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UNIFORM COMMERCIAL CODE

ARTICLE 2B:

SOFTWARE CONTRACTS AND LICENSES

OF INFORMATION

[COMPUTER INFORMATION TRANSACTIONS]

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

February 1, 1999

UNIFORM COMMERCIAL CODE

ARTICLE 2B

SOFTWARE CONTRACTS AND LICENSES OF INFORMATION

[COMPUTER INFORMATION TRANSACTIONS]

With Notes

COPYRIGHT 1999

BY

THE AMERICAN LAW INSTITUTE

AND

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or reporter's notes, have not been passed on by the National Conference of Commissioners on Uniform State Laws, the American Law Institute, or the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners, the Institute and its Members, and the Drafting Committee and its Members and Reporters. Proposed statutory language may not be used to ascertain the intent or meaning of any promulgated final statutory proposal.

DRAFTING COMMITTEE ON

UNIFORM COMMERCIAL CODE ARTICLE 2B

CARLYLE C. RING, JR., 1401 H. Street, N.W., Suite 500, Washington, DC 20005, Chair

DAVID E. BARTLETT, 455 Golden Eagle Drive, Broomfield, CO 80020, The American Law Institute Representative

AMELIA H. BOSS, Temple University, School of Law, 1719 N. Broad Street, Philadelphia, PA 19122, The American Law Institute Representative

JOHN A. CHANIN, 1020 Aoloa Place, Suite 206B, Kailua, HI 96734

STEPHEN Y. CHOW, One Beacon Street, 30th Floor, Boston, MA 02108

PATRICIA BRUMFIELD FRY, University of North Dakota, School of Law, P.O. Box 9003, Grand Forks, ND 58201

THOMAS T. GRIMSHAW, Suite 3800, 1700 Lincoln Street, Denver, CO 80203

LEON M. McCORKLE, JR., P.O. Box 387, Dublin, OH 43017-0387

THOMAS J. McCRACKEN, JR., Room 600, 134 N. LaSalle Street, Chicago, IL 60602

JAMES C. McKAY, JR., Office of Corporation Counsel, 6th Floor South, 441 4th Street, N.W., Washington, DC 20001

BRUCE MUNSON, Revisor of Statutes Bureau, Suite 800, 131 W. Wilson Street, Madison, WI 53703

DAVID A. RICE, 10 Circuit Road, Chestnut Hill, MA 02167, The American Law Institute Representative

LEWIS BART STONE, 52nd Floor, 200 Park Avenue, New York, NY 10166

RAYMOND T. NIMMER, University of Houston, Law Center, 4800 Calhoun, Houston, TX 77204, Reporter

EX OFFICIO

GENE N. LEBRUN, P.O. Box 8250, 9th Floor, 909 St. Joseph Street, Rapid City, SD 57709, President

BARRY H. EVENCHICK, 8th Floor, One Gateway Center, Newark, NJ 07102, Division Chair

AMERICAN BAR ASSOCIATION ADVISORS

DONALD A. COHN, 14 Gale Lane, Greenville, DE 19807, Co-Advisor

DANIEL S. COOLIDGE, 1000 Elm Street, Box 3701, Manchester, NH 03105, Law Practice Management Section Advisor

MARY JO HOWARD DIVELY, One Oxford Centre, 40th Floor, Pittsburgh, PA 15219, Business Law Section Advisor

GEORGE L. GRAFF, 30th Floor, 399 Park Avenue, New York, NY 10022, Co-Advisor

LYNN P. HENDRIX, 1700 Lincoln Street, Suite 4100, Denver, CO 80203, Intellectual Property Law Section Advisor

EXECUTIVE DIRECTOR

FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road, Norman, OK 73019, Executive Director

WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus

Copies of this Act may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

211 E. Ontario Street, Suite 1300

Chicago, Illinois 60611

312/915-0195

SOFTWARE CONTRACTS

AND LICENSES OF INFORMATION

[COMPUTER INFORMATION TRANSACTIONS]

TABLE OF CONTENTS

PART 1

GENERAL PROVISIONS

SECTION 2B-101. SHORT TITLE.

SECTION 2B-102. DEFINITIONS.

[A. General Scope and Terms]

SECTION 2B-103. SCOPE.

SECTION 2B-104. EXCLUSIONS FROM THIS ARTICLE.

SECTION 2B-105. RELATION TO FEDERAL LAW; TRANSACTIONS SUBJECT TO OTHER STATE LAW.

SECTION 2B-106. VARIATION BY AGREEMENT; RULES OF CONSTRUCTION; QUESTIONS DETERMINED BY COURT.

SECTION 2B-107. CHOICE OF LAW.

SECTION 2B-108. CONTRACTUAL CHOICE OF FORUM.

SECTION 2B-109. BREACH OF CONTRACT; MATERIAL BREACH.

SECTION 2B-110. UNCONSCIONABLE CONTRACT OR TERM.

SECTION 2B-111. MANIFESTING ASSENT.

SECTION 2B-112. OPPORTUNITY TO REVIEW; RETURN.

[B. Electronic Contracts: Generally]

SECTION 2B-113. LEGAL RECOGNITION OF ELECTRONIC RECORDS AND AUTHENTICATIONS.

SECTION 2B-114. COMMERCIAL REASONABLENESS OF ATTRIBUTION PROCEDURE.

[SECTION 2B-115. EFFECT OF REQUIRING COMMERCIALLY UNREASONABLE ATTRIBUTION PROCEDURE.]

SECTION 2B-116. DETERMINING TO WHICH PERSON AN ELECTRONIC AUTHENTICATION, MESSAGE, RECORD, OR PERFORMANCE IS ATTRIBUTED; RELIANCE LOSSES.

SECTION 2B-117. ATTRIBUTION PROCEDURE FOR DETECTION OF CHANGES AND ERRORS; EFFECT OF USE.

SECTION 2B-118. ELECTRONIC ERRORS: CONSUMER DEFENSES.

SECTION 2B-119. PROOF OF AUTHENTICATION; OPERATIONS OF ELECTRONIC AGENT.

SECTION 2B-120. ELECTRONIC MESSAGE: TIMING OF CONTRACT; EFFECTIVENESS OF MESSAGE; ACKNOWLEDGING MESSAGE.

PART 2

FORMATION AND TERMS

[A. General]

SECTION 2B-201. FORMAL REQUIREMENTS.

SECTION 2B-202. FORMATION IN GENERAL.

SECTION 2B-203. OFFER AND ACCEPTANCE.

SECTION 2B-203A. ACCEPTANCE WITH VARYING TERMS.

SECTION 2B-203B. ACCEPTANCE OF CONDITIONAL OFFERS.

SECTION 2B-204. OFFER AND ACCEPTANCE; ELECTRONIC AGENTS.

SECTION 2B-205. FIRM OFFERS.

SECTION 2B-206. FORMATION: RELEASES OF INFORMATIONAL RIGHTS.

SECTION 2B-206A. FORMATION: SUBMISSIONS OF INFORMATION.

[B. Terms of Records]

SECTION 2B-207. ADOPTING TERMS OF RECORDS.

SECTION 2B-208. MASS-MARKET LICENSES.

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

PART 3

CONSTRUCTION

[A. General]

SECTION 2B-301. PAROL OR EXTRINSIC EVIDENCE.

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

SECTION 2B-303. MODIFICATION AND RESCISSION.

SECTION 2B-304. CONTINUING CONTRACTUAL TERMS.

SECTION 2B-305. PERFORMANCE UNDER OPEN TERMS

SECTION 2B-305A. TERMS TO BE SPECIFIED.

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

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

[B. Interpretation and Monitoring]

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

SECTION 2B-308. DURATION OF CONTRACT.

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

SECTION 2B-310. ELECTRONIC REGULATION OF PERFORMANCE.

SECTION 2B-311. DELIVERY TERMS.

PART 4

WARRANTIES

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

SECTION 2B-402. EXPRESS WARRANTY.

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

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

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

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

SECTION 2B-407. MODIFICATION OF COMPUTER PROGRAM.

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

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

PART 5

TRANSFER OF INTEREST AND RIGHTS

SECTION 2B-501. OWNERSHIP OF INFORMATIONAL RIGHTS.

SECTION 2B-501A. TITLE TO COPIES.

SECTION 2B-502. TRANSFER OF CONTRACTUAL INTERESTS.

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

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

SECTION 2B-506. PRIORITY OF TRANSFER BY LICENSOR.

SECTION 2B-507. TRANSFER BY LICENSEE.

PART 6

PERFORMANCE

[A. General ]

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

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

SECTION 2B-603. SUBMISSIONS OF INFORMATION TO THE SATISFACTION OF A PARTY.

SECTION 2B-604. IMMEDIATELY COMPLETED PERFORMANCES.

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

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

[B. Performance in Delivery of Copies]

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

SECTION 2B-607A. COPY: PERFORMANCE RELATED TO DELIVERY; PAYMENT.

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

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

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

SECTION 2B-611. COPY: CONTRACTS WITH A PREVIOUS VESTED GRANT OF RIGHTS.

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

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

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

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

[C. Special Types of Contracts]

SECTION 2B-615. ACCESS CONTRACTS.

SECTION 2B-616. CORRECTION AND SUPPORT AGREEMENTS.

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

[D. Performance Problems]

SECTION 2B-620. RIGHT TO ADEQUATE ASSURANCE OF PERFORMANCE.

SECTION 2B-621. ANTICIPATORY REPUDIATION.

SECTION 2B-622. RETRACTION OF ANTICIPATORY REPUDIATION.

[E. Loss and Impossibility]

SECTION 2B-623. RISK OF LOSS OF COPY.

SECTION 2B-624. EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS.

[F. Termination]

SECTION 2B-625. TERMINATION; SURVIVAL OF OBLIGATIONS.

SECTION 2B-626. NOTICE OF TERMINATION.

SECTION 2B-627. TERMINATION ENFORCEMENT.

PART 7

REMEDIES

[A. General]

SECTION 2B-701. REMEDIES IN GENERAL.

SECTION 2B-702. CANCELLATION.

SECTION 2B-703. CONTRACTUAL MODIFICATION OF REMEDY.

SECTION 2B-704. LIQUIDATION OF DAMAGES.

SECTION 2B-705. STATUTE OF LIMITATIONS.

SECTION 2B-706. REMEDIES FOR FRAUD.

[B. Damages]

SECTION 2B-707. MEASUREMENT OF DAMAGES IN GENERAL.

SECTION 2B-708 LICENSOR'S DAMAGES.

SECTION 2B-709. LICENSEE'S DAMAGES.

SECTION 2B-710. RECOUPMENT.

[C. Performance Remedies]

SECTION 2B-711. SPECIFIC PERFORMANCE.

SECTION 2B-712. LICENSOR'S RIGHT TO COMPLETE.

SECTION 2B-713. LICENSEE'S RIGHT TO CONTINUE USE.

SECTION 2B-714. RIGHT TO DISCONTINUE.

SECTION 2B-715. RIGHT TO POSSESSION AND TO PREVENT USE.

PART 8

MISCELLANEOUS PROVISIONS

SECTION 2B-801. EFFECTIVE DATE.

SECTION 2B-802. TRANSACTIONS COVERED.

PART 1

GENERAL PROVISIONS

[A. Short Title and Definitions]

SECTION 2B-101. SHORT TITLE. This article may be cited as Uniform Commercial Code - Software Contracts and Licenses of Information. [Computer Information Transactions]

Reporter's Note: The bracketed language indicates a change in title that might be considered in light of the new scope. It has not been considered or approved by the relevant groups.

SECTION 2B-102. DEFINITIONS.

(a) In this article:

(1) "Access contract" means a contract electronically to obtain access to, or information in electronic form from, an information processing system of another person,not owned or controlled by the licensee, or the equivalent of such access.

(2) "Access material" means any information or material, such as a document, authorization, address, or access code, acknowledgment, or other material necessary for a party to obtain authorized access to information, or control or possession of a copy.

(3) "Attribution procedure" means a procedure established by law, regulation, or agreement, or a procedure otherwise adopted by the parties, to for the purpose of verifying that an electronic message, authentication, record, or performance is that of a specific person, or to for the purpose of detecting changes or errors in the informationcontent. The term includes a procedure that requires the use of algorithms or other codes, identifying words or numbers, encryption, callback or other acknowledgment procedures, or any other procedures that are reasonable under the circumstances.

(4) "Authenticate" means to sign, or otherwise to execute or adopt a symbol or sound, or to use encryption or another process with respect to a record, with intent of the authenticating person to:

(A) identify thate person;

(B) adopt or accept the terms or a particular term of a record that includes or is logically associated with, or linked to, the authentication, or to which referenced in a record containing the authentication refers; or

(C) confirm the content establish the integrity of the information in a record that includes or is logically associated with, or linked to, the authentication, or to which referenced in a record containing the authentication refers.

(5) "Automated transaction" means a contract formed or performed in whole or in part by electronic means or by electronic messages in which the electronic actions or messages of one or both parties that establish the contract are not intended to be reviewed in the ordinary course by an individual.

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

(7) "Computer" means an electronic device that can perform substantial computations, including numerous arithmetic operations or logic operations, without human intervention during the computation or operation.

(8) "Computer information" means electronic information, including software, that is in a form directly capable of being processed or used by, or obtained from or through, a computer, but does not include information referred to in Section 2B-104(2).

(9) "Computer information transaction" means a license or other contract whose subject matter is (i) the creation or development of, including the transformation of information into, computer information or (ii) to provide access to, acquire, transfer, use, license, modify, or distribute computer information. The term does not include a contract for to distributeion or create for purposes of distribution, of information in print form, such as in a book, newspaper or magazine, or to create information for the purpose of distribution in print form even if the information provided for distribution pursuant to the contract is delivered in electronic form.

(10) "Computer program" means a set of statements or instructions to be used directly or indirectly in a computer to bring about a certain result. The term does not include separately identifiable informational content such as a separately identifiable motion picture or sound recording or the like.

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

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

(A) with respect to a person:

(i) a heading in capitals in a size equal or greater than, or in contrasting type, font or color to, the surrounding text;

(ii) language in the body of a record or display that is in larger or other contrasting type, font, or color or is set off from the surrounding text by symbols or other marks that call attention to the language; and

(iii) a term prominently referenced in an electronic record or display which is readily accessible and reviewable from the record or display; and

(B) with respect to a person or an electronic agent, a term or reference to a term that is so placed in a record or display that the person or electronic agent cannot proceed without taking some additional action with respect to the term or reference.

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

(14) "Consumer transaction" means a contract in n agreement under which a consumer is the licensee.

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

(16) "Contractual use restriction" means an enforceable restriction created by contract, agreement which restriction concerns the use or disclosure of, or access to licensed information or informational rights, including an obligation of nondisclosure and confidentiality and a limitation on scope or manner of use.

(17) "Copy" means the medium on which information is fixed on a temporary or permanent basis and from which it can be perceived, reproduced, used, or communicated, either directly or with the aid of a machine or device.

(18) "Court" includes an arbitration or other dispute-resolution forum if the parties have agreed to use of that forum or its use is required by law.

(19) "Delivery" means the voluntary physical or electronic transfer of possession or control of a copy.

(20) "Direct damages" includes compensation for losses measured by Section 2B-708(b)(1) or 2B-709(a)(1). The term does not include consequential or incidental damages.

(21) "Electronic" means of or relating to technology having electrical, digital, magnetic, wireless, optical, or electromagnetic, technology or any other technology that entails similar capabilities. "Electronically" has a corresponding meaning.

(221) "Electronic agent" means a computer program. electronic, or other automated means used by a person to independently initiate an action or to respond without review by an individual to electronic messages or performances without review by an individualon behalf of that person.

(232) "Electronic message" means an electronic record or display that is stored, generated, or transmitted by electronic means for purposes of communication to another person or electronic agent.

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

(254) "Incidental damages":

(A) include compensation for any commercially reasonable charge, expense, or commission reasonably incurred by an aggrieved party after breach of contract:

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

(ii) in stopping delivery, shipment, or transmission;

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

(iv) otherwise incident to the breach; and

(B) do not include consequential or direct damages.

(265) "Information" means data, text, images, sounds, mask works, or works of authorship. The term includes software.

(276) "Information processing system" means an electronic system or facility for creating, generating, sending, receiving, storing, displaying, or processing electronic information.

(287) "Informational content" means information that is intended to be communicated to or perceived by an individual in the ordinary use of the information, or the equivalent of such information. The term does not include computer instructions that control the interaction of a computer program with other computer programs or with a machine or device.

(298) "Informational rights" include all rights in information created under laws governing patents, copyrights, mask works, trade secrets, trademarks, publicity rights, or any other law that gives permits a person, independently of contract, a right to control or preclude another person's use of or access to the information on the basis of the rights holder's interest in that information.

(3029) "License" means a contract within this article that authorizes access to or use of information or of informational rights that exist or are to be created and expressly limits the contractual rights, permissions, or uses granted, expressly prohibits some uses, or expressly grants less than all rights in the information. A contract may be a license whether or not the transferee has obtains title to a licensed a copy. "License" includes an access contract and, for purposes of [the Uniform Commercial Code], a consignment of a copy. The term does not include a reservation or creation of a security interest.

(310) "Licensee" means a transferee in a license or other an agreement under this article, whether or not the agreement is a license. A licensor is not a licensee with respect to rights reserved to it under the agreement.

(321) "Licensor" means a transferor in a license or other an agreement under this article, whether or not the agreement is a license. As bBetween a provider of access in an access contract and its customer, the provider of access is the licensor. As bBetween the provider of access and a provider of the informational content to be accessed, the provider of content is the licensor. In If performance consists of an exchange of information or informational rights, each party is a licensor with respect to the information, informational rights, or access it provides.

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

(343) "Mass-market transaction" means a transaction within under this article that is:

(A) a consumer transaction; or

(B) any other that is a transaction with an end-user licensee if: which

(i) the transaction is for involves information or informational rights directed to the general public as a whole including consumers under substantially the same terms for the same information;

(ii) . A transaction other than a consumer transaction is a mass-market transaction only if the licensee acquires the information or rights in a retail transaction under terms and in a quantity consistent with an ordinary transaction in the a retail market; and

(iii) the . A transaction other than a consumer transaction is not a mass-market transaction if it is:

(IA) a contract for redistribution; or (B) a contract for public performance or public display of a copyrighted work;

(IIC) a transaction in which the information is customized or otherwise specially prepared by the licensor for the licensee other than minor customization using a capability of the information intended for that purpose;

(IIID) a site license; or

(IVE) an access contract.

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

(365) "Nonexclusive license" means a license that does not preclude the licensor from transferring to other licensees the same information, informational rights, or contractual rights within the same scope. For purposes of the [Uniform Commercial Code], the term includes a consignment of a copy.

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

(387) "Published informational content" means informational content prepared for or made available to recipients generally, or to a class of recipients, in substantially the same form. The term does not include informational content that is:

(A) and not customized for a particular recipient, by an individual that is a licensor, or by an individual or group of individuals acting as or on behalf of the licensor, using judgment or expertise; or

(B) . The term does not include informational content provided in a special relationship of reliance between the provider and the recipient.

(398) "Reason to know" means that a person has knowledge of a fact or that, from all the facts and circumstances known to the person without investigation, the person should know that a fact exists.

(4039) "Receive" means:

(A) with respect to a copy, to take delivery; and

(B) with respect to a notice:

(i) to come to a person's attention; or

(ii) to be delivered to and available at a location designated by agreement for that purpose or, in the absence of an agreed location:

(I) to be delivered at the person's residence, or the person's place of business through which the contract was made, or at any other place held out by the person as a place for receipt of such communications; or

(II) in the case of an electronic notification, to come into existence in an information processing system in a form capable of being processed by or perceived from a system of that type, if the recipient uses, or otherwise has designated or holds out that system as a place for receipt of such notices.

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

(421) "Release" means an agreement not to object to, or exercise any remedies to limit, the use of information or informational rights, which agreement requires no affirmative acts by the party giving the release to enable or support the other party's use. The term includes a waiver of informational rights.

(432) "Return", with respect to information to which a rejected record or term applies, means:

(A) with respect to a licensor that rejects a record or term, return of any information delivered; and a right to stop any future delivery or access; and reimbursement from the licensee of any amounts previously paid by to the licensor ee with respect to the rejected record, reimbursement to the licensee of fees that it previously paid with respect to the rejected record; and

(B) with respect to a licensee that rejects a record or term:

(i) reimbursement of any contract fee paid from the person to which it was paid or from another person that may offer to reimburse that fee, and a right to stop payment of the contract fee, on proof of purchase and return of the information and all copies within a reasonable time after delivery to the licensee; and

(ii) with respect to multiple products integrated into a bundled whole but retaining their separate identity and transferred for one bundled fee:

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

(IIb) in all other cases, reimbursement of any separately stated fee that is paid for the information to which the rejected record applies, on proof of purchase and return of the information and all copies within a reasonable time after delivery.

(443) "Scope", with respect to a license, means terms of the license which defining thee:

(A) the licensed copies, or information, or and the informational rights involved;

(B) the use or access authorized, prohibited, or controlled;

(C) the geographic area, market, or location; and

(D) the duration of the license.

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

(465) "Software" means a computer program, any informational content included in the program, and any supporting information provided by the licensor. The term does not include a separately identifiable motion picture or sound recording and does not include a computer program included in a copy of the picture or recording if the purpose of the program is merely to make possible the display or performance of the picture or recording.

(476) "Software contract" means:

(i) a sale of a copy of software;

(ii) a license of software; or

(iii) a conveyance of ownership of informational rights in software.

(487) "Standard form" means a record, or a group of related records, containing terms prepared for repeated use in transactions and so used in a transaction in which there was no negotiation by individuals except to set the price, quantity, method of payment, selection among standard options, or time or method of delivery.

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

(5049) "Transfer", with respect to contractual rights, includes an assignment of the contract. The term does not include an agreement to perform contractual obligations or exercise contractual rights through a delegate or a sublicensee.

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

"Financial asset" Section 8-102(a)(9)

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

"Identification" to the contract Section 2-501

"Instrument" Section 9-105(i) (1995 Official Draft); 9-102(a)(47) (1998 Approved Draft)

"Item" Section 4-104

"Investment property" Section 9-115(f)

"Letter of credit" Section 5-102

"Negotiable instrument" Section 3-104

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

"Sale" Section 2-106

Reporter's Notes:

1. "Access contract." An access contract authorizes access to an electronic facility, including a computer or an Internet site, or authorizes obtaining electronic information from that type of facility. The term does not include contracts that grant a right to enter a building or other physical location, nor does it include the purchase of a television, radio, or other similar goods merely create a technological ability to access information, but are not contractual authorizations to do so. An "access contract" is typified by "on-line" and Internet services. It also includes contracts for remote data processing, third party E-mail systems, and contracts allowing automatic updating from a remote facility to a database held by the licensee.

The term does not encompass ordinary interactions among computer programs within a single system permitted because each program is licensed; such transactions do not involve access to a separately owned facility. However, if an on-line data provider elects to provide access in part by allowing its database to be loaded into the computer of a client, this method of performance retains all of the characteristics of an access arrangement and is within the definition. Thus, if a database provider arranges with a high volume user to transfer all or part of its database to the client's system, allowing access and use on the same terms as in the remote system, the arrangement is an access contract. The same is true if the contract provides a copy of the database on media to be loaded into the user's system, but the data are intermittently updated through transfers of data from remote systems. On the other hand, if a software publisher allows access to and downloading of software into a licensee's systems, the continuing right to use the software after it is downloaded is a license, but not an access contract.

Many access contracts do not depend on intellectual property rights. The owner of a computer system has a fundamental right recognized in criminal law and property law to exclude others from access to its system and to condition the terms on which it permits access. This does not mean that access to identical information cannot be obtained elsewhere, but merely that the access provider can establish contractual terms of access that bind the other party even though the licensee could, if it chose, obtain identical information from other sources or its own research.

An access provider may, or may not, be in a position to give contractual rights in the information accessed. In some cases, that information is controlled by the access provider, while others entail a three-party framework. In a three-party relationship, one party provides access, while another (the content provider) licenses use of the information. This latter transaction involves two and, in some cases, three contracts. The first is between the content provider and the access provider. This may be an ordinary license or an access contract that gives the access provider a right to provide a gateway to access information contained in a system controlled by the content provider. The second is between the access provider and the end user. This is an access contract. The third arises if the content provider contracts directly with the end user. The various contracts are independent of each other.

2. "Attribution procedure." An "attribution procedure" refers to an agreed on, adopted, or otherwise established procedure to identify the person who sent an electronic message, or to verify the absence of changes in the content of the message. Agreement to or adoption of a procedure may occur between the two parties or through a third party. For example, the operator of a multi-database system, which system includes databases provided by third parties, may arrange with database providers and customers for agreement to or adoption of a particular attribution procedures. Those arrangements, although made with the third party, may establish an attribution procedure for purposes of this article between the customers and the individual database providers.

Electronic commerce is anonymous in character and depends on such procedures and their recognition in law and practice. The effect of an attribution procedure is discussed in Sections 2B-114 to 2B-117. The legal benefits of using an attribution procedure only apply to commercially reasonable procedures. In general, use of a commercially reasonable procedure for attribution entitles the user to a presumption that the facts are as established by the procedure.

3. "Authenticate." This term replaces "signature" and "signed," terms which are more appropriate for paper transactions but not as appropriate for electronic transactions. The term "authenticate" is also used in Articles 4A, 5, 8, and 9 of the Uniform Commercial Code. It incorporates all signatures under prior law, but clarifies that qualifying electronic processing systems used in modern commerce are adequate. Any act that would be a signature is an authentication under Article 2B.

An "authentication," as does a "signature," may express three different effects, namely: (i) identifying the person, (ii) adoption of the record or its term(s), and (iii) verifying the content. As under prior law for "signature," what effects are intended are determined by the context and objective indicia associated with that context. Unless the circumstances indicate a different intent, authentication embraces all three effects.

