how to best delineate the scope of the Article.
The basic questions involve first, what primary defining factors should be employed and second, what exclusions or inclusions should be adopted. The choices at the first level involve, largely, defining the subject matter (e.g., digital information or all information) and the type of transaction (e.g., license as contrasted to a sale).
The origins of the project lie in proposals about software transactions. Today, however, software is an ubiquitous element of information products. In a digital world, a focus on "software" transactions would be arbitrary and ineffective. The Draft focuses on transactions in "information."
"Information" means data, text, images, sounds, and works of authorship, including computer programs, databases, literary, musical or audiovisual works, motion pictures, mask works, or the like, and any intellectual property or other rights in information.
The Committee rejected proposals to limit scope to digital information. Modern convergence of various information technologies makes reference to digital or a similar term an unworkable scope definition. One further rationale for this step lies in the desirability that the law not change based solely on the form in which information is distributed. Should, for example, there be a situation in which a factual database is distributed as a newspaper or distributed electronically? In both cases, the obligations and contract terms of the deal should be the same. Thus, bringing both into the same statutory mix enables the development of stable and consistent contract law rules. The consistent theme has been that the rules applicable to electronic information should be the same as the rules applicable to their printed counterparts.
The Committee opted to focus on licensing of information and software contracts. For transactions in information other than software, this allows a distinction between transactions involving a license and transactions involving the sale of a copy. This leaves undisturbed major segments of the traditional information industry that may not need treatment in a uniform law, 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 may be as explicit as the distinction between a sale and a lease in reference to goods. Except for the paper or other material used in the copies, law dealing with such information products arises under a body of common law tort and contract. The scope as to these products utilizes a transaction based characterization consistent with practices in those industries.
For computer software, the more important factor involves the nature of the product. Except for a few cases where no copyright protection exists, all transactions are subject to either express or implied limitations on the use, distribution, modification and copying of the software. These limitations are commercially important because the technology makes copying, modification and other uses easier to achieve in forms that can yield commercially harmful results. Bringing all transactions involving this subject matter into Article 2B reflects the functional and commercial similarity of the transactions and the need for a focused body of law applicable to these 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 regardless of whether a transaction constitutes a license or a sale of a copy (e.g., what limitations are appropriate on use of software to report information about the licensee's computer environment?).
Overlap Within the UCC
Obviously, many transactions entail mixed subject matter, including both information and goods (either sold or leased) Article 2B handles this overlap in two ways. The primary approach applies a variation of the gravamen of the action test. Article 2B covers aspects of a mixed transaction involving information, copies and documentation. Article 2 (or 2A) covers other goods in the same transaction. Which Article applies to a particular dispute depends on the focus of the dispute. No predominant purpose test is intended.
The second approach delegates full coverage to Article 2 in cases of embedded software (e.g., software used to operate the braking system of a car), thus leaving product liability and product quality issues in that context to that law. Defining the scope of this exclusion has been difficult.
Patent, Trademark and Services
The Draft contains a number of tailored exclusions, leaving various information and services contracts to common law coverage. Some of the exclusions have been widely accepted, but some have been controversial.
The exclusions deal with a variety of services and employment contracts. These include any employee relationship and services agreements related to entertainment (e.g., actor, musical group performance, producer, etc.). In the excluded cases, personal services contracts involve different default provisions than here. 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).
In each case, however, whether the work product of the individual entails the creations or modification of information, the essence of the contract deals with the personal labor of an individual or group. Especially as to employment contracts, a large body of existing law regulates the content and enforceability of the contracts in this services context. While the contracts have commercial significance, they are not commercial contracts and no good reason appears to include them within the UCC.
A more controversial exclusion deals with patent and trademark licenses. The desirability of this exclusion has been extensively debated by the Committee. The rationale for exclusion lies in the differences between 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 in the areas covered in this draft. The exclusion allows the draft to concentrate on a more focused area of commerce. In practice, however, one can anticipate that courts will apply aspects of this Article to other fields of licensing.
Electronic Contracts
Article 2B deals with electronic contracts. This area of contract practice is one that the White Paper referred in endorsing the value of this project for commercial practice in the information era.
The basic approach holds that contracts created using computers should be enforceable and that contract law principles establishing a stable basis for such contracts provides an important, facilitating services for developing commerce in this field. The provisions of Article 2B on these issues will provide a model for the other articles of the UCC and, eventually, a framework for national electronic commerce.
Formation Issues
Formation questions present mechanical as well as deeply philosophical issues about the treatment of electronics in contract law. At the most simple mechanical level, Article 2B uses of "record" (see 2B-102) in lieu of the traditional reference to "writing" as a reflection of the fact electronic recordation and transmission stands parallel to or more significant that writings in modern practice. This term is now standard UCC terminology. A 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.192B-102.
The term divorces concepts associated with writings from the traditional paper environment, making electronic records fully equivalent to paper records. The language here relates to language in the federal Copyright Act defining a "copy."
Article 2B also changes terminology in the idea of signature. The Draft replaces signature with "authentication." That term encompasses electronic actions to encrypt electronic records and is defined in a manner independent of concepts of a handwritten signature. The draft follows the emerging consensus that actions other than handwriting can suffice. The definition provides:
"Authenticate" means to sign or to execute or adopt a symbol, including a digital identifier, or encrypt a record in whole or in part with present intent to adopt, 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.20 2B-102(2).
This Draft does not follow modern "digital signature" statutes which confine legal impact to encryption technologies of a designated type. It is open-ended in terms of the technology, but does clarify that the impact accorded to a signature under prior law applies in the case of encryption techniques. The open standard is more appropriate for a general contract statute.
Under the Draft, if the parties agree to a commercially reasonable method of attributing a document to a party, compliance with that methodology per se gives the status of a signature.21 2B-110.
The idea of an "attribution procedure" is adapted from UCC Article 4A, security procedure. This parallels digital signature statutes in that, if the parties agree to use digital signature procedures, that choice is validated in the draft as conclusively constituting a signature. The requirement that the procedure be commercially reasonable allows a court an opportunity to consider the nature of the system adopted in any cases where the accuracy of the attribution is contested.
A more significant proposal deals with an "electronic agent." This concept refers to a computer program or similar automated device established to act on behalf of a party. While not an "agent" in traditional senses, the use of programmed surrogates to make contracts, find information, and otherwise interact with computers of other parties is increasingly important in electronic commerce and will be even more so in the future with respect to information assets where no specific need ever exists for a human being handling the transaction or its result in a digital world.22 2B-102.
Article 2B deals with the fact that electronic contracts, driven by computer capabilities, will increasing involve arrangements entered into and performed without there being any necessity for human intervention or decision making on both ends of the transaction. This yields a number of questions about offer and acceptance, notice and the like. Article 2B adopts the view that electronic contracts can be formed without human choices being made to offer and accept a particular transaction and that notice can occur without a human review of the subject matter. If a party creates a situation in which an electronic agent is to act on its behalf, then that party is bound by the actions of the "agent."23 In Article 2B, this is a question of "attribution." 2B-111.
An aspect of this concept is that contracts can be formed by the interaction of such agents with or without the active involvement of an individual representing the contracting party.24 2B-203.
In an electronic world of information- based transactions, human review of particular transactions and reaction to that review will often be displaced by electronic review within preprogrammed parameters with programmed or "learned" responses. These provisions, and other similar sections, are aimed at identifying and validating these commercial practices under appropriate standards.
There are risks of fraud and error, of course. Article 2B deals with these through a concept of "attribution." The idea that a computer can act on behalf of a party assumes that it serves as an electronic agent, selected, created or otherwise made available by the party for that purpose. More generally, attribution implies that a party will be charged with responsibility for a particular message or performance rendered electronically. There are three methods of attribution: actual involvement of either the person or its electronic agent, compliance with an attribution procedure, and lack of reasonable care resulting in loss to the other party. These concepts parallel international developments relating to the more closed-end use of Electronic Data interchange. They balance between a number of potential, other regimes for allocating loss or risk in electronic deals.
Mass Market Definition and Use
This Article creates the idea of a "mass market" contract that achieves a shift away from traditional patterns in the UCC which focus on "consumers." The term moves to a retail marketplace definition in which consumers and some businesses are treated under the same protective law. This extends some protections typically reserved for consumer to a business licensee and brings in various marketplace assumptions about transferability and the like that may be pertinent to mass market environments.
The "mass market" paradigm in Article 2B creates a number of important policy issues. The issues entail distinguishing "mass market" and "consumer" transactions. While the one incorporates the other (e.g., consumer transactions occur in the mass market), the idea of a mass market transaction goes far beyond the idea of a consumer transaction. Indeed, with respect to transactions that fall within this concept, a significant percentage if not a majority of licensees will be businesses, rather than consumers (e.g., commercial grade word processing; network operating software, database products, project management software). Some of these will be small businesses, but under current licensing practice, many of the licensees will be large business entities, larger than the licensor from whom they are "protected."
Definition.
The definition of mass market has been elusive.
Part of the difficulty lies in the fact that, while many have an intuitive understanding of what constitutes a mass market transaction, the concept has not been used in any other statutory provision. Most contract statutes focus on the consumer-commercial dichotomy. Some consumer protection rules broader the idea of "consumer" to include some business purchasers, but typically do so in terms of dollar amount limitations. Federal law provides mostly a focus on consumers, but in the Magnuson Moss Act uses a concept of "consumer product" which focuses on the general or most common purchaser of a product and then applies the federal regulations to the product, regardless of whether the specific purchaser was or was not a consumer.
As these concepts indicate, one way to conceptualize the "mass market" involves identifying a marketplace in which most participants are consumers in the traditional sense. Thus, for example, transactions made in general retail store environments are typically mass market transactions and also very often characterized by predominantly consumer transactions. On the other hand, purchases from wholesale distributors are often not equivalent to a mass market. Additionally, a characteristic of a mass market is that the party acquiring the relevant material is typically the end user, rather than a person acquiring for redistribution.
As drafted, the idea of a mass market centers on small transactions directed to the general public in a retail marketplace. In light of the risk allocation issues involved and new nature of the undertaking, the goal is to focus on relatively small transactions. This Draft incorporates most consumer transactions within the ambit of mass market. For non-consumer transactions (e.g., transactions between two businesses in a retail market), the definition utilizes a combination of a retail, general public reference point and a monetary cap to achieve the intended focus. The monetary cap does not limit consumer inclusion in the concept.
Applications
The issue with reference to the idea of a mass market in this Article goes beyond the definition and deals with how the concept is applied. The two uses of the concept: 1) treat the marketplace as a surrogate for consumer protection, thereby extending consumer protections to business transactions, or 2) use the concept a marketplace identifier which allows definition of various expectations about the nature of transactions in that market.
In contract law statutes, the idea of a "consumer transaction" has traditionally been associated with a theme of protection and enhanced notice requirements justified largely by the assumption that many consumers will be unsophisticated and lacking in economic power to negotiated terms or seek alternative sources of supply. That term and that tradition are present in various articles of the UCC. Clearly, in Article 2B, use of a reference to a consumer transaction should signal similar concerns.
The idea of a mass market transaction, on the other hand, could better be viewed as identifying a marketplace in which particular assumptions might be made about the nature of the transaction and the expectations of the parties. Thus, a mass market is typically an anonymous market and one in which the purchaser-licensee anticipates being able to retransfer its purchase and to use it in ordinary ways in its own machines. It is a market in which multiple copies of identical information or products are transferred to multiple purchasers without customization, making it possible to ask questions about what are the characteristics, for example, of an ordinary database system or word processing system. One view, quite simply, is that there term mass market is appropriately used when the article identifies a particular marketplace assumption, rather than a rule of purchaser protection in the classic consumer sense.
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 presumably lack the expertise to understand contract issues (e.g., consumer) and cases where the goal is to identify and define a marketplace by reflecting presumed assumptions applicable in that marketplace. The Committee opted to apply the concept of "mass market" as the theme in all but a few sections in which the issue arises.
"CONSUMER" APPLICATIONS:
2B-108 (choice of law): default rule
2B-109 (choice of forum): contract choice limited
2B-117 (electronic error): proposed consumer defense
2B-303 (effect of no-oral modification clause): contract method restricted
2B-618 (hell and high water clauses): effectiveness of clause limited
"Mass Market" Applications:
2B-106 (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-208 (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
Relationship to Existing Consumer Law
Although the idea of "mass market" goes past traditional concepts of consumer protection, the combined effect of using that term and covering some transactions involving consumers specifically produces a draft that, in general, retains all existing UCC consumer protections and in fact creates some protections that are not present under current law.
For mass market transactions, the Draft retains the idea of perfect tender, important for consumer transactions as a means of allowing a simple remedy for products that do not meet standards. In addition, the Draft retains the implied warranty of merchantability in the mass market, applicable to consumers and businesses purchasing in that marketplace. As under current law, the warranty can be disclaimed, but Article 2B goes beyond existing UCC law to require that the disclaimer be in writing (a record) and by requiring a plain language disclaimer that gives the consumer more notice of what its rights are.
There are several situations in which the Draft creates rights beyond current Article 2. One involves so-called electronic viruses in the mass market setting. The Draft creates obligations to exclude viruses and make disclaimer of that obligation in the mass market more difficult than disclaimer of general warranties.
More importantly, as discussed below, the Article allows a consumer to object to terms of a mass market license based on arguments that the term would have caused a refusal of the licensee had it been brought to the licensee's attention. This incorporates ideas from the Restatement, but brings them to a general commercial marketplace where they have generally not been previously accepted. This rule covers both consumers and businesses who acquire information in the mass market.
A chart summarizing consumer-related issues in Article 2B as compared to current law is attached at the end of the Preface.
Standard Forms and Manifested Assent
In Article 2B makes a direct effort to deal with standard form contracts. The basic principle lies in the fact that in commercial agreements, standard form use is widely and broadly acceptable. It provides a number of economies in transaction costs and, quite simply, provides a strongly supported commercial practice. Article 2B adopts the position that standard forms used to document an agreement are enforceable so long as the party being charged with the terms of the form manifested its assent to the form.25 2B-307. No other position would be workable in modern commercial practice.
The Restatement (Second) of Contracts 211 generally supports enforcing standard forms except as to terms that fit the following:
Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement.
Restatement (Second) of Contracts 211 (3). The Restatement emphasizes whether, as viewed from the vantage of the provider of the form, the terms are such as would cause a refusal by the other party if brought to that party's attention. For that to occur, of course, the terms must not only be surprising, but also highly adverse to the deal. Only a small minority of states have adopted the Restatement test on this issue, but many states have rules that provide for closer scrutiny of standard forms in contracts of adhesion, especially consumer contracts.
The UNIDROIT Principles of International Commercial Contracts, reflecting a similar background, deals with standard terms (not forms) and invalidates terms that the "party could not reasonably have expected." For such terms, there must be specific agreement to the term. UNIDROIT art. 2.20. Unlike the Restatement, this emphasis is on the reasonable expectations of the assenting party and creates, one suspects, an impossible burden for a licensor who must structure its forms to fit diverse transactions and diverse contexts, especially in the mass market. This approach is particularly suspect because it centers on terms that are standard, rather than terms in standard forms. The UNIDROIT standard has not been adopted in any country, or any state of this country.
Article 2B approaches the standard form issue in a bifurcated fashion that conforms to the general idea that contractual choices are enforceable in the absence of unusual factors, especially in commercial deals. Article 2B buttresses this presumption with rules that are designed to ensure that, even in a purely commercial deal, the party adopting the form has an opportunity to review the terms and to accept or to reject them without penalty. These protections are embedded in the ideas of manifesting assent and opportunity to review described in 2B- 112 and 113.
A party can "manifest assent" to a form or a term only if they previously had an opportunity to review it and its terms. No assent to unknowable terms is effective. Beyond that, a party who had an opportunity to review the record and any specific terms for which assent is required, manifests assent if it engages in affirmative conduct that the record conspicuously provides will constitute acceptance of the record or of the particular term. Merely retaining the information or the record without objection is not a manifestation of assent. Also, a party's conduct does not manifest assent unless the record was called to the party's attention by before the party acts. In cases where the form is available only after the original agreement and during the period of initial use, manifestation of assent cannot occur unless, if it declines the agreement, the licensee can obtain a refund of any fees paid.
In a mass market, the transaction is anonymous and for often not fully considered by the transferee. In mass market transactions, Article 2B applies the concepts of manifesting assent and opportunity and goes further to invalidate some terms, even if there was an opportunity to review the overall form, unless there was assent to the particular term.
In invalidating refusal terms, Article 2B adapts the Restatement test. The basic theme is that, if the licensor should know that a term is surprising and would cause refusal of the license if the licensee knew of the term, that term is not enforceable unless the licensee expressly manifests assent to the term itself. This rule accommodates concepts about adhesion contracts, unfair surprise and the like. It protects against unfair surprise in a mass market transaction, but enables use of a contract in that setting. Manifestly, parties in the mass market enter into contracts. The issue is what are the appropriate terms of the contract. This approach places procedural protections on the creation of terms and allows a court to exclude unfair terms, but generally accepts that a party (even in the mass market) who assents to a form is bound by that form.
Informational Content.
Article 2B deals with a large number of informational content transactions that are not transactions involving computer programs per se. In dealing with contracts pertaining to information content, however, choices must be made about the applicability of Article 2 sale of goods concepts. In many respects, these concepts do not comfortably fit practices and relevant interests involved in handling contracts about informational content.
Transactional Aspects
This Draft contains two sections dealing with informational content transactions in terms of the transactional processes. One deals with the application of Article 2 concepts of tender, rejection and revocation to information industries. Unlike general rules in common law and the Restatement, the Article 2 model contains an 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 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 and until there is an express indication of acceptance (or rejection) by the licensee. This corresponds to commercial practice in this context.
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.
Liability Issues.
This Draft creates a concept of "published informational content" and relies on First Amendment and related policies to avoid the creation of expansive liability risk under contract law for distributions of information to the public. The issue here involves drawing a balance that allows for the continued, vibrant dissemination of content for use by people in an open society.
Published informational content is exempted from any implied warranty under 2B-404. This is critical insulation for such information providers and also corresponds to what rules exist under current law, such as in the Restatement (Second) of Torts 552 as applied by the courts. The Draft also proposes an exclusion of third party product liability claims with reference to published information under Section 2B-409. This brings the Article into correspondence with the Restatement and with better reasoned cases. Liability for information content is generally restricted to special relationships of reliance.
