DRAFT

FOR DISCUSSION ONLY

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

AUGUST 1, 1998

Copyright ã 1998

By

THE AMERICAN LAW INSTITUTE

and the

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

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

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

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

LEON M. MCCORKLE, JR., P.O. Box 1008, 52 E. Gay Street, Columbus, OH 43216-1008

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

LEWIS B. STONE, 52^nd Floor, 200 Park Avenue, New York, NY 10166

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

Article 2B concerns transactions that largely have never been covered by the U.C.C. The industries and transactions affected by Article 2B involve subject matter unlike the traditional U.C.C. focus on goods. In Article 2B transactions, the value lies in the intangibles: the information and rights to use information.

Article 2B provides a framework for contractual relationships at the center of the information era. This proposal is in effect a cyberspace contract statute. The measure of the project lies in its ability to accommodate diverse practices in a new information era. Evaluating the balance hinges on one's perspective, yet, as the following indicates, Article 2B distributes benefits among the various parties.

The 1990's witnessed a shift in the source of value and value production in the economy. The service sector now dominates. The information industry exceeds most manufacturing sectors in size. The entertainment industry was the first post war international industry in the United States. The on-line industry is the most recent. The software industry, which provides the basis for the information age, did not exist in the 1950's. Today, its products dominate the economy and challenge traditional law in many areas.

Contracts in information are not equivalent to transactions in goods. The contracts emphasize different issues and bring into play a different policy structure concerning to what extent liability risk ought to be created for the author, provider or distributor of the informational subject matter.

Nature of a License.

The paradigmatic transaction is a license of information, rather than a sale of goods. The transaction is characterized by 1) the conditional nature of the rights or privileges conveyed to use the information, and 2) the focus on information, rather than goods for the value conveyed. A license is unlike a sale or lease of goods in many ways, including what the transferee received by the contract. The Federal Circuit Court of Appeals, for example, has stated: "[A] patent license agreement is in essence nothing more than a promise by the licensor not to sue the licensee [even] if couched in terms of "[L]icensee is given the right to make, use, or sell X""

Licenses are commercial transactions. Licensing is a primary means of commerce in digital information; it is important in all information industries. In licensing, contract terms play an important role in defining the product conveyed that transcends sale of goods terms dealing with warranties, time of delivery, and the like. The terms of a license also typically provide for express grants of rights (or permission) to use information and express limitations on use. The grant and restrictions are product and are often buttressed by the licensor's property right to control various uses of the information under patent, copyright or similar law. A license for computer software is a much different commercial value if it grants a right to commercially reproduce 100,000 copies than if it grants the right to personal use of a single copy. Yet, the information and perhaps the particular copy may be identical in both cases

Typically, license use restrictions are enforceable unless a particular term in a particular context conflicts with general doctrines against intellectual property misuse or similar constraints. Courts have enforced license restrictions precluding commercial use of a digital database, limiting a right to access, barring the making of a copy of software, limiting use to a specific computer, limiting use to internal operations of the licensee, controlling redistribution to a particular package of software and hardware, precluding modifications, and various other contract limitations. Article 2B does not create contract law here - it merely provides a more coherent base for contracting.

Many commercial licenses deal with rights in intellectual property, but in many other cases the license is not based on intellectual property rights. For example, numerous licenses in Internet or for on-line services grant one party permission to enter the and obtain information from the computer of the other. That form of licensing is increasingly important in the digital world. Article 2B describes this framework as an "access contract". Where the relationship extends over time, it creates various ongoing obligations (e.g., the obligation to pay, the obligation to maintain accessibility) not present in other licenses.

Commercial Context.

As in commerce in goods, licensing spans a wide range of commercial practices and also occurs in the mass market. Article 2B focuses on many commercially important transactions, but does not apply to all information licensing. It excludes, for example, most forms of patent and trademark licenses.

There are a wide range of companies. Many are large entities, but to an extent far greater than in the fields of selling goods or leasing them, the vast majority of information providers are small companies, reflecting the often small overhead of software and other information enterprise and the role of the software and other information industries as a focus for modern entrepreneurs. The average size of a software company in California, for example, is less than ten employees. The average in the state of Washington is twelve employees.

Similarly, while many people have their primary contact with licensing in reference to mass market transactions, in practice, the most significant forms of licensing and the center of major economic aspects of this field of commerce lie outside the mass market.

At every level of commerce, information providers that may be perceived as primarily licensors are in fact intimately and comprehensively both licensors and licensees with respect to most of their commercial practice. This is true because, for most information products, the product source involves combinations of information from numerous sources, obtained through licenses or similar transactions.

Transactional Context.

There are many different types of licensing, reflecting a diversity as great as that in fields of commerce associated with the production and sale of goods.

One way of distinguishing among the various types of licenses in modern commerce differentiates between licenses that relate to information in copies physically transferred to a licensee, as contrasted to licenses that enable a licensee to access a computer in which information is located. Within transactions in which copies are made available on diskette or otherwise to a licensee subject to license conditions, a variety of transactional formats exist. In some, a licensor deals directly with the end user. In others, a chain of distribution intervenes; the publisher does not deal directly with the end user. In each case, the basis of the license resides in either the existence of intellectual property rights in the information or, more simply, the fact that the licensor has control over a source of the information that the licensee desires to utilize.

The distribution options are affected by the property rights involved. In areas covered by Article 2B, copyright law is a dominant (but not sole) source of intellectual property rights. Copyright law gives the copyright owner the exclusive right to make copies of its work, to distribute copies, to make derivative works, to publicly display or perform the work, and other rights. These rights are not relinquished by selling or transferring a copy of the information. Thus, a basic choice for a copyright owner is whether to license some or all of these rights or to sell copies of the work. A sale relinquishes some rights with respect to the copy. A license tailors what rights are granted. In text publishing, current practice in the non-electronic mass market involves a sale of copies, while transactions for distribution or acquisition of works use many different formats. In motion pictures, licensing is used to provide content to theaters, while in the consumer market, copies are either sold or rented under terms that preclude public performance. Computer programs are typically licensed, although computer game distribution frequently involves sales of copies.

Direct Licenses. Many licenses are face-to-face contracts between the copyright owner and the licensee. In most cases, direct licenses (often standard form agreements) transfer a copy to the licensee subject to express contractual use restrictions. Increasingly, copies are moved to the licensee's site electronically. An additional format involves no delivery of a copy, but licensed access to the information for brief periods as needed.

In direct licensing, common terms include limiting use to a designated system, for specific purposes (e.g., internal use only), subject to confidentiality conditions, transferability limits, and similar restrictions. In software licensing, a central factor of distribution recognizes that loading software into a computer and, even, moving it automatically from one part of memory to another part, constitutes making a copy that falls within the copyright owner's exclusive rights.

Direct licensing also occurs in the many contractual relationships in which information (software, text, movies) is developed for the licensee. Here, it is very common for small companies or individuals to be licensors. This illustrates an important point in the overall contract issues. While large providers are important factors, small company licensors are more numerous and are economically important.

Indirect Distribution Licensing. Commercial licensing also occurs in context of broader distribution chains. These are not analogous to distribution methods used in the sale of goods because of the intangible subject matter and the overlay of intellectual property rights which include the exclusive right to distribute copies. While it over-simplifies the matter, it is useful to discuss two distinct frameworks.

The first involves use of a master copy and is common in the movie industry and in software contracts. A "distributor" receives access to a single master copy of the work and a license to make and distribute additional copies or to make and publicly perform a copy. For example, Correl Software licenses a distributor to load its software into the distributor's computers. Correl limits the distributor to no more than 1,000 copies which can only be distributed in the computers and subject to an end user license. If the distributor does not perform within the limits of this license, since both making and distribution of copies are within the owner's copyright, the unauthorized acts would be infringements as well as contractual breaches.

An alternative uses tangible copies of the software. For example, Quicken may license a distributor to distribute its up to 1,000 copies of its accounting software in packages provided by Quicken. While in some industries, the publisher will sell 1,000 copies to the distributor to achieve this result, a license is used in the software industry. In the license, the distributor is allowed to distribute copies to retailers, provided that conditions are met, such as terms of payment, use of the original packaging, and making the end user distribution subject to an end user license. The distribution right is an exclusive copyright right; distributions outside the license infringe the copyright.

In both formats, the information product eventually reaches an end user. If it does so in an ordinary chain complying with the distribution license, the end user is in rightful possession of a copy. If the authorized distribution involved sales of copies, no more is required to give the end user the very limited rights of the owner of a copy spelled out in copyright law (e.g., to transfer it, make a back-up if it is software, make some changes essential to use if it is software). If, however, the copyright owner elected a licensing framework, the end user's right to "use" (e.g., copy) the software depends on the end user license. Typically, this is in a license from the publisher to the end user. It creates a direct contractual relationship that would not otherwise exist. The contract leaps the chain of distribution and creates a direct link to the publisher by the end user. It is the only contract that enables the end user to make copies of the software.

Article 2B supports contractual choice and commercial expansion in information contracting. In addition, an important theme involves the need to create and preserve as broad as possible a field for expression and communication of ideas, images, and facts; material that this Article refers to as "informational content."

The convergence of technology and the evolution of the information age reflects a fundamental shift in our society and in how people interact, trade and establish commercial relationships. "Informational content," which consists of sights, sounds, text, and images that are communicated to people, has become important commercially. That importance does not diminish its political or social role. The technology does change how informational content is distributed and enhances the importance of direct contracts in that distribution.

As contract rules evolve, basic First Amendment and related policies must remain central. Even as informational content becomes a significant commercial commodity, we must not forget that informational content and its communication in a marketplace of ideas remains equally relevant to political and social norms in this country. What law does here affects not only the commercialization of information, but also the social values its distribution has always had in society.

Informational content does not become something entirely different if the provider or author distributes it commercially can hardly be a premise. Commercialization is not inconsistent with the role of information in political, social and other venues of modern culture. If it were, newspapers, books, television, motion pictures, video games, and other sources of informational content could not exist. How contract law in Article 2B creates (or precludes) liability risk, allows (or precludes) authors to control distribution of their works, or allows (or denies) the right to contract for licenses of information has a significant impact on new, and in older, systems of distribution.

These underlying values argue strongly for an approach to contract law in this field that does not encumber, but supports incentives for distribution of information and its distribution. That theme permeates this Article 2B.

The UCC is a commercial statute whose basic philosophy builds on two assumptions about commercial contract law. The first commercial law theme assumes that contract law should preserve freedom of contract. This permeates the UCC as noted in Article 2A comments: "This article was greatly influenced by the fundamental tenet of the common law as it has developed with respect to leases of goods: freedom of the parties to contract... These principles include the ability of the parties to vary the effect of the provisions of Article 2A, subject to certain limitations including those that relate to the obligations of good faith, diligence, reasonableness and care."

The idea that parties are free to choose terms can be justified in a number of ways. It leads to a preference for laws that provide background rules, playing a default or gap-filling function in a contract relationship. A default rule applies only if the parties do not agree to the contrary. Default rules should mesh with expected or conventional practice in a manner that projects a favorable impact on contracting and that can be varied by the contracting parties. This is in contrast with rules that dictate terms and regulate behavior. As a matter of practice, default rules are common in commercial contexts, while consumer law contains many regulatory rules.

A White Paper Report on global commerce in information strongly indorsed the non-regulatory and contract freedom approach taken in U.S. law and in Article 2B for allocating rights and risks in the information economy.

The second commercial law premise defines codification as a means to facilitate commercial practice. Grant Gilmore expressed this in the following terms:

To be accurate and not original refers to commercial practice as an appropriate standard for gauging appropriate contract law unless a clear countervailing policy indicates to the contrary or the contractual arrangement threatens injury to third-party interests which social policy desires to protect. Uniform contract laws do not regulate practice. They support and facilitate it. The benefits of codification lie in defining principles consistent with commercial practice which can be relied on and are readily discernible and understandable to commercial parties.

Article 2B embraces this philosophy. In context, the best source of substantive default rules lies not in a theoretical model, but in a reference to commercial and trade practice. This is not simple faith in empirical sources for commercial law. It stems from the reality that, even though we may not know how law interacts with contract practice, decisions about contract law will continue to be made. In those decisions, we should refer for guidance to the accumulation of practical choices made in actual transactions. The goal is a congruence between legal premise and commercial practice so that transactions commercial parties achieve commercially intended results.

Yet, the transactions range from a casual deal between two individuals at a garage sale to transactions between sophisticated businesses employing multiple lawyers and affecting billions of dollars of business. The approach is not to draft rules that an individual party would negotiate tailored to each case, but to select an intermediate or ordinary framework whose contours are appropriate, but whose terms will be altered in the more sophisticated environments.

Article 2B reflects an effort to balance and develop appropriate contract law themes reflecting several other major social policy questions. One involves the relationship between contract law and intellectual property law.

The interaction has existed for generations. Article 2B does not create contract law in this field. For many years, owners of intellectual property have contracted for selective distribution of their property and limited contracted-for use. Law enforces the contract options, subject to specific restrictions in federal property law, antitrust or misuse doctrine, and some directly preemptive federal rules.

In most cases, patent and copyright law coexist with state contract law. As stated in the Copyright Act, federal law preempts any state law that creates rights equivalent to property rights created under copyright. But as both a practical and a conceptual matter, copyright (or patent) do not generally preempt contract law. Indeed, contracts are essential to use the property. A contract defines rights between parties to the agreement, while a property right creates rights against all the world. They are not equivalent.

Yet, there are socially important issues here. Digital technology and the distribution systems it allows are changing the contours of how information is placed in commercial settings and what rights or protections are appropriate as a matter of property law for the new methods of distribution. These changes have led to a wide-ranging property law debate that ultimately goes to very fundamental social policy issues about the use and distribution of information. It has been argued in international treaty negotiations and in Congress. The issues that these debates present cannot and should not be resolved as a matter of state contract law.

Article 2B adopts a neutral position with respect to what, ultimately, are issues of federal and international information rights policy. The disputed issues must be resolved by courts and Congress, rather than through state legislation. Article 2B takes no position on these policy questions, but merely provides a generic contract law framework to bring to modern form the existing complex network of common law, code and general industry practice.

The basics of the neutrality policy are in Section 2B-105, which specifically recognizes federal preemption and that Article 2B does not displace state trade secret law. A proposed new provision of this section further emphasizes the neutrality principle by expressly recognizing the ability of courts in common law to apply fundamental public policy principles to the limited extent to which those principles clearly over-ride the policies that sustain enforcement of contracts. Article 2B does not change the law on the enforceability of any restrictive clause that entails copyright misuse or that offends fundamnetal First Amendment concerns. We expect that, as they do today, courts will continue to reject abusive clauses when they encounter them by applying existing doctrines that preserve the role of information in society.

Some have argued that Article 2B should take a proactive position. Thus, they argue that Article 2B should prohibits contract clauses regarded as improper from the perspective of persons holding to one view of this property rights policy debate. The Drafting Committee and the Conference as a whole, and the ALI membership when presented with the issue a second time, rejected the demand to take one or the other side of this debate.

Federal intellectual property law also places some specific and recognized limits on contract. These include restrictions on transferability, some recording requirements, a statute of frauds, and a rule that enforces property rights against good faith purchasers. A state law cannot ignore these rules. While state law themes might prefer a rule that a secured creditor can create and enforce a creditor's interest in a licensee's rights, federal law precludes any transfer of a licensee's rights in a non-exclusive license without the licensor's consent. A default rule that ignores this preemptive provision creates true traps for the unwary. In Article 2B, state contract law is made parallel to such specific preemptive rules, although in several situations, provisions push against explicit federal rules insofar as reasonably possible.

This interaction of state law and specific federal yields default rules that, in some cases, do not correspond to the treatment of analogous issues in other parts of the UCC. These provisions reflect a policy of correspondence of rules in addition to simple recognition that federal law preempts contrary state law.

Because of the concentration of observers from technology fields, Article 2B has become the context for development within the UCC of rules regarding electronic commerce. These rules have been developed in coordination with the NCCUSL project on an Electronic Transactions Act. It is anticipated that the electronic commerce rules here will be adapted to Article 2 and Article 2A, or placed in Article 1 ultimately applicable throughout the UCC.

The electronic commerce rules are contained in Sections 2B-105 through 2B-120, in addition to some definitions (e.g., Section 2B-102, conspicuous) and various contract formation rules (e.g., Section 2B-204). This group of sections reflects several policies.

1. The parties must be able to use electronic authentication (Section 2B-102(3): authentication encompasses the idea of signature) and electronic records, rather than just signed papers, and to engage in transactions all or part of which will be established by automated systems ("electronic agents" as defined in 2B-102).
2. There must be fair allocation of risk reflecting that licensors and licensees of information will vary in terms of their sophistication and economic power. Thus, while Article 2B creates an important new consumer protection in 2B-118, there are no stated dollar limits limiting risk and favoring one or the other party. The "deep pocket" here may be either the licensor or the licensee. The risk allocation is, in part, in Section 2B-116 and 2B-115.
3. The legal protections for electronic commerce must be technologically neutral. This is reflected in the rules on what is the effect of an agreement to follow a procedure to identify a party (described as an "attribution procedure") or to detect errors in electronic records (Section 2B-118).

In the political process that surrounds any new law, many public statements have been made about the effect of Article 2B on consumer protection. Most are political efforts to mislead.

The truth is simple. Article 2B retains current UCC consumer protections, preserves existing non-UCC consumer laws, and creates new protections for the digital environment. When contrasted to existing law in the fields covered, Article 2B expands or retains consumer protection in virtually all states.

Nevertheless, Article 2B is a commercial statute and its primary focus is not on the creation of a uniform consumer protection code. It does not aggressively regulate contracts as many consumer advocates would prefer. It does create new protections in some cases such as Section 2B-118 and 2B-208. It does not take away protections created under existing UCC law.

The following chart compares Article 2B consumer rules that exist in the UCC or common law.