Authentication may be on or logically associated with or linked to the record. Subparagraph (B) follows the proposed EU Directive on Electronic Signatures and reflects the fact that, in digital technology, the analogy between "signing" a record electronically and signing a paper is not precise. "Logically associated" makes it clear that the association between an authentication and record need not be physical in nature. It can be electronic. There must be, however, a direct association such that it can be reasonably inferred that the party that makes the authentication intends by that act to adopt or accept the associated record.

Authentication includes qualifying use of identifiers such as a PIN number, a types or otherwise signed name. In addition, it includes qualifying actions and sounds such as encryption, voice and biological identification, and other technologically enabled acts used to authenticate a record.

Authentication systems are often used to identify the person and indicate its acceptance of a record or term. In addition, in some contexts, authentication may be intended to establish the integrity of the record. "Integrity" means that the record is in unimpaired condition, i.e., that it has not been altered or affected by errors caused by transmission or otherwise.

In "digital signature" systems, the term "authentication" is sometimes used differently. In those systems, it is common that one party applies an encryption technology to a record or message and a second party (recipient) take actions that confirm the identity of the party. Sometimes, the confirming actions of the recipient are referred to as "authenticating" the record. That usage is not followed in this article. In this article, "authenticate" describes the acts (and intent) of the person executing the symbol or taking the initial action and not what another party (the recipient) does to confirm the identity of the other person, its acceptance of the record, or the integrity of the record. Authenticate refers to the signing, not the confirming, step in digital signature technology and in any other technology developed or used to provide electronic signature capability.

The definition is technologically neutral. Technology and commercial practice are evolving. No specific standards of technological sufficiency are appropriate. Rather, procedures are subject to evidentiary scrutiny as to the requisite intent, proof that they were used, and assessment of whether the procedures are commercially reasonable.

4. "Automated transaction." This term refers to relationships formed automatically and effective even though one or both of the parties are represented by an electronic system, rather than a human being. Automated contracting is widely used. While law could fictionally attribute intent to these automated activities, this article recognizes that operations of automated systems can create binding legal obligations for those who use them for that purpose.

5. "Cancellation." This definition is from original Section 2-106. The effect of cancellation is stated in 2B-702.

6. "Computer program." This definition parallels copyright law. 17 U.S.C. § 101 (1996). In this article, a distinction exists between programs as operating instructions and "informational content" communicated to people. "Computer program" refers to functional and operating aspects of a digital system, while "informational content" refers to output that communicates to a human being. There is an inevitable overlap. However, if issues arise that require a close distinction, the answer lies in whether the issue addresses operations (program) or communicated content (informational content). This reference to functionality pertains solely to contract law issues under this article. It does not relate to the copyright law question of distinguishing between a process and copyrightable expression. The distinction here is more like that made in copyright law between a computer program as a "literary work" (code) and the output as an "audiovisual work" (images, sounds). In copyright, the distinction relates to whether a copyrighted work was created or infringed. In Article 2B, the distinction relates to contract law issues in determining liability risk and performance obligation.

7. "Consequential damages." This term corresponds to original Article 2. Consequential damages do not include "direct" or "incidental" damages. Consequential loss deals with loss of benefits anticipated as a result of not being able to exploit the expected contracted performance. These damages include lost profits resulting from that lost opportunity, damages to reputation, lost royalties expected from a licensee's proper performance, lost value of a trade secret from wrongful disclosure or use, wrongful gains for the other party from misuse of confidential information, loss of privacy, and loss or damage to data or property caused by a breach.

Consequential damages may be recovered by either party. The losses must be an ordinary and predictable result of the breach. In the case of economic and similar losses, they must be foreseeable. This means that, for the injured party to recover compensation for losses resulting from its special circumstances, the party in breach must have had notice of those circumstances at the time of contracting. The particular needs and circumstances must be made known at that time. In contrast, losses from ordinary general requirements can often be presumed to have been within the contemplation of the other party. In addition, of course, to be foreseeable the losses must not derive from atypical risk taking by the aggrieved party, such as in a failure reasonably to maintain back-up systems for retrieval of important data.

The burden of proving loss is on the party claiming damages. This article does not require proof with absolute certainty or mathematical precision or beyond the standard of proof at common law. Section 1-103. Article 1 requires liberal administration of remedies, but does not permit recovery of losses that are speculative or otherwise highly uncertain. See Section 2B-707 and Restatement (Second) of Contracts § 352 ("Damages are not recoverable for loss beyond the amount that the evidence permits to be established with reasonable certainty."). No change in law on this issue is intended. See Freund v. Washington Square Press, Inc., 34 N.Y.2d 379, 357 N.Y.S.2d 857, 314 N.E.2d 419 (1974) ("[Plaintiff's] expectancy interest in the royalties … was speculative.").

The definition does not specifically refer to mitigation through cover, but the concept of mitigation (including cover) limits all damage claims under Section 2B-707. No change in law is intended by deletion of the reference to "cover" from the original Article 2 definition. A party can recover compensation only for losses that it could not reasonably have prevented by cover or otherwise.

The definition continues current law as to recovery of damages for personal injury or property damage that "proximately" resulted from the breach. For example, where the injury follows use of a computer program without discovery of a defect causing the damage, the question of "proximate" cause turns on whether it was reasonable for the licensee to use the information without an inspection that would have revealed the defect. If it was not reasonable for it to do so or if the licensee did in fact discover the defect prior to use, the injury would not proximately result from the breach of warranty. Also, proximate causation may not exist where the damages are the result of a misuse of the computer information or a use that violates clear warnings against the particular type of use. Similarly, if injuries allegedly arise from use of informational content created by use of a program, whether they are a proximate result of the defect depends on the reasonableness of the use and the reasonableness of the user's reliance on the result in light of any decision-making that may intervene between creation of the content and the loss-causing use.

8. "Conspicuous." This definition follows original Article 1, but adjusts the standard to reflect modern practice. Whether a term is conspicuous is a question to be determined by the court. Section 2B-106(d). The basic rule is that a term is conspicuous with respect to an individual if it is so positioned or presented that the attention of an ordinary person can reasonably be expected to be called to it. Often, this involves presentation in a record, but the concept is not so limited; it includes verbal or automated voice presentation that meets the basic standard. Whether a term is conspicuous is gauged by the condition of the message as it would be received or first viewed by a person using an ordinary system or method of receiving or reviewing such messages. If a transaction involves use of an electronic agent, to be conspicuous as to the electronic agent requires presentation of the term in a manner capable of invoking a response from a "reasonably configured" electronic agent.

As under prior law, this article delineates some of methods of making a term conspicuous. These have an important role in commercial practice. The purpose of requiring that a term be conspicuous blends a notice function (the term ought to be noticed) and a planning function (giving certainty to the party relying on the term on how that result can be achieved). The illustrations establish safe harbors intended to reduce uncertainty and litigation. A term that conforms is conspicuous. The illustrations, however, are not exclusive. In cases outside the illustrative safe harbors, a court should apply the general standard.

The definition encompasses several new methodologies with relevance in modern commerce, including electronic commerce. Paragraph (A)(ii) contemplates setting off the term or a label by symbols which can be reliably transferred in electronic commerce, whereas font size, color and other attributes may not. It includes a term or reference that provides: *** Disclaimer *** or <<< Disclaimer >>>. Paragraph (A)(iii) deals with hyperlinks and related Internet technologies. It contemplates a case in which a computer screen displays a term, a summary or reference to the term, or an image, and the party using the screen, by taking an action with reference to the display, is promptly transferred to a different file location wherein the contract term is available. To be conspicuous, the image, term, or summary must be prominent and its use must readily enable review of the term. The access must be from the screen or display and not by taking other actions such as a telephone call or physically going to a location. When the term is accessed, it must be readily reviewable. The fact that an entire record is prominently referenced does not automatically mean that a particular term in that record is conspicuous.

Paragraph (B) recognizes a procedure by which, without taking action with respect to the term, the party cannot proceed further in reference to the file or location. Thus, a screen that states: "There are no warranties of accuracy with respect to the information" and is displayed in a way that precludes the user from proceeding without assent to or rejection of this condition, suffices.

The deletion of word "clause" from the prior definition is non-substantive. The definition, however, rejects current law that all terms in a "telegram" are conspicuous and also requires, unlike current law, that for a heading to be conspicuous it must be in larger or contrasting type than the surrounding text. As to telegrams, since a "telegram" includes "any mechanical method of transmission" no rule that the terms are automatically conspicuous is justified.

9. "Consumer." A "consumer" is an individual that obtains information for personal, household, or family purposes. Whether an individual is a consumer with reference to a particular transaction is determined at the time of contracting. It depends on the then intended use of the information at that time. Many "personal" uses of information or informational rights are not consumer uses (e.g., stock broker personally using software to monitor client investments). The definition distinguishes profit making, professional or business use, from primarily non-business personal or family use, treating only the latter as a consumer use. A purpose stated in the agreement would ordinarily determine the purpose of the transaction for this definition.

The second sentence clarifies an issue, but does not alter the definition of "consumer" when properly applied. A transaction involving providing information for profit-making or income production is never a consumer transaction, unless it is for ordinary family asset management. The profit-making standard is applied in many of areas of law. See, e.g., Thomas v. Sundance Properties, 726 F.2d 1417 (9^th Cir. 1984); In re Booth, 858 F.2d 1051 (5^th Cir. 1988); In re Circle Five, Inc., 75 B.R. 686 (Bankr. D. Idaho 1987); Truth in Lending Act 15 U.S.C. § 1603 (excluding "extensions of credit primarily for business, commercial, or agricultural purposes").

10. "Contract fee." This term includes any money payment required under a contract.

11. "Contractual use restriction." This term includes any enforceable restriction on use or disclosure of information or informational rights created by contract. Use restrictions relate only to the copies and information provided under the license. Unless otherwise expressly indicated, a contractual use restriction does not restrict use of the same information lawfully obtained from other sources. The restriction must come from contract terms. The term does not include limitations imposed by property or regulatory law. The definition does not include terms unenforceable under this article or other law, including laws which limit enforcement of some restrictions on use of information. Thus, if trade secret law precludes enforcement of a particular non-disclosure or non-competition term, that term is not a contractual use restriction to the extent of its unenforceability.

12. "Copy" refers to the media containing information and not the information itself. In Article 2B, the term relates to questions associated with contractual events such as delivery, tender, and enabling use. For these purposes, in appropriate cases, the time during which the information is fixed on a particular medium can be temporary. For example, an agreement to deliver a copy of information that can be reviewed by the transferee for one hour is met by delivery of or access to the information from a tangible medium on which it remains only for the temporary period of one hour. Article 2B does not deal with the copyright law question of whether a brief reproduction in computer memory is an infringement under copyright law. Stenograph v. Bossard, 46 U.S.P.Q.2d 1936 (D.C. Cir. 1998); MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993).

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

14. "Delivery." Delivery can occur either through transfer of possession of a tangible copy or by electronic transfer. The method of transfer does not matter. Under modern technology, it is often true that a copy does not move from one location to another. Electronic transfers more often involve copying the information into another location or making it available in a common system shared or accessible by the recipient and the person making the delivery.

15. "Direct damages." Direct damages are compensation for losses associated with the value of the contracted for performance itself as contrasted to loss of a benefit expected from intended use of the performance or its results. Direct damages are measured by formulae in section 2B-708(b) and 2B-709(a). They are capped by the contracted for price and the market value of other consideration for the performance as appropriate. This definition rejects cases that treat as direct damages losses that relate to anticipated benefits from use of information such as Chatlos Systems, Inc. v. National Cash Register Corp., 670 F.2d 1304 (3d Cir. 1982). Those are consequential damages. Thus, if software is purchased for $1,000 and, if merchantable, would yield profits or cost savings in business of $10,000, but it is totally defective, "direct" damages are $1,000. If recoverable, the lost profits or expected cost savings are consequential damages. In a contractual indemnification term, the amount to be indemnified is a form of direct damages in that it identifies a direct obligation of the party under the contract.

16. "Electronic." While most modern information systems use electronic technologies, the term here is open-ended. It also encompasses forms of information processing technology that may be developed in the future.

17. "Electronic agent." This term provides part of the framework for recognition of electronic commerce and automated contracting. It refers to an automated means for making or performing contracts. The term includes a computer program, but is not limited to that technology. The automated system must have been selected, programmed or otherwise used for that purpose by the person to be bound by its operations. In automated transactions, an individual does not deal with another individual, but one or both parties are represented by electronic agents. As indicated in section 2B-116 and 2B-204, the legal relationship between the person and the automated agent is not fully equivalent to common law agency, but takes into account that the "agent" is not a human actor. Parties who employ electronic agents are ordinarily bound by the results of their operations.

18. "Electronic Message." A message is distinguished from a "record" by the fact that it is intended to be communicated to another person or an electronic agent. Communication in modern technology does not necessarily require that the message move from one location to another. Communication of a message may entail copying it into another location or making it available in a common system shared by or accessible to the recipient and the person or electronic agent creating the message. In effect, it is "stored" for purposes of communicating to another. Two different types of message are included. One, such as a fax, a telex, or an E-mail, is intended for a human recipient. The second type involves information communicated where the intended recipient is a computer or computer program operating without review by a human.

19. "Good Faith." This definition expands the standard in original Section 2-103(b) and rejects the pure "honesty in fact" standard in Article 1. While good faith in performance is an element of all contracts, the concept does not over-ride express contract terms or their enforcement. See Kham & Nates Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351 (7^th Cir. 1990); Amoco Oil Co. v. Ervin, 908 P.2d 493 (Colo. 1995); Badgett v. Security State Bank, 116 Wash.2d 563, 807 P.2d 356 (1991). A lack of good faith cannot be shown simply by the fact that the party insisted on compliance with the express terms of the agreement. The primary focus of the concept applies if a party has discretion under the contract and requires that the discretion should be exercised in a good faith manner. Davis v. Sears, Roebuck & Co., 873 F.2d 888 (6^th Cir. 1989).

Good faith is not a negligence or reasonable care standard. Fair dealing is concerned with the fairness of the conduct rather than the care with which an act is performed. A failure to exercise ordinary care in a transaction is an entirely different concept than failure to deal fairly in the transaction. Both fair dealing and ordinary care are judged in light of reasonable commercial standards, but the standards in each case are directed to different aspects of commercial conduct. The fair dealing concept does not alter the rule that good faith obligations do not over-ride, or create new, express contractual obligations. See Ohio Casualty Company v. Bank One, 1997 WL 428515 (N.D. Ill. 1997).

This definition does not support an independent cause of action for failure to perform or enforce in good faith. Rather, a failure to perform or enforce in good faith a right, duty or obligation under a contract, is a breach of contract. The doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached.

21. "Incidental damages." Incidental damages are to expenses incurred after breach. This definition follows original Article 2. The term includes the cost of seeking or arranging for mitigation, but not the actual expenditure for the mitigation itself. Thus, if a licensee must obtain a different computer program because of a breach, the telephone calls and related expenses in arranging for the cover are incidental damages. The cost of the new program may be considered in computing direct damages.

22. "Information." This term embraces a wide range of subject matter, but of course its scope is limited to transactions within the general scope of this article. This includes information in the form or computer information as well as information that is the subject matter of the transaction and is to be transformed into computer information. As used here, "data" refers to facts whether or not organized or interpreted. The term is not limited to subject matter to which informational property rights attach. It includes factual data if the data are the subject of a contractual relationship. On the other hand, "work of authorship" is a defined term in the Copyright Act and refers to expressive works to which copyright interests may attach. This includes literary works, computer programs, motion pictures, compilations, collected works, audiovisual works and the like. A "mask work" is also defined in federal law; the term refers to a representational technology used in creation of semiconductor products.

23. "Informational content." This term refers to information whose ordinary use involves communication of the information to a human being. This is the information people read, see, hear and otherwise experience. For example, if an electronic database of images includes the images and a program enabling display or access to the images, the images are informational content while the search program is not. The Westlaw search program is not informational content, but text of cases and statutes is informational content. The term applies even if the person creating the content does not intend others to see or have access to it since, in that case, the preparation nevertheless reflects an intent that the information be perceivable by its creator.

24. "Information processing system." This definition corresponds to the UNCITRAL Model Law on Electronic Commerce. It includes computers and other information processing systems. In this article, the term is used primarily in reference to standards for sending and receiving notices. In that context, whether the receiving system qualifies as a computer is not pertinent so long as it provides notice-giving or receipt functions.

25. "Informational rights." This term includes, but is not limited to "intellectual property" rights such as rights under patent, trademark, copyright, trade secret, and mask work law. It also includes rights created under any law that gives a person a right to control use of information by another independent of contract, such as may be developing with reference to privacy law and the right of publicity. Other laws determine when such rights exist and, as with traditional intellectual property law, the rights need not be comprehensive or exclusive as to all other persons and all uses. The term does not include mere tort claims such as the right to sue for defamation.

26. "License." A license is a limited or conditional contractual transfer of information or a grant of limited or restricted contractual rights or permissions to use information. A contract "right" entails an affirmative commitment that a party can engage in a specific use, while a contract "permission" means simply that the licensor will not object to the use. Either can be the basis of a license. No specific formality of language of grant or restriction is required. For purposes of the Uniform Commercial Code, the term includes consignments of copies of information, but does not otherwise alter the nature of a consignment.

The term applies only to contracts and the limitations or restrictions must be terms of the contract. A transaction is not a license merely because as a matter of law the transferor retains informational property rights that restrict the transferee's ability to use the information. The term thus does not include a unrestricted sale of a copy since the sale lacks express contractual restrictions on use. The buyer receives ownership of a copy, but copyright (or patent) law restricts its use. Restrictions flowing solely from retained ownership of informational rights do not create a license. A "copyright notice" which merely tracks the privileges and restrictions associated with a first sale under copyright law does not transform a sale of a copy into a license. However, a license does exist if a contract grants greater privileges than a first sale, restricts use privileges that might otherwise exist, or deals with issues that are not explicit attributes of a first sale. Whether such terms are enforceable is determined under this article and other applicable federal and state law.

To create the contractual restrictions of a license, the requirements for an agreement must be met. Thus, language on the first page of a copy that restricts use to educational purposes do not create a license if there is no agreement to the terms or assent that makes them part of a contractual arrangement. A mere copyright notice may or may not become part of a contract. If there is no agreement to terms, they are not contractually enforceable. This article does not address whether or not a notice is enforceable under other law. Similarly, the term does not include the myriad of non-commercial, casual or other exchanges of information that occur in normal political or social discourse where the focus of the interchange is on that conversation even though there may be incidental restrictions on use of the information. These casual exchanges are not within Article 2B because they do not involve a contractual relationship even if a strained analysis might argue that an enforceable promise was made concerning the information itself. Thus, when one friend approaches another and offers to describe the latest marital problems of a third party if the other does not "tell anyone else," that exchange of information is not an Article 2B issue because it is not a contract.

Whether a license is created does not depend on whether the contract transfers ownership of a copy. Ownership of a copy is analytically and commercially distinct from questions about the extent to which use of the information is controlled by a license. A license pertains to rights in information and the copy is the conduit, not the focus of the transaction. The court's analysis in Applied Information Management, Inc. v. Icart, 976 F. Supp. 147 (E.D.N.Y. 1997) indicates how the issues may be separable.

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

28. "Mass-market license" and "mass-market transaction." The definition of "mass market" must be applied in light of its intended and limited function. That function is to describe small dollar value, routine and anonymous transactions involving information that is directed to the general public in cases where the transaction occurs in a retail market available to and used by the general public. The term includes all consumer transactions and some transactions between business in a retail market. It does not include ordinary commercial transactions between businesses using ordinary commercial methods of acquiring or transferring commercial information.

A "mass-market" transaction is characterized by 1) the context in which the transaction occurs, 2) the terms of the transaction, and 3) the nature of the information involved. The context involves transactions in a retail market where information is made available in pre-packaged form under generally similar terms to the general public as a whole and in which the general public, including consumers, is a frequent participant. The prototypical retail market is a department store, grocery store, gas station, shopping center, or the like. These locations are open to, and in fact attract, the general public as a whole. They are also characterized by the fact that, while retail merchants make transactions with other businesses, the predominant type of transaction involves consumers. In a retail market, the majority of the transactions also involve relatively small quantities, non-negotiated terms, and transactions to an end user rather than a purchaser who plans to resell the acquired product. The products are available to anyone who enters the retail location and can pay the stated price.

"Mass-market" refers to transactions that involve information aimed at the general public as a whole, including consumers. This does not include information products for a business or professional audience, a subgroup of the general public, members of an organization, or persons with a separate relationship to the information provider. In determining where is a distribution to the general public, courts should rely on the purpose of the definition which is to avoid artificial distinctions among business and consumer purchasers in an ordinary retail market where the purchasers have relatively similar expectations shaped by the retail environment itself. The transactions covered are purchases of true mass-market information and do not include specialty software for business or professional uses, information for specially targeted limited audiences, commercial software distributed in non-retail transactions, or professional use software. The transactions involve information routinely acquired by consumers or that appeals and intends to appeal to a general public audience as a whole, including consumers. Generally, this is inconsistent with substantial customization of the information for a particular end user. Customization that is routine in mass markets or that is done by the licensee after acquiring the information, of course, does not take the information, and therefore the transaction, outside the concept of a mass-market transaction.

The transaction must be with an end user. An end user licensee is one that generally intends to use the information or the informational rights in its own internal business or personal affairs. An end user in this sense is not engaged in the business of reselling, distributing, or sub-licensing the information or rights to third parties, or in commercial public performances or displays of the information, or in otherwise making the information commercially available to third parties.

The definition excludes a transaction for redistribution or for public display or performance of a copyrighted work. These are never a mass-market transaction because they involve no attributes of a retail market. In the on-line world, consumer transactions are mass-market transactions. However, the definition, by excluding on-line transactions not involving a consumer establishes an important principle. In the new transactional environment of on-line commerce, it is important not to regulate transactions beyond consumer issues. This gives commerce room to develop while preserving consumer interests.

29. "Merchant." This definition comes from original Article 2. The definition covers a person that holds itself out as experienced even though the person did not actually engage in prior transactions of the type involved to qualify as a merchant. The term "merchant" has roots in the "law merchant" concept of a professional in business. The professional status may be based upon specialized knowledge as to the information, specialized knowledge about the business practices, or specialized knowledge as to both. Which kind of specialized knowledge may be sufficient to establish merchant status is indicated by the nature of the provisions. In Article 2B, the term refers primarily to businesses with general knowledge of business practices, rather than to experts in a specific field. Section 2B-401(a) and 401(e), and Section 2B-403, however, require a more focused expertise in the particular type of information involved. This draft contains a bracketed strikeout intended to conform the definition to original Article 2, but which the Committee has not yet reviewed.

The reference to attributing knowledge by the employment of an agent confirms that merchant status does not always depend on the principal's knowledge. Similarly, of course, an organization is charged with the expertise of its employees and even persons such as universities, for example, can come within the definition of merchant if they have regular purchasing departments or business personnel familiar with business practices.

30. "Non-exclusive license." This is the most common type of commercial license. The licensor grants limited rights and does not foreclose itself from making additional licenses involving the same subject matter and general scope. A non-exclusive license has been described as nothing more than a promise not to sue. While it often has more proactive commercial aspects in modern commerce, a license does not convey property rights to the licensee.

31. "Present value." This definition corresponds to Section 2A-103 and Section 1-201(37)(z). It modifies those rules to cover present valuation of performances other than future payments.

32. "Published informational content." This term refers to the type of information most closely associated with free expression. This is the material of newspapers, books, motion pictures and the like, which is distributed to the public and intended to communicate knowledge, sounds, or other experiences to a human being, rather than simply to operate a machine. The term includes interactive content since, in interactive products, the information is generally available and the end user selects from the available information. This is like the reader of a newspaper who reads part, but not all, of the newspaper.

The term does not include information provided in a special relationship of reliance. That phrase, which is also used in Section 2B-404, should be given the same interpretation in both contexts. It excludes transactions in which the provider knows that the particular licensee plans to rely on the particular data that the licensor provides and expects that the licensor will tailor the information to the particular client's business needs. The relationship arises only with respect to persons who possess unique or specialized expertise or who are in a special position of confidence and trust with the licensee such that reliance is justified and the party has a duty to act with care. In a special relationship of reliance the information provider is specifically aware of and personally tailors information to the needs of the particular licensee as an integral part of the provider's primary business of providing such content. A reliance 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.

33. "Reason to know." This definition is consistent with Restatement (2d) Contracts § 19, Comment b. A person has reason to know a fact if the person has information from which a reasonable person of ordinary intelligence would infer that the fact does or will exist based on all the circumstances, including the overall context and ordinary expectations. The party is charged with commercial knowledge of any factors in a particular transaction which in common understanding or ordinary practice are to be expected, including reasonable expectations from usage of trade and course of dealing. If a person has specialized knowledge or superior intelligence, reason to know is determined in light of whether a reasonable person with that knowledge or intelligence would draw the inference that the fact does or will exist. There is also reason to know if from all the circumstances, the inference would be that there is such a substantial chance that the fact does or will exist that, exercising reasonable care with reference to the matter in question, the person would predicate the person's action upon the assumption of its possible existence.

"Reason to know" must be distinguished from knowledge. Knowledge means conscious belief in the truth of a fact. Reason to know need not entail a conscious belief in the existence of the fact or its probable existence in the future. Of course, a person that has knowledge of a fact also has reason to know of its existence. Reason to know is also to be distinguished from "should know." "Should know" imports a duty to others to ascertain facts; the term "reason to know" is used both where the actor has a duty to another and where the person would not be acting adequately in protecting its own interests if it did not act in light of the facts of which it had reason to know.

