(a) The following rules apply to a submissions of information for the creation, development, or enhancement of computer information that is within the subject matter of this article and is not made pursuant to an existing agreement calling requiring for the submission:

(1) Aa contract is not formed and is not implied from the mere receipt of an unsolicited submission.;

(2) Eengaging in a business, trade, or industry that by custom or practice regularly acquires ideas is not in itself an express or implied solicitation of the information.; and

(3) Iif the recipient seasonably notifies the person making the submission that it maintains a procedure to receive and review submissions, a contract is formed only if:

(A) the submission is made and accepted pursuant to that procedure; or

(B) the recipient expressly agrees to terms concerning the submission.

(b) An agreement to disclose an idea creates a contract enforceable against the receiving party only if the idea as disclosed is confidential, concrete, and novel to the business, trade, or industry or the party receiving the disclosure otherwise expressly agreed.

Definitional Cross References.

"Agreement". Section 1-201. "Information". Section 2B-102. "Informational rights". Section 2B-102. "License": Section 2B-102. "Party". Section 1-201. "Record". Section 2B-102. "Release". Section 2B-102.

Reporter's Note:

1. Releases: General Rationale. A release is an agreement that the releasing party will not to object to, or exercise any remedies to limit, the use of information or informational rights. This is a license, but does not contain obligation by the releasing party to enable or support the other party's use of the information.

2. Releases: Enforceability. A release is enforceable without consideration if the release is by a record to which the releasing party agrees, by manifesting assent or otherwise. This clarifies the enforceability of releases in a record, but does not alter other law making releases enforceable, including law enforcing releases given without consideration. For this result, subsection [2B-206(1)] requires agreement to a record. This includes all modern means of recording assent and all forms of records, such as by filmed assent.

Releases are common in Internet "chat room" and "list service" systems. Participation often assumes permission to use comments or materials submitted. If the relationship is a contract supported by consideration (e.g., the operator grants the right to use the service in return for the release), the release is enforceable based on assent to a sign-on screen, regardless of whether consideration sufficient for a contract exists. The opposite is also true. If the service is a private service, dealing with information that persons view as confidential (e.g., a service dealing with the treatment of AIDS), a condition of participation that precludes use of the information associated with the names of the participants is also enforceable.

Illustration. X operates an on-line chat room and a monthly newsletter of selected comments. When an individual enters the chat room, the sign-on screen states: "By participating you grant X the right to use your comments in any medium." By joining, the participant releases its copyright in its comments. The on-screen condition is a record to which the participant's acts assent.

3. Releases: Duration. Absent contrary agreement, a release is for the duration of the released rights. Of course, the release is effective only with respect to its own terms. A release that allows use of a person's image in an Internet site does not release rights to other uses of that image.

4. Idea Submissions: General Premise. Subsections [2B-206A] deals in a limited way with an important issue in information industries: submissions of ideas. The subsections do not deal with 1) submissions of ideas for improving business operations or 2) with equity theories of liability. This leaves undisturbed the array of doctrines dealing with equitable remedies, but clarifies the effect of a submission in contract law. A distinction is stated between submissions pursuant to an agreement and unsolicited submissions.

5. Idea Submissions: No Prior Agreement. Subsection [2B-206A(a)] deals with submissions not pursuant to a prior agreement. Subsection (a)(1) states an obvious contract law principle that gives some courts difficulty. If the submission was not solicited, mere receipt of the submission does not create a contractual relationship. The receiving party may have an obligation to return copies in some cases, but the unilateral action of the other party cannot create obligations in contract on the recipient. This is true, as indicated in subsection (a)(2), even if the industry itself ordinarily relies on ideas. Contracts only arise in the event of agreement by the parties.

Subsection [2B-206A(a)(3)] acknowledges the common practice of establishing a method for receiving and reacting to submissions as a means of controlling risk and giving guidance. Under this subsection, these procedures have impact in contract law if the submitting party is notified that they exist. Undisclosed procedures are not relevant to a contract analysis. If the submitting party is notified of the procedure, decisions about acceptance or rejection of the submission are funneled through that procedure or, in the case of acceptance, an express decision to accept. This protects both parties. The submitter and the recipient receive the benefit of a more specific set of choices about taking on a contract or rejecting it.

5. Idea Submissions: Consideration An agreement for submission of an idea carries with it, in the absence of contrary terms, the assumption that the idea has value or uniqueness. That value exists if the idea is concrete, confidential and novel. If, for example, a party agrees for a fee to submit an idea for enhancing the success of audiovisual works, the contract is not satisfied if the idea is "draw more attractive images." This adopts New York law and cases such as Oasis Music Inc. v. 100 USA, Inc., 614 N.Y.S.2d 878 (N.Y. 1994). A submission that does not meet this standard does not breach the contract, unless the agreement gave express assurances that the submission would be novel. The licensee cannot recover payments it already made. Rather, the default rule is that the provider of the non-novel submission cannot enforce any future obligations as to the submitted idea. The basic principle is that a non-novel idea is not adequate consideration for a contract and that a proponent of an idea implicitly represents that the idea has value. This is not met in a case of a non-novel idea.

This principle does not require that the idea rise to the level of novelty as that term is used in patent law. The information must not be something that is generally and widely known. Cases on combination secrets and other situations in trade secret law where information has sufficient uniqueness or secrecy to qualify as a trade secret should inform decisions under this standard.

Nothing in this section precludes an agreement that does not hinge on the uniqueness of the proposed submission. Whether such agreement exists must be judged based on the fundamental notion that a party does not implicitly contract away its rights, without a fee, to use publicly known information merely because it contracted for "disclosure" of such material.

[B. Terms of Records]

SECTION 2B-207. ADOPTING TERMS OF RECORDS.

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

(b) The Adoption of the terms of a record between parties may occur may be adopted as the terms of the contract after beginning commencement of performance or use under their agreement if the parties y had reason to know that their agreement would be represented in whole or in part by a later record to be agreed and , but at the time performance or use commenced there was no opportunity to review the record or a copy of it before performance or use commencedor it had not been completed..

(bc) If a party adopts the terms of a record, the ose terms become part of the contract without regard to the party's knowledge or understanding of individual terms in the record, except for a term that is unenforceable because it fails to satisfy another requirement of this article.

Definitional Cross Reference:

"Agreement". Section 1-201. "Conspicuous". Section 2B-102. "Contract". Section 1-201. "Information": Section 2B-102. "Informational Rights": Section 2B-102. "Manifest assent." Section 2B-111 "Opportunity to review." Section 2B-112. "Party". Section 1-201. "Record". Section 2B-102. "Standard form". Section 2B-102. "Term". Section 1-201.

Reporter's Notes:

1. Scope of the Section. Article 2B deals separately with forming a contract and the terms of that contract. This section is the primary section on adoption of terms of a record as terms of a contract. Section 2B-208 limits the creation of terms in mass-market licenses and the time over which they can be presented. Section 2B-209 deals with cases when records do not create contract terms, but a contract exists because of conduct.

This section states basic principles about when and how terms of a record are adopted and also expressly recognizes that commercial deals often involve layered contracting, providing a standard for determining when this type of contract term formation exists. Subsection (b) rejects the idea that a contract and all terms must be formed at a single point in time. It permits layered contracting that reflects commercial practice in cases where the parties have reason to believe that terms will be proposed at some later time. The effect of a failure to agree depends on whether the agreement on terms was a condition to the existence of a contract. See Section 2B-202.

2. Adopting Terms. If a party agrees to a record, it adopts the terms of the record whether or not the record is a standard form. Standard forms are common in commercial practice because they provide efficiencies for both parties. Treating them in law as less than any other record of a contract would put commercial law in conflict with commercial practice and reduce the efficiencies such records provide. Because of the broad opportunities allowed in the Internet, standard forms will increasingly not be the province of only one party to the deal. This section rejects decisions which hold that a term that is not unconscionable or induced by fraud may still be invalidated because a court holds, after-the-fact, that a party could not have expected it to be in the contract. Absent unconscionability, fraud or similar conduct, commercial parties are bound by the records to which they assent.

a. Knowledge of Terms. It is not necessary that the adopting party actually read, understand, or negotiate the terms of a record. This rule follows virtually universal law in the United States. Assent to the record encompasses assent to its terms. Unconscionable terms remain unenforceable despite assent.

b. Modes of Assent. A party is bound by the terms of a record only if it agrees to the record, by manifesting assent or otherwise. The party may authenticate (sign) the record. The party's conduct may indicate assent to a record or a contract. Section 2B-111. The latter focuses on objective manifestations of assent. A party cannot manifest assent to a form or other record unless it has had an opportunity to review that form before reacting. Finally, there are residual modes of assent that satisfy the idea that assent must be objectively expressed, even though they do not fit the precise standards of authentication or manifesting asset.

3. Later Terms: Layered Contracting. In ordinary commercial practice, while some contracts are formed and their terms fully defined at a single point in time, many commercial transactions involve a rolling or layering process. An agreement exists, but terms are clarified or created over time. That principle is acknowledged in various portions of original Article 2, for example in provisions allowing contracts formed with terms left open. Comments to original Section 2-207 note that later records presented to the other party are treated as proposed modifications or confirming memorandum only in cases of "a proposed deal which in commercial understanding has in fact been closed." Section 2-207, comment 2. Where that is not true, the later terms are part of the primary contracting process. Similarly, original Section 2-311 allows enforcement of agreements that permit one party to later specify the particulars of performance (e.g., terms of the contract) after the initial agreement is reached. Consistently, original Section 2-305 allows agreements in which one party later fixes the price.

Often, the commercial expectation is that terms will follow or be developed after performance begins. While some courts seem to hold that an initial agreement per se concludes the contracting as a single event notwithstanding ordinary practice and expectations that terms will follow, other courts recognize layered contract formation and term definition, correctly viewing contracting as a process, rather than a single event. ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7^th Cir. 1996). Often, performance commences with each party understanding that terms will be provided for later agreement, or otherwise used to define the contract. See Brower v. Gateway 2000, Inc., -- N.Y.S.2d -- (N.Y.A.D. 1998). This section, along with the contract formation principles, explicitly accepts the layering principle and provides a standard for distinguishing when the intent or expectations is to conclude the contract at the initial point as contrasted to an expectation that terms will be provided for later agreement. In information commerce, the circumstances often indicate that initial general assent assumes that terms will be developed or presented later to fill out the details of the transaction. Such circumstances include customary practices in software licensing customs, but also will include use of electronic agents by licensees. For example, a business or a consumer may instruct its electronic agent to search the Internet for car dealers willing to meet pre-set terms and offer prices within a pre-set range. While the business or consumer will expect to stand on the terms accepted by the dealer, both it and the dealer expect the contract to have more details, such as warranty, maintenance, and other standard provisions, without having to consider all such terms in the first interaction of the automated contracting system.

Section 2B-207(b) clarifies that contract terms can be proposed and agreed to as part of completing the initial contract even though proposed after the beginning of performance by one or both parties. Such terms are treated as part of the initial contracting process if at the time of initial agreement, the parties had reason to know and, thus, expected that this would occur and that terms of a record to be agreed would provide elaboration of their contract. If, instead, the parties considered their deal to be closed at the outset, then subsequently proposed terms from either party are treated as a proposed modification of the agreement, effective only under concepts applicable to such modifications. The third alternative, of course, is that the initial agreement leaves terms open and allows one part to specify what those terms are at some later date. The act of specifying the terms is, in effect, merely a performance of the contract.

In layered contracting terms are created over time. Thus, for example, where the parties reach an initial agreement about a multiple delivery contract and begin shipments before reducing that agreement to more elaborate written terms, the record when agreed to does not modify the original agreement, but reflects an expansion and elaboration as part of that contract. Similarly, the parties might begin performance on a software development agreement while terms are being developed and, ideally, agreed to by counsel and the representatives of the parties. When a final, fully elaborated record is completed and agreed to, it does not amend the contract, but simply becomes part of the now finalized contractual arrangement. Of there is no assent to the record, whether the parties have a contract hinges on whether they regarded assent to the record when developed as a condition to a contractual relationship. If so, and if there is no such agreement, there is no contract and equitable principles apply to avoid unjust enrichment and other effects of the beginning of performance.

The concept in subsection (b) differs from Section 2B-305 and original Section 2-311, both of which refer to agreements that give one party or its designate a contractual right to specify or particularize terms of performance. In cases governed by those sections, the party receiving the later terms is not presented with a right to agree to or reject the terms; the terms are in effect part of the original agreement. Where no further assent is required under the agreement, 2B-305 indicates that the terms must be proposed in good faith and in accordance with reasonable commercial standards.

Subsection (b) indicates that a layered contracting exists if the parties at the time of the initial agreement had reason to know that this would occur. The "reason to know" standard parallels the standard for determining when acts constitute assent to a contract. Reason to know does not require specific notice or specific language in an original agreement, although such factors may play a role in determining reason to know. It can also be inferred from the entire circumstances, including routine or ordinary practices of which a party is or should be aware. In some areas of commerce, such as many aspects of software contracting and many forms of mail order contracting, the circumstances of the agreement in ordinary commerce give reason to know that terms may be subsequently proposed. In Section 2B-207, the time over which the record can be proposed is referenced to the expectations of the parties under the reason to know standard. At some point, the deal has been closed, but specifying when this occurs in terms of a fixed time standard is impossible in general commerce. It requires an analysis focused on the context and circumstances.

The standard set out in subsection 2B-207(b) also carries forward into similar transactions in the mass market in Section 2B-208. Section 2B-208, however, places a time limit on when proposal of the terms must occur and precludes the terms from alter terms that are expressly agreed to by the parties to the license. In addition, of course, Section 2B-208 creates a right to a cost free refund if the proposed terms are unacceptable to the receiving party. See also Section 2B-617.

4. Right to a Return. In many cases governed by subsection (b) and in mass-market licenses, if assent is sought after the person paid or delivered or became obligated to pay or deliver, the manifestation of assent is not effective unless the person had a right to a return if it chooses to refuse the license. Section 2B-112. This return obligation applies in mass market contracts and in other contracts if the expectation is that the terms will be provided at or before the first use of the information, a typical format in certain types of software contracting. It does not apply in the more open-ended commercial arrangements where there is merely an expectation that terms will be agreed to (or rejected) at some point during performance, such as in the software development agreement mentioned in note 5. In these contexts, general principles of equity apply to deal with the circumstances where there is ultimately a failure to agree.

SECTION 2B-208. MASS-MARKET LICENSES.

(a) A party adopts the terms of a mass-market license for purposes of Section 2B-207 only if the party agrees to the license, by manifesting assent or otherwise, before or during the party's initial performance or use of or access to the information. A term is not part of the license if:

(1) if the term is unconscionable under Section 2B-110 or is unenforceable under Section 2B-105(a) or (b); or

(2) subject to Section 2B-301, if the term conflicts with terms to which the parties to the license expressly agreed.

(b) If a licensee party does not have an opportunity to review a mass-market license or a copy of it before becoming the party delivered the information or became obligated to pay and the party does not agree, by manifesting assent or otherwise, to the license after having that opportunity, the licensee following rules apply: (1) The party is entitled to a return and to:;

(12) The licensee is entitled to: (A) reimbursement of any reasonable expenses incurred in complying with the licensor's instructions for return or destruction of the licensed subject matter and documentation or, in the absence of instructions, incurred for return postage or similar reasonable expense in returning them; and

(2B) compensation for any reasonable and foreseeable costs of restoring an information processing system to reverse changes in the system caused by the installation, if:

(Ai) the installation occurs because information must be installed to enable review of the license; and

(Bii) the installation alters the system or information in it but does not restore the system or information upon removal of the installed information because of rejection of the license.

(c) In a mass-market transaction, if a licensor does not have an opportunity to review a record proposing terms before the licensor delivers or becomes obligated to deliver the information, and if the licensor does not agree, by manifesting assent or otherwise, to those terms after having that opportunity, the licensor is entitled to a return.

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

Definitional Cross Reference:

"Contract": Section 1-201. "Information": Section 2B-102. "Information processing system": Section 2B-102. "Informational Rights": Section 2B-102. "License": Section 2B-102. "Licensor": Section 2B-102. "Manifest assent: Section 2B-111. "Mass-market license": Section 2B-102. "Party": Section 1-201. "Return": Section 2B-102. "Term": Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section deals with mass-market licenses, including consumer transactions. It defines the circumstances under which a party's assent to a mass-market license adopts the terms of that record. The section places limitations on the effectiveness of mass-market licenses. The section should be read in connection with Section 2B-207 and Section 2B-111. While most current mass-market licenses are presented by the licensor and accepted by the licensee, modern technology and contracting practices are not necessarily so limited and the section would also apply to a mass-market license presented by a licensee and accepted by a licensor in the mass market.

Many mass-market licenses are presented and agreed to at the outset of a transaction; some are presented afterwards. This section deals with both. The costs of return provided for in subsection (b) provide strong incentives for terms of the license to be presented at the outset of the transaction when practicable.

Some mass-market licenses are between two parties. Others involve two separate agreements and a three-party transaction. The two contracts in the three-party transaction are: 1) the mass-market license between the publisher and the end user, and 2) the retail agreement between the end user and the retailer. These agreements are not necessarily made at the same time. This section deals with both. The three-party arrangement is also addressed in Section 2B-617.

2. General Mass-Market Rules.

There are a number of ways in which the terms of a mass market or other contract can be specified. This can and does often occur by a general agreement of the parties unrelated to any record containing specific terms. In other cases, as described in Section 2B-305, the parties may agree that the terms or particulars of performance may be specified later by one party. See TI Brower v. Gateway 2000, Inc., 676 N.Y.S.2d 569 (N.Y.A.D. 1998). Under Section 2B-305, the later supplied terms are enforceable without further agreement to them if the terms are proposed in good faith and within bounds of commercial reasonableness. This section deals with a third method of deriving the terms of a mass market agreement, obtaining assent to a record containing those terms - either at the outset of the transaction or shortly after it is initially formed.

Three limiting principles govern adoption of mass-market licenses regardless of when the license is presented and agreed to by the assenting party. In addition, as outlined in Section 2B-105, fundamental public policy limit enforceability of mass-market terms in some cases. See notes to Section 2B-105(b).

a. Assent and Agreement. A party adopts the terms of a record only if it agrees to the record by manifesting assent or otherwise indicating its agreement. A party cannot manifest assent unless it had an opportunity to review the record before that assent occurs. This means that the record must be available for review and called to the person's attention in a manner such that a reasonable person ought to have noticed it. Section 2B-112. A manifestation of assent requires conduct, including a failure to act, or its statements, indicate assent and that it has reason to know that, in the circumstances, this will be the case. Section 2B-111 and related notes.

Adopting the terms of a record for purposes of this section occurs pursuant to Section 2B-207. Under that section, if the terms of the record are proposed for assent by a party only after the party commences performance of the agreement between the parties, the terms become effective under these sections only if the party (e.g., the licensee) had reason to know that terms would be proposed after the initial agreement. Even if reason to know exists, this section requires that the terms be presented not later than the initial use of the information and that, if the mass-market license was not made available before the initial agreement, the person is given a right to a return should it refuse the license.

b. Unconscionability. Even if a party adopts the terms of a record, a court may invalidate unconscionable terms pursuant to Section 2B-110. Unconscionability doctrine invalidates terms that are bizarre and oppressive and hidden in boilerplate language. For example, a term in a mass-market license that default on the mass-market contract for $50 software cross defaults all commercial licenses between the parties may be unconscionable if there was no reason for the licensee to anticipate that breach of the small license would constitute breach of an unrelated larger license negotiated between the parties. Similarly, a clause in a mass-market license that grants a license back of all trademarks or trade secrets of the licensee without any discussion of the issue between the parties would ordinarily be unconscionable. The principle is one of prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power.

c. Conflict with Agreed Terms. In addition to unconscionability doctrine, this section provides that standard terms in a mass-market form cannot alter the terms expressly agreed between the parties to the license. A term is expressly agreed by the parties if they discuss and come to agreement regarding an issue and their agreement becomes part of their bargain. For example, in a consumer transaction where the consumer requests software compatible with a particular type of machine and the vendor agrees to provide such software, the standard terms of vendor's mass-market contract cannot alter the vendor's agreement with the consumer to provide compatible software. As is true with express warranties, this is subject to traditional parol evidence concepts which bear on the provability of extrinsic evidence that varies the terms of the writing. Additionally, of course, under Section 2B-617 the terms of any publisher's license cannot alter the agreement between the end user and the retailer unless expressly adopted by them as their own agreement.

Paragraph (a)(2) preserves the essential bargain of the parties to a mass-market transaction. For example, if a librarian acquires educational software for children from a publisher's retail outlet under an express agreement that the software may be used in its library network, a term in the publisher's license that limits use to a single user computer system conflicts with and is over-ridden by the agreement for a network license. This section does not adopt Restatement (Second) of Contracts § 211(c), which has been adopted in only a small minority of states. However, paragraph (a)(2) responds to some of the policy concerns on which that Restatement rule is based.

3. Terms Prior to Payment. If a mass-market license is presented before a price is paid, Article 2B follows general law that enforces a standard form contract if the party assents to it. See, e.g., Storm Impact, Inc. v. Software of the Month Club, 44 U.S.P.Q.2d 1441 (N.D. Ill. 1997) (on-screen license prevents waiver of copyright and precludes fair use claim).

The fact that license terms are non-negotiable or that the contract may constitute a "contract of adhesion" does not invalidate it under general contract law or this article. A conclusion that a contract is a contract of adhesion may, however, require that courts take a closer look at contract terms to prevent unconscionability. See, e.g., Klos v. Polske Linie Lotnicze, 133 F.3d 164 (2d Cir. 1998); Fireman's Fund Insurance v. M.V. DSR Atlantic, 131 F.3d 1336 (9^th Cir. 1998); Chan v. Adventurer Cruises, Inc., 123 F.3d 1287 (9^th Cir. 1997). It should be recognized, however, that this article's concepts of manifest assent and opportunity to review address concerns often relevant to this review. Nevertheless, when applicable, the closer scrutiny followed in general commercial contract law may be appropriate here.

Many mass-market transactions involve three parties and two contracts. The publisher's license does not agree to license under terms other than those in the license and that choice should generally be enforced if manifesting assent after an opportunity to review occurs. In digital commerce, the license terms often define the product, for example, in distinguishing between single user and network use, consumer use and commercial use, ordinary private use or rights to public display or performance. See ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). Market choices of this type provide an important commerce in this field. Often, the license and its enforcement benefit the licensee, giving it rights that would not be present in the absence of an enforceable license. See, e.g., Green Book International Corp. v. Inunity Corp., -- F. Supp. - (D. Mass. 1998) (shrink wrap granted right to distribute an element of the software).

While this section follows general law in enforcing standard form contracts, it adds a significant protection for the party presented with the form. As indicated in subsection (a)(2), the standard terms of the form cannot contradict terms expressly agreed to by the parties to the license and which are admissible in court under parol evidence rules.

4. Terms after Initial Agreement. In modern commerce, licenses are sometimes presented after initial general agreement between the ultimate licensee and either the retailer or the licensor-publisher. These transactions are a form of layered, or open-term, contracting recognized under original Article 2 and this article. In the software industry, such contracts are supported by both commercial expectations developed by standard practice over several decades and, frequently, by enforcement of copyright or other intellectual property rights held by the publisher. The contracting format allows contracts between end users and remote parties that control copyright or other interest in the information. Enforceability of the license can be important to both parties because it allows a non-infringing exercise of licensed rights by the licensee and the licensor to tailor licensed rights to particular market demand. Such licenses are enforceable under this article, but to prevent abuse, in addition to the general protection created for all mass-market licenses, this section creates additional rights for the licensee.

a. Distribution Methods. Commercial distribution of copies of digital information does not necessarily parallel distribution involving sale of goods. The differences are grounded in the nature of the subject matter, the property rights involved, and the choices by the rights owner (publisher). In some cases, of course, the publisher sells copies to a distributor for resale. That choice does create a distribution sequence similar to the sale of goods. In other cases, the information is provided directly to the end user on-line and under an agreement directly between the rights owner and the end user. In many cases, however, the publisher distributes through third parties but does not simply sell copies to a distributor for re-distribution. See, e.g., Microsoft Corp. v. DAK Indus., Inc., 66 F.3d 1091 (9^th Cir. 1995).

This is a different distribution system than that used in the sale of goods because the distributor does not receive ownership, but merely a limited distribution license which allows distribution of the copies only if that occurs subject to an end user license with the rights owner or licensor. This method may be used to provide greater or lesser rights to eventual end users than would occur through simple sales of copies. For copyrighted works, the distribution format is based on the rights owner's exclusive right to distribute the work in copies. If the distributor does not comply with the license, an eventual transferee is not protected as a bona fide purchaser and is subject to an infringement claim. See Microsoft Corp. v. Grey Computer, 910 F. Supp. 1077 (D. Md. 1995); Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (ED NY 1994); Marshall v. New Kids on the Block, 780 F. Supp. 1005 (S.D.N.Y. 1991); Major League Baseball Promotion v. Colour-Tex, 729 F. Supp. 1035 (D. N.J. 1990).

In this latter distribution system, the license presented to the end user after it acquires a copy from a retailer is between the rights owner (or a distributor authorized to license to end users) and the end user, rather than between the end user and the retailer. This license creates, for the first time, a contractual relationship between the rights owner and the end user. In this three-party setting (end user, retailer, copyright owner or authorized licensor), the enforceability of the license is important to both parties. It is important to the end user because it is the first time it receives authorization to copy or otherwise use the work from the rights owner. It may also be important to the end user because many mass-market licenses give the end user rights that would not arise if it purchased a copy. A sale of a copy of a copyrighted work does not give the copy owner a number of rights that it may desire. It does not convey a right to make multiple copies, to publicly display the work, to make derivative works from the copy, or, in the case of computer programs, to rent the copy to others. The enforceability of the license is also important for the rights owner because the terms of use and other conditions of the license help define the product it transfers. There are also general marketplace benefits in that the licensing framework allows price and market differentiation that allows product priced for and tailored to market demands of various forms, such as in distinguishing pricing of a consumer as compared to a commercial or educational license.

b. Timing of Assent. Agreement to the mass-market record can occur before the initial use, but must occur no later than during the initial use of the information. This places an outside limit on layered contracting in the mass market and acknowledges customary practices in the software and other industries applicable to the mass market. The time limitation enacts a potentially significant protection of the licensee's expectations in this type of marketplace. Of course, this time limitation does not prevent subsequent modification of the license at any point in time or performance by a party that defines terms pursuant to agreement.

c. Cost Free Return Right. In mass-market licenses presented after an initial agreement, three issues are important. One involves preventing unconscionable terms; that issue is identical in all mass-market contracting. The second involves the relationship between the license terms and the express agreement of the parties to the license. This issue also does not change based on when the license is presented. The third issue involves assuring the licensee an opportunity to review and an effective choice to accept or reject a license presented after initial payment. Subsection (b) addresses this issue. It creates a return right that places the end user in a situation whereby it can exercise a meaningful choice regarding licenses presented after initial agreement. This article refers to a return right, rather than a right to a refund, because it recognizes that in the mass market, under developing technologies, the concept of requiring this right may apply to either the licensee or the licensor, whichever is asked to assent to a record presented after the initial agreement.

In cases where the form is presented to the licensee after it becomes initially obligated to pay, it must be given a cost free right to say no. This does not mean that the end user can reject the license and use the information. What is created is a right to return to a situation generally equivalent to that which would have existed if the end user had reviewed and rejected the license at the time of the initial agreement. The return right does not apply if the licensee agrees to the license. It is not a means by which a party may rescind an agreement to which it has assented, but rather a method of ensuring that assent in this setting is real. Thus, if the licensee manifests assent to the license because it has reason to know that opening the packet holding the disk of the software constitutes assent to the license, the return right does not apply.

This return right also does not arise if there was an opportunity to review the license before making the initial agreement. In subsection (b) the exposure to potential liability for expenses of reinstating the system after review creates an incentive for licensors to make the license or a copy thereof available for review before the initial obligation is created. Subsection (b) does not apply to transactions involving software obtained on-line if the software provider makes available and obtains assent to the license as part of the ordering process. On the other hand, in a mail order transaction, if the license is first received along with the copy of the information that was ordered, subsection (b) applies. The return right under this section includes, but differs from the return right in Section 2B-112(b) as part of the opportunity to review. The return in Section 2B-208 is cost free in that the end user receives reimbursement for reasonable costs of return and, in a case where installation of the information was required to review the license and caused changes in the end user's system, to reasonable costs in returning the system to its initial condition. Of course, the fact that this section states an affirmative right in the mass market to a cost free refund does not affect whether under other law outside of this article, a similar right might exist in other contexts.

Subsection (b) contemplates that if a licensor chooses to seek assent to a license after the initial agreement, it has an obligation to reimburse the licensee's expenses incurred if it rejects the license. The expenses incurred in return of the subject matter of the rejected license must be reasonable and foreseeable. The costs of return do not include attorney fees or the cost of using an unreasonably expensive means of return or to airplane tickets, lost income or the like unless such expenses are required by instructions of the licensor. The expense reimbursement refer to ordinary expenses such as the cost of postage.

Similarly, in cases where expenses of restoring the system are incurred because the information was required to be installed in order to review the license, expenses chargeable to the licensor must be both reasonable and foreseeable. The reference here is to actual, out-of-pocket expenses and not to compensation for lost time or lost opportunity. The losses here do not encompass consequential damages. Moreover, they must be foreseeable. A party may be reasonably charged with ordinary requirements of a licensee that are consistent with others in the same general position, but cannot be held responsible for losses caused by the particular circumstances of the licensee of which it had no reason to know. A twenty dollar software license provided in the mass market should not expose the provider to significant loss unless the method of presenting the license can be said ordinarily to cause such loss. Similarly, it is ordinarily not reasonable to provide recovery of disproportionate expenses associated with eliminating minor and inconsequential changes in a system that do not affect its functionality. On the other hand, the provider is responsible to cover actual expenses that are foreseeable from the method used to obtain assent.

SECTION 2B-209. TERMS WHEN OF CONTRACT FORMED BY CONDUCT.

(a) Except as otherwise provided in subsections (b) and (c) and subject to Section 2B-301, if a contract is formed solely by conduct of the parties, in determining the terms of the contract, a court shall consider the terms and conditions to which the parties expressly agreed, course of performance, course of dealing, or usage of trade, the nature of the parties' conduct, the records exchanged, the information or informational rights involved, the supplementary terms of [the Uniform Commercial Code] which apply to the transaction, and all other relevant circumstances.

(b) A contract is not formed by conduct Iif there is no agreement on, or if there is a material disagreement about, a material element of scope, a contract is not formed by conduct.

(c) This section does not apply if the parties authenticate a record of the agreement, a party adopts the record of the other party, or there was an effective conditional offer under Section 2B-203 to which the party to be bound agreed, by manifesting assent or otherwise.

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

Definitional Cross References.

"Agreement": Section 1-201. "Authenticate": Section 2B-102. "Contract": Section 1-201. "Court": Section 2B-102. "Information": Section 2B-102. "Informational Rights": Section 2B-102. "Party": Section 1-201. "Record": Section 2B-102. "Scope": Section 2B-102. "Term": Section 1-201.

Reporter's Note:

1. Scope of the Section. This section deals with contracts formed by conduct and not by offer and acceptance in a record or records. Of course, in most cases, contracts created based on conduct also involve an exchange of letters or other writings. If these writings form the contract, this section does not apply. If the sole basis to conclude that a contract is formed lies in conduct, this section governs what are the terms of the contract. Under subsection (c), the section does apply if terms of the contract are in a record to which a party agreed by manifesting assent or otherwise.