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 to occur. Access contracts may distribute rights on the basis of informational rights, but they also reflect the right to control use and access. This does not mean that identical information cannot be obtained elsewhere, but merely that obtaining the information from the access provider can be conditioned on assent to its own terms of access. The access provider can contract for its data and establish contractual terms of access that bind the other contracting 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 by the licensee. In some cases, the information is controlled by the access provider, while in others there is a three-party framework. In the 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 separate 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 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 the 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." This term is new. It deals with electronic commerce and refers to agreed on, adopted, or otherwise established procedures to identify the person who sent an electronic message or verify the absence of changes in the content of the message. Electronic commerce is fundamentally 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 benefits of using an attribution procedure only pertain to procedures that are commercially reasonable. In general, a 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" or "signed" in this article. It incorporates and expands on the traditional idea and general effect of a signature. As in that definition, adoption or execution of a symbol or the taking of an action is an authentication only if accompanied by an objective manifestation of intent with which the party authenticating a record acts. Adoption or execution of electronic or other text or a symbol with intent authenticate a record that would be a signature under prior law is an authentication under Article 2B. This includes use with requisite intent of identifiers such as a PIN number. In addition, the term includes actions and sounds such as encryption of a record, voice identification, and other technologically enabled acts used to achieve the legal effects associated with a traditional signature.

The definition spells out three effects of an authentication; this enumerates the effects given to signatures under prior law. No change in law is intended. Which effect is intended must be determined, as it is under prior law, by the context and the objective indicia of intent associated with that context. Unless the circumstances indicate a different intent, authentication contemplates all three of the effects listed.

The definition is technologically neutral. "Digital signatures", recognized in some states and which rely on a specified encryption technology and a certification system, qualify as authentication for Article 2B. The Article 2B concept is broader however. It recognizes that technology and commercial practice will evolve. There is no effort to set a minimum standard of sufficiency for an authentication, rather unreliable procedures that purportedly authenticate a record are subject to evidentiary scrutiny as to whether they were used with the requisite intent, whether they were the act of the purported party, and other issues.

4. "Automated transaction." This term is new. It refers to relationships formed and made effective as a contract 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 adopt a fiction and attribute intent to these automated activities, this Article directly recognizes that operations of automated systems can create binding legal obligations for those who use them for that purpose.

5. "Cancellation" is from existing Article 2-106. The effect of cancellation is stated in 2B-702.

6. "Computer program." This term is new and parallels the definition in the federal Copyright Act. 17 U.S.C. § 101. 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 functional operations (program) or communicated content (informational content). The distinction is like the made in copyright law between a computer program as a "literary work" (code) and the program interface or other output as an "audiovisual work" (images, sounds). In copyright, the distinction relates to what reference points are used in determining whether a copyrighted work was created or infringed. In Article 2B, the distinction relates to contract law issues relevant in determining liability risk and performance obligations.

7. "Consequential damages" corresponds to existing Article 2. Consequential damages do not include "direct" or "incidental" damages. Consequential loss deals with loss of benefits anticipated as a result of having received and being able to exploit the contracted performance. Consequential 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, in order for the injured party to recover compensation for losses resulting from its special circumstances, the party in breach must have had actual 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.

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

The definition does not specifically refer to mitigation, but that concept applies under Section 2B-707(c). No change in law is intended by deletion of the reference "cover" from the Article 2 definition.

The definition continues current law as to recovery of damages for personal injury that "proximately" resulted from the breach.

8. "Conspicuous." This definition follows existing Article 2, but adds new concepts for electronic commerce. The basic standard is that a term is conspicuous if it is so positioned or presented that the attention of a reasonable person can be expected to be called to it. Under this general standard, in the case of an individual, the concept could include properly presented verbal or automated voice communications. Whether a term is conspicuous is determined by the court. Section 2B-106.

Many transactions are automated using electronic agents. Electronic agents do not "notice" text or images in the sense in which this idea is ordinarily used; they respond operationally to in-put. Conspicuous there requires presentation in a form capable of invoking a response from a "reasonably configured" electronic agent.

Both current UCC § 1-201(10) and this Article list illustrations of conspicuous terms The list plays 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). The illustrations establish safe harbors intended to reduce uncertainty and litigation. Absent exceptional circumstances, a term that conforms to a safe harbor is conspicuous. The illustrations, however, are not exclusive. In cases outside the illustrative safe harbors, a court should apply the general standard.

Subsection (A)(iii) deals with hyperlink 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 the display is transferred to a different file or location wherein the relevant 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 itself. The access must be from the screen or display and not through other actions such as a telephone call or physically going to another location. When the term is accessed, it must be in a form that can be readily reviewed.

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

9. "Consumer." This definition adapts the Article 9 definition of "consumer goods." A "consumer" is a person who obtains information for personal, household, or family purposes. Whether a party is a consumer is determined at the time of contracting.

In many transactions, "personal" uses are not consumer uses (e.g., a stock broker using software to personally monitor client investments). Thus, the definition distinguishes profit making, professional or business use, from non-business personal or family use. It includes, as consumer use, ordinary asset management for a family.

This resolves an issue faced in many areas of law where distinguishing between consumer and non-consumer "personal" use is difficult. It adopts the general view that a transaction aimed at providing information for profit-making or income product by the transferee is not a consumer transaction, unless related to ordinary family asset management. The profit-making standard has been applied by courts in many settings. See, e.g., Thomas v. Sundance Properties, 726 F.2d 1417 (9^th Cir. 1984); In re Manning, 126 B.R. 984 (M. D. Tenn. 1991). In re Booth, 858 F.2d 1051 (5^th Cir. 1988) (The "profit-making" test has been applied in bankruptcy cases. The Fifth Circuit commented that "[The] test for ... whether a debt should be classified ... a debt [is] acquired for personal, family or household purposes is whether it was incurred with an eye toward profit."); In re Circle Five, Inc., 75 B.R. 686 (Bankr. D. Idaho 1987) ("Debt used to produce income is not consumer debt primarily for a personal, family or household purposes."). The Truth in Lending Act uses a definition much like Article 9 but expressly exempts business transactions.

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

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

12. "Copy." The definition corresponds to copyright law. It does not deal with whether under that law a brief reproduction in computer memory is an infringement. Compare MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993), with Lewis Galoob Toys, Inc. v. Nintendo of America, 964 F.2d 965 (9th Cir. 1992). In Article 2B, the term relates to performance questions associated with contractual events such as delivery, tender, and enabling use. For these purposes, the copy can be temporary or permanent.

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

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

15. "Direct damages." Direct damages are losses associated with the value of the contracted for performance itself as contrasted to loss of an expected benefit from intended use of the performance or its results. Direct damages are measured by the formulae in Section 2B-708 and 2B-709. They are capped by either the contracted for price or the market value of the performance, as appropriate. The definition rejects cases that treat as direct damages losses that relate to anticipated advantages from the use of the information. These are consequential damages. Thus, if software is purchased for $1,000 and, if perfect, would yield profits of $10,000, but it is totally defective, "direct" damages are $1,000. The $9,000 lost profits are consequential damages if recoverable at all.

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

17. "Electronic agent." This includes a computer program used for the stated purposes, but is not limited to software technology. The definition and its use in this Article recognize that many aspects of commerce are automated and that automation is expanding. In an automated system, an individual does not deal with another individual, but one or both parties are represented by automated systems. As indicated in Section 2B---- and elsewhere in this Article, the relationship between the person and the automated system here is not fully equivalent to common law agency, but takes into account that the "agent" is not a human actor, but an automated system.

To constitute an electronic agent, the automated system must have been selected, used or programmed for that purpose.

18. "Electronic Message." A message is distinguished from a "record" by the fact that it is to be communicated to another. In many systems, communication to another person does not require that the message be transmitted to a new location; the recipient and the person creating the message may share a common E-mail system or other resource and the message can be "stored" for purposes of communicating to another.

19. "Financier." This definition includes secured parties and lessors. This Article does not deal with financing informational property rights. That is governed by Article 9 and federal or other state law. The financing here involve contractual rights.

20. "Good Faith." The definition expands the duty of good faith to encompass fair dealing and to relate to consumers. It follows current Article 3.

21. "Incidental damages." Incidental damages include costs of seeking or arranging cover or other mitigation, but do not extend to the actual expenditure for the mitigation itself. Thus, if a licensee must obtain a different computer program because of a breach, 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 definition establishes a broad construction of information. The term, "work of authorship" comes from the Copyright Act. It includes literary works, computer programs, motion pictures, compilations, collected works, audiovisual works and the like. It also includes "data", that is factual information. In this Article, information is the broad term; in appropriate situations more specific reference is made to particular types of information, such as computer programs and informational content.

23. "Informational content." This term refers to information whose ordinary use entails communicating the information to a human being. This is the information people read, see, hear and otherwise experience. For example, an electronic database of images includes the images and a program enabling display or access to the images. The functional aspects of the program are not informational content. The images are informational content. Similarly, the Westlaw search program used to obtain a case is not informational content, but the recovered text is.

24. "Information processing system." This definition corresponds to the UNCITRAL Model Law on Electronic Commerce. It includes computers, but also other forms of information processing systems.

25. "Informational rights." This term includes, but is not limited to "intellectual property" rights. It refers to any law that gives a person a right to control another's use of information independent of contract. This Article does not create property rights; the definition references other law to determine when rights exist. The rights need not be comprehensive or exclusive as to all other persons. The term includes the areas of law in which new forms of property are being created, but does not include the right to sue for defamation.

26. "License." A license is a limited or conditional transfer of information or rights in information. The contractual limitations must be express. A license does not exist merely because intellectual property law withholds rights from the transferee. The term does not include a sale of a copy of a book since there is no express contractual restriction on use of the information. In such sales, the buyer receives ownership of the copy, but copyright (or patent) law may place restrictions on use. Restrictions flowing solely from retained ownership of information rights do not create a license.

On the other hand, whether a license exists does not depend on whether or not there has been a transfer of 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. Licenses pertain to rights or restrictions on use of information. The tangible copy is the conduit, not the focus.

IF ownership of a copy transfers, a "copyright notice" which merely tracks the privileges and restrictions associated with a first sale under copyright law does not transform the sale into a license. However, an contract is a license if it grants greater privileges than in a first sale, restricts what use privileges might otherwise apply, or deals with issues that are not explicit results of a first sale. Whether terms are enforceable is determined under this Article and otherwise applicable federal and state law.

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." These definitions are new.

"Mass market" expands consumer protections into a marketplace of transactions even if a particular transaction does not involve a consumer. The definition must be applied in light of its intended function. That function is to identify relatively small dollar value, routine and anonymous transactions that occur in a retail market available to and used by the general public. The term includes all consumer transactions and some transactions involving business licensees. It does not include ordinary commercial transactions in marketplaces characterized primarily by transactions between businesses using ordinary commercial methods of ordering and transferring commercial information.

A mass market is a retail market where information is made available in pre-packaged form under generally similar terms to the general public and in which the general public is a frequent participant. The concept applies only to information aimed at the general public as a whole, including consumers. It does not include products directed at a limited subgroup of the general public or restricted to members of an organization or to persons with a separate relationship to the information provider. In determining the size or scope of a subgroup that qualifies as a distribution directed to the general public courts should make choices based on the purpose of the definition which is to not make artificial distinctions among business and consumer purchasers in an ordinary retail market. The transactions covered are purchases in a true mass market and do not include specialty software, information for specially targeted limited audiences, commercial software distributed in non-retail transactions, or professional use software. The transactions refer to materials routinely acquired by consumers or materials that appeal and intend to appeal to a general public audience as a whole including consumers.

The prototypical retail market is a department store, grocery store, gas station, shopping center, or the like. These locations are open to, and in fact attract, the general public as a whole. They are also characterized by the fact that, while the retail merchants may make transactions with other businesses, the predominant transaction type involves consumers. Also, in a retail market, the majority of the transactions 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 applicable price.

The transaction must be with an end user. An end user is a licensee 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 sublicensing the information or rights to third parties, or in commercial public performances or displays of the information, or in otherwise making the information available commercially to third parties.

The definition contains several exclusions where the person acquiring the information is a commercial entity. A transaction for redistribution or for public display or performance of a copyrighted work is never a mass market transaction because it involves no attributes of a retail market. Similarly, a bifurcated treatment of access (Internet) transactions occurs. While consumer transactions on Internet are mass market transactions, the term does not include online transactions not involving a consumer. In this new transactional environment, it is important to not regulate transactions beyond consumer issues. This gives commerce room to develop while preserving consumer protections. It is consistent with the 1997 White House paper on electronic commerce.

29. "Merchant." This definition comes from Article 2-104. It alters that definition in that it specifically a person that holds itself out as experienced in particular subject matter need not have actually engaged in prior transactions of the type involved to qualify as a merchant.

As indicated in comments to Article 2, the definition applies differently depending on the context. 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-307, 2B-401 and 2B-403, however, require a more focused expertise in the particular type of information involved.

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

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

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

32a. "Reason to know." This definition is new. While Article 1 defines notice and knowledge, it does not define reason to know. The definition is consistent with the usage of the term, which refers to knowledge and inferences from information actually known to the person. No constructive knowledge, notice, or duty to investigate exists under this concept.

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

34. "Record." This definition adopts modern U.C.C. usage. It broadens the traditional reference to "writing" and incorporates electronic records. It 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.

35. "Refund." A refund consists of a reimbursement of fees paid on return of all copies of the information. Whether or when a right to a refund exists depends on the contract and this Article. Refund is not a remedy for breach or a right of rescission. It is a right that arises when a party refuses a proffered license and has previously committed to, or paid, the contract fee. Making a refund available in such cases is essential to allow the party a true opportunity to accept or reject that license. See Sections 2B-111 and 2B-112. The right to refund there expires if the party agrees to the license, including by manifesting assent to it. 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.

Refund must be sought within a reasonable time. If a party fails to seek refund within a reasonable time of the opportunity to review, it will not be entitled to refund under this Article, but expiration of a refund right does not result in assent to the license. Affirmative agreement or assent is still required. What constitutes a reasonable time depends on the facts and the contract.

The definition deals with the difficult problem of administering a refund right in "bundled" products, that is products that include separate items of information transferred as a whole for a single fee. If the products are subject to separate licenses, a refund in such situations consists of the entire bundled product in return for the entire price. Otherwise, a refund consists of price contractually attributable to the particular, returned product. 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 that is based on the fact of bundling multiple products.

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

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

38. "Software contract" includes licenses of software and sales of copies of software. It also covers all forms of software development contracts, whether or not they formally fall within the Copyright Act definition of a "work for hire." Of course, however, the Article generally excludes employment contracts and, thus, does not extend to the contractual arrangement under which an employee of a firm develops software for the employer within the scope of the employee's job.

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

40. "Standard form." The definition refers to forms, not standard terms. See Restatement (Second) of Contracts 211 (referring to but not defining standard forms). A form consists of a group of terms prepared for frequent use. Standard forms in modern commerce are not only widespread, but virtually 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. If a standard form is offered but then heavily negotiated or changed, the resulting contract is not a standard form contract.

41. "Terminate." This definition conforms to Article 2-106.

1. General Premise. This article deals with licenses and software contracts in the copyright and information industries. It does not cover sales of books, newspapers, or magazines, or personal or entertainment services contracts. The Article focuses on software and multi-media contracts, access contracts involving on-line and Internet transactions, and licenses of data, text, images, and related information.

The scope of the Article is defined by this Section and the exclusions in Section 2B-104. Because of rapidly converging information technology and commercial practice, the scope reflects a broad focus counterbalanced by exclusions in Section 2B-104. This parallels the approach in Article 9. See Section 9-104 (13 exclusions).

The covered transactions involve information and rights to use the information. However, this is a contract statute. It does not alter any law creating or limiting intellectual property rights or privileges in information.

2. Basic Scope. Subsection (a) states the basic scope of Article 2B. That scope is subject to the limitations in Section 2B-104. Subsection (b) deals with mixed transactions and the parties' right to opt in to Article 2B. Subsection (c) confirms an opt-in rule for excluded transactions.

a. Software Contracts. A "software contract" is a (1) license of software, (2) a sale of a copy of software, or (3) a contract to develop software. Except for some software contained in another product, all software contracts are included.

b. Access Contracts. Article 2B covers access contracts. This includes Internet and on-line services. Thus, a contract with Westlaw is within this Article, as are the various specific access events that occur pursuant to the contract. Also included are cases where information is available for a fee at a Website and obtained by contractual access to the information electronically. Of course, since this is a contract statute, it does not cover situations where information is simply made available and no contract exists. Also, except where the material accessed is within this article (i.e., software or included information licenses), the article applies to the access contract, but other law applies, for example, to the terms for sale of goods purchased through the access.

c. Licenses. Article 2B applies to licenses. A "license" is a contract for conditional rights, privileges, or permissions to use information, an information processing resource, or an informational property right. A license exists only if the contract expressly conditions the rights or permissions conveyed or expressly grants less than all rights in the information. Section 2B-102. Except for computer software, this Article thus does not deal with unrestricted sales of copies of information even though sales of copies are subject to restrictions under copyright or patent law.

3. Transactions Covered / Transactions Excluded. Because of the convergence of information technologies and diverse modern commercial uses of information, the scope of this Article inevitably involves some areas of uncertainty. This has also been true with respect to Article 2 where the scope ("transactions in goods") has generated extensive litigation. The following discussion draws on both this Section and Section 2B-104 to outline some areas of coverage and some areas of exclusion.

a. Computer Programs. This Article applies to computer software transactions, whether the software is sold or licensed. This includes both software provided as a separate product (e.g., word processing software acquired in the mass market or specially developed for a licensee) as well as software provided as part of a multi-faceted product. Most software contracts do not occur in the mass market. The Article covers those transactions and also information licensed to be included in software (e.g., images or text for digital inclusion).

In mixed transactions, in determining what contract law applies, Article 2B adopts two rules. First, as a general principle, other law (e.g., Article 2 and Article 2A) applies to the goods involved in a transaction. Article 2B applies to the program and the materials that comprise the copy of the program. Section 2B-103(b). This is a gravamen of the action test holding that, in the case of a dispute, a court must determine in reference to which aspect of the mixed deal the issue arise.