34. "Receive." This definition, as to performances, corresponds to original Section 2-103. As to notices, it revises Section 1-201(26) to cover electronic systems used to give and receive notice. As in current law, "receive" includes circumstances in which a message is delivered to a place designated by the recipient even if that place is under the control of a third party. Delivery to a private post office box is receipt by the addressee even though the addressee may not remove or otherwise obtain the message until later. Similarly, receipt of a message at an electronic mail address, even though on a third party system, constitutes receipt as to the ultimate addressee, if that electronic mail address was held out as a place for receipt of such messages. The message must be capable of being processed. This refers to processing in the type of system in its general, reasonably expected configuration and not to the details of an atypical configuration known or knowable only to the party operating the system. The message must be capable of interacting with an ordinary system of the particular type.

35. "Record." A record must be in or capable of being converted to a perceivable form. Electronic text recorded in a computer memory that could be printed from that memory constitutes a record. Similarly, a tape recording of an oral conversation or a video taping of actions could be a record. The term does not require permanent storage or anything beyond temporary recordation. Fixation can be fleeting and perception can be either directly or indirectly with the aid of a machine.

36. "Release." A release is a waiver or permission not accompanied by other commercial attributes, such as an on-going obligation to pay or an obligation to provide the means to implement use of the information. A release is a form of a license, but it is characterized by the lack of other commercial attributes. The term is used in this article to identify a class of transactions important to the information industries in which the sole purpose of the agreement is to permit use and which agreements are often made on a less formal basis than a more typical commercial license.

37. "Return." In this article, a "return" refers to acts that place a party back into their initial position if the party has rejected a record or term of a record made available to it after having committed to, or in fact having completed, an obligation to pay or deliver and as a result of the rejection the transaction will not be carried forward. In traditional commerce, this issue has been most specifically relevant to licensees, but there are many cases where the licensee controls the timing or proposed terms, and the nature of the terms proposed. This will be even more common as modern automated commerce makes possible systems by which consumers or other licensees through automated agents can propose terms after the initial agreement in circumstances where this article recognizes that proposal as part of an on-going contracting process, rather than as a proposal for modification. See original Section 2-311(1); Section 2-305(2). When this occurs with respect to a licensor, a return requires return of information delivered that would have been covered by the rejected record of agreement. With respect to a licensee, "return" consists of a reimbursement of fees paid on return of all copies of the information and documentation.

Whether or when a right to a return exists depends on the terms of the offer and this article. Return is not a remedy for breach or a right of rescission. It is a right that arises if a party refuses a proffered license and it has previously committed to, or paid the contract fee. Making a return available in such cases is essential to allow the party an opportunity to accept or reject that license. See Sections 2B-111 and 2B-112. The right to return in those sections expires if the party assents to the license. Of course, if a party accepts a license but the information is defective, the aggrieved party may have a right to restitution of the contract fee as direct damages or may have a contractual right to a return as defined by the agreement.

Return must be sought within a reasonable time. What constitutes a reasonable time depends on the facts and the contract.

The definition deals with the difficult problem of administering a return right in "bundled" products (products that include separate items of information transferred as a whole for a single fee). Bundled transactions are not based on a mere sum of the fees required for each product in an unbundled setting and, often, include information products that are provided for no charge, even though the information may have a discernable price in other transactions. If the products are subject to separately priced licenses, a return is for the contractual fee attributed to the item in question. Otherwise, return must be of the entire bundled product in return for the entire price. For the former, the price must be separately stated in the sense that the agreement identified an amount allocated to the particular information. A court cannot unbundle the products and estimate appropriate pricing in what is often a complex arrangement for distribution premised on the bundling of multiple products.

38. "Scope." This term refers to contract terms that define the central elements of a license. Scope provisions in a license define the product. In sales or leases of goods, products are self-defining: an offered car is either a Ford or Chevrolet, it is not necessary to read a contract to determine that. That is not the case in the computer information industries. The same information has entirely different characteristics depending on the scope of rights granted. For example, a license that allows use of a word processing program in a single computer is not the same product as a license to make and distribute copies of the word processing software throughout the United States. Neither license transfers the same product as a license to use a copy for three days in one's home. They are all different even if the software is identical.

39. "Send." This definition adapts original Section 2-201(38) to provide criteria relevant to electronic notices. In modern technology sending a message does not require that the information move from one location to another. Electronic transfers more ordinarily involve initiating processes that copy the information into another location or make it available in a system shared or accessible by the recipient and the person or electronic agent creating the message. The message must be capable of being processed by the type of system involved. This refers to the type of system in its general, reasonably expected configuration and not to the details of an atypical system configuration. The message must be capable of interacting with ordinary systems. Of course, if the sender has knowledge of the details of the actual system to which it is sending the message, its actions must take that knowledge into account. Finally, use of the phrase "in addition" makes it clear that the electronic sending must also comply with relevant criteria for other media, such as in use of a reasonable carrier.

40. "Software contract" includes licenses of software and sales of copies of software. It also covers all software development contracts involving independent contractors. This does not depend on whether or not the contract falls within the Copyright Act definition of a "work for hire." Of course, under copyright law, most works for hire are authored by an employee in the scope of its employment. Article 2B does not deal with employee contracts. It thus does not cover a contractual arrangement under which an employee develops software for the employer within the scope of the employee's job.

The distribution of motion pictures and sound recordings in digital form even if the distributed form entails digital instructions that constitute a computer program where the only purpose of the program is to enable the display and performance of the motion picture or sound recording. Such transactions are, in any event, exclude from the scope of this article by virtue of the combined effects of Section 2B-104(1) and Section 2B-104(6). The motion picture is excluded under subsection (6), while the program is excluded under subsection (1) as a mere incident of the transfer of the motion picture product. The language in the definition here merely corresponds to and confirms that result.

41. "Standard form." The definition refers to forms, not standard terms. A form consists of record containing a group of terms prepared for frequent use as a group. Standard forms in modern commerce are ubiquitous. The definition does not cover a tailored contract comprised of "terms" selected from prior agreements. The record must itself have been prepared for repeated use and actually have been used without negotiation other than of the ordinarily tailored terms noted in the definition. If a standard form is offered but then negotiated or changed other than with respect to the ordinarily tailored terms noted in the definition, the resulting record is not a standard form contract.

42. "Terminate." This definition conforms to original Section 2-106.

[B. General Scope and Terms]

SECTION 2B-103: SCOPE

(a) This article applies to computer information transactions.

(b) If a transaction involves computer information and goods, the following rules apply:

(1) This article applies to the computer information and to copies of computer information, its packaging and documentation, but does not apply to a copy of software contained in and transferred as part of other goods unless:

(A) the goods are a computer or computer peripheral; or

(B) giving the purchaser of the goods access to or use of the software is a material purpose of the transaction.

(2) Except as provided in paragraph (1), Article 2 or 2A applies to goods in the transaction.

(c) Except as provided in subsection (b), if another article of the [Uniform Commercial Code] applies to a transaction, this article does not apply to the subject matter of the other article.

(d) The parties may by agreement provide that all or part of this article, including contract formation rules, governs a transaction in whole or in part or that other law governs the transaction in whole or in part. An agreement that this article does or does not apply to some but not all of a transaction cannot alter a rule that otherwise applies and cannot be varied by agreement. In all other cases, following rules apply to the agreement:

(1) An agreement to opt out of Article 2B cannot alter standards of good faith, unconscionability, or public policy invalidation, or the defense in Section 2B-118 and the limitations in Section 2B-716. An agreement to opt into Article 2B is subject to any similar restrictions in otherwise applicable law. Neither agreement can alter an otherwise applicable consumer protection law referenced in Section 2B-105.

(2) In a mass market transaction, the following rules apply:

(A) An agreement to opt into or opt out of Article 2B is enforceable only if the transaction involves subject matter governed by Article 2B and subject matter governed by other contract law, or if there is good faith uncertainty about whether Article 2B or other contract law governs.

(B) The agreement cannot alter law applicable to distribution of information in non-electronic form.

(3) Except for mass market transactions, the following rules apply:

(A) An agreement to opt out of Article 2B is not enforceable unless the transaction involves subject matter not governed by Article 2B or there is good faith uncertainty about whether Article 2B or other contract law governs.

(B) An agreement to opt into Article 2B is not enforceable unless the subject matter of the transaction includes information or informational rights or there is good faith uncertainty about whether Article 2B or other contract law governs.

Definitional Cross Reference:

"Agreement": Section 1-201. "Computer": Section 2B-102. "Computer information": Section 2B-102. "Computer information transaction": Section 2B-102. "Consumer": Section 2B-102. "Copy": Section 2B-102. "Goods": Section 2-1--. "Electronic": Section 2B-102. "Information": Section 2B-102. "Party": Section 1-201. "Purchaser": Section 1-201. "Software": Section 2B-102.

Reporter's Notes:

1. General Structure. Section 2B-103(a) states the affirmative scope of Article 2B. Unless a transaction is a "computer information transaction," this article does not apply. See Section 2B-102 (defining "computer information transaction"). Subsections (b) and (c) deal with mixed transactions. Subsection (d) allows the parties to opt into or out of the article by agreement. An "agreement" does not require a signed writing, but refers to the bargain of the parties in fact, including applicable usage of trade and course of dealing. Section 2B-104 states several exclusions from the scope of the article. As a contract statute, Article 2B does not alter or even deal with intellectual property rights law.

2. Scope of the Article. This article applies to "computer information transactions" as defined in Section 2B-102. The article focuses on transactions involving creation or distribution of computer software, multimedia or interactive products, computer data, Internet, and online distribution of information. This leaves unaffected the many transactions in the core businesses of other information industries (e.g., print, motion picture, broadcast, sound recordings) whose business practices in their core businesses differ from those of the computer software, online, and data industries. This article does not apply to print books, newspapers, or magazines. Whether a magazine publisher can place contractual limitations on purchasers of copies of its magazines or books is not addressed in Article 2B.

The scope of Article 2B is limited by the affirmative scope statement in subsection (a) which does not include:

· Sales or leases of goods, except as indicated in Section 2B-103(b).

· Services contracts, except as in the definition of "computer information transaction".

· Creation or distribution of print materials (books, magazines, newspapers).

· Still photography.

· Casual, non-contractual exchanges of information.

· Creation or distribution of motion pictures, sound recordings, broadcast or cable programming.

· The subject matter of other articles of the Uniform Commercial Code.

3. Transactions in Computer Information. Transactions in computer information are contracts whose subject matter entails the acquisition, development or distribution of computer information. "Computer information" is information in a form directly capable of being processed or used by, or obtained from or through, a computer, but does not include information of a type or used in a manner referred to in Section 2B-104(2). See Section 2B-102.

Transactions in computer information differ from sales or leases of goods because the focus of the transaction is on the information, its content or capability, rather than on the tangible items that contain the information is delivered. In a sale of goods, the buyer obtains ownership of the subject matter of the contract (e.g., the specific toaster or television). That ownership creates exclusive rights in the subject matter (e.g., the toaster). In contrast, a person in a transaction whose subject matter involves obtaining the computer information and that acquires a copy of computer information may obtain ownership of the copy but does not, and cannot reasonably expect to, own the information or the rights associated with it. Unlike a buyer of goods, the purchaser of a copy often has little interest in retaining possession or control of the original disk that contained the information unless the information remains on that disk and nowhere else. Often, a purchaser copies the information into a computer, rendering the original diskette largely immaterial.

Transactions in computer information differ from transactions in other information because of the nature of the information involved. Information capable of being processed in a computer is more readily susceptible to modification and to perfect reproduction than information in other form such as printed books or magazines. Indeed, to use computer information, one must copy it into a machine. See Stenograph v. Bossard, 46 U.S.P.Q.2d 1936 (D.C. Cir. 1998); MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993). In order to access and view computer information from a remote computer, one must copy it into the local computer. This creates copyright law issues with which this article does not deal. It also creates contract law issues addressed in this act.

4. Computer. The term "computer" is defined in Section 2B-102. The definition comes from a leading dictionary of terms related to the computer industry and conforms to ordinary definitions. It does not include traditional televisions, VCR or similar systems whose automated functions are primarily intended to receive or transmit broadcasts, or to perform or display motion pictures or sound recordings. In any event, this article does not apply to all information received or processed by a computer and does not apply to computers per se. Whether or not received by a computer, motion pictures, broadcast and similar programming are excluded from this article under Section 2B-104.

5. Included Transactions. The scope of this article turns on the definition of "computer information transaction." "Computer information transactions" include transactions involving the creation, distribution, or license of computer information, including software. Section 2B-102. Transactions for information not in a form directly capable of computer processing are excluded unless the parties agree to be governed by its provisions.

For a transaction to be included, acquiring the computer information, access to it, or its use must be the subject matter of the transaction and not a mere incident of another type of transaction. The mere fact that information is sent or recorded in digital form is not sufficient. Thus, for example, a contract for airplane transportation does not become an Article 2B transaction simply because the ticket is in electronic form. The subject matter of the transaction is not the computer information, but the service - air transportation from one location to another. Similarly, an insurance policy prepared for a client and recorded in digital form is not a computer information transaction, but simply a contract for insurance whose result or terms is evidenced in digital form. A contract for a digital signature certificate is a contract for digital certification or identification services, not a contract whose subject matter is the computer information. This article does not apply to the many cases in which a person provides information to another person for purposes of another transaction such as making an employment or loan application.

Typically, a contract included in this article is for commercial use or distribution of the computer information. The article thus includes, for example, a license allowing a company to transform photographs into digital form for re-licensing in that form to others. It also includes a contract to compile in digital form a database of names for use by a client as a product furnished to others for use as a mailing list.

a. Creation, Development and Support. The article applies to contracts for the development or creation of computer information, such as software development contracts and contracts for the creation of computer databases. Contracts of this type have been subject to inconsistent court rulings, applying the U.C.C. or common law contract theories based on fine and not clear distinctions. Article 2B applies to all such transactions. The article does not, however, cover contracts for development or creation of motion pictures, sound recordings, or broadcast programs. These are excluded from the definition of "software" and the definition of "computer information." In any event, transactions of this type are excluded under Section 2B-104. This article also does not cover contracts for the creation or development of print books or articles which do not involve computer information.

b. Computer information Transaction. The article covers transactions for access to, acquisition, transfer, use, or distribution of computer information. This includes all transactions involving the distribution or use of computer programs. Such transactions are covered whether they involve a license or an unrestricted sale of a copy of the program.

This article also covers transactions involving access to or information from a computer system. This encompasses Internet and similar systems that allow access to information databases. This form of information distribution does not include broadcast of digital information involving motions pictures, sound recordings or the like.

6. Mixed Transactions. Inevitably, as with Article 2 transactions in goods, some transactions in computer information present questions about to what extent the transaction is governed by Article 2B and to what extent it is governed by common law or law in another statute. Transactions that are governed by several sources of contract law in a single transaction (i.e., "mixed transactions") are so common under current law as to be unexceptional and, indeed, virtually universal. They routinely exist in all consumer transactions (e.g., videos, CDs, and software) and all transactions involving copyrighted works. For consumer goods, transactions are governed by common law, Article 2 (or 2A), and state or federal consumer law. For copyrighted works, transactions are variously (and non-uniformly) governed by common law, copyright law, Article 2 (or 2A), and various state statutes. While Article 2B provides more uniformity and clarity on the issues it addresses, it is supplemented by common law (Section 1-103), copyright law, and consumer or other state law (Section 2B-105).

Here, the relevant issue is not whether a single or multiple sources of contract-related law apply (because multiple sources always apply), but whether Article 2B, rather than another source, is involved in the mix. On this issue, courts use two distinct approaches under other U.C.C. provisions and under common law.

· A "gravamen of the action" standard: applies rules tailored to a subject matter only to that particular subject, asking in effect to which subject matter does the particular dispute pertain.

· A "predominant purpose" standard: makes a determination about the overall transaction and applies the law applicable to the predominant subject matter to the "entire" transaction.

Article 2B adopts a modified gravamen of the action approach in subsection (b) with respect to goods and in subsection (c) with respect to the subject matter of other articles of the U.C.C., but as discussed in a following note, courts may to use a predominant purpose test with respect to non-U.C.C. subject matter.

7. Computer Information and Goods. In a transaction in which computer information and goods are involved, Article 2B applies to the computer information, while Article 2 (or Article 2A) applies to the goods. This recognizes the differences in the two types of subject matter and the transactional differences that result from the different subject matter.

There are two exceptions. The first, in Section 2B-103(b), is that Article 2B applies to goods that are merely a copy, documentation, or packaging of the computer information covered by this article. In effect, these "goods" are mere incidents of the computer information and, as such, should be incorporated into this article to prevent unintended results through the interface of the U.C.C. transactional articles. Article 2B covers both the computer software and the media on which the software is copied or documented.

The second exception in subsection (b) concerns copies of software contained in and sold or leased as part of goods. Section 2B-103(b)(1) provides that, if software is embedded in goods, Article 2B applies to the copy of the software only if it is part of a computer or a computer peripheral or if giving the purchaser access to the functional attributes of the software is a "material purpose" of the transaction. In fact, however, in most mass market transactions where the issues are most significant, which law applies often does not alter the outcome.

Article 2B governs contract issues for software embedded in goods other than a computer or a computer peripheral only if a material purpose of the transaction is to provide the functional attributes of the program. Thus, while a television may be operated by software, the material purpose of the a sale of an ordinary television set is to acquire the set and television reception. This is not an Article 2B transaction, but that result may change if television sets evolve into computing systems in which a material purpose for the user is to obtain software processing. Similarly, while an automobile may have some functions operated by a computer program, the program that operates the brakes or other functions is not a primary purpose of the transaction for the purchaser. The transaction is within Article 2 or 2A. On the other hand, the development or supply contract for the program that enables the manufacturer to use the program in its system, however, is in Article 2B. Similarly, separately licensed software in a digital camera that enables the camera to be linked to a computer so that images can be transferred back and forth and manipulated is within Article 2B. Factors suggesting that the program's processing capacity is a material focus of the transaction include the extent to which the processing capabilities of the software is a dominant focus of the product's appeal, the extent to which discussions of the parties focused on that processing capacity in contrast to other attributes of the product, and the extent to which the agreement makes those processing capabilities a separate focus for agreed terms.

8. Computer Information and other UCC Articles. The articles of the U.C.C. control with reference to their subject matter. For example, Article 8, and not this article, deals with investment securities and rights or remedies with respect to that subject matter, even though in modern practice securities may be dealt with through a computer. The same applies with respect to the subject matter of Article 4 and Article 4A: payment systems, checks, and funds transfers. This follows the same rule that applies under original Article 2 and 2A. Similarly, if a provision of Article 9 conflicts with a provision of Article 2B, Article 9 controls. However, if a computer information transaction is involved, such as a license of computer information, Article 2B applies to the terms and enforcement of that license.

9. Computer Information and Other Contract Law. Where the issue does not involve goods or the subject matter of other articles of the U.C.C., courts should follow general interpretation principles to determine the applicability of Article 2B. In most cases involving computer information and other subject matter, this will entail application of a form of the "predominant purpose" test as used in most states with respect to original Article 2, but modified here to reflect the issues presented in reference to Article 2B. The predominant purpose is judged as of the time of the contracting.

If computer information is the predominant purpose of the transaction, Article 2B rules apply instead of other contract law (e.g., common law). The predominant purpose test has been applied by courts dealing with the scope of Article 2 where goods and other subject matter (e.g., services) are involved in a transaction. The basic test asks whether Article 2B or other subject matter constitutes the main intended focus of the contract. Thus, in a contract between an author and a publisher, if the author agrees to allow the publisher to distribute the work in "book, motion picture or digital form", the agreement is outside Article 2B if the predominant purpose is to give the publisher the right of first publication in book (printed) form or the right to motion picture uses. This is true if, for example, the intended primary exploitation of the contracted-for work is in print or motion picture form, both of which are outside Article 2B. The fact that "electronic rights" are also covered in the agreement does not result in Article 2B coverage since the focus is on other rights. Similarly, a contract with a producer whose predominant purpose is to develop a motion picture for distribution as such does not come within Article 2B simply because the grant includes secondary rights to use parts of the film in interactive contexts. The predominant purpose is creation of a motion picture. On the other hand, a contract giving a software publisher the right to reproduce a photographic image in "software and other works" is governed by Article 2B if the predominant purpose is to allow use in computer information even though use in print form is also permitted. Similarly, a license to acquire rights to use software by a motion picture studio which may use the software as a tool in creating motion pictures is an Article 2B transaction, while a license to use digital scenes or images in a motion picture is excluded.

In applying the predominant purpose test to information transactions, the standard should be refined to include consideration of the type of transaction envisioned in the parties' agreement. For example, in a loan transaction a loan officer might deliver a diskette containing interest rate calculations for use by the borrower. Under the predominant purpose test, no part of the transaction is covered by Article 2B because the predominant purpose of the agreement between the lender and borrower is the common law loan. Further, the transactional type mirrors a common law loan transaction and the mere presence of the software does not alter this fact. This type of an approach is more appropriate than that of some courts which, under prior law, applied sale of goods rules to software development transactions because, even though the bulk of the contract concerned development services, the program was to be delivered on a diskette or tape. The proper analysis should have been whether the principles of Article 2 (e.g., damage calculation rules, conforming tender rule, rules on timing of ownership transfer, rules on duration of license, effect of negligence, contract modification, etc.) fit the nature of the transaction in fact better than would the rules available under other law (e.g., common law regarding services contracts). This more nuanced analysis is more appropriate for new technology areas in order to avoid elevating form over substance

While the cases under Article 2 thus provide some guidance, it is appropriate to consider additional factors. Thus courts should consider the extent to which the transaction as a whole corresponds to the transactional framework involved in computer information transactions. If it does, Article 2B should apply to the entire transaction, but if not, it is possible that Article 2B should not apply at all. Among the transactional factors that courts should consider are: 1) the nature of the underlying intellectual property rights involved, including, with respect to copyrighted works, differences in the rights provided under the Copyright Act for different types of works, 2) the extent to which regulatory regimes apply to the subject matter and were considered in the transaction, 3) the extent to which allocation of liability risk for inaccurate or improperly functioning information is a concern, and 4) the extent to which the parties involved are performing services rather than information-related transactions.

The test applies at various levels of use or distribution, but the result may differ at each level. For example, a courier company that licenses communications software from a software publisher is engaged in an Article 2B transaction. The subject matter of the agreement a license in the software itself. If the courier company provides the software to customers merely to access data on the current location of packages, however, the predominant purpose may be the services. If the software publisher enters into a license with the end user, that license is in Article 2B.

The predominant purpose test can apply only if the parties have not otherwise agreed as to coverage by Article 2B or other law. In the foregoing illustrations, for example, if the parties elect coverage under Article 2B, that agreement governs as would an agreement that Article 2B should not apply at all. In any event, Article 2B coverage or non-coverage does not create "mixed contracts." The only issue is whether Article 2B supplants common law or other rules otherwise applicable to a transaction. Agreement here, as elsewhere in the U.C.C., can be found in the express terms of the contract as well as in the usage of trade or course of dealing between the parties, or as inferred from the circumstances of the contracting.

10. Contract Choice. Subsection 2B-103(d) follows the basic rule that contract choices control and applies this principle to determining what law governs. The subsection distinguishes between decisions to opt entirely into or out of Article 2B subsection (d)(1-3), and decisions to do so only in part (subsection (d)).

The parties can agree to have Article 2B apply to the entire transaction, part of the transaction, or none of the transaction. These choices, of course, deal with applicability of Article 2B and not with whether other law continues to apply to issues not dealt with in Article 2B. Also, a contract choice here is effective irrespective of any "predominant purpose" of the transaction. An enforceable decision to opt into or out of Article 2B may render the "predominant purpose" test moot.

In determining whether the agreement to opt-into or opt-out of Article 2B was formed and is enforceable, a court will ordinarily apply the contract formation rules of this article and the general concept of agreement in the U.C.C. This is especially true where the transaction involves some subject matter governed by Article 2B. Here, as elsewhere, an agreement can be found as easily in the express terms of the contract of the parties as in course of dealing, usage of trade, or as inferred from the circumstances.

For commercial parties, the ability to choose Article 2B or another body of state contract law gives an important opportunity to avoid uncertainty and the effects of potentially conflicting rules potentially applicable under multiple bodies of state contract law (e.g., Article 2B, Article 2, Article 2A, and common law). This power of contract choice is especially important in that Article 2B does not apply to all transactions in information. On the other hand, especially in contracts with no bargaining, there is an interest on the part of the party who receives non-negotiable terms that the choice not unfairly deprive it of protections mandated under the other law that may not be varied by agreement. This interest, of course, does not validly apply to contract rules that can be varied by agreement. The provisions of subsection (d) balance the interests in other contexts.

a. General Limits: Opting Entirely Out. Contract terms on this issue are subject to rules on unconscionability and fundamental public policy concerns. In addition, subsection (d) contains several restrictions on enforcing the choice of the parties on whether Article 2B governs or not.

(1). Subject Matter Limitations. The ability to opt out of Article 2B exists only in certain cases. In essence, in both a mass market and any other transaction, the parties by agreement can opt out of Article 2B only if the transaction includes subject matter that would not otherwise be governed by Article 2B (a "mixed transaction"), or if there is good faith uncertainty about whether Article 2B applies. Thus, in the latter case, the parties may agree to opt out (or opt into) Article 2B to avoid the uncertainty of whether Article 2 or Article 2B applies. The opt out is presumably into the law that governs the other subject matter or the one whose application was uncertain.

A contract choice here is effective irrespective of any "predominant purpose" of the transaction, but may render the "predominant purpose" test moot. The "predominant purpose" test is applicable only if in fact the transaction does involve Article 2B subject matter and other subject matter, at least in part, or if a contract choice to opt out is ineffective in whole or in part under this section. In the latter event, a court could conclude that under a predominant purpose test, particular law governs.

(2). Rules Affected. Subsection (d)(1) states the general rule that a decision to opt out of Article 2B cannot alter certain fundamental rules that would be applicable to the contract if Article 2B applied to part of the transaction. These include standards of good faith, unconscionability and the public policy rule in Section 2B-105(b). For other than the listed Article 2B provisions, opt out is not substantively restricted, but it is limited with respect to the transactions in which it can be used.