Contracts formed by conduct arise in various settings. One is where the parties begin and complete performance without making an oral agreement and without reducing their agreement to writing. Another involves a "battle of forms" that, under Section 2B-203 did not result in an effective offer and acceptance and neither party agreed to a record signifying terms of agreement. This section rejects the so-called "knock-out" rule in Section 2-207(c) as too rigid for information transactions where contract terms may be essential to define the product being transferred and in a setting of convergence among diverse industries. The section requires that the court define the contract terms by considering all commercial circumstances, including the nature of the conduct, the informational rights involved, and applicable trade usage or course of dealing. Given the fluid nature of the context, usage of trade and course of dealing have special importance in defining the terms of the agreement and, as in any other context, when applicable, these elements of the agreement trump the supplemental default rules of this article in providing the content of the agreement.

2. Interpret based on Context. Subsection (a) directs the court's attention to the entire context including the terms of any records exchanged by the parties and the nature of the intellectual property rights involved. This requires a practical interpretation of the relationship. Restatement (Second) of Contracts § 202(1) (2) (1981); 2 Farnsworth, Contracts § 7.10 (1990). Where conduct, rather than offer and acceptance, creates the contract and there was no assent to a record defining terms of the contract, formalistic rules cannot account for the contextual nuances that exist in the rich environment of transactional practice in this area. Subsection (a) thus rejects a "knock-out" rule that would limit a court to a set formula for interpretation. Any such rigid rule prevents courts from more generally determining the actual intent of the parties in these cases. Since Article 2B deals with transactions the vast majority of which are not now governed by the U.C.C., this rule allows courts to continue existing practice of considering all factors when attempting to determine the terms of an agreement. This article does not impose an artificial or inappropriate legal regime on the contract interpretation process.

3. Battle of Forms and Conduct. As in transactions involving sales of goods, some information transactions involve exchanges of inconsistent standard forms coupled with conduct of both parties indicating the existence of a contract. In these cases, one of two results may occur. The first is that a contract is formed and the terms are defined with reference to the forms, either because they do not materially disagree or because a conditional offer or acceptance in a record of one party was agreed to or otherwise adopted by the other party. Those cases do not fall within this section. The second possibility is that the records do not establish a contract or its terms because, for example, they materially disagree and neither party agreed to the record of the other party. Such cases fall within this section. Subsection (a) directs the court to review the entire circumstances in such cases, regardless of which form was first received or sent, but including the terms of the exchanged records and established trade usage, course of dealing, and course of performance as relevant circumstances.

The overall treatment of battle of forms transactions requires consideration of this section and of Section 2B-203. There are two different scenarios:

a. Varying Terms. The first situation involves a case in which forms are exchanged purporting to be an offer and an acceptance, but neither form is made expressly conditional on acceptance of its terms in full. Under these conditions, the analysis involves answering several questions.

1) Did the terms of the offer and acceptance vary? If not, a contract is formed based on the exchanged records.

2) If there is a variance, is the variance material? Section 2B-203 permits a contract formed by an offer and acceptance with varying terms unless the variance is material. If the differences are not material, a contract is formed based on the offer and non-material additional terms in the acceptance.

3) If there is a material variance, a contract based on the records is still possible if one party agree to the terms of the other party's record.

4) If there is a material variance and no agreement to a record, but conduct forms a contract, Section 2B-209 applies, defining terms of the contract based multiple factors.

b. Conditional Offers. If the terms of the offer or acceptance vary and one or both are made conditional on acceptance by the other party of all the terms, the basic premise is that a party has a right to condition its offer or acceptance and that the conditional language is enforced unless waived. The analysis involves the following questions:

1) Are either or both records made conditional on assent to their own terms? If yes, apply Section 2B-203(c).

2) Were the conditions effective or have they been waived? Waiver can be inferred on any traditional basis, but in standard form settings, waiver is assumed if the party does not act in a manner that is consistent with its own conditions.

3) If the conditions were waived, the analysis reverts to the general analysis of conflicting terms indicated above. If the conditions are effective (e.g., not waived), did the one party assent to the conditional offer of the other? If yes, the contract is formed based on the conditional terms.

4) If there was no acceptance of the conditional offer, no contract is formed based on the records and Section 2B-209 applies.

4. Contract Terms in Records. If a party conditions its agreement to a contract on the other party's assent to its terms, that condition should be enforced. Contract law does not impose a contract on unwilling parties nor does it prevent a party from conditioning the terms on which it will do business. If an effective condition was asserted and the terms agreed to by the other party, the terms of that conditional offer or counter offer govern and this section does not apply. Simply stated, the contract was formed on one party's terms and courts should not disturb that result. This is also true in any case where a party adopts a record pursuant to Section 2B-207 or Section 2B-208. Similarly, under subsection (c) this section is inapplicable if a party agrees to terms in a record of the other.

This section applies only where the contract is based merely on conduct. Authenticated (signed) records supersede this section. In cases where there is an authenticated record of contract terms, or a record is presented by one party and agreed to by the other party but these leave some terms unresolved, the proper approach for a court does not involve use of this section, but resort to the general interpretation rules to define the terms of agreement and, in the absence of agreed terms, to the default rules of this article.

5. Scope of License. In information transactions, contract terms relating to scope define the product being licensed. The same subject matter (e.g., one copy of software) has entirely different value and substance depending on what rights are granted none of which are necessarily obvious from the copy itself (the same copy may be a single-user product or for network use). That being true, this article gives special deference to scope issues. Lack of an agreement as to a material element of scope, or a material disagreement, precludes the formation of a contract by conduct. In the absence of contrary agreement, the information provider can define what it is providing. The other party cannot ask a court to provide a product which a party failed to obtain by agreement. A vendor who offers a consumer version of software cannot be forced to have given a commercial license simply because a competing form stated terms that conflict with the consumer restriction. Unlike warranty and similar terms, scope terms define the product (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 may only hold rights to a screen play for use in television, a fact that a competing form seeking Internet use cannot change).

PART 3

CONSTRUCTION

[A. General]

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

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

(2) evidence of consistent additional terms, unless the court finds the record to have been intended as a complete and exclusive statement of the terms of the agreement.

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

Definitional Cross Reference:

"Agreement": Section 1-201. "Court": Section 2B-102. "Record": Section 2B-102. "Term": Section 1-201.

Reporter's Notes:

1. Scope of Section. This section sets out the parol evidence rule taken directly from prior law in original Article 2.

2. Practical Construction. Paragraph (1) makes admissible evidence of course of dealing, usage of trade, and course of performance to explain or supplement the terms of any record stating the agreement of the parties. As in prior law, this rejects the rule that such evidence cannot be considered unless the court makes a determination that the language of the record is ambiguous. Instead, these sources of interpretation are allowed in all cases in order to reach a true understanding of the intent of the parties as to their agreement. Records of an agreement are to be read on the assumption that the course of prior dealings between the parties and the usage of trade were taken for granted when the record was drafted. Unless carefully negated by the record, they have become an element of the meaning of the words used. Similarly, the course of actual performance by the parties may be the best indication of what they intended the record to mean.

3. Consistent Additional Terms. Under paragraph (2), consistent additional terms not reduced to a record may be proved unless the court finds that the record was intended by both parties as a complete and exclusive statement of all the terms. This rejects the view that any record that is final on some terms should be, without more, taken as including all terms of the agreement. On the other hand, if alleged additional terms are such that given the circumstances of the transaction, if agreed upon, they would certainly have been included in the record of the agreement, evidence about the alleged terms must be kept from the trier of fact under this standard.

In many cases, evidence of the intent of the parties about the exclusive nature of the record of their agreement will be provided in the record itself. Particularly in commercial agreements, it is common practice to include a merger clause stating that the record is intended by both parties as a complete and exclusive expression of the terms of the contract. As a practical matter, a merger clause in a negotiated commercial contract creates a strong, nearly conclusive presumption that both parties intended the record to be the exclusive statement of terms of their agreement. The merger clause in such cases does not preclude a court from using course of dealing, usage of trade or course of performance to understand the meaning of contract terms, but does place a difficult burden on the party seeking to establish that additional terms exist. Even in a commercial case, however, that presumption can be shown to be inappropriate if the record itself refers to terms contained in or documented by material extraneous to the purportedly exclusive record. Of course, however, records that contain a merger clause but refer to other documents may still reflect an intent to be exclusive if the agreed statement of what represents the aggregate exclusive statement of agreement includes all documents intended to be aggregated, including the referenced external documents.

4. Contradictory Terms or Agreements. This section follows original Article 2 and excludes evidence of alleged terms or agreements that contradict the terms of a record intended as a final expression of the agreement or the terms on which confirmatory memoranda agree. An alleged term or agreement is contradictory if its substance cannot reasonably co-exist with the substance of the terms of the record. Thus, an alleged term that calls for completion of a software project on July 1 contradicts a term of a record calling for completion on June 10. The two terms cannot reasonably co-exist as part of the same agreement. On the other hand, an alleged term that specifies the processing capacity of the software does not contradict the terms of a record that does not make reference that issue. Of course, the fact that the term does not contradict the record means only that evidence of it can be admitted. It does not indicate whether the alleged term was actually agreed to by the parties.

This rule does not preclude proof of modifications of the agreement expressed in the record. What is excluded is evidence of prior or contemporaneous agreements that are not in record. Modification may be shown by appropriate evidence. Of course, as indicated in Section 2B-303, terms of the original record may restrict what subsequent modification may be proven or effective, such as by requiring that all modifications be in an authenticated record.

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

(a) Where If a the contract involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is shall be relevant to determine the meaning of the agreement.

(b) The express terms of an agreement and any course of performance, as well as any course of dealing, and usage of trade, shall be construed whenever reasonable as consistent with each other. However, if but when such construction is unreasonable:

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

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

(3) course of dealing controls usage of trade.

(c) Subject to Sections 2B-303 and 2B-605, course of performance shall be relevant to show a waiver or modification of any term inconsistent with such course of performance.

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

Definitional Cross References.

"Agreement": Section 1-201. "Contract": Section 2B-102. "Party": Section 1-201. "Term": Section 1-201.

Reporter's Note:

1. Scope of the Section. This section conforms to original Article 2-208. In interpreting an agreement a court should refer to relevant indicia of context in which the parties formed and performed their agreement. This section coordinates with Section 1-205 that deals with the use of course of dealing and usage of trade in interpreting an agreement.

2. Construction based on Performance. This section adopts the premise that the parties themselves know best what they have meant by the words of their agreement and that their actions under that agreement are the most important indication of that meaning. Course of performance as defined in subsection (a) thus provides an important component of the factors that determine the meaning of the "agreement" of the parties. In commercial law, an agreement may extend well beyond a record containing terms of the contract. Indeed, consistent with modern contract law, under this Article, course of performance (as well as usage of trade and course of dealing) are always relevant to determine the meaning and content of the agreement.

3. Nature of Course of Performance. A course of performance requires repeated performance by one party known to the other, an opportunity of the other to object, and a pattern of acceptance or acquiescence by that other party. Since it provides a basis for understanding the agreement of the two parties, the events creating it must have mutual elements. Unilateral conduct unknown to the other party, such as by making uses of information beyond the terms of a license, cannot establish a course of performance. Similarly, a single occasion of conduct does not fall within this concept, although a single event may affect the parties' rights in other respects.

4. Relationship to Waiver. If it is difficult to determine whether a particular pattern of action provides insight into the meaning of the agreement or represents a waiver of a term of an agreement. The preference is in favor of a "waiver" (if the elements of waiver are present) whenever this construction along with the rules on reinstatement of rights waived in Section 2B-605 preserves the flexible character of commercial contracts and prevents surprise or other hardship. A waiver by conduct may be retracted as to future conduct. An interpretation of the agreement based on a course of performance measures the meaning of the contract that is binding on both parties and cannot be retracted by one.

5. Order of Interpretation. Subsection (b) sets out the order of preference in interpreting an agreement among express terms, course of performance, course of dealing, and usage of trade. Express terms always govern. Course of performance and course of dealing are the next preferred, respectively, because each relates to the behavior of the particular parties. See Section 1-205.

SECTION 2B-303. MODIFICATION AND RESCISSION.

(a) An agreement modifying a contract within this article needs no consideration to be binding.

(b) An authenticated record that excludes modification or rescission except by an authenticated record may not otherwise be modified or rescinded. In a standard form supplied by a merchant to a consumer, a term requiring an authenticated record for modification of the contract is not enforceable unless the consumer manifests assent to the term.

(c) The requirements of Section 2B-201(a) must be satisfied if the contract as modified is within its provisions.

(d) An attempt at modification or rescission which does not satisfy subsection (b) or (c) may operate as a waiver if Section 2B-605 is satisfied.

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

Definitional Cross References.

"Agreement". Section 1-201. "Authenticate". Section 2B-102. "Consumer". Section 2B-102. "Contract". Section 1-201. "Merchant". Section 2B-102. "Record". Section 2B-102. "Standard form". Section 2B-102. "Term". Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section deals with the effectiveness of modifications of contracts and of agreed limitations on the ability to modify. This section is subject to Section 2B-304 on changes in terms of an on-going contract pursuant to contract terms allowing such changes. This section generally follows original Section 2-209 but provisions on the relationship between an attempted modification and an effective waiver are moved to Section 2B-605 on waiver.

2. Role of Contract Modifications. Subsection (a), as in original Article 2, seeks to protect and make effective modifications of contracts without regard to technicalities and complex issues of lack of consideration that existed under law prior to the enactment of Article 2. The Restatement is consistent. An agreement to modify a contract needs no consideration to be binding. Subject to the issues discussed in Section 2B-304, however, the modification must be in an agreement, indicating assent by both parties. As in original Article 2, this section does not specifically require that a modification be proposed in good faith to become binding. A court should not be asked to accept or invalidate an agreed modification based on its view of the validity and fairness of the commercial motivations of the party proposing the modification or whether agreement to the modification is fair to the other commercial party. However, there must be an agreement and courts have historically used this to protect against over-reaching and extortion-like demands in cases of abuse, applying a concept like that of good faith to prevent dishonesty in this setting. This article does not alter that existing case law.

3. Contract Terms Prohibiting Oral Modification. Subsection (b) conforms to prior law by generally allowing enforcement of a contract term that bars modification or rescission of an agreement except in an authenticated record. It also continues the policy that, because of the nature of consumer transactions, such terms should be enforceable only if the consumer assents to the term, but adopts the Article 2B concept of manifested assent to a term instead of the existing Article 2 language that the term be separately signed by the consumer. Both standards require specific indication of assent to the term, but the manifested assent requirement better fits modern electronic commerce.

A modification or rescission includes abandonment or other change of a term or contract by mutual consent. It does not include unilateral acts that terminate or cancel a contract.

In commercial practice, terms prohibiting modifications not contained in an authenticated record play an important role in preventing false allegations of oral modifications, difficulties of establishing the terms to which parties are bound, and avoiding circumvention of express agreements through later provision of new terms in a standard form that does not require or obtain an authorized authentication by the recipient. For example, such a clause should prevent modification of a basic agreement through a later provided mass-market license that is not authenticated by the party receiving the license. Morgan Laboratories, Inc. v. Micro Data Base Systems, Inc., 41 U.S.P.Q.2d 1850 (N.D. Cal. 1997). Such agreements are effective to preclude modifications not consistent with their requirements. This permits parties to make their own statute of frauds and to control their risk as regards any claims of modification after the agreement has been stated in a record.

A party whose language or conduct is inconsistent with a contract term requiring a signed record may place itself in a position from which it may no longer assert that term, but this is true only if the language or conduct induced the other party reasonably and in good faith to incur reliance costs. See Autotrol Corp. v. Continental Water Systems, 918 F.2d 689, 692 (7^th Cir. 1990); Wisconsin Knife Works v. National Metal Crafters, 781 F.2d 1280 (7^th Cir. 1986). Reasonableness of such behavior, of course, must be considered in light of the circumstances, including the fact of a no-oral waiver clause. Courts should be slow to find waiver of anti-waiver provisions. See 1 White & Summers, Uniform Commercial Code 1-6, pp. 41-42 (4^th Ed. 1995). It is more likely that the circumstances constitute a waiver of the substantive term for a particular performance, rather than of the "no-oral-modification" clause itself. That interpretation is consistent with Section 2B-302, preferring a waiver analysis over a modification analysis in close cases. In any event, a waiver can be retracted as to future performance by reasonable notice that the original terms of the agreement are to be complied with.

4. Statute of Frauds. Subsection (c) follows existing law and holds that the contract as allegedly modified must satisfy the statute of frauds to be enforceable. This places a barrier against unfounded claims of oral modification that alter the contract in a form that derogates Section 2B-201(a) requirements for an authenticated record. Thus, the alleged modification cannot, without an authenticated record, transform a two year license of software into a perpetual license, nor can it alter the subject matter of a film clip license to include an entirely different clip outside the subject matter referenced in the original record. This rule does not allow validation by partial performance under the original agreement because partial performance in Article 2B validates the entire contract, rather than only that portion of the contract that relates to the performance already rendered and received. If the contract as modified does not satisfy the statute of frauds, the original agreement that did satisfy the statute of frauds constitutes the contract of the parties.

5. Other Restrictions. The modifications must, of course, also satisfy any other applicable rules limiting the effectiveness of agreed terms. Thus, disclaimers of warranties must conform to the disclaimer rules in Section 2B-406. Modifications of scope must comply with Section 2B-307(g).

SECTION 2B-304. CONTINUING CONTRACTUAL TERMS.

(a) Terms of a contract involving successive performances apply to all performances unless the terms are modified in accordance with this article or the contract, even if the terms are not displayed or otherwise brought to the attention of a party with respect to each successive performance.

(b) If a contract provides that it may be changed as to future performances by compliance with a described procedure, a change proposed in good faith pursuant to that procedure becomes part of the contract if the procedure:

(1) the procedure reasonably notifies the other party of the change; and

(2) in a mass-market transaction, the procedure permits the other party to terminate the contract as to future performance if the change alters a material term and the party in good faith determines that the modification is unacceptable.

(c) The parties by agreement may determine the standards for reasonable notice unless the agreed standards are manifestly unreasonable in light of the commercial circumstances.

Definitional Cross References.

"Agreement": Section 1-201. "Contract": Section 1-201. "Good faith": Section 2B-102. "Mass-market license": Section 2B-102. "Notice": Section 1-201. "Notifies": Section 1-201. "Party": Section 1-201. "Term": Section 1-201. "Termination": Section 2B-102.

Reporter's Notes:

1. Scope of the Section. This section deals with contracts involving successive performances by one or both parties. Information contracts frequently contemplate long-term, ongoing relationships that need to be modified over time. This section clarifies the enforceability of agreed methods allowing changes in terms in on-going performance.

2. Continuing Terms. Subsection (a) states the simple principle that contract terms, if enforceable, cover all contractual performance. This principle applies in any case where subsequent performances are covered by prior agreement. Thus, for example, a warranty disclaimer effectively created at the outset of a contract for use of a website applies to all subsequent performances and uses under that contract.

3. Changes in Terms. Subsection (b) addresses an important practice in online and other continuing contracts, such as outsourcing contracts. In long term contracts of this type, changes frequently occur in the terms of service. Separate notice or negotiation of each change is often not feasible or desired by the parties, especially in cases where the change affects large number of users of the on-line system. Commercial practice often accommodates the desire for an efficient method of making changes by providing in the original agreement for a right of one party to alter terms during the contract period. This is a common provision in on-line service agreements where the contracts of most access or information providers provide that terms of service may be altered by posting changes in a particular location or file and that posted changes are effective when posted or at a later point in time. Subsection (b) authorizes two contractual procedures that create effective changes. This does not preclude other methods or imply that other contractual arrangements are not enforceable. Section 2B-106.

This subsection deals with agreements that permit unilateral changes in terms. It does not deal with contracts that provide for periodic adjustment of terms based on some agreed standard, such as an applicable cost of living or price index. Stiles v. Home Cable Concepts, Inc., 994 F. Supp. 1410 (M.D. Ala. 1998).

Contract terms that allow unilateral changes in contract terms are in effect the converse of contractual provisions that restrict the ability of parties to modify a contract other than in a record authenticated by both. They are analogous to cases in which the agreement leaves the particulars of performance to be specified by one party. Section 2B-305(b); Section 2-311. The need for and enforceability of such changes is recognized in other areas of law. See FRB Regulation Z, 12 CFR § 226.5b. It is especially important in electronic commerce to recognize this right because this area of commerce is subject to evolving rules and circumstances that are not predictable, but may require adjustment of performance and other characteristics of the relationship. This would include, for example, changing regulations concerning rights of parental control over access by minors to particular types of information. As the regulations change, the provider of the information service must be able to make corresponding changes in its terms and conditions of service.

The interests of the other party are protected by the general obligation of good faith which restricts the actions of the party given the right to change contract terms, and by the fact that the change right was granted by a contract to which the affected party agreed. Also, in some cases, the contracts involving such provisions may be subject to termination at will or at brief intervals (e.g., monthly).

a. Relationship to Other Rules. The change procedures described in subsection (b) involve changes made pursuant to a contract term authorizing such changes. The terms of an on-going contract may, of course, be effectively altered in other ways. For example, the parties may agree to modify the contract. Article 2B allows such modifications without consideration. Similarly, general principles of waiver and rules on the effect of course of performance may affect the enforceable terms of the agreement. Section 2B-302; Section 2B-605.

b. Contractual Procedures: Commercial Contracts. Subsection (b)(1) provides that, in non-mass-market contracts, a unilateral change becomes part of the contract if it is made pursuant to a contractually authorized procedure that reasonably notifies the other party of the change. The change must be in good faith and must be commercially reasonable. In determining whether a change was in good faith, however, the mere fact that the change adversely affects the other party does not, in itself, indicate bad faith if the change is within general standards of commercial fair dealing or the reasonable expectations of the commercial context.

Subsection (b)(1) requires that the procedure reasonably notify the other party of the change, but does not create other limitations on what contract terms are appropriate. Commercial agreements cover a wide range of contexts and economic or other commercial considerations can properly yield different contractual procedures in different settings. Thus, for example, in an out-source contract, the provider may make significant investments in systems relying on the five year contractual term and pricing of the contract, but the circumstances may require reservation of the right to change terms as technology changes. In such contracts, notice is appropriate, but it would not be appropriate to require (absent a contrary agreement) that the change yield a right to withdraw from the contract.

What reasonably notifies the party of changes depends on the circumstances. Posting changes in a file used for that purpose ordinarily suffices even though individual changes are not separately singled out unless they are especially material, such as price. In many cases, reasonable notification requires action before the change is effective, 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 access codes to prevent on-going third party intrusions). See 12 C.F.R. § 205.8(a)(2) as an example. A procedure that calls for posting changes in an accessible location of which the other party is aware will ordinarily satisfy this requirement. See, e.g., Federal Reserve System, Interim Rule, 63 F. Reg. 14528 (March 25, 1998) (designation of an agreed electronic location for giving notice would ordinarily satisfy delivery requirement).

c. Mass-Market Transactions. Subsection (b)(2) deals with mass-market transactions. The standards of good faith and notification apply. In addition, to be authorized under this section, the procedure must not only have been contractually authorized, it must also permit the licensee in good faith to withdraw from the contract with respect to future performances. This additional element is not appropriate as a rule for general commercial contracts. The termination right extends only to changes that are material and adverse to the licensee. Price is a material term in all cases. Other changes may be material in an on-going relationship, such as a significant change in the agreed hours during which the on-line system is available. Of course, a reduction in price or other beneficial change does not require a right to terminate. Also, this section does not apply where a price or other change is based on an agreed standard to be used to periodically update contract terms, such as a cost of living index, market index or the like.

Withdrawal is without penalty, but the licensee must, of course, perform the contract to the date of withdrawal (e.g., pay all sums due at that time). In many mass-market licenses that entail continuing performance, the contract itself may be subject to termination at will under Section 2B-308. Subsection (b) does not alter that result.

4. Changes in Content. This section deals with changes in contract terms and does not cover changes in the content made available under an access contract, such as a contract providing access to multifaceted databases. In an access contract, the agreement grants rights to materials as changed by the licensor over time. Thus, unless an express contract term provides otherwise, a decision to add, modify, or delete a database or a part of a database does not modify the contract, but merely constitutes performance by the licensor and is not within this subsection.

SECTION 2B-305. PERFORMANCE UNDER OPEN TERMS.; TERMS TO BE SPECIFIED. (a) A performance obligation of a party that cannot be determined from the agreement or from other provisions of this article requires the party to perform in a manner and in a time that is reasonable in light of the commercial circumstances existing at the time of agreement.

SECTION 2B-305A. TERMS TO BE SPECIFIED. (b) An agreement that is otherwise sufficiently definite to be a contract is not made invalid because by the fact that it leaves particulars of performance to be specified by one of the parties. If particulars of performance are to be specified by a party, the following rules apply:

(1) Specification must be made in good faith and within limits set by commercial reasonableness.

(2) If a specification 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.

[SECTION 2B-305BA. PERFORMANCE TO PARTY'S SATISFACTION.]

(a) Except as otherwise provided in subsection (b), an agreement that provides that the performance of one party is to 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.

(b) Performance must be to the subjective satisfaction of the other party if:

(1) the agreement expressly so provides, such as by stating that approval is in the "sole discretion" of the party, or words of similar import; or

(2) the agreement is for informational content to be evaluated in reference to aesthetics, market appeal, subjective quality, suitability to taste, or similar characteristics.

Uniform Law Source: Section 2-305(1)(a); 2-309(1); 2-311(1)(2); Restatement 228. Revised.

Definitional Cross References.

"Agreement": Section 1-201. "Contract": Section 1-201. "Delivery": Section 2B-102. "Good faith": Section 2B-102. "Informational content": Section 2B-102. "Party": Section 1-201. "Term": Section 1-201.

Reporter's Notes:

1. Open Terms. Section 2B-305(a) follows the emphasis of this article on construction of contracts based on the commercial context. If the agreement and this article do not provide content for a term left open by the parties, a court will use a standard of performance that it reasonable in light of the commercial circumstances. This rule, however, applies only if there is no agreement on the term. Agreement may be found in express language or in a term implied from the contractual circumstances, usage of trade or course of dealing.

If the dominant intent of the parties is to have an agreement, that agreement does not fail merely because some terms are not expressly dealt with. Section 2B-202. Of course, this does not create a contract where no contractual intent existed. If a term is left open because there was no agreement on the term and the intent of the parties precludes a contract unless or until that agreement occurs, subsection (a) does not apply. Section 2B-202(e).

What is reasonable commercial conduct in such cases depends on the nature, purpose and circumstances of the action to be taken or avoided and on the entire commercial context of the agreement. If the reasonableness standard under subsection (a) applies, a party is not required to fix, at peril of breach, a time or performance that is in fact reasonable in the unforeseeable judgment of a later trier of fact. In such cases, under general requirements of good faith, effective communication by one party to the other of a proposed time limit or other interpretation of a reasonable performance calls for a response so that a failure to reply in a timely manner creates an inference of acquiescence to the proposal. If the recipient of the proposal objects to the proposal, however, or if no proposal is made, a demand for assurance on the ground of insecurity may be made under this article pending further negotiation. Only if a party insists on undue delay or unreasonably early performance or rejects the other party's reasonable proposal does a question of breach arise under this subsection.

2. Terms Specified by a Party. Subsection (b) deals with circumstances in which the contract gives one party the right to specify terms. This language, which comes from original Section 2-311, is an express recognition of one form of layered contracting in which terms are outlined after the initial agreement, rather than simultaneous with the initial agreement. If the other terms of the initial agreement are sufficiently definite to be a contract, this section allows parties to leave particulars of performance to be filled in by either of them without running the risk of having the contract invalidated for indefiniteness. The party to whom the agreement gives power to specify the missing details is required to exercise good faith and to act in accordance with commercial standards so that there is no surprise and the range of permissible specifications is limited by what is commercially reasonable. This section is an application of some of the layered contracting themes adopted in this article.

The "agreement" which permits one party so to specify may be found in a course of dealing, usage of trade, implication from the circumstances or in explicit language used by the parties. Thus, acquisition of information through a telephone order where there is reason to know that a license provided by the other party will indicate the details of the contractual arrangement may fall within this section. The details thus supplied are bounded by trade use and commercial expectations, as well as by the terms actually agreed by the parties.

3. Failure to Timely Specify. Subsection (b)(2) applies when specification by one party is necessary to or materially affects the other party's performance, but is not seasonably made. The section excuses the other party's resulting delay in performance and the duty to perform. The hampered party may at its option perform in any reasonable manner, suspend its performance, or treat the other person's failure as a breach of contract. These rights are in addition to all other remedies available under the contract and this article. This includes the right to demand reasonable assurances of performance because the delay caused insecurity. The request for assurances may also be premised on the obligation of good faith established in this section which may imply the need for a reasonable indication of the time and manner of performance for which the other party is to hold itself ready.

4. Performance to the Satisfaction of a Party. Section 2B-305A(a) and (b) deal with cases where the contract provides that the required performance is to be to the satisfaction of the other party, a common arrangement in information industries. Subsection (a) follows the "preference" stated in Restatement (Second) of Contracts § 228. It assumes that such "to the satisfaction" clauses require satisfaction measured under an objective, reasonable man standard. This precludes entirely arbitrary demands and is supplemented by the obligation of good faith that applies to all contracts.

There are cases where a subjective standard of satisfaction is appropriate. The Restatement and general contract law recognize this. Subsection (b) provides guidance for determining when such a subjective standard applies. The most obvious is when the contract specifically so states. Subsection (b)(1) provides language that indicates a subjective satisfaction standard. Also, the section presumes a subjective standard if the contract involves informational content evaluated based on aesthetics and market appeal, rather than functional performance. A reasonable person standard in such cases lacks content since the nature of the required evaluation presumes personal judgment.

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

(a) A term that measures the quantity or amount of use by the output of the licensor or the requirements of the licensee means such actual output or requirements as may occur in good faith. No quantity or amount of use unreasonably disproportionate to a stated estimate or, in the absence of a stated estimate, to any normal or otherwise comparable prior output or requirements may be tendered or demanded. However, this limitation does not apply if the party in good faith has no output or requirements.

(b) An agreement by a licensor to be the exclusive supplier of copies to a licensee imposes on the licensor an obligation to use good-faith efforts to supply the copies.

(c) An agreement by a licensee to be the exclusive distributor of information imposes on the licensee an obligation to use good-faith efforts to promote the information commercially if the value received by the licensor substantially depends on that performance.

Uniform Statutory Source: Section 2-306.

Definitional Cross References.

"Agreement". Section 1-201."Good faith". Section 2B-102. "Information". Section 2B-102. "Informational Rights": Section 2B-102. "Licensee". Section 2B-102. "Party": Section 2-102. "Value": Section 2-102.

Reporter's Notes:

1. Scope of the Section. This section deals with requirements and exclusive dealing contracts. Subsections (b) and (c) modify the original Article 2 rule for exclusive dealing arrangements to a requirement of a good faith effort to supply or promote the information. This brings together the diverse common law rules for such situations applicable to industries that have not been within the U.C.C. It avoids the uncertainty that comes from use of "best efforts" as a default rule, when courts have been unable to formulate a uniform meaning of that term..