Second, where computer programs or chips are embedded in and used to create "intelligent products", Article 2B applies to a program that is part of a computer system or peripheral, but in other products only to the program if giving the purchaser access to the program's capabilities is a "material purpose" of the transaction. Section 2B-104(3)(C). Thus, Article 2B does not apply to the computer program that operates the brakes in a motor vehicle and is sold as part of the automobile. There, the purchaser acquires a vehicle and not the processing power of the program. On the other hand, the transaction in which a vendor develops and provides the brake software to the car manufacturer is an Article 2B transaction. Similarly, while a home air conditioning system has some functions operated by a program, the program is either merely incidental to the overall system or, as an embedded program, is not included because acquiring it was not a primary purpose of the transaction for the purchaser. The transaction is within Article 2. The development or supply contract for the program, however, is an Article 2B transaction.

b. Books, Newspapers, Magazine, Videos and Records. Article 2B does not apply to sales of printed, videos, and records. Except for software, the Article is limited to licenses. Licenses are contracts that expressly regulate use of acquired information.

Information similar to printed works, however, is frequently made available via Internet and other on-line systems. While Article 2B does not apply to broadcast information, it does cover on-line access contracts where the information is made available at a time and place of the licensee's choosing. Contracts for access to electronic newspapers and texts are within Article 2B.

Technology enables interactive or multimedia products such as, for example, a digital encyclopedia or a baseball dictionary that shows text, images and gives access to online updates of performance. These are software products in which software-created capabilities and information central to the product; they are within Article 2B.

c. Patent and Trademark Licenses. This Article does not apply to most patent or trademark licenses not associated with an access contract or a software contract. See Section 2B-104(2). Thus, a license of a biotechnology patent and associated know how, or a license of a trademark as part of a franchise agreement for a popular food store are not within Article 2B. In the case of the patent, the basic judgment is that the areas of general patent licensing do not involve the same commercial law concerns that are central to transactions covered in Article 2B. In fact, many pure patent licenses are primarily intended to settle or avoid litigation. In reference to trademarks, licenses often fall under state and federal franchise laws and are covered by principles unrelated to the commercial issues treated here.

Access and software contracts, however, also involve trademarks or patents. These are included in Article 2B. Thus, a license of a software operating system includes not only a copyright license, but also a right to practice the various technologies covered by a patent held by the software provider. The entire license is within Article 2B.

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

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

While the access contracts are covered, the subject matter of the contract may not be within Article 2B. For example, if a customer purchases a television set under an access contract, the access contract is within Article 2B, but the purchase is an Article 2 transaction. Similarly, in the use of an access contract to order a transfer of cash to pay a utility bill, the access conduit is in Article 2B, but the excluded cash transfer is not.

5. Formation Rules. Subsection (b)(3) addresses an effect created by Article 2B contract formation rules and the fact that Article 2B validates electronic commerce practices that may not be effective under common law or under current Article 2 or 2A. The subsection applies Article 2B formation rules to the entire transaction if Article 2B subject matter constitutes the predominant purpose of the transaction itself. This allows maximum scope to the contract formation rules and electronic commerce.

6. Opt-In Rules. Subsection (c) allows the parties to elect full coverage under either Article 2B or other applicable law. This states a rule that would most likely be applicable in any event under general contract law principles. The rule here, however, cannot be used to alter mandatory consumer rules or to take a transaction that does not involve subject matter included in this article and is under Article 2 or 2A into this Article.

1. General Approach. This Section states various exclusions from Article 2B. The approach of a broad scope with specific exclusions follows the approach of Article 9.

Even with a broad scope, of course, since most provisions can be altered by agreement and defer to customs of trade, course of dealing, or formal contracts define the relationship, Article 2B will have little impact on established commercial practice.

2. Licenses that are Incidents of Excluded Subject Matter. This Article does not apply if the information is a mere incident of an excluded subject matter contract. Thus, a services contract to provide legal advice to a client may result in the delivery of a memorandum or other document containing information whose use may be restricted by contract. The information does not fall within this Article; the services are not within the Article and the information is a mere incident of that services relationship. Of course, if services providers engage in broader activities, Article 2B applies. Similarly, services of an independent contractor hired to develop software, are in Article 2B.

The exclusion may work differently at different stages of distribution. Thus, an courier company that acquires a license for communications software is engaged in an Article 2B transaction. When the courier provides the software to customers as merely a means to access data on the location of packages, that is a mere incident of the excluded services as to the courier. As to the publisher, however, if there is a publisher's license with the end user, that relationship is in Article 2B. If the software also enables access to other information resources, the software is not a mere incident to the courier services.

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

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

The exclusion does not apply if the program is in goods that are merely a copy of the program (e.g., a diskette) or in a computer (e.g., embedded operating system software). Article 2B does not apply to cars, toasters, washing machines and other traditional goods. On the other hand, Article 2B does apply to copies of programs in a computer system or a computer peripheral such as a printer, scanner, or modem. Even then, Article 2B does not apply to the product, but merely to the program.

The term "computer" refers to a machine or system that has the capability of performing arithmetic, logical or processing functions on data. Clearly, the scope of the term will change as modern products become increasingly "intelligent" (i.e. reliant on information manipulation capabilities).

The issue centers on the relative coverage of this Article and Article 2 or 2A. In discussing this, however, it is important to recognize that, in the mass market, where the issues will be most significant, Article 2B principles are generally consistent with existing Article 2 and Article 2A. Often, which law applies does not alter the substantive standards.

Sub-part (C) sets out a that a court should use as to embedded computer programs within the inevitable gray areas. It applies Article 2B to the software if a primary purpose of the transaction is to provide access to the functional attributes of the program. Thus, while a television set in modern practice is increasingly driven by computer programs, it remains a television set whose purpose is to provide television program reception unless or until the system evolves into something more or different in which a primary purpose is to offer software processing capability. On the other hand, separately licensed software in a digital camera that allows the camera to be linked to a computer so that images can be transferred back and forth and manipulated is within Article 2B.

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

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

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

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

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

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

"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.

1. General Principle. Article 2B deals solely with contract law, not intellectual property, competition, or trade regulation law. Subsections (a), (b) and (c) clarify that the Article does not displace or alter the relationship between these laws and contract law. Subsection (d) states a similar principle for consumer protection law subject to the limited electronic commerce rules contained in subsection (e).

With the transition from print to digital media, many different and potentially valuable (for users, authors, and publishers) new uses of information and informational rights have emerged and created policy and economic disputes. The difficulty of balancing fundamental rights in this new context is demonstrated by the complexity of the disputes and the fact that many remain unresolved in the U.S. and internationally. These broad policy questions are beyond the scope of contract law and this Article. As urged by a near unanimous "sense of the house" vote at the NCCUSL 1997 Annual Meeting, the approach of Article 2B has been to correspond state law to clear rules of federal law and to take no position on controversial rules whose application cannot be predicted but must await determination as a general federal policy question.

2. Federal Law: Preemption. Subsection (a) states a rule that applies to all state law. If federal law invalidates a state contract law or contract term in a particular setting, federal law rule controls. 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. These are also recognized in subsection (b) which has been proposed for discussion. Defining federal policy or when federal law controls is generally not an issue of state law. State laws, including the UCC, cannot alter or create federal law.

There are many sources of federal preemption. Some stem from intellectual property law. Section 301 of the Copyright Act preempts any state law that creates rights equivalent to copyright. That rule will seldom apply to contracts since a contract deals with the relationship between parties to an agreement, while property law in the Copyright Act deals with interests good against persons with whom the property owner has not dealt. Contracts control many aspects of the commercial distribution of information. This contract law regime pre-existed Article 2B. While, federal copyright law precludes state law that creates rights equivalent to the property rights created under copyright, both as a practical and conceptual matter, copyright does not generally preclude or preempt contract law. Indeed, contracts are essential to use of property whether tangible or intangible.

However, some terms of the copyright or patent act and some established lines of judicial authority that announce specific policies pursuant to those acts, specific federal rules may invalidate conflicting contract law rules. See, e.g., Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996) (transferability of a patent license); Harris v. Emus Records Corp., 734 F.2d 1329 (9th Cir. 1984) (copyright license); Rano v. Sipa Press, Inc., 987 F2d 580 (9th Cir. 1993) (copyright preempts state law on licenses terminable at will). In some cases, preemption may arise under the federal constitutional Supremacy Clause.

Of course, beyond intellectual property law, many other contracts or terms are subject to preemptive federal regulation. See, e.g., Regulation E, the Electronic Communications Privacy Act, the Communications Act of 1996, the Freedom of Information Act, the Food and Drug Administration Act. An enumeration of these would be impossible and ever-changing.

3. Public Policy Invalidation. Contract terms may be unenforceable because of preemption or because the term is unconscionable. In addition, subsection (b) acknowledges the general legal principle that, in certain circumstances, terms enforceable under contract law may be unenforceable because they are invalid under a fundamental public policy that clearly over-rides the fundamental policies that support freedom of contract and enforcing the agreements of parties. The principle in subsection is recognized in common law and the Restatement (Second) of Contracts ? 178. It is a supplementary legal principle incorporated under Section 1-103 and applies to all contract law and all articles of this Code. The principle is mentioned here because the scope of this article and the importance of free expression and competition policy issues regarding information make it important to reiterate basic principles.

The most common source of a fundamental policy invalidating a contract term is legislation that provides that a particular term is unenforceable. In the absence of such legislation specifically invalidating a term, the asserted fundamental policy must be clearly over-riding as compared to the fundamental policies supporting freedom of contract. The strength of any public policy when balanced against the fundamental policies that support contract enforcement may be gauged by a variety of factors, including the strength and consistency of judicial decisions defining and enforcing the policy in similar contexts, the existence of express legislative or similar statements of the policy, the extent to which the policy is recognized nationally, and the likelihood that enforcement will in fact further that policy. In all cases, however, the decision requires a balancing of the general public policy against the public policy to enforce justifiable contract expectations and the need to avoid the forfeiture that may result if a contract term is invalidated. In light of the international character of the information industries and the interests of uniformity embodied in the UCC, courts should be reluctant to rely on purely local policies to invalidate contract terms in the absence of a clear expression of such policy in a local statute.

Public policy, of course, stems from various sources. Among the sources that might be applicable to transactions within this article are policies about innovation, competition, and free expression policy. In practice, enforcing private contracts is most often consistent with the fundamentals of these areas of policy. Contract law, freedom of expression, competition and innovation policy are not only consistent, they are most often mutually supportive. Thus, a wide variety of contract terms relating to the use of information present no significant issue under public policy invalidation doctrine. For example, contract restrictions on libelous or obscene language in an on-line chat room promote interests in free expression and association. In some cases, however, a conflict exists and fundamental public policy other than the policy freedom of contract enforcement may over-ride and control.

Fundamental public policy recognizes the general ability of third parties to use information owned by others for such purposes as comment, criticism and news reporting, but it also recognizes the right of an information owner to place limitations on use and that there are many instances in which such limitations enhance innovation, dissemination of information, and competition. For example, trade secret law allows information to be transferred subject to contractual limitations on disclosure. This facilitates the exploitation and commercial application of new technology. Information policy thus seeks a balance between two competing interests: the interest of creating sufficient incentives for innovation by permitting owners to reap the returns from their innovative activities and the public interest in preserving and expanding information in the public domain in order to provide the store of knowledge on which innovation depends. Striking this 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. The rule recognized in subsection (b) permits courts in appropriate cases to over-ride contract terms where compelling fundamental public policy should prevail to preserve this balance, while continuing to recognize the fundamental policies that support contract and commercial markets as recognized in the [Uniform Commercial Code] and common law.

A term or contract that results from an informed private 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). On the other hand, this Article 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.

However, even in mass market transactions, limitations in a license for software or other information 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 would in most circumstances be enforceable. 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 public library licensee from making an archival copy would ordinarily be invalid in the absence of a showing of significant commercial need. Although it deals with a statutorily created right and not a contract, the Court's discussion in Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 109 S.Ct. 971, 103 L.Ed.2d 118 (1989) indicates some of the intellectual property policy issues that might be considered. The court's discussion in Consumers Union v. General Signal Corp., 724 F.2d 1044 (1983) also indicates some of the First Amendment concerns to considered with respect to such published material. The fundamental policy lies in encouraging and sustaining discussion and appropriate use of information placed in public contexts and is reflected in property law concepts of fair use and fundamental ideas of free expression. However, it is quite clear that the federal policy on dissemination of information co-exists with the ability of parties to make confidential disclosures and deal with information that is to be kept secret.

In balancing freedom of contract against other strong fundamental policies expressed in statutes, the court should take into account this Article and the [Uniform Commercial Code] express public policy regarding general contract law themes such as formation of contracts, creation and disclaimer of warranties, measurement and limitation of damages, basic contractual obligations, contractual background rules, the effect of contractual choice, risk of loss, priority of rights, and the like. While these policies may be over-ridden by statutes, it is inappropriate for a court to reverse or revise the statutory decisions on these issues based merely on its general belief about what should be appropriate policy on general contract law issues.

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 may 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. One debate deals with when a party may reverse engineer a product to discover and use technology for competitive purposes. U.S. law holds that the buyer of a product sold on an unrestricted basis in an open market may disassemble it to obtain insights into the operations of the product and its technology. Even in mass markets, however, the public policy balance is less clear when reverse engineering involves acts that may infringe exclusive property rights of the information rights owner with respect to digital products. Reverse engineering to examine software code may require reproducing (copying) the code to examine it; this may violate the copyright owner's exclusive right to make copies of its work, an issue that does not arise in reverse engineering ordinary goods. Several cases, not involving license restrictions, hold that making intermediate copies of copyrighted technology for "reverse engineering" and understanding technology constitutes fair use in some circumstances associated with, among other things, the need for the information to achieve interoperability and the extent of the copying involved. See Sega Enterprises Ltd. v. Accolade, Inc., 977 F2d 1510 (9th Cir. 1992); Atari Games Corp. v. Nintendo of Am., Inc., 975 F2d 832 (Fed. Cir. 1992). The scope of fair use here is not clear and it is also unclear how a contract term alters the analysis. Doctrines other than fair use may also apply. For example, an anti- reverse-engineering clause that in effect attempts to monopolize a different product market may constitute copyright misuse under U.S. law in some cases. The issue has international dimensions. A European Union Directive provides that reverse engineering is not copyright infringement and cannot be barred by contract if it is necessary in order to obtain information to make interoperable products and that information is not otherwise available. Directive 91/250 on Legal Protection of Computer Programs, OJ 1991 L122/42 (May 14, 1991). Proposed legislation is pending in Congress that may establish by statute a limited right to reverse engineer. Article 2B does not address or alter this area of public policy which is properly left for resolution in other venues.

4. State Law: Unfair Competition and Trade Secrecy. Subsection (c) also restates a principle in Section 1-103 that this Article is supplemented by state law. 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. Beside 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.

5. State Law: Consumer Law. Article 2B does not generally alter state consumer protection statutes in effect on the effective date of enactment of Article 2B. This rule recognizes the role of independent and potentially divergent state consumer protection statutes as a complement to the UCC. Consistent with the stated purpose of the UCC, Article 2B deals with general contract law and commercial contract law principles. It does not promulgate a consumer protection code, although it does contain certain innovative 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 that provide additional consumer protections include: 2B-107 (choice of law); 2B-118 (electronic error); 2B-208 (limit on mass market license; right to refund); 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) is an electronic commerce provision of great significance for Internet and similar transactions. The principle is that Article 2B overrides contrary state law requiring a "writing", a "signature" or a "conspicuous" term to the extent that it provides electronic commerce rules on issues such as authentication and the like. This premise, of course, operates only within the scope of this Article. The rule is necessary to enable the modernization and uniformity themes developed in this Article.

There are thousands of relevant statutes. For transactions governed by Article 2B, the rules of this Article ordinarily supplant the other law as to contractual issues in full and the express preemption stated in this section is not necessary. That is not true for consumer transactions. In the consumer area, the four stated themes reflect a limited approach that balances the modernization theme and the desire not to alter existing protection. The limited approach adopted here contrasts to non-uniform digital signature statutes enacted in several states which replace or amend all signature and writing requirements, including consumer statutes.

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

A number of states have adopted electronic or digital signature statutes. Digital signature statutes that predate Article 2B are not repealed or affected by Article 2B. In many cases, these statutes provide for broader preemptive effect than is contemplated in this Section. On other points, most often, no conflict exists. The statutes create a procedure consistent with and parallel the more general Article 2B themes.

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, e.g., Raymond Nimmer, Information Law ¶ 9.04 (1997).

The fact that most state law and enforcement concerning viruses falls under criminal law correctly suggests that most virus risks result from acts of third parties not in a contractual relationship with the victim. Acts that cause loss through the creation or distribution of a computer virus might also give rise to liability in tort in appropriate cases under concepts of trespass or negligence. While few civil actions have been brought, the liability of a wrongdoer for actions that harm a third party involve issues other than under contract law.

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

Uniform Law Source: None.

"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.

1. Basic Principle. Article 2B follows the basic commercial law principle of contractual freedom. Contract choices control unless there are tangible over-riding policy considerations that mandate restraints on contract choice, such as in the doctrine that contract terms not be unconscionable. Subsection (b) brings together the sections in this Article where contract choice does not control.

The dominance of "agreement" as altering the effect of provisions of this Article does not require a formal writing or express terms. It may occur as the result of course of dealing, trade use or other circumstances; the "agreement" encompasses the entire bargain of the parties in fact. See Section 1-201.

2. Drafting Style. The dominance of agreement over statutory rules characterizes all U.C.C. transactional articles. It is especially important to state the principle here. Article 2B was drafted without use of the phrase "unless otherwise agreed" and frequently use mandatory language, such as "shall" or "must." This does not change the basic principle that the contract controls. Article 2B provisions can be altered by agreement unless otherwise indicated. This section rejects decisions such as Suburban Trust and Savings Bank v. The University of Delaware, 910 F. Supp. 1009 (D. Del. 1995).

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

4. Issues as a Matter for the Court. Subsection (d) follows current law. Other issues in this Article are also questions for the court and are so indicated in the relevant section or applicable case law or procedural rules.