In reference to substantive rules, in most cases, Article 2B allows their variation by agreement and, thus, these rules can be varied by a general opt-out. For those few Article 2B rules that cannot be varied by agreement, except as listed in the subsection, the interest in allowing certainty prevails. An opt-out places the entire contract under a different legal regime with its own applicable rules that deal with these topics. This is true, for example, for limits on liquidated damage terms. Common law, Article 2 and Article 2A all contain provisions dealing with this topic and, while somewhat similar, these rules make a balance attuned to those other legal regimes. A rule which makes ineffective a general contract choice to the extent it affects this rule would create a situation in which an agreement would be required to comply with Article 2B (for its subject matter), Article 2 (for goods) and common law (for other subject matter) in the same transaction. The alternative concept, adopted here, is that the opt-out brings with it both the positive and the restrictive parts of the other body of law in full, and results in the loss of both the positive and restrictive parts of Article 2B. This is also true, for example, in a decision to opt out of Article 2B where Article 2 is the other law and governs as to the creation and disclaimer of warranties. It is also the case of the effect of an opt-out on the provisions of Section 2B-208 on both the enforceability of a mass market form and the return right. If there is an opt- out, other law applies to both issues.

The basic theme is that a contract choice to opt out of Article 2B as a whole (see subsection (d)(4) on partial opt out) should ordinarily be enforced and that the interests of the parties are properly safeguarded under the other law (U.C.C. or common law) as a whole. The issues listed in subsection (d)(1) represent exceptions under current law or policies that are so fundamental that their variance should not be permitted.

b. General Limits: Opting In. Contract terms on this issue are subject to standards of unconscionability and public policy concerns. In addition, subsection (d) contains several restrictions on enforcing the choice of the parties on whether Article 2B governs or not.

(1). Subject Matter Limitations. The ability to opt into Article 2B exists only in certain cases. In a mass market transaction, the parties can opt in only if the transaction involves Article 2B subject matter (along with other subject matter) or if there is good faith uncertainty about whether Article 2B applies. In addition to simply recognizing the role of contract choice, the goal of allowing this option to take effect is to allow parties to reduce conflicting rules and uncertainty, some of which are caused by Article 2B itself (because of the decision to focus on a narrow group of transactions). If there is no Article 2B coverage and no good faith uncertainty, the transaction in the mass market should be governed under otherwise applicable law In this respect, subsection (d)(3)(B) further indicates that a decision to opt into Article 2B cannot alter the law regarding distribution of non-electronic copies, such as books and magazines, which are outside the scope of this article.

Outside the mass market, interests in allowing parties to make and enforce contractual choices is even greater. Yet, even here, it seems inappropriate to allow a decision to opt into Article 2B where the transaction involves subject matter entirely unrelated to the general nature of this article - transactions in information. Subsection (d)(3) allows a decision to opt into Article 2B, but only if the transaction subject matter includes information or informational rights. Thus, a decision by parties to a commercial trademark license to be governed by Article 2B is enforceable, while the decision by parties to a real estate lease is not enforceable.

The overall effect of the subsection is as follows: Assume that three commercial parties enter an agreement to create a product involving cable services (common law), software or multimedia (Article 2B) and hardware (Article 2). The parties to the commercial agreement may agree that any of the three laws governs and, thus, avoid inconsistent and overlapping rules. As to Article 2B subject matter, the agreement does not alter good faith, unconscionability, public policy or self-help rules. If the resulting product is distributed in a mass market transaction, if it involves Article 2B subject matter, the agreement may elect Article 2B or other law as covering the deal, with the limits as stated above, but if there is no Article 2B subject matter in the product, Article 2B cannot be made to apply.

(2). Rules Affected. Subsection (d)(1) states the general rule that a decision to opt in cannot alter any rule of otherwise applicable law similar to the listed rules: good faith, unconscionability, the public policy rule in Section 2B-105(b), the self-help limitation, and the electronic consumer defense. In addition, neither an opt-out, nor an opt-in can vary consumer protection laws described in Section 2B-105.

The discussion in the notes dealing with limits on the right to opt out are relevant here. In reference to substantive rules, in most cases, contract law allows variation by agreement and these rules can be varied by a general opt-in. For those few other rules, the interest in allowing contract choices that enhance certainty prevails, especially where the rule does not involve a consumer protection that cannot be varied by contract. Opting into Article 2B places the entire contract under this legal regime. The basic theme is that a contract choice to opt into Article 2B as a whole (see subsection (d)(4) on partial opt-in) should ordinarily be enforced.

SECTION 2B-104. EXCLUSIONS FROM THIS ARTICLE. This article does not apply to:

(1) a contract or a transaction that provides access to, use, transfer, clearance, settlement, or processing of:

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

(B) an instrument or other item;

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

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

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

(2) a contract to create, perform in, include information in, acquire, use, reproduce, distribute, license, display, or perform:

(A) audio or visual programming that is provided by broadcast, satellite, or cable as defined in the Federal Communications Act as that Act existed on January 1, 1999, or by similar methods of delivering such programming; or

(B) a motion picture or sound recording as defined in the Federal Copyright Act as that Act existed on January 1, 1999; or

(3) a compulsory license under federal or state law.

(4) a contract of employment of an individual other than as an independent contractor.

Definitional Cross References:

"Computer": Section 2B-102. "Computer program": Section 2B-102. "Copy": Section 2B-102. "Electronic": Section 2B-102. "Financial asset": Section 8-102. "Funds transfer": Section 4A-104. "Information": Section 2B-102. "Instrument": Section 3-305. "Item": Section 4-104. "Investment property": Section 9-115. "Lease": Section 2A-103. "License": Section 2B-102. "Letter of credit": Section 5-102. "Sale": Section 2-106.

Reporter's Notes:

1. Effect of the Section. This section states several exclusions from Article 2B. These exclusions reflect decisions that the principles set out in Article 2B should not be applicable absent agreement to the specifically excluded subject matter because the excluded transactions are different in type than transactions within Article 2B. Ordinarily, a court should not apply Article 2B by analogy to these excluded transactions, but should refer to other law, including when applicable, Article 2 and Article 2A.

2. Core Financial Functions. Section 2B-104(1) excludes core banking, payment and financial services activities. Article 2B does not cover transactions governed under other UCC law (e.g., Article 4A, Article 4, Article 8). It is also preempted by certain federal banking regulations. This is not an exclusion of banks or financial institutions. Modern technology and developments in digital cash and similar systems place many companies other than banks in direct competition. Regulations, such as federal Regulation E on funds transfer, do not apply solely to banks, but to any holder of a qualifying account. To the extent that non-banks engage in the activities indicated in the exclusion, those activities are also excluded from this article. Modern banks engage in many activities identical to licensing, however. The on-line systems are within Article 2B to the extent that they involve activities such as on-line shopping, database access, and other activities not within the exclusion. As the information industries converge, so too is the banking industry converging into fields of the information industries. Those non-banking activities are covered by Article 2B.

3. Core Entertainment and Broadcast. Section 2B-104(2) excludes upstream agreements to create, and subsequent contracts to distribute, motion pictures, sound recordings, broadcast programming and cable programming. These are excluded regardless of whether in digital or other form. The exclusion covers the core activities of the entertainment industry, including creation and distribution of theatrical motion pictures or television and radio programs.

There are a number of reasons for the exclusion. One reflects the existence of a regulatory overlay (cable and broadcast). Also, historically the different nature of liability and other issues involved in the entertainment industries as contrasted to the software and data industries leads to transactional formats that are different. Similarly, even for works within the general property realms of copyright law, a different configuration of rights may exist. For example, under copyright law, a first sale of either a computer program or a video game does not allow the buyer to reconvey that copy through a rental agreement with a third party. That retained "rental right", however, does not exist in respect of motion pictures or sound recordings. The exclusion here of motion pictures, sound recordings, and the listed broadcast or cable activities leaves liability and other issues to general law, including when appropriate, Article 2, and not affected by this article. Because these transactions differ from those covered by this article, the liability limitations, contract formation, and other principles set out in this article should not be applied to those areas of practice either to lessen or increase liability risk.

A motion picture is an "audiovisual work" consisting of a "series of related images which, when shown in succession, impart an impression of motion, together with accompanying sounds, if any." 17 U.S.C. § 101. As used here, the term "motion picture" has the meaning used in the Copyright Act. A motion picture is, thus, one type of work within the broader class of audiovisual works. The Copyright Act and the registration system it enacts makes distinctions among and between various types of works, such as audiovisual works generally, video games, literary works, computer programs, and motion pictures and sound recordings on the other. These distinctions have become part of accepted industry practice and are followed here.

The term, motion picture, includes traditional motion pictures regardless of how distributed, e.g., it includes digital video disk distribution of motion pictures for home or other viewing, even though these are digital works and may be distributed in a form that includes in the disk a computer program designed solely to enable display or performance of the motion picture. These digital products are not governed by Article 2B. Either Article 2 or Article 2A, along with common law apply. The term "motion picture" does not include an interactive computer game, multimedia product, or similar work, nor does it include audio visual effects included in such interactive works. The term refers to the work as a whole and does not include images or visual motion within another work or software, such as the animated help feature of a word processing program or images or sequences of motion in an interactive computer encyclopedia.

Section 2B-104 also excludes contracts associated with audio and visual programming by broadcast, cable, or satellite and like methods of delivering such programming. These terms are defined in federal Communications Act. 47 U.S.C. § 522 defines "video programming" as "programming provided by, or generally considered comparable to programming provided by, a television broadcast station." Audio programming refers to audio programming comparable to ration broadcasts. Both "broadcast" and "cable" are defined in the Communications Act also. Satellite transmission refers to satellite broadcast or cable. See 47 U.S.C. § 548. The basic effect in this article is to exclude traditional broadcast and cable services, regardless of whether transmitted in digital or another form, including to exclude transmissions analogous to broadcast but made through the Internet. On the other hand, broadcast, satellite, or cable programming does not include data transmission, interactive services, or similar computer information not analogous to broadcast programming.

SECTION 2B-105. RELATION TO FEDERAL LAW; TRANSACTIONS SUBJECT TO OTHER STATE LAW.

(a) A provision of this article which is preempted by federal law is unenforceable to the extent of that preemption.

(b) If a term of a contract violates a fundamental public policy, the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the impermissible term, or it may so limit the application of any impermissible term as to avoid any result contrary to public policy, in each case, to the extent that the interest in enforcement is clearly outweighed by a public policy against enforcement of that term.

(c) Pursuant to Section 1-103, among the laws supplementing, and not displaced by this article, are trade secret laws and unfair competition laws.

(d) Except as otherwise provided in subsection (e), if this article conflicts with a consumer protection statute or regulation of this State in effect on the effective date of this article, the conflicting statute or regulation prevails.

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

(1) A requirement that a term, waiver, notice, or disclaimer be in a writing is satisfied by a record.

(2) A requirement that a writing or a term be signed is satisfied by an authentication.

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

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

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

(g) A statute authorizing electronic or digital signatures in effect on the effective date of this article is not affected by this article.

Legislative Note: Each state should review the statutes that may be affected by subsection (e) to determine whether under their fundamental policy the effect should not apply to some of those statutes. If any, the state should exclude such statutes from subsection (e).

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

Definitional Cross References:

"Agreement": Section 1-201. "Authenticate:" Section 2B-102. "Conspicuous": Section 2B-102. "Consumer": Section 2B-102. "Electronic": Section 2B-102. "Information": Section 2B-102. "Informational Rights": Section 2B-102. "Notice": Section 1-201. "Record": Section 2B-102. "Rights": Section 1-201. "Signed": Section 1-201. "Term": Section 1-201. "Writing": Section 1-201.

Reporter's Notes:

1. General Principle and Scope of the Section.

Subsections (a), (b) and (c) clarify that this article does not displace or alter the relationship between contract law and intellectual property, competition or trade regulation law. Subsection (d) states a similar principle for consumer protection statutes subject to the limited electronic commerce rules in subsection (e).

The transition from print to digital media has created new demands for information. Because digital information is so easily copied, increased attention has been focused on the formulation of rights in information in order to encourage its creation and on the development of contracting methods that enable effective development and efficient marketing of information assets. Here, as in other parts of the economy, the fundamental policy of contract law is to enforce contractual agreements. At the same time, there remains a fundamental public interest in assuring that information in the public domain is free for all to use from the public domain and to provide for access to information for public purposes such as education, research, and fair comment. While the new digital environment increases the risk of unfair copying, the enforcement of contracts that permit owners to limit the use of information and the development of technological self-help measures have given the owner of information considerable means of enforcing exclusivity in the information they produce or collect. This is true not only against those in contractual privity with the owner, but also in some contexts against the world-at-large.

The effort to balance the rights of owners of information against the claims of those who want access is very complex and has been the subject of considerable controversy and negotiation at both the federal level and internationally. The extent to which the resolution of these issues at the federal level ought to preempt state law is beyond the scope of this article, the central purpose of which is to facilitate private transactions in information. Moreover, it is clear that limitations on the information rights of owners that may be imposed in a copyright regime where rights are conferred that bind third parties, may be inappropriate in a contractual setting where courts should be reluctant to set aside terms of a contract. Subsections (a), (b) and (c) deal with aspects of drawing the balance between fundamental interests in contract freedom and fundamental public policies such as those regarding innovation, competition, and free expression.

2. Federal Law: Preemption. Subsection (a) restates a rule that would otherwise be applicable in any event. If federal law invalidates a state contract law or contract term in a particular setting, federal law controls. See, e.g., Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996) (patent license not transferable); Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984) (copyright license not transferable); Rano v. Sipa Press, Inc., 987 F2d 580 (9th Cir. 1993) (copyright preempts rule on licenses terminable at will); SOS, Inc. v. Payday, Inc., 886 F.2d 1084 (9^th Cir. 1989) (federal policy controls over state contract law interpretation rules; interpretation must protect the rights-holder). Subsection (a) refers to preemptive federal rules, but other doctrines grounded in First Amendment, copyright misuse and other federal law may limit enforcement of some contract terms in some cases. In general, however, except for federal rules that directly regulate specific contract terms, no general preemption of contracting arises under copyright or patent law. See National Car Rental System, Inc. v. Computer Associates Int'l, Inc., 991 F2d 426 (8th Cir. 1993); ProCD Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). No effort is made in this article to define whether or to what extent such a preemption may arise.

3. Public Policy Invalidation. Contract terms may be unenforceable because of federal preemption under subsection (a) of this section or because the term is unconscionable under section 2B-110. In addition, subsection (b) acknowledges the general legal principle that, in certain limited circumstances, terms may be unenforceable because they violate a fundamental public policy that clearly overrides the policy favoring enforcement of private transactions as between the parties. The principle that courts may invalidate a term of a contract on public policy grounds is recognized at common law and in the Restatement (Second) of Contracts § 178 et. seq. It is a supplementary legal principle incorporated under Section 1-103 and applies to all contract law and all articles of this Code. Subsection (b) is designed to clarify the nature of the policies that have particular relevance to the subject matter governed by Article 2B.

Fundamental state policies are most commonly stated by the legislature. In the absence of a legislative declaration of a particular policy, courts should be reluctant to override a contract term. In evaluating a claim that a term violates this subsection, courts should consider a variety of factors including the extent to which enforcement or invalidation of the term will adversely affect the interests of each party to the transaction or the public, the interest in protecting expectations arising from the contract, the purpose of the challenged term, the extent to which enforcement or invalidation will adversely affect other fundamental public interests, the strength and consistency of judicial decisions applying similar policies in similar contexts, the nature of any express legislative or regulatory policies, and the values of certainty of enforcement and uniformity in interpreting contractual provisions. Where the parties have negotiated terms of their agreement courts will be even more reluctant to set aside terms of the contract. In light of the national and international integration of the digital environment, courts should be reluctant to invalidate terms based on purely local policies. In applying these , courts should consider the position taken in the Restatement (Second) of Contracts § 178, comment b ("In doubtful cases … a decision as to enforceability is reached only after a careful balancing, in light of the circumstances, of the interests in the enforcement of the particular promise against the policy against the enforcement of such terms. … Enforcement will be denied only if the factors that argue against enforcement clearly outweigh the law's traditional interest in protecting the expectations of the parties, its abhorrence of any unjust enrichment, and any public interest in enforcement of the particular term.").

The public policies most likely to be applicable to transactions within this article are those relating to innovation, competition, and fair comment. Innovation policy recognizes the need for a balance between conferring property interests in information in order to create incentives for creation and the importance of a rich public domain upon which most innovation ultimately depends. Competition policy prevents unreasonable restraints on publicly available information in order to protect competition. Rights of free expression may include the right of persons to comment, whether positively or negatively, on the character or quality of information in the marketplace.

In practice, enforcing private contracts is most often consistent with these policies, largely because contracts reflect a purchased allocation of risks and benefits and define the commercial marketplace in which much information is disseminated and acquired. Thus, a wide variety of contract terms restricting the use of information by one of the contracting parties present no significant concerns. For example, contract restrictions on libelous or obscene language in an on-line chat room promote interests in free expression and association and such restrictions are enforced to a much broader degree arising out of contractual arrangements than if imposed by governmental regulation. However, there remains the possibility that contractual terms, particularly those arising from a context without negotiation may be impermissible if they violate fundamental public policy.

Contracting parties may have greater freedom contractually to restrict the use of confidential information than information that is otherwise publicly available. While a term that prohibits a person from criticizing the quality of software may raise public policy concerns if included in a shrink-wrap license for software distributed in the mass-market, a similar provision included in an agreement between a developer and a company applicable to experimental or early version software not yet perfected for the marketplace would not raise similar concerns. Trade secret law allows information to be transferred subject to considerable contractual limitations on disclosure which facilitates the exploitation and commercial application of new technology. On the other hand, trade secret law does not prohibit reverse engineering of lawfully acquired goods available on the open market. Striking the appropriate balance depends on a variety of contextual factors that can only be assessed on a case by case basis with an eye to national policies.

A term or contract that results from an agreement between commercial parties should be presumed to be valid and a heavy burden of proof should be imposed on the party seeking to escape the terms of the agreement under subsection (b). This article and general contract law recognizes the commercial necessity of also enforcing mass market transactions that involve the use of standard form agreements. The terms of such forms may not be available to the licensee prior to the payment of the price and typically are not subject to affirmative negotiations. In such circumstances, courts must be more vigilant in assuring that limitations on use of the informational subject matter of the license are not invalid under fundamental public policy.

Even in mass market transactions, however, limitations in a license for software or other information such as terms that prohibit the licensee from making multiple copies, or that prohibit the licensee or others from using the information for commercial purposes, or that limit the number of users authorized to access the information, or that prohibit the modification of software or informational content without the licensor's permission are typically enforceable. See, e.g., Storm Impact, Inc. v. Software of the Month Club, 1998 WL 456572 (N.D. Ill. 1998) ("no commercial use" restriction in an on-line contract). On the other hand, terms in a mass-market license that prohibit persons from observing the visible operations or visible characteristics of software and using the observations to develop non-infringing commercial products, that prohibit quotation of limited material for education or criticism purposes, or that preclude a non-profit library licensee from making an archival copy would ordinarily be invalid in the absence of a showing of significant commercial need.

Under the general principle in subsection (b), courts also may look to federal copyright and patent laws for guidance on what types of limitations on the rights of owners of information ordinarily seem appropriate, recognizing, however, that private parties ordinarily have sound commercial reasons for contracting for limitations on use and that enforcing private ordering arrangements in itself reflects a fundamental public policy enacted throughout [the Uniform Commercial Code] and common law.

In part because of the transformations caused by digital information, many areas of public information policy are in flux and subject to extensive debate. In several instances these debates are conducted within the domain of copyright or patent laws, such as whether copying a copyrighted work for purposes of reverse engineering is an infringement. Article 2B does not address these issues of national policy, but how they are resolved may be instructive to courts in applying this subsection.

With reference to contract law policies that regulate the bargain of the parties, this article makes express public policy choices. Contract law issues such as contract formation, creation and disclaimer of warranties, measuring and limiting damages, basic contractual obligations, contractual background rules, the effect of contractual choice, risk of loss, and the like, including the right of parties to alter the effect of the terms of this article by their agreement should not be invalidated under subsection (b) of this section. This subsection deals with policies that implicate the broader public interest and the balance between enforcing private transactions and the need to protect the public domain of information.

The court, if it finds a particular term unenforceable under this section, may enforce the remainder of the contract if it is possible to do so. In considering this issue the court should consider the factors described in Restatement (Second) of Contracts §184.

4. Supplemental Principles: Unfair Competition and Trade Secrecy. Subsection (c) also restates a principle in Section 1-103 that this article being supplemented by state law in some cases. It specifically refers to unfair competition and trade secret law. For example, these state laws may limit the term during which a contract restriction on competition can be enforced. This article does not alter that rule. In addition to being expressly so stated here, that principle is also incorporated in the definition of "contractual use restrictions", which enforces such terms only to the extent enforceable under other law.

The principle with respect to trade secret and unfair competition law stems from the general concept of Section 1-103. Other important rules are likewise not displaced by this article. For example, this article does not alter developing law with respect to the enforcement of copyright or patent notices that, with or without contractual support, effectively limit the permissions extended to the party receiving a transfer of a copyrighted work or patented information or product.

5. State Law: Consumer Law. Article 2B does not generally alter state consumer protection statutes in effect on the effective date of Article 2B. This recognizes the role of independent and potentially divergent state consumer protection statutes in the fifty states as a complement to the UCC. Consistent with the stated purpose of the UCC, Article 2B deals with general contract law and commercial contract law principles. It does not promulgate a consumer protection code, although Article 2B does contain certain new consumer protections. Historically, consumer protection issues have been resolved on a state-by-state basis. These statutes reflect extensive policy review about the relationship between protection and contract freedom in each state. Article 2B, as a general commercial statute, does not override these judgments. With the exception of the electronic commerce rules in subsection (e), a state's consumer protection statutes or regulations trump the general contract law of this Article. Thus, for example, a consumer protection statute that mandates disclosure of local service outlets or the location of the licensor's main business office in a consumer transaction is not affected by Article 2B.

In addition, Article 2B contains a number of consumer protection rules for consumer transactions within this Article or under the more general reference to mass-market licenses, a category that includes all consumer transactions. These rules augment existing consumer protection statutes and the existing protections control to the extent of any conflict. A conflict, for this purpose, would occur if an Article 2B rule provides less protection for the consumer than does the consumer protection statute. The provisions of this article in many cases provide consumer protections that go beyond original Article 2 for software contracts or general common law for other contracts or that restate protections under original Article 2. The consumer-related rules include: 2B-107 (choice of law); 2B-118 (electronic error); 2B-208 (limit on mass-market license; right to return); 2B-303 (limit on no-oral modification clause); 2B-304 (limit on modification of continuing contract); 2B-406 (warranty disclaimer); 2B-409 (third-party beneficiary); 2B-609 (perfect tender); 2B-619 (limit on hell and high water clauses); 2B-703 (exclusion of personal injury claim).

6. State Law: Electronic Commerce Issues. Subsection (e) states a significant electronic commerce rule. It provides a limited displacement of state law requiring a "writing" or a "signature," shifting those requirements to standards consistent with the electronic commerce treatment in this article. This parallels the treatment of the question in digital signature laws. See, e.g., RCW 19.34.300(1) (signature); RCW 19.34.320 (writing). This rule is appropriate and necessary to achieve the substantial cost savings and expanded access to information that electronic commerce offers, which benefit consumers as well as other entities.

Subsection (e) allows electronic records to suffice for a required writing. This assumes, of course, that the form and presentation of the record otherwise meets the substantive intent of the relevant consumer statute. In some cases, such statutes require that the consumer be able to retain the writing; this subsection would not alter that retention requirement. Similarly, in some consumer statutes requiring a writing, the expectation is that the consumer will actually see the terms of the record. Subsection (e) does not alter that rule; the record that substitutes for a writing in such case must be adequate to achieve the underlying consumer protection policy.

For Article 2B transactions, the rules of this article ordinarily supplant other law as to contractual issues and the rule stated in this section merely reflects that principle. For consumer transactions, however, many contract-related rules are preserved. The four stated electronic commerce issues reverse that rule in a limited way that balances the benefits of modernization with retention of other consumer rules. This limited approach does not alter the other substantive terms of the other laws.

7. State Law: Computer Viruses. Article 2B does not deal with computer viruses and does not alter existing criminal or tort law on that subject. In general, a "virus" consists of computer code put into a software or other system with the intended effect of disrupting the system or altering or destroying information in that system. Law in most states and federal law makes the knowing or intentional introduction of a computer virus a criminal act. See Raymond Nimmer, Information Law ¶ 9.04 (1997).

Most state law and enforcement concerning viruses falls under criminal law. As this indicates, most virus risks result from acts of third parties not in a contractual relationship with the victim. Acts that cause losses from a computer virus might also create liability in tort in appropriate cases under concepts of trespass or negligence. While few civil actions have been brought, the liability of the wrongdoer involves issues other than under contract law.

As to contractual issues, virus problems typically arise between two, ordinarily innocent, contracting parties. In licensing law under Article 2B, they may be handled as any other contract risk. A virus may cause the information to fail to perform. The remedy in contract is determined by the general rules of this article or the agreement, if the agreement allocates the risk. Absent agreement, no clear basis for allocating the risk under contract principles is manifest and this article leaves the allocation of risk to other law. The remedy under tort law or the sanction under criminal law are determined by those laws.

SECTION 2B-106. VARIATION BY AGREEMENT; RULES OF CONSTRUCTION; QUESTIONS DETERMINED BY COURT.

(a) Except as otherwise expressly provided in this article or in Section 1-102(3), the effect of any provision of this article, including allocation of risk or imposition of a burden, may be varied by agreement of the parties.