Section 2B-402 on express warranties leaves current law in place without change for published content. It declines to transport Article 2 express warranty rules into this environment, allowing courts to continue to work out under what conditions a content provider should be held liable for alleged breach of contractual representations.
Warranties and Performance Obligations
Article 2B blends previously disparate areas of contract that have a different mix of policy considerations and commercial practice with respect to implied assurances of quality in performance.
Transactions governed as sales of goods historically carried an implied warranty of merchantability that focuses on the quality of the product received, but can be and is routinely disclaimed. The warranty sets out the premise that the product conforms to ordinary expectations for products of similar type.
Different traditions exist in transactions outside Article 2. Under current law, many of the contracts covered in Article 2B would be services (or information) contracts. In many states, these contracts carry no implied warranty. In other states, and under Restatement law, an implied obligation or warranty exists, but does not guaranty an accurate result. It entails an assurance of workmanlike or reasonably careful effort. In transactions in information, tort and contract law implied obligations, when they exist, typically hinge on assurances that no false information is provided as a result of a failure by the provider to exercise reasonable care in a context where the provider supplies information for the business guidance of a particular client. Restatement (Second) of Torts 552. Case law typically limits this concept to relationships such as consulting contracts, accountant audits, professional client services, and the like; in the vast majority of reported cases, the obligations do not apply to information products distributed outside such relationship and in a form not tailored to a particular client (e.g., newspaper distribution, books). That decisional pattern reflect fundamental and long-standing policy. Contracts involving information content are infused with First Amendment and related concerns about not impeding the free flow and production of information.
To reflect the different traditions and the subject matter addressed in Article 2B, several tailored warranty rules are developed.
Computer Programs
Article 2B sets out an implied warranty of merchantability with respect to computer programs distributed in the mass market, applying a standard of substantial conformance to documentation for programs not distributed in the mass market.
The merchantability standard follows existing Article 2. It compares the particular program to programs of similar kind and asks whether the program meets ordinary standards for its description. As in Article 2, the warranty can be disclaimed in Article 2B. In current practice, few cases arise in which disclaimer does not occur. There are almost no reported cases on the meaning of merchantability in computer software.
For computer programs not in the mass market, there is an implied warranty that the program substantially conforms to its documentation. This corresponds to the most common negotiated warranty in commercial licensing. It differs from the merchantability warranty in its focus. The warranty focuses on the program's documentation itself for the implied obligation, rather than seeking to discern "ordinary" characteristics in "similar" programs outside the mass market as would be required by a merchantability concept. Besides creating a parallel with modern commercial practice, this warranty reflects the fact that outside of the mass market a wide diversity exists in program capabilities and characteristics, even within the same generic type of software. Non-mass-market programs of similar type differ widely in attributes, speed, capacity, and other traits that make comparisons across categories of software uninformative. An "ordinary" data compression program may not exist in this market.
Informational Content.
Article 2B-404 provides an alternative warranty structure relating to the aesthetics and factual accuracy of information content. In a given case, however, both computer program and information content warranties might apply because an information service provides content selected or sorted through use of a computer program.
Information content refers to factual data, images, sounds and the like, intended in the ordinary course to communicate to human beings. (2B-102) This is information in the classic sense of what one reads in the newspaper, sees on television, or obtains by reference to an encyclopedia. This Draft proposes a new term: "published information content" to identify content distributed on an general, non-tailored basis outside any special relationship.
No implied warranty exists in Article 2B about the aesthetic merit or marketability of information content. These are matters of taste and judgment, not of warranty, unless the parties seek and receive express commitments.
Implied warranties relating to the accuracy of factual information are created with respect to information distributed to a client in a special relationship of reliance or in a situation where the author or publisher tailors the information content to the particular contract. In cases where the warranty exists, there is no absolute assurance of accuracy, but a commitment that no inaccuracies are created by the provider's failure to exercise reasonable care. These provisions parallel existing law under contract and tort theory. They neither expand, nor restrict liability risk for the information provider except to the extent that the current draft applies this obligation in cases of non-business information, unlike the Restatement.
Viruses and Damaging Code
Digital products and on-line services create various risks relating to inadvertent (or intentional) introduction of computer viruses into the system of another party to an electronic transaction. The risk runs in both directions. A licensor may introduce viruses into its system or a licensee may inject a virus into a licensor's system. In fact, most virus issues arise in on-line systems or on-line access as compared to distributed software products on diskette.
No current case law provides guidance on how to allocate risk for viruses in a contractual context. No cases have arisen under Article 2. Under criminal law in many states, a party has liability for knowingly (not negligently) introducing harmful code or viruses into a computer system of another person. The cases under these statutes make it clear that this does not entail liability without fault, but focuses on intentional and knowing conduct.
Because the issues runs in both directions, an issue arises about whether to treat questions about virus obligations as a warranty, or as a contractual obligation.
Disclaimers of Implied Warranties.
UCC law allows parties to disclaim warranties. Article 2B follows that tradition.
As to merchantability, in mass market transactions, Article 2B requires a conspicuous disclaimer in a record. It indicates that a disclaimer complying with the terms of Article 2B is not unconscionable. This codifies current law in the majority of jurisdictions under the UCC. Where disclaimer language is invalidated despite compliance with conspicuousness rules in the UCC, this typically occurs because of specific consumer protection laws in a given state. Those laws on this point are not altered by Article 2B.
Article 2B continues current law to allow enforcement of "as is" language in non-mass-market transactions. In mass market transactions, it requires the following language or its equivalent: "The information [or computer program] is being provided as is or with all faults and the entire risk as to satisfactory quality, performance, accuracy, and effort is with the user." To be effective, this language must be conspicuous. This plain language approach makes disclaimers more informative.
Article 2B allows disclaimer of infringement warranties. Under current Article 2, the warranty can be disclaimed by "specific language" or by circumstances that give the buyer reason to know that the vendor is transferring only the rights it has. Current Article 2A uses the same approach.
Transferability and Financing
Article 2B deals with transferability, financing and related issues concerning licensed information. It does so in context of an important group of restraints present in modern federal law relating to intellectual property rights.
Federal policy and case law restricts the transferability of contractual and other rights in intellectual property, a core of the information assets considered in Article 2B. A consistent line of federal court decisions holds that, as a matter of federal policy, a licensee's rights under a non-exclusive license of a copyright or patent cannot be transferred without the consent of the licensor. This was confirmed by the Ninth Circuit in a holding that a patent license did not become part of the bankruptcy estate of a licensee. The explanation for this rule can be stated in terms of the limited nature of a license. It is also an outgrowth of federal policy allowing a licensor to control to which licensee's its intellectual property rights are conveyed:
Allowing free assignability 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.26Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9th Cir. 1996).
The issue reflects the fact that licensed information that is again transferred is not second hand property, but identical to the original. This is true not only in reference to the pure licenses, but also in licensing rights in digital information.
Copyright and patent law also have long held that acts that infringe rights under those statutory property regimes are actionable, even if done in good faith. Copying infringes even if the copyist is not aware of the underlying right. Copying (or other action in violation of the exclusive rights, such as distribution of copies) that goes beyond a license is infringement unless protected by fair use or similar doctrines. These rules shape the available range of good faith purchaser rules in this Article.27See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (E.D.N.Y. 1994).
A basic principle is that state law rules should not create a misleading impression by contradicting partially preemptive federal law. This shapes Part 5 on transfers and how financing can be accommodated. In both settings, the Draft contains suggested provisions that push close to limits. They accommodate financing by allowing creation and enforcement against the licensee, but not sale or control as against the licensor without consent of the licensor. (See 2B-504) Article 2A, not faced with the over-riding gloss of federal intellectual property policy, recognized a similar right of an owner to control its property, noting that 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.
This Draft allows creation of a financing interest in a licensee's interests, but limits enforcement without consent of the licensor. Resale is excluded because of support for the licensor's intellectual property rights. The Draft also proposes an integrated concept of "financier" which includes both a security interest and a financing lease. It does not include unsecured interests. The concept, defined in Section 2B-102, is applied in the two sections on financing. The first is 2B-504. The second, 2B-618, contains a limited discussion of the relative relationship between a licensor, a financier, and a licensee (debtor).
Remedies
Remedies under Article 2B reflect the transient, intangible nature of the subject matter. They do not presume, as does Article 2, the focus of the transaction is on handling tangible, identifiable goods. Rather , in an intangibles transaction, the transferor's remedies reflect the fact that in principle an infinite number of transfers of rights can be made from the same copyright or patented software. The remedies of the licensee likewise do not focus on its handling of tangible material, but on any effects of the breach of contract on the licensee's general business or other operations.
The damages formulae give either party a right to recover for consequential damages. An earlier Draft of Article 2B proposed adoption of what was thought to be the more common commercial approach: that consequential damages are routinely disclaimed in commercial contracts. That experiment has been abandoned. The new rule reflects common law. The Restatement uses a licensing illustration in describing its general damages approach:
"A" contracts to publish a novel that "B" has written. "A" repudiates the contract and B is unable to get his novel published elsewhere. Subject to the limitations stated [elsewhere], B's damages include the loss of royalties that he would have received had the novel been published together with the value to him of the resulting enhancement of his reputation. 28 Restatement (Second) of Contracts 347, illustration 1.
For both licensees and licensors, the remedies provisions allow contract flexibility to define remedies, but absent agreement, they draw two distinctions: (1) a distinction between material and non-material breach, and (2) a distinction between default as to particular events or performance in a contract and default as to the entire contract. Faced with a breach by the other party to the contract, the injured party has an array of options, including continuing to perform the contract but seeking or reserving the right to redress for the particular breach. Materiality can be defined in the contract and a contract definition is definitive.
In digital information, the technology enables automated enforcement techniques that are not available in other contexts. The automation allows a provider of digital information to limit its uses consistent with a contract and, when that permitted use expires, to cancel the capability to use the material in the future.
This Article deals with electronic controls in three different respects. In each, the theme is that the licensor's contractual interest sustains appropriate controls, but that the licensee's interests requires protection in the form of notice, contractual assent in some cases, and an clear reason to act in others. The basic model allows electronic remedies subject to significant restraints.
Section 2B-314 deals with electronic monitoring devices, such as programmed limits on the number of users, number of uses or the like. It enables passive monitoring and restriction. That is, restrictions that simply prevent extra-contractual activity, but do not otherwise alter the information. Beyond that, such devices are generally allowed only if notice is given and their use is assented to.
The more controversial restriction deals with cases of breach. A licensor retains an interest in the intangible subject matter of the transaction. This interest is different from that of a lessor because is applies to an intangible rather than goods. In 2B-716, in cases involving a license (as contrasted to an unrestricted transfer of information), the licensor's remedies include a form of repossession or, at least, taking steps to preclude further use of the information by the licensee. This right is sharply circumscribed. It does not exist in cases where the information was so commingled that it cannot reasonably be extracted from the other information assets of the licensee. There are also limits couched in terms of damage to the property of the licensee. The right to prevent further use will generally be exercised only through court action. Self-help, such as through the use of electronic methods to disable software can occur only in very limited cases.
To use a remedy based on an electronic device enabling disablement of the software or other digital information asset, a licensor must have authorization to do so in the contract and must be acting on a breach that is material independent of contract terms defining materiality. That is, the remedy only exists for important (material) breaches.
Self-help here contrasts to the far broader provisions in Article 9. A secured party can exercise a right of self help so long as the exercise of that right does not result in a breach of the peace. Material breach is not required and there are no limitations on possible damage to property; it allows repossession of "equipment" by disabling it. Article 2A remedies are similarly broad.
COMPARISON OF EXISTING ARTICLE 2 AND OTHER LAW WITH
PROPOSED ARTICLE 2B
IssuesArt 2: Existing Rules Relating to ConsumersArt. 2B: Rules Relating to ConsumersEffect28This column summarizes the impact of the changes based on existing UCC and common law and an assumption that: increased obligations on the vendor, reduced contract flexibility, and increased notice duties are beneficial to the consumer notwithstanding other effects on the marketplace. (NC no change; + increased protection; - reduced protection) different assumptions of a broader analsysis would convert many question markets or negatives to a different result.
Article 9 refers to consumer goods as acquired primarily for personal, household or family use.
Outside the UCC: definitions vary.Article 2B refers to: licensees that acquire primarily for personal, family or household use. Resolves case law debate on profit making, investment or professional uses.NC"Mass market" definedArticle 2: Concept does not exist.Article 2B defines to include retail transactions of information earmarked for the general public. Consumers covered without dollar limitation. +Mass Market: Consumer protections extend to businesses.Article 2 does not provide for thisArticle 2B: implicit in "mass market" concept. All businesses protected, not only small businesses. Protections include refusal term concept.+Non-UCC consumer rules; relationship to UCCArticle 2 did not "impair" existing consumer statutes.
Outside the UCC: Several states have digital signature laws with wholesale repeal of "signature" and similar requirements in all state lawsArticle 2B expressly retains and defers to consumer law outside U.C.C., except for electronic contract formation issues involving authentication, records, and assent. This enables electronic commerce.?Unconscionable clause invalidArticle 2 allows court to invalidate unconscionable clause; procedural and substantive unconscionability. Article 2B: same rule. (2B-111)NC
Unconscionable: clause or contract can be invalidated for unconscionable inducementArticle 2: no provision.
Article 2A: provides for this for consumer leases.
Outside the UCC: unfair and deceptive trade acts, fraud or similar law.Article 2B: same rule as Article 2 (2B- 111) Concepts of manifest assent, opportunity to review, refund, and refusal term concept add procedural and substantive protections.+
or
NCParol evidence
Article 2: no special rule for consumersArticle 2B: same rule. (2B-301) NCModification: contract clause that bars oral modificationArticle 2, in consumer contract, clause enforceable if separately signed.Article 2B: in consumer contract, manifest assent to the clause makes clause enforceable (2B-303)-
PRESUMPTIONS OF CONTRACTTransferee right to transfer without consentArticle 2 contains no provision.
Outside the UCC: right to transfer a copyrightable work is subject to the copyright owner's exclusive right to distribute copies except after a first sale. Licensee cannot transfer without consent (except after first sale).Article 2B allows mass market licensee to transfer copy and related license even if there was no first sale.
Article 2A leaves control with lessor. Outside the UCC: right is subordinate to copyright owner's rights.Article 2B allows mass market licensee to create security interest in its contract rights even if no first sale occurred.+Fair use: relationship between contract and fair use under copyright law.Article 2 has no provision.
Outside the UCC: issues are debated; cases generally enforce contract terms.Article 2B takes no position on this dispute; it involve federal policy. Rules on contract creation merely clarify existing ability of parties to contract.NCRight to make uses "necessary" to granted use.Article 2 has no provision.
Outside the UCC: some cases hold grants are interpreted against licensee to protect licensor; ungranted uses are sometimes protected via implied license.Article 2B requires reasonable interpretation of grants and presumes that the uses necessary for agreement are granted. Even if not mentioned (2B-310)+Duration of contract: no successive performances Article 2 contains no rule for cases not involving successive performancesArticle 2B: term presumed perpetual.+Duration of contract: successive performancesArticle 2: "reasonable time" subject to termination at will. (2-309)
Outside the UCC: similar rule, although the "reasonable time" limitation is not always present.Article 2B: same as Article 2. (2B-308)NC
Termination: notice required, ordinary contractsArticle 2 does not require notification unless termination is for other than an agreed event. Contract term dispensing with notice is valid unless unconscionable. (2-309)Article 2B: same rule. (2B-627) NCTermination: ongoing or access contracts.Article 2 does not require notification unless termination is for other than an agreed event. (2-309)
Outside the UCC: licenses can be terminated without notice, at least where they license use of licensor's facility.Article 2B adopts the common law rule for access contracts.?
or
NC
STANDARD FORMSStandard Forms: general enforceability in consumer marketArticle 2 contains no provision.
Outside the UCC: cases generally enforce contract in absence of contrary, regulatory statutes. Restatement allows enforcement, subject to eliminating some terms if party "manifests assent" to the form. Contract of adhesion analyses generally enforce contract, but scrutinize terms for unconscionability.Article 2B allows enforceability of forms only if there was an opportunity to review the form and an affirmative manifestation of assent to it. Even then, some terms may be invalidated if not specifically assented to even though the terms are not unconscionable. Does not alter conscionability standards
Outside the UCC: Restatement (2d) invalidates some surprising terms, but has been adopted in only a handful of states except for cases involving insurance contracts. Case law generally enforces forms in the absence of special legislation and except in battle of forms which seldom affects consumers. Contract of adhesion analysis requires close scrutiny of terms and interpretation against the vendor, but generally treats contract as enforceable.Article 2B enforces forms only if there is an opportunity to review and an affirmative assent to the form. Excludes "refusal" terms unless there was assent to the specific term, even if the terms are not unconscionable and even where an clear opportunity to review and reject was given. Applies modified Restatement rule, increasing protections for licensee in any state where the Restatement has not been adopted (a vast majority of all states have not adopted it). (2B-208)+Mass Market Forms: require affirmative act to be boundArticle 2 does not expressly deal with this, but recognizes that conduct can be acceptance. Cases do not always require affirmative act; allow assent by retaining product without objection. See Gateway 2000; Cruise LinesArticle 2B provides a contract is not enforceable unless consumer agrees or manifests assent. Assent requires affirmative conduct, not mere retention without objection. (2B-112)+Mass Market Forms: enforceability of terms not seen until after price is paidArticle 2 does not expressly deal with this except through battle of forms and contract modification rules. Case law varies but cases do exist in various contexts that enforce post payment terms.Article 2B allows terms to be enforceable only if there is a right to obtain a refund if the terms are unacceptable. This right exists even if product is perfect.?
Mass Market Forms: refund if terms of form are not acceptableArticle 2 does not deal with this. Cases enforcing post-payment terms do not routinely require a refund.Article 2B requires right to refund if license refused. Refund from remote publisher or the retailer. (2B-113) +Mass Market Forms: remote publisher contract impact on retailerArticle 2 does not deal with this. Cases vary, but often make the two contracts independentArticle 2B: retailer is not bound by and does not receive the benefits of the remote party's contract terms (2B-616)NCMass Market Forms: ability to contract with remote copyright owner to vary use terms to permit otherwise infringing actArticle 2 does not deal with this.
Outside the UCC: in the absence of a contract with the copyright owner, party may not do any infringing act; rights depend on whether or not there was an authorized first sale and are limited to first sale rights..Article 2B creates methodology for contracting between end user and the copyright owner. The contract terms may expand rights on first sale (e.g., copies on portable and desk top system, multiple users, public display) or may reduce rights as compared to a first sale. ?