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

"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-201. "Party": Section 1-201. "Rights": Section 1-201.

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

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

2. Contract Choice: Consumer Contracts. Despite strong reasons for enforcing all contract choices, Article 2B takes the position that the contract cannot override mandatory consumer protections that otherwise apply. A mandatory rule is a rule that, under applicable law, cannot be altered by agreement. Such rules exist in most states, but their content varies widely. The reference to consumer protections includes rules under both the UCC and non-UCC law.

3. Default rule: no contract provision. The second issue in this Section involves choice of law in the absence of contract terms and is covered in subsection (b). The purpose of stating choice of law rules is to enhance certainty against which the parties can bargain if they so choose and a basis for planning transactions with a reasonable understanding of the applicable risk. A leading Treatise comments: "[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. Four or five theories are in vogue among the various states, with many decisions using - openly or covertly - more than one theory." William Richman & William Reynolds, Understanding Conflict of Laws 241 (2d ed. 1992).

Article 2B adopts the modern Restatement (Second) of Conflicts but provides two specific, commercially useful and discernable rules that supersede the general concept.

4. Default rule: Internet Transactions. The most important rule is in subsection (b)(1). It deals with electronic transactional environments and creates a presumptive choice of law based on the location of the licensor. Where an on-line vendor automatically provides direct access to the world through Internet, any other formulation would require the vendor to comply with the law of fifty states and 170 countries since it will often not be clear where the information is being sent.

In this section, the licensor's location refers to its chief executive office, rather than the location of the computer that contains or provides the information. Unlike other choices (such as the licensee's location, the location of the data), this choice provides a single, routinely identifiable background for commerce.

5. Default Rule: Consumer Deliverables. Subsection (b)(2) creates a consumer rule for cases of physical delivery of tangible copies (not involving online contracts). The rule focuses on the location where the copy is received. That location would typically be chosen under any choice of law regime, but this section makes the choice clear. Thus, for example, a consumer acquiring software in Chicago will be subject to the law of Illinois in the absence of contract terms. That rule is consistent with concerns about the "place of performance" and similar considerations under current law. It is also followed in many European consumer protection rules relating to contract choice of law involving sales of goods and services. This rule deals with situations in which the licensor will know where delivery will occur because it delivers a physical copy and is not engaged in an electronic communication. This allows electronic transactions to be governed by a choice of law rule that enables commercial decision-making based on an identifiable body of law and does not impose costs on the transaction by requiring that the electronic vendor determine what physical location corresponds to an electronic location.

The Section, of course, only deals with contract issues. It does not affect tax, copyright, or similar concerns. Compare 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).

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

7. Default Rule: Foreign Jurisdictions. Subsection (c) provides a rule in cases of foreign choices of law where the effect of using the applicable rule would locate the choice in a substantively inappropriate location. This is especially important in context of the global Internet context. The subsection does not address which party has the burden to establish the inadequacy or adequacy of the foreign state's law.

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

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

2. Fairness Limitation. Concerns about fairness and notice may limit enforcement of the clause. This Section adopts the approach to such questions established in Breman and followed in most modern decisions. Breman indicated that the contract term could be rejected if it was "unreasonable and unjust." See Perkins v. CCH Computax, Inc., 106 N.C. App. 210, 415 S.E.2d 755 (1992); Lauro Lines v. Chasser, 490 U.S. 495 (1989); Sterling Forest Assocs., Ltd. v. Barnett-Range Corp., 840 F.2d 249 (4th Cir. 1988).

This section adopts the limiting language that has become the dominant theme in the case law: "unjust and unreasonable." Many courts suggest that choice of forum clauses are presumptively enforceable unless it causes clearly unfair results. The intent in this section is to conform to those cases in reference to what limits on choice of forum are appropriate.

The section precludes clauses that choose an exclusive forum solely for the purpose of preventing a other party from being able to contest disputes that may arise under the transaction. Such choices may be unreasonable and their impact is unjust. On the other hand, clauses that serve valid commercial purposes are not invalidated simply because they adversely effect a party

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

In Internet transactions, choice of forum is ordinarily enforceable. The Supreme Court decision in Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991) has relevance to Internet contracts:

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

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

"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.

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

2. Breach Related to What Remedies Apply. For purposes of remedies for either party, Article 2B distinguishes between immaterial and material breaches. A similar distinction exists in Article 2 and Article 2A except for acceptance or rejection of a single delivery of a product. The concept also corresponds to common law and the Restatement (Second) of Contracts. A similar standard exists in international law. See Convention on the International Sale of Goods (CISG) Art. 25; UNIDROIT Principles of International Commercial Law art. 7.3.1.

If one party fails to conform to the contract, the aggrieved party is entitled to remedies for breach. The aggrieved party's right to cancel the contract and refuse to perform its further obligations, however, hinges on whether the breach was material. For immaterial breaches, the remedy is an action for damages. If the breach is material, the party may cancel. See Section 2B-601; Restatement (Second) of Contracts § 237. Under Article 2B, as in Article 2, an intermediate remedy lies in the right of a party whose expectations of future performance are reasonably impaired by the other's acts or words, to suspend performance and demand adequate assurance of future performance by the other party.

The basic policy is that, while parties are entitled to the contract performance for which they bargained, some breaches are sufficiently immaterial that they do not justify forfeiture of the entire bargain. The concept rests on the common law belief that it is better to preserve a contract despite minor problems and the related belief that allowing one party to cancel for minor defects may cause unwarranted forfeiture and encourage unfair opportunism. For example, a one day delay in payment may or may not be material. A failure to fully meet general, advertised claims of handling 10,000 files may not be material where the licensee's needs never exceed 4,000 if the system handles 9,999 and the contract did not expressly require 10,000 files

Materiality relates to the aggrieved party's perspective and the benefits it expected from full performance of the contract.

4. What constitutes a material breach? A statute cannot define materiality in detail any more than one can define concepts such as negligence, reasonable care, merchantability, or the like. The key lies in defining an appropriate reference point. Subsection (b) emphasizes two elements: contract terms and the extent to which breach causes significant harm to the aggrieved party. These are 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) ("breach ... is material if it is so substantial as to defeat the purpose of the transaction or so severe as to justify the other party's suspension of performance"). The Restatement (Second) of Contracts lists five significant circumstances: 1) the extent to which the injured party will be deprived of the benefit he or she reasonably expected; 2) the extent to which the injured party can be adequately compensated for the benefit of which he will be deprived; 3) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; 4) the likelihood that the party failing to perform or to offer to perform will cure the failure, taking into account all the circumstances, including any reasonable assurances; and 5) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. Restatement (Second) of Contracts § 241 (1981).

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

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

1. Basic Policy. This section adopts the Article 2 doctrine that allows courts to invalidate unconscionable contracts or terms. The basic policy is to prevent oppression and unfair surprise and not to disturb allocation of risks because of superior bargaining power. Extreme imbalance in bargaining power is a factor in some unconscionability analyses where the term objected to reflects an unreasonable and oppressive treatment of the other party without giving that party fair notice of the term. A bargain is not unconscionable, however, merely because the parties to it are unequal in bargaining position, nor even because the inequality results in an allocation of risks to the weaker party.

2. Methods of determination. Determination of whether a clause or a contract is unconscionable must be made in light of the setting, purpose and effect of the contract or term. It is appropriate for a court to consider improprieties in the contracting process when that inquiry is accompanied by consideration of the adverse effects of particular contractual terms. Gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may indicate that the transaction involved elements of deception or unfair surprise. In determining whether a contract term is unconscionable, a court should consider: whether the contract is an adhesion contract, the extent to which the party had an opportunity to review the term, whether the term is inconsistent with ordinary practices for the type of contract, the extent to which the clause serves a valid commercial purpose, whether the term vitiates the dominant purpose of the transaction, and other factors.

3. Bizarre and oppressive terms. Assent to a standard form generally constitutes assent to all of its terms under traditional contract law concepts and this Article. Unconscionability doctrine allows courts to monitor and limit application of that principle in a way that avoids binding the assenting party to unknown terms that are bizarre and unfairly oppressive. A term is bizarre if it is strikingly out of the ordinary or highly eccentric for the type of transaction involved. Such terms, when oppressive, are commonly of a nature that the person proposing the form should know the term would cause an assenting party to refuse the contract if the term were made known to it and that the term was not known by that party. Clauses of this type are clearly outside the expectations of ordinary parties. In an anonymous mass market setting, this standard must be measured in terms of the ordinary, anticipated transferee for the particular type of information and what has actually been called to the other party's attention. The prior discussion and negotiations of the parties establish the framework for the transaction. Terms that are bizarre and oppressive, that eviscerate non-standard terms explicitly agreed to, or that eliminate the dominant purpose of the transaction may support an inference that a failure of the contracting process including a lack of opportunity to learn of the term produced terms which should be corrected under unconscionability doctrine.

4. Electronic commerce. This article confirms the enforceability of automated contracting practices involving "electronic agents." In some cases, however, automation may produce unexpected results because of errors in program, problems in communication, technological "bugs", or other unforeseen circumstances. When this occurs, common law concepts of mistake apply, as do the provisions of Section 2B-118. In addition, unconscionability doctrine may be used to prevent oppressive results caused by the breakdown in the contracting process. While automated transactions are a new setting for this doctrine, the safeguards it supplies are important for this type of commerce.

5. Remedies. 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 clause or group of clauses 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.

6. Decision of the court. Applying standards of unconscionability is a decision to be made by the court. Subsection (2) makes clear that the court may hear evidence on the question, but the commercial evidence is for the court's consideration, not the jury's. Only the agreement which results from the court's action on these matters is submitted to the general trier of facts.

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

"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.

1. Manifestation of assent. The concept of manifesting assent has several roles in contract law. The two primary roles respectively treat manifested assent as one way by which a contractual relationship is accepted by a party and as a standard to determine when a party adopts the terms of a record to define the contractual relationship. Often, of course, the same act both adopts the terms of a record and constitutes agreement to the relationship itself. In addition to these uses of the concept, in some cases, this Article requires manifesting assent to a term to establish the enforceability of the term.

Manifesting assent does not require a signature, any specific type of language or conduct, or any formalities. It can be shown by an authentication, by any conduct including use or other performance with respect to the subject matter, or by words. The breadth of the concept is especially important in modern commerce in which various formats and methods are used to establish contractual relationships, electronically or otherwise.

2. Three analyses. Determining whether a person manifested assent to a record under this article entails three analyses. First, the person must have had knowledge of the record or term or have had an opportunity to review it. Opportunity to review requires that the record be made available in a manner that ought to call it to the attention of a reasonable person. See Section 2B-112. Second, assuming an opportunity to review, the person must authenticate the record or term, orally express assent, or intentionally engage in conduct with reason to know that in the circumstances the conduct indicates assent. Authenticating a record requires executing or adopting a symbol or processing the record with intent that the symbol or processing authenticate the record. See Section 2B-102. Conduct manifests assent if the party intentionally engaged in the conduct and with knowledge or reason to know that the conduct would create an inference of assent. Third, the conduct or authentication must be attributable to the person to be bound. General agency law and Section 2B-116 provide the standards for attribution.

3. Assent by conduct. Analysis of the overall circumstances determines whether the party intended the conduct and whether this occurred in context of knowledge or reason to know that the conduct would be treated as assent to the record or term. The issue does not involve subjective intent or purposes of the assenting party, but whether there was an act that was intentionally engaged in and whether the acting party had reason to know the inference of assent that would be drawn from that act. In making this determination, a court should consider the nature of the conduct, whether the context, including any language on a package, a container or in a record, clearly 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 clearly provided 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, and all other relevant factors.

No particular type of conduct or formality is required. The policy underlying this concept 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 (d) makes clear that if the assenting party has an opportunity to reconfirm or deny assent before proceeding to further use the information establishes the conduct establishes assent. In many cases, of course, a single indication of assent by an electronic or another 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 clear relationship to assent to a contract or a record would fail under the general standard of "reason to know." Similarly, acts that occur in context of a mutual reservation of the right to defer agreement do not establish assent to a contract that neither party intended.

4. Objective standard. Manifesting assent requires that, from all the facts known to it, a reasonable person should know that particular conduct will indicate that the actor assents to the record. Actions indicating assent are effective even though the actor subjectively intends otherwise. This section follows traditional contract law theory of "objective" manifestation of assent. This is especially important in electronic commerce where many transactions do not involve direct contacts between individuals. Information providers and licensees must rely on actions as 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.

5. Electronic Agents. Article 2B recognizes the enforceability of assent through automated systems ("electronic agents"). In electronic commerce, there is a widespread and rapidly increasing use of such computer programs (often described as "bots" or "intelligent agents") programmed to search (on behalf of a potential purchaser) or make available (on behalf of a potential licensor) particular types of information under set contractual terms and alternatives. The licensee, the licensor, or both may use electronic agents. The potential for reduced transaction costs and the benefits in enabling international comparative shopping are immense for consumers and for providers of information. With electronic agents, assent cannot require knowledge or reason to know. The inquiry is whether the circumstances clearly indicate that the operations of the automated system indicate assent. Safeguards are placed through unconscionability doctrine and Section 2B-204 indicating that an electronic agent can only assent to terms to which it can react.

6. 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 traditional recognition of other methods of agreement in general law. For example, a product description can become part of an agreement without manifestation of assent to a record repeating the description; the product description defines the bargain itself. Thus, a party that markets a database of intellectual property attorneys can rely on the fact that the product need only contain intellectual property attorneys because this is the basic bargain; the provider is not required to obtain manifest assent to a record restating that element of the deal. The nature of the product defines the bargain if the party knew of it in making a purchase, the terms became part of the basis of the bargain, or if other methods are used to call attention to the term and the party accepts it. If a copyrighted software product is clearly identified on the package or in representations to the licensee as being for consumer use only, the terms are effective if part of the agreement without requiring pro forma language in a record restating the description or conduct assenting to that record.

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

7. Authority to Act. The person manifesting assent must be one that can bind the party being charged with the benefits or restrictions of the agreement or the record. If a party proposing a record desires to bind the other party, it must establish that the person who acted had authority to do so or, at least, that the entity allegedly represented accepted the benefits of the contract or otherwise ratified the actions of the individual. Concept of apparent authority may apply. Of course, 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 will often infringe a copyright.

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

Questions of this sort 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 indicates deals with when, in an electronic environment, a party is bound to records purporting to have come from that party. This Article, however, does not generally address questions of agency law. See § 1-103.

8. 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 needed, requires acts that relate to that particular term. One act, however, may assent to both the record and the term if the circumstances, including the language of the record, clearly so indicate to the party doing the act.

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

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

2. Refund. The opportunity to review can come at or after payment. If it follows payment, there is no opportunity to review for purposes of this Article unless the party can return the product an receive a refund if it declines the terms of the record. This refund right does not exist in current law. See Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585 (1991); Hill v. Gateway 2000, Inc., 1997 WL 2809 (7^th Cir. 1997). It creates important protection for the licensee.

This Article conditions the adoption of terms between the licensor and the licensee on the existence of that opportunity in some cases. Failure to provide a refund is not a breach of contract, but results in failure of the terms to become part of the bargain.

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

4. First User. The refund exists only for the first user. In general, subsequent parties are bound by the first contract in the sense that they are not authorized to exceed the limitations of the first agreement.

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

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

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

1. Purpose and Effect of a Commercially Reasonable Attribution Procedure. A commercially reasonable attribution procedure that is followed gives enhanced legal recognition to a message or performance. Conforming to a commercially reasonable attribution procedure set out for that purpose results in an authentication as a matter of law. If the issue is who sent the message or performance, compliance with a commercially reasonable attribution procedure to identify a party makes the alleged originator of the message attributable (presumptively) for the message or performance. On the other hand, failure to use a commercially reasonable authentication procedure does not indicate that no authentication occurred or that the purported sender is not responsible for the message or performance.

2. Agreement or Adoption. This Article does not dictate what constitutes a commercially reasonable procedure. Evolving technology and commercial practice make it impractical to predict future developments and unwise to preclude these developments by a narrow statutory mandate. Instead, the Article relies on the parties to select a procedure. An attribution procedure must be established by agreement or adopted by both parties. A procedure of which one party is not aware, does not qualify. On the other hand, parties dealing for the first time may adopt a procedure for authentication of messages.

3. Commercially Reasonable. The requirement of reasonableness buffers against over-reaching and protects parties who lack knowledge of technology. What is a commercially reasonable procedure must take into account the cost relative to value of transactions. How one gauges commercial reasonableness depends on a variety of factors, including the agreement, the then current technology, the types of transactions affected by the procedure and other variables.

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

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

b. Transactions Not Affected. This article deals with licensing and related transactions. The losses allocated here are limited to such transactions. The Section does not apply to credit card, funds transfer or other transactions in which attribution procedures are used, but which are outside Article 2B.

c. Relationship to Reasonable Procedures. The loss allocation rule in this Section is subject to the rules in Section 2B-116 and 2B-117. Those sections establish presumptions about the electronic records to which the procedures apply. The presumptions arise only if a procedure is commercially reasonable. A commercially unreasonable procedure vitiates the presumption, leaving the parties to general proof of content and source of the record. In addition, if the procedure is within this section, it may alter loss allocation.

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

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

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

Second, the Section only applies to losses incurred in transactions to which the requirement and use of the procedure between the parties applies. It does not address the difficult problem of liability where a third party obtains social security or other important identifiers and uses them to fraudulently obtain goods and services from other vendors. That issue lies in tort law, criminal law, and other regulation that is just now developing.

Third, the losses are limited to reliance and restitution recovery. In some cases, however, the existence and non-performance of a contractual relationship may allow expectations recovery. The basic premise here, however, is limited to avoiding a shift of losses through a required procedure that fails to protect the interests of the parties.

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

4. Illustrations. The following suggest some applications of this Section.

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

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

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

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

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

"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.

1. Attribution to a Person. Attribution to a person means that the electronic record is treated in law as having come from that person. This section balances goals of enabling electronic commerce in an open environment, while stating reasonable standards to allocate risk in that setting. The rules do not apply to funds transfers, bank accounts, credit card liability, or other subject matter outside Article 2B.