(b) Except to the extent provided in the following sections, an agreement may not vary the effect of:

(1) the limitations on agreed choice of law in Section 2B-107(a);

(2) the limitations on agreed choice of forum in Section 2B-108;

(3) the provisions invalidating an unconscionable contract or term in Sections 2B-110, 2B-208(a), 2B-626(c), and 2B-703(d);

(4) the provisions defining manifest assent and opportunity to review in Sections 2B-111 and 2B-112;

(5) the provisions on electronic errors in Section 2B-118;

(6) the limitations on enforceability of an agreement in Section 2B-201;

(7) the limits on mass-market licenses in Section 2B-208;

(8) the requirements for an enforceable term in Sections 2B-303(b), 2B-307(g), Section 2B-406, and Section 2B-704(a);

(9) the restrictions on altering the period of the statute of limitations in Section 2B-705(a); or

(10) the limitations on self-help repossession in Sections 2B-715(b) and 2B-716.

(c) In applying this article, the following rules of construction apply:

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

(2) The fact that a provision of this article states a condition for a result does not of itself mean that the absence of that condition yields a different result.

(3) To be enforceable, a term need not be conspicuous, negotiated, or expressly assented or agreed to unless this article expressly so requires.

(d) Whether a term is conspicuous or is excluded under Sections 2B-105(a) or (b) or 2B-208(a) is a question to be determined by the court.

Uniform Law Source: None.

Definitional Cross References:

"Agreement". Section 1-201. "Conspicuous". Section 2B-102. "Contract". Section 1-201. "Court". Section 2B-102. "Electronic": Section 2B-102. "Term". Section 1-201. "Transfer". Section 2B-102.

Reporter's Notes:

1. Basic Principle. This article follows the fundamental policy of the common law and the Uniform Commercial Code: freedom of contract. Contract choices control unless over-riding policy considerations mandate restraints recognized in this article, such as in the doctrine of unconscionability. Subsection (b) specifies the sections of this article where contract choice does not control. With these exceptions, all rules in this article are default rules that apply only in the absence of contrary "agreement." Freedom of contract is especially important in this field of converging industries and richly diverse commercial practice.

2. Altering the Effect. Subsection (a) states that freedom of contract is the basic principle of this article. See also Section 1-102(3). The "effect" of a provision may be varied by "agreement." The meaning of the statute is found in its text, but an agreement can change the legal consequences which would otherwise flow from the provisions of the article between the parties to the agreement. An "agreement" does not require a formal writing. It includes the full bargain of the parties in fact; an agreement altering the effect of a section may be as easily found in express terms of the contract as in course of dealing, course of performance, or usage of trade or inferred from the circumstances of the transaction. Section 1-201(3). The effect of an agreement between two parties on the rights of third parties is left to specific provisions of this article, the remainder of the U.C.C., and supplemental principles under Section 1-103.

3. Mandatory Language. Article 2B provisions generally do not use the phrase "unless otherwise agreed" and frequently use mandatory language such as "shall" or "must." Neither drafting convention alters the basic principle that the agreement controls. Subsection (c)(1) rejects decisions such as Suburban Trust and Savings Bank v. The University of Delaware, 910 F. Supp. 1009 (D. Del. 1995) (disallowing alteration by agreement of a particular section). The effect of all of this article's provisions may be varied by agreement except as expressly indicated.

4. Negative Inference. Subsection (c)(2) resolves questions about the existence of a negative pregnant in rules in this article. The statement of an affirmative result does not necessarily indicate that a different result occurs if the conditions in the statute are not met. Thus, if a provision states: "If the originator of a message requests acknowledgment, the following rules apply: ---", this does not indicate what rule governs in the absence of a request. Similarly, a provision that states that particular language or procedure yields a specific result does not indicate what result occurs with different language or procedure. It merely states the affirmative proposition. If a different interpretation is intended, it is made express in the statutory language.

5. Language Limiting Contract Effect. Agreed terms that alter default rules in this article do not require specific reference to the default rule and ordinarily do not require use of specific language, presentation or assent. In some situations, however, this article expressly imposes a requirement such as that the term be conspicuousness or that there be manifested assent to the term. Subsection (c)(3) confirms the underlying premise that such requirements exist only if made express under this article or in requirements that might arise under consumer protection statutes. Section 2B-105.

6. Issues as a Matter for the Court. Subsection (d) follows original Article 2 and the common law. Other issues in this article are also made questions for the court. These are indicated in the relevant statutory section or in applicable case law or procedural rules.

SECTION 2B-107. CHOICE OF LAW.

(a) The parties in their agreement may choose the applicable law. However, in a consumer transaction, the choice is not enforceable in a consumer transaction to the extent it would vary a rule that may not be varied by agreement under the law of the jurisdiction whose law would apply under subsections (b) and (c) in the absence of the agreement as determined under subsections (b) and (c).

(b) In the absence of an enforceable choice-of-law term, the following rules apply:

(1) An access contract or a contract providing for electronic delivery of a copy is governed by the law of the jurisdiction in which the licensor is located when the agreement is made.

(2) A consumer transaction that requires delivery of a copy on a physical medium is governed by the law of the jurisdiction in which the copy is or should have been delivered to the consumer.

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

(c) In cases governed by subsection (b), if the jurisdiction whose law governs under that subsection is outside the United States, the law of that jurisdiction governs only if it provides substantially similar protections and rights to a party not located in that jurisdiction as are provided under this article. Otherwise, the law of the jurisdiction in the United States which has the most significant relationship to the transaction governs.

(d) For purposes of this section, a party is located at its place of business if it has one place of business, at its chief executive office if it has more than one place of business, or at its place of incorporation or primary registration if it does not have a physical place of business. Otherwise, a party is located at its primary residence.

Uniform Law Source: Restatement (Second) of Conflicts 188; U.C.C. §§ 1-105. Revised.

Definitional Cross Reference:

"Access contract": Section 2B-102. "Agreement": Section 1-201. "Consumer": Section 2B-102. "Consumer transaction": Section 2B-102. "Contract": Section 1-201. "Copy": Section 2B-102. "Delivery": Section 2B-102. "Electronic": Section 2B-102. "Licensor": Section 2B-102. "Party": Section 1-201. "Rights": Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section deals with two issues. The first concerns the enforceability of contract terms that select the applicable law. Subsection (a) adopts a freedom of contract position, limited by a consumer protection rule (see Note 2 and 3). The second issue concerns choice of law in the absence of a contract term. Subsection (b) and (c) provide needed certainty in electronic commerce and enact a uniform general rule for other commercial transactions, replacing current uncertainty (see Note 4).

2. Purpose of Rules. Contract terms that select the law applicable to the contract are routine in commercial agreements. The information economy accentuates their importance because communications capabilities allow remote parties to enter into and perform contracts through systems spanning multiple jurisdictions and that may not depend on the physical location of either party or of the information. Many computer information transactions occur in cyberspace, rather than in fixed locations. This allows many small businesses to engage in multistate or multi-national business. If an agreement cannot designate applicable law, even the smallest business on the Internet would be subject to the law of all fifty states and all countries in the world. That result would have adverse effects on electronic commerce, imposing substantial costs and uncertainty on providing products over the Internet. This section is one of the most important contributions of Article 2B to electronic commerce.

3. Contractual Choice of Law. Article 2B enforces choice of law agreements. This rule follows the rule adopted in a majority of decisions dealing with the issue in information-related contracts. See Medtronic Inc. v. Janss, 729 F.2d 1395 (11th Cir. 1984); Northeast Data Sys., Inc. v. McDonnell Douglas Computer Sys. Co., 986 F.2d 607 (1st Cir. 1993); Universal Gym Equipment, Inc. v. Atlantic Health & Fitness Products, 229 U.S.P.Q. 335 (D. Md. 1985). The Restatement (Second) of Conflict of Laws § 188 follows a similar rule validating such contract terms for all issues that can be resolved by agreement. Subsection (a) rejects any requirement that the contract choice select the law of a jurisdiction with a "reasonable relationship" to the transaction. In a global information economy, limitations of that type are inappropriate and arbitrary. See, e.g., White House Report, A Framework for Global Electronic Commerce, July 1, 1997, ("The U.S. should work closely with other nations to clarify applicable jurisdictional rules and to generally favor and enforce contact provisions that allow parties to select substantive rules governing liability.").

Agreed terms choosing applicable law may in certain circumstances be restricted by a court. For example, a contract choice inconsistent with over-riding fundamental public policy of the forum state may be unenforceable. Section 2B-105(b). See Application Group, Inc. v. Hunter Group, Inc., 61 Cal. App.4th 881, 72 Cal. Rptr.2d 73 (Cal. App. 1998). Compare Lowry Computer Products, Inc. v. Head, 984 F. Supp. 1111 (E.D. Mich. 1997). Also, under subsection (a), the agreement cannot override an otherwise applicable law in a consumer transaction which cannot be altered by agreement. While this rule imposes significant costs on Internet commerce, this section adopts the view that the fundamental policy of freedom of contract should be varied to preserve consumer rules when an individual state, having addressed the cost and benefits, determines that the rule is mandatory and non-waivable. The law referred to includes Article 2B and consumer laws referenced in Section 2B-105(d) that would apply in the absence of the agreed choice under the principles on choice of law stated in this section.

4. Choice of Law: no contract term. Subsection (b) states the choice of law rules that apply in the absence of a contract term deciding the issue. Contracts in information commerce are not like sales of goods contracts in that they can be created and performed remotely, a factor encouraging the need for tailoring of rules. By stating uniform default law rules here, Article 2B enhances certainty in transactions. Without such guidance, electronic commerce would be immersed in choice of law doctrine whose current condition is captured in the following comment: "[C]hoice-of-law theory today is in considerable disarray - and has been for some time. [It] is marked by eclecticism and even eccentricity. No consensus exists among scholars….The disarray in the courts may be worse." William Richman & William Reynolds, Understanding Conflict of Laws 241 (2d ed. 1992). That underlying condition does not facilitate global commerce in information.

Article 2B adopts a rule similar to Restatement (Second) of Conflicts of Law, but enacts two superseding concepts. The most commercially important is in subsection (b)(1), which deals with electronic transactions, a situation in which attempting to apply conflicting traditional choice of law concepts is especially problematic. For such transactions, subsection (b)(1) selects as the applicable law the law of the jurisdiction in which the licensor is located. This enhances certainty in planning in a context where, by virtue of the nature of the distribution systems, an on-line vendor, large or small, makes direct access available to the entire world via the Internet. Any other rule would require that the information provider comply with the law of all states and all countries since under the technology it will not necessarily be clear or even knowable where the information is being sent. The licensor's location is defined in subsection (d); it does not depend on the location of the computer that contains the information.

Subsection (b)(2) is a consumer rule applicable to transactions involving physical delivery of tangible copies not involving remote access contracts. The rule selects the law of the place where the copy was to be delivered. Thus, if a consumer was to receive delivery of software in Chicago, the transaction is subject to the law of Illinois unless the agreement indicates otherwise. That rule is consistent with current U.S. law. It is followed in many European consumer laws relating to goods and services. Because the transaction involves delivery of a tangible copy, the licensor knows where delivery will occur.

Subsection (b), of course, only deals with contract law. It does not affect tax, copyright, or similar issues. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (tax nexus); Allarcom Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381 (9th Cir. 1995) (copyright).

5. Most Significant Relationship. In the absence of an agreement on what law governs and except for the rules in subsections (b)(1) and (b)(2), subsection (b) adopts a "most significant relationship" test. The Restatement (Second) of Conflicts of Law uses a similar test and cases interpreting that rule are applicable here. The "most significant relationship" standard requires consideration of various factors including: (a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, (e) the domicile, residence, nationality, place of incorporation and place of business of the parties, (f) the needs of the interstate and international systems, (g) the relevant policies of the forum, (h) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (i) the protection of justified expectations, (j) the basic policies underlying the particular field of law, and (k) certainty, predictability and uniformity of result.

6. Foreign Countries. Subsection (c) provides a rule in cases where the default rules select the law of a foreign country and the effect of applying that rule is a choice that is substantively inappropriate. This is especially important in Internet commerce. The rule allows a court to revert to a different choice of law principle if the choice would otherwise fail to give a party substantially similar protections to those available under this article. In applying subsection (c), courts should reverse the basic choice of law rule only in extreme cases. It is not sufficient merely that the foreign law is different. The differences must be substantial and adverse. The subsection does not address which party has the burden to establish the foregoing. Subsection (c) does not apply if the agreement chooses applicable law.

SECTION 2B-108. CONTRACTUAL CHOICE OF FORUM.

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

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

Definitional Cross References:

"Agreement": Section 1-202. "Party": Section 1-201. "Term": Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section deals with contractual choice of an exclusive judicial forum. It does not deal with agreements that permit (consent to), but do not require, litigation in a designated jurisdiction. Permissive choice of forum clauses are governed by general contract law. The section deals only with choice of a judicial forum. Arbitration or other non-judicial forum choices are governed by other law.

2. General Rule. Choice of forum agreements are generally enforceable under current law. In this respect, this section adopts the approach of modern cases, as initially stated in Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972), which treat choice of forum clauses as presumptively valid.

Under this section, a choice of forum clause is valid subject to the restrictions stated in this section and subject to general restrictions on contract terms. The general rule of validity governs whether the term is in a custom agreement or in a standard form. The Restatement (Second) of Conflicts of Law proposes a rule similar to that adopted here.

3. Fairness Limitation. The choice of forum term is enforced unless it is "unreasonable and unjust." This rule follows Bremen. The term is invalidated if it has no valid commercial purpose and has severe and unfair affects on the other party. This precludes enforcement of clauses that choose a forum solely to prevent the other party from contesting disputes. Such terms may be unreasonable in that they have no commercial purpose or justification and their impact may be unjust in that the term unfairly harms the other party. On the other hand, a contractual choice of forum that reflects valid commercial purposes is not invalid simply because it has an adverse effect on a party, even if bargaining power is unequal. The burden of establishing that the clause fails lies with the party asserting its invalidity. Bremen v. Zapata Offshore Co., 407 U.S. 1 (1972); Pelleport Investors, Inc. v. Budco Quality Theaters, Inc., 741 F.2d 273 (9^th Cir. 1984); Restatement (Second) of Conflicts of Law § 80, comment c (1989 rev.)

The contract choice may be limited in additional ways. In some cases, a contract choice may be inconsistent with over-riding fundamental public policy of the forum state or an express statute that, if applicable to a transaction precludes the choice of forum. Section 2B-105(b). Also, agreements obtained through fraud or duress may be invalidated under general provisions of law that supplement this article. Section 1-103.

4. Electronic Commerce. Choice of forum terms are especially important in electronic commerce. By 1998, almost one hundred reported decisions had dealt with the issue of personal jurisdiction in the Internet, reflecting the extent to which this medium makes the issue extremely difficult in the absence of contractual guidance. The decisions reveal an uncertainty about when doing business on the Internet exposes a party to jurisdiction in all states and all countries. The uncertainty affects both large and small enterprises, but has greater impact on small enterprises which are and will continue to b the lifeblood of electronic commerce. Choice of forum terms allow parties to control this issue and the risk or costs it creates. This section allows the agreement to govern, but adds restrictions based on fundamental public policy considerations. See White House Report, A Framework for Global Electronic Commerce, July 1, 1997.

Courts have recognized the importance of the issue in information commerce. See, e.g., Evolution Online Systems, Inc. v. Koninklijke Nederlan N.V., 145 F.3d 505 (2nd Cir. 1998). In Internet transactions, a reasonable choice of forum will seldom be invalid under this section. The Court's discussion in Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991) is relevant to determining reasonableness in Internet contracting:

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

In an Internet transaction, choice of forum will often be justified on the basis of the international risk that would otherwise exist. Choice of a forum at a party's location is reasonable.

SECTION 2B-109. BREACH OF CONTRACT; MATERIAL BREACH.

(a) Whether a party is in breach is determined by the agreement or, in the absence of agreement, this article. A breach occurs if a party fails to perform an obligation in a timely manner, repudiates a contract, or exceeds a contractual use restriction. A breach, whether or not material, entitles the aggrieved party to its remedies.

(b) A breach is material if:

(1) the contract so provides;

(2) the breach is a substantial failure to perform an agreed term that is an essential element of the agreement; or

(3) the circumstances, including the language of the agreement, the reasonable expectations of the parties, the standards and practices of the business, trade or industry, or the character of the breach, indicate that:

(A) the breach caused or is likely to cause substantial harm to the aggrieved party; or

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

(c) A nonmaterial breach of contract is material if the cumulative effect of nonmaterial breaches is material.

Uniform Law Source: Restatement (Second) Contracts § 241. Article 2A-501(1).

Definitional Cross References:

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

Reporter's Notes:

1. Scope of Section. This section defines what constitutes a breach of contract and standards to distinguish between a material and a non-material breach. This latter distinction is significant in that this article follows common law and international law holding that a party's contractual remedies are determined by whether a breach is material or not. In the absence of agreement to the contrary: 1) a non-material breach entitles an aggrieved party to a remedy, but not to a right to cancel the contract; and 2) a material breach creates a right to damages and a right to cancel.

While this article follows the distinction between material and non-material breach, it adopts a "conforming tender" rule from original Article 2 with respect to mass-market contracts requiring a single delivery of a product. Section 2B-609.

2. What is a Breach? What is a breach is determined by the agreement or this article, but of course, the contract governs. A party must conform to the contract. A breach occurs if a party acts in a manner that violates the contract or fails to act in a manner required by the contract. This includes a failure timely to perform, a breach of warranty, a repudiation, non-delivery, wrongful disclosure, uses inconsistent with the contract, exceeding contract limits, and other breaches.

3. What Remedies Apply? If a party's performance does not conform to the contract, the aggrieved party is entitled to remedies. The remedies, however, depend on the nature of the breach. The aggrieved party can cancel the contract if the breach was material. For non-material breaches, the appropriate remedy may be a claim for damages and there is no right to cancel. For either type of breach, of course, there is an intermediate remedy in that a party whose expectations of future performance are impaired may suspend performance and demand adequate assurance of future performance from the other party. Section 2B-620.

Article 2B thus adopts the rule followed throughout U.S. common law and international contract law. See Restatement (Second) of Contracts § 237; Convention on the International Sale of Goods Art. 25; UNIDROIT Principles of International Commercial Law art. 7.3.1. Parties are entitled to the performance for which they bargain, but some breaches are so immaterial that they do not justify allowing cancellation of the entire contract. In such cases, it is better to preserve a contract despite minor problems than to allow one party to cancel for minor defects and thereby risk an unwarranted forfeiture or allow unfair opportunism. Materiality depends on the circumstances. A failure to fully conform to advertisements about the capability of software to handle 10,000 files may not be material if the licensee's use never exceeds 4,000 files and the software is able to process substantially the advertised number. Materiality is judged from the aggrieved party's perspective in light of the nature of the bargain and the benefits expected from performance of the contract.

4. Contract Terms. The agreement defines what is a material breach in two ways.

The first is by express terms that either provide a right to cancel for a particular breach or that a particular type of breach is material. In either case, the bargain of the parties controls. Of course, a court must reasonably interpret the contract. Thus, a term providing that any failure to conform to any contract term permits cancellation must be interpreted in light of commercial context. The context, including usage of trade, course of performance, or course of dealing, may indicate that minor breaches of some terms are nonetheless not adequate cause for cancellation. Section 1-205.

The second involves express conditions. If the contract indicates that conforming to a specific requirement is a precondition to the performance of the other party, that condition should be enforced. The express condition also defines part of the remedy: breach allows the aggrieved party to not perform.

Illustration 1. In a software development contract, the contract requires that the final product meet 10 criteria before it is acceptable. One condition is that it must operate at "no less than 150,000 rev. per second." The software does not meet that standard. Failure to meet the condition justifies refusal of the product.

Illustration 2. In a contract for a computerized mailing list, no delivery date is specified. The product is delivered one day later than expected. Whether the breach is material depends on whether the timing was in fact a breach under applicable usage of trade and course of dealing, and if so, on the effect of the delay in reference to the entire bargain.

5. What is a material breach? A statute cannot define materiality in detail, but only the appropriate reference point. Subsection (b) provides three approaches: contract terms defining materiality, materiality found in a substantial failure to performance an essential term of the agreement, and materiality in that the breach causes substantial harm to the aggrieved party or a denial of a reasonably expected benefit. This last consideration, of course, refers to substantiality in context of the agreement itself. Thus, in a contract for a ten dollar software license, a breach causing ten dollars of harm would be material even though, in thirty million dollar license, a ten dollar loss would likely be non-material.

The list in subsection (b) is not exclusive. The standards in this section should be interpreted in light of common law and Restatement principles. See Rano v. Sipa Press, 987 F.2d 580 (9th Cir. 1993); Otto Preminger Films, Ltd. v. Quintex Entertainment, Ltd., 950 F.2d 1492 (9th Cir. 1991). One of the general principles is that common law concepts preclude unreasonable forfeiture of interests for minor defalcations. The Restatement (Second) of Contracts § 241 (1981) lists five significant circumstances: 1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected; 2) the extent to which the injured party can be adequately compensated for the benefit of which the party will be deprived; 3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; 4) the likelihood that the party failing to perform or to offer to perform will cure the failure, taking into account all the circumstances, including any reasonable assurances; and 5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

SECTION 2B-110. UNCONSCIONABLE CONTRACT OR TERM.

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

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

Uniform Law Source: Section 2-302.

Definitional Cross References:

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

Reporter's Note:

1. Scope of the Section. This section adopts the Article 2 doctrine that allows courts to invalidate unconscionable contracts or terms. The use of the word "term," rather than "clause," is stylistic only with no substantive change intended.

2. Basic Policy and Effect. This section allows courts to rule directly on the unconscionability of the contract or a particular term therein and to make a conclusion of law as to its unconscionability. The basic test is whether, in light of the general commercial background and the commercial needs of the particular trade or case, the terms involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. Subsection (b) makes it clear that it is proper for the court to hear evidence on these questions. The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power.

3. Electronic commerce. While this article confirms the enforceability of automated contracting practices involving "electronic agents," in some cases automation may produce unexpected results because of errors in programs, problems in communication, or other unforeseen circumstances. When this occurs, common law concepts of mistake may apply, as may the provisions of Section 2B-118 and Section 2B-204. In addition, unconscionability doctrine may apply to invalidate a term caused by breakdowns in the automated contracting processes.

4. Remedy. The court, in its discretion, may refuse to enforce the contract as a whole if it is permeated by the unconscionability, or it may strike any single term or group of terms which are so tainted or which are contrary to the essential purpose of the agreement, or it may simply limit unconscionable clauses so as to avoid unconscionable results.

5. Decision of the court. Unconscionability is a decision to be made by the court. The commercial evidence allowed under subsection (b) is for the court's consideration, not the jury's. Only the terms of the agreement which result from the court's action on these matters are to be submitted to the general triers of fact for resolution of a matter in dispute.

SECTION 2B-111. MANIFESTING ASSENT.

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

(1) authenticates the record or term;

(2) in the case of the conduct or statements of a person, the person intends to engage in the conduct or make the statement and has reason to know that the other party may infer from the conduct or statement that the person assents to the record or term; or

(3) in the case of operations of an electronic agent, the electronic agent engages in operations that the circumstances clearly indicate constitute acceptance.

(b) If this article or other law requires assent to a specific term, a person or electronic agent does not manifest assent to that term unless it had an opportunity to review the term and the manifestation of assent must relates specifically to the term.

(c) Conduct or operations manifesting assent may be proved in any manner, including a showing that a procedure existed by which a person or an electronic agent must have engaged in the conduct or operations in order to obtain, or to proceed with use of the information or informational rights. Proof of assent depends on the circumstances. Proof of compliance with subsection (a)(2) is sufficient if there is conduct that assents and subsequent conduct that electronically reaffirms assent.

Uniform Law Source: Restatement (Second) of Contracts § 19.

Definitional Cross References.

"Authenticate". Section 2B-102. "Electronic agent". Section 2B-102. "Information". Section 2B-102. "Informational Rights": Section 2B-102. "Record". Section 2B-102. "Term". Section 1-201.

Reporter's Notes:

1. Scope and Purpose. This section defines "manifestation of assent." "Manifesting assent" has several roles in contract law. The two primary roles treat manifested assent as 1) a way by which a party indicates agreement to a binding contract, and 2) a standard to determine when a party adopts the terms of a record as the terms of the contract. Often, the same conduct both adopts the terms of a record and constitutes agreement to the relationship. In addition to these two primary roles, in some cases, this article requires agreement or assent to a term to establish the enforceability of the term.

2. Source and General Theme. "Manifesting assent" as a term comes from the Restatement (Second) of Contracts § 19. This section corresponds substantively to the Restatement. While the concepts that underlie the Restatement on this point are present throughout U.S. law, the concept is more fully explicated here than in case law and codification lends itself to uniformity in terminology and application.

Manifesting assent does not require a signature, any specific type of language or conduct. It can be shown by an appropriate authentication, by conduct including use or other performance with respect to the subject matter, or by words. In electronic commerce, it especially important to clarify the conditions under which conduct may establish contractual relationships and to expressly recognize the diverse alternatives that exist.

3. Three analyses. Determining whether a person manifested assent to a record under this article entails analysis of three issues:

· First, the person must have had knowledge of the record or term or an opportunity to review it. Opportunity to review requires that the record be available in a manner that ought to call it to the attention of an ordinary reasonable person. Section 2B-112.

· Second, assuming an opportunity to review, the person must authenticate the record or term, orally express assent, or engage in conduct with reason to know that in the circumstances the conduct indicates assent. Restatement (Second) of Contracts § 19. Authenticating a record requires executing or adopting a symbol or processing the record with intent to authenticate. Section 2B-102. Conduct manifests assent if the party acted with knowledge or reason to know that this would infer assent.

· Third, the conduct or authentication must be attributable to the person to be bound. General agency law and Section 2B-116 provide standards for attribution.