Outside the UCC: cases reflect willingness to enforce even in non-negotiated contracts. Some consumer laws preclude enforcement.Article 2B: not enforceable against a consumer if it selects a jurisdiction that would not otherwise have jurisdiction and causes "unjust and unreasonable." Subject to consumer statutes. (2B-109)+Choice of forum: no contractual choice.Article 2 does not deal with this.Article 2B same rule.NCChoice of law: in the absence of a contract term dealing with the issueArticle 2 does not deal with this.
Article 1 chooses any state with an "appropriate" relationship to transaction. No special rule for consumers.
Outside the UCC: Wildly divergent rules.Article 2B: Creates rule for on-line information contracts (licensor location) and delivery of tangible copies involving consumers (delivery place). Otherwise adopts Restatement (2d) (2B-108)+Choice of law: enforceability of contract term dealing with the issue Article 2 does not deal with this.
Art. 1 requires that contract choice have a reasonable relationship to transaction, but other articles contain different rules.
Outside the UCC: contract generally governs unless consumer law or other mandatory law bars.Article 2B: Allows contract choice except where precluded by consumer statute or judicial rule.?
WARRANTIES
Viruses in a product or information: liability where virus created by vendor.Article 2 does not deal with this. Might be included and disclaimable in merchantability warranty.
Outside the UCC: a criminal event.Article 2B: obligation to use reasonable care to avoid; obligation cannot be disclaimed for mass market products distributed in tangible form (2B-311)+Viruses: liability where virus implanted by a stranger to the transaction.Article 2 does not deal with this. Might be included and disclaimable in merchantability warranty.
Outside the UCC: no clear rule or cases.Article 2B: obligation to use reasonable care to avoid; obligation cannot be disclaimed for mass market products distributed in tangible form (2B-311)+Warranty: title or authorityArticle 2 imposes a good title warranty. Article 2A does not require "good title".
Outside the UCC: in licensing, status of good title warranty is uncertain.Article 2B: imposes a warranty of authority to make the transfer. (2B-401)
?Warranty: delivery does not infringe intellectual property rightsArticle 2 warranty that merchant will deliver goods free of infringement; liability is without knowledgeArticle 2B imposes a warranty that a merchant has no reason to known delivered product infringes. (2B-401)-Warranty: use does not infringe intellectual property rightsArticle 2 warranty does not apply to use of information nor does Article 2A.
Outside the UCC: warranty does not exist unless created expressly.Article 2B imposes a warranty that authorized use of the information by the licensee does not infringe; warranty is that there is no knowledge (2B-401)+Warranty: quiet enjoyment
Article 2 does not deal with this.
Art. 2A gives this warranty.
Outside the UCC: the cases are unclear.Article 2B imposes a warranty of quiet enjoyment (2B-401)+Implied Warranty: merchantability of productArticle 2: an implied warranty given to buyer by merchant seller of a product. Art. 2A same warranty.
Outside the UCC: does not exist.Article 2B: same warranty for mass market (which includes consumers). (2B- 403)NC>> Merchantability: includes "pass without objection in the trade"Article 2 requires goods to "pass without objection in the trade"Article 2B: same rule. (2B-403)NC>> Merchantability: measure by effect on an "ordinary system"Article 2 does not deal with this directly, but focuses on the relationship between the product and ordinary descriptions of the product.Article 2B: same rule. (2B-403)NCImplied Warranty: accuracy of informational contentArticle 2: no provision.Article 2B creates a warranty except for published informational content (2B-404)+
Implied Warranty: product will be fit for purchaser's particular purpose
Article 2 implies a warranty if seller had reason to know purpose and that buyer was relying on seller's expertise. The warranty is only for sales of "goods".
Outside the UCC: no warranty. Article 2B: same warranty if the essence of the transaction is to deliver a product. Creates a standard to distinguish this from services contracts. (2B-405)NCImplied Warranty: services will give result fit for transferee purposeArticle 2 contains no provision.
Outside the UCC: no warranty.Article 2B creates a warranty that the services will not fail of the purpose because of a lack of effort. (2B-405)+Implied Warranty: system components will work in integrationArticle 2 contains no provision; may be implicit in the fitness warranty.
Outside the UCC: no warranty, general services contract rules.Article 2B creates a warranty that components will perform as a system in addition to being independently functional. (2B-405)+Express warranty: standard applicable to its creationArticle 2 includes in the warranty any affirmations or promises that become part of basis of bargain; except puffery.
Outside the UCC cases do not use basis of the bargain test.Article 2B: same rule, but adds advertising as a possible source of warranty. (2B-402)NCExpress Warranty: is proof of actual reliance required?Article 2: basis of bargain test intended to exclude requiring specific reliance. Cases vary, but tend to use some variant of reliance.Article 2B: same rule. (2B-402)NCExpress warranties: created by advertisingArticle 2 contains no express provision for this. Case law varies.
Article 2B codifies that advertising can create an express warranty if it becomes part of the basis of the bargain. When that occurs is left to the development of case law. (2B-402)+
>> merchantability: is there a general standard for disclaimer:Article 2 contains no provision for this. It provides merely that disclaimer must mention merchantability.Article 2B: same rule, but provides more informative disclaimer language. (2B- 406)NC> >merchantability - how disclaim, is record and conspicuousness required?Article 2 allows disclaimer without a writing and disclaimer that mentions merchantability; if a writing is required, disclaimer must be conspicuous.Article 2B requires a "writing" and a plain language disclaimer or mention the word merchantability; requires conspicuous disclaimer (2B-406)+>> merchantability: can it be disclaimed by "as is"?Article 2 allows disclaimer subject to some limitations.Article 2B: same rule.NC>> merchantability: is a disclaimer adequate under the statute still potentially unconscionable?Article 2 contains no provision for this. Case law varies.Article 2B: same rule. (2B-406) NCFitness warranty: can the warranty be disclaimed?Article 2 allows disclaimer. Article 2B: same rule. (2B-406)NC>>fitness: how disclaim?Article 2 allows disclaimer by a mere statement that "no warranties beyond this"Article 2B allows disclaimer, but creates a plain language model. (2B-406)+General Disclaimer: effect of "as is" language
Article 2 allows this language for all warranties but the warranty of good title, under some limitations focused on the circumstances of the disclaimer.Article 2B: same rule. (2B-406)NC
Outside the UCC: cases generally reject third party claims against information products. Restatement on products liability recognizes that information is not a product for that law; negligent misrepresentation claims may be raised by third parties if they are part of an intended group. Article 2B does not deal with tort rules and takes a neutral position on products liability. It defines a concept of third party beneficiary consistent with contract law and current Restatement themes involving information liability.
?Third party liability majority version: does warranty extend to the consumer's householdArticle 2 majority adopted version covers household for personal injury; one other version allows for all damages. 2-318 Article 2B: same rule as majority version for personal injury, but expands to economic loss. (2B-409)+Warranty of title and non-infringement: does it extend to third parties?Article 2 generally does not extend warranties to third parties except for personal injury claims.Article 2B: does not extend the warranty to third parties. ?
Third Party claims: damages coveredArticle 2: Two of three options, including majority version, personal injury only; may disclaim warranty in the original transaction. In some states, no privity bar for sale of goods and upstream disclaimer may or may not be enforceable later.Article 2B extends to third party, generally intended beneficiaries and allows claims for both personal injury and economic loss; party may disclaim warranty. (2B-409)?
Outside UCC: law varies and allows contract to control; material breach concept is preferred norm.Article 2B requires material breach.NC
Outside the UCC: No presumption in information contracts.Article 2B contains no presumption regarding this exclusion. (2B-704)-Contractual Modification of RemediesArticle 2 allows this limitation.Article 2B: same rule (2B-704)NCContract Modification: limiting damages to replace or repair or refundArticle 2 allows this limitation.Article 2B: same rule (2B-704)NCModification: Effect failure of limited remedy on limit of consequential damagesArticle 2 is unclear. Case law splits on whether terms are independent or dependent.Article 2B provides that the two contract terms are independent unless the contract provides otherwise-Contract Modification: party must have minimum adequate remedyArticle 2 black letter does not require this. (comments suggest this is unconscionable)Article 2B black letter does not require this.NC Statute of limitations: basic termArticle 2 provides for four years from date of breach in most cases; cannot be reduced below one year or extended.Article 2B: four years from date of breach, extended to five by discovery rule; cannot be reduced to less than one year, can extend (2B-705)+> Limitations: when warranty extends to future, from what date does limitation period run?Article 2 cause of action accrues when breach was or should have been discovered. Article 2B: accrues when conduct that is a breach occurs or should have occurred, but no later than date warranty expires (2B-705)-
Self Help RepossessionArticle 2 has no specific self-help, but if seller reserves title to goods, Article 9 applies.
Article 9 allows for any default; limits self- help cannot breach the peace.
Article 2A has same rules.Article 2B allows only if there is a license. It requires statutory material default and places other restrictions significantly greater than in Art. 9 or Art. 2A. (2B-716)NC
Or
+Self Help: Electronic remediesArticle 2 contains no provisions.
Article 9 and Article 2A allow disabling in place.
Outside the UCC: limited case law allows if prior notice or agreement in contract, but not otherwise.Article 2B allows, but requires assent to contract term permitting this and places restrictions on when and how it can be implemented that substantially exceed restrictions under Article 9 or 2A.?
TABLE OF CONTENTS
SECTION 2B-101. SHORT TITLE.
SECTION 2B-102. DEFINITIONS.
SECTION 2B-104. TRANSACTIONS SUBJECT TO OTHER LAW.
[SECTION 2B-105. RELATION TO FEDERAL LAW.[new]]
SECTION 2B-106. APPLICATION TO OTHER TRANSACTIONS BY AGREEMENT.
SECTION 2B-107. EFFECT OF AGREEMENT.
SECTION 2B-108. LAW IN MULTI JURISDICTION TRANSACTIONS.
SECTION 2B-109. CONTRACTUAL CHOICE OF FORUM.
SECTION 2B-110. BREACH.
SECTION 2B-111. UNCONSCIONABLE CONTRACT OR CLAUSE.
SECTION 2B-112. MANIFESTING ASSENT.
SECTION 2B-113. OPPORTUNITY TO REVIEW; REFUND.
SECTION 2B-115. ATTRIBUTION PROCEDURE.
SECTION 2B-116. ATTRIBUTION TO A PARTY OF MESSAGE, RECORD, OR PERFORMANCE.
SECTION 2B-117. CHANGES AND ERRORS; CONSUMER DEFENSES.
SECTION 2B-118. AUTHENTICATION EFFECT AND PROOF; ELECTRONIC AGENT OPERATIONS.
SECTION 2B-119. ELECTRONIC AND MESSAGES: TIMING OF CONTRACT AND EFFECTIVENESS OF MESSAGE.
SECTION 2B-120. ACKNOWLEDGMENT OF ELECTRONIC MESSAGE.
SECTION 2B-202. FORMATION IN GENERAL.
SECTION 2B-203. OFFER AND ACCEPTANCE.
SECTION 2B-204. OFFER AND ACCEPTANCE; ELECTRONIC AGENTS.
SECTION 2B-205. FIRM OFFERS.
SECTION 2B-206. RELEASES.
SECTION 2B-208. MASS MARKET LICENSES.
SECTION 2B-209. CONFLICTING TERMS.
SECTION 2B-301. PAROL OR EXTRINSIC EVIDENCE.
SECTION 2B-302. COURSE OF PERFORMANCE; PRACTICAL CONSTRUCTION.
SECTION 2B-303. MODIFICATION AND RESCISSION.
SECTION 2B-304. CONTINUING CONTRACT TERMS.
SECTION 2B-305. OPEN TERMS.
SECTION 2B-306. OUTPUT, REQUIREMENTS, AND EXCLUSIVE DEALINGS.
SECTION 2B-307. INTERPRETATION OF GRANT.
SECTION 2B-308. DURATION OF CONTRACT.
SECTION 2B-309. RIGHTS IN INFORMATION IN ORIGINATING PARTY.
[SECTION 2B-310. OBLIGATIONS REGARDING IMAGES, MARKS AND NAMES [new].]
SECTION 2B-312. ELECTRONIC REGULATION OF PERFORMANCE.
SECTION 2B-401. WARRANTY AND OBLIGATIONS CONCERNING AUTHORITY AND NONINFRINGEMENT.
SECTION 2B-402. EXPRESS WARRANTIES.
SECTION 2B-403. IMPLIED WARRANTY: MERCHANTABILITY AND QUALITY OF COMPUTER PROGRAM.
SECTION 2B-404. IMPLIED WARRANTY: INFORMATIONAL CONTENT.
SECTION 2B-405. IMPLIED WARRANTY: LICENSEE'S PURPOSE; SYSTEM INTEGRATION.
SECTION 2B-406. DISCLAIMER OR MODIFICATION OF WARRANTY.
SECTION 2B-407. MODIFICATION OF COMPUTER PROGRAM.
SECTION 2B-408. CUMULATION AND CONFLICT OF WARRANTIES.
SECTION 2B-409. THIRD-PARTY BENEFICIARIES OF WARRANTY.
SECTION 2B-501. OWNERSHIP OF RIGHTS AND TITLE TO COPIES.
SECTION 2B-502. TRANSFER OF PARTY'S INTEREST.
SECTION 2B-503. CONTRACTUAL RESTRICTIONS ON TRANSFER.
SECTION 2B-504. FINANCIER'S INTEREST IN A LICENSE.
SECTION 2B-505. EFFECT OF TRANSFER OF CONTRACTUAL RIGHTS.
SECTION 2B-506. DELEGATION OF PERFORMANCE; SUBCONTRACT.
SECTION 2B-507. PRIORITY OF TRANSFER BY LICENSOR.
SECTION 2B-508. PRIORITY OF TRANSFERS BY LICENSEE.
SECTION 2B-601. PERFORMANCE OF CONTRACT.
SECTION 2B-602. SUBMISSIONS OF INFORMATIONAL CONTENT.
SECTION 2B-603. ACTIVATION OF RIGHTS; LICENSOR'S OBLIGATIONS.
SECTION 2B-604. PERFORMANCE AT A SINGLE TIME.
SECTION 2B-605. WHEN PAYMENT DUE.
SECTION 2B-606. ACCEPTANCE; EFFECT.
SECTION 2B-607. TENDER OF PERFORMANCE; RIGHT TO ACCEPTANCE.
SECTION 2B-608. COMPLETED PERFORMANCES.
SECTION 2B-609. LICENSEE'S RIGHT TO INSPECT; PAYMENT BEFORE INSPECTION.
SECTION 2B-610. REFUSAL OF DEFECTIVE TENDER.
SECTION 2B-611. DUTIES FOLLOWING RIGHTFUL REFUSAL
SECTION 2B-612. WHAT CONSTITUTES ACCEPTANCE.
SECTION 2B-613. REVOCATION OF ACCEPTANCE.
SECTION 2B-614. ACCESS CONTRACTS.
SECTION 2B-615. CORRECTION AND SUPPORT CONTRACTS.
SECTION 2B-616. PUBLISHERS, DISTRIBUTORS AND RETAILERS.
SECTION 2B-617. DEVELOPMENT CONTRACT.
SECTION 2B-618. FINANCIAL ACCOMMODATION CONTRACTS.
SECTION 2B-619. CURE.
SECTION 2B-620. WAIVER.
SECTION 2B-621. RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE.
SECTION 2B-622. ANTICIPATORY REPUDIATION.
SECTION 2B-623. RETRACTION OF ANTICIPATORY REPUDIATION.
SECTION 2B-624. RISK OF LOSS.
SECTION 2B-625. EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS.
SECTION 2B-626. TERMINATION; SURVIVAL OF OBLIGATIONS.
SECTION 2B-627. NOTICE OF TERMINATION.
SECTION 2B-628. TERMINATION: ENFORCEMENT AND ELECTRONICS.
SECTION 2B-701. REMEDIES IN GENERAL.
SECTION 2B-702. CANCELLATION.
SECTION 2B-703. CONTRACTUAL MODIFICATION OF REMEDY.
SECTION 2B-704. LIQUIDATION OF DAMAGES; DEPOSITS.
SECTION 2B-705. STATUTE OF LIMITATIONS.
SECTION 2B-707. MEASUREMENT OF DAMAGES IN GENERAL.
SECTION 2B-708 LICENSOR'S DAMAGES.
SECTION 2B-709. LICENSEE'S DAMAGES.
SECTION 2B-710. RECOUPMENT.
SECTION 2B-711. SPECIFIC PERFORMANCE.
SECTION 2B-712. LICENSOR'S RIGHT TO COMPLETE.
SECTION 2B-713. LICENSEE'S RIGHT TO CONTINUE USE.
SECTION 2B-714. RIGHT TO DISCONTINUE.
SECTION 2B-715. RIGHT TO POSSESSION AND TO PREVENT USE.
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) Unless the contract otherwise requires:
(1) "Access contract" means a contract for electronic access to a resource containing information, a resource for processing information, a data system, or other similar facility of a licensor, licensee, or third party.
(2) "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 exercise the right or privilege.
(3) "Authenticate" means to sign, or to execute or adopt a symbol or sound, or encrypt a record in whole or in part, with present intent to
(i) identify the authenticating party;,
(ii) or to adopt or accept a record or term;, or to
(iii) establish the authenticity of a record or term that contains the authentication or to which a record containing the authentication refers.
(4) "Cancellation" means an act by either party which ends a contract because of a breach by the other party. "Cancel" has the corresponding meaning.
(5) "Computer program" means a set of statements or instructions to be used directly or indirectly to operate an information processing system in order to bring about a certain result. The term does not include any informational content created or communicated as a result of the operation of the system.
(6) "Consequential damages" includes compensation for any loss es of a party resulting from its general or particular requirements and needs of which at the time of contracting the other party had reason to know and which would probably result from a breach of the contract. The term does not include compensation for losses and which are not unreasonably disproportionate to the risk assumed under the contract by the party in breach under the contract or which and could not have been prevented by the aggrieved party by reasonable measures. The term includes losses resulting from injury to person or property proximately resulting from breach of warranty. The term does not include direct or incidental damages.
(7) "Conspicuous", with reference to a term, means so written, displayed or presented that a reasonable person against whom it is to operates ought to have noticed it or, in the case of an electronic message intended to evoke a response by an electronic agent 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:
(A) a heading in all capitals (as 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.
(8) "Consumer" means an individual who is a licensee of information that at the time of the contracting, are is intended by the individual to be used primarily for personal, family, or household use. The term does not include an individual 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 the individual's personal or family investmentsan ordinary person's personal or family assets.