2. Act of the Person or Electronic Agent. There are two circumstances under which a message or action is attributed to a party. The first (subsection (a)(1)) simply makes a person responsible for the record or performance if the person or its agent actually performed or actually created the record. General agency law applies for human agents. In addition, a person is responsible for the actions of its electronic agent. An "electronic agent" is an automated system that responds to or initiates actions without human review. Having opted to use an automated system, the person is responsible for its operations. The person who set out the automated system has responsibility for its conduct. The rules parallel the UNCITRAL Model Law. Article 13.

3. Use of Attribution Procedure. Subsection (a)(2) makes a message attributable to a person if the other party used the procedure and reached the conclusion that it came from the other person because of that use. Attribution in this form creates a presumption that it was the party identified who sent the message, created the record, or engaged in the performance or authentication. The presumption is rebuttable.

4. Duty of Care. Subsection (c) deals with a situation where the rebuittable nature of the presumption created under subsection (a) arises. The issue focuses on loss allocation. If a procedure was used, but a third party actually sent the message, the relying party can nevertheless obtain protection against reliance loss if it proves that the loss was caused by the other party's negligence.

The subsection does not create an omnibus risk of liability. The loss allocation principle recognizes protected reliance where the cause of the reliance lies in a lack of reasonable care by the person to whom the message is attributed. Since this is reliance-based liability, if the message, performance or context indicates that the indicated source is incorrect or gives reason to doubt the source, reliance may not be protected.

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

Article 2B adopts an intermediate position. 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. Our context requires a general structure that goes beyond consumer issues; the problems will not routinely entail consumer protection questions or, even, a licensor with better ability to spread loss.

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

2. The presumptions are limited to issues to which the procedure applies. Proof or disproof of alleged errors is left to law outside this Article. The common law of mistake applies as does case law on the legal consequences of garbled or forged transmissions.

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

Prior Uniform Law: None.

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

Common law principles about mistakes provide the basic framework against which problems of error and mistake will be resolved. This Section sets out a specific application of those principles to establish a new protection for consumers in automated transactions. The protection created here provides a simple method for a consumer to contest errors in the consumer's transmissions to a third party. Under common law, in many instances, in a unilateral mistake, the party making that error is liable for its consequences. This Section rejects those decisions to protect consumer in modern commerce.

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

This section does not create a right to rescind a contract because a consumer changes its mind. The section deals solely with errors in creation of a contract. There must have been no intent to make the order or, at least, to order the quantity transmitted in error.

1. Subsection (a) contains a specific application of the general principle that actions of an electronic agent bind the party that selected and deployed the agent for that purpose. An electronic agent is an automated system of response or originating messages or performances. A party that uses such systems is bound by its operations.

Reporter's Notes:

1. Subsection (a) adopts a time of receipt rule; rejecting the mail box rule for electronic messages.

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

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

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

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

"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.

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

2. Basic Rule: Subject Matter and Value. The record, when required, must reasonably describe the subject matter or copies involved. This leaves significant elements of scope of a license not required in the documentation. Disputes about scope, however, may indicate that no contract exists. See Section 2B-202. A record is required only if the transaction requires payments in excess of $5,000 and it is a license whose fixed duration exceeds one year. Both the $5,000 and the one year rule, refer to what the contract affirmatively requires, rather than to what might occur under some variations of the agreed terms. Thus, an indefinite term contract which can be terminated at will does not require a writing since the term is not in excess of one year. A contract calling for royalty payments whose total amount hinges on the success of a product does not exceed the $5,,000 amount even if, in fact, the royalties later prove to far exceed that number unless a minimum amount is required and exceeds this figure.

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

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

4. Transactional Exceptions: Performance and Admissions. There are many circumstances in which the requirements of subsection (a) are moot because of other events. Two are described in subsection (c). The first obviates the requirements of the statute of frauds if performance has been offered and accepted. This adequately documents the existence of the contract to the extent of the performance and the minimal record required under the statute is not necessary. The second supplants the statutory requirements to the extent a person admits the existence of the contract in a sworn statement in connection with litigation. The statement confirms the existence of the contract and supplants the writing requirement.

5. Transactional Exceptions: Confirming Memoranda. As in Article 2, this Section provides that, as between merchants, confirming memoranda satisfy the statute if the receiving party does not object within ten days after their receipt. This validates practice in a number of industries where the volume of transactions make it impossible to prepare and receive assent to records as part of making the initial agreement. The confirming memorandum can be in various forms, but it serves to place the other party on notice that a contract has apparently been formed. This memorandum has a validating effect only as between merchants. It removes the statutory bar to enforcement. The party claiming that a contract exists must show that an agreement actually occurred and that other aspects of this Article regarding a contract are met.

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

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

"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.

1. Basic Rule. Subsection (a) conforms to current Article 2. It adds an express reference to electronic agents. Article 2B separates two issues. One is whether a contract was formed. The second concerns what terms govern that contract. That latter issue is dealt with in Section 2B-207, 2B-208, and 2B-209. In many cases, of course, the same events create a contract and its terms.

2. Electronic Agents. A contract can be formed by the operations of electronic agents. An electronic agent is an automated system used by a person for purposes of achieving contract-related effects.

Giving this effect to an electronic agent can be explained in several ways. One is that it gives force to a choice made by the party. The party selected and deployed the automated system for a purpose and this Article enforces that result. Alternatively, electronic agents could be described as a form of indirect acceptance of a contractual relationship. The agent is a mere extension of the person utilizing it. Under either approach, the automated agent's operations bind the agent's user. In article 2B, reference is simply made to the operations of agents as having specified effects in law and as being attributable in law to a particular party.

3. Open Terms and Layered Transactions. As in common law, Article 2B distinguishes preliminary negotiations or incomplete efforts to make a deal that do not create a contract and actions or statements that manifest an intent to be bound even though terms are left open or the time of formation cannot be determined. Ultimately, the distinction often requires consideration of all of the circumstances relating to the alleged agreement.

Under subsection (b), the distinction lies in the existence of an intent to contract as manifested by the language, conduct or operations of the parties or their agents. Given an intent to contract, a contract can be formed despite the existence of terms remaining to be agreed and terms left open by the parties. In the latter case, this Article, general expectations of the trade, and general intellectual property law often provide background rules that flesh out the details of the relationship. The background rules do not apply if the parties disagree about the term. While disagreement may not always bar creation of a contract, it often indicates no agreement.

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

4. Material Terms and Scope of a License. Subsection (d) provides simply that a material disagreement about an important (material) term indicates that no intent to enter a contract exists at that time. As described in Section 2B-203, a contract can be formed by an acceptance that varies the terms of the offer. Yet, not all variances indicate an intent to contract. See White & Summers, The Uniform Commercial Code (1995). In information commerce, the most significant terms of a contract deal with the scope of the license. Scope is a defined term. Section 2B-102. It goes to the fundamentals of the transaction and what the licensor intends to transfer and what the licensee expects to receive. Indeed, in many respects, in this field, the contract is the product and scope is the basic product description. Disagreements about this fundamental issue are like ordering a Corvette and confirming purchase of a Volkswagon. They indicate fundamental disagreement about the contract and its subject matter.

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

1. Basic Coverage. This Section deals with three issues involving offer and acceptance: general methods of acceptance, acceptances that vary the terms of the offer, and conditional offers or acceptances. 2. Methods of Acceptance and Formation. Subsection (a) follows Article 2-206(1). It allows acceptance of an offer by a variety of means, but also recognizes the right of the offeror to control the terms of the acceptance.

3. Acceptance that Varies the Terms of an Offer. Subsection (b) rejects the mirror image rule which permits a binding contract only if the acceptance fully matches the offer. As in Article 2, however, the acceptance must be an acceptance; no contract is formed by a counteroffer unless it is accepted.

Contract formation by an acceptances that vary the terms of an offer creates several conceptual and practical issues. The legal concepts must be fitted to commercial practice.

4. Varying Terms: Material Variance. Subsection (b) concerns how to distinguish cases of a contract formed by a varying acceptance and cases where the variance indicates that no contract is formed by the offer and acceptance. Material variance, either a conflict with a material term or a material modification of the offer, precludes formation. A contract requires a meeting of the minds. That does not occur when there is material disagreement on material terms. That rule protects both parties. What constitutes a material term or a material alteration of the offer depends on the context, including what the parties might reasonably expect to find in contracts in light of applicable trade use and course of dealing.

The rule does not preclude formation of a contract by conduct subject to the terms of Section 2B-209. Circumstances adequate to show agreement despite material conflict in the records exchanged by the parties as a purported offer and acceptance correspond to the broad concept of contract formation outlined in Section 2B-202.

If a contract is formed, important issues center on what terms are applicable to the contract. By hypothesis, the records exchanged as an offer and acceptance materially diverge. Subsection (b)(1) contemplates two 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. .

5. Varying Terms: Non-Material Variance. If the offer and acceptance do not materially vary, they form a contract. The terms of the contract are the terms of the accepted offer. Subsection (b)(2), however, also allows for the introduction of non-material additional terms from the acceptance unless the offeror timely objects to those terms. This rule comes from existing Article 2. It does not apply to terms that provide conflicting treatment of the same subject matter.

6. Conditional Offers and Acceptances. As a matter of general contract law, a person has a right to state and insist on preconditions for acceptance of its offer. The most common conditional offer or acceptance is one that conditions its effect on adherence to all of its own contractual terms. No principle in contract law precludes a party from using such conditional offers.

Subsection (c) recognizes that these conditional statements are entitled to recognition. Subsection (d) provides a limit on this proposition. Conditional language in the standard terms of standard forms creates special problems in the "battle of forms" transaction in which either or both parties make the acceptance or offer expressly conditional on its specific contractual terms, but perform irrespective of acceptance of the condition. Subsection (d) treats this as a question involving the effectiveness of the conditional language.

7. Battle of Forms. In resolving issues about the treatment of so-called battle of forms cases, this section must be considered in connection with Section 2B-209. Note 4 to that section presents a list of the questions that are asked to resolve such questions under this Article.

1. The Section deals with two contexts: 1) interaction between a human and an electronic agent, and 2) an interaction between two electronic agents without human intervention. In both, the first premise is that the interaction can create a contract. In subsections (1) and (2) the second sentences describe specific instances within the general rule, but do not state the exclusive way of satisfying the rule.

Electronic methodology is in widespread use, but there are questions of under what circumstances agreement is inferred from behavior and of to what terms an electronic agent can agree. The following, although not within Article 2B scope, illustrates an aspect of the issue:

There is a contract. The verbal addition or condition is ineffective. Stating conditions clearly outside the capability of the electronic agent to react does not vitiate the agreement reached by taking the steps needed to initiate the shipment. The verbal conditions are ineffective to alter the agreement since the Tootie system could not respond to the verbal condition.

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

2. As between electronic agents operations that signify a contract form an enforceable contract. The automated agents were selected or used by the parties to achieve these results and Article 2B acknowledges the efficacy of the choice. See Section 2B-202.

Reporter's Note: This Section follows existing Article 2.

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

2. Enforceability. Under subsection (a)(1) a release is enforceable without consideration, but places a limitation on that concept as an affirmative premise by focusing on a release contained in a record to which the releasing party manifested assent. This clarifies existing law, but does not alter other law making releases enforceable.

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

The section refers to assent to a record. This covers modern means of recording assent, such as by filming assent. The filmed assent is in effect no different from other acts. In both cases, the included act or signing authenticates the record.

4. Consideration Subsection (c) adopts the approach of New York cases on whether a contract is formed in reference to idea submissions. If the idea that is a subject of the agreement is not in fact novel, this rule does not give the licensee a right to recover payments it has made, but does vitiate any future, executory obligations. The basic theory combines a view that a non-novel idea is not adequate consideration with a concept that the proponent of the idea who receives consideration represents that the idea it reveals has value and that this is not met in a case of a non-novel idea.

1. General Structure: Terms of Contract. Article 2B deals with the terms of a contract, in three sections. Section 2B-207 and 2B-208 deal with cases involving a single record adopted by the parties. Section 2B-209 deals with cases where an offer and acceptance in records do not create a contract, but a contract exists because of the conduct of the parties.

2. Adopting Terms: Enforceability. Subsection (a) states the principle that if a party agrees or assents to a record, it adopts the terms of the record, including a standard form. .The section rejects in commercial transactions any rule that a term that is not unconscionable or induced by fraud may still be invalidated by a court. The principle adopted here is followed in the vast majority of modern cases. Absent unconscionability, fraud or similar conduct, commercial parties are bound by the records to which they assent and cannot later claim a failure to read the language presented.

Assent often not only refers to adopting the terms of the record. It also entails acceptance of the contractual relationship. See Restatement (Second) of Contracts 19.

3. Adopting Terms: Knowledge. It is not necessary that the adopting party actually read, understand, or negotiate the terms. This follows virtually universal law in the United States. In many situations, parties do not closely review or dicker about each term. The defense that "I did not read" the contract does not enable a party to avoid the effect of the terms of a record it adopted.

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

One involves authenticating (signing) the record. This is a traditional means of adopting terms of a record, but has never been the sole method of doing so.

The second is conduct that indicates assent to a record or a contract. As defined in Section 2B-111, this focuses on objective manifestations of assent. Section 2B-111 adopts procedural safeguards requiring that the party have a fair an opportunity clearly delineated to review the terms before assenting and to reject the agreement if the terms are not acceptable. See Section 2B-112. A party cannot manifest assent to a form or other record unless it has had an opportunity to review that form before reacting. Except in contract modifications and situations contemplated by Section 2B-207(a)(2), an opportunity to review does not occur unless the party has a right to return the subject matter, refuse the contract, and obtain a refund of fees already paid (if any).

The third entails residual modes of assent, and follows current law in recognizing that structured options are inadequate to cover all situations in which it can be fairly said that a party agreed to a record. 5. Rolling or Layered Term Adoption. While some contracts are formed and their terms delineated at a single point in time, in many transactions a rolling or layering process occurs. An agreement exists and terms are provided, clarified or introduced later or over time. Contract term definition is a process, rather than a single event. Subsection (a) rejects the idea that a contract and all of its terms must be formed at a single point in time. See Carnival Cruise Lines, Inc. v. Shute, 111 S.Ct. 1522 (1991); Hill v. Gateway 2000, Inc., 1997 WL 2809 (7^th Cir. 1997). A rolling contract concept reflects commercial reality. Terms often are created by assent after beginning performance. Each party anticipates an enforceable record will be created and agreed to, but neither waits on performance until one is fully drafted. This section accommodates that process as well as the common practice of providing terms for assent at some point prior to the initial performance.

AT THE NCCUSL ANNUAL MEETING, COMMISSIONER HENDERSON MADE A MOTION THAT THE ARTICLE 2B COMMITTEE SHOULD CONSIDER A PROPOSED DRAFT PROVISION OF PENDING REVISIONS OF ARTICLE 2. THE MOTION WAS NOT ACTED UPON BY THE COMMITTEE OF THE WHOLE, BUT THE DRAFTING COMMITTEE AGREED TO REVIEW THE PROPOSAL. THE DRAFT IS THE SUGGESTION OF THE ARTICLE 2 REPORTER AND HAD NOT BEEN CONSIDERED BY THE ARTICLE 2 COMMITTEE AT THE TIME THAT THIS ARTICLE 2B DRAFT WAS PREPARED. IT READS AS FOLLOWS:

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

1. General Approach. This section deals with mass market (retail) contracts. Many mass-market licenses entail two separate agreements involving a three-party transaction: 1) the license between the remote publisher (informational rights holder) and the end user, and 2) the retail agreement between the end user and the retailer. These three party settings create important market-place benefits for the end user and establish contractual privity between the publisher and end user, but also present issues about treating the end user fairly. The three party deal is also dealt with in Section 2B-617.

This Section places procedural and substantive restrictions on mass-market licenses. The restrictions apply to all mass market forms. This Section should be read in connection with Section 2B-207 and with the requirements for manifesting assent in Section 2B-111. Adoption of the terms of a mass market license occurs only when the limitations stated in 2B-207 and the restrictions stated here are met.

The Section does not adopt the rules of Restatement (Second) of Contracts § 211 which allow a court to invalidate terms that are not unconscionable if the court concludes that they are not within expectations of a party. Instead, the section responds directly to the policies that underlie the Restatement which are to prevent bizarre and oppressive terms (unconscionable) or terms that vitiate the basic deal (subsection (a)(2)). In the more than twenty years since it was first proposed, the Restatement has been adopted in less than ten states because it creates uncertainty on criteria that are not defined.

This Section is not limited to consumer transactions or to transactions involving so-called "shrink wrap" licenses. Subsection (a) deals with all retail transactions and all consumer transactions.

2. Records Presented Prior to Payment. If terms of a mass-market license are presented before a price is paid, the enforceability of a mass-market contract presents questions that have been presented to courts for years. Article 2B follows the vast majority of courts that enforce the standard form if the party manifests assents to the form. The fact that the terms are non-negotiable or may be a "contract of adhesion" does not invalidate them. It may, however, suggest a need for close scrutiny of terms under general standards of unconscionability. Section 208(a)(1) requires this scrutiny.

Ideas of assent must reflect the position of all parties in a retail license. In a typical transaction, the publisher does not agree to license under any terms other than those in its license. The other party can assent or can forego the transaction. So long as there is no fraud or unconscionable terms, a publisher (or other vendor) may choose the terms under which it markets its product and the terms that define the product itself.