2. Out-put and Requirements. Subsection (a) follows original Article 2. A contract for one party to accept the entire output of the other or for one party to meet or allow use that meets the requirements of the other is not too indefinite to be enforced because it is held to mean the actual good faith output or requirements of the particular party. This principle has become a part of basic common law. The agreements also do not lack mutuality of obligation since the party who will determine the obligation is required to operate in good faith so that its output or requirements will approximate a reasonably foreseeable figure. The section envisions and permits reasonable elasticity and good faith variations from prior requirements or output even though they may result in discontinuation. Results such as that in Advent Sys., Ltd. v. Unisys Corp., 925 F.2d 670 (3d Cir. 1991) are appropriate. A sudden expansion of demand based on an expansion of a facility or an unpredicted merger or acquisition would not be within the contract, but normal expansion undertaken in good faith would be within this section.

If an estimate of output or requirements is included in the agreement, no quantity or level of use or demand unreasonably disproportionate to it may be tendered or demanded. Any minimum or maximum set by the agreement limits the intended elasticity. In the same manner, the agreed estimate is to be regarded as a center around which the parties intend the variation to occur. If an enterprise is sold and the buyer obtains or is bound by the requirements contract, the output or requirements in the hands of the new owner continue to be measured by the actual good faith output or requirements under the normal operation of the enterprise prior to sale. The sale itself is not grounds for sudden expansion or decrease.

3. Exclusive Dealing. Subsection (b) and (c) integrate the various bodies of law that pertain to exclusive dealing relationships in information and modify the original Article 2 rule for exclusive dealing arrangements to a requirement of a good faith effort to promote or supply the information. This standard brings together the diverse common law rules for such situations applicable to industries that have not been within the U.C.C. Some cases refer to "best efforts" obligations, while other refer to good faith efforts, but the outcome of the decision seldom hinges on the phraseology and the meaning of "best effort" in this and other contexts is not clear. Despite differing language, the basic thrust of the case law is consistent across all of the fields. The exclusive licensee in a distribution contract has an obligation to undertake commercially reasonable efforts to market the product, consistent with ordinary business standards and business judgment, including judgments that reflects it own business needs and judgment about the marketplace.

This section adopts a good faith effort standard which requires honesty in fact and adherence to commercial standards of fair dealing. Under this article, the good faith concept is expanded from the original U.C.C. and common law concept that required mere "honesty in fact." The definition in this article also encompasses an obligation to act consistent with commercial standards of fair dealing. This additional concept creates a basis that allows courts to draw an appropriate balance in light of the commercial context and the existing traditions of that context if the contract is silent on the issue. What constitutes an effort that meets standards of commercial fair dealing, of course, must reflect the entire business context, including other obligations of each party and the extent to which efforts are necessary to give the other party a fair return on the contract..

Of course, the agreement of the parties may establish a higher standard. An agreement that does so may be found in the express terms of a record, or in usage of trade, course of dealing, or by implication from the circumstances of the transaction.

This section follows general law and creates this obligation only if the return to the licensee hinges primarily on the performance of the other party and the results of that performance in terms of royalties and other return. Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214 (1917). If the licensee receives substantial compensation independent of the results of the other's efforts, no special obligation arises, although of course, general concepts of good faith in performance apply. See, e.g., Beraha v. Baxter Health Care Corp., 956 F.2d 1436 (7^th Cir. 1992); Permanence Corp. v. Kenmetal, Inc., 980 F.2d 98 (6^th Cir. 1990)

[B. Interpretation]

SECTION 2B-307. INTERPRETATION AND REQUIREMENTS FOR OF GRANT.

(a) A license grants:

(1) the rights to use the information or informational rights that are expressly described; and

(2) the right to use any all informational rights within the licensor's control at the time of contracting which are necessary in the ordinary course to exercise the expressly described rights.

(b) If a license expressly limits use of the information or informational rights, use in any other manner is a breach of contract. In all other cases, a license contains an implied limitation that the licensee will shall not use the information or informational rights other than as described in subsection (a). However, a use inconsistent with this implied limitation is not a breach if it the use would be is permitted under applicable law in the absence of the implied limitation.

(c) An agreement that does not specify the number of permitted users permits a number of users which is reasonable in light of the informational rights involved and the commercial circumstances existing at the time of agreement.

(d) Neither party is entitled to any rights in new versions of, or improvements or in modifications to, information made by the other party after a license becomes enforceable. A licensor's agreement to provide new versions, improvements, or modifications after acceptance of the completed information requires that the licensor provide them as developed and made generally commercially available from time to time by the licensor.

(e) Neither party is entitled to receive copies of source code, object code, schematics, master copy, design material, or other information used by the other party in creating, developing, or implementing the information.

(f) Terms dealing with the scope of an agreement must be construed under ordinary principles of contract interpretation in light of the informational rights and the commercial context. In addition, the following rules apply:

(1) A grant of "all possible rights and for all media", or "all rights and for all media now known or later developed", or a grant in similar terms, includes all rights then existing or later created by law, and all uses, media, and methods of distribution or exhibition whether then existing or developed in the future, and whether or not anticipated at the time of the grant.

(2) A grant of an "exclusive license", or a grant in similar terms, means that:

(A) for the duration of the license, the licensor will not exercise, and will not grant to any other person, rights in the same information or informational rights within the scope of the exclusive grant; and

(B) the licensor affirms that it has not previously granted those such rights in a contract in effect when the licensee's rights begin.

(g) The rules of this section may be varied only by a record that is:

(1) sufficient under Section 2B-201; and

(2) authenticated by the party against which enforcement is sought, or is prepared and delivered by one party and adopted by the party against which enforcement is sought.

(g) The rules of this section may be varied only by a record that is sufficient to indicate that a contract has been made and:

(1) authenticated by the party against which enforcement is sought; or

(2) prepared and delivered by one party and adopted by the other under Sections 2B-207 or 2B-208.

Definitional Cross References.

"Agreement". Section 1-201. "Contract": Section 1-201. "Copy": Section 2B-102. "Information": Section 2B-102. "Informational rights": Section 2B-102. "License". Section 2B-102. "Licensee". Section 2B-102. "Licensor". Section 2B-102. "Party": Section 1-201. "Receive": Section 2B-102. "Rights": Section 1-201. "Scope": Section 2B-102. "Term": Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section deals with a variety of significant interpretation issues, establishing a basic premise that a license is interpreted in a commercially reasonable manner, but providing specific interpretation rules that reflect commercial practice.

2. License Grant Terms. Subsection (a) recognizes that a license gives the contractual rights it expressly creates and, in appropriate cases, limited implied rights necessary to use the expressly granted rights. The reference in paragraph (a)(1) is to contractual rights relating to information or to grants of informational rights. Thus, for example, a license may expressly grant the right by contract to make copies of software, an informational right that otherwise remains within the exclusive control of the holder of the copyright in the software.

Subsection (a)(2) adopts the reasonable interpretation that an affirmative express grant implies a grant of all rights necessary to exercise that express grant to the extent these are within the control of the licensor. For example, a license to use a photograph in a digital product implies a right to transform that photograph into digital form to fit the media. A license of software to create visual presentations for public speaking implies a right to publicly display images from the software in such presentations because that right is necessary to the expressly granted right. The implied rights, however, relate only to rights in information and material provided to the licensee. They do not require that the licensor transfer additional materials (such as source code), unless that transfer was agreed to by the parties. Additionally, the implied rights must be necessary to the express grant and do not include rights merely because the rights are desired or even helpful, unless necessary to the expressly granted uses. Express terms of an agreement, of course, over-ride any implied rights. As in all cases, the terms of the agreement may be found in a record or inferred from the context, usage of trade, or course of dealing.

This subsection expresses a contract law rule. Some copyright license cases hold that federal policy requires interpretation of the scope of a license against the licensee and in a manner that withholds any use not expressly granted. SOS, Inc. v. Payday, Inc., 886 F.2d 1084 (9^th Cir. 1989). The better view as adopted here is that applied in cases such as Bourne v. Walt Disney Co., 68 F.3d 621 (2d Cir. 1995), which treat interpretation issues as ordinary commercial contract questions. Of course, to the extent a mandatory federal policy precludes different state law on this issue, that policy over-rides the standard in subsection (a).

3. Exceeding the Grant. Subsection (b) resolves what interpretation is given to a license that gives the licensee a right "to do X." It adopts the most commercially reasonable interpretation, i.e., that uses which exceed the grant or differ from the grant breach the contract. This, of course, refers to the grant as interpreted, including consideration of course of dealing, usage of trade and the implied rights under subsection (a).

The fact that uses differing from the grant are a breach of contract is clear under all case law if the licensed scope allows the licensee "only to do X" or otherwise precludes other uses. The first sentence of subsection (b) confirms this. Of course, if fundamental public policy or other restrictions on the enforceability of such terms apply, the contract limitation may not be enforceable. See Section 2B-105, comments.

If the word "only" or its equivalent does not appear, some patent license cases hold that uses not covered by the grant infringe the patent, but may not breach the license. These decisions deal with contract interpretation, rather than over-riding public policy. Independent of infringement issues with which the cases deal, as a matter of contract law, a rule that hinges on the use or failure to use the word "only" provides a true trap that is avoided in subsection (b) by adopting the ordinary commercial understanding that an affirmative grant implicitly excludes uses that exceed or are not otherwise within the grant.

The implied limitation, however, is not as strong as an express contract term of limitation. It does not yield a breach of contract if the use would have been permitted by law in the absence of the implied limitation. Thus, scholarly use of a quotation from licensed material not subject to trade secrecy restraints, if a fair use under federal law allowing such use, would not conflict with the implied limitation. However, even if a license does not use the magic word "only" and gives a right to use software at a designated location, a licensee that makes multiple copies for sale infringes the copyright and breaches the contract. A grant to show a movie in Peoria implies the lack of a contract right to do so in Detroit.

Illustration 1: LR licenses copyrighted software to LE. The license is silent on reverse engineering and consumer use, but grants the right to use the software in a 1,000 person network. LE reverse engineers the software to examine the code. The use is not a breach if it would be a fair use in the absence of the implied limit. Use in a 2,000 person network, however, breaches the express limitation.

4. Number of Users. A license can specify the number of permitted users or uses. In the absence of agreed terms, the contract authorizes a number that is reasonable in light of the informational rights and commercial circumstances involved. In some cases, especially in the mass market, a single user limitation would be assumed for a computer program. In other contexts, multi-use or network use concepts are more appropriate. Given the diversity of the modern marketplace, no single presumed number of users or uses would fairly meet all circumstances. Of course, as with all default rules in this article, this provision is subject to contrary agreement, which agreement may be found as well in express terms as in course of dealing, usage of trade and course of performance. In making the commercial determination required by the general rule, however, the nature of the underlying property rights must be considered. Contract interpretation rules should not be used to unfairly take away important property rights by inadvertence, nor should they deny the commercial realities and reasonable expectation that arise in the transaction in which the license grant occurs.

5. Improvements and Design Material. As a basic presumption, and unless the contract clearly indicates otherwise, neither party receives a contract right to receive subsequent modifications or improvements made by the other party, or a contract right of access to design and confidential material. Arrangements for contractual rights in modifications, improvements, source code or designs entail separate valuable relationships to be handled by express contract terms. In the absence of such express terms, the contract gives no right to the other party in an improvement subsequently developed by either the licensor or the licensee. This contract law principle does not, of course, supplant intellectual property rules on derivative works. Section 2B-105(a). The contract principle is independent of the implied license in subsection (a) which applies only to materials and information delivered to the licensee.

This section takes no position on what constitutes an improvement of an existing product and what constitutes a new product for purposes of applying contractual terms creating an obligation to provide improvements to the other party. That issue ultimately turns on the agreement of the parties as indicated by the commercial context and the actual language used.

6. Grant Clauses. Subsection (f) states that ordinary commercial contract principles apply to interpreting a grant. This resolves questions of whether, under state law, policy considerations require an interpretation that precludes a grant of rights unless express in the agreement. As a state law rule, of course, it is subject to contrary federal policy which, some courts hold, requires interpretation in favor of the licensor to protect intellectual property rights. Section 2B-105.

Subsections (f)(1) and (f)(2) provide guidance on interpreting common and important license terms. Subsection (f)(1) adopts the majority rule on whether a grant covers future technologies and all rights. This is ultimately a fact sensitive interpretation issue. But use of language that implies a broad scope for the grant without qualification should be sufficient to cover any and all rights (such as the right to copy, modify, publicly perform and the like) as well as present and future media (such as print, television, and other modes of distribution). This is subject to the other default rules in this article, 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. The point of this interpretation rule is not to encourage use of such broad grants, but to indicate what language achieves the indicated result. In many cases, the licensor will not be willing to grant such a broad conveyance. In such cases, the statutory language provides insight on what language should be avoided if a broad grant is not acceptable.

Subsection (f)(2) resolves a conflict in case law and treatise opinions among the various areas of commerce affected by Article 2B. It clarifies that an exclusive license that does not otherwise deal with the issue, conveys exclusive rights including rights of the licensor. Thus, the licensor may not license or use the information within the scope of the exclusive license, and affirms that it has not granted any other subsisting license covering the same scope and will not grant any future license covering the same scope that takes effect during the duration of the original exclusive license. For example, a grant of exclusive right to distribute software in a stated geographical area means that the licensor itself will not engage in distribution within that same area during the term of the license, and that it has not previously conveyed similar rights that continue to exist during the term of the exclusive license.

SECTION 2B-308. DURATION OF CONTRACT. If an agreement does not specify its duration, to the extent allowed by other law, the following rules apply:

(1) Except as otherwise provided in paragraph (2) and Section 2B-206(a), the agreement is enforceable for a time reasonable in light of the commercial circumstances but may be terminated as to future performances at will by either party during that time on seasonable notice to the other party.

(2) The duration of contractual rights to use licensed subject matter is a time reasonable in light of the licensed informational rights and the commercial circumstances. However, subject to cancellation for breach of contract, the duration of the license is perpetual as to the contractual rights and contractual use restrictions if:

(A) the license is a software contract, other than one that provides for a license of for source code, that transfers ownership of a copy or delivery of a copy for a contract fee, the total amount of which is fixed at or before the time of delivery of the copy; or

(B) the license expressly granted the right to incorporate or use the licensed information or informational rights with information or informational rights from other sources in a combined work for public distribution or public performance

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

Definitional Cross References.

"Agreement". Section 1-201. "Cancellation". Section 2B-102. "Contract": Section 1-201. "Contractual use restriction": Section 2B-102. "Copy". Section 2B-102. "Delivery". Section 2B-102. "Information". Section 2B-102. "Informational rights": Section 2B-102. "License". Section 2B-102. "Licensee". Section 2B-102. "Notice". Section 1-201. "Party". Section 1-201. "Rights". Section 1-201. . "Software contract". Section 2B-102.

Reporter's Note:

1. Scope of the Section. This section deals with the agreements that are indefinite in their duration. It follows common law and original Article 2 making such agreements subject to termination at will in most cases, but creating two exceptions that establish important licensee protection by presuming (as a default rule) a perpetual license. Notice of termination is required for at will termination under Section 2B-626.

2. Reasonable Time. Subsection (1) adopts a rule of commercial reasonableness to resolve issues that arise in cases of contracts of indefinite duration. What time is reasonable for any given arrangement is defined by the circumstances. If the agreement is carried out over an extended period of time, the reasonable time can continue indefinitely while the parties continue to perform; the contract will not terminate until notice is given. The basic policy, however, is that a person making an open-ended commitment can be held to performance over a time that is reasonable, but cannot be placed in a position of perpetual servitude. The commercial circumstances that determine what is a reasonable time include consideration of licenses or third-party rights which constrict the licensor of the information. The licensor should not be presumed to have given a license that exceeds its own rights with respect to the information. As in common law and original Article 2, the contract is generally subject to termination at will.

In some cases, what constitutes a reasonable term can be determined by reference to other law. In this field, there are various federal policy considerations that affect the duration of licenses either by direct rule or indirectly by suggesting what is a reasonable time. Thus, a patent license that does not state its term can reasonably be presumed to extend for the life of the patent. A similar premise exists for an indefinite copyright license. For a copyright license of an indefinite term, however, duration is subject to over-riding federal copyright law rules. Rano v. Sipa Press, Inc., 987 F2d 580 (9th Cir. 1993). An obligation to pay royalties for use of information for an indefinite period extends for a reasonable time which can often be measured by the term over which proprietary rights continue to exist in reference to the licensed information.

Parties to a contract under either subsection (1) or (2) are not required, in giving notice of termination, to fix at peril of breach, a time which is in fact reasonable in the unforeseeable judgment of a later trier of fact. Effective communication of a proposed time limit calls for a response so that failure to reply will infer acquiescence. If objection is made, however, or if the demand is merely for information, demand for assurance on the ground of insecurity may be made under this article pending further negotiation. Only when a party insists on undue extension or unreasonably early termination or rejects the other party's reasonable proposal is there a question of breach under this section.

The section applies only if there is an agreement. In some cases, failure to agree on duration indicates that no contract exists.

3. Termination at Will. The general rule is that the indefinite term contract can be terminated at will by either party, except as provided in subsection (2) as to contractual rights of use under a license. This follows common law principles with respect to contracts generally. Under this standard, for example, a contract that grants a license and promises support services for an indefinite period can be terminated at will as to the support services. Treatment of the licensed rights is handled differently under subsection (2). At will termination enables a non-judicial method of ending the contract. Termination does not end all obligations or rights, including rights that vested based on prior performance. Which rights these include, of course, depends on the terms of the agreement.

4. Termination. Termination discharges executory obligations, except for contractual use restrictions. It does not end or otherwise affect rights that are vested based on prior performance. For example, if a single license fee paid grants a permanent right to use software, but the license also calls for an on-going obligation to deliver updates of the software for an indefinite term, termination does not affect the license rights, but does end the obligation to provide updates if that obligation was not earned by prior performance.

Justifiable cancellation for breach is a remedy for breach and is not the kind of ending of a contract covered under this section.

5. Contracts for Definite Term. The standards of this section do not apply if the agreement provides for a specific duration. Agreement to a definite duration may be found in express language or in a term implied from the contractual circumstances, usage of trade or course of dealing. A license for "the life of the edition" or "for so long as the work remains in print" defines a duration as well as does a contract for one year duration. On the other hand, commitments to "lifetime" service or "perpetual" maintenance are indefinite in duration.

6. Perpetual Licenses. Subsection (2) rejects in two specific instances the Article 2 and common law rule that a license that does not specify its duration is for a duration that is a reasonable time subject to termination at will. As in all other contracts, the presumed term is a reasonable time, but in two cases the default rule is that an indefinite term license is perpetual as to the licensed rights and use restrictions, subject to cancellation for breach or contrary agreement. As elsewhere, terms of agreement may be found in express terms, usage of trade, course of dealing or the circumstances of the transaction. In many cases, for example, these considerations would suggest an agreement for something other than a perpetual term where the transaction involves delivery of a copy of source code subject to confidentiality and other limitations on use. The perpetual term default rule does not apply to services, such as support obligations. These are within the general rule in subsection (1). There is no default rule about perpetual term if a party has an on-going obligation to deliver affirmative performances to the other party.

A perpetual term is set out as a default rule if a license transfers ownership of a copy or delivers a copy of software for a single fee, the total amount of which is determined at or before delivery. This does not contemplate royalty or other variable fees whose total dollar amount cannot be determined at the outset. This rule seeks to identify situations in the mass market and other similar settings where the transaction commercially conveys implicit long term rights to the licensee. The default rule is over-ridden in cases where the circumstances suggest that, despite a single fee or similar terms, there is no agreement to give perpetual rights. This may occur in cases where source code is delivered to a party subject to confidentiality or non-disclosure obligations. In such settings, the most likely construction of the agreement limits the transferee's rights in the confidential code. On the other hand, acquisition of a copy of a program under a license that is indefinite on duration and is acquired in the absence of confidentiality or similar obligations suggests a perpetual term if the remaining conditions of subsection (2) are met.

The second situation deals with cases where the licensed information is incorporated into a product for distribution to third parties, such as an art clip licensed for use in a digital multimedia encyclopedia. This recognizes the reliance interests that develop in such case and which would be disrupted by an at will termination right.

SECTION 2B-309. LIMITED RIGHTS TO INFORMATION GIVEN FOR STORAGE OR PROCESSING IN RECEIVING PARTY.

(a) Between merchants, tThis section applies to a transaction between merchants in whichif:

(1) one party , (the recipient), receives is given confidential commercial, scientific, or technical information of the other party under an agreement that obligates the recipient it to store or process that information; and

(2) the recipient has reason to know that the information is confidential and that the other delivering party does not authorize publication of the informationit.

(b) The information and any summaries or tabulations based on it may be used by the recipient only in a manner and for purposes expressly authorized by agreement or reasonably necessary for performance of the agreement.

(c) The recipient of information under subsection (a) shall:

(1) hold the information in confidence in a manner consistent with ordinary standards of its business, trade, or industry; and

(2) on termination, deliver all copies of the information to the other party or make the information available to be destroyed or delivered to the other party pursuant to the agreement or the reasonable instructions of that party or, in the absence of agreed terms or instructions, in a commercially reasonable manner.

(d) This section does not apply to, or alter rights in, information made available to the recipient because the party providing the information was engaged in or intended to engage in a transaction with or to be facilitated by the recipient, and:

(1) the information was collected or created to effectuate, process, or make a record of the transaction; or

(2) the information describes the subject matter of the transaction, or reports, analyses. or other information based on such information.

(e) Nothing in this section precludes or creates a claim for breach of confidentiality or invasion of privacy under other law by a person that is the subject of the information.

Definitional Cross References.

"Agreement": Section 1-201. "Information": Section 2B-102. "Merchant": Section 2B-102. "Party": Section 1-201. "Reason to know": Section 2B-102. "Record": Section 2B-102. "Termination". Section 2B-102.

Reporter's Notes:

1. Scope of this Section. This section describes default rules for transactions in which one merchant receives confidential information from another in a contract that requires the recipient to store or process that information. This covers modern outsourcing contracts and other arrangements where data storage or processing is provided to another party pursuant to agreement. Under subsection (d), the section does not apply to handling of data collected as an incident of processing transactions involving the other party. It does not deal with issues of data privacy or data protection and creates no inferences about the proper handling in other contexts in which confidential information is handled. The section limits the recipient to uses of information that are granted under the contract in cases where it had reason to know it was dealing with confidential material.

2. Nature of the Transaction. The limitations and obligations set out in this section arise only if a person receives, pursuant to contract, confidential commercial, scientific or technical information of the other party with reason to know that the information is confidential to the other party. This does not require that the information be a trade secret under applicable law. Between merchants, reason to know information is confidential creates contractual obligations in any transaction where the recipient is to process or store that information. Whether the same transaction gives rise to obligations under tort law is not addressed in this article.

The obligations of this section do not arise where under the agreement the party whose information is provided to the other authorizes its publication. The agreement that authorizes publication may be found in express terms of a record or in implication from the circumstances, usage of trade or course of dealing.

3. Limitations on Use. Subsection (b) states the premise that, unless it agrees otherwise, the party about whose business or technology the data relate maintains control. The recipient's right to use the data is limited to the purposes of the contract. This rule applies to cases involving information that has not been released to the public and which the recipient knows is unlikely to be released. The information is received and to be held in a confidential manner; it remains the property or under the control of the party who provided it to the transferee. For example, if a data processing company contracts to receive and process a hospital's records on patient care and billing, the hospital is the party in control of the information; on termination of the contract, the data processing company must return all copies of the data to the hospital. See Hospital Computer Systems, Inc. v. Staten Island Hospital, 788 F. Supp. 1351 (D.N.J. 1992).

4. Obligations to Maintain Confidentiality. Paragraph (c)(1) provides that the recipient must exercise care consistent with ordinary standards of its trade or industry to maintain the information in a confidential manner. If the parties desire a higher standard of care, they can so specify in their agreement, but a lesser standard cannot be specified. Section 1-102(3). A failure to exercise the required level of care breaches the contract. However, the obligation does not prevent proper discovery from non-confidential sources, use of public domain material, or receipt of the same information from other non-privileged sources.

5. Return of Copies. The information is to be returned to the providing party at the end of the contract. Subsection (c)(2) confirms this obligation, requiring compliance with contractual terms or reasonable instructions to return the information. Regardless of whether all copies are returned, the contractual limitations on use of copies of the information survive termination of the agreement. Section 2B-625. Failure to comply with this or the other obligations of this section and the agreement is a breach of the contract.

6. Transactional Data. Subsection (d) clarifies that section does not apply to data collected about others pursuant to processing or effectuating transactions. Thus, for example, this section would not apply to information collected by a credit card company as part of processing of credit transactions with respect to either the merchants or the card holders with which it deals. This information, collected as a by-product of ordinary transactions that have a different purpose than collecting or processing the information for its own sake, present significant questions about trade secrecy law and personal data privacy that are being debated in national and international venues. Those issues are outside the scope of this article. Of course, since this is a default rule, nothing here prevents development of contract terms regarding such information.

SECTION 2B-310. ELECTRONIC REGULATION OF PERFORMANCE.

(a) In this section, "restraint" means a program, code, device, or similar electronic or physical limitation that restricts use of information.

(b) A party entitled to enforce a limitation on use of information which does not depend on a breach of contract by the other party may include a restraint in the information or a copy of it and use that restraint if:

(1) a term of the agreement authorizes use of the restraint;

(2) the restraint prevents uses which that are inconsistent with the agreement or with informational rights that were not granted to the licensee;

(3) the restraint prevents use after expiration of the stated duration of the contract or a stated number of uses; or

(4) the restraint prevents use after when the contract terminates, other than on expiration of a stated duration or number of uses, and the licensor gives reasonable notice to the licensee before further use is prevented.

(c) This section does not authorize or prohibit a restraint that affirmatively prevents or makes impracticable a licensee's access to its own information or information of a third party, other than the licensor, if that information is in the licensee's possession and accessed without use of the licensor's information or informational rights.

(d) A party that includes or uses a restraint pursuant to subsection (b) or (c) is not liable for any loss caused by that use.

(e) This section does not preclude electronic replacement or disabling of an earlier copy of information by the licensor in connection with delivery of a new copy or version under an agreement electronically to replace or disable the earlier copy with an upgrade or other new information.

Definitional Cross References.

"Agreement": Section 1-201. "Contract": Section 1-201. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Electronic": Section 2B-102. "Information": Section 2B-102. "Informational rights": Section 2B-102. "License": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Notice": Section 1-201. "Party": Section 1-201. "Term": Section 1-201.

Reporter's Notes:

1. Scope of Section. This section deals with electronic or physical limitations on use of information that enforce contract terms by preventing breach or by implementing a contracted-for termination of rights to use the information. The section does not deal with devices used to enforce rights in the event of cancellation for a breach and cancellation or with enforcement concerning information that is outside the scope and subject matter of this article. The restraints here derive from contract terms and limit use consistent with the contract or the termination of a license at its natural end. The basic principle is that a contract can be enforced and that it is appropriate to do so through automated means. If the contract places enforceable time or other limits on use of information, electronic devices that enforce those limitations are appropriate and, in fact, are an important new capability created by digital information systems.

2. Passive or Active Devices. This section distinguishes between active and passive devices. An active device terminates the ability to make any further use of the licensed subject matter and the information it handles, while a passive device merely precludes acts that constitute a breach or a use of the licensed information after expiration of the contract. As specified in subsection (c), nothing in this section authorizes active devices that affirmatively limit the licensee's ability to access or use its own information through its own means other than by continued use of the licensed subject matter itself. Passive devices are mere automated contract parameter enforcement tools and are appropriately used to enforce contractual restrictions.

3. Bases for Use. Subsection (b) states alternative bases that permit use of automated restraints. The alternatives are co-equal; satisfying any one of the alternatives supports use of the restraint under this section. The list is not exclusive. Federal or other law (including other contract law) may also allow limiting devices (restraints).

a. Contract Authorization. The first option arises if the contract authorizes the party to use the restraint. Under this subsection, the contractual authorization must be in addition to the contract term that the restraint enforces.

b. Passive Restraints That Prevent Breach. Subsection (b)(2) provides that a passive restraint can be used without notice or express contract authorization if it merely prevents use inconsistent with contract terms or the intellectual property rights of the party using the restraint. All the restraint may do is prevent use; if it does more than that, it is not authorized by this subsection. For example, if a license restricts the licensee to only one back-up copy, this subsection authorizes a restraint to enforce that limitation so long as the restraint does not destroy or disable the licensed information. If the restraint does more (i.e., destroy information) than merely enforce the contract, it is not authorized under this section. Restraints here enforce contracts, but do not impose a penalty for attempted breach. Similarly, if an enforceable contract term limits use of a copy of digital information to a single designated hardware systems, a restraint that precludes use on other systems is authorized under this subsection. A restraint that deletes the digital copy if the licensee attempts to use it on an unauthorized system is not authorized by this subsection. The agreement must support the electronic limitation. An agreement that limits use to a particular location does allow destruction of the information at the unauthorized location if that restriction is violated, or if a violation is attempted. The licensee still retains the right to use the information within contractual terms unless or until the contract is canceled. A restraint inconsistent with the contract is a breach of contract.

Illustration 1: The license provides that no more than five users may have access to and online database at any one time. If a sixth user attempts to sign on, that user is electronically denied access until another user discontinues use. This restraint is authorized under subsection (b)(2). A restraint that disables or deletes the database if a sixth user attempts access, it is not authorized.

c. Enforcing Property Rights. Subsection (b)(2) also allows use of passive devices that merely preclude infringing intellectual property rights. Merely preventing the act does not require a contract or other notice. Thus, 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 although such may be precluded by intellectual property law absent fair use. 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).

d. Enforcing Termination. The restraints authorized in subsections (b)(3) and (b)(4) enforce termination of a contract. Termination ends the contract for reasons other than breach. Subsection (b)(3) allows restraints that end use of the information upon expiration of a stated term or number of uses. At termination, the restraint may do more than merely prevent use since, at the end of the contract term, the party no longer has any rights in the information under the license. Thus, a card that allows thirty minutes of use can be disabled at the expiration of the contractual term and be made no longer operational. A machine allowing a single video game play can automatically discontinue use or delete the game when that game is completed. A license for a time limited use of downloaded software fragments allows erasure of those elements when the limited time for use expires. Consistent with rules on termination, no prior notice is required for such termination. In contrast, subsection (b)(4) requires prior notice if the restraint implements termination other than on the happening of an agreed event.

e. Cancellation. Cancellation means ending a contract because of breach. Nothing in this section authorizes or otherwise deals with electronic or other devices used to enforce rights in the event of breach and cancellation.

Illustration 2. A license requires monthly payments on the first of the month and runs for a one year term. Licensee makes one payment five days late. Licensor uses an electronic device to turn off the software before payment. That act is not authorized under this section since it enforces a remedy for breach of contract. If, however, the license reaches the end of the contractual duration, a restraint that turns off and deletes the software at that time is valid under this section.

4.

SECTION 2B-311. DELIVERY TERMS. Delivery terms such as "F.O.B." and "C.I.F." must be interpreted according to Article 2 and any applicable custom or usage of trade.

Definitional Cross Reference:

"Term". Section 1-201.

Reporter's Notes:

This section adopts the treatment of shipment terms found in original Article 2. These rules are default rules subject to contrary agreement. The agreement may be in express terms of a contract, or found in usage of trade, course or dealing or inferred from the circumstances of the contracting. An important factor in determining the actual agreement is the emergence of modern interpretations grounded in international understanding about the meaning of delivery terms.

PART 4

WARRANTIES

SECTION 2B-401. WARRANTY AND OBLIGATIONS CONCERNING QUIET ENJOYMENT AND NONINFRINGEMENT.