(9) "Contract fee" means the price, fee, or royalty payable under a contract under this article.
(10) "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.
(11) "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. The term includes sound recordings.
(12) "Court" includes an arbitrator or other dispute-resolution officer.
(13) "Delivery" means the transfer of physical possession, or the communication, of a copy to a recipient of the copy, to a facility, or to an information processing or storage system used, controlleddesignated, or otherwise held out by the recipient or its intermediary for receipt, or to a bailee if the recipient has a right of access to the copy in the bailee's possession. If an electronic copy is to be delivered from one party to another within the same processing or storage system, the copy is delivered when it enters or comes into existence within that portion of the system used, designated or otherwise held out by the recipient for the purpose of receiving such copies.
(14) "Direct [general] damages" compensation for losses of a party consisting of the difference between the value of the required expected performance as measured by the contract and the value of the performance actually received[, and any compensation for losses in the nature of reliance or restitution]. The term does not include consequential damages and incidental damages.
(15) "Electronic" includes electrical, digital, magnetic, optical, electromagnetic, or any other form of technology that entails capabilities similar to these technologies.
(16) "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.
(17) "Electronic message" means a record that, for purposes of communication to another person, is stored, generated, or transmitted by electronic means. The term includes electronic data interchange, electronic or voice mail, facsimile, telex, telecopying, scanning, and similar communications.
(18) "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 ordinary step in forming the contract.
(19) "Financier" means a person that under 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.
(20) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing.
(21) (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 delivery, shipment, or transmission;
(iii) effecting cover or return of copies or information;
(iv) reasonable efforts to minimize or avoid 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.
(22) "Information" means data, text, images, sounds, and works of authorship, including computer programs, databases, literary, musical or works, audiovisual works, motion pictures, mask works, or the like, and any intellectual property or other rights in information.
(23) "Informational content" means information which is intended to be communicated to or perceived by a person in the ordinary use of the information.
(24) "[Intellectual] [Informational] 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 independently of contract to control or preclude another party's use or disclosure of information because of the rights owner's interest in the information.
(25) "License" means a contract that expressly authorizes, prohibits, or controls access to or use of information and, by its terms limits the scope of the rights granted, or affirmatively grants less than all rights in the information, whether or not the contract transfers title to a copy of the information and whether or not the rights granted are made exclusive to the licensee. The term includes an access contract and a consignment of copies of information. The term does not include a contract that assigns ownership of intellectual property rights, reserves or creates a financier's interest, or that makes a transfer by will or operation of law.
(26) "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.
(27) "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 information, each party is a licensor with respect to the information it provides.
(28) "Mass-market license" means a standard form that is prepared for and used in a mass-market transaction.
(29) "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 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 publicly to perform or display a copyrighted work; or
(D) a commercial site license, or an access contract not involving a consumercontract between two businesses.
(30) "Merchant" means a person that deals in information of the kind involved in the 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 holds itself out as having purports to have the knowledge or skill.
(31) "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 from having previously done so in a license that remains in force at the time of the contract. The term includes a consignment of copies.
(32) "Present value" means the amount as of a date certain of one or more sums payable in the future, discounted to the date certain. The discount is determined by the interest rate specified by the parties in their agreement if that rate is not manifestly unreasonable at the time the transaction was entered into. Otherwise, the discount is determined by a commercially reasonable rate that takes into account the facts and circumstances of each case at the time the transaction was entered into.
(33) "Published informational content" means informational content that is prepared for, distributed, or made available to all recipients or a 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.
(34) "Receive" as to a copy of information means to take delivery of a copy of information. An electronic copy record is received when it enters or comes into existence in an information processing or storage system in a form capable of being processed by a system of that type or of being perceived from a system of that type and the recipient uses, or has designated or otherwise holds out that system for the purpose of receiving such copiesrecords or information. A person "receives" a notice or notification when it comes to his attention, or it is duly delivered at the individual's residence or the person's place of business through which the contract was made, or at any other place held out by the person as a place for receipt of such communications, or the notice or notification enters or comes into existence in an information processing or storage system in a form capable of being processed by or perceived from a system of that type, and the recipient uses, has designated or otherwise holds out that system as a place for the receipt of such communications. If an electronic copy, notice or notification is delivered from one party to another within the same system, the copy is received when it enters or comes into existence within that portion of the system used, designated or otherwise held out by the recipient for the purpose of receiving such copies, notice or notification. "Receipt" has a corresponding meaning.
(35) "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.
(36) "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 to enable or support the other party's use of the information by providing copies of the information or access or otherwise. The term includes a waiver of intellectual property rights and a covenant not to sue.
(37) "Sale" means the passing of title to a copy of information for consideration.
(38) "Scope", with respect to a license, means the terms of the license that define the licensed subject matter or copies; the uses and number of users authorized, prohibited, or controlled; the geographic area, market, or location in which the license applies; and the duration of the license.
(39) "Send" with respect to a copy, record, message or notice, means to deposit in the mail, or to deliver for or otherwise take steps that initiate transmission to or creation within another system or location by any usual means of communication with any costs provided for and properly addressed or directed as reasonable under the circumstances. A party sends an electronic copy, record, message or notice to another person within the same system when it initiates operations that in the ordinary course will cause the copy, record, message or notice to enter or come into existence within that portion of the system used, designated or otherwise held out by the recipient for the purpose of receiving copies, records, messages or notices. The receipt of any record, message or notice within the time in which it would have arrived if properly sent has the effect of a proper sending.
(4039) "Software" means a computer program, including any informational content included or to be included as part of a program and any supporting material provided by a licensor as part of the transaction.
(410) "Software contract" means a contract that constitutes a sale of a copy of software, 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.
(421) "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.
(432) "Substantial performance" means performance of an obligation in a manner that does not constitute a material breach of contract.
(443) "Termination" means ending 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. "Terminate" has a corresponding meaning.
(b) In addition, Article 1 contains general definitions and principles of construction that apply throughout this article and sections of this article contain definitions applicable to the particular section..
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 to particular types of damages from 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)
9. Annual Meeting 1997: Voted as a sense of the house that the term should be the same in all three articles and that the definition should retain safe harbor language.
10. Annual Meeting 1997: Sense of the house that conspicuousness should be a matter of law for decision by court.
Reporter's Notes:
Changes Since the June Meeting:
A number of revision were made in the definitions as a result of the Harmonization meeting, designed either to conform to language being used by other drafts revisions, or to more specifically conform to current law. The definition of "contractual use restrictions" was moved to this section n that it is used in more than one section in the remainder of the draft. The definition of "direct" damages was modified to more fully cover damage theories of that nature. A definition of "present value" has been added based on current Article 2A.]
General 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 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 contract occurs when the content provider contracts directly 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 with additional language reflecting the distinction drawn in this Article for "informational content.".
4. Consequential damages. This article follows existing Article 2 except for three issues.
The Draft follows current law with respect to personal injury and property damage. These types of loss 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. Proposed Article 2 revisions treat property damage differently, placing it within the general standard of consequential damages, rather than under the proximate cause standard used for personal injury. This Draft follows current law. The Article 2 Draft also expressly places the burden of proof of disproportionate damages on the breaching party. This Draft is silent.
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 in 1996.
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 comments will point out that this is not an inclusion of general equity relief concepts and that, to the extent that reliance and restitution concepts are a form of consequential losses, they are not included here.
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. That formulation was supported by a vote of the Conference at the 1996 Annual Meeting.
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. The comments will make clear that interactive informational content product falls within the concept since the basic set of all information is generally available and the end user selects, perhaps interactively from this.
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 an 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?
20a. Record: The comments will indicate that there is no requirement of permanent storage or that there be anything beyond temporary recordation. The analogy is to case law under the copyright act and the idea of an electronic copy. Also, the comments will make clear that perception can be either directly or indirectly with the aid of a machine.
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.
Except as otherwise provided in subsections (c) and (d), if another article of [the Uniform Commercial Code] 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 medium containing the information, its packaging, and its documentation, but Article 2 or 2A governs standards of performance of goods other than the physical medium containing the information, 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) or (2), this article applies to the information, physical medium containing the information, and 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;
(2) a license of a trademark, trade name, or trade dress, or of a patent, or and know-how related to athe patent, unless the license is or is associated with part of a software contract, a motion picture license, an access contract, or database contract;
[(3) information that represents money or deposit accounts;] or
(43) a sale or lease of a copy of a computer program that was not developed specifically for a particular transaction and which is embedded in goods other than a copy of the program or an information processing machine, unless the program was 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)
Changes Since the Last Meeting:
Bracketed language raises the issue of whether scope should be defined to exclude transactions where the licensed subject matter is information that represents money or deposit accounts.
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 industries whose current or future direction deals with digital products. The article does not deal with sales of books, newspapers or traditional print media; except for transactions in computer software, the scope of the article is limited to licenses which are defined as transactions in which the contract itself expressly conveys less than all rights in the information.. 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) and (c) discuss issues pertaining to the interface between Article 2B and other UCC Articles. 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 "gravaman of the action" test. It rejects the "predominant purpose" test used under current law for allocating coverage between transactions governed by Article 2 or law outside the UCC. The primary exception involves embedded software as discussed in (d)(3). Based on a suggestion from the floor of the 1996 Annual Meeting, comments will make it clear that manuals delivered in connection with software are covered under Article 2B.
5. Subsection (d) exclusions. Because Article 2B brings into the UCC a variety of transactions that were previously covered under common law, the broad scope of inclusion has be tempered by the development of specific exclusions. These are brought together in subsection (d). While some exclusions have been suggested based on industry-specific activities, the exclusion in general refer to particular types of contractual activities in a more generic form.
a. Subsection (d)(1) deals with individual services contracts, including employment contracts and entertainment services (e.g., actor, musical group performance, producer, etc.). The excluded cases involve personal services 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 author and other upstream contracts generally , but at this point have not pressed that issue, preferring to work toward a draft that accommodates the characteristics of those contracts. Indeed, while sometimes involving different practices, the issues in upstream contracts across the various areas of commerce discussed in Article 2B are very similar. Upstream software contracts are clearly included. Illustrations of the provisions resulting from discussion of this topic include the treatment of "to the satisfaction" clauses in 2B-305 and submissions of information in 2B-602.
b. Subsection (d)(2) excludes patent and trademark licenses not associated with the other subject matter of the Article. The rationale lies in the differences between copyright and digital licensing and practices in unrelated areas of patent law. Patent licensing relating to biotech, mechanical and other industries entails many different assumptions and standard practices that are not contemplated by this draft. This is also true for trademark licensing. A similar analysis may also be true, to an extent that needs further discussion and clarification either in text or comments, for merchandising transactions and commercial tie-ins, such as those involving the use of images, film indicia, or graphics on a toy, apparel, or other tangible goods. Whether these licenses should be specifically excluded from the scope of this Article requires further analysis in like of concerns expressed by the affected industry and the fact that trademark licensing is current excluded.. As to trademark licensing, there is the additional consideration of coverage of aspects of that industry under federal and state franchising laws
While the Article excludes patent and trademark licensing, in practice, however, courts are likely to apply Article 2B by analogy 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., Article 2A comments
c. Subsection (d)(3) excludes computer programs such as airplane navigation or operation software, software that operates automobile brake systems, and the like. Issues 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).
6. Banks as licensors. Prior to the May, 1997 meeting, a Commissioner, representing Citibank, communicated a proposal that Article 2B exclude any transaction involving a bank as the licensor. The argument for this refers to the regulatory structure that controls core banking activities and approves non-traditional business activities for banks. The proposal was strongly resisted by others present at the meeting in May based on the fact that, outside the specifically regulated activities, banks are engaged in many of the same licensing and processing activities as are all other industries involved in Article 2B.
Article 2B as drafted does not cover transactions governed under other law (e.g., Article 4A, Article 4). It is preempted to the extent of specific controls under federal or state banking regulation. In implementing this exclusion, the Committee recognized that modern developments in digital cash and similar systems place many companies other than traditional banks in the same situation. Regulations, such as Regulation E on funds transfer, do not apply solely to banks, but to any holder of a depository account and, depending on regulatory decisions, non-bank entities will be included (e.g., a digital account 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).
Equally important, modern banks engage in many commercial activities that are identical to companies whose licensing practice and online systems are clearly within Article 2B, such as Netscape, Westlaw, Home Shopping, Microsoft Network, America On-Line, and others. As the information industries converge, so too is the banking industry converging into fields identical to that of the information industries. Bank entry into these fields is regulated - 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. Complete exclusion of banks is not warranted.
7. Motion pictures. The motion picture industry has expressed concern about the impact of Article 2B o established licensing practices in that industry, especially in reference to its core business of developing, producing, distributing, exhibiting and performing motion pictures, which can be defined as audiovisual works that are primarily intended for viewing in a predetermined, continuous and sequential manner (e.g., those that do not rely on interactivity). The industry has raised this issue, but has devoted substantial time and resources to working with the Committee and that work has yielded significant improvements in the Draft. At this point, the industry has not determined whether to seek a carve out for these transactions, but has circulated draft language to the foregoing effect to the Drafting Committee.
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 a statute or any regulation of this State or any final decision of a court of this State interpreting the statute or regulation, the conflicting statute, regulation or decision controls, if it exists on the effective date of this article and that:
(1) a law of this State establishes ing 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 regulates ing purchase or license of rights in motion pictures by exhibitors; or
(3) any law of this State that establishes a consumer protection different rule for consumers.
(b) If a law of this State 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.
(5) A statute authorizing electronic or digital signatures, or authorizing electronic or digital substitutes for requirements of a writing controls over the provisions of this article to the extent of a conflict with this article.
(c) With respect to this article, failure to comply with a law referred to in subsection (a) has only the effect specified therein.
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)
b. Reviewed without substantive change. (February, 1997)
Reporter's Notes:
Changes Since the June Meeting:
a. The language in (c) was added as a result of the Harmonization Meeting to correspond to Article 2A as currently drafted.
b. The language in (b)(5) was added in response to an issue raised in comments to the June Draft revised Article 2. In underscores the intent of this Draft to fit alongside and in conformity with Digital and Electronic Signature statutes that have been enacted in many states. To date, most of these statutes do not deal with the subject matter of this Article.
c. During the Annual Meeting, written comments of several Commissioners asked for clarification of the prior draft reference to conflicting "law" and clarification of as to what point in time the conflict is assessed. Existing Article 2 provides that it does not impair or repeal "any statute" relating to consumers, farmers or other special class of buyers. Existing Article 2A, defers to certificate of title statutes and consumer protection statutes or court rulings existing at the effective date of the Article. The prior language was taken from proposed revisions of Article 2, but leaves open both timing and source of law. One question, for example, is whether a common law ruling after the effective date of the Act can reverse a specific provision of this Article? The answer is no under both existing Article 2 and existing Article 2A. If the answer were yes, in effect, Article 2B would govern consumer transactions only unless or until a court decides otherwise.
The issue does not relate to a distinction between prior or subsequent consumer protection statutes or regulations. Both control over Article 2B: the pre-existing statute because of the carve out here and the subsequent statute because it, presumably, contains its own scope and conflict provisions.
The proposed solution here links the deference to other law to statute and regulatory law, in addition to case law that interprets the statute or regulation. The conflict is measured at the time of the effective date of this article. As indicated above, subsequent regulations and statutes on these (or any other topic) have the capability of preempting provisions of Article 2B if the legislature so chooses.
General 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. While these rights may be the subject of a license within this article, the underlying 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 deals with contract terms and remedies. While privacy and public access laws are especially relevant for the increasing commercial use of information, this article 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). The comments perhaps should also discuss professional regulations in a transaction involving a lawyer or medical professional. Also, based on a suggestion at the Annual Meeting, the comments will discuss the relationship between the reference to acts of "this" state in situations involving choice of law questions.
Subsection (a)(2) 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.
2. Subsection (b) implements a balance between the modernization themes in Article 2B relating to electronic commerce and existing law regulating consumer contracts. It adopts a limited, circumspect reconciliation approach that contrasts to the many non-uniform digital and electronic signature statutes that have been enacted in Utah, Washington, Florida, Texas, Minnesota, and a number of other states. Many of these other non-uniform statutes take the approach of replacing or amending all signature and writing requirements with a rule that allows a digitally encrypted record or other electronic indicia of a signature to satisfy writing, signature, certification and other formalities. 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.
The problem addressed here involves the fact that literally thousands of potentially relevant statutes may affect electronic commerce transactions. For transactions governed by Article 2B (or revised Article 2), the provisions of this Article would ordinarily replace the other law. That is not true for consumer transactions. Yet, the policies that led to a required "writing" most often did not consider the digital alternative. The balance must preserve important policies (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 some aspects of UCC electronic commerce rules where it is appropriate to reverse that presumption. 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 beyond the particular enactment. This will be through a legislative note.
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.
A legislative note should accompany the final draft highlighting that each state should examine existing law to determine if the changes in (b) should not apply to particular existing rules.
Based on concerns expressed by consumer groups, subsection (b)(4) was altered and 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.
[SECTION 2B-1054A. RELATION TO FEDERAL LAW. A provision of this article which is preempted by federal law is unenforceable to the extent of such preemption.]
Votes and Action:
a. At the 1997 ALI Annual Meeting, the general membership after a brief debate and by a narrow vote of 86-82, approved a motion that Section 2B-308 (mass market licenses) be amended to provide that a term inconsistent with federal copyright law does not become part of a contract under Section 2B-308.
b. At the 1997 NCCUSL Annual Meeting, the Conference adopted by a substantial majority a motion that Article 2B should not deal in its text with questions of federal preemption but should be neutral and that position should be stated in the comments.
Issue:
1. Should the section be deleted and the issue handled in comments to Section 104, former 308 and elsewhere?
Reporter's Note:
1. This section has not been reviewed by the Drafting Committee.
2. Article 2B deals with general contract law, not with the issues faced in federal property law and regulation. The relationship between federal law and state contract law on transactions involving information is complex. The approach of Article 2B has been to correspond to clear rules of federal law and to take no position regarding controversial or context determined rules whose application cannot be predicted. The comments to this section will make clear that Article 2B is not intended to alter federal law and will discuss illustrations of cases where the interaction of contract and federal policy occurs.
3. The complexity of the interaction is heightened by the fact that many property rights that underlie transactions in this field are created by federal, rather than state law (e.g., Copyright Act, Patent Act). Also, beyond property law, many situations involving disclosure, access, and transfer of information are subject to federal regulations, such as in Regulation E, the Electronic Communications Privacy Act, the Communications Act of 1996, the Freedom of Information Act, the Food and Drug Administration Act, and various other regulations or statutes.