4. Assent by Authentication. Under current law, a person indicates assent to a record or term by signing the record or term. In this article, "authentication" replaces "signature", but the concept remains the same. Signing a record containing contract terms in a setting that entails the formation of an agreement ordinarily indicates the intent of the signing party to show assent to the terms or, at least, that a reason to know the act of signing or authenticating can be inferred as an expression of assent to the contract and terms. In most cases, as under current law on signatures, no question exist about the meaning of a signature or authentication or the context will clearly indicate the appropriate inference. In the few cases in which doubt exists, the authentication must be made with intent to adopt or agree to the record. Section 2B-119 states a presumption generally true under prior law on signatures: unless the circumstances indicate to the contrary, an authentication encompasses an intent to identify the party, accept or adopt the record and its terms, and establish the integrity of the record's contents. The intent pertains to the person to be bound, not to the person receiving the authenticated record and confirming that the authentication is that of the other party. See notes to Section 2B-102(4).

5. Assent by Conduct or Words. Assent also occurs if a party acts (or fails to act), or makes a statement, having reason to know these will be inferred as assent by the other party. Determining when this occurs entails reference to the circumstances. The issue does not involve proof of subjective intent, knowledge, or purpose, but objective characteristics of assent, including whether there was an act or a failure to act voluntarily engaged in with reason to know the inference of assent that would be drawn. Assent does not require that the party have an ability to negotiate or alter terms. However, the person's conduct or failure to act must be voluntary. This is satisfied if the alternative of refusing the contract existed even if refusal would leave no alternative source for the refused deal.

Of course, actual knowledge that the inference will be drawn from particular conduct suffices. More generally, "reason to know" can be indicated by one or more of the following: the nature of the conduct; whether the context, including any language on a package, a container or in a record, indicates what actions indicate assent; whether the actor could decline to engage in the conduct and return the information; what information was communicated to the actor before the conduct occurred; whether the conduct resulted in access to and use of information that was offered subject to contract terms; what are the ordinary expectations of other persons in similar contexts; what are the standards and practices of the business, trade or industry; or other relevant factors. As in the Restatement, failure to act constitutes assent if the party that fails to act has reason to know this will create an inference of assent.

No particular type of conduct or formality is required. The section recognizes the wide range of behavior and interactions that in modern commerce establish a contractual relationship between parties and the terms of that relationship. However, subsection (c) makes clear that if the assenting party has an opportunity to confirm or deny assent before proceeding to obtain or use the information, the confirmation establishes assent. This sets out one method of meeting the criteria of subsection (a)(2). In many cases, of course, a single indication of assent by an electronic or other act, such as by opening a container or commencing to use information, suffices if it occurs under circumstances giving the actor reason to know that this signifies assent. On the other hand, an act that does not bear a relationship to a contract or a record would fail under the general standard. Similarly, acts that occur in context of a mutual express reservation of the right to defer agreement do not assent to a contract that neither party intended.

Illustration 1: The registration screen for NY Online prominently states: "Please read the license. It contains important terms about your use and our obligations with respect to the information. Click here to review the License. If you agree to the license, indicate this by clicking the "I agree" button. If you do not agree to the license, click the "I decline" button." The on-screen buttons are clearly identified. The underlined text is a hypertext link which, if selected, promptly displays the license. A party that indicates "I agree" manifests assent to the license and adopts the terms of the license

Illustration 2: The first screen of an on-line stock-quote service requires that the potential licensee enter a name, address and credit card number. After entering the information and striking the "enter" key, the licensee has access to the data and receives a monthly bill. In the center of the screen amid other language in small print, is the statement: "Terms and conditions of service; disclaimers" indicating a hyperlink to the terms. The customer's attention is not called to this sentence nor is the customer asked to react to it. Even though entering name and identification, coupled with using the service, assents to a contract, there is no assent to the "terms of service" and disclaimer since there is no act indicating assent to the record containing the terms. A court would determine the contract terms on other grounds, including the default rules of this article and usage of trade.

6. Objective standard. Manifesting assent requires that, from all the facts known to it, a reasonable person has reason to know that particular conduct will indicate that the actor assents to the record. Actions objectively indicating assent are effective even though the actor may subjectively intend otherwise. This follows traditional contract law doctrine of "objective" assent. This concept is especially important in electronic commerce where many transactions do not involve direct contact between individuals. Information providers and licensees must rely on actions confirming the existence of a contract, and the acceptance of contract terms. Doctrines of mistake, supplemented by Section 2B-118, as well as doctrines invalidating the effects of fraud and duress apply in appropriate cases.

7. Electronic Agents. Assent may occur through automated systems. In electronic commerce, there is rapidly increasing use of computer programs (described as "bots" or "intelligent agents") programmed to search for (on behalf of a potential purchaser) or make available (on behalf of a potential licensor) particular types of information under set contractual terms or alternatives. Either or both parties may use electronic agents. The reduced transaction costs are significant and the benefits that come from a technology that enables broad comparative shopping and electronic shopping on terms set by the consumer are immense for consumers and for providers of information. For an electronic agent, assent cannot be based on knowledge or reason to know. The issue is whether the circumstances clearly indicate that the operations of the automated system indicate assent. Safeguards exist under Article 2B through unconscionability doctrine and Section 2B-204.

8. Third Party Service Providers. Assent requires an act by the party to be bound or by its agents. In many Internet situations, a party is able to reach a particular system because of services provided by a third party communications or other service provider. In such cases, the services provider typically does not intend to engage in a contractual relationship with the provider of the information. While the "customer" activity may constitute assent to terms, they do not bind the service provider since the service provider's actions are in the nature of transmissions and making information access available by the user of the service, not assent to a contractual relationship.

This article is clear that service providers - providers of online services, network access, or the operation of facilities thereof - do not manifest assent to a contractual relationship from their provision of such services, including but not limited to transmission, routing, providing connections, linking or storage of material at the request or initiation of a person other than the service provider. If, for example, a telecommunications company provided the routing for a user to reach a particular online location, the user of the service would potentially manifest assent to an agreement or record at that location. The service provider who provided the routing to such online location would not.

Of course, in some on-line systems, the service party provider has direct contractual relationships with the content providers or may desire access to and use of the information on its own behalf and therefor assent to terms in order to obtain access. In the absence of these circumstances, however, the mere fact that the third-party service provider enables the customer to reach the information site does not constitute assent to the terms at that site.

9. Other Means of Assent. Manifestation of assent to a record is not the only way in which parties define their bargain. This article does not alter recognition of other methods of agreement. For example, a product description can become part of an agreement without manifestation of assent to a record repeating the description; the product description can define the bargain itself. Thus, a party that markets a database of names of consumer attorneys can rely on the fact that the product need only contain consumer attorneys because this is the basic bargain it is proposing; the provider is not required to seek manifest assent to a record stating that element of the deal. Similarly, the licensee may rely on the fact that the database must pertain to consumer lawyers, not other lawyers. The nature of the product defines the bargain if the party makes the purchase on that basis. If a product is clearly identified on the package or in representations to the licensee as being for consumer use only, the terms are effective without requiring language in a record restating the description or conduct assenting to that record. Of course, if the nature of the product is not obvious and there is no assent to a record defining that nature or other agreement to it, the conditions may not become part of the agreement.

In many cases, copyright or other intellectual property notices or restrictions restrict use of a product, regardless of whether there is assent under this section. For example, common practice in video rentals places a notice on screen of the limitations imposed on the customer's use of the video under applicable copyright and criminal law, such as by precluding commercial public performances. The enforceability of such notices does not depend on compliance with this section.

10. Authority to Act. The person manifesting assent must be one that can bind the party seeking the benefits or being charged with the obligations or restrictions of the agreement. If a party proposing a record desires to bind the other party, it must establish that the person that acted had authority to do so or, at least, that the entity allegedly represented by that person accepted the benefits of the contract or otherwise ratified the individual's actions. Concepts of apparent authority may apply. If the person who manifested assent did not have authority and the conduct was not ratified or otherwise adopted, there may be no license. If this is the case, use of the information may infringe a copyright.

There must be a connection between the individual who had the opportunity to review and the one whose acts constitute assent. Of course, a party with authority can delegate that authority to another. Thus, a CEO may implicitly authorize her secretary to agree to a license when the CEO instructs the secretary to sign up for legal materials online or to install a newly acquired program that is subject to a screen license.

Questions of this sort arise under agency law as augmented in this article. In appropriate cases, Article 2B rules regarding attribution play a role in resolving whether the ultimate party is bound to the contract terms. Section 2B-116 deals with when, in an electronic environment, a party is bound to records purporting to have come from that party. This article leaves to other law questions of agency law. Section 1-103.

11. Assent to particular terms. The section distinguishes assent to a record and, if required by other provisions of this article, assent to particular terms. Assent to a record involves conduct, expressions or an authentication with respect to a record as a whole, while assent to a particular term, if required, encompasses acts that relate to that particular term. One act, however, may assent to both the record and the term only if the circumstances, including the language of the record, clearly indicate to the party that doing the act is assent also to the particular term.

12. Proof of Terms. A party that relies on the terms of linked text or other electronic records must prove the content of the text at the time of the licensee's assent. One way of doing so is to retain records of content at all periods of time or maintain a record of changes and their timing. Issues of proof are matters of evidence law.

SECTION 2B-112. OPPORTUNITY TO REVIEW; RETURN.

(a) A person or electronic agent has an opportunity to review a record or term only if the record or term is made available in a manner that :(1) in the case of a person, ought to call it to the attention of a reasonable person and permit review.

(b) ; or (2) in the case of aAn electronic agent has an opportunity to review a record or term only if the record or term is made available in manner that , would enable a reasonably configured electronic agent to react to the record or term.

(cb) Except as otherwise provided in subsection (c), iIf a record or term is available for review only after a person becomes obligated to pay or begins its performance, the person has an opportunity to review only if the person has a right to a return if upon its rejects ion of the terms of the record. The right to a return may arise by law under Section 2B-208 or 2B-617, by agreement or otherwise. However, (c) Aa right to a return is not required for an opportunity to review if the record or term:

(1) the record is a proposes a al to modification of y a contract;

(2) the record provides the particulars of performance pursuant to agreement under Section 2B-305; or

(3) in a case that does not involve is not a mass- market license, but is governed by Section 2B-207, and the parties at the time of contracting had reason to know that a the record or terms would not be presented at or prior to the initial use or access to the information. .

Definitional Cross References:

"Contract". Section 2B-102. "Electronic agent". Section 2B-102. "License": Section 2B-102. "Record". Section 2B-102. "Return": Section 2B-102. "Term". Section 1-201.

Reporter's Notes:

1. Scope of Section. This section gives content to the concept of "opportunity to review." An "opportunity to review" is a precondition to manifesting assent to a record. Consistent with general contract law, the concept requires an opportunity to review the record, not that the record actually be read.

2. General Concept. An opportunity to review in the case of a person requires that the record be made available in a manner that ought to call it to the attention of a reasonable person and permit review. This is met if the person actually knows or has reason to know that the record or term exists and the circumstances permit review. Of course, an opportunity to review a copy of the record or term suffices if the actual record or term is the same as that made available for review.

a. Declining to Use the Opportunity to Review. An opportunity to review may exist even though the person foregoes or ignores the opportunity. Contract terms presented in an over the counter transaction or made available in a binder as required for some transactions under federal law create an opportunity to review even if the party does not use that opportunity. This is not changed because the party desires to complete the transaction rapidly, or is under external pressure to do so, or because the party has other demands on its attention, unless one party intentionally manipulates the circumstances to induce the other party not to review the record.

b. Permits Review. How a record is made available for review differs for electronic and paper records. In both settings, however, a record is not available for review if access to it is so time-consuming or cumbersome as to effectively preclude review. It must be presented in such a way as to reasonably permit review. In an electronic system, a record that is promptly accessible through an electronic link ordinarily qualifies. Actions that comply with federal or other applicable consumer laws that require making contract terms available or provide standards for doing so, satisfy this section.

3. Return. In modern commerce, there are circumstances in which the terms of a record are not available until after there is a commitment to the transaction. This is often true in mail order transactions, software contracts, insurance contracts, airline ticket purchases, and other common transactions. If the record is available only after that commitment, there is no opportunity to review unless the party can return the product (or in the case of a vendor that refuses the other party's terms, recover the product) and receive reimbursement of any payments if it declines the terms of the record. This return right, which does not exist in current law absent agreement, creates important protection for the party asked to assent to terms in these circumstances. In cases governed by Section 2B-208, there is a statutory right to a return.

This right is also intended to provide a strong incentive for a provider of information to make the terms of the license available up-front if commercially practicable. Doing so avoids the obligations regarding return stated in this article, both in this section and in Section 2B-208. In addition to that incentive, deferring when license terms are presented may have implications on the application of other doctrines where the choice to do so is not grounded in commercial judgment. For example, the doctrine of unconscionability has a procedural fairness aspect which might be affected by the method of presenting terms where the terms are oppressive.

The return right exists only for the first user. Subsequent parties are bound by the first contract.

Failure to provide an opportunity or a right to a return in cases of records presented after the initial commitment to the transaction, does not invalidate the overall agreement, but means that the terms of the record have not been assented to by the party to which it was presented. The terms of the agreement must then be discerned by consideration of all the circumstances, including the general expectations of the parties, applicable usage of trade and course of dealing, and the informational property rights, if any, involved in the transaction. In such cases, courts should be careful to avoid unwarranted forfeiture or unjust enrichment in terms of the conditions or terms of the agreement. An agreement whose payment and other agreed terms reflect a right to use solely for consumer purposes can not be transformed into an unlimited right of commercial use by a failure of assent to the terms of a record.

4. Modifications and Layered Contracting. The return provisions do not apply to or alter law on modification of an agreement or the law regarding the agreed right of a party to specify particulars of performance. The provisions also do not apply in the commercial context of Section 2B-207(a)(2) where parties begin performance in the expectation that a record containing the contract terms will be presented and adopted later.

[B. Electronic Contracts: Generally]

SECTION 2B-113. LEGAL RECOGNITION OF ELECTRONIC RECORDS AND AUTHENTICATIONS.

(a) A record or authentication may not be denied legal effect solely because it is in electronic form.

[(b) This article does not require that a record or an authentication be generated, stored, sent, received, or otherwise processed by electronic means or in electronic form.

(c) In any transaction, a person may establish requirements regarding the type of authentication or record acceptable to it.]

Definitional Cross References:

"Authentication". Section 2B-102. "Electronic". Section 2B-102. "Record." Section 2B-102.

Reporter's Notes:

1. General Concept. This section states a fundamental principle of electronic commerce that frames the remaining provisions of this article on electronic commerce. The fact that a message or record is electronic does not alter or reduce its legal impact. Of course, this principle applies only to transaction within Article 2B. It does not apply to payment orders, documents of title, or similar applications of electronic commerce.

2. Relation to Evidence Issues. This section only states the affirmative principle that the electronic nature of a record does not allow denying legal validity to it. This does not address the difficulties of proof that may exist, or the resolution of questions about to whom the record or authentication can be attributed.

SECTION 2B-114. COMMERCIAL REASONABLENESS OF ATTRIBUTION PROCEDURE. The commercial reasonableness of an attribution procedure is determined by the court. In making this determination, the following rules apply:

(1) An attribution procedure established by statute or regulation is commercially reasonable for transactions within the coverage of the statute or regulation.

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

(3) A commercially reasonable attribution procedure may use any security device or method that is reasonable under the circumstances.

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

Definitional Cross References:

"Attribution procedure": Section 2B-102. "Court": Section 2B-102.

Reporter's Note:

1. Scope of the Section. This section provides standards for determining if an attribution procedure is commercially reasonable.

2. Effect of a Commercially Reasonable Procedure. In this article, an attribution procedure receives enhanced legal effect only if it is commercially reasonable. Conforming to a commercially reasonable attribution procedure for authentication results in authentication as a matter of law. Section 2B-119. Complying with a commercially reasonable procedure for identifying a party or detecting errors or changes creates a rebuttable presumption of identity and the absence of errors or changes in the record. Sections 2B-116; 2B-117. On the other hand, failure to use a commercially reasonable attribution procedure does not preclude a finding that authentication occurred or of the identity and integrity of the sender and the record itself. It leaves the parties with general questions of proof.

3. Nature of an Attribution Procedure. This article does not dictate what constitutes an attribution procedure. Evolving technology and commercial practice make it impractical to predict future developments and unwise to preclude developments by a narrow statutory mandate. This article relies primarily on the parties to select an appropriate procedure.

In most cases, an attribution procedure is established by agreement or otherwise adopted by both parties. A procedure of which one party is not aware does not qualify. On the other hand, parties dealing for the first time may adopt a procedure for authentication of messages. These requirements assure an important element of assent as a predicate for the creation of procedures that may affect substantive rights.

In some cases, statutes or regulations define a particular methodology as an appropriate procedure. These laws, such as digital signature statutes, establish by law a procedure that complies with the concept of an attribution procedure for purposes of this article. Under subsection (1), procedures established by statute or regulation are per se commercially reasonable within the scope of their coverage.

4. Commercially Reasonable. The general requirement of commercial reasonableness is that the procedure be a commercially reasonable method of identifying the party as compared to others, a commercially reasonable method of detecting or preventing changes, or a commercially reasonable method of achieving any other purpose relevant to this article and to which the procedure is addressed. This does not require state of the art procedures. Rather, the requirement that a procedure be commercially reasonable in order to attain enhanced legal recognition provides an incentive that encourages good practices and allows a court to provide a direct buffer against over-reaching. It protects parties who lack knowledge of technology and use procedures established by others because if the procedure is found to be not commercially reasonable, it creates no presumption of the party's identity.

What is a commercially reasonable procedure takes into account the choices of the parties and the cost relative to value of the transactions. How one gauges commercial reasonableness depends on a variety of factors, including the agreement, the choices of the parties, the then current technology, the types of transactions affected by the procedure, sophistication of the parties, volume of similar transactions engaged in, availability of feasible alternatives, cost and difficulty of utilizing alternative procedures, and procedures in general use for similar types of transactions. The concept is similar to that in Section 4A-202(c). The quality of the procedure may reasonably be tailored to the particular transaction and the degree of risk involved. Additionally, if a procedure results from a fully negotiated agreement of the parties, it should receive deference in terms of its reasonableness applicable to their particular situations. This flows from the principle of assumed risk and that the parties' agreement should ordinarily be enforced. The same principle may apply if the two parties, aware of the risks of a particular procedure, nevertheless agree to use the procedure for a particular transaction. In effect, the parties here have concluded that it is commercially reasonable in their context to accept the risks.

[SECTION 2B-115. EFFECT OF REQUIRING COMMERCIALLY UNREASONABLE ATTRIBUTION PROCEDURE. PROPOSED FOR DELETION

(a) Subject to subsection (b), between parties to an attribution procedure, a party that conditions a transaction on required use of a commercially unreasonable attribution procedure is liable for losses in the transaction for which the procedure was required caused by reasonable reliance on that procedure.

(b) The recovery of a party under subsection (a) is limited to losses in the nature of reliance or restitution and does not include:

(1) loss of expected benefit;

(2) consequential damages;

(3) losses that could have been prevented by the exercise of reasonable care by the aggrieved party; or

(4) a loss the risk of which was assumed by the aggrieved party.

(c) For purposes of subsection (a), a person does not require a commercially unreasonable procedure if the person makes available a commercially reasonable alternative.]

Definitional Cross References:

"Attribution procedure": Section 2B-102. "Consequential damages": Section 2B-102. "Electronic": Section 2B-102.

Reporter's Notes:

1. General Policy and Scope. This section deals with cases where one party (licensor or licensee) requires the other to use an attribution procedure that is not commercially reasonable and use of that procedure causes a loss in a transaction between the parties either because of undetected errors or because of third party fraud. The section deals only with cases in which a party does in fact require use of the commercially unreasonable procedure. This does not create a principle that loss is always placed on the party whose procedure is not commercially reasonable. It deals with the more limited context where one party demands use of the commercially unreasonable procedure and prohibits alternatives.

The rule in this section is subject to Sections 2B-116 and 2B-117. Those sections establish presumptions about electronic records subject to commercially reasonable procedures. A commercially unreasonable procedure does not create those presumptions, leaving the parties to general proof. In addition, if the case is within this section, it may alter loss allocation.

2. Imposed as a Condition. The loss allocation in this section requires two elements. The first is that the commercially unreasonable procedure be required as a precondition to entering the transaction. This means more than that the procedure is merely made available. The party must insist on the particular procedure and be in a position where no alternatives are available or allowed. A procedure negotiated or jointly selected by the parties, selected by one from among alternatives that include a commercially reasonable option, or a mutually designed procedure, does not fall within this section. Responsibility for loss in such cases and in cases where the procedure allows a fraud in an unrelated transaction lies outside this article.

3. Reasonable Reliance in a Covered Transaction. The second element of allocating loss under this section is that the loss result from reasonable reliance on the required procedure in a transaction to which the requirement applies. The reliance must be reasonable. Thus, for example, a party that relies on an ordinary E-mail order for a multi-million dollar order may not be acting in reasonable reliance given the size of the transaction. What constitutes reasonable reliance depends on the circumstances, including consideration of the nature of the procedure, the size of the transaction involved, and the existence or non-existence of relevant safeguards or alternatives.

The loss must occur in a transaction to which the requirement applies. This is a contract statute that does not attempt to allocate all losses caused by fraudulent behavior. This section allocates loss within affected transactions. For example, if the unreasonable attribution procedure requires use of a bank account number and a third party invades the system and misappropriates the number, the party requiring use of such a number is not responsible for losses caused in unrelated transactions because the thief obtained the number. This section does not address the difficult problem of liability for misuse of important identifiers fraudulently to obtain goods and services from other vendors. The answers to those issues lie in tort law, criminal law, and regulation

4. Party Responsible. The person that required the procedure is responsible for the loss. In some cases the person imposing the requirement is the licensor and in other cases the licensee. The rule applies in either case. The section does not necessarily create an affirmative right of recovery. In some cases, it merely bars the responsible party from recovering from the other person. Thus, pursuant to a commercially unreasonable attribution procedure a licensor might deliver information to a third party who used the inadequacies of the procedure to impersonate the named licensee. If the licensor had required the procedure, this section allows the licensee to resist any claim by the licensor to charge the licensee for the contract price. It is also likely in such case that, not being entitled to the presumption stated in Section 2B-116, the licensor will be unable to show that the order is attributable to the licensee. On the other hand, if the licensee had required the procedure, the licensor may recover against the licensee for the losses in the nature of reliance.

5. Type of Loss, The loss must come from use of the procedure. Thus, if an attribution procedure is unreasonable, but the party to whom it attributes a message did actually engage in the transaction and suffered loss due to a breach of contract, this section does not apply. The losses addressed here are from misattribution of who sent a message or from tampering with the content, not losses caused by ordinary breach of contract.

The losses are limited to reliance and restitution recovery. This restriction is spelled out in subsection (b). Subsection (b)(3) follows the general principle that a party cannot recover for losses that could have been avoided. This mitigation principle corresponds to general common law and the restatement of the concept in Section 2B-707. Subsection (b)(4) recognizes the concept of assumption of risk. Application of that general equity concept in the circumstances covered in this section, of course, must account for the fact that one party exercised strong leverage to impose an unreasonable procedure on the other. An assumption of risk cannot be found merely in acquiescing to this requirement.

6. Illustrations. The following suggest some applications of this section.

a. False Identity Cases: No Contract. Often, if a loss is suffered because a third party fraudulently used an attribution identifier to order information, this section produces results that are parallel to the results that could be inferred under other attribution rules of this article.

Illustration 1. LR (vendor) required and LE agreed to a procedure for identifying LE in placing orders with LR. Thief, purporting to be LE, obtains a $10,000 electronic encyclopedia from LR. LR seeks the license fee from LE. Under the general attribution sections, if the procedure is not commercially reasonable, there is no presumption that the sender was LE. Since LE was not the sender, it has no liability. The required attribution procedure caused a loss, but LR is responsible for that loss. It cannot shift that loss to LE.

In some false identity cases, the party demanding the use of the attribution procedure may be responsible for reliance losses in transactions to which the requirement applied.

Illustration 2. LE (purchaser) requires LR to use a procedure under which LE identifies itself when placing orders with LR. Thief uses the procedure fraudulently to obtain a $10,000 software system from LR posing as LE. Since LE required use of the procedure and it was commercially unreasonable, the loss suffered may be recovered from LE. The amount of loss is measured by reliance, not lost profit. The recovery is the cost (not license price) of the software shipped plus related expenses.

b. True Contract: Errors in Performance. If an actual contract exists and the error or fraud relates to performance, contract remedies will often provide the primary recovery and, under the principle that precludes double recovery, the reliance loss allocation in this section does not create affirmative recovery.

Illustration 3. LR (licensor) and LE (licensee) agree to a $10,000 commercial license. LR requires LE to agree to a procedure for instructions as to where to transmit the software. LE pays the license fee. A third party causes misdirection of the copy. LE demands its software. LR bears responsibility for reliance or restitution loss. LE can recover the fee or enforce the unperformed contract.

Illustration 4. In Illustration 3, assume that LE did direct transmission of the software, but now denies that it did so. If the procedure were reasonable, LR would have the advantage of a presumption of attribution of the message. Since it was not, LR must prove that LE sent the message. If it can do so, it can enforce the contract. LE suffered no loss due to the attribution procedure.

c. Errors in the Offer and Acceptance. Problems of garbled or otherwise mistaken offers and acceptances are of long-standing in commercial practice. This section allocates loss based on the reasonableness of the procedure and independent of arcane questions about what terms were accepted and when.

Illustration 5. LR (vendor) requires that LE use an unreasonable procedure for orders. LE agrees to the procedure. It places an order for ten software widgets. Because the procedure is flawed, the message arrives requesting 100. LR ships on that basis. LE desires to return the ninety excess widgets and not pay. One could argue that no contract exists because of mistake. Alternatively, a contract might be formed on the offer as sent or as received. Case law support exists for each result. This section focuses on reliance loss. Either LE or LR could be said to suffer reliance loss. Since LR required the procedure, it bears responsibility for the loss and cannot demand the price for the ninety widgets unless LE decides to retain them.