(a) A licensor that is a merchant regularly dealing in information of the kind warrants that the information shall be delivered free of the rightful claim of any third person by way of infringement or misappropriation, but a licensee that furnishes detailed specifications to the licensor and the method required for meeting the specifications must hold the licensor harmless against any such claim caused by compliance with the specification or method except for a claim that results from the failure of the licensor to adopt a noninfringing alternative of which the licensor had reason to know.

(b) A licensor warrants:

(1) for the duration of the contract, that no person holds a claim to or interest in the information which arose from an act or omission of the licensor, other than a claim by way of infringement or misappropriation, which will interfere with the licensee's enjoyment of its interest; and

(2) as to rights granted exclusively to the licensee, that within the scope of the license the licensed informational rights are valid and exclusive for the information as a whole to the extent that exclusivity and validity are recognized under applicable law.

(c) The warranties in this section are subject to the following rules:

(1) If informational rights are subject to a right of public use, collective administration, or compulsory licensing, the warranty is subject to those rights.

(2) The obligations under subsections (a) and (b)(2) apply solely to informational rights arising under the laws of the United States, or a State thereof, or other jurisdiction of the United States, unless the contract expressly provides that the warranty obligations extend to rights under the laws of other countries. Language is sufficient for this purpose if it states "The licensor warrants [exclusivity] [noninfringement] in [specified countries] [worldwide]," or words of similar import. In that case, the warranty extends to the specified country or, in the case of a general reference to "worldwide" or the like, to all countries within the description, but only to the extent that the rights are recognized under a treaty or international convention to which the country and the United States are parties.

(3) The warranties under subsections (a) and (b)(2) are not made in an agreement by a party that merely permits use of its rights under a patent.

(d) Except as provided in subsection (e), a warranty under this section may be disclaimed or modified only by specific language or by circumstances that give the licensee reason to know that the licensor does not warrant that competing claims do not exist or that the licensor purports to grant only the rights it may have. In an automated transaction, language is sufficient if it is conspicuous. Otherwise, language in a record is sufficient if it states "There is no warranty against interference with your enjoyment of the information or against infringement", or words of similar import.

(e) Between merchants, a grant of a "quitclaim", or a grant in similar terms, grants the information or informational rights without an implied warranty as to infringement or misappropriation, or as to the rights actually possessed or transferred by the grantor.

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

Definitional Cross References.

"Automated transaction": Section 2B-102. "Conspicuous": Section 2B-102. "Contract": Section 1-201. "Information": Section 2B-102. "Informational rights": Section 2B-102. "License": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Merchant": Section 2B-102. "Person": Section 1-201. "Reason to know": Section 2B-102. "Record": Section 2B-102. "Rights": Section 1-201. "Scope": Section 2B-102. "Term": Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section deals with implied warranties relating to non-infringement, exclusivity, and quiet enjoyment. These warranties, if they arise, cannot be disclaimed except as stated in this section.

2. Non-Infringement Warranty. Subsection (a) language comes from original Article 2. If the information is part of the licensor's normal stock and is provided in the normal course of its business, it is the licensor's duty to see that no claim of infringement of an intellectual property right by a third party will affect the information as delivered to the licensee. A transfer by a person other than a dealer in the particular type of information, however, raises no implication of such a warranty. This section creates a warranty, when applicable; but it does not create an implied right of indemnity unless the parties expressly so agree.

a. Delivered Free of Infringement. Subsection (a) requires that the information be delivered free of any claim of infringement. This warranty refers to circumstances at the time of delivery. It expresses a fundamental undertaking in any transfer of information: transfer of a copy does not infringe rights of another person. It does not pertain to future events, such as a subsequently issued patent.

The warranty does not cover infringement claims that result from a licensee's decision to use the information in connection with other information or property, the composite of which infringes a third party right. The decisions in Chemtron, Inc. v. Aqua Products, Inc., 830 F.Supp. 314 (E.D. Va. 1993) and Motorolla v. Varo, Inc., 656 F.Supp. 716 (N.D. Tex. 1986) frame the issue correctly. That principle governs cases of computer software with multiple, generalized functions. For example, in a license of a spreadsheet program, the warranty is that the spreadsheet itself does not infringe another person's rights. If the licensee uses the capabilities of the software to implement an inventory control system that is covered by a patent held by a third party, the infringement comes from the licensee's use of the system and not from the software. No breach of an infringement warranty occurs and liability, if any, lies with the licensee. A licensor of software that can be adapted to may different functions at the option of the licensee does not warrant that none of the functions that might be implemented by the licensee infringe the rights of other parties.

b. Patent License. Under subsection (c)(3), the subsection (a) warranty does not apply to patent licenses. This means a party licensing a patent per se. While most patent licenses are not within Article 2B, a license of a software patent may be covered. For these cases, this article adopts the rule that prevails in patent licensing generally. A patent license does not warrant that the licensee can use the licensed technology. Instead, as referenced in the basic concept of patent rights, the license merely states that the licensor will not sue for use of its rights. There is no warranty that the license assures that there are no blocking patents which may prevent use of the licensed patented technology. This section thus recognizes the traditions of patent licensing. A patent does not create an affirmative right to use technology, but merely a right to prevent another person's use. Patent licenses are mere waivers of the right to sue and do not promise a right to non-infringing use of the patented technology unless the contract expressly so provides. Thus, if a party licenses software and the software is supported in part by patent rights, the warranty is breached if use of the software infringes a third party patent. On the other hand, if the software licensor also grants a license for the patent itself, that license does not create a warranty under subsection (a).

c. Specifications and Hold Harmless Duty. Nor is there an implication of a warranty by the licensor when the licensee orders information to be assembled prepared or manufactured on the licensee's specifications liability will run from the licensee to the licensor. In essence, if the project is defined by detailed specifications given by the licensee including the method for meeting those specifications or features, no warranty arises on behalf of the licensor and the licensee bears the obligation if, in such cases, the result of compliance infringes a third party right. See Bonneau Co. v. AG Industries, inc., 116 F.3d 155 (5^th Cir. 1997). There is, under such circumstances, a tacit representation on the part of the licensee that the licensor will be safe in creating the information according to specifications.

To establish this circumstance, the specifications must mandate acts that cause infringement, rather than allowing choices some of which may result in infringement. Thus, for example, a requirement that a product contain an image of a famous character specifies both the outcome (specification) and the method, triggering the hold harmless obligation unless that obligation does not arise because of other provisions of this section. The requirement design must be specific or detailed, rather than general. See Bonneau Co. v. AG Industries, inc., 116 F.3d 155 (5^th Cir. 1997) (design of "sufficient specificity for a competent manufacturer to construct the product and, thus, constitutes a specification"). The "hold harmless" obligation only exists if infringement is caused by compliance, not because of choices of the licensor in implementing goals of the licensee. This section goes beyond Article 2 in limiting when a licensee's obligation arises. A licensor receiving specifications with expertise in the field, cannot hold the licensee liable if the licensor failed to adopt a noninfringing alternative which it had reason to know existed.

d. Non-Infringement and Passive Transmission. The warranty in subsection (a) applies only to licensors of information. It does not apply to persons who merely provide communications or transmission services even if such service falls within this article. Service providers of this type do not, for purpose of contract law, engage in activities that reasonably create the inference that they assure the absence of infringing information. That obligation could be expressly undertaken, but if not, it is not created by law. Article 2B takes no position on and has no effect on federal questions about what constitutes infringement in such situations. This section follows a contract law premise that commitments about the absence of infringing material between two parties to a contract are appropriate. Whether, a particular party is a "licensor of information" for contract law depends on the circumstances of the contract regarding its position with respect to affirmatively providing the information as part of its ordinary business, but that issue pertains to liability in reference to the licensee. It has no bearing on whether a passive transmission provider is liable for infringement to the owner of the intellectual property rights.

e. Limitations Period. The infringement warranty under this section does not extend to future performance. Nevertheless, Section 2B-705, establishes a limitations period for breach of non-infringement obligations that commences on the earliest of when the breach was or should have been discovered, rather than on delivery of the information.

2. Quiet Enjoyment. The warranty of quiet enjoyment was abolished in Article 2 for sales of goods and, thus, did not apply under prior law to software licenses. Paragraph (b)(1) reinstates that warranty for licenses and with respect to issues other than infringement. The licensor warrants that it will not interfere with the licensee's exercise of rights under the contract. This "quiet enjoyment" warranty reflects the licensor's implied commitment to not act for the term of the license in a manner that detracts from the grant to the licensee by interfering with the licensee's use. If reflects the judgment that the nature of the limited interest transferred in a license - the right to use the information - results in a need of the licensee for protection greater than that afforded to a buyer of goods. The warranty is limited to claims or interests that arise from acts or omissions of the licensor.

3. Exclusivity. Subsection (b)(2) deals with obligations that arise when the transaction is an exclusive license in the sense that it assures the licensee that it is the only person able to exercise the rights granted within the scope of the grant. "Exclusivity" pertains to two issues not relevant in non-exclusive licenses. The first involves the validity of the intellectual property rights. Validity corresponds to whether the information is in the public domain, i.e., the information under property law can be used or recreated by anyone. Validity is important if a licensee relies on the "exclusive" rights to create a product for third parties. An exclusive licensor warrants that the rights conveyed are not in the public domain.

The second issue involves whether a portion of the rights may be vested in another person because co-authors or co-inventors were involved. Alternatively, the transferor may have executed a prior license to a third party. In an exclusive license, the licensor warrants that this is not true. For non-exclusive licenses, the question of whether intellectual property rights are exclusive in the licensor is insignificant because it does not alter the end user's ability to continue to use the licensed rights without challenge.

Exclusivity and validity are warranted only to the extent recognized in law. Thus, the licensor of a trade secret warrants that it has not granted rights to another person, but does not warrant that no other person independently holds or may discover the secret information. A trade secret gives no rights against independent discovery and, thus, the warranty does not purport to claim that no one else knows or uses the secret information.

Subsection (c)(1) further reinforces this theme. If, under applicable law, the rights are subject to compulsory licensing, public access or use, the license warranty is limited by the terms of these rights. Thus, for example, a license of rights in information which, under applicable law, must be licensed to any other party for a specified fee, does not warrant exclusivity as to such rights. These off-setting rights, however, must be embodied in law, rather than in another contract.

4. International Issues. Intellectual property rights are territorial in character. They extend only within the territory of the state that creates them, although some deference internationally occurs through multi-lateral treaties. Subsection (c)(2) parallels this and provides that the obligations created about exclusivity and infringement extend only within this country and to a country specifically referenced in the license or warranty. Specification in the license of particular countries or "worldwide" in this sense refers only to specifications or representations made with express reference to the non-infringement warranty, such as "Licensor warrants non-infringement worldwide." Other references in a license may not be intended to create a warranty. For example, a grant of a license for worldwide use may in the circumstances be no more than a permission to use the information worldwide without risk of a lawsuit by the licensor, rather than a warranty that worldwide use will not infringe other rights. In the case of a "worldwide" warranty, the obligation extends only to countries that have property rights treaties with the United States. In the absence of such relationships, the rights created under United States law cannot create rights in the other country and, thus, the warranty cannot extend there.

5. Disclaimer. As with all other warranties, the warranties in the section can be disclaimed. This section provides for such disclaimer in language based on original Article 2. This requires specific language or circumstances indicating that the warranties are not given. Consistent with the general approach of contract law as a planning tool, illustrative language is provided. Subsection (d) limits the conditions under which the warranty of this section can be disclaimed or modified, it does not limit or preclude avoidance or modification of the hold harmless obligation that might arise under subsection (a). If the circumstances or language indicate no intent to hold harmless, that agreement is enforceable and this subsection does not require proof that the language is conspicuous.

SECTION 2B-402. EXPRESS WARRANTY.

(a) Subject to subsection (c), an express warranty by a licensor is created as follows:

(1) An affirmation of fact or promise 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 to be furnished under the agreement shall conform to the affirmation or promise.

(2) Any description of the information which is made part of the basis of the bargain creates an express warranty that the information shall conform to the description.

(3) Any 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 shall reasonably conform to the performance of the sample, model, or demonstration, taking into account such differences as would appear to a reasonable person in the position of the licensee between the sample, model, or demonstration and the information as it will be used.

(b) It is not necessary to the creation of an express warranty that the licensor use formal words such as "warrant" or "guarantee", or state a specific intention to make a warranty. However, an express warranty is not created by:

(1) an affirmation or prediction merely of the value of the information or informational rights;

(2) a display or description of a portion of the information to illustrate the aesthetics, market appeal, or the like, of informational content; or

(3) a statement purporting to be merely the licensor's opinion or commendation of the information or informational rights.

(c) This article does not alter or establish any standards under which an express warranty or an express contractual obligation for published informational content is created or not created. If an express warranty or contractual obligation is created for published informational content and is breached, the remedies of the aggrieved party are those pursuant to this article and the agreement.

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

Definitional Cross References.

"Aggrieved party": Section 1-201. "Agreement": Section 2B-102. "Information": Section 2B-102. "Informational content": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Party": Section 1-201. "Published informational content": Section 2B-102. "Remedy": Section 1-201. "Value": Section 1-201.

Reporter's Note:

1. Scope and Basis of Section. This section adopts original Article 2 law on express warranties, except with respect to published informational content, where it preserves current law. "Express" warranties rest on "dickered" aspects of the individual bargain and go so clearly to the essence of that bargain that, as indicated in Section 2B-406(a), words of disclaimer in a standard form cannot alter the dickered terms. "Implied" warranties, on the other hand, rest on a common factual situation or set of conditions so that no particular language is necessary to evidence them and they will exist unless disclaimed.

2. Basis of the Bargain. Subsection (a) adopts the "basis of the bargain" originally created in Article 2. This allows courts and parties to draw on a body of case law for distinguishing express warranties from puffing and other, unenforceable statements, representations or promises. While there are many factual issues, this standard provides better guidance than would an entirely new standard. The "basis of the bargain" concept is that express affirmations, promises and the like are enforceable as express warranties if they are within the matrix of elements that constitutes and defines the bargain of the parties, but that they are not express warranties if they are not part of that basis for the contract. The standard does not require that a licensee prove actual reliance on a particular statement, affirmation or promise in deciding to enter into the contract, but does require proof that the statement, affirmation or promise played a role in reaching or defining the bargain. This standard enables the creation of express obligations on the more general showing that statements about the information are part of the deal and basic to it. On the other hand, express warranty law deals with the elements of a bargain and is not a surrogate for regulation. It does not support imposing liability in contract for all statements of a licensor made about an information product, even if not brought to the attention of the licensee. This holds as well for advertising. If the licensee knows of the advertisement by the vendor and it became part of the basis of the bargain with the vendor, the advertisement may create an .

The question is whether statements of the licensor made to the licensee have in the circumstances and in objective judgment become part of the basic bargain. No specific intention to make a warranty is necessary. In actual practice affirmations of fact describing the information and made by the licensor about it during the bargain are ordinarily regarded as part of the description of the information unless they are mere puffing, predictions, or otherwise not an enforceable part of the bargain. No reliance on such statements need be shown in order to weave them into the fabric of the agreement. Rather, to take such affirmations, once made, out of the agreement requires clear affirmative proof. The issue normally is one of fact. This is true also of the question of whether product documentation may create an express warranty. Whether the documentation is reviewed before or after the initial deal, the test is the same. If it contains affirmations of fact or promises that otherwise qualify and it became part of the basis of the bargain, an express warranty may arise.

The question is whether language, samples, or demonstrations are fairly to be regarded as part of the contract. If language is used after the closing of the deal, (as when the licensee on taking delivery asks for and receives an additional assurance), the assurance may become a modification of the contract and does not need to be supported by further consideration if it is otherwise reasonable. Section 2B-304. Alternatively, under the layered contract formulation established in Article 2 and employed here, that assurance may simply be treated as a further elaboration of the actual terms of the contract.

3. Relation to Disclaimers. The basic principle is that the purpose of the law of warranty is o determine what it is that the licensor has in essence agreed to provide. A contract is normally a contract for something describable and described. These descriptions, if part of the bargain, are an express warranty. This article follows the general principle, as in original Article 2, that the obligations in a proven express warranty cannot other than in exceptional cases be materially deleted. A contract term generally disclaiming "all warranties, express or implied" cannot be given literal effect under Section 2B-406(a). This does not to mean that the parties, if they consciously desire, cannot make their own bargain as the desire, including a bargain that does not encompass the purported express warranty. But in determining what they have agreed upon consideration should be given to the fact that the probability is small that a real price is intended to be exchanges for a pseudo-obligation. Thus, for example, a contract for a "word-processing program" that contains the general disclaimer noted above is nevertheless a contract for an information product that meets the basic description of a "word-processing program."

4. Puffing and Expressions of Opinion. Subsection (b) retains current law to the effect that puffing or mere statements of opinion do not form an express warranty. The law on the distinction between an actionable representation and puffing is long and well-developed. The distinction requires a determination based on the circumstances of the particular transaction. It reflects that in common experience some statements and predictions cannot fairly be viewed as entering into the bargain. In transactions involving computer programs as with other commercial information, the closer the statement relates to describing the technical specifications, technical performance or product description of the information, the more likely it is to be an express warranty when communicated to the licensee, while the more the statement pertains to predictions about expected benefits that may result from use of the information, the more likely it will be found to be puffing. Of course, whether or not a statement is an express warranty does not affect whether the statement in context might yield a remedy under the law of fraud or misrepresentation.

Subsection (b) also refers to statements or demonstrations pertaining to aesthetics and market appeal. Aesthetics, as used here, refers to questions of the artistic character, tastefulness, beauty or pleasing character of the informational content, not to statements pertaining to how a person uses the information or to what is the essential nature of the information itself. Thus, for example, a statement that a clip art program contains easily useable images of "horses" or images of "working people," if it becomes part of the basis of the bargain, creates an assurance that the subject matter of the clip art program is horses or working people and that the images are usable. However, it does not purport to state that they are tasteful or artistically pleasing.

5. Advertising as a Source of Express Warranty. Paragraph (a)(1) provides that advertising may create an express warranty if the advertising statements otherwise conform to the standards for creation of an express warranty under this section. This expands the scope of express warranty law in some states. Statements made in advertising, of course, often reflect puffing or mere expressions of opinion and do not create an express warranty. As with other statements, a warranty arises only if the statement becomes part of the bargain and a bargain actually occurs. The affirmation of fact made in the advertising must be known by the licensee, influence and in fact become part of the basis of the bargain under which it acquired the information.

In the absence of that relationship, liability for false advertising, if any, would not be under contract law, but under tort or advertising law rules. This section does not create a false advertising claim under the guise of contract law.

6. Descriptions. Paragraph (a)(2) makes specific some of the principles described above about when a description of the information becomes an express warranty. The description need not be by words. Technical specifications, blueprints and the like can afford more exact descriptions that mere language and, if made part of the basis of the bargain, become express warranties. Of course, all descriptions by merchants must be read against the applicable trade usage and in light of the concepts of general rules as to merchantability resolving any doubts about the meaning of the description. The description requires a commercially reasonable interpretation.

7. Samples and Models. Subsection (a)(3) expands current Article 2 by expressly referring to express warranties created by demonstrations of information. In addition, subsection (a)(3) carries forward the Article 2 principle that express warranties may be created by descriptions, samples or models.

The basic treatment of samples, models and demonstrations is no different that the treatment of statements. Although the underlying principles are unchanged, the facts are often ambiguous when something is shown to be illustrative in nature. In merchantile experience, the mere exhibition of a "sample", a "model" or a "demonstration" does not of itself show whether it is merely intended to "suggest" or to "be" the character of the subject-matter of the contract.

Representations created by demonstrations and models must be gauged by what inferences would be communicated to a reasonable person in light of the nature of the demonstration, model, or sample. In the world of goods, showing a sample of a keg of raw beans by lifting out a cup-full communicates one inference, while a demonstration of a complex database program running ten files creates an entirely different inference if the ultimate intended use of the system is to process ten million files. This difference also applies to beta models of software which are used on a test or a demonstration basis and may contain elements that are not carried forward into the ultimate product. In such cases, the parties ordinarily understand that what is being demonstrated on a small scale or what is being tested on a beta model basis is not necessarily representative of actual performance or of what will eventually be the product. The basic rule, as with any other purported express warranty, is that any affirmation model or demonstration must be interpreted in a reasonable fashion that reflects the circumstances of the test or demonstration. The court's discussion in NMP Corp. v. Parametric Technology Corp., 958 F. Supp. 1536 (S.D. Okla. 1997) illustrates the issue in respect to software demonstrations.

8. Published Informational Content. Subsection (c) preserves current law for published informational content. This section does not create any express warranty for published informational content, but does not preclude the imposition of any liability under other law or the creation of an express contractual obligation. While there are many reported cases dealing with express warranties in goods and using the standards adopted here, no case law for published informational content uses Article 2 standards. See Joel R. Wolfson, Express Warranties and Published Informational Content under Article 2B: Does the Shoe Fit?, 16 John Marshal Journal of Computer & Info. Law 384 (1997). This subject matter entails significant First Amendment interests and general public policies that favor encouraging public dissemination of information. Courts that deal with liability pertaining to published informational content must balance contract themes with these more general social policies.

This section leaves undisturbed existing law dealing with how obligations are established with reference to published informational content. The cases tend to deal with obligations of this type as questions of express contractual obligation, rather than in language relating to warranties. Thus, a promise to provide an electronic encyclopedia obligates the party to deliver that type of work and is not fulfilled by delivery of a computerized work of fiction. In other cases where the issues focus on the quality of the content or the like, courts if inclined to find contract liability will do so under general contract law theory. Many, however, will conclude that the level of risk in the published informational content situation and the potentially stifling effect that contract liability might have on the dissemination of speech should lean toward limiting or excluding liability. See Daniel v. Dow Jones & Co., Inc., 520 N.Y.S.2d 334 (N.Y. City Ct. 1987). In some other cases, liability may arise under tort law theories, such as in Hansberry v. Hearst, 81 Cal. Rptr. 519 (Cal. App. 1968). However, this section rejects the seemingly simple, but ultimately inappropriate step of merely adopting Article 2 concepts from sales of goods to this much different context. That would risk a large and largely unknown change of law and over-reaching of liability in a sensitive area. It would create uncertainty that would in itself chill public dissemination informational content while courts grapple with adapting entire new standards of liability to this area.

Where there is a contract obligation that is breached, the remedies of this article apply and replace remedies under common law for breach of contract. This includes all provisions of Part 7 of this article, including standards that measure and exclude or limit damages.

9. Third Parties. This section deals with express warranties made by the licensor to its licensee. It does not deal with the enforceability under contract or tort theory of representations made by remote parties and relied on by an ultimate user of the information. The case law in tort dealing with such issues pertaining to information does not generally parallel cases dealing with the manufacture and sale of goods. Information providers have been held liable to third parties in only a few, atypical cases. This article does not expand or exclude such third party liability, however it may develop under tort law.

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

(a) Unless the warranty is disclaimed or modified, a merchant licensor of a computer program warrants:

(1) to the end user that the computer program is reasonably fit for the ordinary purpose for which it is distributed;

(2) to a distributor that:

(A) the program is adequately packaged and labeled as the agreement or the circumstances may require; and

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

(3) that the program conforms to the promises or affirmations of fact made on the container or label, if any.

(b) Unless disclaimed or modified, other implied warranties may arise from course of dealing or usage of trade.

(c) A warranty created under this section does not apply to informational content, including its aesthetics, market appeal, accuracy, or subjective quality, whether or not included in or created by a computer program.

Uniform Law Source: Section 2-314; 2A-212. Revised.

Definitional Cross References.

"Agreement": Section 1-201. "Computer program": Section 2B-102. "Contract": Section 1-201. "Delivery": Section 2B-102. "Informational content": Section 2B-102. "Licensor". Section 2B-102. "Merchant". Section 2B-102.

Reporter's Notes:

1. Background and Policy. This section generally applies the Article 2 warranty of merchantability to computer programs. Since it applies to all computer programs provided by a merchant, it creates a merchantability warranty for cases that under prior law are services contracts with no warranties or with obligations limited to making a reasonable effort and exercising ordinary care. The merchantability warranty does not depend on how the program is delivered, whether it be electronically or in a tangible copy. It flows from the presumed nature of a commercial undertaking in which the supplier of the program is a merchant dealing with that type of information. Disclaimer or modification of the warranty of merchantability or any part of the warranty is dealt with in Section 2B-406.

Article 2B warranties stem from a combining of three different legal traditions. One is from Article 2 and focuses on the quality of the product, creating an implied warranty that the result delivered will conform to ordinary standards for products of that type. The second is from common law dealing with licenses, services and information contracts, which in many states focuses on the process or performance effort, rather than the result. The third is from common law pertaining to services in some states and information contracts. It disallows implied obligations of accuracy in information transferred other than in a special relationship of reliance. In this and the following section, Article 2B distinctions are drawn between computer programs, on the one hand, and information or services, on the other hand.

The implied merchantability warranty and the warranty in Section 2B-404 pertaining to the accuracy of data may both apply to the same transaction and the same information product. The one applies to the program and its functions, while the other applies to the accuracy of data in an appropriate relationship.

2. Merchantability. The content of the merchantability obligation turns basically on the meaning of the terms of the agreement as recognized in the applicable business, trade or industry. A computer program delivered under an agreement by a merchant must be of a quality fit for the purpose for which it was distributed. The implied warranty is made by all merchant-licensors. It does not apply to non-merchants. Non-merchants, however, like merchants, are obviously subject in appropriate cases to claims grounded in fraud or other theories premised on misrepresentation.

a. Concept of Merchantability. Merchantability does not require perfection, but the concept is that the subject matter of the warranty must fall generally within the average standards applicable in commerce for information of the type.

In 1998, a popular operating system program for small computers used by both consumers and commercial licensees contained over ten million lines of code or instructions. In the computer these instructions interact with each other and with code and operations of other programs. This contrasts with a commercial jet airliner popular in that year that contained approximately six million parts, many of which involved no interactive function. A typical consumer goods product contains fewer than one hundred parts. A typical book has fewer than one hundred fifty thousand words. In the software environment, it is virtually impossible to produce software of complexity that contains no errors in instructions that intermittently cause the program to malfunction, so-called "bugs." The presence of errors in general commercial products is fully within common commercial expectation. Indeed, in programs of complexity, the absence of errors would be unexpected. In this commercial environment, the contract law issue is whether the level of error exceeds the bounds of ordinary merchantability. This occurs only if the significance of the errors or their number lies outside ordinary commercial expectations for the particular type of program.

b. Fit for Ordinary Purposes. The program must be fit for the ordinary purpose for which it is distributed. Ordinary purposes focuses on expected end user applications of the type to which the product as distributed was addressed. To an extent greater than in reference to sales of goods, computer programs are often adapted to and employed in ways that go well beyond the uses expected when the distribution occurs. Use of ordinary, mass-market database programs in the context of highly sensitive or commercial applications does not change the warranty into one assuring fitness for ordinary purposes of such use. The focus is to the market and types of uses to which the program is directed. Ordinarily, of course, that also defines the ordinary actual use of the program. In any event, to be fit for ordinary purposes does not require that the program be the best fit or the perfect application for that use. If the transfer is to a person acquiring the program for re-distribution by sale, the program must be honestly resellable because it is what it purports to be.

3. Aesthetics. Subsection (c) makes clear a rule that would apply in any event. Merchantability does not apply to the aesthetics of a product under this article. Aesthetics, as used here, refer to questions of the artistic character, tastefulness, beauty or pleasing nature of informational content. These are matters of personal taste, rather than elements of any standard of merchantability. On the other hand, merchantability standards are appropriately addressed to whether the information is what its description purports it to be and to whether it is or is not useable by the transferee. Thus, for example, if the complaint about the images created by a program is that they are not attractive, merchantability does not apply. If the complaint is that the commands and images are blurred and not useable, an issue of merchantability exists. A statement that a clip art program contains images of "horses" creates an assurance that the subject matter of the clip art program is horses or working people and that the images are usable. It does not purport to state that they are tasteful or artistically pleasing or whether they are brown, beige, white or green.

4. Cause of Action for Breach. In a cause of action for breach of warranty, as with all products, it is of course necessary to show not only the existence of the warranty, but that the warranty was broken and that the breach of the warranty was the proximate cause of the loss sustained. In such an action, in complex computer systems involving different hardware and software, the loss must be connected to defects in the computer program for which a breach of warranty is claimed. Proof that losses were caused by events after the program was installed and unconnected to it operate as a defense.

SECTION 2B-404. IMPLIED WARRANTY: INFORMATIONAL CONTENT.

(a) Unless the warranty is disclaimed or modified, a merchant that, in a special relationship of reliance with a licensee, collects, compiles, processes, provides, or transmits informational content, warrants to its licensee that there is no inaccuracy in the informational content caused by the merchant's failure to perform with reasonable care.

(b) A warranty does not arise under subsection (a) with respect to:

(1) published informational content; or

(2) a person that acts as a conduit or provides only editorial services in collecting, compiling, or distributing informational content identified as that of a third person.

(c) The warranty under this section does not come within Section 1-102(3).

Uniform Law Source: Restatement (Second) of Torts 552.

Definitional Cross References.

"Informational content". Section 2B-102. "Licensee". Section 2B-102. "Merchant". Section 2B-102. "Party". Section 1-201. "Published informational content". Section 2B-102.

Reporter's Notes:

1. Scope and Effect. This section recognizes a new implied warranty present in some informational content contracts, consulting, data processing or similar agreements. The warranty focuses on the accuracy of data, but does not create an absolute liability or absolute assurance of no inaccuracy. Instead, it creates a protected assurance in such contracts that no inaccuracies are caused by a failure of reasonable care. This section does not create a non-disclaimable duty of reasonable care.

2. Accuracy. A party that provides or processes information in a special relationship of reliance warrants that no inaccuracy exists due to the provider's lack of reasonable care in performing its obligations under the contract.

a. Ordinary Standards as Described. The presence of an inaccuracy relates to expectations gauged by ordinary standards of the relevant trade under the circumstances. In most large commercial databases, ordinary expectations assume that some data will be inaccurate. Variations or error rates within the range of commercial expectations of the business, trade or industry do not breach the warranty established in this section. If greater than ordinary accuracy is desired that desire must be expressed in the terms of the agreement and provide for greater than normal expectations of accuracy. For example, if in reference to a particular type of database the normal expected error rate is twenty percent, an error rate of fifteen percent does not create an inaccuracy within this section and does not breach the warranty. On the other hand, if in a database of thousands of medical treatments for various allergic reactions the commercial expectation is that the error rate should be no more than three percent, an error rate of ten percent may create an inaccuracy that results in breach of this implied warranty if caused by a failure to exercise reasonable care in compiling the information.

In addition, inaccuracy is gauged by reference to what the data purport to be under the agreement. This section follows cases such as Lockwood v. Standard & Poor's Corp., 175 Ill.2d 529, 689 N.E.2d 1140, 228 Ill.Dec. 719 (Ill. App. 1997). A contract to estimate the number of users of a product in Houston does not imply an obligation to provide an accurate count, but merely requires an estimate. That estimate, if honestly made and given cannot breach this warranty.

b. Accuracy and Aesthetics. The warranty is that information is not inaccurate because of a lack of reasonable care. Informational content is accurate if, within applicable understandings of the level of permitted errors, the informational content correctly portrays the objective facts to which it relates. This warranty is not a warranty about the aesthetics, subjective quality, or marketability of informational content. These are subjective issues. Assurances on these issues require express agreement to give such assurances.

c. Adequate Results. One who hires an expert for purposes of consultation or data-related services relying on that expert's skills cannot expect infallibility. As under common law, reasonable efforts, not perfect results, provide the appropriate standard in the absence of express contract terms to the contrary. The analysis of the New York court in an analogous setting indicates the policy for the rule adopted here for those who collect, compile or process informational content. Milau Associates v. North Avenue Development Corp., 42 N.Y.2d 482, 398 N.Y.S.2d 882, 368 N.E.2d 1242 (N.Y. 1977).