4. The basic principle is that federal law controls if it preempts. When or whether that occurs is not a question of state law. State law, including the UCC, cannot alter that balance and does not intend to do so. Thus, a federal law determination that a specific form of disclosure creates an enforceable term cannot be altered by state law. Similarly, a limit on liability mandated by federal law cannot be abridged by state contract law. A requirement of a writing to transfer a copyright in federal law cannot be altered by abolishing a state statute of frauds. A mandatory rule that prevents transfer of a non-exclusive license without the licensor's consent as a matter of federal law precludes a contrary state law rule.
5. The basic principle of preemption is supplemented in licensing law by the fact that federal competition, antitrust, and intellectual property rules provide a basis for courts to monitor some practices in licensing involving the use of particular terms in particular setting that may be viewed as abusive. State law cannot control or alter those rulings. They involve determinations about federal law and policy that go beyond state law. Article 2B takes no position on the complex competition, social policy and other issues present here. It simply sets out basic contract principles governing the contractual relationship in information transactions. It governs the contractual relationship, federal law and policy determines whether a particular contract in a particular setting is barred by federal law.
6. In respect to these issues, Article 2B does not alter the relevant policy equation. Even without Article 2B's clarification of complex and often out-dated contract rules, contract law and practice already controls much of distribution of information. The contract law regime exists and in most cases and with respect to most issues, contracts control as the method by which parties obtain value from information. As stated in the Copyright Act, federal property law precludes state law that creates rights equivalent to property rights created under copyright. 17 U.S.C. 301. But as both a practical and a conceptual matter, copyright (or patent) do not generally preclude or preempt contract law. Indeed, contracts are essential to use one's own property, even when the property is tangible, let alone when it is intangible. A contract defines rights between parties to the agreement, while a property right creates rights against all the world. They are not equivalent.
7. With the transition from print to digital media as a main method of conveying information, major policy disputes have erupted concerning the redistribution of rights in light of the fact that the media of distribution allows many different and potentially valuable (for users or authors) uses of information products. The difficulty of balancing fundamental rights in this context is demonstrated by the fact that disputes about underlying social policy have erupted and been left unresolved in numerous contexts in the U.S. and internationally. These fundamental questions are beyond the scope of this Article. State law that conflicts with the resolution of those questions in federal law may be preempted if that is the policy choice made in federal law.
8. Typically, in determining whether or when such policies apply, courts accept that contract law generally prevails, but ask whether a particular contract clause in a particular setting conflicts with federal policies when balanced against the general role of contracts in the economy and legal system. How far the federal policies reach is uncertain. Not surprisingly, in light of the shifts caused by digital technology, defining the proper scope of rights under federal property law has been controversial; it remains unresolved despite extensive negotiation and political discussion. Some disputed issues deal with reverse engineering of copyrighted, but unpatented technology and the scope of educational or scientific fair use of digital works. These are questions of federal policy. They must be resolved by courts and Congress, rather than through state legislation. Article 2B takes no position on these or similar questions, whether a preclusion potentially stems from antitrust law or from intellectual property law or other source of federal preemption. Article 2B merely provides a contract law framework.
SECTION 2B-1065. APPLICATION TO OTHER TRANSACTIONS.
(a) Except in a mass market transaction, in an agreement represented by a record:
(1) parties to a transaction not governed by this article may elect in their contract to have all or part of this article apply to the transaction; and
(2) 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) An agreement described in subsection (a) 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.
Selected Issue:
In an on-line contract, should there be an opt-in right even if the mass market 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-10715. 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 this article or in Article 1, the effect of any provision of this article may be varied by agreement of the parties. To the extent stated in the following sections, the agreement may not vary:
(1) the right to relief from an unconscionable contract or clause;
(2) the effect of Section 2B-406 on limitation or disclaimer of 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 in Section 2B-625(e) on excuse by unexpected events;
(7) the restrictions in Section 2B-705(a) on the statute of limitations;
(8) the limits on inclusion of refusal terms in Section 2B-208(a)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 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 a term excluded under Section 2B- 308(b)(1) is a question of law to be determined by the court.
Uniform Law Source: None.
Changes Since Last Meeting:
Moved here from 2B-115 as part of general reorganization. No substantive changes.
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. 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).
2. 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."
3. Subsection (d) holds that conspicuousness is a matter of law. This follows current law.
4. Subsection (f) deals with a major concern that arises from the drafting style used in the UCC revisions. It resolves interpretation questions about the existence of a so-called negative pregnant in many of the rules in this article. Thus, if a section indicates that "If the originator of a message requests acknowledgment, then the following rules apply: ---" that does not indicate what rules apply in the absence of that request; in itself, it does not bar a court from adopting some or all of the same rules in the absence of a request, but merely states the affirmative proposition. Of course, in many cases, the more exclusionary result is intended. This can be inferred from the context or the associated policies.
SECTION 2B-1086. 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.
(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 the law of the jurisdiction in the United States which has the most significant ubstantial relationship to the transaction.
(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)
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 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. In 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.
The language in (b)(2) only deals with contract issues. It does not affect tax or other relevant concerns. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992) the Supreme Court held that no adequate nexus for tax purposes was established where the only contact of an entity with a state was advertising and delivery through common carrier. This Article, of course, deals only with contract issues.
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 rule is not uniformly accepted. Many states use principles from the Restatement (First) or theories evolved by academic authors. One text states: "[C]hoice-of-law theory today is in considerable disarray - and has been for some time. [It] is marked by eclecticism and even eccentricity. No consensus exists among scholars. [Like] revolutionaries who can unite only to eliminate the existing government, they cannot agree on the establishment of a new one. The disarray in the courts may be worse. Four or five theories are in vogue among the various states, with many decisions using - openly or covertly - more than one theory." William Richman & William Reynolds, Understanding Conflict of Laws 241 (2d ed. 1992). The disarray argues for giving guidance for contracts in cyberspace.
8. 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-1097. 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 is unreasonable and unjust as to [unfairly disadvantages] the consumer. A choice-of-forum term 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)
Selected Issue:
a. Should the choice of forum be validated in Internet transactions?
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 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:
[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.
The bracketed language relating to access contracts refines a concept that was discussed without objection by the Committee in February, 1997.
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 section has modified to remove the former bracketed language and adopt the language that has become the dominant theme in reported case law. "Unjust and unreasonable" has become the dominant standard to measure enforceability and, indeed, most courts now suggest that choice of forum clauses are presumptively enforceable unless this standard is proven. The intent is to conform to Supreme Court and other holdings in reference to what type of limits on choice of forum are appropriate. The comments will spell out the case law development in greater detail.
6. This section does not deal with arbitration or other alternative dispute resolution clauses. The law there is characterized by substantial federal preemption and specific, existing state law rules that should not be disturbed here.
SECTION 2B-1108. BREACH OF CONTRACT.
(a) Whether a party is in breach of contract is determined by the contract. Breach of contract includes a party's failure to perform an obligation in a timely manner, repudiation of a contract, or exceeding a contractual limitation on the use of information.
(b) A breach of contract is material if the contact so provides [or if the breach is a failure to perform an express contract term or condition]. In the absence of an express contractual term, a breach is material if the circumstances, including the language of the agreement, reasonable expectations of the parties, 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; or
(2) the breach will substantially deprive the aggrieved party of a benefit it reasonably expected under the contract.
(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 a list of events that are material. Vote: 11 - 0 (Feb. 1997)
Selected Issue:
1. Should the proposed recognition of express contract conditions in subsection (b) be adopted?
Reporter's Notes:
1. In this Article, as in general contract law, a party must perform in conformity with its contract. For purposes of remedies, this Article also follows common law and distinguishes between immaterial and material breaches. A similar distinction exists in Article 2 in cases other that cases of a single delivery of a product, The reference to material breach corresponds to common law and the Restatement (Second) of Contracts which govern many of the transactions brought under Article 2B. Article 2 revisions use a different phrase ("substantial impairment") for a similar idea.
2. Subsection (a) defines breach. Breach occurs whenever a party acts or fails to act in a manner required by the contract. Encompassed in this term are failures to make timely performance, breach of warranty, late delivery, repudiation, non-delivery, and exceeding contractual limitations, etc. What is and is not a breach is determined by the contract and, in the absence of contract terms, by this Article.
3. Subsection (b) defines material breach. "Material breach" and "substantial performance" are interchangeable.(See Section 2B-102: defines substantial performance as "performance of a contractual obligation in a manner that does not constitute a material breach of that contract.") The primary relevance of the term lies in what remedies are available. As in common law (except for mass market transactions) a party can refuse to perform payment or other obligations and can cancel only if a breach is material. For immaterial breaches, the remedy is damages. Restatement (Second) of Contracts 237 expresses the rule as follows: "[It] is a condition of each party's remaining duties to render performances ... under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time."
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 and the contract did not expressly require 10,000 files. Subsection (b) has been revised to make clear that, as in common law, if the parties agree to an express contract condition, that condition must be satisfied. Thus, for example, in a development contract, the parties agree that the final product must meet 10 conditions before it is acceptable. One condition provides for operation at a speed of no less than 150,000 rev. per second. The delivered product fails to meet that standard, falling short by a relatively small amount. Since meeting that conditions was an express contractual standard, the failure to perform is material, justifying refusal of the product. On the other hand, in a contract for delivery of a database to be used as a mailing list, assume that no specific delivery date is specified. The product is delivered but arguably later than expected. Whether the breach is material in the absence of an express term hinges on the effect of the delay on the overall value of the contract.
Breach entitles the injured party to remedies. What remedies are available depends on whether the breach is material or immaterial. 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 an immaterial 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; there, the Article follows existing Article 2.
4. Material breach rules apply in current law to all transactions not governed by the Article 2. For some licensing cases, see Rano v. Sipa Press, 987 F.2d 580 (9th Cir. 1993); Otto Preminger Films, Ltd. v. Quintex Entertainment, Ltd., 950 F.2d 1492 (9th Cir. 1991) ("breach is material if it is so substantial as to defeat the purpose of the transaction or so severe as to justify the other party's suspension of performance"); Compuware Corp. v. J.R. Blank & Associates, Inc., 1990 WL 208,604 (N.D. Ill. 1990).
5. The materiality standard parallels international laws which often 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.
6. What constitutes a material breach? One cannot define materiality in absolute terms any more than one can define concepts such as negligence, reasonable care, merchantability, or the like. The key lies in defining an appropriate reference point. Subsection (b) emphasizes two elements: contract terms and the extent to which breach causes significant harm to the aggrieved party. The Restatement (Second) of Contracts lists five circumstances as significant: 1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected; 2) the extent to which the injured party can be adequately compensated for the benefit of which he will be deprived; 3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; 4) the likelihood that the party failing to perform or to offer to perform will cure the failure, taking into account all the circumstances, including any reasonable assurances; and 5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. Restatement (Second) of Contracts 241 (1981).
The factors listed in subsection (b) are not exclusive. Courts should be free to draw on common law cases. For example, the concept incorporates questions about the motivation of the breaching party. A series of minor breaches may constitute a material breach where the motivation for this conduct involves a bad faith effort to reduce the value of the deal to the other party or to force that party into a position from which it will be forced to relinquish either the entire deal or, through re-negotiation, aspects of the deal that are otherwise important to it.
7. The strength of the materiality concept is also its weakness in commercial cases. It provides a flexible standard that allows courts to deny unwarranted forfeitures (cancellation for small, inconsequential problems). That flexibility, however, creates potentially disruptive uncertainty in commercial contracts. It is important, therefore, that ideas of materiality hinge on the terms of the contract. As expressed in subsection (b), the contract terms can define what is material. As drafted in this section, that can happen in three ways. The first two involve either expressly providing a remedy for a particular breach (e.g., failure to meet "X" test permits cancellation of the contract) or expressly defining a particular breach per se material. The third context involves what, under common law is described as "express conditions." These are express contract terms conformance to which is implicitly or expressly a precondition to the performance of the other party. Here, the nature of the express agreement itself conditions the remedy.
Illustration 1. The licensee agrees to specifications for a new word processing program. The standards expressly 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 time. The failure to meet the express standards constitutes a material breach. The licensee can refuse the product.
Illustration 2. A contract requires delivery of a database program but does not expressly describe the characteristics required of the program. The database program meets its own specifications, but fails to in a manner comparable to other similar type programs. There is a breach. Materiality hinges on whether the defect causes substantial harm to the licensee under subsection (b).
8. 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-11109. 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 any 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.
Conference and Committee Action:
1. At the 1997 NCCUSL Annual Meeting, the Conference adopted a motion that the three transactional articles should follow a consistent "core" definition. No motion was voted on to define the content of that core and the movant explicitly made clear that he did not intend to resolve that issue. This Draft retains current Article 2 law as the applicable core definition.
Reporter's Note:
1. This draft follows current law in Article 2. Since many of the transactions covered by Article 2B are not now within the UCC, in many states, it expands the ability of courts to monitor transactions beyond the law that current governs. The intent is to adopt in full modern contract law decisions on unconscionable contracts and clauses of those contracts. An important expansion of judicial review, however, is contained in 2B-308, which imposes procedural requirements on mass market form contracts and allows courts to invalidate some terms even though they are conscionable.
2. This Draft does not follow proposed revisions of Article 2 which also contain language regarding unconscionable inducement of a contract. The inducement concept does not exist in current law other than in Article 2A. In Article 2A, the concept is limited to consumer leases; it does not apply to mass market or other commercial contracts. Notes to the latest draft of revised Article 2 suggest that the concept is intended to incorporate a wide-ranging inquiry about the value promised and received, the nature of the advertising and the sales context. The argument for extending the doctrine in this way is not clear and is especially unpersuasive beyond consumer contracts (the limit adopted in current Article 2A). In this article, many 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 subcommittee recommended that the inducement provision be rejected in Article 2B.
SECTION 2B-112. MANIFESTING ASSENT.
(a) A party or electronic agent manifests assent to a record or term in a record if, with 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 The mere retention of 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, a party's 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) A manifestation of assent may be proved in any manner, including by a showing that a procedure existed by which a party or an electronic agent must have engaged in conduct or operations that manifests assent to the contract or 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 notarization 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: "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 enable the electronic agent to react to the record or term.
(b) Except for a proposal to modify a contract, if a record is available for review only after a 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 bundled price:
(1) if the party whose terms are refused is the transferor 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 fee attributable to the rejected license; and
(2) if the party whose terms are refused was not the transferor 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.
Reporter's Note:
This section is proposed for Committee consideration. It derives from pending Digital Signature legislation in several states, most notably, in the developing Illinois legislation. The purpose is to avoid any uncertainty about the efficacy of electronic records and signatures under state law as they apply to transactions covered by Article 2B. it would become part of the electronic commerce package of sections applicable to other UCC articles if accepted by the Committee.
SECTION 2B-1150. ATTRIBUTION PROCEDURE.
(a) An attribution procedure is a procedure established by law or agreement or adopted by both the parties for the purpose of verifying that electronic authentication, records, messages, or performances are those of the respective parties or for detecting changes or errors in the transmission or informational in content, of an electronic message, record, or performance, if the procedure is commercially reasonable.
(b) The commercial reasonableness of an attribution procedure is to be determined by the court in light of the purposes of the procedure and the commercial circumstances at the time of the parties agree to or adopt the procedure. ment[, 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.
(c) Except as otherwise provided in Section 2B-116 (a), if a loss occurs because a party complies with a procedure for attribution that was not commercially reasonable, a party that required use of the procedure bears the loss unless if it disclosed the nature of the risk to the other party or offered commercially reasonable alternatives that the party rejected. The liability of the party that required use of the procedure is limited to losses that could not have been prevented by the exercise of reasonable care by the other party.
Uniform Law Source: Article 4A-201; 202.
1. The comments to the final Draft will outline that among the considerations to be addressed in determining the reasonableness of the procedure are: 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.
2. Subsection c has been returned to this section from former section 2B-111 without substantive change.
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-1161. ATTRIBUTION TO A PARTY OF ELECTRONIC MESSAGE, RECORD, OR PERFORMANCE.
(a) As between the parties, an electronic authentication, message, record, or performance received by a party is attributable to a the party indicated as the sender if:
(1) it was in fact the action of sent by that party, a person authorized by the party, its agent, or the party's its electronic agent;
(2) the receiving other party, in good faith and in compliance with an attribution procedure for identifying a party concluded that it was the action of sent by the other party party, a person authorized that party, or the party's electronic agent; or
(3) subject to subsection (b), the authentication, message, record, 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 actor creating the appearance that it came from thate partyalleged sender;
(B) the access occurred under circumstances constituting a failure to exercise reasonable care by the alleged actorsender; and
(C) the other 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 relying party has the burden of proving reasonable reliance, and the alleged actor sender has the burden of proving reasonable care.
(2) Reliance on an electronic record or performance that does not comply with an agreed authentication attribution procedure is not reasonable unless authorized by an individual representing the other partyalleged sender.
(c) Attribution under subsection (a)(2) creates a presumption that the authentication, message, record or performance was that of the party to which it is attributed.
a required by the attribution procedure offor attribution
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:
[Changes since last Draft: The Section formerly dealt with two different settings - identity and error detection. The Error detection material has been moved to and elaborated upon in Section 2B-111A. Former (d), which potentially deals with both issues, was moved back to Section 2B-110.
The most significant change in this section appears in subsection (c). Both is discussions at the ALI meeting and at the annual meeting, concerns were expressed about the potentially preclusive effect of the use of an attribution procedure for determining identity under 2B-111(a)(2). In the open marketplace to which this Article refers, irrebuttable presumptions may often be inappropriate because of the open-ended nature of the relationships and the open nature of the assumption that the procedure must be commercially reasonable. A review of recent proposals for digital signature laws revealed what might be expected. The proper treatment of identification procedures is that they create a presumption, rather than a certainty. Thus, subsection (c) creates a rebuttable presumption of attribution by use of the procedure. The presumption can be rebutted by showing a lack of attribution under the three rules outlined in (a).]
1. This section states risk allocation rules relevant to the anonymous nature of electronic commerce regarding information assets. The intent is to balance making electronic commerce possible in an open environment (as contrasted to the closed structures of funds transfer, credit cards, and EDI transactions), while apportioning risk in a reasonable manner. It should be noted here that the risk allocation rules do not apply to handling of funds, bank accounts, or other subject matter outside the scope of Article 2B.