3. General Rules. Subsection (a) sets out general rules for when the terms of a mass market license become the terms of the contract. These apply to both records presented for review prior to committing to the transaction with the retailer, and records presented at or before the first use of the information.

a. Assent and Agreement. A party is bound to the terms of a record if it agrees to the record. Agreement can be shown in various ways. One of these is by manifesting assent to the record. See Restatement (Second) of Contracts 19, 211. The idea of manifesting assent is that the party adopts the record by taking some action that objectively indicates agreement to the record. In addition, under Section 2B-111, a party cannot manifest assent unless it has had an opportunity to review the record. This requires that the record be reasonably available. It does not require that the party actually read the record.

b. Unconscionability. Even if a party adopts a record, this does not adopt terms that are unconscionable. The doctrine that disallows unconscionable terms allows courts to avoid bizarre and oppressive results in standard form contracting. How that theory evolves in modern markets for licenses of information requires judicial decisions. Unconscionability doctrine blends questions about the contracting process (procedural) with questions about the substantive terms (substantive). It prevents abuse and unfair surprise. In an non-bargained market, this doctrine provides a safeguard against over-reaching.

The doctrine invalidates terms that are bizarre and oppressive and hidden in boilerplate language. For example, a term in a mass market license that default on the mass market contract for $50 software cross defaults on all other licenses between two companies may be unconscionable if there was no reason to expect the linkage of the small and the larger licenses. Similarly, a clause abrogating all responsibility for intentional wrongful acts buried in a license form violates public policy and, in addition to being unenforceable on that basis, might also be unconscionable.

Unconscionability doctrine requires a contextual analysis. It is not possible to fully describe the various situations in which it may apply. The doctrine is sufficiently flexible to consider underlying public policies and protection of public interests in free flow of information. Article 2B takes a neutral position on the federal policy issues in information transactions. Within that approach, issues about the relationship between a contract clause and underlying principles of free speech, free idea flow, and the like in mass markets are appropriate elements in an unconscionability analysis. Thus, for example, a contract term purporting to prevent the buyer of a publicly distributed magazine from quoting the magazine's observations about consumer products might be unconscionable.

In practice, however, the standards come from federal law. The fact that the contract is generally enforceable under Article 2B does not alter application of federal law concepts.

c. Agreed Terms. Subsection (a) creates a new premise that a mass market form cannot alter the terms agreed to between the parties to the license. This covers an issue discussed in the Restatement (Second) of Contracts § 211 which allows a court to invalidate standard form clauses that vitiate the essential bargain of the parties while the reference to unconscionable terms deals with the other Restatement concern, which deals with the invalidation of surprising terms that are "bizarre and oppressive."

3. Case Law. In single form cases, no appellate case law rejects the enforceability of mass market contracts and recent cases expressly support it. See ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7^th Cir. 1996); Arizona Retail Systems, Inc. v. Software Link Inc., 831 F. Supp. 759 (Ariz. 1993). Compare Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5^th 1988) (appellate court did not address contract issue). Cases are less clear in cases of conflicting forms (battle of forms) or transactions outside the mass market. See Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F.2d 91 (3d Cir.1991); Arizona Retail Systems, Inc. v. Software Link Inc., 831 F. Supp. 759 (Ariz. 1993). The cases do not contest the enforceability of standard forms in general..

4. Forms presented after payment. In modern commerce, licenses are often presented after a price is paid or committed to be paid to a retailer.

a. Distribution and Intellectual Property Rights. Distribution of digital information does not parallel that in the sale of goods. The differences lie in the intellectual property rights and the choices by the rights owner (publisher) which are to provide rights different (greater or lesser) from those created if it simply sold copies to a distributor for resale to an end user.

In most transactions where a license is presented to the end user after it acquires a copy from a retailer, the license is between the copyright owner and the end user, rather than between the end user and the retailer. In this three-party setting (end user, retailer, copyright owner), the enforceability of the post-payment license is important to the end user. The form establishes for the first time a relationship between the copyright owner and the end user that may be central to the end user's right to use the information.

In establishing a mass-market distribution system, an informational rights owner may give its distributors either (1) ownership of a copy and a right to sell copies of its work to others, or (2) a license to license copies to others. Intellectual property law supports either choice. It also provides that, if a license is created and the distributor exceeds the license, the eventual transferee (even if in good faith) is not protected as a bona fide purchaser. See Microsoft Corp. v. Harmony Computers & Electronics, Inc., 846 F. Supp. 208 (ED NY 1994); Major League Baseball Promotion v. Colour-Tex, 729 F. Supp. 1035 (D. N.J. 1990); Microsoft Corp. v. Grey Computer, 910 F. Supp. 1077 (D. Md. 1995); Marshall v. New Kids on the Block, 780 F. Supp. 1005 (S.D.N.Y. 1991).

The end user is often benefited by a license rather than a sale transaction. A sale creating ownership of a copy of a work (book, computer program or other work) does not give the owner a number of rights that it may desire. It does not give the right to make multiple copies, to make a public display of the work, to make derivative works from the copy, or to do other significant things. Licenses in the mass market and otherwise typically create rights that go beyond the rights that arise in the event of mere sales of copies.

In this setting, both the publisher and the end user have an interest in the license being enforceable. If the license is not enforceable, the end user receives few if any rights to use the acquired information and has no rights against the remote publisher in warranty or otherwise in the absence of rules that vitiate all concepts of privity. The end user contracted solely with the retailer. On the other hand, the publisher that chooses this distribution method has an interest in the enforceability of the license because that license defines the product that it allowed into the market.

b. Refund Rights. In post-retail purchase licenses, two issues are important. One involves dealing with prevention of bizarre and oppressive terms. That issue is identical to that presented in pre-retail purchase transactions. The second involves whether a licensee has a real opportunity to review and accept or reject the license with the remote publisher.

Subsection (b) deals with this second issue. It creates a refund and reimbursement right that places the retail end user in a situation whereby it can exercise a meaningful choice on a post-retail purchase license. The end user must be given a cost free right to say no to the proposed license. This does not mean that the end user can reject the license and use the information. What is created is a right to be in a situation equivalent to what would exist if the license were presented for adoption before the retail acquisition of the copy. If there is no assent to the contract, the end user can return itself to the place that it was in before acquiring the copy and reviewing the license.

6. Intellectual Property Issues. Important federal policy issues can arise in distribution of information in a mass market. Article 2B adopts a neutral position on these issues. See discussion in notes to 2B-105.

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

1. General Effect. This Section deals with cases where a contract is formed by conduct. The Section does not apply if the parties conditioned the existence of a contract on agreement to terms that were not in fact later agreed upon. In that case, despite the conduct, Section 2B-203(e) applies.

Contracts formed by conduct can arise in various settings. One setting is where the parties begin and complete performance without ever having reduced their agreement to writing or, even, making a specific offer and acceptance. Another involves a "battle of forms" which did not result in an effective offer and acceptance and in which neither party adopted or authenticated a record signifying the terms of agreement.

In determining what are the terms of contracts created by conduct, this Section rejects the so-called "knock-out" rule in 2-207(c). It requires that the court determine the terms of the contract by considering all of the commercial circumstances, including the nature of the conduct, the informational rights involved, and applicable trade usage or course of dealing. This, of course, includes the default rules of this Article.

If the exchanged records create a contract, or one party agrees to terms proposed by the other in a record or otherwise, this section does not apply. Subsection (c) confirms that result. Subsection (b) deals with lack of agreement on material terms concerning scope.

2. Interpret based on Context. Subsection (a) directs attention to the entire context including the terms of exchanged records and the nature of the intellectual property rights held by the licensor or licensee. This conforms to the basic UCC theme of practical construction of a relationship. See Restatement (Second) of Contracts § 202(1) (2) (1981); 2 Farnsworth, Contracts § 7.10 (1990).

Where conduct, rather acceptance of an offer, creates the contract, a priori or formalistic rules cannot account for the contextual nuances that exist in a rich environment of transactional practice. Subsection (a) thus rejects the "knock-out" rule which requires that a court apply a set formula. Any rigid rule needlessly restrains courts from more generally determining the intent of the parties. Since Article 2B deals with transactions the vast majority of which are not now governed by the U.C.C., This rule allows courts to continue existing practice, rather than impose an inappropriate legal regime on the contract interpretation process.

3. Battle of Forms and Conduct. The battle of standard forms deals with a case where the parties exchange forms, but ignore those forms in determining to perform or not. The rule in subsection (a) looks to the entire circumstances in such cases, regardless of which form was first received or sent.

4. Battle of Forms: Integrated Result. To be within this Section, the records of the parties must not establish a contract. Thus, the overall impact of this Section on battle of forms transactions requires consideration of this Section and of Section 2B-203. There are two different scenarios to be considered.

a. Varying Terms. The first situation involves a case in which forms are exchanged, but neither form is made expressly conditional on acceptance of its terms in full. Under these conditions, Section 2B-203 applies and Section 2B-209 provides a back-up. The analysis involves answering several questions.

b. Conditional Offers. If the terms of the offer or acceptance vary and one or both are conditional on acceptance of their terms, a different analysis applies. The basic premise is that a party has a right to condition its offer or acceptance and that the conditions are enforced unless waived.

5. Contracts by Records. If a party conditions its agreement to a contract on the other party's assent to its terms, that condition should be enforced. Contract law does not impose a contract on unwilling parties nor does it prevent a party from conditioning the terms on which it will do business. This Section recognizes that, where an effective condition was asserted and agreed to by the other party, the terms of that conditional offer or counter offer override the provisions of this section. Simply stated, the contract was formed on one party's terms and courts should not disturb that result.

Similarly, under subsection (c) this section is inapplicable if a party signs and accepts a contract embodied in a record of the other. This Section applies only where the contract is based merely on conduct.

Authenticated (signed) records supersede conduct subject of course to parole evidence issues.

7. Scope of License. In information products, the contract terms relating to scope of use define the product being licensed. The same subject matter (e.g., one copy of software) has entirely different value and substance depending on what rights are granted. That being true, this section gives special deference to scope issues. It provides that the lack of an agreement as to a material element of scope, or a material disagreement, precludes the formation of a contract by conduct. In the absence of contrary agreement, the information provider can define what it is providing. The other party cannot resort to a court to obtain that product which it failed to obtain from the licensor by negotiation. A vendor who provides a consumer version of software cannot be forced to have given an unlimited, license in the software for development and other use simply because a competing form stated terms that conflict with the consumer restriction. Unlike warranty and similar terms, scope terms define the product being provided (e.g., multi-user or single user license). Additionally, it is only the licensor who is aware of what can be granted (e.g., it holds rights to a screen play only for use in television).

Definitional Cross References.

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

Reporter's Note: Conforms to Article 2.

This Section follows existing Article 2-209 except for the use of "manifest assent" regarding the use of a no modification term in a consumer contract.

1. Continuing Terms. Subsection (a) states the simple principle that contract terms, if enforceable, cover all contractual performance. This principle applies in any case where the subsequent performances are covered by the prior agreement. 2. Modifications: General Issue. Subsection (b) addresses a common practice in online and other continuing contracts, such as outsourcing arrangements. In these long term contracts, frequent changes occur in the terms of service; separate negotiation of each change is often not feasible or desired by the parties. Common practice entails posting changes in a particular location or file and providing that the posted changes are effective when posted or at a later point in time.

Subsection (b) specifies one method for making changes in on-going relationships but does not preclude enforceable modifications based on other law or circumstances. For example, a signed modification is effective. Similarly, under general common law, principles of waiver (see, e.g., Section 2B-605) and on course of performance (Section 2B-302) also deal with enforceability.

What constitutes an effective modification hinges on agreement, but changes in terms are routinely found based on objective indicia of assent, such as awareness or notice, coupled with behavior not objecting to the changes in terms or performance. For example, even in a fixed term mortgage, federal rules allow unilateral changes in consumer contracts if the changes meet any of several criteria, including that either the change benefits the consumer or makes an "insignificant change" to the contract. FRB Regulation Z, 12 CFR § 226.5b. The contracts covered here are often subject to termination at will by either party and present a clearer case to allow non-material modifications.

3. Contractual Authorization and Notice. Subsection (b) describes a safe harbor indicating that modifications that comply are enforceable. This does not preclude other methods.

The approach in subsection (b) requires an agreement authorizing the modification procedure and that the procedure entail notification of the other party. What constitutes notification varies depending on the circumstances. In many cases, reasonable notification requires notification before the change is effect, but in some emergency situations, notice that coincides with the change or follows the change would be sufficient (e.g., blocking access to a virus infected site, or a change in the access codes required for access). See 12 CFR 205.8(a)(2) as an example. A procedure that calls for posting changes in an accessible location of which the other party is aware will ordinarily satisfy this section.

4. Mass-Market Transactions. Subsection (b)(2) modifies the safe harbor provision in the case of a mass-market transaction. In this situation, the procedure must not only have been agreed to and provide reasonable notification, it must permit the licensee an opportunity to withdraw as to future performance. This additional restriction is not appropriate in general commercial practice where by prior agreement the parties may provide that they are bound by good faith changes proposed by the other party.

The termination right extends only to changes that are material and adverse to the licensee. Price is a material term in all cases. Various other changes may be material matters in the on-going relationship. Of course, a reduction in service charges does not require a right to terminate.

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

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

1. Open Terms. Subsection (a) and (b) bring together rules relating to open terms under current Article 2.

2. Performance to the Satisfaction of a Party. Subsection (c) and (d) focuses on cases where performance is to be to the satisfaction of the other party, a common contractual arrangement in information industries. Consistent with the Restatement (Second) of Contracts § 228, the general interpretation of such clauses requires satisfaction measured under an objective, reasonable man standard. However, also as recognized in the Restatement, there are many cases where a subjective standard is appropriate. Subsection (d) provides guidance for determining when the subjective standard is appropriate. The issue is especially important since a factor that distinguishes the information industries is that many information products focus on aesthetics and marketability, rather than the capability of performance. Here, a "to the satisfaction clauses" creates a subjective standard, rather than one defined by reference to a reasonable person test. The objective standard is more appropriate in cases involving functional characteristics of computer programs.

3. Contractual Language. The choice between objective and subjective standards, of course, can be controlled by express contract terms. Subsection (d)(1) provides safe harbor language, indicating what language achieves a subjective satisfaction standard.

Uniform Statutory Source: Section 2-306.

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

1. Out-put and Requirements. Subsection (a) follows existing Article 2. In practice, however, many information transactions within its scope do not involve issues about "quantity" in the same way that sales (or leases) entail that issue. Courts must recognize and adjust their approach to this fact. A prime characteristic of information as a subject matter of a transaction is that information can be reproduced in relatively unlimited numbers; the goods on which copies are made are often the least significant aspect of a commercial deal. Rather than supply needs or sell output, the typical license gives a right to use or reproduce the information subject to an obligation to pay royalties based on the volume or other measurable quantity figure.

2. Exclusive Dealing. Subsection (b) integrates the various bodies of law that pertain to exclusive dealing relationships in information. Unlike for goods, the typical case here does not necessarily entail production and delivery of copies for resale by the other party. Article 2-306 creates a best efforts rule for goods. That rule, however, is not the law in any other field governed by Article 2B. This Section adopts a good faith effort standard: honesty in fact and adherence to commercial standards of fair dealing. This allows courts to draw appropriate balances in light of the commercial context and the existing traditions of that context in the atypical case where the contract is silent on the issue.

1. Implied Licenses. The subsection (a) deals with the appropriate contract interpretation where rights not expressly granted are essential to the licensee's use of the information in a manner consistent with the expressly granted rights. Subsection (a) adopts the reasonable interpretation that the affirmative grant includes all necessary rights to use that grant, to the extent that these are within the control of the licensor. For example, a license to use a film clip in a CD ROM product conveys the right to crop or modify the size of the clip to fit the media unless a right to make such modifications is expressly excluded. A grant of a license in software conveys the right to use functions provided in the software in the ordinary course to modify that software. The implied rights, however, relate only to materials provided to the party; they do not require a transfer of additional materials (such as source code), unless that transfer was agreed to by the parties. Contract terms precluding such rights are effective.

2. Exceeding the Grant. Subsection (b) deals with what interpretation is placed on a grant "to do X." Under current law, it is clear that uses of licensed information outside the express scope of a license breach the contract if the scope is defined in terms of "to do only X" or otherwise expressly precludes the use. If the word "only" does not appear, the cases are less clear; some cases suggest that the omission of the word means that there is no contract breach if the licensee exceeds the grant. Other cases hold that federal policy requires interpretation of a copyright license that holds that any use not expressly granted is withheld. A rule that hinges on the use of the word "only" provides a true trap for unwary drafters and unwary licensees. It is rejected in this section.

Subsection (b) adopts the ordinary commercial understanding that an affirmative grant implicitly excludes uses that exceed or are not otherwise within the grant. The implied limitation, however, is not as strong as an express contract term of limitation. It does not yield a breach of contract if the use would have been permitted by law in the absence of the implied limitation. Thus, scholarly use of a quotation from a licensed material not subject to trade secrecy restraints, if a fair use, would not conflict with the implied limitation. However, even if a grant does not use the magic word "only" and gives a right to perform a motion picture at a designated location, a licensee that makes multiple copies for sale violates the copyright and breaches the contract. A grant to use a work in Peoria implies the lack of a contract right to do so in Detroit.

3. Number of Users. Subsection (c) uses a commercial reasonableness test to deal with cases where a license fails to specify the number of users that are permitted for the particular information. In some cases, especially in the mass market, a single simultaneous user limitation could be assumed for a computer program. In other contexts, multi-use or network use concepts are more appropriate. The section guides a court, and the parties, by making reference to commercially reasonable assumptions the context, including the intellectual property rights involved.

4. Modifications. As a basic principle a party receives no right in contract to subsequent modifications made by the other party, nor is access to typically confidential material. Arrangements for improvements and source code or designs constitute separate valuable relationships handled by express contract terms, rather than presumed away from their owner by the simple fact of forming a general contract.

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

Subsection (f) (1) provides guidance for whether (when) a license grants rights only in existing media or methods of use of information or whether it extends to future uses. It adopts the majority approach. Ultimately, interpretation of a grant in reference to whether it covers future technologies is a fact sensitive interpretation issue. But use of language that implies a broad scope for the grant without qualification should be sufficient to cover any and all future uses. This is subject to the other default rules in this Article, including for example, the premise that the licensee does not receive any rights in enhancements made by the licensor unless the contract expressly so provides.

1. Basic Scope and Theme. This Section follows current Article 2 and common law, but provides for several cases in which licensees receive greater durational assumption than under existing law.