3. Merchants in a Reliance Relationship. The implied warranty arises only if the licensor is a merchant with respect to the particular activity. In addition, the information must have been provided in a "special relationship of reliance" between the licensor and the licensee. If the absence of such relationship, the mere fact that one person provides information to another creates no implied obligation beyond good faith.

a. Reliance Relationships. The requirement of a special relationship of reliance is fundamental to the implied obligation and to balancing the interest of protecting client expectations while not imposing excessive liability risk on informational content providers in a way that might chill their information-providing activities. This stems in part from cases applying Restatement (Second) of Torts § 552. The special element of reliance comes from the relationship itself, a relationship characterized by the provider's knowledge that the particular licensee plans to rely on the data in its own business and expects that the provider will tailor the information to its needs. The obligation arises only for those persons who possess unique or specialized expertise, or who are in a special position of confidence and trust with the licensee such that reliance on the inaccurate information is justified and the party has a duty to act with care. See Murphy v. Kuhn, 90 N.Y.2d 266, 682 N.E.2d 972 (N.Y. 1997).

The relationship also requires that the provider make the information available as part of its own business in providing such information. The licensor must be in the business of providing that type of information. This adopts the rationale of cases holding that information provided as part of a differently focused commercial relationship, such as the sale or lease of goods, does not create protected expectations about accuracy except as might be created under warranty law. The court in A.T. Kearney v. IBM, 73 F.3d 238 (9^th Cir. 1997) describes many of the relevant issues. See also Picker International, Inc. v. Mayo Foundation, 6 F. Supp.2d 685 (ND Ohio 1998).

An equally fundamental aspect of a special reliance relationship is that the information provider is specifically aware of and personally tailors information to the needs of the licensee. A special relationship does not arise for information made generally available to a group in standardized form even if those who receive the information subscribe to an information service they believe relevant to their commercial needs. The information must be personally tailored for the recipient. The transaction involves more than merely making information available. It does not require a fiduciary relationship, but does require indicia of special reliance.

b. Published Informational Content. The implied warranty does not apply to published informational content. By definition, published informational content is information transferred other than in a reliance relationship. Published informational content is informational content made available to the public as a whole or to a range of subscribers on a standardized, rather than personally tailored basis. This includes a wide variety of commercially important general distribution or subscription services providing informational content. It includes, for example, an Internet Website listing information of local restaurants, their prices and their quality, as well as services that provide data about current stock or monetary exchange prices to subscribers.

Published informational content is the subject matter of general commerce in ideas, political, economic, entertainment or the like, whose distribution entails fundamental public policy interests in supporting distribution and not chilling this process through liability risks. In the new technology era to which this article is addressed, many information systems analogous to newspapers, magazines, or books and are made available digitally or in on-line arrangements. Their traditional counterparts have never been exposed to contractual liability risks based on claims of mere inaccuracy and treating the new systems differently would reject the wisdom of prior law. A computerized database is the "functional equivalent of a traditional news service." These services have no contractual liability for mere inaccuracies in data in part because ordinary expectations anticipate the presence of errors and in part because of fundamental public policies supporting the free flow of information and free expression. Creating and applying a lower standard that creates greater liability for an electronic data provider than applies to a public library, book store, or newsstand would place an undue burden on the free flow of information. This policy underlies the results in Cubby, Inc. v. CompuServ, Inc., 3 CCH Computer Cases 46,547 (S.D.N.Y. 1991) and in Daniel v. Dow Jones & Co., Inc., 520 N.Y.S.2d 334 (N.Y. City Ct. 1987).

4. Reasonable Care. The primary obligation is that there is no inaccuracy in the data. An inaccuracy in informational content, however, creates no liability unless the inaccuracy results from a failure to exercise reasonable care. This corresponds to common law standards in many states for implied obligations in contracts involving services or information content. What constitutes reasonable care depends on the circumstances. Where the nature of the subject matter involves significant risks of personal injury if data are inaccurate, a higher degree of care can be expected than in situations in which the recipient reasonably should have other sources and judgments that will influence its decision, rather than mere reliance on the specific information provided in a transaction within this section.

5. Conduits and Editing.. The implied warranty applies only to information provided by the licensor. Subsection (b) clarifies that there is no warranty with respect to third party content where the provider identifies the information as coming from that third party. The implied warranty does not apply to parties engaged in editing informational content of another person. See Doubleday & Co. v. Curtis, 763 F.2d 495 (2d Cir.), cert. dismissed, 474 U.S. 912 (1985); Windt v. Shepard's McGraw-Hill, Inc., 1997 WL 698182 (ED Pa. Nov. 5, 1997)

A person collecting, summarizing or transmitting the third party data acting as a conduit does not create the same expectations about performance as does a direct information provider. Whatever expectations arise focus on the third party identified as the originator of the information. In these cases, however, that third party may not be contractually obligated to the licensee. Whether or not a contract exists, however, the conduit's obligation and the licensee's reasonable expectations with respect to it do not entail an obligation regarding the accuracy of the third party data. Concerning the policy issues in dealing with conduits, see Zeran v. America On-Line, Inc., 129 F.3d 327 (4^th Cir. 1997). Merely providing a conduit for third party data should not create an obligation to ensure the care exercised in reference to the data provided by the third party. On the related issue of tort liability for publishers who are not also authors, Winter v. G.P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991) (describes policy interests that also support subsection (b)).

6. Relationship to Tort Law. Since this section creates a new warranty analogous to the theory of negligent misrepresentation, disclaimer or non-existence of the implied warranty should have a strong bearing on potential existence of the tort claim in the same transaction. In cases involving economic loss, a disclaimer of this warranty in most cases forecloses a tort claim based on the same facts. However, this section does not foreclose development of other approaches to liability for information products under tort law. Most courts have held that published information products are not products for purposes of a product liability claim and that there is little or no duty of reasonable care owed to third parties in screening advertising or similar material for publication. See Winter v. G.P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991). There are cases to the contrary on both points, however. Since these are issues under tort law, this article neither precludes nor encourages further exploration of the tort law questions.

7. Disclaimer. This warranty may be disclaimed pursuant to Section 2B-406. For an analogous case under common law, see Rosenstein v. Standard and Poor's Corp., 636 N.E.2d 898 (Ill. App. 1993). The warranty is that there are no inaccuracies in the information caused by a lack of care. It is, therefore, not subject to the general rule that duties of reasonable care cannot be disclaimed by contract. Section 1-102. What is disclaimed is a warranty related to the accuracy of the content, not the exercise of reasonable care with respect to the information. That disclaimer is not affected by Section 1-102. No obligation of reasonable care is created under this section.

SECTION 2B-405. IMPLIED WARRANTY: LICENSEE'S PURPOSE; SYSTEM INTEGRATION.

(a) Unless the warranty is disclaimed or modified, if a licensor at the time of contracting has reason to know any particular purpose for which the information is required and that the particular licensee is relying on the licensor's skill or judgment to select, develop, or furnish suitable information, the following rules apply:

(1) Except as otherwise provided in paragraph (2), there is an implied warranty that the information is be fit for that purpose.

(2) If from all the circumstances, it appears that a licensor was to be paid for the amount of its time or effort regardless of the fitness of the resulting information, the implied warranty is that the information will not fail to achieve the licensee's particular purpose as a result of the licensor's lack of reasonable care.

(b) There is no warranty under subsection (a) with regard to:

(1) the aesthetics, market appeal, or subjective quality of informational content; or

(2) published informational content, but there may be a warranty with regard to the licensor's selection among published informational content from different providers.

(c) If an agreement requires a licensor to provide or select a system consisting of computer programs and goods, and the licensor has reason to know that the licensee is relying on the skill or judgment of the licensor to select the components of the system, there is an implied warranty that the components provided or selected will function together as a system.

(d) The warranty under this section is not governed by the limitations does not come within Section 1-102(3).

Uniform Law Source: Section 2-315; 2A-213. Substantially revised.

Definitional Cross References.

"Agreement": Section 1-201. "Computer program": Section 2B-102. "Information": Section 2B-102. "Informational content": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Published informational content": Section 2B-102. "Reason to know": Section 2B-102

Reporter's Note:

1. General Approach. This section reconciles diverse case law and, in subsection (c), recognizes a new implied warranty. Subsection (a)(1) states as a general rule that in some cases reliance creates an implied warranty of fitness for the licensee's particular purpose. Subsection (a)(2) applies the common law "efforts" standard in other cases. This bifurcation deals with the issue of whether the appropriate implied obligation is an obligation to produce a result (present in sales of goods) or an obligation to make an effort to achieve a result (common law). Under prior case law in software and other fields, the decision is based on whether a court views the transaction as a sale of goods (result) or a contract for services (effort). The reported decisions are split and often lack a principled basis for distinction.

2. Warranty of Fitness. Subsection (a)(1) follows original Section 2-315. Whether or not this warranty arises in any individual case is basically a question of fact to be determined by the circumstances at the time of contracting. A "particular purpose" differs from the ordinary purpose for which the information is used in that it envisages a specific use by the licensee which is peculiar to the nature of its business whereas the ordinary purposes for which information products are used are those envisaged in the concept of merchantability. Although normally this warranty arises only if the licensor is a merchant with appropriate "skill or judgment," if the circumstances justify the warranty it may be appropriate in the case of a non-merchant licensor.

The warranty does not exist if there is no reliance in fact or if the particular purposes are not made known to the licensor. This warranty requires particularization of the needs of the licensee in the context.

No express exclusion is made for cases where the information product is identified by a trade name. The designation of an item by a trade name, or indeed in any other definite manner, is only one of the facts to be considered on the question of whether the licensee actually relied on the licensor, but it is not of itself decisive of the issue. However, if the licensee is insisting on a particular brand, it is not relying on the licensor's skill or judgment is making the selection and no warranty results. But the mere fact that the product acquired has a known trade name is not sufficient in itself to indicate nonreliance if it was recommended by the licensor. A similar principle is expressly stated in subsection (b)(2) relating to the selection from among various publishers.

The warranty obligates the licensor to meet known licensee needs if the circumstances indicate that the licensee is relying on the provider's expertise to achieve this result. There are many development contract and other situations where no reliance exists, including cases where the licensee provides the contract performance standards, rather than relying on the provider to fill needs of the licensee. The express terms of the agreement require that the product meet the specifications, but no reliance exists on whether fulfilling the specifications will meet applicable needs.

3. Services Warranty. Subsection (a)(2) applies to cases that more closely resemble services contracts and carries forward the type of implied obligation most appropriate in such cases. The subsection recognizes that a skilled service provider does not guaranty a result suitable to the other party unless it expressly agrees to do so. Milau Associates v. North Avenue Development Corp., 42 N.Y.2d 482, 398 N.Y.S.2d 882, 368 N.E.2d 1242 (N.Y. 1977). Subsection (a)(2) provides a standard to determine when a contract calls for services and effort, rather than result. The test centers on whether the circumstances indicate that the service provider would be paid for time or effort, regardless of the fitness of the result. Such payment terms typify a services contract. Other standards evolved under general common law may also indicate that the parties intended a services obligation as delineated in subsection (a)(2). What constitutes reasonable care or effort depends on the project involved and other circumstances of the relationship. Micro Manager, Inc. v. Gregory, 147 Wisc.2d 500, 434 N.W.2d 97 (Wisc. App. 1988).

4. Aesthetics and Published Information. Subsection (b) makes clear that the warranty does not apply to published informational content or to aesthetics associated with the information. Aesthetics, as used here, refer to questions of the artistic character, tastefulness, beauty or pleasing nature of informational content. These are matters of personal taste, rather than elements of any standard of implied warranty. On the other hand, warranty standards are appropriately addressed to whether the information is what its description purports it to be and to whether it is or is not useable by the transferee. Thus, for example, if the complaint about images created by a program is that they are not attractive, no implied warranty applies. If the complaint is that the commands and images are blurred and not useable, a warranty issue may exist.

5. System Integration. Subsection (c) creates a new implied warranty that requires systems performance in cases of systems integration contracts. While related to the implied fitness warranty, it expands that concept creating new protection for licensees. The warranty is that the selected components will function as a system. This does not mean that the system, other than as stated in subsection (a), will meet the licensee's needs. Neither does it mean that use of the system does not or may not infringe third party rights. This warranty simply creates an assurance that the parts will functionally operate as a system. This is an additional assurance beyond the fact that each component must be separately functional.

SECTION 2B-406. DISCLAIMER OR MODIFICATION OF WARRANTY.

(a) Words or conduct relevant to the creation of an express warranty and words or conduct tending to disclaim or modify an express warranty must be construed wherever reasonable as consistent with each other. Subject to Section 2B-301 with regard to parol or extrinsic evidence, the disclaimer or modification is inoperative to the extent that this construction is unreasonable.

(b) Except as otherwise provided in subsections (c), (d), and (e), to disclaim or modify an implied warranty or any part of it, but not the warranty in Section 2B-401, the following rules apply:

(1) To disclaim or modify an implied warranty arising under Section 2B-403 language must mention "merchantability", or "quality", or use words of similar import. To disclaim or modify an implied warranty arising under Section 2B-404, language must mention "accuracy", or use words of similar import.

(2) Language to disclaim or modify an implied warranty arising under Section 2B-405 must be in a record. It is sufficient to state "There is no warranty that this information or efforts will fulfill any of your particular purposes or needs", or words of similar import.

(3) Language is sufficient to disclaim all implied warranties if it individually disclaims each implied warranty or, except for the warranty in Section 2B-401, if it states "Except for express warranties stated in this contract, if any, this [information] [computer program] is being provided with all faults, and the entire risk as to satisfactory quality, performance, accuracy, and effort is with the user", or words of similar import.

(4) Language that is sufficient under Article 2 or 2A to disclaim or modify an implied warranty of merchantability is sufficient to disclaim or modify the warranties under Sections 2B-403 and 2B-404. Language that is sufficient under Article 2 or 2A to disclaim or modify an implied warranty of fitness for a particular purpose is sufficient to disclaim or modify the warranties under Section 2B-405.

(5) In a mass-market transaction, language in a record that disclaims or modifies an implied warranty must be conspicuous.

(c) Unless the circumstances indicate otherwise, all implied warranties, but not the warranty in Section 2B-401, are disclaimed by expressions like "as is" or "with all faults" or other language that in common understanding call the licensee's attention to the disclaimer of warranties and makes plain that there are no implied warranties.

(d) When the licensee before entering into the contract has examined the information or the sample or model as fully as it desired or it has refused to examine the information, there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to the licensee.

(e) An implied warranty may can also be disclaimed or modified by course of performance, course of dealing, or usage of trade.

(f) If a contract requires ongoing performance or a series of performances by the licensor, language of disclaimer or modification which complies with this section is effective with respect to all performances under the contract.

(g) Remedies for breach of warranty may be limited in accordance with this article.

Uniform Law Source: Section 2A-214. Revised.

Definitional Cross References.

"Computer program": Section 2B-102. "Conspicuous": Section 2B-102. "Contract": Section 1-201. "Information": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Mass-market license": Section 2B-102. "Record": Section 2B-102.

Reporter's Note:

1. General Structure and Policy. This section brings together various rules relating to the disclaimer of warranties, except for the statutory warranties under Section 2B-401. The general approach corresponds to existing Article 2 and Article 2A. This article does not alter consumer protection statutes which in some states preclude disclaimer of warranties in consumer cases. See Section 2B-105. With respect to implied warranties, this section follows fundamental policies of U.S. law which recognize that parties may disclaim or limit warranties. Implied warranties are default rules whose contractual disclaimer and limitation is integral to the contract choice paradigm under which commerce occurs and to the ability of a party to control the risk it elects to undertake.

2. Express Warranties. Subsection (a) restates original Article 2. It uses modern language of "disclaimer" and "modification," rather than prior Article 2 language, without substantive change. General language of disclaimer cannot alter or avoid express warranties. While courts should construe contract terms of disclaimer and language of express warranty as consistent with each other whenever reasonable, in cases of inconsistency, the express warranty language controls. In effect, express warranties cannot be disclaimed, but as always, the parties' agreement controls. For example, the language of the agreement, including language styled as a disclaimer, may indicate that a purported warranty did not in fact become part of the basis of the bargain and is not, therefore, an express warranty.

Express warranties arise in various ways, including by description of the information itself. Since they cannot be disclaimed, express product descriptions are an important balance in contracts that comprehensively disclaim all implied warranties. The information must conform to its express description. A word processing system for a particular computer system that is delivered with a disclaimer of all implied warranties, must still meet the express warranty describing it as a "word processing" program for a particular type of hardware. However, that goes less to quality of the program than to the fact of the program if without content being a program.

While express warranties survive general disclaimers, the licensor is protected against unfounded claims of oral express warranties by the provisions of this article on parol and extrinsic evidence and the terms of its contract, and against unauthorized representations by the law of agency. Remedies for breach of an express warranty are dealt with in other sections of this article and may be modified in accordance with this article.

3. Disclaimers and Fraud. This article does not alter the law of fraud. In some cases, liability for fraud may arise despite the presence of a general disclaimer of warranties. Thus, if the licensor makes an intentional misrepresentation of an existing material fact on which the licensee reasonably relied, it may be liable for fraud even though such disclaimer eliminates contractual warranty liability. A failure to disclose known material problems in a product being provided pursuant to a license may constitute fraud if an obligation to disclose arises under that law. The court's discussion in Strand v. Librascope, Inc., 197 F. Supp. 743 (E.D. Mich. 1961) illustrates one such circumstance. While general disclaimers do not foreclose liability for intentional fraud in most states, disclaimers or other denials of obligation specific to the particular facts may foreclose a claim in fraud because they eliminate the element of fraud that requires reasonable reliance on a material misrepresentation.

4. Disclaimer of Implied Warranties in a Record. Subsection (b) brings together various provisions on disclaimer of implied warranties. These rules are subject to the provisions of subsections (c), (d) and (e).

a. When a Record is Required. This article follows original Article 2. Disclaimer of the implied warranty of merchantability is not required to be in a record, nor is a disclaimer of a warranty in Section 2B-404 required to be in a record. However, as in original Article 2, the rule is different for disclaimer of the "fitness" warranty. This must be in a record, except in cases governed by subsections (c), (d) or (e).

b. Merchantability and Accuracy Warranties. Under subsection (b)(1), to disclaim the warranty of merchantability or accuracy of data, the disclaimer must mention merchantability or accuracy, or use words of similar import. Use of the specific term "merchantability" is allowed, but not required. The use of alternative words, of course, must in fact communicate the nature of the disclaimer. The other language suffices if it reasonably achieves the purpose of clearly indicating that the warranty is not given in the particular case.

c. Conspicuousness. Subsection (b)(5) requires that if language of disclaimer is in a record, that language must be conspicuous in cases involving a mass-market license. This provides additional protection against surprise in such retail market environments. Article 2B does not require that the language be conspicuous in other types of transaction. Outside the mass market, benefits of requiring conspicuous language are off-set by the trap created for persons drafting contracts and the difficulty of reliably meeting this requirement in electronic commerce. Also, unlike what might have been expected when original Article 2 developed, implied warranties are routinely disclaimed in modern commercial transactions. Original Article 2 requires a conspicuous disclaimer only if the disclaimer is in writing.

d. Fitness Warranty. Subsection (b)(2) provides language adequate to disclaim the warranty under Section 2B-405. The language is more explicit than under Article 2, but use of the specific language is not mandatory. This language works, but other language may also be sufficient if it reasonably achieves the purpose of indicating that the warranty is not given.

e. Disclaimer of All Warranties. Subsection (b)(3) recognizes that in some cases all implied warranties are disclaimed. The subsection sets out language sufficient for this purpose. The disclaimer of all warranties using this language is, of course, subject to the requirement of a record and, in the case of mass-market transactions, the requirement that the disclaimer be conspicuous.

f. Article 2 and 2A Disclaimers. Subsection (b)(4) provides for cross-article validity of disclaimer language. The intent is to avoid requiring parties to make a priori determinations about Article 2B or Article 2 (or 2A) coverage particularly when "mixed" transactions will be increasingly common. Language adequate to disclaim a warranty under one of these articles is adequate to disclaim the equivalent warranty under Article 2B.

4. Disclaimers of Implied Warranties By the Circumstances. Subsections (c), (d) and (e) deal with common factual situations in which the circumstances of the transaction are in themselves sufficient to call the licensee's attention to the fact that no implied warranties are made or that a certain implied warranty is being excluded.

a. "As is" Disclaimers. This provision follows original Article 2. Terms such as "as is" and "with all faults" in ordinary commercial usage are understood to mean that the licensee takes the entire risk as to the quality of the information involved. The terms here are in fact merely a particular application of subsection (e) which provides for exclusion of modification of implied warranties by usage of trade. They provide an important means of conducting business in many areas of commerce. They also accommodate electronic commerce which may require in many contexts "short" or summary terms defining the contract because of limited space in records. The language need not be in a record.

b. Excluding Warranties by Inspection. Subsection (d) also follows original Article 2. Implied warranties may be excluded or modified by the circumstances where the licensee examines the information or a sample or model of it before entering into the contract. "Examination" as used in subsection (d) is not synonymous with inspection before acceptance or at any other time after the contract has been made. It goes rather to the nature of the responsibility assumed by the licensor at the time of the making of the contract. Of course if the buyer discovers the defect and uses the information anyway, of if it unreasonably fails to examine the information before using it, resulting damages may be found to result from his own action rather than from a breach of warranty. It goes to the nature of the obligation undertaken by the licensor at the time of the transaction.

In order to bring the transaction within the scope of the "refused to examine" language of this subsection, it is not sufficient that the information merely be available for inspection. There must in addition be a demand or offer by the licensor that the licensee examine the information. This puts the licensee on notice that it is assuming the risk of defects which the examination ought to reveal.

Application of the doctrine of "caveat emptor" in all cases where the buyer examines the goods regardless of statements made by the seller is, however, rejected. Thus, if the offer of examination is accompanied by words as to their merchantability or specific attributes and the buyer indicates clearly that he is relying on those words rather than on his examination, they may give rise to an "express" warranty. In such case the question is one of fact as to whether a warranty of merchantability has been expressly incorporated in the agreement. Disclaimer of such an express warranty is governed by subsection (a).

The particular licensee's skill and the normal method of examining information in the circumstances determine what defects are excluded by the examination. A failure to notice defects which are obvious cannot excuse the licensee. However, an examination under circumstances which do not permit extensive testing would not exclude defects that could be ascertained only by such testing. A merchant licensee examining a product in its own field will be held to have assumed the risk as to all defects which a merchant in the field ought to observe, while a non-merchant licensee will be held to have assumed the risk only for such defects as an ordinary person might be expected to observe.

c. Course of Dealing, etc. Subsection (e) is from original Article 2. It permits disclaimer or other elimination of implied warranties by course of performance, course of dealing or usage of trade. It is consistent with the U.C.C. concept of practical construction of contracts established under Article 2 and continued in this article.

d. Detailed Specifications. If a licensee gives precise and complete specifications, this is a frequent circumstances by which the implied performance warranties may be excluded. The warranty of fitness will not normally apply because there is usually no reliance on the licensor. The warranty of merchantability in such a transaction must be considered in connection with Section 2B-408 on cumulation and conflict of warranties. As in Article 2, in the case of an inconsistency, the implied warranty of merchantability is displaced by any express warranty that the information will conform to the specifications. Thus, if the licensee gives detailed specification as to the information, neither the implied warranty of fitness nor the implied warranty of merchantability normally will apply unless consistent with the specifications.

SECTION 2B-407. MODIFICATION OF COMPUTER PROGRAM. A licensee that modifies a copy of a computer program, other than by using a capability of the program intended for that purpose in the ordinary course, does not invalidate any warranty regarding performance of an unmodified copy, but does invalidate any warranties, express or implied, regarding performance of the modified copy. A modification occurs if a licensee alters code in, deletes code from, or adds code to the computer program.

Definitional Cross References.

"Computer program". Section 2B-102. "Copy". Section 2B-102. "Licensee". Section 2B-102.

Reporter's Notes:

1. Scope of Section. This section deals with the effect of modifications in computer program code on the continued existence of performance warranties that might extend to the modified program. The rule applies only to the modified copy. If the defect existed in the unmodified copy, the modifications have no effect. Modifications other than changes made using an aspect of the program intended for that purpose eliminate any performance warranties extending to the modified copy. This applies only to warranties related to the performance of software. It does not apply to title and non-infringement warranties.

The basis for the rule in this section lies in the fact that because of the complexity of software systems, changes may cause unanticipated and uncertain results. The complexity of software means that it will often not be possible to prove to what extent a change in one aspect of a program altered its performance as to other aspects.

2. Application. The section voids the warranties unless the agreement indicates that modification does not alter performance warranties. The section covers cases where the licensee makes changes that are not part of the program options. Thus, if a user employs the built-in capacity of a word processing program to tailor a menu of options suited to the end user's use, this section does not apply. If, on the other hand, the end user modifies code in a way not made available in the program options, that modification voids any performance warranties as to the altered copy.

This section does not apply where the parties jointly work on development of a program, with each being authorized by the agreement to change code created by the other or created by both parties. Who constitutes the licensor in such cases is not clear, but the joint project characteristic takes the case out of this section. What warranties arise in the joint development context is determined by whose is the licensor and by the agreement of the parties, which agreement is defined and construed in light of the circumstances of the transaction, including the course of dealing and usage of trade.

SECTION 2B-408. CUMULATION AND CONFLICT OF WARRANTIES.

Warranties whether express or implied shall be construed as consistent with each other and as cumulative, but if this construction is unreasonable, the intention of the parties determines which warranty is dominant. In ascertaining that intention, the following rules apply:

(1) Exact or technical specifications displace an inconsistent sample or model or general language of description.

(2) A sample displaces inconsistent general language of description.

(3) Express warranties displace inconsistent implied warranties other than an implied warranty under Section 2B-405(a).

Uniform Law Source: § 2-317.

Definitional Cross Reference.

"Party". Section 1-102.

Reporter's Note: This section follows original Article 2.

SECTION 2B-409. THIRD-PARTY BENEFICIARIES OF WARRANTY.

(a) Except for published informational content, a warranty to a licensee extends to persons for whose benefit the licensor intends to supply the information or informational rights and which rightfully use the information in a transaction or application of a kind in which the licensor intends the information to be used.

(b) A warranty to a consumer extends to each individual consumer in the licensee's immediate family or household if the individual's use was reasonably expected by the licensor.

(c) A contractual term that excludes or limits third-party beneficiaries is effective to exclude or limit a contractual obligation or contract liability to third persons except individuals described in subsection (b).

(d) A disclaimer or modification of a warranty or remedy which is effective against the licensee is also effective against a third persons under this section.

Definitional Cross References.

"Consumer transaction". Section 2B-102. "Information". Section 2B-102. "Licensee". Section 2B-102. "Licensor". Section 2B-102. "Party". Section 1-201. "Person". Section 1-201. "Published informational content". Section 2B-102. "Remedy": Section 1-201. "Rights": Section 1-201. "Term": Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section utilizes third-party beneficiary concepts based on the contract law theory of "intended beneficiary" and on the Restatement (Second) of Torts § 552 dealing with the scope of liability to third parties for a provider of information. It expands both where they apply to uses within the household of the licensee. The section does not address products liability law, leaving that law and other forms of tort law for development by the courts.

2. Liability to Third Parties. Dealing with an informational content product, the California Supreme Court in Bily v. Arthur Young & Co., 3 Cal.4th 370, 11 Cal. Rptr. 2d 51, 834 P2d 745 (1992), commented:

By confining what might otherwise be unlimited liability to those persons whom the engagement is designed to benefit, the Restatement rule requires that the supplier of information have notice of potential third party claims, thereby allowing it to ascertain the potential scope of its liability and make rational decisions regarding the undertaking.

To impose liability under contract-related theories, the information provider must have known of and clearly intended to have an effect on third parties. This is a third party beneficiary concept and requires a conscious assumption of risk or responsibility for particular third parties. Even within that standard, courts should not be aggressive in finding the requisite intent.

All of this relates to the unique role of information in our culture and to the uniquely difficult nature of proving a causal connection between a release of information and harmful effects. The cases and this section also reflect sensitivity to the risk that placing excessive liability exposure on information providers without their express undertaking may chill the willingness of those providers to disseminate information.

3. Product Liability Law. This Section does not deal with products liability issues. It neither expands nor restricts tort concepts that might apply for third party risk. Article 2B leaves development or non-development of any appropriate liability doctrine to common law courts. Indeed, few courts impose third party tort liability in transactions involving information. The Restatement (Third) on Products Liability, recognizing this, notes that informational content is not a product for that law. The only reported cases that impose product liability on information involve air flight charts. The cases analogized the technical charts to a compass or similar, physical instrument. These cases have not been followed in other contexts. Most courts specifically decline to treat information content as a product, including the Ninth Circuit, which decided two of the air flight chart cases, but later commented that public policy accepts the idea that information once placed in public moves freely and that the originator does not owe obligations to those remote parties who obtain it. Winter v. G. P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991); Berkert v. Petrol Plus of Naugatuck, 216 Conn. 65, 579 A.2d 26 (Conn. 1990).

While there may be a different policy for software embedded in tangible products, this article does not deal with embedded software. Section 2B-104. Contract issues regarding the software that operates the brakes in an automobile sold to a consumer fall within Article 2.

4. Intended Effect Required. Subsection (a) derives from and should be interpreted in light of both the contract law concept of "intended beneficiary" and the concept in the Restatement (Second) of Torts § 552. In both instances, liability is restricted to intended third parties and those in a special relationship with the information provider. Intention requires more than that the person be within a general category of those who may use the information (.e.g., all readers). There must be a closer and more clearly known connection to the particular third party. The liability covers use in transactions that the provider of information intended to influence. The section also must be considered in light of the scope of warranties under this article which create no implied warranty of accuracy pertaining to published informational content.

Illustration: LR contracts for publication of a text on chemical interactions. Publisher obtains an express warranty that LR exercised reasonable care in researching. Publisher distributes the text to the general public. Some data are incorrect. Neither Publisher (which makes no warranty for published information), nor LR (excluded under (a)) makes a warranty to a general buyer of the book.

5. Household and Family Use. Subsection (b) modifies intended beneficiary concepts to per se include the family of an individual, consumer licensee. This covers both personal injury and economic losses and applies to consumer use by the indicated persons. To apply, the use by the family members must be authorized under the license and the licensee must be an individual (with a family), not a corporation. The section assumes that the licensor had some reason to anticipate that the information would be used in the licensee's household. Thus, the mere fact that a household member in fact uses a commercial data compression system licensed to a professional does not extend the warranty to the individual consumer in that person's household. On the other hand, the provider of mass-market word processing software might reasonably expect acquisition of it for use of the software at home. Ordinarily, for this rule to apply, the software must be provided in a consumer transaction or be such as is commonly used for consumer purposes.

6. Limitation by Contract. The policy adopted here focuses on the information provider's original intent with respect to third parties. Subsections (c) and (d) flow from the fact that the basis of this section lies in beneficiary status, rather than product liability. A disclaimer or a statement excluding intent to effect third parties excludes liability under this section. This follows current law. Rosenstein v. Standard and Poor's Corp., 636 N.E.2d 898 (Ill. App. 1993) applied a variation of this rule in the case of an information product.