2. Subsection (a) refers to attribution of a message or performance to a particular party. It describes three circumstances under which a message or action is attributed to a party. Subsection (a)(1) relies on general agency rules, but 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. The general approach holds that, to be bound by electronic activity, a party must affirmatively create the agency. Having 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 electronic contracting for information because of the increasing use of preprogrammed software to acquire information assets. The principle is that the individual or company who created and set out the program undertakes responsibility for its conduct. That result could be reached under agency theory, but the goal is to eliminate uncertainty on this point. This parallels the UNCITRAL Model Law. Article 13 provides that as between the parties, a message is deemed that of the originator if sent "by an information system program by or on behalf of the originator to operate automatically." 3. Subsection (a)(2) focuses on agreed procedures for authentication and makes a message attributable to a party if the other used the procedures and reached that conclusion. This covers the desirable goal of establishing greater certainty when the parties adopts a reasonable way of identification of a party. The attribution here creates a presumption that it was the party identified who in fact sent the message, created the record, or engaged in the performance or authentication. The case also deals with situations where, for example, a party obtained a PIN or other identifier and used it without authorization.
4. Paragraph (a)(3) an important issue: when can a person be held accountable for messages not sent by it, but on which the other party relied? Subsection (a)(3) adopts a middle ground that parallels proposed international law (UNCITRAL Model Act). It 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 occurs only if the receiving party reasonably relied. Thus, 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.
In current law, there are several approaches to analogous problems: 1) in the telephone system, a party is responsible for any charges incurred for long distance calls from its equipment and using its number; fault and authorization are irrelevant; 2) credit card and electronic funds regulations limit liability for a consumer for unauthorized use of its card or number; 3) in commercial funds transfers, the presence or absence of a "security procedure" conditions risk; 4) in check collections, an absolute risk rule is imposed on many recipients of fraudulent instruments unless the party whose signature was forged contributed to the fraud by its negligence.
In determining which approach to take, the Committee elected an intermediate position. The provisions of (a)(3) deal only with cases where access codes or similar systems are in place to establish authentication of a message. The Committee rejected a rule of liability without proof of fault. The issue requires drawing a balance between senders and reliance interests of recipients of messages.
5. The rule restricting consumer risk for credit cards and funds transfers is appropriate where the protected party is always the less economically resourceful party and the other party is typically a deeper pocket that can spread loss among many transactions. It is not viable for an open system, heterogeneous environment such as that dealt with in Article 2B. In cases where the electronic process involves transactions between large businesses and consumers, allocation of the risk of fraud or false attribution developed in a way that responds to the better ability of the system operator to spread loss than the consumer. Our context requires a more general structure that goes beyond consumer issues; the problems will not routinely entail consumer protection questions or, even, a licensor with better ability to spread loss. An individual may be an injured party or the wrongdoer. Transactions will often involve two businesses or two individuals. Also, the transactions occur in a public network, not owned, operated or controlled by a single operator. Also, unlike in electronic funds transfers the messages here involve the creation or performance of contracts and the risk of financial loss without reciprocal value will typically be less.
Here, one could look to communications law for its allocation of risk. In telephone systems, the proprietor of a system (telephone) is responsible for all calls using that number, even if produced by a hacker engaged in entirely illegal and unauthorized access. The loss allocation there, of course, is between the owner of the system and the system operator.
SECTION 2B-117. DETECTION OF CHANGES AND ERRORS; CONSUMER DEFENSES [new].
[(a) If through an attribution procedure to detect changes in content, the content of an electronic message, record or performance can be shown to be unaltered since a specified point in time, the content shall be presumed to have been unaltered since that time.
(b) If an electronic record, performance or other action is created or sent pursuant to an attribution procedure for the detection of error, the information in the message, record, or performance is presumed to be as intended by the person creating or sending it as to portions of the content to which the procedure applies.] If the message, record or performance nevertheless contained an error but the error was not discovered, 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 relates to a material element of the message, record or performance.
(2) If the sender receives a notice required by the attribution procedure that describes the content as received, the sender shall review the notice and report any error detected by it in a commercially reasonable manner.
[(c) In a transaction involving a consumer, the consumer is not responsible for a message that the consumer did not intend but that was caused by an electronic error if, on learning of the other party's reliance on the erroneous message, the consumer:
(1) in good faith promptly notifies the licensor of the error and that it did not intend the content received by the other party;
(2) takes reasonable steps, including steps that conform to the licensor's reasonable instructions, to return to the licensor all copies of any information received or, on instructions from the licensor, to destroy all copies; and
(3) has not used or received value from the information or made the information available to a third party.
(d) In subsection (c), the burden of proving intent and lack of an error is on the party dealing with the consumer, while the consumer has the burden of proving compliance with subsection (c)(1)(2)(3).
(e) In this section, "electronic error" means an error created by an information processing system, by the communication of the information, or by acts of the consumer in a system that did not reasonably allow for correction of the error.]
Reporter's Notes:
This Section contains some old material (subsection (b)(1)(2)), but proposes several new concepts for consideration by the Committee. The goal is to complete the coverage of electronic commerce questions and, in subsection (c), propose a solution for a problem raised in communications from an observer and in discussions at the ALI annual meeting.
1. Subsection (a) sets out a presumption (rebuttable) regarding the effect of the use of an attribution procedure, at least part of which has the effect of precluding changes made in a record without detection. The langauage is taken largely from a pending Illinois Digital Signature statute which contains far more elaborate provisions regarding so-called secure electronic records. This verification or protection function is a by-product of at least one of the currently used electronic encryption technologies.
2. Subsection (b) sets out a similar presumption for error detection procedures. It is limited to materials to which the error detection methodology applies. Alleged errors in other aspects of an electronic transaction are, with the exception of consumer cases, left entirely to law outside this Article. The common law of multilateral and unilateral error applies. The greater certainty available to parties through a commercially reasonable procedure provides an incentive for such techniques to develop. The idea of error here is not limited to documents involving offers and acceptances, but also to performances.
3. Subsection (c) and (d) contain a major new proposal and an important form of protection for consumers in electronic transactions. The basic approach is to provide a relatively simple method for an consumer to contest the results of errors in his or her transmissions to a third party. Under current law, the effect of errors in contract formation, for example, would be resolved under common law theories of mistake - in many instances, where there is a unilateral mistake, the party making that error may be held liable for its consequences. They would, in any event, face a difficult dispute about the nature and source of the error.
The proposal stems from materials submitted by Professor Jay Dratler who described the risks of electronic and system errors and suggested the development of a simple remedy, at least presumptively for a consumer as a means to encourage use of electronic commerce and avoid unjust results. The basic model adopted here is that, if an electronic error occurred (e.g., one within the system, as compared to a simple mistake by the individual), and the consumer acts promptly to notify the other party, presumptions of accuracy shift and a contract is not formed so long as the consumer has not used or received the benefits of the mistakenly transmitted information or mistakenly shipped product.
The section does not propose a rescission right. That is, it is not sufficient that the consumer reconsidered its order. It deals with an error resolution system, allowing immediate return to essentially place the other party in the position of having to affirmatively establish that there was no error, without the benefit of the presumption that might otherwise apply in (b).
Illustration 1: Consumer intends to send an order for ten copies of the latest video game released by Jones Corp. In fact, the information processing system, through no fault of the consumer, records 110. The electronic agent maintaining Jones' site, after validating that the order came from Consumer and that the number entered was 110, electronically disburses 110 copies to Consumer's location, with an appropriate bill. The next morning, Consumer notices the mistaken shipment. He sends an E-Mail to Jones describing the problem, offering to immediately return or destroy copies, and does not use the games.. Under subsection (c), there is no presumption that the content was as intended and, if it pursues the matter, Jones must prove that there was no error. Alternatively, Jones may instruct Consumer to destroy the excess 100 game copies and pay a revised bill for 10.
Illustration 2: Same facts as above, except that Jones' system before shipping the materials sends a confirmation notice, asking Consumer to confirm that it ordered 110 games. Consumer sees the message. If it confirms 110 copies, even though its later claim rebuts any presumption, confirmation of the same volume twice would be strong evidence of intent to contract at the indicated amount. If it refuses to confirm, of course, the contract must be made later on the basis of the 10 copies confirmed.
SECTION 2B-1184. AUTHENTICATION EFFECT AND PROOF; ELECTRONIC AGENT OPERATIONSAUTHENTICATION.
(a) Unless the circumstances otherwise indicate that a party intends less than all of the effect, authentication is intended to establish:
(1) the party's identity,
(2) its adoption and acceptance of a record or a term, and
(3) the authenticity of the record or term.
(b) Operations of an electronic agent constitute the authentication or manifestation of assent of a party if a the party designed, programmed, or selected the electronic agent for the purpose of achieving results of that type.
(c) A record or message is authenticated as a matter of law if the 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:
1. Subsection (a) has not been reviewed by the committee. It deals with the fact that "authentication", as with a signature under current law, potentially serves many different functions. On approach to this would be to design language that captures each function and differently describes what will often be the same act - signing or encrypting a record. This draft takes the less formalistic approach of providing that, unless circumstances indicate to the contrary, all three functions of a signature or an authentication are intended. Any other rule creates complexity and traps that serve no useful commercial purpose. Under this subsection, an authentication that relates only to identity (as compared to accuracy of content) has only that effect, not more. The appropriate approach is to allow the context and actual intent to control.
2. Subsection (b) 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. Subsection (c) 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 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-119. 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 intent to be bound, a contract exists:
(1) when 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 unless the originating message prohibited that form of response.
(b) Subject to Section 2B-120205, 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.
Changes Since Last Meeting:
This Section was moved here from Section 2B-2045 without substantive change as part of a reorganization of sections to group electronic commerce provisions together.
Reporter's Notes:
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-120. 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 the message expires if acknowledgment is not received within a reasonable time after the message was sent.
(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 the originator, on notice to the other party, may either treat the message as having expired or specify a further reasonable time within which acknowledgment must be received or the message will then be treated as not having expired. 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, the originator may exercise the options in paragraph (2) if receipt does not occur within that time.
(b) Receipt of acknowledgment establishes that the message was received but does not in itself establish that the content sent corresponds to the content received.
Committee Vote and Action:
a. Motion to delete the section was rejected. Vote: 5-6. (February, 1997)
b. Reviewed without substantive change. (April, 1997)
Changes Since Last Meeting:
This Section was moved here from Section 2B-205 without substantive change as part of a reorganization of sections to group electronic commerce provisions together.
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-115. EFFECT OF AGREEMENT. [moved]
(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 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 prepared by a party against which enforcement is sought.
(c) 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 nominal consideration for the rights acquired, or the total value of any payments to be made and any affirmative obligations incurred, excluding payments for options to renew or buy, is less than $20,000;
[(2) if the agreement is a license and the term of the license is less than ninety days;]
(32) to the extent that a person authorized by the holder of intellectual property rights delivered copies of the information or access materials to the licensee or performance has been otherwise tendered by one party and accepted by the other; or
(43) to the extent that the party against which enforcement is sought admits in its pleading, or 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 covered by this article, this article states 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.
6. At the 1997 Annual Meeting, the sense of the house motion which passed was to harmonize the three articles with respect to the judicial denial requirement. Passed
7. At the 1997 Annual Meeting, a sense of the house motion to harmonize by deleting the "denial of agreement" exception was rejected.
Selected Issue:
1. Should an exception be provided for short-term licenses (e.g., up to six months) involving use of information provided by the licensor?
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 section allows enforcement without a writing 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). The absence of consideration is permitted under the section dealing with releases.
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 offer and acceptance, conduct by both parties, or the operations of an electronic agent which recognize the existence of a contract.
(b) If the parties intend to make a contract, 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 or, one party reserves the right to modify terms, or the standard forms of the parties contain varying terms. However, a contract is not 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 make a contract and there is a reasonably certain basis for giving an appropriate remedy.
(d) If an agreement is made, but a term is to be fixed by later 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. The licensor shall return any portion of the contract fee paid for which performance has not been received and retained by the licensee. The parties remain bound with respect to any obligation of confidentiality, or similar obligations, to which the parties have agreed.
Uniform Law Source: Section 2-204; 2-305(4).
Committee Votes:
a. Committee voted unanimously to adopt the section in principle. (September, 1996)
Changes Since Last Draft:
This section and the remaining sections on formation and terms have been restructured for clarity and flow of concepts. The provisions removed from this section have been placed in other sections, including Section 2B-204. Subsection (d) was moved here from Section 2B-305 since the provisions deal with contract formation, rather than terms and set out part of the important concept of how a contract conditional (expressly or impliedly) on agreement to additional terms is unraveled where the agreement does not occur.
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 otherwisee unambiguously indicated by the language of the offer or the circumstances:,
(1) Aan offer to make a contract invites acceptance in any manner and by any medium reasonable under the circumstances.
(2b) An order or other offer for prompt or current performance invites acceptance either by a prompt promise to perform or by prompt or current performance. However, a performance involving nonconforming information is not an acceptance if the party that provides the information seasonably notifies the transferee that the information is offered only as an accommodation.
(bc) 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.
(cd) Subject to subsection (d), Section 2B-202, a definite and seasonable expression of acceptance may create a binding obligation even if it is in a standard form that contains terms that vary from the terms of the offer. However, if records exchanged by the parties conflict on the scope of a license, no agreement exists unless from all the other circumstances it appears that an agreement, including with respect to scope, existed.
(d) An offer or acceptance that because of the circumstances or the language of the offer or acceptance is conditional on assent by the other party to the terms of the offer or acceptance precludes the formation except by compliance with the condition. However, Llanguage in a standard form which makes an offer or acceptance expressly conditional on assent by the other party to the terms of the form varying terms precludes the formation of a contract only 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 or permit performance until its terms are accepted, and the other party does not accept the terms. 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.
Uniform Law Source: Section 2A-206; Section 2-206.
Committee Vote:
a. Approved in principle. (September, 1996).
Changes Since Last Meeting:
This section has been reorganized and edited without changes in substances. Some language has been moved here from 2B-203. The first sentence of subsection (d) was added to provide the general rule against which the special treatment of standard for conditions has been provided. Subsections dealing with electronic agents and offer and acceptance were moved to a new section.
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 with an invoice conditioning the contract on assent to its terms. Purchaser accepts shipment. Under these circumstances, neither party acted 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 sections on conflicting forms [2B-209] and general interpretation law, including the actual terms of any affirmative agreement the parties may have had. If 2B-[209] applies, there is a knock-out rule; conflicting terms 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 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. See 2B-209 regarding the superseding effect of actually conditioned terms.
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.
SECTION 2B-204. OFFER AND ACCEPTANCE; ELECTRONIC AGENTS.
(ae) Subject to subsection (f), oOperations of one or more electronic agents which confirm the existence of a contract or that signify agreement are effective to form a contract even if no individual representing either party was aware of or reviewed the actions or it results.
(cf) In an electronic transaction, the following rules apply:
(1) A contract may be is formed by the interaction of two electronic agents. A contract is formed if the interaction results in both agents each engaging in operations that signify agreement, such as by engaging in performance of ing the contract, ordering or instructing performance, accepting performance, or making a record of the existence of a contract. The terms of the contract are determined under Section 2B-209.
(2) A contract may be formed by the interaction of an electronic agent and an individual. A contract is formed if an individual has reason to know that the individual is dealing with an electronic agent and performs actions the individual person 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. The terms of the contract are determined under Section 2B-207 or 2B-208 as applicable, but do not include terms provided by the individual in a manner to which the electronic agent could not react.
(3) The 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.
Source: 2B-203
Committee Vote:
a. Approved in principle. (September, 1996).
Changes Since Last Meeting:
The section has been edited for clarity. Also, determinations of what terms govern the contract are expressly referred to applicable sections of the Article.
Reporter's Notes:
1. This Draft separates out former subsection (e) and (f) from 2B-203. The substantive provisions are largely unchanged, except with respect to the black-lined materials. The separation is intended to enable dealing with the electronic commerce provisions of Article 2B as a package, in the event they are transported to the other UCC transactional articles. As discussed above, 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 electronically, shifting most issues about terms to other sections.
2. Subsection (a) 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 1. Tootie is an electronic system for placing orders for Home Shopping Network. When you dial the number, a voice comes on line instructing you to indicate your card number, the item number you will purchase, the quantity, your location, and other items. You indicate this by striking keys and numbers on your telephone. Tootie automatically orders shipment. Ray calls Tootie and, after entering his card number, verbally states to Tootie that he will only accept the 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 2. User dials the ATT information system. A computerized voice states: "If you would like us to dial your number, strike "1", there will be an additional charge of $1.00. If you would like to dial yourself, strike "2". User states into the phone that he will not pay the $1.00 additional charge, but would pay .50. Having stated his conditions, User strikes "1". The computerized voice asks User to state the name of the recipient of the call. User states "Jane Smith". The ATT computer dials Jane Smith's number, having located it in the database.
Under the circumstances, User's "counter offer" is ineffective; it could not be reacted to by the ATT computer. The charge for the use should include the additional $1.00.
3. 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. [moved]
SECTION 2B-205. [moved]
SECTION 2B-2056. FIRM OFFERS. An offer by a merchant to enter into a contract made in an authenticated record that by its terms gives assurance that the offer will be held open is not revocable for lack of consideration during the time stated. If a time is not stated, the offer is irrevocable for a reasonable time not exceeding 90 days. A term providing assurance that the offer will be held open that is contained in a standard form supplied by the party receiving the offer is ineffective unless the party making the offer [authenticates the term] [manifests assent to that 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.
Issue: Should the Committee reconsider and follow existing Article 2 by requiring that the term be signed (authenticated)?
SECTION 2B-2067. RELEASES.
(a) A release of intellectual property rights in whole or in part is effective without consideration if it is:
(1) contained in a record to which the party giving the release manifested assent and which identifies the rights released; or
(2) enforceable under other law including estoppel, implied license, or other rules allowing enforcement of a release.
(b) A release continues 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 acts done in complying with an agreement to give acknowledgments or credits in subsequent use of the information or to provide a small number of copies of any new works.
Selected Issues:
a. Is the definition of a release sufficiently distinct from the general idea of a license to permit the special rules in this section (i.e., no authenticated record required and presumption of a perpetual term), neither of which rule is appropriate for licenses in general?
Reporter's Note:
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.