SECTION 2B-116. DETERMINING TO WHICH PERSON AN ELECTRONIC AUTHENTICATION, MESSAGE, RECORD, OR PERFORMANCE IS ATTRIBUTED; RELIANCE LOSSES. [see proposed revision]

(a) An electronic authentication, message, record, or performance is attributed to a person if:

(1) it was in fact the act of that person or the person's electronic agent; or

(2) subject to subsection (b), the person receiving it in accordance with a commercially reasonable attribution procedure for identifying a person, reasonably concluded that it was the action of the other person or the person's electronic agent.

(b) Attribution under subsection (a) (2) has the effect provided by the statute, regulation, or agreement establishing the attribution procedure. If the statute, regulation, or agreement does not specify a different effect, attribution under subsection (a)(2) creates a presumption that the authentication, message, record, or performance was that of the person to which it is attributed [*proposed alternative: places the burden of establishing on the person to which the authentication, record or performance was attributed to show that it was not responsible for the authentication, message, record, or performance].

(c) If subsection (b) applies and , the person to which the authentication, message, record, or performance was originally attributed is found to be not responsible in fact, that person is nevertheless liable for losses in the nature of reliance the cost of performance of the other party if the losses occur because:

(1) the person found not otherwise responsible failed to exercise reasonable care;

(2) the other party reasonably relied on the belief that the person found not otherwise responsible was the source of the electronic authentication, message, record, or performance; and

(3) the use of the attribution procedure creating access material, computer programs, or the like created the appearance that it came from the party person found not otherwise responsible and resulted from acts of a third person that obtained materials enabling it to use the procedure that obtained them from a source under the control of the that partyperson found not otherwise responsible.

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

Definitional Cross References.

"Access materials": Section 2B-102. "Attribution procedure: Section 2B-102. "Computer program": Section 2B-102. "Electronic": Section 2B-102. "Electronic agent". Section 2B-102. "Electronic message": Section 2B-102. "Good faith": Section 2B-102. "Party": Section 1-201. "Person": Section 1-201. "Presumption": Section 1-201. "Record": Section 2B-102.

Reporter's Notes:

1. Scope of the Section. This section deals with when an authentication, message, record or performance is attributed to a particular person. Attribution to a person means that the authentication, message, record, or performance is treated in law as having come from that person. The section enables electronic commerce in an open environment, while stating reasonable standards to allocate risk. The section does not apply to funds transfers, bank accounts, credit card liability, or other subject matter outside Article 2B. It deals with an issue independent of whether the record has been authenticated. Authentication requires an act and an appropriate intent. Attribution deals with determining to whom the act is charged.

2. Act of the Person or Electronic Agent. Subsection (a)(1) makes a person responsible if it or its agent actually created the authentication, message, or record, or provided the performance. Common law agency rules govern for human agents. In addition, however, a person is responsible for the actions of its electronic agent. Section 2B-102; 2B-116(a)(1). Having decided to use an automated system, the person is responsible for its operations. The rules of subsection (a)(1) parallel the UNCITRAL Model Law. Article 13.

3. Use of Attribution Procedure. In many cases in electronic commerce, proof of actual involvement is not possible. Subsection (a)(2) makes an authentication, message, record, or performance attributable to a person if there existed a commercially reasonable "attribution procedure" and the other party used the procedure, reasonably concluding that the message came from the other person. "Attribution procedure" is a defined term, referring to a procedure agreed to or adopted by the parties, or created by law, for the particular purpose of attribution of authentication, messages, records, or performances.

This procedure yields the result in subsection (a)(2) only if the attribution procedure is commercially reasonable. Section 2B-114.

Unlike attribution to a person under subsection (a)(1), however, the effect of attribution under (a)(2) is determined under subsection (b) which, in the absence of other agreement, limits the effect to a [rebuttable presumption] [shift of the burden of proof]. While giving legal relevance to a commercially reasonable attribution procedure creates benefits for electronic commerce, the uncertainties of modern commerce indicate that, as a default rule, it is inappropriate to adopt an absolute rule that the person identified by the procedure is attributed with its results for all purposes.

Subsection (b) recognizes that fact. It provides that unless otherwise provided by agreement or by other law or regulation, attribution through a commercially reasonable procedure creates a [rebuttable presumption] [shift of the burden of proof] of the party's responsibility. Section 1-201(3!). How this might be rebutted in litigation, of course, depends on the circumstances. No general standard can be stated. However, since this is a default rule, if the parties agree that following the procedure will have a different effect, that agreement should be enforced. Similarly, if another statute or regulation provides for a different result, that law controls.

4. Reliance Losses. Subsection (c) deals with when the presumption in (b) is rebutted. If a commercially reasonable procedure was used, but a third party actually sent the message, the relying party may nevertheless recover reliance loss if it proves that the loss was caused by the other party's negligence with reference to the attribution procedure and its use. What constitutes a lack of reasonable care depends on the circumstances, including the nature of the risks involved and the sophistication of the party. A consumer with no experience in attribution methodology would be expected to take fewer precautions in the relatively small transactions in which the consumer engages, than would a sophisticated company using the attribution procedure in reference to high value, large volume, or sensitive information transactions. In either case, the burden of proving a lack of reasonable care by a party rests on the person asserting the right to recover under this subsection.

The loss allocation principle recognizes a form of protected reliance where there was reliance on an agreed or otherwise established and commercially reasonable procedure. Since this is reliance-based liability, if the message, performance or context indicates that the indicated source is incorrect or gives reason to doubt the source, reliance may not be protected. This form of loss allocation adopts an intermediate position among the other potentially available loss allocation theories. Unlike in credit card and funds transfer systems, one cannot predict the relative nature of the sending and receiving parties, their economic strength, or technological sophistication. Individuals with limited resources are as likely to be on either side of a transaction in electronic commerce as are large corporations. Because of this, the rule creating a dollar cap for consumer risk for credit cards and funds transfers is not viable in this open system, heterogeneous environment. This context requires a more general structure because the problems will not routinely entail consumer protection or a licensor with better ability to spread loss.

SECTION 2B-117. ATTRIBUTION PROCEDURE FOR DETECTION OF CHANGES AND ERRORS: EFFECT OF USE.

(a) In this section, "electronic record" means an electronic authentication, message, record, or performance.

(b) If Between the parties use to a commercially reasonable attribution procedure to detect errors or changes in an electronic authentication, message, record, or performance, the following rules apply:

(1) The effect of the procedure is determined by the agreement or, in the absence of agreement, by this section or any law establishing the procedure.

(2) If the procedure indicates that an electronic authentication, message, record , or performance was unaltered since a point in time, it is presumed not to not have been altered since that time.

(3) As to portions to which the procedure applies, if a procedure indicates that there is no error in content, an An electronic authentication, message, record, or performance created or sent pursuant to the procedure is presumed at the time it was sent to have had the content intended by the person creating or sending it pursuant to the procedureas to portions to which the procedure applies.

(4) If the sender has conformed to complies with the procedure, but the other receiving party has does not and the nonconforming party would have detected the and a change or error would have been detected had thate receiving party also conformed complied the sender is not bound by the change or error.

Definitional Cross References.

"Attribution procedure": Section 2B-102. "Electronic": Section 2B-102. "Electronic message". Section 2B-102. "Party". Section 1-201. "Presumed." Section 1-201. "Record". Section 2B-102. "Send". Section 2B-102.

Reporter's Notes:

1. Scope of the Section. This section deals with the effect of using a commercially reasonable attribution procedure for the detection of errors or changes in electronic records. It creates default rules in terms of rebuttable presumptions and recognizes that these can be varied by agreement. The presumptions do not arise if the procedure is not commercially reasonable.

2. Effect of Agreement and Presumptions. If the parties agree to or adopt a commercially reasonable attribution procedure, an authentication, message, record or performance created, transferred or stored in compliance with that procedure is entitled to enhanced legal recognition. The effect of a commercially reasonable procedure can be determined by agreement or by applicable law or regulations outside this article. In their absence, use of the commercially reasonable procedure creates a presumption regarding the accuracy or unchanged nature of the record. The presumptions are limited to issues to which the procedure applies. Other presumptions may be appropriate depending on the nature of the procedure. This section does not foreclose their development by courts.

The presumptions are rebuttable and refer only to attribution procedures. The procedure must be commercially reasonable and must have been agreed to or adopted by the parties or created by other law. The principle here hinges on agreement and general considerations of commercial reasonableness. It is technologically neutral. Ultimate proof or disproof of alleged errors is left to law outside this article. The common law of mistake applies as do cases on the legal consequences of garbled or forged transmissions.

3. Failure to Use. Subsection (a)(4) deals in a limited way with the effect of a failure of one party to conform to an attribution procedure that is commercially reasonable (compare Section 2B-114). If the sender complies, but the recipient does not, the sender has no liability under contract law for an error that would have been detected through compliance by the recipient.

4. Commercially Unreasonable Procedures. If the procedure is not commercially reasonable, its effect is not governed by this section and is determined by other law.

SECTION 2B-118. ELECTRONIC ERROR: CONSUMER DEFENSES.

(a) In this section, "electronic error" means an error created by an information processing system, by electronic transmission, or by a consumer using an information processing electronic system, when a reasonable method to detect and correct or avoid the error was not provided.

(b) In an automated consumer transaction, a the consumer is not bound by an electronic message that the consumer did not intend and which was caused by an electronic error, if the consumer:

(1) promptly on learning of the error or of the other party's reliance on the message, whichever occurs first:

(A) in good faith notifies the other party of the error and that the consumer did not intend the erroneous message; and

(B) causes deliverys to the other party of all copies of information it receives or delivers or destroys all copies pursuant to reasonable instructions received from the other party; and

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

(c) Ifn all cases not governed by subsection (b) does not apply, the effect of the an error is determined by other law.

Prior Uniform Law: None.

Definitional Cross Reference.

"Automated transaction": Section 2B-102. "Copy": Section 2B-102. "Consumer transaction": Section 2B-102. "Electronic": Section 2B-102. "Electronic message": Section 2B-102. "Good Faith": Section 2B-102. "Information". Section 2B-102. "Information processing system": Section 2B-102. "Informational Rights": Section 2B-102. "Notifies": Section 2B-102. "Party": Section 1-102. "Receive": Section 2B-102.

Reporter's Note:

1. Scope of the Section. This section creates a statutory error correction procedure that supplements common law concepts of mistake. The section does not displace general common law concepts of mistake which continue to apply in electronic contexts and in other cases of error. To use the defense, the consumer must act promptly to minimize loss to the other party. This section does not alter law concerning transactions that do not involve a consumer.

2. Electronic Errors: Defined. Electronic errors in automated contracting occur in two distinct situations. In one the transmission or processing system causes unintended changes in a message sent. In the second, a consumer causes an error in an electronic transmission. The rule adopted here allows the consumer, by prompt action, to avoid the effect of its mistake.

The defense created here does not apply if the system itself reasonably provides a means to correct errors. Thus, a consumer's mistake in entering 100 as the quantity of copies desired may constitute an electronic error, but it does not come within this definition if the ordering system requires confirmation of the quantity and allows the consumer to correct an error before sending the order. The rule here thus provides an incentive to create error-correction procedures and provides protection to the consumer where such procedures are not made available.

What is a reasonable means to correct errors depends on the commercial setting, including the extent to which it entails immediate reaction time. For example, in an electronic which occurs over several days and not in real time, it may be reasonable to require a verification of a bid before it is placed, while in an on-line, real time auction, reconfirmation may not be possible. A reasonable procedure may entail no more than requiring two indications that the bid should be placed.

3. Avoiding the Effect of Error. If an electronic error occurs, the rule allows a consumer to avoid responsibility for unintended messages if the consumer acts promptly to do so. The message must not have been intended. Error avoidance is not a procedure to rescind a contract because the consumer has second thoughts. The procedure creates a means to avoid the complexity and uncertainty of relying on common law principles about mistakes. Under common law, in many instances of a unilateral mistake, the party making the error is responsible for its consequences. This section creates a consumer protection that avoids such decisions.

To avoid the effects of an electronic error, the consumer must act promptly on learning of the error or of the other party's reliance. The consumer must notify the other party of the error and deliver back, at the consumer's own cost, any copies of the information received. Return of copies is not required if the other party reasonably instructs the consumer to destroy the copies. However, the consumer must act in a manner that promptly returns it to the position that would have been true if the error had not occurred. Compare EU Distance Contracts Directive (rescission right for consumer if software returned unopened).

This concept builds on equity principles that allow a party to avoid the adverse consequences of its error or errors beyond the control of either party if the error causes no detrimental effect on another party and does not produce a benefit for the person making the mistake. It does not apply if the consumer has used or otherwise received a benefit from the erroneous order. If the consumer acts promptly to minimize the adverse effects, this section allows the consumer to vitiate the effect of the mistake. The right is grounded in equity principles. Of course, since there will be unavoidable detrimental effects on the party who received an erroneous message (e.g., costs of filling erroneous orders), courts should apply this rule with care. The basic assumption that there is no detrimental effect on the person who did not cause the error is particularly suspect if manufacturing, production, or other costs are significant. Also, a vendor who fills erroneous orders in a just-in-time inventory system can incur considerable costs for products such as computers or cars; where the product is information, the premise is that the lesser cost of manufacturing justifies the rule.

Illustration 1: Consumer intends to order ten copies from Jones. In fact, the processing system records 110. The electronic agent maintaining Jones' site disburses 110 copies. The next morning, Consumer notices the mistake. He immediately sends an E-Mail to Jones describing the problem, offering to immediately return or destroy copies; he does not use the games. Under this section, there is no contract obligation for 110 copies.

Illustration 2: Same facts as in Illustration 1, except that Consumer did order 110 copies and merely changed his mind. The conditions for application of this section are not met.

Illustration 3: Same as in Illustration 1, but Jones' system before shipping sends a confirmation, asking Consumer to confirm an order of 110 copies. Consumer confirms. There was no "electronic error" since the procedure reasonably allowed for correction of the error.

4. Non-consumer Transactions. This section does not alter common law in transactions that do not involve consumers. The diversity of commercial transactions make a simple rule inappropriate because of the far different patterns of risk and the greater ability of commercial parties to develop tailored solutions to this problem. A court addressing electronic errors in these other contexts should apply general common law, including an inquiry about whether any contract was actually formed. The existence of this remedy in this section for a consumer does not indicate that other remedies under the law of mistake are precluded.

SECTION 2B-119. PROOF OF AUTHENTICATION; OPERATIONS OF ELECTRONIC AGENT OPERATIONS.

(a) A person that uses Operations of an electronic agent for are the authentication, manifestation of assent, or performance of a person if the person used the electronic agent for such purpose. A party is bound by the operations of its the electronic agent, even if no individual was aware of or reviewed the agent's operations actions or their results.

(b) Subject to Section 2B-116, compliance with a commercially reasonable attribution procedure for authenticating a record authenticates the record as a matter of law. Otherwise, aAuthentication may be proven in any manner, including by showing that a party made use of information or access which that could only have been available if it engaged in conduct or operations that authenticated the record or term.

(c) Unless the circumstances indicate otherwise, authentication is deemed to have been done with the intent to establish:

(1) establish a person's identity;

(2) establish that person's adoption or acceptance of the authenticated record, term, or contract; and

(3) confirm the content the integrity of the record or term as of the time of the authentication.

Definitional Cross References.

"Attribution procedure": Section 2B-102. "Authenticate:" Section 2B-102. "Contract". Section 1-201. "Electronic agent". Section 2B-102. "Information". Section 2B-102. "Informational Rights": Section 2B-102. "Record": Section 2B-102.

Reporter's Notes:

1. Scope of the Section. This section deals with authentication (subsections (b) and (c)) and electronic agent operations (subsection a).

2. Electronic Agents. Subsection (a) states the general principle that operations of an electronic agent bind the party that used the agent for that purpose. Section 2B-116(a)(1) states the analogous principle in reference to attribution rules. Electronic agents are automated systems that respond to or originate messages or performances. They enable important savings in transactional costs in electronic commerce and this article provides legal support sustaining their use in commerce.

The concept embodies principles like those under ordinary agency law that the electronic agent function within the scope of its intended purpose. In reference to human agents, this concept is often referred to in terms of whether the human agent acted within the scope of its actual or apparent authority. Here, since the concept deals with automation and the focus is more accurately placed on whether the agent was used for the relevant purpose. Cases of fraud, manipulation and the like are discussed in Section 2B-204.

3. Proof of Authentication. In dealing with an authentication, two separable issues are (1) whether the symbol or process was executed and intended as an authentication, and (2) to whom the authentication is attributed. Under Subsection (b), compliance with an a commercially reasonable procedure for authentication removes questions about whether an authentication was intended or occurred. It does not resolve attribution issues under Section 2B-116. Subsection (b) deals with whether there was an authentication, while Section 2B-116 identifies who is responsible. Ordinarily, the two issues are resolved in a single step. On whether an attribution procedure is commercially reasonable, see Section 2B-114.

Proof of authentication can occur in any manner. One of the most important involves showing that a process existed that required an authentication in order to proceed in an automated system. To satisfy the concept of authentication, however, it is not sufficient merely to show that some act was required to proceed. The act must constitute an authentication (e.g., execution of a relevant symbol).

4. Effect of Authentication. As with common law signatures, an authentication can be used with several different intended effects. Section 2B-102(1). In the absence of contrary indications present in the circumstances, the presumed intent encompasses all such effects. The contrary indications would be present if the attribution procedure was used solely for a single effect. Intention under this section must, as in other contexts, be gauged by objective criteria.

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

(a) Except as otherwise provided in subsection (b) and (c), an electronic record message is effective when received even if no individual is aware of its receipt.

(b) If In determining when a contract is formed, if an offer in an electronic message evokes an electronic message in response, a contract is formed:

(1) when an acceptance is received; or

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

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

(1) If the effectiveness of the message was expressly conditioned on receipt of an electronic acknowledgment, the message:

(A) does not bind the originator until acknowledgment is received; and

(B) expires if acknowledgment is not received within the time specified or, in the absence of a specified time, within a reasonable time after the message was sent.

(2) If the effectiveness of the message was not expressly conditioned on electronic acknowledgment and acknowledgment is not received within the time specified or, in the absence of a specified time, within a reasonable time after the message was sent, the originator, on notice to the other person, may: (A) treat the message as no longer effective; or (B) specify a further time for acknowledgment and, if acknowledgment is not received within that time, treat the message as no longer effective.]

(d) Receipt of an electronic acknowledgment creates a presumption that the message was received, but, the acknowledgment does not in itself, does not establish that the content sent corresponds to the content received.

Definitional Cross References.

"Electronic agent": Section 2B-102. "Electronic message": Section 2B-102. "Information": Section 2B-102. "Person": Section 1-201. "Presumption": Section 2B-102. "Receive": Section 2B-102.

Reporter's Notes:

1. Scope of the Section. This section deals with the timing and effectiveness of electronic messages. It rejects the mailbox rule for electronic messages. It also deals with the impact of a request for an acknowledgment. The section does not deal with questions of to whom the message is attributed or with liability for errors. Section 2B-116; 2B-117.

2. Time of Receipt Rule. Subsection (a) adopts a time of receipt rule; rejecting the mail box rule for electronic messages. This reflects both the relatively instantaneous nature of electronic messaging and places the risk on the sending party of ensuring that receipt occurs. What rule applies in common law to modern messaging system is not clear. Here, the message is "effective" when received. Being effective, however, does not create a presumption that the message contains no errors. If errors are present, general law of mistake and Section 2B-118 determine the outcome.

The message is "effective" when received, not when read or reviewed by the recipient. A contract can exist even if no human being reviews or reacts to the electronic message or the information delivered. This applies traditional theories of assent and notice to electronic commerce. In electronic transactions, automated systems can send and react to messages without human intervention. A contract rule that demands direct human assent would inject an inefficient and error prone element in the modern electronic format.

3. Effect of Requested Acknowledgment. The effect of a request for acknowledgment depends on whether the requestor made the message conditional on acknowledgment (e.g., this message is not effective until receipt of confirmation of the message) or merely requested that an acknowledgment occur. The message sender has the right to control the effect of its messages if it does so expressly. A message that is expressly conditional on receipt of an acknowledgment does not bind the sending party until acknowledgment occurs. If there is no express condition, the sender may after a commercially reasonable time treat the message as no longer effective.

Acknowledgment is not acceptance, although an acceptance can be a sufficient recognition to also be treated as an acknowledgment. Acknowledgment confirms receipt. In modern electronic systems, this often occurs automatically on receipt of the electronic message in the recipient's system.

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

PART 2

FORMATION AND TERMS

[A. General]

SECTION 2B-201. FORMAL REQUIREMENTS.

(a) Except as otherwise provided in this section, a contract requiring payment of $5,000 or more is not enforceable by way of action or defense unless:

(1) the party against which enforcement is sought authenticated a record sufficient to indicate that a contract has been formed and that reasonably identifies the copy or subject matter to which the contract refers; or

(2) the contract is a license for an agreed duration of one year or less.

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

(c) A contract that does not satisfy the requirements of subsection (a), but which is valid and enforceable in all other respects, is enforceable if:

(1) a performance was tendered or the information was made available by one party and the tender was accepted or accessed by the other; or

(2) the party against which enforcement is sought admits in court, by pleading, testimony, or otherwise that a contract had been formed, but the agreement is not enforceable under this paragraph beyond the number of copies or the subject matter admitted.

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

(e) An agreement that the requirements of this section need not be satisfied as to future transactions is effective if evidenced in a record authenticated by the person against whom enforcement is sought if it is in a record that satisfies subsection (a).

(f) No This section is the only statute of frauds imposed by any other state law shall be applicable to transactions within this article.

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

Definitional Cross References:

"Agreement": Section 1-201. "Authenticate": Section 2B-102. "Contract": Section 1-201. "Copy": Section 2B-102. "Court": Section 2B-102. "Information": Section 2B-102. "License": Section 2B-102. "Merchant": Section 2B-102. "Notice": Section 1-201. "Party": Section 1-201. "Reason to know": Section 2B-102. "Receive": Section 2B-102. "Record": Section 2B-102. "Term": Section 1-201.

Reporter's Notes:

1. General Policy. This section provides important protections in commerce because of the character of the Article 2B subject matter, the threat of infringement, and the split of interests involved in a license with ownership of intellectual property rights in one party and rights or privileges to use or to possess a copy in the other. The section blends traditional U.C.C. concepts which focus on value issues with common law approaches that focus on duration of the contract in determining when a record is required.

The effect of this section must be construed in relationship to federal intellectual property statutes that may establish an independent, preemptive statute of frauds rule. The copyright Act, for example, requires a signed writing for an effective "transfer" of a copyright. This includes a requirement of a signed writing in the case of an exclusive license of a copyright and applies or not depending on the interpretation of that term under copyright law. Obviously, Section 2B-201 merely states a rule applicable under state law and, as to federal law, the copyright provision controls when applicable. Significantly, however, the federal rule does not apply to non-exclusive licenses of copyright.

2. Basic Rule. Subject to the stated exceptions, a contract is not enforceable by way of action or defense unless there is a record indicating that a contract was formed, if the contract calls for payments in excess of $5,000 and is a license for an agreed duration of one year or more. This dual standard reflects two traditional statute of frauds rules. The intent is to focus the formalities required by statute on transactions of significance, without requiring unnecessary formalities in the numerous small transactions that occur in ordinary commerce.

The $5,000 must be payments required under the contract. A royalty term that may ultimately yield millions of dollars would not come within this requirement unless there was a minimum payment that exceeds $5,000. Similarly, the existence of an option that might trigger an additional payment is not relevant unless the "option" payment is mandatory.

For licenses, as compared to other contracts, a record is required if the dollar amount is met and the license is for an agreed term of more than one year. A license for a perpetual duration, whether that exists because of an express term or through application of default rules, exceeds one year as would any license that states a term longer than a year even if the license may be terminated by a party before that time. On the other hand, a license for an indefinite term that is subject to termination at will does not exceed a one year term. The existence of an option to extend the duration of the license does not bring the contract within the statute unless the option is mandatory.

3. Record Required. The record, when required, must be sufficient to indicate that a contract was formed and must reasonably identify the copy or subject matter involved. No particular formalities are required. Only three invariable requirements are made by subsection (a). First, the record must evidence a contract within the scope of this article. Second, it must be authenticated. Third, it must specify the copy or subject matter involved.

The required record need not contain all material terms of the contract or even be designated by the parties as the contract. The record must, however, give a reasonable basis for believing that a contracts exists. Extrinsic evidence, including course of dealing and course of performance, along with the supplemental rules of this article may provide the remaining terms. Of course, the mere fact that a record exists which satisfies this section does not indicate that a contract was in fact formed. For example, while the record need not describe all elements of scope of a license, disputes about scope may indicate that no contract exists. See Section 2B-202.

There is no requirement that the record be retained. Obviously, retaining the record is good practice and may affect questions of proof, but this section merely requires that the record exist at a point in time. In electronic systems, a "record" requires that information be in a form from which it can be perceived. This section does not take a position on how long the information must be in that form, but a record is not a mere ephemeral manifestation of information.

a. Authenticated.

The record must be authenticated by the party to be bound. A party can prove prior existence of an authenticated record by showing that a procedure existed by which an authenticated record must necessarily have been made in order for the party to have proceeded in use of the information or another activity.

In this article, "authentication" replaces the term "signature", but the concept is the same. In most cases, as under prior law on signatures, no real question will exist about the intended meaning of an (or signature) or it can be presumed that the authentication expresses agreement to a record and identifies the party. In the few cases in which doubt exists, since the concept of the rules in this section is that there must be some indication of the existence of a contract, the authentication must be made with intent to adopt or agree to the record or to identify the person as associated with the record which indicates the existence of the contract. Section 2B-119 states a presumption generally assumed to be true under prior law on signatures: unless the circumstances indicate to the contrary, an authentication encompasses an intent to identify the party, accept or adopt the record and its terms, and establish the integrity of the record's contents. The intent referred to pertains to the person making the authentication, not to the person receiving the authenticated record. See notes to Section 2B-102(4).

b. Subject Matter.