The section applies to agreements that do not specify their duration. The basic policy is that a person making an open-ended commitment should be held to performance over a time that is reasonable, but not be placed in a position of perpetual servitude. Consistent with Article 2 and common law, the basic rule is that the contract in such cases is subject to termination at will on reasonable notice. Subsection (2) describes cases in which, as to duration of a license, the term is presumed to be perpetual.

The section assumes that there is an agreement. In some cases, a failure to agree on duration will, like failure to agree on any other scope provision, indicate that no contract exists. In addition, the section does not apply simply because a record that documents the agreement is silent. Agreement refers to the entire bargain of the parties, including oral agreements, trade use, and course of dealing, any one of which might provide a defined duration.

The Section does not deal with contracts that define their duration, even if those terms do not specify a fixed date. Thus, a license for "the life of the edition" or "for so long as the work remains in print" defines the duration as does a contract term of, for example, ten years. On the other hand, decisions under Article 2 rule for commitments to "lifetime" service or "perpetual" maintenance, provide guidance on whether that language in a services obligation creates a definite term.

2. Standard for Termination: Reasonable Time. The basic rule is that in the absence of terms on duration, the duration of a contract is presumed to be a "reasonable" time. The reasonable time standard allows the parties and the court, if needed, to make determinations of what duration is appropriate in light of the commercial context.

Common law and Article 2 likewise make indefinite contracts subject to termination at will on reasonable notice to the other party. This allows a non-judicial method of ending the contract. Termination does not end all obligations or rights, including rights that vested based on prior performance. Which rights these include, of course, depends on the terms of the agreement.

In some cases, what constitutes a reasonable term can be determined by reference to other law. In this field, there are various federal policy considerations that affect the duration of licenses either by direct rule or by indirect influence on determining what is a reasonable time. Thus, a patent license that does not state its term can reasonably be presumed as extending for no more than the life of the patent. A similar premise exists for an indefinite copyright license.

3. Effect of Termination. Termination cancels executory obligations, except for contractual use restrictions. It does not end or otherwise affect rights that are vested based on prior performance. Thus, for example, assume a license for software that would be perpetual under subsection (2), but with respect to which the licensor agrees to an indefinite obligation to provide telephone support to the end user. The successive performances in that support obligation are under subsection (1). If the support provider terminates that obligation, it can end the executory obligation to provide support. That does not, however, alter the rights to use vested in the license.

4. Perpetual Licenses. Paragraph (2) differs from Article 2 and common law by presuming a perpetual term for two types of licenses. The first is a license associated with the sale or delivery of a copy of software. This rule corresponds to software licensing in general. The perpetual term assumption does not apply to services, such as ancillary support obligations, which are governed under the general reasonable time presumption. It also does not apply where the licensee has an on-going obligation to deliver affirmative performances to the other party.

The second situation deals with cases where the licensed information is intended to be incorporated into a product for third parties. The rule recognizes the reliance concerns that would be affected by a termination right.

1. General Principle. Subsection (a) states the principle that, unless agreed to the contrary, the delivering party or the person about whose business the commercial data relates maintains control of delivered data and that the recipient's right to use the data is limited to the purposes of the contract. This resolves an important issue in cases in which one party transfers data to another to enable that other party's performance of the contract. The rule applies to cases involving information that has not been released to the public and that the recipient knows is unlikely to be released. The presumption is that the information is received in a confidential manner and remains the property of the party who delivers it to the transferee.

2. Remedies. The remedies for breach of the obligations described in this section are for breach of contract. Ordinary contract remedies apply as do ordinary contract remedy limitations.

1. Scope of Section. This section deals with electronic limitations on use that involve enforcement of contract terms by preventing breach. It does not involve electronic devices used to make a repossession or force discontinuation of use in the event of breach. The electronic restrictions discussed here derive from contract terms; they limit use consistent with contract terms or terminate a license at its natural end.

The basic principle is that a contract can be enforced. If the contract places time or other limits on a party's use of licensed information, electronic devices that merely enforce those limitations are appropriate. This reflects an important new capability created by digital information systems.

3. Bases for Use. Subsection (b) states alternative bases for the use of automated restraints. The section does not state exclusive rules. Federal or other law (including other sources of contract law) may also allow limiting devices. This section contains an affirmative statement of when such limiting devices are enforceable under contract law.

a. Contract Authorization. The first option arises if the contract authorizes the party to use the restrictive tool. In this respect, the authorization must be in addition to the contract term that the tool enforces.

b. Passive Restraints Preventing Breach. Subsection (b)(2) provides that for passive devices, notice is not required if the electronics merely restrict use without otherwise disabling the information. Thus, for example, assume that the contract restricts the licensee to making no more than one back-up copy and that applicable copyright law rules provide that same limitation. This subsection authorizes use of a devices to enforce that limitation, so long as the device does not destroy the licensed information. The permitted restraint enforces a contract, but does not impose a penalty for attempted breach. The limitations, for example, might entail a counter used to monitor the number of simultaneous uses or restrict use to a pre-agreed system. Although no notice is required, the agreement must support the electronic limitation. The licensee is protected by the fact that a limitation inconsistent with the licensor's rights is a breach of contract.

c. Enforcing Property Rights. Subsection (b)(2) also allows use of passive devices that merely preclude infringing intellectual property rights. Merely preventing the act does not require contract or other notice. Thus, a contract that grants a right to make a back-up copy and to use a digital image, does not deal with the right of the licensee to transmit additional copies electronically. A device that precludes communication of the file electronically, but does not alter or erase the image in the event of an attempt to do so is authorized under (b)(2).

d. Enforcing Termination of the Contract. The restraints described in subsections (b)(3) and (b)(4) enforce termination of the license. Termination ends the license for reasons other than breach. Subsection (b)(3) corresponds to the right to terminate without notice either at the end of the fixed duration of the license, or on its termination on the happening of an agreed event. Both Article 2B and Article 2 recognize termination without notice in such cases and there is no principled reason to distinguish between termination enforced by automated means and any other form of termination. Subsection (b)(4), on the other hand, requires notice if termination is other than for the happening of an agreed event.

This adopts the detailed treatment of shipment terms found in existing Article 2.

1. Non-Infringement Warranty. Subsection (a) contains the affirmative warranty of non-infringement applicable to persons who are merchants in information of the particular kind. The language comes from Article 2 and requires the information to be delivered free of any claim of infringement or the like. This means (1) that, if the information were used and the licensed rights exercised in all of the ways granted by the licensor at the time of delivery, the use would not be subject to a claim of infringement and (2) that the delivery itself does not infringe a third party property right which would subject the licensee to liability for receiving that delivery. If no infringement claim exists on this basis, but, for example, a contract grants a three year license when the transferor's rights are limited to two years, the cause of action is for breach of contract, not breach of the infringement warranty. Liability under this warranty is based on conditions at the time the copy is delivered.

The warranty does not apply to the licensor of a patent. This refers to a party licensing a patent per se. Thus, if a party licenses software and the software is supported in part by patent rights, the warranty is breached if use of the software infringes a third party patent. On the other hand, if a licensor grants a license for the patent itself, that license does not create a warranty under subsection (a). A patent does not create an affirmative right to use technology, but merely a right to prevent another person's use. Reflecting this, patent licenses are mere waivers of the right to sue and do not promise a right to non-infringing use of the patented technology unless the contract expressly so provides.

Since subsection (a) uses language from existing Article 2, the comments to existing Section 2-312 are relevant. The warranty is made only by a person that is a merchant in information of this kind. The "hold harmless" obligation only applies if the infringement arises from compliance with licensee specifications, not because of choices of the licensor in implementing general specifications or goals of the licensee.

2. Non-Infringement and Passive Transmission. The obligation in subsection (a) applies only to licensors of information. It does not apply to persons who provide communications or transmission services. In copyright law, the issue of under what circumstances a transmittal entity has liability for infringement is controversial. Article 2B has no effect on federal questions about what constitutes infringement. This section follows a contract law premise that commitments about the absence of infringing material between two parties to a contract are appropriate. Whether, a particular party is a "licensor of information" for contract law depends on the circumstances of the contract. It has no bearing on whether a passive transmission provider is liable for infringement to the owner of the intellectual property rights.

3. Quiet Enjoyment Warranty. Subsection (b)(1) deals with issues other than infringement. The licensor warrants that it will not interfere with the licensee's exercise of rights under the contract. Non-interference is the essence of the contract. This "quiet enjoyment" warranty reflects the licensor's implied commitment to not act in a manner that detracts from the rights granted to the licensee for the term of the license by interfering with the licensee's use.

4. Exclusivity Warranty. Subsection (b)(2) deals with obligations arising when the transaction is an exclusive license. "Exclusivity" pertains to two issues not relevant in non-exclusive licenses. The first involves the validity of the intellectual property rights. Validity corresponds to whether the information is in the public domain. The converse of validity is that the information under property law can be used or recreated by anyone. It is important if a licensee relies on the rights transferred to create a product for third parties. An exclusive licensor warrants that the rights conveyed are valid.

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

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

5. International Issues. Intellectual property rights are territorial in character in that they extend only within the territory of the state that creates them, except as some deference internationally occurs through multi-lateral treaties. Subsection (c)(2) parallels this facet of intellectual property law and provides that the obligations created about exclusivity and infringement extend only within this country and to a country specifically referenced in the license.

6. Disclaimer. Article 2B provides for disclaimer of the warranties under this Section based on language from existing Article 2. This requires specific language or circumstances indicating that the warranties are not given. In addition, consistent with the general approach of contract law as a planning tool, illustrative language is provided for purposes of disclaimer.

AT THE NCCUSL ANNUAL MEETING, A MOTION TO DELETE SUBSECTION (c) WAS DEFEATED OVERWHELMINGLY. IN ITS DELIBERATIONS, THE COMMITTEE OF THE WHOLE HAD BEFORE IT THE BRACKETED PROPOSAL FROM THE CHAIR OF THE COMMITTEE AND THE REPORTER AND FAVORABLE COMMENTS WERE RECEIVED ABOUT THE PROPOSAL AS A CLARIFICATION OF THE PRIOR LANGUAGE OF THE SUBSECTION.

1. Basis of the Bargain: General Approach. This section adopts existing Article 2, except with respect to published informational content, where it preserves current law relating to express obligations.

Subsection (a) retains the "basis of the bargain" standard. This allows courts and parties to draw on an extensive body of case law for distinguishing express warranties from puffing and other, non-enforceable statements. While the cases involve difficult factual determinations, they provide better guidance than would an entirely new standard.

While there has been some dispute about the meaning of the traditional "basis of the bargain" standard, the concept is that express affirmations, promises and the like are enforceable as express warranties if they fit within the matrix of elements that constitute the bargain of the parties, but that they are not enforceable as express warranties if they are not part of the basis of the contractual deal. This standard does not require proof of reliance on a particular representation to make the deal, but enables a more general showing that the statements are part of the deal and basic to it.

2. Basis of the Bargain: Advertising. Subsection (a)(1) conforms to existing Article 2, except that it expressly provides that advertising may create an express warranty. This expands the scope of express warranty law in some states. Statements made in advertising, of course, are often mere puffing which does not create a warranty. As with other statements, a warranty arises only if the statement becomes part of the bargain and a bargain actually occurs. In the absence of such a relationship, liability for false advertising, if any, would not be under contract law, but under tort or advertising law rules.

3. Basis of the Bargain: Samples and Models. Subsection (a)(3) expands current Article 2 by expressly referring to express warranties created by demonstrations of an information product.

Representations created by demonstrations and models must be gauged by what inferences would be communicated to a reasonable person in light of the nature of the demonstration, model, or sample. In the world of goods, showing a sample of a keg of raw beans by lifting out a cup-full communications one inference as to a whole, while a demonstration of a complex database program running ten files creates an entirely different inference if the intended use of the system is to process ten million files. The standard follows the approach of most courts to such issues.

4. Published Informational Content. Subsection (c) preserves current law for published informational content. While there are many reported cases dealing with express warranties in goods and using the standards adopted here, no case law exists for published informational content using the Article 2 standards. This subject matter entails significant First Amendment interests and general public policies that favor encouraging public dissemination of information. Courts that deal with liability risks pertaining to this subject matter must balance contract themes with more general social policies.

The intent is to leave undisturbed existing law dealing how obligations are established with reference to published information. Courts, if inclined to find contract liability for published information, may do so under general contract law theory. Many will conclude that the broad risk in the published content situation and the potentially stifling effect that imposing contract liability in that realm might have on the dissemination of speech should lean toward limiting or excluding liability in that context. However, merely adopting Article 2 concepts from sales of goods to this much different context would risk a large and largely unknown change or over-reaching of liability in a sensitive area.

1. Background and Policy. Article 2B warranties blend three different legal traditions. One stems from Article 2 and focuses on the quality of the product. This centers on the result delivered: a product that conforms to ordinary standards for products of that type. The second stems from common law, including cases on licenses, services contracts and information contracts. This tradition focuses on how a contract is performed, the process rather than the result. The transferor's obligations are to perform in a reasonably careful and workmanlike manner. The third comes from contracts for informational content. It disallows implied warranties and implied obligations of accuracy in information transferred other than in a special relationship of reliance.

Current case law selects the applicable rule in part based on a court's characterizations about whether a transaction involves goods or not. That distinction is not reliable and is unworkable in Article 2B. In this and the following Section, Article 2B distinctions are drawn between computer programs, on the one hand, to which an implied warranty of result is applied, and information or services, on the other hand, to which a process warranty applies. The policy is that warranties focused on result and merchantability are appropriate for information that most closely resembles functional products - computer programs.

2. Expanded Application. This Section applies the Article 2 warranty of merchantability to computer programs. Since this Section applies to all computer programs provided by a merchant, it expands the scope of the merchantability warranty by including cases that under current law are treated as a services contract with no warranties or with warranties limited to making a reasonable effort. The warranty does not apply if the contract is for processing, analysis or other services and the licensor merely uses a computer program in its own activities. It applies if the program itself is the subject matter of the agreement.

3. Dual Application. The implied warranty in this Section and the warranty in Section 2B-404 may both apply to the same transaction and the same information product (e.g., an encyclopedia). The one would apply to the program and its functions, while the other would apply to the accuracy of data provided to the end user.

4. Merchantability. The merchantability warranty generally corresponds to original Article 2, except where the difference between software and goods requires a difference in the formulation of the definition. Since most modern agreements disclaim the warranty of merchantability, there are few reported commercial cases involving merchantability in any industry, including the software industry. Merchantability standards ask what are normal characteristics of ordinary products of the type.

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

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

1. Scope and Effect. This section creates a new implied warranty for consulting, data processing, and informational content contracts. The warranty focuses on the accuracy of data and reports, but incorporates a concept from common law.

The standard adopted is consistent with the process-oriented rules that the common law courts that find any obligation typically apply in similar contexts. See, e.g., Restatement (Second) of Torts § 552 ("One who ... supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance on the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information."). The appropriate approach here is not an absolute liability standard for accuracy, but a protected assurance that no errors are caused by a failure of reasonable care.

2. Terms and Existence of the Warranty.

a. Accuracy and Care. Subsection (a) gives a warranty that no inaccuracy exists due to the provider's lack of reasonable care. This does not make warranty assurances about aesthetics or marketability. These are subjective issues. Assurances on these issues require express contract terms.

Accuracy relates to what the information purports to be. A license of a large mailing list of addresses does not create an implied warranty of 100% accuracy. A contract to estimate the number of end users in Houston does not imply an accurate estimate, but merely an estimate. The warranty adopts the rulings of cases such as Lockwood v. Standard & Poor's Corp., No. 1-95-3063, 1997 WL 323659 (Ill. App. June 13, 1997).

Inaccuracy does not, in itself, establish breach of warranty. An actionable inaccuracy is one caused by a lack of reasonable care.

b. Merchants. The warranty applies only to merchants in the particular type of information. When dealing with a merchant, the licensee has a rightful expectation that errors are not created by lack of care.

c. Special Relationship of Reliance. The warranty arises only if the information is provided in a special relationship of reliance. This language follows cases applying the Restatement standard. The warranty-creating transaction involves more than merely making information generally available. It does not require a fiduciary relationship, but does require indicia of special reliance. The case law under the Restatement provides applicable guidance. See A.T. Kearney v. IBM, -- F.3d - (9^th Cir. 1997); Daniel v. Dow Jones & Co., Inc., 520 N.Y.S.2d 334 (NY City Ct. 1987).

This excludes information distributed to the public. That is made explicit in subsection (b)(2). This exclusion stems from First Amendment and general social norms about the value of encouraging distribution of information.

Information systems analogous to newspapers, magazines, or books and are treated as such here for purposes of contract law. "Technology is rapidly transforming the information industry. A computerized database is the functional equivalent of a more traditional news vendor, and the inconsistent application of a lower standard [enabling] liability [for] an electronic news distributor ... than that which is applied to a public library, book store, or newsstand would impose and undue burden on the free flow of information." Cubby, Inc. v. CompuServ, Inc., 3 CCH Computer Cases 46,547 (S.D.N.Y. 1991); Daniel v. Dow Jones & Co., Inc., 520 N.Y.S.2d 334 (NY City Ct. 1987).

3. Exclusions. Subsection (b) lists various exclusions from the warranty.

a. Aesthetics and Published Content. Subsection (b)(1) clarifies that this is not a warranty of aesthetic quality, but accuracy. Subsection (b)(2) exempts published informational content. Both points, although they could be inferred from the terms of the warranty itself and were added for clarity.

b. Conduits. Subsection (b)(3) holds a publisher harmless from claims based on inaccuracies in third party materials merely distributed by it. Merely providing a conduit for third party data should not create an obligation to ensure the care exercised in reference to the data provided by the third party. On the related issue of tort liability, see Winter v. G.P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991).

1. General Approach. This Section reconciles diverse case law and also creates, in subsection (d), a new implied warranty. It clarifies the standard under which a licensee receives an implied assurances of a particular result, expanding the circumstances in development and design contracts under which this assurance occurs.

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

Of course, express contract terms control over either variation of the implied warranty.