Subsection (b) is a specific application of a rule previously expressed in Section 2B-311, creating a presumption that some single or no-payment contracts create perpetual rights if no term is specified. The broader rule was abandoned based on extensive discussion at the April, 1997 meeting, but this specific application was developed to deal with issues common in software, publishing and other industries where parties develop products in part on reliance on general releases or waivers that do not contain specific duration terms. Leaving those cases to the general "reasonable time" standard in Section 2B-311 would create unwarranted and potentially costly uncertainty.
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 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 a record 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 party's attention.
(a) 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 assent, to the record before or in connection with the initial performance or use of or access to the information. 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 a party has not yet had an opportunity to review or that has not yet been completed, the party adopts the terms of the later record if the party agrees to or manifests assent to that record.
(c) A term adopted under subsection (b) 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.
(d) A term of a record which is unenforceable for failure to satisfy a requirement of this article, such as a provision that expressly requires use of conspicuous language or manifesting assent to the term is not part of the contract.
(a) 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 without regard to the party's knowledge or understanding of the terms of the record. However, a term which is unenforceable for failure to satisfy a requirement of this article, such as a requirement for conspicuous language, is not part of the contract.
(b) Except as otherwise provided in Sections 2B-206 and 2B-207, a party adopts the terms of a record if the party agrees, including by manifesting assent, to the record before or in connection with the initial performance or use of or access to the information. If performance or use of the information is commenced with the expectation that their agreement will be represented in whole or in part by a record that a party has not yet had an opportunity to review or that has not yet been completed, the party adopts the terms of the later record if the party agrees to or manifests assent to that record.
Uniform Law Sources: Common law decisions; 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)
d. Reviewed without substantive change. (April, 1997)
Changes Since Last Meeting:
This section was moved from 2B-307 for purposes of clarifying the relationship between contract formation and contract terms. It was reorganized and edited for clarity without substantive change.
Reporter's Notes:
1. Article 2B deals with standard form records in three separate sections. This Section and 2B-207 deal with standard forms in "single form" cases. Section 2B-209 deals with cases involving an exchange of conflicting forms. These sections assume that a contract exists and do not address formation issues. If no contract is formed under other provisions of this Article, the sections are not applicable. What is addressed here is, given a contract, what are the terms?
2. The theme in Article 2B is that, while contracts are in some situations, formed and their terms delineated at a single point in time, in many modern transactions, a rolling process occurs in which terms are provided, clarified or introduced at more than one point. Formation and term delineation is a process, rather than a single event.
In single form cases, Article 2B proposes a balance is implemented in 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 does not depend on the party actually reading the terms. As the language in (a) clarifies, however, the adoption of terms does not circumvent separate rules requiring that a term be conspicuous.
The second is that, in 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-207 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 rely solely on 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, including agreement by manifesting 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). This rolling contract concept reflects that, in many agreements, terms are considered at two different points in time (some at the initial discussion and others when the products arrives), while in still others, terms may continue to be created and modified over time.
Terms can and often are created in modern commerce by assent after beginning performance. Thus, in the entertainment industry and in many development contracts, contract terms are developed and drafted while performance occurs, not before performance begins. Each party anticipates an enforceable record will be created and agreed to, but neither waits on performance until one is fully drafted. This section accommodates that process as well as the common practice of providing terms for assent at some point prior to the initial performance, even if not at the first step in the agreement process..
SECTION 2B-208. MASS-MARKET LICENSES.
(a) 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 assent, to the mass-market license before or in connection with the initial performance or 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 party does not manifest assent to the particular term and 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 general 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 the agreement.
(c) Subsection (b)(1) does not exclude a term that:
(1) states a limit on the licensee's use of the information which limit would exist under intellectual property law in the absence of the contractual term;
(2) was disclosed in compliance with any federal or state law; or
(3) becomes part of the contract under other provisions of this article.
(d) A term that is unenforceable for failure to satisfy a requirement of this article, such as a provision that expressly requires use of conspicuous language or manifesting assent to the term, is not part of the contract.
(e) 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.
(f) 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.
(a) Except as otherwise provided Section 2B-209, a party adopts the terms of a mass-market license for purposes of Section 2B-207(a) if the party agrees, including by manifesting assent, to the license before or in connection with the initial performance or use of or access to the information. 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 party does not know of or manifest assent to the particular term and 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 general 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 the agreement between the parties to the license.
(b) Subsection (a)(1) does not exclude a term that:
(1) states a limit on the licensee's use of the information which limit would exist under intellectual property law in the absence of the contractual term;
(2) was disclosed in compliance with any federal or state law;
(3) was reasonably disclosed on the product packaging or otherwise before payment of the license fee, or was part of the product description; or
(4) becomes part of the contract under other provisions of this article.
[(c) The court may exclude a term under this subsection (a)(1) only if it finds that the term is bizarre or oppressive by industry standards or commercial practices, abrogates or substantially conflicts with the nonstandard terms explicitly agreed to by the parties to the license, or eliminates the dominant purpose of the transaction as agreed to by the parties to the license.]
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 adopt the language proposed in the "Henderson motion" at the Annual Meeting and derived from comments to the Restatement?
b. Should the bracketed language be adopted limiting the refusal term idea to post payment contract terms?
Reporter's Notes:
Changes Since the June Meeting:
a. The section was moved here from 2B-308 in a reorganization to made clear the relationship between formation and term-creation rules. The section has been also reorganized for clarity and to relate back to the general provisions of Section 2B-207. Reference to lack of knowledge and to the fact that adopting terms does not over-ride exclusion of terms under more specific provisions requiring, for example, that a term be conspicuous, occurs in Section 2B-207, which is incorporated in this section under subsection (a). Subsection (a) stating the refusal terms concept is framed as an exception to the general rule that adopting a record adopts all of its terms, except those made unenforceable under other rules.
b. The refusal term concept holds that unknown terms that are no assented to specifically are not included if they would have led to refusal of the license. At the Annual Meeting, in discussion of Article 2, a motion was made to clarify the basis of exclusion in that Draft and seemed to receive substantial support, but it was withdrawn on the assurance from the Article 2 Committee that the "message" had been received and that, in two years, adjustments would be made. Bracketed subsection (c) contains language from that motion and the Restatement comments. The Committee should consider whether the concept should be expressly adopted.
c. Subsection (b)(3) was added at the May, 1997 meeting, but has not been directly discussed by the Committee. It responds to the potential of conflicting regulations or disclosure demands and holds that disclosure of terms pursuant to applicable federal or state regulations suffices for purposes of this Article. This is based on the concept that direct regulations tailored to specific disclosures should not be altered by the general rules of this section.
d. Former subsection (f) requiring that terms be interpreted the same for all licensees was deleted based on written suggestions by various commissioners at the Annual Meeting that this language states an obvious interpretation principle and was not necessary.
General Notes:
1. This Section deals with all standard forms used in the mass market in transactions governed by this Article. It states an exception to the general rule in Section 2B-307 and creates what has been a controversial rule allowing a court to invalidate some terms of a mass market standard form even though the term is not unconscionable and was not obtained through fraud or duress unless the party assenting to the form also assents to the particular term. These are so-called "refusal terms," defined in subsection (b) as terms that the party proposing the form should know would cause a refusal of the license by the licensee. As drafted, the scope of the section is determined by the scope of the term "mass market." This currently covers consumer transactions and transactions involving two businesses. It is not limited to deals involving small businesses.
2. In the mass market, contract terms are created in several different ways. This section deals with all standard forms in the mass market, including 1) forms presented before a purchase fee is paid, 2) situations where terms are presented online, and 3) situations where a publisher's terms are made available for assent by the end user only after the end user pays the retailer. A failure to focus on the differences clouds assessment of the provisions of this section.
3. Forms assented to before payment. Where the terms of a form (mass market or other) are presented before a price is paid, determining the validity of the form terms involves issues that have been presented to courts for years. In this setting, the vast majority of case law on consumer or other grounds enforces the contract. The fact that the terms are non-negotiable or represent a "contract of adhesion" typically results in close scrutiny of terms and whether they violate concepts of unconscionability, but it seldom results in a decision that invalidates the contract itself. The fact is that, while neither party bargained for terms, the vendor did not agree to sell under any other terms than those set out in its contract and, as long as there is fairness, disclosure or notice to the other party, contract law does not vitiate those terms.
Subsection (a) states a principle in the Restatement (Second): by manifesting assent to a standard form record, a party adopts the terms of that record. Unlike common law, Article 2B 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 sufficient to enforce clause in that form). 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.
In this setting, however, courts express concern about the risk of over-reaching and fraud or surprise in the form of hidden or otherwise unknown terms that fundamentally alter the deal and vitiate the bargain. In most cases, courts concerned about or presented with claims of this nature focus on whether the contract is adhesive and, if so, on whether a particular term is "unconscionable." Few courts invalidate conscionable terms in the mass market. Section 2B-308 creates a right to invalidate terms that are not unconscionable. It also applies that result to business purchasers.
The issue is whether new law is justified to avoid abuses in contracting that are dealt with adequately under current consumer regulations, fraud concepts, and the general rule avoiding unconscionable contract terms. Should an otherwise "conscionable" term be excluded?
In cases where the license arises through initial screens presented to the licensee before it pays, the issue is identical to paper-based formats, except for the automated nature of the contracting. The issues are whether there are adequate indicia of assent and adequate protection against over-reaching.
In both cases, one view is that law should disallow the ability of a vendor to insist on the terms under which it chooses to market its product or service. That viewpoint challenges fundamental contract law. It argues that law defines terms, conditions and risks under which information is transmitted to the general public. This is a regulatory structure that is not accepted in Article 2B.
4. Forms presented after payment. In modern commerce, licenses and other contract terms are often presented after a price is paid to a retailer. These situations (which include so-called "shrink-wrap" licenses) invoke the same issues present in ordinary use of forms in a mass market, but present two additional questions.
First: does the form contract give any advantages to the end user? The answer here centers on the fact that, in most cases, the license presented after payment is between the copyright owner and the end user, rather than between the end user and the retailer. In this three-party setting (end user, retailer, copyright owner), the post-payment license is important to the end user. In that case, the standard form establishes for the first time a relationship between the copyright owner and the end user. That relationship may be central to the end user's right to use the information.
A copyright owner may elect to license distributors a right to sell copies of its work. Alternatively, it may preclude a right to sell and instead authorize distributors to license works under terms it specifies to the distributor. Copyright law supports either choice. If the copyright owner authorizes others to transfer copies, it is licensing its exclusive distribution right. If the distributor/ licensee exceeds that license, cases hold that its transferees are not protected under copyright law. Thus, a common distribution situation is:
1) copyright owner licenses distributor to distribute, but not sell, copies of its work, and only subject to a license;
2) distributor (retailer) transfers copies to end users for a price, but under applicable case law, this cannot be a "first sale" unless the copyright owner authorized sales;
3) if it is not a first sale, end user has possession, but an uncertain status in copyright until is assents to a license with the copyright owner
4) if it is a first sale, end user has some statutory rights, but cannot make a public performance, display or multiple copies of the work under copyright law.
The "post-payment" license is the first contract between the end user and the copyright owner. It is the only setting in which the end user can obtain rights that are in excess of rights to a first sale purchaser and, if that is barred, any rights to copy at all under copyright law.
Second: In post-payment license terms, the unique issue is what protections does the end user have if the license terms are unacceptable. Under Article 2B, the post-payment terms cannot be made enforceable unless the licensee has a right to a refund if it rejects the proposed agreement. This refund right is enforceable against either the publisher or the retailer. If that right is not given, the contract terms are entirely unenforceable. 2B-113.
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.
5. Subsection (a) requires agreement or a manifestation of assent to the form. Its 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 (f). 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.
6. This section deals with single-form cases. In that situation, case law generally affirms the enforceability of standard 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).
7. Subsection (a) places two general restrictions on the enforceability of terms in the mass market license in situations where the term is not known by or called to the party's attention and assented to by the party. These are in addition to general UCC rules invalidating unconscionable terms and requiring good faith. The restriction in (a)(1) prevents the creation of terms that contradict the basics of the agreement without giving the assenting party fair notice of the terms. Under current law, in most states, this function is served by cases interpreting forms strictly against the proposing party and excluding unconscionable terms.
The bracketed language 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.
8. Subsection (a)(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.
Subsection (a)(1) parallels the Restatement, but does not adopt the broad interpretation that some courts place 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.
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.
9. Subsection (a) 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 (a)(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 (a)(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.
10. A term is not excluded if the party manifests assent to the term. At the heart of the Restatement test 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. If the proposing party calls the term to the licensee's attention, it is not an unknown refusal 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.
11. Subsection (b) describes situations in which the exclusionary test 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 (a)(1). This does not validate terms outside what rights the licensor would have under copyright and patent (including any limitations on those rights under federal law or policy). Also, it does not validate terms that conflict with the negotiated terms of the deal. The intent is simply to validate contract terms that merely implement a copyright owner's exclusive rights and reflect conditions already established by federal property law.
A second exception 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. The third exception refers to terms presented in a manner that complies with otherwise applicable federal or state disclosure rules (subsection (c)(2)). This subsection was added before the May, 1997 meeting in response to issues raised by the banking industry in connection with disclosure regulations to which and other must comply. (e.g., Regulation E) 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.
SECTION 2B-209. CONFLICTING TERMS.
(a) If 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 the conditions are enforceable under Section 2B-205, 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 coincide 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 (4); and
(3) terms under subsection (b)(3) govern terms under (b)(4).
(d) Terms in a record authenticated by the party to be bound supersede the inclusion or exclusion of terms under subsection (a) or (b).
(a) If the parties exchange standard forms which contain varying terms, and a contract is formed by conduct or otherwise, subject to subsection (b), the terms of the contract are:
(1) negotiated terms agreed to by the parties and any term in a form if the party claiming exclusion of the term agreed, including by manifesting assent, to the term;
(2) terms on which the standard forms agree in substance;
(3) terms of the licensor's form governing scope of a license if they do not materially alter terms included under (a)(1);
(4) terms on which the forms do not conflict, if the terms do not materially alter the agreement and the party receiving the term does not seasonably give a notice of objection to the other party; and
(5) supplementary terms included under this [Act].
(b) Terms in a record authenticated [signed] by the party to be bound or in a record containing conditional terms enforceable under [Section 2B-203(d)], supersede subsection (a). In the case of a conflict among terms included under subsection (a), terms rank in priority in the order of the paragraphs of subsection (a) in which they are listed.
(c) 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 unless the term materially alters the agreement. (d) In determining whether a term materially alters an agreement, a court shall consider whether the term conflicts with the negotiated terms of the agreement and whether it is consistent with the course of dealing of the parties or the customs and practices of the applicable trade or industry for transactions of the type.
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)
Changes Since Last Meeting:
This section was moved here from 2B-309 as part of the general reorganization of sections.
The section was modified in light of discussions at the Annual Meeting, review of the current Draft of Article 2, and review of the terms and associated case law under current 2-207 of the UCC. It deals with one of the issues considered in current 2-207 and applies a modified "knock out" rule to resolve the situation in which the parties exchange standard forms, but do not generally discuss or consider the terms of the respective forms.
The Section is limited to standard forms. It leaves for common law resolution cases involving the exchange of numerous tailored writings, the collection of which taken together form the contract terms. Under common law principles, in cases involving an exchange of writings that do not entirely agree, the typical interpretation approach involves considering all of the terms of all of the writings and reconciling them in light of all the circumstances. See Abram & Tracy, Inc. v. Smith, 88 Ohio App.3d 253, 623 N.E.2d 704, 708 (1993) ("Generally, a writing should be interpreted as a whole and all the writings that are part of the same transaction should be interpreted together."); Restatement (Second) of Contracts 202(1) (2) (1981); 2 Farnsworth, Contracts 7.10 (1990). In such unstructured environments, requiring that a court adopt a "knock-out" rule such as that described here would needlessly place blinders and restraints on courts whose focus in such settings should more generally deal ith determining the intent of the parties. Since Article 2B deals with transactions the vast majority of which are not now governed by the U.C.C., the focus on standard forms allows this broader approach to continue, rather than enforcing an entirely new regime on the interpretation process.
Current Article 2-207 is not limited to standard forms. However, a review of cases decided under that section indicates that the vast majority, if not all, of the decisions rendered deal solely with the relationship between standard forms and agreements in which the party cannot be said to have closely reviewed or even agreed to a form.
Reporter's Note:
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.
8. Subsection (a)(2) holds that silence in one form is not a conflict that triggers the knock out rule. Subsection (a)(3) 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.
SECTION 2B-301. PAROL OR EXTRINSIC EVIDENCE. Terms with respect to which confirmatory records of the parties agree or which are otherwise set forth in a record intended by the parties as a final expression of their agreement with respect to the terms included therein may not be contradicted by evidence of any prior evious agreement or of a contemporaneous oral agreement. However, the terms may be explained or supplemented by:
(1) course of performance, course of dealing, or usage of trade; and
(2) evidence of consistent additional terms unless the court finds that the record to have been was intended also by both parties as a complete and exclusive statement 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.
c. At the 1997 Annual Meeting, a sense of the house motion was adopted to harmonize the parol evidence rules in the three articles.
Reporter's Notes:
1. This Draft generally corresponds to current Article 2. The new edits correspond the draft to that language.
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 contract involves repeated occasions performance 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 which modifies a contract is binding without consideration.
(b) An agreement that contains a term that excludes modification or rescission except by a record authenticated may not otherwise be modified or rescinded. However, in a standard form supplied by a merchant to a consumer, a term requiring an authenticated record for modification of the contract is not enforceable unless the consumer manifests assent to the term.
(c) 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 unless modified in accordance with 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 the terms of a continuing contract made pursuant to a term in a contract providing that the contract may be modified as to future performances by compliance with a described contractual procedure is effective if:
(1) compliance with the procedure reasonably notifies the other party of the change; and
(2) in a mass-market license, the procedure permits the licensee to terminate the contract if the modification deals with a material term and the licensee in good faith determines that the modification is unacceptable.
(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:
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. 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., blocking access to a virus infected site, or a change in the access codes required for access). See 12 CFR 205.8(a)(2) as an example. The standard requires that the party 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 this section.
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 multifaceted 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. 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 that is 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 that must be satisfied. However, the agreement requires performance to the subjective satisfaction of the other party to the extent that:
(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 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 efforts to supply, and on a licensee that is the exclusive distributor to use good faith 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:
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.
After extended discussion of the standard, no clear resolution was reached. The basic choice was between reasonable commercial efforts and good faith. After the April, 1997 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 about conflict of interest handles situations where one party has 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. This 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. [moved]
SECTION 2B-308. MASS-MARKET LICENSES. [moved]
SECTION 2B-309. CONFLICTING TERMS. [moved]
SECTION 2B-30710. INTERPRETATION OF GRANT.