The record must describe the copy or subject matter covered by contract. "Subject matter" refers to defining to which information the contract refers. The section does not require description of the scope of the license. A reference to a film clip from the motion picture "Wise Choices" satisfies this section even though the record does not describe what rights were granted. Filling out the details of scope and actual terms is a matter of parol evidence. A record is adequate for purposes of this section if it refers to one copy of the word processing software "Word Perfection." There is no requirement that the record describe the quantity or contract fee.

4. Exception: Partial Performance. Circumstances may render subsection (a) moot. One involves tender of performance by one party and acceptance by the other. These acts adequately document that a contract exists and the record required under subsection (a) is unnecessary. This section rejects the Article 2 rule that allows partial performance to validate the existence of a contract only to the extent of the performance itself. That rule is not consistent with the limited nature of the required record and splits transactions in an unacceptable manner. Parol evidence rules and ordinary contract interpretation principles protect against unfounded claims of extensive contract obligations. The exception requires tender and acceptance of performance. A party relying on the exception must show that the copy was tendered to it by the other party. Mere possession of a copy does not meet this exception, which depends on proving an authorized source for the copy. Similarly, the performance tendered and accepted must be sufficient to show a contract exists and cannot consist of minor acts of ambiguous nature.

Partial performance under this section only allows the party to prove the existence of the contract. It does not, of course, prove the existence of a contract or its terms, which terms must be established under other provisions of this article. It merely avoids the defense stated in subsection (a). For example, in a contract to develop and deliver three modules of a new program, tender and acceptance of one satisfies this section, but whether there is a contract covering three modules must be proven by the party claiming that to be the case.

5. Exception: Judicial Admissions. A record is not needed if the party charged with the contract obligations admits in judicial proceedings that a contract exists. The admission confirms the existence of the contract to the extent of the subject matter admitted.

6. Exception: Confirming Memoranda. Subsection (d) follows original Article 2. Between merchants, failure to answer a record that contains a confirmation of a contract within ten days of receipt is tantamount to an authenticated record under this section and is sufficient to satisfy this section with respect to both parties. This validates practice in many industries where the volume or nature of the transactions make it impossible to prepare and receive assent to records as part of making the initial agreement. The confirming memorandum places the other party on notice that a contract has apparently been formed. Accordingly, it must object to the existence of a contract if one, in fact, does not exist.

The memorandum removes the statutory bar to enforcement. The only effect, however, is to take away from the party who fails to answer, the defense of this section. The burden of persuading the trier of fact that a contract was actually made prior to the confirmation is unaffected by this rule. Cf. Section 2B-203 (effect on contract terms). The confirming memorandum does not of itself establish the terms of the contract, which terms must be established under other provisions of this article such as general rules on manifesting assent to a record or agreeing to a modification.

7. Other Agreements. Subsection (f) confirms the enforceability of trading partner or similar agreements that alter the formal requirements of this section with respect to covered transactions. The parties can agree in a record to conduct business without additional authenticated writings. That agreement satisfies the statute and the policies of requiring minimal indication that a contract was formed.

8. Other Laws. Subsection (g) clarifies that the formalities required by this section supplant formalities required under any other laws relating to transactions within this article. This rule is applicable only with respect to state law. In many licenses, federal law requires more stringent formalities for effective conveyance. For example, the Copyright Act requires that an exclusive copyright license be in a writing and makes non-exclusive licenses that are not in a writing subject to subsequent transfers of the copyright.

9. Estoppel. This section does not address the relevance of equity theories such as estoppel in cases where the required record is not present. The law on the applicability of estoppel remains as it existed before the adoption of this article.

SECTION 2B-202. FORMATION IN GENERAL.

(a) A contract may be formed in any manner sufficient to show agreement, including by offer and acceptance, or by conduct of both parties or operations of electronic agents which recognize the existence of a contract.

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

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

(d) In the absence of conduct or performance by both parties to the contrary, a contract is not formed if there is a material disagreement about a material term, including scope.

(e) If a term is to be fixed by later agreement and the parties intend not to be bound unless the term is so fixed, a contract is not formed if the parties subsequently do not agree to the term. In that case, each party shall return or, with the consent of the other party, destroy all copies of information and other materials already received, and return any contract fee paid for which performance has not been received. The parties remain bound by any contractual use restriction with respect to information or copies received or made under the contract and not returned or returnable to the other party.

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

Definitional Cross References:

"Agreement". Section 1-201. "Contract". Section 2B-102. "Contract fee". Section 2B-102. "Contractual use restriction": Section 2B-102. "Electronic agent". Section 2B-102. "Information". Section 2B-102. "Licensee". Section 2B-102. "Licensor". Section 2B-102. "Party". Section 1-201. "Receive". Section 2B-102. "Remedy": Section 1-201. "Scope". Section 2B-102. "Term". Section 1-201.

Reporter's Note:

1. Scope of the Section. This section describes basic contract formation rules. With exceptions as noted, these rules come from original Article 2. The section is subject to the specific rules on offer and acceptance in 2B-203. Article 2B separates two issues. One is whether a contract was formed. The second is what are the terms of that contract. That latter issue is dealt with under general rules of interpretation, the parol evidence rule, and Sections 2B-207, 2B-208, and 2B-209. In many cases, of course, the same events create a contract and define its terms.

2. Manner of Formation. Subsection (a) continues the basic U.C.C. policy recognizing the effect of any manner of expressing agreement, oral, written or otherwise, including by conduct or inaction. This follows original Article 2. Cases interpreting original Article 2 may be applicable. Of course, no contract is formed without an intent to contract. This section and general law do not impose a contractual relationship where none has been assented to by the parties. In determining whether conduct or words establish a contract, courts should look to the entire circumstances, including usage of trade and course of dealing.

Subsection (a) also expressly recognizes that an agreement can be formed by operations of electronic agents. This gives force to a choice made by the party to use an electronic agent. The agent's operations bind the user. In Article 2B, the operations of electronic agents are treated as having specified effects in law attributable to a party. Section 2B-116.

3. Time of Formation. Subsection (b) confirms that a contract can be formed even though the exact time of its formation is not known, if the actions or records of the parties or the operations of their electronic agents confirm the existence of a contract.

4. Open Terms and Layered or Rolling Transactions. As in common law, subsection (c) recognizes that if the parties intend to enter a binding agreement, that agreement is valid despite missing or otherwise open terms so long as there is any reasonably certain basis for granting a remedy. This rule does not apply if the parties do not intend to be bound unless or until the remaining terms are agreed to by the parties. This distinction, based on the intent of the parties states a basic principle applicable under both original Article 2 and general common law. See Evolution Online Systems, Inc. v. Koninklijke Nederlan N.V., 145 F.3d 505 (2nd Cir. 1998) ("Under New York contract law, parties may enter into a contract orally even though they contemplate later memorializing their agreement in writing. If, however, the parties do not intend to be bound absent a writing, they will not be bound until a written agreement is executed."); Winston v. Mediafare Entertainment Corp., 777 F.2d 78 (2d Cir.1986).

If there is an intent to be bound, the test for enforceability is not certainty as to all terms about what the parties were to do, what obligations they assumed, or what damages are due in the event of breach. Rather, commercial standards are to be applied to answer these questions in light of the recognition that in many commercial arrangements, terms are defined over time, rather than at one specific time. The more terms the parties leave open, however, the less likely it is that they have intended to conclude a binding agreement, but their actions are frequently conclusive on the formation issue despite the omissions.

Subsection (c) follows common law and original Article 2 and distinguishes between preliminary negotiations or incomplete efforts to make a deal, and actions or statements with an intent to be bound even though terms are left open. Making the distinction requires consideration of all of the circumstances. If the parties intend a contract, it can be formed despite the existence of terms remaining to be agreed and terms left open. On the other hand, if there is no intent to contract, no contract exists and the default rules of this article do not create one.

This section provides a foundation for the layered contracting that typifies many areas of commerce and that is recognized in original Article 2 with respect to transactions in goods. The foundation begun in here is further developed in Section 2B-207, 2B-208 and 2B-305. The concept that all contracts arise at one single point in time and that this single event defines all the terms of agreement is not consistent with modern commercial practice. Contracts are often formed over a period of time, and contract terms are often developed during performance, rather than before performance occurs. In some cases, later adopted terms might be viewed as a modification of the agreement, but often the parties expect to adopt records later and that expectation itself is the agreement. Rather than a modification of an existing agreement, these terms fulfill prior expectations or normal practice. They are part of the agreement itself, rather than proposed changes. Treating later proposed terms as a proposed modification is appropriate only if the deal has in commercial understanding of both parties has been closed and recognized as a contract with no reason to expect new terms to be provided. If the parties do not intend to be bound unless later terms are agreed to, subsection (e) gives guidance for unwinding the relationship.

During the period of time in which the terms in layered contract are being developed or to be proposed, it is not appropriate to apply default rules of this article. The default rules are applicable only if the "agreement" of the parties does not deal with the subject matter of the default rule. Agreement may be found in express terms, or through application of usage of trade or course of dealing, or inferred from the circumstances of the transaction. In layered contracting, the agreement is that there are no terms on the undecided issues until the terms are made express by the parties. Applying a default rule there might in fact be a case of applying the rule despite contrary agreement. Of course, distinguishing such cases from cases in which the default rule should apply in the interim requires consideration of the circumstances of the transaction and, especially, usage of trade, course of dealing, and other indicia of the expectations of the parties.

5. Disagreement on Material Terms and Scope. A material disagreement about an important (material) term indicates that no intent to enter a contract exists. "Scope" of the license goes to the fundamentals of the transaction and what the licensor intends to transfer and what the licensee expects to receive. Indeed, in many respects, the contract scope provisions are the basic product description. Disagreements about this fundamental issue indicate fundamental disagreement about the contractual subject matter.

6. Failure to Agree. Subsection (e) derives from original Section 2-305(4) and indicates procedures that apply where the parties conditioned agreement on subsequent specification of terms, but that later determination did not occur. The basic principle is that the parties are to return to the status that would have prevailed in the absence of any agreement.

SECTION 2B-203. OFFER AND ACCEPTANCE. Unless otherwise unambiguously indicated by the language of the offer or the circumstances, the following rules apply:

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

(2) An order or other offer for prompt or current delivery of a copy invites acceptance either by a prompt promise to ship or by the prompt or current shipment of a conforming or nonconforming copy. However, a shipment of nonconforming copies is not an acceptance if the party providing the shipment seasonably notifies the other party that the shipment is offered only as an accommodation to that party.

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

[SECTION 2B-203A. ACCEPTANCE WITH VARYING TERMS.]

(a) In this section, an acceptance "materially alters" an offer if it contains terms that materially conflict with the terms of the offer or terms that materially vary from the terms of the offer.

(b) Except as otherwise provided in Section 2B-203B), a definite and seasonable expression of acceptance operates as an acceptance, even if the acceptance contains terms that vary from the terms of the offer, unless the acceptance materially alters conflicts with a material term of the offer or materially varies from the terms of the offer.

(b) If an the acceptance materially alters conflicts with or materially varies the offer, the following rules apply: (1) Aa contract is not formed unless all the other circumstances, including the conduct of the parties, establish indicate that a contract.n agreement existed. (2) If a contract is formed under paragraph (1), the terms of the contract are determined:

(1A) under Section 2B-207 or 2B-208, as applicable, if one party agreed, by manifesting assent or otherwise, to the other party's terms other than by the acceptance that contained the varying terms; or

(2B) under Section 2B-209, if subparagraph (1A) does not apply and the contract is formed by conduct.

(c) If the offer and acceptance contain varying terms but the acceptance did not materially alter the offervariation or conflict was not material, a contract is formed on the terms of the offer. Terms in the acceptance that conflict with terms in the offer are not part of the contract. In addition, and the following rules apply:

(1) The terms of the contract are those of the offer.

(2) Nonmaterial aAdditional terms contained in the acceptance are treated as proposals for additional terms.

(23) Between merchants, the proposed additional terms become part of the contract unless the offeror gives notice of objection before or within a reasonable time after it receives notice of the proposed terms.

SECTION 2B-203B. CONDITIONAL OFFER OR ACCEPTANCE.

(a) Except as otherwise provided in subsection (b), an offer or acceptance that, because of the circumstances or the language, is conditioned on agreement by the other party to the terms of the offer or acceptance, precludes formation of a contract unless the other party agrees to its terms, by manifesting assent or otherwise.

(b) If an offer and acceptance are in standard forms and one or both are conditioned on acceptance of their terms, the following rules apply:

(1) Conditional language in a standard term of a standard form precludes the formation of a contract only if the party proposing the form acts in a manner consistent with that language, such as refusing to perform, refusing to permit performance, or refusing to accept the benefits of the contract, until the proposed terms are accepted.

(2) If aA party that agrees, by manifesting assent or otherwise, to a conditional offer effective under paragraph (1), it adopts the terms of that offer under Section 2B-207 or 2B-208, as applicable, except to the extent the terms of the conditional offer that in a standard form conflict with the expressly agreed terms on of the parties as to price and quantity.

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

Definitional Cross References.

"Agreement": Section 1-201. "Contract". Section 1-201. "Delivery": Section 2B-102. "Merchant": Section 2B-102. "Notice". Section 2B-102. "Notice": Section 1-201. "Notifies". Section 1-201. "Party". Section 1-201. "Receive": Section 2B-102. "Standard form". Section 2B-102. "Term". Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section deals with offer and acceptance. It deals directly with acceptances that vary the offer and with conditional offers or acceptances. The basic principle is that a party has a right to control the terms of acceptance of its offer if it does so expressly, but that in the absence of control, any reasonable manner of acceptance suffices. In resolving issues about the so-called battle of forms, this section must be considered in connection with Section 2B-209. Note 4 to that section lists questions asked in such cases.

2. Methods of Acceptance. Subsection (a) deals with general rules of offer and acceptance. It follows Section 2-206(1). As under the Restatement (Second) of Contracts § 19, acceptance may be in any form, including a manifestation of assent pursuant to Section 2B-111.

a. Any Reasonable Manner. Any reasonable manner of acceptance is available unless the offeror has made it clear that a method is not acceptable or that acceptance requires a particular method. The offeror can control acceptance of its offer. Article 2 adopted this rule in the 1950's. This section follows original Article 2 in that acceptance may be in any manner or any medium reasonable under the circumstances. This standard accommodates new methods of communication as they develop.

b. Shipment or Promise to Ship. Either a shipment or a prompt promise to ship or transmit is a proper means of acceptance unless the offer otherwise provides. This follows Section 2-206(1)(b).

c. Beginning of Performance. The beginning of performance by an offeree can be effective as an acceptance to bind the offeror only if followed within a reasonable time by notice to the offeror. To be effective, the beginning of performance must unambiguously express the intent to be bound.

3. Acceptance Varying the Offer. Subsection (b) conforms to original Article 2. It allows contract formation even though the offer and acceptance contain varying terms that do not fully match. A term is a varying term if it conflicts with a term of the offer in whole or in part or if it covers an additional subject not dealt with in the offer. Article 2 altered the common law "mirror image" rule and common law in most states no longer consistently follows it. The mirror image rule precludes formation of a contract unless the terms completely match. However, there must be an acceptance; no contract is formed by a counteroffer. To resolve an issue not addressed in original Article 2, Article 2B provides a standard for determining when variations in terms does or does not yield an acceptance. This section presumes that varying terms do not create a contract if the variance is material.

In sales of goods and in traditional literature, this set of issues is often discussed in reference to the exchange of purchase order and acceptance forms. This is not routinely the context in information commerce. This section follows the premises in original Article 2, expanding on its principles and recognizing the fact of layered contracting. Where neither the offer nor the acceptance are expressly conditioned on acceptance of their own terms. there are two different cases. In one, the offer and acceptance materially conflict. In the other, the differences are not material.

a. Varying Terms: Material Variance. Subject to the rules dealing with conditional offers or acceptances, subsection [2B-203A(a)] provides that a material variance in a purported acceptance precludes contract formation based on the purported acceptance. What constitutes a material variation of the offer depends on the context, including what degree of acceptable variation the parties might reasonably expect in light of applicable trade use and course of dealing. However, an "acceptance" that purports to alter basic elements of the proposed bargain is not an acceptance and, in the absence of conduct creating a contract, no contract is formed by that "acceptance" unless the new terms are accepted by the other party.

An acceptance that materially varies the offer does not create a contract. However, this rule does not preclude formation of a contract by conduct. If a contract is formed by the circumstances, including conduct of the parties, the important issues center on what terms are applicable. In cases where the records exchanged materially conflict. Subsection [2B-203A(a)(1)] contemplates two approaches to determining the terms of the contract. The first arises if one party agreed to the terms of the other. In that case, the terms of the accepted record control subject to the limitations in Section 2B-207 and 2B-208. Agreement can be manifested in any manner except that it cannot be found solely in the "acceptance" that contains a materially varying term. The second is where the exchanged offer and acceptance materially conflict, but a contract is formed solely by conduct. This places the relationship under Section 2B-209 which instructs a court to consider the entire context in determining the terms of the contract.

b. Varying Terms: Non-Material Variance. If an offer and acceptance do not materially vary, they form a contract. The terms of the contract are the terms of the offer. Section 2B-209 does not apply because the contract is formed by offer and acceptance.

Subsection [2B-203A(a)(2)] allows for inclusion of non-material additional terms from the acceptance unless the offeror timely objects to those terms. This rule comes from existing Article 2 and follows the basic principle that the offeror controls the terms of its offer. If the acceptance gives conflicting treatment of a subject contained in the offer and the difference is not material, the offer controls. Standards of materiality in this context include whether the additional terms involve unreasonable surprise when measured against the commercial context, including usage of trade and course of dealing, or whether they so change the effect of the other terms of the offer and acceptance such as to significantly alter the bargain reached. In either context, the terms are not part of the agreement.

4. Conditional Offers and Acceptances. A person has a right to state and insist on preconditions for acceptance of its offer. Subsection [2B-203B(a)] recognizes that principle. In commercial practice, the most common conditional offer or acceptance limits its effect on the other party's adherence to all of its terms. No principle in contract law precludes a party from enforcing such conditions. However, conditional language in standard terms of a standard form creates special problems in "battle of forms" transactions where either or both parties make an acceptance or offer expressly conditional on its specific terms, but perform irrespective of acceptance of the condition. Subsection [2B-203B(b)] treats this as a question involving the effectiveness of the conditional language. In a standard form, the party desiring enforcement of its conditional language is entitled to that result only if its conduct corresponds to the condition. Conduct corresponds to the condition if the party insisting on the condition precludes further performance unless the other party assents to its terms.

Illustration 1. Licensee sends a standard order form indicating that its order is conditional on the Licensor's assent to the terms on the Licensee's form. Licensor ships with an invoice conditioning the contract on assent to its terms. Purchaser accepts shipment. Here, neither party acted consistent with the language of condition. A contract exists based on conduct. The terms are governed by 2B-209.

Illustration 2. In Illustration 1, assume that Licensor refuses to ship, but informs Purchaser that agreement to the Licensor's terms is a condition of shipment. It does not ship until Purchaser agrees to terms. Until that occurs, there is no contract. If it occurs, the contract exists based on the form agreed to.

Illustration 3. In Illustration 1, assume Licensor ships pursuant to a "conditional" form, but when the shipment arrives, Purchaser refuses it. In a telephone conversation, Licensor agrees to Purchaser's terms. Until that agreement, there is no contract; Purchaser acted in a manner consistent with its conditional language. When agreement occurred, that agreement sets out terms of the contract.

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

(a1) A contract may be formed by the interaction of electronic agents. A contract is formed iIf the interaction results in the electronic agents' engaging in operations that confirm or indicate the existence of a contract a contract is formed unless the operations resulted from fraud or electronic mistake, fraud or the like.

(b2) A contract may be formed by the interaction of an electronic agent and an individual. A contract is formed if the individual takes actions that it is free to refuse to take or makes a statement that the individual has reason to know will:

(A) cause the electronic agent to perform, provide benefits, permit the use or access that is the subject of the contract, or instruct a person or an electronic agent to do so; or

(B) indicate acceptance or an offer, regardless of other expressions or actions by the individual to which the electronic agent cannot react.

(c3) The terms of a contract formed under subsection paragraph (b2) are determined under Section 2B-207 or 2B-208, as applicable, but do not include terms provided by the individual if it had reason to know that the electronic agent could not react to the terms as provided.

Definitional Cross References

"Agreement": Section 1-201. "Automated transaction": Section 2B-102. "Contract": Section 1-201. "Electronic agent": Section 2B-102. "Information": Section 2B-102. "Informational Rights": Section 2B-102. "Party": Section 1-201. "Reason to know": Section 2B-102. Term": Section 1-201.

Reporter's Notes:

1. Scope of the Section. This section deals with two setting: 1) an interaction between two electronic agents and 2) an interaction between a human and an electronic agent. Both interactions can create a contract. In each case, however, contract formation rules take into account the fact that an electronic agent cannot react to terms outside the scope of its programming and, at least in most cases, that the party using the agent does not, by virtue of that use, accept the possibility of agreeing to other terms.

Modern systems enable the use of electronic contracting agents by consumers and other licensees as well as by licensors. Intelligent agents that search for information or other products within predefined purchase terms creates a significant new form of comparison shopping that is supported by the rules here.

2. Interaction of Electronic Agents. An interaction of two electronic agents can create a contract that bind the parties that used the agents to achieve that result if the operations of the electronic devices indicate that a contract exists. This rule follows the basic principle that conduct can create a contract. That would occur, for example, if the interaction results in information being sent by one and accepted in the system of the other. It might also occur if the agents' operations result in recording within their respective systems that a contract has been created. The terms of the contract that result from this interaction are determined under Section 2B-207 or 2B-208 as applicable.

3. Electronic Mistake and Fraud. Assent from the operations of the two electronic agents does not arise if the operations are induced by mistake, fraud or the like. Formation of a contract does not occur if one party or its electronic agent manipulates the programming or response of the other electronic agent in a manner akin to fraud. This, in essence, vitiates the inference of assent which would occur through the normal operations of the agent. Similarly, the inference is vitiated if because of aberrant programming or through an unexpected interaction of the two agents, operations indicating the existence of a contract occur in circumstances that are not within the reasonable contemplation of the person using either electronic agent. In such cases, the circumstances are analogous to mutual mistake. In some cases, especially if the electronic agent is supplied by one party to the purported agreement, it would be appropriate for a court to avoid results that are clearly outside the reasonable expectations of the other party. The concept here is more akin to the law of unilateral mistakes except that it places the risk on the party that supplied the agent for and required its use in a particular transaction.

Subsection (1) makes clear that restrictions analogous to common law concepts of fraud and mistake are appropriate to prevent abuse or clearly unexpected results. Courts applying these concepts may refer to cases involving mistake or fraud doctrine even though, in the case of electronic agents, the electronic agent cannot actually be said to have been misled or mistaken. Of course, parties may agree to reallocate the risk of mistake or fraud in a separately formed agreement, such as an EDI agreement setting out a procedure for subsequent electronic ordering.

This section does not address the liability of a supplier of the electronic agent whose programming or lack of security causes loss. If such supply contract is within this article, allocation of liability is handled as in any other contractual relationship. Liability under other law is not dealt with in this article.

4. Interaction of Human and Electronic Agent. Contracts may be formed by an interaction of a human and an electronic agent. The electronic agent's ability to bind the party using it derives from the choice of that party to so use an automated system. A contract is formed if the human makes statements or engages in conduct that indicate assent. Consistent with the concept of manifesting assent, assent may be indicated by taking actions with reason to know that they indicate agreement. Here, that occurs if the acts or statements will cause the electronic agent to deliver benefits or permit the access that is the subject matter of the contract. Statements by the individual purporting to alter or vitiate agreement to which the electronic agent cannot react are ineffective.

Illustration 1. Tootie is an electronic system for placing orders with Home Shop. If a customer dials the number, a voice instructs the customer to indicate a credit card number, the item number, the quantity, the customer's location, and other data. Customer, after entering the data, verbally states that he will only accept the information if there is a 120 day "no questions" return right. Otherwise: "I don't want the damn things." Customer has reason to know that the electronic system cannot react to the verbal condition. Tootie automatically orders shipment.

There is a contract. The verbal condition is ineffective. Stating conditions beyond the capability of the agent to react does not vitiate agreement when there is reason to know that they cannot be dealt with by the electronic system. Agreement is indicated by the steps that initiate shipment.

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

User's "counter offer" is ineffective. The charge includes the additional $1.00.

SECTION 2B-205. FIRM OFFERS.

(a) An offer by a merchant to enter into a contract which is made in an authenticated record that by its terms gives assurance that the offer will be held open is not revocable for lack of consideration during the time stated or,. if If a time is not stated, the offer is irrevocable for a reasonable time not exceeding 90 days.

(b) An offer by a merchant containing a term providing assurance that the offer will be held open which term is contained in a standard form supplied by the party receiving the offer and used by the party making the offer is ineffective unless the party making the offer authenticates the term.

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

Definitional Cross References.

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

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

SECTION 2B-206. FORMATION: RELEASES OF INFORMATIONAL RIGHTS. The following rules apply to releases of informational rights:

(a1) A release in whole or in part is effective without consideration if it is:

(1A) in a record to which the releasing party agrees, by manifesting assent or otherwise, and which identifies the informational rights released; or

(2B) enforceable under estoppel, implied license, or other rules.

(b2) A release continues for the duration of the informational rights released if the agreement does not specify its duration and does not require affirmative performance after the grant of the release:

(1A) by the party granting the release; or

(2B) by the party receiving the release, except for relatively insignificant acts.

(c3) In cases not governed by subsection (2), the duration of a release is governed by Section 2B-308.

[SECTION 2B-206A. FORMATION: SUBMISSION OF INFORMATIONIDEAS.]