PART 5

TRANSFER OF INTERESTS AND RIGHTS

SECTION 2B-501. OWNERSHIP OF INFORMATIONAL RIGHTS AND TITLE TO COPIES.

(a) If an agreement provides for conveyance of ownership of informational rights in software, ownership passes at the time and place specified by the agreement. Ifn the agreement does not specify a different time or place, absence of such specification ownership passes when the information and the informational rights are in existence and identified to the contract.

(b) Transfer of a copy does not transfer ownership of informational rights.

SECTION 2B-501A. TITLE TO COPIES.

(ab) The following rules apply to title to copies:

(1) Transfer of a copy does not transfer ownership of informational rights.

(2) In a license:

(A) title to a copy is determined by the license;

(B) a licensee's right under the license to possession or control of a copy is governed by the license and does not depend on title to the copy; and

(C) if a licensor reserves title to a copy, the licensor retains title to that copy and has title to any copies made of it, unless the license grants the licensee a right to make and transfer copies to others, in which case reservation of title reserves title only to copies delivered to the licensee by the licensor.

(bc) If an agreement provides for transfer of title to a copy, title passes:

(1) at the time and place specified in the contractagreement; or

(2) in the absence of such specification:

(A) at the time and place the licensor completed its obligations with respect to delivery of a copy on a tangible medium; and

(B) at the time and place at which the licensor completed its obligations with respect to electronic delivery of a copy if a first sale occurs under federal copyright law.

(cd) If the party to which ownership or title passes under the contract refuses delivery of the copy or rejects the terms of the contractagreement, ownership and title revest in the licensor.

Uniform Law Source: Section 2-401; Section 2A-302. Revised.

Definitional Cross References.

"Agreement": Section 1-201. "Contract": Section 1-201. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Electronic": Section 2B-102. "Identified": Section 2-501. "Information": Section 2B-102. "Informational rights": Section 2B-102. "License": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Party": Section 2B-102. "Sale": Section 2B-102. "Transfer". Section 2B-102.

Reporter's Notes:

1. Scope of the Section. This section deals with both transfers of ownership of intellectual property rights and transfers of title to a copy. As a general rule, most transfers of ownership of rights are not within this article. The treatment of the issue here deals primarily with transfers of ownership under a software contract.

2. Copy vs. Rights Ownership. This section distinguishes title to the copy from ownership of the intellectual property rights. The distinction is fundamental in all intellectual property law and flows from the Copyright Act and other law. It is acknowledged in paragraph (b)(1). While ownership of a copy may transfer some rights with respect to that copy, it does not convey underlying property rights to the work of authorship or patented invention. The media is merely the conduit. Subsection (a) deals with the timing of a transfer of ownership of informational rights. The remaining subsections of this section deal with ownership of copies.

3. Rights Ownership. Subsection (a) deals with intellectual property rights and when ownership of the rights transfers as a matter of state law. This deals with cases where there is an intent to transfer title to informational rights (as compared to title to a copy). If federal law requires a writing for this, state law is subject to that rule. Section 2B-105. The subsection reverses the rule in In re Amica, 135 Bankr. 534 (Bankr. N.D. Ill. 1992) which delayed transfer of rights ownership until actual delivery of the completed work..

The agreement of the parties controls when ownership of rights pass to the other party. That agreement may be found in express terms of the contract or be inferred from usage of trade, course of dealing, or the circumstances of the particular transaction. In the absence of terms of that agreement, transfer of ownership does not hinge on delivery of a copy. Rather, it occurs on identification to the contract of the information and the rights involved. This includes both completion to a sufficient level that separates the transferred property from other property of the transferor and designation by the transferor that the particular property is that which is transferred under the contract. This does not include early drafts or working copies. In re Bedford Computer, 62 Bankr. 555 (D.N.H. 1986) provides guidance on identifying information to a contract. More generally, the concept of identification to the contract is used here as in Article 2 on sale of goods.

While identification to the contract controls when ownership of rights passes in the absence of contrary agreement, when that transfer is effective between the parties ultimately depends on their agreement. In many cases, the agreement is that title does not vest until the transferee performs all of its obligations due at or before that time. In such cases, a transferee's material failure to perform an obligation to pay or provide other consideration due precludes the transfer until those obligations are met. In other cases, performance is reasonably viewed as an agreed condition precedent to the vesting of title in the transferee. If payment or other consideration is deferred until after title vests, however, a court may conclude that it was not a condition precedent to the transfer of title under the agreement.

4. Ownership of a Copy. Paragraph (b)(2) applies only to licenses. In a license, title to the copy depends on the terms of the agreement. As in Article 2A, this article does not presume a transfer of title on delivery. The license controls. If the license is silent, determination of intent on whether title to a copy passes to the licensee may require consideration of the entire terms and context of the transaction. Applied Information Management, Inc. v. Icart, 976 F. Supp. 147 (E.D.N.Y. March 3, 1997); DSC Communications Corp. v. Pulse Communications, Inc., 976 F. Supp. 359 (E.D. Va. 1997).

Under subsection (b)(2)(C), a reservation of title in a copy extends that reservation to all copies made by the licensee. That presumption is altered if the transaction contemplates that the licensee will make copies for sale or other distribution. Thus, a license of a manuscript to a book publisher contemplating production of books and sale of the copies, does not reserve in the author title to all of the books. This concept does not apply where the expectation is that the licensee will transfer copies to others subject to a license.

5. When Title to a Copy Passes. Subsection (c) deals only with contracts where the parties agreed to transfer title to a copy, whether in a license or a simple sale of a copy. The subsection states presumptions relating to when title passes to copies. The contract controls. Absent contract terms, the section distinguishes between tangible and electronic transfers. The rule for tangible transfers of a physical copy parallels original Article 2. Title transfers when the licensor completes its obligations regarding delivery, which obligation are spelled out in Section 2B-607 and 2B-60A which define the time and place of tender of delivery. The electronic transfer rule defers to federal law. Some argue that electronic delivery of a copy of a copyrighted work is not a first sale because it does not involve transfer of a copy from the licensor to the licensee. Under subsection (c), state law will coordinate with the resolution of that issue in federal law. Article 2B takes a neutral position.

If there was no intent to transfer title to a copy, title remains in the transferor. While the focus of the transaction is the information and its use, the transaction then resembles a lease as to the tangible property. Under subsection (b), however, the location of title to the copy has only limited significance for contract law purposes if a license controls the use of the information and the copy.

SECTION 2B-502. TRANSFERS OF CONTRACTUAL INTERESTS. The following rules apply to a transfers of a contractual interests:

(1) A party's interest in a contract may be transferred unless the transfer:

(A) is prohibited under other applicable law; or

(B) would materially change the duty of the other party, materially increase the burden or risk imposed on the other party, or materially impair the other party's property or its likelihood or expectation of obtaining return performance.

(2) Except as otherwise provided in paragraph (3), aA term prohibiting transfer of a party's interest is enforceable, and a transfer made in violation of that term is a breach of contract and is ineffective except to the extent that:

(A) the contract is a license granted for incorporation or use of the licensed information or informational rights with information or informational rights from other sources in a combined work for public distribution or public performance and the transfer is of the completed, combined work; or.

(B3) the transfer is A contractual term prohibiting transfer of the right to payment and would be is unenforceable unless the transfer would be prohibited under paragraph (1) in the absence of the contract term prohibiting transfer. A prohibited transfer is a breach of contract and ineffective.

Uniform Law Source: Section 2-210; Section 2A-303.

Definitional Cross References.

"Agreement": Section 1-201. "Contract": Section 1-201. "Copy": Section 2B-102. "Information": Section 2B-102. "Informational rights": Section 2B-102. "License": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Transfer". Section 2B-102.

Reporter's Note:

1. Scope of the Section. This section deals with transfers of contractual interests. It relates both to transferability in the absence of a contract term and the effect of a contract term prohibiting or limiting transfer of the contract rights. Transfer issues pertaining to security interests and finance leases is considered in Section 2B-503. In this section, and other sections of Part 5, the word "transfer" refers to what in many contexts is described as an "assignment of a contract." The term here does not refer to a "transfer of a copyright" or similar intellectual property interest. It does not refer to delegation of performance under a license. Delegation occurs when a third party performs the duties or rights of the licensee, while transfer (assignment) involves conveying those contract rights to the third party.

2. Transferability in the Absence of Contract Restrictions. In contracts for information, transferability involves different background policy and property considerations than with contracts for the sale of goods. While the general state law rule is that a contract right can be transferred, in reference to licenses, transfer is often not permitted in the absence of the consent of the other party to the contract. The reasons lie in the fact that much of the information involved has elements of confidentiality that foreclose non-consensual transfers because the transfer jeopardizes the other party's interests. Additionally, the nature of the property involved and the ease of its reproduction may lead to a similar conclusion even in the absence of truly confidential information. More generally, given the intangible nature of the property, allowing free transferability may in effect place a licensee in direct competition with the licensor as a source of the information.

a. Federal Policy and Other Law. Paragraph (1) recognizes two limitations on the rule that, when the agreement is silent, transfer of contract rights may be made without consent of the other party to the contract. The first is when other law prevents transfer. In licensing, the other source of law may come from a federal intellectual property policy that precludes transfer of a non-exclusive copyright or patent license without the consent of the licensor. Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996); Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984); Unarco Indus., Inc. v. Kelley Co., Inc., 465 F.2d 1303 (7th Cir. 1972); In re Patient Education Media, Inc., 210 B.R. 237 (Bankr. S.D.N.Y. 1997); In re Alltech Plastics, Inc., 71 Bankr. 686 (Bankr. W. D. Tenn. 1987). When applicable, this federal policy on non-exclusive copyright or patent licenses preempts contrary state law. The federal policy flows in part from the fact that a nonexclusive license is a personal contractual privilege that does not create a property interest. It is also embedded in policies of encouraging innovation and reserving to the rights owner control over to whom and when a license is granted. See Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996).

b. Material Harm to Other Party. The second restriction on transferability in the absence of a contractual restriction holds that the contract cannot be transferred without consent if the transfer would significantly affect the other party's position in the contract or expectation of performance. This rule corresponds to original Article 2 and to the Restatement (Second) of Contracts § 317. This result is often associated with cases in which the transfer occurs by a party owing executory or on-going performance obligations and the transfer either purports to shift that performance obligation to a third party or otherwise undermines its occurrence. For example, a transfer of contractual rights under which the transferee holds and has use of trade secret information of the other party will ordinarily be barred because it would place that information in the hands of another person to which the licensor never agreed. Similarly, a transfer that places the information in the hands of a person who will engage in far greater commercial or other use may be precluded if a license for such greater use would ordinarily have required additional terms or additional consideration.

Material harm should be interpreted here in light of the commercial context and the original expectations of the contracting parties. The issue is not only whether there will be actual harm to the other party, but whether there is a material impairment of its expectation of return performance. The federal policies noted above are also relevant. Also, as noted in Article 2A, "[The] lessor is entitled to protect its residual interest in the goods by prohibiting anyone other that the lessee from possessing or using them." Section 2A-303, Comment 3. Licensors similarly have residual interests in the information they have licensed to a third party.

In addition to the preclusion of transfers that cause material harm, a transfer may be cause for insecurity and a demand for assurance of future performance. Section 2B-504.

3. Contractual Restrictions. Subsection (2) validates contractual restrictions on transfer of a contractual interest. This rule is consistent with current law and the approach of the Restatement regarding prohibitions on transfers of contractual interests; it recognizes the relevance of supporting contractual choice and the importance of the retained interest of the licensor in a license. A transfer in violation of the contract restriction is ineffective. This rule parallels that for unauthorized transfers in copyright and patent law. Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (E.D.N.Y. 1994); Major League Baseball Promotion v. Colour-Tex, 729 F. Supp. 1035 (D. N.J. 1990); Microsoft Corp. v. Grey Computer, 910 F. Supp. 1077 (D. Md. 1995).

The rule renders a transfer ineffective, rather than merely a breach. "Ineffective" means that it creates no contractual rights or privileges in respect to the relationship of the third party and the party to the original license who did not participate in the transfer. If the rule were otherwise (e.g., the prohibited transfer is effective, but a breach of contract), there would be a potentially significant period of time in which the transferee would be protected by the license before it could be canceled in litigation against the licensee. For example, assume a license for $5,000 that allows licensee (ABC, a small company) to make as many copies as needed for use in the licensee's enterprise for employees. ABC has ten employees and the license is expressly not transferable. ABC transfers the license to AT&T, a much larger company with 50,000 employees. If it had requested an enterprise license, the fee would have been $10,000,000. If the transfer is merely a breach, ATT may be licensed to make as many copies as it needs for its (as licensee) employees. Until licensor sues and obtains cancellation of the license against ABC, all copies made are non-infringing. In contrast, a rule making the prohibited transfer ineffective preserves the original bargain of the parties and precludes the licensee from going into competition with its licensor, having obtained a license based on the lower use promise associated with the original licensee. See Section 2B-306(a).

Illustration N licenses its copyrighted software to various licensees, but refuses to license to M, its chief competitor. One license is from N to LE. After the license, M acquires all of the assets of LE. If the transfer of the license is effective, M has indirectly obtained access to potentially valuable technology of its competitor, which it can use until a contract breach remedy precludes use. If the transfer is ineffective, as in this article, M obtains no greater rights in this license than are allowed under informational rights law.

If information is not protected under copyright, trademark, or patent law, the fact that the transfer is ineffective does not expose the transferee to greater liability. Thus, in trade secret law, a good faith transferee without notice may have a right to use information it receives in violation of trust. That rule is not changed by the contract rule stated here. The rule making the transfer ineffective merely indicates that the transferee does not receive contractual rights because of the transfer.

4. Payment Streams. Subsection (2)(B) allows transfer of payment streams despite a contrary contractual provision unless the transfer of the payment stream would make a material change of the other party's position and therefor be precluded under subsection (1). In cases where Article 9 applies, this leaves unaffected the Article 9 rule that, in itself, the contract term cannot preclude such transfer, while also preserving the underlying rule of law that precludes transfers that materially harm the other party.

SECTION 2B-504. EFFECT OF TRANSFER OF CONTRACTUAL RIGHTS.

(a) A transfer of "the contract" or of "all my rights under the contract", or a transfer in similar general terms, is a transfer of all contractual rights. Whether the transfer is effective is determined under Section 2B-502.

(b) The following rules apply to a transfer of a party's contractual rights:

(1) The transferee is subject to all contractual use restrictions.

(2) Unless the language or circumstances otherwise indicate, as in a transfer as security, the transfer delegates the duties of the transferor and transfers its rights, subject to Section 2B-505.

(3) Acceptance of the transfer constitutes a promise by the transferee to perform the delegated duties. The promise is enforceable by the transferor and any other party to the original contract.

(4) The transfer does not relieve the transferor of any duty to perform, or of liability for breach of contract, unless the other party to the original contract agrees that the transfer has that effect.

(c) A party to the original contract other than the transferor may treat a transfer that delegates performance without its consent as creating reasonable grounds for insecurity and, without prejudice to the party's rights against the transferor, may demand assurances from the transferee pursuant to Section 2B-620.

Uniform Law Source: 2-210; 2A-303.

Definitional Cross References.

"Contract": Section 1-201. "Contractual use restriction": Section 2B-102. "Party": Section 2B-102. "Rights": Section 1-201. "Transfer": Section 2B-102. "Term". Section 1-201.

Reporter's Note:

1. Scope and Effect of Section. This section conforms to original Section 2-210(4) and Article 2A. It outlines the effect of a transfer of contract rights. This section is not a complete statement of the law on assignment and delegation. Issues not addressed here are dealt with under other law.

2. Subject to Contract Terms. The transferee of a contract is bound by the terms of the original contract and that obligation can be enforced either by the transferor or the other party to the original contract. An effective transfer of contractual rights constitutes a transfer of those rights and, unless the agreement or the circumstances otherwise indicate, a delegation of duties. The transferee, by accepting the transfer, promises to perform any delegated duties.

3. Transfers in General and for Security. Subsection (b)(2) states a general rule of construction distinguishing between a commercial assignment of a contract, which substitutes the transferee for the assignor both as to rights and duties, and a financing assignment in which only the transferor's rights are conveyed. When the latter occurs and is effective, Article 9 deals with questions about the on-going ability of the original contracting parties to make ordinary adjustments in the original contract without consent of the financing entity.

4. Assurances. Subsection (c) recognizes that the non-transferring party has a stake in the reliability of the person to whom the contract is transferred. In part, that stake is protected under Section 2B-502. Subsection (c) also gives the non-transferring party a right to demand adequate assurances of future performance and to proceed under Section 2B-620 to protect its interest in performance of the contract.

5. Effect on Transferor's Obligations. Paragraph (b)(4) follows current law providing that the transfer does not alter the transferor's obligations to the original contracting party in the absence of a consent by that party to a novation.

SECTION 2B-505. DELEGATION OF PERFORMANCE; SUBCONTRACT.

(a) A party may perform its contractual duties through a delegate or pursuant to a subcontract unless:

(1) the contract prohibits delegation or subcontracting; or

(2) the other party has a substantial interest in having the original promissor perform or control the performance.

(b) Delegating or subcontracting performance does not relieve the party delegating or subcontracting the performance of a duty to perform or of liability for breach.

Uniform Law Source: Section 2-210; Section 2A-303.

Definitional Cross References.

"Contract": Section 1-201. "Party": Section 2B-102.

Reporter's Notes:

1. Nature of Delegation. Delegation or subcontracting of performance exists when a party to the original contract uses a third party to make an affirmative performance under a contract. While the performance may be by the delegate, the original party remains bound by the contract and responsible for any breach.

2. Effect of Contract. The ability to delegate is subject to contrary agreement. A contract that permits use or creation of licensed information only by a named person or entity controls and precludes delegation.

3. Delegation in the Absence of a Contract Restriction. In the absence of a contractual limitation, delegation can occur unless the other party has a substantial interest in having the original party perform or control the performance. Obviously, a party has a substantial interest in having the original party perform if the delegation triggers the restrictions in 2B-502, but may also have such an interest in other cases. Delegation is permitted, however, where no substantial reasons exist to believe that the delegated performance will not be as satisfactory as performance by the original party.

SECTION 2B-506. PRIORITY OF TRANSFER BY LICENSOR. A licensor's transfer of ownership of informational rights is subject to any enforceable nonexclusive license that is made before prior to the transfer.

Uniform Law Source: Section 2A-304. Revised.

Definitional Cross References:

"Authenticate": Section 2B-102. "Good faith": Section 2B-102. "Information": Section 2B-102. "Informational rights": Section 2B-102. "License": Section 2B-102. "Licensee": Section 2B-102. "Licensor": Section 2B-102. "Nonexclusive license": Section 2B-102. "Record": Section 2B-102. "Transfer": Section 2B-102.

Reporter's Note:

1. Background. This area is heavily influenced by federal copyright law as to copyright interests. This section traces that influence while providing maximum state law recognition for traditional U.C.C. priorities. As to transfers of ownership of copyrights or patents by assignment or exclusive license, federal law controls. Federal law may also control the priority between security interests and ownership transfers or the priority among security interests in intellectual property under copyright or patent law. There is no preemption with respect to transfers of data, trade secrets and other non-federal property rights. This Section deals with general priorities.

2. Prior Oral Licenses. This Section gives priority to a prior license that is enforceable, including enforceability under the statute of frauds in 2B-201. This parallels copyright law but is not an exact match to the policies in that federal law, which require a signed writing to give priority to an non-exclusive license over a subsequent transfer of the copyright. This creates a state law priority system with reference to the coverage allowed to state law. The rule governs as to data, access contracts, trade secrets and other information not within the Copyright Act. The Copyright Act gives priority only if a license is in a signed writing. To the extent inconsistent with this section, that rule governs with respect to copyright interests. Section 2B-105. There are currently no decisions on whether an electronic record or authentication qualify under the copyright standard. However, the copyright rule should be applied in light of modern technology treating an electronic record as being sufficient to be a writing.

SECTION 2B-507. TRANSFER BY LICENSEE.

(a) If all or any part of a licensee's interest in a license is transferred, voluntarily or involuntarily, the transferee acquires no interest in information, copies, or the contractual or informational rights of the licensee unless the transfer is permitted under Section 2B-502. If the transfer is effective, the transferee takes subject to the terms of the license.

(b) Except as otherwise provided under trade secret law, a transferee that acquires information or informational rights that are subject to the informational rights and contractual use restrictions of a third party acquires no more than the contractual or other rights its transferor was authorized to transfer.

Uniform Law Source: Section 2A-305

Definitional Cross References.

"Information": Section 2B-102. "Informational Rights": Section 2B-102. "License": Section 2B-102. "Licensee". Section 2B-102. "Party": Section 2B-102. "Transfer". Section 2B-102. "Term". Section 1-201.

Reporter's Notes:

1. Transferee Interests. Subsection (a) provides that a transferee of the license acquires only the rights that the license and this article allow. This reflects the simple fact that what is transferred is the contract and that the transfer cannot change contractual rights. This principle holds true even if the transfer includes the tangible manifestations of the information that is subject to the license.

2. Transfers and Underlying Property Rights. Subsection (b) provides that the transferee of a licensee acquires only those rights that the licensee was authorized to transfer. This is an important principle under intellectual property law which differs from transactions involving sales of goods. It comes from the fact that one of the property rights created under copyright law is the exclusive right to distribute a work in copies. A transferee who receives a transfer not authorized by the rights holder does not acquire greater rights than its transferor was authorized to transfer, even if the acquisition was in good faith and without knowledge. The basic fact is that, as regards property rights, the transfer if unauthorized was itself a violation of the property rights of the copyright owner. Ideas of entrustment and bona fide purchase, which play a role in dealing with title to goods, have no similar role in intellectual property law. Neither copyright nor patent recognize concepts of protecting a buyer in the ordinary course (or other good faith purchaser) by giving that person greater rights than were authorized to be transferred. Copyright law allows for a concept of "first sale" which gives the owner of a copy various rights to use that copy, but the first sale must be authorized.

Section 2B-503 creates a limited exception to this rule with respect to the creation and perfection of a security interest. But, as described in that section, this exception does not permit taking possession or enforcement of the interest. Also, the interest created is subject to the license terms.

Transfers that exceed or are otherwise unlicensed by a patent or copyright owner create no rights of use in the transferee. A transferee that takes outside the chain of authorized distribution does not benefit from ideas of good faith purchase and its use is likely to constitute infringement. See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (ED NY 1994); Major League Baseball Promotion v. Colour-Tex, 729 F. Supp. 1035 (D. N.J. 1990); Microsoft Corp. v. Grey Computer, 910 F. Supp. 1077 (D. Md. 1995); Marshall v. New Kids on the Block, 780 F. Supp. 1005 (S.D.N.Y. 1991).

3. Trade Secret and Unprotected Information. Subsection (b) allows a bona fide purchaser in reference to trade secret claims. These are state law property rights. A trade secret enforces confidentiality. If a party takes without notice of such restrictions, it is not bound by them; it is in effect a good faith purchaser, free of any obligations regarding infringement except as such exist under copyright, patent and similar law.

PART 6

PERFORMANCE

[A. General]

SECTION 2B-601. PERFORMANCE OF CONTRACT IN GENERAL.

(a) A party shall perform in a manner that conforms to the contract.

(b) Except as otherwise provided in subsection (c), tender of performance by a party entitles that party to acceptance of that performance. In addition, the following rules apply:

(1) A tender of performance occurs when the party, with manifest present ability and willingness to perform, offers to complete the performance.

(2) If a performance by the other party is due at the time of the tendered performance, tender of the other party's performance is a condition to the tendering party's obligation to complete its tendered performance.

(3) A party shall pay or render the consideration required by the agreement for a performance it accepts. A party that accepts a performance has the burden of proving a breach with respect to the accepted performance.

(c) If there is an uncured material breach of contract by a one party which precedes the aggrieved party's performance, the aggrieved party does not have a duty to perform other than with respect to contractual use restrictions. In addition, the following rules apply:

(1) An aggrieved party may refuse a performance that is a material breach as to that performance or that may be refused under Section 2B-609(b).

(2) The aggrieved party may cancel the contract only if the breach is a material breach of the entire contract or the agreement so provides.

(d) Except as otherwise provided in Sections 2B-603 and 2B-604, in the case of a performance with respect to a copy, Sections 2B-606 through 2B-614 prevail over this section.

Uniform Law Source: Restatement (Second) of Contracts 237. Substantially revised.

Definitional Cross References.

"Aggrieved party": Section 1-201. "Agreement": Section 1-201. "Cancel": Section 2B-102. "Contract": Section 1-201. "Contractual use restriction": Section 2B-102. "Copy": Section 2B-102. "Party": Section 2B-102.

Reporter's Notes:

1. General Approach. This section brings together several general principles pertaining to performance of a contract. The provisions of this section are supplanted by more specific sections on tender and acceptance (or refusal) of copies as indicated in subsection (d). The general approach follows the Restatement (Second) of Contracts and common law using the concept of material breach to determine what remedies arise for an aggrieved party other than in the mass market where a standard of conforming tender applies. The characteristics of this particular subject matter often involves a continuing performance, rather than a single delivery and the nature of the product is such that the advancement of the state of the technology involves continuingly pushing the edge.

A program for small computers may contain over ten million lines of code or instructions. These instructions interact with each other and with code and operations of other programs. This contrasts with a commercial jet airliner popular with approximately six million parts and typical consumer goods with fewer than one hundred parts. A typical book has fewer than one hundred fifty thousand words. In the software environment, it is virtually impossible to produce software of complexity that contains no errors in instructions that intermittently cause the program to malfunction.

2. Duty to Conform: Material Breach. A party must conform to its contract. Any failure to conform gives the aggrieved party a right to a remedy subject to concepts of waiver and the agreement. What remedies are available depends on the agreement and, in absence of agreement, on whether the breach was material. Subsection (c) adopts the common law doctrine of material breach. A party's duty to perform is contingent on the absence of a prior material failure of performance by the other party. See Restatement (Second) of Contracts § 237.

The material breach concept is simple: a minor defect in performance does not warrant rejection or cancellation of a contract. While minor problems constitute a breach, the remedy lies in recovery or recoupment of damages. The policy avoids forfeiture for small errors. Especially if performance involves ongoing activity, perfect performance cannot be expected as a default rule. If the parties desire to create a more stringent standard, they must do so by the terms of their agreement. The material breach standard applies to the performance of both the licensor and the licensee. A licensor that receives imperfect performance cannot cancel the contract on account of a minor problem, nor can the licensee that receives less than perfect performance from the licensor.

The contingent relationship described in subsection (c) does not refer to contractual use restrictions. A breach by one party does not allow the other party to ignore contract restrictions on use. This is true even if the aggrieved party has a duty to mitigate loss. Contractual use restrictions limit any duty to mitigate; they define what the party can do in use of the information. A breach by the licensor does not give the licensee unfettered rights to act in derogation of use restrictions that are often buttressed by intellectual property rights.

3. Material Breach: Mass Market. As described in Section 2B-609(b), Article 2B does not apply the material breach standard to mass-market transactions involving tender of delivery of a copy other than in an installment contract setting. This follows Article 2 and Article 2A. Article 2 and Article 2A stand alone in modern contract law in not using the material breach concept for all contracts that they cover. Article 2 requires so-called "perfect tender", but does so in only a single fact situation: a single delivery of goods not part of an installment contract. Article 2B creates a parallel rule for single delivery mass-market transactions. As in Article 2, the rule applies only to tender of a copy that is the vendor's sole performance. Additionally, the "perfect tender" rule is a misnomer even in Article 2. It is better described as a "conforming tender" rule. What constitutes a conforming tender even in a single delivery context is hemmed in by legal considerations regarding merchantability, and interpretation principles including usage of trade and course of performance. It is further limited by principles of waiver and a right to cure. As one leading treatise comments: "[we have found no case that] actually grants rejection on what could fairly be called an insubstantial non-conformity . . ."

4. Duty to Accept and Tender. Subsection (b) brings together general rules from the Restatement and current Article 2 regarding the presumed sequence of performance. It is subject to the more specific rules on tender and acceptance of copies in sections 2B-606 through 2B-614. The primary principle is that tender of performance entitles the tendering party to acceptance of that performance. The rule is stated in general terms here. Of course, if the tendered performance is a material breach, the party receiving the tender is not required to perform.

5. Refusing a Performance and Cancellation. An important distinction exists between the right to refuse a particular performance and the right to cancel the entire contract. That distinction is more central in Article 2B than in Article 2 because of the nature of the contracts involved.

A party may refuse a performance if the performance fails to conform to the contract and consists of a material breach as to that performance. Whether that breach also allows the party to cancel the entire contract depends on whether the breach is material to the entire contractual relationship. In contracts where the entire performance is delivery of a single copy, a right to refuse the copy corresponds to the right to cancel the contract. In more complex situations, a single breach may not be material to the whole agreement. Thus, for example, a payment that is one-half the required amount is a material breach as to that payment, but whether it also constitutes a material breach of the entire contract depends on the circumstances and the agreement.

SECTION 2B-602. LICENSOR'S OBLIGATIONS TO ENABLE USE.

(a) In this section, "enable use" means to grant a contractual right or permission with respect to information or informational rights and to complete the acts, if any, required under the agreement to make the information available to a party.

(b) A licensor shall enable use by the licensee pursuant to the contract. The following rules apply to enabling use:

(1) If nothing other than the grant of a contractual right or permission is required to enable use, the licensor enables use when the contract becomes enforceable.

(2) If the agreement requires delivery of a copy, enabling use occurs when the copy is delivered. If the agreement requires delivery of a copy and steps authorizing the licensee's use, enabling use occurs when the last of those steps occurs.

(3) In an access contract, to enable use requires providing all access material necessary to obtain the agreed access.

(4) If the agreement requires a transfer of ownership of informational rights and a filing or recording is allowed by law to establish priority of the transferred ownership, on request by the licensee, the licensor shall execute and deliver a record for that purpose.

Definitional Cross Reference:

"Access contract": Section 2B-102. "Access material": Section 2B-102. "Agreement": Section 1-201. "Contract": Section 1-201. "Information": Section 2B-102. "Informational Rights": Section 2B-102. "Licensee". Section 2B-102. "Licensor": Section 2B-102.

Reporter's Notes:

1. Scope of Section. This section defines the licensor's obligation to enable use of the information or access that it provides to the licensee. The term, "enable use," replaces the Article 2 idea of tender of delivery of goods. In information contracts, the licensor may or may not be required to deliver anything. In some cases, it suffices to authorize use of information the licensee obtained from other sources. The licensor's obligation depends on the agreement, but in most commercial cases it consists of two elements: making the information available (if necessary) and giving authority or permission to use the information. The alternatives in subsection (b) conform to that dual requirement.

2. No Acts Required. Paragraph (b)(1) recognizes that in many cases mere authorization of a right to use or access information suffices to enable use. Such cases include, for example, circumstances in which a publisher is already in possession of a photograph that it desires to use in a digital multi-media work, but must obtain permission to do so from the photographer who holds the copyright. Similar circumstances frequently arise throughout the information industries. In such cases, the creation of an effective license contract suffices to enable use.

3. Recording Information. If the agreement involves a transfer of ownership of informational property rights and a filing or other recording is needed to complete that transfer so as to have priority over other transfers, subsection (b)(4) indicates that the licensor must cooperate in completing that recording.