(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 withheld exceeds this implied limitation unless the use was necessary to the granted uses or would be legally permitted in the absence of the implied limitation.
(b) A license that does not specify the number of simultaneous users permitted only authorizes use by one party at any one time. However, if the license authorizes display or performance of the information, it permits viewing by any number of persons but only of a single display or performance 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, 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, a court shall look to the commercial circumstances of the transaction and, in addition, the following rules apply:
(1) A grant of "all possible rights and media" in information, "all rights and media now known or later devised", or 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.
(4) 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.
(5) A grant that states that it is an "exclusive license", or uses 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.
3. 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, scholarly use of a direct quotation from a licensed text not covered by confidentiality restrictions would likely be a fair use and would not conflict with the implied limitation. Sitting in one's office doing a letter to a family friend using software that is under a commercial use license would likely not conflict with any implied limitation. 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 interoperability 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.
SECTION 2B-30811. DURATION OF CONTRACT. If an agreement is indefinite in duration, the following rules apply:
(1) Except as provided in paragraph (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 on a physical medium 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 of contract.
(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:
Changes Since Past Meeting:
a. This section was substantially redrafted in light of extensive discussion during the April Meeting and the revisions have not yet been discussed by the Drafting Committee.
b. The redrafting returns the section toward current law under Article 2 and the common law, except with respect to the perpetual duration assumed where a tangible copy is delivered and there is no performance (e.g., payment) to be delivered in the future to the other party. Overall, this returns to the general approach approved at a prior meeting. It abandons the attempt to accommodate various special rules on duration present in different fields of intellectual property law. The reference in subsection (1) to "other law" incorporates that law; some of the major non-UCC themes will be discussed in comments.
General Notes:
1. Paragraph (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 a position of perpetual servitude without a very clear indication that should be the case.
2. Paragraph (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 black 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. Paragraph (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 Paragraph (2) is applied to intellectual property releases, but is stated in Section 2B-207 on releases.
4. Paragraph (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 current Article 2.
SECTION 2B-30912. RIGHTS TO INFORMATION IN ORIGINATING PARTY.
(a) Except as otherwise provided in subsection (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, the 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 receiving, processing, or handling the information and its agents 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) Except as otherwise provided in subsection (c), 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 party, 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-310. OBLIGATIONS REGARDING IMAGES, MARKS AND NAMES [new].
(a) If the licensed information consists of an image, trademark or similar material to be used by the licensee in the creation of information or goods or services containing the licensed information, the [licensee has] [parties have] the obligation to:
(1) not use or alter the licensed information in a manner that dilutes the value of the image, trademark, or similar material;
(2) not use the licensed information in a quality of product, service or information other than that indicated in the license and, in the absence of contractual terms, will use the licensed information only in connection with goods, services or other information of fair average quality consistent with ordinary standards of the trade applicable to the type of license involved,
(3) not use the licensed information in connection with obscene, pornographic or similar material.
(b) The obligations created here extend to any intended third party that is a beneficiary of the license.
Reporter's Note:
This Section has not been reviewed by the Committee. While Article 2B does not deal with pure trademark licensing, many of the materials covered by Article 2B are in the nature of the such licensing. This Seciton is suggested as a means to begin discussion of whether treatment of such licenses is desirable. They involve implied and express obligations to retain the value of the information (images etc.) involved. The language here is merely exploratory, seeking response from affected persons.
SECTION 2B-3113. ELECTRONIC VIRUSES.
(a) In this section, "virus" means instructions to a computer instructions intended by the person that includes including the instructions in the information to operate in manner likely materially to disrupt, damage, or destroy information, or inappropriately interfere with the use of a computer or communications facility without the consent or permission of the owner and not authorized under Sections 2B-3124 or 2B-716.
(b) Unless the circumstances clearly indicate that no obligation 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. In determining whether this obligation has been met, the following rules apply:
(1c) The contractual obligation duty described in subsection (b) is owed solely to the other party to the contract.
(2) and, eExcept 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, the obligation is satisfied if the language in a contract states that no action was taken to ensure exclusion of a virus or that a risk exists that viruses have not been excluded.
(3d) A party is not liable if the virus was introduced by a third party after the party and its agent completed its operations dealing with the information into which the virus was introduced. its performance or
(c) The liability of a party for breach of its obligation is limited to the extent that if the party injured by the virus failed to exercise reasonable care to prevent or avoid loss.
(de) In determining whether reasonable care was has been exercised, 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 exercises 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.
(ef) 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).
Drafting Note:
This section has been restructured to reflect comments at the Annual Meeting and for clarity. The major substantive changed proposed is that the section no longer employs a contributory negligence standard, but shifts to comparative fault. This is consistent with a variety of comments made at the Annual Meeting.
Reporter's Notes:
1. This section deals primarily with situations where a third party (not the licensor or licensee) intentionally inserts viruses into information intending to cause damage. Its main application is to allocate loss between the two innocent parties in that case. One question is whether there should be separate, specific treatment of intentional viruses by the party to the agreement.
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-3124. ELECTRONIC REGULATION OF PERFORMANCE.
(a) In this section, a "restraint" means a program, code, device or other limitation that restricts use of information.
(b) A party entitled to enforce a limitation or restriction that does not depend on the existence or non-existence of a breach may include in the information and utilize a restraint that restricts use in a manner consistent with the agreement if:
(1) a term in the contract authorizes use of the restraint;
(2) the restraint does not destroy or alter the information, but merely prevents uses of the information inconsistent with the agreement, or with a licensor's rights under intellectual property law and that were not granted to the licensee;.
(3) the information is obtained for a stated period of time not more than 30 [90] days or a stated number of uses and the restraint merely enforces that limitation; or
(4) the restraint prevents use at the expiration of the term of the license and the licensor gives reasonable notice to the licensee before further use is prevented.
(c) Operation of a restraint authorized under (a) is not a breach of contract, and the party that included the restraint is not liable for any loss created by its operation. Operation of a restraint which prevents use permitted by the agreement is a breach of contract. Nothing in subsections (a)(2), (3) or (4) authorizes a restraint that affirmatively prevents a licensee's access to its own information accomplished without use of the licensor's information.
(d) 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 under an agreement with the licensee.
(e) A restraint included in information in accordance with this section or as authorized under other law is not a virus for purposes of Section 2B-313.
Uniform Law Source: None
Reporter's Notes:
Changes Since the June, 1997 Meeting:
This section was edited for clarity and several substantive changes were made based on the discussion at the June, 1997 Drafting Committee meeting. Included in the editing was the introduction of the defined term "restraint" to simplify the reference to electronic limiting devices. The second sentence of (c) is new and in corresponds to a concern raised by a licensee representative. It clarifies the focus of the section. With or without that language, however, the concept would still be inherent. The time period in subsection (a)(3) was changed to 90 days to correspond to practices in shareware and other industries.
General Notes:
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. Of course, the electronic regulation discussed here assumes that the licensor is enforcing a restriction that is, itself, enforceable under applicable intellectual property and contract law that may limit license terms in some cases. 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 (b) distinguishes between active and passive electronic devices. An active device terminates the ability to make any further use of the information. These are dealt with in subsection (b)(1) and subsections (b)(3)(4). Passive devices merely prevent unauthorized use, but leave the subject matter otherwise unaltered. These are dealt with in subsection (b)(2). The concept of an active device.
4. Under subsection (b)(2) provides that for passive devices, special notice is not required if the electronics merely restrict use without otherwise disabling the information. This authorizes use of passive devices to enforce use limitations. 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 1: 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 2: The same situation as in Illustration 1, except that the limiting device permanently disables the software if a sixth user attempts access. This device is not authorized by subsection (b)(2). It involves a form of cancellation for breach. Section 2B-716 applies.
Illustration 3. 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 (b)(2) allows use of passive devices that merely preclude infringing intellectual property rights reserved to the licensor. Merely preventing the act does not require contract or other notice. Thus, for example, a contract that grants a right to make a back-up copy and to use a digital image, does not deal with the right of the licensee to transmit additional copies electronically. A device that precludes communication of the file electronically, but does not alter or erase the image in the event of an attempt to do so is authorized under (b)(2).
6. The devices described in subsections (b)(3) and (b)(4) may be passive or active. 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 (b)(3) and (b)(4) 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 (b)(1), a short term contract (b)(3), or reasonable notice before termination. If notice is required, of course, it can come directly from the licensor (a letter, e-mail, or telephone call) or through operation of the electronic restraint.
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 4. 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 5. In Illustration 4, 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.
6. Subsection (c) 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. What this section permits is enforcement of contract terms with respect to the subject matter of the contract. It does not deal with rights to exclude, block out, or otherwise impact other information owned by or licensed to the licensee.
SECTION 2B-401. WARRANTY AND OBLIGATIONS CONCERNING AUTHORITY AND NONINFRINGEMENT.
(a) A licensor warrants that:
(1) the licensor has authority to make the transfer and that 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 third party claims by way of infringement;
(2) in an exclusive license, 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
(3) if the licensor is a merchant regularly dealing in information of the kind, the licensor at the time of the transfer has no reason to know that the transfer, any copies transferred by the licensor, or the information, when used in any authorized use, infringes an existing intellectual property right of a third party except as disclosed to or known by the licensee.
(b) The warranties in this section are subject to the following:
(1) The warranty under subsection (a)(3) 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 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.
(3) Unless the contract expressly applies to uses or rights outside the United States, the warranties under (a)(2) and (a)(3) apply solely to rights arising under the intellectual property laws of the United States or a state thereof. If the license of an intellectual property right expressly includes territories outside the country of its origin, the warranties under subsection (a)(2) and (3) extend only to countries specifically named in the license and countries included in the license but not named that, at the time of the license, had entered into a treaty or other binding international obligation granting the foreign intellectual property right protection under the applicable intellectual property law.
(c) A licensee that furnishes technical specifications to a licensor or financier holds the licensor and financier harmless against any claim 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 it is conspicuous as to that term. Otherwise, language in a record is sufficient if it states "There is no warranty of quiet against third party claims that may interfere with the licensee's enjoyment of the [information] [computer program] or against infringement", or words of similar import.
(1) for the contract term no person holds a claim to or interest in the information that arose from an act or omission of the licensor other than by way of a claim of infringement or the like, which will interfere with the licensee's enjoyment of its rights under the contract;
(2) in an exclusive license, the intellectual property rights that are the subject of the license are valid and exclusive within the scope of the license for the information delivered as a whole; and
(3) if the licensor is a merchant regularly dealing in information of the kind, the information is delivered free of the rightful claim of any third person by way of infringement, except that a party who acts as a conduit for information of another warrants only that it has no [knowledge] [notice] that the information infringes the rights of third parties.
(b) The warranties in this section are subject to the following:
(1) If intellectual property rights are subject to a right of public use, collective administration, or compulsory licensing, the warranty is subject to those rights.
(2) Unless the contract expressly applies to uses or rights outside the United States, the warranties under (a)(2) and (a)(3) apply solely to rights arising under the intellectual property laws of the United States or a state thereof. If the license of an intellectual property right expressly includes territories outside the country of its origin, the warranties under subsection (a)(2) and (3) extend only to countries specifically named in the license and countries included in the license but not named that, at the time of the license, had entered into a treaty or other binding international obligation granting the foreign intellectual property right protection under the applicable intellectual property law.
(c) A licensee that furnishes technical specifications to a licensor or financier shall hold the licensor and financier harmless against any claim of infringement that arises 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 it is conspicuous as to that term. Otherwise, language in a record is sufficient if it states "There is no warranty of quiet enjoyment or against infringement", or words of similar import.
[If adopted, comments or definition setting out what is a conduit will be developed.]
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 Issues:
a. Should subsection (a)(1) be modified to conform to the language of current or revised Article 2A as generally described in Alternative B?
Reporter's Notes:
Changes since the June Meeting:
1. Article 2B uses a reason to know standard for the warranty of infringement for both licensors and licensees, but expands the scope of the licensor warranty by including use of the information. In its initial review of the warranty, the Committee supported the proposed trade-off as a proper balance for a default rule. Concerns, however, have been expressed about both the standard and the expansion. Alternative B 1) returns to the Article 2 warranty for copyright infringements (absolute liability but narrower scope); 2) makes special accommodation for public use rights; and 3) accommodation a provider that is merely a conduit for information provided by third parties.
The ultimate issue here, as in other default warranties does not lie solely in determining an appropriate risk allocation in the abstract, but also incorporates a decision about whether the default rules should construct a fair and manageable system that may eliminate the need for disclaimers supplanted by express and differently defined warranty obligations.
2. The language of the safe harbor disclaimer was modified as a result of the harmonization meeting to correspond to the language adopted in Article 2A. A further question arises about whether the (a)(1) language should be modified to follow Article 2A or whether a separate policy supports the different phrasing and apparently different substance of this warranty.
3. The first sentence of (b)(3) was added to clarify the scope of the warranty in the ordinary case in which a licensor does not undertake worldwide or similar obligations. A Texas licensor making a license for use in the state of Oklahoma should not undertake to have made a worldwide patent and copyright search.
General Notes:
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. Subsection (a)(1) deals 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)(2) and (a)(3) 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)(2) deals with the first two of these. Subsection (a)(2) 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)(2) reflects practice in motion picture and publishing industries and is 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. The presence or absence of exclusivity in the provider of the information does not alter the end user's ability to continue to use the licensed rights without challenge from third parties. A license from one co-owner adequately grants rights to the licensee and the dispute would then shift to one between the two co-owners to determine accounting for and distribution of the proceeds f the license.
5. The subsection (a)(3) warranty relating to infringement risk goes beyond 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. Also, unlike in reference to copyright or trade secret claims, violation of a patent does not require copying or wrongful appropriation.
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. Cases under copyright law indicate that the vendor may be liable for infringement, but that this liability does not exist in all cases. The 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?
SECTION 2B-402. EXPRESS WARRANTIES.
(a) Subject to subsection (c), 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 or description 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.
(c) This section does not create any express warranty for published informational content but does not preclude the creation of an express warranty for published informational content under other law or the creation of an express contractual obligation. If an express obligation in contract is established for published informational content and that obligation is breached, the remedies of the aggrieved party arise under this article.
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 and that the issue can be made clear in the comments.
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.
d. Motion to change the presentation of the except clause for published informational content, making an affirmative statement in (c) that leaves the development of obligations for informational content to common law under standards evolved therein. Adopted: 6-2 (June, 1997)
Changes Since the June, 1997 Meeting:
a. Subsection (c) implements the Committee vote clarifying that the Article is neutral on the basis for the creation of express obligations for published content, leaving that issue to other law. Based on concerns expressed at the 1997 Annual Meeting, language has been added to clarify that, while the creation of express contract obligations does not occur under the basis of the bargain test for published content, an obligation created and breached gives rise to remedies under this Article.
Reporter's Note:
1. This section adopts existing law. 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 section retains the "basis of the bargain" standard from current law relating to transactions in goods. This allows courts and parties to draw on an extensive body of case law for distinguishing express warranties from puffing and other, non-enforceable statements. While the cases involve many difficult factual determinations, they provide better guidance than would an entirely new standard. 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) (express warranty that 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 proposed revisions of Article 2, an extended debate and new structure has developed for warranties through advertising. That debate was triggered in part by the adoption of an entirely new approach to warranties in in that proposal. Subsection (a)(1) makes clear that advertising can create an express warranty if the basis of the bargain test is met. Article 2B clarifies appropriate law on this point. No conceptual barrier exists to a published statement becoming part of the bargain sufficient to constitute a warranty.
3. Subsection (a)(2) deals with samples and the use of beta models. These are employed in testing 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).
4. The section also preserves current 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 for 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. As stated in Subsection (c), 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 largely unknown change or over-reaching of liability in a sensitive area.
5. The term, "published information content" focuses on information content not customized to particular end users. (see Section 2B-102) 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 contract theory.
SECTION 2B-403. IMPLIED WARRANTY: MERCHANTABILITY AND QUALITY OF COMPUTER PROGRAM.
Subject to Sections 2B-406, 2B-407 and 2B-408, in a mass-market transaction a licensor that is a merchant with respect to information of the kind that provides a computer program to a licensee makes an implied warranty that the computer program and media are merchantable. To be merchantable, the computer program and any physical medium containing the program at minimum 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) conform to the promise or affirmations of fact made on the container 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 delivers a program to a licensee warrants that any physical medium on which the program is transferred is merchantable and that the computer program will perform in substantial conformance with any promises or affirmations of fact contained in the documentation provided by the licensor at or before the delivery of the program. 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.
(c) A warranty under this section pertains to the functionality of a computer program, but 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.
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:
Changes since the June Meeting:
a. Edited based on the harmonization meeting to conform to existing Article 2 and to proposed revisions of Article 2. Subsection (c) was edited to clarify the distinction between the warranty for programs and the treatment of informational content.
b. During the June Meeting in a memorandum signed by a leading consumer advocate and an attorney from a major publisher, the following alternative formulation of subsections (a) and (b) was suggested:
(a) A merchant licensor of a computer program warrants to the end user that the computer program is reasonably fit for the ordinary purpose for which it is distributed.
(b) A merchant licensor of a computer program warrants to a retailer that
(1) the program is adequately packaged and labeled as the agreement or circumstances may require; and
(2) in the case of multiple copies, that the copies are, within the variations permitted by the agreement, of even kind, quality, and quantity, within each unit and among all the units involved.
This proposal should be considered by the Committee and reflects earlier proposals in the Draft to consider a restructuring of the merchantability warranty in a manner that would provide acceptable and tailored protections for both sides, thereby reducing the desirability of disclaimers except in exceptional cases. The proposal follows part of the tradition under which the original Article 2 warranty was developed. As explained in the Comments to the current 2-314, some of the various elements of the warranty were developed for specific types of products (e.g., "fair average" developed with reference primarily for agricultural bulk products, "adequately packaged" refers to cases where agreement requires a certain type of container).
General Notes:
1. Article 2B warranties blend three different legal traditions. One tradition stems from the UCC and focuses on the quality of the product. This tradition centers on the result delivered: a product that conforms to ordinary standards of performance. The second tradition stems from common law, including cases on licenses, services contracts and information contracts. This tradition focuses on how a contract is performed, the process rather than the result. The obligations of the transferor are to perform in a reasonably careful and workmanlike manner. 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. Current law selects the applicable tradition in part based 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 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. 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 a