2. Warranty of Fitness. Subsection (a)(1) adopts the rule of existing Article 2-305.

This obligates the provider to meet known licensee needs if the circumstances indicate that the licensee is relying on the provider's expertise to achieve this result. There are many development contract and other situations where no such reliance exists, including cases where the licensee provides the contract performance standards, rather than relying on the provider to fill an acknowledged need of the licensee. Then there is no reliance on the licensor about whether meeting the specifications will meet applicable needs.

3. Services and Warranty. This section does not override the general law of services contracts. Under that law, the services provider in a skilled context does not guaranty suitability unless it expressly agrees to do so. Subsection (a)(2) proposes one standard to determine when a contract calls for services, rather than a result. Other standards evolved under general common law may also indicate that the parties intended a services obligation as delineated in subsection (a)(2).

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

1. General Structure and Policy. This Section brings together various rules relating to the disclaimer of warranties. As in current Article 2, rules on disclaimer of the warranties relating to infringement are contained in another section (Section 2B-401).

The general approach corresponds to existing Article 2 and Article 2A. U.S. law recognizes that parties may disclaim or limit implied warranties. Implied warranties are default, rather than mandatory rules. Disclaimer and limitation is integral to the contract choice paradigm under which commerce occurs and to the ability of a party to choose the terms under which it markets information and the risk it elects to undertake.

This Article does not alter consumer protection law. See Section 2B-105.

2. Express Warranties. Subsection (a) restates current Article 2 law. It uses modern language of "disclaimer" and "modification", rather than current Article 2 language, without substantive change.

3. Disclaimer of Implied Warranties: General Rules. Subsection (b) brings together various provisions on disclaimer of implied warranties.

a. Record Required. Article 2B changes existing law and, except for cases noted in subsection (c), (d) and (e), requires that a disclaimer be in a record. This increases the likelihood that the disclaimer will be brought to the other party's attention and provides a statute of frauds requirement against fraudulent claims that a disclaimer occurred.

b. Conspicuousness. Except for mass-market licenses, Article 2B does not require that a disclaimer be conspicuous. Outside the mass market, this requirement provides a trap for persons drafting contracts who are found later to have failed to meet applicable standards that the language be conspicuous. Current Article 2 requires a conspicuous disclaimer only if the disclaimer is in writing.

c. Merchantability and Accuracy Warranties. Subsection (b)(2) follows current law and provides language that suffices to disclaim the merchantability, quality and accuracy warranties.

As in existing Article 2, the language is not mandatory. Other language also works if it reasonably achieves the purpose of indicating that the pertinent warranty is are not given in the particular case.

d. Fitness Warranty. Subsection (b)(3) follows current law and provides language adequate to disclaim the warranty under Section 2B-405. The language here is more explicit than under Article 2. As in Article 2, the language is not mandatory. This language works, but other language may also work if it reasonably achieves the purpose; that purpose is to indicate that the pertinent warranty is not given in the particular case.

e. Article 2 and 2A Disclaimers. Subsection (b)(5) provides for cross-article validity of disclaimer language. The intent is to avoid traps for parties from having to make a priori determinations about the extent of Article 2B or Article 2 coverage. In effect, language adequate to disclaim a warranty under the one article is adequate to disclaim the equivalent warranty under the other.

4. Mass-Market Disclaimers. Subsection (b)(4) provides that a disclaimer in a mass market environment must be conspicuous and in a record except as provided in subsections (c), (d), and (e).

5. "As is" and General Disclaimers. Subsection (c)(1) follows existing Article 2 language, providing parties with a means of conducting business without giving assurances of quality. The "as is" language need not be in a record. It is not effective with respect to the infringement warranty unless the circumstances or language satisfy the standard stated in Section 2B-401.

Subsection (c)(2) deals with where the intent is to disclaim all warranties in a single sentence. The subsection sets out a common language disclaimer as a means of giving more disclosure to the consumer of what is disclaimed. As in Article 2, the specified language is not mandatory. This language works, but other language also works if it reasonably achieves the purpose of indicating that the warranties are not given in the particular case.

6. Excluding Warranties by Inspection or General Circumstances. Subsection (d) and (e) are taken from Article 2 with modifications.

a. Inspection and Disclosure. As in Article 2, an information provider is not responsible for defects that were either 1) known by or disclosed to the other party, or 2) could have been discovered on reasonable inspection if the opportunity to inspect was available.

b. Course of Dealing, etc. Subsection (e) is from existing Article 2.

1. Scope. This method of losing warranty protection applies only to warranties related to the performance of software. It does not apply to title and non-infringement warranties. It applies only to the modified copy. If the defect existed in an unmodified copy, the modifications have no effect.

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

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

Uniform Law Source: § 2-317.

"Party". Section 1-102.

Reporter's Note: This Section follows existing Article 2.

1. Focus and Policy. This section defines third-party beneficiary concepts. It adopts an approach based on the contract law theory of "intended beneficiary" and on the Restatement (Second) of Torts § 552 dealing with the scope of liability to third parties for a provider of information. It expands both concepts as applied to household uses.

The California Supreme Court in Bily v. Arthur Young & Co., 3 Cal. 4th 370, 11 Cal. Rptr. 2d 51, 834 P2d 745 (1992), commented:

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

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

2. Product Liability Law. This Section does not deal with products liability issues. It neither expands nor restricts tort concepts that might apply for third party risk. Products liability is governed by tort law. Article 2B leaves development of any appropriate liability doctrine to common law courts. As a matter of fact, few courts impose third party liability in information. The Restatement (Third) on Products Liability recognizes this; it notes that informational content is not a product for purposes of that law. The only reported cases that impose product liability on information involve air flight charts. The cases analogized the technical charts to a compass or similar, physical instrument. These cases have not been followed in any other context.

Most courts specifically decline to treat information content as a product, including the Ninth Circuit, which decided two of the air flight chart cases, but later commented that public policy accepts the idea that information once placed in public moves freely and that the originator does not owe obligations to those remote parties who obtain it. See Winter v. G. P. Putnam's Sons, 938 F.2d 1033 (9th Cir. 1991); Fairbanks, Morse & Co. v. Consolidated Fisheries Co., 190 F.2d 817, 824 (3rd Cir. 1951); Berkert v. Petrol Plus of Naugatuck, 216 Conn. 65, 579 A.2d 26 (Conn. 1990); Porter v. LSB Industries, Inc., 1993 WL 264153 (N.Y.A.D. 4 Dept. 1993); E.H. Harmon v. National Automotive Parts, 720 F. Supp. 79 (N. D. Miss. 1989); Snyder v. ISC Alloys, Ltd, 772 F Supp. 244 (W. D. Pa. 1991); Jones v. Clark, 36 N. C. App. 327, 244 S.E.2d 183 (N. C. App. 1978).

3. Embedded Software. While there may be a different policy for software embedded in tangible products, this Article does not deal with embedded software. See Section 2B-104. Tort law and contract privity issues regarding, for example, the software that operates the brakes in an automobile fall within Article 2.

4. Intended Effect Required. Subsection (a) derives from and should be interpreted in light of both the contract law concept of "intended beneficiary" and the concept in the Restatement (Second) of Torts § 552. In both instances, contract-based liability is restricted to intended third parties and those in a special relationship with the information provider. The liability extends to transactions that the provider of information intended to influence. This Section incorporates these concepts. The section also must be considered in light of the scope of warranties under this Article which create no implied warranty of accuracy pertaining to published informational content.

5. Family Effects. Subsection (b) modifies beneficiary concepts to include the family of a licensee. This goes beyond the relevant alternative in current Article 2-318 which limits that extension to personal injury claims. This covers both personal injury and economic losses.

6. Limitation by Contract. The policy adopted here focuses on the information provider's original intent with respect to third parties. Subsections (c) and (d) flow from the fact that the basis of this section lies in beneficiary status, rather than product liability. A disclaimer or a statement excluding intent to effect third parties excludes liability under this section. This follows current law. See, e.g., Rosenstein v. Standard and Poor's Corp., 1993 WL 176532 (Ill. App. May 26, 1993).

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

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

1. Copy vs. Rights Ownership. This section distinguishes title to the copy from ownership of the intellectual property rights. The distinction flows from the Copyright Act and other law. It means that, while ownership of a copy may give some rights with respect to that copy, it does not convey ownership of the underlying property rights to the work of authorship or patented invention. The media is not the message, but merely the conduit.

2. Timing of Rights Ownership Transfer. Subsection (a) deals with intellectual property rights and when ownership of the rights transfers as a matter of state law. This deals with cases where there is an intent to transfer title to intellectual property rights (as compared to title to a copy). If federal law requires a writing to make this ownership transfer; state law is subject to that rule.

The subsection solves the problem in In re Amica, 135 Bankr. 534 (Bankr. N.D. Ill. 1992). Transfer of rights ownership does not hinge on delivery of a copy. Rather, it refers to identification to the contract, including both completion to a sufficient level that separates the transferred property from other property of the transferor and designation by the transferor that the particular property is that which will be transferred.

3. Ownership of a Copy. Although separate from a transfer of ownership of informational rights, title to copies of the information may be important. In a license, under subsection (b)(2)(A), title to the copy depends on the terms of the contract. As in Article 2A, this article does not presume a transfer of title on delivery. The determination of intent on whether or not title to a copy transfers may require consideration of the entire terms of the transfer. See Applied Information Management, Inc. v. Icart, 1997 WL 535813 (EDNY March 3, 1997); DSC Communications Corp. v. Pulse Communications, Inc., 1997 US Dist. LEXIS 10048 (ED Va. 1997).

5. When Title to a Copy Passes. Subsection (c) deals only with contracts where the parties agreed to transfer title to a copy. It states presumptions relating to when title passes to copies. The contract controls. Absent contract terms, the Section distinguishes between tangible and electronic transfers. The rule for tangible transfers of a physical copy parallels current Article 2. The electronic transfer approach defers to federal law. The White Paper on copyright in the Internet suggests and legislation is being considered to implement that the electronic delivery of a copy of a copyrighted work is not a first sale because it does not involve transfer of a copy from the licensor to the licensee.

Uniform Law Source: Section 2A-303(2)(3)(4)(6)(8).

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

1. General Enforceability. Subsection (1) generally provides that interests in a contract can be transferred, but limits that principle by reference to standards that protect the non-transferring party's interest. The language follows existing Article 2. The concepts here seem especially relevant to licensing where, in many transactions outside retail markets, important reliance and confidentiality interests are involved that may be compromised by a transfer of the contract. In practice, under federal law, many licenses may not be transferable without licensor consent even in the absence of a contract provision to that effect.

2. Transfer. This section, and other sections of Part 5 use the word "transfer" to what in many contexts is described as an "assignment of a contract." The term here does not refer to a "transfer of a copyright" or similar intellectual property interest. It does not refer to delegation of performance under a license. Delegation, which is covered in a later section, occurs when a third party performs the duties or rights of the licensee, while transfer (assignment) involves conveying those contract rights to the third party.

3. Contractual Restrictions. Subsection (2) validates contractual restrictions on the transfer of a contractual interest. This is consistent with both the underlying theme of this article recognizing contractual choice and with the importance of the retained interest of the licensor in a license arrangement. A transfer in violation of the contract restriction is ineffective. This rule is appropriate as a general principle, rather than merely allowing the term to create a breach, because of the important interests involved in the licensor's position in a license. If the rule were otherwise (e.g., the prohibited transfer is effective, but a breach of contract), this would create a significant period in which the transferee would be protected by the license before it could be cancelled in litigation against the licensee. For example, assume a license for $5,000 that allows licensee (ABC, a small company) to make as many copies as needed for use in the licensee's enterprise for employees. ABC has ten employees and the license is expressly not transferable. ABC transfers the license to AT&T, a much larger company with 50,000 employees. If it had requested an enterprise license, the fee would have been $10,000,000. If the transfer is merely a breach, ATT may be licensed to make as many copies as it needs for its (as licensee) employees. Until licensor sues and obtains cancellation of the license against ABC, all copies made are non-infringing. In contrast, a rule making the prohibited transfer ineffective precludes the licensee from without permission going into competition with its licensor, having obtained a license based on the lower use expectations associated with the original licensee.

4. Financier Interests. As provided in Section 2B-503, a contract restriction on transfer is not fully enforceable with respect to creation of some financing arrangements.

5. Payment Streams. Subsection (3) allows transfer of payment streams despite a contrary contractual provision unless the transfer of the payment stream would make a material change of the other party's position. In cases where Article 9 applies to the purported transfer, this leave unaffected the Article 9 rule that, in itself, the contract term cannot preclude such transfer, while also preserving the underlying rule of law that precludes transfers that materially harm the other party.

1. General Rule. This Section deals with the ability of a financier to obtain an interest in contractual rights. It distinguishes between financing of a licensor's interest and financing of a licensee's interest in a non-exclusive license. The provisions coordinate with Article 9 treatment of licenses.

In determining the applicable rights, a further distinction is made between the act of creating a security interest and the act of enforcing that interest. This section allows creation of an interest, except in the other party's intellectual property rights, in essentially all cases. For non-exclusive licenses, however, it does not permit enforcement of that interest without the licensor's consent. Unlike in sales of goods, licenses create a situation where three parties have an interest in what happens to the property and the contractual rights associated with it: the lender, the debtor and the licensor. In many cases, the licensor's property rights dominate. In dealing with these three parties, a material difference may exist between creation of a non-possessory interest and enforcement by repossession, foreclosure, or sale or by creation of a non-possessory interest.

2. Non-exclusive Licenses. For non-exclusive licenses, the transferability of a licensee's rights is constrained in law by federal policy limitations that presume non-transferability without licensor consent. See 2B-502(1). See Everex Systems, Inc. v. Cadtrak Corp., 89 F.3d 673 (9^th Cir. 1996). See also In re Patient Education Media, Inc., 210 BR 237 (Bankr. SD NY 1997) (copyright license). It is also constrained by a general state law policy, reflected in Article 2A, that in three party transactions of this type, the rights owner is entitled to protection. Article 2A-303(3) limits the enforceability of lease provisions restricting security interests, stating: "[The] lessor is entitled to protect its residual interest in the goods by prohibiting anyone other that the lessee from possessing or using them." Article 2A-303, Comment 3. As in Article 2A, the licensor has a right to control who is in effective possession (including use and access) of the subject matter of the license. This policy has been enforced by a number of courts in reference to assignments of a licensee interest to third parties, either by contract or by operation of law.

This Section assumes that the licensor's interests are protected so long as there is no actual transfer of possession or control without its consent.

3. Taking Subject to the License. The financier and any transferee take subject to the limiting terms of the license and the intellectual property rights of the other party. The license is the dominant agreement in that it defines the licensee's rights. This does not mean that the transferee undertakes or is bound by affirmative obligations, such as any duty to pay royalties. However, if through non-payment or otherwise, a breach occurs and the license is cancelled, the cancellation vitiates the financier's rights.

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

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

1. This section conforms to current Article 2 and Article 2A.

2. The recipient of a transfer is bound to the terms of the original contract and that obligation can be enforced either by the transferor or the other party to the original contract. An effective transfer of contractual rights constitutes a transfer of those rights and, a delegation of duties if accepted by the transferee.

3. Subsection (b) also follows current law and provides that the transfer does not alter the transferor's obligations to the original contracting party in the absence of a consent to the novation.

1. Nature of Delegation. Delegation or subcontracting of performance refers to a party's ability to use a third party in making an affirmative performance under a contract. Compare "transfer" defined in 2B-102. While the performance may be by the delegate, the original party remains bound by the contract and responsible for any breach.

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

3. Delegation in the Absence of a Contract Restriction. In the absence of a contractual limitation, delegation can occur unless the other party has a substantial interest in having the original promissor perform or control the performance. Obviously, a party has a substantial interest in having the original party perform if the delegation triggers the restrictions in 2B-502, but may also have such an interest in other cases.

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

Definitional Cross References:

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

Reporter's Note:

1. Background. This is an area heavily influenced by federal copyright law as to copyright interests. The rules here trace that influence while providing maximum state law recognition for traditional UCC priorities. As to transfers of ownership and, arguably, security interests, federal law may preempt state law in reference to federal intellectual property rights. There is no such preemption on preemption for data, trade secrets and other non-federal rights.

Subsection (a) deals with general priorities. Subsection (b) deals with the priority of a security interest in conflict with a non-exclusive license.

2. Prior Oral Licenses. Subsection (a) grants priority to a prior license that is enforceable under the statute of frauds in 2B-201. This parallels but does not fully conform to copyright law. It creates a state law priority system with reference to the coverage allowed to state law. The rule governs as to data, access contracts, trade secrets and other information are not within the Copyright Act. The Copyright Act gives priority to licenses in a signed writing. To the extent inconsistent with this Section as to copyright subject matter, that rule governs.

3. Security Interests and Licenses. Subsection (b) deals with priority between a security interest and a license. While there are preemption issues here, the case for preemption is less strong since the UCC generally controls law relating to security interests. Federal concerns in the priority statute are more focused on title transfers. This section adopts priority rules that parallel priority positions in current Article 9. The goal is to facilitate use of secured lending related to intangibles by creating provisions that enable the licensor to continue to do business in ordinary ways.

This Section does not deal with conflicting transfers of informational rights ownership.

4. Preemption Issues. For rights not created under federal law, priority issues are questions of state law. The same is true for non-ownership rights in patent. The situation is different in copyright law. Section 205(f) of the Copyright Act provides:

17 U.S.C. § 205(f). There is no case law under this provision.

This provision of the Copyright Act can be viewed either as a comprehensive rule of priority (e.g., unwritten license is never superior to transfer of ownership; priority of a written license entirely controlled by Section 205(f)), or as a minimum condition for a particular result (e.g., that a written nonexclusive license has priority under specified circumstances, but not suggesting that these are the only conditions under which this is true). This Article adopts the view that the priority rule states a minimum and does not establish a comprehensive rule. Thus, a nonexclusive license prevails in the listed situations, but priority of a nonexclusive license in cases not covered by Section 205 is not controlled by federal law.