SECTION 2B-603. SUBMISSIONS OF INFORMATION TO THE SATISFACTION OF A PARTY. If an party submits information pursuant to an agreement that requires that the submission of information be to the satisfaction of the recipient, the following rules apply:

(1) Sections 2B-606 through 2B-614 do not apply to the submission.

(2) If the information is not satisfactory to the recipient and the parties engage in efforts to correct the deficiencies in a manner and over a time consistent with the ordinary standards of the business, trade, or industry, the efforts or the passage of time required for the effort are neither an acceptance nor refusal of the submission.

(3) Except as otherwise provided in paragraph (4),. neither refusal nor acceptance occurs unless the recipient expressly refuses or accepts the submission, but the recipient may is not entitled to use the submission before acceptance.

(4) Silence and a failure to act in reference to a submission beyond a commercially reasonable time to respond entitles the submitting party to demand in a record delivered to the recipient a decision on the submission. If the recipient fails to respond within a reasonable time after receipt of the demand, the submission is treated as having been refused.

Definitional Cross References.

"Agreement": Section 1-201. "Party": Section 2B-102.

Reporter's Notes:

1. General Purpose. This section deals with situations where Article 2 rules on tender, acceptance and rejection of goods are not appropriate because the agreement calls for submissions of informational content to the satisfaction of the receiving party. Section 2B-305. The section excludes sale of goods standards in such cases, and focuses on practices of industry.

2. Tender-acceptance of Copy Not Applicable. Paragraph (1) indicates that rules related to the tender and acceptance of copies do not apply where the information is submitted under terms that provide for approval to the satisfaction of the licensee or other person. In goods-related transactions, the focus is on making decisions about the particular item presented. In information transactions of the type described here, the submission triggers a process that centers around the fact that the recipient has the right to refuse if the submission does not satisfy its expectations, but that immediate acceptance or rejection is often not expected. A process of revision and tailoring occurs. This corresponds to ordinary commercial expectations in these fields, which includes handling of submitted book manuscripts, games, and similar materials.

3. Express Choices. In cases involving information submitted to the recipient's satisfaction, acceptance or rejection is not implied from delay and silence alone. Consistent with ordinary practices, subsection (3) makes it clear that only an explicit refusal or acceptance satisfies the standard of acceptance or refusal in this setting since the circumstances are keyed to the subjective satisfaction of the receiving party. The paragraph also makes clear that, until acceptance, the recipient cannot "use" the submitted information. This refers to commercial or other exploitation and does not, of course, prevent use for the purpose of reviewed, correcting, or otherwise adjusting the information to meet the recipient's satisfaction.

4. Demand for Decision. Generally, under paragraph 3, express choices supplant rules that might operate from silence in not refusing or from delays in submitting changes. However, paragraph (4) recognizes that in some cases and extraordinary delay in responding in any manner creates rights in the submitting party to obtain a firm answer. What constitutes sufficient delay for this purpose must, of course, be judged in reference to ordinary commercial standards associated with the applicable context.

5. Other Remedies. This section deals with contract issues only. If the person receiving a submission does not enter a contract for that information, but misuses the submission, other law provides remedies when appropriate. These include liability under concepts of quantum meruit, fraud, conversion and the like as appropriate to the circumstances. The continued development of law under these non-contractual theories is not affected by this article.

SECTION 2B-604. IMMEDIATELY COMPLETED PERFORMANCES. If a performance involves delivery of information or services covered by this article that which, because of their nature, may immediately provide a licensee immediately with substantially all the benefit of the performance or with other significant benefit on performance or delivery that cannot be returned after received, the following rules apply:

(1) Sections 2B-607 through 2B-614 do not apply.

(2) The rights of the parties are determined under Section 2B-601 and the ordinary standards of the business, trade, or industry.

(3) Before tender of the performance, a party may inspect the media, labels, or packaging but may not view the information or otherwise receive the performance before completing any performance of its own that is then due.

Definitional Cross Reference:

"Agreement": Section 1-201. "Delivery": Section 2B-102. "Information": Section 2B-102. "Licensee". Section 2B-102. "Party": Section 2B-102.

Reporter's Notes:

1. Scope of Section. This section deals with subject matter that is, in effect, fully received when made available to, viewed by, or read by the transferee. In reference to this subject matter, concepts of inspection, rejection and return from the law of the sale of goods cannot apply. The section leaves the parties to the general rules of Section 2B-601 which incorporate common law. This section applies, for example, in a case where the licensed subject matter is a short song licensed for a single performance. Once performed, the subject matter cannot be returned; inspection prior to acceptance is not a relevant standard. This is true, for example, in a disclosure of a valuable fact known to one party, but not to the other. The subject matter of the contract involves informational content that, once seen, has in effect communicated significant value.

2. Inspection not Permitted. In these transactions merely viewing or receiving the information transfers significant value to the licensee which cannot be returned. Given that fact, subsection (3) clarifies that inspection rights are limited to media and packaging. A person that joins a fee-based celebrity chat room cannot participate before deciding whether to accept or not accept it. The participation itself transfers the value and that value cannot be returned. A person licensing the formula for Coca Cola cannot read and potentially memorize the formula before being bound to the contract and its performance under the contract.

SECTION 2B-605. WAIVER OF REMEDY FOR BREACH OF CONTRACT.

(a) A claim or right arising out of a breach of contract may be discharged in whole or in part without consideration by a waiver contained in a record to which the party agrees after breach, by manifesting assent or otherwise.

(b) A party that accepts a performance with knowledge that the performance constitutes a breach and that fails within a reasonable time after acceptance to notify the other party of the breach, waives all remedies for the breach, unless acceptance was made on the reasonable assumption that the breach would be cured and it has not been seasonably cured.

(c) Except for performance that is are to be to the party's its satisfaction, a party that refuses a performance and fails to identify in connection with its refusal a particular defect that is ascertainable by reasonable inspection waives the right to rely on that defect to justify refusal if:

(1) the other party could have cured the defect if it had been identified seasonably; or

(2) between merchants, the other party after refusal made a request in a record for a full and final statement in a record of all defects on which the refusing party proposes to rely.

(d) Waiver of a remedy for breach of contract in one performance does not waive any remedy for the same or a similar breach in future performances unless the party making the waiver expressly so states.

(e) A waiver may not be retracted as to the performance to which the waiver applies. However, except for a waiver in accordance with subsection (a) or a waiver supported by consideration, a waiver affecting an executory portion of a contract may be retracted by seasonable notice received by the other party that strict performance will be required in the future, unless the retraction would be unjust in view of a material change of position in reliance on the waiver by that party.

Definitional Cross Reference:

"Contract": Section 1-201. "Manifest assent": Section 2B-111. "Merchant": Section 2B-102. "Notice": Section 1-201. "Notify": Section 1-201. "Party": Section 1-201. "Receive": Section 2B-102. "Record": Section 2B-102. "Term". Section 1-201. "Seasonable": Section 1-204.

Uniform Law Sources: Section 2A-107; Section 2-605

Reporter's Notes:

1. Scope of the Section. "Waiver" is the voluntary relinquishment of a known right. Conduct or words may create a waiver. This section brings together rules from various sections of original Article 2 dealing with waiver issues and recasts those rules to fit the variety of performances in Article 2B transactions. The section also adopts principles from common law.

2 Waivers in a Record. Subsection (a) follows Section 2A-107. Waivers in a record are enforceable without consideration. See Restatement (Second) of Contracts § 277. Subsection (a) does not preclude other forms of waiver, but confirms that waivers within its provisions are effective. For example, an oral waiver, if effective under common law, remains effective under Article 2B. This subsection does not require delivery of the record to the party that receives the benefit of the waiver.

3. Waiver by Accepting a Performance. Subsection (b) and (c) deal with waivers that result from accepting a performance without objecting to known defects. Waiver is implied from the combination of knowledge of the defect and silence beyond a reasonable time after accepting the performance. This rule does not apply if the party merely knows that a performance is not consistent with the contract unless the performance was tendered to, and accepted by, the party that waives its rights. Thus, failure to object to a pattern of behavior that violates a license but pertains to performance not delivered to the other party cannot create a waiver. In some cases, of course, such a pattern may result in an estoppel.

Illustration: LE is to pay royalties of 2% of the sale price of products it licensed for distribution; payment is due on the first of each month. A 5% late fee is imposed for delays of more than five days. LE does not tender payment until the 25^th day of the month and its tender does not include the late charge. Licensor may refuse the tender and cancel the contract if the breach is material. If it accepts a tender that it knows to be a breach without objecting in a reasonable time, it cannot cancel the contract for that breach and may waive its right to the late fee or other damages, if any.

4. Waiver by Failure to Particularize. Subsection (c) provides that a waiver may result from a failure to particularize the reason for a refusal of a performance only in a limited number of circumstances. Failure to particularize is a waiver only if the other party could have cured the problem had it known of the basis for refusal. Additionally, between merchants, waiver occurs when the breaching party asks for a specification in writing of the reasons for refusal and a basis for that refusal is not listed among the given reasons. This generalizes the language of original Section 2-605.

5. Executory and Waived Performances. Under Subsection (d), unless the intent is express or the circumstances clearly indicate to the contrary, a waiver applies only to the specific breach waived. This principle does not alter estoppel concepts; a waiver may create justifiable reliance as to future conduct in an appropriate case.

6. Retracting a Waiver. A waiver cannot be retracted with respect to past events. Similarly, a waiver enforceable as to future events because supported by consideration cannot be unilaterally retracted. It constitutes a bilateral agreement. On the treatment of waivers supported by consideration, see Restatement (Second) of Contracts § 84, comment f.

SECTION 2B-606. CURE OF BREACH OF CONTRACT.

(a) A party in breach of contract may cure the breach at its own expense if:

(1) the time for performance has not expired, the party seasonably notifies the aggrieved party of its intention to cure, and, within the time for performance, the party makes a conforming performance;

(2) the party in breach had reasonable grounds to believe the performance would be acceptable with or without money allowance, seasonably notifies the aggrieved party of its intent to cure, and provides a conforming performance within a further reasonable time after performance was due; or

(3) in cases not governed by paragraph (1) or (2), the party seasonably notifies the aggrieved party of its intention to provide a conforming performance and promptly does so before cancellation by the aggrieved party.

(b) In a license other than a mass-market license, if the agreement required a single delivery of a copy and the party receiving tender of delivery was required to accept a nonconforming copy because the nonconformity was not a material breach of contract, the party in breach shall promptly and in good faith make an effort to cure if:

(1) the party in breach receives seasonable notice of a specified nonconformity and a demand for cure of the nonconforming copy; and

(2) the cost of the effort to cure does not disproportionately exceed the direct damages caused by the nonconformity to the aggrieved party.

(c) A party may not cancel a contract or refuse a performance because of a breach that has been seasonably cured. However, notice of intent to cure does not preclude refusal of the performance or cancellation.

Uniform Law Source: Sections 2-508; 2A-513

Definitional Cross References.

"Aggrieved party": Section 1-201. "Cancellation": Section2B-102. "Contract": Section 1-201. "Copy": Section 2B-102. "Direct damages": Section 2B-102. "Enable use": Section 2B-602. "Good faith": Section 2B-102. "License": Section 2B-102. "Mass-market license": Section 2B-102. "Material breach": Section 2B-109. "Notice": Section 1-201. "Notifies: Section 1-201. "Party": Section 2B-102. "Receive": Section 2B-102. "Seasonable": Section 1-204.

Reporter's Notes:

1. Scope of the Section. This section recognizes that the licensor or the licensee (whichever is in breach) may have an opportunity to cure the breach and retain the contractual relationship. For licensees, cure will often relate to missed or delayed payments, failure to give a required accounting or other report, and misuse of information. For licensors, the issues often focus on timeliness of performance, adequacy of product, and the like. The section places limits on the opportunity to cure that reflect a balance between the goal of preserving contract relationships and the goal of giving the injured party the full benefit of its contractual expectations. Subsection (b) creates a limited obligation to cure in cases where the injured party was required to accept the tender of a copy because the performance was not a material breach as to that copy.

2. General Law on Cure. The idea that a breaching party may, if it acts promptly to eliminate the effect of its breach and preserve the contract is embedded in modern law. See, e.g., Restatement (Second) of Contracts § 237. However, there is significant disagreement about the scope of allowed cure, reflecting different balances drawn between the policy of allowing a party to preserve a contractual relationship and policies that protect the valid expectations of the party that received the performance constituting a breach. Compare UNIDROIT International Principles of Commercial Contract Law art. 7.1.4; U.N. Sales Convention on the International Sale of Goods art. 48. This section draws primarily from original Section 2-508, but adapts the provisions of that section to reflect the unique context of information transactions.

3. Right to Cure. This section generally allows cure if it is prompt and the circumstances indicate that the cure will avoid harm to the other party. The ability to cure is not an excuse for performance that fails to conform to the contract, but is rather an opportunity to avoid loss and retain the benefits of the contract for both parties.

This section creates a right to cure if the cure occurs before the contractual time for performance expires under paragraph (a)(1). This gives a party whose early actions created a breach an opportunity to make a good tender within the contract time. What is the agreed time for performance is determined not only by the original agreement, but also by any subsequent modifications agreed by the parties. If, despite the prompt and timely cure, there are damages incurred by the aggrieved party, these remain recoverable, but the prompt cure precludes cancellation for that breach.

Cure requires seasonable notice to the other party of an intent to cure. The closer that the time of the breach is to the contractual time for performance, the greater is the necessity for promptness in giving notice and completing the cure. In addition, what constitutes seasonable notice depends on the context, including the importance of the expected performance and the timing and difficulty of obtaining substitutes. The notice does not constitute cure. Cure only occurs when a conforming performance is tendered.

4. Permissive Cure. If the time for original performance expires before cure, cure is permissive, rather than available as a matter of right. There are two different circumstances in which cure is permitted.

a. Expectation that initial performance would be acceptable. Paragraph (a)(2) creates a rule that seeks to avoid injustice by reason of a surprise refusal of a performance by the other party. The party in breach has an opportunity to cure only if had "reasonable grounds to believe" that the original tender would be acceptable. Thus, tender of payment of eighty percent of the amount due would not create an opportunity to cure unless from the course of performance the tendering party had reason to believe that the tender would be acceptable to the other party. Reasonable grounds for believing that a tender would be acceptable can arise from prior course of dealing, course of performance or usage of trade, as well as the particular circumstances surrounding the contract. The party is charged with commercial knowledge of any factors in a particular transaction which in common commercial understanding require strict compliance with contractual obligations, but can also rely on any reasonable expectations and usage of trade regarding variation of performance unless these have been clearly refuted by the circumstances of the particular transaction, including the terms of the agreement. If the other party gives notice either implicitly, through a clear course of dealing, or through terms of the agreement that strict performance is required, those indications control application of this section. Requirements in a standard form that are not consistent with trade usage or the prior course of dealing and are not called to the other party's attention may be inadequate to show that expectations consistent with the trade usage or course of dealing are unreasonable.

b. Cure subject to other person's actions. Outside of the settings described in paragraphs (a)1) and (a)(2), the opportunity to cure is limited by the aggrieved party's right to insist on performance. Paragraph (a)(3) allows cure, but is restricted by the limitation that the cure must occur before the aggrieved party cancels the contract. This places control in the aggrieved party affected by a material breach. In the mass market and in other cases of contracts involving rights in a copy of information, refusal of the copy may be cancellation because the entire transaction focused on providing rights associated with a copy. In such cases, no special notice or words of cancellation are required. As indicated in subsection (c), the aggrieved party is not required to withhold cancellation because of a notice of intent to cure received from the other party.

5. What Constitutes Cure Cure requires the completion of acts that put the aggrieved party in essentially the position that would have ensued on full conforming performance. A completed cure requires a party to fully perform the obligation that was breached, fully compensate for loss, timely perform all assurances of cure, and provide adequate assurance of future performance. Monetary compensation may be required, but constitutes a cure only if provided in addition to tendering full conforming performance, such as tender of a conforming copy or tender of a late payment with any required late payment charges. Cure does not occur merely because one party announces its intention to cure, even if that intention is held in good faith. Cure only occurs when or if the proposed compensatory and conforming actions are completed.

Some contract breaches cannot be cured. This is true, for example, if a party breaches a contract by publicly disclosing licensed trade secret information. In such cases, the damage done by breach cannot be reversed and the provisions for cure under this section are inapplicable. A similar condition may arise where the agreement demands performance on a specific date or hour, but the performing party materially fails to meet the deadline. Cure is to be regarded as offering an opportunity to avoid ending a contract relationship by bringing the performance into line with the other party's rightful expectations. It is not a rule that allows a breaching party to avoid consequences of breaches that have clear and irreversible effects.

6. Effect of Cure. Cure of a breach does not mean that the aggrieved party is bound to accept without a remedy less than conforming conduct. The main effect is that a contract cannot be canceled if the breach was cured before cancellation occurs. The aggrieved party retains, after cure, a right to any remedies appropriate under the agreement or this article.

7. Obligation to Cure. Subsection (b) applies to cases where the licensee is required to accept a performance because the material breach standard is not met even though some defect exists. It creates an obligation to attempt a cure. Failure to undertake the effort is a breach, but if the effort occurs and fails, there is no additional breach of contract. The obligation is limited by a concept of proportionality. No obligation arises if it would entail costs disproportionate to the direct damages caused by the nonconformity. Thus, for example, if a party delivers a one thousand name list for $500 that omits five non-material names reducing the value of the list by a small amount, it has no obligation to cure if obtaining those additional names would be disproportionate to the damages. In such case, the proper remedy is the difference in value (if any) of the copy rendered and the performance promised.

[B. Performance in Delivery of Copies]

SECTION 2B-607. COPY: DELIVERY; TENDER OF DELIVERY.

(a) Delivery of a copy must be at the location designated by agreement, but, in the absence of a such designation, the following rules apply:

(1) The place for delivery of a copy on a physical medium is the tendering party's place of business or, if it has none, its residence. However, if the parties know at the time of contracting that the copy is located in some other place, that place is the place for delivery.

(2) The place for delivery of a copy electronically is an information processing system designated by the licensor.

(3) Documents of title may be delivered through customary banking channels.

(b) Tender of delivery of a copy requires the tendering party to put and hold a conforming copy at the other party's disposition and give the other party any notice reasonably necessary to enable it to obtain access, control, or possession of the copy. Tender must be at a reasonable hour and, if applicable, requires the tender of access material and other documents required by the agreement. The party receiving tender shall furnish facilities reasonably suited to receive tender. In addition, the following rules apply:

(1) If the contract requires delivery of a copy held by a third person without being moved, the tendering party shall tender access material or documents required by the agreement.

(2) If the tendering party is required or authorized to send a copy to the other party and the contract does not require the tendering party to deliver the copy at a particular destination, the following rules apply:

(A) In tendering delivery of a copy on a physical medium, the tendering party shall put the copy in the possession of a carrier and make a reasonable contract for its transportation that is reasonable in light of having regard to the nature of the information and other circumstances, with expenses of transportation to be borne by the receiving party.

(B) In tendering electronic delivery of a copy, the tendering party shall initiate a transmission that is reasonable in light of having regard to the nature of the information and other circumstances, with expenses of transmission to be borne by the receiving party.

(3) If the tendering party is required to deliver a copy at a particular destination, the party shall make a copy available at that destination and bear the expenses of transportation or transmission.

[SECTION 2B-607A. COPY: PERFORMANCE RELATED TO DELIVERY; PAYMENT.] If performance requires delivery of a copy:

(1) The party required to deliver need not complete a tendered delivery until the receiving party tenders any performance then due.

(2) Tender of delivery is a condition of the other party's duty to accept the copy.

(3) Tender entitles the tendering party to acceptance of the copy.

(4) If payment is due on delivery of a copy, the following rules apply:

(A) Tender of delivery is a condition of the receiving party's duty to pay.

(B) Tender entitles the tendering party to payment according to the contract.

(C) All copies a contract required by the contract must be tendered in a single delivery, and payment is due only on tender.

(5) If the circumstances give either party the right to make or demand delivery in lots, the contract fee, if it can be apportioned, may be demanded for each lot.

(6) If payment is due and demanded on delivery of a copy or on delivery of a document of title, the right of the party receiving tender to retain or dispose of the copy or document, as against the tendering party, is conditional on making the payment due.

Definitional Cross References.

"Agreement": Section 1-201. "Contract": Section 1-201. "Contract fee": Section 2B-102. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Electronic": Section 2B-102. "Information": Section 2B-102. "Information processing system": Section 2B-102. "Notice": Section 1-201. "Party": Section 2B-102. "Receive": Section 2B-102. "Send". Section 2B-102. "Term". Section 1-201.

Reporter's Notes:

This composite section corresponds to Article 2 with changes that reflect information as the subject matter. This section maintains the traditional distinction between shipment and destination contracts as that rule exists under original Article 2 and also the underlying doctrine as to determining when a contract is a shipment or a destination contract. As under Article 2, the presumption is that the licensor is not required to deliver to a particular destination unless the agreement so provides. This, the obligation in the absence of agreement is to make the copies available at the licensor's site or, if shipment is expected, to tender them to a carrier making appropriate arrangements for their transport with fees paid by the recipient. Merely designating a place to which shipment is made does not in itself alter the presumption that a "shipment contract" is intended. The presumption can be altered or confirmed, of course, by the shipment terms (e.g., FOB, CIF) the parties require in their agreement. The proposed new sections reflect suggestions that shortening the section would aid in interpretation.

SECTION 2B-608. COPY: RIGHT TO INSPECT; PAYMENT BEFORE INSPECTION.

(a) Except as otherwise provided in Sections 2B-603 and 2B-604, if performance requires delivery of a copy, the following rules apply:

(1) Except as otherwise provided in this section, the party receiving the copy has a right before payment or acceptance to inspect at a reasonable place and time and in a reasonable manner to determine conformance to the contract.

(2) Expenses of inspection must be borne by the party making the inspection.

(3) A place or method of inspection or an acceptance standard fixed by the parties is presumed to be exclusive. However, the fixing of a place, method, or standard does not postpone identification to the contract or shift the place for delivery, passage of title, or the risk of loss. If compliance with the place or method becomes impossible, inspection must be made as provided in this section unless the place or method fixed by the parties was an indispensable condition the failure of which avoids the contract.

(4) A party's right to inspect is subject to existing obligations of confidentiality.

(b) If a right to inspect exists under subsection (a), but the agreement is inconsistent with an opportunity to inspect before payment, the party does not have a right to inspect before payment.

(c) If the contract requires payment before inspection of a copy, nonconformity in the tender does not excuse the party receiving the tender from making payment unless:

(1) the nonconformity appears without inspection and would justify refusal under Section 2B-609; or

(2) despite tender of the required documents, the circumstances would justify an injunction against honor of a letter of credit under Article 5.

(d) Payment made under the circumstances described in subsection (b) or (c) is not an acceptance of the copy and does not impair a party's right to inspect or preclude any of the party's remedies.

Uniform Law Source: CISG art. 58(3); Section 2-512; 513. Revised.

Definitional Cross Reference:

"Agreement": Section 1-201. "Contract": Section 1-201. "Copy": Section 2B-102. "Delivery": Section 2B-102.

"Party": Section 2B-102.

Reporter's Notes:

This section generally conforms to original Article 2 with changes that reflect information as the subject matter.

SECTION 2B-609. COPY: REFUSAL OF DEFECTIVE TENDER.

(a) Subject to subsection (b) and Sections 2B-610 and 2B-611, if a tender of a copy constitutes a material breach of contract, the party to which tender is made may:

(1) refuse the tender;

(2) accept the tender; or

(3) accept any commercially reasonable units and refuse the rest.

(b) In a mass-market license, a licensee may refuse a tender of a copy if the contract calls only for a single tender and the copy or tender fail in any respect to conform to the contract. The refusal cancels the contract.

(c) Refusal is ineffective unless it is made before acceptance and within a reasonable time after tender or completion of any permitted effort to cure and the refusing party seasonably notifies the tendering party.

(d) Except as otherwise provided in subsection (b), a party that refuses tender of a copy may cancel the contract only if there has been a material breach of the entire contract or the agreement so provides.

Uniform Law Source: Combines 2-601, 2-602, 2A-509. Revised.

Definitional Cross References.

"Aggrieved party": Section 1-201. "Agreement": Section 1-201. "Cancel": Section 2B-602. "Contract": Section 1-201. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Licensee". Section 2B-102. "Mass-market license": Section 2B-102. "Notifies": Section 1-201. "Party": Section 2B-102.

Reporter's Notes:

1. Scope of Section. This section deals with refusal of copies. It is a specific application of the rule in Section 2B-601. In general, the right to refuse a performance hinges on there being a material nonconformity or an uncured, prior material breach by the tendering party. The right to refuse is subject to Sections 2B-610 and 2B-611. This section applies a different rule for mass-market transactions.

2. Acceptance of the Tender. A party may accept or reject all of tendered multiple copies, but may also accept some commercial units and reject the rest. This rule comes from Article 2 where the commercial units are separable and clearly identifiable. It should be interpreted in reference to that context. If the vendor tenders thirty copies of a software product and ten are defective, the licensee can accept the twenty and reject the remainder.

In general, acceptance of a performance does not waive the party's rights to a remedy for breach unless it occurs in a setting in which the acceptance constitutes a waiver. Under subsection (a), this principle carries forward to cover circumstances of acceptance of part of the tendered performance. The primary limits on partial acceptance are that it must occur in good faith and that commercial reasonableness must be considered to avoid impairment of the value of the items that were rejected due to breach.

This does not permit a party to disassemble an integrated or composite product, keeping what it desires and rejecting the rest. The part accepted (or rejected) must be a reasonable commercial unit. Reasonableness reflects the overall tender. It is not reasonable to reject parts of a tender provided as an integrated whole. The issue is not whether some of the composite product could have been provided separately, but whether as provided pursuant to the agreement, it was a separable element and whether it is reasonable to treat it as separate and apart from the remaining, rejected units.

3. Conforming Tender Rule. Subsection (b) adopts the "conforming tender" rule for mass-market transactions that fit the circumstances under which that rule exists under original Article 2 - transactions where the only obligation of the transferor entails providing a copy in a single delivery. In more complex transactions, neither original Article 2, nor this article require conforming tender as a precondition to the recipient's obligation to accept.

While often described as a "perfect tender" rule, the "conforming tender" rule does not require tender of a "perfect" copy or "perfect" product. The rule displaces general law concepts based on the material breach (or substantial performance) standard. What performance conforms to the agreement depends on what the agreement entails, including the express terms as interpreted in light of usage of trade, course of dealing and concepts of merchantability. In addition, refusal of a tender may yield a right or opportunity to cure. Section 2B-606.

4. Effective Refusal. Under subsection (c), refusal of a tender is ineffective if the refusing party does not timely notify the other party of its refusal. This corresponds to waiver rules under common law and this article. It precludes arguments that silent "refusal" can be coupled with active use of the information.

5. Refusal and Cancellation. Many transactions involve contractual commitments that go beyond the obligation to deliver a particular copy. Subsection (d) confirms that an aggrieved party that refuses tender of a copy may cancel the contract only if the breach is a material breach of the entire contract or the agreement so provides. Cancellation of the entire contract requires breach that is material as to the entire agreement, or a contract term that allows cancellation.

SECTION 2B-610. COPY: INSTALLMENT CONTRACTS; REFUSAL AND DEFAULT.

(a) In this section, "installment contract" means a contract in which the terms require or authorize delivery of copies of the same information with the same informational rights in lots to be separately accepted, even if the contract contains a term that states "Eeach delivery is a separate contract", or words of similar importits equivalent.

(b) In an installment contract, the party receiving tender may refuse a nonconforming installment if the nonconformity is a material breach as to that installment and cannot be cured or if the nonconformity is a defect in any required documents. However, if the nonconformity is not within subsection (c) and the tendering party gives adequate assurance of its cure, the aggrieved party shall must accept that installment and may not cancel the contract unless the tendering party fails seasonably to complete the cure.

(c) If a nonconformity or breach with respect to one or more installments is material as to the entire contract, there is a breach as to the entire contract. However, the aggrieved party reinstates the contract if it accepts a nonconforming installment without seasonably notifying the party in breach of cancellation or if the aggrieved party brings an action with respect only to past installments or demands performance as to future installments.

Definitional Cross Reference:

"Aggrieved party": Section 1-201. "Cancellation": Section 2B-102. "Contract": Section 1-201. "Delivery": Section 2B-102. "Information": Section 2B-102. "Notify": Section 1-201. "Party": Section 2B-102. "Seasonably": Section 1-204. "Term". Section 1-201.

Reporter's Note:

This section generally conforms to original Article 2 with changes that reflect information as the subject matter.

SECTION 2B-611. COPY: CONTRACTS WITH A PREVIOUS VESTED GRANT OF RIGHTS. If an agreement grants a rights in or permissions to use informational rights which precedes or is are otherwise independent of the delivery of a copy, the following rules apply:

(1) A party may refuse a tender of a copy which is a material breach as to that copy, but refusal of ing that tender does not cancel the contract.

(2) In a case governed by paragraph (1), the tendering party may cure the breach by seasonably providing a conforming copy before the breach becomes material as to the entire contract.

(3) A breach that is material with respect to a copy allows cancellation of the contract only if the breach cannot be seasonably cured and is a material breach of the entire contract.

Definitional Cross Reference:

"Agreement": Section 1-201. "Cancel": Section 2B-102. "Contract": Section 1-201. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Informational Rights": Section 2B-102. "Party": Section 2B-102. "Seasonably": Section 1-204.

Reporter's Notes:

1. Scope and Purpose. This section deals with an important contractual relationship in information industries that resembles, but differs from "installment" contracts. The similarity lies in that more than one performance by the licensor occurs. The difference is that the performances involve a grant of informational rights followed by delivery of a copy, while installment contracts deal with serial deliveries of copies.

The section follows commercial practice and distinguishes between (1) agreements where a grant to use informational rights vests independent of any copy, and (2) agreements where the purpose is to obtain informational or other rights associated with a copy. It describes the relationship in the former situation between a tender of a copy and cancellation of the entire contract or cure of the tender. Refusal of the copy does not necessarily permit cancellation of the contract. The grant of rights (already vested) is an independent, performed part of the agreement and any particular copy used to implement that grant is a mere conduit. If the copy does not materially breach the entire contract, the tendering party has a right to cure. That right is cut off only if tender and a failed or delayed cure constitute a material breach of the whole agreement.

2. Nature of the Transaction. The section applies only if the contract vests the right or permission to use informational rights without the transferee's receipt of a copy. Whether this circumstance exists depends on the agreement. It is, however, a routine transaction in information industries, especially in distribution agreements and performance rights.

When a vested rights transaction occurs, the parties view a copy as a mere conduit to complete an already vested grant. In such cases, a defect in a copy is not necessarily material to the entire contract. In contrast, if the agreement does not create a prior vesting of rights and the transaction is not an installment contract, a material defect in the copy tendered is more often material to the entire transaction. This may benefit or disadvantage either party depending on the circumstances. Thus, if the contract is for rights associated with a copy, the licensee that refuses the copy is left solely with an action for damages; refusal in essence cancels the contract. If the informational rights vest by agreement independent of a copy, the licensee can refuse the copy and still expect and insist on performance and exercise rights under the contract.

Illustration 1. IBM grants LE the right to distribute up to twenty thousand copies of its Fast-Pace Internet software in the United States during one year. Several weeks later, IBM delivers a master disk of the software for LE. The master disk contains a manufacturing flaw. The contract is within this section. LE can refuse the copy if the defect was material as to the copy, but cannot cancel the entire contract unless the defect and the delay was material to the entire contract. IBM can cure by timely tendering a conforming copy. LE can recover damages for the delay, if any.

Illustration 2. LE orders a 100 person site license from Micro for its operating system software. Micro ships a copy of the software, but the copy is warped and defective and arrives several weeks late. This contract is not within this section since there was no vested right to use informational rights independent of the copy to be delivered.

Illustration 3. Prince D's estate grants LE an exclusive license to show a still photographs of Prince D on an Internet Website for one week during June, 1999, the anniversary of Prince D's death also giving LE the right to advertise the exhibit. A copy of the photographs is to be delivered one week before the first showing. The copy is delivered several days late and the copy is technically defective and cannot be used. LE refuses the copy. The contract is within this section because the grant of rights is independent of the copy. Refusal does not cancel the contract. LE can continue to advertise. Prince D can cure in a reasonable time unless it delays to the point that it creates a material breach of the entire contract.

SECTION 2B-612. COPY: DUTIES UPON RIGHTFUL REFUSAL.

(a) After rightful refusal of a copy, if the refusing party rightfully cancels the contract, Section 2B-702 applies, but if the contract is not canceled, the parties remain bound by all contractual obligations.

(b) The following rules apply to a copy that was rightfully refused and to any copies of it that are within the possession or control of the refusing party to the extent that the rules are consistent with Section 2B-702 if that section also applies:

(1) Any use, sale, or other transfer of the refused copy or the information it contains, or any failure to comply with a contractual use restriction, is a breach of contract unless authorized by this section or by the tendering party. However, use for a limited time within contractual use restrictions is not a breach and does not constitute acceptance under Section 2B-613(a)(5) if the use:

(A) occurs after the tendering party is seasonably notified of refusal;

(B) is not for distribution and is solely to mitigate loss; and

(C) is not contrary to instructions concerning disposition of the copy received from the party in breach.

(2) The refusing party shall:

(A) deliver all copies, access materials, and documentation pertaining to the refused copy to the tendering party or hold them with reasonable care for a reasonable time for disposal at that party's instructions; and

(B) follow reasonable instructions of the tendering party for returning or delivering the copies, access material, and documentation. Instructions are not reasonable if the tendering party does not arrange for payment of or reimbursement for reasonable expenses of complying with the instructions.

(3) If the tendering party gives no instructions within a reasonable time after being notified of refusal, the refusing party may, in a reasonable manner to avoid or mitigate loss, store the copies, access material, and documentation for the tendering party's account or ship them to the tendering party and is entitled to reimbursement for reasonable costs of storage and shipment.

(4) The refusing party has no contractual obligations other than those stated in this section or the contract agreement with respect to the copy, access material, and documentation that were refused. Both parties remain bound by any contractual use restrictions that would have been enforceable had the performance not been refused.

(5) In complying with this section, the refusing party shall act in good faith and with care that is reasonable in the circumstances. Reasonable conduct in good faith under this section is not acceptance or conversion and is not the basis for an action for damages under the contract.

Uniform Law Source: Section 2-602(2), 2-603, 2-604.

Definitional Cross Reference:

"Access material": Section 2B-607. "Aggrieved party": Section 1-201. "Agreement": Section 1-201. "Cancel": Section 2B-102. "Contract": Section 1-201. "Contractual use restriction": Section 2B-102. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Good faith": Section 2B-102. "Information": Section 2B-102. "Notify": Section 1-201. "Party": Section 2B-102.

Reporter's Note:

1. Scope of the Section. This section deals with the rights and obligations of a party that rightfully refuses tender of a copy and remains in possession or control of that copy or copies made from it. The section coordinates with Section 2B-702 in the event of cancellation of the contract. If it applies, Section 2B-702 controls to the extent of any conflict. This includes, of course, the various terms provided as surviving cancellation.

2. Cancellation and Refusal. Refusal of a copy may or may not permit cancellation or result in a decision to cancel the entire contract. If it does result in cancellation, Section 2B-702 governs the handling of copies to the extent it is inconsistent with this section. If the contract is not canceled, this section applies in full, and the parties remain bound by all contractual obligations, except of course, as altered by the breach itself and the remedies thus made available.

The difference lies in the fact that cancellation requires both parties promptly to disengage from the entire contract, returning any material previously received and refraining from any use of the information that would be allowed under the license. Cancellation ends the license. On the other hand, refusal without cancellation presumes that the contract continues to govern the rights and obligations of the parties, although the refused copy and related material will be returned to the tendering party, or any defect cured.

3. No Right to Use. In general, under paragraph (b)(1), a refusing party has no right to use the refused copies or any copies made from them. Uses inconsistent with this section or the contract constitute a breach by the party engaging in or allowing the misuse and may, in appropriate cases, be treated as acceptance of the tendered copies.

Despite this general principle, the paragraph permits limited, short-term uses for purposes of mitigating loss. The uses must be solely for the purposes of mitigation and cannot extend to disclosure of confidential information, violation of a contractual use restriction, or sale of the copies. It cannot be inconsistent with the refusal. This section asks courts to reach the balance discussed in Can-Key Industries v. Industrial Leasing Corp., 593 P.2d 1125 (Or. 1979) and Harrington v. Holiday Rambler Corp., 575 P.2d 578 (Mont. 1978) with respect to goods, but with an understanding of the nature of any intellectual property rights that may be involved.

4. Handling Copies. This section does not give the refusing party a right to sell goods, documentation or copies under any circumstance. The materials may be confidential and may be subject to the overriding influence and limitations of the proprietary rights held and retained by the other party. In the case of a refusal of a copy, there is no commercial necessity to sell that copy to a third party to avoid commercial loss. More important, in many cases, sale would be clearly inconsistent with protecting the interests of the tendering party which are often focused on protection of confidentiality or control, not on optimal disposition of the goods that may contain a copy of the information.

5. Confidentiality. Both parties remain bound by contractual use restrictions, including confidentiality obligations with respect to the information. Unlike in reference to sales of goods, it is not uncommon that each party have some such information of the other and a mutual, continuing restriction is appropriate to the extent allowed by applicable trade secret or other law. The contractual use restrictions, of course, relate only to the information acquired under and subject to the license. This does not restrict the party's ability to obtain the same information from alternative lawful sources independent of the contract restrictions.

SECTION 2B-613. COPY: WHEN ACCEPTANCE OCCURS; EFFECT.

(a) Acceptance of a copy occurs when the party to which the copy is tendered:

(1) signifies, or acts with respect to the copy in a manner that signifies, that the tender was conforming or that the party will take or retain the copy in spite of a nonconformity;

(2) fails to make an effective refusal;

(3) commingles the copy or the information in a manner that makes compliance with the party's duties after refusal impossible;

(4) substantially obtains the benefit from the copy and cannot return that benefit; or

(5) acts in a manner inconsistent with the licensor's ownership, but any such act is an acceptance only if the licensor elects to treat it as an acceptance and ratifies the act to the extent it was within contractual use restrictions.

(b) Except in cases governed by subsection (a)(3) or (4), if there is a right to inspect under Section 2B-608 or the agreement, acceptance of a copy occurs only after the party has had a reasonable opportunity to inspect.

(c) If an agreement requires delivery in stages involving separate portions which taken together comprise the whole of the information, acceptance of any stage is conditional until acceptance of the whole.

Reporter's Notes:

1. Nature of Acceptance. Acceptance of a copy is the opposite of refusal. Under Section 2B-613A(a), acceptance precludes refusal and, if made with knowledge of any nonconformity, may not be revoked because of it unless acceptance was on the reasonable assumption that the nonconformity would be seasonably cured. In the case of a transaction in which payment is due on delivery of the copy, acceptance entitles the licensor to payment. More broadly, unless revoked, acceptance of a copy entitles the licensor to whatever consideration is to be given for copy. In contrast, of course, rightful refusal of the copy does not create an obligation to pay or give other consideration unless the licensor cures. Acceptance puts the burden on the party accepting the copy to prove any breach with respect to that copy. See also Section 2B-601.

While acceptance of a copy precludes refusal of the copy unless acceptance is revoked, acceptance does not in itself impair any other remedy for nonconformity. Except in cases of waiver under Section 2B-605, for example, the accepting party retains the right to recover damages for breach where the copy is defective.

2. What constitutes Acceptance. Subsection 2B-613(a) provides guidance on what constitutes acceptance of a copy. Paragraphs (a)(1) and (a)(2) conform to Section 2-606 and to Article 2A. They clarify that acts as well as communications may signify acceptance. These paragraphs must be read in connection with subsection (b) which retains existing Article 2 rules by indicating that the referenced acts or communications are not acceptance if the party had a right to inspect the information or copy under the agreement or the default rules of this article, unless they occur after there has been a reasonable opportunity to inspect.

a. Commingling Paragraphs (a)(3) and (a)(4) focus on two circumstances significant in reference to information and that raise issues different from cases involving goods. In paragraph (a)(3), the rule reflects that it is inequitable or impossible to reject data or information having commingled the material. The party that commingles the information retains the right to its remedies for breach, but the concept of a refusal of the tendered copy is not a helpful paradigm in working through the rights of the parties. To refuse a tendered copy (or revoke an acceptance of the copy), the refusing party must return or keep available the information for return to the other party. Commingling precludes this. Commingling refers to blending the information into a common mass in which it is indistinguishable. It also refers to software integrated into a complex system in a way that renders removal and return impossible or information integrated into a database or knowledge base from which it cannot be separated.

b. Non-returnable Benefits. Subsection (a)(4) involves use or exploitation of the value of the material by the licensee. In information transactions, in many instances merely being exposed to the factual or other material transfers the significant value. Often, use of the information does the same. Again, rejection is not a useful paradigm. The recipient can sue for damages for breach and, when breach is material, either collect back its paid up price or avoid paying a price that would otherwise be due.

c. Ownership. Paragraph (a)(5) adopts the Article 2 rule that, even though the buyer did not explicitly accept the goods, its acts inconsistent with the vendor's ownership constitute acceptance if ratified by the seller. This gives the seller an option to either treat the acts as acceptance, or to treat the situation as a rejection of the goods followed by acts of conversion or the like. In information transactions, the options are less clear, since a licensee can avoid explicit acceptance of the information, but then act in a manner that is outside the contract terms, even had it accepted the tender. The language of paragraph (a)(5) gives the licensor a right to elect where the inconsistent acts are within contractual use restrictions. Paragraph (a)(5) modifies the Article 2 rule and recognizes that if the licensor decides to treat the acts as acceptance, it need not also ratify actions of a licensee's that would, in any event, be outside the contract terms. For example, if a licensor provides a conforming copy of educational software pursuant to a license for use in a single school district and the district, while not communicating acceptance of the copy, distributes the software throughout the country, the licensor can either: 1) treat silence as refusal of the tender and sue for breach and infringement, or 2) treat the actions as acceptance and sue for the price, ratifying uses within the designated district, but also sue for infringement as to uses or distribution outside the contract terms.

[SECTION 2B-613A. COPY: EFFECT OF ACCEPTANCE OF A COPY.]

(a) Acceptance of a copy precludes refusal and, if made with knowledge of a nonconformity in the tender, may not be revoked because of it unless acceptance was on the reasonable assumption that the nonconformity would be seasonably cured. Acceptance does not in itself impair any other remedy for nonconformity.

(b) The party accepting a copy has the burden of proving a breach of contract with respect to the copy.

(c) If a copy has been accepted, the accepting party shall:

(1) within a reasonable time after it discovers or should have discovered any breach, notify the other party of a breach or be barred from any remedy for that breach; and

(2) if the claim is for breach of an obligation regarding noninfringement and the accepting party the copy is sued by a third party because of such the breach, notify the other party within a reasonable time after receiving notice of the litigation or be barred from any remedy over for the liability established by the litigation.

Uniform Law Source: Section 2-606; 2-607(2); Section 2A-515. Revised.

Definitional Cross Reference:

"Agreement": Section 1-201. "Cancel": Section 2B-102. "Contract": Section 1-201. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Party": Section 2B-102. "Remedy": Section 1-201.

Reporter's Notes:

This section deals with the effect of acceptance of a copy. It derives largely from existing Article 2 and Article 2A provisions on the similar subject matter, but makes some changes in those rules to reflect the nature of information as the primary focus of the transaction, rather than the copies themselves.

SECTION 2B-614. COPY: REVOCATION OF ACCEPTANCE.

(a) A party that has accepted a nonconforming copy may revoke acceptance only if the a nonconformity is a material breach of contract and the party accepted the copy:

(1) on the reasonable assumption that the nonconformity would be cured, and it has not been seasonably cured;

(2) during a period of continuing efforts by the party in breach at adjustment and cure, and the breach has not been seasonably cured; or

(3) without discovery of the nonconformity, if the acceptance was reasonably induced either by the other party's assurances or by the difficulty of discovery before acceptance.

(b) Revocation is not effective until the revoking party notifies the other party of the revocation.

(c) Revocation is barred if:

(1) it does not occur within a reasonable time after the party attempting to revoke discovers or should have discovered the ground for it;

(2) it occurs after a substantial change in condition or identifiability not caused by defects in the information, such as after the party commingles the information in a manner that makes its return impossible; or

(3) the party attempting to revoke received a substantial benefit from the information, which benefit cannot be returned.

(d) A party that rightfully revokes has the same duties and is under the same restrictions as if the party had refused the copy.

Uniform Law Source: Section 2A-516; 2-608. Revised.

Definitional Cross Reference:

"Copy": Section 2B-102. "Information": Section 2B-102. "Informational Rights": Section 2B-102. "Licensee". Section 2B-102. "Notifies: Section 1-201. "Party": Section 2B-102. "Seasonable": Section 1-204.

Reporter's Note:

1. Scope of the Section. This section sets out rules for determining whether a party may revoke acceptance of a copy. Revocation, when effective, returns the parties to the same position as if the copy had been refused. In effect, the revoking party is no longer liable for the purchase price and, in appropriate circumstances, can obtain a refund. This section deals only with revocation of acceptance of a copy.

2. Conditions for Revocation. Revocation is appropriate only if the breach is a material breach. This is true even in cases involving mass market licenses which may involve application of the "conforming tender" rule with respect to the initial right to refuse the tender of delivery. Acceptance ordinarily establishes a closure of the transaction with respect to the accepted copy. That expectation cannot be altered based on mere minor defects. For this purpose, the general standards of material breach apply. Section 2B-109. This follows law under original Article 2 and Article 2A. Under subsection (b), revocation requires notice to the other party and is not effective until the other party is so notified.

Revocation is inappropriate if based on a defect in the copy or the information of which the accepting party was aware when it accepted the copy. This follows law under original Article 2. Acceptance with knowledge of a defect does not eliminate other remedies of the party unless it creates a waiver, but does bar revocation based on the defect unless conditions mentioned in subsection (a) are present. These deal with two different circumstances:

a. Expectation of Cure. In the first, revocation may be permitted if the acceptance was on the assumption that the defect would be cured. This is dealt with in both paragraph (a)(1) and paragraph (a)(2). It allows the parties to proceed on a course involving a mutual effort to resolve problems within the contract, rather than by ending it. Paragraph (a)(2) adds a provision not found in Article 2 to deal with an issue often encountered in software litigation. In cases of continuing efforts to modify and adjust the software to fit the licensee's needs, asking when an acceptance occurred raises unnecessary factual disputes. Both parties know that problems exist and this would allow revocation if the effort fails within a seasonable time and the other conditions barring revocation do not arise.

b. Latent Defects. Paragraph (a)(3) follows original Article 2 and allows revocation if the defect was not discovered before acceptance because of the difficulty of discovery or assurances from the other party that had the effect of delaying discovery.

[C. Special Types of Contracts]

SECTION 2B-615. ACCESS CONTRACTS.

(a) If an access contract provides for access over a period of time, the licensee's rights of access are to the information as modified and made commercially available by the licensor from time to time during that period. In addition, the following rules apply:

(1) A change in the content of the information is a breach of contract only if the change conflicts with an express term of the agreement.

(2) Unless it is subject to a contractual use restriction, information obtained by the licensee is free of any use restriction other than a restrictions resulting from the informational rights of another person or other applicable law.

(3) Access must be available at times and in a manner:

(A) conforming to the express terms of the agreement; and

(B) to the extent not expressly stated in the agreementdealt with by the contract, at times and in a manner that is reasonable for the particular type of contract in light of the ordinary standards of the business, trade, or industry.

(b) In an access contract that gives the licensee a right of access at times substantially of its own choosing during agreed periods of time, an intermittent and occasional failure to have access available during those times is not a breach of contract if it is:

(1) consistent with the express terms of the contractagreement;

(2) consistent with ordinary standards of the business, trade, or industry for the particular type of contract; or

(3) caused by:

(A) scheduled downtime;

(B) reasonable needs for maintenance;

(C) reasonable periods of equipment, software, or communications failure; or

(D) events reasonably beyond the licensor's control and the licensor exercises such commercially reasonable efforts as the circumstances require.

Definitional Cross Reference:

"Access contract": Section 2B-102. "Agreement": Section 1-201. "Contract": Section 1-201. "Contractual use restriction": Section 2B-102. "Information": Section 2B-102. "Informational Rights": Section 2B-102. "License": Section 2B-102. "Licensee". Section 2B-102. "Licensor": Section 2B-102. "Person": Section 2B-102. "Software". Section 2B-102. "Term". Section 1-201.

Reporter's Note:

1. Scope of the Section. This section provides default rules dealing for basic attributes of an access contract concerning availability of access and treatment of information obtained as a result of that access.

2. Nature of an Access Contract. There are two types of access contract. In one, the access and the contract occur at the same time and there is no on-going relationship between the parties. In the other, a continuous access contract, the licensee has a right to intermittent access at times of its own choosing within the time period of agreed availability. This relationship is illustrated by on-line services which operate on a subscription or membership basis. The agreement is not only that the transferee receives the access or the information, but that the subject matter be accessible on a continuing basis. A continuous access contract is unlike installment contracts under Article 2 which are segmented into tender-acceptance sequences. Often, the licensor here merely keeps the system on-line and available for the licensee to access when it chooses.

Access contracts are licenses in the pure sense that they grant a right to have use of a facility or resource controlled by the licensor. This is not an intellectual property license, but a modern application of traditional concepts of licensed use of physical resources applied to electronic. They do not fall within Article 2.

3. Basic Obligation. The obligation in a continuous access contract is to make and keep the system available in a manner consistent with contract terms or industry.

a. General Standards of Availability. As indicated in subsection (a)(3), availability is subject to contractual specification, but in the absence of contract terms, the appropriate reference is to general standards of the industry involving the particular type of transaction. Thus, a contract involving access to a news and information service would have different accessibility expectations than would a contract to provide remote access to systems for processing air traffic control data. See Reuters Ltd. v. UPI, Inc., 903 F.2d 904 (2d Cir. 1990); Kaplan v. Cablevision of Pa., Inc., 448 Pa. Super. 306, 671 A.2d 716 (Pa. Super. 1996).

b. Content Changes. The access agreement does not bind the provider of access to making available particular information unless the express contract terms require this. Access is granted to the information or other resources provided as they exist at the time of the particular access. Databases may be added, modified or deleted consistent with this core obligation.

4. Use of Received Information. The access contract may or may not contain provisions that restrict use of information obtained through the access. If there are no restrictions provided in the agreement, subsection (a)(2) indicates that the information is received on an unrestricted basis, subject only to intellectual property rights and any separate agreement concerning that information. For example, if an access contract merely enables access to news articles, but does not limit their use by the licensee, no limitation exists other than under copyright law.

In contrast, if a transaction allowing access or a separate agreement establish conditions or limitations on the use of the information obtained through the access, those license terms would be governed under Article 2B. They are interpreted and enforced pursuant to other provisions of this article and, of course, the terms of the agreement itself. Once the information is received by the licensee, however, it is ordinarily no longer appropriate to construe the relationship as an access contract, but rather, it is simply a license. For example, if licensee uses the access provided by its contract with ABC Corporation to acquire a copy of a spreadsheet program, when the program is received by the licensee, the rights and remedies of the parties with respect to use of the program are governed by the agreement with respect to that program and, in the absence of agreed terms, by the default rules of this article regarding software licenses. As to the software, the relationship ceased to be an access contract when the software was received by the licensee. Of course, the terms of the license may be found in the agreement establishing the access contract or in a separate agreement concerning the licensed information.

The restrictions that might arise are not necessarily based on creation of a license. In some cases, a mere copyright notice may adequately restrict the right to use the information obtained through the on-line access. Storm Impact, Inc. v. Software of the Month Club, 1998 WL 456572 (N.D. Ill. 1998) (On-screen limitation precluding commercial use of software enforced and resulting use infringed; court did not clarify whether the notice was a license or merely limited permission granted by posting the software on the Internet).

SECTION 2B-616. CORRECTION AND SUPPORT AGREEMENTS.

(a) If a person agrees to correct performance problems or provide similar services with respect to information other than as an effort to cure its own breach of contract, the following rules apply:

(1) Except as otherwise provided in paragraph (2), the person:

(A) shall perform at a time and, place and in a manner consistent with the express terms of the agreement and, to the extent not stated in dealt with by the express terms, at a time and , place and in a manner that is reasonable in light of ordinary standards of the business, trade, or industry; and

(B) does not undertake that its services will correct all performance problems unless the agreement expressly so provides.

(2) If the services are provided by a licensor of the information as part of a limited remedy, the licensor undertakes that its performance will provide the licensee with information that conforms to the agreement to which the limited remedy applies.

(b) A licensor is not required to provide instruction or other support for the licensee's use of information or access. A person that agrees to provide support shall make the support available in a manner and with a quality consistent with the express terms of the support agreement and, to the extent not stated in the dealt with by express terms, at a time and, place and in a manner that is reasonable in light of ordinary standards of the business, trade, or industry.

Uniform Law Source: Restatement (Second) of Torts § 299A.

Definitional Cross Reference:

"Agreement": Section 1-201. "Contract": Section 1-201. "Information": Section 2B-102. "Licensee". Section 2B-102. "Licensor": Section 2B-102. "Person": Section 2B-102. "Remedy": Section 1-201. "Term". Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section provides default rules regarding contracts to correct errors or to provide support in use of information. A support agreement is an agreement to make available advisory or consulting services relating to the use of the information. The default rules do not apply if the parties have otherwise agreed. Agreement altering these terms does not depend on express terms of a record, but can be found or inferred from the circumstances surrounding the contracting, applicable usage of the trades, in course of dealing and the like.

2. Nature of the Error Correction Obligation. Obligations to correct performance problems are different from an obligation to provide updates or new versions of software to remedy warranty breaches. In modern practice, contracts to provide updates are a source of revenue for software providers. The reference to error correction covers contracts where, for example, a vendor agrees to be available to come on site and correct or attempt to correct problems in the software for a fee. This is a services contract. An agreement to provide updates or new versions, on the other hand, is more in the nature of an installment contract calling for deliveries as new versions of the software are developed and made available for general distribution. While the new versions often cure problems in earlier versions and the two types of contracts overlap, the update arrangement deals with new products. This article makes no attempt to set standards by which this distinction can be made in fact, but courts faced with the issue must necessarily refer to the terms of the agreement of the parties and general industry standards.

3. Services Obligation. Most agreements to correct problems are services contracts. In most cases, the obligation is as stated in subsection (a)(1). The obligation parallels the obligation that any services provider undertakes: a duty to act consistent with the standards of the business to complete the task. A services provider does not guaranty that its services yield a perfect result. The standard measures a party's performance by reference to standards of the relevant trade or industry.

4. Services in Lieu of Warranty. Subsection (a)(2) recognizes an alternative formulation of the provider's obligations in contracts where the promissor agrees to a particular outcome. This obligation arises if the repair obligation is part of a limited remedy in lieu of a warranty. The prototype is the "replace or repair" warranty. The obligation to correct errors in that context is to complete a product that conforms to the contract. What performance conforms to the contract, of court, hinges on the terms of that agreement as interpreted in light of usage of trade, course of performance and the like. If the services performance fails to yield a conforming product, what remedy is available depends on other rules in this article, such as the conditions for cancellation and rules on perfect tender or substantial performance.

5. Support Agreements. Subsection (b) provides a default rule regarding support agreements. As a form of services contract, the appropriate standard is an obligation consistent with reasonable standards of the industry.

SECTION 2B-617. CONTRACTS INVOLVING PUBLISHERS, DEALERS, AND END USERS.

(a) In this section:

(1) "Dealer" means a merchant licensee that receives information directly or indirectly from a licensor for sale or license to end users.

(2) "End user" means a licensee that acquires a copy of the information from a dealer by delivery on a physical medium for the licensee's own use and not for sale, license, transmission to third parties, or for public display or performance for a fee.

(3) "Publisher" means a licensor, other than a dealer, that offers a license to an end user with respect to information distributed to the end user by a dealer.

(b) In a contract between a dealer and an end user, if the end user's right to use the information or informational rights is subject to a license from the publisher and there was no opportunity to review the license before the end user became obligated to pay the dealer, the following rules apply:

(1) The contract between the end user and the dealer is conditioned on the end user's agreement to the publisher's license.

(2) If the end user does not agree, by manifesting assent or otherwise, to the terms of the publisher's license, the end user has a right to a refund on return of the information to the dealer. A right to a refund under this paragraph is a return for purposes of Sections 2B-112 and 2B-208.

(3) The dealer is not bound by the terms, and does not receive the benefits, of an agreement between the publisher and the end user unless the dealer and end user adopt those terms as part of their agreement.

(c) If an agreement provides for distribution of copies on a physical medium or in packaging provided by the publisher or authorized third party, a dealer may shall only distribute those copies and documentation only:

(1) in the form as received; and

(2) subject to any contractual terms of the publisher that the publisher provides for end users.

(d) A dealer that enters into a license or software contract with an end user is a licensor of the end user under this article.

Definitional Cross References. "Agreement": Section 1-201. "Contract": Section 1-201. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Information": Section 2B-102. "License": Section 2B-102. "Licensee". Section 2B-102. "Licensor": Section 2B-102. "Merchant": Section 2B-102. "Party": Section 2B-102. "Receive": Section 2B-102. "Return": Section 2B-102. "Term". Section 1-201.

Reporter's Note:

1. Scope of the Section. This section deals with a three party relationship in which a retail transaction involves a publisher, dealer, and end user. This section describes the relationship among the contracts of these parties. The section only applies to distribution of tangible copies.

2. Dealer and End User. Subsection (b) deals with the three-party relationship from the perspective of the dealer's contract with the end user. While the end user acquires the copy from the dealer, whether the dealer has authority to convey a right to use the work is determined by its contract with the publisher. That contract permits distribution only under specified conditions. In such cases, the end user's right to "use" (e.g., copy) arises by a separate agreement between the end user and the publisher. See ProCD v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996); Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (ED NY 1994).

a. Contracts are Separable. The basic principle is that a dealer is not bound by nor does it benefit from any contract created by the publisher with the end user. This mirrors case law on manufacturer warranties and warranty limitations under Article 2 which do not bind the dealer, but also do not benefit that dealer although that rule has been over-ridden in some states. See Cal. Civ. Code § 1791 ("as is" disclaimer disclaims warranties for manufacturer, distributor and retailer-dealer). The agreements are separate unless the dealer and end user adopt the publisher's license as defining their own relationship. Of course, the dealer remains bound by its contract with the publisher or other party from whom it received the information.

b. Dealer is a Licensor. Subsection (d) confirms that warranties exist on the part of the dealer by stating that the dealer is a licensor with respect to its end user transferee. In effect, the end user licensee has separate recourse from two different licensors (the dealer and, if it agrees to the license, the publisher).

c. Conditional Rights. Under subsection (b)(1) and (b)(2) performance of the dealer's relationship with the end user hinges on the end user's ability to make use of the information supplied by the dealer. This depends on the license between the publisher and the end user. If the end user declines that license, it has a right to obtain a refund from, or to cancel payment to the dealer. This creates a return right, rather than merely an option. If the end user assents to the publisher's license, the publisher's license in effect replaces the dealer-end user contract except as to obligations expressly created and earmarked as continuing on the part of the dealer (such as a services or support obligation). Of course, if the information breaches a warranty, the right to recover from the dealer remains unless disclaimed by the dealer.

An alternative view of the relationship, which is appropriate in some cases, treats the publisher's license as part of the dealer's contract which the end user and dealer understood from the outset would be provided to complete the entire terms of the relationship. This is a variation of the right, long recognized in commercial law, of parties to conclude a contract leaving it to one party to supply particulars of performance after the initial agreement, with the specifications here coming in the form of a publisher's license. Where the arrangement is that assent to these later particulars is required and the end user rejects the terms, it in effect is also rejecting the contract with the dealer and is entitled to return the copy and receive a refund. Agreement on this issue, as in other respects, does not depend on express terms of the contract, but can be found or inferred from the circumstances surrounding the contracting, applicable usage of the trade, in course of dealing and the like.

Illustration: User acquires a program from Dealer for $1,000 each. User is aware that each software program comes subject to a publisher license. When it reviews one license, it notices that the license restricts use to non-commercial purposes. User refuses that license. It has a right to refund since the dealer's contract is conditioned on the user's consent to the publisher's terms.

3. Dealer and Publisher. Often the publisher's arrangement with the dealer is a license that retains ownership of copies in the publisher and permits distribution only subject to an end user license. The legislative history of the Copyright Act indicates that, whether there was a sale of the copy or not, contractual restrictions on use are appropriate under contract law. "[The] outright sale of an authorized copy of a book frees it from any copyright control over … its future disposition…. This does not mean that conditions … imposed by contract between the buyer and seller would be unenforceable between the parties as a breach of contract, but it does mean that they could not be enforced by an action for infringement of copyright." H.R. Rep. No. 1476, 94^th Cong., 2d Sess. 79 (1976).

[D. Performance Problems]

SECTION 2B-620. RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE.

(a) A contract imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. If reasonable grounds for insecurity arise with respect to the performance of either party, the aggrieved party may:

(1) demand in a record adequate assurance of due performance; and,

(2) until the demanding party receives that assurance, may if commercially reasonable, suspend any performance, other than with respect to contractual use restrictions, for which the party has not already received the agreed return.

(b) Between merchants, the reasonableness of grounds for insecurity and the adequacy of any assurance offered must be determined according to reasonable commercial standards.

(c) Acceptance of any improper delivery or payment does not prejudice an aggrieved party's right to demand adequate assurance of future performance.

(d) After receipt of a justified demand, failure to provide within a reasonable time not exceeding 30 days to provide assurance of due performance that is adequate under the circumstances of the particular case is a repudiation of the contract.

Uniform Law Source: 2-609.

Definitional Cross References.

"Aggrieved party": Section 1-201. "Contract": Section 1-201. "Contractual use restriction": Section 2B-102. "Delivery": Section 2B-102. "Merchant": Section 2B-102. "Party": Section 2B-102. "Record": Section 2B-102.

Reporter's Note: Corresponds to original Article 2.

SECTION 2B-621. ANTICIPATORY REPUDIATION. If either party repudiates a contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may:

(1) for a commercially reasonable time, await performance by the repudiating party; or

(2) resort to any remedy for breach of contract, even if it has notified the repudiating party that it would await its performance and has urged retraction; and

(3) in either case, suspend its own performance or proceed in accordance with Sections 2B-712 or 2B-713, as applicable.

Uniform Law Source: 2-610.

Definitional Cross References.

"Aggrieved party": Section 1-201. "Contract": Section 1-201. "Notify": Section 1-201. "Party": Section 2B-102. "Remedy": Section 1-201. "Value": Section 1-201.